Liability Flashcards
Who is Liability in solidum (joint and several)?
Principal obligant and cautioner are liable in solidum. (Creditor can claim whole sum from either.) Must be default, but creditor need not first seek to enforce against principal obligant. Right of relief against principal obligant.
Primary Healthcare Centres (Broadford) Ltd v Humphrey and others [2010] CSOH 129.
See this for a recent example of the right to relief
What is the general extent of liability?
(1) Caution for £10000 loan. Cautioner’s liability can never increase.
(2) Caution for overdraft. This is continuing guarantee and (unless otherwise agreed) may be terminated by notice to creditor, which fixes liability at sum then due.
Example (combined with rule in Clayton’s Case): Anne is cautioner for overdraft of Blixx Ltd. When overdraft stands at £25,000 Anne terminates. Thereafter credits to account of £12,000 and debits of £10,000. Anne now liable only for £13,000. (The £10,000 of debits are post-termination loans.)
What is a liability ceiling?
Caution often limited to defined ceiling: eg caution for overdraft but maximum liability £60,000. This can lead to interpretation problems. Suppose principal debtor sequestrated. Debt £100,000. Dividend 30% - £30,000. Then:
1) Is the £30,000 to be ascribed to guaranteed part of debt? In that case cautioner now liable only for £60,000 minus £30,000 = £30,000.
2) Or is the £30,000 to be ascribed to non-guaranteed part of debt? In that case cautioner liable for full £60,000.
3) Or is the £30,000 to be ascribed rateably to both? That would mean: £12,000 to non-guaranteed part and £18,000 to guaranteed part. In that case cautioner liable for £60,000 minus £18,000 = £48,000.
Answer depends on the wording of bond. A clause which leads to (2) is called ultimate loss clause. If wording is unclear, (3) seems to be what law presumes
Harvie’s Trs v Bank of Scotland (1885) 12 R 1141
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Veitch v National Bank 1907
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Consideration of Veitch in the Stair Memorial Encyclopaedia
**MUST READ
What is the general rule of liability ceilings?
The broad rule of thumb seems to be, if it’s a fixed debt owed by the principal obligant, then it looks like the presumption is the cautioner will be liable for the totality of that debt up to a cap. If it is a fluctuating debt, it looks like the cautioner is liable for only a part of it.
To avoid any confusion, make sure the cautionary obligation is clear. It is in the cautioners interest to try and guarantee a proportion of the debt.
What are the cautioner’s rights against the creditor?
1) The cautioner has a right to escape liability in the event that the creditor and the debtor change the terms of the underlying contract.
⁃ Examples of changing the underlying contract:
⁃ A) The creditor “giving time” to the principal obligant. This means that the parties have agreed to a variation of the contract (usually by notation) - if this happens then the cautioner can escape liability (prejudice is not required, simply novation of the agreement is sufficient.)
⁃ B) The creditor has a right in security over assets belonging to the principal obligant and gives up the security then this changes the terms - it prejudices the position of the cautioner so the cautioner can escape liability in this case too.
⁃ This is one instance where it may seem as if there was prejudice to the cautioner but the court disagreed: BoS v Macleod
⁃ 2) If the cautioner ends up paying the creditor (i.e. because the PO doesn’t pay) then the cautioner gets the beneficium cedentarum actionum - this means (1) while the cautioner has a right of relief against the principal obliging, the cautioner might feel in a stronger position if they can have the personal right of the creditor assigned to then, the cautioner is entitled to request (the personal right) transferred to them directly, (2) the cautioner gets the rights in security that are held by the creditor against the PO so that the cautioner can use them (the cautioner becomes the assignee of the rights in security and can then enforce against the PO.)
- So the cautioner is entitled to have that security transferred to them, and then to enforce it. - **The creditors right is dependent on the cautioner having paid the creditor.
3) Right of relief – the right to get payment from the principal obligant (but what happens in bankruptcy? (See below).
- However if the cautioner has paid before the principal obligant becomes bankrupt then their personal right to cover payment before the debtor, they can then claim. It is in the interests of the cautioner to claim early.
4) Division and Discussion (if proper cautionry)
⁃ Division: arise when there is a co-cautioner. This means that each cautioner is only entitled to a pro rata share of debt and can only be asked to pay if all creditors asked to pay onable steps to enforce the debt against the principal obligant. This is only available if contracted for: Mercantile law Amendment (Scotland) Act 1856, s 8.
- You now have to opt expressly into this.
⁃ Both can be supplanted by agreement.
Cautioner has right to rank in bankruptcy of principal obligant (if the cautioner has paid the debt in full) but the cautioner cannot rank in the bankruptcy of the principal obligant if the creditor has ranked for the debt in the bankruptcy (as a result of the rule against double ranking). The rule on bankruptcy is complicated and warrants special consideration
- Discussion was the right that the cautioner had to effectively ensure that the creditor took all steps to enforce against the principal obligant before the cautioner could be liable.
- The benefit of discussion was done away with by default in proper caution in 86, but it remains something you can still contract into expressly. But this is not in the creditors interest (to make it more difficult for them to get the money).
5) If the debt is paid in full then the cautioners can rank in the insolvency of the principal obligant, but only if the debt has been paid in full.
BoS v Macleod
⁃ Overdraft and the cautioner agrees that they will pay up to a limit. The bank after the cautionary obligation had been entered into extended the overdraft to a higher amount. From the perspective of the cautioner this would worsen their position because they would be more likely to have to pay (since if the PO is borrowing more money then they are less likely to be able to pay themselves). However the court disagreed since the cautioners liability had been capped so the position hadn’t really worsened.
