Scottish Court of Session Decisions

[1] In this action the pursuer seeks reduction of a standard security which she, along with her husband and son, granted in favour of the defenders over Westquarter House, Glassford, Strathaven ("the security subjects"). The security subjects were at the material time jointly owned by the pursuer, her husband, Leslie Broadway, and her son, Anthony Broadway, in the proportions of one quarter, one quarter and one half respectively. There are also conclusions for reduction of a sheriff court decree granting warrant for ejection, which the defenders obtained against the pursuer and her son, as an individual and as executor of his father, in reliance on the standard security, for reduction of a charge for eviction proceeding on that decree, and for interdict of the defenders from ejecting the pursuer from the security subjects or selling them without her consent.

[2] The action proceeds on averments that (a) the pursuer was induced to sign the standard security by the exercise by her son and/or her husband of undue influence over her, and (b) that the defenders were not in good faith in relation to the granting of the standard security. On that basis she claims to be entitled to reduction of the standard security, and consequently to the other remedies sought.

[3] The action was appointed to debate solely on the issue of the defenders' good faith.

[4] On 15 October 1992 there was executed a standard security over the security subjects in favour of the defenders. It is No. 6/4 of process, and is in the defenders' standard form. The personal obligation was granted by Anthony and his wife, Sandra, and was in respect of "all sums which are now and which may at any time hereafter become due to the Bank in any manner of way by us, either solely or jointly with any person or persons or corporation, company, firm or other body". The standard security was granted over the security subjects by Anthony, Leslie and the pursuer.

[5] The circumstances which led up to the granting of the standard security, as averred by the pursuer, may be summarised as follows. A company, Gardiner Environment Services Limited ("the company"), had been owned and managed by the pursuer's husband until about 1987. The pursuer had been a director and company secretary, but her role had been largely clerical. As at 1992 Anthony was the managing director. The pursuer was still formally company secretary, but in practice her duties as such had been taken over by Sandra. In about 1992 Anthony and Sandra decided to invest money in the company by way of a loan to it. They approached Mr Ian McMillan, the manager of the defenders' Stirling branch. It was agreed that the defenders would lend to Anthony and Sandra the sum of £200,000, which was to be secured by a standard security over the security subjects.

[6] The pursuer in her averments sets out in some circumstantial detail the occasion on which she says the standard security was executed. She describes a visit by Mr Ian McMillan to Westquarter House on 15 October 1992. At that time part of the house was occupied by the pursuer and her husband, and another part was occupied by Anthony and Sandra. The meeting took place in Anthony and Sandra's lounge. They, as well as the pursuer and her husband, were present. The pursuer avers that she had not met Mr McMillan before, and had not been involved in any discussions concerning the loan, then or previously. She had had no previous dealings with the defenders, the company's bankers having previously been the Royal Bank of Scotland. Anthony had advised her only that he required to borrow money for the business. She was not advised of the amount of the loan. She was asked to sign a document, the standard security. She was advised by Anthony and her husband that she should sign the document. She was not advised by Mr McMillan of the nature of the document or the effect of her signing it. He did not advise her that her house would be at risk if she signed it. She was not advised that the security would cover further sums advanced to Anthony and Sandra. She was not advised that there was no limit to the sums secured over the house. She was not asked if she had obtained, nor was she advised to obtain, independent legal advice before signing the document. Mr McMillan did not interview her separately to ensure that she understood and was willing to sign the document. There was on the face of the document no warning of the consequences of signing it or of the need for independent advice. The pursuer signed the document, and the defenders thereafter advanced £200,000 to Anthony and Sandra. Further advances were later made without intimation to the pursuer.

[7] The pursuer avers that she was induced to grant the standard security by the undue influence of her son, Anthony, and her husband, Leslie. No point is taken at this stage as to the relevancy of those averments, so it is unnecessary to set them out in detail. I wish, however, expressly to reserve my opinion as to the relevancy of the averments of undue influence exercised by the pursuer's husband, since he was not one of the principal borrowers, but rather a fellow cautioner with the pursuer (to use the terminology adopted by Lord Clyde in Smith v Bank of Scotland 1997 SL (HL) 111).

[8] The pursuer's averments of bad faith on the part of the defenders are set out in article 5 of the condescendence. It is averred that they knew or ought to have known of the relationship between the pursuer and her husband and son; knew that the transaction was to her manifest disadvantage; knew that in the circumstances it was possible that she would be subject to undue influence by her son or her husband or both of them; knew that in the circumstances she might not be fully informed as to the consequences of signing the standard security and that her consent to it might not be freely given; and had no reason to believe that she understood the consequences of signing the standard security or that she had received independent legal advice in relation to the transaction. There then follow averments about the Report by the Review Committee on Banking Services (Cmnd. 622), paragraph 12.1 of the Code of Banking Practice issued by the British Bankers' Association in March 1992 and Codes of Practice containing similar provisions published by the defenders and the Bank of Scotland, also in March 1992. The averments then continue with the assertion that it was accordingly the duty of the defenders to advise the pursuer of the consequences of granting the standard security; to advise her to seek independent legal advice before granting it; to take reasonable steps to check that she had received independent legal advice; and to include in the document a clear and prominent notice warning the pursuer of the legal effect of signing it and that she should seek independent legal advice. It is averred that by virtue of their failure in these duties the defenders were not in good faith in relation to the transaction and are therefore not entitled to enforce the standard security.

[9] The defenders' position on averment is that they acted at all times in good faith, having no reason to believe that the pursuer's consent was not fully informed and freely given. Even if they were or ought to have been aware that such was the case, there was no duty incumbent on them to warn the pursuer of the consequences of entering into the transaction or to advise her to take independent advise. In support of those propositions they make reference to circumstances which they aver in answer 3. Those averments include the following passage:

[10] In response to those averments the pursuer avers that she did not receive the letter dated 14 October 1992; that she was not advised of its existence or contents; that she did not instruct or ask anyone to instruct Burnett & Reid to act on her behalf in preparing the standard security; and that she did not meet with or receive any advice from Mr Michael McMillan of Burnett & Reid in relation to it.

[11] It is convenient to examine in more detail at this stage the correspondence on which the defenders found in the passage in their pleadings which I have quoted in paragraph [9] above. Mr Davies for the pursuer did not dispute that the correspondence had taken place.

1. The first letter (No. 7/12 of process) is the letter of instruction from the defenders to Burnett & Reid to act on their behalf in the preparation of the standard security. It is dated 12 October 1992 and identifies in its heading the defenders' customers as "Anthony James William Broadway & Mrs Sandra Broadway". It opens with the words, "We are to make advances to the above named and shall be obliged if you will act for us in the preparation of a security which we are to obtain over the property mentioned in the attached schedule". There then follow a number of specific instructions, and in the schedule the property is identified as Westquarter House, and it is stated (erroneously) that "The advance is being made to assist with the purchase of a dwelling house". There is nothing on the face of the letter to indicate that Burnett & Reid were selected for instruction because the defenders already knew that they were acting for the borrowers, although I understand that the defenders accept that that was in fact the basis of their selection.
2. The next letter (No. 7/13 of process) is dated 14 October 1992 and is Burnett & Reid's reply to the defenders. It is signed on their behalf by Mr Michael McMillan, who is mentioned in the pleadings and who appears to have been at the material time a consultant to Burnett & Reid. That letter is in the following terms:

3. The third letter (No. 7/14 of process) was also dated 14 October 1992 and was addressed by Mr Michael McMillan of Burnett & Reid to "The Broadway Family, C/o Messrs Macdonalds Sergeants, Solicitors, ... East Kilbride". It was in inter alia the following terms:

1. AJWB and SB are the borrowers, and they are the persons liable to repay the loan, and pay the interest charges.
2. However, the house is owned as to 1/4 by each of LJB and IDB, and as to 1/2 by AJWB. The security has to be granted by them as the three owners.
3. Accordingly, although LJB and IDB have no personal liability for repaying the loan or interest, they would lose their interest in the house if the Bank called in the loan and forced a sale of the house. What would happen then is that the house would be sold by the Bank, the loan would be deducted, and the money left over would then be paid to AJWB, LJB and IDB in the proportions 1/2:1/4:1/4.
4. ...
5. On the other hand, the loan is not available unless the security is granted!

3. Finally Burnett & Reid wrote to the defenders on 16 October 1992 (No. 7/15 of process) confirming that the standard security was in their hands "duly executed", and on 22 October 1992 (No. 7/16 of process) dealing with their report on title. In each of those letters the heading was:

[12] There was a considerable measure of agreement between the parties as to the principles of law which fall to be applied in this case. The starting point is to be found in Smith v Bank of Scotland, 1997 SC (HL) 111. I take from the speech of Lord Clyde in that case the following propositions:

1. "The general rule in the law of Scotland is that misrepresentations by a debtor which induce another person to enter into a cautionary obligation have no effect on the contract of caution. Indeed the proposition may be stated more generally that a voluntary obligation is not rendered open to challenge simply on the ground that it has been entered into as the result of a misrepresentation made by a third party" (116H);
2. "The general rule appears to hold in cases of undue influence" (117A);
3. "[T]here should also be a duty in particular circumstances to give the potential cautioner certain advice. Thus in circumstances where the creditor should reasonably suspect that there may be factors bearing on the participation of the cautioner which might undermine the validity of the contract through his or her intimate relationship with the debtor the duty would arise and would have to be fulfilled if the creditor is not to be prevented from later enforcing the contract" (121E-F);
4. "In the first place the duty which arises on the creditor at the stage of the negotiation of the contract should only arise on the creditor if the circumstances of the case are such as to lead a reasonable man to believe that owing to the personal relationship between the debtor and the proposed cautioner the latter's consent may not be fully informed or freely given" (121H); and
5. "Secondly, if the duty arises, then it requires that the creditor should take certain steps to secure that he remains in good faith so far as the proposed transaction is concerned. ... All that is required of him is that he should take reasonable steps to secure that in relation to the proposed contract he acts throughout in good faith. So far as the substance of those steps is concerned it seems to me that it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and to advise him or her to take independent advice" (122B-C).

[13] It was not disputed that in the present case the relationship between the pursuer and her son, Anthony, was an example of the sort of intimate or personal relationship between principal debtor and cautioner that would cause a creditor who was aware of it reasonably to suspect that the cautioner's consent to the granting of the standard security might not be fully informed or freely given. Moreover, the pursuer makes averments relevant to yield the inference that the defenders were aware of the existence of that relationship. It was therefore not disputed that if that were the end of the matter the pursuer would have made averments relevant to place upon the defenders, if they were to preserve their good faith, a duty to take steps of the sort contemplated by Lord Clyde in Smith at 122C, as well as averments that they had failed to take such steps.

[14] Smith was, of course, a case in which there was no question of the cautioner having had the benefit of legal advice. In two subsequent decisions of mine (Forsyth v Royal Bank of Scotland 2000 SCLR 61, and Wright v Cotias Investments Inc, 23 March 2000, unreported; see also the Sheriff Court case, Royal Bank of Scotland plc v Clark 2000 SCLR 193) consideration has been given to the extent to which the steps required of a lender in order to preserve his good faith are affected by the fact that the cautioner has, or appears to have, the benefit of legal advice. In Forsyth, where it was a matter of concession that the pursuer's husband's solicitors gave to the defenders the appearance of representing the pursuer as well (see 65A), I expressed the following views:

In Wright, a case in which on the face of the pursuer's own averments the lenders' solicitors had sought and obtained from the pursuer's solicitors confirmation that they were acting for her in relation to the transaction, I followed the same approach (see paragraphs [24] and [26] of my opinion), and held that the defenders had not acted in bad faith in failing to take the steps desiderated in Smith. In the present case, Mr Davies did not argue (at least at this stage; he reserved his position for the future) that Forsyth was wrongly decided. The issue came to be, rather, whether the parties' averments and the admitted correspondence could be held to take the case clearly into the Forsyth category, to the effect of rendering the pursuer's averments of bad faith irrelevant.

[15] Junior counsel for the defenders, Miss Tait, submitted that the pursuer's averments (at page 12A-B of the Closed Record) - that the pursuer did not receive the letter of 14 October 1992 (No. 7/14 of process), was not advised of its existence or contents, did not instruct Mr Michael McMillan of Burnett & Reid to act for her in the matter, and received no advice from him on it - were not relevant to the question of the defenders' good faith. What mattered in that connection was not whether the pursuer did in fact receive independent advice from Mr McMillan, but whether it was reasonable in the circumstances as they understood them for the defenders to believe that the pursuer had the benefit of the advice of Mr McMillan acting as her solicitor. The terms of the correspondence between the defenders and Burnett & Reid were sufficient to entitle the defenders to understand that Burnett and Reid were advising the pursuer. Since the fact that the correspondence passed was not disputed, the pursuer's assertion that the defenders acted in bad faith was not relevantly supported by averments of circumstances properly identifying a basis for that assertion.

[16] As the defenders' submissions were developed by senior counsel, Mr McNeill, attention came to be focused on the terms of the correspondence, and in particular on the terms of the letter of 14 October 1992 (No. 7/13 of process) addressed by Burnett & Reid to the defenders. Mr McNeill accepted that the terms of the other letter of 14 October 1992 (No. 7/14 of process) addressed by Burnett & Reid to "The Broadway Family" did not assist the defenders on the question of good faith, because they did not aver that they were aware of the terms of that letter at the time when the standard security was executed. The crux of the defenders' case that they acted in good faith because they understood that Burnett & Reid were acting for the pursuer was to be found in the terms of No. 7/13 of process. Those terms were, Mr McNeill submitted, sufficiently unequivocal to entitle the defenders to form that understanding. He pointed first to the fact that the writer of the letter, Mr McMillan, was evidently sufficiently familiar with the affairs of the Broadway family to realise immediately that there was an error in the defenders' instructions in that the security subjects were not wholly owned by the borrowers, and to know the proportions in which the pursuer and her husband were also part owners. Secondly, the letter contained no suggestion that any other solicitor required to be involved on behalf of the pursuer (or her husband); it was stated that the deed had been prepared on the basis that it required to be granted by all three proprietors, and had been submitted to "the clients" for execution; and it was implicit in the way the matter was expressed that the writer contemplated that the deed when returned by the clients would be fully executed. In these circumstances the reasonable inference was that the "clients" referred to included the pursuer, and the defenders were therefore entitled to suppose that Burnett & Reid were acting for the pursuer (and her husband) as well as for Anthony and Sandra. Thus, on the face of the correspondence which the pursuer conceded had passed between Burnett & Reid and the defenders, the defenders were entitled to suppose that the circumstances were such that the pursuer had legal advice from a solicitor acting for her, and that accordingly good faith did not require them to warn her of the consequences of granting the security or to advise her to take separate advice. If the pursuer was to seek in these circumstances to maintain the proposition that the defenders had acted in bad faith, further averments of the circumstances on which the proposition depended were required, identifying circumstances in which it could be said that despite their understanding that the pursuer had the benefit of legal advice from her own solicitor, good faith nevertheless required the defenders to take further steps. There were no such averments.

[17] Mr Davies for the pursuer submitted that the question whether the defenders had done what, in the circumstances, good faith required of them should be reserved for determination at proof before answer. He accepted that for the pursuer to succeed she required to establish both that she had granted the standard security as a result of undue influence exercised upon her, and that the defenders had acted in bad faith. So far as bad faith was concerned, it was initially for the pursuer to aver that, to the knowledge of the defenders, there existed between her and the borrowers such a personal relationship as would lead a reasonable man to suppose that her consent to the granting of the security might not be fully informed or freely given. That had been done. It was then for the defenders to aver that they had done all that good faith required of them. That they might do by averring that they had taken the steps contemplated by Lord Clyde in Smith. Alternatively they might do so by averring that they understood that the pursuer had the benefit of the advice of a solicitor acting for her in the transaction, and that it was thus unnecessary for them to take such steps in order to preserve their good faith. In the latter connection what mattered was the actual knowledge that the defenders had at the time the security was granted about the advice available to the pursuer. The defenders could not establish their good faith by relying on circumstances unknown to them when the security was granted, such as the terms of the letter from Burnett & Reid to the Broadway family, No. 7/14 of process. If eventually it were established that the pursuer had received that letter, that evidence might bear on whether it was accepted that she had been affected by undue influence, but it did not bear on whether the defenders acted in good faith or not.

[18] Before examining the admitted correspondence on which the defenders found, Mr Davies cited a number of authorities bearing on good faith. He referred first to Rodger (Builders) Limited v Fawdry 1950 SC 483, citing in particular the following dicta:

Reference was also made to Barclays Bank plc v O'Brien [1994] 1 AC 180 in which Lord Browne-Wilkinson, in explaining the doctrine of notice on which the English approach to cases such as the present rests, said (at 195H-196A):

Reference was also made to CIBC Mortgages plc v Pitt [1994] 1 AC 200, per Lord Browne-Wilkinson at 210-211.

[19] Mr Davies submitted that the present case was distinguishable from Forsyth and Wright. Here there was neither the concession made in Forsyth that the solicitors had given the bank the impression that they were acting for the pursuer, nor the clearly answered request for confirmation that the solicitors were acting for the pursuer that had been made by the defenders' solicitors in Wright. What the defenders required to do in the present case was to identify an unequivocal representation made either by the pursuer or by solicitors claiming to act on her behalf that in relation to the security transaction she had the benefit of her own legal advice. The correspondence between Burnett & Reid and the defenders did not, on a fair reading, come up to that standard. The defenders' letter of instruction to Burnett & Reid (No. 7/12 of process) identified Anthony and Sandra Broadway as the defenders' customers. Although the letter did not mention the defenders' knowledge that Burnett & Reid were the borrowers' solicitors, Mr Davies accepted that Burnett & Reid were, to the defenders' knowledge, acting for Anthony and Sandra Broadway in relation to the loan transaction. At that stage, however, there was nothing to suggest to the defenders that Burnett & Reid had any other clients in the transaction. Burnett & Reid's letter of 14 October 1992 to the defenders (No. 7/13 of process) was headed in a way which, while consistent with Anthony and Sandra being their clients, went no further in suggesting that they had additional clients. The second paragraph, pointing out the true state of the title, did disclose some knowledge of the proprietorship of the security subjects, but did not yield any inference that Burnett and Reid were acting for the pursuer. In drawing that matter to the attention of the defenders Burnett & Reid, whatever the source of their information on the matter, were doing something which their duty to the defenders as the defenders' solicitors in the transaction required them to do. The letter contained no unequivocal indication that Burnett & Reid had instructions from the pursuer to act on her behalf in relation to the transaction or had advised her in relation to it. At the highest, the reference to execution by "the clients" without mention of the involvement of any other solicitors, left open the possibility that Burnett & Reid were regarding themselves as acting for the pursuer, but there was no unequivocal assertion that they were. The letter of 14 October to "The Broadway Family" (No. 7/14 of process) took the matter no further forward, since there was no averment that the defenders were aware of it at the time of execution of the security. The subsequent letters (Nos. 7/15 and 7/16 of process) continued to refer in their headings only to Anthony and Sandra Broadway. On the basis of that correspondence it could not be held on the pleadings alone that the defenders were entitled to proceed on the understanding that the pursuer had the benefit of the professional advice of Burnett & Reid. It was open to the pursuer to argue that, in face of that correspondence, good faith required the defenders to seek confirmation that Burnett and Reid were acting for the pursuer before relying on an inference from the terms of No. 7/13 of process that they were. Mr Davies did not go so far as to submit that the defenders' plea that they had acted in good faith should be repelled at this stage, but he submitted that that the issue of good or bad faith could not be determined without proof.

[20] The issue which requires to be determined at this stage in this case is whether it can be affirmed, on the basis of the parties' pleadings and the correspondence which is admitted to have passed between Burnett & Reid and the defenders, that the defenders, despite not having taken steps themselves to warn the pursuer of the consequences of granting the standard security or to advise her to seek independent advice on the transaction, were nevertheless acting in good faith in entering into the security transaction with the pursuer. It is not disputed that the pursuer has relevantly averred (i) that she was induced to grant the standard security by undue influence exercised by her son, who was one of the principal borrowers, (ii) that the defenders were aware that there existed between her and the borrower, her son, a personal relationship of the sort that would lead a reasonable man to believe that because of it the pursuer's consent to the granting of the standard security might not be fully informed or freely given. It is not disputed that in those circumstances, if there was no question of the pursuer having the benefit of the advice of a solicitor, the defenders, if they were to preserve their good faith so as to be able to enforce the standard security against the pursuer, would have required to warn the pursuer of the possible consequences for her of granting of the standard security, and to advise her to seek independent advice on the matter. It is averred by the pursuer that the defenders did not take those steps, and the defenders do not aver that they did. The defenders, however, contend that they nevertheless acted in good faith in entering into the security transaction with the pursuer without taking those steps, because they believed on reasonable grounds that she had the benefit of the advice of solicitors acting for her in the transaction. In support of that contention they point to the correspondence that passed between them and Burnett & Reid, and submit that it supports the inference that Burnett & Reid were acting for the pursuer. They submit further that, since the pursuer accepts that that correspondence took place, she must be taken to accept that they were entitled to understand that Burnett & Reid were acting for her, and that her averments of bad faith on their part are therefore irrelevant.

[21] The crux of the issue therefore comes to be whether the only inference that the correspondence will bear is that Burnett and Reid were acting as the pursuer's solicitors in the transaction. If that is unequivocally the meaning of the correspondence, the defenders' submission is, in my view, well founded. If, on the other hand, the correspondence does not properly bear that interpretation, or if it is equivocal, it would in my view be wrong to determine that matter without proof. In particular, it seems to me that Mr Davies was well-founded in his submission that good faith might require of the defenders, if the correspondence was equivocal, to make further inquiry as to whether Burnett & Reid were acting for the pursuer before acting on the assumption that they were. In that context, I take the view that what good faith requires depends on the circumstances of the particular case. Where no solicitor is involved for the cautioner, good faith requires that the lender take the steps desiderated in Smith at 122C. Where there is, to the knowledge of the lender, a solicitor acting for the cautioner, good faith does not require the lender to take those steps, because he is entitled to assume that the points will be adequately covered by the pursuer's own solicitor. Where, however, it is unclear into which of those categories the case falls, good faith may, in my view, require the lender to make enquiries to clarify the position before he can act in safety on the assumption that he need take no action himself to warn and advise the cautioner. In Smith it was held that in the circumstances of that case good faith did not lay on the lender a duty to investigate whether the cautioner's consent was in fact undermined by misrepresentation or undue influence or the like (per Lord Clyde at 121G). But it does not, in my view, follow that good faith never requires the lender to make inquiry of any sort. Although the context is rather different, Rodger (Builders) Limited v Fawdry affords an example of a situation in which a party was obliged to undertake inquiry in order to preserve his good faith. In my view, a lender faced with unclear information as to whether or not a cautioner (the validity of whose consent to the security transaction may, because of a personal relationship between the borrower and the cautioner of which he is aware, be undermined) has the benefit of independent legal advice may, in order to preserve his good faith, be obliged to make inquiry seeking clarification of that point.

[22] In my opinion it would not be appropriate to hold that the correspondence founded on by the defenders would yield to any reasonable man the unequivocal inference that Burnett & Reid were acting as solicitors for the pursuer. It seems to me that it is a possible inference from the terms, in particular, of the letter of 14 October 1992 (No. 7/13 of process) that Burnett and Reid were so acting, but I do not consider that the point is made unequivocally clear. It is, in my view, arguable that the terms of the correspondence were sufficiently uncertain to cast on the defenders an obligation, if they were to preserve their good faith, to make inquiry to clarify the position. I do not consider that the point can safely be decided on the pleadings and correspondence without proof. What interpretation the correspondence properly bears and whether good faith required of the defenders that they make further inquiry are matters which can, in my view, better be determined in light of the whole circumstances after proof.

[23] It was matter of agreement between the parties that, if there was to be a proof on the question of good faith, it should not be separated from proof on the other issues in the case. In these circumstances I shall allow to parties a proof before answer of their respective averments. I shall put the case out By Order for the purpose of discussing what further procedural steps are required in preparation for the proof.