Catherine Nimmo Cooper v. The Bank of Scotland and Andrew Cooper 30 January 2014- reduction of a standard security where granter not advised of consequences and need for legal advice

Outer House case in which Mrs Cooper sought reduction of a standard security (in so far as) granted by her in favour of the Bank of Scotland over her share of the home she shared with her husband. Mrs Cooper argued that her husband had procured her signature of the security by misrepresentation and that the bank had neither advised her of the consequences of signing the document nor advised her to take independent legal advice.

The Coopers’ had granted a standard security over their house in favour of the Bank of Scotland in 2002 (securing the present and future debts of both/either of them). At about the same time Mr Cooper obtained an overdraft from the Bank of Scotland for his business and, when the business overdraft grew to £72k, granted a personal guarantee in favour of the Bank of Scotland in January 2006 (in effect securing the business debt over the house). At the end of 2006 the house was re-mortgaged in favour of the Halifax. Due to an oversight (there was still outstanding business debt), and despite an instruction to the contrary, the security in favour the Bank of Scotland was discharged. In March 2007 the Bank of Scotland wrote to the Coopers asking them to sign a fresh security in respect of the business debt. Mr Cooper had failed to tell Mrs Cooper about the overdraft and personal guarantee. When the fresh security arrived, he gave Mrs Cooper the second page only and asked her to sign it telling her only that it related to the mortgage and that the higher monthly payments would pay off the mortgage more quickly.

Mrs Cooper based her case on the principles arising from Smith v. Bank of Scotland[1] in which it was found that a bank may owe a duty to warn a potential cautioner of the consequences of entering into a proposed obligation and advise him or her to take independent advice where:

“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…”

In order to have an obligation set aside, the cautioner must show[2] (1) that an actionable wrong has been perpetrated by the principal debtor (2) that the creditor was in bad faith and (3) that the obligation was undertaken gratuitously.

The Bank of Scotland argued that, because Mrs Cooper had been liable for Mr Cooper’s business debts before the discharge (in error) of the 2006 security, the Bank had no reason to believe that her consent to the 2007 security was not freely given. Further, they argued that reducing the security would give a windfall benefit to Mrs Cooper and put her in a better position than she would otherwise have been by allowing her to escape from the obligations previously incumbent upon her merely because of the erroneous discharge of the 2002 security.

Lord Tyre found had that Mrs Cooper was entitled to a reduction of the standard security. The grant of the standard security by the pursuer was gratuitous (i.e. there was no obligation on Mrs Cooper to grant it). Having accepted that Mr Cooper had misrepresented the purpose and effect of signing the security to Mrs Cooper, it was also found that Mr Cooper had committed an actionable wrong. The Bank of Scotland were also found not to have acted in good faith as there was no evidence that either they or their solicitors took any steps whatsoever to bring to the pursuer’s attention the consequences for her of signing the standard security. The letter sending the security for signature had been in bland terms and conveyed an impression that the execution of the security was something of a formality. There was also no mention of the need for Mrs Cooper to obtain independent legal advice.

The discharge of the 2002 security had not been gratuitous as it had been granted in consideration of repayment of the loan then outstanding. The bank did not attempt to argue that the discharge could have been reduced on the ground of a unilateral uninduced error on the part of the bank (or their solicitors). There was no obligation on Mrs Cooper to grant the 2007 security at the time she signed it. That was the time to have in mind when determining whether restoration of the position was possible. Consequently, Lord Tyre held that the reduction of the 2007 security should not be refused on the basis that it would fail to restore the parties to the position they had been in prior to the granting of the security.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

[1] 1997 SC(HL) 111

[2] Royal Bank of Scotland v Wilson 2004 SC 153,

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