Scottish Court of Session Decisions

[1] In this action the pursuer concludes for production of a standard security over Flat G/R, 1735 Great Western Road, Glasgow ("the subjects"), granted by her and her husband, Riaz Ahmed, in favour of the defenders, dated 29 August and registered in the Land Register for Scotland on 10 September 1991, and for reduction of it in so far as it purports to affect her interest in the subjects.

[2] The averments on which the pursuer relies in seeking reduction were summarised by senior counsel for the pursuer, Mr Gale, as follows:

1. In August 1991 the pursuer and her husband purchased the subjects.
2. The purchase was financed by a house purchase loan advanced by the defenders to the pursuer and her husband.
3. In connection with that loan the pursuer and her husband executed the standard security (No. 7/2 of process), in terms of which they (a) undertook a personal obligation to pay to the defenders all sums which were then and which might at any time thereafter become due by them or either of them to the defenders, and (b) granted a standard security over the subjects for all such sums.
4. In 1992 the pursuer's husband borrowed £30,000 from the defenders to finance the purchase of a shop business.
5. On 15 August 1995 the pursuer's husband entered into a term loan agreement with the defenders, which gave effect to a restructuring of the original business loan obtained in 1992, coupled with a loan to replace existing overdraft facilities. The term loan agreement was entered into without the pursuer's knowledge.
6. The effect of the term loan agreement in conjunction with the standard security was to render the pursuer a guarantor of her husband's business liabilities to the defenders.
7. On 10 April 1995 the defenders had written to the pursuer a letter (No. 6/1 of process) in the following terms:

1. As a consequence of giving the Guarantee you may become liable to us instead of or as well as our above named customer(s).
2. We strongly urge you to seek independent legal advice before entering into the Guarantee.

8. The pursuer was not willing to grant such a guarantee. About two weeks after receiving the letter, having consulted members of her family with business experience and the Citizens Advice Bureau, she telephoned the defenders and so informed them.
9. The defenders thus proceeded to enter into the term loan agreement with the pursuer's husband, the legal effect of which, by virtue of the standard security, was to place the pursuer in the position of guarantor of his personal indebtedness to them and burden her interest in the subjects in security of that indebtedness, in actual knowledge that she was not willing to act as such guarantor.
10. During the period between April 1995, when the pursuer's unwillingness to act as guarantor was communicated to them, and August 1995, when the term loan agreement was entered into, the defenders had no further communication with the pursuer. They did not advise her of their intention to enter into the term loan agreement with her husband. They did not advise her that the effect of their doing so would be to render her liable to them as guarantor of her husband's indebtedness under that agreement. They did not suggest that she should take independent advice.

[3] Although the case was appointed to debate principally in respect of the defenders' plea to the relevancy of the pursuer's pleadings, it was agreed between counsel at the beginning of the debate that it would be convenient for Mr Gale to address the court first. In doing so he began by pointing out that this is not a case in which the ratio of Smith v Bank of Scotland 1997 SC (HL) 111 falls to be directly applied. The circumstances of this case are quite different from those of Smith. In particular, it is not suggested in this case that there was any misrepresentation on the part of the pursuer's husband. Moreover, although there are averments to the effect that the attestation of the pursuer's signature on the standard security was defective, it is not maintained that the standard security, so far as affecting the pursuer's interest in the subjects, can be reduced on that account. In addition, Mr Gale indicated that he did not seek to maintain the case expressed in article 5 of the condescendence to the effect that the defenders ought to have warned and advised the pursuer, at the time when the standard security was executed, about its effect in relation to borrowings other than the house purchase loan. In effect, therefore, the case which Mr Gale sought to maintain was confined to an attack on the good faith of the defenders' actings in August 1995 in entering into the term loan agreement with the pursuer's husband (a) in knowledge (i) that its effect, in combination with the standard security, would be to render the pursuer liable as guarantor for her husband's business debts, and (ii) that she had expressed unwillingness to become so liable, and (b) without taking any steps to inform her of their intention of doing so, or to advise her to seek independent advice.

[4] Despite his acknowledgement that the circumstances of the present case are fundamentally different from those of Smith v Bank of Scotland, Mr Gale nevertheless sought the legal foundation for his argument in that case. In Smith a wife sought reduction of a standard security which she and her husband had executed in favour of the bank. The security subjects were the jointly owned matrimonial home. The secured debt was a business loan to a firm in which the pursuer's husband was a partner. The pursuer averred that she was induced to grant the standard security by misrepresentation on the part of her husband. English law affords a plaintiff in such circumstances a remedy on the basis that the lender has constructive notice of the misrepresentation (Barclays Bank v O'Brien [1994] 1 AC 180), but the solution adopted in Smith to achieve the same result in Scots law was based on the creditor's obligation of good faith. It was held that, as part of the good faith required of a creditor in a contract of cautionry, where the creditor should reasonably suspect that because of the relationship between the principal debtor and the proposed cautioner the consent of the cautioner may not be fully informed or freely given, the creditor must, if he is to preserve his right to found on the cautionary obligation, warn the cautioner of the consequences of entering upon it and advise him to take independent advice (per Lord Clyde at 121E-122C). What Mr Gale sought to rely upon was an earlier passage in Lord Clyde's speech (at 117E-118C):

[5] Mr Gale submitted that in the context of good faith matters of impression were important. When the defenders approached the pursuer, by means of the letter of 10 April 1995, to invite her to grant a guarantee of her husband's business liabilities to them, they conveyed the clear impression that in order to become the guarantor of her husband's liabilities she would require to sign a guarantee in the form of the style deed enclosed with the letter, and, as a corollary of that, that if she did not sign such a deed she would not become liable as guarantor of her husband's liabilities. Becoming a guarantor required active steps on her part; inaction could not place her in such a position. It did not matter that it was not expressly averred that the pursuer did in fact gain such an impression from the letter of 10 April 1995. It was sufficient that the letter was capable of giving that impression. That impression was wrong. As a matter of law, the terms of the personal obligation in the standard security (reading the primary undertaking along with Declaration (NINTH)) were such that upon the term loan agreement being entered into between the defenders and the pursuer's husband, the pursuer would become liable as cautioner in respect of her husband's liabilities thereunder, and her interest in the subjects would be burdened in security of those liabilities. As grantees of the standard security, the defenders must be taken to have been aware of that. As a result of the pursuer's response to the letter of 10 April 1995, the defenders must be taken also to have been aware that she was unwilling to undertake liability as guarantor of her husband's debts. In these circumstances, good faith required that the defenders correct the erroneous impression created by the letter of 10 April before entering into the term loan agreement. Their failure to do so meant that they were in bad faith, and that had the consequence that they were not entitled to rely on the combined effect of the standard security and the term loan agreement to the effect of realising their heritable security over the pursuer's interest in the subjects for the purpose of satisfying her husband's liabilities.

[6] The pursuer had in these circumstances made relevant averments in support of her conclusion for reduction, and a proof before answer should be allowed, although it was conceded that there should be excluded from probation (a) the averments about defective attestation, and (b) the averments in article 5 of the condescendence.

[7] Mr Wallace, for the defenders, noted that the pursuer's case of bad faith depended on the assertion that the defenders' letter of 10 April 1995 conveyed the erroneous impression that if she did not sign a guarantee in the form attached to the letter, she would not become liable as guarantor of her husband's debts. It was that mis-statement of the position, and the defenders' subsequent failure to correct it before relying on the combined effect of the standard security and the term loan agreement as imposing such liability on the pursuer, that were said to place the defenders in bad faith. He did not accept, however, that the letter did convey that erroneous impression. All that the letter did was invite the pursuer to grant a guarantee, and exhibit to her the form which it would take if she agreed to do so. Nothing was said that might be construed as releasing the pursuer from earlier obligations, including the general cautionary obligation for her husband's debts constituted by the personal obligation in the standard security. The standard security was granted at a time when, as was conceded on her behalf, the pursuer had solicitors acting for her. It should therefore be taken that she had been properly advised as to, and understood, the effect of the "all sums" standard security. There was no averment that she had in fact been misled by the terms of the letter of 10 April into thinking that she would have no liability for her husband's debts if she declined to sign the proposed guarantee.

[8] Mr Wallace's second line of argument was to the effect that the pursuer had not averred that the circumstances founded on as bad faith on the part of the defenders had had any effect on her position. If the defenders' letter had never been sent, the pursuer's position would have been exactly as it is. It was not suggested that the false impression said to have been conveyed by the letter, and subsequently allowed to go uncorrected, had led to the pursuer undertaking a liability that she would not otherwise have undertaken. The liability which the defenders now sought to enforce was constituted by the standard security, which had been executed some four years before the alleged actings in bad faith. There was no authority for the view that bad faith on the part of the creditor could in some way undo a valid liability already incurred before the date of actings in bad faith. It was clear from the speech of Lord Clyde in Smith that what he had in mind was the effect of the creditor's bad faith on the constitution of an obligation. At 118C he said:

and made further reference at 121E to:

Here no new contract on the pursuer's part was constituted under the influence of the misrepresentation allegedly made in the letter of 10 April and thereafter allowed to go uncorrected. The most that might have happened in August 1995 was an alteration to the extent of the obligation undertaken by the pursuer in the standard security, in precisely the way that it was contemplated that it might be altered from time to time, namely by the undertaking of a new primary obligation to the defenders by the pursuer's husband. It was, however, far from clear that even that had happened. The pursuer's averment was that the term loan agreement gave effect to a restructuring of her husband's existing business loan and overdraft facilities. There was no suggestion that before August 1995 the pursuer was not liable as cautioner for her husband's existing liabilities to the defenders, or that her interest in the subjects was not then burdened in security of those liabilities. There was therefore no clear basis in the pursuer's averments for an inference that her cautionary liabilities after August 1995 were any more extensive than they had been before that date. It could not therefore be suggested that the pursuer's position had been made worse in any way by any lack of good faith on the part of the defenders.

[9] In these circumstances Mr Wallace submitted that the pursuer had failed to make relevant averments in support of her conclusion for partial reduction of the standard security. The defenders' first plea-in-law should therefore be sustained, and the action dismissed.

[10] In my opinion the starting point for examination of the relevancy of the pursuer's case for reduction must be a consideration of the deed which she seeks to reduce, namely the standard security which she and her husband granted in August 1991. The context in which it was granted was the making of a loan by the defenders to the pursuer and her husband to finance the purchase by them of a house. They were to be joint owners of the house, and they were joint borrowers of the loan. It is therefore not surprising to find that they incurred a joint and several personal obligation, as well as burdening the subjects which they were jointly acquiring as security for the loan. This was therefore not the sort of situation dealt with in Smith and the cases which have followed it, where one spouse grants a standard security over her share in the matrimonial home in security of a debt owed to the lender by the other spouse alone. The form of the standard security, however, was not such as to confine the personal obligation undertaken to the repayment of the house purchase loan, or to provide heritable security only for that loan. Instead, the personal obligation was:

and Declaration (NINTH) added:

The security granted was of corresponding scope. The effect was that the pursuer there and then undertook a personal obligation in respect of all sums that her husband might at any time become liable to pay to the defenders, as well as granting a heritable security for all such liabilities over her interest in the security subjects. The pursuer thus committed herself in advance to being cautioner for her husband's future debts to the defenders, and extended the heritable security that she granted to cover all such debts. Mr Wallace was in my view correct in submitting that, since it was conceded that there were solicitors acting for the pursuer and her husband at the time when the standard security was granted, the defenders were entitled to suppose that the pursuer was advised as to those aspects of the effect of the standard security expressed as it was. It was not argued on the pursuer's behalf that there were any circumstances adversely affecting the validity of the standard security when it was granted.

[11] The next circumstance that in my view requires to be noted is that in 1992 the pursuer's husband obtained a business loan of £30,000 from the defenders. By virtue of the personal obligation in the standard security, the pursuer became liable as cautioner for repayment of that loan. That loan became part of the sums secured by the standard security over the subjects. No attempt was made to suggest that the pursuer had no personal liability as cautioner in respect of that loan, or that it was not secured over her interest in the subjects.

[12] These were accordingly the circumstances prevailing when the defenders wrote the letter of 10 April 1995 to the pursuer. It is in my view difficult to see what it was that the defenders were seeking to achieve at that stage. Plainly they were inviting the pursuer to grant some form of guarantee of the liabilities of her husband to them. Unfortunately, the style deed which is mentioned in the letter has not been produced, but it was not, I think, disputed that what was being sought was a personal guarantee by the pursuer of her husband's debts. If that is correct, the defenders were seeking something that they already had by virtue of the personal obligation incumbent on the pursuer under the standard security. It is conceivable that the explanation is that the person who wrote the letter of 10 April was unaware of the existence or of the terms of the standard security. There are, however, no averments on that matter. What matters for the purposes of the pursuer's argument is whether it is right to regard the terms of the letter of 10 April as containing a representation to the pursuer that if she did not sign the proposed guarantee deed, she would not be liable as guarantor of her husband's debts to the defenders. Against the background that the pursuer had granted the "all sums" standard security in the terms that she had, less than four years earlier and while enjoying the benefit of legal advice, I do not consider that that is an interpretation of the letter that is readily to be adopted. Something rather more unequivocal would, in my view, be required to constitute a representation that the effect of the standard security was in some way to be treated as having flown off. Moreover, it is in my view significant in this context that the pursuer makes no averment that she did in fact regard the letter as making such a representation. If, as Mr Gale submitted, impressions are all-important in such matters, one would expect to see an assertion of the impression that the pursuer in fact formed. The most that can, in my view, be taken from the pursuer's averments is that, since she refused to grant the guarantee, it may be supposed that she thought that by so doing she was avoiding some form of liability for her husband's debts.

[13] Assuming for the purpose of argument that the letter of 10 April did convey the impression that the pursuer would have no liability for her husband's debts if she declined to grant the proposed guarantee, it is in my view clear that that was a false impression, because the effect of the standard security was otherwise. It is in the falsity of that impression and the absence of any steps taken to correct it that the pursuer identifies the circumstances which she argues put the defenders in bad faith. It seems to me, however, that in his argument Mr Gale was attempting to deploy the principle of good faith in a way for which there is no authority and which is unsound in principle. I have no difficulty in accepting from Smith that a creditor owes a duty to a potential cautioner not to mislead him by silence where disclosure is required or by positive misrepresentation (118C). But it seems to me that the context in which Lord Clyde was discussing that duty was as a basis for setting aside a cautionary obligation which the cautioner entered into as a result of having been misled by what the creditor did or said in bad faith  (118C and 121E). The pursuer did not enter into any obligation as a result of the circumstances which Mr Gale identified as constituting bad faith on the part of the defenders. The obligation which the pursuer seeks to set aside, namely the standard security, was entered into by her, in circumstances which are not impugned, long before the alleged acts of bad faith. If the allegedly misleading letter had never been sent, the pursuer's position would have been no different from her present position. If the defenders had done what Mr Gale suggested good faith demanded of them, namely drawn to the pursuer's attention that the letter, if it suggested that refusal to sign a guarantee would keep her free of liability for her husband's debts, was in that respect erroneous, the pursuer would again have been in a position no different from that in which she presently finds herself. She would have been unable to do anything to avoid the liability which the standard security imposed upon her. Moreover, there is no clear averment that the term loan agreement, which was the only contract entered into after the alleged acting in bad faith on the part of the defenders, altered the pursuer's position for the worse. There is nothing to suggest that in any way the pursuer acted so as to worsen her position because of the alleged bad faith.

[14] In all these circumstances I am of opinion that the pursuer has no relevant averments in support of her conclusion for reduction of the standard security so far as affecting her interest in the subjects.

[15] I shall accordingly sustain the defenders' first plea-in-law and dismiss the action. Had I decided the main issue in the case otherwise, I would have given effect to Mr Gale's concessions by excluding from probation (a)  the passage in article 2 of the condescendence beginning with the words "Said Standard Security ..." in line 1 of page 9 of the Closed Record (No. 21 of process) and ending with the words "... of these witnesses" in line 15 of that page, and (b) the whole of article 5 of the condescendence, and would thereafter have allowed a proof before answer with both parties' preliminary pleas standing. I shall reserve the question of expenses for future discussion.