Scottish Court of Session Decisions

This case came up by reclaiming note against an interlocutor pronounced by the Lord Ordinary ( Young) as follows:—

“ Edinburgh, 21 th March 1875—The Lord Ordinary sustains the claim of the Commercial Bank of Scotland to the extent of Two thousand seven hundred and thirty-two pounds three shillings and tenpence, and ranks and prefers the said Bank accordingly: And with respect to the amount of the funds belonging to the estate of the late Peter Laing Gordon, deposited in the said Bank (subject to the arrestments at their instance) in the name of Mr A. G. Smith, as Judicial Factor on that estate, and forming part of the fund in medio in this process, Finds that the said amount (including interest to this date) is Five thousand five hundred and twenty-five pounds six shillings and ninepence, and that the Bank is bound to account therefor, and to pay the same to the real raiser, as representing the parties entitled to the said estate, under deduction of the foresaid sum of Two thousand seven hundred and thirty-two pounds three shillings and tenpence, for which the claim of the said Bank has been sustained, and of any claims by the Judicial Factor on said fund, which claims are reserved entire, and decerns accordingly; Finds the said Bank entitled to expenses, subject to modification, and remits the Account to the Auditor,” &c.

His Lordship delivered the following Opinion in causa, in which the circumstances of the case are sufficiently detailed:—

The question in this case regards the extent to which the Commercial Bank are entitled to enforce payment of a promissory note for L.10,000, granted to them by Mr John Duncan of Aberdeen, and Mr Gordon of Craigmyle, both now deceased, against the estate of the latter.

The note being in common form, the Bank, as the holders, are of course entitled to enforce payment in full against Mr Gordon's estate—he being an admitted obligant on the face of it—unless it shall appear that their right is limited by some writing habile for the purpose, or by the contract, duly established, on which they received it or continued to hold it.

The parties took the precaution of putting their contract into writing, and it is to be found in the letter of 12th January 1864, (quoted on page 50 of the Record), which was prepared by the Bank, and signed by Duncan and Gordon, the obligants on the note. It is remarkable that this document is not subscribed by the party whose right is thereby limited, but by the parties in whose favour it is limited. It is, however, admitted by both parties that the letter contains the contract on which the Bank received the note, and that it must have effect accordingly, except in so far as it may have been subsequently altered; and it was in fact subequently altered.

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The parties differ as to the construction of this letter, and on this point two questions were raised, and elaborately and ably argued. The first was, whether the promissory note was pledged to the Bank as a security for L.10,000, if so much should be due by Duncan after the 650 shares of the Deeside Railway Company were realized and placed to his credit (as the Bank contend), or whether the note and the railway shares together were pledged as a security for L.10,000, the note being enforceable for only so much of the secured L.10,000 as the proceeds of the shares when realized should be insufficient to meet (as contended for by Gordon's factor). The second was, whether the security was confined to Duncan's debt on current account, or extended to the debt which he might owe to the Bank in any manner of way.

1. On the first question, my opinion is against the Bank, and in favour of Gordon's factor. I think the note was, according to the terms of the letter, only pledged as a guarantee that the railway shares (being a very speculative property) should prove a good security for L.10,000, and that recourse upon it could only be had to cover a deficiency on realization of these shares. The note was not given as a security for L.10,000, in addition to such sum as the shares should prove good for. On the contrary, the security was for L.10,000 in all; although two pledges were given, with the condition that the one (the railway shares) should be realized and imputed in payment of the secured sum before recourse was had on the other (the promissory note).

2. On the second question, my opinion is in favour of the Bank, and against Gordon's factor, for I find it impossible to disregard, or by construction to put another than the plain and natural meaning on the words, ‘any debts due or to be due by the said John Duncan in any manner of way whatsoever.’

3. But the contract, as constituted by this letter of 12th January 1864, was not allowed to stand unchanged. For by letters to the Bank, of date l6th and 17th December 1864, Mr Gordon consented that the 650 Deeside Railway shares should be transferred “to another party,” on “behalf of Mr Duncan,” who was then carrying out some “financial arrangements,” into the particulars of which it is, in my view of the case, unnecessary to enter. The shares were accordingly transferred by the Bank, who, in respect thereof, and as part of Mr Duncan's “financial arrangements” at that time, received the sum of L.7281, 6s. 3d., which was duly placed to his credit. This of course operated, with Mr Gordon's consent, a change in the position of matters. The Bank continued to hold the promissory note under the letter of 12th January 1864, as a security for Mr Duncan's debt to the extent of L.10,000, but they no longer held the railway shares, in terms of that letter, as a security to be primarily used in relief of that constituted by the promissory note. It is contended by Gordon's factor that Gordon was immediately entitled to the benefit of the sum of L.7281, 6s. 3d., which the Bank received for the transfer of these shares in December 1864, to the effect of reducing the amount for which his promissory note was pledged from L.10,000 to L.2718, 13s. 9d. But his letters consenting to the transfer of the shares contain no such condition, and I am unable to imply it. Whether or not the Bank would, if asked, have agreed to such a condition, I cannot say; but they certainly did not agree to it, and I can see very good reasons why they should have refused. But looking to the amount of the debt claimed by the Bank (L.2804, 15s. 8d.), success on this point, contrary to my opinion, would be of trifling advantage to Gordon's estate, unless accompanied by success in the points remaining to be noticed.

4. The shares in question, being obtained from the Bank, were, along with other shares, pledged by Duncan to Sir David Baxter and Mr Gordon of Cairnfield, in security of loans obtained from these gentlemen, Mr Gordon of Craigmyle being a party along with him, ostensibly as a principal, but really only as a cautioner, to the deeds by which the loans were effected. These loans were repaid by means of partial payments from time to time, from the produce of the shares held by the lenders in security, and otherwise, but not to any extent by Mr Gordon of Craigmyle, or with his funds. When the repayment was complete, there remained a balance of the proceeds of the shares, amounting in round numbers to L.3000, which the Bank, as Duncan's creditor, arrested. Mr Gordon of Craigmyle being then dead, his executor disputed the Bank's right to the money, and claimed it as due to him by the terms of the deeds of security to which Mr Gordon was a party. The money was eventually paid to the Bank upon an arrangement, that the question of right should remain open for subsequent determination. It has now to be determined, the contention of the Bank being that the money is only to be credited generally (as they have credited it) in Mr Duncan's account, while Gordon's factor contends that it must all be imputed in diminution or extinction of Mr Gordon's cautionary obligation.

I am of opinion that the contention of Gordon's factor is not well founded. The shares which produced the money were not Mr Gordon's but Mr Duncan's. The former never had any right or title to them. He was no doubt a party to the deeds by which Duncan, the owner, pledged them to his creditors, Sir David Baxter and Mr Gordon of Cairnfield, but he was in truth only a cautioner. Had he been called on to pay the debts in whole or in part, he might have demanded a transfer of the shares from the creditors, in order to operate his relief of what he had paid to them as Duncan's cautioner, but he never paid or was called on to pay any part of these debts. I must therefore hold that the balance of the price remaining after paying the debts belonged to Mr Duncan, who was the owner of them; and that, whether well attached by the Bank's diligence or not, it is applicable to the reduction of his debt generally, without any right on the part of Gordon or his estate to have it otherwise applied.

5. The next question in the case relates to certain shares in the Bank of Otago, which Duncan transferred to the Bank in February 1866 as a security for his debt on account current. There is no question that the proceeds or value of these shares must be credited to Duncan's account, and that they have been so. But Gordon's representative maintains that the whole amount ought to be imputed in diminution or extinction of the security afforded by the promissory note, and for this contention I see no ground whatever. Nothing short of a bargain with the Bank (express or implied) could limit to their prejudice the security afforded by the promissory note under the letter of 12th

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January 1864; and there is, in my opinion, no evidence of such bargain with reference to the shares of the Otago Bank. These are therefore to be regarded and dealt with as additional security to the Bank, and not as a security substituted to that extent for the security of the promissory note, which, so far as I see, remained unaffected.

6. The only other question in the case relates to the sum of L.490, paid by Mr Duncan to the Bank on 5th April 1867, for a transfer of shares to that value of the Otago Bank, then held by the Bank in security of Duncan's account, as already noticed. The facts relative to this matter, as gathered from, and I think established by, the correspondence (pages 37, 38, 39 of the print), appear to be, that the money (supplied by Gordon's executor) was on 5th April 1867 paid by Duncan on behalf of Gordon's executor to the Bank for a transfer of the shares to be held as an investment of the executry funds; and that the Bank, although they agreed to make the transfer, and retained the money, have never made it. The money was placed to the credit of Duncan's account, as it was intended it should be, and of course to that extent diminishes the balance due upon it; and it seems clear that Gordon's estate is entitled to the Otago shares of which it was the price, or their value—for the Bank cannot have the shares and the price also. It does not appear why the shares were not transferred to Gordon's executors, who in effect bought them through Duncan; but the admitted fact is, that the bank retained and subsequently realised them along with the other shares which they held in security of Duncan's account, and that the whole proceeds have been credited in bringing out the balance now claimed. Gordon's factor does not ask damages for being disappointed of the shares for which L.490 was paid out of the estate, but only contends that their value (assumed to be L.490) ought to be deducted from the amount for which he would otherwise be liable on the promissory note, and I think the contention is well founded. But the contention will practically affect his liability for the amount claimed by the Bank, or not, according as he shall prevail or not on the other points of his case. Should it be held, contrary to the opinion which I have expressed, that his liability on the note is diminished by the sums obtained by the Bank for Deeside Railway and Otago Bank shares (other than those which ought to have been transferred to Gordon's executor) to an amount less than the balance now due on Duncan's account, he will of course benefit by the present contention—for his liability, already (according to this assumption) below the sum claimed by the Bank, will be still further reduced by L.490, and may even be thereby altogether extinguished. But if, as I think, this sum of L.490 is the only reduction of his liability to which he is entitled, he will take no benefit, for in this view he is liable for Duncan's debt to the amount of L.10,000 minus L.490, while the actual amount of the debt, and consequently of the claim against him on his obligation, is under L.3000. In bringing out the amount of the debt claimed from him he is of course entitled to see that all the sums realised by the Bank from their securities are properly credited. But no question is raised on this head, and indeed it is admitted that they are all credited. The value of the Otago shares immediately in question is, in fact, twice credited, as was proper in the circumstances, according to the opinion which I have expressed; for the Bank, however irregularly, got their value twice over, viz., first, from Duncan when he paid the L.490, and again on the subsequent sale of them by the Bank. To rectify the irregularity, it would be necessary to strike one of the values so received from the credit side of Duncan's account, thereby increasing the balance by that amount, and to credit Gordon's factor with the precise amount by which the debt for which he is liable was thus increased. But as this would obviously not affect the result, it would be idle to order the operation to be performed. There is, besides, this difficulty in the way, that it is impossible to ascertain the exact number of shares to which Gordon's executor was entitled in return for the L.490, and I am unable to deal with the matter more exactly than it was dealt with by the parties, viz., that the question regards Otago shares of the assumed value of L.490. 1 think it clear that Gordon's estate must be credited with this amount as a deduction from the obligation on the promissory note, but, as I have explained, this result is practically attained by the value of the shares in question (assumed to be L.490) being twice credited before striking the balance claimed from that estate by the Bank, the balance itself being greatly within the amount of the obligation on which the claim is made.

Gordon's representative referred to various letters addressed from time to time to Duncan by the officers of the Bank, expressing limits which the Bank had resolved to put to his credit, urging the necessity of new arrangements with further securities, and pressing for reduction of his debt. I have been unable to see the bearing of these letters on any part of the present controversy, for they afford no evidence of any contract or undertaking by the Bank in favour of Mr Gordon of Craigmyle, which imposed on them a special duty to him as a cautioner for Duncan's debt, and by a breach of which they forfeited his security or diminished its value. Indeed, it was not contended that there was in fact any such contract or undertaking.

Having stated my opinion on the several questions which were specially argued, I have to observe, in conclusion, that common prudence and the reasonable safety of business transactions require that a man who pledges his personal security in the familiar and very available form of a promissory note to a bank for advances made, and to be made, to a speculating friend, shall see to it that any limitation upon his obligation as it appears ex facie of the document which he has granted shall be distinctly expressed in some writing expressly or obviously referable to the transaction. The late Mr Gordon certainly so pledged his security for Mr Duncan, a solicitor in Aberdeen, who speculated extensively in railway and other shares, and for this reason required bank accommodation. The only limit to his obligation as debtor in the promissory note which he granted to the bank is that which is expressed in the letter of 12th January 1864, on the meaning and effect of which I have stated my opinion. This arrangement was subsequently altered by Mr Gordon's unconditional consent, given in December 1864, to a transfer of the 650 Deeside shares, which, by the letter of January, stood between him and liability on his note. He was thereafter absolutely bound for L.10,000, if Duncan should owe so much to the Bank on “his account-current

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with the said Bank,’ or ‘any debts due, or to be due, by the said John Duncan in any manner of way whatsoever.” This ia the plain import, and, indeed, language, of the only document relative to Gordon's obligation by his promissory note, and made for the purpose of qualifying or limiting it. His representative now puts before the Court many hundreds of documents passing between other parties and extending over a period of years, and contends that these, when taken altogether, furnish evidence that further limitations were agreed to. I have read the documents without finding such evidence in any of them, or in all of them taken together. But 1 venture to doubt the possibility of thus limiting an obligation by promissory note, or of extending or varying the limitation expressed in a relative document made for the purpose.

I am therefore of opinion that the Bank have a good claim on the promissory note against Gordon's estate for the amount of Duncan's debt, which is greatly within the sum thereby secured, and I sustain their claim accordingly. I will not, however, pronounce an interlocutor to this effect until the objections to the Bank's account have been disposed of, and the amount has been exactly ascertained.”

The trustees of Mr Gordon reclaimed.

At advising—