Background
The Appellant and her partner, Mr Bishop, jointly entered into a re-mortgage of a property for £384,000 with the Respondent, a bank, which the Respondent understood was to enable the couple to purchase a new property and to settle some outstanding debt.
It is important to note that at the time the Appellant met Mr Bishop, she owned her own home, which was mortgage free, she was financially independent with personal savings, and she had a modest pension.
In relation to the loan, the bank was aware that £39,500 would be used to discharge debts in Mr Bishop’s sole name, including for his car and personal credit card bill. However, what was unknown to the bank was that Mr Bishop would also use the loan for other purposes, including making a £142,000 divorce payment to his ex-wife rather than using that money to purchase another property
Following the breakdown of the relationship between Mr Bishop and the Appellant, Mr Bishop disappeared, the Appellant did not have the means to pay the mortgage sum and the bank commenced possession proceedings in 2021.
The Appellant defended the possession proceedings on the basis that she had been subjected to Mr Bishop’s undue influence and the bank’s knowledge of the £39,500 payment had put the Respondent on inquiry, as Mr Bishop’s use of £39,500 amounted to a surety by the Appellant. As such, the loan, as between the Appellant and Respondent, should be set aside.
The County Court, the High Court and the Court of Appeal all concluded, as a matter of fact, that that the Appellant had entered into the agreement under Mr Bishop’s undue influence and that finding has not been challenged. Despite that finding, the lower courts concluded the Respondent had not been put on inquiry as this agreement was to be properly considered a joint borrowing transaction, and not a surety transaction, because as HHJ Mitchell said, after the contested trial, ‘I do not accept that the fact that just over 10% of the total borrowing was to do to Mr Bishop’s credit debts, tip this case into one akin to a surety case’.
The Supreme Court
It has long been accepted that the husband and wife relationship (or in this case unmarried partners) is one which presents a heightened risk of undue influence when financial transactions are involved, but there are other examples too. Such relationships present potential issues and considerations for lenders to assess when entering into financial transactions.
Taking the husband and wife relationship as an example, the law considers that a lender is put on enquiry when dealing with a three way transaction, where either the husband or wife agrees to stand as surety for the other’s debts (“a surety transaction”). The lender is not put on enquiry where the lending is on a joint basis unless the bank is aware the loan is being made for the one party’s purpose which is distinct from their joint purposes (“a joint borrowing transaction”).
The necessary steps to be taken by a bank once put on inquiry of a surety transaction are known as the Etridge Protocol and are summarised at paragraph 33 of the judgment.
Whilst that might paint a clear picture in relation to a joint borrowing transaction or surety transaction, how should lenders deal with ‘hybrid’ transactions where the loan is non-commercial and the amount advanced is partly for a joint benefit and partly for a sole benefit?
The Respondent proposed looking at a non-commercial hybrid transaction as a whole and deciding, as a matter of fact and degree, whether the loan was being made for purposes of the borrower with the debts, and distinct from their joint purposes (“the fact and degree test”). This also happened to be the test which the Court of Appeal had concluded was the correct approach and accorded with the established case law in this area (see Barclays Bank plc v O’Brien [1994] 1 AC 180; CIBC Mortgages plc v Pitt [1994] 1 AC 200; and Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44).
The Appellant proposed the bright line test which would consider a lender is put on enquiry if, where the relationship is non-commercial, it appears on the face of the proposed transaction that one party is offering, or has accepted, to stand as surety to any extent which is more than de minimis.
The Supreme Court unanimously allowed the appeal and, with Simler SCJ giving the judgment, approved the bright line test. Thus, there was no need for a third test for hybrid cases. Instead, a non-commercial hybrid transaction, with the existence of an exclusive benefit for one borrower which is not considered de minimis, will be categorised as a surety transaction and not as a joint borrowing transaction. Once categorised as a surety transaction the need to follow the Etridge Protocol will be triggered.
The court described this approach as being clear, promoting certainty and being easy to apply effectively in all non-commercial hybrid transactions [55]. Further, the court highlighted that lenders could discharge the onus rather simply and inexpensively.
Comment
This case has offered some much needed clarity to lenders dealing with hybrid transactions. Whilst the finding demonstrates that there is a relatively low threshold for a lender to be put on enquiry, which is unlikely to be a welcome finding for lenders, it is helpful that instead of introducing a new test and/or separate mechanism for hybrid cases, they can be treated in the same way as surety transactions and the well-established Etridge Protocol will apply.
CHELSEA SPARKS
ANTONIA HALKER
Lamb Chambers