Waller-Edwards  concerned undue influence in respect of a hybrid loan – that is a loan which is partly for joint borrowing by the couple and partly to discharge the debts of one party (often the husband) to the financial disadvantage of the other party (often the wife).

Ms Waller-Edwards opposed the lender’s possession proceedings on the basis that she had entered the loan as a result of the undue influence of her former partner Mr Bishop. She also opposed the possession proceedings on the basis that, because some of the loan was being applied for Mr Bishop’s sole benefit, the bank should have been on inquiry of the risk of undue influence to Ms Waller-Edwards and the lender’s security should not be enforceable against her.

The law had already been clarified as regards three-way loan transactions (i.e. transactions involving a couple and a lender) where on the face of the transaction the wife stands as surety for a loan for her husband (or vice versa). Three cases in the early 1990s and 2000s established the “Etridge” principle to the effect that, in such a circumstance, the lender was put on inquiry of undue influence. The lender could protect themselves against the risk of having such a transaction set aside by the party at risk (i.e. often the wife) by taking modest steps set out in what is known as the “Etridge Protocol” designed to ensure that the party at risk understood the nature of the transaction into which they were entering and the risks to them.

By contrast, in a case of a transaction which was on its face a joint borrowing transaction to the advantage of both people in the couple, the law had previously clarified that the lender was not put on inquiry, and the Etridge  principle therefore did not apply, unless the lender is aware that the loan is being made for the husband’s purposes as distinct from the joint purposes of husband and wife (or vice versa).

The distinction between the law’s treatment of these two kinds of transactions was, the Supreme Court said in Waller-Edwards, “straightforward and binary”.

Waller-Edwards, however, clarified the law in respect of the more difficult “middle-ground” situation of a hybrid loan. In Waller-Edwards, the lower courts had held it was a matter of fact and degree as to when a lender is put on inquiry of undue influence. In other words, the Court was required “to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes”. This would lead to a situation where lenders must carefully look at each hybrid transaction and determine the risk of undue influence.

“Either there is, on the face of the non-commercial transaction, a surety element giving rise to a heightened risk of undue influence or there is not…. the level of risk presented by a surety transaction is the same whether it is accompanied by joint-borrowing or not. They hybrid element does not reduce that risk.”

Accordingly, there is to be no third test for hybrid transactions – the existence of any exclusive benefit for one borrower, which is not de minimis (trivial), moves the case out of the joint loan category and into the surety category, triggering the need for lenders to comply with the modest steps set out in the “Etridge Protocol”.

Harneys does not advise on the law of England and Wales, but this judgment will be of significant interest to all lenders including in the BVI where the Etridge  principles have been applied.