Scottish Court of Session Decisions

Horatius Stuart, S.S.C., Edinburgh, as assignee of the Scottish Metropolitan Life Assurance Company, Limited, Edinburgh, brought an action against Potter, Choate, & Prentice, bankers and stockbrokers, New York, and against W. D. Fisher, sometime stockbroker in Dundee and London, and E. L. Bennett, C.A., London, as trustee in bankruptcy of the last-named, for any interest they might have, for delivery by the first-named defenders to him of twelve 4 per cent. gold bonds for the sum of 1000 dollars each of the Louisville and Nashville Railroad Company (Atlanta, Knoxville and Cincinnati Division), or alternatively for payment of (first) £1889, 14s. 3d., and (second) £671, 17s. 11d.

This narrative of the facts out of which the action arose is taken from the opinion of the Lord Ordinary (Skerrington) — “Messrs J. P. Morgan & Company of New York having purchased from the Louisville and Nashville Railroad Company 10,000,000 dols. of their 4 per cent. bonds (Atlanta, Knoxville, and Cincinnati Division) at the price of 97 1 2, they wrote on 20th February 1906 to the compearing defenders, Potter, Choate, & Prentice, bankers, New York, stating that they were forming an underwriting syndicate for these bonds at 98 1 2, and offering the said defenders an interest of 200,000 dols. bonds therein. They added—‘We are to act as syndicate managers, and to have the sole direction and management of the syndicate. Payments for the bonds are to be made when and as called for by us, and the bonds are to be held subject to our control for purposes of sale. We shall make no charge to the syndicate for our services; but all expenses, including commissions allowed to brokers, are to be charged to the syndicate.’ The defenders accepted this offer, and on 21st February they cabled to W. D. Fisher, a London stockbroker, offering him a participation of 50,000 dols. in this syndicate at 98 5 8. Fisher, partly through an agent in New York and partly by cable, purchased from the said defenders three participations of 25,000 dols., 13,000 dols., and 12,000 dols. — in all 50,000 dols. Before doing so he had agreed with the pursuer, Mr Stuart, that

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the latter would take two participations of 25,000 dols. and 13,000 dols. respectively, and he had disposed of the remaining 12,000 dols. to Messrs Zuluetta of London. The pursuer in his turn had contracted with two Edinburgh insurance companies—the Century Insurance Company, Limited, and the Scottish Metropolitan Life Assurance Company, Limited—that the former should take the participation of 25,000 dols. and the latter the participation of 13,000 dols. The price payable by the pursuer was 98 1 2, and the price payable to him by the insurance companies was 99.

The syndicate was dissolved in June 1907, and the defenders received from Messrs Morgan the bonds and cash proportionate to their interest of 200,000 dols. Only a small proportion of the bonds had been sold. The pursuer, as assignee of the Scottish Metropolitan Company, sues the defenders for delivery of twelve bonds of 1000 dols. each and for payment of £73, 16s., being the bonds and cash proportionate to the company's holding of 13,000 dols. The whole difficulty has arisen from the bankruptcy of Fisher, who disappeared on or about 4th March 1907 with a debtor balance on the account between him and the defenders. He and his trustee have been cited as defenders, but neither has lodged defences. The Scottish Metropolitan Company duly paid to Mr Stuart, and he in his turn paid to Fisher the first call of 70 per cent. on their participation of 13,000 dols., and the second call of 25 per cent. As Mr Stuart was ultimately unable to deliver to his clients, the Scottish Metropolitan Company, the securities which he had contracted to give them, he repaid the company their advances and took an assignation of any claims they might have against the defenders

When the Scottish Metropolitan Company paid Mr Stuart the first call of £1884, on 18th April 1906, they asked him to send the syndicate managers' receipt in due course. Mr Fisher had on the previous day cabled to the defenders for the receipts, and had received a reply that it was impossible to send the receipts as they must remain in New York. The defenders in the same cable offered to finance the transaction for Mr Fisher on a 20 per cent. margin. Fisher accepted this offer, and at the same time he exacted payment from the pursuer of the calls payable on the participations of 25,000 dols. and 13,000 dols. If I am right in thinking that Fisher contracted independently with the defenders on the one side and with the pursuer on the other, there was nothing improper in this arrangement even so far as Fisher was concerned. From the point of view of the defenders the offer was, I think, a natural one, seeing that they could not give Fisher any receipt upon which he could raise money in the London market. The Scottish Metropolitan Company did not press their request for a receipt, and I do not think that from first to last they were really seriously uneasy on the subject. They had confidence in Mr Stuart, and as events proved their confidence was justified. On 31st January 1907 the pursuer wrote a strong letter to Fisher pressing him to procure at least a letter from the parties in whose names the participations stood certifying as to the extent of the interest held by the two insurance companies. On the following day Fisher cabled to the defenders to send a letter certifying that they held an interest of 25,000 dols. on account of the Century Insurance Company, and requesting them to draw upon him for the amount required to preserve the margin. On 5th February the defenders wrote Fisher enclosing a letter addressed to the said company and intimating that they had drawn on him at three days' sight for £5146. On 14th February Fisher sent this letter to the pursuer, who gave it to the company. In May 1906 the defenders had, at Fisher's request, sent a similar letter direct to Messrs Zuluetta regarding their 12,000 dols. holding. In both these cases the letters were delivered before the relative drafts by the defenders on Fisher had been honoured. On 14th February Fisher cabled the defenders to draw on him against 13,000 dols. in the Syndicate, and to send a letter attesting that they held this interest on behalf of the Scottish Metropolitan Company. On 15th February the defenders wrote such a letter and enclosed it to Fisher. On 28th February he sent this letter to the pursuer in Edinburgh, and on 1st March the pursuer sent it to the Scottish Metropolitan Company. The relative draft by the defenders on Fisher was presented for payment on Saturday 2nd March, and on Monday 4th March, and was dishonoured and protested. Though the exact date of Fisher's disappearance was not proved, it was stated that he disappeared on 4th March. The letter is as follows—‘The Scottish Metropolitan Life Assurance Company, 25 St Andrew Square, Edinburgh, Scotland. — Dear Sirs—We beg to advise you that we are holding for your account an interest of 13,000 dollars in the Louisville and Nashville, Atlanta, Knoxville, and Cincinnati Division 4 per cent. Bond Syndicate, on account of which 95 per cent. has been paid.—Yours very truly, Potter, Choate, & Prentice.’”

The pursuer pleaded, inter alia — “(1) The defenders Potter, Choate, & Prentice being the holders for the account of the Scottish Metropolitan Life Assurance Company, Limited, of the said interest in the said bond syndicate which is now represented by the bonds and cash, of which delivery and payment is concluded for, the pursuer as assignee of the said company is entitled to decree as craved. (2) Alternatively the defenders Potter, Choate, & Prentice as holders foresaid are liable to make payment to the pursuer as assignee foresaid of the several sums specified in the alternative conclusions of the summons, and decree in terms thereof should be pronounced as craved, with expenses. (3) In the circumstances condescended on the defenders are barred personali exceptione from maintaining that they are entitled to retain the said bonds.”

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The defenders averred, inter alia—“(Stat. 4) The contract between the defenders and Mr Fisher in reference to the said participation was entered into in New York … and the validity and effect of it, and of the said letter of 15th February 1907, fall to be determined according to the law of the State of New York.… The said letter is not under seal, and does not express that the defenders received any consideration for the same. Upon these grounds the said letter is invalid and ineffectual according to the law of the State of New York. …”

The defenders pleaded, inter alia—“(4) There having been no contract between the said Assurance Company and the defenders, and the said letter of 15th February 1907 being by the law applicable to the case invalid and ineffectual because not under seal and expressing no consideration for the granting thereof, it cannot receive any effect. (5) The defenders being entitled to hold the securities sued for until payment of all debts due to them by Mr William D. Fisher are entitled to absolvitor.”

On 12th February 1910 the Lord Ordinary ( Skerrington), a proof having been taken, pronounced this interlocutor—“The Lord Ordinary, on the motion of the counsel for the pursuer, allows him to amend the record as proposed at the bar, opens up the record in order that said amendments may be made, and the same having been made, of new closes the record, and having considered the cause sustains the fourth plea-in-law stated for the defenders, assoilzies them from the conclusions of the summons, and decerns,” &c.

Opinion. — [ After the narrative above given]—“The contracts between the five parties … viz., Messrs Morgan, the defenders, Fisher, the pursuer, and the Scottish Metropolitan Company, were all constituted by telegram or letter, and on reading these documents it is clear that there was no privity of contract except between the parties who contracted directly or indirectly with each other. It is true that in wiring and writing to Fisher the pursuer stated that the participation of 13,000 dols. was for the Scottish Metropolitan Company, but he had no authority to make any contract between that company and Fisher, and the company throughout refused to recognise Fisher as their debtor. It is also true that the pursuer deponed that he looked upon Fisher as the agent of the defenders, but no such agency has been proved, or in my opinion existed. The important point is that there was no privity of contract between the pursuer's assignors the Scottish Metropolitan Company, and the defenders Potter, Choate, & Prentice. Accordingly I do not think that the pursuer's case would have been arguable if it had not been that on 15th February 1907 the defenders signed a letter in favour of the Scottish Metropolitan Company. It is really on this letter that the action is laid. In his able argument, however, the pursuer's counsel maintained that apart from this letter the company had a good claim against the defenders. He referred to the correspondence as showing that the defenders must have known that Fisher was acting on behalf of clients, and he referred to the evidence given on commission by Mr Potter as showing that Mr Potter refused to depone that, according to his belief, Fisher was contracting on his own account. If it could have been demonstrated that there was a contract between the Scottish Metropolitan Company and the defenders (Mr Stuart and Fisher being merely agents), the defenders could not, on the principles explained in the case of Cooke v. Eshilby, 1887, 12 A.C, 271, have founded on Fisher's indebtedness to themselves as a defence against a claim by the Scottish Metropolitan Company for delivery of the bonds and cash proportionate to their participation of 13,000 dols. But in the absence of such a contract the question does not arise. The pursuer's counsel founded his argument on the case of National Bank of Scotland v. Dickie's Trustees, 1895, 22 R. 740, which seems to me to have no application. In that case the question was whether the admitted owners of certain stocks were or were not affected by certain security rights expressly or impliedly given to a bank by a stockbroker employed by the owners. Here at the date of the contract the defenders had in their possession no securities which the Scottish Metropolitan Company could claim as their property. There was simply a contract obligation on the defenders to account for certain bonds and cash when received, and the creditor in this obligation was Fisher and no one else. It cannot, I think, be maintained that (apart from the letter) the bonds received by the defenders in June 1907 were the property of the Scottish Metropolitan Company.…

The defenders first defence is that Fisher was not authorised to deliver this letter to the Scottish Metropolitan Company until the draft for £1700 had been met. They did not expressly impose any such condition on Fisher, and I see no reason for implying it. The next defence is that the validity and effect of the letter must be determined according to the law of the State of New York, and that it is invalid and ineffectual because not under seal and expressing no consideration.

If the facts stated in the letter are assumed to be true they import an obligation on the defenders, just as an IOU imports an obligation to repay. The resulting or implied obligation in the present case was that the defenders should at the dissolution of the syndicate account for any bonds or cash received in respect of the Scottish Metropolitan Company's interest, and that in the meanwhile they should continue to hold the said interest on behalf of the company, and should give due notice of any calls, and should otherwise protect the company's interest in the syndicate. These obligations fell to be performed in the State of New York, and as the letter was signed there, I am of opinion that its validity and effect as an obligatory instrument depend on the law of that State.

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The pursuer's counsel argued that the law of Scotland applied. Even if that were so I should hold that the letter is not a writ in re mercatoria, and that as it is not holograph it is not per se valid. The pursuer does not aver rei interventus. Further, he does not allege that the letter per se creates any obligation according to the law of New York. These considerations are probably enough for the disposal of the case, but as each of the parties examined two experts on American law, and as the pursuer's counsel argued that the defenders were personally barred from denying the truth of the facts stated in the letter, I shall refer shortly to these two matters.

As regards the American law applicable to the case, the experts on both sides practically assumed without giving any particular reason that the letter per se was worthless as creating any obligation on the defenders unless the latter could be held to be ‘estopped’ from disputing the statements in the letter. Mr Fuller, the pursuer's leading expert, deponed in so many words that the defenders could not be held liable except on the ground of estoppel. The experts assumed no doubt, what everybody knows, that, according to the principles of English law, a unilateral and gratuitous engagement is invalid if not under seal. It was suggested to them that the letter might be regarded as an ‘agreement’ within the meaning of a certain statute, but they were unanimous in rejecting this suggestion.

The defenders have no averments on record as to the American law of ‘estoppel,’ but nevertheless voluminous evidence was led on the subject. I was not referred to anything in the evidence which suggested that the American law as to the particular kind of ‘estoppel’ referred to by the witnesses differed in any way from the Scots law of personal bar, as explained by Lord Kinnear in Mitchell v. Heys & Sons, 1894, 21 R. 600, p. 611.

Personal bar is a question of fact, but the pursuer has no averments on the subject though he has a plea of bar. On the evidence it appears clearly enough that the pursuer's assignors did not alter their position in any way in consequence of the receipt of the letter of 15th February. If the pursuer had been suing in his own right, and if the facts had been wholly different, it might have appeared that he was lulled into security by the letter and so lost a chance of recovering his money from Fisher. In the actual circumstances there is no room for this suggestion. Another suggestion was that if the letter had not been received on 1st March the Scottish Metropolitan Company might have appealed to Messrs Morgan. I cannot take this suggestion seriously. There was ample time in any case to appeal to Messrs Morgan between March and June 1907, but Messrs Morgan, though the managers of the syndicate, were not the arbiters as between all persons interested in it. They were bound to account and pay to the defenders in terms of their contract unless legal proceedings were instituted to restrain them.

The pursuer's counsel founded in his speech upon the fact that the defenders had made an entry in their account with Fisher which apparently ear-marked an interest of 13,000 dols. in the syndicate as belonging to the Scottish Metropolitan Company. This marking does not seem to me to carry matters any further than the letter itself. It and the letter would have been valuable and almost conclusive as evidence if the pursuer had relevantly alleged an antecedent contract between the Scottish Metropolitan Company and the defenders; and of course no question of American law would have arisen if the pursuer had simply proposed to use the letter as evidence of an antecedent contract. It is plain, however, from the pleadings and from the correspondence that no such contract was alleged by the pursuer or existed in fact.

I accordingly assoilzie the defenders. I should have mentioned that, as a last resort, the pursuer's counsel asked me to find that his client was entitled to succeed on condition that he paid the amount of the draft for £1700, the dishonour of which by Fisher gave rise to the whole difficulty, but I do not see any legal ground for doing so.”

The pursuer reclaimed, and argued—The contract between the pursuer and defenders fell to be determined by Scots law. The letter of 15th February 1907 did not constitute the obligation. There was a pre-existing obligation on the defenders to deliver to Fisher, which he could transfer. Fisher had so done. This letter was evidence of the pre-existing obligation. The Lord Ordinary had not distinguished between the original contract and the letter, which was merely an acknowledgment that the defenders had substituted the insurance company for Fisher as regards the 13,000 dols. interest in the syndicate. There was a vital distinction between the constitution of the obligation and the change of the creditor therein. The question was accordingly to be judged of by Scots law, for the lex fori regulated the admission of evidence— Don v. Lippmann, May 26, 1837, 2 Sh. & M'L. 682 (Lord Brougham at 726); Yates v. Thomson, 1835, 3 CI. & Finn. 544 (Lord Brougham at 587); Dickson on Evidence, para. 1003. The Lord Ordinary had held that the letter was not a writ in re mercatoria, and that accordingly it was invalid as neither holograph or tested. This question only arose if it were held that the letter per se constituted the obligation. The transaction was in essence an ordinary mercantile arrangement. The rule with regard to documents in re mercatoria was an exception introduced as regards obligations that must be formally constituted in writing, e.g., cautionary obligations. The defenders must in the first place show that the obligation in question was one that would need to be constituted formally apart from the exception as to documents in re mercatoria.

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This was really a trust, and an acknowledgment of a trust might be proved by any writing under the hand of the trustee, however informal— Paterson v. Paterson, November 30, 1897, 25 R. 144 (Lord Kyllachy at 175), 35 S.L.R. 150; Thomson v. Lindsay, October 28, 1873, 1 R. 65, 11 S.L.R. 12; Dickson on Evidence, para. 585. A depositreceipt had been held to afford evidence of trust — National Bank of Scotland v. Mackie's Trustees, July 25, 1905, 13 S.L.T. 383. The letter was an acknowledgment that the defenders held the bonds in trust for the insurance company. It was not the practice of banks to give holograph or tested receipts for money or scrip. Connal & Company v. Daunt & Company and Others, July 18, 1868, 5 S.L.R. 694, was also referred to. Moreover it was for the defenders to show that there was want of consideration within the meaning of the law of New York. They had not done that. In the case of a unilateral obligation written in one country and to be observed in another, the criterion as to what law should be applied was the intention of the parties — Lloyd v. Guibert and Others, 1865, L.R., 1 Q.B. 115 (Willes (J.) at 119 and 122); Corbett, &c. v. Waddell, &c., November 13, 1879, 7 R. 200, 17 S.L.R. 106; Hamlyn & Company v. Talisker Distillery, May 10, 1894, 21 R. (H.L.) 21, 31 S.L.R. 642. The parties intended this letter to be judged by Scots law. In judging of intention here the following two points were to be considered — (1) The letter was to be delivered and held in Scotland, (2) in case of doubt there was a presumption that if a document was valid in one country and invalid in another it should be judged by the law by which it was valid — in re Missouri Steamship Company, 42 Ch D 321 (Chitty (J.) 326, Fry (L.J.) 331 and 341, Lord Chancellor Halsbury at 337). As regarded the two objections under the New York law — the want of a seal and the absence of expression of consideration — the former was an objection to the formal validity, and the latter to the substantial validity. With reference to the formal validity, all instruments executed abroad (except conveyances of land), according to the solemnities of the place of execution, must receive the same effect as if executed in Scotland — Dickson on Evidence, para. 997. A contract deficient in the solemnities required by the lex loci actus would not be sustained in Scotland, although it satisfied the Scots forms, unless it was to take effect here — Dickson on Evidence, para. 998. But the present contract was to take effect in Scotland. That being so, it was good if made according to forms prescribed here, or according to the forms of the country where it was executed — Valery v. Scott, July 4, 1876, 3 R. 965, 13 S.L.R. 622; Taylor v. Scott, July 16, 1847, 9 D. 1504 (Lord Fullarton, 1508); Guthrie's Savigny (2nd ed.), 224; Nelson, Private International Law, 257. As regarded the objection to the substantial validity, i.e., want of consideration, that depended on the lex loci contractus, which itself, as above observed, depended primarily on the intention of parties.

Argued for defenders — There was no privity of contract between the insurance company and the defenders. The pursuer must found on the letter of 15th February 1907. The letter was not evidence of a preexisting obligation. The pursuer could not find an obligation on the defenders to deliver bonds to the insurance company apart from the letter. The letter constituted the contract. No obligation between the insurance company and the defenders existed till the date of the letter. The letter, moreover, was sent to Fisher on the implied condition that he would not deliver it till he met the draft of £1700. It was sent to the insurance company without the defenders' authority and in fraud of the above condition. If Fisher or his assignee had been suing on the original obligation the defenders would have been able to avail themselves of equities against Fisher. The question whether the letter was a document in re mercatoria arose on the two following assumptions—(1) that the letter per se constituted the obligation, and (2) that its validity fell to be determined by Scots law. The Lord Ordinary was right in his view that if the law of Scotland applied the letter was not a document in re mercatoria — Erskine, iii, 2, 24; Bell's Comm., i, 324. But on the hypothesis that the letter constituted the obligation (as it did) its meaning and construction clearly fell to be determined by the lex loci contractus, i.e., the law of New York—Westlake, Private International Law (4th ed.), pp. 271 and 272. It was a unilateral document written by parties domiciled in New York, and it was to be carried out there. It was not to be presumed that the writers of the letter intended foreign law to apply to it. New York was both the place of execution and solution. The letter was invalid and ineffectual by the law of New York except as regards estoppel or bar, because it was not under seal and expressed no consideration for the granting thereof. The cases quoted by the pursuer, e.g., in re Missouri Steamship Company ( cit. sup.) and Hamlyn & Company v. Talisker Company ( cit. sup.), were cases of contract and not unilateral obligation—see Shedlock v. Hannay, January 30, 1891, 18 R. 663, 28 S.L.R. 560. There could really be little dispute between the parties as to the international law applicable. Moreover, the evidence of the American lawyers showed clearly that the letter was ineffectual to constitute an obligation. It might have been different if the defenders had actually had bonds in their possession. But there were not existing bonds in the hands of the defenders. The pursuer had only the right to get an accounting from Morgan & Company. As regarded estoppel, the pursuer must prove that the insurance company did something or refrained from doing something on the faith of the letter, and that they thereby suffered detriment. Here there was no alteration of circumstances. It might be that the insurance company was “put to rest” by the receipt

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of the letter. That was not sufficient. They must show as matter of fact (it was a question of fact and not of law) that they had been damaged by being put to rest, and they had not been able to do that— Mitchell v. Heys & Sons, February 27, 1894, 21 R. 600 (Lord Kinnear at 610 on the general doctrine of bar), 31 S.L.R. 485; Simm v. Anglo-American Telegraph Company, 1879, 5 QBD 188 (Brett (L.J.) at 111; Mayor, &c., of Kingston-upon-Hull v. Harding, [1892] 2 QB 494 (Bowen (L.J.) at 506; Foster v. Tyne, &c., Docks Company, 1893, 63 L.J. (Q.B.) 50 (Collins (J.) at 55).

At advising—