Two for the price of one

Extending the Etridge protocol

By way of reminder, the Etridge protocol came about following a series of cases, culminating in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 where a spouse or partner who had acted as surety for the other spouse’s or partner’s borrowings was able to successfully claim that there had been undue influence and that they were therefore not liable under their guarantee or charge. The lenders were adjudged to have been put on inquiry of the potential for duress.

As a result, lenders are now able to protect themselves by following the Etridge protocol, which requires the lender to communicate directly with the spouse or partner (surety), informing them that the lender would require written confirmation from a solicitor, acting for the surety, to the effect that the solicitor had fully explained to them the nature of the transaction and its practical implications.

The bank also had to ask the surety to nominate a solicitor who they were willing to instruct to advise them, separately from their partner, and act for them in giving the necessary confirmation to the bank. This has become standard practice in the banking sector where English law applies.

This should be contrasted with a non-commercial joint borrowing by a couple where, on the face of the transaction, the loan was advanced to a couple jointly, the lender was not put on inquiry of possible duress (unless it was aware that the loan was being made for one partner’s purposes as distinct from the couple’s joint purposes). In such cases, there is no need for the lender to follow the Etridge protocol.

In the recent Supreme Court case of Waller-Edwards v OneSavings Bank plc [2025] UKSC 22, the court considered the situation in relation to non-commercial “hybrid” transactions. In these cases, there is a joint borrowing by a couple but with an element of the borrowing which serves to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other. In this case, the loan was in the region of £300,000, of which the lender was aware that about £30,000 was to be used to discharge a prior debt owed by one of the borrowers. The court decided that if, on the face of the transaction, there was more than a de minimis element of the loan being used in this way, the lender is put on notice of the possibility of undue influence and should follow the Etridge protocol to protect itself.

Comment

This is what is known as a “bright line test”, which makes life easier for the lender in that there is no ambiguity. They don’t have to make a difficult judgment about the degree of borrowing being used in this way. If it exists and is not de minimis, they simply protect themselves by following the straightforward and inexpensive Etridge protocol.

Mortgagee’s duty on enforced sale

Our second case, Finlayson v Caterpillar Financial Services Corp [2025] UKPC 24, is a Privy Council decision in relation to Bahamian litigation. The simple facts of the case are that a company borrowed a loan from a lender for the construction of a super-yacht. This loan was guaranteed by the two beneficial owners of the borrower. There were major problems with the construction of the yacht and its subsequent use so that when the borrower eventually defaulted on its loan, the lender had great difficulty in selling the yacht or getting any sort of meaningful valuation, and eventually agreed to sell it to a buyer on an “as is, where is” basis (which is always accompanied by low price because the purchaser takes so much risk).

This resulted in a shortfall on recovery, and so the lender pursued the guarantors who argued that they were not liable because the lender had failed in its duty to take reasonable precautions to get the best price reasonably obtainable at the time of the sale.

This included an argument over whether the burden of proof fell on the guarantors or the lender. The guarantors relied on the case of Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 which related to the sale of a mortgaged piece of real estate in Hong Kong. It feels like there is an element of clutching at straws here. The Tse Kwong case did indeed determine that the burden of proof lay with the mortgagee in that case, but this was because the mortgagee had sold the mortgaged asset to a company in which it had an interest.

There was, therefore, a clear conflict of interest, hence why the burden of proof shifted to the mortgagee. The Privy Council in the current case therefore confirmed that, generally, the burden of proof lies with the party claiming that there had been a breach of the duty, unless there is a conflict of interest (which there wasn’t in this case).

Comment

While this does not create any new law, it is a useful reminder of the law in this area which, of course, applies to all forms of asset, not just ships.

It is also worth remembering that it is not just mortgagors and guarantors who might bring such a claim. Very often, where a mortgaged property is subject to multiple mortgages, mortgagees lower down the pecking order are also vulnerable to loss if the mortgaged property is sold at below market value. Of course, in such cases there will normally be an intercreditor agreement.

In the most sophisticated of these, where a security agent is involved, the security agent will also want to protect itself from claims by the lenders on behalf of whom it is acting. See for example the fair value provisions in the LMA form of Intercreditor Agreement, where the security agent can obtain a “fair value opinion” from any financial adviser which it has engaged in the process.

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