Legal Authority moot Problems 21/22 PDF

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Royal Bank of Scotland v Wilson Court Court of Session (Inner House, Second Division) Judgment Date 9 July 2003 Report Citation 2004 S.C. 153 Representation No 7 Second Division Sheriff Court 9 July 2003 ROYAL BANK OF SCOTLAND, Pursuer (Respondent)— McIlvride (Solicitor-advocate) FRANCIS JOHN WILSON AND ANOTHER; JOHN PATRICK MCCORMACK WILSON AND ANOTHER, Defenders (Appellants)— Agnew of Lochnaw QC, Robertson Cautionary obligations—Execution of standard security by wife—Alleged misrepresentation by failure to indicate extent of borrowings—Whether averment of misrepresentation by silence sufficient to instruct case of bad faith The second defenders in both actions were wives who had signed standard securities along with their respective husbands in favour of the pursuer, a bank. Subsequently, ‘partnership letters’ were entered into by both husbands in respect of firm loans. Both firms and the first defenders defaulted on the loans and the pursuer enforced the standard security against the defenders. The second defenders defended the respective actions, inter alia , on the basis that they had individually been misled into believing that the standard security secured only the loan for

which it was granted, and that the pursuer was in bad faith for procuring from her the cautionary obligation which the standard security contained. Solicitors had acted for the second defenders in constituting the standard securities. Counsel for the second defenders submitted that the standard security in making the second defenders cautioners for their respective husbands in each case gave the pursuer security far beyond the immediate purpose of the transaction. This placed the pursuer in bad faith from the outset since it would know that no solicitor could responsibly advise the wife to grant such a security. Held that: (1) the second cautioners did not incur the cautionary obligations gratuitously ( Smith v Bank of Scotland 1997 SC (HL) 111 applied ) (para 24 ); (2) no relevant defence either of misrepresentation or bad faith had been pled, there being no averment of any positive misrepresentation and therefore no actionable wrong on the part of the husband (paras 25 – 27 ); (3) no circumstances were averred which would have given the creditor reason to think the solicitors acting had not discharged their professional duties nor that the pursuer made any representations as to the effects of the standard security, and the averments anent the creditors' bad faith and misrepresentation were accordingly irrelevant ( Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773; [2001] 3 WLR 1021 ; [1998] 4 All ER 705 distinguished (para 34 ); Forsyth v Royal Bank of Scotland 2000 SLT 1295 approved (para 78 )) (paras 37 – 42 ; 62 , 63 ; 65 ); and appeals dismissed. ROYAL BANK OF SCOTLAND plc raised actions seeking warrant to enter into possession of security subjects and for removing of Francis John Wilson and Mrs Annette Wilson; and John Patrick McCormack Wilson and Mrs Norma Wilson in the Sheriffdom of Lothian and Borders at Edinburgh. The sheriff repelled both the first and second defenders' defences on the merits as being irrelevant and allowed a proof before answer restricted to quantum. The defenders appealed to the Court of Session. The first defenders abandoned their appeals and the second defenders insisted on theirs only in so far as relating to misrepresentation and bad faith. At the appeal hearing, the pursuer was granted leave to amend the crave for removing to one for ejection and the second defenders were allowed to amend their defences and add a new, third, plea-in-law.

The full facts and averments of the parties are sufficiently set forth in the opinion of the Lord Justice-Clerk (Gill). Cases referred to: Ahmed v Clydesdale Bank plc 2001 SLT 423 Barclays Bank plc v O'Brien [1994] 1 AC 180 *154 Braithwaite v Bank of Scotland 1999 SLT 25 Clydesdale Bank plc v Black 2002 SC 555 Falconer v North of Scotland Banking Co (1863) 1 M 704 Forsyth v Royal Bank of Scotland 2000 SLT 1295 Mumford v Bank of Scotland 1996 SLT 392 Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773; [2001] 3 WLR 1021 ; [1998] 4 All ER 705 Royal Bank of Scotland v Greenshields 1914 SC 259 Smith v Bank of Scotland 1997 SC (HL) 111 Textbooks etc referred to: W M Gloag, Law of Contract (2nd ed, W Green, Edinburgh, 1929) W M Gloag and J M Irvine, Law of Rights in Security (1897, W Green Edinburgh) D M Walker, The Law of Contract and Related Obligations (3rd ed, T&T Clark, Edinburgh, 1995) The causes called before the Second Division, comprising the Lord Justice-Clerk (Gill), Lord Osborne and Lord Hamilton for a hearing on the summar roll. At advising, on 9 July 2003— Lord Justice-Clerk (Gill)— Introduction 1. These are appeals from decisions of the sheriff at Edinburgh in two actions by the pursuer as holder of standard securities over houses at 98 Dalum Grove and 100 Dalum Grove, Loanhead. In these actions the pursuer seeks (1) warrant in terms of sec 24(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970 (cap 35) to enter into possession of

the security subjects and (2) removing of the defenders with a view to selling the security subjects. 2. In the first action (the Francis Wilson action), the pursuer sues Francis John Wilson and his wife, Mrs Annette Wilson. The action relates to their house at 100 Dalum Grove. In the second action (the John Wilson action), the pursuer sues John Patrick McCormack Wilson and his wife Mrs Norma Wilson. The action relates to their house at 98 Dalum Grove. Francis Wilson and John Wilson are brothers. 3. The standard security in the Francis Wilson action was granted by Francis Wilson and his wife on 12 July 1991 in consideration of a loan for the purchase of their house. The standard security in the John Wilson action was granted by John Wilson and his wife on 28 November 1991 in consideration of a loan for the construction of a conservatory. securities 4. The standard security in each case, so far as relevant to these appeals, provides as follows: ‘We [name] and [name], Spouses ... (hereinafter referred to as “the Obligant”) hereby undertake to pay to The Royal Bank of Scotland plc (hereinafter referred to as “the Bank”, which expression includes its successors and assignees whomsoever) on demand all sums of principal, interest and charges which are now and which may at any time hereafter become due to the Bank by the Obligant whether solely or jointly with any other person, corporation, firm or other body and whether as principal or surety; DECLARING THAT; ... (2) in the event of the foregoing personal obligation being granted by more than one person the expression “the Obligant” means all *155 such persons together and/ or any one or more of them; and in all cases the obligations hereby undertaken by the Obligant shall bind all person(s) included in the expression “the Obligant” and his, her or their executors and representatives whomsoever all jointly and severally without the necessity of discussing them in their order; ...’. The partnership letters

5. Francis Wilson and John Wilson were partners in two firms, F J Wilson Associates and Wilson Brothers. On 8 October 1992 and 15 October 1993 each of them signed so-called ‘Partnership Letters’ in favour of the pursuer. The 1992 letter was granted in respect of borrowings by F J Wilson Associates. The 1993 letter was granted in respect of borrowings by Wilson Brothers. Each letter authorised the pursuer to open or continue an account in its books in the name of the firm and to establish joint and several liability on the part of the signatories ‘for the repayment of any indebtedness or liability incurred by the firm and interest and charges thereon.’ 6. Both firms defaulted on the loans. The pursuer then sought recourse against the first defenders. The first defenders in turn defaulted. The pursuer then enforced the standard security against both defenders in each case. The defences 7. In each case, both the first and the second defenders lodged defences on the merits and on quantum . On the merits, the first defender's defence in each case was that he was not liable to repay any debt due by either firm. The second defenders took the same line; but in each case the second defender also pled that she was misled into believing that the standard security secured only the loan for which it was granted, and that the pursuer was in bad faith in procuring from her the cautionary obligation that the standard security contained. The pleadings 8. In the Francis Wilson action, the pursuer avers that the pursuer advised the defenders that they would require to instruct solicitors to act on their behalf in connection with the standard security; that the defenders instructed Allan McDougall and Co, solicitors, Penicuik, who acted on their behalf in the constitution of the security and were at all material times independent of the pursuer; that the pursuer has at no time been advised by the defenders that that firm failed to advise them on the of the standard security; and that in accepting the standard security the pursuer reasonably believed that both defenders had been properly advised by that firm on those matters (cond 2).

9. The second defender admits that Allan McDougall and Co acted on the defenders' behalf in the constitution of the security (ans 2). Her averments about the granting of the standard security are as follows: ‘All the defenders' financial affairs were ordinarily handled by the first defender. The second defender relied on the first defender in such matters. The defenders had a joint personal bank account with the pursuers' Penicuik branch. The pursuers were or ought to have been aware that the defenders were husband and wife. The pursuers were or ought to have been aware that the second defender had no interest in the said businesses of Wilson Brothers and F J Wilson Associates. The second defender attended the pursuers' Penicuik *156 branch with the first defender to sign application forms for a house purchase mortgage. Neither the pursuers' branch manager nor the first defender indicated to the second defender that the standard security would secure any borrowings other than the house purchase loan. The pursuers' branch manager was or reasonably ought to be [ sic ] aware that the second defender understood she was dealing only with a house purchase loan. Esto the standard security secures the business borrowings condescended upon over the second defender's property, the pursuers' branch manager and the first defender misrepresented the true position to the second defender. The second defender would not have signed the standard security had she been aware that it extended to borrowings relating to the first defender's business. Thereafter the second defender was asked to sign the standard security. The second defender reasonably understood the standard security to relate solely to the house purchase mortgage for which the defenders had applied. The standard security is, so far as material, in a standard printed form used by the pursuers. At the time of granting the standard security the second defender was not told by the pursuers or by the first defender of any other debts owed or obligations undertaken by the first defender to the pursuers. The second defender was not offered any explanation by the pursuers of the consequences of her signing the standard security. The second defender was not advised by the pursuers to take independent legal advice before signing the standard security. The pursuers referred the defenders to Messrs Allan McDougall and Co., to complete the conveyancing work associated with the house purchase and loan. The pursuers did not inform Messrs Allan McDougall and Co., of any business relationship between the pursuers and the first defender giving rise to business borrowings from the pursuers for which the first defender would be

liable. In these circumstances the pursuers were in bad faith in procuring the said standard security as a cautionary obligation from the second defender. In these circumstances the pursuers are personally barred from enforcing the said standard security against the second defender in respect of the debts condescended upon’ (ans 2). 10. In the John Wilson action the pursuer makes similar averments about the instruction of solicitors on behalf of the defenders in the transaction and about the pursuer's belief as to their having been properly advised in relation to it, except that in this case the solicitors concerned were Henderson and Co, Edinburgh. 11. The second defender admits that Henderson and Co acted on the defenders' behalf in the constitution of the security. Her averments about the granting of the standard security are as follows: ‘The first defender ordinarily dealt with the defenders' financial affairs. The second defender relied on the first defender in such matters. The first defender explained to the second defender that the said loan would be secured on the defenders' house. The first defender told the second defender that said manager had advised that this was the best way of raising funds for building the conservatory. The first defender did not indicate that the standard security would secure any other borrowings. Esto the standard security secures the business borrowings condescended upon over the second defender's property, the first defender's representation misled the second defender. The second defender would not have signed the standard security had she been aware that it extended to borrowings relating to the first defender's business. Thereafter the second defender signed the standard security in the reasonable belief that it related solely to the conservatory loan. In her belief the second defender was misled by the representation of the first defender. The defenders had a joint personal bank account with the pursuers' Penicuik branch. The pursuers were or ought to have been aware that the defenders were husband and wife. The pursuers were or ought to have been aware that the second defender had no interest in the businesses or Wilson Brothers and F J Wilson Associates. The standard security is, so far as material, in a standard printed form prepared by the pursuers. At the time of granting the standard security the second defender *157 was

not told by the pursuers of any other debts owed or obligations undertaken by the first defender to the pursuers. The second defender was not offered any explanation by the pursuers of the consequences of her signing the standard security. The second defender was not advised by the pursuers to take independent legal advice before signing the standard security. The pursuers did not inform Messrs Henderson and Co., of any business relationship between the pursuers and the first defender giving rise to business borrowings from the pursuers for which the first defender would be liable. In these circumstances the pursuers were in bad faith in procuring the said standard security as a cautionary obligation from the second defender. In these circumstances the pursuers are personally barred from enforcing the said standard security against the second defender in respect of the debts condescended upon’ (ans 2). 12. The references in the defences to personal bar have not been pursued either before the sheriff or before this court. Procedure to date 13. The sheriff repelled both the first defenders' and the second defenders' defences on the merits as being irrelevant and allowed proof before answer restricted to the question of quantum . Both defenders appealed to this court; but the first defenders abandoned their appeals and the second defenders insisted in theirs only so far as they related to misrepresentation and bad faith. 14. At the hearing of these appeals the solicitor advocate for the pursuer was granted leave to amend the crave for removing to one for ejection. Counsel for the second defenders did not object to this amendment. 15. Counsel for the second defenders were granted leave to amend the defences on the question of the legal advice available to them when they granted the standard securities. The effect of these amendments was to add to the defences already tabled in the Francis Wilson action the following averments: ‘Messrs Allan McDougall & Co were also instructed to act for the pursuers. Messrs Allan McDougall & Co gave the second defender no advice anent the scope or effect of the proposed Standard Security’; and in the John Wilson action

the following averments: ‘Henderson & Co were also instructed to act for the pursuers. Henderson & Co gave the second defender no advice anent the scope or effect of the proposed Standard Security. Henderson & Co merely posted the Standard Security to the defenders for signature and return.’ Counsel for the second defenders were also granted leave to add the following plea-in-law in each case: ‘3. In the circumstances condescended upon, the pursuers not having acted in good faith in procuring the second defender to execute the standard security, and the second defender having been induced it upon the misrepresentations as condescended upon, the pursuers are not entitled to enforce the standard security against the second defender's pro indiviso share of the house for the debts condescended upon and accordingly the craves of the writ should be refused in so far as directed against the second defender.’ Submissions for the parties 16. The general proposition underlying these appeals is that although in each case the second defender and her husband granted the securities as co-obligants in respect of the initial borrowing, the second defender became a cautioner for her husbandinrespectofhissubsequentborrowings.Juniorcounselfortheseconddefenders *158 submitted(1)thatthesecond defender in each case undertook a gratuitous cautionary obligation in consequence of a misrepresentation by her husband; (2) that the existence of the marital relationship imposed on the pursuer a duty of good faith towards her ( Smith v Bank of Scotland ); (3) that the pursuer was on its enquiry as soon as the second defender offered to grant the standard security; (4) that it was not sufficient for the creditor to assume that the second defender's solicitors had given appropriate advice, Forsyth v Royal Bank of Scotland being wrongly decided on that point; and (5) that the pursuer should have advised the second defender to take independent legal advice and should have sought confirmation from her solicitors that the appropriate advice had been given ( Royal Bank of Scotland v Etridge (No 2) ).

17. Senior counsel for the second defenders put the submission on a broader basis. His proposition was that since the standard security made the second defender cautioner for debts that her husband might incur to the pursuer, whether solely or jointly with ‘any other person, corporation, firm or other body and whether as principal or surety,’ and since that gave the pursuer a security that was far beyond the immediate purpose of the transaction, the pursuer was in bad faith from the outset since it would know that this was a security that no solicitor could responsibly advise the wife to grant ( Royal Bank of Scotland v Etridge (No 2) , per Lord Hobhouse at paras 112, 126). 18. Counsel for the second defenders submitted that the defences on the merits were sufficient to entitle the second defenders to enquiry. They moved us to allow the appeals and remit these cases to the sheriff for proof before answer on the whole record, as now amended. 19. The solicitor advocate for the pursuer submitted that (1) the sheriff was right in holding that the defences for the second defenders were irrelevant; (2) that the second defenders had failed to aver facts and circumstances which, if proved, could establish that the pursuer was not in good faith; and (3) that they had failed relevantly to aver that they were induced to grant the standard security as a result of any misrepresentation. The transactions in these cases predated the decision in Smith v Bank of Scotland ; but he was content to show that the defences were irrelevant even if judged by the principle laid down in that case. However, the prescriptions set out in Royal Bank of Scotland v Etridge (No 2) did not apply...