Hybrid loan transactions and undue influence – an underwriting nightmare?

The world thrives on certainty, it allows people to have confidence in their decision making. For those in practice in the early 2000s, Etridge No 2 [1] marked a clear way forward through the quagmire of O’Brien [2] type surety transaction cases with which financial institutions were dealing. (That is, cases in which lenders faced the question of when they might be put ‘on inquiry’ that a party in a non-commercial relationship may be being unduly influenced to provide security for lending that would benefit only their partner and what process should be adopted to protect both the lender and the party providing security).

It was testament to the clarity of decision that the ‘Etridge protocol’ [3] was immediately and universally adopted across the financial services industry. Everyone had sufficient certainty and could plan their processes accordingly.

However, the world has become more complex in the types of finance we take out and how those funds are used. There is now an increased culture of debt consolidation. Also, when entering new personal relationships, each party will frequently have pre-existing financial commitments.

The 2025 Waller-Edwards [4] case illustrates modern day complexity perfectly. The fact that it reached the Supreme Court reflects that hybrid loans (where a loan is partly for joint borrowing and partly to discharge the debts of one party so to that extent to the financial disadvantage of the other party) had created uncertainty.

Earlier in this litigation, the Court of Appeal had applied a ‘fact and degree’ test. It looked at the transaction as a whole to decide, as a matter of fact and degree, whether it was for joint purposes or for the benefit of the borrower with the debts. That risked creating underwriting complexities, forcing lenders into nuanced decision making and undermining the certainty previously established by Etridge No 2.

Supreme Court clarity

Instead, the Supreme Court has now adopted a ‘bright line approach’ for non-commercial hybrid transactions. So, when viewed from the lender’s perspective, if more than a de minimis (trivial) element of a loan will discharge the debts of one borrower and so may not be to the financial advantage of the other borrower, that should be regarded as a surety transaction. The lender is put on inquiry of the possibility of undue influence and the Etridge protocol must be adopted. This approach is consistent with the policy and principle which founded Etridge No 2.

So does that mean we now just end up arguing about what is de minimis? No. There’s established case law on the meaning of de minimis [5]. And any suggested residual uncertainty remains preferable to what the effect of being left with the ‘fact and degree’ test would have been.

If the future for lenders navigating the risk of undue influence in non-commercial hybrid transactions is now clear, what about the past? The Supreme Court has acknowledged the likelihood of historic transactions being opened up to legal challenge. Far from ideal, but there are well established solutions to that for lenders, such as the alternative remedy of an order for sale if a legal charge is determined not to be enforceable against one party’s interest in a property.

This is an incremental development of the valued principles in Etridge No 2. As matters settle down, it’s likely to be welcome for the protection it affords parties at risk of undue influence, and for the certainty it affords lenders and their underwriters.

How we can help

At Walker Morris, we have a large cross-departmental team of financial services experts providing regulatory, compliance and dispute resolution advice to the full range of financial services firms. For tailored, practical advice in relation to the impact of the Waller-Edwards case or any other secured lending issues, please contact Rob Payne or Richard Sandford, who will be very happy to help.

[1] Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773

[2] Barclays Bank Plc v O’Brien [1994] 1 AC 180

[3] The consequential threshold and process for a surety to obtain independent legal advice

[4] Waller-Edwards v One Savings Bank Plc [2025] UKSC 22 on appeal from [2024] EWCA Civ 302

[5] See paragraph 60 of the Waller-Edwards judgment. Also, for illustration, in Waller-Edwards, the surety element was £39,500 of a £384,000 loan and was not regarded as de minimis/trivial