One Savings Bank Plc v Catherine Waller-Edwards

Hearing date: 29 February 2024

This judgment was handed down remotely at 10:00am on 28 March 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Sir Geoffrey Vos, MASTER OF THE ROLLS:

Introduction

This is a second appeal, which raises a single question of law concerning the application of the principles laid down by the House of Lords in three well-known cases: 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). I shall refer to these three cases together as “the authorities”.

HH Judge Mitchell (the trial judge) and Mr Justice Edwin Johnson (the appeal judge) decided, as a matter of fact and degree, that the bank was not put on inquiry of the undue influence that, as it has now been established, had been exerted over Ms Waller-Edwards by her then partner, Nicholas Bishop (Mr Bishop). That undue influence had in fact led to Ms Waller-Edwards remortgaging to the bank the property at Spectrum, 32B Beaucroft Lane, Wimborne, Dorset BH21 2PA (the property) that she jointly owned with Mr Bishop.

The property was, in fact, held in joint names subject to a declaration of trust providing that 1% was held for Mr Bishop and 99% for Ms Waller-Edwards. So far as the bank knew at the time of mortgage transaction on 24 October 2013, the mortgage advance of £384,000 was being used: (a) as to some £200,000 to pay off the previous mortgage, (b) as to some £40,000 (to pay off a £24,000 debt on Mr Bishop's car and £16,000 on his credit card), and (c) as to some £142,000 to purchase another property. These figures are not exact, but are taken from the trial judge's findings at [47]–[52]. The actual completion figures are somewhat different, but the differences are not material to what we have to decide.

It is common ground between the parties that the authorities provide for two different categories of case relating to secured borrowing by two persons in a relationship.

First, there is the category of case described, perhaps only partly accurately, as a “surety case”. A surety case covers non-commercial situations where, for example, (a) one borrower guarantees the debts of the other or of a company, or (b) of more relevance to our case, the borrowers take secured borrowing on jointly owned property to pay off the debts of only one of them. In such circumstances, the lender will normally have constructive notice of the possibility of one borrower being unduly influenced by the other, and will be put “on inquiry”. In current terms, if a lender is put on inquiry, it is normally required to follow what the parties before us called the “ Etridge protocol”. The Etridge protocol involves the series of steps described by Lord Nicholls at [79] in Etridge.

Secondly, there are cases, epitomised by Pitt, where a loan is taken for the joint noncommercial purposes of two borrowers in a relationship (whether husband and wife or not). In Pitt, the bank was told that the purpose was to remortgage previous debts and to release capital for a jointly owned holiday home. In such circumstances, the lender will not normally have constructive notice of the possibility of one borrower being unduly influenced by the other, and will not be put on inquiry. I shall refer to these two clear cut categories of case as the “surety case” and the “joint borrowing case”.

The case before us raises an issue that has not seemingly been addressed (at least head on) before. That is the situation in which the borrowers seek a loan partly for their joint non-commercial purposes and partly for the benefit of one borrower only (described before us as a “hybrid case”). As already explained, from the bank's viewpoint, the £40,000 used to discharge Mr Bishop's car debt and credit card debt was for his sole benefit, whilst the remaining 90% of the loan was for joint purposes.

Ms Waller-Edwards ultimately submitted that, in a hybrid non-commercial loan situation, the lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial. She contended that the judges below had been wrong to say, as in effect they had, that: (a) the court's task was to look at the transaction as a whole so as to determine whether it was, in substance from the lender's point of view, a surety case or a joint borrowing case, and (b) the question of whether an element of a transaction that was for the sole benefit of one of the borrowers put the lender on inquiry was one of fact and degree. In effect, Ms Waller-Edwards contended for a third category of hybrid case and submitted that, in every such case where the sole benefit element was non-trivial, the lender was put on inquiry. This, she said, was clear from the authorities, and provided a bright line rule, giving certainty and clarity to lenders and borrowers alike as to how they had to proceed. Compliance with the Etridge protocol was not onerous.

The bank submitted in response that the judges below had been right. There was not a third category for hybrid cases. The authorities demonstrated that the lender was entitled to look at the transaction holistically. If it was essentially a joint borrowing transaction, the lender was not put on inquiry. If it was essentially a surety transaction, the lender was put on inquiry. The question was ultimately one of fact and degree as the judges below had said.

Lewison LJ granted Ms Waller-Edwards permission to appeal limited to the question of the correct legal test in a hybrid case, where a loan is taken out for a variety of purposes. He said that: “If (as both judges [below] held) the legal test is a question of fact and degree, then permission to challenge the judges' evaluation of that question is refused”. Accordingly, neither party sought to persuade us that, if a “fact and degree” evaluation had to be undertaken, the judges below had reached the wrong conclusion.

Before turning to the legal question we have to determine, I will (a) set out some of the essential background (taken largely from the judgments below), and (b) summarise the main points to be drawn from the authorities.

Essential background

In 2011, Ms Waller-Edwards, when she was at a vulnerable period in her life, began a relationship with Mr Bishop, who was a builder then constructing three houses including the property. She lived at that time in her own mortgage-free property at 60 Pilford Heath Road, Wimborne (the Wimborne property) and had savings of some £150,000 and a small income. On 25 May 2012, Ms Waller-Edwards exchanged her Wimborne Property (then worth some £585,000) plus £150,000 for the property (expected to be worth some £750,000 when complete). By the time of the completion of that transaction, Ms Waller-Edwards had been persuaded to accept two charges on the property, namely an existing one to a Mr Higgins for some £78,000, and a second charge in her favour for the £150,000 she had handed over to Mr Bishop. Pending completion of the building of the property, Ms Waller-Edwards and Mr Bishop began living together in the Wimborne property with her two children and his one child. Later in 2012, the loan from Mr Higgins was increased and eventually replaced by another loan and charge in favour of Mr Higgins' company. The couple moved into the property before it was complete in September 2012. The declaration of trust that I have mentioned was also executed at some stage. In these transactions, a Mr Clake of Ellis Jones Solicitors, instructed originally for Mr Bishop alone, acted for him and for Ms Waller-Edwards.

In mid-2013, the bank was approached for a loan of £440,000 secured on the property, but agreed to loan only the £384,000 already mentioned. Mr Clake acted for all three parties.

[31]–[33] of the appeal judge's judgment sets out what the trial judge had found as to the bank's knowledge at the time of the transaction. I summarise the salient points as follows:

i) The head of the bank's underwriting department said that the bank's understanding was that the couple wanted to remortgage the jointly owned property in order to pay off an existing mortgage debt and purchase another property. The remortgage was a buy to let mortgage, in the sense that the payments due to the bank would be funded by letting out the property.

ii) The bank did not know that Ms Waller-Edwards owned 99% of the equity in the property or that £142,000 was intended by Mr Bishop to be going to Mr Bishop's wife in respect of her divorce settlement.

iii) The bank did know that the loan would pay off £20,000 in car finance and £19,000 for Mr Bishop's credit card. That was a condition of the mortgage offer.

iv) Mr Richardson told the trial judge that it was not uncommon for a joint application to be made to consolidate debts and for debts to be in one party's name, or greater debt to be attributable to one party than the other. In this case, Mr Bishop was the major wage earner, so it was not unusual that debts were in his name. The bank thought that Ms...