3PLR – NATIONAL BANK OF NIG. LTD V. OBA M.S. AWOLESI

POLICY, PRACTICE AND PUBLISHING, LAW REPORTS  3PLR

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NATIONAL BANK OF NIG. LTD

V.

OBA M.S. AWOLESI

 

PRIVY COUNCIL

1964 JULY 15; OCT. 5.

3PLR/1964/57  (PC)

 

BEFORE THEIR LORDSHIPS

LORD REID

LORD HODSON

SIR BENJAMIN ORMEROD.            

 

MAIN ISSUES

Guarantee – Banking account – Overdraft – Guarantee in consideration of bank “continuing the existing account” – Due payment guaranteed of “all advances, overdrafts, liabilities, … whether made, incurred or discounted before or after the date hereof” to named person – Second account opened with same bank and operated without guarantor’s knowledge – Substantial payments into second account – Manner of operation of accounts increasing burden on guarantee – Overdraft on original account remaining unreduced – Whether guarantee of an existing account – Whether opening of second account substantial variation of terms of guarantee – Whether guarantor discharged.

 

Between September 26 and December 24, 1955, T. issued 14 cheques drawn on his account with the plaintiff bank, the National Bank of Nigeria, at the Shagamu branch, each of which was returned marked “Refer to Drawer.” On December 30, 1955, the defendant, T.’s uncle, executed a guarantee of T’s account up to 10,500. The cheques were honoured by the plaintiffs on December 29, 30 and 31, 1955, and as a result on the latter date the account became overdrawn to the extent of 10,096. By the guarantee the defendant, in consideration of the bank “continuing” the existing account” with T. for so long as they thought fit, “or otherwise giving credit, accommodation or granting time,” guaranteed “on demand in writing… the due payment of all “advances, overdrafts, liabilities, bills and promissory notes, “whether made, incurred or discounted before or after the date “hereof to or for [T] either alone or jointly with any other “person…together with interest, commission and other bank “charges …” On January 12, 1956, a new account (account No.2) was opened by T, at the Shagamu branch; its opening and subsequent operation took place without the defendant’s knowledge. No further cheques were drawn on the first account and the payments into it were only just sufficient to pay the monthly debits of interest, and by July 24, 1957, the account was still overdrawn to the extent of 10,023 14s. 3d. During, 1956, however, 29,000 was paid into the No. 2 account, and between January 1 and March 31, 1957, approximately a further 4,000 was paid in, so that at times the No. 2 account was in credit to over 2,500. By May, 1957, the credit balance was again reduced to only 2 19s. 4d. T. also had an account at the bank’s Lagos branch, to which in December, 1955, he transferred 520. On May 21, 1957, the bank wrote to T. and the defendant demanding security and a substantial reduction in the overdraft by June 10. That demand not having been complied with, the bank sued both T. and the defendant, T. submitting to judgment for 10,023 14s. 3d and judgment being given against the defendant as guarantor for 9,610 14d., the sum found to be due by combining all three accounts and striking a balance. That judgment was reversed on appeal and the bank’s claimed dismissed with costs. On appeal by the bank:-

 

HELD: (1) That, on its true construction, the guarantee was of the account as it existed at the date when the guarantee was made and the parties did not contemplate the opening of a second account and that, by permitting the opening of the second account, the bank had permitted a substantial variation of the terms of the contract without the defendant’s knowledge and to his detriment. The defendant, therefore, was discharged from his guarantee.

 

Holme v. Brunskill (1878) 3 Q.B.D. 495, C.A. applied.

 

Held, further, that even were the guarantee to be construed as covering all three counts, since they had not been operated as one account, whereby the principle sum guaranteed would have been reduced, but had been operated in such a way as to increase the burden on the defendant, the defendant was discharged from his guarantee.

 

Decision of the Federal Supreme Court of Nigeria affirmed.

 

APPEAL (No. 8 of 1963) by the National Bank of Nigeria Ltd. from a judgment of the Federal Supreme Court of Nigeria (Taylor and Bairamian F.JJ., Unsworth F.J. dissenting) (March 30, 1962) allowing, by a majority, an appeal by Oba. M. S. Awolesi from the judgment of the High Court of Justice in the Western Region of Nigeria (Irwin J.) (July 21, 1959) and ordering that the claim of the plaintiff bank be dismissed with costs. Unsworth F.J.’s dissenting judgment agreed with the judgment of Irwin J.

 

The following statement of facts is taken from the judgment of the Judicial Committee: The claim by the plaintiffs, the National Bank of Nigeria Ltd. (the present appellant), hereafter called the bank, was made against E. O. Adeyemi Taiwo, sued as first defendant and principal debtor, and the respondent, Oba. M. S. Awolesi, sued as second defendant and guarantor for the sum of £10,023 14s. 3d. That sum represented money lent to Taiwo by the bank at his request together with interest and bank charges.

 

Taiwo, a nephew of the respondent, was a customer of the bank at their Shagamu branch. Over the period from September 26, 1955, to December 24, 1955, Taiwo issued fourteen cheques drawn on his account at that branch for a total of £9,844. Each cheque was endorsed “Refer to Drawer.” One cheque dated September 26, 1955, for £1,120 was honoured on December 29 and the remaining thirteen cheques drawn for a total of £8,724 were honoured on December 30 and December 31, 1955. After payment of those cheques the account was, on December 31, 1955, overdrawn to the extent of £10,096.

 

On December 30, 1955, the respondent executed a guarantee of Taiwo’s account in favour of the bank, such guarantee not to exceed the sum of £10,500. The terms of the guarantee were as follows:

 

“GUARANTEE, AWOLESI TO BANK

 

“Singular – For an Individual

 

“TO THE NATIONAL BANK OF NIGERIA LIMITED

 

“In consideration of the bank (which expression shall include their successors and assigns) continuing the existing account

 

with Emanuel Olaseni Adeyemi Taiwo of 140 Akarigbo Street, Shagamu (hereinafter called the principal), for so long hereafter as the bank may think fit, or otherwise giving credit or accommodation or granting time to the principal, I, the undersigned, Moses Sowemimo Awolesi, Afin Akarigbo, Shagamu hereby guarantee, on demand in writing being made to me, the due payment of all advances, overdrafts, liabilities, bills and promissory notes, whether made, incurred or discounted before or after the date hereof, to or for the principal, either alone or jointly with any other person or persons together with interest, commission and other banking charges, including legal charges and expenses.

 

“(2)   It is mutually agreed that the total amount recoverable hereon shall not exceed [£10,500] in addition to such further sum for interest thereon and other banking charges in respect thereof, and for costs and expenses as shall accrue due to the bank within six months before or at any time after the date of demand by the bank upon me for payment.

 

“(3)   And further, that this guarantee shall be applicable to the ultimate balance that may become due to the bank from the principal.

 

“(4)   I agree that this guarantee shall be a continuing security to the bank, and shall not be determined except at the expiration of six calendar months, written notice given to the bank of my intention so to do, and in the event of my death the liability of my legal personal representatives and of my estate shall continue until the expiration of six months’ notice in writing given to the bank of the intention of my executors or administrators to determine this guarantee.

 

“(5)   A demand in writing shall be deemed to have been duly given to me or my legal personal representatives by sending the same by a messenger or by post addressed to me at the address hereon and shall be effectual notwithstanding any change of residence or death and notwithstanding notice thereof to the bank, and such demand shall be deemed to be received by me or my legal personal representatives after the despatch thereof, and shall be sufficient if signed by any officer of the bank, and in proving such service it shall be sufficient to prove that the letter containing the demand was properly addressed and despatched by a messenger or put into the post office.

 

“(6)   I agree that a copy of the account of the principal contained in the bank’s books of account, or of the account for the preceding six months if the account shall have extended beyond that period, signed by the manager or any officer for the time being of the bank, shall be conclusive evidence against me of the amount for the time being due to the bank from the principal in any action or other proceedings brought against me or my legal personal representatives upon this guarantee.

 

“(7)   I also agree that any admission or acknowledgment in writing by the principal or any person on his behalf of the amount of the indebtedness of the principal, or otherwise in relation to the subject matter of this guarantee, or any judgment or award obtained by the bank against the principal shall be binding and conclusive on me and my legal personal representatives.

 

“(8)   I waive in the bank’s favour all or any of my rights against the bank or the principal [so] far as may be necessary to give effect to any of the provisions of this guarantee.

 

“Dated at Shagamu this [December 30, 1955].

“(Sgd) M. S. Awolesi,

“Guarantor.

“Witness: Emanuel Amusan,

“Ishokun Street,

“Shagamu.”

 

On January 12, 1956, a new (No. 2) account was opened by Taiwo at the bank’s Shagamu branch. Its opening and subsequent operation took place without the knowledge of the respondent. After the No. 2 account was opened no cheques were drawn on the first account which remained overdrawn. The amounts paid in to the first account after that date did not represent a serious attempt to reduce the overdraft and interest thereon but were enough to pay off the monthly debits on account of interest. The resultant total overdraft on July 24, 1957, after debiting interest due on July 23 was £10,023 14s. 3d.

 

During the year 1956 approximately £29,000 was paid into the No. 2 account, and from January 1, 1957, to March 31, 1957, approximately £4,000 was paid in. The bank ledger showed that the No. 2 account was at times in credit to the extent of over £2,500 but that in May, 1957, the credit balance was only £2 19s. 4d. Taiwo also had an account with the bank’s Lagos branch, and on December 30, 1955, he issued a cheque for £520 payable to the bank and that amount was transferred to the Lagos branch account.

 

On May 21, 1957, by letter addressed to Taiwo and to the respondent, the bank demanded collateral security for the overdraft and payment of a substantial amount in reduction thereof before the close of business on June 10, 1957. Legal proceedings were threatened in the event of non-compliance with the demand. Compliance not having been made proceedings for recovery of the debt due were begun on August 21, 1957, against Taiwo and the respondent. Taiwo submitted to judgment for £10,023 14s. 3d. and judgment was given against the respondent as guarantor for £9,610 14s. 4d. found to be due to the bank after a reference at which the resulting figure was obtained by the referee combining the two accounts at Shagamu with the Lagos account and taking the balance due on July 24, 1957, after treating all three as one unbroken account. The plaintiffs appealed to the Federal Supreme Court who, by a majority (Taylor and Bairamian F.JJ., Unsworth  J. dissenting), reversed the decision of Irwin J. and dismissed the plaintiffs’ claim with costs. The plaintiffs appealed to the Judicial Committee of the Privy Council.

 

1964. July 15. Neil P. M. Elles and John G. H. Gasson for the bank.

 

The defendant did not appear and was not represented.

 

The following cases, in addition to those cases referred to in the judgment, were cited in argument: Devaynes v. Noble [Clayton’s Case]¹; Henniker v. Wigg²; Mutton v. Peat³; and Deeley v. Lloyds Bank Ltd.⁴

 

1964. October 5. The reasons for the judgment of their Lordships were given by Lord Hodson, who stated the facts as set out above and continued: it is unnecessary to consider in detail how the total figure of indebtedness was ascertained but the basis of the calculation, in accordance with the judge’s direction, was that the three accounts had been operated as one account from December 30, 1955, to July 24, 1957.

 

It is clear according to the terms of the guarantee that it was a continuing security to the bank and it is assumed by their Lordships that the letter of May 21, 1957, constituted a sufficient demand made upon the respondent for the purposes of the guarantee.

The question for consideration which depends in the main on the construction of the document of guarantee itself is whether the majority of the Federal Supreme Court were right in arriving at the conclusion that in the events which have happened the respondent was discharged from his responsibility as guarantor.

 

The guarantee refers to “the continuing of the existing account” as consideration for the guarantee which suggests that the parties had agreed that the account of the principal debtor existing on December 30, 1955, should be continued in an unbroken state and that they did not contemplate the opening of a second account. It is true that the way in which consideration for a contractual obligation is expressed is not conclusive but it is relevant in construing the terms of the contract itself. It would appear also that the words “ultimate balance” in clause 3 and “account” in clause 6 can most naturally be read, in the light of clause 1, as relating to the existing account and that the words “or otherwise giving credit or accommodation or granting time” in clause 1 prima facie refer to the existing account. Their Lordships agree with Taylor and Bairamian F.JJ. in construing the guarantee in the narrow sense of a guarantee of the account as it existed at the date when the guarantee was given. When the

 

1 (1816) 1 Mer. 529.

2 (1843) 4 Q.B. 792; 1 Dav. & Mer. 160.

3 [1900] 2 Ch. 79, C.A.

4 [1912] A.C. 756; 29 T.L.R. 1, H.L.

 

bank allowed Taiwo to open the second account they were permitting the position of the respondent to be prejudiced as to his guarantee, for, as happened thereafter, it was possible for Taiwo to make payments into the bank without releasing the respondent from his liability under the guarantee. The opening of the new current account was an unauthorised departure from the terms of the contract of guarantee.

 

In Ward v. National Bank of New Zealand Ltd.¹ their Lordships said²:

 

“A long series of cases has decided that a surety is discharged by the creditor dealing with the principal or with a co-surety in a manner at variance with the contract, the performance of which the surety had guaranteed.”

 

The same judgment adopted the language of Cotton L.J. in Holme v. Brunskill³ where he said⁴:

 

“The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the court will not, in an action against the surety, go into an inquiry into the effect of the alteration. …”

 

In In re Sherry, London and County Banking Co. v. Terry⁵ Lord Selborne L.C. referred to the rule saying⁶:

 

“A surety is undoubtedly and not unjustly the object of some favour both at law and in equity, and I do not know that the rules of law and equity differ on this subject.”

 

On the construction of the contract so far accepted there was a substantial variation of the contract of guarantee to the prejudice of the respondent without his knowledge for he lost the benefit of all sums paid in by the principal debtor into his No. 2 account, which was, as the ledger shows, at times in credit to the extent of as much as £2,500. The respondent’s guarantee therefore must be taken to have been discharged.

 

If, on the other hand, the contract should be construed, as the bank contends, so as to cover any account which Taiwo opened at their branches the opening of the No. 2 account would not necessarily be a variation of the contract and the guarantee, being a continuing security, would cover all the accounts since ultimately there would be only one debt due from the debtor to the bank. The various accounts were not however operated as one entity and each had its own independent existence. In the ordinary way there is no objection to a bank allowing a customer to open a number of accounts but, where there is a guarantor of the customer’s indebtedness, his position may be affected. An examination of a copy of the plaintiff bank’s ledger shows that,

 

1 (1883) 8 A.P. 755, P.C.

2 Ibid. 763.

3 (1878) 3 Q.B.D. 495, C.A.

4 Ibid. 505.

5 (1884) 25 Ch.D. 692, C.A.

6 Ibid. 703.

 

in the original account, monthly debits were entered in respect of interest charged on the amounts outstanding by way of overdraft. If all the sums that Taiwo paid into the bank had been paid into this account this would have produced a reduction of the principal debt and a consequent reduction of the interest. Since this course was not followed the position of the respondent was prejudiced and the amount for which he became liable on his guarantee was increased.

 

Taiwo as principal debtor was bound under clause 6 of the guarantee to accept a copy of these accounts of the principal contained in the bank’s books of account as conclusive evidence against him of the amount for the time being due to the bank. He submitted to judgment for the full amount stated in the original account as being due from him to the bank. By clause 7 of the guarantee the judgment obtained against Taiwo was binding and conclusive against the respondent. On this footing the bank would be entitled to judgment for the full amount of £10,023 14s. 3d. as claimed and not for the lesser sum of £9,610 14s. 4d. awarded by the trial judge. The bank is now content to accept the lesser sum as representing an approximation of the amount which would be due if the various accounts had in truth been operated as one. They were not operated as one and the question is whether the respondent has been substantially prejudiced by the way in which the accounts were in fact operated. Their Lordships are of opinion that by acting as it did, outside the terms of the guarantee, the bank increased the burden on the respondent as guarantor and that the respondent’s guarantee was discharged whichever construction of the document is adopted.

 

They have accordingly humbly advised Her Majesty that the appeal be dismissed.

 

Solicitors: A. L. Bryden & Williams.