A landmark UK Supreme Court decision will extend the scope of protection afforded to people at risk of economic abuse from partners and reshape the law of undue influence.
The judgment concerned the law of undue influence and how “hybrid” banking transactions (those involving both joint borrowing and surety elements) will now be treated by the Court.
In this case, the appellant said she was subject to undue influence by her ex-partner when they took out a remortgage with One Savings Bank.
Background
In 2011 Catherine Waller-Edwards began a relationship at a point in her life when she was emotionally vulnerable but financially independent as the sole owner of her mortgage-free home with substantial savings. Her partner, Mr Bishop, persuaded her to exchange her home and savings for a property he was building, which was already subject to an existing charge. In 2013, Bishop remortgaged the property for £384,000 with One Savings Bank. The Bank understood from Bishop that the remortgage would be to purchase another property for the couple to use as a buy-to-let and to pay off an existing mortgage debt.
The Bank required Bishop to use the loan to pay off his other existing debts totalling £39,500. In fact (but unknown to the Bank), the loan was used by Bishop to make a divorce payment to his ex-wife and pay off the first charge on the property.
Following completion of the remortgage in October 2013, the relationship between the couple ended. Waller-Edwards remained living in the property, now heavily mortgaged. The couple fell into arrears and ultimately the Bank commenced possession proceedings in November 2021.
When appealing the repossession, Waller-Edwards argued that the Etridge protocol should have applied and that she was put under undue influence by Bishop when entering into the remortgage because it was partly used to pay off Bishop’s debt of £39,500.
Etridge requires the lender to ensure a surety (i.e. a guarantor) receives independent legal advice about the risks of entering the transaction and are proceeding on their own account.
Waller-Edwards argued that she was a surety for part of the loan made to pay off Bishop’s debts so the Bank was “put on inquiry” that her agreement to the transaction may have been obtained by undue influence.
Since the Bank failed to take steps to be satisfied that her agreement to stand surety had been obtained in full knowledge of the liability she was taking on, the appellant argued that the remortgage transaction should be set aside as between her and the Bank.
The judge agreed, but later the County Court, High Court and Court of Appeal found that One Savings Bank was not required to follow the protocol and carry out checks to ensure that Waller-Edwards was not put under undue influence because it was considered “joint borrowing” rather than a “surety transaction” where she was acting as a guarantor.
The latest judgment reverses that finding.
Judgment
The Supreme Court unanimously allowed the appeal. A judge ruled that a lender should be 'put on inquiry' in any non-commercial hybrid transaction where there is a more than a trivial element of borrowing which might not be to the financial advantage of the other.
Such a transaction, if viewed in this way, should be regarded as a “surety” transaction and the creditor placed on inquiry of the possibility of undue influence.
When a lender is put on inquiry, it is then required to follow the Etridge protocol. This is a series of steps designed to reduce the risk of a vulnerable person entering into a transaction where there is a risk in providing a legal guarantee of their partner’s debts for nothing in return. If a lender is put on inquiry and fails to follow the Etridge protocol the vulnerable party is entitled to set aside the transaction as against the bank.
Etridge notes that surety transactions are more likely than others to be tainted by undue influence because the vulnerable party takes on a legal liability for the other’s debt for no apparent personal gain. On the other hand, the risk in a joint borrowing transaction is much lower because, on the face of it, both parties are jointly liable for the debt and so both stand to benefit from it.
Because the risk of undue influence is sufficiently high in surety transactions, the judge ruled that it is proportionate to place a requirement on banks faced with surety transactions to follow the Etridge protocol to avoid being fixed with notice of the undue influence.
The latest ruling states that a lender should be put on inquiry whenever one party offers to stand surety for another's debts.
This means that additional and meaningful protection will be extended to men and women at risk of economic abuse by their partners.
A report recently published by the FCA suggests that as many as one in six women in the UK has experienced financial abuse by a current or former partner. In addition, a report by the charity Surviving Economic Abuse found that one in eight UK women who held a joint mortgage in the last two years experienced joint mortgage economic abuse from a current or former partner – equivalent to over 750,000 people.
A spokesperson for OSB said: “We note the judgement of the Supreme Court today. We are naturally disappointed by the decision, which was based on a very particular set of facts.
“This is a complex case arising from a loan in 2013, and we are assessing the implications of the ruling, although we note that cases involving undue influence are rare. At the same time, we will review our current procedures.”
Joel Leigh, partner at Howard Kennedy who represented the appellant, Catherine Waller-Edwards, said: “The Supreme Court’s decision is a landmark development in the law of undue influence, the most significant since Etridge. It is remarkable that hybrid transactions have gone unrecognised for so long, and that a workable test has only now been confirmed.
“While some lenders may have already adopted a cautious approach, the absence of formal recognition likely left many vulnerable individuals without recourse. These were people who, dependent on a partner who abused their trust, were drawn into transactions that left them financially exposed. Many will have lost homes, creditworthiness, and stability and lacked the means or confidence to challenge it. Even those prepared to challenge such contracts would have faced an uphill battle, because without any legal recognition of "hybrid" transactions, claims were doomed to fail unless (as in Catherine's case) taken to the highest court in the land. The Supreme Court’s judgment delivers long-overdue clarity and a vital safeguard: from now on, in any non-commercial hybrid transaction, a more than de minimis surety element is enough to put a lender on inquiry and require compliance with the Etridge protocol.
“Catherine’s fight has not only secured justice for her but has reshaped the legal landscape, extending meaningful protection to both men and women at risk of economic abuse within their personal relationships.”
