United Kingdom House of Lords Decisions

Smith v. Governor and Company of the Bank of Scotland [1997] UKHL 26; [1997] 2 FLR 862 (12th June, 1997)

LORD GOFF OF CHIEVELEY

My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I would allow this appeal.

LORD JAUNCEY OF TULLICHETTLE

My Lords,

      In this appeal the appellant, a wife, seeks to reduce a standard security granted by her and her husband over the matrimonial home whose title was in their joint names. The standard security was granted in favour of the Bank of Scotland, the respondents, to enable the husband to obtain overdraft facilities for a partnership of which he was a member. The wife was thus in the position of a cautioner for the partnership. The sole ground of reduction relied upon is material representation by her husband as to the purpose of the standard security. She avers that she relied upon her husband to make financial decisions and that she was advised neither by the bank nor their solicitors that she should obtain independent legal advice.

      At the time when the First Division refused the wife's reclaiming motion from the interlocutor of the Lord Ordinary, Lord Johnston, dismissing the action the law of Scotland relative to the issue may be summarised as follows:

(1) A contract of caution although not a contract uberrimae fidei, requires perfect fairness of presentation by the creditor otherwise it cannot be enforced (Bell's Principles of the Law of Scotland, 10th ed. (1899), p. 110, para 251, Gloag and Irvine's Law of Rights in Security (1897), at p. 706). In practical terms this means that the creditor must disclose to an intending cautioner circumstances known to him which are material to the risk to be undertaken but which are unlikely to be known to the cautioner. Furthermore in so far as the creditor discloses information to the cautioner whether voluntarily or upon request, he must not mislead by inaccurate or partial disclosure (Gloag and Irvine, at p. 708 et seq). A creditor must not put his head in the sand. If he is aware of circumstances which suggest that the transaction is tainted with fraud he cannot abstain from further enquiry because of the risk of discovering what the true position may be. Wilful ignorance in such circumstances becomes equivalent to knowledge. (Owen and Gutch v. Homan (1853) 4 H.L. C. 997, discussed in Gloag and Irvine, at p. 712).

(2) Subject to (1) supra it is well settled that a creditor is under no duty to an intending cautioner to give information as to the debtor's state of indebtedness and he is entitled to assume that the cautioner has informed himself as to the matters material to the obligation which he is about to undertake. (Young v. Clydesdale Bank Ltd. (1889) 17 R. 231, Lord Adam at p. 240, Lord Shand at p. 244).

(3) The doctrine of undue influence was received from England into Scots law in Gray v. Binny (1879) 7 R 332. In Fraser v. Fraser's Trustees (1834) 13 S. 703 which concerned a dispute between a son and his father's trustees Lord President, Lord Hope, at p. 710 in the course of his charge to a jury pointed out that in contracts between parent and child and husband and wife "everything ought to be done as fairly, equally, openly, and candidly as possible." In McKechnie v. McKechnie's Trustees, 1908 S.C. 93, which concerned the alleged impetration of a will in her favour by a mistress of long standing Lord Justice Clerk McDonald, at p. 98, considered that the rule of undue influence did not apply to a close relationship such as that of husband and wife since such persons were entitled to use influence to induce a man to make provision for someone whom he had placed in the position of being dependent on him. It is probable that the Lord Justice Clerk did not have contracts in mind at the time. However, Lord Low, at p. 102, went further and expressed the general view that the relationship existing between a man and a woman who lived together was not of the kind to admit of application of the doctrine of undue influence. No case was cited to your Lordships in which the doctrine had been applied in such a situation. Furthermore in no case since Gray v. Binny has a contract been reduced when the undue influence has not been exercised by or on behalf of the other party to the contract. So stated Lord Guthrie in Forbes v. Forbes's Trustees, 1957 S.C. 325, 333 and the position has not since altered.

(4)      Just as a contract between A and B is reducible by A where B has exerted undue influence in the circumstances described in Gray v. Binny so is it reducible where B by misrepresentation has induced A to contract. There appears to be no Scottish case in which A has been held entitled to reduce a contract on the ground of misrepresentation by C who was not acting as B's agent.

      The foregoing summarised propositions are discussed in much greater detail in the speech of my noble and learned friend Lord Clyde which I have had the advantage of reading. They represent the law of Scotland as it was at the time of the First Division hearing and approximate closely to the law of England as it was prior to October 1993 when Barclays Bank Plc. v. O'Brien [1994] 1 AC 180 was decided. In that case a wife executed a second mortgage of the joint matrimonial home in favour of a bank as security for overdraft facilities extended to a company in which the husband alone had an interest. As in this case she was not separately advised and claimed that her husband had misrepresented the effect of the transaction. This House decided that the bank had constructive notice of the wrong which entitled the wife to set aside the transaction against the husband. Lord Browne-Wilkinson observed, at p. 190C, that where a wife could demonstrate that the relationship between herself and her husband was such that she reposed confidence and trust in her husband in relation to their financial affairs undue influence exerted by the husband was to be presumed without proof of actual exertion. Although Lord Browne-Wilkinson was here referring only to undue influence it is clear from consideration of his speech as a whole that he was equating misrepresentation thereto. He then went on to point out that the wife's equity to set aside the transaction against the husband would also be enforceable against the creditor who had actual or constructive notice of the husband's wrong. At p. 196A-B his Lordship said:

"Therefore where a wife has agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife's equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety."

And he went on to say at p. 196D-F:

"Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife: and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction."

Lord Browne-Wilkinson, at p. 198, then applied the principles which he had enunciated in relation to husbands and wives to co-habitees whether of the same or opposite sexes.

      My Lords the decision in Barclays Bank Plc. v. O'Brien undoubtedly extended the law of England in favour of sureties co-habiting with a principal debtor. It did so by fixing the creditor with constructive notice of the risk of undue influence or misrepresentation by the debtor. The difficult question in this appeal is whether a similar extension should be made to the law of Scotland. By clothing the creditor with constructive knowledge English law appears to accept that there is a presumption that a husband in circumstances such as the present is likely to exercise undue influence over or misrepresent to his wife. No such presumption as to undue influence presently exists in Scotland although there will be cases in which an inference may without difficulty be drawn from the particular facts (Professor Walker's Law of Contracts and related Obligations in Scotland, p. 306, para. 15.26). Misrepresentation seems to me to be even less likely to lead to a presumption although it is treated in the same way as undue influence in O'Brien. On one view a non co-habiting principal debtor might be thought to have even more incentive to misrepresent than a co-habiting one who would sooner or later have to face the music at close quarters and perhaps for a prolonged period when the truth was out.

      My Lords while I can follow the policy reasons for clothing a creditor with constructive knowledge of the risk of undue influence by a husband in the special circumstances of a cautionary obligation I have the greatest difficulty in seeing why such constructive knowledge should extend to misrepresentation. There has so far as I am aware never been any suggestion in the law of Scotland that any particular class of persons is more likely to misrepresent in relation to a contract than any other class. Applying the principles of Scots law alone I would therefore have been disposed to dismiss this appeal. Nevertheless I am conscious that your Lordships do not share my difficulties and I appreciate the practical advantages of applying the same law to identical transactions in both jurisdictions. In these circumstances I do not feel able to dissent from your Lordships' view that the appeal should be allowed.

      I would however make two further points. In the first place it is not difficult to conceive of other situations in which a wife enters into a contract with a third party which is to her financial disadvantage but is to the apparent advantage of her husband. I would demur to any suggestion that the other party to the contract should be clothed with constructive knowledge of the risk of the husband having exerted undue influence over or misrepresented the nature or purpose of the transaction to the wife. As I have already observed a cautionary obligation involves certain special requirements which are not present in other contracts. The policy considerations referred to by Lord Browne-Wilkinson in O'Brien [1994] 1 AC 180, 188 relate solely to surety obligations and the joint ownership of matrimonial homes. In these circumstances as at present advised I would resist any attempt to extend the concept of constructive knowledge embodied in O'Brien to other types of contracts between a wife and a third party. In the second place when it is apparent from the terms of the transaction that the cautioner and principal debtor are, as here, husband and wife or that they are co-habiting as for example by living at the same address the creditor should take the steps suggested by my noble and learned friend, Lord Clyde. However if the creditor has no information to suggest that cautioner and principal debtor are co-habiting I do not consider that he is under any obligation to make enquiries thereanent. Furthermore the degree of non-marital co-habitation which can give rise to constructive notice must be a matter for decision in each individual case.

LORD LLOYD OF BERWICK

My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I too would allow this appeal.

LORD HOFFMANN

My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I would allow this appeal.

LORD CLYDE

My Lords,

      The Pursuer and Appellant in this appeal seeks reduction of a Standard Security which she and her husband executed in favour of the Bank of Scotland who are the Respondents ("the bank"). The ground on which she seeks reduction is that she was induced to sign the deed as a result of misrepresentations by her husband. The security was granted over the matrimonial home which was owned jointly by herself and her husband. The husband required the security for the purposes of enabling him to obtain a loan for a business which he ran in partnership with another. The case proceeds on the basis of fact that the bank manager knew that the grant of the Standard Security was over a dwelling house which was the matrimonial home of the pursuer and her husband, that the grant was not to the financial advantage of the pursuer, that it was in security of the pursuer's husband's business debts and that the pursuer had no involvement nor interest in that business. The pursuer and her husband signed the security documents at the office of the bank's solicitors, but she was given no opportunity of perusing the document, was not given a copy of it and was not given nor advised to obtain any independent advice. She alleges that she was induced to sign the Standard Security as a result of misrepresentations by her husband to the effect that she required to sign as his wife in order for him to receive a loan and that her personal assets were not at risk. It is said that she relied upon her husband to make financial decisions within the family.

 

      The pursuer in this case is thus seeking to reduce a contract of caution against the cautioner on the ground of misrepresentations made by the debtor. 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. To the generality of the rule there are apparent exceptions, as where the third party is acting as the agent for the contracting party so that the misrepresentation is attributable to the latter as the principal, or where the contracting party may be treated as having in some way participated in the making of the representation so that it is regarded as having been made by him. An example of the former case can be found in Mair v. Rio Grande Rubber Estates Ltd., 1913 S.C. (H.L.) 74 and an example of the latter case can be found in Falconer v. North of Scotland Banking Co. (1863) 1 M. 704. The general rule appears to hold in cases of undue influence, (Forbes v. Forbe's Trustees, 1957 S.C. 325, 333) and in cases of fraudulent misrepresentation (Universal Import Export GmbH v. Bank of Scotland 1995 SLT 1318, 1321). But in relation to fraud a further principle may come into play at least where there has been a gratuitous benefit. The principle here, as formulated in Scholefield v. Templer (1859) 28 Ch. 452 and quoted by Lord Shand L.J. in Clydesdale Bank v. Paul (1877) 4 R. 626, 628-629 is: "a person cannot avail himself of what has been obtained by the fraud of another, unless he is not only innocent of the fraud but has given some valuable consideration". So also in cases of facility and circumvention the reduction of an onerous contract requires proof that the acts of circumvention were those of the other party or of an agent for him (Gloag on Contract 2nd ed., (1929) 486). The rule should, however, not apply where the complaint made is not simply that the contract is open to reduction as voidable but that it is void as having been entered into without any true consent. Thus where a contract has been induced by means of extortion such as to exclude consent and prevent the constitution of a valid contract the participation of the third party may be relevant. In Trustee Savings Bank v. Balloch 1983 S.L.T. 240 a wife was allowed to argue that an agreement should not be enforced against her, where unknown to the creditor, the contract had been induced by force and fear of her husband.

      In the context of cautionary obligations it is well settled that as a general rule the cautioner is expected to look to his own interest and to make such inquiries as he considers necessary or appropriate. There is thus in general no obligation on the creditor to make any disclosure to the cautioner about the financial position of the debtor. The rule was affirmed in Hamilton v. Watson (1845) (Bell's App. 87, 103) where Lord Campbell pointed out the impracticability of requiring the creditor to disclose all that the surety ought to know. The rule is well established in Scotland (Young v. Clydesdale Bank Ltd. (1889) 17 R. 231 and Royal Bank of Scotland v. Greenshields, 1914 SC 259) as well as in England (e.g. North British Insurance Co. Ltd. v. Lloyd (1854) 10 Exch. 523). But the rule is not absolute. One exception arises in cases of fraud. In the English case of Owen and Gutch v. Homan (1853) 4 H.L. C. 997 discussed in Gloag & Irvine, Law of Rights in Security p. 713 Lord Carnworth L.C. stated, at pp. 1035-1036:

"Without saying that in every case a creditor is bound to inquire under what circumstances the debtor has obtained the concurrence of a surety, it may safely be stated that if the dealings are such as fairly to lead a reasonable man to believe that fraud must have been used in order to obtain such concurrence, he is bound to make inquiry, and cannot shelter himself under the plea that he was not called upon to ask, and did not ask, any questions on the subject. In some cases wilful ignorance is not to be distinguished in its equitable consequences from knowledge. If a person abstains from inquiry because he sees that the result of inquiry will probably be to show that a transaction in which he is engaging is tainted with fraud, his want of knowledge of the fraud will afford no excuse. . . ."

      Another exception is where the creditor does make some representation to the potential cautioner, either spontaneously or in response to a question. The representation then made by the creditor must be full and fair. The creditor must not mislead the cautioner by withholding part of the truth. Again, if there is some fact in the relationship between the creditor and the debtor which is material to the risk and that is a fact which would not be expected to exist and of which the cautioner is excusably ignorant, the creditor must disclose it. Again, if the guarantor makes a statement in the presence of the creditor which demonstrates that he entirely misunderstands the position of the debtor, that also will require the creditor to give a true and accurate explanation. These limitations are recognised in the law both of Scotland and England. Indeed in the consideration of them both in Gloag and Irvine (Cautionary Obligations, p. 708 ff.) and in Halsbury's Laws of England, 4th ed. vol. 20 (1993), p. 26, paras. 126 and 127) reference is made to reported cases from both Scotland and England.

      Lying behind these examples of situations where the creditor is obliged to take steps in the interest of the cautioner is the basic element of good faith. As was recognised by Gloag & Irvine (p. 706) there must be perfect fairness of representation on the part of the creditor in the constitution of the contract. Thus if the creditor misleads the cautioner either by his silence or by some positive representation he will be acting in bad faith and may thereby lose the right to enforce the contract.

      It is apparent that the law of Scotland has broadly developed in harmony with the Law of England. Historically no doubt their respective roots have been distinct but the general principles which are applied are nearly the same (Bell's Comm. I 364). It was observed in Aitken's Trustees v. Bank of Scotland, 1944 S.C. 270, 279 that the decisions on the English cases on matters of general principle may have persuasive authority in Scotland and in Royal Bank of Scotland v. Brown 1982 S.C. 89, 100 it was observed that such decisions are entitled to be treated with great respect. On the other hand due regard has to be paid to the differences in the specialties of the two systems.

      In the present case the pursuer seeks to extend to Scotland the decision in the recent case in this House of Barclays Bank Plc v. O'Brien [1994] 1 AC 180. In that case a bank was seeking to enforce a mortgage over the matrimonial home granted by a husband and wife. The transaction was not to the wife's advantage and carried with it a substantial risk of the husband committing a legal or equitable wrong such as which would entitle the wife to set the transaction aside. This House held that the mortgage was not enforceable against the wife who had signed the deed without reading it in reliance on her husband's misrepresentation as to the effect of it. It was held that in the circumstances the bank had constructive notice of the wrongful representation made by the husband and that the wife was entitled to have the legal charge set aside. This House went further and decided that the principle should apply not only to cases of husband and wife but to all cases where the creditor is aware that the relationship between the surety and the debtor is such that the former will be reposing trust and confidence in the latter in relation to the financial affairs of the debtor. The view was expressed that in all such cases the creditor should be put on his inquiry. The First Division of the Court of Session in Scotland correctly recognised that the decision goes beyond the present situation of the law in Scotland, and, applying the existing Scottish law, declined to follow it. In O'Brien this House consciously sought to extend the law of England, The question for your Lordships is whether a corresponding extension should be made to the law of Scotland.

      My Lords, it is not easy to identify any major distinction between the law in England in this matter as it stood before the decision in O'Brien and the corresponding law of Scotland. It is evident that there was concern in England about the uncertainties which were being experienced in formulating clear guidance in the circumstances of cases such as the present. But the general position appears to have been otherwise comparable. It was accepted before us that the principles on caution in Scotland were the same as those governing surety in England and that the general rules as to the duties of a cautioner were identical in both jurisdictions. It was also recognised that at least on a broad basis the policy considerations which lay behind the decision in O'Brien were applicable North of the Border. The use of the matrimonial home as a security for the business debts of one of the spouses must be a matter of practical experience on both sides of the Border. The only area in which issue was seriously joined was in relation to the proposition put forward by the pursuer to the effect that the law in relation to undue influence was in essence the same in each jurisdiction. The only substantial ground on which counsel for the bank argued that there was a difference between the two systems which could justify a decision not to apply the decision in O'Brien to Scotland related to the law regarding undue influence. While the decision in O'Brien touches on what was referred to in English law as the "invalidating tendency" or the law's "tender treatment" of married women that does not seem to be at the heart of the decision and was not prominent in the argument before the House in the present case.

      Now it has to be noticed that in the present case the pursuer bases her case solely on misrepresentation. In the course of the argument her counsel confirmed that that was the sole basis and that she was not presenting a case based on undue influence. However, the reasoning in O'Brien does touch upon the matter of undue influence and it was in that context that the principal dispute in the present appeal arose. The point of difference between the two jurisdictions which counsel for the bank sought to draw was that in England there was a recognised rebuttable presumption of undue influence arising out of certain relationships while in Scotland there was no such presumption. The point was focused by Professor Walker (Civil Remedies, (1973) p. 155) under reference to a scholarly article by W.H.I. Winder entitled Undue Influence in English and Scots Law (1940) 56 L.Q.R. 97. However, in Harris v. Robertson (1864) 2 M. 664 Lord Kinloch referred to "a presumed undue exercise of the influence which an agent possesses over his client", although, as Professor Walker observes in his work on The Law of Contracts and Related Obligations in Scotland, para. 15.29, his Lordship founded only on English authority. It appeared from the study of a number of Scottish cases which counsel for the bank reviewed that no obvious recognition is given in Scotland to any established presumptions in this area of the law. But on the other hand in Honeyman's Executors v. Sharp, 1978 SC 223, Lord Maxwell without defining the limits of the kinds of cases to which the principle of undue influence might arise recognised, at p. 230, that:

"there must be cases where the facts as proved raise a prima facie inference that a gift has been acquired by abuse of a position of trust and which at least cry out for an explanation even though the precise mode of abuse is not known and might indeed be too subtle to be readily capable of precise expression."

The reception from England of the concept of undue influence as a ground of action distinct from fraud was clearly established in Gray v. Binny (1879) 7 R 332, but in relation to contracts between close relations the necessity for fairness and avoidance of undue pressure had already been recognised. In Fraser v. Fraser's Trustees (1834) 13 S. 703, 710, the Lord President, Lord Hope, observed:

"where bargains and contracts are entered into between persons standing in the relationship to each other, such as that of husband and wife, parent and child, every thing ought to be done as fairly, equally, openly and candidly as possible."

It is unnecessary to explore all the kinds of relationships in which the possibility of undue influence may now be admitted. At least in the context of wills close personal relationships may prompt a perfectly proper influence towards the benefit or support of those who are dependent upon a testator (M'Kechnie v. M'Kechnie's Trustees, 1908 S.C. 93). if influence is exercised in genuine devotion to the interests of the person influenced reduction may not lie (Forbes v. Forbes' Trustees 1957 S.C. 325). But if the required elements are present to establish an abuse of a trusted and influential position there seems to be no good reason why reduction of a contract should not be available where the contracting parties are husband and wife. And so far as the recognition of any presumption is concerned, even if it be the case that Scotland has never accepted that there is a presumption of undue influence in the formation of contracts between husband and wife, it is evident that despite the so-called "invalidating tendency" England did not recognise any such a presumption in the case of a husband and wife (Bank of Montreal v. Stuart [1911] AC 120, 137), so that in that respect at least the position seems to have been the same. In any event the existence of any such presumption in the context of undue influence is primarily of evidential significance and does not seem to be of such general materiality as to prevent development of the Scottish law on the substantial issue which is now before the House.

      Counsel for the bank cautioned against the imposition of a change in the law of Scotland where, as was recognised in Invercargill City Council v. Hamlin [1996] AC 624, a monolithic uniformity might be destructive of the individual development of a distinct common law system. But in the present case we are dealing with an area of the law whose development has for a long time been influenced by decisions on the other side of the Border. I am not persuaded that there are any social or economic considerations which would justify a difference in the law between the two jurisdictions in the particular point here under consideration. Indeed when similar transactions with similar institutions or indeed branches of the same institutions may be taking place in both countries there is a clear practical advantage in the preservation of corresponding legal provisions. Furthermore, the development which is here proposed is one which is of clear advantage and usefulness to those who may be prompted to join with a spouse or other close companion in the granting of a security over their home or other property with grave disadvantage to themselves, which they may not even fully appreciate, and with a particular benefit to the business interests of the companion. Of course, in many cases such transactions may be entered into with full knowledge and understanding. It is not to be supposed or presumed that simply because there is a close personal relationship the security will be given otherwise than with a full and free consent, that is to say with a full understanding and a truly voluntary consent. But to require the creditor to take some initiative where the circumstances of the case may reasonably seem to give rise to the risk that the cautioner's consent is not full and free does not necessarily create as matter of the law of evidence any presumption in the proving of any ground of reduction. What it does is to render it less easy for the creditor to challenge a reduction of the security if the cautioner seeks to take that course.

      I have not been persuaded that there are sufficiently cogent grounds for refusing the extension to Scotland of the development which has been achieved in England by the decision there in Barclays Bank Plc. v. O'Brien [1994] 1 AC 180. On the contrary I take the view that it is desirable to recognise a corresponding extension of the law in Scotland. But the basis on which that might be done requires consideration. The route which this House took in developing the law in O'Brien related substantially to the concept of notice. It was pointed out that such a concept is not unknown in Scotland and reference was made in particular to Rodger (Builders) Ltd. v. Fawdry, 1950 SC 483. But the basis on which the Court proceeded in that case was not in terms the doctrine of notice, which is properly a development of the English principles of equity, but rather a recognition of the requirement of good faith on the part of the second purchaser. As was noticed in Trade Development Bank v. David W. Haig (Bellshill) Ltd. 1983 S.L.T. 510, 517, the decision in Rodger (Builders) Ltd. v. Fawdry rested upon the broad principle in the field of contract law of fair dealing in good faith. The point can, as the Lord President observed in the present case, be expressed in Scotland in terms of personal bar. That approach may serve as a defence to enforcement against the cautioner by the creditor. But in the present case the cautioner is seeking reduction of the contract against the creditor. This could be expressed in terms of a legal fiction that the bank should be treated as a party to the misrepresentation. But that may only be describing the effect and not explaining the principle.

      It was not disputed that effect could be given in Scotland to the decision in O'Brien by the use of the concept of constructive notice. Reference was made to a footnote in paragraph 13A of Bell's Principles, 10th ed., where it is indicated that notice of fraud which may prevent a third party from taking benefit from a fraudulent transaction includes knowledge of facts and circumstances which ought to have put them on their inquiry. But it seems to me preferable to recognise the element of good faith which is required of the creditor on the constitution of a contract of cautionary and find there a proper basis for decision. The law already recognises, as I have sought to explain, that there may arise a duty of disclosure to a potential cautioner in certain circumstances. As a part of that same good faith which lies behind that duty it seems to me reasonable to accept that there 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. Such a duty does not alter the existing law regarding the duty, or the absence of a duty, to make representations. Nor does it carry with it a duty of investigation. This is simply a duty arising out of the good faith of the contract to give advice. It is unnecessary on the approach which I have suggested to deem the creditor a potential participant in any misrepresentation by the debtor.

      In extending to Scotland the development of the law which was achieved in Barclays Bank Plc. v. O'Brien it is desirable to say something more about what the effect of it should be. 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. Of course if the creditor, acting honestly and in good faith, has no reason to believe that there is any particularly close relationship between the debtor and the proposed cautioner the duty will not arise. It is unnecessary to attempt any further classification or analysis of the range of personal relationships. Given the range of circumstances in which persons may be prepared or prevailed upon to act as cautioners it seems to me unwise to endeavour to make any more precise formulation but to leave the matter to the application of common sense to the circumstances.

      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. Whether there has in fact been or may yet be any conduct by the debtor directed at the cautioner which might vitiate the contract is not a matter necessarily to be explored by the creditor. 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. Of course, in accordance with the existing law, he will still have the duty to make a full and honest disclosure if occasion arises for that to be done. But apart from that it seems to me that the giving of the warning and the advice should be sufficient so far as Scots law is concerned to fulfil the duty on the creditor and secure that he remains in good faith in relation to the proposed transaction. As was recorded by the Lord President a practice has been recognised by banks and building societies of advising private individuals proposing to act as guarantors or cautioners for the liabilities of another to issue a warning regarding the consequences and to point out the importance of receiving independent advice. This practice may extend more widely than is required by the duty which I have described in so far as it may not be limited to cases where a close personal relationship exists, but adoption of the wider practice would clearly help to obviate any practical problem in deciding whether or not the duty arises in any given case.

      In my view the appeal should be allowed so that the case may proceed to a proof before answer.