Cautionary Obligations

Cautionary Obligations

1. Constitution and form

   • Doesn't need to be in writing unless gratuitous unilateral obligation RoW(S)A s1(2)(a)(ii)
     • All co-cautioners or none are bound (Scottish Provincial Insurance v Pringle)

2. Misrepresentation

   • By the Creditor - contractual rules apply. Void/voidable
     • Creditor does not need to disclose material facts but if they choose to, must disclose fully (Young v Clydesdale Bank)
       • Have to disclose if aware cautioner is under a misrepresentation (RBS v Greenfields)
   • By the Debtor - introduced idea of good faith to cautionary obligs. If the creditor is not in good faith, cannot enforce it. Smith v Bank of Scot
     • Duty of good faith is met if independent legal advice is sought (Forsyth v Bank of Scotland)

3. Rights of Co-Cautioners

   • Can get relief from each other excluding insolvents (Buchanan v Main)
     • Rank on bankrupt estate - if creditor sought payment but not if he's ranking on the estate as well.
       • Veitch v National Bank of Scotland
         • If cautioner has guaranteed specific funds then he can pay the creditor and both can rank on the estate for the different debts.
   • Proper cautioner - pro rato share
     • Improper cautionary - joint and several liable.

4. Termination of the obligation

   • By the cautioner
     • Only if guarantee continuing with no time limit then can say no to future advances
       • Must give reasonable time
         • May have to pay the principal debt
   • By operation of law
     • Cautioner's death does not release them
       • British Linen Co v Monteith - guarentee called on 14 years after cautioner's death
     • Change in constitution of a partnership under s18
     • Prescription - 5 years after cautioner was asked to pay
   • By action of the creditor
     • Giving time - to pay without cautioner's consent.
       • Not pressing for immediate payment is not giving time (Hamilton's Exrs v Bank of Scotland)
         • Creditor can expressly retain right to give time
     • Alteration of principal debt without consent
       • If fixed limit, cautioner is not released if debtor is given more money (Huewind v Clydesdale)
     • If discharge one co-cautioner then all discharged if joint and severally liable.
     • Creditor who voluntarily gives up security discharges the cautioner to the extent of the security
   • By extinction of principal debt
     • Two exceptions to principal debt subsisting (Aitken's Trs v BoS) - bankruptcy and pactum de non petendo (Muir v Cranford)
       • Pactum - keep right to sue cautioner but not debtor and don't need to notify cautioner
     • Rule in Clayton's case - money going in is set off against the first debt
     • Compnsation so set off owed debts
     • Novation - old debt extinguished and new one. new one is not covered by obligation.
     • Prescription - 5 years