Q3. Explain the function of a cautionary in Scots law and detail the rights of the cautioner as well as the extent of their liability?
It may give lenders comfort. It is a personal obligation given by a third party in respect of an obligation of a principal debtor. It is therefore an accessory obligation. May be debt or may be obligation ad factum praestandum. May be gratuitous. Parent guaranteeing child’s obligations. May be onerous. Bank guaranteeing developes obligations under building contract.No special form
Writing – Generally, cautionary obligations do not require to be committed to writing in order to be validly constituted, but there are important exceptions to that rule. S1 (2) (a) (ii) of the Requirements of Writing (scot) Act 1995 stipulates that writing is required for the proper constitution of a cautionary obligation where it is a gratuitous unilateral obligation not undertaken in the course of business.
Where a cautionary obligation amounts to a security or guarantee for a regulated agreement under the Consumer credit act 1974 s105 states it MUST be in writing and executed by the cautioner.
Accessory obligation – A cautionary obligation is accessory in nature. Therefore, it is not an independent principle which stands on its own and it cannot exist without linkage to an independent principle obligation between a debtor and creditor
The Rights of the cautioners
Right to Relief –
- Cautioners have rights to demand that the principle debtor relieve him of all liability incurred to the creditor, even if debt isn’t due.
- Where cautioner pays then:
- He has a right of relief against the debtor
- He has a right to an assignation of any securities held by the creditor
- He has a right of relief against co-cautioners if he has paid more than his pro rata share
- Where there is more than one cautioner, unless each is bound only for a specific part of the debt, any who has paid more than his share may seek relief to that extent from the other cautioners
Buchanan v Main 1900
2 out of 5 co cautioners were insolvent, when two other cautioners aid the principle debt, they were entitled to require the 5th cautioner to contribute 1/3 of the debt. This presupposes that the cautioners are bound equally.
Assignation – where the cautioner has paid the principle debt in full, he can demand from the creditor an assignation of the debt, as well as any security for it, or diligence done on it. Such security must have been granted by the debtor.
- The right does not extend to securities granted to the creditor by 3rd If the creditor holds the security over two debts, then he is entitled to retain it despite the cautioner paying the principle debt if the other debt is unpaid, unless the second debt is incurred subsequent to the cautioner paying the principle debt