EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Osborne Lady Smith Lord Wheatley	[2011] CSIH 23 XA20/10 OPINION OF THE COURT delivered by LORD OSBORNE in appeal from the Sheriffdom of Glasgow and Strathkelvin at Glasgow by BANK OF SCOTLAND PLC Pursuers and Respondents; against WILLIAM FORBES Defender and Appellant: _______

Pursuers and Respondents: Hawkes; McClure Naismith, Solicitors, Glasgow

Defender and Appellant: Party

18 March 2011

The background circumstances

[1] In this action, the pursuers and respondents seek a decree for payment to them of the sum of £15,000, with interest, against the defender and appellant. The basis of the action is a Personal Guarantee granted by the appellant to the respondents in respect of all sums owed from time to time to the respondents by Fairclaim Limited, executed by the appellant on 30 June 2003. By virtue of clause 2 of the Guarantee, the total amount recoverable thereunder was limited to £15,000, plus interest as specified therein. The Personal Guarantee is reproduced as Item 1 in the Appendix to this appeal. The appellant was at one time a director of Fairclaim Limited, "the company". In condescendence 2 of their pleadings, the respondents set out certain details of the business relationship between them and the company, which included the establishment of a business current account. Between March 2001 and 22 June 2003, the company allowed the current account to become overdrawn without the authorisation of the respondents. The respondents aver that, on or around 10 December 2002, the company sought an overdraft facility from the respondents who, in their discretion declined to grant such a facility, on the basis that they took the view that it was not viable to grant that facility at that time, taking into account the information provided to them by the company, in connection with that application. The respondents aver that the company sought a review of that decision, which was carried out. The outcome of that review is revealed in letters written by the respondents to the company dated 20 February and 17 April 2003. However, the respondents aver that on or around 23 June 2003 an overdraft facility was placed on the company current account with a limit of £4,000. No guarantee was provided by any person in relation to that facility. The company drew sums down in terms of that facility. It is averred that that facility expired on 20 July 2003. The respondents go on to make the following averments:

"The Borrowers made arrangements with the Governor and Company of the Bank of Scotland to have a Business Overdraft Facility placed on the Current Account with a limit of £15,000. On or around 17 June 2003 the [respondents] met with William Alexander, a Director of the Borrowers at that time to discuss the Borrowers' business plan. On the information provided by the Borrowers the [respondents] took the view that the business plan was achievable. On or around 8 July 2003, the [respondents] carried out scorecard assessment to enable them to consider whether to approve the Business Overdraft Facility for £15,000 sought by the Borrowers. The scorecard assessment involves considering a statement of assets and liabilities in relation to the Borrowers. Having considered the Borrowers' business plan and having carried out the scorecard assessment the [respondents] approved the Business Overdraft Facility. The Business Overdraft Facility was processed on 17 July 2003 and the arrangement fee of £75 was charged to the Current Account on 17 July 2003. Draw down of funds in terms of the Business Overdraft Facility was made available on the Current Account with effect from 21 July 2003."

The respondents further aver:

"In or around June 2003, the [appellant] mentioned to Ian Brocket of the [respondents] that he was prepared to grant a guarantee in respect of a company called Fairclaim Limited. Ian Brocket did not deal with any bank account held by Fairclaim Limited with the [respondents]. The [appellant] asked Ian Brocket to advise the relevant manager of Fairclaim's account that he was prepared to grant such a guarantee. Ian Brocket advised the manager for Fairclaim Limited of the [appellant's] offer of a guarantee as requested by [him]. Ian Brocket had no further involvement or knowledge of the Fairclaim Limited account. The [appellant] did not make any request of Ian Brocket as to the financial state of Fairclaim Limited and Ian Brocket could not have provided such information as he was not the manager of the Fairclaim Limited connection. Ian Brocket was not involved and was not a party to the decision as to whether to approve the £15,000 overdraft granted to the Borrowers on or around 17 July 2003."

[2] The respondents in condescendence 4 go on to make extensive averments about the business relationship between them and the company, which, for the present purposes, need not be narrated. However, they go on to aver that they wrote on 22 November 2005 formally demanding immediate repayment of the sums due by the company in respect of the sums overdrawn under the current account, which totalled £19,180.44 plus interest. The company failed to make payment as requested. They also aver that the company was dissolved on 25 January 2008. In condescendence 5, the respondents aver the circumstances in which they have come to raise the present action on the basis of the guarantee. They aver that the appellant has failed to pay the sums due to them in terms of the guarantee.

[3] The appellant's defence to the present action is set forth in Answer 2. Certain matters must be highlighted from his averments. In the first place, he avers that he was unaware of previous debts of the company and in 2003 was unaware of the various appeals and investigations into the refusal of the company's loan application of November 2002. The appellant then goes on to make averments concerning the circumstances in which he came to sign the Guarantee. He explains that, at the beginning of June 2003, he had entered into a contract for the sale of his business and had planned retire to Spain. He was at that time and remains a client of the respondents. His manager for banking purposes was Mr Ian Brocket. The appellant and Mr Brocket were in the habit of meeting socially at intervals, when the appellant's business affairs were discussed. The appellant goes on to aver:

"As the [appellant] was intending to leave for Spain, [he] asked the [respondents'] Mr Ian Brocket (among other business matters) to establish what the problem was with the Borrowers' overdraft application. The said Ian Brocket asked the defender if he would still act as Guarantor. This occurred in a telephone call between the [appellant] and Ian Brocket on or about 23 June 2003, before the guarantee was sent to the [appellant's] solicitors. Mr Brocket responded that there was no problem and that matters would be sorted before the [appellant's] departure at the end of that month. He neglected to tell the [appellant] that the bank had already approved a facility without security. At no point did Mr Brocket suggest that the application had been refused on grounds of viability; that the previous debts of the Borrower were being considered as part of the process or that an unsecured overdraft had by that time already been granted even although he knew of the situation. During the week beginning 23 June 2003, Mr Brocket made further contact with the [appellant] suggesting that the limit of Guarantee be increased from £4,000 to £15,000 to cover all possible eventualities in the future whilst the defender was abroad...It is clear that the response to the request made by the [appellant] of the [respondents'] manager, Mr Ian Brocket, was not met with the perfect fairness which is to be expected in a contract of caution. Mr Brocket knew and did not advise that

(i) the previous application had been refused on grounds of viability;

(ii) the fact of the Borrower's previous unpaid debt to the bank was an issue;

(iii) the [respondents] had already granted the Borrower an unsecured overdraft in the sum of £4,000;

(iv) at the time of soliciting the higher level of guarantee, there had been no assessment carried out as to whether the borrower was considered able to repay a debt of £15,000.

(v) the increased guarantee solicited by him for 'future' events would be used to immediately increase the facility to the Borrower;

(vi) there was no request by the Borrower for the increase (sic) facility of £15,000.

Had the [respondent] been advised on any of these issues, the Guarantee may not have been given and would certainly not have been given at the increased level requested by the [respondents'] manager.

...

Mr Brocket failed to observe fair dealing in good faith. As such, his actions and/or inactions personally bar the pursuers from enforcing the Guarantee."

Two pleas-in-law have been tabled on behalf of the appellant in the following terms:

"1. The [respondents] having failed in their duty of fairness in disclosing facts to the intending Cautioner and the [respondents] being in breach of their duty the Guarantee is unenforceable.

2. Separatim, the guarantee should be set aside ope exceptionis."

The respondents have tabled a plea to the effect that the appellant's averments are irrelevant and that decree should be granted as craved, plea-in-law 2.

Procedure in the Sheriff Court

[4] The case called before the sheriff on 30 July 2009 for a debate in respect of the respondents' plea-in-law 2. On 10 December 2009, the sheriff, having resumed consideration of the case sustained plea-in-law 2 for the respondents and granted decree against the appellant for payment to the respondents of the sum of £15,000 with interest thereon as specified. In paragraph [70] of his opinion, the sheriff says:

"The defender makes much of the obligations on the pursuers to have perfect fairness in making representation to a potential cautioner. This presupposes that the bank had been placed in the situation where it was obliged to make disclosures. The issue here is what information the bank was obliged to disclose in light of the limited information sought by the defender. This is at the heart of the case."

However, he goes on to conclude in paragraph [74] that the appellant had not averred that this case fell within one of the exceptions to the general rule that a bank was under no obligation of disclosure to a potential guarantor.

[5] The appellant thereafter appealed that decision to the Sheriff Principal, who heard the appeal on 8 January 2010. On 22 January 2010, the Sheriff Principal refused the appeal. Against that decision, the appellant has now appealed to this court.

Submissions of the appellant

[6] When the appellant appeared before us he was not legally represented. However, he had prepared an extensive written Note of Arguments to which we refer. He moved the court to recall the judgment of the Sheriff Principal, which had affirmed the judgment of the sheriff, and to allow a proof before answer on the whole case. He drew our attention to several authorities, which he contended were of assistance, beginning with Law of Rights in Security (1897), Gloag and Irvine at page 706 and following. He recognised that the authors stated that, in an ordinary case, there was no universal obligation on a creditor to make a disclosure of the whole state of affairs affecting a debtor to a proposed cautioner. However, as was observed at page 708, where the creditor, either spontaneously, or in reply to questions by a proposed cautioner, does make a representation, the representation must be a full and fair one. If the creditor in making a statement concealed any facts which obviously or materially affected the risk or misrepresented the facts, the cautioner would be liberated. He went on to draw to our attention Young v The Clydesdale Bank Limited & Another (1889) 17 R. 231, The Royal Bank of Scotland v Greenshields 1914 SC 259 and Smith v Bank of Scotland 1997 S.C. (H.L.) 111. The appellant's position was that the Guarantee would not have been granted at the level of £15,000 if the bank had made a full and fair declaration of the factual background, in response to his question to Mr Brocket. In particular, he contended that the respondents should have informed him that they had not obtained a guarantee and that they had previously granted a facility for £4,000 without one. The position had been that the company was a known defaulter and one of their business plans had been deemed non-viable. While the appellant recognised that Mr Brocket was not the business manager for the company, he had been the representative of the respondents with whom he had dealt in relation to the guarantee. The appellant indicated that he had indeed been a director of the company at an earlier stage, but had left it in early 2002. There had been quite a long and involved history of dealings between the respondents and the company in relation to the provision of overdraft facilities to them, which had not been disclosed to the appellant. Furthermore, it was evident that, at the time when the appellant made his enquiry of Mr Brocket, negotiations were continuing between the company and the respondents concerning the provision of an overdraft facility of £15,000. It was evident from the respondents' own averments that the granting of that facility was still under consideration around 8 July 2003, when they carried out an assessment to enable them to consider whether to approve the facility. It was to be inferred from the circumstances that the bank had not been willing to take a risk with the company, which was why the guarantee had been sought from the appellant, yet the bank had not been frank about that situation.

Submissions of the respondents
[7] Counsel for the respondents moved the court to refuse the appeal. There had been prepared a written Note of Arguments on behalf of the respondents, to which we refer. Counsel elaborated its contents orally. One of the difficulties that existed in the present case was that documentation relating to the facilities that were accorded to the company had been lost. Attempts had been made to locate the material, but these had been unsuccessful. Counsel pointed out that, for whatever reason, the pleadings formulated on behalf of the appellant did not seem to reflect the position which he now wished to advance. The averments did not properly disclose any negotiations relating to overdraft facilities other than those in 2002 and latterly those which resulted in the granting of a facility of £15,000. The crucial averments of the appellant were to be found at page 8 of the appeal print, but those averments had been held to refer to what might be called the second application for facilities, not the earlier one which had been refused. It might have been expected that the appellant would have amended his pleadings to bring them more into line with what he had claimed orally was the position. Upon the construction of the pleadings adopted by the respondents, the decision of the sheriff was correct and had been rightly affirmed by the sheriff principal. The premise upon which he had proceeded was that the question which the appellant had posed related to what might be called the second application for facilities. However, it was acknowledged that the pleadings were not in an ideal state.

[8] Counsel said that there appeared to be no difference between the parties in relation to the law applicable to the case. It was set out in the several authorities to which the appellant had referred. In relation to the third of the decided cases referred to, Smith v The Bank of Scotland, surprisingly it appeared that there might be an error in the judgment of Lord Jauncey of Tulllichettle at page 113F, where he used the word "presentation" in a context in which it appeared that what was intended was the word "representation". In the passage concerned he had been quoting from the Law of Rights in Security, Gloag and Irvine, where what was referred to was a "representation" by the creditor. The proper rule was that explained fully by Lord Clyde at page 117-118 of the decision. Upon the basis that the answer given by Mr Brocket related to the second application for facilities, it was accurate and proper.

The decision

[9] It was evident from the submissions made to us that there was no difference of view between the parties as to the law which is applicable to a case of this kind. The fundamental position is stated in Law of Rights in Security (1897) of Gloag and Irvine at pages 706-710. At page 706, the learned authors say:

"At the same time, in the ordinary case, there is in guarantee no universal obligation on the creditor to make disclosure of the whole state of matters to the propose cautioner; in other words, guarantee is not, like insurance, a contract uberrimae fidei, where full disclosure is required on the part of one of the contracting parties."

However, at page 708 the authors continue:

"On the other hand, where the creditor, either spontaneously or in reply to questions by the proposed cautioner, does make a representation, the representation must be a full and fair one."

The position as described was affirmed in Young v The Clydesdale Bank and Royal Bank of Scotland v Greenshields. Most recently this area of the law has been considered in Smith v Bank of Scotland. At page 117, Lord Clyde set out his view of the law, which was to the effect that there was, in general, no obligation on the creditor to make any disclosure to the cautioner about the financial position of the debtor. However, he went on to identify certain exceptions to that rule. He said:

"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."

In the light of this acknowledged formulation of the law, the issue before us is whether it has been properly applied to the circumstances of this case, as disclosed in the averments of the parties. In regard to that, it must be recognised that the averments of the parties appear to us, to some extent, to lack appropriate coherence and lucidity and do not seem to wholly reflect the position that the appellant advanced in argument. That became increasingly apparent as we were addressed by him. However, the test to be applied in determining whether averments in defence of an action are or are not relevant does not depend upon the elegance or lucidity of the pleadings. The test which we consider has to be applied is the counterpart of that applied in testing the relevance of a pursuer's claim and is whether, assuming a defender proves all the averments that he has made, his defence is bound to fail. Looking at the matter in that way, we cannot affirm that the appellant's averments are irrelevant. What is averred at page 8 of the appeal print in Answer 2 is crucial. It is there averred that in his discussions with Mr Ian Brocket, the relevant representative of the respondents, the appellant asked:

"What the problem was with the Borrower's overdraft application. The said Ian Brocket asked the defender if he would still act as guarantor. ... Mr Brocket responded that there was no problem and that matters would be sorted before the defender's departure at the end of that month."

It appears that that interchange took place against a background of matters that is more particularly described in the respondents' own averments at page 3 of the appeal print in condescendence 2. What is averred there is that, as at at least as early as 17 June 2003, negotiations were taking place between the company and the respondents concerning the granting of enhanced overdraft facilities. An overdraft facility was granted on 23 June 2003 with a limit of £4,000. Around 8 July 2003 the respondents carried out an assessment to enable them to consider whether to approve a business overdraft facility for £15,000, which was sought by the company. It was not until 17 July 2003 that that facility was granted. Since the conversation between the appellant and Mr Ian Brocket is averred to have taken place on 23 June 2003, it might have been expected that a full and fair representation on the part of the respondents would have involved an indication of the nature of the ongoing negotiations between the company and the respondents and the fact that an unsecured overdraft of £4,000 had been or was about to be granted that day. Plainly the appellant's question to Mr Ian Brocket was capable of being seen as a request relative to the state of affairs at the time when the question was posed. It would hardly be realistic to suppose that the question was designed merely to elicit information of historical interest only relating to overdraft facilities which had in the past either been declined or granted. Against this background we have concluded that the appellant has averred enough to entitle him to an inquiry to determine whether the respondents' response to his enquiry on 27 June 2003 amounted, in all the circumstances, to a full and fair representation or not.

[10] We feel it necessary to say that, having regard to the state of the pleadings which we have described, it would be in the interests of the appellant and, it might be, of both parties if they were to review the state of their pleadings with a view to considering whether amendment is necessary. In particular, it became apparent during the course of the debate before us that, at a proof, the appellant might wish to testify concerning matters which are not properly focussed in his pleadings. However, that is essentially a matter for which the parties themselves must be responsible.

[11] In all these circumstances we shall recall the interlocutor of the Sheriff Principal, dated 22 January 2010 and the interlocutor of the sheriff, dated 10 September 2009 and allow parties a proof before answer.