THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND v. THE UNITED KINGDOM

AS TO THE ADMISSIBILITY OF

Application No. 37857/97

by THE GOVERNOR

AND COMPANY OF THE BANK OF SCOTLAND

against the United Kingdom

The European Commission of Human Rights (First Chamber) sitting in private on 21 October 1998, the following members being present:

MMM.P. PELLONPÄÄ, President

N. BRATZA

E. BUSUTTIL

A. WEITZEL

C.L. ROZAKIS

MrsJ. LIDDY

MML. LOUCAIDES

I. BÉKÉS

G. RESS

A. PERENIČ

C. BÎRSAN

M. VILA AMIGÓ

MrsM. HION

MrR. NICOLINI

MrsM.F. BUQUICCHIO, Secretary to the Chamber

Having regard to Article 25 of the Convention for the Protection of Human Rights and Fundamental Freedoms;

Having regard to the application introduced on 30 June 1997 by THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND against the United Kingdom and registered on 22 September 1997 under file No. 37857/97;

Having regard to the report provided for in Rule 47 of the Rules of Procedure of the Commission;

Having deliberated;

Decides as follows:

THE FACTS

The applicant ("the bank") is a bank, incorporated by Act of Parliament in 1625.  It has its head office in Edinburgh and is represented before the Commission by Mr A.J.N. Loudon, its group solicitor.

In 1986, the bank was granted a security by a Mr and Mrs Smith over their house.

In 1992, Mr Smith's business experienced financial difficulties, and the bank sought payment of some £60,000 plus interest by calling up its security.  Mrs Smith, relying on a recent English decision of the House of Lords (Barclays Bank plc v. O'Brien and another, [1993] 4 All ER 417, "the O'Brien decision"), claimed that the security should be set aside as null and void.

On 1 July 1994, the Outer House of the Court of Session found in favour of the bank on a preliminary point of law.  The Inner House confirmed the judgment on 2 June 1995, and Mrs Smith appealed to the House of Lords.  Lord Clyde, giving the main judgment (Lord Jauncey of Tullichettle gave a concurring judgment), accepted that in Scotland, misrepresentations by a debtor which induced another person to enter into a cautionary obligation generally had no effect on the contract of caution, although certain exceptions existed, such as where the contracting party in some way participated in the making of the representation so that it was regarded as having been made by him.  He continued:

"... Thus if the creditor misleads the cautioner either by his silence or by some positive representation he will be acting in bad faith and may thereby lose the right to enforce the contract. ...

In the present case the pursuer seeks to extend to Scotland the [O'Brien] decision.  In that case a bank was seeking to enforce a mortgage over the matrimonial home granted by a husband and wife.  The transaction was not to the wife's advantage and carried with it a substantial risk of the husband committing a legal or equitable wrong such as which would entitle the wife to set the transaction aside.  This House held that the mortgage was not enforceable against the wife who had signed the deed without reading it in reliance on her husband's misrepresentation as to the effect of it.  It was held that in the circumstances the bank had constructive notice of the wrongful representation made by the husband and that the wife was entitled to have the legal charge set aside.  This House went further and decided that the principle should apply not only to cases of husband and wife but to all cases where the creditor is aware that the relationship between the surety and the debtor is such that the former will be reposing trust and confidence in the latter in relation to the financial affairs of the debtor.  The view was expressed that in all such cases the creditor should be put on his inquiry.  The First Division of the Court of Session in Scotland correctly recognised that the decision goes beyond the present situation of the law in Scotland, and, applying the existing Scottish law, declined to follow it.  In O'Brien this house consciously sought to extend the law of England.  The question for your Lordships is whether a corresponding extension should be made to the law of Scotland.

My Lords, it is not easy to identify any major distinction between the law in England in this matter as it stood before the decision in O'Brien and the corresponding law of Scotland. It is evident that there was concern in England about the uncertainties which were being experienced in formulating clear guidance in the circumstances of cases such as the present.  But the general position appears to have been otherwise comparable.  It was accepted before us that the principles on caution in Scotland were the same as those governing surety in England and that the general rules as to the duties of a cautioner were identical in both jurisdictions.  It was also recognised that at least on a broad basis the policy considerations which lay behind the decision in O'Brien were applicable North of the Border.  The use of the matrimonial home as a security for the business debts of one of the spouses must be a matter of practical experience on both sides of the Border.  The only area in which issue was seriously joined was in relation to the proposition put forward by the pursuer to the effect that the law in relation to undue influence was in essence the same in each jurisdiction.  The only substantial ground on which counsel for the bank argued that there was a difference between the two systems which could justify a decision not to apply the decision in O'Brien to Scotland related to the law regarding undue influence. ...

... The point of difference between the two jurisdictions which counsel for the respondents sought to draw was that in England there was a recognised rebuttable presumption of undue influence arising out of certain relationships while in Scotland there was no such presumption. ...  It appeared from the study of a number of Scottish cases which counsel for the bank reviewed that no obvious recognition is given in Scotland to any established presumptions in this area of the law.

...

Counsel for the bank cautioned against the imposition of a change in the law of Scotland where, as was recognised in Invercargill City Council v. Hamlin [1996] A.C. 624, a monolithic uniformity might be destructive of the individual development of a distinct common law system.  But in the present case we are dealing with an area of the law whose development has for a long time been influenced by decisions on the other side of the Border.  I am not persuaded that there are any social or economic considerations which would justify a difference in the law between the two jurisdictions in the particular point here under consideration.  Indeed when similar transactions with similar institutions or indeed branches of the same institutions may be taking place in both countries there is a clear practical advantage in the preservation of corresponding legal provisions.  Furthermore, the development which is here proposed is one which is of clear advantage and usefulness to those who may be prompted to join with a spouse or other close companion in the granting of a security over their home or other property with grave disadvantage to themselves, which they may not even fully appreciate, and with a particular benefit to the business interests of the companion.  Of course, in many cases such transactions may be entered into with full knowledge and understanding.  It is not to be supposed or presumed that simply because there is a close personal relationship the security will be given otherwise than with a full and free consent, that is to say with a full understanding and a truly voluntary consent.  But to require the creditor to take some initiative where the circumstances of the case may reasonably seem to give rise to the risk that the cautioner's consent is not full and free does not necessarily create as matter of the law of evidence any presumption in the proving of any ground of reduction. What it does is to render it less easy for the creditor to challenge a reduction of the security if the cautioner seeks to take that course.

I have not been persuaded that there are sufficiently cogent grounds for refusing the extension to Scotland of the development which has been achieved in England by the decision there in [O'Brien].  On the contrary I take the view that it is desirable to recognise a corresponding extension of the law in Scotland. ...

... The law already recognises, as I have sought to explain, that there may arise a duty of disclosure to a potential cautioner in certain circumstances.  As a part of that same good faith which lies behind that duty it seems to me reasonable to accept that there should also be a duty in particular circumstances to give the potential cautioner certain advice.  Thus in circumstances where the creditor should reasonably suspect that there may be factors bearing on the participation of the cautioner which might undermine the validity of the contract through his or her intimate relationship with the debtor the duty would arise and would have to be fulfilled if the creditor is not to be prevented from later enforcing the contract. Such a duty does not alter the existing law regarding the duty, or the absence of a duty, to make representations.  Nor does it carry with it a duty of investigation.  This is simply a duty arising out of the good faith of the contract to give advice.  It is unnecessary on the approach which I have suggested to deem the creditor a potential participant in any misrepresentation by the debtor.

In extending to Scotland the development of the law which was achieved in Barclays Bank Plc v. O'Brien it is desirable to say something more about what the effect of it should be.  In the first place the duty which arises on the creditor at the stage of the negotiation of the contract should only arise on the creditor if 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.  Of course if the creditor, acting honestly and in good faith, has no reason to believe that there is any particularly close relationship between the debtor and the proposed cautioner the duty will not arise.  It is unnecessary to attempt any further classification or analysis of the range of personal relationships.  Given the range of circumstances in which persons may be prepared or prevailed upon to act as cautioners it seems to me unwise to endeavour to make any more precise formulation but to leave the matter to the application of common sense to the circumstances.

Secondly, if the duty arises, then it requires that the creditor should take certain steps to secure that he remains in good faith so far as the proposed transaction is concerned.  Whether there has in fact been or may yet be any conduct by the debtor directed at the cautioner which might vitiate the contract is not a matter necessarily to be explored by the creditor.  All that is required of him is that he should take reasonable steps to secure that in relation to the proposed contract he acts throughout in good faith.  So far as the substance of those steps is concerned it seems to me that it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and to advise him or her to take independent advice."

COMPLAINTS

The bank alleges a violation of Article 1 of Protocol No. 1 to the Convention.  It claims that the decision in the case constitutes retrospective legislation as until that decision - as the House of Lords accepted - Scots law did not permit reduction of a security in cases such as the present, but in future reduction will be permitted, and will be permitted not merely for contracts entered into in the future, but also for contracts entered into in the past.  The bank estimates that some 5,800,000 of its debt from small and medium-sized enterprises is secured by securities of the type in the present case, and claims that it can no longer rely on those securities.  The bank also points out that it is not alone to be affected by the decision, as other lending institutions will be in a similar position.

THE LAW

The bank alleges a violation of Article 1 of Protocol No. 1 to the Convention by reason of the decision in the present case.  Article 1 of Protocol No. 1 provides as follows:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions.  No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

The bank claims that as a result of the decision in the present case, its claims against other debtors have lost value or have become worthless.  The Commission notes, however, that, it is not clear to what extent, if at all, any other claims are in fact affected.  That question can only be answered when the circumstances of any future case are known.  The Commission is therefore unable to consider this aspect of the case as the bank cannot claim to be a victim of a violation of the Convention in respect of it.

In the present case, too, there is some doubt as to whether the bank may claim to be a victim of a violation of the Convention, as the decisions were all on preliminary points of law.  There was therefore no final finding as to possible misrepresentations by Mr Smith to Mrs Smith, and there was no finding as to what were the reasonable steps the bank could have taken or did take.  However, the Commission will assume in the following that the House of Lords decision effectively determined the dispute between the bank and Mrs Smith, and that the bank may therefore claim to be a victim of the alleged violation of Article 1 of Protocol No. 1.

The decisions of domestic courts do not generally give rise to an interference with property rights under Article 1 of Protocol No. 1 to the Convention (see, for example, No. 13021/87, Dec. 8.9.88, D.R. 57, p. 275).  Rather, the function of the domestic courts in a dispute between private parties is to determine the nature and extent of the parties' mutual duties and obligations.

In the United Kingdom the progressive development of the common law through judicial law-making is a well entrenched and necessary part of the legal tradition.  In the present case, the House of Lords did no more than to extend to Scotland the development of the law which had already been achieved in England in the O'Brien decision, and to do so by reference to the concept of good faith which had long been an established principle of contract law in Scotland.  The Commission accepts that when Mrs Smith entered into her cautionary contract with the bank in 1986 the law had not developed in either jurisdiction so as clearly to impose on creditors a duty to warn potential cautioners of the consequences of entering into such an obligation and to recommend the taking of independent advice.  However, banks and other lenders were or ought to have been aware of the requirement of good faith in entering into contracts and of the fact that this requirement was subject to judicial elucidation and development.  Moreover, the Commission does not find that the development of the House of Lords in the present case was in any sense arbitrary.  In these circumstances the Commission cannot find that the decision of the House of Lords interfered with the bank's "possessions" in its contractual relationship with Mrs Smith.

It follows that the application is manifestly ill-founded within the meaning of Article 27 para. 2 of the Convention.

For these reasons, the Commission, unanimously,

DECLARES THE APPLICATION INADMISSIBLE.

  M.F. BUQUICCHIO  M.P. PELLONPÄÄ

     SecretaryPresident

to the First Chamberof the First Chamber

 

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