Scottish Court of Session Decisions

Archibald Veitch, cattle dealer, Jedburgh, had been charged at the instance of the National Bank of Scotland, Limited, to make payment of the sum of £1500 with interest.

He brought a note of suspension.

The following narrative of facts is taken from the opinion of Lord Low—“In 1902 the complainer and one Robert Hunter became cautioners for the now deceased William Rutherford, cattle dealer in Hawick, in a bond of cash credit for £1500 granted by these parties to the respondents.

Rutherford was at his death indebted to the respondents in the sum of £5855, 8s. 11d., and they recovered from his estate the sum of £3903, 17s. 3d., being a composition of 13s. 4d. in the pound. The balance of Rutherford's debt therefore still remaining due to the respondents is £1951, 11s. 8d., and accordingly they claim that the complainer as cautioner is bound to pay the full amount of £1500 for which he undertook liability in the bond. The complainer, on the other hand, contends that he is only bound to pay £500 to the respondents, being the sum of £1500 under deduction of the amount of the composition recovered from Rutherford's estate effeiring to that sum.”

The bond was in the following terms—“We, William Rutherford, cattle dealer and meat salesman, Hawick, Archibald Veitch, cattle dealer, Jedburgh, and Robert Hunter, farmer, Chapelhill, Hawick, considering that the National Bank of Scotland, Limited, have agreed to allow us credit on a current account, to be kept in the books of said bank in name of me, the said William Rutherford, and to be operated on by me or by anyone duly authorised by me, and that to the extent of £1500 sterling, on these presents being granted, have there

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fore bound and obliged, like as we, the said William Rutherford, Archibald Veitch, and Robert Hunter, hereby bind and oblige ourselves, conjunctly and severally, each as full debtor, and our respective heirs, executors, and representatives whomsoever, without the benefit of discussion, to repay to the National Bank of Scotland, Limited, aforesaid, or assignees thereof, on demand, the foresaid principal sum of £1500, or whatever portion thereof may appear to be due to said bank on the foresaid current account, and also whatever moneys the said bank have advanced or may advance, or have or may become engaged for, on account of the said William Rutherford, or on the faith of his name, or that of any company firm of which he is or may hereafter become a partner, on or by bills or promissory-notes, letters of credit, guarantees, or other obligations, or in any other way whatever, such advances and engagements not exceeding in all the said sum of £1500 of principal beyond any balance which may be at the credit of the said William Rutherford in said current account, and, in general, to refund to the said bank whatever loss and expense not exceeding said sum of £1500 of principal the said bank may sustain or incur through their transactions with the said William Rutherford, all which sums, losses, and expenses, the bank may debit to the said current account without losing any right, remedy, or claim competent against other obligants, it being the express meaning of these presents that this bond shall, to the extent foresaid, be a covering security to said bank against any ultimate loss that may arise on the transactions of the said William Rutherford with said bank. And, in addition, we bind and oblige ourselves to pay the said bank interest at the rate of five per centum per annum, or at such higher rate as the said bank may for the time be in use to charge on cash-credit accounts, on all such moneys, from the time of advance or becoming due thereof till repayment, the said bank being hereby allowed to fix such rate of interest from time to time without any notice thereof to any of us or our foresaids, and also any charge for commission on the amount of the foresaid credit or the transactions in said account, as the said bank may be in use to charge on all such credits, and a fifth part more of said principal sum of £1500, or of any lesser sum that may be due, of liquidate penalty in case of failure in punctual payment. …”

The complainer pleaded, inter alia—“On a sound construction of said cash-credit bond, the complainer's guarantee is a guarantee for payment by William Rutherford to the respondents of a sum limited to £1500, and not for payment of the whole debt which might be due by him to them.”

The respondents pleaded, inter alia—“On a sound construction of the bond of cash credit, the complainer is liable thereunder for any sum (not exceeding £1500 of principal and interest thereon) remaining due by William Rutherford to the respondents after crediting Rutherford's account with sums received by the respondents by way of dividend or otherwise on their total claim against Rutherford's estate.”

The Lord Ordinary ( Salvesen) on 10th January 1906 pronounced the following interlocutor:—“Finds (1) that on a sound construction of the cash-credit bond, dated 26th and 28th April and 1st May 1902, the complainer is not liable to make payment of any sum in excess of the difference between the sum of £1500 contained in the bond and the composition received by the respondents from the estate of the late William Rutherford.”

Opinion.— “This is a suspension of a charge given by the respondents to the complainer for payment of the sum of £1500 and interest. The complainer along with a Mr Robert Hunter, who has brought a suspension of a similar charge, were cautioners to the extent of £1500 of the late Mr William Rutherford, who at one time carried on a large business in Hawick as a cattle dealer and salesman. Mr Rutherford obtained large advances beyond the £1500 from the respondents as his bankers, and when he was ultimately obliged to suspend payment and grant a trust deed for behoof of his creditors, he was due the bank a sum of £5855, 8s. 11d., including the amount guaranteed by the complainer and his co-cautioner. The bank ranked on his estate and received a composition at the rate of 13s. 4d. in the pound, or £1000 in respect of the £1500 with which the complainer was alone concerned. He not unnaturally contends that in these circumstances his maximum liability does not exceed £500, which I was informed had already been tendered by his co-cautioner Mr Hunter. On the other hand, the bank say that the total deficiency on the amount of their claim against Mr Rutherford's estate amounts to £1951, 11s. 8d., and that they are entitled under the terms of the bond to hold the cautioners bound for this loss to the extent of £1500, the admitted maximum liability.

The question accordingly depends entirely on the construction of the bond to which the complainer became a party. The earlier part of it is in the form of an ordinary cash-credit bond, and proceeds on the narrative that the bank had agreed to allow the three parties named (the principal debtor and his two cautioners) a credit on a current account to the extent of £1500. The parties then bind themselves, conjunctly and severally, each as full debtor, to repay to the bank ‘the foresaid principal sum of £1500, or whatever portion thereof may appear to be due to said bank on the foresaid current account.’ Pausing here for a moment, it is plain that what is contemplated is that, after the account has been operated upon for some time, the bank may close it, and call upon the principal debtor and his cautioners to repay the amount of the advances appearing in the current account as still unpaid. The bond then proceeds, ‘and also whatever monies the said bank have advanced, or may advance, or have or may become engaged for, on account of the said William Rutherford, or on the faith of his name, or that of any company firm of which he is or

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may hereafter become a partner, on or by bills or promissory-notes, letters of credit, guarantees or other obligations, or in any other way whatever, such advances and engagements not exceeding in all the said sum of £1500 of principal beyond any balance which may be at the credit of the said William Rutherford in said current account.’ This clause which I have quoted fully seems to provide for the case of the bank having undertaken obligations on the faith of the cash-credit bond, either for the principal debtor or for any company of which he was a partner, and to secure that the bank shall be indemnified against such obligations by the cautioners to the full amount which they guarantee. It does not, as I read it, extend the liabilities of the co-cautioners, but only provides for the bank not being prejudiced by the sums advanced, or obligations undertaken by them not being entered in the current account, and relieves them from the necessity of getting William Rutherford to draw the money out of the current account and transfer it to some other account in security of obligations which he might ask the bank to undertake on his behalf. So far, therefore, the bond is an ordinary cash-credit bond, payment of the amount due thereunder entitling the cautioners to an assignation to the bank's claims against the principal debtor, and so to recover any dividend paid by his estate for their own behoof.

But then it is said that the following words convert what is a cash-credit bond in form into a general guarantee against all loss which the bank might sustain through any tansactions which they chose to enter into with William Rutherford, the only limit being that the total amount of the loss should not exceed £1500. The words are—‘and in general to refund to the said bank whatever loss and expense, not exceeding said sum of £1500 of principal, the said bank may sustain or incur through their transactions with the said William Rutherford, all which sums, losses, and expenses the bank may debit to the said current account without losing any right, remedy, or claim competent against other obligants, it being the express meaning of these presents that this bond shall to the extent foresaid be a covering security to said bank against any ultimate loss that may arise on the transactions of the said William Rutherford with said bank.’

In my opinion the bank's construction of this clause is inadmissible. If it were sound the carefully worded clauses which precede are wholly unnecessary, all that was required was to have a guarantee expressed in a couple of lines similar to the one which was the subject of construction in Harvie's Trustees, 12 R. 1144. Prima facie this is not likely, and I think the complainer is well founded, on the authority of Lord Blackburn in the case of Ellis. 1 Exch. Div. 157, in his contention that the guarantee as between the surety and the creditor is to be construed as applicable to that part only of the debt due by the principal debtor which is co-extensive with the amount of the guarantee. I think Lord

Blackburn's dicta also prima facie apply to the present case when he says that it is inequitable in the creditor who is at liberty to increase the balance or not to increase it at the expense of the surety. These general principles would of course not avail the complainer if the language of the bond were clear and not open to construction, but I think that on a close consideration of the bond as a whole it sufficiently appears that the true meaning of the obligation is that it is limited to such transactions as might result in the bank advancing money to the extent of £1500, or undertaking obligations on behalf of the principal debtor to the same amount. It does not contemplate the bank making advances beyond £1500 on the credit of the cautioners, and the word ‘transactions’ on which so much reliance was placed by the respondents does not, I think, mean transactions after the limit of £1500 has been passed, with which the cautioners have no concern and which the bank make on their own responsibility, but only transactions which were contemplated as following the granting of the cash-credit bond itself. The general clause is not in itself meaningless, because it provides for the bank debiting expenses which they might incur in connection with engagements on behalf of the principal debtor and permits them to charge these against the cautioners. But the sums, losses, and expenses are expressly stated as being such as the bank might properly debit to the current account, and I cannot conceive that after the cash credit has been exhausted by the whole amount being advanced, the cautioners were to be liable for losses which occurred in connection with other transactions of which they had no knowledge and over which they could have no control. This construction is further strengthened by the interest clause which follows, and which, as I read it, can only be applicable to the £1500 advanced under the cash-credit bond. Again, in the next clause, by which the cautioners are taken bound to pay ‘any charge for commission on the amount of the foresaid credit, or the transactions in said account as the said bank may be in use to charge on all such credits,’ it is plain that their liability is again limited to the sum which alone they gave the bank a mandate to advance to the principal debtor on their credit.

On these grounds I have formed the opinion, on a strict reading of the bond itself, that it will not bear the construction put upon it by the respondents, contrary, as I think, to the good faith of the whole transaction.”

The respondents, the National Bank of Scotland, reclaimed, and argued—On a true construction of the bond the debt guaranteed by the cautioners was a debt of any amount which the bank might choose to advance to the principal debtor, limited only in this respect that the cautioners could not be called upon to pay more than £1500 in respect of any such debt. The bond, it was true, had it stopped at the words “the credit of the said William

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Rutherford in said current account,” would have been an ordinary cash-credit bond for £1500, but its whole character was changed by the succeeding clauses. The Lord Ordinary's reading had the effect of giving no reasonable meaning to the latter part of the bond, and was further radically unsound in that it did not regard the bond as a whole but divided it into two, regarding the first part of it as the essential and ruling part, and the latter merely as an exegetical excrescence. The words “a covering security to said bank against any ultimate loss” were in themselves conclusive. The case was analogous to Harvie's Trustees v. Bank of Scotland, &c., June 19, 1885, 12 R. 1141, 22 S.L.R. 758, where it was held that a cautioner was not entitled to a ranking on the estate of the principal debtor while the full amount due to the party to whom he had given the bond of caution was unpaid, so as to interfere with the right of the creditor to rank for the full amount of his debt—see also Maxton v. M'Intosh's Creditors, January 17, 1777, M., voce “Cautioner,” App. I, p. 1; Balfour & Gibson v. Borthwick, Fac. Coll., January 29, 1819, and March 27, 1822, 1 Shaw's Appeals, 131; Midland Banking Company v. Chambers, 1869, L.R., 4 Ch. 398. The case of Ellis v. Emmanuel, L.R., 1 Ex. D. 157, relied on by the complainer, was distinguishable, and in any event the principles there laid down had never been applied to Scotland.

Argued for the complainer and respondent—The only question in the case was what was the meaning of the particular bond in question, and the Lord Ordinary was right in holding that its effect was to limit the cash credit, and not merely the cautioner's liability, to £1500. The citation of authorities was accordingly unnecessary and useless. The cases, however, of Harvie's Trustees, Maxton, Balfour v. Borthwick, relied on by the appellants, were all distinguishable in their circumstances (see infra the opinions of Lords Stormonth Darling and Low). The general principles of law applicable to the case were, if authority was required, laid down correctly by Lord Blackburn in Ellis v. Emmanuel, cit. supra. The appellants' construction of the bond involved the breaking of a cardinal rule of construction, viz., that the effect of a prior particular clause cannot be destroyed by a subsequent general clause. Thus in the first half of the present bond the cash credit was clearly limited to £1500, and yet the appellants' argument was that it was made indefinite by the subsequent half of the bond introduced by the words “and in general.” “Covering security” merely meant a covering security for all transactions up to £1500, and was meant to bring within the scope of the bond any debt of Rutherford's which might not fall precisely within any of the enumerated cases.