The Supreme Court has handed down its judgment in the case of Waller-Edwards v One Savings Bank Plc and has deemed the “bright line” test the correct approach for lenders to follow in “hybrid” cases.
This case considered whether a lender was “put on inquiry” of undue influence in a situation where lending comprised genuine joint borrowing but also the payment of one party’s debt (where one party takes responsibility for another’s debt in the nature of a surety). Our previous insight, published after the Court of Appeal’s decision, gives a detailed explanation in respect of the facts of this case. In summary, the Court of Appeal held that in hybrid non-commercial transactions such as this, when assessing if a lender should be put on inquiry, a transaction should be looked at as a whole to determine if, as a matter of fact and degree, the overall purpose of the loan was for the benefit of a single borrower as distinct from their joint purposes.
Ms Waller-Edwards was subsequently given permission to appeal to the Supreme Court, arguing that in a non-commercial hybrid loan transaction, the lender is put on notice of undue influence unless the part of the transaction that is for the sole benefit of one borrower is de minimis. This is referred to as the “bright line” test.
Supreme Court – important takeaways
The following key points were highlighted in the judgment, which ultimately concluded that the “bright line” test is the correct one that should be adopted in a hybrid case.
- A lender is put on inquiry in any non-commercial hybrid transaction where it appears on the face of it that more than a de minimis element of the borrowing is to repay the debts of one of the borrowers, regardless of whether there are also elements of joint borrowing. It is intended to be a clear approach that “promotes certainty” and is “less onerous” for lenders than considering the overall purpose of every non-commercial loan transaction.
- This does not involve there being a third test for hybrid cases. This approach simply involves treating a non-commercial hybrid transaction as a surety transaction and not as a joint loan. Where anything more than a de minimis element of the monies loaned is used to discharge the debts of one borrower, this moves the case out of the joint loan category and into the surety category and requires the bank to follow the Etridge protocol.
- The Court of Appeal had been wrong to focus on the purpose for which the loan was used and the fact that debt in the name of the husband could have been used for the benefit of the wife. It is not a question of who benefits from the money loaned; it is a question of whether the wife has taken on a legal liability that is not her own and received nothing in return.
- A lender is not expected to try to deduce whether there is a case of undue influence. Once the lender is on notice, they are simply expected to take reasonable steps to satisfy themselves that the vulnerable partner understands the implications of the proposed transaction. These steps involve recommending that the wife (or other vulnerable party) should obtain independent legal advice.
- The approach adopted is a binary one; either the lender is on notice of the risk of undue influence, or they are not. If the lender is on notice, then the Etridge protocol will apply. If the lender is not on notice, no steps are required at all. There is no scale which dictates the actions that need to be taken depending on the different degrees of risk.
Practical implications
Although many lenders will have been taking a cautious “bright line” approach to joint loans already, there will be some who have not. Lenders will need to consider their processes to ensure that in every non-commercial hybrid transaction (where the surety element is not de minimis), the Etridge process requiring independent legal advice is followed.