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20 Cards in this Set
- Front
- Back
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Where does a cautionary obligation arise? |
It arises where one party (the cautioner) enters into an agreement with another party (the creditor) whereby the cautioner undertakes that, should a third party (the debtor) fail to complete his obligations to the creditor, the cautioner will perform them instead. They are guarantees. |
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What is a third party pledge? |
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How can you distinguish cautionary obligations from other things? |
Cautionary obligations are said to be accessory to, or dependent on, a principal debt obligation. The distinction: it depends on whether the parties intend the second obligation to be conditional on the debtor's breach of the first obligation. If they do then the second obligation is cautionary, if they do not, it is a separate principal obligation |
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When does proper caution arise? |
Where the cautioner is bound explicitly as a cautioner, for the debts of a named debtor (Principles of the Law of Scotland). |
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Where does improper caution arise? |
The cautioner and principal obligant purport to bind themselves as joint borrowers, but the intention differs. |
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Does the difference between proper and improper caution matter? |
Proper caution gives the cautioner the benefit of discussion and division. Improper caution does not have those benefits. |
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What is a right in security? |
‘any right which a creditor may hold forensuring payment or satisfaction of his debt, in distinction from and inaddition to his right of action and execution against the debtor.' |
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What is personal security? |
It is caution; a guarantee from another person who acts as acautioner (i.e. a guarantor). |
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What is proper security? |
- Creates a subordinate real right in favour of the creditor. - The asset now has two real rights in it: (1) the real right of ownership of the debtor and (2) the subordinate real right of the creditor. - The debtor retains ownership. |
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What is improper security? |
- Transfer of the asset to the creditor so the creditor gets ownership - There is only one real right; the creditor has ownership for the purpose of security. - Here the contract says as and when the debtor pays it off, the creditor will convey back to the debtor. |
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What type of security is used for corporeal property (moveable (e.g. a pen) or immoveable (e.g. a building))? |
You can only create security for corporeal property (moveable or immoveable) by proper security. |
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What type of security is used for immoveable property (e.g. leases, mortgages)? |
You can only create security for immoveable property by improper security. |
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What is 'real' security? |
It is asset security. Sub-types of 'real' security are proper and improper. |
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Do cautionary obligations need to be in writing? |
Under s 1 of the RoW(S)A 1995, cautionary obligations do not be in writing. There are two exceptions (1) if a cautionary obligation is constituted as a unilateral obligation, otherwise than in the course of business, then it must be in writing and signed by the granter (s 1(2)(a)(ii) ROW(S)A). (2) if a cautionary obligation relates to a regulated credit agreement it must be in writing (ss 105-6 of the Consumer Credit Act 1974). |
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How is the validity of cautionary obligations regulated? |
Cautionary obligations are subject to the normal rules of capacity, error, misrepresentation, fraud, force and fear, undue influence, facility and circumvention, and illegality, as any other voluntary obligation. |
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Can the cautioner escape liability on the ground of misrepresentation/fraud/undue influence by the principal agent? |
Yes, refer to the case of Smith v Bank of Scotland (1997). |
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Smith v Bank of Scotland (1997) |
Wife induced to sign a standard security securing her husband's debt due to H's misrepresentation. The security was over co-owned property. W did not get independent advice. Bank unaware. W seeks reduction of security. Held that the standard security should be set aside because the bank had failed in its duty to the w by not warning her of the consequences of entering into the security and advising her to take separate legal advice. |
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Royal Bank of Scotland plc v Wilson (2003) |
It was held that failure good faith alone is not enough to allow a cautioner to escape liability, it needs to be coupled with an actionable wrong by the debtor. Moreover, it added that the rule in Smith is only relevant where the obligation is gratuitous. |
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From the case of Royal Bank of Scotland plc v Wilson (2003), what does gratuitous mean? |
It was given a fairly wide meaning. A joint security which covers all sums due to the creditors by either party would not be 'gratuitous', for present purposes, as both parties would have the benefit of the other's potential liability for their debt. |
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In what situations can a cautioner seek a reduction of a cautionary obligation? |
It seems as though a cautioner may do this where (a) there was an objective risk of wrongdoing by the debtor against the cautioner by virtue of their non-commercial relationship; (b) the caution is granted gratuitously; (c) the creditor failed to take steps to mitigate that risk; and (d) the debtor did in fact commit an actionable wrong against the cautioner. |
