One Savings Bank PLC v Catherine Waller-Edwards

This is a second appeal, which raises a single question of law concerning the application of the principles laid down by the House of Lords in three well-known cases: Barclays Bank plc v. O’Brien [1994] 1 AC 180 (O’Brien), C.I.B.C. Mortgages plc v. Pitt [1994] 1 AC 200 (Pitt) and Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773 (Etridge). I shall refer to these three cases together as “the authorities”.

HH Judge Mitchell (the trial judge) and Mr Justice Edwin Johnson (the appeal judge) decided, as a matter of fact and degree, that the bank was not put on inquiry of the undue influence that, as it has now been established, had been exerted over Ms Waller-Edwards by her then partner, Nicholas Bishop (Mr Bishop). That undue influence had in fact led to Ms Waller-Edwards remortgaging to the bank the property at Spectrum, 32B Beaucroft Lane, Wimborne, Dorset BH21 2PA (the property) that she jointly owned with Mr Bishop.

The property was, in fact, held in joint names subject to a declaration of trust providing that 1% was held for Mr Bishop and 99% for Ms Waller-Edwards. So far as the bank knew at the time of mortgage transaction on 24 October 2013, the mortgage advance of £384,000 was being used: (a) as to some £200,000 to pay off the previous mortgage, (b) as to some £40,000 (to pay off a £24,000 debt on Mr Bishop’s car and £16,000 on his credit card), and (c) as to some £142,000 to purchase another property. These figures are not exact, but are taken from the trial judge’s findings at [47]-[52]. The actual completion figures are somewhat different, but the differences are not material to what we have to decide.

It is common ground between the parties that the authorities provide for two different categories of case relating to secured borrowing by two persons in a relationship.

First, there is the category of case described, perhaps only partly accurately, as a “surety case”. A surety case covers non-commercial situations where, for example, (a) one borrower guarantees the debts of the other or of a company, or (b) of more relevance to our case, the borrowers take secured borrowing on jointly owned property to pay off the debts of only one of them. In such circumstances, the lender will normally have constructive notice of the possibility of one borrower being unduly influenced by the other, and will be put “on inquiry”. In current terms, if a lender is put on inquiry, it is normally required to follow what the parties before us called the “Etridge protocol”. The Etridge protocol involves the series of steps described by Lord Nicholls at [79] in Etridge.

Secondly, there are cases, epitomised by Pitt, where a loan is taken for the joint non-commercial purposes of two borrowers in a relationship (whether husband and wife or not). In Pitt, the bank was told that the purpose was to remortgage previous debts and to release capital for a jointly owned holiday home. In such circumstances, the lender will not normally have constructive notice of the possibility of one borrower being unduly influenced by the other, and will not be put on inquiry. I shall refer to these two clear cut categories of case as the “surety case” and the “joint borrowing case”.

The case before us raises an issue that has not seemingly been addressed (at least head on) before. That is the situation in which the borrowers seek a loan partly for their joint non-commercial purposes and partly for the benefit of one borrower only (described before us as a “hybrid case”). As already explained, from the bank’s viewpoint, the £40,000 used to discharge Mr Bishop’s car debt and credit card debt was for his sole benefit, whilst the remaining 90% of the loan was for joint purposes.

Ms Waller-Edwards ultimately submitted that, in a hybrid non-commercial loan situation, the lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial. She contended that the judges below had been wrong to say, as in effect they had, that: (a) the court’s task was to look at the transaction as a whole so as to determine whether it was, in substance from the lender’s point of view, a surety case or a joint borrowing case, and (b) the question of whether an element of a transaction that was for the sole benefit of one of the borrowers put the lender on inquiry was one of fact and degree. In effect, Ms Waller-Edwards contended for a third category of hybrid case and submitted that, in every such case where the sole benefit element was non-trivial, the lender was put on inquiry. This, she said, was clear from the authorities, and provided a bright line rule, giving certainty and clarity to lenders and borrowers alike as to how they had to proceed. Compliance with the Etridge protocol was not onerous.

The bank submitted in response that the judges below had been right. There was not a third category for hybrid cases. The authorities demonstrated that the lender was entitled to look at the transaction holistically. If it was essentially a joint borrowing transaction, the lender was not put on inquiry. If it was essentially a surety transaction, the lender was put on inquiry. The question was ultimately one of fact and degree as the judges below had said.

Lewison LJ granted Ms Waller-Edwards permission to appeal limited to the question of the correct legal test in a hybrid case, where a loan is taken out for a variety of purposes. He said that: “If (as both judges [below] held) the legal test is a question of fact and degree, then permission to challenge the judges’ evaluation of that question is refused”. Accordingly, neither party sought to persuade us that, if a “fact and degree” evaluation had to be undertaken, the judges below had reached the wrong conclusion.

Before turning to the legal question we have to determine, I will (a) set out some of the essential background (taken largely from the judgments below), and (b) summarise the main points to be drawn from the authorities.

In 2011, Ms Waller-Edwards, when she was at a vulnerable period in her life, began a relationship with Mr Bishop, who was a builder then constructing three houses including the property. She lived at that time in her own mortgage-free property at 60 Pilford Heath Road, Wimborne (the Wimborne property) and had savings of some £150,000 and a small income. On 25 May 2012, Ms Waller-Edwards exchanged her Wimborne Property (then worth some £585,000) plus £150,000 for the property (expected to be worth some £750,000 when complete). By the time of the completion of that transaction, Ms Waller-Edwards had been persuaded to accept two charges on the property, namely an existing one to a Mr Higgins for some £78,000, and a second charge in her favour for the £150,000 she had handed over to Mr Bishop. Pending completion of the building of the property, Ms Waller-Edwards and Mr Bishop began living together in the Wimborne property with her two children and his one child. Later in 2012, the loan from Mr Higgins was increased and eventually replaced by another loan and charge in favour of Mr Higgins’ company. The couple moved into the property before it was complete in September 2012. The declaration of trust that I have mentioned was also executed at some stage. In these transactions, a Mr Clake of Ellis Jones Solicitors, instructed originally for Mr Bishop alone, acted for him and for Ms Waller-Edwards.

In mid-2013, the bank was approached for a loan of £440,000 secured on the property, but agreed to loan only the £384,000 already mentioned. Mr Clake acted for all three parties.

[31]-[33] of the appeal judge’s judgment sets out what the trial judge had found as to the bank’s knowledge at the time of the transaction. I summarise the salient points as follows:

When the transaction was completed, £233,801.76 was used to pay off the existing charge and most of the balance was in fact used to pay Mr Bishop’s wife. The latter was another transaction to which Ms Waller-Edwards consented under Mr Bishops’ undue influence. The mortgage was also subject to a condition that Ms Waller-Edwards and Mr Bishop would let the property within 30 days of completion, but this did not occur.

Subsequently, the relationship between Ms Waller-Edwards and Mr Bishop terminated. Mr Bishop moved out of the property towards the end of 2014, and ultimately ceased paying the mortgage instalments. On 4 November 2021, the bank initiated these proceedings seeking possession of the property and the arrears.

The appeal judge noted that the facts of this case were particularly sad, because, when Ms Waller-Edwards met Mr Bishop, she was the sole owner of her own unencumbered home, and had personal savings. By the time the relationship ended, the series of transactions engineered by Mr Bishop left her in a heavily mortgaged home, which she was not supposed to be occupying, with no personal savings and lacking the means to maintain the payments due. I entirely endorse the appeal judge’s view of the sadness of this case.

As I have said, the trial judge decided that the mortgage had been entered into as a result of Mr Bishop’s undue influence, but that the bank did not have notice of it. He gave judgment for £451,638.87 with costs to be added to the security. The trial judge dealt with the question of whether the bank was put on inquiry at [113]-[146]. He held that it had not. He said at [119] that the case was not, on the face of it “what would be called a surety-type case”. At [121], he said that “whilst to a limited extent the instant situation could be described as hybrid, overall, the pattern of borrowing is much more consonant with what was being considered in Pitt than the straightforward surety case in Etridge”. Having gone through all the alleged red flags raised against the bank by Ms Waller-Edwards, he held at [136] that the only arguable one was Mr Bishop’s car debt and credit card debt. At [137] he concluded:

The appeal judge dealt with what he called the “inquiry issue” at [62]-[112]. He upheld the trial judge as to both the facts and the law. Having referred to the authorities, the appeal judge said at [82] that the fact that, to the knowledge of the lender, the transaction was not, on its face, to the financial advantage of one of the borrowers put the lender on inquiry, where the relevant relationship was a non-commercial one. He thought that principle encompassed what he referred to as the partial surety case. At [89]-[90], he held that the identification of partial surety cases to which the O’Brien principles could legitimately be applied was necessarily a fact sensitive one. At [94], he held that it was “not simply a numbers exercise” and that it was “necessary to look at the transaction constituted by the [r]emortgage as a whole” as Judge Rich QC had done in Midland Bank plc v. Greene [1994] 2 FLR 827 at 833. He thought that the overriding consideration was whether the transaction was or should have been perceived by the Respondent as a transaction which was not to the financial advantage of Ms Waller-Edwards. Peter Jackson LJ suggested in argument, and I agree, that this formulation might be more accurate if it referred to a transaction that “might not be” to Ms Waller-Edwards’ advantage. Ultimately at [111], the appeal judge concluded that the trial judge had correctly identified the question which he had to answer as one of fact and degree, and reached an answer to that question which was justified on the facts of the case, as he had found them.

The authorities are well known. I do not intend to provide a comprehensive treatise on each of them. They need to be read. That said, the parts of them upon which the parties have relied are relatively short and bear recitation here, as I shall be following the principles adumbrated in them.

In O’Brien, Lord Browne-Wilkinson (with whom the other judges agreed) described the key to the problem as being “to identify the circumstances in which the creditor will be taken to have had notice of the wife’s [now a party to any relationship] equity to set aside the transaction”. He continued in a classic passage at pages 195-6:

In Pitt, Lord Browne-Wilkinson (with whom the other judges agreed) found that a bank was not put on inquiry by a transaction in which equity in a property was released, as far as the claimant bank was aware, for the purposes of buying a holiday home. Lord Browne-Wilkinson said at page 211D that: “[s]o far as the [claimant bank] was aware, the transaction consisted of a joint loan to husband and wife to finance the discharge of an existing mortgage …, and as to the balance to be applied in buying a holiday home. The loan was advanced to both husband and wife jointly. There was nothing to indicate to the [claimant bank] that this was anything other than a normal advance to husband and wife for their joint benefit”. Lord Browne-Wilkinson further explained at page 211G that: “[w]hat distinguishes the case of the joint advance from the surety case is that, in the latter, there is not only the possibility of undue influence having been exercised but also the increased risk of it having in fact been exercised because, at least on its face, the guarantee by a wife of her husband’s debts is not for her financial benefit. It is the combination of these two factors that puts the creditor on inquiry”.

In Etridge, the House of Lords was dealing with 8 cases of alleged undue influence and constructive notice in the context of loans secured on matrimonial property. All 5 judges gave substantive judgments. Every member of the House agreed with Lord Nicholls, whose judgment is, therefore, the most authoritative. For our purposes, the most important section of Lord Nicholls’ speech is at [40]-[49]. I am reciting that section extensively, because it was subjected to minute analysis in argument, and I do not think it can be fairly understood without seeing the passage as a whole:

Numerous passages in the speeches of Lords Bingham, Hobhouse and Scott were drawn to our attention. I do not think that, for our purposes, they add much to what I have cited already from Lord Nicholls’ speech. The precise position in this case was not squarely addressed in Etridge, but the applicable principles can, I think, be properly drawn from Lord Nicholls’ exposition.

The question I have posed in the heading is the formulation on which Ms Waller-Edwards’ counsel finally alighted in argument. He pointed out that such a test for the kind of transaction in this case would, as I have said, give certainty, and would reflect the low threshold of risk enunciated in the passages I have already cited from O’Brien and Etridge. The question is whether that is the right test for a case such as this which is to be drawn from the authorities. In my judgment it is not.

Before turning to the essential legal question, there are three important points to make by way of introduction as to the ambit of the case.

First, it is accepted that the question of whether a bank in surety cases, joint borrowing cases and hybrid cases is put on inquiry is to be ascertained through the lens of the lender.

Secondly, there are, of course, in some cases one or more red flags which ought to alert a lender to circumstances which require further inquiry. But this is not such a case. The trial judge rejected 10 of the 11 indicators raised by Ms Waller-Edwards on the facts, and there is no appeal on those matters (see [122]-[138] of the trial judge’s judgment). The trial judge and the appeal judge dealt with the case, as we must, on the basis that the only matter that might have put the bank on inquiry was the fact that the transaction entailed paying off some £40,000 of debts in the sole name of Mr Bishop. The evidence established that this was not an uncommon situation (see [14(iv)] above).

Thirdly, if this court were to accept that the judges below had applied the correct legal test, Ms Waller-Edwards has not been given permission to appeal the factual findings of the courts below. Accordingly we must accept that, if the test is as the judges below said, they were right to decide that looking at the transaction as a whole, the fact that some 10% of the advance was to be used to pay debts in Mr Bishop’s sole name did not, as a matter of fact and degree, turn the transaction from a joint borrowing case (where the bank was not put on inquiry) to a surety case (where it would have been put on inquiry).

It is against that background that I shall try now to explain why I think the judges below were right as to the legal test.

It is true, as Ms Waller-Edwards’s counsel submitted to us, that Etridge was an extension of O’Brien. But it was not the extension which he submitted it was. He argued that Etridge imposed a lower threshold for when a case was properly to be regarded as a surety case. In fact, the lower threshold that Etridge imposed, beyond O’Brien, was as to the inquiries that were necessary into the nature of the relationship between the borrowers. Lord Browne-Wilkinson said famously in O’Brien that “a creditor in put on inquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction”. Subsequent cases had been confused as to how these factors, if regarded as tests, might be satisfied. Lord Nicholls put the matter to rest in Etridge by saying that “this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts” (my emphasis). In other words, there was a low threshold for the risk that was required, because in every case where a wife (or other borrower in a relationship) stood surety for the debts of a husband (or another borrower in a relationship), the bank was put on inquiry. Neither Lord Nicholls (in that passage in Etridge) nor Lord Browne-Wilkinson (in O’Brien) was addressing the question of whether a particular transaction was properly to be regarded as a surety case in the first place. That much is clear from [45]-[47] of Lord Nicholls in Etridge.

It is only at [48] to [49] that Lord Nicholls briefly addresses the nature of a surety transaction. There he makes clear that “the case where a wife becomes surety for her husband’s debts is” straightforward, as is “the case where money is being advanced, or has been advanced, to husband and wife jointly”. Lord Nicholls’ following words are important in our context. He said that “[i]n such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband’s purposes, as distinct from their joint purposes. That was decided in [Pitt]”. He then makes clear at [49] that company cases are not joint borrowing cases even if the wife has an interest in the company.

In my view, therefore, Lord Nicholls was imposing a clear test for the low threshold for the risk that was required to put a bank on inquiry: every non-commercial case where a wife (or other borrower in a relationship) stood surety for the debts of a husband (or another borrower in a relationship). As to the non-commercial requirement, see [43] of Lord Nicholls. As regards, however, the identification of a surety case, Lord Nicholls tells us that a joint borrowing case only puts a bank on inquiry if “the bank is aware the loan is being made for the husband’s purposes, as distinct from their joint purposes”.

In effect, it was from these passages that the judges below drew the need to look at the transaction as a whole and to decide, as a matter of fact and degree whether the loan was being made for “the [purposes of the borrower with the debts], as distinct from their joint purposes”. In a case where the transaction is on its face not to the financial disadvantage of the wife, and the court is looking only at a hybrid transaction, where part of the loan is being used for one party’s purposes, I think the judges were right.

Nothing in Etridge implies a third test for hybrid cases of the kind that Ms Waller-Edwards advances. Even her proposed test would introduce some uncertainty. There would still be arguments as to whether a particular percentage was or was not “non-trivial”. Moreover, it is not always easy for a bank to know whether particular debts are truly for the sole benefit of the person in whose name they stand. How was the bank to know, in this case for example, what benefit each party had derived from either the car or the credit card?

More importantly, however, I think the approach that requires the court to look at the transaction as a whole and to decide on the facts whether it was really being made for the purposes of the borrower with the debts as distinct from their joint purposes, accords with the substance of Lord Nicholls’ speech in Etridge.

This case does not require us to explore the outer limits of the non-straightforward cases considered in Chapter 24 of the 4^th edition of Professor Nelson Enonchong’s interesting treatise on Duress, Undue Influence and Unconscionable Dealing (2023). I have, however, found nothing either in what he says or in the various post-Etridge cases he refers to at [24-017]-[24-027] that casts doubt on the principles I have explained.

As I have said, this is a sad case. In my judgment, however, we must apply Etridge to the facts as found by the trial judge. Etridge does not demand that, in a hybrid case, a lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial. Instead, it requires the court to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes. In this case, the judges below decided, and I would agree (though there is no appeal on the point), that the loan was, looked at as a whole and from the point of view of what the bank knew, a joint borrowing made for their joint purposes.

I would dismiss the appeal.

I agree that the appeal should be dismissed for the reasons given by the Master of the Rolls. Like him, I would reject the test proposed by the appellant (that in a hybrid case, a lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial). That would be unduly onerous to lenders and to many borrowers.

Although the authorities were not concerned with ‘hybrid’ cases, I am persuaded that they require us to decide whether a case is a ‘surety’ case or a ‘joint borrowing’ case. Were it otherwise, I could see the attraction of identifying cases where a lender is on notice by asking a single question, namely whether there is any aspect of the transaction that should indicate to the lender that the transaction as a whole might not be to the financial advantage of one of the borrowers.

However, that approach, insofar as it differs from the approach taken by the judges, would lead to the same result in the present case. The trial judge was entitled to find after examination of the facts that the proposed redemption of personal loans of the principal earner was a relatively routine incident of a remortgage of this kind and that this element of the transaction did not put the bank on notice of the possibility of undue influence of the kind that Ms Waller-Edwards had in fact experienced.

I agree with both judgments.