Scottish Court of Session Decisions

By agreement to guarantee, dated 26th, 29th, and 30th July 1889, the Sickness and

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Accident Assurance Association, Limited, Edinburgh, agreed, in consideration of payment of the premium therein set forth, to make good and reimburse to Messrs Joseph Haworth & Company, tea merchants, Manchester, to the extent of the sum of £250, all moneys which Richard Slater, one of their tea salesmen, should embezzle. The agreement proceeded upon a proposal and declaration which it was stipulated should form the basis of the contract, and which included, inter alia, the following questions:—“11. How often will the employer balance and settle the applicant's accounts? Ans. Monthly. 12. Specify the checks which the employer will use to secure accuracy in the applicant's accounts? Ans. Statements sent to customers by employer. 13. In particular, will the employer send accounts direct to customers, and if so, how often? Ans. Every three months.”

Between 16th September 1889 and 3rd January 1890, Slater embezzled sums amounting to £87, 11s. 10d., by uplifting money before the usual period of three months' credit had expired, and failing to account for such sums. The first sum embezzled was £8, 14s. 6d. upon an order from W. Moran, Blackburn, of 14th August, duly executed.

In consequence of Slater's defalcations, Messrs Joseph Haworth & Company brought an action against the above-mentioned Assurance Association, under the agreement to guarantee, to recover the said sum of £87, 11s. 10d. It was pleaded in defence that—“(1) The pursuers having failed to use the checks upon Slater for the protection of the defenders, stipulated for and agreed to in the contract of guarantee, the defenders are not liable, and should be assoilzied from the conclusions of the action.”

A proof was allowed, from which it appeared that no monthly settlement with Slater had ever taken place, and that no accounts applicable to orders obtained by him had been sent direct to customers until about 1st January 1890. The reasons assigned by the pursuers for neither of these things having been done sufficiently appear from the Lord Ordinary's opinion.

Upon 26th November 1890 the Lord Ordinary ( Stormonth Darling) pronounced decree in favour of the pursuers.

“ Opinion.—This is a claim under a contract dated in July 1889, whereby the defenders agreed to make good to the pursuer, who is a tea merchant in Manchester, all sums to the extent of £250, which Richard Slater, salesman to the pursuer, might embezzle in the course of his employment. There is no dispute as to the defalcations, which all took place between the month of August and the close of the year 1889.…

The defence is that the pursuer failed to use the checks upon Slater stipulated for in the contract, … viz., (1) that he did not balance and settle Slater's accounts monthly; and (2) that he did not send accounts direct to the customers every three months… .

What happened was this—Slater took a few orders for the pursuer in June 1889, but these do not affect the present question, for they were got in anticipation of his employment by the pursuer, and he did not take any orders as a servant of the pursuer until early in August. The first order in the list of defalcations was taken on 14th August, and the amount (£8, 14s. 6d.) was collected by Slater on 16th September. This was nearly two months before the sum was due, for all the goods were bought on three months' credit. The remaining orders were taken from time to time down to 14th December, and the amounts uplifted, in the majority of cases, much within the period of credit. Slater's remuneration (besides a nominal salary of £5) was to consist of a commission of half the net profits, but no settlement of this commission took place between him and the pursuer, monthly or otherwise, the reason being, as the pursuer explains, that he was always in advance of Slater, and accordingly there was nothing to settle. It appears from the correspondence that accounts were sent by the pursuer to Slater for collection at or about the expiry of the three months' credit, but no accounts applicable to any of the orders obtained by him were sent direct to the customers till 1st January 1890.

The pursuer's explanation of this is that he never, as a rule, sent accounts direct to customers until they were overdue, and that customers would have resented it if he had. He also says that his only departure from that rule was in the case of the statements sent to Slater's customers on 1st January, the reason being that he had by that time resolved to dismiss him.

As regards the absence of monthly settlements of Slater's accounts, it seems to me that the pursuer's explanation is sufficient.

It cannot be said that in the actual circumstances a monthly settlement would have led to the detection of any of Slater's embezzlements, and I think that the undertaking so to settle meant nothing more than that he was to receive his commission, if any should be due, at monthly intervals. So far as payments by Slater were concerned, the system was that he should pay sums collected by him into the pursuer's bank account, and should send the pursuer cash-sheets, which, when compared with the bank's advice-notes, would show how far he was in the pursuer's debt. He did make certain payments into bank, and did forward certain cash-sheets, and the correspondence shows that the pursuer was constantly urging him to be more active both in obtaining orders and remitting money. But, of course, no statements by him nor settlements with him could throw any light on intromissions of his which he deliberately suppressed, and I think, therefore, that the defenders are not relieved from liability by the want of formal monthly settlements, which in the circumstances could have done no possible good.

It is a much more difficult question whether the pursuer has lost his remedy by a breach of his undertaking to send

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statements direct to customers every three months. But there also, though not without hesitation, my opinion is in favour of the pursuer.

I assent to the defenders' doctrine that answers 12 and 13 were not mere vague representations of how the pursuer's business was likely to be carried on, but constituted a positive undertaking by the pursuer that he would send statements direct to customers every three months as a check on Slater's conduct. Nor can I accept the view suggested by the pursuer himself in his evidence, that he sufficiently fulfilled this undertaking by sending statements through Slater. The statements, if they were to be of any value as a check, clearly required to be sent direct. But the expression ‘every three months’ is ambiguous. It might mean, and the defenders contended it did mean, on the first quarter day occurring after the date of the order. Thus, they say that the statement applicable to Moran's order of 14th August should have been sent out on 1st October. On the other hand, it might mean three months complete from the date of each order, in which case Moran's statement should have been sent out on 14th November. Again, it might mean, on the first quarter-day occurring three full months after the date of the order, in which case Moran's statement did not require to be sent out till it actually was sent out, viz., on the 1st of January. I reject the first of these interpretations, because I do not think the words justify it, and because I fail to see what check it would afford in the ordinary case to send a statement to the customer before the account was due. It is quite true that Slater, by importunity or contrivance of some sort, did get payment of most of his accounts before they were due; but I think that the meaning of a stipulation of this kind must be taken with reference to the length of credit given in the particular trade, and that the check was much more likely to be effectual if the statement was to be sent after the time when the salesman might fairly be expected to have received the money. It would in that case almost certainly draw from the customer the explanation that he had already paid the account, while in the other case he would not require to take any notice of it at all. For the same reason I think it unlikely that the expression ‘every three months’ was used or understood in the sense that an account should be sent out on the exact expiry of three months from the date of each order. The average amount of the orders is apparently not more than a few pounds; and such a course would mean a constant sending out of very small accounts, with the probability, as in the case last supposed, that it would not extract any useful information from the customer. I come, therefore, to the conclusion that the most reasonable interpretation of the undertaking is that quarterly accounts were to be sent direct to the customers, but not till the accounts were due. If that is even a possible interpretation, I think the pursuer is entitled to the benefit of it; for if the defenders understood it in a different sense, and intended to exact a strict performance of it, they were bound to clear up all ambiguity at the time.

There is some confusion in the proof as to what the pursuer's practice was with regard to the time of sending out his quarterly statements. He says that he had no fixed quarter-days, but I rather think that in saying so he must have had in his mind the accounts which he sent to his salesman for collection, which undoubtedly were sent at various periods, occurring on the termination of the three months' credit. I agree with the defenders that the lithographed docquet on No. 245 of process, and especially the phrase ‘quarterly audit,’ together with such indications of practice as are to be found in the correspondence, all point to the conclusion that the statements sent to the customers were sent on fixed quarter-days. But if the defenders were not prepared to accept the pursuer's explanation that he never sent these statements in the ordinary case till the items were overdue, they might have brought evidence to show that the statements did in point of fact include items which were not yet due. In the absence of such evidence I must accept the pursuer's explanation. A number of cases were cited to me, but I do not think that the legal principles applicable to the case are doubtful.

No assistance is to be derived from cases like Weems v. Standard Life Assurance Company, 11 R. 658 (H. of L.) 48, which turn on the question, whether statements applicable to existing facts are of the nature of representation or warranty. The answers here on which the defenders rely were undoubtedly of a different kind, and imported an undertaking for the future. I do not doubt that these answers were part of the contract, and that the pursuer was bound by them in the sense explained by Lord Wood in British Guarantee Association v. Western Bank, 15 D. 834 (at p. 839), viz., that the undertaking was one ‘not requiring specific performance to the letter, but only that it should be substantially implemented or fulfilled.’ This is in accordance with the ratio decidendi in the English case of Benham, 1852, 7 W. H. & G. 744. But my opinion is really founded on what seems to me the reasonable interpretation of the undertaking, and if so, there can be no doubt that it was sufficiently fulfilled.” …

The defenders reclaimed and argued—The pursuers had failed to observe the checks promised in their proposal, and could not therefore recover under the policy. Even if not perfect, the checks if observed might have prevented the embezzlement or at least have limited the amounts taken. Although no commission was owing, Slater should have been called upon to give an account of his transactions every month. No direct communication had taken place between the pursuers and their customers for more than four months after Moran's (the first) order. Pursuers were

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not entitled to recover sums embezzled within the last three months, because if the check promised had been observed in November something might have been recovered from Slater and further embezzlement stopped.

The respondent argued — The monthly accounts to be settled were commission accounts, but there had never been any commissions to settle. Even if Slater had been asked monthly about customers' accounts, it would have been no check upon him. He would simply have lied. As to sending accounts direct to customers, that was only to be done after three months. It would not have led in any case to the discovery of embezzlements in and after October. But it was capable of meaning at the first quarterly audit after three months had expired, and this had been done and the check had operated successfully. If the term was ambiguous it was to be construed against the insurance company. Further, the policy contemplated considerable trust being put in the person whose honesty was guaranteed. That was the reason of the policy. The checks were not to be read too strictly. They were honest expressions of intention rather than conditions-precedent— M'Taggart & Others v. Watson, April 16, 1835, 1 Sh. & Maclean 553, Lord Brougham 590–91; Benham v. United Guarantee & Life Assurance Company, June 7, 1852, 7 W. H. & G. (Excheq.) 744; British Guarantee Association v. Western Bank of Scotland, July 8, 1853, 15 D. 834.

At advising—