Scottish Court of Session Decisions

[1] In this action the pursuer's primary conclusions are for reduction of two documents, namely (1) a guarantee which she granted in favour of the defenders on 10 February 1998, and (2) a standard security over the heritable property at 3 Royal Terrace, Edinburgh, which she granted in favour of the defenders on 28 January 1998 and which was recorded in the Division of the General Register of Sasines for the County of Midlothian on 15 April 1998. She also concludes for reduction of a notice dated 14 December 1998 demanding payment in terms of the guarantee and of a notice dated 15 December 1998 calling up the standard security. In addition there is a conclusion for interdict and interim interdict against the defenders to prevent them from taking any steps to enforce the debt or exercise any rights under the standard security. There is presently in force an interim interdict granted on 11 June 1999 in terms somewhat more restricted than the conclusion.

[2] There is also in dependence an action at the instance of the present defenders against the present pursuer (case reference 8499; "the Cotias action"), in which they conclude for payment by her to them of the sum of £200,000 with interest, allegedly due in terms of the guarantee. The challenge to the validity of the guarantee, which is focused in the first conclusion in the present action, is the only defence to the Cotias action. Both actions were appointed to the same diet of debate, but the substantive submissions were made in the present action. It was matter of agreement that the result in this action would dictate the result in the Cotias action.

[3] The guarantee and the standard security were granted by the pursuer in support of the obligations of the borrower in respect of a loan made by the defenders to a company called The Bond Corporation Limited ("Bond"). The circumstances which led up to the making of the loan and the granting of the guarantee and the standard security are set out in the pursuer's pleadings in some circumstantial detail, but not with complete clarity. The pursuer avers that she is a widow aged 69 years. Her involvement with the heritable subjects forming 3 Royal Terrace, Edinburgh ("the premises") began in 1957 when she and her late husband became proprietors of them. The pursuer became sole proprietor in 1969 on the death of her husband, and remains sole proprietor. It is averred that between 1986 and February 1998 various bar businesses (the details of which do not seem to me to matter for present purposes) were carried on from the premises, and that the pursuer was not "actively involved" in those business, which were under the management of one or other of her sons, Graham Wilson and Gordon Wilson. The pursuer does, however, admit that (at least latterly before Bond took over the business - it is not clear whether it was always the case) she held the liquor licence in respect of the premises. In about 1986 the pursuer granted a standard security over the premises in favour of Tennant Caledonian Breweries Limited (subsequently Bass Brewers Limited) in respect of a loan provided by them to the business. On 19 August 1997 Gordon Wilson was sequestrated. It is averred that after his sequestration Gordon Wilson, being anxious to be able to earn a living from the business which he had been conducting, that the business should be maintained, and that the pursuer should not be unduly worried about the financial position of the "company" (sic), consulted Messrs Wilson Terris & Co, Solicitors, regarding "various debts" incurred by the pursuer or by him and the pursuer jointly. He also confided in one Brian Morton, a customer who, it is averred, held himself out to be an experienced business man able to obtain access to bank borrowing, and who offered to assist him.

[4] The pursuer's averments then set out a scheme which was suggested by Brian Morton. The proposal is said to have been made in December 1997, and its main features were that a limited company should be incorporated to conduct the business at the premises, that Gordon Wilson should be employed by the company to manage the business, that Brian Morton should "deal with the financial arrangements for the company", and that Brian Morton and the pursuer should be equal shareholders in the company. The averments continue:

[5] The pursuer then avers that subsequent perusal of the files maintained by Wilson Terris & Co disclosed that there were standard securities in favour of each of the Royal Bank of Scotland, the Clydesdale Bank and Bass Brewers Limited, and that the total sum required as at February 1998 to obtain discharge of those standard securities was approximately £155,000. The pursuer's averments offer no explanation of when and how the standard securities (other than the one in favour of Bass Brewers Limited) came into existence. Although she avers that she had received no communication regarding them from Wilson Terris & Co between June 1997 and 9 January 1998, and believes and avers that that firm dealt with various demands for payment by secured and unsecured creditors on the instructions of Gordon Wilson and without instructions from her, there is no suggestion in her pleadings that the standard securities were not granted by her or were in any way invalid. It is averred, however, that decree by default was obtained by Bass Brewers Limited on 19 November 1997 and by Clydesdale Bank on 15 January 1998. Averments are made about meetings on 5 December 1997 and 7 January 1998 involving Gordon Wilson, Brian Morton, Grant Knight (a partner in Wilson Terris & Co) and (on the former occasion) one Patrick McDade. The pursuer avers that she was not involved in those meetings. It is, however, averred that at them it emerged that the intention was that a loan of £200,000 be obtained and applied towards redeeming the three secured loans and clearing other debts.

[6] Although the pursuer's pleadings are not particularly clear as to the chronology, it appears that the next significant stage in the development of the arrangements was a meeting that took place on 9 January 1998. The pursuer avers that she and her son, Gordon Wilson, attended the meeting with Gordon Russell and Grant Knight of Wilson Terris & Co. She avers that Grant Knight had acted for her previously and was acting for Gordon Wilson in connection with his sequestration. Various averments are made about the extent of the advice given by Wilson Terris & Co to the pursuer, but it is unnecessary to repeat them in detail here. It is averred that the pursuer and Gordon Wilson had understood from Gordon Wilson's earlier discussions with Brian Morton that the lender was to be Allied Irish Banks, and that the pursuer had had no intimation before the meeting on 9 January that the defenders were to be the lenders. Although the pleadings do not expressly state that this occurred at the meeting on 9 January, it is averred that Patrick McDade and Brian Morton intimated, "[at] very short notice, without any adequate explanation and to the surprise of the Pursuer and Gordon Wilson", that Allied Irish Banks were not prepared to lend to Bond, but that the defenders were prepared to lend. It is averred that Brian Morton had explained to Gordon Wilson that the defenders were an investment company in which an associate of his, Craig Fallon, had "a considerable interest and influence". It is not made clear when that explanation was given or whether the pursuer was present when it was. The averments continue by narrating that, given the precarious position of the business, Gordon Wilson was anxious that the funds be obtained urgently, and therefore agreed that borrowing be obtained from the defenders and "persuaded the pursuer also to agree". Whatever the precise chronology of the emergence of the proposal that the defenders should be the lenders may have been, the pursuer avers that during the meeting on 9 January she "signed the acceptance of the offer of loan from the defenders". The offer of loan is No. 6/6 of process. It is typed on the defenders' letterhead, dated 5 January 1998 and addressed to "Mrs Irene Wilson, Mr Brian Morton, Directors, The Bond Corporation Limited". The docquet of acceptance is signed by the pursuer and Brian Morton as directors, for and on behalf of The Bond Corporation Limited, and dated 9 January 1998. The pursuer avers that a company was "subsequently" incorporated and its name changed to The Bond Corporation Limited, but the defender's averment is that the date of incorporation was 8 January 1998, and that is borne out by the pursuer's averments in her petition to wind up Bond (No. 6/12 of process). It is averred that the pursuer and Brian Morton were appointed directors of Bond and that 5000 shares in Bond were issued to each of them. It was agreed that Grant Knight would become company secretary, and that the registered office should be at the offices of Wilson Terris & Co.

[7] Following the meeting on 9 January, the pursuer on 28 January 1998 granted the standard security which is the subject of the second conclusion (No. 6/2 of process) in security of Bond's indebtedness to the defenders. On 29 January she granted a twenty-five year lease of the premises (No. 6/5 of process) in favour of Bond. On 10 February she granted the guarantee which is the subject of the first conclusion (No. 6/1 of process). On 13 February the defenders advanced the sum of £200,000.

[8] Thereafter, it is averred, Bond continued the business operated from the premises. The pursuer's only involvement was to clean the premises. An agreement that she and Brian Morton would both sign company cheques was not implemented. Gordon Wilson was initially employed as front-of-house manager. Brian Morton made clear that he was to have sole control of finance, and instructed that the weekly takings of about £7000 be handed to him or an associate of his to enable them to be credited to Bond's bank account. The pursuer and Gordon Wilson believed that the takings were being so banked, and were being used to meet Bond's business debts including monthly payments to the defender, but they were not allowed to see the bank statements. The pursuer received no rent from Bond. Bond made only three monthly payments to the defenders, and thus created a situation of default. The business appeared to be trading properly, but the pursuer was not shown management accounts.

[9] The pursuer then avers that at a series of general meetings of Bond between 4 June and 5 August 1998 resolutions were moved by Brian Morton (i) to terminate the employment of Gordon Wilson, (ii) to appoint Patrick McDade as a director on 26 June, (iii) to appoint Craig Fallon as a director on 20 July and (iv) to allocate shares so as to leave the pursuer with a minority holding by 20 July. Some of those resolutions, which were seriously prejudicial to the pursuer's position, were carried by virtue of Brian Morton's use of his casting vote as chairman. At the meeting on 4 June the pursuer asked why Craig Fallon had, on a recent visit to the premises, claimed to have put money into the business, and Brian Morton explained that "Craig Fallon was the principal behind the defender and was concerned [that] his loan would not be repaid". It is averred that "Brian Morton then indicated that he wished to withdraw and be replaced by Craig Fallon". It is further averred that the pursuer did not attend the meeting on 20 July because she was alarmed and distressed by an incident in which a firearm was discharged outside her home a few days earlier. On later occasions further shots were fired near the pursuer's home. The police apprehended one Jimmy Singh, whom Craig Fallon had previously mentioned to Gordon Wilson as an associate of his. On 27 May 1999, Craig Fallon, Jimmy Singh and a third person were apprehended outside the premises and detained for three days. On the same date the pursuer received intimation that her legal aid application in connection with this action had been granted, and it is believed and averred that the defenders would also have received such intimation.

[10] The pursuer subsequently took independent legal advice and on 19 October 1998 presented a petition to wind up Bond. On the pursuer's motion, opposed by Wilson Terris & Co acting on behalf of Brian Morton, Craig Fallon and Patrick McDade, a provisional liquidator was appointed on 20 November. On 18 December the notices referred to in the third and fourth conclusions were served. The Cotias action was then raised on 24 December.

[11] The pursuer's first plea-in-law is in the following terms:

The averments in support of the bad faith aspect of the plea are to be found principally in article 10 of the condescendence where it is averred inter alia that:

In response to the defenders' averments to the effect that she was fully advised by her own solicitors, the pursuer makes the following supplementary averments:

There then follow averments about the extent of the advice which the pursuer maintains she was given by Wilson Terris & Co, after which the averments about the defenders' position resume as follows:

[12] In making those averments the pursuer seeks to rely on the principle identified in Smith v Bank of Scotland 1997 SC (HL) 111. In that case the pursuer had joined with her husband in granting a standard security over their jointly owned matrimonial home in security of a business loan made by the defenders to a firm in which the pursuer's husband was a partner. She averred that she had been induced to concur in granting the standard security by misrepresentation on the part of her husband. The case was concerned with whether, and if so in what circumstances, the pursuer could rely on that misrepresentation in a question with the defenders as ground for reduction of the standard security so far as granted over her interest in the matrimonial home. The difficulty which had been held in this court to be fatal to the pursuer's case was identified by Lord Clyde in the House of Lords (at 116G-H and 117A and C) as follows:

Thereafter, having held that there were no sufficiently cogent grounds for refusing the extension to Scotland of the development of the law which had been achieved in England by the decision in Barclay's Bank v O'Brien [1994] 1 AC 180, but having rejected the option of effecting such extension by deploying the concept of constructive notice, Lord Clyde continued (at 121E):

[13] In Smith v Bank of Scotland the pursuer did not have the benefit of legal advice. In Forsyth v Royal Bank of Scotland (26 July 1999, unreported) I had occasion to consider the application of the Smith principle in a case in which the pursuer had the benefit of legal advice, albeit legal advice from solicitors who also acted for the lender and for the principal debtor. I expressed my conclusions as follows (at pages 28-30 of my Opinion):

[14] The defenders' attack on the relevancy of the pursuer's pleadings in support of her first plea-in-law, when fully developed in the submissions made by Mr Marnie and Mr McNeill, was in three parts. In the first place, it was submitted that there were no relevant averments that the guarantee and the standard security were procured by facility and circumvention. In the second place, there were no relevant averments of the sort of "intimate relationship" or "personal relationship" between the principal debtor and the cautioner (which expression I use in the broad sense in which it was used by Lord Clyde in Smith to cover both the granter of a personal guarantee and the granter of a heritable security) that would give rise to a duty on the part of the lender, in order to preserve his own good faith, to warn the cautioner of the consequences of the transaction and advise her of the need take separate advice. Thirdly, even if such a relationship did exist, it was submitted that the pursuer's own averments disclosed either that the duty did not arise because there were circumstances that entitled the defenders to think that the pursuer was separately advised, or alternatively that the defenders had done all that was necessary to comply with their duty.

[15] The form of the pursuer's first plea-in-law, which asserts that the guarantee and the standard security were "impetrated from the pursuer by the defender when the pursuer was easily imposed upon and the defender did not act in good faith" (emphasis added), might at first sight be thought to be attempting to make a case of facility and circumvention against the defenders, on the basis that it was they who had perpetrated the circumvention. The addition of the reference to their good faith, however, makes it tolerably clear that the case which is sought to be made is a Smith v Bank of Scotland case, in which the assertion that the pursuer was easily imposed upon relates to imposition by others than the defenders. In my opinion Mr McNeill was correct in his submission that in any Smith v Bank of Scotland case the pursuer must, as well as making averments relevant to yield the inference that the lender was not in good faith, also make relevant averments of the circumstances which are said to undermine the validity of the cautioner's consent. In other words, relevant averments of bad faith on the part of the lender do not by themselves constitute ground for reduction of the contract of cautionary. The function of those averments is to deprive the lender of the benefit of the rule that a voluntary obligation is not rendered open to challenge simply on the ground that it has been entered into as a result of a misrepresentation made by a third party (or undue influence exerted by a third party, or circumvention practised on a facile contracting party by a third party). I do not regard as sound Mr Kennedy's submission that bad faith on the part of the defenders would by itself be ground for reduction. To make a relevant case there must in my view be both (a) relevant averments of misrepresentation, or undue influence, or facility and circumvention, by a third party and (b) relevant averments that the defenders were in bad faith.

[16] Mr McNeill accepted that averments of facility and circumvention would often have to go to proof before answer (see e.g. Pascoe-Watson v Brock's Executor 1998 SLT 40; Anderson v The Beacon Fellowship 1992 SLT 111; MacGilvray v Gilmartin 1986 SLT 89). In the present case, however, there were no sufficient averments of facility and circumvention to go to proof. He identified the following averments as all that the pursuer offered to prove:

1. "She is a widow aged 69" (Article 1 of the condescendence);
2. "The Pursuer is elderly and had no relevant financial experience. She was very anxious to assist her son in his financial difficulties. She placed her trust in Brian Morton" (article 3);
3. "[Gordon Wilson] therefore agreed that borrowing be obtained from the Defender and he persuaded the pursuer also to agree" (article 5); and
4. "It was obvious to the defender that the Pursuer's relationship with her son, Gordon Wilson, with Brian Morton and with Bond were (sic) of such a nature that her consent to the granting of the Guarantee and the Standard Security was likely to be flawed" (article 10).

These averments were to be seen in the context of the averment (in article 2) that in about 1986 the pursuer and her son, Graham Wilson, opened a business in the basement of the premises known as Chesterfields Bar, and that in that connection the pursuer granted a standard security over the premises; the averment (also in article 2) that at the end of 1997 Gordon Wilson consulted Wilson Terris & Co about various debts incurred by the pursuer or him and the pursuer jointly; the admission (in article 3) that the pursuer held the liquor licence for the premises; and the averment (in article 4) that [prior to the meeting on 9 January 1998] Grant Knight of Wilson Terris & Co had acted for the pursuer. In that context the averments made did not amount to a relevant case of facility and circumvention.

[17] In my view there is a danger that the full flavour of the pursuer's averments will be lost if parts of them are read in isolation. In particular, it seems to me that the range of averments which Mr McNeill sought to treat as the context of the averments of facility and circumvention might be extended to encompass the averments that the pursuer had not been actively involved in running the various businesses conducted from the premises, but had left the management to one or other of her sons; and the averments that Wilson Terris & Co dealt with matters relating to the debts of the business on the instructions of Gordon Wilson, without communicating with the pursuer herself. More generally, I consider that it is appropriate to read the pursuer's averments as a whole when seeking to determine whether they are relevant for inquiry on the question of facility and circumvention. That said, however, I am of opinion that Mr McNeill's attack on the relevancy of the averments in support of the first part if the pursuer's first plea-in-law is well-founded. There is, in my view, nothing said in the pursuer's averments to indicate that she was in a facile state of mind or that anything was done to impose on her while she was in that state of mind. The averments relating to her age, lack of relevant experience, non-involvement in the day-to-day conduct of the business of which she was the owner, and anxiety to assist her son in his financial difficulties in my view fall short of relevant averments of facility, just as the averments that her son persuaded her to agree to the scheme for borrowing from the defenders, and that she trusted Brian Morton, fall short of relevant averments of circumvention. As her averments disclose, she had solicitors acting for her in the matter. Although it may be that she has ground for complaint about the standard of service she received from them (I was informed that she has pending an action of damages for professional negligence against them), I do not consider that it assists her case of facility and circumvention to point to any inadequacies there may have been in the advice she received. Nor is this a case in which an absence of benefit from the transaction can be relied upon as helping to support a case of circumvention. Although the pursuer avers that the loan transaction and the undertaking of the related cautionary obligations "offered her no personal advantage on any objective view" (article 10), she admits that of the £200,000 advanced, £155,000 was used to repay her secured creditors. Whatever may have happened thereafter, the loan was made to a company of which she was a director and in which she held 50% of the issued share capital. In all the circumstances, reading the pursuer's pleadings as a whole, I am of opinion that there are no relevant averments of facility and circumvention or, more generally, of any ground on which her consent to the granting of the guarantee and the standard security might be said to have been flawed.

[18] The defenders' second submission against the relevancy of the averments in support of the pursuer's first plea-in-law focused on the absence of an averment of a personal or intimate relationship, in the sense indicated in Smith v Bank of Scotland, between the pursuer as cautioner and the principal debtor, Bond. The submission was founded on two passage in Lord Clyde's speech; first (at 121F) where his Lordship said that the duty to give certain advice, if good faith was to be preserved, would arise in circumstances where the creditor should reasonably suspect that there might be factors which might undermine the validity of the contract "through [the cautioner's] intimate relationship with the debtor", and secondly (at 121H) where his Lordship reiterated that the duty would only arise "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". Although it was accepted that the relationship of mother and son was a personal relationship of the sort contemplated, it was submitted that the existence of that relationship between the pursuer and Gordon Wilson in the present case was of no relevance, since Gordon Wilson was not the principal debtor, and what Lord Clyde referred to was a personal relationship between the principal debtor and the cautioner. In so far as the pursuer's averments put in issue her relationship with Brian Morton, that relationship was not of the sort contemplated. In the present case the principal debtor was Bond, a company of which the pursuer was a director and in which she was a 50% shareholder. That was not a relationship of the sort contemplated in Lord Clyde's formulation of the principle in Smith v Bank of Scotland. Whether one lifted the corporate veil, and thus saw the pursuer as truly one of the principal debtors, or did not do so, and therefore saw the pursuer as a director of and shareholder in the principal debtor, the situation was not one which suggested that the relationship might undermine the validity of the pursuer's consent. The repercussions of extending the principle of Smith v Bank of Scotland to cases where the cautioner was a director of and shareholder in the principal debtor would be profound and undesirable.

[19] Mr Kennedy for the pursuer pointed out that in Smith v Bank of Scotland Lord Clyde had declined (at 122A) to analyse the range of personal relationships that might suffice to bring the principle into operation. His Lordship pointed out that the range of circumstances in which persons may be prepared or prevailed upon to act as cautioners made it unwise to attempt a more precise formulation. Here, it was submitted, the material relationship was that between the pursuer and her son. The relationship of mother and son was one which had been held to fall within the scope of the equivalent English rule (Barclays Bank plc v O'Brien [1994] 1 AC 180, per Lord Brown-Wilkinson at 198E-F; Avon Finance Co Ltd v Bridger [1985] 2 All ER 281).

[20] In my opinion a lender comes under the obligation of good faith identified in Smith v Bank of Scotland only if the circumstances are such as to lead a reasonable man to believe that, because of the personal relationship between the principal debtor and the cautioner, the consent of the latter may not be fully informed or freely given (Smith v Bank of Scotland, per Lord Clyde at 121H). If the principal debtor were the son of the proposed cautioner, that would in my view be a sufficient personal relationship to give rise to such an obligation. On the other hand, there is in my view no warrant for extending the rule to apply to a case where the relationship is simply that the principal debtor is a company and the cautioner is a shareholder in and director of that company. Such a relationship gives no reason to suppose that the principal debtor, the company, has used the relationship to undermine the validity of the consent of the director and shareholder to act as a cautioner. To apply the rule in such circumstances would go very far beyond the circumstances contemplated in Smith v Bank of Scotland (see per Lord Clyde at 120F-G), and would have a very serious impact on commercial lending practice. It is, however, an over-simplification to regard the circumstances of the present case as falling into either the simple mother/son category or the simple company/director and shareholder category. It is therefore, in my view, necessary to examine the circumstances in more detail before deciding whether the rule may have been relevantly invoked by the pursuer in the present case.

[21] It seems to me that the present case does not fall into the simple mother/son category because the pursuer's son was not the principal debtor. But the rule can, in my view, apply even in circumstances where the person who is in a close personal relationship with the cautioner is not himself the borrower, provided he has an interest to use the personal relationship to prevail on the cautioner to agree to act as such, and the existence of that relationship is known to the creditor. Thus, in Smith v Bank of Scotland, the actual principal debtor appears to have been a firm of which the pursuer's husband was a partner, rather than the pursuer's husband as an individual. Likewise the English authorities include examples where the principal debtor was a company controlled by close relatives of the plaintiff (e.g. Bank of Baroda v Rayarel [1995] 2 FLR 376).

[22] Conversely, the present case is not in my view a simple example of a director of and shareholder in a company acting as cautioner for the debts of the company. That is because the company did not exist before the package of arrangements which included the loan, the guarantee and the standard security was devised. The incorporation of the company itself formed part of that package of arrangements. If the existing debt had been the debt of the pursuer's son or of a business which in one format or another belonged to him, and he had devised a scheme which, to the knowledge of the lender, involved the setting up of a company, the pursuer becoming a shareholder in and director of the company, a loan being made to the company, and the pursuer guaranteeing the company's obligations in respect of the loan, and granting heritable security for the loan over property belonging to her, I do not rule out the possibility that in such circumstances it might have been open to the pursuer to invoke the rule.

[23] In my view, however, the circumstances of the present case are not such as to entitle the pursuer to invoke the rule in Smith v Bank of Scotland. The circumstances which, in my view, combine to yield that result are (1) that the loan was necessary to re-finance an existing business, (2) that, albeit the pursuer avers that she was not actively involved in the business, the debts of that business were debts for which she was personally liable, (3) that the premises which belonged to the pursuer were the subject of heritable securities in respect of the debts of the business, (4) that the interest of the pursuer's son in the business was only that of an employee and was thus much less direct than her own, (5) that the re-financing package was designed to enable to the pursuer's existing borrowing to be repaid and the existing heritable securities over her property to be discharged, (6) that as part of that package Bond was set up and the pursuer became the holder of 50% of the issued share capital, as well as a director of the company, (7) that the guarantee which the pursuer granted was thus a guarantee of the indebtedness of a company of which she was to the extent of 50% the beneficial owner, and (8) the standard security which she granted was in security of the loan made to that company. Assuming that, as the pursuer avers, the proposed arrangement had been explained in detail to the defenders, I am of opinion that the circumstances are not such as to be capable of leading them, as reasonable men, to believe that owing to the personal relationship between the pursuer and her son her consent to the granting of the guarantee and the standard security might not be fully informed or freely given.

[24] The third branch of the defenders' attack on the relevancy of the averments in support of the pursuer's first plea-in-law arises out of the circumstance that at the material time the pursuer had solicitors acting for her. In opening his submissions on this point, Mr Marnie referred to the passage in the speech of Lord Clyde in Smith v Bank of Scotland where his Lordship said (at 122C) that it would be sufficient for a 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". Mr Marnie then referred to the passages from my own opinion in Forsyth v Royal Bank of Scotland which I have quoted in paragraph [10] above. He also drew my attention to paragraph 49 of the judgment in Royal Bank of Scotland v Etridge [1998] 4 All ER 705 at 722g, which identified circumstances which would constitute exceptions to the normal entitlement of a lender to assume that a solicitor asked to advise the granter of the security would discharge his duties fully and competently, instancing the case where he knows or ought to know that the assumption is false, the case where the lender has material information not available to the solicitor and the case where the transaction is one into which no competent solicitor could properly advise a client to enter. He referred further to Credit Lyonnais v Burch [1997] 1 All ER 144, in which the bank was held not to have done enough by urging Miss Burch, a junior employee who granted a personal guarantee and a second charge over her flat in security of her employer's business overdraft, to obtain independent legal advice. It was held that her reply declining to do so could not reasonably have allayed suspicion that she was the subject of undue influence, because it was obviously written at the instance of the employer and after consultation with him. Against that background of authority, Mr McNeill submitted that if, contrary to his earlier submissions, the circumstances were such that in order to preserve their good faith the defenders required to take the steps contemplated in Smith v Bank of Scotland, it was clear on the pursuer's pleadings and the documents that they had done so. In the first place, he pointed to the guarantee (No. 6/1 of process) and in particular to the warnings printed both at the beginning of the document and at the end just before the place for the granter's signature. The text which appears at the beginning in block capitals is as follows:

The text at the end of the document is to the same effect, with the added warning, again in block capitals:

In the second place, he pointed to the exchange of correspondence between Downie Aiton and Wilson Terris & Co on 22 and 29 January 1998 (quoted in paragraph [11] above). By checking whether Wilson Terris & Co were acting for the pursuer, and obtaining their confirmation that they were, the defenders' agents had done all that was necessary to preserve the defenders' good faith. Where the cautioner was represented by solicitors, and there had been an exchange of letters of that character, it was, Mr McNeill submitted, almost inconceivable that there could be circumstances disabling the defenders from relying on the contract. The defenders could not be expected to say to a guarantor: "You must seek advice from someone other than your present solicitors; we do not consider that they are offering you independent advice."

[25] Mr Kennedy did not, as I understood him, challenge the soundness of the views which I expressed in Forsyth v Royal Bank of Scotland. He submitted, however, that the involvement of Wilson Terris & Co, as explained in the correspondence, was not enough to elide the need for the defenders to take the steps desiderated in Smith v Bank of Scotland. Moreover, there were other circumstances which justified making an exception to the proposition that such steps need not be taken when the cautioner has solicitors acting for her. So far as the exchange of correspondence was concerned, he pointed out that the question which Downie Aiton asked was whether the pursuer was going to obtain separate legal advice regarding her proposed granting of the guarantee and the standard security, and the response made it clear that she was not going to obtain independent legal advice, because Wilson Terris & Co were acting also for Bond and for Brian Morton. For the defenders to proceed without taking any further steps to warn or advise the pursuer was insufficient to preserve their good faith. In addition he relied on the following further circumstances:

1. the structure of the transaction; there was no good reason why, if the purpose of the loan was to re-finance the pursuer's own borrowing, the loan should have been to Bond rather than to the pursuer herself;
2. the terms of the loan; the interest rate was high (12% or base rate plus 4.75%, whichever was higher) and increased by 2% on default; the interest was of a fixed amount (i.e. fixed by reference to the foregoing formula) even when partial repayment had taken place;
3. the nature of the loan; it was last resort finance made available to a newly formed company with no assets;
4. the provision of clause 3.1(c) of the loan offer, which required payment of a bonus of 10% of the transfer value of the lease in the event of Bond selling the lease;
5. the discrepancy between the guarantee and the standard security; the former was limited in amount to £200,000 plus interest, whereas the latter was not, and covered all sums due by Bond, which was not what the loan offer contemplated.

In all these circumstances it could not be said that the pursuer was bound to fail after proof to show that the defenders had not taken all the steps necessary to preserve their good faith.

[26] This part of the defenders' submissions falls to be considered on the assumption that, contrary to their earlier submissions, the pursuer has made relevant averments of facility and circumvention and relevant averments that the circumvention had been effected by a party who was or had an interest in the principal debtor and was in a personal or intimate relationship with the pursuer in the sense desiderated in Smith v Bank of Scotland. I adhere to the view which I expressed in Forsyth v Royal Bank of Scotland that the need for the creditor to take active steps to preserve his good faith in such a situation by warning the cautioner of the consequences of granting the cautionary obligation and advising her to take independent advice will ordinarily be elided if it appears to the creditor that the cautioner already has a solicitor acting for her. The creditor is entitled to assume that the solicitor will give his client appropriate advice. That is ordinarily so even where the solicitor acts both for the cautioner and for the principal debtor, because the lender is entitled to assume that the solicitor will give proper advice about the effect of the potential conflict of interest. A cautioner who has the benefit of a solicitor acting for her is thus ordinarily in the same position as would be achieved by the creditor advising her to seek independent advice. There is therefore no need for the creditor to do so. Although I have quoted in paragraph [13] above only certain conclusions from my Opinion in Forsyth v Royal Bank of Scotland, I adopt in its entirety my reasoning in support of those conclusions, as set out at pages 25 to 32. I conclude from the terms of the correspondence between Downie Aiton and Wilson Terris & Co that the defenders, through their solicitors, asked for confirmation that Wilson Terris & Co were acting for the pursuer in relation to the granting of the guarantee and the standard security and received an affirmative answer to that question. It is to be remembered that the approach suggested by Lord Clyde in Smith v Bank of Scotland requires the creditor to advise the cautioner to obtain separate advice, not to ensure that she does so. When it is confirmed that the cautioner has a solicitor acting for her, albeit also acting for the principal debtor, the creditor need in my view generally do no more. The creditor is entitled to assume that the solicitor will act properly in advising his client, and that will include, if there is a conflict of interest making separate advice necessary or advisable, advising to that effect. Here Wilson Terris & Co advised Downie Aiton that the pursuer had signed "the appropriate conflict letter", by which I understand them to have meant a letter acknowledging that she had been advised of the potential conflict of interest but wished Wilson Terris & Co to continue to act for her. Mr McNeill was, in my view, correct in his submission that the lender could not be expected in these circumstances to go any further. They could not insist that the pursuer withdraw her instructions from Wilson Terris & Co and instruct other solicitors to advise her separately. The matters that the defenders were, in my view, entitled to assume that the pursuers' solicitors would deal with in advising her in relation to the guarantee and the standard security included the nature of the contracts and their effect. In these circumstances it is unnecessary for me to reach a conclusion as to whether the warnings printed at the beginning and end of the guarantee would, in the absence of solicitors advising the pursuer, have been sufficient to preserve the defenders' good faith. I prefer to reserve my opinion on that point. I would observe, however, that any effect of those warnings would be confined to the guarantee and would not affect the standard security, particularly

[27] I have considered all of the additional circumstances on which Mr Kennedy founded in submitting, in effect, that I should not in the present case apply the reasoning that I applied in Forsyth v Royal Bank of Scotland. I do not consider that individually or in cumulo they are capable of justifying the conclusion that the defenders failed to take steps necessary to preserve their good faith. The loan contract was, no doubt, an onerous one and the structure of the scheme was more complex than it might have been. These were, however, matters upon which the defenders were, after receiving the response their solicitors did from Wilson Terris & Co, entitled to assume would be properly considered on the pursuer's behalf by Wilson Terris & Co. They do not, in my view, disclose a situation in which no competent solicitor could have advised the pursuer to grant the guarantee or the standard security (c.f. Royal Bank of Scotland v Etridge, page 722g, paragraph 49). The discrepancy between the standard security and the loan offer (which, as I shall discuss later, the pursuer now seeks to make the subject of rectification proceedings) does not in my view undermine the defenders' good faith.

[28] In all the circumstances, I am of opinion that each of the three branches of the defenders' attack on the relevancy of the pursuer's pleadings in support of her first plea-in-law is well-founded. I conclude that the pursuer has not made relevant averments in support of that plea-in-law, and that it should therefore be repelled.

[29] The pursuer's second plea-in-law is in the following terms:

The averments which the pursuer makes in support of that plea-in-law are set out in article 13 of the condescendence. I propose to quote them virtually in full, and in doing so I shall highlight the averments which bear to relate to representations made to the pursuer, along with those which, although not expressed in terms of representation were relied upon as such in Mr Kennedy's submissions. Article 13 is in the following terms: