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Cite as: [2024] Ch 279, [2024] 3 WLR 281, [2024] EWCA Civ 302, [2024] WLR(D) 171

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		Neutral Citation Number: [2024] EWCA Civ 302
		Case No: H00BH712 Appeal No: CA-2023-001936

IN THE COURT OF APPEAL OF ENGLAND AND WALES (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
CHANCERY APPEALS (ChD)
Mr Justice Edwin Johnson
HH Judge Mitchell (County Court at Bournemouth & Poole)

Royal Courts of Justice
Strand, London WC2A 2LL

28 March 2024

B e f o r e :

SIR GEOFFREY VOS, MASTER OF THE ROLLS
LORD JUSTICE PETER JACKSON
and
LADY JUSTICE FALK
____________________

Between:

	ONE SAVINGS BANK PLC	Claimant/Respondent
	- and -
	CATHERINE WALLER-EDWARDS	Defendant/Appellant

____________________

Marc Beaumont (direct access) for the Appellant/second Defendant (Mrs Waller-Edwards)
Antonia Halker and John Ditchburn (instructed by Equivo Limited) for the Respondent/Claimant (the bank)

Hearing date: 29 February 2024
____________________

HTML VERSION OF JUDGMENT
____________________

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 non-commercial 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 Waller-Edwards and Mr Bishop were in a relationship and had joint expenditure.

v) Box 42 of the mortgage application referred to an existing mortgage in the sum of £200,000, Mr Bishop's credit cards of £16,000 and Mr Bishop's unsecured bank loan of £24,000. We were shown that document after the hearing. It is notable that the boxes indicating which of those debts would be repaid by the remortgage transactions were not ticked for any of these three items.

When the transaction was completed, £233,801.76 was used to pay off the existing charge and most of the balance was in fact used to pay Mr Bishop's wife. The latter was another transaction to which Ms Waller-Edwards consented under Mr Bishops' undue influence. The mortgage was also subject to a condition that Ms Waller-Edwards and Mr Bishop would let the property within 30 days of completion, but this did not occur.

Subsequently, the relationship between Ms Waller-Edwards and Mr Bishop terminated. Mr Bishop moved out of the property towards the end of 2014, and ultimately ceased paying the mortgage instalments. On 4 November 2021, the bank initiated these proceedings seeking possession of the property and the arrears.

The appeal judge noted that the facts of this case were particularly sad, because, when Ms Waller-Edwards met Mr Bishop, she was the sole owner of her own unencumbered home, and had personal savings. By the time the relationship ended, the series of transactions engineered by Mr Bishop left her in a heavily mortgaged home, which she was not supposed to be occupying, with no personal savings and lacking the means to maintain the payments due. I entirely endorse the appeal judge's view of the sadness of this case.

As I have said, the trial judge decided that the mortgage had been entered into as a result of Mr Bishop's undue influence, but that the bank did not have notice of it. He gave judgment for £451,638.87 with costs to be added to the security. The trial judge dealt with the question of whether the bank was put on inquiry at [113]-[146]. He held that it had not. He said at [119] that the case was not, on the face of it "what would be called a surety-type case". At [121], he said that "whilst to a limited extent the instant situation could be described as hybrid, overall, the pattern of borrowing is much more consonant with what was being considered in Pitt than the straightforward surety case in Etridge". Having gone through all the alleged red flags raised against the bank by Ms Waller-Edwards, he held at [136] that the only arguable one was Mr Bishop's car debt and credit card debt. At [137] he concluded:

The question in the end is whether the fact that the re-mortgage was, to a minor extent, in part, to repay Mr Bishop's credit debts should have put the Bank on inquiry. This is a matter of fact and degree but in the end, I do not accept that the fact that just over 10% of the total borrowing was to go to Mr Bishop's credit debts, tip[s] this case into one akin to a surety case.

The appeal judge dealt with what he called the "inquiry issue" at [62]-[112]. He upheld the trial judge as to both the facts and the law. Having referred to the authorities, the appeal judge said at [82] that the fact that, to the knowledge of the lender, the transaction was not, on its face, to the financial advantage of one of the borrowers put the lender on inquiry, where the relevant relationship was a non-commercial one. He thought that principle encompassed what he referred to as the partial surety case. At [89]-[90], he held that the identification of partial surety cases to which the O'Brien principles could legitimately be applied was necessarily a fact sensitive one. At [94], he held that it was "not simply a numbers exercise" and that it was "necessary to look at the transaction constituted by the [r]emortgage as a whole" as Judge Rich QC had done in Midland Bank plc v. Greene [1994] 2 FLR 827 at 833. He thought that the overriding consideration was whether the transaction was or should have been perceived by the Respondent as a transaction which was not to the financial advantage of Ms Waller-Edwards. Peter Jackson LJ suggested in argument, and I agree, that this formulation might be more accurate if it referred to a transaction that "might not be" to Ms Waller-Edwards' advantage. Ultimately at [111], the appeal judge concluded that the trial judge had correctly identified the question which he had to answer as one of fact and degree, and reached an answer to that question which was justified on the facts of the case, as he had found them.

The authorities

The authorities are well known. I do not intend to provide a comprehensive treatise on each of them. They need to be read. That said, the parts of them upon which the parties have relied are relatively short and bear recitation here, as I shall be following the principles adumbrated in them.

In O'Brien, Lord Browne-Wilkinson (with whom the other judges agreed) described the key to the problem as being "to identify the circumstances in which the creditor will be taken to have had notice of the wife's [now a party to any relationship] equity to set aside the transaction". He continued in a classic passage at pages 195-6:

The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it.

Therefore where a wife has agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife's equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety. …

Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction. It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights.

In Pitt, Lord Browne-Wilkinson (with whom the other judges agreed) found that a bank was not put on inquiry by a transaction in which equity in a property was released, as far as the claimant bank was aware, for the purposes of buying a holiday home. Lord Browne-Wilkinson said at page 211D that: "[s]o far as the [claimant bank] was aware, the transaction consisted of a joint loan to husband and wife to finance the discharge of an existing mortgage …, and as to the balance to be applied in buying a holiday home. The loan was advanced to both husband and wife jointly. There was nothing to indicate to the [claimant bank] that this was anything other than a normal advance to husband and wife for their joint benefit". Lord Browne-Wilkinson further explained at page 211G that: "[w]hat 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 Etridge, the House of Lords was dealing with 8 cases of alleged undue influence and constructive notice in the context of loans secured on matrimonial property. All 5 judges gave substantive judgments. Every member of the House agreed with Lord Nicholls, whose judgment is, therefore, the most authoritative. For our purposes, the most important section of Lord Nicholls' speech is at [40]-[49]. I am reciting that section extensively, because it was subjected to minute analysis in argument, and I do not think it can be fairly understood without seeing the passage as a whole:

40. … The law imposes no obligation on one party to a transaction to check whether the other party's concurrence was obtained by undue influence. But O'Brien has introduced into the law the concept that, in certain circumstances, a party to a contract may lose the benefit of his contract, entered into in good faith, if he ought to have known that the other's concurrence had been procured by the misconduct of a third party.

41. There is a further respect in which O'Brien departed from conventional concepts. Traditionally, a person is deemed to have notice (that is, he has 'constructive' notice) of a prior right when he does not actually know of it but would have learned of it had he made the requisite inquiries. A purchaser will be treated as having constructive notice of all that a reasonably prudent purchaser would have discovered. In the present type of case, the steps a bank is required to take, lest it have constructive notice that the wife's concurrence was procured improperly by her husband, do not consist of making inquiries. Rather, O'Brien envisages that the steps taken by the bank will reduce, or even eliminate, the risk of the wife entering into the transaction under any misapprehension or as a result of undue influence by her husband. The steps are not concerned to discover whether the wife has been wronged by her husband in this way. The steps are concerned to minimise the risk that such a wrong may be committed.

42. These novelties do not point to the conclusion that the decision of this House in O'Brien is leading the law astray. Lord Browne-Wilkinson acknowledged he might be extending the law: see [1994] 1 AC 180, 197. Some development was sorely needed. The law had to find a way of giving wives a reasonable measure of protection, without adding unreasonably to the expense involved in entering into guarantee transactions of the type under consideration. The protection had to extend also to any misrepresentations made by a husband to his wife. In a situation where there is a substantial risk the husband may exercise his influence improperly regarding the provision of security for his business debts, there is an increased risk that explanations of the transaction given by him to his wife may be misleadingly incomplete or even inaccurate.

43. The route selected in O'Brien ought not to have an unsettling effect on established principles of contract. O'Brien concerned suretyship transactions. These are tripartite transactions. They involve the debtor as well as the creditor and the guarantor. The guarantor enters into the transaction at the request of the debtor. The guarantor assumes obligations. On the face of the transaction the guarantor usually receives no benefit in return, unless the guarantee is being given on a commercial basis. Leaving aside cases where the relationship between the surety and the debtor is commercial, a guarantee transaction is one-sided so far as the guarantor is concerned. The creditor knows this. Thus the decision in O'Brien is directed at a class of contracts which has special features of its own. That said, I must at a later stage in this speech return to the question of the wider implications of the O'Brien decision.

The threshold: when the bank is put on inquiry

44. In O'Brien the House considered the circumstances in which a bank, or other creditor, is 'put on inquiry.' Strictly this is a misnomer. As already noted, a bank is not required to make inquiries. But it will be convenient to use the terminology which has now become accepted in this context. The House set a low level for the threshold which must be crossed before a bank is put on inquiry. For practical reasons the level is set much lower than is required to satisfy a court that, failing contrary evidence, the court may infer that the transaction was procured by undue influence. Lord Browne-Wilkinson said ([1994] 1 AC 180, 196):

'Therefore in my judgment a creditor in put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.'

In my view, this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts.

45. The Court of Appeal, comprising Stuart-Smith, Millett and Morritt LJJ, interpreted this passage more restrictively. The threshold, the court said, is somewhat higher. Where condition (a) is satisfied, the bank is put on inquiry if, but only if, the bank is aware that the parties are cohabiting or that the particular surety places implicit trust and confidence in the principal debtor in relation to her financial affairs: see Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 719.

46. I respectfully disagree. I do not read (a) and (b) as factual conditions which must be proved in each case before a bank is put on inquiry. I do not understand Lord Browne-Wilkinson to have been saying that, in husband and wife cases, whether the bank is put on inquiry depends on its state of knowledge of the parties' marriage, or of the degree of trust and confidence the particular wife places in her husband in relation to her financial affairs. That would leave banks in a state of considerable uncertainty in a situation where it is important they should know clearly where they stand. The test should be simple and clear and easy to apply in a wide range of circumstances. I read (a) and (b) as Lord Browne-Wilkinson's broad explanation of the reason why a creditor is put on inquiry when a wife offers to stand surety for her husband's debts. These are the two factors which, taken together, constitute the underlying rationale.

47. The position is likewise if the husband stands surety for his wife's debts. Similarly, in the case of unmarried couples, whether heterosexual or homosexual, where the bank is aware of the relationship: see Lord Browne-Wilkinson in O'Brien's case, at p 198. Cohabitation is not essential. The Court of Appeal rightly so decided in Massey v Midland Bank Plc [1995] 1 All ER 929: see Steyn LJ, at p 933.

48. As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband's debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes. That was decided in [Pitt].

49. Less clear cut is the case where the wife becomes surety for the debts of a company whose shares are held by her and her husband. Her shareholding may be nominal, or she may have a minority shareholding or an equal shareholding with her husband. In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company. Such cases cannot be equated with joint loans. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company's business.