Northern Rock (Asset Management) Plc v. Jane Steel and Bell & Scott, 19 February 2016 – solicitor’s liability to client’s bank on discharge of security

Background
Inner House case in which Northern Rock sought damages from the solicitor of one of its customers. Headway Caledonian Ltd borrowed sums from Northern Rock to finance the purchase of a Business Park in Hamilton. In return it granted a standard security in favour of Northern Rock. Some years later, Headway’s solicitor sent a draft discharge of the standard security to Northern Rock requesting that it sign and return the document. In the accompanying email, the solicitor stated that the company intended to sell the subjects and redeem the loan. However, that information was incorrect as Headway only intended to sell part of the subjects and to redeem part of the loan. (The reason for the error was unknown.)

Northern Rock (which had not instructed solicitors to act on its behalf in the transaction) relied on the email and granted the discharge of the standard security. The solicitor then registered it in the Land Register. As a result the loan became unsecured. Headway then became insolvent and the Northern Rock raised an action for damages against the solicitor and her firm in respect of its losses.

The solicitor argued that the lender was a third party to whom she did not owe a duty of care.

In the Outer House Lord Doherty agreed with that argument finding that, in the circumstances: (1) it was not reasonable for Northern Rock to rely on the solicitor’s statements without checking them by seeking clarification from the solicitor and/or looking at their file; and (2) that it was not reasonably foreseeable by the solicitor that Northern Rock would rely on the statements without such checks.

Decision
The Inner House allowed an appeal finding that, in the circumstances, it was reasonably foreseeable that Northern Rock would rely on the solicitor’s statements and sign and return the discharges. Consequently the solicitor was to be taken to have assumed responsibility for her statements. The Inner House considered that Lord Doherty had not considered whether it was fair just and reasonable to impose a duty on the solicitor:

“As a consequence of the Lord Ordinary’s approach, he did not go on to consider whether the imposition of a duty of care would be fair, just and reasonable.  The context was, for the reasons I have explained, a background of assumption of responsibility and reasonable foresight of significant economic loss suffered by a bank in a sufficiently proximate relationship with a solicitor who had previously shown herself to be a trustworthy source.  The context was also, importantly, that that solicitor whilst acting outwith her mandate and instructions made a serious error and put in train a series of events which caused the bank to suffer significant loss.  What then of the fact that the loss could have been avoided if, having received the email which ought never to have been written and the attachments which ought never to have been sent, the bank had checked its file?  Does that mean that it would not be fair, just and reasonable to hold the solicitor liable?  I cannot identify any policy reason for doing so.  Nor can I conclude that that fact demonstrates that the solicitor should be relieved of liability.”

The full judgement is available from Scottish Courts here.

 

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Simon Christopher Philip Barr v. Dunbar Assets Plc, 18 March 2016 –potential reduction of guarantee alleged to have been obtained by bank’s misrepresentations

Outer House case in which a property developer (Mr Barr) sought reduction of a personal guarantee executed by him in favour of Dunbar Bank in 2008.

Background
In 2006 Mr Barr and his business partner sought to acquire land near Tain for a development. To do so they established a limited partnership (Edenroc) registered in the Isle of Man which was to purchase the property with funding from Dunbar Bank.

Extensive negotiations took place between the bank and Edenroc during which 6 facility letters (each of which superseded the previous letter and only the last of which was executed) constituting offers of loan were sent to Edenroc by the bank. The first four of the letters made reference to the requirement for a joint and several guarantee to be granted by Mr Barr and his business partner. However, this requirement was not included in the last two letters which made reference (as had the fourth letter) to a requirement for “[a]ny other security as we [the bank] may, at our absolute discretion, require.” The fifth facility letter had been sent with a further separate letter addressed to Edenroc confirming that there was to be a joint and several guarantee granted by Mr Barr and his business partner. That letter also included an annexed form which Mr Barr and his business partner had signed as evidence of their agreement to the proposal.

The formalities of the loan transaction were executed 5 days after the final (sixth) facility letter and Mr Barr attended at Edenroc’s solicitors’ office to sign the personal guarantee. The document he signed was an individual guarantee by him (including a cover page indicating that it was an individual guarantee) and not a joint and several guarantee granted with his business partner.

The development failed in 2011 and the bank sought to enforce the individual guarantee against Mr Barr who sought reduction of the guarantee on the basis that he had been induced into entering it by misrepresentations by the bank.

Arguments
In particular he claimed that the prior facility letters (referring to the joint and several guarantee) were misrepresentations and that one of the bank’s employees (who was said by Mr Barr to have informed him that the bank never called up guarantees). Although Mr Barr accepted that he had signed the guarantee freely, he said he had signed the document without reading it and was unaware of the content and did not think it was necessary to obtain legal advice (although he had signed it in the presence of a friend who was usually his solicitor but in this case was acting for Edenroc).

Decision
Lord Armstrong rejected those arguments, holding that no misrepresentations were made to Mr Barr and that he had not been induced by the bank to sign the guarantee.

Lord Armstrong concluded that no express representation had been made by the bank in terms of the final facility letter that a joint and several guarantee would be required from Mr Barr. As each of the facility letters superseded the last, and only the final letter was executed, it was that letter which governed the documentation required at completion of the loan transaction. (The letters prior to the final letter merely represented ongoing negotiations and the signed form which had been sent with the fifth letter simply indicated Mr Barr’s (and his business partner’s) willingness to provide a joint and several guarantee if the funds had been advanced in terms of that letter (i.e. if the fifth letter had been the final letter)).

Moreover, there was no basis for inferring from the relevant documentation, however implicitly, that the guarantee required would be joint and several. In particular, Lord Armstrong noted that Mr Barr had not been a party to the facility letters (which had been between the Bank and Edenroc- a separate legal entity Mr Barr had gone to some trouble to set up).

Lord Armstrong also found that he did not believe Mr Barr’s evidence (taking account of his previous experience as a developer) that he had not read the document, did not appreciate the significance of what he was doing and, in particular, that he would not have signed the document without the bank’s alleged representations.

In coming to his conclusions Lord Armstrong noted:

“In the context of cautionary obligations it is well settled that as a general rule the cautioner is expected to look after his own interests and to make such enquiries as he considers necessary or appropriate.”

The full judgement is available from Scottish Courts here.

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Royal Bank of Scotland plc. v. William Derek Carlyle, 11 March 2015 – whether telephone call with bank created an obligation to provide funding for the development of land in addition to funding for its purchase constituted in written loan agreements

Background
Supreme Court case concerning agreements between RBS and a property developer. In July 2007 the bank and the developer entered written agreements for loans of £845k and £560k in respect of the purchase of two plots of land at Gleneagles on which the developer was to build two houses.

Argument
The repayment date for the loans was in August 2008 and, when the developer failed to repay the loans at that date, the bank sued the developer for recovery of the funds. However, the developer counter claimed arguing that he had only entered into the loan agreements on the basis of assurances given by the Bank that it would make additional funding (of up to £700k) available to fund development on the plots and claimed damages in respect of the bank’s breach of those assurances. The assurances said to have been given by the bank included a telephone call prior to the signing of the agreements in which the developer was told that, in addition to the sums lent to buy the land, the bank would advance further funding for development of the land.

The central issue for the court was whether, on an objective assessment of the exchanges between the parties, the bank had entered into a legally binding agreement to lend Mr Carlyle the money for development of the plots in addition to money for their purchase.

Court of Session decisions
In the Outer House Lord Glennie found that bank had agreed a “collateral warranty” obliging them to lend for the development of the plots. However, the Inner House allowed an appeal finding that the telephone call only amounted to a statement of future intention and that legal obligations would only arise when the parties entered a written contract[1].

Supreme Court decision
The Supreme Court have allowed an appeal of the Inner House decision.

The court found that the Inner House had disagreed with Lord Glennie on questions of fact without having sufficient regard to the limited role an appeal court has in such questions. (Generally speaking, a court of appeal can only interfere with the decision of the judge at first instance on a question of fact where the decision of the judge cannot be reasonably be explained or justified on the evidence before him[2].)

In this case the court found that, although Lord Glennie could have interpreted the evidence differently and concluded that there was no obligation on the bank to lend the money for the development, he had a reasonable evidential basis for coming to the conclusion he had (i.e. that the bank had made a legally binding promise to provide the development funding).

The court also found that use of the term “collateral warranty” had been a distraction in this case and that the bank’s obligation could equally have been described as a “promise” or “unilateral undertaking”. In coming to its conclusion the court noted that, in Scots law, unlike the situation in England, a unilateral undertaking such as a promise can be binding without consideration from the recipient of the promise and that the undertaking or promise does not require to be collateral to another contract.

The full judgement is available from the Supreme Court here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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 [1] The court said “If the [developer] considered that the [written agreements] did not properly reflect what he understood was to be agreed, or had been agreed orally, then he ought not to have signed the agreements. At all events, whatever the [developer] thought was the position, the informed observer would understand the written agreements to cover all matters agreed to date. It may well be that, at that time, the [bank] fully intended to enter into a further bargain with the [developer] to advance additional funding for the building works. However, they had not done so and did not do so. That may have been contrary to the spirit of the negotiations prior to the signing of the written agreements, but that spirit, or its moral content, cannot be taken as creating a legally binding voluntary obligation.”

[2] Lord Hodge’s judgement refers to the reasons for the restriction on the role of the appeal court highlighting that it is the judge at first instance who hears the evidence and is best placed to assess the credibility of the witnesses and, having heard the evidence over an extended period, will have “greater familiarity with the evidence and a deeper insight in reaching conclusions of fact than an appeal court whose perception may be narrowed or even distorted by the focused challenge to particular parts of the evidence”. Lord Hodge also noted the increased cost which would be incurred if all questions of fact were open for redetermination on appeal.

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Clive Joseph Aronson v The Keeper of the Registers of Scotland and others, 19 December 2014 – whether property disburdened of securities where creditor failed to follow calling up procedure when repossessing

Background
This is an Outer House case in which Mr Aronson sought rectification of the Register. Mr Aronson had bought a property (on Dean Street in Kilmarnock) from the Bank of Scotland which was exercising a power of sale under a standard security following a repossession.

The property previously belonged to Mr Alexander who, in addition to granting the standard security in favour of the Bank of Scotland, had subsequently granted three further securities in favour of two other creditors. When Mr Alexander fell into arrears, the Bank of Scotland obtained a warrant to repossess and sell the property[1] (in May 2010) and subsequently disponed the property to Mr Aronson (in February 2011).  At the time of the repossession proceedings it was common for creditors to repossess and sell property without first following the calling up procedure and, in this case, the Bank had not served a calling up notice. However, in November 2010 the Supreme Court[2] decided that in any case where a creditor seeks repayment of a debt, failing which, the sale of the security subjects, it must first serve a calling up notice and thereafter wait two months before repossessing the property.

Mr Aaronson submitted an application to register the disposition in the Land Register in March 2011. In terms of the (Form 2) application, Mr Aronson required to indicate whether the necessary statutory procedures had been followed in relation to the Bank’s power of sale and, as a result of the Supreme Court’s decision noted above and the failure to follow the calling up procedure, Mr Aronson indicated that the necessary procedures had not been complied with.

When the Keeper registered the disposition, she excluded indemnity in respect of Mr Aronson’s title and, although the standard security in favour of the Bank of Scotland did not appear in the Charges Section of the Title Sheet, the three securities in favour of the other two creditors did[3].

In terms of the relevant legislation[4], where a creditor grants a disposition in exercise of a power of sale, the property is disburdened of that security and all other securities ranking equally with it or behind it. Mr Aronson sought to have the register rectified so as to delete the three remaining securities. The Keeper maintained that the register was not inaccurate as the property had not been disburdened of the standard securities on the basis that there had been no sale of the property in terms of the legislation as the Bank had not followed the correct procedure.

Decision
Lord Doherty rejected the Keeper’s argument and found that the register was inaccurate. There had been a sale by the bank, within the meaning of the legislation and, as such, the property had been disburdened of the securities.

As to a contention by the Keeper that, allowing the property to be disburdened of the securities where the correct procedures with regards to repossession and sale had not been followed, was to allow the Bank to benefit from its own wrong and was contrary to public interest, Lord Doherty said the following:

 “While I do not rule out entirely the possibility that the circumstances of some sales might be so contrary to public policy that Parliament might be taken to have intended to exclude them from the ambit of s. 26, I am very clear that the circumstances of the sale by the Bank to the pursuer do not fall within any such category.  In treating the loan default as a default in terms of standard condition 9(1)(b), and in proceeding down the s. 24 route, the Bank acted in good faith and in accordance with what was then understood (by the courts, conveyancers, and financial institutions and their advisers) to be a lawful route to sale.  There was no deception or bad faith.  There was no intention to depart from or undermine the proper procedures for sale…  …In such circumstances I see no scope for giving any weight to the canon of construction that a party should not be permitted to benefit from his own wrong.  I am equally clear that there is no justification for giving “sale” in s. 26(1) a strained construction in order to avoid the natural construction producing serious damage to the public interest.  On the contrary, in my view the natural and ordinary meaning relied upon by the pursuer serves the public interest.  On the other hand, deserving persons such as the pursuer would be prejudiced by the strained construction which the first defender suggests.  That strained construction is also one which runs counter to the presumption that a statutory provision should be construed so as not to produce injustice.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] Under s24 of the Conveyancing and Feudal Reform (Scotland) Act 1970.

[2] Royal Bank of Scotland plc (Respondent) v Francis John Wilson and another, [2010] UKSC 50.

[3] Notes were appended to the entries excluding indemnity both in respect of any loss arising from rectification of the register to delete the standard securities or from the property being found not to have been disburdened of the above standard security.

[4] S26(1) of the 1970 Act.

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Northern Rock (Asset Management) Plc v. Jane Steel and Bell & Scott, 5 December 2014 – solicitor’s liability to client’s bank on erroneous discharge of security

Background
Outer House case in which Northern Rock sought damages from the solicitor of one of its customers. Headway Caledonian Ltd borrowed sums from Northern Rock to finance the purchase of a Business Park in Hamilton. In return it granted a standard security in favour of Northern Rock. Some years later, Headway’s solicitor sent a draft discharge of the standard security to Northern Rock requesting that it sign and return the document. In the accompanying email, the solicitor stated that the company intended to sell the subjects and redeem the loan. However, that information was incorrect as Headway only intended to sell part of the subjects and to redeem part of the loan. (The reason for the error was unknown.)

Northern Rock (which had not instructed solicitors to act on its behalf in the transaction) relied on the email and granted the discharge of the standard security. The solicitor then registered it in the Land Register. As a result the loan became unsecured. Headway then became insolvent and the Northern Rock raised an action for damages against the solicitor and her firm in respect of its losses.

The solicitor argued that the lender was a third party to whom she did not owe a duty of care.

Lord Doherty agreed with that argument.

Decision
Whilst a solicitor on one side of a conveyancing transaction will not normally owe a duty to the party on the other side, the law will imply a duty in exceptional circumstances.

The crucial considerations this case were (i) whether it was reasonable in the circumstances for Northern Rock to rely upon the misstatements without checking them by seeking clarification from the solicitor and/or looking at their file; and (ii) whether it ought to have been foreseeable by the solicitor that Northern Rock might reasonably rely upon the misstatements without checking them, and thereby suffer loss.

In favour of the view that there was the requisite foreseeability and reasonable reliance were that the email (i) contained no disclaimer; (ii) had a degree of urgency in its tone; (iii) was communicated directly to Northern Rock, rather than to professional advisers; and (iv) that it came from a solicitor (a trustworthy source).

On the other hand, being a commercial bank, Northern Rock were in no sense vulnerable or dependent. They had the ability to obtain legal advice if they required it. Ultimately though, the critical information had been factual and concerned matters that could have been checked very easily and very quickly by Northern Rock.

Lord Doherty also took into account the fact that the erroneous information in the email conflicted with what had previously been agreed between Headway Caledonian and Northern Rock and that in some respects the email had been vague and ambiguous and, as such, “cried out for further clarification”.

The full judgement is available from Scottish Courts here.

(NB: see appeal to the Inner House here. See also the decision of Lord Woolman allowing the Proof here.)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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Dem-Master Demolition Limited v. Alba Plastics Limited, 11 July 2014 – dispute regarding access to commercial premises

Inner House case concerning a lease of a unit in a large (and mostly unoccupied) industrial complex in Shotts. Dem-Master were the landlords and Alba, the tenants.

Background
Dem-Master raised an action for payment in respect of electricity and outstanding rent. Alba disputed that the sums were due and a secondary issue arose regarding access to the property. Alba argued that Dem-Master had restricted vehicular access to the property by securing gates and locking loading bay doors which were used to allow heavy goods plants and equipment to be manoeuvred into the premises.

Alba sought an interim interdict to prevent Dem-Master restricting access to the premises in such a way as to prevent their rights under the lease. Dem-master granted an undertaking allowing access via a defined route and Alba dropped their motion for interim interdict but subsequently returned to court arguing that Dem-master had failed to comply with the undertaking.

Arguments
Alba argued that they were unable to carry on their business and that they wished to vacate their premises and move to other premises but that they were unable to remove their plant and machinery without access to the loading bay door. Dem-Master argued that Alba had no right to exercise access via the loading bay doors in terms of the lease and, in view of the fact that Alba’s published accounts showed them to be insolvent, they were concerned that removal of Alba’s plant and machinery would prevent use of the Landlord’s hypothec (i.e. the right to retain a tenant’s property as security).

Decision
In the Outer House the motion for interim interdict was granted so as to allow access via the loading bay doors. The Inner House found that, on a construction of the lease (under which the landlord, acting reasonably was entitled to designate the route of the rights of access), it could not be said that Alba had the right to use the loading bay doors. However, the court did find that the balance of convenience (required to allow an interim interdict) did favour access over another route which would allow Alba to operate their business from the premises (but which would not allow the removal of their heavy plant and machinery from the unit).

The case was put out by order to discuss the exact terms of the order for interim interdict.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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UK Acorn Finance v Charles Smith, 14 July 2014 – enforcement of standard security by creditor after the granting of a second security and assignation of personal obligation to a third party

Sheriff Court case concerning the remedies available to a creditor (Acorn) under a standard security after it had granted a further security (and also assigned the personal obligation to pay the sums due) to a third party (Connaught) over the first security in its favour (The second security securing an advance made to Acorn by Connaught).

When Mr Smith (the debtor under the first security) failed to pay the sums due under the first security, Acorn served a calling up notice on him and, when he failed to comply, raised an action to enforce the first security and eject Mr Smith from the subjects (agricultural property). Mr Smith argued that, as the personal obligation to pay Acorn had been assigned to Connaught by way of the second security, there was no longer any debt due to Acorn. As such, Acorn had no title to sue.

The sheriff accepted Acorn’s argument to the effect that the statutory rights in a standard security which arise under the Conveyancing and Feudal Reform (Scotland) Act 1970 are separate to the common law rights in terms of the personal obligation contained in the separate contract between Acorn and Mr Smith. Both sets of rights could be held by different people. Acorn remained the creditor under the first security and, as such, was entitled to exercise the statutory rights to enforce the security albeit that the common law rights in the personal obligation had been assigned to Connaught and enforcement of the security would ultimately result in a payment to Connaught. This was logical as it provided Acorn with a powerful means of ensuring it could meet its obligation to Connaught and, from Connaught’s point of view,  it was right that a procedure by which Acorn could meet its obligation to them (along with any related costs) should be Acorn’s responsibility.

Accordingly the sheriff found that Acorn had both title and interest to sue.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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Matthew Purdon Henderson v. Foxworth Investments Limited and 3052775 Nova Scotia Limited, 2 July 2014 – reduction of security following gratuitous alienation

Supreme Court case of some complexity in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The Liquidator argued that the holder of the security, Foxworth (a company controlled by Mr Liu), had not acquired the rights under the security in good faith and for value. The Liquidator had previously successfully challenged a disposition by Letham Grange in favour of Nova Scotia Limited (also a company controlled by Mr Liu) on the basis that it was a gratuitous alienation. (The property which had been purchased by Letham Grange for £2,105,000 was sold to Nova Scotia for only £248,100.)

In the Outer House Lord Glennie found that there had not been a gratuitous alienation accepting Mr Lui’s evidence that the price had been reduced as there had been loans made by Mr Liu’s family in favour of Letham to finance the original purchase and that Foxworth (having assumed liability) was obliged to repay those loans to the family.

The Inner House have allowed an appeal finding that, to avoid a gratuitous alienation, the consideration given in exchange for the granting of the disposition of the resort to Nova Scotia required to be enforceable at the time when the disposition was granted. However, at that date, there was no enforceable obligation binding Nova Scotia to repay the loans to the family. Even if that had not been the case, taking account of all of the circumstances, the Inner House found that the various transactions surrounding Letham Grange had been intended to defeat the claims of lawful creditors.  For those reasons a decree granting reduction of the standard security was given. The Inner House also found that Lord Glennie had failed to give satisfactory reasons for the factual conclusions he had reached on the evidence.

The Supreme Court unanimously allowed an appeal of the Inner House decision.  Whilst the Inner House had been correct to identify that an appellate court can interfere where it is satisfied that the trial judge has gone “plainly wrong”, it had erred in concluding that Lord Glennie had been “plainly wrong” in this case.

Lord Glennie had clearly understood that the critical issue was whether “the alienation was made for adequate consideration”. He was aware that an obligation on the part of Nova Scotia could only constitute part of the consideration for the sale if it was undertaken as the counterpart of the obligations undertaken by Letham Grange. His opinion had focused whether, and not when, any obligation was taken to assume the Letham Grange debts and he had been entitled to accept Mr Liu’s evidence on that point. The Supreme Court noted that Lord Glennie had taken into account the various criticisms of Mr Liu’s evidence before concluding that his evidence was credible and reliable and also noted that the weight given to the material evidence was pre-eminently a matter for the trial judge (subject only to the requirement that his findings be reasonable).

The full judgement is available from the Supreme Court here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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Northern Rock (Asset Management) Plc v. Jane Steel and Bell & Scott, 27 February 2014 – solicitor’s liability to customer’s bank on discharge of security

This is an Outer House case in which Northern Rock sought damages from the solicitor of one of its customers. Headway Caledonian Ltd borrowed sums from Northern Rock to finance the purchase of a Business Park in Hamilton. In return it granted a standard security in favour of Northern Rock. Some years later, Headway’s solicitor sent a draft discharge of the standard security to Northern Rock requesting that it sign and return the document. In the accompanying email, the solicitor stated that the company intended to sell the subjects and redeem the loan. However, that information was incorrect as Headway only intended to sell part of the subjects and to redeem part of the loan. (The reason for the error was unknown.)

Northern Rock (which had not instructed solicitors to act on its behalf in the transaction) relied on the email and granted the discharge of the standard security. The solicitor then registered it in the Land Register. As a result the loan became unsecured. Headway then became insolvent and Northern Rock raised an action for damages against the solicitor and her firm in respect of its losses.

The solicitor argued that the lender was a third party to whom she did not owe a duty of care.

Lord Woolman considered the authorities on liability for economic loss including Midland Bank plc v Cameron, Thom, Peterkin & Duncans[1] in which Lord Jauncey identified four conditions that should normally be present for liability in such cases:

“…

  1. the solicitor must assume responsibility for the advice or information furnished to the third party;
  2. the solicitor must let it be known to the third party expressly or impliedly that he claims, by reason of his calling, to have the requisite skill or knowledge to give the advice or furnish the information;
  3. the third party must have relied upon that advice or information as a matter for which the solicitor has assumed personal responsibility; and
  4. the solicitor must have been aware that the third party was likely so to rely.”

Lord Woolman found that liability in delict[2] could not be decided without hearing the evidence and allowed a proof.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

 

 


[1] 1988 SLT 611, 616D-F

[2] However, Northern Rock’s case based on implied contract was dismissed.

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Catherine Nimmo Cooper v. The Bank of Scotland and Andrew Cooper 30 January 2014- reduction of a standard security where granter not advised of consequences and need for legal advice

Outer House case in which Mrs Cooper sought reduction of a standard security (in so far as) granted by her in favour of the Bank of Scotland over her share of the home she shared with her husband. Mrs Cooper argued that her husband had procured her signature of the security by misrepresentation and that the bank had neither advised her of the consequences of signing the document nor advised her to take independent legal advice.

Background
The Coopers’ had granted a standard security over their house in favour of the Bank of Scotland in 2002 (securing the present and future debts of both/either of them). At about the same time Mr Cooper obtained an overdraft from the Bank of Scotland for his business and, when the business overdraft grew to £72k, granted a personal guarantee in favour of the Bank of Scotland in January 2006 (in effect securing the business debt over the house). At the end of 2006 the house was re-mortgaged in favour of the Halifax. Due to an oversight (there was still outstanding business debt), and despite an instruction to the contrary, the security in favour the Bank of Scotland was discharged. In March 2007 the Bank of Scotland wrote to the Coopers asking them to sign a fresh security in respect of the business debt. Mr Cooper had failed to tell Mrs Cooper about the overdraft and personal guarantee. When the fresh security arrived, he gave Mrs Cooper the second page only and asked her to sign it telling her only that it related to the mortgage and that the higher monthly payments would pay off the mortgage more quickly.

Arguments
Mrs Cooper based her case on the principles arising from Smith v. Bank of Scotland[1] in which it was found that a bank may owe a duty to warn a potential cautioner of the consequences of entering into a proposed obligation and advise him or her to take independent advice where:

“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…”

In order to have an obligation set aside, the cautioner must show[2] (1) that an actionable wrong has been perpetrated by the principal debtor (2) that the creditor was in bad faith and (3) that the obligation was undertaken gratuitously.

The Bank of Scotland argued that, because Mrs Cooper had been liable for Mr Cooper’s business debts before the discharge (in error) of the 2006 security, the Bank had no reason to believe that her consent to the 2007 security was not freely given. Further, they argued that reducing the security would give a windfall benefit to Mrs Cooper and put her in a better position than she would otherwise have been by allowing her to escape from the obligations previously incumbent upon her merely because of the erroneous discharge of the 2002 security.

Decision
Lord Tyre found had that Mrs Cooper was entitled to a reduction of the standard security. The grant of the standard security by the pursuer was gratuitous (i.e. there was no obligation on Mrs Cooper to grant it). Having accepted that Mr Cooper had misrepresented the purpose and effect of signing the security to Mrs Cooper, it was also found that Mr Cooper had committed an actionable wrong. The Bank of Scotland were also found not to have acted in good faith as there was no evidence that either they or their solicitors took any steps whatsoever to bring to the pursuer’s attention the consequences for her of signing the standard security. The letter sending the security for signature had been in bland terms and conveyed an impression that the execution of the security was something of a formality. There was also no mention of the need for Mrs Cooper to obtain independent legal advice.

The discharge of the 2002 security had not been gratuitous as it had been granted in consideration of repayment of the loan then outstanding. The bank did not attempt to argue that the discharge could have been reduced on the ground of a unilateral uninduced error on the part of the bank (or their solicitors). There was no obligation on Mrs Cooper to grant the 2007 security at the time she signed it. That was the time to have in mind when determining whether restoration of the position was possible. Consequently, Lord Tyre held that the reduction of the 2007 security should not be refused on the basis that it would fail to restore the parties to the position they had been in prior to the granting of the security.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.


[1] 1997 SC(HL) 111

[2] Royal Bank of Scotland v Wilson 2004 SC 153,

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