Supreme Court sets out the test for where, in joint borrowing, a lender is on notice of potential undue influence

The Supreme Court has handed down judgment in the case of Waller-Edwards v OneSavings Bank, concerning the test for determining whether a lender has constructive notice of undue influence in relation to joint lending where part of the lending is to meet one borrower’s sole obligation.

Unanimously allowing Ms Waller-Edwards’ appeal, the Supreme Court has concluded that a lender is put on inquiry as to potential undue influence in this type of situation.  Applying this ‘bright line’ test, where the lender is on notice, the ‘Etridge protocol’ must be followed.

Our previous article set out the background to the case and the decision of the Court of Appeal (CoA).  The Appellant obtained permission to appeal to the Supreme Court as to the correct test for determining whether a lender is put on inquiry.  The Appellant contended, contrary to the “fact and degree” approach endorsed by the CoA, that a ‘bright line’ test should apply.  That is, that a lender is put on inquiry whenever – on the face of it – a loan will benefit one borrower more than the other, such that the other borrower is taking on a liability for no or reduced benefit, with no duty to investigate the degree to which one borrower benefits.

Below we summarise the key points from the Supreme Court judgment, and what these mean in practice for lenders.

Supreme Court judgment – key points

The Supreme Court concluded that the Appellant’s bright line test was indeed the correct test in joint borrowing cases, where “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”. 

On reaching this conclusion, the Court had particular regard to the following points:

• None of the existing authorities addressed the approach to these types of transactions where you have joint borrowing but within this an element of borrowing for only one borrower’s benefit (i.e. a suretyship). To address the hybrid position it was therefore necessary to understand why the two separate categories were treated differently.

  • The rationale coming through from the authorities was that surety transactions are considered more likely to be tainted by undue influence or misrepresentation, given the assumption by one borrower of legal liability for the other’s debts with no apparent financial benefit in return.

  • On the other hand, the risk in straightforward joint borrowing cases was sufficiently low that it was considered unnecessary to impose any additional obligations on lenders.

  • Hybrid transactions however are less straightforward, being “infinitely variable” in terms of how they are constituted, e.g. the ratio of borrowing for the parties and an individual’s obligations.

• The Respondent bank contended that this variability weighed in favour of the CoA’s “fact and degree” approach, and there being a “spectrum of risk” requiring a proportionate response. Whilst acknowledging that spectrum of risk as a matter of fact, the Supreme Court saw “no scope for a nuanced (or fact-sensitive) approach to whether the creditor is on notice or not”. The approach of the House of Lords in the authorities was a binary one: either the lender was on notice or it wasn’t; if it was, the Etridge protocol must be followed, and if it wasn’t, then nothing more was required.

• Etridge did not envisage a “debate about fine distinctions” that may arise in this type of joint lending and it was “difficult to see how such a debate could help underwriting departments faced with deciding whether to apply the Etridge protocol”. A bright line approach however “is clear, promotes certainty, and….is easy to apply”. The Court opined that the bright line test would be less onerous for lenders, and noted both that no other lenders had applied to intervene on the basis they would be affected, nor had any evidence of standard banking practices and procedures been adduced.

• As to the CoA’s concern that a bright line test would engender argument as to what constitutes ‘de minimis’ or “non-trivial”, the Supreme Court acknowledged such argument may arise, but that considered that a “fact and degree” test posed a greater risk in this regard, and noted that the “de minimis principle is of such long standing that it is surprising to regard it as a source of unworkable uncertainty”.

What does this mean for lenders?

As the Court observed, in practice different lenders may variously have been “effectively operating” the “fact and degree” or the ‘bright line’ approach since Etridge over 20 years ago.   The degree to which any individual lender is required to make procedural changes will naturally vary accordingly. 

What is clear however is that all lenders would be well advised to review their current practices and procedures, and consider critically whether the necessary systems are in place to ensure that the Etridge protocol is followed in joint lending transactions where part of the loan is due to meet one of the parties’ obligations only.  That is to say that the affected borrower should be sent to receive independent legal advice ahead of completion in order to confirm their informed consent to the transaction.

Standard joint borrowing is not affected by the decision, such as where a husband and wife buy a house together as joint tenants, as both parties will benefit equally from the loan. 

If you need any assistance in interpreting what this means for your business, please do not hesitate to reach out to Neil, Deborah or your usual TLT contact.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.