Scottish Court of Session Decisions

This was an action of damages for breach of contract at the instance of Joseph Constant, shipowner, 11 Billiter Square, London, as the assignee of the trustee on the sequestrated estate of Carmichael, Maclean, & Company, shipbuilders, Greenock, against John G. Kincaid & Company, engineers, Greenock.

In August 1897 Carmichael, Maclean, & Company agreed to build for Constant two tug-steamers with their engines, and Carmichael, Maclean, & Company sub-contracted with Kincaid & Company for the engines and boilers. Kincaid & Company sub-contracted again for the boilers, but it is not necessary further to notice this sub-contract.

Kincaid & Company in their contract agreed to relieve Carmichael, Maclean, & Company from all responsibility in connection with a six months' guarantee on their part for faulty material or workmanship so far as the machinery and boilers were concerned.

Kincaid & Company and Carmichael, Maclean, & Company in turn made delivery under their contracts, and the contract price in each case was paid.

Shortly after delivery of the tugs the boilers were found to be defective and had to be replaced by Constant, to whom Carmichael, Maclean, & Company thus became liable in damages, having themselves a corresponding claim against Kincaid & Company.

Before any payments of damages had been made Carmichael, Maclean, & Company became bankrupt, and a trustee was appointed on their estates, who granted to Constant an assignation of his claim against Kincaid & Company in exchange for a discharge by Constant of his claim against the bankrupt estate.

Constant then raised the present action in the Sheriff Court at Greenock, in which the defenders Kincaid & Company pleaded as follows—“(5A) The pursuer, as assignee of the trustee on Carmichael, Maclean, & Company's sequestrated estates, if entitled to claim to any extent against the defenders (which is denied) damages in respect of the alleged breach of contract, is not entitled to claim for more than the sum of any dividend or dividends which may be paid out of the sequestrated estates on the sum of such damages when and as the same may be lawfully ascertained. (8) The pursuer's cedent not having at the date of the alleged assignation suffered loss at the hands of the defenders, or of anyone for whom the defenders are responsible, the alleged assignation conferred on the pursuer no right which he can enforce against the defenders, and the action, so far as laid on the alleged assignation, is therefore irrelevant and unfounded. (11) No loss or damage in respect of the boilers in question having in point of fact been sustained by the pursuer's cedent, this action, so far as at the pursuer's instance as assignee foresaid, is unfounded, and none having been sustained by the pursuer in his individual capacity, or at all events in respect of any default of the defenders, or of any person for whom they are responsible, the action is unfounded, and the defenders are entitled to absolvitor.”

A minute of admissions was lodged for the parties, in which it was admitted, inter alia, as follows—“(2) The defenders admit that the boilers which were supplied to the screw tugs ‘Lady Jackson’ and ‘Empress of India’ by Carmichael, Maclean, & Company in pursuance of the contract between the pursuer individually and Carmichael, Maclean, & Company … were disconform

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to that contract, and that Carmichael, Maclean, & Company thus committed a breach of said contract for which they became liable to the pursuer in damages, which breach of contract and damages the defenders admit were due to breach of contract on their part … of the contract between them and Carmichael, Maclean, & Company. (3) The parties admit that no payment for or in respect of said claim of damages has been made by Carmichael, Maclean, & Company, or by anyone representing them, or by the trustee on their sequestrated estates, and that the estates of Carmichael, Maclean, & Company were sequestrated on 12th December 1899. (4) The pursuer admits that no claim in said sequestration has been lodged by or for him for or in respect of said damages, and that he agreed to accept the assignation mentioned in the petition in full of his claim against the estate. (5) The parties further admit that a first dividend of one shilling per pound was declared in the said sequestration on the claims as ranked of the ordinary creditors therein, and was payable on 24th January 1901, but no further dividend has been declared. The parties, however, agree that for the purposes of judgment in the present action it shall be assumed and held ( first) that a further and final dividend of three shillings per pound on the said claim will be declared, and will be payable on the date of the Sheriff-Substitute's judgment in this action; ( second) that £1350 sterling is the sum for which, but for the foresaid transaction between him and the trustee in said sequestration mentioned in article 4 of this minute, the pursuer would be entitled to claim and to rank for dividend as an ordinary creditor of Carmichael, Maclean, & Company in their said sequestration, it being admitted that the state of the boilers was such that the pursuer had right to replace them with new boilers, at a loss of £1350, which sum Carmichael, Maclean, &Company, if solvent, would have had to pay to the pursuer as the damages due by them, and which, in that event, and on such payment being made by Carmichael, Maclean, & Company, the defenders would have had to pay Carmichael, Maclean, & Company as the damages due to them by the defenders.”

On 10th December 1901 the Sheriff-Substitute ( Glegg) pronounced an interlocutor whereby after sundry findings in fact he found in law—“(1) that the pursuer as assignee of the trustee has the same right against the defenders as Carmichael, Maclean, & Co. had at the date of their bankruptcy; (2) that the defenders were then indebted to Carmichael, Maclean, & Co. in the sum of £1350;” and repelled the pleas-in-law for the defenders, and granted decree in favour of the pursuer for the sum of £1350.

Note.—“Joseph Constant ordered from Carmichael, Maclean, & Co. two steam tugs fully equipped. Carmichael, Maclean, & Co. sub-contracted with the defenders Kincaid & Co. for the boilers, and they in turn sub-contracted with Neilson & Sons for the same. The boilers were delivered and paid for by these parties in turn, but after being in use they were found to be defective and had to be replaced by Constant at an expense of £1350. It is admitted that the defects constituted a breach of the contract between Constant and Carmichael, Maclean, & Co., and also of the contract between them and Kincaid & Co., and that in consequence of said breaches Carmichael, Maclean, & Co. became liable to pay to Constant £1350, and that in the ordinary course Kincaid & Co. would be liable in the same sum to Carmichael, Maclean, & Co. Before any payments of damages were made, however, Carmichael, Maclean, & Co. became bankrupt, and a trustee was appointed on their estates. Constant then, instead of claiming in the sequestration, accepted an assignation of the trustee's rights against Kincaid & Co. in full of his claim against the bankrupt estate. It is as such assignee that Constant now sues the present action, and as the effect of the assignation in operating a complete transfer of the trustee's right was not questioned, I regard the action as one at the instance of the trustee.

At the hearing of the case the defenders intimated that they departed from their pleas, except 5a, 8, and 11, and stated that their contentions were ( first) that no sum was due by them, and ( secondly) and alternatively that only £270 was due. This latter sum is equal to 4s. per £ on the £1350, which is the rate of the dividend the bankrupt estate is expected to produce.

No argument was offered in support of the first contention, and I do not see how it can be sustained.

On the second head it was argued that the defenders' liability to the bankrupt estate was limited to the amount of actual payments made to the purchaser of the boilers, or that, in other words, the amount of the dividends paid to the purchaser being the amount by which the bankrupt estate was depleted by the defenders' breach of contract, they repaired the breach by replacing that amount. In the present case, the dividend being assumed for the purposes of this case to be 4s. in the £, the defenders say that they are liable to pay only that proportion of the £1350, making £270. In my opinion this argument is unsound in principle and contradicted by authority. In the first place, it seems to make the amount of the dividend payable to the creditor of the bankrupt estate depend on the amount contributed by the debtor, and at the same time to determine the amount to be contributed by the debtor in accordance with the amount of dividend payable to the creditor. Several anomalous cases may be figured as the result of adopting this principle, of which the following may be taken as illustrative:—Suppose, for the sake of argument, that Kincaid & Co. had become insolvent and could pay only 10s. in the £. They could then pay only £135 instead of £270, and the estate of Carmichael, Maclean, & Co. would then have to pay a smaller dividend than 4s. per £, consequently the sum demandable from Kincaid & Co. would be less that £270, and as they

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could only pay a dividend on this smaller sum the difficulty would be again renewed. ‘Now,’ in the words of Lord President Inglis, ‘that is one of those absurd results which is a very good test of the unsoundness of the doctrine of which it is a result’ ( Cunningham v. Macgregor, 6 R. 1333, 1338). Although in the present case, on account of the admission of parties, the difficulty in fixing the amount of the dividend does not arise, that admission does not seem to me to entitle the defenders to ask judgment in their favour if the principle on which they ask it is not generally applicable. In the next place the defenders' contention seems to me opposed to the doctrine that the creditors of a bankrupt are entitled to demand implement of a contract obligation undertaken to the bankrupt. ‘The obligation under the contract,’ says Bell Com. (7 ed.), i. 471, ‘may be made available to the purchaser's bankrupt estate either if the price has already been paid, or if the creditors are willing to pay the stipulated price; for the solvent party has no further interest than to demand full performance of the bankrupt's obligations.’ There has here been full performance of the bankrupt's obligation, but the defenders have failed to perform their obligation to an extent valued at £1350. The boilers were, in fact, worth less by that amount than the sum paid by the bankrupt, and the defenders were overpaid to that extent. It is true, since the claim is now stated as one of damages, that if Carmichael, Maclean, & Co. had been able to settle with the purchaser for £270, no more could now be demanded of the defenders, but (disregarding the assignation as above explained) that has not been done, and the obligation of Carmichael, Maclean, & Co. is to pay the full sum of £1350. The fact of bankruptcy does not annul the obligation, but only excuses performance to the extent of the inadequacy of the estate.

If, again, the position of a trustee in bankruptcy with reference to a debtor to the estate is regarded—and this is probably the most satisfactory way of disposing of the case—a result adverse to the defenders is also reached. The right of the pursuer in this case is that which was vested in the trustee by his act and warrant. The claims competent to Carmichael, Maclean, & Co. at the moment of bankruptcy were thereby transferred to the trustee. The amount of their claim against the defenders at that time seems to me to have been £1350. It is true that Carmichael, Maclean, & Co. had not paid the amount, and that it was not constituted; but there is now an admission that it was due to Constant by them, and that the same sum would have had to be paid by the defenders to Carmichael, Maclean, & Co. if the latter had remained solvent, since they would have had to pay it to Constant. The position is therefore the same as if Constant had held a decree against Carmichael, Maclean, & Co. for the amount of his debt. Carmichael, Maclean, & Co. could then, even without payment, have sued the defenders, and they could have had no answer to the claim. The effect of their contention therefore is that the trustee in bankruptcy took up a less right than there was in the bankrupts in the matter. On this point there is authority, and it is adverse to the defenders. According to Bell's Com. (7 ed.) ii. 335, a trustee in bankruptcy is entitled ‘to recover any debt due to the bankrupt and to maintain action in the same way as the bankrupt might have done if his estate had not been sequestrated.’ The only authority cited against this statement as I am using it is an observation of Lord Chancellor Westbury in the case of Ewart v. Latta, 3 Macph. (H.L.) 36, at p. 42; but there is nothing in the decision contrary to the view here adopted, and I read the observation as agreeing with the construction I put on the sentence in Bell. I understand it to mean that the trustee is in the same position as the bankrupt would have been in if he had remained solvent; that the accident of bankruptcy does not affect the position of the parties as it existed at the date of the bankruptcy; and that no change takes place in the liability of the debtor because of the insolvency of the creditor. This view is supported by English authority. In Ashdown v. Ingamells, L.R., 5 Ex. Div. 280, the trustee in the liquidation of a trader who had transferred his business to another on condition, inter alia, that the transferee should pay a creditor of the trader, was found entitled to recover the whole amount of the debt from the transferee. There, as in the present case, the trustee was suing on breach of contract between the bankrupt and his debtor, a contract to which the bankrupt's creditor was not a party, and the amount recovered from the debtor was not to go to the particular creditor but to be divided generally. In the course of his opinion, Bramwell, L. J., said (p. 284):—‘If the liquidating debtor had not become insolvent, he clearly would have been entitled to recover by way of damages the sum which the defendant ought to have paid but did not pay. That being the position of the parties, how can it be possible that the trustee in liquidation is not entitled to recover the sum which the defendant omitted to pay? The plaintiff, who is the trustee in the liquidation, must have a right to the same amount as the liquidating debtor would have been entitled to if he had continued solvent and had brought an action for breach of contract.’ See also Carr v. Roberts, 5 B. and Ad. 78; Hill v. Smith, 12 M. & W. 618; Eddiston Insurance Co. v. Western Insurance Co. (1892), 2 Ch. 472.

The case of Cunningham v. MacGregor, 6 R. 1333, which was founded on by both parties, decided that a mandatory was entitled to relief from his principal when called on to meet a liability incurred for the principal, and thus differs in some respects from the present case. I do not think, however, that in any view of it the defenders can claim it as an authority in their favour; and it benefits the pursuer to this extent, that it was held that the debtor was not relieved of his obligation under contract with his creditor because the creditor was unable fully to implement

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a corresponding obligation to another party. The flaw in the defenders' argument appears to me to be that it regards the ability of the creditor to fulfil his obligation, and not the extent of the obligation, as the measure of his right against his debtor for breach of an ancillary contract.”

The defenders appealed to the Court of Session, and argued—Under their contract with the pursuer's cedents the defenders were only liable to relieve them of any loss sustained under their guarantee; but the cedents had received the full contract price, and had made no payments under their guarantee, therefore they had sustained no loss and the defender's obligation to relieve had not emerged. In any case, Carmichael, Maclean, & Company could only have recovered from the defenders the amount of the loss they had sustained, but the claim against them had been discharged, therefore they had sustained no loss. Assuming, however, that the assignation sued upon carried with it a claim against the defenders, the measure of that claim was the extent to which the pursuer's claim would have depleted his cedent's bankrupt estate, and it would only have done so to the extent of 4s. in the pound; therefore the defenders were in no case liable to the pursuer in more than 4s. in the pound. The line of authorities followed by the Sheriff-Substitute, of which Ashdown v. Ingamells (1880), 5 Ex. Div. 280, and Carr v. Roberts (1833), 5 B. & Ad. 78, were examples, did not stand uncontradicted— Porter v. Vorley (1832), 9 Bing. 93.

Counsel for the respondent were not called upon.