A lender is on notice of undue influence where there is more than a trivial element of borrowing to pay the debts of only one of the borrowers.
Summary
The Supreme Court considered undue influence where joint applicants for a mortgage were in a non-commercial relationship.
Where part of the loan is used to discharge the debts of one of the borrowers and might not financially benefit the other person, this can constitute constructive knowledge of undue influence.
Background
Ms Waller-Edwards entered a personal relationship with Mr Bishop at a vulnerable point in her life. She became involved in his business affairs as a property developer.
The couple entered several financial transactions together, eventually resulting in a mortgage against Ms Waller-Edwards’ property. The mortgage appeared to be for the joint benefit of the borrowers, and around 10 percent of the funds advanced were used to pay off Mr Bishop’s debts.
One Savings Bank obtained a possession order following the borrowers' default.
Ms Waller-Edwards applied to have the mortgage set aside, stating that the lender was put on notice of undue influence and should have undertaken inquiries to establish whether this was the case.
Previous applications to have the mortgage set aside had failed. The lower courts held that undue influence existed, but the lender was not put on notice due to the ‘non-commercial hybrid’ nature of the transaction. Most of the mortgage was for the benefit of the couple and only a small portion was used to pay Mr Bishop’s debts.
The court’s decision
The Supreme Court held that where one of the borrowers has taken on a legal liability that is not their own, and for which they are otherwise not responsible, then lenders must follow the protocol established in Royal Bank of Scotland Plc v Etridge (No 2) [2001] UKHL 44.
The ‘Etridge’ protocol requires the lender to obtain written confirmation that the party at risk of undue influence has received independent legal advice before the transaction is finalised.
The Supreme Court held that the lower courts had made an error in law in using a ‘fact and degree’ test. For non-commercial relationships, the correct test is that where there is more than a trivial element of borrowing which only benefits one of the borrowers, the lender is put on notice. This is known as a 'bright line' test.
The court emphasised that it is how the transaction looks to the lender at the point of the application that is important, not how it looks when considered later in court.
The Supreme Court passed the case back to the lower courts to decide what remedy or relief Ms Waller-Edwards should be given.
Comment
Where a couple make a joint application for a mortgage and part of the loan is intended to repay the debts of one of the borrowers, mortgage lenders are more likely to refer the other borrower for independent legal advice before approving the application.
Where the lender fails to do so, a borrower can try and argue that the transaction should be set aside.
The court also highlighted that the arguments for constructive knowledge of undue influence apply equally to other non-commercial relationships open to abuse and that men can also be abused or exploited by their intimate partners.