A recent decision of the Supreme Court affects the circumstances in which a lender bank will be put “on inquiry� in non-commercial loan transactions involving couples. This article considers the state of play.

A bank can be put “on inquiryâ€� whenever a party agrees to act as guarantor for a loan made to another party, where the bank is aware that the loan will be used to clear a debt. The principle exists to protect potentially vulnerable parties from risk of undue influence over loans. The article sets out practical implications of a recent judgment for non-commercial parties (i.e. couples or family members) who jointly enter into a loan agreement where a proportion of the loan is for one party’s own purposes, to the disadvantage of the other party, and the practical implications for lender banks.

The following article, from Sophia Smout, associate, Hunters Law, examines a UK Supreme Court ruling that has implications for lenders making non-commercial loans involving couples. (Further details below on the author.)

We hope readers find this material valuable and invite responses. This article is designed to foster conversations; the usual editorial disclaimers appl. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The well-known cases of Barclays Bank v O’Brien (1), CIBC Mortgages plc v Pitt  (2) and Royal Bank of Scotland v Etridge (No 2) (3) established that a lender will be put “on inquiryâ€� in any non-commercial loan transaction in which one party to the relationship is agreeing to stand surety for the personal debts of the other. 

O’Brien established that a bank will be put “on inquiryâ€� whenever one party agrees to act as guarantor for a loan made to the other party, where the bank is aware that the loan will be used to clear that party’s debts. Etridge confirmed that, where the loan is to be made to the couple jointly, the lender will not be put on inquiry unless the bank is aware that the loan will be used for one party’s purposes only, rather than for the couple’s joint purposes. The principle exists to protect potentially vulnerable parties from the risk of undue influence in relation to the loan, in circumstances where they are agreeing to assume legal liability for another’s debt, without any personal financial gain. 

If a bank is put “on inquiry,â€� it must follow the steps known as the Etridge protocol, in order to mitigate the risk that the potentially vulnerable party’s agreement has been procured by undue influence. The lender must ensure that the vulnerable party has obtained independent legal advice on the transaction; they must inform the solicitor if they have any suspicions about undue influence, in addition to providing information on the other party’s financial affairs. If the Etridge protocol is not followed, the transaction should not proceed; if it does, then the loan can be set aside as against the lender.  

Whilst these are well-established principles in sole- or joint-name transactions where the loan is for one party’s sole benefit, the position was less clear in joint-name cases where the loan was to be used partly for the couple’s joint purposes, and partly to clear one party’s debts ("hybrid" loans). This was the context behind the transaction in Waller-Edwards v One Savings Bank plc (4), which came before the Supreme Court in June this year. 

In 2013, Catherine Waller-Edwards and her then-partner, Nicholas Bishop, entered into a loan agreement with the respondent bank, whereby the bank agreed to lend £384,000 ($516,775) to the couple to remortgage a property which Bishop was building. As far as the bank was aware, most of the loan was for the couple’s joint purposes, apart from £39,500, which was, as a condition of the loan, to be used to pay off Mr Bishop’s existing personal debts. The majority of the loan was used for Mr Bishop’s sole purposes. When the relationship began, Ms Waller-Edwards was financially secure, with her own (unmortgaged) property and savings. By the time the bank repossessed the property, she was in significant arrears with the mortgage and had no personal savings with which to pay off the debt. 

The County Court found that Ms Waller-Edwards had been unduly influenced by Mr Bishop into entering into the loan agreement. It also found, however, that the bank was not put “on inquiryâ€� because, viewed as a whole, this was joint borrowing for joint purposes. The High Court and Court of Appeal agreed. Overturning this, the Supreme Court found that a lender bank will be put on inquiry in non-commercial hybrid loan transactions where a “more than trivialâ€� proportion of the loan will be used to discharge one party’s debts. 

In such circumstances, the bank must view the transaction as a surety transaction and must follow the Etridge protocol to reduce the risk that the surety party has been unduly influenced into agreeing to the loan.

The implications for lender banks 
The decision places the burden on lenders to follow the Etridge protocol in a greater number of transactions, by making clear that lenders are “on inquiry� whenever there is a “surety� element to the loan – that is, whenever one party is agreeing to take on a legal liability they should not otherwise have, regardless of whether that liability represents the entirety of the loan or only a (non-trivial) proportion of it, and whether the borrowing is sole or joint. Borrowers and lenders alike may find that a greater number of loan transactions will be subject to heightened due diligence as a result.

Arguably, however, the Supreme Court’s decision promotes greater certainty for lenders in hybrid transactions than the Court of Appeal’s preferred approach, in which lenders would only be put “on inquiryâ€� where, when viewed as a whole and as a matter of ‘fact and degree’, the loan was being made for one borrower’s debts rather than the borrowers’ joint purposes. The “fact and degreeâ€� approach would require lenders to assess the level of risk of undue influence on a fact-specific basis in every hybrid transaction case, only applying the Etridge protocol where the risk is deemed to be high. 

Whilst hybrid loans may assume different forms, there would be less certainty for lenders if they were required to determine this “spectrum of riskâ€� in each transaction, depending on its specific nature. Such a nuanced test would likely make it difficult for lenders to adopt a uniform approach to hybrid loans. 

The Supreme Court’s approach instead reduces the question to whether there is a surety element to the loan; if there is, then there is an inherent risk of undue influence, and accordingly the Etridge protocol should be followed. Whilst some uncertainty could arise over the question of “triviality,â€� the Supreme Court’s approach avoids the need, on the lender’s part, for a more subjective assessment of the likely risk of undue influence. 

Lenders can instead easily identify the circumstances in which they will be "on inquiry" in hybrid loan cases, and apply the Etridge protocol as a straightforward, inexpensive means of discharging the burden of inquiry.

The implications for borrowers
The decision may introduce unnecessary friction for couples engaging in ordinary borrowing transactions where there is no realistic prospect of undue influence occurring, as lenders will now be required to increase their due diligence wherever there is a non-trivial surety element, rather than adopting a nuanced, fact-specific approach to the level of risk. 

On balance, however, the Supreme Court’s approach offers greater protection for potentially vulnerable parties entering non-commercial loans with their partners. The decision recognises that the risk of undue influence increases whenever a party assumes a legal liability for which they should otherwise have no responsibility, to their potential financial detriment – even where that liability arises in the context of a joint loan which might otherwise be largely for that party’s financial benefit. 

In turn, the judgment recognises the myriad forms which undue influence and economic abuse may take and offers a level of practical protection which will apply uniformly to the majority of non-commercial surety transactions. 

The judgment therefore strikes precisely the right balance between providing certainty for banks as to the steps they must take and the circumstances in which they must take them, and protection for borrowers whose vulnerability might otherwise be overlooked because of the joint and hybrid nature of the loan. 

The Supreme Court has thus re-acknowledged the inherent distinction between commercial and non-commercial loans, in which parties to the former may be expected to bring a level of business acumen to the transaction, but the latter may be tainted by power imbalance, blind trust, or abusive dynamics. 

Footnotes:

1,  [1994] 1 AC 180 
2,  [1994] 1 AC 200
3,  [2001] UKHL 44; [2002] 2 AC 773
4,  [2025] UKSC 22

About the author
Sophia Smout joined Hunters in October 2022 as a trainee solicitor and qualified in October into our Dispute Resolution team.

Prior to joining Hunters, Sophia studied BA English and modern languages (German) at Oriel College, University of Oxford, before completing her MA law and legal practice course at the University of Law in Bristol. As a student, Sophia was a volunteer caseworker with the National Centre for Domestic Violence (NCDV) and continues to assist/shadow the family law team with remote appointments for the Plymouth Legal Advice Centre. She is a member of the Oriel College Alumni Advisory Committee and helps to promote engagement, access and funding.