Nelson Enonchong, Barber Professor of Law
In a secured lending transaction where the relationship between the debtor and the surety (or between two borrowers) is non-commercial, if it is established that the surety entered into the transaction with the bank as a result of some wrongdoing by the debtor, such as duress or undue influence, to what extent does law provide a remedy to the surety? It is well known that if, at the time of the transaction, the lender had constructive notice of the wrongdoing of the debtor the surety is entitled to have the transaction set aside as against her. However, for the lender to be fixed with constructive notice it must be established that the lender was put on inquiry and, being on inquiry, failed to take the steps prescribed by the House of Lords in Royal Bank of Scotland plc v Etridge (No 2) [2001], sometimes referred to as the Etridge Protocols. But what are the circumstances that will put the lender on inquiry? In Etridge, in clarifying and restating the principles enunciated in Barclays Bank plc v O’Brien [1994], Lord Nicholls, with whose speech all the other members of the House agreed, made it clear that in terms of the nature of the relationship between the debtor and the surety, the lender is put on inquiry in every case in which that relationship is “non-commercial”. In terms of the type of transactions, Lord Nicholls expressly addressed and distinguished between two types. On the one hand are cases where one individual, in a non-commercial relationship with another, stands as surety for the debts of the other. In such a case the bank is put on inquiry. On the other hand are cases where two individuals, in a non-commercial relationship, apply for a loan from a lender for their joint purposes, for example, to make improvements to their jointly owned house. In such a case the bank is not put on inquiry, unless it is aware that the loan is being made for the purposes of one of the borrowers only, as distinct from their joint purposes. In between these two types of transaction, is a transaction where, in a secured lending to two individuals, the loan is advanced (a) in part for the joint purpose of both borrowers and (b) in part for the purposes of one of them only. In what circumstances is a lender put on inquiry in such a case? Sadly, in his statement of principles, Lord Nicholls did not expressly address this specific type of case. It is this type of transaction that the courts had to deal with in the recent case of One Savings Bank plc v Waller-Edwards [2024].
One Savings Bank plc v Waller-Edwards (2024) – A “Hybrid” Case
In Waller-Edwards a bank advanced a loan of £384,000 to a couple, Ms Waller-Edwards (W) and Mr Bishop (B), secured by a legal charge over their jointly owned house (W owning 99% of the equity and B owning 1%). The bank was aware that the part of the loan, about 90%, was for their joint purpose, and part of it, about 10%, was for the benefit of B only. In fact, unbeknown to the bank, a further part of the loan was intended by B to be used, and was in fact used, to pay off B’s ex-wife (divorce settlement). That transaction was described in Waller-Edwards as a “hybrid” transaction, as it contains elements of the two types of transaction expressly distinguished in Etridge. I discuss “hybrid” transactions, where one party is surety in part, and other “less straightforward” transactions in my book, Duress, Undue Influence and Unconscionable Dealing (4th edition, 2023, Sweet & Maxwell), paras 24-020 to 24-029. In Waller-Edwards, the Court of Appeal remarked that the case ‘raises an issue that has not seemingly been addressed (at least head on) before.” So, what is the test for determining whether the lender is put on inquiry in a hybrid case? The Court of Appeal held, endorsing the approach of the lower courts, that the court is required to look at the transaction “as a whole” and “as a matter of fact and degree”. Applying that test, the Court of Appeal upheld the decision of the lower courts that the bank was not put on inquiry and therefore the doctrine of constructive notice did not protect W who, the courts accepted, had entered into the mortgage transaction as a result of the undue influence of her partner, B. The bank, as mortgagee, was therefore entitled to take possession of her house.
A Particularly Sad Case
Sir Geoffrey Vos, MR, like the first appeal judge, remarked that the facts of this case were particularly sad and expressed sympathy for W, the victim of undue influence. However, the judges had to apply the law as they found it. And that law, as the judges found it, did not protect W. I have argued that there are significant problems with the approach adopted by the Court of Appeal. I have done so in an article entitled ‘Secured Lending: When is the Lender Put on Inquiry in a “Hybrid” Transaction?’ that will be published in the Butterworths Journal of International banking and Financial Law (February 2025 issue). However, it is worth noting here that in the High Court, when applying the evaluation “on the whole” approach, that was endorsed by the Court of Appeal, Edwin Johnson J relied heavily on the decision of Judge Rich QC in Midland Bank plc v Greene [1994], a case which also involved a hybrid transaction. However, while Greene is a post O’Brien case, it is a pre-Etridge decision. The approach of Judge Rich in Greene is expressly and heavily based on the principles of constructive notice as stated in O’Brien, before they were reformulated and restated into the wider principle in Etridge. Greene is, therefore, not a reliable guide on the applicable principles to be drawn from the subsequent restatement of the law in Etridge. Indeed, Greene is not even mentioned by the House in Etridge. It may just be possible that closer examination of the decision in Etridge would show that the Etridge principles can and should provide protection for victims like W.