Scottish Court of Session Decisions

By his trust-disposition and settlement the late Mr Charles Alexander, who died in 1879, conveyed his whole estate, heritable and moveable, to trustees for the purpose, inter alia, of paying to his widow such sums as they should think proper for her maintenance and for the bringing up of her children.

The trustees were authorised to invest the trust-estate “upon good heritable property in Scotland … or upon any of the Government stock of Great Britain or the United Kingdom, or on debenture bonds of any municipal or parliamentary trust in Scotland.” The trust-disposition and settlement contained a declaration that the trustees “shall not be liable for omissions, errors, or neglect of management, nor singuli in solidum, but each shall be liable for his own actual intromissions only,”

On 16th October 1880 the trustees lent £2000 of trust-funds to the Greenock Harbour Trustees for a period of seven years from the following Martinmas at 4 per cent. They received from the Greenock Harbour Trustees in return therefor an assignment under the Greenock Harbour Act 1872, sec. 34 and sec. 38, sub-sec. (3), purporting to assign to them “all and sundry the rates, duties, and other revenues of the Trust, and the works and property of the Trust, payable or belonging to the Trust.”

The Greenock Harbour Trust was announced to be insolvent on 11th May 1887,

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and after the passing of the Greenock Harbour Act 1888 the trustees received, in exchange for the original assignment, a certificate for £2000 B debenture stock of the Greenock Harbour Trust. The market value of that amount of the said stock in 1898 was about £750.

In these circumstances Mrs Alexander, the truster's widow, raised an action against James Johnstone, farmer, Moffat, the sole surviving testamentary trustee, and against the representatives of the deceased trustee, who did not appear, concluding for payment of £2378, being the amount of trust-funds invested with the Greenock Harbour Trust, plus the difference between the rate of interest which ought to have been earned and that actually earned—the said defender on making payment of the said sums to receive in exchange an assignation to the £2000 B debenture stock.

The pursuer averred—“The defender, the said James Johnstone, made no inquiries for himself as regards the Greenock Harbour Trust or the security which they had to offer for money lent to the Trust; neither did he obtain and consider the published balance-sheet of the harbour before making the said investment.” The pursuer further averred—“The said loan was not one which Mr Alexander's trustees, including the defender the said James Johnstone, were entitled or authorised to make either at common law or under the Trusts (Scotland) Amendment Act 1884. Further, it was not a safe and proper investment for the trustees and the said defender to make under the powers given to them in the investment clause in the truster's settlement which authorised investment of the trust-estate. The said trustees, and in particular the said James Johnstone, did not obtain, as they ought to have done, a copy of the published reports of the harbour accounts for the year which had closed at 3rd September 1880, nor for the previous year which ended on 1st September 1879. These accounts disclosed that at 6th September 1880 there were prior loans to the extent of £878,429, 1s. 7d. preferable to the money proposed to be lent by the said trustees. The Harbour Trust accounts for the year ending 3rd September 1880 were only approved of by the Harbour Trustees on 12th October 1880. This was the date on which Mr Alexander's trustees resolved to lend the said sum of £2000 to the Greenock Harbour Trust, and the balance-sheet for the year to 3rd September 1880 was not therefore considered by the said trustees. Yet it disclosed that the prior assignments shown by the balance-sheet of 1879 had increased by the sum of £78,000. By the Greenock Harbour Act 1880, passed on 12th August 1880, it was provided, as above mentioned, that all money borrowed at and prior to the passing of the Act was to have priority over assignments for money borrowed after the passing of the Act. The trustees of Mr Alexander in agreeing to lend the said sum of £2000 knew, or ought to have known, that they were lending on a postponed security, and that the prior debt of the harbour at the time of the said investment was no less a sum than £878,000, Further, the defender knew, or by the exercise of reasonable attention and diligence ought to have known, and as the said published reports of the harbour accounts showed, that there was no sufficient margin either on the capital or revenue of the Harbour Trust to render the investment of trust-funds in such an undertaking reasonably safe, having in view that the only security which could be effectually given and was given to Mr Alexander's trustees consisted of the dues and other revenues of the Harbour Trust, which the trustees knew to be of a fluctuating and most uncertain character, entirely dependent on the trade which might be attracted to the said harbour, which was largely connected with one industry, viz., sugar refining. Not only was this so, but Mr Alexander's trustees knew, or ought to have known, as the said published accounts of the Harbour Trust disclosed, that the Harbour Trustees were at the time the said investment was made engaged in the construction of a new dock, for which purpose the money then being borrowed by the Harbour Trust was being applied. This new dock had only been begun in 1878; and the said trustees, and the defender the said James Johnstone, knew, or ought to have known, that several years would elapse before this dock could be completed, that the total cost of it was uncertain, and that even when finished its success was entirely a matter of speculation, depending on the state of trade. The Greenock harbour was thus not a completed and tried undertaking at the time said investment was made, and the said trustees in investing a sum which constituted three-fourths of the whole trust-funds under their charge, on a postponed security in such an undertaking, in view of the facts above mentioned, grossly failed to act with the care and discretion which any prudent man would have exercised in his own affairs.”

The defender denied that he had made no inquiries as regards the Greenock Harbour Trust or the security it had to offer, and explained that at the date at which the investment was made and for several years afterwards the Greenock Harbour Trust was in good credit, and its securities regarded among business men as good and safe securities of their kind, viz., bonds of Parliamentary trusts in Scotland. The trustees took the security in the bona fide administration of the trust and after due consideration, and nothing occurred until the bond had almost reached maturity to raise any doubt as to the sufficiency thereof.

The pursuer pleaded, inter alia—“(2) The defender ( a) in making the said loan of £2000 to the Greenock Harbour Trust, and ( b) in continuing the said loan, and failing timeously to realise the same as above condescended on, having acted in violation of his duty as trustee, and with gross negligence, he is liable to make good the loss arising thereon to the said trust-estate.”

The defender pleaded—“(6) The said loan having been within the powers of the trustees, and having been made by them in bona fide, and in the due administration of

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the trust at a time when the Greenock Harbour Trust was in good credit, and separatim, the trustees being protected by the clause of indemnity in the truster's settlement referred to in answer 10, the defender ought to be assoilzied.”

The import of the proof allowed by the Lord Ordinary was as follows:—By arrangement with the defender, Mr Inglis, his co-trustee, who died in 1896, and prior to the raising of the present action, was to make inquiries as to the Greenock Harbour Trust investment, and upon his communicating the result of these inquiries to the defender the latter became satisfied that the investment was a prudent one. After 1882, in order to save expense, the management of the trust was left in the hands of Mr Inglis, who paid the income to the pursuer. The annual reports of the Greenock Harbour Trust were never sent to the defender. From statements produced by the treasurer of the Harbour Trust it appeared that in 1880, out of a debt of £878,429, the sum of £284,493 represented trust funds; the respective amounts in 1884 being £1,265,752, and £486,604, and at Whitsunday 1887 £1,533,361 and £746,144.

The assignment granted by the Harbour Trustees for the loan of £2000, dated 19th November 1880, bore to be granted in virtue of the Greenock Port and Harbour Acts, 1866, 1867, and 1872. The Greenock Harbour Act 1880. which came into force on 12th August of that year, by section 66 authorised the Harbour Trustees to borrow on the security of the rates and duties and other revenues of the trust any sum which, together with the amount already authorised to be borrowed before the passing of this Act, should not exceed £1,300,000. The amount actually borrowed before the passing of the 1880 Act was £873,000, and it appeared from the Act that the additional amount authorised therein to be borrowed was for the construction of a new wet dock. Section 72 of the 1880 Act provided that “all assignments for money borrowed by the trustees before the passing of this Act in force at the passing of this Act shall, during their respective continuance, and subject to the provisions of the Acts under which the same were respectively granted, have priority over any assignments for money borrowed by them after the passing of this Act.”

The revenue of the Harbour Trust was in 1876 £69,211; in 1877 £73,740; in 1878 £72,154; in 1879 £77,107. The net surplus after meeting all expenditure, including interest on money borrowed, was in 1876 £11,258; in 1877 £13,092; in 1878 £6,542; in 1879 £13,309. The accounts for 1880 showed a revenue of £74,951 and a net surplus of £4850. The accounts from 1882 onwards disclosed a steadily increasing deficit.

On 25th May 1898 the Lord Ordinary ( Kyllachy) found that the loan in question was not justified, and that the defender and the representatives of his co-trustee were liable conjunctly and severally to make good the loss which had thereby accrued or might accrue to the trust-estate.

Opinion,—“The defender in this case is the survivor of two trustees, who in November 1880 invested in the bonds of the Greenock Harbour Trust a sum of £2000, forming the bulk of the trust-estate under their charge. The present action is brought to compel him as such survivor to make good the loss arising on this investment—a loss amounting, as it has turned out, to about £1250.

The defender's case, if he is liable, is beyond doubt a hard one. He is a farmer in Dumfriesshire, not skilled in accounts or an expert in business. The investment in question was submitted to him and his co-trustee by the agent of the trust, an experienced man of business. It was described by the latter as ‘perfectly safe,’ although inferior to an alternative investment which he recommended as preferable. The deceased co-trustee, who was a near relative of the pursuers, undertook to make inquiries, and reported that he had done so, and the investment was made by the two trustees, with the assent of the law-agent, beyond doubt in the best of faith, and in the honest belief that the security was sound and sufficient. The result however is, that the co-trustee being now dead, and having died bankrupt, the whole loss—if the action succeeds—will be thrown on the defender.

The question of liability does not arise quite identically with that which was lately before the Court and the House of Lords in the case of Annan v. Hutton. I do not refer merely to the clause of indemnity in the trust deed. That does not seem to me to make any difference. But there are two other points of distinction which require to be noted.

In the first place, the trustees here had power to invest, inter alia, ‘in the debenture bonds of any Parliamentary trust.’ It was not I think seriously disputed—at least no grounds were suggested for doubting—that the bonds of the Greenock Harbour Trust were within that category. One ground therefore of the judgment in the case of Annan does not apply in the present case.

In the next place, the loan here in question was made in 1880, and the position of the Greenock Trust was not then quite the same as in 1885, when the loan was made by Annan's curator. In 1885 the accounts of the Trust disclosed that there was practically no surplus arising upon the Harbour revenue from existing works, and, moreover, that for several years the revenue, such as it was, had been steadily declining. In 1880 the case was different. Down to the year 1879 inclusive the revenue of the Trust had been fairly steady. Disregarding the distinction between ordinary and extraordinary revenue and expenditure (a distinction which only came in occasionally and appeared only on analysis of the accounts) there had been for a number of years a substantial surplus. There had been, speaking roundly, £13,000 in 1875, £11,000 in 1876, £13,000 in 1877, £8500 in 1878, and £10,000 in 1879. I do not say that those margins were ample. On a gross revenue

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of over £60,000 a-year the percentage of margin was not large, but still it was not unsubstantial.

Unfortunately however for the defender the loan here in question was made towards the end of the year 1880, when—if applied for—the Harbour accounts of that year might have been obtained, and when also it might have been ascertained that an Act of Parliament had been passed, viz., the Harbour Act of 1880, which materially affected the position of subsequent lenders, and that being so the pursuers' point is that the Harbour accounts for 1880 showed a surplus revenue of only £4800, and that the Act of Parliament showed further (1) that bonds issued subsequent to August 1880 were postponed to all prior bonds, the amount of those prior bonds being £878,000; (2) that in addition to about £120,000 of unissued bonds under previous Acts, the Trustees had obtained in 1880 power to borrow for new works a further sum of £300,000; and (3) that there was thus in prospect an additional charge on the revenue of the Harbour of about £16,000 a-year, which unless recouped by an additional revenue from new works must more than extinguish any surplus available for subsequent lenders.

In these circumstances I am not able to hold otherwise than that it must have been obvious to any intelligent person who had ascertained the facts that the only chance which new lenders had of receiving payment of their interest, or being repaid their principal, lay in the prospect of the new works adding to the free revenue of the Harbour a return at least equal to the interest on the cost of those new works. In other words, the safety of the loan depended entirely on the success as a commercial enterprise of the James Watt Dock. But that, I apprehend, was just the element which in the case of Annan's Curator was held both in this Court and in the House of Lords to stamp the loan in that case as speculative, and therefore improvident.

It is no doubt true that the defender here is not, like the defender in Annan's case, a person skilled in accounts; and it is very possible that although he had examined personally the accounts of the Trust and their Acts of Parliament, he might have failed to ascertain the true character of the security. But if this was his position, it was, I am afraid, his duty either to have sought some other investment, or to have taken—as he might have done—skilled advice and assistance. He was not, I apprehend, entitled to proceed upon mere repute, or upon mere general inquiries made by his co-trustee. But that is what he seems to have done. It would have been a different matter if he and his co-trustee had remitted, say to the agent of the trust, to inquire into the merits of the investment and to report on his professional responsibility. In that case if the law-agent had failed to ascertain the facts or to appreciate their significance, it may very well be that the trustees would be held to have done their duty, and that the law-agent would be alone responsible. But no case of that sort was presented upon the evidence; nor was it argued to me that the trustees were entitled to rely or did rely on the initial statement by the law-agent that although he preferred a certain other investment he deemed the Greenock Harbour Bonds ‘perfectly safe.’ I do not therefore feel called upon to consider any question of that kind, the more especially as I could hardly do so without more or less prejudging a question affecting persons who are not parties to this suit. On the whole, I have not been able to see my way to any other result than a finding similar to that which was pronounced in the case of Annan's Curator, viz., that the loan in question was not justified, and that the defender and the representatives of his co-trustee are bound conjunctly and severally to make good the loss which has accrued or may accrue to the trust-estate.”

The defender reclaimed, and argued—The Lord Ordinary was wrong. This case was distinguishable from that of Cowan's Trustees v. Ferrie's Curator Bonis, February 26, 1897, 24 R. 590, and from that of Annan v. Annan's Curator Bonis, May 14, 1897, 24 R. 851, aff. February 28, 1898, 25 R. (H.L.) 23. It was not seriously contended that the investment here was ultra vires of the trustees. The only question was, whether it was a prudent specimen of its class. Here the investment was made in 1880. In Annan the investment was made in 1885. That made all the difference. In 1880 the revenue though fluctuating had shown no signs of a permanent downward tendency. The same might be said of the surplus. It was true that the surplus in 1880 dropped to a little over £4000. But the accounts of the Harbour Trust for 1880 had not been published when the money was lent. Contrast Annan's case. In 1885 the revenue had for several years been steadily falling. In place of an annual surplus there was a growing annual deficit. The Greenock Harbour Act of 1884 was a fait accompli. By its provisions the money which it authorised the Trustees to borrow was to rank pari passu with money borrowed under the Act of 1880. Much of the loss sustained by the estate here was due to the Act of 1884, which could not have been foreseen in 1880. In 1885 the failure of the Greenock sugar trade was manifest. That, again, could not have been anticipated in 1880. The defender believed, what the assignment told him, that he was borrowing under the 1872 Act, and that he had a conveyance in security, not only of the rates, but of the property of the Trust. He was never put on his guard against the provisions of the 1880 Act. Believing as he did in the validity of the security, he was not bound to dispose of his debenture when the affairs of the Harbour Trust became less prosperous. At the most, the defender had been guilty of neglect, not of culpa lata, and he was protected by the indemnity clause in the truster's settlement. Authorities referred to— Seton v. Dawson, December 18, 1841, 4 D. 310; Cunningham, &c. v. Montgomerie, &c., July 19, 1879, 6 R. 1333;

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Lamb v. Cochran, March 23, 1883, 20 S.L.R. 575; Breatcliff, &c. v. Bransley's Trustees, January, 11, 1887, 14 R. 307; Ritchies v. Ritchie's Trustees, July 20, 1888, 15 R. 1086; Scott's Trustees v. Scott, November 1, 1895, 23 R. 52; Johnstone v. Hodge, L.R., 1886, W.N. 72; Speight v. Gaunt, L.R., 22 Ch D 727, per Jessel, M.R. 746; Smith v. Thompson, L.R. [1896] 1 Ch 71; Wilkins v. Hogg, 31 L.J. Ch. 41.

The argument for the pursuer, who admitted that the investment was intra vires of the trustees, sufficiently appears from the opinions of the Lord Ordinary and Lord Adam. Authorities cited— Seton, ut sup.; Perston, &c. v. Perston's Trustees, January 9, 1863, 1 Macph. 245, per Lord Neaves, 250; Knox v. Mackinnon, November 2, 1886, 14 R. 22, aff. August 7, 1888, 15 R. (H.L.) 83; Rae v. Meek, July 20, 1888, 15 R. 1033, rev. August 8, 1889, 16 R. (H.L.) 31; Maclean v. Soady's Trustee, July 19, 1888, 15 R. 966; Thomson's Trustees v. Henderson, October 25, 1890, 18 R. 24; Learoyd v. Whiteley, L. R. 12 A.C. 727; Rickett v. Sharp, L.R. 45 Ch. D. 286.

At advising—