Scottish Court of Session Decisions

In March 1888 James Duthie, provision merchant in Aberdeen, disposed of his business to his brother-in-law John Reid Cormack, who had previously been his manager, and Cormack thereupon became tenant of Duthie's shop and took up his business. While he was in business, Duthie had been supplied with goods by Messrs C. & A. Johnstone, wholesale merchants in Aberdeen, and at the date when he transferred the business to Cormack he owed them a sum of £50.

On 2nd April 1888 Duthie granted Messrs C. & A. Johnstone the following letter of guarantee—“In addition to the account of £50 pounds due by me to you for goods supplied to my shop at 50 Summerfield Terrace, I hereby guarantee and undertake to see you duly paid for all goods you may supply from and after this date to the order of J. R. Cormack, to whom I have made over my business there.” Goods were thereafter supplied to Cormack under this guarantee down to April 1890, when the account was closed.

On 19th November 1890 Cormack became bankrupt, and Messrs C. & A. Johnstone then brought an action against Duthie for payment of £137, 15s., being the balance admittedly due under the account.

The defender averred in answer in his statement of facts—“Cormack, as manager for the defender, had carried on a successful business in the Summerfield Terrace shop prior to March 1888. The grocery

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goods for said shop were obtained mainly from the pursuers, on the usual terms between wholesale grocers and small dealers in Aberdeen, namely, that the goods supplied during one month should be paid for at latest before the end of the next month. The retail business conducted at said shop was mainly a cash business. To a few customers credit for periods not exceeding one month was allowed. This custom of dealing mainly in cash, with short credit to a few customers, is general in the retail grocery trade in Aberdeen at such shops as that in question, and this custom was well known to the purchasers, who deal largely with such shops. It is principally because of the existence of this retail custom that wholesale dealers limit their credit to the retail dealers to the period of one month after the month of supply, so that if the retail dealer falls behind in his payments to the wholesale dealer the latter at once knows that the retail dealer will sooner or later become bankrupt…. The transactions in respect of which the pursuers now maintain liability against the defender were not of the nature covered by the letter founded on. The pursuers were bound, in terms of the arrangement and undertaking, and the custom of trade before libelled, not to allow Cormack credit exceeding the period of one month beyond the month of supply. They, however, without any communication with the defender, allowed Cormack credit not only beyond the said period, but accorded him unreasonable terms and an excessive period of credit entirely outwith the ordinary conduct of the grocery trade, and particularly of such a trade as Cormack's… . The pursuers must have well known that he was not allowing more than one month's credit to his customers, and that his falling behind with the pursuers clearly indicated that sooner or later he would become bankrupt, as before explained. In place, however, of stopping his account or communicating with the defender, as they were bound and ought to have done, the pursuers concealed from the defender the state of Cormack's account with them, and in place of abiding by the usual trade terms, they took bills at currencies of three and six months, and it is believed longer periods, and even renewed these bills when the same fell due. … In particular, on 26th September 1890 they renewed two bills, one for £99, 17s. 4d., and the other for £70, 18s. 4d., together £170, 15s. 8d., which are not mentioned in the pursuers' statement, and which are still due to the extent of the sum sued for. Further, the pursuers, without the knowledge or consent of the defender, agreed with Cormack to take payment of said bills by instalments of £10 weekly, and even finally reduced the instalments from £10 to £5 weekly…. By taking the bills and renewals of bills before specified, and by agreeing to accept payment of Cormack's debt by instalments, the pursuers precluded themselves from using proper measures to compel payment of the sums due to them, and for which the credit allowed by the trade had expired, and thereby and by other ways granting time to Cormack in the knowledge that his affairs were insolvent, they materially prejudiced the defender in his recourse against the principal debtor.”

In answer to the defender's statement of facts the pursuers denied that there was any fixed rule or custom of trade as to the extent or period of credit given by wholesale merchants to retail grocers in Aberdeen. They admitted that they “occasionally took bills from Cormack at two or three months' date for their own convenience, and on a few occasions they took partial renewals from him for a like period, as they were entitled to do under an open guarantee where no mention was made of dates or payments, and in accordance with the usual practice in such cases. The account annexed to the petition contains the whole of these bills with the exception of the two last bills for £99, 17s. 4d. and £70, 18s. 4d. respectively, which were drawn by them on Cormack on 26th September 1890 in order to constitute and settle the amount then due by him to pursuers, and also to enable the pursuers to have the use of the money by discounting said bills with their bankers as is usual and customary in such cases. The defender, even if unaware of the bills, was in no way prejudiced by the taking of them. They are now past due and unpaid, are in the pursuers' custody, and will be delivered up to the defender on the balance sued for being paid.”

The pursuers pleaded—“(1) The defender being bound by the terms of his said letter of guarantee for goods supplied by the pursuers to himself and the said John Reid Cormack, as specified in the account herewith produced, decree should be pronounced as craved. (2) The defender having ratified, approved of, and adopted the course of dealings between the pursuers and Cormack, and the amount due under letter of guarantee, and having agreed that time should be given to Cormack as condescended on, is now barred personali exceptione from objecting to the account libelled, or the length and extent of the credit allowed, or the nature of the dealings between the said parties.”

The defender pleaded—“(1) The pursuers having given time to Cormack for payment of his accounts beyond the usual period allowed in the trade, and in breach of the understanding between the parties, the defender was thereby liberated from liability under his guarantee. (2) Separatim—The pursuers having allowed Cormack unreasonable terms and an excessive period of credit, outwith the ordinary custom and conduct of trade, and without communication to the defender, he is not liable under the guarantee.”

Proof was led. It appeared that a month was the customary period of credit in Aberdeen between wholesale grocers and retail dealers, the accounts for one month being rendered at the beginning of the next month, and paid at the beginning of the

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month following that on which they were rendered. Occasionally bills for two or even three months were taken, and in Cormack's case this had been done outwith the defender's knowledge, and the bills had sometimes been renewed for a further period, as is fully set out in the Sheriff-Substitute's note. The monthly dealings between the pursuers and Cormack varied from about £50 to £100, his total indebtedness rising from £105 in August 1888 to £290 in February 1890. On May 13th 1890 the defender wrote to the pursuers intimating that he had learnt that they held him responsible for Cormack's debt, and denying liability, on the ground that he had only guaranteed payment of the £50 worth of goods which had been supplied to himself and taken over by Cormack along with the business. On 19th May, Cormack's debt amounting at that date to £285, the pursuers made an arrangement with him that he was to pay £10 a-week to account of his debt, and also to pay cash for all future supplies of goods. This arrangement was communicated to the defender, and in answer he reiterated his denial of liability for Cormack's debt. On 13th August, Cormack having failed to pay the £10 per week, it was arranged that the weekly instalment payable by him should be reduced to £5. On 26th September the pursuers took two bills from Cormack for £70, 18s. 4d. and £99, 17s. 4d. at three months, their object being, as stated in answer to the defender's statement of facts, to constitute their debt, and enable them to have the use of their money. The bills were not met, and on 19th November, when Cormack became bankrupt, a sum of £137, 15s. was still due.

On 27th October 1891 the Sheriff-Substitute ( Grierson) pronounced this interlocutor:—“Finds, under reference to the annexed note, (1) that the defender granted the letter of guarantee; (2) that the pursuers supplied goods to Cormack; (3) that their ordinary period of credit allowed by the pursuers in the ordinary course of business with persons such as Cormack was about three months, and that there was nothing in Cormack's position to operate any change in their ordinary practice; (4) that they allowed Cormack credit to such extents as five, seven, and twelve months, and that such extensions were granted in respect of the sums now alleged to be due to the pursuers by Cormack; and (5) that the defender was in ignorance of these extensions of Cormack's credit: Finds in law that by their extending Cormack's credit far beyond the period usual in their ordinary business in the circumstances of Cormack, and in the trade in which they were engaged, the pursuers have liberated the defender from his obligations under the letter of guarantee: Therefore assoilzies the defender from the conclusions contained in the prayer of the petition, and decerns: Finds the defender entitled to expenses, &c.

“ Note.—The pursuers began to supply Cormack with goods in April 1888. Cormack was allowed the same period of credit which had been allowed to the defender, i.e., if goods were supplied in April he paid them in June, a small balance being carried over. This balance, however, grew larger and larger until in September 1889 the account was squared up to the end of July by payment of £60 in cash and by taking two bills, together amounting to £111, 3s. 2d. for the balance. In this way a credit of five months was given for part of the July goods. The August account was squared in October, the September account in November, and the October account in December, the bills for £111, 3s. 2d. being partly paid up and partly renewed by the taking on November 11th of two bills for £50 each, one at a two months' and the other at a three months' currency. The credit for the July goods was thus extended in one case to seven, in the other case to eight months. These bills were met by Cormack, and are therefore out of the case— Bingham v. Corbitt, 34 L.J. (N.S.) Q.B. 37. But they are worthy of consideration, as explaining the subsequent course of events. The November account was squared in January by £50 cash and a bill for £15 at two months, and the December account was squared in February by £30 cash and a bill for £65 at two months, the credit for the November and December goods being thus extended to five months to the extent of the bills. The January account was squared in March by £50 cash and a bill for £18 at two months, and the bill for £15 was retired. The February account was squared in April by £50 cash, £1, 3s. 7d. allowed for returns, and a bill for £90, 8s. 11d., and in April £20 was paid to account of the £65 bill, the bill being renewed for the balance. The credit is thus extended to five months in respect of part of the January and February account, and to seven months in respect to part of the December account. These bill transactions were all outwith the knowledge of the defender. In May the defender wrote to the pursuers denying liability under the guarantee, and in September the pursuers drew two bills at three months on Cormack, one for £99, 17s. 4d., and the other for £70, 18s. 4d. They allege that these bills were taken merely to constitute their debt, but they discounted them, and the result was simply further to increase the term of credit. Now, the defender will be liable under the guarantee unless he can show that there was something unreasonable in the terms allowed by the pursuers. An examination of the case of Calder & Company v. Cruickshank's Trustees, 1889, 17 R. 74, shows that the following circumstances must be taken into account in dealing with the question of what is reasonable—(1) The course of dealing usually followed by the dealer ( i.e., the pursuers) in his business; (2) the trade in which the parties are engaged; and (3) the circumstances in which the parties stand to each other. Now, the defender had been a customer of the pursuers' firm for a considerable time. He had enjoyed a credit averaging nearly three months. He was punctual in his payments, and he never engaged in bill transactions. When

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the pursuers agreed with Cormack to supply him with goods upon the defender's guarantee, nothing was said about length of credit. The pursuers admit that they regarded Cormack's business and the defender's business as similar, if not identical in character. They knew Cormak's financial position, his credit, his failings, the amount of his stock, and the kind of people who were his customers. I think it is impossible in these circumstances to say that in bargaining with Cormack it was in contemplation to give him a credit more extended than that accorded to the defender, and accordingly I take as the measure of the rule laid down by Lord Shand in Calder's case—‘that where there is no limitation or restriction in the guarantee itself, the guarantor must be held to have undertaken to guarantee the actual transaction as arranged between the principal parties'—the period of credit allowed by the pursuers to the defender. Has, then, this period been unreasonably exceeded? I am of opinion there can be but one answer to that question. If the trade in which the parties are engaged in is looked to, no such period is known. If the circumstances of the case are looked to, there was every reason why the ordinary period should be adhered to. If the course usually followed by the pursuers, e.g., in the defender's case, is looked to, it is plain that their ordinary course of business was not, and could not have been, to grant such extended credit—credit extending in the case of part of the December goods to a year at least— Samuel v. Howarth, 3 Merivale, 272; Polak v. Everett, L.R., 1 Q.B.D. 674; Clarke v. Birley, L.R., 41 Ch. D. 434; Coombe v. Woolf, 8 Bing. 156; Croydon Gas Company v. Dickenson, L.R., 1 C.P.D. 707; Forsyth v. Wishart, 1859, 21 D. 449; Warne & Company, 1867, 6 Macph. 283; Caledonian Banking Company v. Kennedy's Trustees, 1870, 8 Macph. 862; Bowe and Christie v. Hutchinson, 1868, 6 Macph. 642; Stewart, Moir, & Muir v. Brown, 1871, 9 Macph. 763, and the authorities cited in the last case. In these circumstances it appears to me that the pursuers are not entitled to succeed in any part of their claim.”

The pursuers appealed, and argued—The letter of guarantee made no reference to the usage of the trade in Aberdeen, but was unlimited in its terms, and the question was whether the credit given was so unreasonable— i.e., so far beyond the contemplation of parties as to free the cautioner. Taking bills at three months was not an unreasonable credit to give— Calder & Company v. Cruickshank's Trustee, November 15, 1889, 17 R. 74. Further, no fixed period of credit had been proved as the usage of the trade in question, though custom of trade was capable of precise proof. At all events, down to the date at which the account was closed nothing had occurred which could be said to liberate the cautioner— Bingham v. Corbitt, 1864, 34 L.J., Q.B. 37; Croydon Commercial Gas Company v. Dickenson, 1876, L.R., 1 C.P. Div. 707, aff. 2 C.P. Div. 46. After that date, the defender having repudiated liability, the pursuers were entitled to take the best means they could in order to get payment of their debt, and it was to the interest of the cautioner that they should do so. This was their object in taking the two bills in September 1890, and in point of fact the debt had been considerably reduced after that date. The cautioner must also show that he had been prejudiced by the debtor's action, and the defender had failed to do so.

Argued for the defender—Where, as here, no term of credit was mentioned in the guarantee the custom of trade must be read into the contract. This was implied by the words “duly paid.” The pursuers therefore must prove that they had not given the debtor more than “the utmost credit allowed in ordinary circumstances”— Maclagan & Company v. Macfarlane, November 19, 1813, 17 F.C. 451; Cook v. Moffat & Couston, June 7, 1827, 5 S. 774, per Lord Balgray, 775; Warne & Company v. Lillie, January 16, 1867, 5 Macph. 283, and 39 Scot. Jur. 127; Stewart, Moir, & Muir v. Brown, May 24, 1871, 9 Macph. 763, and 43 Scot. Jur. 417; Samuel v. Howarth, 1817, 3 Merivale, 272; Coombe v. Woolf, 1832, 8 Bing. 156. The result of the proof was to show that the ordinary credit in the trade in question was, where a customer was not known, three months. The pursuers had given far more than that, because even admitting that the taking of bills at three months was not an unreasonable extension of the usual credit, the renewal of these bills certainly was. The cases of Bingham and the Croydon Gas Company were distinguished by the fact that in each of these cases the transactions which were the subject of the guarantee were held to be separable. Whether the defender was or was not freed by the pursuers' action prior to the closing of the account, he was certainly released by the taking of the bills in September out-with his knowledge, as he was thereby prevented from taking action against the principal debtor. It was not necessary that he should prove prejudice— Petty v. Cooke, 1871, L.R., 6 Q.B. Div. 790, per Lord Blackburn, 795. There was no doubt an Irish case— Dowden v. Lewis, 1884, Ir. Rep. 14 Q.B.D. 307—which was against the defender's contention, but the ground of judgment there appeared to be that the position of the cautioner was not wholly altered by the action of the creditor in taking bills from the principal debtor.

At advising—