Caution

Question 1

Cautionary Obligations

Answer 1

Personal, not real. They are accessory in nature, without debt there is not.

It is a three way relationship. Principal debtor against the creditor, and then the cautioner backs them up. If the principal debtor does not pay them back then they go after the cautioner. There can be multiple cautioners

Question 2

Rights?

Answer 2

Creditor’s rights against the cautioner
Cautioner’s rights against principal debtor
Cautioner’s rights against each other
Cautioners rights against the creditor

Question 3

Creditor rights to cautioner

Answer 3

Creditor sues cautioner for the whole debt, they then pursue the principal debtor for relief

If the creditor would sue one cautioner rather than the other, then they can receive half from the other cautioner

Creditor sues cautioner for whole debt, cautioner obtains an assignation from the creditor. Cautioner proceeds against the principal debtor as if he were the creditor

Question 4

Constitution and form

Answer 4

Generally made in the same way as any other contract.

General offer - Fortune v Young

Co-cautioners can be brought in the way as normal ones

Normally no requirement for writing, but might be… If getting paid for it, better put some of it in writing.

Must be something to guarantee
How much liability?

Question 5

Proper and Improper caution

Answer 5

Proper - Stand behind someone else’s obligation.
Improper - Stand alone independent obligation.

Distinction is largely historic

Question 6

Misrepresentation

Answer 6

By the creditor - Material misrepresentation by creditor inducing contract will make it void, Smith v Bank of Scotland

Undue influence, force and fear, error, facility and

By the debtor - Traditional approach, Smith v Bank of Scotland 1997

Advise the proposed cautioner to take separate legal advice.

Question 7

Smith v Bank of Scotland 1997

Answer 7

Principle of good faith, relationship between the debtor and the proposed cautioner.

Question 8

Extent of cautioner’s liability

Answer 8

Cautionary obligations construed against the person who is trying to rely on them

You will be liable for principal debt

Creditor’s costs of enforcement

Fixed or continuing caution

Limit on caution

Question 9

Cautioner’s rights

Answer 9

Relief
Divison
Assignation

In insolvency terms there is a right to rank in principal debtor’s

Question 10

Termination

Answer 10

Underlying debt is paid
If new supplier comes on board (new event) that the cautioner wasn’t part of
Prescription
Compensation
Clayton’s case - Earliest credit leads to earliest debit

Debt may still be there but unfair to keep cautionary going:
Giving more time 
Prejudicial change to contract
Discharge of co-cautioner 
Voluntary discharge of a security

Question 11

Good faith by creditor

Answer 11

CRA 2015 help them? Unfair terms, not sure if it works