Hybrid loans and undue influence: the Supreme Court clarifies key legal principles

The Supreme Court has examined whether a lender is put on notice of undue influence where a jointly owned property is remortgaged with an element of the loan being used to repay only one proprietor’s sole debts (referred to in the Judgment as a “Hybrid Case”). Victoria Savage and Sarah Grendon have reviewed the Supreme Court Judgment and have summarised it here.

Undue Influence; Barclays Bank plc v. O’Brien [1994] 1 AC 180 (“O’Brien”), C.I.B.C. Mortgages plc v. Pitt [1994] 1 AC 200 (“Pitt”) and Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773 (“Etridge”); Joint Borrowing; Constructive Notice; Section 199 of the Law of Property Act 1925.

Why should I read this?

It is not unusual for a lender to offer a mortgage to joint borrowers where some of the lending is used to repay one borrower’s debts only. The authorities (O’Brien, Pitt, Etridge (the “Authorities”)) support the proposition that (a) if the lending was a joint borrowing transaction, the lender is not usually put on inquiry of undue influence; and (b) if the lending is a surety transaction, the lender is put on inquiry. So, for example, if a wife guarantees her husband’s debts and she receives no direct benefit for the giving of that security, in order to satisfy itself that the wife has not been unduly influenced by her husband, the lender must ensure that the wife obtains independent legal advice (explaining the nature and effect of the guarantee, and the potential risks of becoming liable for her husband’s debts if he does not repay them) so that she fully understands the risks of entering into the guarantee (and cannot later rely on a defence of undue influence).

In the present case, on appeal to the Supreme Court, Ms Catherine Waller-Edwards (“Ms Waller-Edwards”) submitted that, in a hybrid non-commercial loan situation (i.e. where some of the lending is used for the benefit of both borrowers; but some of the loan is used to repay one borrower’s debts only (and is not for the benefit of both borrowers)), the lender is put on notice of undue influence unless the element of the transaction that is for the sole benefit of one borrower is trivial.

The Authorities do not deal with a Hybrid Case scenario, and so this case now serves as authority on the application of undue influence principles in the context of hybrid borrowing, which is particularly important for financial institutions and legal practitioners dealing with secured lending.

Summary of the Supreme Court decision

This note should be read alongside our earlier article which sets out the history leading up to the Court of Appeal decision: Court of Appeal clarifies whether lenders are on inquiry of undue influence in hybrid cases

The Supreme Court judgment was handed down on 4 June 2025, where it has determined whether the lender (or other creditor) is put on inquiry by a hybrid transaction so as to trigger the requirement to take the steps as per the Etridge protocol to avoid the risk of the transaction being set aside in the future for undue influence by one of the borrowers over the other.

Ms Waller-Edwards advanced an argument that the proper test is the “bright line” test where, in circumstances involving a non-commercial relationship, if it appears on the face of the transaction that one party to the relationship is offering or has offered to stand surety to any extent more than a de minimis extent for the other (and therefore apparently to his/her financial disadvantage), the lender is “put on inquiry”. The Supreme Court has allowed Ms Waller-Edwards appeal, and the “bright line” test is the correct test for all lenders to now follow in Hybrid Cases.

Following this much needed guidance and clarity, lenders will now need to consider the implications of this judgment, and (if not already) will need to immediately put processes in place to ensure that in every Hybrid Case (where one borrower stands surety for the other for more than a de minimis value) it is complying with the Etridge protocol to avoid later dispute. What is “de minimis” is not properly defined in the judgment, and this will likely lead to lenders applying the Etridge protocol in all Hybrid Cases.

Practical considerations

When is a creditor put on inquiry?

A creditor is put on inquiry in any non-commercial hybrid transaction where, on the face of the transaction, there is a more than de minimis element of borrowing which serves to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other. In Ms Waller-Edwards’ case, she and her then partner Mr Bishop borrowed £384,000 (the “Loan”) from One Savings Bank plc (the “Bank”) and the Bank was told by Ms Waller-Edwards and Mr Bishop (before advancing the Loan) that:

1. £200,000 was being used to repay a previous charge
2. £24,000 was being used to repay Mr Bishop’s car finance (the “Car Finance”)
3. £16,000 was being used to repay Mr Bishop’s credit card (the “Credit Card”)
4. £142,000 was being used by both Mr Bishop and Ms Waller-Edwards to purchase another property (unbeknown to the Bank, this advance was in fact being used solely for the benefit of Mr Bishop, paying this sum to his ex-wife as part of a divorce settlement)

The Car Finance and Credit Card payments (amounting to £39,500) constituted the asserted suretyship part of the joint Loan.

The Supreme Court has stated that the transaction must be viewed from the lender’s perspective. Such a transaction, if viewed in this way, should be regarded as a “surety” transaction (by virtue of the Car Finance and Credit Card payments) and the lender placed on inquiry of the possibility of undue influence. The Supreme Court has stated that, being placed on inquiry, the steps set out in the Etridge protocol should then have been followed by the Bank.

The Supreme Court stated that this was not a radical departure from the present position set out in the Authorities. Rather, it accords with the principle in, and policy objectives of, the Authorities that favour certainty and afford a broad scope of protection by putting a lender “on inquiry” in every non-commercial case where a wife offers to stand surety for a loan used to pay off her husband’s debts to a more than de minimis extent. It recognises and applies, on the one hand, the low threshold for the lender being put on inquiry in such cases given the elevated risk of undue influence or misrepresentation because the transaction is on its face not to the financial advantage of the wife; and on the other, the modest steps which a lender must take to acquire protection in a case where the lender is put on inquiry.

Would it matter if Ms Waller-Edwards had derived a benefit from payment of her partners’ debts?

No, the Supreme Court found that the Court of Appeal was wrong to focus on the purpose for which the Loan was to be used. The Court of Appeal thought that Ms Waller-Edwards might have derived some benefit from the repayment of the Car Finance or Credit Card as she might have driven Mr Bishop’s car or used his credit card. The Supreme Court was firm in that, it is not a question of who benefits from the money loaned (the lender would not ordinarily know this), it is a question of whether the wife has, for no consideration, taken on a legal liability that is not her’s and for which she is otherwise not responsible. That, the Supreme Court said, is the only relevant question and is fully apparent from the face of the proposed transaction. If on the face of the proposed transaction she is undertaking to provide a guarantee of her husband’s debts for nothing in return, that legal liability should be explained to her under the Etridge protocol. Of course, the fact that she expects to benefit indirectly from the use of the money loaned solely to her partner may be what prompts her to agree to the transaction when the Etridge protocol is followed.

What should underwriters do when on notice of a hybrid surety?

In non-commercial relationships, lenders are generally put on inquiry and need to recognise signs of undue influence in situations where one borrower stands as surety for the other’s debts. In joint borrowing situations, this obligation lessens unless there are specific indications that the arrangement predominately benefits one party.

In hybrid cases (where part of the loan is designated for joint purposes and part for an individual’s benefit) it is now crucial, in light of Waller-Edwards, to consider the totality of the transaction. In Waller-Edwards, only a minor portion (c.10%) of the borrowing was used for Mr Bishop’s debts, yet this did not shift the lender’s notice requirements.

Once on notice, lenders should follow the principles set out in Etridge. If in any doubt, it would be prudent for lenders to comply with the principles set out in Etridge in order to mitigate the risks associated with later arguments of undue influence.

It would also be prudent for lenders to maintain comprehensive records of loans, document the reasons for lending decisions, and proactively identify potential risks associated with co-borrowers, so as to protect their interests should disputes later arise.

The “bright line” test applied to non-commercial hybrid cases will help underwriting departments faced with deciding whether to apply the Etridge protocol to apply workable simplistic procedures as a matter of routine. Discharge of the onus of inquiry involves recommending that the wife (or other vulnerable party) should obtain independent legal advice. That onus can be discharged simply and inexpensively in accordance with the Etridge protocol, described by Lord Nicholls at para 87 as “a modest burden for banks and other lenders. It is no more than is reasonably to be expected of a creditor who is taking a guarantee from an individual.”

Should the Etridge protocol be applied in joint-borrowing scenarios?

In the case of Pitt, which was considered in the Supreme Court judgment, the lender was not put on inquiry: On the face of the transaction, the loan was advanced to both husband and wife jointly to buy a second home and there was nothing else to put the lender on inquiry of the undue influence that the wife later alleged.

Lord Browne-Wilkinson in Pitt explained the distinction between joint borrowing and surety cases as follows:

“What distinguishes the case of the joint advance from the surety case is that, in the latter, there is not only the possibility of undue influence having been exercised but also the increased risk of it having in fact been exercised because, at least on its face, the guarantee by a wife of her husband’s debts is not for her financial benefit. It is the combination of these two factors that puts the creditor on inquiry.”

In Pitt it was held that the the risk of wrongdoing is sufficiently low to conclude that it would be unduly burdensome to borrowers and banks to require the bank to take any additional steps. That being said, if the lender is on notice of the risk of undue influence in any context, then the Etridge protocol must be applied, regardless as to whether or not the transaction is of joint borrowing or hybrid lending, so even joint borrowing should be considered by underwriting teams on a case-by-case basis (and nothing in Waller-Edwards changes that).

Should lenders continue to lend where there is hybrid lending?

Yes, although lenders will want to ensure that their processes are compliant with this judgment before continuing to lend. In the present case, the Supreme Court has recognised that the higher risk of undue influence or misrepresentation in surety transactions does not mean that all surety transactions are procured by wrongdoing. There are many good reasons why a wife or husband may knowingly and willingly agree to be a surety for their spouse’s borrowing, and it is likely to be only in a minority of cases that the wife is in fact being exploited or abused. That being said, internal processes and procedures ought to be updated to reflect the fact that lenders are deemed to be on notice in Hybrid Cases (where a party stands surety for more than a “de minimis” extent).

Lenders are, unfortunately, left with little or no guidance as to what may be de minimis such that they will likely have no option but to apply the Etridge protocol in every case of surety or hybrid borrowing going forward. 

What if the harmed party is not the wife?

The Supreme Court made the important point that, whilst this case involved a non-commercial relationship of husband and wife, and to the wife as the vulnerable party since that is the fact pattern in this appeal (and an all too common one), the same points would apply equally to other non-commercial relationships open to abuse and men can also be abused or exploited by their intimate partners.

Further or associated reading

• Barclays Bank plc v. O’Brien [1994] 1 AC 180
• C.I.B.C. Mortgages plc v. Pitt [1994] 1 AC 200
• Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773
• Midland Bank plc v Greene [1994] 2 FLR 827
• Section 199 of the Law of Property Act 1925
• High Court Decision – Waller-Edwards v One Savings Bank PLC [2023] EWHC 2386 Ch
• Court of Appeal Decision - Waller-Edwards v One Savings Bank PLC [2024] EWCA Civ 302
• Supreme Court decision: Waller-Edwards (Appellant) v One Savings Bank Plc (Respondent)