Scottish Court of Session Decisions

On 12th March 1908 the Britannia Steamship Insurance Association, Limited, a mutual marine insurance company carrying on business in London, raised an action against Thomas Lawrie Duff, shipowner, Glasgow, and John Eiston Wilson, writer there, to recover the sum of £88, 10s. with interest. That sum was the amount of three calls made by the pursuers, in May 1906 for £10, 16s. 6d., on 2nd July 1906 for £25, 1s. 6d., and on 1st September 1906 for £17, 14s., on the Cullum Steam Shipping Company, Limited, in respect of the insurance of the steamship “Samara,” and of an additional call then due of £35, 8s., in respect of future calls. The first intimation of such calls received by the defenders was on 20th September 1906 when they were asked to pay. The claim against the defenders was made in virtue of a letter of guarantee granted by them upon 5th June 1902. At that date the defenders were virtually though not formally mortgagees of the “Samara,” the mortgage being in the name of the Bank of Scotland, and the defenders being guarantors of the bank.

The letter of guarantee was in these terms—

To the Britannia Steamship Insurance

Association, Limited.

Class 3.— Ownership Risks—Protection

and Indemnity.

“We, Thomas Lawrie Duff and John Eiston Wilson of Glasgow, for mortgagees of the steamship “Samara” of, entered by the Cullum Steam Shipping Company, Limited, of London, for insurance in the above-named Association, in order that the said insurance and any further or other insurance of the said steamship in the name of the said Cullum Steam Shipping Company, Limited, in the said Association or in any class or classes thereof may remain in force, notwithstanding such mortgage, do hereby undertake and agree to pay and discharge all sums of money which now are or may hereafter become due from the said Cullum Steam Shipping Company, Limited, in respect of such insurance or insurances of the said steamship in the said Association or in any class or classes thereof.”

The defenders pleaded, inter alia—“(3) The defenders' obligations under said letter of guarantee having come to an end when the mortgage in respect of which it was granted was discharged, they are entitled to be assoilzied from the conclusions of the summons. (4) Separatim—The defenders having by their actings, and in particular by their omission to give the defenders timeous intimation of the Cullum Steamship Company's failure to pay said respective calls of May and July 1906, prejudiced the defenders' position, are barred from making the present claim.”

The facts are given in the two opinions ( infra) of the Lord Ordinary ( Salvesen), who on 20th November 1908 allowed parties a proof.

Opinion.—“On 10th March 1902 the Cullum Steamship Company Limited became members of the pursuers' Association, which carries on business as a mutual marine insurance company in London; and their steamship, the ‘Samara,’ was entered for protection and indemnity at an insured value of £20,000. The risk was to commence on 22nd March 1902, and continue from year to year, unless notice to the contrary was given in writing.

At the time of the insurance the pursuers were advised by the owners that there was a mortgage over the ‘Samara.’ Under rule 5 of the Association a vessel which is mortgaged is not held to be insured at all unless—prior to the happening of any loss which might give rise to a claim—the mortgagee shall have deposited with the managers a sum in cash to be agreed on between him and them, or shall have delivered an approved deed or undertaking ‘whereby such mortgagee, assignee, or other approved person shall in due form covenant or undertake to pay and discharge all sums of money which may then be or thereafter become due from such member

Page: 896↓

in respect of said steamship.’ In accordance with this rule the defenders, who were the mortgagees at the time, granted the obligation.

The mortgage was paid off in the following year, 1903; but the pursuers aver that they were entirely ignorant of this, and that they continued the vessel in their Association in reliance, inter alia, on the defenders' obligation to pay calls. Such calls are, as is well known, equivalent to premiums payable to a proprietary insurance company, and are levied on the owners of the vessels insured in the Association in proportion to the insured values.

The calls made from time to time were duly met until May 1906, when a call of £10, 19s. 6d. was made on the Cullum Steamship Company Limited. This call was due on the 4th of June, and was not met. Further calls were made on 2nd July and 1st September, which also remain unpaid. The Cullum Steam Shipping Company went into liquidation in the end of September 1906.

The defenders maintained that, it being conceded that they had ceased to be mortgagees in 1903, the calls, of which payment is now sought, were in respect of liability arising subsequent to the date of discharge of their mortgage, and that they are entitled to be assoilzied. This contention has been given effect to in a similar case in the Sheriff Court of Lanarkshire; and I was referred to the opinion of Sheriff-Substitute Fyfe as embodying the view which they take. He says,—Defenders never had any direct liability as members of the club. Their only liability was that of guarantors, and I think it is perfectly clear the guarantee was given only for the period during which the mortgage subsisted, and that it fell when the mortgage was discharged. The rules impose no conditions as to notice; and the laying on or discharge of a mortgage on a ship is a public fact which interested parties could ascertain from official registers.'

I am unable to take that view in the present case. The object of rule 5, under which the letter of obligation was granted, is, I think, perfectly clear. The pursuers being a mutual marine insurance company, require to assess their members for losses which they from time to time incur; and they desire, as far as possible, to guard against the assessments which they make turning out bad debts. Where a ship is not mortgaged they assume that they will have no difficulty in recovering the assessments from the owners, but in the case of a vessel which is mortgaged, possibly to her full value, they decline to hold such a vessel insured unless they have some guarantee from the mortgagee that the calls will be paid. This was what the defenders provided in the letter already referred to. The cause of granting the letter, no doubt, was the fact that the defenders were then mortgagees; but it does not, in my opinion, follow that the obligation contained in it fell whenever they ceased to hold that character. That appears to me primarily to depend on a construction of the letter itself.

The obligation is thus expressed:—‘We do hereby undertake and agree to pay and discharge all sums of money which now are or may hereafter become due from the said Cullum Steam Shipping Company, Limited, in respect of such insurance or insurances of the said steamship in said Association.’ That is a perfectly general obligation; and is not expressly limited to the period of the subsistence of the mortgage. The mortgagees are not even named; and although they are said to be the same persons as the guarantors, that could certainly not be gathered from the terms of the letter itself. I do not doubt, however, that the defenders could have put an end to the obligation as soon as they ceased to be mortgagees if the calls that had been made or were payable in respect of the period during which they had held the mortgage were duly met. In that case, however, the pursuers would, in accordance with rule No. 5 of their Association, have insisted that the new mortgagees should take their place (for it was admitted at the bar that a new mortgage was in fact granted), and give a similar obligation as a condition of their continuing the vessel in their Association. The Sheriff-Substitute seems to think that it is the duty of the insurance company to examine the register of each vessel which is insured with them,—I suppose from day to day, to ascertain if there is any change in the mortgages upon them. That might well be so if the letter of obligation had been expressed as binding only during the subsistence of the particular mortgage, in which case the more or less impracticable burden of making such investigation would have fallen upon the pursuers. It is, however, not so expressed; and in my opinion it was the duty of the defenders, when the mortgage was discharged, at once to intimate this fact to the pursuers, in which case they would have been relieved of further responsibility, and the vessel would either have remained uninsured, or a fresh obligation would have been procured. I am unable, therefore, at this stage to assoilzie the defenders on this ground.

A serious question may arise as to whether the defenders can be made liable for any but the first call, as it would appear to be the duty of the pursuers to have intimated to them the failure of the Steam Shipping Company to pay it, and I doubt whether they can impose any other liability upon the defenders than would have been exigible from them if such intimation of non-payment had been duly made. In the meantime, however, I express no opinion on this, as there are certain facts which will require to be cleared up, either by a proof, or—what would seem to be more appropriate here—by a joint-minute of admissions, before I am able finally to dispose of the case. Meanwhile I shall allow parties a proof of their averments; and, as the case was sent to the Procedure Roll on the motion of the defenders, I shall find them liable in the expense of the Procedure Roll discussion.”

And on 20th February, after a joint

Page: 897↓

minute had been lodged and a proof had been taken, the Lora Ordinary sustained the defenders' fourth plea-in-law and assoilzied them.

Opinion.—I refer to the opinion which I delivered, after a hearing in the procedure roll, for a narrative of the facts out of which this action arises, and for my view as to the construction of the guarantee on which it is laid. The proof which has now been led discloses the following facts:—On 4th June 1906, when the first call (for which the defenders are sought to be made liable) was made, the steamship ‘Samara’ was trading in the East; and she continued to be subject to the ordinary marine risks until towards the end of September, when she arrived in port in this country, and when the shipping company, of which she formed the only asset, went into liquidation. It is admitted that, had the defenders received notice that they were being held liable for this call under their guarantee they would have been entitled at once to put an end to it, and under the rules of the pursuers' Association the vessel would thereafter have remained uninsured, for there was then an existing mortgage upon her for which the deposit or guarantee required by rule 5 had not been obtained. In these circumstances the defenders say that the owners of the new mortgage would have been compelled, in their own interests, to have procured a fresh guarantee which would effectually have relieved them of all liability for calls. I see no reason to doubt this; for while the owners of the vessel would have been uninsured, they would still have remained liable for the calls; and the mortgagee would almost certainly have preferred to undertake a cautionary liability for payment of the calls, rather than allow his interest in the steamer to be uninsured. By 20th September 1906, when application was made to the defenders for payment of the calls then due, the situation had entirely changed, for the shipping company had gone into liquidation, and the vessel having arrived in port was no longer subject to the ordinary marine risks. The mortgagee, therefore, had no interest to continue the insurance in force, more especially as it was then certain that he would have to sell the vessel under his mortgage. The defenders accordingly say that the failure of the pursuers to intimate to them that the call had not been met, and that they were being held liable under the guarantee, has seriously prejudiced their position, because it deprived them of the opportunity of getting some new obligant to take their place. I think they have proved this; and the only question which remains is, whether there was a duty on the pursuers to give such intimation—always keeping in view that they had no reason to suppose that the mortgage for which the defenders had originally become guarantors was no longer in existence—and were therefore, as I think, entitled to treat the defenders as still guarantors of the calls which from time to time became due.

On the assumption just stated, I think it clear that the pursuers had a duty to intimate the non-payment of the calls to the mortgagee. Under rule 9 it is provided—‘In the event of default being made by any member in the payment of the sum or sums for which he may be liable, as aforesaid, his respective steamship or steamships shall thenceforth cease to be protected or indemnified (as the case may be).’ Accordingly, if the defenders had still been interested in the mortgage in respect of which they signed the guarantee, the pursuers knew that any loss thereafter occurring was one for which they would not be liable. In these circumstances I think it was their plain duty to the guarantors to intimate to them the default of the member, so that the insurance might be kept alive if the guarantors so desired. Evidence was given that in many cases the pursuers did not press the members for payment of calls when these were overdue. This was a course which, as in a question with the members, they were quite entitled to take, and which indeed it might be in their interest to take, for the member continued liable for payment of the calls, while the association was relieved of any obligation to pay for losses which the member's steamer might meanwhile sustain. In a question with the guarantors, who were either mortgagees themselves or signed the obligation on their behalf, the case seems to me to stand differently. The failure of the member to pay bis call was not a thing which the pursuers had any reason to expect would be known to the mortgagee or his guarantors; and in all fairness the latter was surely entitled, if they were being held liable in the obligations of paying premiums, to have an opportunity of keeping the policy in force. As this opportunity was not given, I think the pursuers must be held to have released the guarantors from their liability for premiums, and on this ground I am of opinion that they fall to be assoilzied.

The same result would no doubt also follow if I was wrong in the opinion I formerly gave—as to the guarantee falling with the mortgage in connection with which it was granted. A strong argument was submitted that there was no injustice to the pursuers in so holding, for the vessel would quoad them, have been uninsured from the date when the new mortgage was granted, and they would therefore be in the happy position of receiving premiums in respect of the ‘Samara,’ although they were under no obligation to meet any losses which might occur to her. The validity of this argument depends upon whether the existing guarantee might not be held to satisfy all the pursuers' requirements under their rules, and it seems that it was so treated throughout, for losses were settled in respect of the ‘Samara’ during the years following the discharge of the defenders' mortgage. No doubt this was done by the pursuers in ignorance that a new mortgage had been created; but there would certainly have been no equity which would have supported

Page: 898↓

the pursuers in refusing payment of a loss had they discovered the existence of the new mortgage at a time when all the calls had been paid by the owners and the pursuers were still in possession of the defenders' guarantee. The question thus raised is a difficult one, and I prefer to rest my judgment on the ground embodied in the defenders' fourth plea-in-law, as regards which I have already expressed my views.”

The pursuers reclaimed, and argued—(1) The pursuers were under no obligation to give the defenders notice that the calls were not paid immediately they fell due. The obligation of the creditor to the cautioner in a case like the present, where the guarantee was for payment of sums of money, was altogether different from the obligation where the guarantee was one for the faithful discharge of the duties of an office—Bell's, Comm., 7th ed., i, pp. 378–380, and note 4 p. 379. In the present case the cautioner would not be liberated by the creditor's failure to tell him that the debtor had not discharged the obligation for which caution was granted— M'Taggart and Others v. Watson, 1835, 1 8. & M'L. 553: Young v. Clydesdale Bank, Limited, December 6, 1889, 17 R. 231, per Lord Adam at p. 240, 27 S.L.R. 135, p, 143; Aitken & Company v. Pyper, November 24, 1900, 38 S.L.R. 74; Queen v. Fay, 1878, L.R. (Ir.) 4 Q.B.D. 606. Nor were the defenders freed by the pursuers' failure to raise action against the debtors immediately the calls became due. Mere inactivity on the creditor's part was not enough to liberate the cautioner—Bell's Prin., 10th ed., section 262; Black v. Ottoman Bank, 1862, 15 Moore, P.C. 472, per Lord Kingsdown, at p. 483. Further, the cautioner was only liberated if the creditor's failure to do something deprived the cautioner of some opportunity of keeping himself safe— Snaddon v. London, Edinburgh, and Glasgow Assurance Company, Limited, December 3, 1902, 5 F. 182, 40 S.L.R. 164. The defenders here could instruct no prejudice. They could not have forced the new mortgagee to relieve them. He might have protected himself by calling up his mortgage or by insuring elsewhere. Besides, he ran no risk, for no default had been made under rule 9 by the mere non-payment by the debtor of calls recently due, especially where there was a cautioner. (2) The defenders' obligations were not terminated by the discharge of the first mortgage. The letter specified no particular mortgage, and was therefore binding so long as there was any mortgage on the ship. The pursuers never knew who were the mortgagees, and did not know of the change.

Argued for the defenders (respondents)—(1) The pursuers had discharged the defenders by their failure to notify them of the non-payment of the calls when they fell due. Under rule 9 the ship became uninsured on the default of the Cullum Company, and the pursuers were therefore demanding that the defenders should remain liable for calls after they themselves had ceased to be liable for losses. The defenders undoubtedly suffered prejudice by the failure of the pursuers to notify them of the default in June 1906. Had they then known of the default they could have forced the new mortgagee to take over their obligations in order to keep the vessel, which was then at sea, still insured. The Court would not inquire minutely how the cautioner might have protected himself had timeous notice been given— Snaddon v. London, Edinburgh, and Glasgow Insurance Company, Limited, cit., per Lord Justice-Clerk. The pursuers had also lost their recourse against the defenders by their failure to take steps to get payment from the debtors— Philips v. Astling, 1809, 2 Taunton 206, 11 R.R. 547. (2) In any event the defenders' obligation came to an end when the mortgage in favour of the Bank of Scotland, in respect of which it was granted, was discharged. The letter of guarantee must be read in the light of the surrounding circumstances— per Lord Justice-Clerk (Moncreiff) in Caledonian Banking Company v. Kennedy's Trustees, June 15, 1870, 8 Macph. 862, at p. 867, 7 S.L.R. 550; per Lord President Inglis in Gray v. Gray's Trustees, May 24, 1878, 5 R. 820, at p. 824, 15 S.L.R. 571, at p. 574. It was clear from the circumstances here that the guarantee was intended to subsist only so long as there was a mortgage in favour of the Bank of Scotland, and was not intended to create a personal obligation for calls which might become due when the mortgage no longer existed. It made no difference that after the mortgage in favour of the bank was discharged a new one was granted in favour of a party with whom the defenders had nothing to do. Counsel also referred to Gaythorne v. Swinburne, 1807, 14 Yes. 160, 9 R.R. 264.

At advising—