Scottish Court of Session Decisions

The Bank of Scotland, pursuers, raised an action against Charles Morrison, 25 Royal Terrace, Edinburgh, defender. The first sum sued for was £194, 10s. sterling, being the amount paid by the pursuers on 1st February 1908, in respect of the premiums on two policies of life assurance assigned by John Ayling, printer, Edinburgh, by assignation dated 13th June 1899, with interest at the rate of 5 per cent. from 1st February 1908 till payment, which sum the defender was bound to pay them as cautioner under the said assignation. The assignation was granted in part security of a special advance of £4000 made to Ayling. The second sum sued for was £100, being the amount due by the defender to the pursuers as at 31st December 1907, in respect of a guarantee granted by him in their favour, dated 13th June 1899, by which he guaranteed to the pursuers due payment of all interest then due or which might become due to the pursuers by Ayling on the said special advance of £4000 made to him to an extent not exceeding £100 in any one year.

The defender pleaded, inter alia—“(5) The pursuers having by their conduct and actings released the defender of any cautionary obligation undertaken by him, the defender ought to be assoilzied.”

On 24th November 1908 the Lord Ordinary ( Mackenzie) repelled the defences and decerned against the defender de plano.

The defender reclaimed to the Second Division, who on 23rd June 1909 recalled the Lord Ordinary's interlocutor, and before answer allowed the parties a proof of their respective averments, remitted the case to the Lord Ordinary to proceed, and reserved all questions of expenses.

The facts of the case are given in the opinion ( infra) of the Lord Ordinary, who on 19th November 1909, after the proof, pronounced this interlocutor—“Decerns against the defender in terms of the conclusions of the summons: Finds the pursuers entitled to expenses,” &c.

Opinion.—“The defence … maintained by the cautioner is that he has been liberated from the obligations imposed upon him by the documents set out on record, in consequence of the failure of the bank to communicate to him certain facts regarding the debtor which had come to their knowledge on 18th December 1906. The result of this failure, according to the contention of the cautioner, was that he suffered prejudice.

The defender was cautioner for John Ayling, who was a customer of the pursuers at their Dalry branch, where he had two accounts,—No. 2 for a special advance of £4000, a dormant account; No. 1 was his current account, to which was debited the interest accruing upon No.2.

There were bill transactions at the Dalry and also at the Greenside Branches. It is in regard to one of the bills discounted at the Dalry Branch that the present question has arisen. This was a bill for £3000 dated 18th July 1906, bearing to be drawn by John Ayling and accepted by Francis Bennet Goldney, Abbots Barton, Canterbury, Kent. The proceeds were credited to Ayling's account on 4th August 1906. It fell due on 21st December 1906. Shortly before that date Ayling had made proposals to Mr MacBeth Forbes, the agent at the Dalry Branch, for its renewal, and on 17th December the Head Office had instructed Mr Forbes that the bank would agree to the bill being renewed to the extent of £2000. The bill had, however, on the 14th December been transmitted for collection to the Capital and Counties Bank, Limited, at Chippenham. The Capital and Counties Bank, after communicating with Mr Goldney telegraphed on 18th December to the Bank of Scotland that they were informed by their customer that the acceptance for £3000 was not signed by him.

On receipt of this telegram Sir George Anderson, the treasurer of the Bank of Scotland, sent for Ayling and had a meeting with him on 18th December. Ayling was shown the telegram, and it was pointed out that it was a very serious matter for him; that the inference was that the bill was a forgery, and that he was the forger. Ayling's explanation was that there had been a misunderstanding, and that Goldney would call upon Sir George Anderson about the New Year, and would put it all right. It was arranged on the 18th that Ayling should pay the £3000 next day. He offered to do so. The Capital and Counties Bank were wired on the 18th to return the acceptance, which they did. On the 18th Ayling wrote to Mr Forbes, telling him Goldney had repudiated the bill, that he (Ayling) had promised Sir George Anderson £3000 in exchange for the bill, and was then going to write Goldney for a thorough explanation. On 19th December Sir George Anderson got from Ayling notes for the whole sum of £3000. As Sir George Anderson says, ‘It is not usual for customers who have £3000 bills to come and pay them in notes.’

On the 19th Ayling wrote to Sir George Anderson that ‘his friend (that is Goldney) has apologised to me by telephone this afternoon and is writing me and is coming to see me about January 1907, when I will prevail upon him to come up with me to

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see you.’ On the 19th Sir George Anderson returned the acceptance to Ayling. His position at that date was this, according to his evidence:—‘Of course I was suspicious about the circumstances, but Ayling spoke so confidently about a misunderstanding and that he would put it all right, that I kept, as it were, a sort of open mind to see what would come out of it. As at that date I had no knowledge that the bill for £3000 was a forgery, beyond the telegram.’ There was, Sir George Anderson says, no occasion for him to make the necessary inquiries to verify whether Ayling was a forger or not. There were, on the 18th of December 1906, bills of Ayling's current at the bank to the amount of £8700 in all, including the Goldney bill. Sir George Anderson thought that, following on the transaction regarding the £3000 bill, there was a good chance of getting rid of these bills, which he did not care about, as they were temporary accommodation bills. These bills were run off after 18th December 1906. According to Sir George Anderson's evidence, if he had verified on or about 18th December that Ayling was a forger, he thinks he would have closed his account right off.

A few days after the 19th Ayling called again and showed Sir George Anderson a letter which purported to be from Mr Goldney, to the effect that he (Goldney) was to be in Edinburgh about the New Year and would make a point of calling at the Bank of Scotland and explaining the whole circumstances of the case. Mr Goldney did not call. There is no evidence which proves when Sir George Anderson saw Mr Forbes on the matter. The latter says it was not until after the 4th of March 1907. Sir George Anderson thinks he saw him on 18th December. He says his communication with Mr Forbes would be through the inspector of branches. On 28th February 1907 Mr Forbes wrote a letter to Mr Simpson, the manager of the Capital and Counties Bank, with reference to the telegram of December as to the £3000 bill, saying he was anxious to know if the matter had been cleared up, as the bank still had dealings with the drawer; that Ayling informed him (Forbes) that he had seen Simpson and Goldney since the affair in the office of the Capital and Counties Bank; and wanting to know if Goldney still repudiated his signature on the £3000 bill. Mr Simpson communicated with Sir George Anderson on the matter, who had a meeting with him in London the following May. The evidence of Mr Simpson is this—‘I saw Sir George Anderson and informed him that there could be no question that the bill was a forgery in view of Mr Goldney's repudiation of the signature,’ and also told him that the statement by Ayling (referred to in Mr Forbes' letter to the Capital and Counties Bank) that he had been to the Chippenham Office and had an interview with Mr Goldney and the manager was a falsehood. At this meeting Mr Simpson told Sir George Anderson of certain transactions which Goldney had had with Ayling before, representing very considerable sums, and Sir George Anderson deponed that what Mr Simpson said with reference to the particular bill ‘was rather upset by what he told me of those dealings. Sir George Anderson says that the meeting with Mr Simpson left him very much where he was before, ‘my suspicion was certainly there, but there was no more certainty about the matter than there had been before.’ At the meeting Mr Forbes subsequently had with Sir George Anderson he was not asked his view as to the bill.

On 28th October 1907 there was a meeting in Sir George Anderson's room at the Bank of Scotland, at which were present Mr A. L. Menzies, W.S., agent for the firm of Messrs T. & A. Constable, of which Ayling was a partner, Mr Bogie, manager of the Commercial Bank of Scotland, Limited, Mr Nicholson, manager of the Clydesdale Bank, George Street, Edinburgh, and Mr Goggs, secretary of the Scottish Metropolitan Life Assurance Company, Limited. There was a discussion about Ayling's affairs, and there is a conflict of evidence as to whether Sir George Anderson stated that he knew in December 1906 that the Goldney bill was a forgery. His evidence is that he could not have said so, and did not say so. The other witnesses are unable to speak to the exact words used, but their evidence is sufficient to show that Sir George Anderson did on that occasion use language which conveyed to his hearers the impression that in December 1906, when he received the telegram from the Capital and Counties Bank, he was suspicious, and that his suspicions were confirmed by his subsequent interview with Ayling.

Ayling's estates were sequestrated on 1st November 1907. He pleaded guilty and was sentenced on 29th November, in respect of the following charges:—(1) uttering as genuine a forged promissory-note for £2000 on 22nd April 1907; (2) uttering a forged promissory-note for £2500 on 24th May 1907; (3) uttering a forged promissory-note for £5250 on 12th August 1907; (4) uttering a forged promissory-note for £1660 on 13th August 1907; and (5) uttering a forged promissory-note for £2000 on 24th September 1907.

The position of the defender is that when Sir George Anderson learnt on 18th December that Mr Goldney repudiated his signature, he was bound to intimate this fact to him, and that by his failure to do so the bank have forfeited their right to enforce the cautionary obligations. The defender further maintains that Sir George Anderson knew upon 18th December that Ayling was a forger, and was therefore bound to close his account as at that date, and also to inform the cautioner. The argument indeed went further, that Sir George Anderson had the means of knowing on 18th December that Ayling was a forger if he had inquired into his previous banking transactions at the Dalry Branch, and that he is not now entitled to say he did not know. According to the

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defence there was at 18th December. 1906 no debit balance for which the cautioner was liable, whereas at the date of Ayling's sequestration on 1st November 1907 the amount of his unsecured liability to the bank was £528, 9s.

Before dealing witht he defender's main contention, it is right I should advert to what is founded on as having taken place at the Dalry Branch prior to December 1906. The pursuers objected to the admission of this evidence on the ground that there is no averment on record that the bank prior to 18th December 1906, suspected Ayling's honesty, but looking to the statements in answer 2 the evidence cannot be held incompetent. It shows that for a considerable period Ayling had had recourse to a variety of methods for raising money. His account was overdrawn, and pressure had been put upon him from the Head Office to reduce the amount of his overdraft; he had on several occasions obtained money from the bank upon cheques signed with his firm's name, which were not put through the books, but retained by the bank's agent until redeemed. On occasions he endeavoured to get acceptances discounted which bore the firm's name, and when he was requested to get his partners' signatures the proposal was dropped; that pressure was put on Ayling by the bank's agent to get payment of one of the bills as the acceptor would ‘hate’ to get notice of dishonour; and that the explanations given by the bank's agent to the Head Office in regard to Ayling's accommodation bills were not intelligible. As regards these matters, though the way money was raised on the firm's cheques is open to animadversion, the course of dealing was not such as per se was necessarily sufficient to raise the suspicion that Ayling was dishonest. The only witness examined on behalf of the defender upon this point, the agent at the Dalry Branch, deponed that he did not, prior to 18th December 1906, suspect him. Sir George Anderson depones that personally he had no knowledge in December 1906, or until October 1907, of the course of correspondence between Ayling and the bank's agent at Dalry. I am unable to see how it can be successfully alleged against Sir George Anderson that there was a breach of duty in failing to disclose facts which, it is said, he might have known had he inquired, but which, in point of fact, he says he did not know.

The question is whether there was upon 18th December 1906 an obligation upon Sir George Anderson to disclose to the cautioner a fact which was then within his knowledge, viz.—that Mr Goldney had repudiated his signature on the bill. The case must, in my opinion, be so put, although the defenders counsel dwelt on what he called Sir George Anderson's knowledge, and on the obligation there was on him to communicate this knowledge. In the present case what was thus described as knowledge could only be opinion on the facts. Ayling never admitted that Goldney's signature was a forgery. On the contrary, he disputed Goldney's repudiation. Nor has it been proved in this case that Goldney's signature was a forgery.

The 18th of December, and that date alone, for reasons connected with the state of the bank account, which will be obvious later on, was founded on as the point of time when, it was said, the obligation arose to close the account and intimate to the cautioner. Facts, therefore, which came to Sir George Anderson's knowledge subsequent to 18th December cannot be founded on as imposing upon him the obligation of disclosure as at that date.

The case for the defender is that at the meeting Sir George Anderson had with Ayling on 18th December 1906 the circumstances arose which put on the former the duty of making intimation to the cautioner. The situation, however, then was that Ayling said Goldney's repudiation was due to a misunderstanding, that he would write to him, and bring Goldney to see Sir George Anderson, and that he would put it all right. The letters written at the time bear out that this was the explanation given. Whatever opinion may be held as to the effect which probably was produced on Sir George Anderson by Goldney's repudiation and Ayling's payment, the question is whether there was a legal obligation upon him to tell the defender, Ayling's father-in-law, that in consequence of the telegram he had received from Chippenham he suspected his son-in-law of being a forger; and to do so although it was not then beyond the region of possibility that an explanation might be forthcoming.

The defender's contention involves the proposition that there is an obligation upon every creditor, not only at the inception of the contract of caution, but throughout its duration, to communicate to the cautioner any fact coming to his knowledge which materially adds to the risk. No authority was cited to support so wide a proposition as this. The passage in More's Notes to Stair i, 107, refers to the duty of disclosure before the contract is entered into. The only cases relied on by the defender were those which relate to fidelity guarantees, of which Smith v. Bank of Scotland, 7 S. 224, 1 Dow 272, and Snaddon v. London, Edinburgh & Glasgow Assurance Company, 5 F. 182, 40 S.L.R. 164, are examples. It was contended that there was no distinction in principle between those cases and the present; that in each case the contract of caution was renewed de die in diem, and that there was in each case involved a representation that the creditor had no material fact to disclose. The argument is in my opinion unsound. In the one case, that of a fidelity guarantee, what the cautioner guarantees is the faithful discharge of duty, though, no doubt, if there is a failure in duty, the solvent is money. In the other case, which is the present, the cautioner guarantees the credit of the debtor that he will pay a sum of money of fixed amount. The cautioner for payment of a money debt can

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at any time, by paying the amount for which he is liable, free himself as in a question with the creditor. He can then sue the debtor upon the assigned contract. He is master of the situation. Accordingly there is not the same obligation towards him on the part of the creditor that there is in the case of a fidelity guarantee. A cautioner for the faithful discharge of an office cannot himself perform the contract. He cannot by paying up the sum engaged for discharge his obligation and take the debtor in his own hand. The representation and understanding therefore as to the trustworthiness of the servant on which the contract was originally founded continues to its end. The cautioner for payment of money guarantees the credit of the debtor which depends on many considerations other than the state of the account, and of which the cautioner is presumably better able to judge than the creditor. In the case of a fidelity guarantee the cautioner guaranteed the dealings between the servant and his master, and of these the master has opportunities of judging which the cautioner has not. The difference between the two classes is pointed out in Bell's Com. i. 380, and this passage shows that the considerations applicable to fidelity guarantees do not apply to guarantees for payment of money. The defender's counsel founded on Bell's Prin., sec. 251, but the authority for the proposition there stated is Owen v. Homan, 4 H.L. Ca. 997, a case in which the bank were guilty, art and part with the debtor, of fraud. Once the contract of cautionry has been entered into, the law is averse to put the obligation upon a creditor of volunteering information to the cautioner. Passive inactivity is not enough to discharge the cautioner. There must be some positive act on the part of the creditor, or such negligence as to imply connivance and amount to fraud—M‘ Taggart v. Cowan, 1 S. and M'L. 553; Black v. Ottoman Bank, 15 Moo. P.C. 672; Mayor, &c., of Durham v. Foster, 22 Q.B.D. 394. The law upon this point is the same in Scotland and in England. In addition to the cases cited, reference may be made to Hamilton v. Watson, 5 D. 280, 4 Bell's App. 67; North British Insurance Company v. Lloyd, 10 Exch. 523; and Wythes v. Labouchere, 3 De G. & J. 593. The defender has, in my opinion, failed to prove sufficient to liberate him from his obligation.

Further, if the defender had received intimation of the repudiation upon 18th December, I do not think it is proved he would have been in any better position. The unsecured debit balance on Ayling's account as at the date of the sequestration on 1st November 1907, was £528, 9s.; as at 31st December 1906, after interest had been debited, the nett unsecured indebtedness was £590, 14s. 11d. This is brought out by deducting the surrender value of the policies held by the bank, £3900, from the liabilities, which (excluding bills) at that date amounted to £4490, 14s. 11d. It was argued that if the account had been closed as at 18th December there was a balance then at Ayling's credit of £1068, 5s. 11d. I do not think that figure can be taken alone. The sum of £1046, 8s. 6d. was paid in upon the 18th, and, as Mr Laird explains, the account ought not to be credited with that figure without taking into account the debit entry of £1040 which appears the following day as being drawn out in order to meet Goldney's bill. In like manner the credit of £250, which appears upon the 19th, is a cross entry to the extent of one half to meet a bill for £500 due in London on that date.

The way in which counsel for the defender sought to state the account as at 18th December 1906 was this—Liability on bills £8700, on No. 2 account £4000, total £12,700, deduct credit balance on No. 1, £1068, 5s. 11d., leaves nett liability £11,631, 14s. 1d.; total amount of the bills which were paid was £8700, deducting this from the nett liability of £11,631, 14s. 1d., leaves to be paid £2931, 14s. 1d.; the surrender value of the policies held by the bank was £3900, showing a surplus of over £1000 as at 18th December 1906. It was then argued that between 18th December 1906 and 1st December 1907 the bank allowed Ayling to draw out over £1000, which they should not have done; had they not done so there would have been no debit balance at the date of the sequestration, and the present action would not have been rendered necessary.

This, as it appears to me, involves a fallacy. According to this way of stating the account it is assumed that the £8700 to meet the bills was supplied aliunde—in point of fact, it was to the extent of £1040 provided out of the credit balance of £1068, 5s. 11d., which, according to the defender's statement of the account, has already been deducted in order to bring out the net indebtedness. This is, in effect, to use the same £1040 twice over. Counsel then maintained that even if it was not correct to say there was a surplus as at 18th December, at any rate the account was square. This is not so, because the cross entry of £250 must be taken into account, and interest on the overdraft debited, which brings out the total indebtedness at the figure above given. Further, the amounts drawn out during the period 18th December 1906 to 1st November 1907 cannot be regarded without considering the amounts paid in. Mr Laird's evidence is that the amounts paid in were £1208, 17s. 7d., while £1207 was drawn out.

I am of opinion that the defender has failed to prove he has suffered prejudice owing to his not having received intimation on 18th December 1906 that Goldney repudiated his signature on the bill.

I am accordingly of opinion that the pursuers are entitled to decree as craved, with expenses.”

The defender reclaimed, and argued—The pursuers were in breach of the implied agreement between them and the defender in respect that they did not let him know in December 1906 that the bill had been repudiated. There was a contract between them in this sense, that the creditor must

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deal fairly with the cautioner. There were really joint-obligations between them. The pursuers had at that time and afterwards known, or very strongly suspected, that the debtor was a forger. They did not—as they were bound to do—disclose their information to the defender, who was therefore relieved from his cautionary obligation, and if they did not know, they were wilfully blind, and wilful ignorance was equivalent to knowledge—Bell's Prin., 251; Owen and Gutch v. Homan, 1853, 4 H.L. Ca. 997 (Lord Chancellor Cranworth at 1034); Jones v. Gordon, 1877, 2 App. Cas. 616 (Lord Blackburn at 628–9 and Lord Gordon at 635); Dawson v. Lawes, 1854, 23 L.J. Ch. 434 (Wood, V.-C., at 441); Williams v. Bayley, 1886, L.R., 1 E. & I. App. 200 (Lord Chancellor Cranworth at 208–9, and Lord Westbury at 220–22). There was no distinction between what it was necessary to disclose at the commencement of the cautioner's obligation and during the course of its subsistence. The obligation was a continuous one throughout the duration of the guarantee. Accordingly, if the creditor at any time acquired knowledge he must put the cautioner in position of being able to take steps with a view to relieving himself of his obligation—More's Notes on Stair, i, cvii; Phillips v. Foxhall, 1872, L.R., 7 Q. B. 666; Paterson v. Bonar, March 9, 1844, 6 D. 987 (Lord Murray at 1001); Hamilton v. Watson, March 11, 1845, 4 Bell's App. 67 (Lord Campbell at 103); Smith v. Bank of Scotland, June 9, 1813, 1 Dow 272, and January 14, 1829, 7 S. 244; M'Taggart and Others v. Watson, April 16, 1835, 1 S. & M. 553 (Lord Ordinary's note at 565); Mayor of Durham v. Fowler, 1889, 22 Q.B.D. 394; Burgess v. Eve, 1872, 13 Eq. 450. The only difference between cautionary and fidelity guarantees was that the Court was less ready to assume duty on the part of the creditor than on the part of the master. The reason for that was that in the case of a fidelity guarantee the master had greater means of knowledge and would have to disclose certain things to a cautioner that a creditor would not. But in both cases failure to give information would relieve the guarantor. The motive for concealment did not matter, it might be perfectly innocent but that would not relieve the creditor. The defender was really in the same position as a debtor in a bond. Such variation of his rights had been made as to discharge him— Polak and Another v. Everett, 1876, 1 QBD 669. The giving of time to the debtor released the cautioner— Johnstone v. Duthie, March 15, 1892, 19 R. 624, 29 S.L.R. 501; Swire v. Redman, 1876, 1 QBD 536. It was not necessary for the defender to show that he had suffered prejudice by the bank's failure to inform him of what they knew. At the same time he had as matter of fact proved prejudice. The contract of guarantee was void, because a fact materially affecting the nature of the obligation was not communicated to the defender— Pidcock v. Bishop, 1825, 3 B. & C. 605 (Bayley (J.) at 610, and Holroyd (J.) at 611). The statement of the law made in Bell's Com. i, 380, which was relied on by the Lord Ordinary, had been altered by Phillips v. Foxhall ( cit. sup.).

The pursuers were not called on.

At advising—