After a lengthy period of silence, a new case in the Court of Session reminds lenders that a high degree of care is required where a wife is granting a security on account of her husband's debts. We examine what lessons might be learned.
In the case of Smith -v- Bank of Scotland 1997 SC (HL) 111, the courts extended the English legal position which they had formulated in the case of Barclays Bank plc -v- O'Brien into Scotland. Thus, where a spouse was granting a security for his or her spouse's business debts, the court imposed a duty on creditors to warn a potential cautioner (the Scots term for a person granting a Guarantee or security on another's debts) of the consequences of entering into the proposed arrangements and to advise him or her to take independent advice.
Following Smith, there were a series of cases litigated in the Court of Session which further defined the parameters of the principle - so, for example, the cautioner required to prove an actionable wrong by his/her spouse in order to have a remedy (Braithwaite -v- Bank of Scotland 1999 SLT 25); the lender may infer from the involvement of solicitors on the cautioner's behalf that proper advice was being given and did not require to involve itself in the content of that advice nor any potential conflicts of interest on the part of the solicitors (Forsyth -v- Royal Bank of Scotland plc 2000 SLT 1295); that the principle in Smith was not retrospective (Clydesdale Bank plc -v- Black 2002 SC 555).
For a number of years, however, this area of law had gone quiet, apparently settled.
However, the question of whether security given by a wife for her husband's debts can be challenged has been raised again in the recent case of Cooper -v- Bank of Scotland plc, in which Lord Tyre issued his opinion on 30 January 2014. Whilst the outcome turns primarily on the facts, it is a judgment of which lenders in Scotland will wish to take note.
In this action Mrs Cooper's husband had gone into business with their son, bottling and selling water from an artesian well on a property they owned. Mr & Mrs Cooper held a mortgage with the defenders, secured by an all sums security. The defenders also advanced overdraft facilities to the husband's business and deemed those liabilities to be covered by the security.
The business began to fail and personal guarantees were sought. Mr Cooper signed a personal guarantee, whilst Mrs Cooper did not (and it appears that this was never pressed). At some point, Mr Cooper arranged a remortgage with Halifax plc. The mortgage lending was paid off and the Bank's security was discharged.
At some later point, the Bank discovered that the security had been discharged without payment of the guarantee obligation having been made. Their solicitors sent out a fresh security for execution with a covering letter explaining that "this replaces the similar document signed by you in 2002" and this was duly executed and registered.
Ultimately, the Bank called up the security and this action was raised by Mrs Cooper, claiming that she was unaware of the Guarantee and of the security, had never taken advice on it and (whilst it was established that she had signed the security) that she had been presented only with the signing page, had not known what she was signing and had never been advised to gain legal advice. The court found in fact that Mr Cooper had misled her as to the nature of the second security, claiming that it was a remortgage to shorten the term of their secured loan.
The court analysed the law as it was developed by Smith and some of the subsequent cases referred to above. The court identified that the elements which required to be in place in order for a security of this nature to be challenged were:-
- the security required to be gratuitous on the part of the cautioner
- there must be proof of an actionable wrong by the husband on the wife
- that the lender had not been in good faith, within the meaning of Smith
- there must be a causal link between the lenders' failures and the execution of the security
In relation to (1), it was accepted by the Bank that the security was gratuitous in that Mrs Cooper derived no benefit from it. In relation to element (2), the court was satisfied on the evidence of Mr Cooper that he had committed an actionable wrong against his wife through his concealment of the true position.
The court also held that the requirement of good faith had not been met by the Bank. They had failed to make any attempt to bring to Mrs Cooper's attention the consequences for her of signing the security, nor advised her to take legal advice. The security had arrived with a cover letter "in bland terms" which conveyed the impression that the fresh security was a mere formality. The requirement at (3), above, was therefore held to have been satisfied.
The court also held that there was a causal link between these factors and the signing of the security. The court accepted the pursuer's evidence that had she known the true position she would not have signed. The requirement at (4) was therefore satisfied.
The court therefore granted the orders sought by the pursuer.
With hindsight, it is perhaps easy to see what went wrong here - there having been a previous security discharged in error, the lender's solicitors appear to have treated the granting of the fresh security as a mere formality. It appears they did not therefore take the care that might have been expected had this been "new" security.
It is clear that the courts expect lenders to have the same degree of care at every stage in the life cycle of a business lend - whether it be a brand new security or a replacement of existing security. It is a matter of which lenders (and the solicitors who act for them) will take note.