Scottish Court of Session Decisions

The trust-estate of Mr George Wallace, who died in 1867, was put under judicial factory in 1868, Mr James Wink being appointed judicial factor. Mr Wink left his residence in Glasgow and was sequestrated, never having received his discharge as factor, but in October 1890 his cautioner obtained warrant from the Court for delivery of his bond of caution after the factor's accounts had been reported on by Mr H. Horsbrugh, C. A.

In succession to Mr Wink, Mr John Rose Kelso was appointed factor on 16th April 1889. He absconded in the end of July 1896. His first cautioner was Thomas Struthers Smith, merchant in Glasgow, who died on 3rd April 1892.

A petition was presented by Miss Melanie Wallace, one of the beneficiaries, craving

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for recal of Mr Kelso's appointment, and for the appointment of Mr David Guthrie, C.A., Glasgow, in his place. The petitioner further craved the Court “(3) to remit the accounts of the said John Rose Kelso to the Accountant of Court to examine, audit, and report upon the same; and to decern and ordain the said John Rose Kelso, or any persons representing him, or having possession of the funds, security, writs, documents, and vouchers belonging to said trust-estate, and the said Mrs Margaret Rae Arthur or Smith, as widow and executrix foresaid, and the said Peter M'Kissock junior, as the present cautioner of the said John Rose Kelso, to make payment, each according to her or his respective liability, and delivery respectively, to the said David Guthrie, or other person to be appointed judicial factor as aforesaid, of any balance that may be due upon the said accounts, and of all the title-deeds, security writs, documents, and vouchers of the said trust-estate of the said deceased George Wallace.”

The Lord Ordinary ( Pearson) on 11th September 1896 recalled Mr Kelso's appointment, appointed Mr Guthrie, and remitted to the Accountant of Court to examine and audit Mr Kelso's accounts.

The Accountant of Court reported as follows:— “In obedience to the foregoing interlocutor the Accountant of Court has to report—“That he has examined and audited the accounts of the said factor from 16th April 1889, the date of his appointment, to 21th July 1896, and finds them to close with a balance due by the factor of £496, 0s. 7d., or including penal interest to 11th September 1896, £572, 15s. 3d.…

That the law agent in the factory, in calling at the Accountant's chambers on or about 8th May 1896, mentioned he had then ascertained the cautioner was dead, but the date of death was not mentioned, and of that date the Accountant issued a requisition on the factor to find caution of new, and that within one month. After pressure from the Accountant caution was found of new.

That the first cautioner of the said John Rose Kelso was Thomas Struthers Smith, merchant, or manufacturer and calico printer, Glasgow. He died on 3rd April 1892, and his executrix is his widow Mrs Margaret Rae Arthur or Smith, residing at 31 Ashton Terrace, University Avenue, Hillhead, Glasgow. Delivery of his bond of caution was not obtained. The present cautioner is Peter M'Kissock junior, mason, builder, and contractor, 55 Bath Street, Glasgow. His bond, dated 24th June 1897, was accepted by the Clerk of Court on 26th June 1896. At that date the balance due by Mr Kelso exceeded the above sum of £572, 15s. now due as per state of balances appended hereto. The factor never reported to the Accountant the death of his first cautioner, though it was his duty to do so, and annually added on his accounts the name of said cautioner, thus leading the Accountant to believe he was alive.

That in the opinion of the Accountant decree may be granted against the said John Rose Kelso for the said sum of £572, 15s. 3d., with all further penal interest due, and that on payment of the said sum of £572, 15s. 3d., and all interest due, being made by the said cautioners in such proportions as may be determined by the Court (there being a conflict between the cautioners as to who is liable for the factor's defalcations) to the new factor, and on production in process of his receipt therefor and for the securities of the trust-estate, warrant may be granted for delivery of the bonds of caution.

That the Accountant refers to Bell's Commentaries, 5th ed. i. 366, 7th ed. 384, and Grant v. Kennedy, 17th June 1828, 6 S. 982.”

Answers were lodged to this report by Mr Guthrie, making additional claims in respect of failure of duty by Mr Wink; by Mrs Smith, in which she stated that she did not in any way represent her deceased husband; and by Mr Peter M'Kissock.

Mr M'Kissock's answers contained the following statements— “Mr M'Kissock signed the bond of caution for John Rose Kelso, the late judicial factor, under which it is now sought to attach liability to him, on 24th June 1896, and this bond was accepted by the Clerk of Court on 26th June. The previous cautioner for Mr Kelso had died on 3rd April 1892. The Accountant had, on or about 8th May 1896, peremptorily required Kelso to find a new cautioner, and brought pressure to bear on him to make him do so. At this time there was a sum due to the factory estate greater than that now reported by the Accountant as being due at the date of recal. These circumstances Kelso fraudulently concealed from Mr M'Kissock, representing that he was merely required as a matter of course to become cautioner for future intromissions with an estate which was at the time intact. Mr M'Kissock was thereby induced to become cautioner under essential error in regard to the nature and scope of the obligation which he was undertaking.” “On 8th May 1896 the Accountant was made aware by the Edinburgh agent of the petitioners that Mr Kelso's cautioner was dead. Even if the exact date of Mr Struthers Smith's death was not mentioned, the said agent was then aware, and apprised the Accountant of Court that the death had happened some time previously. The said agent called upon the Accountant expressly for the purpose of acquainting him with what he had discovered as to the cautioner's death. It was thus brought to the Accountant's knowledge that the judicial factor had been guilty of a failure in performance of the duty laid upon him by section 11 of the Pupils Protection Act 1849 (12 and 13 Vict. c. 51), and section 7 of the Act of Sederunt of 25th November 1857, of giving immediate notice of the death of his cautioner, and it accordingly became the duty of the Accountant, under section 20 of said Pupils Protection Act, to report the facts to the Lord Ordinary in order that the same might be immediately dealt

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with. Instead of doing so, he, with the knowledge and approval of the agents for the petitioner, issued a printed requisition on the factor to find a new cautioner. Such requisition contained no indication that it was other than the ordinary formal requisition issued on the death of the cautioner, when the same had been duly and promptly reported. The factor failed to find caution within a month from the date of the requisition, and it thereupon became the duty of the Accountant forthwith to report the circumstances to the Lord Ordinary, the Accountant having no power to prorogate the time, the power of prorogation being, under the Act of Sederunt of 11th December 1849, vested in the Court alone. Immediate report was the more imperative, as it was apparent from the correspondence passing between the Accountant and the agents in the factory on the one hand, and Mr Kelso on the other, that the latter had been in negotiations with a guarantee association and others, and had found difficulty in finding caution. The Accountant and agents in the factory had, moreover, by this time ascertained—if they had not known it before—that the former cautioner had died long before the 8th May 1896, as is apparent from the terms of a letter of 18th June from the Accountant to Kelso, a copy of which is produced. They also knew that Kelso had regularly returned his cautioner as alive, the last return being made so late as 1st August 1895, yet without inquiry or report to the Court, the Accountant continued, with the knowledge of the petitioner's agents, to press for a new cautioner, and on Mr M'Kissock being induced to act, the said agents, at Mr Kelso's request, framed the bond of caution in the ordinary terms, and delivered up the same to Mr Kelso to obtain Mr M'Kissock's signature thereto, thus allowing him to become bound without warning of the foresaid irregularities, which were within their knowledge, and which they were condoning. A copy of the correspondence between the Accountant and the agents and Mr Kelso, so far as forthcoming, is produced and founded on. Upon the cautioner's death becoming known to him, it was the Accountant's further duty, under section 20 of the Pupils Protection Act, to ascertain and report to the Court any claims competent to the factory against the deceased cautioner's estate, in order that the same should be immediately dealt with. An examination of the accounts for this purpose was the more imperative as the factor had frequently incurred on his previous accounts liability for penal interest. Such examination and report was not however made. It is believed and averred that the Accountant's neglect or forbearance was known to and approved of by the agents for the petitioner, who nevertheless, without warning to Mr M'Kissock, went on to act in preparing and completing as aforesaid the said bond of caution. The result was that Mr M'Kissock was not”… “informed of the position of matters either by the Accountant or by said agents, but he was allowed to sign the bond, induced thereto by concealment of these material facts. He submits that the fraudulent concealment and misrepresentation on the part of the factor, and the neglect and want of disclosure on the part of the Accountant and the agents of the petitioners, have nullified the bond, or at least have voided his obligation. And he further submits, that even if no fraud should be established, his obligation is voided by the failure above mentioned to disclose the state of affairs. He is prepared, if necessary, to have the bond set aside by process of reduction. He acted-in the matter gratuitously, and no change of circumstances prejudicial to the beneficiaries or the estate followed upon his intervention. Were he held liable, the beneficiaries would gratuitously profit from an obligation undertaken by him under essential error induced by fraud. In any event, Mr M'Kissock submits that on a sound construction of the bond of caution, he is only liable for losses to the estate due to intromissions or breach of duty subsequent to his becoming cautioner. In point of fact there were no such losses. As at 24th June 1896, Mr Kelso was indebted to the estate in the sum of £596, 11s. 1d. This sum had been lost to the estate by defalcations on the part of Mr Kelso prior to that date, and Mr Kelso had in his hands at that time no assets of the estate representing this deficiency, nor had he any personal assets which by any diligence of his own or of the cautioner could have been made available to reduce this deficiency further than it was in point of fact reduced before the date of recal. It was further submitted that the principal sum lost to the estate being one for which Mr M'Kissock is not liable, neither is he liable for interest thereupon, the factor never having said sum in his hands as a part of the estate during the period for which the cautioner is alleged to have been bound. In any event, the claim put forward by the present judicial factor for penal interest subsequent to the date of recal falls to be disallowed.”

Mr M'Kissock's bond of caution contained the following obligation— “Therefore I, the said John Bose Kelso, as principal, and I, the said Peter M'Kissock junior, as cautioner, surety, and full debtor for and with the said John Rose Kelso, and we both, principal and cautioner, do hereby bind and oblige ourselves and our respective heirs, executors, and successors whomsoever, conjunctly and severally, renouncing the benefit of discussion, that I, the said John Rose Kelso, shall do exact diligence in performing my duty as judicial factor foresaid, and shall render just and regular accounts of my intromissions and management in relation to the premises, and make payment of whatever sum or sums of money shall be justly due by me, as judicial factor foresaid, and that to such person or persons as shall be found to have best right thereto, and that I shall perform every duty incumbent on me as judicial factor foresaid, and in doing so shall observe the rules and instructions prescribed, or that may hereafter be prescribed,

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for the discharge of my said office.”

The Lord Ordinary on 16th December 1897 pronounced the following interlocutor, by which he found “that the averments of Peter M'Kissock junior as to the circumstances in which the bond of caution was signed by him are not relevant or sufficient to free him from liability under the bond according to its terms.” In respect of a joint minute lodged by the judicial factor and Mr M'Kissock, the Lord Ordinary dismissed the petition so far as Mrs Smith was concerned; and he remitted to the the judicial factor to prepare a progressive statement of Mr Kelso's intromissions.

Opinion.—“… Mr M'Kissock, who was cautioner for little more than a month before Mr Kelso disappeared, maintains that he is entitled to be free of the bond of caution, in respect he was induced to sign it (1) through fraudulent concealment of material facts by Mr Kelso, (2) through neglect of duty on the part of the Accountant, (3) through undue concealment on the part of the law-agents of the petitioner. He avers that if he were held liable on the bond, the beneficiaries would gratuitously profit from an obligation undertaken by him under essential error induced by fraud. If this were relevantly averred, I should probably have allowed him a proof of the averment, following the case of Wardlaw v. Mackenzie, 1859, 21 D. 940. But the circumstances here exclude the idea that the cautionary obligation was gratuitous in a question with the estate. And while the whole averments on this branch of the case are worthy of careful consideration, I arrive at the conclusion that, if proved, they would not avail the cautioner so as to free him from his bond. I think he is liable according to the tenor of it, whatever liability that may import.”

The judicial factor having lodged a statement showing the amount due by Mr Kelso in July 1896 to be £496, with penal interest amounting to £76, Mr M'Kissock put in a minute in which he submitted, in respect that “the said statement shows the whole malversations of the said John Rose Kelso in regard to the factory estate to have occurred prior to 24th June 1896, when the said Peter M'Kissock became bound as cautioner for his intromissions, and that it does not appear that during the period between the said 24th June and the recal of the said John Rose Kelso's appointment, there were any funds which by the exercise of diligence could have been recovered to the estate other than those which the statement shows to have been restored to it,” and craved for delivery of his bond of caution and to be assoilzied from the conclusions in the prayer of the petition.

The Lord Ordinary on February 8th pronounced the following interlocutor:— “Finds that on a sound construction of the bond of caution libelled, the respondent Peter M'Kissock junior is only liable for loss to the estate through such wrongful intromission or failure in duty on the part of the factor as occurred subsequent to the said Peter M'Kissock junior becoming cautioner: Allows the parties a proof of their respective averments bearing on the question of such liability.”

Opinion.—“Mr John Rose Kelso was appointed judicial factor on the estate of the late George Wallace in 1889. He left Glasgow in July 1896, and is said to have absconded, and his appointment as factor was recalled on 11th September 1896. The Accountant reports a balance due by the factor of £496, Os. 7d. of principal, exclusive of penal interest.

Mr Kelso's cautioners were, (1) Mr Thomas Smith, who died on 3rd April 1892, and (2)Mr Peter M'Kissock. Mr M'Kissock's bond of caution is dated 24th June 1896, a week or two before the factor disappeared. It is in ordinary form, binding the factor and the cautioner that the former shall do exact diligence in performing his duty as factor, and shall render just and regular accounts of his intromissions and management, and make payment of whatever sum shall be justly due by him as factor, and that he shall perform every duty incumbent on him as factor.

The actual defalcations of the factor occurred between 30th June 1894 and 17th June 1896, as shown in the state No. 82 of process. At the latter date they amounted to £596, 11s. 1d., and they remained at that amount at the date of Mr M'Kissock's bond of caution. At the close of the factory they amounted, as I have said, to £496, 0s. 7d., the factor having himself made good £100 of the deficit after the bond of caution was signed.

The cautioner contends that he is free from liability, the losses having all accrued before the date of his bond, and the estate having been made better and not worse during the currency of his cautionary obligation. On the other hand, the newly appointed factor maintains that the bond obliges the cautioner to make good prior defalcations. For this proposition he relies mainly on the case of Grant v. Kennedy, 1828, 6 S. 982. That case, however, seems to me to have turned on the fact that the money withdrawn from the bank before the bond of caution was executed was still in the hands of the trustee at that date. In the present case it appears to me that the bond does not infer liability except for losses through default or failure in duty committed during the currency of the obligation.

But it is not a complete answer to say that the estate improved during the obligation, and that all the actual defalcations were prior to it. While I do not think that by signing the bond the cautioner eo ipso incurred liability for a pre-existing deficit, he was cautioner for the performance of duty by the factor; and there was a continuing duty on the part of the factor to restore what he had taken. The cautioner's liability to make that good may be affected by the circumstances under which the factor failed to perform that duty, and among others by the factor's solvency or insolvency. If, as is here alleged, the factor had no private assets from which the deficiency could have been made up, it may

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be that no loss can be shown to have accrued to the estate through the factor's default subsequent to the execution of the bond. I think this part of the case must be cleared up by a proof.

The judicial factor reclaimed, and argued—1. As regards interlocutor of 8 th February— The law of cautionary obligation depended upon the terms of each individual bond, without there being any presumption either way as to the extent of the obligation—Bell's Comm. (7th ed.), i. 384. The terms of the present bond were almost identical with those of the bonds in Grant v. Kennedy, June 17, 1828, 6 S. 982; Magistrates of Edinburgh v. Gardiner, 1766, Hailes 109, in both of which cases the obligation was held to cover past as well as future dealings. A judicial factor was under an indivisible obligation to restore the estate at the expiry of his term of office, and accordingly he had a continuing duty all through the time to make good any defalcations, for the due performance of which the cautioner had become liable. The case was quite different from that of a commercial traveller bound to render accounts weekly. Moreover, the terms of the bond in the cases cited by the respondent were quite different from this. 2. As regards interlocutor of 16 th December—There were here no relevant averments to support the reduction of the cautionary bona. Any concealment by the factor himself was certainly not enough to release the cautioner. Nor had there been any concealment by the beneficiaries of any material fact which they were bound to disclose. The agent had no authority to represent the beneficiaries and disclose to the Accountant of Court the fact of the previous cautioner's death. Nor was that a fact which would lead to the inference that the factor would prove dishonest in money matters. In any view, it was the duty of the cautioner to make inquiries and satisfy himself— Young v. Clydesdale Bank, December 6, 1889, 17 R. 231, at 240. The case of French v. Cameron, July 14, 1893, 20 R. 966, cited by the respondent, was on quite a different footing, since the concealment there was of most material facts.

Argued for respondent—It was important to keep in view the distinction existing between a cautionary obligation for the payment of money and one for the performance of duties. The latter only extended to future acts, and was not a guarantee of solvency, which would not lightly be presumed. This principle was applied to the terms of a bond similar to the present one in Napier v. Bruce, February 11, 1840, 2 D. 556, aff. 1842, 1 Bell's App. 78; Bell's Comm. i, 391; Dykes v. Watson, June 3, 1825, 4 S. 69; Smith, v. Bank of Scotland, January 14, 1829, 7 S. 244; Bell's Pr. sec. 289. In the case of Magistrates of Edinburgh v. Gardiner there was a strong dissent, and it was clearly decided on the specialities of the case; and there were also very special circumstances in Grant v. Kennedy. The true construction of the bond was that if money had been lost before its date, the cautioner would not be liable, and this was borne out by the use of the future tense in the wording of it. (2) There had been fraudulent concealment by the factor, which was sufficient for the reduction of the bond— Wardlaw v. Mackenzie, June 10, 1859, 21 D. 940. There had also been concealment of a material fact, viz., the death of the late cautioner, and the case was accordingly ruled by Smith v. Bank of Scotland, and French v. Cameron, supra.

At advising—