Legal Insight: What the imminent Waller-Edwards Supreme Court judgment means for undue influence

The Supreme Court's decision in Waller-Edwards v One Savings Bank Plc [1] is expected imminently and will provide much needed certainty for borrowers and lenders alike. Howard Kennedy LLP acts for Catherine Waller-Edwards ("Catherine") in respect of her ongoing fight for justice. 

Undue influence: The current position

This case is all about undue influence, the legal principle that the influence of one person over another should not be abused. In such relationships, the Courts can interfere to protect that person. Undue influence can be established in more than one way: "actual" undue influence, meaning undue influence proved by evidence; and, "presumed" undue influence, where the undue influence is assumed given the nature of the relationship and the type of transaction in question. If established, and there is a causal link between the undue influence of one party inducing the other to enter into a contract, that transaction is voidable and the contract can be rescinded. 

As between two persons, undue influence is (relatively speaking) straightforward. However, many transactions involve more than two persons. Specifically, and in the context of a married or cohabiting couple, financial transactions usually include a "third party" lender, L. Undue influence often arise between A and B, where A wants to obtain a sum of money to fund their own venture and approaches L. L is happy to oblige but, as with most lenders, requires security in return. A, either unable or unwilling to put themselves at risk, has the "entrepreneurial" idea of asking B to guarantee the loan, who generally requires little convincing, trusting A implicitly. B guarantees the loan, A gets their money and later defaults, but (lucky for A!) L seeks to recover the money from B. B often gets relatively little or nothing out of the loan yet carries much if not all of the risk. 

This is neither a fair nor just outcome for B, a point (thankfully) well established in law. In the most recent and significant authority in this area [2], the House of Lords (which since 2009 we refer to as the Supreme Court) affirmed the following Etridge principles: 

1. If in a surety/guarantee transaction, A induces B to enter into a guarantee; and
2. The transaction is not (on its face) to the financial advantage of B; and
3. There is a substantial risk of undue influence by A in transactions of this kind, then

L is "put on inquiry" of A's undue influence. Unless it takes certain steps (in summary aimed at ensuring B is suitably aware of the risks and content to proceed) L will be "fixed" with constructive notice of the undue influence. In which case, B will later be able to seek a court Order that the guarantee is voidable and cannot be enforced against B. L's money is gone and its only recourse is against A for debt recovery, however L is a lender and (usually) a large financial institution, so it can take the hit. B is invariably an individual (indeed, the Etridge principles only extend to non-commercial transactions) and so many agree such protection is warranted.

The Etridge principles apply purely to surety type relationships. A distinct line of cases has developed in relation to joint advance transactions, in which A and B own property together. Here, A seeks from L a loan ostensibly for the joint benefit of A and B (but, in reality and unbeknownst to L for A's sole benefit).  L agrees in return for security over A's and B's jointly owned property. The courts take a different approach here, as unlike in Etridge and on the face of the matter, there is no financial disadvantage to B nor does it appear to be a transaction with a substantial risk of undue influence. Ergo, L is not put on inquiry and cannot be fixed with constructive notice. B, in these circumstances, cannot prevent L from enforcing its security against B's home in the event of loan default.

This is precisely what happened in Pitt, the leading case confirming this principle [3]. So and as of today there are two recognised categories of case concerning undue influence:

1. Surety/Guarantee: In which a lender is put on inquiry and B can prevent enforcement for A's defaults. 
2. Joint Advance: In which L is not put on inquiry and B cannot prevent enforcement of a security against an asset (land or otherwise) jointly held with A.

However, what happens when it's a little bit of both: Security provided over jointly held assets in return for a loan partly for the joint benefit of A and B and partly for the sole benefit of A?

Surprisingly, this "hybrid" scenario didn't occur to the House of Lords in either Etridge or Pitt.  So, there was no precedent for such transactions, until Catherine's case came along.  

The factual background: Catherine and Mr Bishop

Before 2011, Catherine owned a mortgage-free home worth £585k and had £150k in savings. In 2011, she began a relationship with Mr Bishop, a building contractor, who soon after moved into her home. In early 2012, Mr Bishop proposed an exchange: Catherine would give up her home and savings in return for a new property, "Spectrum", which he would build, expected to be worth £750k. Spectrum was subject to a £78k mortgage in favour of a Mr Higgins, for which Mr Bishop was primarily liable. Despite the risk, Catherine trusted Mr Bishop and agreed. The exchange completed on 25 May 2012.

Later that summer, Mr Bishop claimed he needed more funds to complete construction at Spectrum. He proposed increasing the loan secured against it from £78k to £160k. Catherine, trusting him and seeing no alternative, agreed.

In September 2012, Catherine and Mr Bishop moved into Spectrum with their children. The relationship deteriorated, and Mr Bishop became increasingly aggressive. Later that year, he persuaded Catherine to agree to a further refinancing: a £170k loan from Martin Simon Properties Limited ("MSP") (a company controlled by Mr Higgins) would redeem the original loan and replace it with a new charge. Mr Bishop pressured Catherine with the threat of default, and she felt she had no choice. In summer 2013, he used the same tactic to increase the loan yet further to £220k.

That summer, Mr Bishop faced further financial pressure due to a £142k divorce settlement and £38.5k in personal credit card debts. He was also struggling with the existing £220k loan repayments. Again, he pushed Catherine to agree to further borrowing against Spectrum, threatening possession by MSP. She felt compelled to comply.

Mr Bishop approached One Savings Bank for a £440k loan. They approved £384k. He failed to disclose that part of the funds would go direct to his ex-wife, though the agreement specified that £38.5k would repay his credit cards. The bank believed the loan would redeem MSP’s charge over Spectrum, with the remainder invested in property.

When the mortgage completed, £233,801.76 went to repay the existing loan. Most of the remainder—£142k—was used to pay Mr Bishop’s ex-wife, without the bank’s knowledge. Catherine received none of the surplus. In 2014, the relationship ended. The mortgage fell into arrears, prompting the bank to seek possession of Spectrum.

First instance decision

The Bank issued possession proceedings in October 2021. In response Catherine sought to set aside the mortgage on grounds of undue influence. Trial took place in December 2022 before His Honour Judge Mitchell ("HHJ Mitchell"), who found as follows: 

1. There was “little doubt” that there was a relationship of trust and confidence between Catherine and Mr Bishop, which was “sadly abused”.
2. While this alone didn’t establish undue influence, the transactions clearly called for clarification. Prior to the One Savings Bank mortgage, Mr Bishop had repeatedly increased borrowing secured on Catherine’s property, with none of the proceeds going to her — “plainly” calling for explanation.
3. The One Savings Bank mortgage partly redeemed the MSP loan, but was also “another money-raising venture” for Mr Bishop — notably to pay his ex-wife. HHJ Mitchell held: “If raising a substantial sum on Ms Waller-Edwards’ property for the benefit of Mr Bishop’s ex-wife does not call for an explanation, I am not sure what would.” 
4. Both limbs of presumed undue influence were met, and the Bank failed to rebut the presumption (Mr Bishop, as a side note, did not attend the trial nor any subsequent hearing). Undue influence was established as between Catherine and Mr Bishop.
5. The remaining issue was whether the Bank was put on inquiry. Applying Etridge (No 2), a lender is put on inquiry where: (1) the transaction is not to the wife’s financial advantage; and (2) there’s a substantial risk the husband procured it through legal or equitable wrong. Such a case being a “suretyship” case. However, these are to be distinguished from "joint advance" cases, exemplified by Pitt, in which a lender is not put on inquiry. 
6. Here, the transaction was on its face closer to a "joint advance" case, notwithstanding the surety element. The loan was principally for Catherine and Mr Bishop's joint benefit, releasing funds for a new purchase. The credit debts, being only just over 10%, were not sufficient enough to make this case a type of "suretyship" transaction. HHJ Mitchell concluded “This was very far from an Etridge surety situation… I am driven to conclude the Bank was not put on inquiry”.

The lack of “hybrid” case law was noted by HHL Mitchell but ultimately, he classified this as a joint borrowing, not a suretyship. He felt  limited by the binary "suretyship" and "joint advance" distinction and, viewed in this way, felt obliged to classify it as one falling under one or other. 

Catherine's appeals

Catherine appealed on the basis HHJ Mitchell was wrong to find the Bank was not put on inquiry. She contended that the general rule had been mischaracterised/misapplied and it was wrong to apply a binary distinction between surety and joint advance cases. The general rule (affirmed in Etridge) is that a lender is put on inquiry where the relationship is non-commercial and the loan secures the other party’s debts without financial advantage to one borrower. 

The key factor in Catherine's submission was whether the "surety element" was substantial (meaning "more than merely trivial"). The threshold was low, and the credit card debts covered by the loan and secured by the mortgage over Spectrum easily met it.

The appeal was heard in September 2023 before Justice Edwin Johnson (J Johnson), who upheld the original decision: One Savings Bank was not put on inquiry and had no constructive notice. However, J Johnson did, in principle, accept that hybrid cases could put lenders on inquiry:

1. J Johnson applied Etridge (No 2) and its predecessor Barclays Bank plc v O’Brien [1994]. The key issue was whether the Bank’s knowledge of a “surety element” in the remortgage was enough to treat Catherine as a surety and Mr Bishop as principal debtor.
2. There was no authority on how to treat “hybrid” cases — part joint advance, part surety. The former does not put a lender on inquiry; the latter does.
3. The Etridge principles were not limited to full suretyship but extended to “partial surety” cases — where a party stands as surety for only part of the loan. The first limb of the inquiry test (financial disadvantage) was flexible enough to include such cases.
4. In such hybrid cases, whether a lender is put on inquiry is a matter of "fact and degree", so a lender must: (1) consider the transaction as a whole; and (2) query whether as a whole the transaction appeared not to be to the financial advantage of the one providing the surety element.
5. J Johnson found the transaction did not meet that threshold. Using part of a joint remortgage to pay one party’s credit card debts was he said not unusual. The £39.5k debt was not enough to render Catherine a surety and, while broadly speaking it was wrong to classify this case as a purely "suretyship" case, HHJ Mitchell had not erred in his factual finding that the credit debts did not sufficiently place the Bank on inquiry.

Catherine appealed again, arguing the test should not be one of fact and degree, but whether the surety element was substantial (i.e. not trivial) and if so, the transaction should be treated as one which put the Bank on inquiry. The Court of Appeal again disagreed, re-affirming J Johnson’s fact-and-degree test.

Catherine’s final appeal was made to the Supreme Court and rests on this same point. We await the outcome. 

Change on the horizon

Catherine’s pursuit of justice has already prompted an important change: it is now accepted that hybrid cases can put a lender on inquiry of undue influence.

Yet the law remains in an uneasy state, offering little clarity to lenders or protection to vulnerable borrowers. J Johnson’s “fact and degree” test requires lenders — typically banks and building societies — to assess, case by case, whether a hybrid transaction should have raised enough red flags to put the lender on inquiry. While legal advisors may guide them, the burden of applying this nuanced test falls on lenders themselves. 

The only precedent is Waller-Edwards v One Savings Bank, where a 10% surety element was deemed insufficient to put the Bank on inquiry. A cautious lender might treat this as a ceiling; a bullish one might stretch it to 20% or 30%. We say this isn’t reckless lending; it’s the inevitable result of a test that lacks certainty. Different institutions will inevitably apply a test of "Fact and Degree" differently.

Borrowers subject to undue influence are left exposed, wholly reliant on whether their particular lender takes a cautious or aggressive stance. Their only recourse is litigation, often at great personal and financial cost, exacerbated by the looming threat of losing their home and/or facing bankruptcy.

There is hope the Supreme Court will adopt the lower, clearer, and we say correct threshold: that a substantial (i.e. not trivial) surety element should suffice to put a lender on inquiry. Such a ruling could bring closure to Catherine’s 14-year ordeal and restore both meaningful protections, and certainty, to future transactions. We look forward to the outcome with interest and will produce a follow up piece as soon as the judgment has been published. 

Howard Kennedy instructed Julian Malins KC (of Malins Chambers) and Marc Beaumont (of Windsor Chambers). Marc also appeared on a direct access basis for Catherine at all stages below the Supreme Court. 

[1] UKSC/2024/0066

[2] Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 (11 October 2001)

[3] CIBC Mortgages plc v Pitt [1993] UKHL 7)