One Savings Bank PLC v Waller-Edwards

Factual and Procedural Background

This case concerns a second appeal raising a single question of law regarding the application of established principles from three key authorities: Barclays Bank plc v. O'Brien, C.I.B.C. Mortgages plc v. Pitt, and Royal Bank of Scotland v. Etridge (No 2). The dispute arose from a remortgage transaction involving a jointly owned property between two parties in a non-commercial relationship, where undue influence was exerted by one party over the other.

The property was held under a declaration of trust with 1% interest held by one party and 99% by the other. The mortgage advance of £384,000 was used partly to pay off an existing mortgage, partly to discharge debts in the sole name of one party, and partly to purchase another property.

The trial judge and the first appeal judge found that undue influence had been exerted by one party over the other, but that the lending bank was not put on inquiry of such undue influence. The bank initiated possession proceedings after the relationship between the parties ended and mortgage payments ceased.

The legal issue concerns whether, in a "hybrid" loan case—where part of the loan benefits both borrowers jointly and part benefits one borrower solely—the lender is put on inquiry of undue influence.

Legal Issues Presented

1. What is the correct legal test to determine when a lender is put on inquiry in a hybrid non-commercial loan transaction involving joint borrowers where part of the loan benefits one borrower solely?
2. Whether the presence of a non-trivial element of the loan solely benefiting one borrower automatically puts the lender on inquiry of undue influence?
3. Whether the lender should assess the transaction as a whole to decide if it is essentially a surety case or a joint borrowing case?

Arguments of the Parties

Appellant's Arguments

• In hybrid loan cases, the lender is put on inquiry unless the part of the transaction benefiting only one borrower is trivial.
• The court should not view the transaction as a whole to categorize it strictly as a surety or joint borrowing case.
• A clear, bright-line rule should apply to provide certainty to lenders and borrowers regarding the application of the Etridge protocol.

Respondent's Arguments

• The trial and appeal judges correctly applied the law by assessing the transaction holistically.
• There is no separate third category of hybrid cases; the lender is put on inquiry only if the transaction is essentially a surety case.
• The question of whether the lender is put on inquiry is one of fact and degree, not a bright-line rule.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined the established legal authorities which distinguish between "surety cases" and "joint borrowing cases" in the context of undue influence and constructive notice. The key principle is that a lender is put on inquiry in surety cases—where one borrower guarantees the debts of the other and the transaction is not to the surety's financial advantage—while in joint borrowing cases, where the loan is for joint non-commercial purposes, the lender is not put on inquiry.

The court addressed the novel question of "hybrid cases," where part of the loan benefits both borrowers jointly and part benefits one borrower solely. The appellant argued for a bright-line rule that any non-trivial sole benefit element puts the lender on inquiry. The court rejected this, holding that the correct legal test requires a holistic, fact-sensitive examination of the transaction as a whole.

The court emphasized that the lender's perspective governs the inquiry threshold. The presence of a minor element benefiting one borrower solely does not automatically impose inquiry obligations if the overall transaction is essentially a joint borrowing. The court noted practical difficulties in identifying the sole benefit element and cautioned against imposing an unduly onerous burden on lenders.

Applying these principles to the facts, the court agreed with the trial and appeal judges that the loan was essentially a joint borrowing for joint purposes. The approximately 10% of the loan used to discharge debts solely in one borrower's name did not, as a matter of fact and degree, convert the transaction into a surety case that would put the bank on inquiry.

Holding and Implications

The appeal is dismissed.

The court held that in hybrid non-commercial loan transactions, the lender is not automatically put on inquiry merely because a non-trivial portion of the loan benefits one borrower solely. Instead, the transaction must be assessed as a whole to determine whether it is essentially a surety case or a joint borrowing case. This decision affirms the existing legal framework without creating a new category or bright-line test for hybrid cases.

The direct effect is that the lender in this case was not put on inquiry and is not liable for the undue influence exerted between the borrowers. No new precedent is established beyond clarifying the application of existing authorities to hybrid cases.