Scottish Court of Session Decisions

On September 11, 1906, John Wilson Bruce, accountant and property agent, Glasgow, brought an action against the Scottish

Page: 425↓

Amicable Life Assurance Society, in which he sought declarator that the defenders were bound to execute and deliver, on receipt of the considerations therein mentioned, two assignations of certain bonds and dispositions in security for the principal sum of £28,000, over his property fronting Renfield Street in Glasgow, the first in favour of the Refuge Assurance Company, Limited, and the second in favour of Thomas Richard Canch, 45 East Trinity Road, Edinburgh. The first assignation was of the principal sum contained in the said bonds, and no question arose as to its terms. The second was of the sum of £773, 11s. 9d., which was the amount of arrears of interest, &c. on the bonds said by the defenders to be still due, and as to its terms a question had arisen whether the defenders were entitled to have inserted a certain clause.

The clause desired by the defenders was—“Which interest the said John Wilson Bruce ( the pursuer) and the said Scottish Amicable Life Assurance Society ( the defenders) hereby acknowledge and declare to be correctly stated at the said sum of £773, 11s. 9d. after settlement of accounts between them.”

The facts are given in the opinion of the Lord Ordinary ( Salvesen), who, on 24th January 1907, pronounced an interlocutor finding the defenders bound to deliver the assignations as craved on having first received due premonition.

Opinion.—“The pursuer in this action is the proprietor of certain heritable subjects in Glasgow which have been disponed to the defenders in security of a cumulo sum of £28,000, under bond and disposition in security granted by the previous proprietor, and relative bond of corroboration by the pursuer.

On 8th November 1901 the defenders raised an action of maills and duties in the Sheriff Court of Lanarkshire, at Glasgow, in the ordinary form, and under a decree which they obtained in that action they have since been in possession of the subjects and drawn the rents. A second action of the same nature was raised on 25th January 1905 by the defenders against the pursuer, in which they obtained decree on 2nd November 1905. This decree was extracted on 18th November.

As might be inferred from the defenders requiring to take legal proceedings to enforce their rights, they were at that time desirous of obtaining payment of the principal sums and interest due to them. With this object they, on 12th August 1904, served the usual schedule of intimation, giving notice to the pursuer that payment was required at the ensuing term of Martinmas. This demand was subsequently departed from, but as it might at any time have been renewed, the pursuer appears to have looked about for some lender who would take their place.

Ultimately the pursuer was successful in arranging with the Refuge Assurance Company to advance the principal sum of £28,000, and with Mr Thomas Richard Canch to advance the balance of interest and expenses, and the present action has now been brought to obtain declarator that the defenders are bound to execute and deliver assignations in favour of these two lenders on being paid the considerations specified in the draft assignations produced. The terms of the proposed assignation in favour of the Refuge Assurance Company have been settled, and the only dispute as regards the assignation in favour of Mr Canch is whether the defenders are entitled to insert a clause referring to the arrears of interest in the following terms:—“… [ quotes clause supra] …”

The defenders maintain their right to have this clause inserted before they are asked to denude of their security. They say that unless they have a final clearing up of accounts now, the pursuer may at any time raise an action against them to obtain a count and reckoning as to their intromissions with his property while they were in possession as heritable creditors, and that he has intimated that his reason for objecting to the clause is that he reserves his right to bring such an action. In the event of his doing so and being unsuccessful, they will only have his personal security for payment of the expenses, whereas if the action is raised while they are still in possession under their bond they will be entitled to charge their expenses in the action against the real estate disponed to them in security. This consequence is said to follow from the fact that the bond contains the usual penalty clause, which, according to their contention, entitles them to charge expenses in connection with such an action, to an extent not exceeding £3600 (one-fifth of the principal sum) against the property in preference to subsequent bondholders.

The validity of this argument depends upon whether the penalty clause gives security for the expenses of such an action as that which the defenders apprehend. I was referred to a number of institutional writers, but as they are all to the same effect I need only note 1 Bell's Coms. 701 (M'Laren's edn.), and the authorities on which that learned author relies. It seems now to be quite settled that the penalty in a bond covers all expenses that may be incurred in making the debt effectual, as, for instance, the expense of diligence and even the expense of a litigation collaterally arising in making effectual the claims. The strongest illustration of this doctrine is to be found in the case of Orr v. Mackenzie, 1 D. 1046, where it was stated by Lord President Hope that the penalty in a bond covers the necessary expense of obtaining payment, whoever may be the party who has resisted payment. The question here is whether this rule applies to the defenders' possible expenses in the action which they anticipate, but which has not yet been raised. In my opinion they do not.

In the first place, it falls to be noted that the defenders have been tendered full payment of all the sums, whether of principal, interest, or expenses, which they claim. Secondly, the proposed action will not lie

Page: 426↓

against them as heritable creditors only, but as heritable creditors who chose to enter into possession, and thereby constituted themselves trustees for the administration of the estate. Such expenses are not expenses necessary to render the security effectual, or in defending the security, but expenses which may be incurred in justifying their administration, and I think it would be unjust to apply the principle laid down in Orr's case to such expenses. The owner of property over which there are bonds, and the reversionary value of which is small, is already, according to our law, in a very unenviable position. Not merely may the heritable creditor, after three months' intimation, sell the heritable subjects, but he is also entitled under the personal obligation in the bond at any moment to obtain full payment on giving a fourteen days' charge under the compulsitor of making the debtor bankrupt if he does not find the money within that time. If in addition the creditor is entitled to hold the property and prevent the debtor from arranging with other lenders to enable him to pay up the sum due under the bond until the debtor admits the accuracy of his accounts, a powerful lever will be conferred upon him of forcing the debtor to acknowledge what may be quite unfounded claims. An action of accounting against a heritable creditor, who has been in possession for several years, may conceivably be one which may not be finally determined until the litigation has run the whole gamut of the law courts; and all this time, if the defenders' contention be sound, the debtor must submit to having his estate administered by heritable creditors in whom he has no confidence, and of whose maladministration in the past he may be complaining. From the point of view of subsequent bondholders, of whom I was informed there are several in the present case, the injustice of having their security diminished by a reckless litigation in which the debtor may involve himself is even more obvious. On the other hand, the only inconvenience which the opposite view involves is that the heritable creditor who enters into possession of his debtors' subjects may have to run the risk of having no recourse for the expenses of an unfounded action against him except against the personal estate of his opponent, a risk which most litigating defenders are already exposed to. I am accordingly of opinion that the defenders are not entitled to have the clause in dispute inserted as a condition of their granting the assignation in favour of the parties who are willing to take their place as bondholders.

This view seems also to be alone consistent with section 49 of the 1874 Act, although this section was not referred to at the debate.

It was further argued that apart from the penalty clause the defenders are in the position of trustees, who, it is said, are not bound to denude until they have got a final settlement of their accounts with the beneficiaries. I do not think the analogy holds; the relation between the pursuer and defenders under the bond and disposition in security which they are asked to assign is that of debtor and creditor; and I am not aware of any case where a creditor who has a security can refuse to part with it when he is offered full payment of the sums for which he claims to hold it, even although a right is reserved to challenge the amount of his claim in a subsequent process.

The defenders also maintained a subsidiary argument to the effect that they were only bound to receive payment of the principal sum on getting three months' premonition. It was not disputed that this was their right under the Act of 1868, the plain object being that the bondholder should have a reasonable time within which to look out for another investment. The only question therefore is whether in point of fact such a premonition has been given. In my opinion the correspondence discloses that it has not….

I ought to notice one argument that was pressed by the pursuer's counsel to the effect that no premonition was required where the creditor was doing diligence to recover payment of the principal sum.

No doubt, where a personal charge has been given, the bondholder cannot refuse to take payment of his claim, but I do not think the stereotyped conclusion in an action of maills and duties under which a creditor who enters into possession may draw the rents not merely to pay the interest due from time to time, but also to extinguish pro tanto the principal sum, is in the same category. Such a diligence is a real diligence attaching only the revenue. In the present case, as in most instances, it was really a mere form, since the interest was largely in arrear, and I see no reason why a heritable creditor who has entered into possession because his interest has fallen into arrear is entitled to less favourable consideration than one whose interest has always been regularly paid. I have, accordingly, pronounced findings embodying the results at which I have arrived; and I have given either party leave to reclaim so that there may be a prospect of the case being disposed of before the Whitsunday term.”

The defenders reclaimed, and argued—1. The defenders, while bound to grant an assignation instead of a discharge, were not bound to do so if they were put in a worse position thereby. Now the tender of payment here was only a qualified one, with a reservation of claims, and they were not hound to accept such a tender and give a discharge, but were entitled to have a full statement of all claims and an unconditional tender— Bilsborough v. Bosomworth, December 5, 1861, 24 D. 109. Similarly a security-holder was not bound to give up his security-subject on a mere payment of the debt, but was entitled first to be freed from all claims arising out of the transaction

Will v. Elder's Trustees, November 6, 1867, 6 Macph. 9. A creditor was entitled to demand two things, the payment of his debt and the ascertainment of the exact amount due, before granting a receipt. He was entitled to remain in petitorio. The questions sought to be reserved here were not of counter claims, but were of the amount due under the bond, and any subsequent action would be of the nature of a condictio indebiti, to recover part of what had been paid. The creditors qua trustees for the debtor were entitled to be freed from all claims before demitting. The interest of the defenders in having this clause inserted was twofold. They were entitled to the benefit of the penalty clause in the bond to cover their expenses in the threatened action of count and reckoning, were they successful— Orr v. Mackenzie, June 20, 1839, 1 D. 1046—and this benefit they would lose were they to assign the bond without precluding the threatened action. And further, if the clause were omitted, they would warrant debitum subesse to the assignee, and would be personally liable if the debtor subsequently challenged it— Reid v. Barclay, &c., June 6, 1879, 6 R. 1007, 16 S.L.R. 582. The Lord Ordinary's interlocutor should therefore be recalled. 2. If the assignations without the desiderated clause must be granted, then premonition was necessary, and in this the Lord Ordinary was right, but in its absence he should have dismissed the action. Having possession under a decree of maills and duties did not obviate the necessity of premonition. Such possession was to be ascribed to the clause in the bond assigning the rents. It was contractual. The decree of maills and duties was indefinite, and in no sense a specific demand for payment. But the demand, in order to dispense with the need for premonition, must be specific.

Argued for the pursuer and respondent—(1) The pursuer had tendered the amount of the debt alleged to be due, and was entitled to a discharge, or its equivalent, an assignation. Any subsequent question between the parties could be settled by an accounting which was competent at common law, and by statute—Titles to Land Consolidation Act 1868, sec. 119. The bondholder was not entitled to force a present settlement of all claims by refusing an assignation, and to prevent the owner from dealing with his property if the settlement he proposed were not acceded to. The pursuer had right to an assignation on tendering the full sum claimed— Fleming v. Burgess and Trustee, June 12, 1867, 5 Macph. 856, Lord Neaves at p. 861, 4 S.L.R. 89; Smith v. Gentle, June 19, 1844, 6 D. 1164 — and the creditor was not entitled before he would grant an assignation to adject conditions. The penalty clause in the bond only covered the expenses of recovering payment of the debt—Menzies' Lectures on Conveyancing, 1900 ed., p. 227—and these were not in question here. Orr, cit. sup., only decided what were such expenses. Practice was entirely against the defenders contention, and hence the lack of authority. Bell's Lectures, 3rd ed., p. 305, and Burns on Conveyancing, 2nd ed., p. 545, were referred to. (2) Premonition was not necessary. The defenders had used one of the recognised methods of doing diligence to recover a debt under a heritable bond, viz., entered into possession under a decree of maills and duties— Fleming, cit. sup.; Smith, cit. cup. The interlocutor of the Lord Ordinary should be varied to the extent of declaring premonition unnecessary, or be sustained.

At advising—