STANDARD LAW SCHOOL
CASE BOOKS
Arant Cases on Suretyship, 1926 $6.50
Bauer Cases on Damages, 1923 5.00
Bays Cases on Com'l Law, 2nd Ed., 1923 5.50
Brennan Cases Personal Property, 1918 4.00
Britton Cases on Bills and Notes, 1923 5.50
Cook & Hinton Cases Com. Law Pldg., 1923 4.50
Costigan Cases on Contracts, 1921 6.50
Evans Cases on Const. Law, 2nd Ed., 1925 5.50
Evans Cases on International Law, 2nd Ed., 1922 5.25
Goddard Cases Bailments and Car., 1904 4.50
Goodnow Cases Government and Administration, 1906 3.50
Goodnow Cases on Taxation, 1905 4.50
Hinton Cases on Code Pldg., 2nd Ed„ 1922 4.50
Hinton Cases on Equity Pldg., 1927 4.25
Hinton Cases on Trial Practice, 1915 4.50
Holbrook & Aigler Cases Bankruptcy, 1920 4.50
Hughes Cases on Crim. Law and Proc., 1922 3.75
Hughes Cases on Evidence, 1921 4.75
Humble's Cases Conflict of Laws, 1923 4.50
Kales Cases on Contracts (Comb. Restraint of Trade, 2 vols.) .. 9.00
Mechem Cases on Agency, 2nd Ed., 1925 5.00
Mechem Cases on Partnership, 4th Ed., 1924 5.50
Robinson Cases on Public Utilities, 1926 6.00
Rush Cases on Equity Pldg., 1913 4.00
Sullivan Cases Real Property, 1921 6.00
Sunderland Cases Code Pldg., 1913. 4.50
Sunderland Cases Com. Law Pldg., 1914 4.50
Sunderland Cases Trial and Appellate Prac., 1924 5.50
Thompson Cases Equity Pldg., 1903 4.00
Tooke Cases on Municipal Corporations, 1926 6.50
Wheaton Cases Federal Procedure, 1920 5.50
Published by
CALLAGHAN & COMPANY, Inc.
Established 1864.
401 East Ohio Street
Chicago, Illinois
CASES
ON
Commercial Law
GENERAL SURVEY, CONTRACTS, AGENCY,
BAILMENTS, SALES, NEGOTIABLE
PAPER, PARTNERSHIPS, CORPO-
RATIONS, BANKRUPTCY
By ALFRED W. BAYS
Author of "Bays' Commercial Law Series (Second Edition), "Bays'
Business Law (Second Edition), Member of Chicago Bar and Pro-
fessor of Business Law, Northwestern University School of Commerce'
Second Edition
CHICAGO
CALLAGHAN AND COMPANY
1923
Copyright, 1923
by
CALLAGHAN & COMPANY
PREFACE TO FIRST EDITION
These cases have been prepared for the use of students in
Commercial Law.
When the writer took charge of the Commercial Law classes
in Northwestern University, some years ago, he doubted whether
he could profitably use cases as material for assigned lessons,
and he therefore relied upon mimeographed notes in the form
of a text, using cases only in brief paraphrase as illustrations,
and these notes were afterwards put in type and published in
the form of small hand books. But it was noticed that when the
writer dwelt in his lectures on the facts of actual cases and
stated the court's decision and read from the opinion, the stu-
dent seemed deeply interested, and retained the matter better in
his memory than other parts of the work. From this experience,
the writer became convinced of the value of the use of cases, in
his classes, and he has used them in mimeograph form in connec-
tion with text for some time with considerable success.
The '' case system'' of law study for those whom we may term
professional law students has been so widely adopted and
approved in law schools that anything said in its behalf would
seem superfluous and presumptuous. A word or two in its justi-
fication may seem desirable when applied to those who are taking
up the study temporarily and briefly for business and general
cultural purposes.
That there are differences of an important nature between the
professional and non-professional student of law, and that these
must be dealt with in practical ways, is very true. For, the law
student makes the study of the law the beginning of his life work;
its importance is direct and vital. His ambitions, plans, hopes,
his keenest self-interests all center around his study. Usually,
also, he devotes his entire working time to its pursuit. He
realizes that the chief objective of his student career is to train
his mind for a work that will begin after he leaves school. The
non-professional student takes up the study of law in an entirely
different view point. His chief interests are elsewhere. Usually,
iii
iv
PREFACE TO FIRST EDITION
only a fraction of his time is devoted to its study. And in his
school work he not only makes a beginning but an ending of his
study of the subject. He has, therefore, an entirely different
goal to be attained than that of the professional law student.
To teach this student, under these circumstances, law in any
final sense, is of course beyond the bounds of possibility. The
writer once heard from one of his students of a prodigy who
had learned commercial law. He had read the book thereof and
mastered the subject. He could solve any problem that could
be put to him. Unfortunately, the rest of us are limited in our
powers. And it seems to the writer that one of the first things
that the student should be taught is this: that he is entering
upon the study of a subject that is as broad as human endeavor,
of endless application, and of ever changing condition, and that
even by a life time of study there is no such thing as finally
mastering it or any of its branches. To offset this discouraging
information, he should be advised that in its study he may hope
to learn certain fairly permanent principles and rules and to
acquire information that will enable him to answer for himself
many questions that will present themselves, and, what is per-
haps of greater importance, that he may recognize legal problems,
as problems, and avoid pitfall by seeking professional advice,
where necessary; and that he can find no better subject as a
study for general cultural purposes. To recapitulate, the stu-
dent should acquire:
(1) A realization of the character, source and universality of
law;
(2) A practical working knowledge, enabling him to be more
efficient and safe in his business affairs;
(3) The general broadening and enlightenment of his mind.
In the accomplishment of these ends, the cases as the chief part
of his study seem better adapted than mere text or lecture. In
the case, the student sees law in its relationship to life; he learns
that it is principle applied to varying sets of facts; he under-
stands the character of law and the nature of its development.
The case not only informs him, but it has a dramatic value
that arouses and holds his interest.
The stage is set with real characters. No longer is the truth
unconnected with actual human conduct. The student sees men
situated as he has been, or may be situated. And it is in con-
nection with these facts that the judge's exposition of the law
PREFACE TO FIRST EDITION
v
is made, wherein at some length he announces the principle,
applies it, and limits, distinguishes, and harmonizes.
The case system enables the student, and to an extent requires
him, to make some original research in first hand material. It
encourages independence of thought. The case is to him some-
what as the cadaver is to the medical student.
But the instructor must remember in using the case system
that his vision is not the vision of the student. The student
must be led; he must be shown the way; he must be kept within
the proper bounds. He must be led up into the high places and
shown the field that he is to traverse so that the whole may be
properly correlated to its parts; the teacher must accompany
the inquirer upon the journey, explaining, asserting and guiding.
Hence the value of lecture, of text, of quiz. Without these helps
the student gropes blindly.
In this book there has been an attempt to arrange the cases
under such an outline and with such explanatory and connecting
notes as to give unity and completeness to the subjects covered.
Two difficulties have been encountered. One is to present the
subjects covered within the range of a moderately priced volume,
and the other is, the final spurt that was required to furnish the
book within the time planned for. But on the whole the editor
has produced a book fairly satisfactory for his own purposes and
trusts it will prove so to those who have indicated or may indicate
a purpose to use it.
The book contains nearly eleven hundred pages, and the
development of some phases has been necessarily limited, but
topics of a merely technical or peculiarly confusing character or
having a remote importance have been purposely omitted or
slighted.
The book should be useful in all schools teaching the subjects
included, except perhaps in courses of very elementary nature.
It should be accompanied with such text, or other helps, as the
instructor deems advisable. Questions follow each case, and it
is thought these will be very helpful.
- It is perhaps unnecessary to add that the editor of these cases
has made very free paraphrases of the facts, and made omissions
from lengthy opinions.
ALFRED W. BAYS.
Northwestern University,
Chicago, November, 1914.
PREFACE TO SECOND EDITION
In this, the second edition of Cases on Commercial Law, the
editor has followed the general outline and method of the first
edition. Much new material has been added in the shape of
new cases and more extensive annotations. The questions fol-
lowing the cases have been increased and revised. There has
a'so been added a preliminary division called  General Sur-
vey and a division on Bankruptcy. Some of the cases of the
former edition have been eliminated to make way for later or
better cases.
In detail, the outline follows the outline of the set of text
books by the same author known as American Commercial Law
Series (second edition), the same section numbers being re-
tained in parenthesis following the serial section numbers of
this case book. This method has the advantage of serving those
who use both the text and the cases, and does no harm to others.
It results, however, in having some section numbers in the case
book for which there are no cases, and where that occurs, the
reader will understand the reason.
Experience in teaching has confirmed the editor of this book
in the belief that the treatment of the subject under the generally
accepted headings of Contracts, Agency, Sales, etc., is the ad-
visable one. A view is held by some authorities that this is a
lawyers' division and that while such a division is suitable for
the professional law student, a different method of approach
should be worked out for the business law students who are not
preparing to become lawyers.
The writer cannot subscribe to this view. There is a law of'
con-tracts, a law of agency, a law of negotiable paper, a law of
partnerships, a law of corporations, for the business man, just
as there is for the lawyer. It is a natural and logical division.
The business man, rather than the lawyer, is responsible for it.
To use a simple illustration, suppose a business man brings me
a negotiable promissory note and asks me to explain to him its
vii
viii
PREFACE TO SECOND EDITION
legal meaning and effect. I say to him: "This instrument is
a certain form of contract, and it is desirable that I explain
to you something of the general law of contracts. This particu-
lar note is made by a corporation and is executed by an agent
and you should understand something of the law of corporations
and of agency. A knowledge of at least those branches of the
law will enable you better to understand the branch of law
known as the law of negotiable paper which governs this in-
strument you have handed'me. Thus I outline to the business
man a course of study according to what appears to me to be the
logical and natural classification.
The writer can think of no more acceptable classification of
general business law. And it is fortunate that we can use the
same general arrangement, subdivision and terminology that the
lawyer uses. Such classification has at least had the merit of
general acceptance, and in addition it aids the student, to get
the viewpoint of the lawyer, which is the thing he needs. He
already has the business man's viewpoint. The promissory note
is an item handled by him in his daily work, but it means
certain things to me, as a lawyer, which do not occur to him as
a business man. This meaning and the reasons for it, he learns
in his study of business law.
It seems to the writer that this is a thought deserving empha-
sis, because there are apparently other views entertained by
some authorities which appear to the writer erroneous. There are
authorities who tell their students of business law that they are
not studying Law, and that all of our business law books with
their law book classifications are merely made over law texts for
business law students. And they suggest an entirely new
method of treatment and classification.
The editor of this book tries to teach to his business law
classes, law—the law that applies to business problems and which
naturally grows up and develops out of business practices and
business needs, and that is the law also studied by the profes-
sional law student. To be sure, the method of presentation must
be a different method, but different in degree, rather than kind.
There is (except for procedural law) not one law for the business
man and another for the lawyer. It is all one cloth.
A criticism might be made by some authorities that this
classification does not group certain information which the busi-
ness man should have to handle every conceivable business
transaction. For example, if the business man is about to make
PREFACE TO SECOND EDITION
ix
a sale of goods he may be confronted with the problem whether
to sell for cash or credit, and, if not for cash, upon what terms
or in what fashion. Shall he require a chattel mortgage from
the buyer, or sell under the form of a conditional sale, or ship
"C. 0. D, or with an order bill of lading with sight draft
attached. Leaving out the fact that this is in part a credit
man's problem to be largely solved by his own judgment and
experience, the answer from the standpoint of education in
business law is that any given business transaction involves legal
consequences and has legal aspects that require a knowledge of
the various fundamental branches of law. The above example
involves a knowledge of the law of contracts, the law of sales,
the law of negotiable paper, all of which must be studied as
subjects in themselves to enable a person to comprehend the
legal effects of the particular course he adopts. In other words,
the supposed method would logically require a presentation of
multitudinous specific business transactions each one of which
involves a knowledge of the various fundamental branches of
business law. The chief function of the business law instructor
is to equip his students with an education in basic legal principles
the application of which he is then prepared to make "for him-
self or to have his lawyer make for him where the exigencies
of the particular case require. Here, as in all departments of
education, the principle or law of indirection applies. The
student cannot expect, nor can the instructor hope to give him,
a business law education as a whole except by a step by step
process through the various branches of law. If a client asks
me as his lawyer to advise him in a problem such as the one
suggested above, I can give him the legal advice and assistance
that he needs in the particular case, but in so advising him I
am by no means under the belief that he is acquiring a legal
education or is thereafter competent to handle matters as he
would be had he taken a general course in business law.
The order of the subjects as adopted in this case book is
believed to be fairly logical. First comes a general survey which
enables the student .to acquaint himself with fundamental
terminology and to get an introductory view of law in general.
Then comes the subject of Contracts which underlies and per-
meates all of our business subjects.
After that, Agency seems to be properly placed as it also has
a general and fundamental application. Some authorities group
Agency with Partnerships, Corporations and Business Trusts
X
PREFACE TO SECOND EDITION
under a general heading of Business Associations, but this
appears to the editor inconvenient and illogical. The law of
Agency is f-undamental, far reaching law and deals with a
certain group of legal concepts that differentiate it sharply as
a study in itself to be taken up as early as possible. "What we
really study in Partnerships, Corporations and Business Trusts
is a certain kind of business association, rather to be
known as business proprietorship. The term, business associa-
tion, would as logically include the form of royalty agreement
which an author makes with his publisher or which a patentee
makes with his manufacturer, as it would Agency. In a
broader sense, it would include any business contract or rela-
tionship. Agency, therefore, is not co-ordinate with forms of
business association of a proprietary nature, but has a far more
basic importance. After Agency, come in order, Sales, Negoti-
able Paper, Partnerships, Corporations, Business Trusts and
Bankruptcy, with some material on Bailments, Carriers, Bank-
ing and Suretyship.
The teacher of business law must always keep in mind that
his students are in a very different situation from that of pro-
fessional law students in the matter of the time that they give
to the study and in the interest which they have in it. The busi-
ness student studies for a brief period as a part of a general
program of education. We must give him a good deal of help.
It is for this reason the editor has retained the "Point In-
volved and has freely paraphrased the facts of the cases and
edited the judicial opinions. The teacher must help the process
along by wise summarization and lecture work.
A study of business law gives the student a fund of workable
information, teaches him the value of seeking legal advice, de-
velops his reasoning and analytical powers and, not least, shows
the student the relationship of law to business—how the law
has so largely developed out of business situations, practices and
customs and is so largely the crystallization of sound business
experience.
The editor begs indulgence for the mapy shortcomings of his
effort. He has been gratified at the reception accorded to the
first edition and tenders this revision in the hope it may help
along the cause of general education.
Northwestern University, ALFRED W. BAYS.
Evanston, Chicago,
September, 1923.
CONTENTS
DIVISION A
GENERAL SURVEY
CHAPTER 1
LAW DEFINED
§ 1. What is law.
§ 2. International law.
§ 3. National or municipal law.
§ 4. Branches of municipal law.
CHAPTER 2
THE BRANCHES OF MUNICIPAL LAW
§ 5. Constitutional law.
§ 6. The federal constitution.
§ 7. The state constitutions.
§ 8. Administrative law.
§ 9. The law of crimes.
§ 10. The law of torts.
§ 11. The law of judicial procedure.
§ 12. Other branches of municipal law.
CHAPTER 3
FORM OF LAW
§ 13. Purpose of this chapter.
§ 14. Written law.
§ 15. Codes.
§ 1G. Uniform laws.
§ 17. Unwritten law.
§18. Judicial reports.
§ 19. Doctrine of stare decisis.
§ 20. Secondary sources of the law.
xi
xii
CONTENTS
CHAPTER 4
THE JUDICIAL SYSTEM
§ 21. Function of the courts.
§ 22. Courts of law and courts of equity.
§ 23. Courts of original jurisdiction and of review.
§ 24. The progress of a case through the courts.
CHAPTER 5
ADMINISTRATIVE BOARDS AND COMMISSIONS
§ 25. In general.
§ 26. The Interstate Commerce Commission.
§ 27. The federal reserve board.
§ 28. The federal trade commission.
§29. Public utility commissions.
§ 30. Employer's liability commissions.
§ 31. Commissions to revise or regulate .taxes.
§ 32. Other boards or commissions.
DIVISION B
CONTRACTS
PART I
FORMATION OF CONTRACTS
CHAPTER 6
DEFINITION AND CLASSIFICATION
§ 33. Contract defined.
§ 34. Essential elements in contracts.
§ 35. Kinds of contracts.
CHAPTER 7
PARTIES TO CONTRACTS
A. Who Are Parties
§ 36. Parties defined.
§ 37. Capacity of parties generally.
CONTENTS
xiii
B. Minors as Parties
§ 38. Who are minors.
§ 39. Power of minors to contract.
§ 40. Minor's liability for necessaries.
§41. What are necessaries.
(a) Kind of advantages that may constitute necessaries.
(b) Station in life as factor.
(c) Minor already supplied.
(d) Necessaries must be actually supplied.
§ 42. Disaffirmance of minor's voidable contracts.
(a) Disaffirmance.
(b) Ratification.
§ 43. Tortious liability of minors in cases involving contracts.
C. Other Parties Under Disability
§ 44. Married women.
§ 45. Insane persons.
§ 46. Drunken persons.
§ 47. Aliens.
§ 48. Corporations,
CHAPTER 8
OFFER AND ACCEPTANCE (i) WHAT CONSTITUTES
A. Necessity of Offer and Acceptance
§ 49. No contract without offer and acceptance.
B. What Constitutes Offer
§ 50. No offer and acceptance because no communication to
offeree.
§ 51. No offer because offer not uttered.
§ 52. Preliminary announcements intended to secure offers
distinguished from offers.
§ 53. Offer indefinite.
§ 54. Offer incomplete.
C. How Long Offer Continues
§ 55. Duration of offer.
§ 56. Termination of offer by rejection.
^ 57. Termination of offer by destruction of subject matter.
^ 5g. Termination by death and insanity of offeror or offeree.
§ 59. Revocation of offer,
s go. Contracts to keep offers open.
xiv
CONTENTS
D. The Acceptance
§ 61. What constitutes acceptance.
§ 62. Acceptance by promise or act.
§ 63. Communication of acceptance.
§ 64. Silence as acceptance.
CHAPTER 9
OFFER AND ACCEPTANCE (2) VALIDITY OF ASSENT THEREIN
§ 65. Introduction.
A. Extrinsic Circumstances Defeating Contractual Intent
§ 66. Fraud in inception or execution.
§ 67. Mistake.
B. Circumstances of Undue Advantage Rendering Contract
Voidable
(a) Fraud in the inducement or consideration
§ 68. Fraud in the inducement defined.
§ 69. Express statements of fact as fraud.
§70. Opinions and predictions not fraud.
§ 71. Active concealment as fraud.
§ 72. Silence as fraud.
§ 73. Silence as fraud—facts not discoverable.
§ 74. Silence as fraud—contract one uberrimae fidei.
§ 75. Silence as fraud—relationships of trust and confidence.
§76. Summary of what constitutes fraud.
(b) Duress
§ 77. Duress defined.
(c) Undue influence
§78. Undue influence defined—its effect.
(d) Disaffirmance and ratification of contracts voidable for
foregoing reasons
§ 79. Conditions of disaffirmance.
§ 80. Ratification.
CHAPTER 10
CONSIDERATION
A. Theory and Nature
§81. Consideration defined; a necessary element.
§ 82. Inadequacy of consideration.
CONTENDS xv
B. Examples of Consideration
§ 83. Consideration may consist in promise or act.
§ 84. Past act.
§ 85. Performance of or promise to perform obligation imposed
by law.
§ 86. Promise to perform unexecuted contract.
§ 87. Part payment of debt as consideration of release of
balance.
(a) Part payment of liquidated debt—general rule.
(b) Any disadvantage to debtor in addition to part pay-
ment of debt.
(c) Debt unliquidated.
(d) Composition with creditors.
§ 88. Compromise of disputed claim.
§ 89. Forbearance of suit as good consideration.
§ 90. Consideration in subscriptions.
CHAPTER 11
LEGALITY OF CONTRACTS
A. Legality of Contract an Essential Element
§ 91. Illegal agreements void.
B. Particular Classes of Illegal Agreements
1. CONTRACTS WHOSE OBJECTS ARE IN VIOLATION OF LAW
§ 92. Contracts in restraint of trade.
§ 93. Contracts of monopolistic tendency.
§ 94. Contracts limiting liability.
§ 95. Usurious contracts.
§ 96. Wager contracts.
§ 97. Contracts tending to corrupt the public service.
§ 98. Agreements in restraint of marriage.
2. CONTRACTS ILLEGAL BECAUSE OF MANNER OF FORMATION
§ 99. Sunday agreements.
§ 100. Contracts without required license.
C. Intent to Put to Illegal Use Avails of Legal Contract
§ 101. Knowledge by one of other's intent to commit crime.
D. Judicial Remedies in Illegal Agreements
§ 102. No remedy by way of enforcement.
§ 103. No remedy by way of rescission,
s 104. Parties not in equal guilt.
xvi
CONTENTS
§105. Defendant's contract wholly .executory.
§ 106. Where statute allows recovery.
§ 107. Where contract partly legal, partly illegal.
CHAPTER 12
FORM AND EVIDENCE
§ 108. General statement.
A. The Formal Contract or Contract Under Seal
§ 109. Definition of sealed instrument.
§ 110. Effect of seal in early law.
§ 111. Instruments requiring seal at common law.
§ 112. Modern legislation in respect to sealed instruments.
B. Contracts Required by Law to Be in Writing
§113. Certain kinds of contracts to he in writing.
C. Contracts Not Enforcible Unless in Writing
(a) Nature and object of statute of frauds
§ 114. The statute of frauds.
§ 115. Text of the statute.
§ 116. Statute relates to enforcement, not validity of contracts,
(b) The cases within the statute
§ 117. Promises of executors and administrators.
§ 118. Promises to answer for the debt, default or miscarriage
of another person.
§ 119. Promises in consideration of marriage.
§ 120. Contracts for the sale of lands or interest therein.
§ 121. Contracts that cannot be performed within a year.
§ 122. Contracts for the sale of goods, wares and merchandise.
(c) "What amounts to compliance with statute
§ 123. The memorandum and the signature.
§ 124. Compliance by delivery and acceptance in sales.
§ 125. Compliance by payment or part payment in sales.
§ 126. Contracts of "work and labor not within the statute.
§ 127. The statute of frauds and the uniform sales act.
D. The Parol Evidence Rule
§ 128. The parol evidence rule defined.
§ 129. Parol evidence rule permits contract partly in writing,
partly oral.
CONTENTS xvii
§ 130. Parol evidence rule permits proof of customs.
§ 131. Evidence not forbidden by parol evidence rule.
E. Oral and Implied Contracts
§ 132. Oral contracts.
§ 133. Contracts implied in fact.
F. Contracts Implied in Law (Quasi Contracts)
§ 134. Definition of quasi contract.
PART II
THE INTERPRETATION OF CONTRACTS
CHAPTER 13
GENERAL RULES OP INTERPRETATION
§ 135. The governing principle in construction of contracts.
§ 136. General rules of construction.
CHAPTER 14
CONSTRUCTION IN RESPECT TO TIME OF PERFORMANCE
§ 137. In a court of law time is of the essence.
§ 138. Time of performance in a court of equity.
CHAPTER 15
INTERPRETATION OF PROVISIONS AS TO PENALTIES AND LIQUIDATED
DAMAGES
In explanation.
Damages difficult to ascertain and amount reasonable.
Larger sum than debt payable in event of default.
Certain sum payable for breach of any of several cove-
nants.
Forfeiture of amounts paid.
PART III
OPERATION OF. CONTRACTS
CHAPTER 16
OPERATION AS TO PARTIES
General rule.
139.
140.
141.
142.
143.
§144.
xviii
CONTENTS
CHAPTER 17
BENEFICIARIES TO CONTRACTS
§ 145. General statement.
§ 146. Incidental beneficiary cannot sue.
§ 147. Beneficiary may sue when
CHAPTER 18
ASSIGNMENT OF CONTRACTS
§ 148. General statement.
§ 149. Power to assign mere contractual rights.
§ 150. Power to assign contractual obligations.
§ 151. Power to assign contractual rights accompanied with
personal confidence or liability.
§ 152. Contractual rights to be acquired in future not assign-
able.
§ 153. Effec^ of assignment as to assignor.
§ 154. Assignee as successor to title of assignor.
§ 155. Effect of assignment as to other party.
§ 156. What constitutes assignment.
§ 157. Assignment by operation of law.
CHAPTER 19
INTERFERENCE WITH CONTRACTUAL RELATIONSHIPS BY THIRD
PERSONS '
§ 158. Duty not to interfere with contract rights.
§ 159. Contract for indefinite period.
§ 160. Prevention of future contracts.
PART IV
DISCHARGE OF CONTRACTS
CHAPTER 20
DISCHARGE BY PERFORMANCE, TENDER AND BREACH
§ 161. Meaning of phrase discharge of contracts.
§ 162. Of the performance which will discharge contracts.
§ 163. Contracts to be performed to satisfaction.
§ 164. Of performance which will not discharge and breach.
§ 165. Effect of acceptance of insufficient performance.
§ 166. Performance or tender as condition precedent.
§ 167. Breach of one part of several contract.
§ 168. To what contract performance relates.
§ 169. Anticipatory breach.
CONTENTS
xix
CHAPTER 21
DISCHARGE OF CONTRACTS BY OTHER MEANS THAN PERFORMANCE
OR BREACH
Discharge by impossibility of performance.
Discharge by alteration of written instrument.
Discharge by novation.
Discharge by merger.
Discharge by agreement.
Discharge in bankruptcy.
Discharge by statute of limitations.
CHAPTER 22
REMEDIES OF THE PARTIES
A. Actions for Damages
§ 177. In general.
§ 178. Kinds of damages in contract cases.
§ 179. Rule for computing damages in contract cases.
* B. Bill for Specific Performance
§ 180. General rule.
§ 181. Contracts for sale of real estate.
§ 182. Contracts for sale of personal property.
§ 183. Contracts for personal services.
C. Bill for Injunction
§ 184. When court will enjoin breach of contract.
division c
PRINCIPAL AND AGENT
part i
NATURE AND FORMATION OF AGENCY
CHAPTER 23
DEFINITIONS
§ 185. Nature of agency.
§ 186. The responsibility of the principal or master.
§170.
§ 171.
§ 172.
§173.
§174.
§175.
§176.
CONTENTS
The principal and agent as one person.
Kinds of agencies.
CHAPTER 24
CAPACITY OF PARTIES AND POWER OF DELEGATION
In general.
Power to Be Principal or Agent as Dependent Upon
Capacity to Contract
General rule as power to be principal.
Minors as principals.
Corporations as principals.
Power to act as agent.
B. Power to Be Principal or Agent as Dependent Upon Nature
of Act Involved
§ 194. Appointment of agent for illegal purpose.
§ 195. Acts not delegable because general public policy forbids.
§ 196. Personal duties imposed by contract not delegable.
CHAPTER. 25
THE APPOINTMENT OF THE AGENT
A. Authorization by Act of Party
§197. In general.
§ 198. Formalities required in appointment of agent.
§ 199. Elements essential in appointment of agent.
B. Authority Conferred by Law
§ 200. In general.
§ 201. Authority of wife to bind husband.
§ 202. Authority of child to bind parent.
§ 203. Statutory liability for family expenses.
CHAPTER 26
AUTHORIZATION BY RATIFICATION
A. Definitions and Essentials
§ 204. Meaning of ratification.
§ 205. Essentials of ratification.
B. What Constitutes Ratification
§ 206. Express ratification.
§ 207. Silence as ratification.
XX
§ 187.
§ 188.
189.
A.
§ 190.
§ 191.
§ 192.
§ 193.
CONTENTS xxi
Ratification by receiving benefits.
Ratification by bringing suit.
C. Results of Ratification
Ratification cures original defect.
Ratification irrevocable.
PART II
THE DUTIES AND LIABILITIES ARISING OUT OF
AGENCY
CHAPTER 27
THE DUTIES AND LIABILITIES OF THE PRINCIPAL TO THE AGENT
§ 212. Agent's right to compensation.
§ 213. When compensation considered earned.
§ 214. Agent's right to damages where principal wrongfully
revokes.
§ 215. Agent's right to compensation where guilty of breach of
contract.
§ 216. Agent's right of compensation where he abandons serv-
ice without his own fault.
CHAPTER 28
THE DUTIES AND LIABILITIES OF THE AGENT TO THE PRINCIPAL
A. The Agent's Obligation of Good Faith
§ 217. Duty of agent to use good faith. General rule.
§ 218. Agent cannot secretly represent both parties.
§ 219. Agent cannot buy from, or sell to, self.
§ 220. Agent cannot take secret profits and benefits.
B. Duty to Obey Instructions, to Use Care and Skill, etc.
Duty of agent to obey instructions.
Duty of agent to use care and skill.
Agent's duty of personal performance.
Whether agent is selected to perform or to obtain agent
to perform.
Same subject applied to collections by banks.
C. Liability of Agent to Principal for Default of Third
Person
§ 226. General rule.
§ 227. Del credere agencies.
208.
209.
§210.
5 211.
§ 221.
§ 222.
§ 223.
§ 224.
§225.
xxii
CONTENTS
CHAPTER 29
the duties and liabilities in contract of a disclosed
principal (the agent's authority;
§ 228. General rule.
§ 229. Unauthorized assertions by agent of his authority.
§ 230. Implied and apparent authority distinguished.
§ 231. Implied and apparent authority in general and special
agencies.
§ 232. Construction of special appointments.
§ 233. Implied and apparent power of agent to borrow money.
§ 234. Implied and apparent power of agent to bind principal
upon commercial paper:
§ 235. Implied and apparent power of agent to sell personal
property.
§ 236. Implied and apparent power of agent who has indicia of
title to sell goods.
§ 237. Implied and apparent power of selling agent to receive
payment.
§ 238. Implied and apparent authority of selling agent to ex-
tend credit on sales.
§ 239. Implied and apparent power of buying agent to buy on
credit.
§ 240. Implied and apparent power to warrant.
§ 241. Admissions of agent.
§ 242. Authority of agent to receive notice.
CHAPTER 30
undisclosed principals
§ 243. General rule.
§ 244. First exception to rule.
§ 245. Second exception to rule.
§ 246. Third exception to rule.
§ 247. Fourth exception to rule.
§ 248. Where alleged undisclosed principal had not conferred
authority.
§ 249. Undisclosed principal's right to hold third person.
CHAPTER 31
principal's liability for torts of agent
§ 250. Authorized torts.
§ 251. Ratified torts.
§ 252. Liability for torts within scope of authority.
§ 253. What torts within scope of authority.
CONTENTS
xxiii
CHAPTER 32
THE DUTIES AND LIABILITIES OF THE AGENT TO THE THIRD PERSON
§ 254. General statement.
A. Liability of Agent in Contract
(a) The agent warrants his authority
§ 255. Warranty of authority by agent.
(b) Agent may bind himself on contract
§ 256. General statement.
§ 257. Principal undisclosed.
§ 258. When agent bound on sealed instruments by form of
his execution.
§ 259. When agent bound on negotiable paper by form of his
execution.
§ 260. When agent bound on other contract by form of his
execution.
§ 261. Agent bound where no responsible principal.
B. Liability of Agent in Tort
§ 262. Agent responsible for his torts.
PART III
PROFESSIONAL AGENTS
CHAPTER 33
A. Factors
§ 263. Definition of factor.
§ 264. Duties of factor.
§ 265. Implied authority of factor.
§ 266. Same as to third persons.
§ 267. Factor's lien.
B. Brokers
§ 268. Definition.
§ 269. Kinds of brokers.
§ 270. Authority of broker.
C. Auctioneers
8 271- Auctioneers defined.
8 272. Auctioneer's authority.
8 273- When sale by auction takes place.
§ 274. "By bidding.
xxiv
CONTENTS
PART IV
TERMINATION OF RELATIONSHIP
CHAPTER 34
TERMINATION BY ACT OF PARTIES
§ 275. By terms of original agreement.
§ 276. By accomplishment of object.
§ 277. Revocation by act of principal.
§ 278. Irrevocable agencies.
§ 279. When principal has right to revoke.
§ 280. Termination by agent.
§ 281. Notice of revocation to agent.
§ 282. Notice to third persons.
CHAPTER 35
REVOCATION BY OPERATION OF LAW
§ 283. By death of principal.
§ 284. By death of agent.
§ 285. By insanity of party.
§ 286. By bankruptcy.
§ 287. By war.
DIVISION D
BAILMENTS, CARRIERS AND SALES
SUBDIVISION I
BAILMENTS AND CARRIERS
CHAPTER 36
DEFINITIONS
§ 288. Bailment defined.
§ 289. Kinds of bailments.
§ 290. How bailment differs from sale.
§ 291. Same subject in case of fungible goods.
CHAPTER 37
RIGHTS AND OBLIGATIONS OF ORDINARY BAILEES
§ 292. Bailee's duty of care.
§ 293. Use of property by bailee.
CONTENTS
XXV
§ 294. Bailee's lien.
§ 295. The pledge.
CHAPTER 38
EXTRAORDINARY BAILEES
§ 296. Public service businesses.
§ 297. Innkeepers.
§ 298. Common carrier defined.
§ 299. Common carrier's duty of indiscriminate service.
§ 300. Common carrier's duty to transport goods safely.
§301. Common carrier's duty to transport without delay.
§ 302. Freight and demurrage.
CHAPTER 39
BILLS OF LADING AND WAREHOUSE RECEIPTS
§ 303. Documents of title defined.
§ 304. Assignability at common law.
§ 305. Legislation upon documents of title.
§ 306. Bills and receipts negotiable and non-negotiable.
§ 307. Legal meaning of negotiability as here applied.
§ 308. How negotiation of documents accomplished.
§ 309. Result of transfer of document to transfer title to goods.
§ 310. Warranties of transferor.
§ 311. The use of documents of title as security.
§ 312. Right of transferee of negotiable document against the
issuer thereof.
SUBDIVISION II
SALES OF PERSONAL PROPERTY
PART I
FORMATION OF CONTRACT OF SALE
CHAPTER 40
• DEFINITION AND GENERAL NATURE
A. Definitions and Distinctions
8 313. Definitions.
8 314. Consideration called the price.
8 315- Conditional sales defined.
| 316. Sales distinguished from gifts.
xxvi
CONTENTS
B. Form of Contract
Sale in writing; oral; or implied.
Formalities required in certain cases.
Statute not applicable if price less than a certain amount.
Statute no defense if payment made in whole or part.
Statute no defense where part delivery and acceptance
of goods.
Statute no defense where sufficient signed memorandum.
What is contract of sale within the statute.
CHAPTER 41
PARTIES AND SUBJECT MATTER
Parties to sales.
Sales of future goods.
Destruction or deterioration of the goods before making
of contract.
Destruction or deterioration after contract to sell.
CHAPTER 42
THE CONTRACT'S OBLIGATIONS AS AFFECTED BY WARRANTIES
§ 328. Definition of warranty.
A. Express Warranties
§ 329. What constitutes express warranty.
§ 330. Whether alleged oral warranty provable if sale in writ-
ing.
B. Implied Warranties
Doctrine of caveat emptor.
Generally of the implied warranties.
Implied warranties in express sales.
The implied warranties of title.
The implied warranties in a sale by description.
The implied warranties in a sale by sample.
The implied warranty of fitness for purpose bought.
Warranties do not run with personal property.
Right of remote purchaser to sue in tort.
§ 317.
§318.
§ 319.
§ 320.
§ 321.
§ 322.
§ 323.
324.
325.
326.
327.
§ 331.
§ 332.
§ 333.
§ 334.
§ 335.
§ 336.
§ 337.
§ 338.
§ 339.
CONTENTS
xxvii
PART II
THE CONTRACT'S EFFECT AS TRANSFERRING TITLE
CHAPTER 43
TRANSFER OF TITLE BETWEEN BUYER AND SELLER, WHERE RIGHTS
OF THIRD PARTIES NOT INVOLVED
Meaning of phrase "transfer of title.
Goods unascertained.
Goods ascertained.
Rules for ascertaining intention of parties: first rule.
Second rule.
Third rule.
Fourth rule.
Fifth rule.
Reservation, upon shipment, of title in seller.
Risk of loss.
CHAPTER 44
TITLE AND THIRD PERSONS
Attempted sale by one not owner; in general.
A. When True Owner Not Estopped to Assert Title
§ 351. In general.
§ 352. In case of consignment for sale.
§ 353. In case of bailment other than for sale.
B. When True Owner Estopped to Assert Title Against Third
Persons
§ 354. In general.
§ 355. Allowing another to assert that he is owner.
§ 356. Clothing another with documentary indicia of title.
C. When True Owner Prevented by Statute from Asserting
Title
§ 357. In general.
§ 358. Effect of retention by seller after sale.
§ 359. Conditional sales,
s 3(50. Bulk sales acts.
§ 361. Factor's acts.
§ 362. Chattel mortgages.
§ 340.
8 341.
§ 342.
§ 343.
§ 344.
§ 345.
§ 346.
§ 347.
§ 348.
§ 349.
350.
xxviii
CONTENTS
PART III
THE PERFORMANCE OF THE CONTRACT
CHAPTER 45
OBLIGATIONS OF THE PARTIES
§ 363. In general.
§ 364. Obligations in respect to time.
§ 365. Obligations in respect to place.
§ 366. Obligation in respect to quantity.
§ 367. Delivery to carrier as-delivery to buyer.
§ 368. Buyer's right to examine the goods.
§ 369. What constitutes acceptance by buyer.
CHAPTER 46
RIGHT OF BUYER UPON NON-PERFORMANCE
§ 370. Enumeration of rights and remedies of unpaid seller.
§ 371. In general of these rights and remedies.
§ 372. Whether sale is on credit.
A. Where Goods Have Not Been Delivered to Buyer
(a) If title has not passed
§ 373. Goods not delivered, title not passed, right to withhold
delivery, or rescind contract.
§ 374. Goods not delivered, title not passed, right to sue for
price.
§ 375. Goods undelivered, title not passed, seller's right to sue
for damages.
(b) If title has passed (goods being still undelivered)
§ 376. Goods undelivered, title passed, seller's lien.
§ 377. Goods undelivered, title passed, right of resale.
§ 378. Goods undelivered, title passed, seller's right of rescis-
sion upon breach by buyer.
§ 379. Goods undelivered, title passed, seller's right to sue for
purchase price.
B. Where Goods Have Been Delivered to Buyer or His Agent
(a) Where title has not passed
§ 380. Right to sue for price or damages.
§ 381. Goods delivered, title not passed, buyer in default, right
of seller to reclaim goods.
§ 382. Same subject: conditional sales.
CONTENTS xxix
(b) Where title has passed
§ 383. Goods delivered, title passed, buyer in default.
§ 384. Right to stop in transit.
CHAPTER 47
EIGHT OF BUYER UPON NON-PERFORMANCE
§ 385. Enumeration of rights and remedies of buyer.
A. Where Goods Have Not Been Delivered to Buyer
(a) Where title has not passed
§ 386. Goods not delivered, title not passed, buyer's right to
sue for damages.
§ 387. Goods not delivered, title not passed, buyer's fight to
specific performance.
(b) Where title has passed
§ 388. Goods not delivered, title passed, buyer's right to re-
cover goods themselves.
B. Where Goods Are Delivered or Tendered to Buyer
(a) Eight to refuse acceptance for breach of warranty
§ 389. Goods tendered to buyer, right to refuse acceptance for
breach of warranty.
§ 390. Goods delivered to buyer, right to reject after trial.
§ 391. Goods delivered to buyer, buyer's right to accept and sue
for breach.
PART IV
CHAPTER 47A
CONDITIONAL SALES
§ 391a. The Uniform Conditional Sales Act.
§ 391b. Definitions of terms.
§ 391c. Primary rights of buyer.
§ 391d. Primary rights of seller.
§ 391e. Conditional sales valid.
§ 391f. Conditional sales void as to certain persons.
§ 391g. Place of filing.
§ 391h. Futures.
§ 391i. Railroad equipment.
§ 391 j. Conditional sale of goods for resale.
§ 391k. Filing.
§ 3911. Refiling.
§ 391m. Cancellation of contract.
§ 391n. Sale or removal by buyer.
XXX
CONTENTS
§ 391o. Refiling or removal.
§ 391p. Fraudulent injury, concealment.
§ 391q. Retaking possession.
§ 391r. Notice of intention to retake.
§ 391s. Redemption.
§ 391t. Compulsory resale by seller.
§ 391u. Resale at option of parties.
§ 391v. Proceeds of resale.
§ 391w. Deficiency on resale.
§ 391x. Rights where no resale.
§ 39ly. Election of remedies.
§ 391z. Recovery of part payment.
§ 391aa. Waiver of statutory protection.
§ 391bb. Loss and increase.
APPENDICES
Uniform Sales Act and Uniform Warehouse Receipt Act
DIVISION E
NEGOTIABLE INSTRUMENTS
PART I
GENERAL NATURE AND HISTORY
CHAPTER 48
GENERAL DESCRIPTION OF NEGOTIABLE PAPER
Meaning of word "negotiable.
Peculiarities of negotiable paper.
CHAPTER 49
NEGOTIABILITY OF VARIOUS INSTRUMENTS
to 405.
A. Promissory notes.
B. Bills of exchange and checks.
C. Instruments not covered by negotiable instruments
law.
CHAPTER 50
HISTORY AND ORIGIN OF COMMERCIAL PAPER
Continental origin and adoption in England.
Negotiable paper in the United States.
§ 392.
§ 393.
§§ 394
§ 406.
§ 407.
CONTENTS xxxi
PART II
THE FORMATION OF THE CONTRACT
CHAPTER 51
EXPRESSION NEGOTIABLE FORM (1) FORMAL REQUISITES
§ 408. In general.
A. "It Must be in Writing and Signed by the Maker or
Drawer.''
§ 409. Writing and signature.
B. "Must Contain an Unconditional Promise or Order.
§ 410. Unconditional promise or order.
(1) In general.
(2) Reference to transaction or consideration.
(3) Indication of fund, etc.
C. "To Pay a Sum Certain in Money
§ 411. Sum certain.
§ 412. Payment in money.
D. "Must be Payable on Demand or at a Fixed or Determin-
able Future Time
§ 413. Demand paper.
§ 414. Fixed or determinable future time.
(1) In general.
(2) What constitutes fixed or determinable future time.
E. "Must be Payable to Order or to Bearer
§ 415. In general.
§ 416. When payable to order.
§ 417. When instrument payable to bearer.
F. "Where the Instrument Is Addressed to a Drawee, he
Must be Named or Otherwise Indicated Therein with
Reasonable Certainty.
§ 418. Meaning of provision.
CHAPTER 52
EXPRESSION NEGOTIABLE FORM (2) PROVISIONS WHICH DO NOT
PREVENT NEGOTIABILITY
§ 419. I11 general.
8 420. Provision authorizing sale of collateral securities.
xxxii
CONTENTS
§ 421. Reference to mortgage given as security.
§ 422. Provision authorizing confession of judgment.
§ 423. Waiving benefit of exemption and similar laws.
§ 424. Effect of affixing seal.
§ 425. Omission of date.
§ 426. Ante-dating and post-dating.
§ 427. Rules of construction.
CHAPTER 53
EXECUTION AND DELIVERY
428. Delivery essential.
429. Delivery presumed in favor of holder in due course.
430. Incomplete instrument.
431. Delivery of complete instrument containing uncancelled
spaces.
432. Execution by agent.
CHAPTER 54
CONSIDERATION FOR EXECUTION
§ 433. Necessity for consideration.
§ 434. What may constitute consideration.
§ 435. Antecedent debt as consideration.
§ 436. Consideration presumed.
§ 437. Recital of consideration.
§ 438. Want of consideration aud holder in due course.
CHAPTER 55
THE FORMATION OF THE CONTRACT OF THE ACCEPTOR
In general.
Definition of acceptance.
How acceptance must or may be made.
Acceptance presumed from retention.
Kinds of acceptance.
Effect of qualified acceptance.
Acceptance of check.
§ 439.
§ 440.
§ 441.
§442.
§ 443.
§ 444.
§ 445.
CHAPTER 56
THE FORMATION OF THE CONTRACT OF PARTIES FOR ACCOMMODA-
TION OR FOR HONOR
§ 446. Accommodation party defined,
§.447. Acceptance for honor.
§ 448. Payment for honor,
CONTENTS
xxxiii
PART III
OPERATION OF THE CONTRACT
CHAPTER 57
NEGOTIATION
A. In General of Negotiation and Indorsement
§ 449. Meaning of negotiation.
§ 450. Kinds of negotiation.
§ 451. How indorsement accomplished.
§ 452. Attempted partial indorsement.
§ 453. Effect of indorsement to transfer incidents.
§ 454. Presumptions as to indorsements.
§ 455. Miscellaneous rules concerning indorsement.
B. Kinds of Indorsements
§ 456. Special indorsement.
§ 457. Blank indorsement.
§ 458. Qualified indorsement.
§ 459. Restrictive indorsement.
§ 460. Conditional indorsement.
CHAPTER 58
HOLDER IN DUE COURSE
§ 461. Introduction.
§ 462. Who is holder in due course.
§ 463. Complete and regular upon its face.
§ 464. Transferee must give value.
§ 465. Transferee must take in good faith.
(1) In general.
(2) Payment of less than face value as showing bad
faith.
(3) Knowledge that consideration is still unperformed.
§ 466. Transferee must acquire instrument before overdue.
(1) In general.
(2) When demand paper overdue.
(3) Interest overdue; installments overdue.
(4) Overdue paper sold in breach of trust.
§ 467. Indorsement requisite.
§ 468. Transferee of holder in due course as holder in due
course.
§ 469. Burden of proof as to whether one is holder in due
course.
§ 470. Amount recoverable by holder in due course.
xxxiv
CONTENTS
•CHAPTER 59
DEFENSES AGAINST HOLDER IN DUE COURSE
A. Defenses not Available Against Holder in Due Course
Personal Defenses
In general.
Payment before maturity.
Set off.
Want of consideration.
Failure of consideration and breach of contract.
Fraud in consideration.
Duress.
Illegality of consideration.
Lack of authority of agent known to payee.
Lack of authority of partner.
Lack of authority of corporate officer.
B. Defenses Available Against Holder in Due Course—Real
Defenses
Real defenses defined.
Personal incapacity of defendant.
Forgery.
Material alteration.
Fraud in execution.
Illegality voiding under statute.
§ 471.
§ 472.
§ 473.
§ 474.
§ 475.
§ 476.
§ 477.
§ 478.
§ 479.
§ 480.
§ 481.
§482.
§ 483.
§ 484.
§ 485.
§ 486.
§ 487.
CHAPTER 60
THE OBLIGATIONS OF THE PARTIES
§ 488. Of maker of note.
§ 489. Of drawer of bill.
§ 490. Of drawee of bill or check.
§ 491. Of acceptor.
§ 492. Of unqualified indorser.
§ 493. Warranty where negotiation by mere delivery.
§ 494. Contract of qualified indorser.
§ 495. Contract of irregular indorser.
§ 496. Order of liability among indorsers.
CHAPTER 61
PRESENTMENT FOR PAYMENT AND FOR ACCEPTANCE
§ 497. General statement.
A. Presentment for Payment at Maturity to Parties Primarily
Liable
§ 498. Not necessary to charge parties primarily liable.
§ 499. Presentment for payment necessary to charge parties
secondarily liable.
CONTENTS
XXXV
§ 500. "What presentment sufficient.
§ 501. "When presentment for payment not required.
B. Presentment of Bill for Acceptance
§ 502. Presentment for acceptance necessary in certain cases.
§ 503. What presentment for acceptance sufficient.
§ 504. When excused.
§ 505. Rights of holder where bill not accepted.
CHAPTER 62
NOTICE OF DISHONOR
§ 506. Notice of dishonor necessary to charge drawer and in-
dorser.
§ 507. What notice sufficient.
§ 508. When notice to drawer is excused.
§ 509. Where notice to indorser excused.
§ 510. When notice of dishonor waived.
CHAPTER 63
PROTEST
§ 511'. Protest necessary to charge drawer and indorser of
foreign bill.
§ 512. Who authorized to make protest.
§ 513. Time, place and manner of protest.
§ 514. Protest dispensed with or waived.
PART IV
discharge of negotiable paper
CHAPTER 64
MANNER AND EFFECT OF DISCHARGE
§515. Meaning of term "discharge.
§ 516. Causes of discharge of paper.
§ 517. Discharge of party secondarily liable.
§ 518. Effect of payment by party secondarily liable.
§ 519. Material alteration as discharge.
§ 520. Renunciation of rights.
PART V
added chapters on banks and suretyship
CHAPTER 65
§§ 521-558.
BANKS AND BANKING
CONTENTS
CHAPTER 66
GUARANTY AND SURETYSHIP
APPENDIX A
Uniform Negotiable Instruments Act
DIVISION F
PARTNERSHIPS
PART I
GENERAL NATURE AND FORMATION OF
PARTNERSHIPS
CHAPTER 67
THE GENERAL NATURE OF PARTNERSHIPS
§ 560. Partnerships defined.
§ 561. The partnership not an entity.
§ 562. Partners co-owners.
§ 563. Association must be for financial profit.
§ 564. Test of partnership.
§ 565. Co-ownership, but no sharing of profits.
§ 566. Partnerships by estoppel.
§ 567. Doctrine of delectus personae.
§ 568. How partnership differs from corporation.
§ 569. Kinds of partnerships.
§ 570. Kinds of partners.
§ 571. Sub-partnerships.
CHAPTER 68
THE PARTNERSHIP AGREEMENT
§ 572. Agreement essential.
§ 573. Form required.
§ 574. Articles of partnership.
§ 575. Competency of parties to be partners.
§ 576. Consideration.
§ 577. Legality of object.
CONTENTS
xxxvii
PART II
FIRM NAME, CAPITAL AND PROPERTY
CHAPTER 69
NAME, CAPITAL AND PROPERTY
§ 578. Necessity of firm name.
§ 579. What firm name may consist of.
§ 580. Use of firm name.
§ 581. Distinction between firm capital and firm property.
§ 582. What constitutes firm property.
§ 583. Real estate as firm property.
§ 584. Nature of partner's interest in firm property.
PART III
MUTUAL RIGHTS AND OBLIGATIONS OF PARTNERS
CHAPTER 70
RIGHTS OF PARTNER IN MANAGEMENT OF FIRM
Partner's right to be active participator.
Right of majority to govern.
General rule of conduct of partner.
Partner cannot oppose his own interests to those of firm.
Right of partner to deal openly with firm.
Right of partner to sue firm.
Right of partner to compensation, interest, etc.
PART IV
THE PARTNERSHIP AND THIRD PERSONS
CHAPTER 71
AUTHORITY OF PARTNER TO REPRESENT FIRM
§ 592. General statement.
§ 593. Recital of powers of partner in Uniform Law.
§ 594-. Apparent power of partner to buy and sell stock in trade.
§ 595. Implied or apparent power of partner to sell otherwise
than in usual course of trade.
§ 596. Implied or apparent power of partner to sell choses in
action belonging to firm.
§ 597. Implied or apparent power of partner to buy or sell
firm real estate.
§ 598. Power of partner to make warranties.
§ 585.
§ 586.
§ 587.
§ 588.
§ 589.
§ 590.
§ 591.
xxxviii CONTENTS
§ 599. Power to bind firm on negotiable paper.
§ 600. Power of partner to borrow money on firm credit.
§ 601 s Apparent power of partner to appoint agents and em-
ploy servants.
§ 602. Power of partner to settle, compromise, release^ etc.
§ 603. Power of partner to settle individual debts with firm
assets.
§ 604. Partner may be specially authorized to represent the firm.
§ 605. Ratification.
CHAPTER 72
LIABILITY OF PARTNER FOR TORTS OF CO-PARTNER
§ 606. General rule.
§ 607. Liability of partner for fraud and deceit of co-partner.
§ 608. Liability of partner for negligence of co-partner.
§ 609. Liability of partner for independent torts of co-partner.
CHAPTER 73
RIGHTS OF THIRD PERSONS AGAINST INCOMING, OUTGOING AND
SECRET PARTNERS
§ 610. Liability of incoming partner.
§ 611. Liability of outgoing partner.
§ 612. Liability of secret partner to third persons.
CHAPTER 74
REMEDIES OF CREDITORS
A. The Nature of the Partner's Liability to Third Persons
§ 613. Partners are jointly liable for firm indebtedness.
§ 614. Partners liable in toto.
B. Remedies of Creditors
(a) Where no judicial proceedings are in progress to distribute
assets.
Right of firm creditor against firm property.
Right of firm creditor against individual property of
partner.
Preference of creditors.
Right of creditor of individual partner against firm
assets.
(b) Where equitable proceedings are in progress to distribute
assets.
§ 619. Equitable rules for distribution of assets of insolvent
partnership estate.
§615.
§616.
§ 617.
§ 618.
CONTENTS
XXXIX
PART V
DISSOLUTION OF PARTNERSHIP
CHAPTER 75
DISSOLUTION BY LAPSE OF TIME, AGREEMENT AND TRANSFER OF
PARTNER 's INTEREST
In general.
Dissolution by lapse of time.
Dissolution by mutual agreement.
Dissolution by transfer of partner's interest.
Liquidation upon dissolution for foregoing causes.
The accounting between the partners and distribution of
assets.
CHAPTER 76
DEATH OF PARTNER
Effect of death of partner.
Rights, titles and duties as between surviving partner
and representative of deceased partner.
Devolution of title to firm real estate.
Rights of creditors of firm against surviving partner
and estate of deceased partner.
CHAPTER 77
DISSOLUTION BY BANKRUPTCY PROCEEDINGS AND BY JUDICIAL
DECREE
§ 630. Dissolution by bankruptcy.
§ 631. Dissolution by judicial decree on account of internal
dissensions.
§ 632. Dissolution by judicial decree"on account of partner's
incapacity.
§ 633. Dissolution by judicial decree because of partner's mis-
conduct.
§ 634. Dissolution by judicial decree because of financial failure
of enterprise.
PART VI
CHAPTER 78
LIMITED PARTNERSHIPS
S 635. Definition.
| g36. The limited partnership act.
§ 620.
§ 621.
§ 622.
§ 623.
§ 624.
§ 625.
626.
627.
§ 628.
§ 629.
xl CONTENTS
APPENDIX A
The Uniform Partnership Act
APPENDIX B
The Uniform Limited Partnership Act
DIVISION G
CORPORATIONS
PART I
CREATION AND ORGANIZATION OF PRIVATE
BUSINESS CORPORATIONS
CHAPTER 79
DEFINITION AND NATURE OF CORPORATIONS
Definition.
The corporation as a distinct entity.
The corporation as a person.
Corporate entity not allowed to defe&t responsibility of
real principal.
Corporations distinguished from partnerships.
Reasons for the incorporation of business companies.
Kinds of corporations.
Purposes for which corporations may be formed.
CHAPTER 80
PRELIMINARY OBSERVATIONS IN ORGANIZATION OF CORPORATIONS
Whether to incorporate.
Where to incorporate.
Adoption of name.
Questions of financing, etc.
Compliance with blue sky laws.
CHAPTER 81
CHARTER AND ORGANIZATION
§ 637.
§ 638.
§ 639.
§ 640.
§ 641.
§ 642.
§ 643.
§ 644.
§ 645.
§ 646.
§ 647.
§ 648.
§ 649.
§ 650.
§651.
Necessity and general nature of charter.
Power of the state and federal governments to grant
charters.
CONTENTS
xli
§ 652. Power of state to alter and repeal charters.
§ 653. Form of charter—special statute.
§ 654. Form of charter—certificate under general law.
§ 655. Form of charter—illustration.
§ 656. De facto corporations.
§ 657. Amendment of charter.
§ 658. First meetings and elections of directors and officers.
§ 659. The by-laws.
§ 660. Opening of corporate books and records.
CHAPTER 82
PROMOTERS OF CORPORATIONS
§ 661. Corporations defined.
§ 662. Liability of stockholders or corporation for acts of
promoter.
§ 663. Promoters in position of trust.
PART II
STOCK AND STOCKHOLDERS
CHAPTER 83
DEFINITIONS AND KINDS OF STOCK
§ 664. Definition of capital stock and share of stock.
§ 665. Common and preferred stock.
§ 666. Par and no par stock.
§ 667. Unissued and treasury gtock.
§ 668. The certificate of stock.
§ 669. The legal nature of shares of stock.
CHAPTER 84
SUBSCRIPTION TO STOCK
§ 670. Form, manner and effect of subscribing to stock.
§ 671. Fraud in securing stock subscriptions.
§ 672. Subscriptions upon condition.
CHAPTER 85
PAYMENT FOR STOCK
8 673. Liability upon unqualified subscription.
8 674. Medium of payment.
§ 675- Definition of "watered stock.
xlii
CONTENTS
§ 676. Liability of stockholders for payment of stock for bene-
fit of creditors.
§ 677. Calls for payment.
§ 678. Payment required by statute as condition precedent.
§ 679. Forfeiture of stock for non-payment.
CHAPTER 86
eights of stockholders
§ 680. In general.
A. The Rights Growing Out of the Stockholders' Relation-
ship, as Such
§ 681. Stockholder's rights to dividend.
§ 682. Right of stockholder to prevent ultra vires acts.
§ 683. Right of stockholder to prevent a change in the charter
in material respects.
§ 684. Right of stockholder to inspect corporate books and
records.
B. Rights Growing Out of Special Contracts Made by Cor-
poration with Stockholders
§ 685. Right of stockholder to contract and deal with corpora-
tion.
§ 686. Same with respect to stock subscription.
CHAPTER 87
stockholders' meetings
§§ 687-706. Purpose of meetings; kinds of meetings, quorums,
etc.
CHAPTER 88
transfer of stock
Transferability of stock.
Method of transfer.
By-laws and regulations restricting transfer.
Rights of transferee of stock sold without authority.
Liabilities of transferee to corporation.
Liability of transferee to creditor of the corporation.
Liability of transferor to transferee.
§ 707.
§ 708.
§ 709.
§710.
§711.
§712.
§713.
CONTENTS
xliii
CHAPTER 89
DIVIDENDS
§ 714. Definition and kinds.
§ 715. Declaration of dividends within discretion of directors.
§ 716. Payment of dividends.
§ 717. Who entitled to dividends.
§ 718. Dividends upon preferred stock.
PART III
THE DIRECTORS AND OFFICERS OF A CORPORATION
CHAPTER 90
DIRECTORS
A. The Function and Composition of the Directorate
§ 719. The directorate defined.
§ 720. Qualification for membership in the board.
§ 721. Election of directors.
§ 722. Right to remove directors during the term,
B. The Responsibilities and Rights of Directors
The director's responsibility to the corporation.
Liability of director to third person.
Right of director to profit by the relationship.
C. Powers of Directors
§ 726. Various powers of the directors considered.
D. Directors' Meetings
§ 727. In general.
§ 728. Method of transacting business at directors' meeting.
§ 729. Minutes.
CHAPTER 91
THE ADMINISTRATIVE OFFICERS OF THE CORPORATION
§ 730. Introductory.
§ 731. The president.
§ 732. The vice president.
§ 733. The secretary.
8 734. The treasurer.
8 735! In general.
8 736. Execution of contracts by officers of the corporation.
§ 723.
§ 724.
§ 725.
xliv
CONTENTS
PART IV
CREDITORS OF A CORPORATION
CHAPTERS 92, 93
§§ 737-749 (No cases).
PART V
POWERS OF A CORPORATION
CHAPTER 94
GENERAL CONSIDERATION OF THE POWERS OF A CORPORATION
§ 750. A corporation as a creature of limited powers.
§ 751. Powers inherent in corporate existence.
§ 752. Express charter powers.
§ 753. Implied charter powers.
§ 754. Notice of powers of corporation.
§ 755. Enforcibility of contracts ultra vires.
CHAPTER 95
CERTAIN PARTICULAR CORPORATE POWERS CONSIDERED
Power of corporation to acquire and hold real estate.
Power of corporation to borrow money, ■ mortgage its
property, etc.
Power of corporation to loan money.
Power of corporation to sell its property.
Power of corporation to acquire shares in other corpora-
tions.
Power of corporation to acquire its own shares.
PART VI
SUNDRY TOPICS
CHAPTER 96
FOREIGN CORPORATIONS
Definition and general statement.
Common provisions in respect to foreign corporations.
What constitutes doing business in another state.
When foreign corporation has constitutional right to
enter other state.
§ 756.
§ 757.
§ 758.
§ 759.
§ 760.
§761.
§ 762.
§ 763.
§764.
§ 765.
CONTENTS xlv
§ 766. Suit against foreign corporation.
§ 767. Jurisdiction of state courts over internal affairs of
foreign corporation.
CHAPTER 97
TRUSTS AND MONOPOLIES
§§ 768, 769, 770.
CHAPTER 98
DISSOLUTION AND WINDING UP OF CORPORATIONS
§§ 771, 772 (no cases).
CHAPTER 99
PUBLIC SERVICE CORPORATIONS
§§ 773-785 (no cases).
CHAPTER 100
BUSINESS TRUSTS
§§ 786, 787. Business trusts defined.
CHAPTER 101
NON STOCK CORPORATIONS
§§ 788-790 (no cases).
CHAPTER 102
BLUE SKY LEGISLATION
APPENDIX A
Uniform Stock Transfer Act
DIVISION H
BANKRUPTCY
CHAPTER 103
THE HISTORY AND PURPOSE OF BANKRUPTCY LEGISLATION
8 791. Definition of bankruptcy.
§ 792. H istory of bankruptcy legislation in other countries.
xlvi
CONTENTS
§ 793. Legislative jurisdiction of the subject of bankruptcy in
the United States.
§ 794.. The extent of the federal power; constitutionality of
present act.
§ 795. History of bankruptcy laws in the United States.
§ 796. Function of the bankruptcy act to benefit creditors.
§ 797. Function of the bankruptcy act to benefit debtors.
§ 798. Bankruptcy discharges only money debts.
§ 799. Brief view of proceedings in bankruptcy.
CHAPTER 104
THE COURTS AND OFFICERS IN BANKRUPTCY
§ 800. The courts that have bankruptcy jurisdiction.
§ 801. The territorial limits of the court's jurisdiction.
§ 802. Jurisdiction as determined by the location of the cause
within the jurisdiction.
§ 803. Ancillary jurisdiction.
§ 804. Extent of jurisdiction over subject matter.
§ 805. Jurisdiction of bankruptcy court to recover assets.
§ 806. Jurisdiction of state courts for that purpose.
§ 807. Summary proceedings in district court to recover prop-
erty.
§ 808. Appellate jurisdiction.
§ 809. The referee in bankruptcy.
CHAPTER 105
WHO MAY BE A BANKRUPT
§ 810. Introductory.
A. In Respect to Business or Calling
(a) Of natural persons
§ 811. In general.
§ 812. ' Wage earners.
§ 813. Persons engaged chiefly in farming or tilling the soil.
§ 814. Occupation considered as of what date.
(b) Of corporations
815. In general.
(1) Plistory of this section.
(2) Corporations which can file voluntary petitions.
(3) Corporations which are subject to involuntary
bankruptcy.
CONTENTS xlvii
B. In Respect to Legal Status
§ 816. Corporations.
§ 817. Unin eorporated companies.
§ 818. Partners and partnerships.
§819. Minors.
§ 820. Insane persons.
§ 821. Estates of deceased persons.
§ 822. Aliens.
C. In Respect to Amount of Indebtedness
§ 823. Voluntary bankruptcy.
§ 824. Involuntary bankruptcy.
CHAPTER 106
ACTS OF BANKRUPTCY
A. Introductory
§ 825. In general.
§ 826. Insolvency defined.
§ 827. Within what time act of bankruptcy must be committed.
B. The Particular Acts of Bankruptcy
§ 828. Fraudulent transfers.
§ 829. Preferential payments or transfers.
§ 830. Preferences secured through legal proceedings as acts
of bankruptcy.
§ 831. General assignment for benefit of creditors as acts of
bankruptcy.
§ 832. Admission of insolvency and consent to bankruptcy.
CHAPTER 107
THE PETITION AND PROCEEDINGS THEREON
§ 833. Voluntary petitions.
§ 834. Involuntary petitions.
(1) Who may file petition.
(2) What petition must allege.
§ 835. The adjudication; first meeting of creditors and election
of trustee.
§ 836. Duties of trustee.
CHAPTER 108
THE TRUSTEE'S TITLE
S 837 -As w^at date in respect to bankrupt's ownership.
§ 838* Trustee as representative of creditors.
xlviii CONTENTS
§ 839. As to nature of property.
§ 840. Same subject: personal privileges.
§ 841. Interests in patents, patent rights, copyrights and trade-
marks.
§ 842. Insurance policies.
§ 843. Property held by bankrupt in trust or nature of trust.
§ 844. Property transferred or money paid as preference.
§ 845. Fraudulent conveyances.
§ 846. Property held by bankrupt claimed by third persons.
§ 847. Property held by third person belonging to bankrupt.
§ 848. Rights to sue.
§ 849. Burdensome property.
§ 850. To what liens trustee's title is subject.
CHAPTER 109
CLAIMS AGAINST ESTATE
§ 851. In general.
A. What Claims Provable in Bankruptcy
§ 852. In respect to whether due or not.
§ 853. In respect to whether owing before or after petition filed.
§ 854. Claims based upon judgments.
§ 855. Fixed liabilities as evidenced by written instruments.
§ 856. Rents to accrue.
§ 857. Claims founded on open accounts.
§ 858. Claims arising on any contract express or implied for
payment of money.
§ 859. Unliquidated claims. (1) When provable.
§ 860. Unliquidated claims. (2) When not provable.
§ 861. Fines.
B. Proof and Allowance of Claims
§ 862. How claims proved.
§ 863. Allowance of claims.
C. Secured and Lien Claims
§ 864. In general.
§ 865. The standing of a secured creditor.
§ 866. Other lien claims.
D. Claims Having Priority
§ 867. How a claim having priority differs from a secured claim.
§ 868. What claims have priority.
E. Claims of Preferred Creditors
§ 869. Preferred creditor must surrender preference.
CONTENTS
xlix
F. Dividends on Claims
§ 870. How payable.
G. Composition with Creditors
§ 871. Composition may be offered by bankrupt.
§ 872. Conditions of the composition.
§ 873. When composition set aside.
H. Set Offs
§ 874. Right to set off.
CHAPTER 110
DUTIES AND RIGHTS OF BANKRUPTS
§ 875. Duties enumerated by the act.
§ 876. Questions which bankrupt must answer.
§ 877. Protection of bankrupt from arrest in civil cases,
§ 878. Detention of bankrupt.
§ 879. Offenses of bankrupt.
§ 880. The bankrupt's exemptions.
CHAPTER 111
DISCHARGE
A. The Discharge of the Bankrupt
§ 881. Importance of discharge.
§ 882. Within what time discharge must be applied for.
§ 883. The petition for discharge.
§ 884. Filing objections to discharge.
§ 885. Grounds for refusing discharge.
B. Debts Not Dischargeable
§ 886. In general.
§ 887. General rule.
§ 888. Debts not affected by discharge.
§ 889. New promise to pay.
DIVISION A
GENERAL SURVEY
DIVISION A
GENERAL SURVEY
Chapter 1. Law Defined.
Chapter 2. The Branches of Municipal Law.
Chapter 3. Form of Law.
Chapter 4. The Judicial System.
Chapter 5. Administrative Boards and Commissions.
CHAPTER 1
LAW DEFINED
§ 1. What is law?
§ 2. International law.
§ 3. National or municipal law.
§ 4. Branches of municipal law.
§ 1. (General Survey, Sec. 1.) What is law.
Case 1. Holland, Jurisprudence, page 41.
"By a successive narrowing of the rules for human
action, we have at length arrived at such of those rules
as are laws. A law in the proper sense of the term, is
therefore a general rule of human action, taking cog-
nizance only of external acts, enforced by a determinate
authority which authority is human, and, among human
authorities is that which is paramount in a political
society.
i' More briefly, a general rule of external human action
enforced by sovereign political authority.
"All other rules for guidance of human action are
called laws merely by analogy; and any propositions
which are not rules for human action are called laws by
metaphor only.''
Question 1: There are said to be "physical laws"; "divine
laws"; "laws of morality"; "political laws"; to which of
these phrases do we refer when we say that we are studying-
law? In what sense only is the word "law otherwise used?
(2) Define "law in the proper meaning of the term.
(Note to case 1: A law is enforced by "sovereign political
authority. The world is composed of organized political groups
which we term "sovereignties, "sovereign states, "nations,
"governments or "powers. They are, by hypothesis, politi-
cally independent. They organize themselves, and maintain co-
4
LAW DEFINED
5
hesion and internal peace by mandatory provisions and rules
that are described under the name of law. Law, therefore, neces-
sarily emanates from "sovereignty. It may be a rule enforced
by a subdivision or dependency of the sovereignty, but it has
its ultimate source from the sovereignty itself.
The definition of law so far ignores that which is called "in-
ternational law or rules of conduct recognized by sovereignties
for their mutual benefit, which, says Holland (page 130) can be
described as law '' only by courtesy.''
The law of a sovereignty or state, is frequently called '' munci-
pal law or "national law to distinguish it from the so-called
"international law. Whether international law is properly
called "law or not, is a mere matter of definition. Certainly
it is not law in the sense that municipal law is law. It has no
political superior to declare, construe or enforce it. But it is
generally called '' law'' and is law in the sense that it emanates
from and has behind it the .moral sanction of political sov-
ereignties. In the restricted and generally used sense law means
the law of a sovereign body or its dependencies or subdivisions.
It is with national, or so-called municipal law, only, that we
are concerned in this book.)
§ 2. (General Survey, Sec. 2.) International law.
Case 2. Davis, The Elements of International Law,
pages 1 and 2.
"Political laws are also subject to classification ac-
cording to their source, their authority or scope, and the
parties subject to their operation; those which control
the relations of citizens to the state and to each other
are called 'national' or 'municipal' laws; while those
which regulate the intercourse of sovereign states with
each other are known as 'international' laws. The par-
ties to the former are the citizens or subjects of a partic-
ular state; the parties to the latter are sovereign states
(citing Pomeroy, Int. Law, sec. 47-50; Lawrence, Int.
Law, sec. 42-55).
"International law, or as it is sometimes called, the
'law of nations,' may therefore be defined as that body
of rules and limitations which the sovereign states of
the civilized world agree to observe in their intercourse
6
GENERAL SURVEY
and relations with each other. The agreement or con-
sent which is essential to the validity of a rule of inter-
national law is said to be express, or positive, when it
is embodied in treaties, or formal declarations of public
policy, or in statutes which are enacted in support or
recognition of the accepted usages of nations; it is said
to be tacit when it takes the form or conformity to the
approved practices of states in their international rela-
tions.
Question 2: (1) Define "municipal law"; who are the sub-
jects of municipal law?
(2) What is "international law"? When "express, when
"tacit"?
(Note: See Note to-Case 1.)
§3. (General Survey, Sec. 3.) National or Municipal
Law.
Case 3. Davis, The Elements of International Law,
page 2.
"Municipal law may therefore be defined as compris-
ing those rules of human conduct which are established
or sanctioned by a state in virtue of its sovereign author-
ity, for the guidance or direction of its citizens or sub-
jects. The municipal law of a state applies, as will sub-
sequently appear, not only to citizens, properly so called,
but to all persons whatever their nationality, who come
within its territorial limits, as travelers or sojourners
* * * > >
Question 3: Define municipal law. Is its operation confined
to citizens?
§4. (General Survey, Sec. 4.) Branches of Municipal
Law.
Case 4. American Commercial Law, Vol. 1, page 29.
"The objects sought to be attained by municipal law
by which we may divide it into branches for the purpose
of comprehending its character, are as follows:
LAW DEFINED
1
A. Public Law; or The Law with Whose Objects the
State at Large Is Primarily Concerned.
1. Constitutional law.
2. Administrative law.
3. Criminal law and procedure.
B. Private Law, or the Law Provided for the Benefit of
the Individual with whose Enforcement the State is
not Concerned Except for the Individual's Benefit and
at His Instance.
1. The law of obligation of individual to individual.
A. The law of contracts.
B. The law of quasi contract
C. The law of torts.
2. The law of property.
A. The law of tenure.
B. The law of transfer inter vivosa
C. The law of descent and wills.
3. The law of status.
4. The law of delegation of authority.
5. The law of business proprietorship.
A. The law of partnerships.
B. The law of corporations.
C. The other forms of business proprietorship.
6. The law of judicial-procedure in civil cases.
A. The law of pleading.
B. The law of evidence.
C. The law of judicial procedure generally.
Question 4: What is public law? What are its subdivisions?
Private law? Its subdivisions?
(Note to Case 4: This subdivision is given at this point not as
a satisfactory and complete outline of different kinds of laws, but
to help us gain a viewpoint of the law's objectives. Clearly no
law falls entirely in one subdivision. A legislator does not say:
"Let us pass a lawT of torts. A need for a law is felt and it is
enacted, or develops under judicial decision. Such law may pro-
tect an individual in his right of property, and involve constitu-
tional law, the law of crimes and the law of property.)
CHAPTER 2
THE BRANCHES OF MUNICIPAL LAW
§ 5. Constitutional Law.
§ 6. The federal constitution.
§ 7. The state constitutions.
§ 8. Administrative law.
§ 9. The law of crimes.
§ 10. The law of torts.
§ 11. The law of judicial procedure.
§ 12. The other branches of the municipal law.
§ 5. (General Survey, Sec. 5.) Constitutional law.
Case 5. Cooley's Constitutional Limitations, 7th edi-
tion, excerpt from chapter 1.
"A Constitution is sometimes defined as the funda-
mental law of a State, containing the principles upon
which the government is founded, regulating the division
of the sovereign powers, and directing to what persons
each of these pov/ers is to be confided, and the manner
in which it is to be exercised. Perhaps an equally com-
plete and accurate definition would be, that body of rules
and maxims in accordance with which the powers of
sovereignty are habitually exercised.
» "In a much qualified and very imperfect sense every
State may be said to possess a constitution; that is to
say, some leading principle has prevailed in the admin-
istration of its government until it has become an under-
stood part of its system, to which obedience is expected
and habitually yielded; like the hereditary principle in
most monarchies, and the custom of choosing the chief-
tain by the body of the people which prevails among
some barbarous tribes. But the term constitutional gov-
ernment is applied only to those whose fundamental
rules or maxims not only locate the sovereign power in
8
BRANCHES OF LAW
9
individuals or bodies designated or chosen in some pre-
scribed manner, but also define the limits of its exercise
so as to protect individual rights, and shield them against
the assumption of arbitrary power. The number of these
is not great, and the protection they afford to individual
rights is far from being uniform.
''In American constitutional law the word Constitu-
tion is used in a restricted sense, as implying the written
instrument agreed upon by the people of the Union, or
of any one of the States, as the absolute rule of action
and decision for all departments and officers of the gov-
ernment, in respect to all the points covered by it, until
it shall be changed by the authority which established it,
and in opposition to which any act or regulation of any
such department or officer, or even of the people them-
selves, will be altogether void.
'' The term unconstitutional law must vary in its mean-
ing in different States, according as the powers of sov-
ereignty are or are not possessed by the individual or
body which exercises the powers of ordinary legislation.
Where the law-making department of a State is restricted
in its powers by a written fundamental law, as in the
American States, we understand by unconstitutional law
one which, being opposed to the fundamental law, is
therefore, in excess of legislative authority, and void.
Indeed, the term unconstitutional law, as employed in
American jurisprudence, is a misnomer, and implies a
contradiction; that enactment which is opposed to the
Constitution being in fact no law at all. But where, by
the theory of the government, the complete sovereignty
is vested in the same individual or body which enacts the
ordinary laws, any law, being an exercise of power by
the sovereign authority, could not be void, but if it con-
flicts with any existing constitutional principle it must
have the effect to modify or abrogate such principle, in-
stead of being nullified by it. This must be so in Great
Britain with every law not in harmony with pre-existing
constitutional principles; since, by the theory of its gov-
ernment, Parliament exercises sovereign authority, and
10
GENERAL SURVEY
may even change the Constitution at any time, as in many
instances it has done, by declaring its will to that effect.
And when thus the power to control and modify the
Constitution resides in the ordinary law-making power
of the State, the term unconstitutional law can mean no
more than this: a law which, being opposed to the settled
maxims upon which the government has habitually been
conducted, ought not to be, or to have been adopted. It
follows, therefore, that in Great Britain, constitutional
questions are for the most part to be discussed before
the people or the Parliament, since the declared will of
the Parliament is the final law; but in America, after a
constitutional question has been passed upon by the leg-
islature, there is generally a right of appeal to the courts
when it is attempted to put the will of the legislature
in force. For the will of the people, as declared in the
Constitution, is the final law; and the will of the legis-
lature is only law when it is in harmony with, or at least
is not opposed to, that controlling instrument which gov-
erns the legislative body with the private citizen.
Question 5: (1) How does Cooley say that a constitution is
sometimes defined ? What other definition does he suggest ?
(2) In what qualified way does every state possess a consti-
tution ?
(3) To what sort of government is the term "constitutional
government'' most correctly applied ?
(4) In American Constitutional law what sense is the word
"constitution used?
(5) What various meanings has the term "unconstitutional
law".and what do we mean thereby in American constitutional
law?
(6) How is the power of Parliament different from that of
Congress in respect to constitutional law?
§ 6. (General Survey, Sec. 6.) The Federal
Constitution.
(Note: Poiver of Federal Government. The government of
the United States is a government of delegated powers. The
original states, being in fact independent political bodies,
BRANCHES OF LAW
H
formed the Union under an arrangement whereby they delegated
to a central government sovereignty as a nation and other pow-
ers set forth in the instrument of creation, namely, the United
States Constitution, reserving to themselves all power not
granted away, that is to say, retaining the reserve of political
power. The powers of the United States are found and found
only in the United States Constitution and the amendments
thereto. To ascertain whether the Federal Government has
power in a particular matter we must seek the power in the
Constitution, and if not there to be found, it has been reserved
to the states.
The power of the Federal Government is not, however, to be
narrowly construed to extend only to that which is expressly
set forth in the Constitution. The power of the Federal Govern-
ment under the Constitution includes the power to do all that is
incidental to the powers expressly granted, and to do all that
is reasonably necessary to carry the express powers into effect.
This power is usually referred to as the implied power of the
Federal Government. Under this so called implied power the
Congress may pass any law which will serve as a means of carry-
ing into effect the powers expressly granted by the Constitu-
tion. Thus the government having extensive fiscal powers gen-
erally conferred, may charter a National Bank, although not
specifically given by the Constitution any such power. (McCul-
loch v. Maryland, 4 Wheat. 316.) Under the Interstate Com-
merce Clause it has created the Interstate Commerce Commission
and passed a multitude of laws governing and regulating inter-
state commerce.
But, notwithstanding this implication of power, it is still true
that the general reserve of power is in the states, and the central
government is one of delegated and limited power. The Federal
Government was founded upon the assumption that the states
would have the general reserve of power and nothing was to be
passed over to the national government except those powers set
forth in the constitution deemed to be of national rather than of
local importance.
"In the maintenance of local self government on the one hand,
and the national power on the other, our country has been able to
endure and prosper for near a century and a half. (Taft, C. J.
in Bailey v. Drexel Furniture Co., 66 L. Ed. (U. S.) —.)
(Note: Power of the Court to declare legislation unconstitu-
tional. It was a matter of dispute in the early history of the
12
GENERAL SURVEY
Federal Government whether the judicial branch of the govern-
ment possessed the power to nullify the legislation of the legis-
lative branch upon the ground that it was unconstitutional. It
was conceded that the constitution was the Supreme Law of the
Land, and must be followed until amended in the manner set
forth in the constitution; but it was argued that Congress had
the right to determine whether its own legislation was or was
not in accordance with the constitution and that the judicial
branch, being co-ordinate with, and not superior to, the legisla-
tive branch, could not overrule the judgment of the legislative
branch. But this view did not prevail. The business of the
judicial branch is to judge, and if the court has a case before it
in which the legislation sought to be applied appears to be not
in accord with the constitution, the Court will declare the law
unconstitutional. Chief Justice Marshal in McCulloch vs. Mary-
land, 4 Wheat, 316, said: "Should Congress, in the execution of
its powers, adopt measures which are prohibited by the Constitu-
tion, or should Congress under the pretext of executing its pow-
ers, pass laws for the accomplishment of objects not intrusted to
the government, it would become the painful duty of this
tribunal, should a case requiring such a decision come before*it,
to say that such an act was not the law of the land.'' But the
Court held, nevertheless, in that case, that it would construe the
Constitution liberally, and uphold all laws which by fair im-
plication seem reasonably necessary to carry into effect the ex-
press constitutional powers.
Similarly, a state law must be constitutional under the Fed-
eral and State constitution.)
§ 7. (General Survey, Sec. 7.) The state constitutions.
(Note: Nature of State constitutions. The State constitutions
are the fundamental laws of the various states, by which the state
governments are organized, and the powers of the law making
body, and the other departments and officers restricted. The
state constitution is therefore a restriction upon power, rather
than a delegation of power (as the federal constitution is). The
state may amend its constitution as it sees fit. Obviously the
state cannot in its constitution take on any powers that have
been granted away to the Federal Government and cannot tran-
scend or abate the Federal powers in any respect.)
BRANCHES OF LAW
13
§ 8. (General Survey, Sec. 8.) Administrative law.
(Note: Under such a heading may be grouped all laws of
revenue, territorial division, conservation of resources, road
building, etc.)
§ 9. (General Survey, Sec. 9.) The law of crimes.
Case 6. McClain, Criminal Law, Sec. 4.
 Definition. A crime is an act or omission punish-
able as an offense against the state. It is thus distin-
guished from a civil injury which is considered only as
a wrong against an individual. As will hereafter appear,
some acts or omissions may be both crimes arid civil
injuries (torts); but the distinction is that, in case of a
crime, the State is deemed the injured party and punishes
the wrongdoer in the interests of the general public and
in its own name, while in the case of a civil injury, al-
though the State furnishes means for redress, the pro-
ceeding is in the name and under the control of the party
injured. The State in the sense here intended is simply
the governing power acting in behalf of the people; in
England it means the sovereign and Parliament; in the
United States it means the Federal or State government,
according as the offense is one against the United States
or one of the States.
Question 6: (1) Define a crime.
(2) May an act be both a crime and a tort? What is the
difference in judicial procedure in case of a crime and a tort?
why? May acts be criminal under the state law or the federal
law or both ?
§ 10. (General Survey, Sec. 10.) The law of torts.
Case 7. Cooley on Torts, 3rd Ed., Sec. 2.
a* * * xt is customary in the law to arrange the
wrongs for which individuals may demand legal redress
into two classes: the first embracing those which consist
in a mere breach of contract, and the second, those which
arise independent of contract. The classification is not
14
GENERAL SURVEY
very accurate. Many cases exist where the complaining
party may, on the same state of facts, at his option, count
upon a breach of contract as his grievance, or complain
of a wrong in a manner that puts the contract out of
view. Imperfect as it is, however, the classification has
been found sufficient for judicial purposes; * * *
Breaches of contract were mere failures to perform agree-
ments and the actions for redress in the courts of- law
were actions on contracts or actions ex contractu. Other
acts or omissions giving rise to a suit at law were called
specifically wrongs or torts, and the actions by which
redress was to be obtained were called actions for torts,
or actions ex delicto.
Question 7: What is an action ex contractu? ex delicto? Are
they both civil (as distinguished from criminal) actions?
Case 8. Clerk & Lindsell on Torts, 7th Ed., excerpts
from chapter 1.
"A tort may be described as a wrong independent of
contract, for which an appropriate remedy is a common
law action. In order, therefore, to discover what a tort
is, we must examine the various kinds of actions which
the law has from time to time recognized, not on any
systematic theory, but according to the dictates of expe-
rience and convenience, and eliminate from the list those
that are dependent on contract. It is impossible to define
the general term otherwise than by an enumeration of
particulars. In every action there must be a plaintiff
and a defendant, the former alleging a right in himself
and a corresponding duty on the latter and which duty
has been broken * * * where there is a breach of
duty imposed by the law apart from any consent of the
person owing the duty, and the remedy claimed is not
the payment of a definite sum of money, but pecuniary
compensation for the injury, we then have a wrong inde-
pendent of contract which gives rise to an action of tort.
The expression * independent of contract' is one that re-
quires explanation, for there may be a tort which arises
out of a breach of contract and yet is independent of it.
BRANCHES OF LAW
15
At a time when the forms of action were strictly dis-
tinguished in pleading, it was often allowable to declare
[sue] in tort [as well as in contract] on a breach of duty
which arose simply in consequence of the agreement of
the parties. * * * So, if a bailee by some careless
act damages goods entrusted to him, he probably com-
mits a breach of the express or implied contract of bail-
ment, but he is also guilty of a tort, for every one is
bound to take care that he does not damage the property
of another. * * *
< i * # *
'(Torts may be classified from the point of view of the
plaintiff or from that of the defendant, from the nature
of the right infringed or damage done on the one hand,
or from the nature of the wrongful act on the other.
'' First, to consider them from the point of view of
the plaintiff. There must be an infringement of some
personal right. * * * What then are the rights the
invasion of which will constitute a tort? Although it
is impossible to lay down any general principle to which
all actions of tort may be referred, it will be found they
are in the main directed to afford the simple remedy of
pecuniary satisfaction for invasion of three elementary
rights of civilized society—the right of personal liberty
and security, the right of reputation and the right of
property.''
Question 8: (1) Define a tort in the language of the above
excerpt ?
(2) Give an illustration of a wrong that may be treated
as a breach of contract or the commission of a tort.
(3) What are the "three elementary rights of civilized so-
ciety'' ?
(Note to Case 8: Various torts are: Trespass to the person
(assault and battery) ; trespass to personal property; wrongful
appropriation or dominion over another's personal property;
called conversion, the remedy for which is called trover; trespass
to real property (trespass quare clausium fregit); maintaining
nuisance; negligence (the great class of cases in tort) ; fraud; de-
famation (libel, if written; slander, if spoken) ; malicious prose-
16
GENERAL SURVEY
cution (or prosecution for a crime without reasonable cause for
the procedure); conspiracy; seduction; inducing a party to a
contract to break it to the injury of the other party; infringe-
ment of copyright; infringement of trademarks; infringement
of patents; unfair competition; etc.)
Case 9. The Tripartite Division of Torts. John H.
Wigmore, 8 Harvard Law Review, 200.
 There are, therefore, three distinct elements in every
tort which may be conveniently termed, the primary, sec-
ondary and tertiary limitations. The first class deals
with the sort of harm to be recognized as a basis of the
right; this may be called the damage element; the second
class deals with the circumstances fixing the connection
of the obligor with this forbidden harm; this we may
call the responsibility element; the third class deals "With
the circumstances in which (assuming with the damage
and the responsibility elements to be satisfied) the harm
may be inflicted with impunity; this we may term the
excuse or justification element. This analysis results in
a tripartite division of the tort nexus.
(Note to Case 9: The following are excuses or justifications
that will deprive the act of its otherwise tortious character; self
defense; authority of the law, as that of a sheriff, to punish or
deprive of liberty; overruling necessity, as that of firemen in
checking the spread of conflagration; privilege, as in some situa-
tions in libel and siander. In other words the act is an inter-
ference with a right which constitutes a tort except for the justi-
fication or excuse which constitutes the protection or defense of
the party to whom the same is sought to be charged.)
Question 9: Name some excuses or justifications which pre-
vent an act from being a tort?
§ 11. (General Survey, Sec. 11.) The law of judicial
procedure.
Case 10. Salmond's Jurisprudence, Sec. 172.
u * * # The law of procedure may be defined as that
branch of the law which governs the process of litiga-
tion. It is the law of actions—jus quod ad actiones per-
BRANCHES OF LAW
17
tinet—using the term in a wide sense to include all legal
proceedings, civil or criminal. All the residue is sub-
stantive law, and relates not to the process of litigation,
but to its purposes and subject matter. Substantive law
is concerned with the ends which the administration of
justice seeks; procedural law with the means and instru-
ments by which these ends are to be attained. The latter
regulates the conduct of courts and litigants in respect
to the litigation itself, the former determines their con-
duct and relations in respect to the matter litigated.
Procedural law is concerned with affairs inside the courts
of justice; substantive law deals with matters in the
world outside. * * *
Question 10: What -is the function of the law of procedure?
CHAPTER 3
FORM OF LAW
§ 13. Purpose of this chapter.
§ 14. Written law.
§ 15. Codes.
§ 16. Uniform laws.
§ 17. The unwritten law.
§ 18. Judicial reports.
§ 19. Doctrine of stare decisis.
§ 20. Secondary sources of the law.
§ 13. (General Survey, Sec. 13.) Purpose of this
chapter.
(Note: This chapter is concerned with the subject of the form
which the law, in its expression, takes. If it is thought desirable
to study 'unwritten law' before studying 'written law' (as many
believe to be the more logical) of course that can be done.)
§ 14. (General Survey, Sec. 14.) Written law.
Case 11. Blackstone's Com., Cooley's Ed., Book I,
Sec. 3, page 85.
"Let us next proceed to the leges scriptae, the written
laws of the kingdom, which are statutes. * * * The
oldest of these now extant and printed in our statute
books is the famous Magna Charta * * * though
doubtless there were many acts before that time, the rec-
ord of which are now lost. * * *
 * * * Statutes are either general or special, pub-
lie or private. A general or public act is an universal
rule, that regards the whole community. * * * Spe-
cial or private acts are rather exceptions than rules,
being those which only operate upon particular persons
and private concerns. * * *
"Statutes are either declaratory of the common law
or remedial of some defects therein. Declaratory where
18
FORM OF LAW
19
the old custom of that kingdom is almost fallen into dis-
use or become disputable. * * * Remedial statutes
are those which are made to supply defects, and abridge
such superfluities in the common law, as arise either in
the general imperfection of all human laws, from change
of time and circumstances, from the mistakes and un-
advised determinations of * * * judges, or from
any other cause whatsoever.
Question 11: (1) What is a statute ? A general statute ? A
special statute ?
(2) What is the relationship of statutory law to the common
law ?
(Note to Case 11: Written law, so called because it originates
in written form, includes not only statutes, but any written docu-
ment having the force of law, as treaties and constitutions.
Written law is the law made by a lawmaking body or power, as
distinguished from common law, called unwritten law, the origin
and nature of which is explained in following sections.)
§ 15. (General Survey, Sec. 15.) Codes.
Case 12. 37 Cajiadian Law Times, 177 (1917).
1' The term ' Code' has various significations even in
jurisprudence. In Roman Law it is used more partic-
ularly with reference to the great works of Theodosius
and Justinian. It was Justinian's ambition to make un-
necessary any reference, elsewhere than to his own work
to ascertain the law. But the Books of the Roman Em-
perors were not codes in the sense in which the term
has been used since the .Napoleonic Code was promulgated
in 1804. This definition of the word is given in the new
Oxford Dictionary 'A systematic collection or digest of
the laws of a country or of those relating to a particular
subject.' This definition is wide enough to include a
revision or consolidation of statutory laws. Yet the term
is used generally, I think, in late years to indicate not
only a systematic but exhaustive collection of laws and
involves the ideas of concisement and simplicity. It is
in this sense and with these modifications, justified by
20
GENERAL SURVEY
usage that I employ the' term. Mere revisions or con-
solidations of statutes are not codes or intended to be
such. Our Criminal Code, though called such in the act,
is not a code, but a compilation or consolidation.''
Question 12: What was the famous Roman Code ? The other
great historical code? In what two ways is the word "code
employed ? What is the correct meaning 1
(Note to Case 12: The advocates of codification in the correct
meaning of that term believe it adds certainty to the law and dis-
courages litigation. This is at least doubtful. An attempt at
codification may impede the development of the law rather than
help it. This is particularly true of subjects not well developed
when complete codification is attempted. The English and
American law has developed by judicial interpretation and not
in statutory codification.)
§ 16. (General Survey, Sec. 16.) Uniform laws.
(Note: Origin, Nature and Scope of the National Conference
of Commissioners on Uniform State Laws, as set forth in Vol.
XLVII, Reports of American Bar Association, 1922.
"The National Conference of Commissioners on Uniform
State Laws is composed of Commissioners from each of the
states, the District of Columbia, Alaska, Hawaii, Porto Rico
and the Philippine Islands. In thirty-three of these jurisdic-
tions the Commissioners are appointed by the chief executive
acting under express legislative authority. There are usually
three representatives from each jurisdiction. The term of ap-
poiritment varies, hut three years is the usual period. The Com-
missioners are chosen from the legal 'profession, being lawyers
and judges of standing and experience and teachers of law in
some of the leading law schools. They serve without compensa-
tion and in most instances pay their own expenses. They are
united in a permanent organization under the constitution and
by-laws, and annually elect a president, a vice president, a
secretary and a treasurer. The Commissioners me£t in annual
conference at the same place as the American Bar Association,
usually for four or five days immediately preceding the meeting
of that association. * * * ")
FORM OF LAW
21
(Note: The following Uniform Laws have been adopted by
the states indicated at the time this volume goes to press.
Domestic Acknowledgments Act: Iowa, Louisiana, Massachu-
setts, Michigan, Minnesota, Montana, New Mexico, North Dakota,
Tennessee, Alaska.
Execution of Wills Act: Kansas, Louisiana, Maryland, Michi-
gan, Nevada, Utah, Alaska.
Probate of Foreign Wills Act: Louisiana, Massachusetts,
Michigan, New York, Utah, Washington, Wisconsin, Alaska.
Negotiable Instruments Act: All states and territories except
Georgia and Porto Rico.
Sales Act: Arizona, Connecticut, Idaho, Illinois, Iowa, Mary-
land, Massachusetts, Michigan; Minnesota, Nebraska, Nevada,
New Jersey, New York, North Dakota, Ohio, Oregon, Pennsyl-
vania, Rhode Island, South Dakota, Utah, Vermont, Wisconsin,
Wyoming, Alaska.
Warehouse Receipts Act: All states and territories except
Georgia, Kentucky, New Hampshire, South Carolina, Hawaii.
Bills of Lading Act: Arizona, California, Connecticut, Idaho,
Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, New Hampshire, New Jersey,
New York, North Carolina, Ohio, Pennsylvania, Rhode Island,
Vermont, Washington, Wisconsin, Alaska, Philippine Islands.
Stock Transfer Act: Connecticut, Illinois, Indiana, Louisiana,
Maryland, Massachusetts, Michigan, New Jersey, New York,
Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee,
Wisconsin, Alaska, Philippine Islands.
Partnership Act: Idaho, Illinois, Maryland, Massachusetts,
Michigan, Minnesota, New Jersey, New York, Pennsylvania,
Tennessee, Utah, Wisconsin, Wyoming, Alaska.
Limited Partnership Act: Idaho, Illinois, Iowa, Maryland,
Minnesota, New Jersey, New York, Tennessee, Utah, Wisconsin,
Alaska.
The following Uniform Acts have been adopted in some states:
Foreign Depositions Act; Migratory Divorce Act; Family De-
sertion Act; Marriage License Act; Child Labor Laws; Marriage
Evasion Act; Foreign Acknowledgments Act; Cold Storage Act;
Workmen's Compensation Act; Foreign Probated Wills Act;
Land Registration Act (Torren's System) ; Act for Extradition
22
GENERAL SURVEY
of Persons of Unsound Mind; Flag Law; Fraudulent Convey-
ance Act; Conditional Sales Act.
The following Acts, among others, are in process of being
drafted: Act Relating to the Status and Protection of Illegiti-
mate Children; Uniform Fiduciaries Act; Uniform Incorporation
Act; Uniform Mortgage Act; Uniform Aviation Act.)
Case 13. Extract from Address of Henry Stockbridge,
President, 1921, National Conference Uniform State
Laws. Reported 46 American Bar Reports, page 715.
 Within the past few days a suggestion has been made
of rather a revolutionary character. The purport of it is
that the name of this Conference, and the scope of its
work is too limited; that it should be in place of a Con-
ference of Commissioners on Uniform State Laws a
Conference of Commissioners on Uniformity of Law, and
if this Amendment is adopted to our constitution, it is
then further proposed that the Constitution of the United
States be amended so as to put it within the power of
Congress by a general act, to regulate the matter of Nego-
tiable Instruments, Warehouse Receipts, Bills of Lading,
and other subjects which have always been regarded as
falling strictly within the domain of the legislative power
of each state. Immediately upon the receipt of this sug-
gestion from a member of the Commission, the subject
of such an amendment of the Federal Constitution was
referred to the Committee on Scope and Program. There
are some things which can be said in favor of vesting
this power in the Federal Government, but much more
apparently in opposition to it. It would be the biggest
step toward a centralization of power that has been
known in this country since the adoption of the Consti-
tution in 1789; it will take away from the states a large
proportion of their power of self-government and will
render the further existence of this conference absolutely
useless.
Question 13: In your estimation would it be a good plan to
have the National Government pass National Laws on Commer-
cial subjects similar to those laws now known as Uniform Laws?
FORM OF LAW
23
What would be an advantage of thisf What a disadvantage?
Would an amendment to the Federal Constitution be necessary
to bring this about ?
(Note to Case 13: This quotation is given merely as a means
of emphasizing in the mind of the student that our commercial
law is chiefly state law. Admitting a tendency to vest power in
the Federal Government, it seems utterly unlikely that there will
ever be a passing over to the Federal Government, legislative
jurisdiction in the sense suggested in the above quotation.)
§ 17. (General Survey, Sec. 17.) Unwritten law.
Case 14. Blackstone's Commentaries, Cooley's Ed.,
Book I, Sec. 3.
''The Municipal Law of England, or the rule of civil
conduct prescribed to the inhabitants of this kingdom,
may with sufficient propriety be divided into two kinds:
the lex non scripta, the unwritten or common law; and the
lex scripta, the written or statute law.
n* * * When I call these parts of our law leges
non scriptae, I would not be understood as if all those
laws were at present merely oral or communicated from
the former ages to the present solely by word of mouth.
* * * With us at present, the monuments and evi-
dences of our legal customs are contained in the records
of the several courts of justice, in books of reports and
judicial decisions and in the treatises of learned sages
of the profession preserved and handed down to us from
the times of highest antiquity. However, I therefore
style these parts of our law leges non scriptae, because
their original institution and authority are not set down
in writing as Acts of Parliament are, but they receive
their binding power and the force of laws by long and
immemorial usage, and by their universal reception
throughout the kingdom. * * *
Question 14: What is the ''unwritten (or common) law?
Why so called ? In what sense is the '' unwritten law'' written ?
Case 15. Walker's American Law, 8th Ed., Sec. 18.
n ^ * * rphg comrQon iaw> thus slowly matured into
24
GENERAL SURVEY
a system in England, was introduced into this country
by the first colonists, together with the statutes by which
it had then been modified, so far as applicable to their
condition. This was at first a matter of necessity, and
when the colonies became independent, the system, which
in the meantime had been much improved by legislation,
was retained from choice. The new states with the ex-
ception of Louisiana, which has preferred the civil code,
have adopted it from the old; so that the common law
now prevails generally throughout the Union. Nearly
all our technical terms and forms of proceeding are bor-
rowed from it and defined by it. * * *
Question 15: Is there a common law in force in the United
States ? Whence its original source ?
(Note: The unwritten or common law must not be thought of
as having reached a state of development and there stopped.
Common law is ever developing. A good illustration is the law
of unfair trade which has lately come frequently before the
courts. Blackstone says that the common law is law '' whereof
the memory of man runneth not to the contrary'' but this state-
ment is inaccurate. We can trace the development of much of
the common law, and see the process of its growth even within
our own time.)
§ 18. (General Survey, Sec. 18.) The judicial reports.
Case 16. Blackstone's Com. Intro., page 71.
"The decisions therefore of courts are held in the
highest regard, and are not only preserved as authentic
records in the treasuries of the several courts, but are
handed out to public view in the numerous volumes of
reports which furnish the lawyer's library. These re-
ports are histories of the several cases, with a short sum-
mary of the proceedings, which are preserved, at large
in the record; the arguments on both sides and the rea-
sons the court gave for its judgment; taken dowh. in short
notes by persons present at the determination. And
these serve as indexes to, and also to explain, the records,
FORM OF LAW
25
which always, in matters of consequence and nicety the
judges direct to be searched.''
Question 16: What are the judicial reports?
(Note to Case 16 : In the reports we find not only the judge's
declaration of the common law but the validity, construction
and application of the statutory law. The reports of decided
cases are in that sense, therefore, not only the repository of the
common law, but of the statutory law.)
S 19. (General Survey, Sec. 19.) Doctrine of stare
decisis.
Case 17. Kent's Commentaries, lecture 21.
a* * # a solemn decision upon a point of law, aris-
ing in any given case, becomes an authority in a like
case, because it is the highest evidence which we can
have of the law applicable to the subject, and the judges
are bound to follow that decision so long as it stands
unreversed, unless it can be shown that the law was mis-
understood or misapplied in that particular case. If a
decision has been made upon solemn argument and ma-
ture deliberation, the presumption is in favor of its cor-
rectness; and the community have a right to regard it
as a just declaration or exposition of the law, and to
regulate their actions and contracts by it. It would,
therefore, be extremely inconvenient to the public, if
precedents were not duly regarded and implicitly fol-
lowed. It is on the notoriety and stability of such rules
that professional men can give safe advice to those who
consult them; and people in general can venture with
confidence to buy and trust, and to deal with each other.
If judicial decisions were to be lightly disregarded, we
should disturb and unsettle the great landmarks of prop-
erty. "When a rule has been once deliberately adopted
and declared, it ought not to be disturbed, unless by a
court of appeal or review, and never by the same court,
except for very cogent reasons, and upon a clear mani-
festation of error; and if the practice were otherwise,
26
GENERAL SURVEY
it would be leaving us in a state of perplexing uncertainty
as to the law.
*' But I wish not to be understood to press too strongly
the doctrine of stare decisis, when I recollect that there
are more than one thousand cases [of course this number
has been greatly augmented since this was written] to
be pointed out in the English and American books of re-
ports, which have been overruled, doubted, or limited in
their application. It is probable that the records of many
of the courts of this country are replete with hasty and
crude decisions; and such cases ought to be examined
without fear, and revised without reluctance, rather than
to have the character of our law impaired, and the beauty
and harmony of the system destroyed by the perpetuity
of error. Even a series of decisions are not always con-
elusive evidence of what is law; and the revision of a
decision very often resolves itself into a mere question
of expediency, depending upon the consideration of the
importance of certainty in the rule, and the extent of
property to be affected by a change of it.
Question 17: What is a judicial precedent? What is the
doctrine of stare decisis? Is it ever departed from? Why?
§ 20. (General Survey, Sec. 20.) Secondary sources of
the law.
(Note: The original sources of the law are so vast in bulk,
that it is at once apparent that the practicing lawyer, or any
student of the law, must have assistance in finding the law in its
original sources. We may classify the secondary sources of the
law as
follows:
1.
Text Books.
2.
Cyclopedias.
3.
Digests.
4.
Annotations of cases.
5.
Citation systems.
6.
Legal periodicals.
7.
Law dictionaries.
8.
Miscellaneous,
FORM OF LAW
27
Text Books* The text book is a statement of the law upon
some subject, as Law of Contracts, with a reference to and per-
haps discussion of, the statutes and cases which constitute the
authorities. Needless to say, text books may range from the
book that is little more than a reference book to the book which
takes rank as almost an original authority in itself. Some
text books, perhaps better called treatises, have been very influen-
tial in the development of the law. As illustrations, Blackstone's
Commentaries on the English Law, Chitty on Pleading, the
works of Justice Story,.have had a remarkable influence on the
development of the law, while among remarkable modern works
may be mentioned Pomeroy's Equity Jurisprudence, and Wig-
more's Evidence.
The Cyclopedia is a book or set of books which purports to
cover the entire body of the "law, being a series of articles upon
the various topics of the law, alphabetically arranged. It may
be local or general in its subject matter. There are encyclopedias
covering the entire United States and those that cover merely
a particular state. The important national legal cyclopedia of
today is ''Corpus Juris.
The cyclopedia constantly refers to the original sources from
which the text is written. The lawyer uses it as a means of
direction to original sources.
Digests. The digest is a sort of cyclopedia, except that instead
of being in narrative form, it consists of a topical division of
headings under which the cases are briefly digested. There are
local and national digests, and digests of reporter systems. The
great digest now in use is the Century Digest purporting to
digest all American Cases down to 1896; supplemented by the
Decennial Digest, bringing the cases to 1906; thq Second De-
cennial bringing the cases down to 1916; and the annual digests
which are temporary digests of the current law.
Annotations of Cases. The selected case series, referred to in
the section above are "annotated,"' that is the cases are sup-
plemented by a discussion of the law or some point of law cov-
ered in the case.
Citation Systems. By means of the citation system a case
may be traced through all references to it in the same jurisdic-
tion. For instance if I have a case in 16 Illinois Reports, 425;
and I want to find whether it has ever been referred to again, I
use one of the citation systems and am able in a few minutes
28
GENERAL SURVEY
to find all the references to it in later cases. In this way I may
find whether it has been approved, followed, over-ruled, criti-
cised, or modified. These systems are mere tables of references,
with no or very little comment.
Legal Periodicals. These periodicals contain articles, notes
upon cases, etc. (The majority of them are published by the law
schools. Among the important ones are: The Harvard Law Re-
view, The Yale Law Journal, The Columbia Law Review, The
Illinois Law Review, The Michigan Law Review, The American
Law Review, The Green Bag.)
CHAPTER 4
THE JUDICIAL SYSTEM
§ 21. Function of the courts.
§ 22. Courts of law and courts of equity.
§ 23. Courts of original jurisdiction and of review.
§ 24. The progress of a case through the courts .
§ 21. (General Review, Sec. 21.) Function of the courts.
(Note: The judicial courts are established for the purpose of
deciding legal contests and granting legal remedies.)
§ 22. (General Review, Sec. 22.) Courts of law and
courts of equity.
(Note : The courts of law and courts of equity are both courts
of law in the general sense. The distinction has historical origin.
The court of law has jurisdiction in civil cases to give damages
for breach of contract, for commission of tort, and to try criminal
cases. It may give judgment (in replevin) for the recovery of
the plaintiff's personal property; and (in ejectment) for the
wrongful withholding of plaintiff's real property. The court of
equity has established a number of equitable titles and doctrines,
and developed a wide variety of. equitable remedies, such as the
remedy of injunction, of specific performance, of removing
clouds on title, etc. See American Commercial Law Series,
Vol. 1, Sec. 22.)
§ 23. (General Review, Sec. 23.) Courts of original ju-
risdiction and of review.
(Note: Courts may be divided into those that have original
jurisdiction of causes, and those whose function is to review cases
that are brought to them from the lower courts. In the Courts
of original jurisdiction the trial takes place, the evidence is
heard, and the judgment rendered. It is in these courts of course
that the jury sits to determine questions of fact. A Court of
29
30
GENERAL SURVEY
Review does not hear evidence, but merely passes upon the record
that is brought up from the court below, and on this record de-
termines whether the case was correctly tried in the court below.
It does not disturb the findings of fact of the trial court unless
those findings are clearly against the weight of the evidence; in
other words, it will not usurp the function of a jury. Its pur-
pose is to determine whether error was committed in the trial
below, so that the appealing party did not get a fair trial. It is
obviously true that the vast majority of cases are never taken
up to the higher courts. It is a costly process and unless a party
feels that the appeal will probably result in a reversal of the
court below, and unless he also feels that the amount involved
or the question involved is of enough importance, he generally
will not appeal. The Judicial Reports are reports of decisions
in these Courts of Review. These courts are variously called
Courts of Appeal, Appellate Courts, Supreme Courts, etc. If the
Court of Review is of the opinion that no substantial error has
been committed in the trial of the case, it will affirm the decision;
otherwise it will reverse it, and in reversing it, may send the case
back for a new trial.
Trial courts are frequently called nisi prius courts.)
§24. (General Review, Sec. 24.) The progress of the
case through the courts.
(Note: The progress of a case through the courts is as follows:
1. The pleadings. When a case is begun the issues involved
are set forth in written papers called pleadings. In the common
law courts the plaintiff's statement*is called the declaration and
the defendant's answer is called a plea. If the plaintiff replies
to this his reply is called a replication, and to this the defendant
may file a rejoinder. If a pleading is deemed insufficient by the
other party he may demur to it and this demurrer is either
sustained or overruled upon argument. Frequently a de-
murrer will settle the case without any trial as it raises
the question of the sufficiency of the case as stated in the
pleading. If the demurrer is sustained, the pleading may be
amended if it is amendable, but if it already sets forth as favor-
ably as possible the case or the defense, then the demurrer may
result in a final disposition. In Courts of Equity the complain-
ant's case is set forth in what is called a bill in equity, and the
COURTS
31
defendant's case is set forth in an answer. The sufficiency of
these equitable pleadings may likewise be raised by demurrer to
the bill or exceptions to the answer. The old system of common
law pleading was very technical. It has lost considerable of its
useless technicalities under the influence of modern ideas, and in
some states there is what is called code pleading supposed to be
by way of reform. However, under any system there must be
a statement of a case by the plaintiff and a defense by the de-
fendant before the case is at issue and ready for trial.
2. The trial. If the case is at issue under the pleadings
it proceeds to trial. The parties are entitled to a trial by
jury in the common law courts, but there is no jury in Courts
of Equity. Juries pass upon questions of fact under instructions
from the vourt. The court determines questions of law. The
evidence goes in and there is a finding of fact by the court where
there is no jury, or a verdict by the jury. A defeated party may
make a motion for a new trial. If this motion is overruled or if
none is made, judgment is entered upon the verdict or the
finding.
3. The. appeal. The defeated party may appeal as we have
noticed in the section above.
4. Title of the cause. A case goes by the name of the plain-
tiff vs. the defendant, as Johnson vs. Ferguson. If the plaintiff,
Johnson, loses, he may appeal and the case will still be called in
the Court of Appeal, Johnson vs. Ferguson. If, however, the
defendant, Ferguson, loses, and carries up his case, the case may
be entitled in the upper court Ferguson vs. Johnson. But in
some jurisdictions the rule has been changed so that the title of
the case keeps the same order throughout its career no matter
which party takes it to the court of review. So that it is not
always possible for one to tell at a glance at the title which
party was originally plaintiff. This explains why in some of
the cases in this book the name of the case is Defendant vs.
Plaintiff.)
CHAPTER 5
ADMINISTRATIVE BOARDS AND COMMISSIONS
§ 25. In general.
§ 26. The Interstate Commerce Commission.
§ 27. The Federal Reserve Board.
§ 28. The Federal Trade Commission.
§ 29. Public Utility Commissions.
§30. Employer's Liability Commissions.
§ 31. Commissions to revise or regulate taxes.
§ 32. Other Boards or Commissions.
(Note: To carry out the idea of uniformity in this Case Book
and American Commercial Law Series, these sections are merely
enumerated, but no subject matter given.)
32
DIVISION B
CONTRACTS
DIVISION B
CONTRACTS
Part I. The Formation of Contracts.
Part II. The Interpretation of Contracts,
Part III. The Operation of Contracts.
Part IV. The Discharge of Contracts.
PART I
THE FORMATION OF CONTRACTS
Chapter
6.
Introductory.
Chapter
7.
Parties.
Chapter
8.
Offer and Acceptance.
Chapter
9.
Consideration.
Chapter
10.
Legality of Object.
Chapter
11.
Form and Evidence of Contract.
35
THE FORMATION OF CONTRACTS
CHAPTER 6
INTRODUCTORY
§ 33. Definition.
§ 34. Essential elements in contracts.
§ 35. Kinds of contracts.
§33. (Contracts, Sec. 1.) Definition.
Case 18. Sir William R. Anson, Principles of the Eng-
lish Law of Contracts (Knowlton's Edition), pages 1
to 10.
< i # * * Contract results from a combination of the
two ideas of Agreement and Obligation. Contract is
that form of Agreement which directly contemplates and
creates an Obligation: the contractual Obligation is that N
form of Obligation which springs from Agreement.
* # # Agreement requires for its existence at least
two parties. There may be more than two. * * *
The parties must have a distinct intention common to
both. * * * The parties must communicate to one
another their common intention. * * # The inten-
tion of the parties must refer to legal obligations.
* * * It must have reference to legal rights and du-
ties as opposed to those of a social character. * * *
The consequence of Agreement must affect the parties
themselves. * * * But Agreement * * * seems
to be a wider term than contract. It includes acts in the
law of two kinds besides those which we ordinarily term
Contracts. These are: (1) Agreements the effect of
which is concluded so soon as the parties thereto have
expressed their common consent. Such are conveyances
and gifts * * * (2) Agreements which create obli-
gations incidental to transactions of a different and
36
INTRODUCTORY
37
"wider sort. * * * Marriage for instance, * * *
So, too, a settlement of property in trust. * * *
These obligations are the result of Agreement, yet they
are not Contract. * * * Obligation is a legal bond
whereby constraint is laid upon a person or group of per-
sons to act or forbear on behalf of another person or
group. * * * And so we are now in a position to
attempt a definition of contract, or the result of the con-
currence of Agreement and Obligation. And we may
say that it is an Agreement enforceable at law, made be-
tween two or more persons, by which rights are acquired
by one or more to acts or forbearances on the part of the
other or others
Question 18: Define a contract. What are the "two ideas
from which contract results?
(Note to Case 18 : "A contract is a promise, or set of promises,
to which the law attaches legal obligation. This definition may
seem somewhat unsatisfactory since it is necessary subsequently
to define the circumstances under which the law does in fact
attach legal obligation to promises, but in order to make a defini-
tion which should state these circumstances it would be neces-
sary to compress the whole law of the formation of contracts
into a sentence, which is impossible. The definition given at
least makes clear that the obligation of a contractor is based
on a promise made by him. Williston, Contracts, 1920 Vol.
1, p. 1.)
§34. (Contracts, Sec. 2.) Essential elements in
contracts.
(Note: To have a contract of any kind, we must have cer-
tain elements. To have a particular kind of contract (e. g., a
negotiable instrument, a deed), we must have additional ele-
ments. What are those elements that are basic—common to all
contracts? They have been differently stated, but it appears
to the editor that they are correctly stated as follows:
1. Parties having capacity to contract.
2. An agreement between parties (or Offer and Accept-
ance).
3. Consideration (or, in Formal Contracts, Form).
4. Legality.
38
CONTRACTS
Perhaps it is not strictly logical to say that a Party is an ele-
ment in a contract, for a contract is something made by a party.
It is essential to the commission of any act that there be a party
capable of committing it, but the definition of the act itself
hardly includes a definition of the actor. Inasmuch, however, as
the Capacity of Parties is a subject to be considered in Con-
tracts, and upon that capacity the existence of a contract de-
pends, it is convenient to treat it under the general subdivision
of Formation of Contracts, and to call it an essential element.)
§ 35. (Contracts, Sec. 3.) Kinds and forms of contracts.
(Note: At this point it is impossible for the student to ae-
quire a comprehension, from mere recital, of the different forms
and kinds of contracts. Yet it is thought, incidental to the defini-
tion of contract to describe the various forms of contractual obli-
gation. Hence, the following:
1. Division based on seal or lack of seal. The common law
fundamentally divided contracts into those which were under
seal, and those not under seal. Consideration was not a neces-
sary element in the one, but was necessary in the latter. The
former were called Formal contracts or Specialties; the latter,
informal or simple contracts, and included all contracts not
under seal whether in writing, oral or implied. This distinction
has been whittled down by time.
2. Contracts bilaterial or unilateral. A bilateral contract is
one in which both undertakings are at making of the contract
executory, i. e., outstanding to be performed. Thus A promises
to sell his house to B, upon definite terms, in return for B's
promise to buy the house upon the terms offered. Here we have
a promise for a promise. There is a contract. A unilateral
contract is one in which one side is executed while the other
is executory. A offers B money if B will perform a certain act.
B performs the act. A owes the money.
3. Contracts express and implied. An express contract is one
in which the agreement is set out in terms, oral or written.
An implied contract (or implied term in a contract) is a con-
tract inferred from the acts of the party, rather than from his
language. This division relates to the sort of evidence from
which the existence and terms of a contract is shown. Implied
contracts are said to be implied in fact and implied in law. The
distinction is developed later.)
CHAPTER 7
PARTIES
A. Who are parties.
B. Minors as parties.
C. Other parties under disability.
A. Who are Parties.
§ 36. Parties defined.
§ 37. Capacity of parties generally.
§ 36. (Contracts, Sec. 4.) Parties defined.
Case 19. Gorham's Adm'r v. Meacham's—Adm'r, 63
Vermont Reports, 231, 22 Atl. 512.
Facts: R. S. Meacham, administrator of an estate,
became indebted thereto for money belonging to the
estate collected by him as administrator. For the pur-
pose of giving security to the estate for this indebted-
ness, he executed a promissory note payable to himself,
adding after his name as promisee "executor of A. W
Gorham's estate. This note was secured by a mort-
gage on his home made out in the same form. The note
and mortgage were never delivered by him to any other
person, but were retained by him and found among his
effects at his death.
Point Involved: The necessity of adversary parties
to every contract. That a man cannot contract with
himself.
Tylek, J. "The mortgage must be held invalid for
the want of contracting parties. A contract neces-
sarily implies a concurrence of intention in two parties
one of whom promises something to the other who on
his part accepts such promise. One person cannot by
39
40
CONTRACTS
his promise confer a right against himself until the prom-
isee to whom it is made has accepted the same. *
It is essential to the validity of a contract that there be
proper parties—a person able to contract and a person
able to be contracted with.
(Note: A contract signifies the existence of adversary par-
ties. There must be "sides to every contract. Generally, there
are two sides, with one or more parties on each* side. But a
contract may in fact (though this is unusual) have more than
two sides.)
Question 19: What is meant by the statement there must be
'' sides  to a contract ? Can there be more than two sides ? More
than one party on a side?
f
§ 37. (Contracts, Sec. 5.) Capacity of parties generally.
(Note: Obviously, the subject of the capacity of parties to
contract requires inquiry into the capacity of classes of parties
who for some reason and for some purposes have not full legal
power. When we say that the law permits individuals to con-
tract, it follows that any individual may contract unless he is
for some reason under a disability.)
B. Minors As Parties
§ 38. Who are minors.
§ 39. Power of minors to contract.
§40. Minor's liability for necessaries.
§ 41. What are necessaries.
§ 42. Disaffirmance of minor's voidable contracts.
§43. Tortious liability of minors in cases involving contracts.
§ 38. (Contracts, Sec. 6.) Who are minors.
Case 20. Ex parte McFerren, 184 Alabama Reports,
223, 63 So. 159, 47 Lawyers Reports Anno. 543.
Facts: Suit by a minor, nearly of age, to recover rents
paid upon premises of which he never took possession.
De Graffenried, J., delivered the opinion of the Court.
"* * * 'The law,' says Parsons, Ch. J. in Baker v.
PARTIES
41
Lovett, 6 Mass. 78, 4 Am. Dec. 88, 'has drawn no line
between an infant six years old and one twenty years
old, for all infants are entitled to equal protection.'
Certainly an infant of six years of age could not, by any
court, be denied the right to recover rents paid out by
him on a lease which he, as tenant, did not and under
his situation could not, have received any benefit, whatso-
ever. 'A minor who has nearly attained his majority
may be as able in fact to protect his interests in a con-
tract as a person who has passed that period. But the
law must necessarily fix some precise age at which per-
sons shall be held sui juris [capable of acting in their
own right]. We cannot measure the individual capacity
in each case as it arises. It must hold the youth who
has nearly reached his majority to be no more bound
by his contract than a child of tender years,' McCarty v.
Carter, 49 111. 53, 95 Am. Dec. 572.
(Held: the minor could recover the rents paid by him.)
(Note to Case 20: A minor at common law was a person under
21 years of age. He was said to come of age on the day pre-
ceding his 21st birthday. This is also the general rule now, ex-
cept that in some jurisdictions women become of age at the
eighteenth birthday.)
Question 20: At what age does a person become of age?
Prior to that age does the law draw any distinctions in respect
to age so far as capacity to be bound upon contracts is con-
cerned? If in a particular case a minor nearly of age is as
capable of protecting his own interests as most persons who are
of age, will the law take this fact into consideration? Why?
Was the minor allowed to recover the rents that had been paid
by him in Case No. 20?
§ 39. (Contracts, Sec. 7.) Power of minor to contract.
Case 21. Coursole v. Weyerhauser, 69 Minn. 328.
Facts: In 1856 the U. S. government issued to Cour-
sole (a half breed Sioux Indian) "half-breed script for
320 acres of land. In 1870 when Coursole was 20 years
old, he appointed a man by the name of Dorr as his agent
42
CONTRACTS
to locate the land for him and sell it, and gave him a
power of attorney for that purpose. In 1874, Dorr in
Coursole's name sold the land to Brown, who resold,
until finally it was bought by Weyerhauser, the defend-
ant in the present case. Coursole in 1895 sues Weyer-
hauser to contest the title, claiming that as he gave the
power of attorney before he became of age, the same was
void, and therefore any title depending on it is void.
Defense: that his power of attorney was not void, but
merely voidable, and not having been avoided for so long
a time after becoming of age, Coursole had lost the right
to avoid, that is, has by his conduct ratified or confirmed
his act, and waived the right to disaffirm.
Point Involved: Are a minor's contracts void or void-
able ? That is to say, is a minor incapable of contracting
at all, or does he have capacity to contract with a right
on his part to withdraw if he chooses to do so %
Mitchell, J.; 11 The rule is that the act to be ratified
must be voidable merely, and not absolutely void; and
the question remains—which to our minds is the most
important one in the case—whether the act of a minor in
appointing an agent or attorney is wholly void, or merely
voidable. Formerly the acts and contracts of infants
were held either void, or merely voidable, depending on
whether they were necessarily prejudicial to the infant.
Latterly the courts have refused to take this responsi-
bility, on the ground that, if the infant wishes to deter-
mine the question for himself on arriving at his majority,
he should be allowed to do so, and that he is sufficiently
protected by his right of avoidance. Hence the almost
universal modern doctrine is that all the acts and con-
tracts of an infant are merely voidable. Upon this rule
there seems to have been ingrafted the exception that the
act of an infant in appointing an agent or attorney, and
consequently all acts and contracts of the agent or attor-
ney under such appointment, are absolutely void. This
exception does not seem to be founded on any sound
principle, and all the text writers and courts who have
PARTIES
43
discussed the subjects have, so far as we can discover,
conceded such to be the fact.
"On principle, we think the power of attorney of an
infant, and the acts and contracts made under it, should
stand on the same footing as any other act or contract,
and should be considered voidable in the same manner
as his personal acts and contracts are considered void-
able. If the conveyance of land by an infant personally,
who is of imperfect capacity, is only voidable, as is the
law, it is difficult to see why his conveyance made through
an attorney of perfect capacity should be held absolutely
void. It is a noticeable fact that nearly all the old cases
cited in support of this exception to the general rule are
cases of technical warrants of attorney to appear in
court and confess judgment. In these cases the courts
held that they would always set aside the judgment at
the instance of the infant, but we do not find that any
of them go as far as to hold that the judgment is good
for no purpose and at no time.
"The courts have from time to time made so many
exceptions to the exception itself that there seems to be
very little left of it, unless it be in cases of powers of
attorney required to be under seal, and warrants of attor-
ney to appear and confess judgment in court. See Free-
man's note to Craig v. Van Bebber, 18 Am. St. Rep. 629
(s. c., 100 Mo. 584, 13 S. W. 906); Schouler, Dom. Eel.
Sec. 406; Ewell's Lead. C'as. 44, 45, and note; Bishop,
Cont. Sec. 930; Metcalf, Cont. (2d Ed.) 48; "Whitney v.
Dutch, 14 Mass. 457-463; Bool v. Mix, 17 Wend. 119-131.
"Hence, notwithstanding numerous general statements
in the books to the contrary we feel at liberty to hold,
in accordance with what we deem sound principle, that
the power of attorney from plaintiff to Dorr, and the
deed to Brown under that power, were not absolutely
void because of plaintiff's infancy, but merely voidable
and that they were ratified by him after attaining his
majority.
Question 21: (1) Why was it important to determine in
Case 21 whether the power of attorney was void or voidable?
44
CONTRACTS
(2) What was the early test whether an infant's contract
was binding on him?
(3) What constituted ratification in the above case?
(4) State the present general rule as to a minor's power to
make a contract.
(5) Is it your opinion that the other party to the contract
may raise the point of the infancy of the minor, in order to avoid
his contract, if the minor himself does not raise it?
(Note to Case 21: While the courts of the United States are
in unison in holding the general rule to be that the contracts
of a minor are voidable and not void [except the implied con-
tracts to pay for necessaries received by the minor which are
neither voidable nor void, but binding], they differ as to the
power of a minor to appoint an agent, especially agents with
formal powers to confess judgments, sell real estate, etc. See
the authorities cited in the above opinion. See also Hiestand v.
Kuns, 8 Blackf. (Ind.) 345; Cole v. Pennoyer (obiter), 14 111.
158, contra to above case. "Probably courts would still hold an
infant unable to authorize a confession of judgment, or to ap-
point an agent for judicial proceedings; but there seems no
reason except the antiquity of the rulings to that effect which
can support the broad proposition that an infant's power of
attorney or appointment of an agent is void; and, generally,
in recent cases courts have been disposed to treat the creation
of an agency by an infant, like other agreements made by him
as merely voidable. Williston on Contracts, Sec. 227.)
§40. (Contracts, Sec. 8.) Minors' liability for
necessaries.
Case 22. Nash v. Inman (1908), 2 K. B. 1, 1 British
Ruling Cases 143.
Facts: Defendant, a minor, was a freshman at Trin-
ity College, Cambridge, in October, 1902. The plaintiff,
a tailor, sent a traveling salesman to Cambridge to solicit
orders. The salesman heard that the defendant was
spending money very freely and he called upon him, and
between Oct. 29, 1902, and June 16, 1903, the defendant
had run up a bill of $1,451 for clothing of an extravagant
and ridiculous style. Defendant was already adequately
supplied with clothing by his father. Plaintiff sues for
PARTIES
45
the price and defendant pleads infancy. Defendant had
judgment below and plaintiff appeals.
Points Involved: What is the nature of the liability
of a minor to pay for necessaries furnished him? What
are necessaries? Is the test solely the naiure of the
goods sold, or must the minor's actual present needs in
respect to such goods also be considered?
Fletchek-MoultonVL. J.: "I think that the difficulty
and at the same time the suggestion of hardship to the
plaintiff in such a case as this disappear when one con-
siders what is the true basis of an action against an in-
fant for necessaries. It is usually spoken of as a case
of enforcing a contract against the infant, but I agree
with the view expressed by the court in Rhodes v. Rhodes
(1890) 44 Ch. D. 94, 59 L. J. Ch. N. S. 298, 62 L. T. N. S.
342, 38 Week Rep. 385, in the parallel case of a claim
for necessaries against a lunatic, that this language is
somewhat unfortunate. An infant, like a lunatic, is in-
capable of making a contract of purchase in the strict
sense of the words; but if a man satisfies the needs of
the infant or lunatic by supplying to him necessaries,
the law will imply an obligation to repay him for the
services so rendered, and will enforce that obligation
against the estate of the infant or lunatic. The conse-
quence is that the basis of the action is hardly contract.
Its real foundation is an obligation which the law im-
poses on the infant to make a fair payment in respect
of needs satisfied. In other words, the obligation arises
re and not consensu. I do not mean that this nicety of
legal phraseology has been adhered to. The common and
convenient phrase is that an infant is liable for goods
sold and delivered, provided that they are necessaries,
and there is no objection to the phraseology so long as
its true meaning is understood. But the treatment of
such actions by the courts of common law has been in
accordance with that principle I have referred to. That
the articles were necessaries had to be alleged and proved
by the plaintiff as part of his case, and the sum he re-
covered was based on a quantum meruit. If he claimed
46
CONTRACTS
anything beyond this he failed, and it did not help him
that he could prove that the prices were agreed prices.
All this is very ancient law, and is confirmed by the
provisions of No. 2 of the sale of goods act, 1893,—an
act which was intended to codify the existing law. That
section expressly provides that the consequence of nec-
essaries sold and delivered to an infant is that he must
pay a reasonable price therefor.
"The sale of goods act, 1893, gives a statutory defi-
nition of what are necessaries in a legal sense, which
entirely removes any doubt, if any doubt previously
existed, as to what that word in legal phraseology means.
(The Lord Justice read the definition.) Hence, if an
action is brought by one who claims to enforce against
an infant such an obligation, it is obvious that the plain-
tiff in order to prove his case must show that the goods
supplied come within this definition. * * * That is
to say, the plaintiff has to show, first, that the goods
were suitable to the condition in life of the infant; and,
secondly, that they were suitable to his actual require^
ments at the time,—or, in other words, that the infant
had not at the time an adequate supply from other
sources. There is authority to show that this was the
case even before the act of 1893. * * *
a* * * judge came to the conclusion, to use
the language of the court in Ryder v. Wpmbell, supra,
that there was no evidence on which the jury might prop-
erly find that these goods were necessary to the actual
requirements of the infant at the time of the sale and
delivery, and therefore, in accordance with the duty of
the judge in all cases of trial by jury, he withdrew the
case from the jury and directed judgment to be entered
for the defendant. In my opinion he was justified by
the practice of the court in so doing, and this appeal
must be dismissed.
Question 22: (1) For what did plaintiff sue in Case 22?
What was the defense? Did it prevail? Why?
(2) Suppose that a minor buys an overcoat, admittedly a
PARTIES
47
necessary for him, and. agrees to pay the sum of fifty dollars
therefor, can he be held to that price ? Why ?
(3) Where the minor purchases an article that would be a
necessary for him were he not already adequately supplied, is
the burden of proof on the seller to show both that the article
comes within the class of goods that may constitute necessaries
and also that the purchasing minor was as a fact not adequately
supplied ?
(Note to Case 22, answering the last question: The above
case holds that the burden of proof is on the seller to show that
the goods were necessaries to the minor (taking into considera-
tion his station in life), and also that the minor was not being
supplied from other sources. In a note to this case in 1 British
Ruling Cases, at page 159, it said: "To summarize, it may be
said that while the decisions are harmonious, where it appears
that an infant lives with his parents or is under the care of a
guardian, that one who seeks to charge the infant for articles
otherwise conceded to be necessaries must, in order to overcome
the presumption that he was properly supplied, show that such
is not the case, there is a conflict of opinion whether or not, where
the infant does not live with his parents, nor is under the care
of a guardian, the burden is upon the plaintiff to show that the
infant was not sufficiently provided.")
§ 41. (Contracts, Sec. 9.) What are necessaries?
(a) Kinds of advantages that may constitute necessaries.
(b) Station in life as factor.
(c) Minor already supplied.
(d) Necessaries must be actually supplied.
(a) Kinds of Advantages That May Constitute
Necessaries.
Case 23. Coke upon Littleton, 172. (a) "An infant
may bind himself to pay for his necessary meat, drink,
apparel, necessary physic, and such other necessaries,
and likewise for his good teachings and instruction
whereby he may profit himself afterwards.''
Question 23: What are "necessaries for which a minor is
legally bound to pay, according to the above quotation?
48
CONTRACTS
Case 24. Strong v. Foote, 42 Connecticut Reports 203.
Facts: Suit by a dentist for services in filling and
cleaning defendant's teeth. The defendant makes it his
defense that he was a minor and that the services cannot
be legally classed as necessaries.
Pakdee, J.: "In suits against minors instituted by
persons who have rendered services or supplied articles
to them, the term 'necessaries' is not invariably used
in its strictest sense, nor is it limited to that which is
requisite to sustain life, but includes whatever is proper
and suitable in the case of each individual, having refer-
ence to his circumstances,and condition in life.
"The defendant applied to the plaintiff for relief from
pain and the prevention of its occurrence; he, finding the
cause in the defendant's decaying and neglected teeth,
immediately began the work of relief and repair, and
continued the same from time to time during a period of
six weeks, until its completion. It was necessary for the
preservation of the teeth and the charge therefor is rea-
sonable in amount. In view of the circumstances of this
defendant, we have no hesitation in saying that the serv-
ices are within the legal limitations of the word 'neces^
saries.'  (Accord: McLean & Jackson, 76 S. E. (Ga.)
792.)
Question 24: If a minor should have an accident and employ
a surgeon to treat him, would he he liable, and if so, for what
amount ?
Case 25. Ryan v. Smith, 165 Mass. 303.
Facts: Suit by Ryan, a minor, to repudiate his con-
tract with Smith for the purchase of a barber shop busi-
ness and the furniture therein, and to recover back his
money paid on account thereof. Plaintiff is a minor with
no means of support except out of his own earnings.
Point Involved: Whether the purchase of a business
by a minor who has to support himself out of his own
earnings is binding upon him?
PARTIES
49
Knowlton, J.: "The only question in this case is
whether the judge should have ruled, at the request of
the defendant, that the articles purchased by the plain-
tiff were necessaries. They were a barber shop and chair
and divers other articles of furniture designed to be
used in furnishing a barber shop. The plaintiff was a
minor and he had no means of support except what he
earned. The law does not contemplate that a minor
shall open a shop and become a trader, or the proprietor
of a business which involves the making of a variety of
contracts. This has long been settled by the authorities.
* * *. It is clear that the articles in question were
not necessaries. If they had been hand tools to a reason-
able amount, such as are ordinarily provided by a jour-
neyman and necessary for use in his trade or business,
the case would be different.
(Judgment for the minor.)
Question 25: (1) A minor buys an automobile truck, intend-
ing to earn his living in the cartage business. He tenders back
the truck and demands his money. How should the court deter-
mine the case? (See Lein v. Centaur Motor Co., 194 111. Ap.
509.) (2) Suppose a minor earns his living as a barber, and
buys razors used by him to carry on his occupation. Are they
necessaries ?
(b) Station in Life as Factor.
Case 26. Wharton v. McKenzie, 5 Q. B. 606.
Facts: Defendant was a minor, attending college
away from home and boarding at the University Com-
mons. He was a gentleman of rank and fortune and
from time to time gave dinners in his lodgings to his
acquaintances, and for that purpose obtained on his cred-
it from plaintiff, a tradesman, meats, fruits and con-
fectionery. Failing to pay his account, plaintiff sued
him, and he pleaded infancy.
Point Involved: Are expensive dinners purchased by
a minor of rank and fortune for the entertainment of
his friends, necessaries?
50
CONTRACTS
Lord Denman, C. J.:  * * * For a young man in
some situations in life, not only clothes may be consid-
ered necessaries, but a watch and the like articles, which
he is expected to wear in that condition of life; but with
respect to the articles here supplied, it is an outrage to
common sense to say they can possibly be necessaries.
* * * Suppose the son of the richest man in the king-
dom to have been supplied with diamonds and race
horses, the judge ought to tell the jury that such articles
cannot be necessaries. # # * It is said we must look
to the circumstances of each defendant. True; we must
do so. But the articles supplied must be necessaries,
not mere comforts or conveniences.
Question 26: (1) State the facts, the question presented
and the court's decision in the above case.
(2) Suppose A, the son of a wealthy society leader, becomes
a member of a social club, can he be held for his dues ?
(3) Suppose he purchases an automobile? Can he be held
for the price?
(4) What does the court say in respect to his purchase of a
watch ?
(5) Suppose he buys expensive jewelry, is it a necessary?
(c) Minor Already Supplied.
(Note: See Nash v. Inman, set out as Case 22.)
(d) Minor Must Be Actually Supplied.
Case 27. Gregory v. Lee, 64 Conn. 407.
Facts: Lee, a minor aged 19 years, was a student at
Yale college. He engaged rooms of Gregory for the
school term of 40 weeks at $10 per week. He occupied
the rooms only about three months and then engaged
rooms elsewhere. G. was unable to rent the rooms for
the balance of the term and now sues L. for such period.
Points Involved: Generally, what are necessaries'?
PARTIES
51
Specifically, can a minor be held on an executory con-
tract for necessaries?
Torrange, J.: "* * * Under the facts stated it
must be conceded that this room, at the time the defend-
ant occupied it and during the time he hired it, came
within the class called 'necessaries,' * * * for lodg-
ing comes clearly within the class of necessaries, and
the room in question was a suitable and proper one.
* * * Things necessary are those without which an
individual cannot reasonably exist. In the first place,
food, raiment, lodging and the like. About these there
is no doubt. So long then as the defendant actually
occupied the room as his sole lodging room it was clearly
a necessary to him, for the use of which the law would
compel him to pay * * *. The question now is
whether he is bound to pay for the room after December
20, 1892 (when he abandoned it). The obligation of an
infant to pay for necessaries actually furnished to him
does not seem to arise out of a contract in the legal sense
of that term, but out of a transaction of a quasi-con-
tractual nature; for it may be imposed on an infant too
young to understand the nature of a contract at all.
* * * And where an infant agrees to pay a stipulated
price for such necessaries, the party furnishing them re-
covers not necessarily the price, but only the fair and
reasonable value of the necessaries * * *. This be-
ing so, no binding obligation to pay for necessaries can
arise until they have been supplied to the infant; and
he cannot make a binding executory agreement to pur-
chase necessaries. * * *. In this case, the defendant
gave up the room and repudiated the agreement so far
as it was in his power to do so in the most positive and
equivocal manner. The plea of infancy, then, under the
circumstances, must prevail. * * *
Question 27: What is the suit for in this case? Was the
contract one for necessaries ? Was the minor held liable ? Why ?
52
CONTRACTS
§ 42. (Contracts, Sec. 10.) Disaffirmance of minor's
voidable contracts. Ratification.
(a) Disaffirmance.
Case 28. Wuller v. Chuse Groc. Co., 248 Illinois Re-
ports 398.
Facts: Wuller, while a minor, subscribed and paid
for 15 shares of stock in the Grocery Co. at the par value
of $1,500. He also acted as secretary and treasurer, and
was a salesman and bookkeeper of the corporation at a
salary of $12.00 and $15.00 a week for about two years
and a half. At the end of that time, being still a minor,
he brings a suit to recover the $1,500 so paid, tendering
back the stock. He had judgment below and the Grocery
Company appeals.
Points Involved: Whether the executed contract of
a minor in reference to personal property is voidable by
him. Whether being emancipated or in business makes
any difference.
Dtjnx, J.: "The position of the appellant (defendant)
is that an infant, having advanced money upon a contract
voidable because of his infancy, cannot rescind the con-
tract and recover the money. * * # If the fact that
the payment of money upon his contract was voluntary
precluded its recovery, the right to avoid the contract
would be no protection to an infant against his inexperi-
ence and the wiles of swindlers and cheats. Such vol-
untary payment may be recovered upon the avoidance
of the contract. The consideration, or such part of it as
remains in the possession or control of the minor must
be returned, but if he has lost or expended it, so that
he cannot restore it, he is not obliged to make restitution.
Contracts concerning personal property and executory^
agreements may be avoided by the infant either during
or after his minority. The shares of capital stock of a
corporation are personal property, the same as promis-
sory notes or bonds. An infant's purchase of such stock
PARTIES
53
is voidable, and be may, at bis election, avoid it and re-
cover tbe purchase money. Tbe appellee having offered
to return tbe stock which he had received under the con-
tract, was entitled to the return of the purchase money
he had paid. The certificate of stock held by the appellee
was merely the evidence of his rights as a stockholder.
The contract by which he became a stockholder having
been avoided, the decree properly provided for the can-
cellation of the certificate, which amounted, in effect, to
the surrender of the stock by appellee and its restoration
to appellant.
"The contract of an infant is, in general, voidable by
him, and gains no additional force from the fact that he
is engaged in business for himself or is emancipated.
The exercise of his right to disaffirm his contract may
operate injuriously and unjustly against the other party,
but the right exists for the protection of the infant
against his own improvidence and may be exercised en-
tirely in his discretion. The fact that the contract has
been executed is immaterial; there is no distinction be-
tw^en executed and executory contracts so far as the
right of disaffirmance is concerned.
Question 28: (1) A minor, 18 years of age, who was mar-
ried, bought a horse, wagon and harness. He used same for
pleasure purposes. He afterwards sold the wagon and harness,
and the horse because of its emaciation from disease or neglect,
was shot. The minor sues to get his money hack. Defense, that
unless he tenders what he got, he cannot disaffirm. How should
court decide? (McGuckian v. Carpenter, — R. I. —, 110 Atl.
402, 16 A. L. R. 1473.)
(2) May a minor avoid Iiis contract as to personal property
before he becomes of age? After he becomes of age?
(3) Does the fact that a minor is in business for himself
affect his contracts? Suppose he is emancipated by his parents,
does this make any difference?
(4) Does the fact that a minor cannot restore what he has
received, under the contract, affect his right?
(Note: In a few states (e. g., Georgia, Iowa) it is provided
by statute that where a minor is in business for himself, his con-
54
CONTRACTS
tracts in respect to such business shall be binding upon him.
But it is held that one who merely works for another is not in
business for himself within the meaning of such a statute.
Bieckler v. Guenther, 121 la. 419.)
Case 29. Hauser v. Marmon Co., 208 111. Ap. 171.
171.
Facts: Hauser, a minor, bought an automobile from
the Marmon Co. for $600. He paid $450 on this price
and now, while still a minor, brings suit to recover the
$450, offering to restore the machine which has been used
and has deteriorated in value.
Points Involved: Can a minor sue to set aside a con-
tract made by him and recover what he has paid the
defendant even though unable to restore the benefits, or
restore them as received?
By the Court: (Syllabus). "Minors upon restora-
tion of an automobile to the seller, although it has been
used and has deteriorated in value, are entitled to rescind
the contract of sale and recover back that part of the
purchase price which has been paid.
Question 29: What were the facts in this case ? How did the
court hold?
(Note to Case 29: This is the general rule. But in New
York it has been held that where the minor sets aside his eon-
tract and restores what he received in deteriorated condition he
may be charged with the value of its use during the time he
had it, and the amount of its depreciation. Rice v. Butler,
160 N. Y. 578 (restoration of bicycle by minor and suit by him
for price paid for it). But New York appears to stand alone
in this viewpoint.)
Case 30. Derocher v. Continental Mills, 58 Maine, 217.
Facts: This is a suit brought by a minor against Con-
tinental Mills for 25% days' work at $1.25 per day. The
minor had agreed to work at least six months and not
to leave except upon giving two weeks' notice. He left
before the time agreed upon had expired and without
giving any notice. The defendant contended and the
trial court held that the defendant was entitled to have
PARTIES
55
the damages caused by plaintiff's leaving deducted from
the wages he would otherwise be entitled to recover. The
minor appeals.
Point Involved: Whether a minor's contract to per-
form personal services is voidable by him. Whether upon
abandoning such contract he is entitled to recover the
value of his services.
Walton, J.: "* * * To compel the minor thus to
make good the loss occasioned by the non-performance
of his contract is virtually to enforce the contract; and
thus to enforce the contract is in effect to abrogate the
rule of law that a minor is not bound by his contract.
We presume no one would undertake to maintain that
an action would lie against an infant to recover damages
for the breach of such a contract; and yet it seems to us
that there can be no difference in principle between de-
ducting the damages from the amount which the infant
would otherwise be entitled to recover in a suit brought
by him and recovering the same in a suit brought against
him. Stripped of all its sophistical surroundings, we
think the doctrine contended for in defense amounts to
simply this, that the minor's contract not to leave with-
out giving two weeks' notice was obligatory, and having
violated it, he must pay the damage. Such a doctrine
cannot be maintained.
 Having avoided his contract to work not less than
six months and not to leave without giving two weeks'
notice, the plaintiff had a right to have his case tried
and determined precisely as if no such contract had ever
been made. (New trial granted.)
Question 30: Did the minor in quitting his employment vio-
late his contract, or avoid it? Why? Was he entitled to re-
cover the reasonable value of his services?
Case 31. Scott v. Buchanan et al., 30 Tenn., 468.
Facts: Suit to eject defendants from certain lands.
Defendants claim title through a deed given by plaintiff
during her minority. Plaintiff is now an adult.
56
CONTKACTiS
Point Involved: That the deed of an infant is void-
able; the time at which it may be avoided, and the man-
ner of avoidance. Also what constitutes a ratification
by which the right to avoid is lost.
Tottex, J.: "# * * The better opinion seems to
be that a sale of chattels by an infant may be avoided
during infancy, but that a sale of lands cannot be avoided
by him till he become of age. The act of avoidance in
relation to his personalty is allowed him during infancy,
as it may be the more necessary to his personal interest,
but is not allowed him as to his realty, because of his
supposed indiscretion to exercise it, and as its exercise
during infancy may not be so material to his interest.
* * *
"The deed of an infant may be avoided after he comes
' of age, by executing a deed to a third person for the same
land, that being an act of like character and notoriety
with the first; or by making an entry upon the land, re-
claiming it and declaring his dissent to his deed; or, as
we apprehend, by suit for the land, without having made
any previous entry. * * *
"In the next place, what will amount to an affirmance
of the voidable deed 1 The court instructed the jury that
this might be by express ratification, or by acts which
reasonably imply an affirmance, or by an omission to dis-
affirm the deed in a reasonable time. * * *
"We see nothing unjust or inconvenient in the rule
which requires the party within a reasonable time after
he arrive at full age, to make his election whether he will
stand to or abide by his voidable contract made during
infancy. On the contrary, it would be highly unjust and
inconvenient to the other party, who is bound by the
contract and has no right to avoid it, to be held subject
to an indefinite period to his right of election. * * * 
Question 31: (1) When can a minor disaffirm his deeds of
conveyance ?
(2) May he avoid his other voidable contracts before be-
coming of age?
PARTIES
57
(3) In what ways may an infant avoid his deed of convey-
ance?
(4) In what ways may one ratify his deeds, voidable on the
ground of infancy?
(Note: By statute or judicial decision in many states the
"reasonable time in which an infant may disaffirm after he
becomes of age has been crystallized into a certain time, as, say,
three years, but he may deprive himself of the full statutory
period by a ratification before that time.
It should always be borne in mind that an act of ratification
is irrevocable. When one has ratified what was before that time
voidable, his right to avoid has gone.)
(Note: A minor seeking to avoid a contract may be in one of,
the following situations:
(1) The minor a defendant—can restore what he has re-
ceived.
(2) The minor a defendant—cannot restore what he has re-
ceived.
(3) The minor a plaintiff—can restore what he has received.
(4) The minor a plaintiff—cannot restore what he has re-
ceived.
In the first three cases we may say that a minor can disaffirm
the contract subject to the qualification that he cannot disaffirm
and also keep the benefit if he has it to restore. In the fourth
case there has been a difference of opinion. It has been said
that his minority is a  shield and not a sword. It is undoubt-
edly true that many merchants believe that they are safe in
dealing with minors if they receive payment. And as a practical
matter they generally would be safe, as it is unlikely the minor
will demand his money back. Yet legally he may do so, by the
weight of authority, even if he cannot restore what he has re-
ceived. It seems a hardship upon a merchant that such is the
law. But protection of minors requires such to be the law.
And the hardship is after all no greater than it is in a case in
which the minor defends, without being able to restore. A
merchant can use this philosophy: Do not deal with minors
unless payment is received. The minor is unlikely to ask for
his money back. However, he may do so. On small accounts
the loss is not likely at all, and if it does occur, is not large and
can be borne. On large accounts do not sell to the minor even
58
CONTRACTS
for cash. Reauire the father, guardian or a friend to be the
purchaser.)
(b) Ratification of Minor's Voidable Contracts.
Case 32. Sanger v. Hibbard et al., 104 Fed. 455.
Facts: Sanger, while a minor, purchased goods from
Hibbard Brothers and others, for use by him as a retail
dealer. Later, Hibbard Brothers and others sued out
attachment proceedings against the goods. Sanger, un-
der statutory authority, gave a bond to dissolve the
attachment, one of his creditors becoming surety there-
on, and such creditor afterwards receiving the proceeds
-from the sale of the goods in satisfaction of his claim.
It is asserted that by giving the bond the minor (who
is still under age) ratified his contract or estopped him-
self from setting up his minority.
Point Involved: Whether a minor, while still a minor,
can ratify his voidable contracts or estop himself to set
up his minority.
Caldwell, Circuit Judge : "* * * The rule is well
settled that an infant has an absolute right to disaffirm
and avoid his contract for the purchase of property with
which to enter into trade. He can repudiate his contract
to pay for property purchased for such a purpose, and
the seller has no redress unless the property purchased
remains in the possession and control of the infant. In
such case the infant's repudiation of his contract revests
the title to the property sold in the vendor, who may
recover it in a proper action for that purpose. * * *
It is not claimed that he (the minor) ratified the contract
or did any act to estop him setting up his defense after
he had attained his majority, and the claim that the
execution of the bond to dissolve the attachment during
his infancy operated as an affirmance of the contract or
as an estoppel is untenable. * * * A minor can
neither make nor affirm a contract of this character dur-
ing his infancy. The rule which precludes him from
PARTIES
59
making a [binding] contract precludes him from ratify-
ing it. * * *
Question 32: Can a party who has contracted with a minor
set up that the minor has lost his right to avoid his contract
because while still a minor he ratified it? Why?
Case 33. Rubin v. Strandberg, 288 Illinois Reports,
64.
Facts: Erik P. Strandberg, Jr., while a minor, en-
tered into a contract with David, Ike, and Jacob Rubin,
partners, by which Strandberg agreed to buy and the
Rubins, to sell, certain real estate. This contract was
made March 4, 1915. On October 7, 1915, defendant be-
came of age. Strandberg made payments on the contract
up to December 4, 1915, paying on the aggregate includ-
ing interest, before and after age, the sum of $2,575. He
made a payment in November and another in December
(after he was of age). He also recorded the contract
after he was of age. On February 4, 1916, he employed
a lawyer and tendered back the contract, together with
a quitclaim deed of all his interest in the property, and
demanded back his money on the ground that he was a
minor when he made the contract. The Rubins refused
to accept the tender or accede to his request, and after-
wards started the present suit asking that Strandberg
be compelled to pay the balance due on the contract.
Strandberg contends he did not know his legal right to
disaffirm when he made the payments and recorded the
contract after becoming of age.
Point Involved: What acts after majority constitute
ratification of contracts entered into during minority?
Is the party's ignorance of his legal rights after becoming
of age material?
Me. Justice Farmek: "* * * It is not disputed
that defendant was a minor when the contract was en-
tered into and that he attained his majority October 7,
1915, but complainants contend that the payments made
by defendant after he became of age, and his act in caus-
60
CONTRACTS
ing the contract to be recorded in January, 1916, con-
stituted a ratification of the contract after he attained
his majority. The defendant's answer to this contention
is that at the time these acts were performed he did not
know he had the legal right to disaffirm the contract upon
attaining his majority, and that before said acts can be
held to be a ratification of the contract it is necessary
that the defendant should have known, at the time of
their performance, that he had a right to disaffirm the
contract on the ground that it was entered into during
his minority.
"A minor may disaffirm a contract made by him dur-
ing minority within a reasonable time after attaining his
majority, and he may by acts recognizing the contract
after becoming of age ratify it. There can be no doubt
that the acts of the defendant after attaining his ma-
jority, in making the monthly payments and causing the
contract to be recorded, were a ratification of the con-
tract, unless the law is, as contended by defendant, that
it was essential, in order to constitute said acts a ratifica-
tion, that he knew at the time he performed the acts that
the law authorized him to disaffirm the contract. Cases
decided by this court relied on by defendant are David-
son v. Young, 38 111. 145, Sayles v. Christie, 187 Id. 420,
and Coe v. Moon, 260 id. 76. In none of those cases was
the question of the knowledge of the party, at the time
of the alleged ratification, that he had a right, under the
law, to disaffirm, involved. In the Davidson case the
court held the act or circumstance relied on as a ratifica-
tion of a deed made while the grantor was a minor was
not of a character to constitute a ratification. The court
said: 'In order to constitute a ratification of acts done
in infancy, the act relied upon as a ratification must be
performed with a full knowledge of its consequences
and with an express intent to ratify what is known to be
voidable.' Whether the grantor knew at the time of the
alleged ratification that she had the legal right to dis-
affirm the deed is not mentioned or referred to. The
case of Sayles v. Christie, supra, is the same in substance.
-V- -v-
7p W w
PARTIES
61
"In none of the above cases was the question here
under consideration involved. In this case the proof
failed to show that defendant had been induced by fraud
and misrepresentation to enter into the contract. He had
no reason for disaffirming it except that he had changed
his mind. His change of mind was not the result of any
discovery of the truth of facts which had been fraudu-
lently misrepresented to him by complainants and upon
which he relied in making the contract. He simply con-
eluded that he had made an unprofitable contract and
sought to disaffirm solely because he was a minor when
it was made. Just when he reached that conclusion does
not definitely appear. He defaulted in the January, 1916,
payment, and on the day the February payment. was
due notified complainants of his election to disaffirm. He
then would have had the legal right to disaffirm the con-
tract if he had not previously and since attaining his
majority ratified it. The payments in November and
December, 1915, evidenced his intention to comply with
his contract and were a ratification of it, unless, as con-
tended, he did not then know the law authorized him
to disaffirm it. In our opinion defendant's acts after
becoming of age must be regarded as done in the light
of knowledge of his legal right to disaffirm; that he was
presumed to know the law, and cannot be heard to say
that he was ignorant of his legal right in that respect
and performed the alleged acts of ratification in ignor-
ance of that right. Upon this particular question the
authorities are not altogether in accord, but in our opin-
ion the more logical reasoning sustains that proposition.
Wharton on Contracts (vol. 1, sec. 57), in discussing the
question says: 'Hence the better opinion is that a ratifi-
cation made by a person of sound mind on arriving at
his majority will be held valid, if untainted with fraud
or undue influence, though the party making it was not
at the time aware that it bound him in law.' • The propo-
sition that it is not necessary to a binding ratification
that the party sought to be charged knew at the time of
the act that he had the legal right to avoid the contract
62
CONTRACTS
is sustained in American Mortgage Co. v. Wright, 101
Ala. 658; Bestor v. Hickey, 71 Conn. 181; Morse v.
Wheeler, 86 Mass. 570; Anderson v. Soward, 40 Ohio
St. 325 ; Clark v. VanCourt, 100 Ind. 113; 14 R. C. L. 249.
"In our opinion the Appellate Court did not err in
holding defendant's acts after attaining his majority
were a ratification of the contract, and its judgment is
affirmed.
"Judgment affirmed.
Question 33: What was the contract in this case ? By whom
is the suit brought and for what purpose ? What is the defense ?
The answer to that defense? What acts were done by the
minor after he became of age? Was he ignorant of his right
at that time? Did this make any difference?
§ 43. (Contracts, Sec. 11.) Tortious liability of minors
in cases involving contracts.
Case 34. Pitts v. Hall, 9 N. H., 441.
Facts: Plaintiff, having a large quantity of hats for
sale, sold them to defendant, first inquiring of defend-
ant if he were of age and being informed that he was.
Plaintiff sued defendant for the price and defendant set
up and proved he was a minor. Plaintiff now brings
suit for damages sustained by reason of the deceit and
fraud practiced upon him by defendant.
Point Involved: Is a minor who procures benefits
through false misrepresentation as to his age, under a
contract voidable by him, answerable in damages for the
deceit?
Parker, C. J.:  The general principle * * * is
that an infant is liable in actions ex delicto [in tort]
* * *. But a matter of contract * * * is not to
be turned into a tort in order to charge the infant by
change of the form of action. * * *
"But if the tort is subsequent to the contract and not
a mere breach of it, but a distinct, wilful and positive
wrong of itself, then, although it may be connected with
a contract, the infant is liable.
PARTIES
63
t < * * * jnfanCy js not permitted to protect fraud-
ulent acts, and infants are liable ex delicto, * * *
there is no sound reason that occurs to us why an in-
fant should not be liable in damages for a fraudulent
representation whereby another has received damage.
* * * The representation * * * was not part of
the contract. * * * No contract was made about de-
fendant's age. * * *
Question 34: (1) State the facts in the above case, the spe-
cific question involved and the court's decision.
(2) A sells goods to B, a minor, who is 20 years of age, but
looks to be 25. Nothing is said about B's age. Is B guilty of
fraud in not disclosing his age ? .
(Note to Case 34: There are some authorities that hold a con-
trary view to the above decision. Thus, the minor is not held in
the English cases: Johnson v. Pye, 1 Keble, 913. Also, see Slay-
ton v. Barry, 175 Mass. 513. "An unfortunate reversion to the
old rule."—Note in 57 L. R. A., p. 678. See the cases collected
in that note, beginning page 675.
Effect of representation by minor that he was of age upon his
right to disaffirm the contract. By the weight of authority a
minor is liable for damages caused by his misrepresentation that
he was a minor. It is another question whether his deceit in that
respect prevents him from setting up that he was a minor in a
suit by him to avoid a contract, or in a defense by him when sued
on a contract, the contract being in its nature voidable by him.
In the case of La Rosa v. Nichols, 92 N. J. L. 375, 105 Atl.
201, the court said: "As applied to the facts of the case at bar,
the law as I view it is that if a youth under 21 years of age, by
falsely representing himself to be an adult, which he appears to
be, for the purpose of inducing another to enter into a contract
with him, and thereby through such representation and appear-
ance the other party is led to believe that such infant is an adult
and makes a contract with him, the benefit of which he obtains
and retains, then in a suit on that contract the minor will not
be permitted to set up the privilege of infancy, because by his
fraudulent conduct, he has estopped himself from so pleading,
and this in a court of law as well as in a court of equity. In
a note to this case in 6 American Lawyers Reports 416, the an-
notator says "the courts are not agreed on this subject.
64
CONTRACTS
The reviewer divides the cases according to the following head-
ings:
1. When infant is sued at law on the contract. The conclu-
sion is, the minor is not estopped, there being a Kentucky and a
Texas case to the contrary.
2. When infant suing at law. The conclusion is that the in-
fant is not estopped, there being a Georgia case, and the case
above quoted from, to the contrary.
3. When infant is sued in equity. In some cases the minor is
held to be estopped to set up his defense (Ga., Minn., Miss., N.
J.) while in others not estopped (Conn., Md., N. Y., N. C.).
4. When infant suing in equity. "Weight of authority he can-
not come into equity for relief when he has been guilty of deceit
as to his age whereby he procured the contract, but there is im-
portant authority to the contrary.)
Case 35. Towne v. Wiley, 33 Vt. 355.
Facts: The facts are given in the opinion.
Point Involved: Is a minor liable for wilful injury to
the property of another, procured by him under his void-
able contract with that other?
Redfield, J.:  This is an action on the case, in trover,
for the conversion of a certain horse. The facts which
appeared on the trial were that the defendant, being an
infant of twenty years, hired of the plaintiffs, who were
livery stable keepers at Bellows Falls, the horse in ques-
tion, to go to Brattleboro' and back the same day. He
went to Brattleboro' and returned by a circuitous route,
nearly doubling the distance, which, in a direct course, is
twenty-three miles, at about eight o'clock in the evening
went to a house in Westminster, and remained until four
o 'clock the next morning, the night being cold and windy,
and the horse exposed, during the whole night, without
shelter or covering of any kind. This was on the. thir-
tee'nth of July, and the horse, when returned to the plain-
tiffs, the next morning, was sick, ate nothing, and died
in five or six days, from the over-driving and exposure.
The court charged the jury, that these facts constituted
a conversion by the defendant, and that his infancy was
no bar to the action, and that the plaintiffs were entitled
to recover the value of the horse, at the time of the con-
PARTIES
65
version, which would be when the defendant departed
from the use for which he hired the beast.
''The cases upon the subject of the liability of infants,
for torts, when viewed with reference to their facts, may
not seem altogether consistent; but when the principle,
upon which the courts profess to proceed, is examined,
they will all be found to be placed upon the same ground;
and no case is to be regarded as authority, except for
the principle, upon which the courts professed to pro-
ceed in deciding it. In all the cases, then, upon this
subject, it will be found that the courts profess to hold
infants liable for positive substantial torts, not for viola-
tions of contract merely, although, by construction, the
party claiming redress may be allowed, by the general
rules of pleading, to declare in tort, or contract, at his
election. Jennings v. Rundall, 8 T. R. 335, was entirely
of this character. The form of the action was trespass
on the case, for immoderately driving a mare, let to hire
by the plaintiff to the defendant, and trover for conver-
sion. The defendant pleaded infancy to the counts for
immoderately driving, and the plaintiff demurred, and
Lord Kenyon, in giving judgment, speaks of the defend-
ant as a lad. But in every view of the case, the defendant
was guilty of a mere omission, a nonfeasance, or breach
of the implied contract, to use the beast discreetly and
carefully, and he had judgment.
< t * * *
"Applying these general principles to the case before
us, it seems to us that the distinction taken in the court
below is the true one. So long as the defendant kept
within the terms of the bailment, his infancy was a pro-
tection to him, whether he neglected to take proper care
of the horse, or to drive him moderately. But when he
departs from the object of the bailment, it amounts to a
conversion of the property, and he is liable as much as if
he had taken the horse in the first instance without per-
mission.
Question 35: (1) State the facts in the above case, the spe-
cific question presented and the court's decision.
66
CONTRACTS
(2) A minor hires a horse to drive from Chicago to Evans-
ton, but drives it from Chicago to Wheaton (another direction)
and injures it on the way. Can the owner recover damages?
(3) A, a minor, hires a horse to drive from Chicago to
Evanston, and drives it immoderately. Can the owner recover
damages?
(4) A, a minor, made a contract with B, an adult, that he
would thresh his grain for him. A was negligent in the per-
formance of his contract and the grain was thereby destroyed
by fire. Is A liable to B? (Lowery v. Cate [Tenn.] 57 L. R. A.
673.)
C. Other Parties Under Disability.
§ 44. Married women.
§ 45. Insane persons.
§ 46. Drunken persons.
§ 47. Aliens.
§ 48. Corporations.
§ 44. (Contracts, Sec. 12.) Married women.
Case 36. Snell v. Snell, 123 111. 403.
Facts: Ellen J. Snell, wife of Philip Snell, joined
with him in a deed of mortgage to Jane Snell, to waive
and release her right of homestead and dower. The
mortgage misdescribed the land. Later the mortgagee,
Jane Snell, filed a bill to correct and foreclose the mort-
gage. The present suit is by Ellen J. Snell as widow of
Philip Snell, and her two minor children, for assign-
ment of homestead, claiming that no interest therein
passed by the deed of mortgage.
Point Involved: Generally, what was the effect of a
married woman's contract at common law? by the stat-
utes of Illinois?
Mrs. Justice Mulkey: "* * * Coming now to the
merits of the case, it may somewhat aid us to advert
hastily, and in a general way, to the legal disabilities of
married women, as they existed here and in England be-
fore the commencement of the reform legislation which
PARTIES
67
has resulted in so radical a change in the present law on
the subject. Their contracts, by the common law, as it
existed in England, and in this State prior to the com-
paratively recent legislation on the subject, commencing
in 1861, were absolutely void at law, and were equally so
in equity, so far as imposing any personal obligation is
concerned. They might, however, by such contracts, sub-
ject to certain limitations, bind their separate estate,
but they imposed no personal obligation whatever. The
right of a married woman to have a separate estate in
personal property was purely a creature of equity, and
the power to bind it [the estate, not herself], by a con-
tract fairly entered into in respect to the estate, and on
her own account, was regarded as a mere incident of
such ownership. As her contract imposed on her no
personal obligation, either at law or in equity, it there-
fore followed, as a logical result and legal sequence, that
a bill would not lie to reform a contract or conveyance
alleged to have been made by a married woman. As
a conveyance of land by deed was a species of contract,
it followed that an instrument executed by a married
woman, purporting to convey real property, was abso-
lutely void, both at law and in equity, and consequently
could' not be enforced or reformed. While at common
law a married woman could not convey her own real
estate, or release her inchoate right of dower or other
interest in the lands of her husband, yet she might,
through the instrumentality of a fictitious suit, called a
fine' or fine and recovery, permit another to recover what-
ever right she had in the land proposed to be conveyed,
and thus, by a species of estoppel, bar her rights. At
common law this was the only mode by which a married
woman could dispose of her own lands, or any interest
she might have in those of her husband. This cumbrous
and expensive mode of conveying her interests in real
property was abolished by an act of the British Parlia-
ment (3 and 4 William IV, chap. 74), under the provi-
sions of which the wife was enabled to accomplish the
same ends as she has been able to do here from a very
66
CONTRACTS
(2) A minor hires a horse to drive from Chicago to Evans-
ton, but drives it from Chicago to Wheaton (another direction)
and injures it on the way. Can the owner recover damages?
(3) A, a minor, hires a horse to drive from Chicago to
Evanston, and drives it immoderately. Can the owner recover
damages ?
(4) A, a minor, made a contract with B, an adult, that he
would thresh his grain for him. A was negligent in the per-
formance of his contract and the grain was thereby destroyed
by fire. Is A liable to B? (Lowery v. Cate [Tenn.] 57 L. R. A.
673.)
C. Other Parties Under Disability.
§ 44. Married women.
§ 45. Insane persons.
§ 46. Drunken persons.
§ 47. Aliens.
§ 48. Corporations.
§ 44. (Contracts, Sec. 12.) Married women.
Case 36. Snell v. Snell, 123 111. 403.
Facts: Ellen J. Snell, wife of Philip Snell, joined
with him in a deed of mortgage to Jane Snell, to waive
and release her right of homestead and dower. The
mortgage misdescribed the land. Later the mortgagee,
Jane Snell, filed a bill to correct and foreclose the mort-
gage. The present suit is by Ellen J. Snell as widow of
Philip Snell, and her two minor children, for assign-
ment of homestead, claiming that no interest therein
passed by the deed of mortgage.
Point Involved: Generally, what was the effect of a
married woman's contract at common law? by the stat-
ntes of Illinois?
Mrs. JusTiCE Mulkey :  # * * Coming now to the
merits of the case, it may somewhat aid ns to advert
hastily, and in a general way, to the legal disabilities of
married women, as they existed here and in England be-
fore the commencement of the reform legislation which
PARTIES
67
has resulted in so radical a change in the present law on
the subject. Their contracts, by the common law, as it
existed in England, and in this State prior to the com-
paratively recent legislation on the subject, commencing
in 1861, were absolutely void at law, and were equally so
in equity, so far as imposing any personal obligation is
concerned. They might, however, by such contracts, sub-
ject to certain limitations, bind their separate estate,
but they imposed no personal obligation whatever. The
right of a married woman to have a separate estate in
personal property was purely a creature of equity, and
the power to bind it [the estate, not herself], by a con-
tract fairly entered into in respect to the estate, and on
her own account, was regarded as a mere incident of
such ownership. As her contract imposed on her no
personal obligation, either at law or in equity, it there-
fore followed, as a logical result and legal sequence, that
a bill would not lie to reform a contract or conveyance
alleged to have been made by a married woman. As
a conveyance of land by deed was a species of contract,
it followed that an instrument executed by a married
woman, purporting to convey real property, was abso-
lutely void, both at law and in equity, and consequently
could' not be enforced or reformed. While at common
law a married woman could not convey her own real
estate, or release her inchoate right of dower or other
interest in the lands of her husband, yet she might,
through the instrumentality of a fictitious suit, called a
fing or fine and recovery, permit another to recover what-
ever right she had in the land proposed to be conveyed,
and thus, by a species of estoppel, bar her rights. At
common law this was the only mode by which a married
woman could dispose of her own lands, or any interest
she might have in those of her husband. This cumbrous
and expensive mode of conveying her interests in real
property was abolished by an act of the British Parlia-
ment (3 and 4 William IV, chap. 74), under the provi-
sions of which the wife was enabled to accomplish the
same ends as she has been able to do here from a very
68
CONTRACTS
early period, by joining her husband in an ordinary deed
of conveyance, subject to certain prescribed formalities,
which, in all cases, had to be strictly complied with. But
these statutory enactments, which enabled a married
woman to make a valid transfer or conveyance of real
property, did not at all affect her disabilities in other
respects. As to her, the deed, only operated as a con-
veyance; therefore, all covenants contained in it were, in
law, the covenants of the husband only. It followed, that
if her deed was not sufficient, on its face, to pass her
property, there was no relief but to induce her to make
another; and if she declined to do so, equity would not
compel her, nor would it reform the instrument, for such
a suit could not, in any case, be maintained for either
purpose, except upon the theory that a contract for a
deed had existed between the parties. This, of course,
could not be done in the case of a married woman, for
the simple reason she could not make such a contract,
nor, indeed, any at all; and of this the court would take
judicial notice. * * *
"The law, however, in respect to the right and dis-
abilities of married women, has of late years undergone
a radical change. By the acts of 1861, 1869 and 1874,
married women are to-day, and were at the time of the
execution of the mortgages in question, placed upon a
common footing with married men in respect to all prop-
erty rights, including the means to acquire, protect and
dispose of the same. They may own, buy, sell, transfer
and convey any and all kinds of property, to the s£me
extent as married men or single women may, and sub-
ject to no other or different conditions or restrictions.
Not only so, but their duties and obligations in respect
to these rights and powers are the same as those of others
sui juris. Like other persons, they must perform their
contracts; and if they fail to do so, they are amenable
to legal process to the same extent as if they were un-
married. If, in the execution of a deed by a married
woman a mistake occurs, so that it does not truly state
the contract between the parties, a court of equity will
PARTIES
69
correct it against her, just as readily as it would against
any other person. * * *
(Decision for the defendant.)
Question 36: (1) For what purpose did the complainant,
Ellen J. Snell, bring the present suit? What was the theory
upon which she based her right?
(2) Did a married woman at common law have any power
to make a contract?
(3) By what sort of procedure did the courts work out a
means by which she could convey her real estate?
(4) Why in a conveyance by a married woman under the
early English law could a misdescription not be reformed by
the court ?
(5) How has the law in this respect been changed?
(6) Was Ellen J. Snell bound by the foreclosure suit in
which the misdescription was corrected by the court?
§ 45. (Contracts, Sec. 13.) Insane persons.
(Note: An insane person's contracts are generally consid-
ered voidable, and not void. He is liable for necessaries actually
furnished him. However local statutes must be consulted. If
a legal guardian or conservator has been appointed, it is gen-
erally provided that the acts of the insane person are void.)
§ 46. (Contracts, Sec. 14.) Drunken persons.
(Note: Drunkenness as a ground for avoiding a contract is
not looked upon with favor. "Mere drunkenness is not enough
to release a party from his contracts. To render a transaction
voidable on account of the drunkenness of the party to it, the
drunkenness must have been such as to have drowned reason,
memory and judgment and to have impaired the mental facul-
ties to such an extent as to render the party non compos mentis
for the time being. (Martin v. Harsh, 231 111. 389.)
§ 47. (Contracts, Sec. 15.) Aliens.
(Note: An alien can contract with another alien or with a
citizen. An alien enemy, however, cannot contract. The rights
of such alien enemies are governed by legislation enacted as a
wartime measure.)
§ 48. (Contracts, Sec. 16.) Corporations.
(Note : See cases post, under Subdivision Gr.)
72
CONTRACTS
service called for when the acceptor knows that it has
been made and acts in performance of it, but not other-
wise. He may do such things as specified in the offer, but
in so doing, does not act in performance of it, and there-
fore does not accept it, when he is ignorant of its having
been made. There is no such mutual agreement of minds
as is essential to contract * * * The judgment' of
the lower court affirmed.
Question 38: (1) How was xhe point in Case 38 raised? What
was that point ? What did the lower court hold ? Did the upper
court sustain plaintiff ? Do you think defendant won on a mere
technicality or on the merits?$(2) A magazine has various so-
licitors for subscriptions upon commission. It posts a notice
offering $200 to the agent who will by December 31st next bring
in the largest number of subscriptions. A, a solicitor, brings in
the largest number. He is then told of the offer and admits he
had no knowledge of it. Can he force the magazine to pay ?
(Note to Case 38: There have been rulings allowing a recovery
of reward in cases of ignorance by the party claiming the reward.
On principle such cases are unsound. Statutes in some states
allow a recovery upon rewards whether known or not. In such
cases the recovery is based upon the statute, and not upon the
theory of contracts.)
§ 51. (Contracts, Sec. 19.) No offer because offer not
uttered.
Case 39. Benton v. Springfield Young Men's Christian
Ass'n., 170 Massachusetts Reports, 534, 49 N. E. 928.
Facts: A committee of the Springfield Y. M. C. A.
having requested plans from architects, with the right
to reject all plans submitted, voted to accept the plans
submitted by the Architect Benton and to employ him
as architect for the proposed building. This action was
never communicated to him, although he learned of it
through unofficial channels. At a later meeting this vote
was rescinded. Benton sues on the theory of contract.
Held: That no communication had been made to him
and no contract existed.
Question 39: Why was there no contract in this case ?
OFFER AND ACCEPTANCE
73
§52. (Contracts, Sec. 20.) Preliminary announcement
intended to secure offers distinguished from offers.
Case 40. Montgomery, Ward & Co. v. Johnson, 209
Massachusetts Reports, 89.
Facts: Mary Johnson, transacting business as Iver
Johnson's Arms and Cycle Works, sent out a circular
letter setting forth the terms and conditions under which
she would supply revolvers to the jobbing trade. Mont-
gomery, Ward & Company was a customer to whom one
of such circulars was sent. This company sent in an
order for revolvers, which Johnson refused to fill. Suit
is brought upon the theory that a contract was made by
the letter and the order.
Point Involved: Whether a circular letter sent gen-
erally to the trade for the purpose of attracting orders
is an offer which ripens into a contract upon receipt of
an order sent in by a person to whom such letter was sent.
Braley, J.: "We are of opinion that a fair interpre-
tation of the letter and document very plainly shows that
it was not a general offer to sell those addressed, but an
announcement, or invitation, that the defendant would
receive proposals for sales on the terms and conditions
stated, which she might accept or reject at her option.
No contract between the parties having been created,
the defendant's refusal to accept and fill the plaintiff's
orders was not an actionable wrong. * * * 
Question 40: (1) Why is a circular letter sent generally to
prospective customers announcing goods on hand for sale at
prices quoted, not an offer to sell such goods to the parties
to whom sent? If such circular letter used the words "We are
offering, etc., would that make any difference?
(2) Is a display advertisement in a newspaper quoting
articles and prices an offer ?
Case 41. Harsh (Defendant) v. Nebraska Seed Co.
(Plaintiff), 152 Northwestern (Nebraska) 310.
Facts: Harsh was a farmer living near Lowell, Ne-
braska. He wrote the Nebraska Seed Co. as follows:
74
CONTRACTS
4'I have about 1800 bu. or thereabouts of millet seed
of which I am mailing you a sample. This millet is re-
cleaned and was grown on sod and is good seed. I want
$2.25 per cwt. for this seed f. o. b. Lowell.
The Seed Company immediately telegraphed a reply as
follows:
"Sample and letter received. Accept your offer.
Millet like sample $2.25 per hundred. Wire how soon
can load.
Harsh refused to sell and the Seed Company sues.
Point Involved: Whether the statement by Harsh was
an offer which was accepted by the addressee's order
thereby creating a contract between the parties.
Morrissey, Ch. J.: "In our opinion the letter of de-
fendant cannot be fairly construed into an offer to sell
to the plaintiff. * * *. The language used is general
and such as may be used in an advertisement or circular
addressed generally to those engaged in the seed busi-
ness, and is not an offer by which he may be bound, if
accepted, by any and all the persons addressed. * * *.
"We do not think the correspondence made a com-
plete contract. To so hold, where a person sends out
letters to a number of dealers would subject him to a
suit by each one receiving a letter or invitation to bid,
even though his supply of seed were exhausted. In Ly-
man v. Robinson, 14 Allen, 242, 254, the Supreme Court
of Massachusetts has sounded the warning. * Care should
always be taken not to construe as an agreement letters
which the parties intended only as a preliminary negotia-
tion.'
'' Decision for the defendant.'f
Question 41: What was Harsh's proposition in this case?
Was it an offer so that acceptance completed a contract between
the parties ? Why ?
(Note to Case 41: Cases of this sort are sometimes close to
the line and difficult to decide. Harsh would have saved a law
suit and we would have been deprived of this illustration, had
OFFER AND ACCEPTANCE
75
lie used some qualifying words, as that the order would be sub-
ject to his acceptance. Such words would not have changed the
legal effect of his letter, but would have saved him expense and
difficulty.
If a letter is sent to a prospective customer and is in the form
of a circular letter, clearly it is for advertising purposes and is
not an offer even if it has sufficient definiteness as to quantity,
etc. But if it is an individual letter and contains sufficient
definiteness, is it an offer or a request for an offer? That de-
pends on its terms and character. If it is so phrased as to indi-
cate to the reasonable mind that it is such a letter that might go
generally to customers then it is clearly in substance a circular
letter and is not to be taken as an offer.
The word "offer itself is not very material. "We are offer-
ing is a frequent phrase.)
§53. (Contracts, Sec. 21.) Offer indefinite.
Case 42. Sherman v. Kitsmiller, Adm'r, 17 Sargeant
& Rawle's Reports, 45.
Facts: Elizabeth Sherman, nee Koons, lived as house-
keeper for the deceased until her marriage, upon his
promise to convey her 100 acres of land for her services.
No particular 100 acres were stated. This is a suit
against the administrator for the enforcement of the
alleged contract.
Duncan, Justice : "* * * Express promises * * *
ought to be explicit, to a common intent at least. * * *
<<* * * jn present case * * * the prom-
isor himself would not know what to convey, nor the
promisee what to demand. If it had been a promise to
give her 100 pieces of silver, this would be too vague
* * *; for what pieces'? * * *—what denomina-
tion? One hundred cows would be sufficiently certain,
because the intention would be that they should be of
middling quality; but 100 acres of land, without locality,
without estimation of value, without relation to anything
that could render it certain, does appear to me to be the
most vague of all promises; and if any contract can be
void for its uncertainty this must be. One hundred acres
76
CONTRACTS
on the Rocky Mountains, or in the Conestoga manor—
100 acres in the mountain of Hanover County, Virginia,
or in the Conewango rich lands of Adams county—100
acres of George Sherman's mansion place at $80 per
acre, or 100 acres of his barren lands at $5?
"This vague and void promise, incapable of specific
execution * * * would not prevent the plaintiff from
recovering * * * for the value of the woman's serv-
ices until her marriage, (i. e., though the offer of 100
acres of land was too uncertain for its acceptance to
constitute a contract, yet for services actually performed,
she could recover a reasonable compensation as on an
implied offer and acceptance.—Ed.)
Decision of the Court: For defendant, on the express
contract as too indefinite; for the plaintiff on a contract
implied in law (quasi contract) for services rendered.
Question 42: (1) What was the promise in Case 42? Why
was it unenforceable? Would a promise to give claimant 100
cows for her services be too indefinite? Why a difference in
that case ?
(2) The S. O. Co. agreed to sell M oil on such reasonable
terms as would enable him to compete with others in the same
territory. M sues for breach of contract. Is there a contract?
(Marble v. S. O. Co., 169 Mass. 553.)
§ 54. (Contracts, Sec. 22.) Proposition incomplete.
(Note: A proposition is not an offer if it is unfinished, that
is to say, requires a further statement to make it an enforceable
proposition; but where terms can be and are meant to be implied,
they are a part of the alleged offer and in such a case there may
be a contract by the help of the implied terms.)
C. Duration of Offer.
§ 55. Duration of offer.
§ 56. Termination of offer by rejection.
§ 57. Termination of offer by destruction of subject matter. '
§ 58. Termination by death or insanity of offers or offeree.
§ 59. Eevocation of offer.
§ 60. Contracts to keep offers open.
OFFER AND ACCEPTANCE
77
§ 55. (Contracts, Sec. 23.) Duration of offer.
Case 43. Kempner v. Kohn, 47 Ark. 519.
Facts: January 30, 1885, P, at Little Rock, offered
his real estate lot to D, at Hot Springs; Feb. 7, D wrote
attempting to accept the offer on the terms proposed.
Feb. 7, and before P received D's letter, P wrote attempt-
ing to withdraw his offer. Feb. 9, P received D's at-
tempted acceptance. Assume that the attempted revoca-
tion was placed in the Post Office prior to the time that
D's attempted acceptance was posted.
Point Involved: Where no length of time is stated in
an offer, how long will the offer continue open for ac-
ceptance? May such period be cut down by actual with-
drawal? What constitutes effective withdrawal?
Smith, J.: "* * * The defendant, having caused
the question to be submitted to the jury, under an in-
struction drawn by his counsel, and having met with an
adverse decision, now asks us to declare as a matter of
law, that Kohn's acceptance was unreasonably delayed.
But we think the question was properly resolved in favor
of the plaintiff. The subject of negotiation was real
estate, which requires more deliberation than if it had
been a transaction in cotton or other particle of merchan-
dise. It is also less subject to sudden and violent fluctua-
tions in price. Five days was not an unreasonable time.
 Then as to the attempted retraction: An offer made
by letter which is to be answered in that way, cannot be
withdrawn unless the withdrawal reaches the party to
whom it is addressed before he has accepted. * * *
The acceptance was effectual to complete the contract
notwithstanding Kempner had previously mailed a letter
to Kohn announcing the retraction of the offer.
Question 43: What was the subject matter of the offer in
Case 43? Is the nature of the subject matter an element in de-
termining how long an offer remains open? Why? Is the jury
the judge of the reasonableness or unreasonableness of the time?
78
CONTRACTS
Could the offer have been withdrawn prior to the expiration of a
reasonable length of time? If a letter was sent by the offeror
attempting a withdrawal when would it be effective to constitute
a withdrawal ? If offeree had mailed a letter within a reasonable
time accepting the offer before the letter attempting withdrawal
reached him, would there be a contract ?
Case 44. Minn. Linseed Oil Co. v. Collier White Lead
Co., 4 Dill (U. S.) 531; Fed. Cas. No. 9635.
Facts: The Minnesota Linseed Oil Co. telegraphed to
the Collier White Lead Co., asking for best offer on oil.
The Lead Co. replied offering to buy 300 barrels at 55
cents a barrel. To this the Oil Co. returned an offer at
58 cents a barrel. This last telegraph was transmitted
on Saturday, July 31 at 9.15 P. M. and reached the Lead
Company at St. Louis, Monday morning between 8 and
9 o'clock. On Tuesday, Aug. 3, 8.53 A. M. the Lead
Company sent a telegraph attempting to accept the offer.
After this attempted acceptance was telegraphed, the
Oil Company wired it must withdraw its offer. The
Lead Company refused to consent and maintained that a
contract existed, and claims damages for breach thereof.
Nelson, District Judge : i ' It is well settled * * *
that there is no difference in the rules governing the
negotiation of contracts by correspondence through the
post-office and by telegraph, and a contract is concluded
when an acceptance of a proposition is deposited in the
telegraph office for transmission. See 14 Am. Law Reg.
401, 'Contracts by Telegraph,' article by Judge Redfield,
and authorities cited; also, Trevor v. Wood, 36 N. Y. 307.
"The reason for this rule is well stated in Adams v.
Lindsell, 1 Barn. & Aid. 681. The negotiation in that
case was by post. The court said: 'That if a bargain
could not be closed by letter before the answer was re-
ceived, no contract could be completed through the me-
dium of the post-office; that if the one party was not
bound by his offer when it was accepted (that is, at the
time the letter of acceptance is deposited in the mail),
then the other party ought not to be bound until after
OFFER AND ACCEPTANCE
79
they had received a notification that the answer had been
received and assented to, and that so it might go on ad
infinitum.' * * * In the case at bar the delivery of
the message at the telegraph office signified the accept-
ance of the offer. If any contract was entered into, the
meeting of minds was at 8:53 of the clock, on Tuesday
morning, August 3rd, and the subsequent dispatches are
out of the case. 1 Pars. Cont. 482, 483.
"The rule is not strenously dissented from on the argu-
ment, and it is substantially admitted that the acceptance
of an offer by letter or by telegraph completes the con-
tract, when such acceptance is put in the proper and usual
way of being communicated by the agency employed to
carry it; and that when an offer is made by telegraph, an
acceptance by telegraph takes effect when the dispatch
containing the acceptance is deposited for transmission
in the telegraph office, and not when it is received by
the other party. Conceding this, there remains only
one question to decide, which will determine the issues:
Was the acceptance of defendant deposited in the tele-
graph office Tuesday, August 3rd, within a reasonable
time, so as to consummate a contract binding upon the
plaintiff f
"It is undoubtedly the rule that when a proposition
is made under the circumstances in this case, an accept-
ance concludes the contract if the offer is still open, and
the mutual consent necessary to convert the offer of one
party into a binding contract by the acceptance of the
other is established, if such acceptance is within a rea-
sonable time after the offer was received.
"The better opinion is, that what is, or is not, a rea-
sonable time, must depend upon the circumstances attend-
ing the negotiation, and the character of the subject
matter of the contract, and in no better way can the
intention of the parties be determined. If the negotia-
tion is in respect to an article stable in price, there is
not so much reason for an immediate acceptance of the
offer, and the same rule would not apply as in a case
where the negotiation related to an article subject to
sudden and great fluctuations in the market.
80
CONTRACTS
'' The rule in regard to the length of the time an offer
shall continue, and when an acceptance completes the
contract, is laid down in Parsons on Contracts (volume
1, p. 482). He says: 'It may be said that whether the
offer be made for a time certain or not, the intention or
understanding of the parties is to govern. * # * If
no definite time is stated, then the inquiry as to a reason-
able time resolves itself into an inquiry as to what time
it is rational to suppose the parties contemplated; and
the law will decide this to be that'time which as rational
men they ought to have understand each other to have
had in mind. Applying this rule, it seems clear that
the intention of the plaintiff, in making the offer by tele-
graph, to sell an article which fluctuates so much in price,
must have been upon the understanding that the accept-
ance, if at all, should be immediate, and as soon after
the receipt of the offer as would give a fair opportunity
"for consideration. The delay here was too long, and
manifestly unjust to the plaintiff, for it afforded the de-
fendant an opportunity to take advantage of a change in
the market, and accept or refuse the offer as would best
subserve its interests.
Question 44: (1) Set out the facts in this case and show
what legal question was presented thereby?
(2) By what act would the acceptance be complete (if in
time) in this case, and was such acceptance in time? Why?
(3) Why a quicker acceptance required in this case than in
Case 43 ?
Case 45. (Maclay v. Harvey, 90 111. 525.
Facts: John Harvey, defendant, owner of a millinery
store in Monmouth, on March 21, 1876, wrote plaintiff,
a milliner in Peoria, Illinois, offering her a position in
his shop at $15 per week during the season, which was
to begin about the 5th to the 10th Of April and to end
about July 1st. He ended by saying:
"You will confer a favor by giving me your answer by
return mail. Plaintiff on March 23rd answered this
letter accepting position, and gave the answer to a boy
to post. The postmark showed it was not put in the post-
OFFER AND ACCEPTANCE
81
office until March 25th. Defendant not receiving plain-
tiff's answer by return mail or several mails thereafter,
made other arrangements. Plaintiff sued for breach of
contract.
Point Involved: If acceptance to an offer is requested
within a certain time, does this limit the life of the offer?
Schofield, J.: 1 ' * # * If a contract was consum-
mated between the parties, it was by the mailing of ap-
pellant's (plaintiff's) postal card on the 25th of March.
# # * It is clear here that the nature of the business
demanded a prompt answer, and the words, 'You will
confer a favor by giving me your answer by return mail,'
do in effect stipulate for answer by return mail. * * *
There were two daily mails between Peoria and Mon-
mouth. * * * and it did not require more than one
day's time between the points. Appellee's (defend-
ants') letter * * * bears date March 21st. * * *
(Plaintiff) received appellee's letter on the evening of
the 22nd. Appellee was, therefore, entitled to expect a
reply mailed on the 23rd, which he ought to have received
on that day, or at the farthest, on the morning of the
24th, but appellant's reply was not mailed until the 25th.
It does not relieve appellant of fault that she gave the
postal card to a boy on the 23rd to have him mail it.
* * * The boy was her agent, * * * and his neg-
ligence * * * was her negligence. * * *
Question 45: (1) What was the language here that deter-
mined the duration of the offer? When was the letter sent to
plaintiff? When was reply put in mails? Would the depositing
of the reply in the mails constitute an acceptance had it been
done in time? Why was the boy's delay considered the delay
of the plaintiff?
§ 56. (Contracts, Sec. 24.) Termination of offer by
rejection.
Case 46. Lewis v. Johnson, 123 Minn. 409, 143 N. W.
1127.
Hallam, J.: * * * "The law is that a party t<5
whom an offer is made is at liberty to accept wholly, or to
82
CONTRACTS
reject wholly, but one of these things he must do. 1 Par-
sons, Contr. 477. A proposition to accept on terms vary-
ing from those offered is a rejection of the offer, and a
substitution in its place of the counter proposition. It
puts an end to the negotiation so far as the original offer
is concerned. The original offer thereby loses its vitality,
and is no longer pending between the parties; hence the
party who has submitted the counter proposition cannot,
at his own option, revive and accept the original offer,
which he has once virtually rejected. Fox v. Turner,
1 111. App. 153. See also Lanz v. McLaughlin, 14 Minn.
72, Gil. 55, and cases above cited. In order to give the
rejected offer any new vitality, there must be a renewal
of it, or renewed assent to it, by the party who made it.
Sheffield Canal Co. v. Sheffield & R. R. Co., 3 Eng. Ry.
& C. Cas. 121, 132. The attempted acceptance of a re-
jected offer is in effect nothing more than a proposal
which must be assented to by the original offerer before
any contract arises. The revival of the rejected offer
is an essential part of the contract, and it must be proven
as a substantive fact.
Question 46: Jones offers Wadsworth his horse for $150, say-
ing that Wadsworth may have a week in which to accept. Two
days later Wadsworth offers $125. Jones declines, saying noth-
ing at all one way or the other about his original offer. Wads-
worth two days later advises that he will accept Jones' original
offer. Jones refuses and Wadsworth sues. Is there a contract?
Why?
§ 57. (Contracts, Sec. 25.) Termination of offer by
destruction of subject matter.
(Note: If specific subject matter is offered and then de-
stroyed before acceptance there is no contract. As where I
offer you a horse and he dies before the contract is completed
by your acceptance. The effect of destruction after contract
made is treated under Discharge of Contracts.!
OFFER AND ACCEPTANCE
83
§ 58. (Contracts, Sec. 26.) Termination of offer by
death or insanity of offeror or offeree.
Case 47. Beach v. M. E. Church, 96 Illinois Reports,
177.
Facts: Lorenzo Beach in February, 1874, signed the
following paper:
"Fairbury, February 14, 1874.
"We, the undersigned, agree to pay the sum set oppo-
site our respective names, for the purpose of erecting a
new M. E. church in this place, said sums to be paid as
follows: One-third to be paid when contract is let, one-
third when building is enclosed, one-third when building
is completed. Probable cost of said church from ten
thousand dollars ($10,000) to twelve thousand dollars
($12,000).
To which he attached and subscribed the following:
 Fairbury, 1874.
"Dr. Beach gives this subscription on the condition
that the remainder of eight thousand dollars is sub-
scribed.
"Lorenzo Beach $2,000.
Beach was adjudged insane and conservators appointed
in April, 1875; other subscriptions to the amount of
$8,000.00 were received and the building begun in Sep-
tember, 1876; in 1878 Beach died. This suit was begun
shortly before Beach's death against his conservators;
dying before trial, his heirs were made parties.
Point Involved: If, after an offer is made, and before
its acceptance, the offeror becomes insane, or dies, does
the offer thereby lapse? Incidentally, what is the nature
of a charitable subscription to pay money?
Mb. Chief Justice Dickey: "* * * There is noth-
ing in the record tending to show that the church, in this
case, took any action, upon the faith of the subscription,
until after Dr. Beach was adjudged insane, or that the
church paid money, or incurred any liability. His in-
sanity, by operation of law, was a revocation of the offer.
In Pratt, Administratrix, etc., v. The Trustees of the
84
CONTRACTS
Baptist Society of Elgin, 93 111. 475, this court said, in
relation to such a subscription:
11 'The promise, in such case, stands as a mere offer,
and may, by necessary implication, be revoked at any
time before it is acted upon. It is tjie expending of
money, etc., or incurring of legal liability on the faith of
a promise (of this kind) which gives the right of action.
* * * Until acted upon, there is no mutuality, and,
being only an offer, and susceptible of revocation at any
time before being acted upon, it follows that the death of
the promisor, before the offer is acted upon, is a revoca-
tion of the offer. * * .* The continuance of an offer
is in the nature of its repetition, which, of course, neces-
sarily requires some one capable of making a repetition.
Obviously, this can no more be done by a dead man than
a contract can, in the first instance, be made by a dead
man.'
"Conservators of the person and property of an insane
man may perform personal contracts of their ward
legally subsisting, under some circumstances; but in this
case there was no contract between Dr. Beach and the
church. The paper signed by Dr. Beach was of such a
nature that no binding contract sprung therefrom until
the church had accepted the same by incurring some
legal liability, or expending money upon the faith of it.
There being no binding contract upon Dr. Beach at the
time that his conservators made the payments, they had
no lawful authority to make the same, and the estate of
Dr. Beach was not bound thereby.''
Question 47: What was the date of Beach's offer? When
was he adjudged insane ? Had anything been done in reliance on
his offer at that time? What reason does the court give that
death or insanity should terminate an unaccepted offer?
(Note to Case 47: A promise to contribute to charitable en-
terprise is essentially in the nature of a gift and therefore unen-
forceable. Generally held, that action upon the subscription
makes it binding. Subscriptions often recite that they are given
in consideration of other subscriptions. If this is true, they are
OFFER AND ACCEPTANCE
85
contractual, but it is generally not true, some being received
prior to others.
§ 59. (Contracts, Sec. 27.) Revocation of offer.
Case 48. Kempner v. Kohn.
(See Case No. 43, supra.)
Question 48: In a revocation of an offer must the revocation
to be effective actually reach the offeree before he has accepted,
assuming that otherwise he has accepted in time ?
§ 60. (Contracts, Sec. 28.) Contracts to keep offers
open.
Case 49. Shubert Theatrical Co. v. Roth, 271 Fed. 827.
(Set out as Case No. 55, post.)
Question 49: What is an option ? What are the two elements
therein? Can an offer in an Option contract be withdrawn?
(Note: In an option, there is an offer made, and then, in
addition thereto, a promise by the offeror to keep it open a
definite time, in consideration of something paid, given or
definitely promised by the offeree. Options are frequently tied
up in other contracts, as in the Shubert case, or as an option to
renew a lease. In such cases the consideration for the option is
the making of the original contract itself.)
D. The Acceptance.
§ 61. What constitutes acceptance.
§ 62. Acceptance by promise or act.
§ 63. Communication of acceptance.
§ 61. (Contracts, Sec. 29). What constitutes acceptance.
Case 50. Four Oil Co. v. United Oil Producers, 145 Cal.
623.
Facts: Suit to recover for breach of alleged contract
to buy oil. The evidence showed an offer to sell petro-
leum of a 4'guaranteed gravity of not less than 15 de-
grees Beaume, and a reply to that offer stating, "but
we wish this distinctly understood under this agreement
86
CONTRACTS
to be 15 degrees Beaume at a temperature of 60 degrees
Fahrenheit
Point Involved: If the offeree responds upon terms
and conditions not stated in the offer, is the response
an acceptance of such offer?
Hinshaw, J., delivered the opinion of the court:
<<* * * -0ffer imposes no obligation unless it is
accepted upon the terms upon which it was made.
* * * A qualified acceptance is a new proposal.
* # * "[jncler these principles of law it is clear
* * * that the minds of the parties had not met
in the creation of a legal obligation, and for the reason
that the acceptance of the defendant was conditional
and imported into the contract a term not found in the
original proposal, and one requiring the assent of the
plaintiff before either could be bound.''
Question 50: (1) State the facts in the above case, the ques-
tion presented and the court's decision thereupon.
(2) A offered a reward for the apprehension and evidence
leading to B's conviction. C, after B's apprehension by an-
other, furnished the information upon which B was convicted.
Is he entitled to the reward ?
Case 51. Curtis Land & Loan Co. v. Interior Land Co.
137 Wis. 341, 118 N. W. 853 (1908).
Facts: The plaintiff sues to enforce an alleged con-
tract with defendant whereby defendant agreed to sell
and plaintiff to buy certain real estate. The defendant
claims there was no contract because the plaintiff added
to his acceptance of the offer the words "We note that
this description (land) was sold in 1903 and 1904 to
F. J. Smith for delinquent taxes. Please take care of
these taxes. Defendant's claim is that this meant "we
accept your offer to sell provided you will clear up the
title.'' Plaintiff's answer to this is that this proviso adds
nothing to what the law would imply anyway.
Points Involved: Whether an offeree unqualifiedly ac-
cepts an offer if he adds to his acceptance conditions or
qualifications which are otherwise impliedly present.
OFFER AND ACCEPTANCE
87
Whether an offer to sell real estate carries with it an
obligation to transfer a merchantable title.
Baknes, J.: '' Plaintiff's letter of acceptance also con-
tained the following statement: 'We note that this de-
scription was sold in 1903 and 1904 to F. J. Smith for
delinquent taxes. Please take care of these taxes.' This
letter makes it clear that the plaintiff expected the de-
fendant to take care of the outstanding tax certificates
mentioned in the letter. If this portion of the letter
contained any requirement that was not comprehended
in the defendant's offer to sell, then it may well be as-
severated that plaintiff did not make an unqualified ac-
ceptance, but a conditional one, and that therefore no
contract was made. If the legal effect of defendant's
offer to sell the land at a stated price was that it should
furnish a marketable title free and clear of outstanding
liens and incumbrances, then the paragraph quoted added
nothing to the defendant's proposition to sell, and did not
constitute a counter proposition. The defendant's offer
to sell is silent as to the nature of its title and as to the
character of the conveyance which it purposed giving.
But the law seems to be well settled that an agreement in
general terms to convey real estate, without specifying
the nature of the title held by the vendor, or the kind
of a deed which is to be given, calls for a conveyance of
the entire interest in the land sold by a good and suffi-
cient deed. In other words, an agreement to sell at a
sound price, without reservation or exception, implies
that a marketable title free of incumbrances will be
passed to the vendee upon compliance with his obliga-
tions. Young v. Wright, 4 Wis. 144, 65 Am. Dec. 303;
Id; 6 Wis. 127, 70 Am. Dec. 453; Bateman v. Johnson, 10
Wis. 1, 3; Arentsen v. Moreland, 122 Wis. 167, 175, 99
N. W. 790, 65 L. R. A. 973, 106 Am. St. Rep. 951. On
an agreement by the vendor of lands to execute a good
and sufficient conveyance, the purchaser may demand a
clear title, as well as that it be assured him by proper
covenants. Davis v. Henderson, 17 Wis. 105, 107; Taft
88
CONTRACTS
v. Kessel, 16 Wis. 273, 277. The decisions outside of this
court are generally to the effect that an agreement to
convey, in the absence of any reservation or exception
therein, requires the vendor to convey a marketable title
free of incumbrances. Drake v. Barton, 18 Minn. 462
(Gill. 414); Dwight v. Cutler, 3 Mich. 566, 64 Am. Dec.
105; Sibley v. Spring, 12 Me. 460, 28 Am. Dec. 191; Hill
v. Hobart, 16 Me. 164; Shreck v. Pearce, 3 Iowa 350;
Bartle v. Curtis, 68 Iowa, 202, 26 N. W. 73; McGuire v.
Blanchard, 107 Iowa 490, 78 N. W. 231; Swan v. Drury,
22 Pick. (Mass.) 485; Van Eps v. Schenectady, 12 Johns.
(N. Y.) 436, 442, 7 Am. Dec. 330; Dearth v. Williamson,
2 Serg. & R. (Pa.) 498, 7 Am. Dec. 652; Swayne v. Lyon,
67 Pa. 436. The tax certificates referred to in the plain-
tiff's letter of December 17th were outstanding liens
against the land. One of the certificates was subject to
a tax deed, and the other would be subject to a deed
within a few months. The holder of these certificates, if
they were in fact held adversely to the defendant, had
an equitable title to the land. Eaton v. Supervisors, 44
Wis. 489. They imported, if outstanding, an absolute
and paramount right, subject only to the right of redemp-
tion. C'oe v. Manseau, 62 Wis. 81, 22 N. W. 155. They
constituted an incumbrance upon the land (Pillsbury v.
Mitchell, 5 Wis. 17) and a cloud upon the title (Dean v.
Madison, 9 Wis. 402). It is apparent that the defendant
would not be complying with the terms of its offer to
sell in the event of its refusal to take care of these out-
standing tax liens, and that, therefore, the plaintiff
might insist in its letter of acceptance that the certifi-
cates in question, if outstanding, be redeemed, and that,
by so doing, it added nothing to the obligations the de-
fendant had assumed in the event of its offer being ac-
cepted. Aside from the considerations referred to, de-
fendant's offer to sell was without qualification, and the
plaintiff's acceptance was without condition. The state-
ment in plaintiff's letter, 'If it is just as satisfactory to
you, will you please send your deed to National Bank of
Merrill for collection,' was a mere suggestion or request,
OFFER AND ACCEPTANCE
89
and not an attempt to impose a condition upon the de-
fendant not in consonance with its offer. It is apparent
that there was no intention on the part of the plaintiff
to make its acceptance conditional upon the deed being
sent to Merrill for collection. (On this latter point see
also Case 52.)
Question 51: (1) What was the alleged condition added to
the acceptance in Case 51 ? Why did the court believe that when
the offeree said (in effect) "I will buy provided you will clear up
the title'' this was no modification of the offer ?
(2) If an owner of land agrees to sell it does he impliedly
agree to give a good title ?
(Note: It is generally recognized that an addition by an
offeree of terms which are implied in the offer is not any qualifi-
cation, of the offer. This seems sound sense. Thus suppose a
manufacturer offers goods under such circumstances as imply a
warranty of their merchantability, and the offeree responds, "I
accept provided they are merchantable.'' He is putting nothing
in the contract that was not there before. See Collection of au-
thorities in 1 American Lawyer's Reports, 1508. The cases pass-
ing on this point have not been numerous.)
Case 52. Rucker v. Sanders, 182 North Carolina Re-
ports 607, 109 S. E. 857.
Facts: Rucker resided at Greensboro, N. C., and ad-
dressed a letter of inquiry to defendant who lived at
Smithfield, asking defendant for the lowest price he
would take for his stock in the Jefferson Standard Life
Insurance Co. Defendant answered by mail saying he
owned 50 shares which he would sell for $10,000. Plain-
tiff replied: ''Regarding your 50 shares of Jefferson
Standard stock that you offer at $10,000 while this is
the highest price I have heard of, I will accept it. Just
draw on me here at Greensboro with your Jefferson
Standard stock attached to the draft and I will honor
same. Please advise me that you have drawn so I will
be looking out for the draft.
Defendant sold to another party and plaintiff sues
for damages.
90
CONTRACTS
Defense: That there was no contract.
Points Involved: The distinction between a condition
attached to an acceptance and a suggestion or direction
by the offeree regarding performance. Whether a direc-
tion by an offeree included in his letter of acceptance
for the offeror to send his stock offered to be sold, at-
tached with draft to be paid, is a condition added to his
acceptance or a mere suggestion as means of perform-
ance.
Stacy, J. "* # * There is no controversy or dif-
ference of opinion between the parties as to the general
rules of law governing the subject of contracts by corre-
spondence; but the defendant contends that the plain-
tiff's letter of March 27th was not an unconditional and
unqualified acceptance of his offer. He says the terms
were varied by the direction to draw draft with stock
attached, and that such was a condition precedent to
plaintiff's acceptance. We think this construction is
rather too technical and might properly be characterized
as 'sticking in the bark.' It is quite certain that, if the
plaintiff were seeking to avoid his agreement on this
grounds, we would be disposed to hold against him. And,
if the contract be binding as to one of the parties, it is
binding as to both. The defendant's offer was accepted
absolutely, without condition, and this resulted in an
executory contract, with mutuality of obligation and
remedy. Howell v. Pate, 181 N. C. 117, 106 S. E. 454,
and cases there cited.
"The difficulty in the instant case arises out of the
failure of the parties to distinguish between a condition
which goes to the making of a contract and a suggestion
relating only to its ultimate performance or execution.
Of course, to consummate any kind of a contract, there
must be a meeting of the minds upon a given subject.
An unaccepted offer is not a contract; and, as stated in
a number of cases, an acceptance to be effectual must be
identical with the offer and unconditional. 13 C. J. 281.
But, in order for this subsequently intended direction or
—suggestion to invalidate the acceptance, it should amount
OFFER AND ACCEPTANCE
91
to a qualification or condition imposed as a part of the
acceptance itself. In other words, it must be construed
in the case at bar as a qualified acceptance to the effect
that 'I will accept your offer; provided you attach stock
to draft and draw on me here in Greensboro and advise
me so that I can be looking out for same.' It will be
readily conceded, without debate, that if this latter mean-
ing be the reasonable and natural interpretation of plain-
tiff's letter dated March 27th, then there was no contract,
and the defendant's contention, based upon this assump-
tion, is entirely correct. But, on the other hand, if a con-
trary purpose were intended, as apparently and evidently
it was, and the parties so understood it, we must give
effect to the most essential and controlling element of
all executory contracts, to wit, the real understanding
and intention of the parties. The suggestion or direction
made by plaintiff to draw draft with stock attached
was not an unusual or unexpected method by which the
parties might reasonably have contemplated carrying out
the contract; and this lends color to the conclusion that
a compliance with the plaintiff's wish, hope, or expressed
request, 'Just draw on me here with stock attached,' was
not intended as a condition precedent to his acceptance
of the defendant's offer. It is further conceded that the
result would have been otherwise had this suggestion not
been accompanied by a declaration of unqualified and
unconditional acceptance. 39 Cyc. 1199, and cases cited
in note.
"There is no effort to circumvent or deny the well-
settled principle that an offer must be accepted in its
exact terms in order that a contract should arise there^
from, and any attempt to impose new conditions or terms
in the acceptance, however slight, will ordinarily deprive
it of any efficacy. Kreutzer v. Lynch, 122 Wis. 474, 100
N. W. 887.
"But where the letter of acceptance contains a mere
suggestion or requests that payment be made in a certain
way, and such request is not in the form of a condition
attached to the acceptance, it does not amount to an
attempt to vary the terms of the offer to sell, and will
92
CONTRACTS
not defeat an action in proper instances for specific per-
formance, or one for the breach of the contract. Curtis
Land Co. v. Interior Land Co., 137 Wis. 341, 118 N. W.
853, 129 Am. St. Rep. 1068; Turner v. McCormick, 56
W. Va. 161, 49 S. E. 28, 67 L. R. A. 853,107 Am. St. Rep.
904.
Question 52: (1) An offer to sell stock for a definite price,
and a reply: "I accept your offer, provided you will attach stock
to draft on me here in Greensboro and advise me. Is this an
acceptance? Why? How does that differ from the case above?
(2) Assuming the acceptance was good in the reported case
to close the contract, would the acceptor be bound to observe the
direction? Would he not have a right to insist on cash?
(Note to Case 52. The distinction between a condition,
qualification or new term in an answer which prevents it from
being an acceptance, and a direction as to method of perform-
ance which is in the nature of mere suggestion and is not binding
upon the parties, is well taken, although there may be cases upon
which there is a difference of opinion as to whether the provision
is one or the other. In the above case, Clark, C. J., filed a dissent-
ing opinion and argued that the acceptance was qualified. He
seems to believe that the additional words signify that the offeror
would have to take something other than cash for his stock. He
says, '' It is, on its face, neither an inquiry or a mere suggestion
of the mode of payment, but the statement of the conditions on
which the plaintiff would accept the defendant's offer.'' Admit-
ting that there may be difficulties in applying the rule in close
cases, there is certainly a distinction between words that qualify,
and words that merely suggest, the former words being con-
tractual in nature, but the latter not binding. In this editor's
•opinion the case above was rightly decided and the dissenting
justice was in the wrong. It seems to the editor that it was just
as though the facts had been as follows:
1. Offer by owner to sell the stock on terms proposed.
2. Acceptance by the words "I accept your offer.
3. A suggestion by the buyer as to means of consum-
mation, same being, of course, not binding on the
seller who could require cash.
See case just preceding this one for another illustration in
point. There could hardly be any question in that case.)
OFFER AND ACCEPTANCE
93
Case 53. Albright v. Stegeman Motor Car Co., 168
Wisconsin Reports 557 (1919).
Facts: Plaintiff, Albright, ordered in writing from
the Stegeman Motor Car Co. a truck to be built accord-
ing to specifications, agreeing to pay therefor $4,500.
The blank upon which he wrote the order contained the
clause: 4'This proposal, if accepted, constitutes a con-
tract subject to the approval of the Stegeman Motor
Company at its offices in Milwaukee and must be counter-
signed by an officer of the company to be valid and in
force. The proposal was never so countersigned.
Plaintiff, however, paid down $450 which was accepted
by the Company, and it entered upon the work of build-
ing the truck. Plaintiff went to work for defendant and
deposited with it certain money. Afterwards he at-
tempted to cancel his order for the truck but the company
refused to accept cancellation. He now sues for the
money deposited, but the company claims a right to
apply it on the purchase price of the truck. Plaintiff
claims there was no contract to purchase the truck be-
cause the order was not countersigned as provided in the
written agreement.
Point Involved: Whether a provision that an offer
shall not be accepted until countersigned by the offeree
can be waived by the parties. Whether such an offer may
be accepted in fact though not so countersigned.
Owen, J. "Appellant contends that the judgment of
the civil court should have been reversed because there
never was a valid contract for the manufacture and sale
of the truck, for the reason that the written order there-
for was never countersigned by an officer of the company
as required by its express terms. It is quite fundamental
that parties may become bound by the terms of a con-
tract even though they do not sign it, where their inten-
tion to do so is otherwise indicated. Manifestly the
provision requiring the order in question to be counter-
signed by an officer of the company was inserted for the
benefit of the company, and to prevent its liability thereon
94
CONTRACTS
until ratified by some one occupying a position of re-
sponsibility with the company. If a contracting party
may be bound on a contract by acts evidencing an intent
to that end, we see no reason why the provision here un-
der consideration could not be waived, nor why the com-
pany could not by its acts accept the order, or become
estopped to deny its binding force. If the company
became bound upon the contract so that it could not resist
its enforcement by appellant, it acquired the right to
enforce it against appellant.
44 Conceding that the order was never countersigned by
an officer of the company as required by its terms, the
inquiry is whether the company otherwise became bound
thereon. It is undisputed that shortly after the date of
the order the company started work on the truck to be
delivered in fulfillment thereof; that appellant was cog-
nizant of the fact; that he secured work in the factory
in order that he might work on 4his' truck and become
familiar with its construction; that delay in its comple-
tion was the subject of frequent complaint and discussion,
and that he even had the truck out on trial trips. If this
is not sufficient to indicate an acceptance of the order by
the company, the receipt and retention by it of $450 down
payment is certainly sufficient to estop it from denying
its acceptance of the offer. Hoyt v. Schillo M. S. Co.,
185 111. App. 628; McKeage v. Scully-Kostner C. Co., 185
111. App. 122; Edwards v. Gildemeister, 61 Kan. 141, 59
Pac. 259; Babbit v. Central L. Ins. Co., 93 Kan. 564, 144
Pac. 837. * * *
Question 53: If a corporation receives an order upon a blank
furnished by it that states that an order shall not be binding
upon the company until signed by a certain officer, may the com-
pany be bound to fill the order where there has been no such
signature? Why?
§ 62. (Contracts Sec. 30.) Acceptance by promise
or act.
(Note: Some offers are acceptable by promises and some by
acts. It depends on the offer. An order for goods may contem-
OFFER AND ACCEPTANCE
95
plate a promise to make up the goods and supply them at a later
date, or may contemplate an immediate shipment without prior
communication. Obviously in the latter event the shipment is an
acceptance, and even acts prior to shipment may be an acceptance
where they are unequivocally done pursuant to the offer and are
such that the offeror would expect the offeree to do in case he
should see fit to accept the offer. In such cases attempted can-
cellations by the buyer are ineffectual unless the seller sees fit
to honor them. In cases of acceptance by act, there should be
reasonable notice of the fact.
Public offers of rewards are good examples of orders accept-
able by doing an act.)
§ 63. (Contracts, Sec. 31.) Communication of
acceptance.
Case 54. Lucas v. W. U. Tel. Co., 131 Iowa Reports,
669.
Facts: Lucas on the evening of Nov. 11,1912, received
a letter from one Sas offering to exchange real estate and
stating: "I will have to know at once as I have another
deal pending.'' Lucas replied by telegram at 9:10 A. M.
the following day. The telegraph company did not send
the message until 4:41 P. M. and Sas received reply at
6:03 P. M. Sas had sold the property at 3:30 P. M. to
another party and wrote that, not hearing from Lucas,
he had decided Lucas did not want the property. Lucas
sued 'the telegraph company for loss of the contract by
its negligent delay. The trial court held that by the
negotiations a contract had resulted notwithstanding the
delay and therefore Lucas had no case against the tele-
graph company, but should pursue his action against Sas
for breach of contract. Lucas appeals.
Point Involved: If an offerer in making an offer to an
offeree at a distant point directs the use of the mail or
directs the use of telegram, at what point is the ac-
ceptance effective when the offeree replies as directed?
At what point is the acceptance effective if the offeree
uses another mode of transmission than the one directed?
96
CONTRACTS
Does the use of the mail or telegraph by the offeror im-
pliedly direct the offeree to use the same mode of com-
munication, so that any other mode is used at the
offeree's risk?
Ladd, J. "* * * The proposition was made to
plaintiff by letter. In committing it, properly addressed
to the mails for transmission, the postoffice became the
agent of Sas to carry the offer, he taking the chances of
delays in the transmission. * * * Having sent the
proposition by mail he impliedly authorized its accept-
ance through the same agency. Such implication arises
(1) when the post is used to make tlm offer and no other
mode is suggested, and (2) when the circumstances are
such that it must have been within the contemplation of
the parties that the post would be used in making the
answer. * * * The contract is complete in such a
case when the letter containing the acceptance is properly
addressed and deposited in the United States mails.
* * * This is on the ground that the offeror, by de-
positing this letter in the postoffice, selects a common
agency through which to conduct the negotiations, and
the delivery of the letter to it is in effect a delivery to
the offeror. Thereafter the acceptor has no right to the
letter, and cannot withdraw it from the mails. Even
if he should succeed in doing so the withdrawal will
not invalidate the contract previously entered into. But
the plaintiff did not adopt this course. On the contrary,
he chose to indicate his acceptance by transmitting a
telegram to Sas by the defendant company. Sas had
done nothing to indicate his willingness to adopt such
agency and the defendant, in undertaking to transmit
the message, was acting solely as the agent of the plain-
tiff. The latter might have withdrawn the message or
stopped its delivery at any time before it actually reached
Sas. It is manifest that handing the message to his own
agent was not notice to the sendee of the telegram. The
most formal declaration of an intention of acceptance of
an offer to a third person will not constitute a contract.
OFFER AND ACCEPTANCE
97
A written letter or telegram, like an oral acceptance,
must be communicated to the party who had made the
offer, or to someone expressly or impliedly authorized to
receive it; and this rule is not complied with by deliver-
ing it to the writer's own agent or messenger even with
direction to deliver to the offeror. * * *
'' The party making the offer may be entirely satisfied
to trust the mails, and not be willing to chance the use of
the telegraph. * * * It is very evident on authority
and principle that, in the absence of any suggestion, one
transmitting an offer by mail cannot be bound by an
acceptance returned in some other way until it is received
or he has notice thereof. The plaintiff, then, did not
accept the offer of Sas until the telegram was received
by the latter, a few minutes after 6 o'clock P. M. of the
day after the letter had been received, and the question
arises whether this was 'at once' within the meaning of
the offer which stated that another deal was pending.
Like 'forthwith' and 'immediately,' 'at once' does not
mean instantaneously, but requires action to be taken
within a reasonable time. * * * It is doubtful
whether the same vigilance should be exacted in the ac-
ceptance of an offer to exchange or purchase real estate
as in transactions relating to the transfer of chattel prop-
erty. See Kemper v. Cohn, 47 Ark. 519, 58 Am. Rep. 775,
S. W. 869. The circumstances of each case necessarily
have an important bearing. There was no evidence of
the time a letter, if promptly mailed, might have reached
Sas. He has indicated in his letter that he was contem-
plating another deal, and we think ordinary minds fairly
differ as to whether, in these circumstances, an accept-
ance twenty-three or twenty-four hours after the letter
had been received was in time to bind the party making
the offer, and the issue was for the jury to determine.
Question 54: By what medium did Lucas make his offer to
Sas in Case 54? What was the liiftitation of time put on the
acceptance by the offeror? Within what time did this mean
according to the court? If Sas had replied by return mail by
letter properly stamped and addressed when would the accept-
98
CONTRACTS
ance have become complete? Would loss of the reply or delay
of the reply in the mails prevent a contract? Why? When,
according to this decision, would a contract he complete in case
of reply by telegraph? Suppose the offeror had said, "Wire me
your reply,'' would that have made any difference ? Why ?
(Note to Case 54: If we concede the doctrine that a contract
by mail or telegraph is complete when the acceptance is deliv-
ered to the proper agency to receive it (see note to Case 55, post),
the question still remains, what is the proper agency? There is
some difference of opinion on that point where the agency is not
expressly suggested by the offeror. The doctrine that, where
there is no other thing in the case to rest upon, an offer by
letter means a reply by letter and any other form of reply
puts the risk upon the offeree, has been frequently asserted.
See next case. But a contrary view is taken in Farmers'
Produce Co. v. Schreiner (Okla.) L. R. A. 1916 A, 1297,
namely, that an offer by mail may be accepted by telegram, or
vice versa, unless there is some element in the case besides the
mere method of offer, indicating the contrary.)
Case 55. Shubert Theatrical Co. v. Rath et al., 271
Fed. 827, (1921).
Facts: Suit brought by the Theatrical Co. against
Rath and others to enjoin them from performing for any
party except complainant until the expiration of the term
mentioned in an alleged contract between them.
Points Involved: (See opinion.)
(Note: This case is in point under three headings in this book
as follows: (1) "Option Contracts, see § 60; "Communication
of Acceptance, see § 63 (the present section); and "When the
Court Will Enjoin Breach of Contract, see §184. It is par-
ticularly in point under the last heading.)
Rogers, Circuit Judge, delivered the opinion of the
court: "The plaintiff corporation is organized under
the laws of the state of New York, is in business as a
theatrical manager and producer of plays, and for a
number of years last past was and still is engaged in pro-
ducing plays and attractions at various theaters in the
city of New York. It likewise presents plays on the road
OFFER AND ACCEPTANCE
99
in a tonr of the United States and Canada and among
the plays so produced is one known as 'The Passing
Show of 1919,' in which the defendants appear.
"The plaintiff on July 8th, 1919, entered into a writ-
ten agreement with the defendants by the terms of which
the plaintiff engaged them to render their exclusive serv-
ices to it for a period of one. year commencing from
September 1, 1919. It was agreed therein that the de-
fendants should appear at all times as directed by the
plaintiff during the year, and it was guaranteed that
they should be employed for twenty weeks in the mini-
mum, and their salary was fixed at the sum of $250 per
week while appearing in the city of New York and $275
per week while on the road. It was further provided
that the plaintiff had an option on the services of the
defendants for the theatrical year beginning September
1,1920, and ending September 1, 1921, provided plaintiff
gave notice of its desire to exercise such option prior
to July 1, 1920. If the plaintiff exercised the option
reserved to it, the agreement provided that the guarantee
of twenty weeks should again apply for the period, but
that the salary should be $300 per week while appear-
ing in the city .of New York and $325 per week while
appearing on the road. On June 7, 1920, the plaintiff,
pursuant to its option, employed the defendants for the
year beginning on' September 1, 1920. Notwithstanding
this, the defendants advised the plaintiffthat they refused
to perform according to their agreement; and it appears
that they have contracted with a rival manager to appear
in a production to be presented in a rival theater in the
city of New York.
"An injunction is asked to restrain the defendants
from performing for any managers other than the plain-
tiff, or from performing in any other theater or place
of public amusement, or in any other company, except
that of the plaintiff, until the expiration of the term
mentioned in the agreement made between the plaintiff
and the defendants. The court below granted the in-
junction as prayed.
100
CONTRACTS
"The contract is found in a letter addressed by the
plaintiff to the defendants and signed 'Shubert Theat-
rical Company, by J. J. Shubert.' Then follows:
"'We have read the foregoing. The same contains
our full understanding, and, with our signatures at the
bottom hereof, let this be deemed a contract between us.
 'Geo. & Dick Rath, by Geo. H. Rath.'
"The letter (contract) contains the following: 'You
(the defendants) agree throughout the term hereof that
you shall not render your services, nor will you appear
publicly for any other firm or corporation, whether mov-
ing pictures or otherwise, without our written consent
first had and obtained, and shall you attempt to appear
for any other management or in moving pictures, we
shall have the right to apply to any court having com-
petent jurisdiction for an injunction restraining your
appearance, and you agree, for the purpose of such law-
suit, that your services are extraordinary and unique,
and you cannot be replaced, except for Morris Gest.5
"The performances which the defendants contracted
to give are acrobatic in character. The testimony shows
that their feats are unique and extraordinary. A promi-
nent theatrical manager and producer of wide experience,
and not associated with the plaintiff, testified. One of
the feats of the defendants' performances as he described
it, is that one of the defendants, with one hand, raises
the other defendant, a full-grown man, from the floor,
his body being stretched at full length upon the floor.
The witness, in describing it, said this was done with-
out apparent effort, 'just as easy as you would lift a
straw.' In reply to a question by the court, he declared:
'It is a fact that it is the most marvelous thing that has
ever been before.'  * * *
"The finding of the trial court that the performances
of the defendants are unique and unusual is amply justi-
fied by the testimony. The services of the defendants
are extraordinary, unique, and cannot be replaced.
"These services were to be given to the plaintiffs ex-
clusively, and the contract contains an express negative
OFFER AND ACCEPTANCE
101
covenant that they would not be given under any other
management during the period named. By a negative
covenant the covenantor promises that something shall
not he done. The relief appropriate to a breach of such
a contract is an injunction. The leading authority, as
respects covenants of personal service, is the well-known
case of Lumley v. Wagner, 1 De G. M. & G. 604, 42 Eng.
Reprint, 687, 21 L. J. Ch. N. S. 898, 16 Jur. 871, 6 Eng.
Rul. Cas. 652. In that case a famous singer agreed to
sing in the opera house of the complainant for a certain
time, and not to sing for anyone else during that time.
The opinion in that case reviews the authorities and con-
tains what is regarded as a very able and convincing
discussion of the principle applicable in such cases. As
the services contracted for were those of a person pos-
sessing special and extraordinary qualifications, Lord
Chancellor St. Leonards granted an injunction restrain-
ing the defendant from singing at any other theater than
that belonging to the plaintiff. It was held that the fact
that the court would have been unable to enforce specif-
ically the defendant's affirmative covenant to sing at the
plaintiff's theater, did not affect the complainant's right
to an injunction to restrain a violation of the negative
covenant not to sing elsewhere.
< < * * #
"The basis upon which the decisions rest in all such
cases is that the damages for the breach of such contracts
cannot be estimated with any certainty, and the employer
cannot, by means of any. damages, purchase the same
services from others. The injury in such cases is ir-
reparable. Damages which can be estimated in cases of
this class only by conjecture, and not by any accurate
standard, constitute such an irreparable injury as courts
of equity will restrain by injunction.
"In the argument in this court counsel for the de-
fendants insisted that the contract between the parties
is so lacking in equitable mutuality that a court of equity
should not enforce it. We are not impressed by the argu-
102
CONTRACTS
ment. The contract binds fhe complainant to give the
defendants employment for at least twenty weeks in the
theatrical year, 'not necessarily consecutive,' for which
the plaintiff is bound to pay a certain specific amount.
The contract also binds the defendants to render their
services to the plaintiff for a like number of weeks at
least, and to do so for the specified salary. That there
is mutuality of obligation in such an agreement is too
plain for controversy, and mutuality of obligation is
sufficient to justify the issuance of an injunction to re-
strain the breach of the agreement if the services to be
rendered are unique, special, or extraordinary, and the
contract be not otherwise inequitable or oppressive.
Whether the contract is inequitable or oppressive will
be considered in a subsequent part of this opinion.
"An application for an injunction in a case like this
does not depend, as counsel for the defendants in his
argument in this court seemed to think, upon the principle
applicable to cases for specific performance. It is not
necessary in the present case for us to inquire as to
what the doctrine of mutuality means in cases of specific
performance. There is a distinction between actions
brought to compel the specific performance of an affirma-
tive covenant and those which are brought to restrain by
injunction the breach of a negative covenant in the same
agreement. It is familiar doctrine that courts of equity
do not exercise their jurisdiction to grant the remedy
an affirmative specific performance of a contract for
personal services. This they decline to do, because they
cannot in any direct manner compel an actor to act or
a singer to sing. But the rule is established in England
and in this country that the courts of equity may re-
strain by injunction the breach of a negative covenant
by which an actor or a singer of unusual gifts has agreed
not to act or not to sing in a specified period, except
under the management of the other party to the contract.
That this may result or may not result in indirectly com-
pelling the specific performance of the affirmative cov-
enant is not a matter with which this court needs in the
OFFER AND ACCEPTANCE
103
present case to concern itself. There has been a great
difference of opinion, especially in the English courts,
over the question whether an injunction can issue to
prevent the breach of a contract unless it contains an
express negative covenant. But with that question also
we are not concerned in this case, as the contract here
involved does contain an express negative covenant. It
is sufficient for our present purpose that a distinction
exists between suits brought to compel specific perform-
ance of an affirmative covenant for personal services^
and suits brought to restrain by injunction the violation
of a negative covenant respecting such services. McCall
Co. v. Wright, 198 N. Y. 143, 31 L. R. A. (N. S.) 249, 91
N. E. 516.
"The contract gave the plaintiff an option to renew
its contract for the theatrical year from September 1,
1920, to September 1, 1921, provided it gave defendants
notice in writing or orally of its desire to exercise such
option prior to July 1,1920. If the option was not exer-
cised according to its terms, the contract has expired,
the defendants have not violated it, and no injunction
can issue.
"The testimony shows that Mr. Shubert, the vice presi-
dent of the plaintiff corporation, and who had full charge
of such matters, dictated to his stenographer on June
7, 1920, a letter exercising the option; that she had typed
it and then handed it to Shubert, who signed it and gave
it back to her; that she then handed it, properly ad-
dressed, to the head of the mailing department in the
Shubert office, telling her that it was important and to
mail it herself; and that the latter person stamped it
and herself mailed it on the same day in a regular United
States government postoffice box. The letter was mailed
in a Shubert envelop having a return address stamped
on it, and it was never returned for non-delivery. The
letter was addressed to defendants, in care of the Detroit
Opera House, Detroit, Michigan, where the defendants
were engaged for the week beginning on that day.
"The court below has found as a fact that the letter
104
CONTRACTS
was written and mailed. We concur with him in that
finding. The court also said that in writing and mailing
the letter the plaintiff did all that was required of it
under the contract. In that proposition we also fully
concur; the letter having been written prior to the ex-
piration of the option. Prior to that time the defendants
^are deemed in law to have been making to the plaintiff
a continuing offer, and the mailing of the letter was an
acceptance of it. An option, when based on a sufficient
consideration, is a contract by which one binds himself
to sell property or perform services, and leaves it dis-
cretionary with the other to take the property or accept
the services on the terms specified. In such a contract
two elements exist: first, the offer to sell or to render
service which does not become a contract until accepted ;
second, the completed contract to continue the offer or
to leave it open for the time named. Black v. Maddox,
104 Ga. 157,162, 30 S. E. 723.
"An option is said in Milwaukee Mechanics' Ins. Co.
v. Rhea, 60 C. C. A. 103, 123 Fed. 11, to be nothing more
than a continuing offer to sell. In Standiford v. Thomp-
son, 68 C. C. A. 425, 430, 135 Fed. 996, it is defined as
' an unaccepted offer to sell,' and it is said to be 4 a con-
tinuing offer until the expiration of the time limited.'
In McMillan v. Philadelphia Co., 159 Pa. 142, 28 Atl.
220, it is said that an option is an unaccepted offer, which
becomes a binding contract when the holder of the option
signifies that he accepts the offer within the time fixed.
And an option is defined in Adams v. Peabody Coal Co.,
230 111. 469, 82 N. E. 645, as a continuing offer which
the offerer may not withdraw until the expiration of the
time limited. In Rease v. Kittle, 56 W. Va. 269, 49 S. E.
150, it is said that 'an option contract to purchase is but
a continuing offer to sell.' In 35 Cyc. 56 it is said that
an option is a continuing offer or contract by which the
owner stipulates with another that the latter shall have
the right to buy the property at a fixed price within a
certain time. And see Ganss v. J. M. Guffey Petroleum
Co., 125 App. Div. 760, 110 N. Y. Supp. 176, 177; Sizer
OFFER AND ACCEPTANCE
105
v. Clark, 116 Wis. 534, 93 N. W. 539; Snider v. Yar-
brough, 43 Mont. 203, 115 Pac. 411; Bates v. Woods,.
225 111. 126, 80 N. E. 84; John v. Elkins, 63 W. Va. 158,
59 S. E. 961.
i' The law is settled that, if a letter accepting an offer
is made in the manner either expressly or impliedly
indicated by the party making the offer, it makes no
difference whatever that the letter is never received be-
cause of some mistake of the postoffice authorities, or
through accident in transmission, or because in some way
it becomes lost. Patrick v. Bowman, 149 U. S. 411, 37
L. Ed. 790, 13 Sup. Ct. Rep. 811, 866; Tayloe v. Mer-
chants' F. Ins. Co., 9 How. 390, 13 L. Ed. 187; Burton
v. United States, 202 U. S. 344, 384-386, 50 L. Ed. 1057,
1072,1073, 26 Sup. Ct. Rep. 688, 6 Ann. Cas. 362; Mactier
v. Frith, 6 Wend. 103, 21 Am. Dec. 262; Vassar v. Camp,
11 N. Y. 441; Trevor v. Wood, 36 N. Y. 307, 93 Am. Dec.
511; White v. Corliss, 46 N. Y. 467; Howard v. Daly, 61
N. Y. 362, 19 Am. Rep. 285; Mercer Electric Mfg. Co. v.
Connecticut Electric Mfg. Co., 87 Conn. 691, 89 Atl. 909;
Perry v. Mt. Hope Iron Co., 15 R. I. 380, 2 Am. St. Rep.
902, 5 Atl. 632. The law of England is to the same effect,
Brogden v. Metropolitan R. Co., 2 App. Cas. 666, 6 Eng.
Rul. Cas. 94; Re Imperial Land Co., L. R. 15 Eq. 18, 42
L. J. Ch. N. S. 372.
"It is necessary, therefore, to inquire whether, under
the circumstances, the plaintiff had a right to use the
mails for the purpose of communicating its exercise of
its option. The plaintiff was expressly authorized by
the defendants to exercise the option in writing or orally.
We think that this gave it the right to communicate by
mail its written acceptance of the offer. Authorization
to communicate acceptance by mail is implied in two
cases:
"(1) Where the post is used to make the offer, and
says nothing as to how the answer is to be sent.
"(2) Where the circumstances are such that it must
have been within the contemplation of the parties that
according to the ordinary usages of mankind the post
106
CONTRACTS
might be used as a means of communicating the accept-
ance. Henthorn v. Fraser, (1892) 2 Ch. 27, 61 L. J. Ch.
N. S. 373, 63 L. T. N. S. 439, 40 "Week. Rep. 433; Carey
v. Roots, 5 Alberta L. R. 125, 21 West. L. R. 795, 2 West.
Week. Rep. 678, 5 D. L. R. 670; Ellis v. Block, 187 Mass.
408, 73 N. E. 475; Campbell v. Beard, 57 W. Ya. 501,
509, 50 S. E. 747. See 13 C. J. p. 300, Sec. 116.
"Where authority is given to accept in writing an
offer which was made orally the offeree has a right to
understand, in our opinion, that he is at liberty to send
his answer by post; and if he encloses the writing in an
envelop properly stamped and addressed, and deposits it
either in the postoffice or in a street letter box, which is
a part of the postoffice system-for the transmission of
mail, he has done all that is required. Wood v. Cal-
laghan, 61 Mich. 402, 1 Am. St. Rep. 597, 28 N. W. 162.
Question 55: (1) How was the offer of the Raths in this case
(by way of renewal of the original contract) accepted? "Was it
material whether the acceptance ever actually reached the
Raths ? Why ?
(2) In what cases may an offer be accepted by mail accord-
ing to the court's statement ?
(Note: Effect on rule (that a contract is complete when
acceptance is mailed) of right of acceptor to withdraw the
letter from the mails. The rule of the Post Office Department
that a sender of a letter may withdraw same from the mails
has caused inquiry to be made whether this would not change
the rule that the delivery of the letter to the post office con-
stitutes an acceptance and closes the contract. That rule has
been said to be based upon the fact that the acceptor has put
the letter out of his control, but if it'may be withdrawn by him,
it is not out of his control. In 9 American Law Reports, at page
386, there is a note on this question following the case of Traders'
National Bank v. First National Bank of McMinnville, 217 S.
W. (Tenn.) 977 in which the court held (head note), "A bank
which merely places in the mail a draft in payment of a check
upon its customer does not accept (certify) the check so as to
become liable upon it in case the drawer's account is overdrawn;
if within 24 hours it secures a return of the letter containing
OFFER AND ACCEPTANCE
107,
the draft from the mail, under the postal regulations. The
author of the note says: '' There is, perhaps, ground for distinc-
tion between the question presented in the reported case.
* * * and the question presented in ordinary contracts,
whether the depositing of a letter of acceptance in the mails,
where this mode of acceptance is authorized, completes the con-
tract. And the annotator says that this question has received
but little attention from the courts. The postal rule goes back
to 1887 "at least. The regulations of 1913 made little sub-
stantial distinction in the rule. And he continues, "The better
rule would seem to be that the acceptance is not completed at the
time of the posting of the letter, whether in fact it is with-
drawn or not. But the weight of authority is clearly the
other way, and there seems to be no good reason for any such
conclusion by the annotator. In Lucas v. W. U. Tel. Co., 131
Iowa 669 (Case No. 54, herein) the court says that if the sender
should Succeed in withdrawing the letter from the mails such
"withdrawal will not invalidate the contract previously entered
into. And the case of Shubert Theatrical Co. v. Rath, Case
No. 55 herein, was decided in 1921, and is reported in 21 Ameri-
can Lawyers Reports, and a year later than the note above re-
ferred to was written, wherein the court makes no comment on
the effect of such a rule and in Williston on Contracts (Edition
of 1920) the learned author says:
"§ 86. It is not important that the acceptor has the power to
withdraw his acceptance from the mails. An inference is pos-
sible from an English case (Ex parte Cote, L. R. 9 Ch. 27) that
the doctrine that an acceptance is complete when it is mailed is
based on the assumption that thereafter the letter is no longer
within the sender's control. * * * This doctrine can hardly
be accepted in the United States. * * * 
The conclusion is that while there are authorities pointing the
other way, and while it is possible that there may be a develop-
ment of the law in that direction, the better view is that this
right to withdraw a letter from the mails has no effect on the
present doctrine and notwithstanding that fact, a contract is
complete when the acceptance is posted, provided that was the
authorized mode of acceptance, and provided there was no stipu-
lation that the acceptance must actually reach the offeree in order
to be complete.)
108
CONTRACTS
§ 64. (Contracts, Sec. 32.) Silence as acceptance.
Case 56. Hobbs v. Massasoit Whip Company, 158
Mass. 194.
Facts: Plaintiff, Hobbs, had sent eel skins to the de-
fendant, on several different occasions, and had been
paid for them. He then sent the eel skins in question,
and received no reply from the Company which kept
them for several months till they became worthless.
Plaintiff then sued for the price. The defendant claims
there was no contract and that having no contract with
the plaintiff it was under no duty to go to the expense
and trouble of notifying him of the rejection of skins
which it had never ordered and did not want or make
use of. Plaintiff claims that owing to his prior relations
with the defendant, the defendant was under obligations
to notify him of its rejection and that its failure so to do
was evidence of its acceptance from which a jury might
properly find a contract.
Point Involved: May silence by an offeree who is in
receipt of goods from the offeror, be considered as an
acceptance of the offer if the prior dealings of the parties
have been such that the offeror is justified in believing
that he will be notified if there is a rejection of his offer?
Holmes, J.: "This is an action for the price of eel
skins sent by the plaintiff to the defendant, and kept by
the defendant some months, until they were destroyed.
It must be taken that the plaintiff received no notice
that the defendant declined to accept the skins. The case
comes before us on exceptions to an instruction to the
jury, that, whether there was any prior contract or not,
if the skins are sent to the defendant, and it sees fit,
whether it has agreed to take them or not, to lie back,
and to say nothing, having reason to suppose that the
man who has sent them believes that it is taking them,
since it says nothing about it, then, if it fails to notify,
the jury would be warranted in finding for the plaintiff.
"Standing alone, and unexplained, this proposition
might se&n to imply that one stranger may impose a duty
OFFER AND ACCEPTANCE
109
upon another, and make him a purchaser, in spite of
himself, by sending goods to him, unless he will take the
trouble, and be at the expense, of notifying the sender
that he will not buy. The case was argued for the de-
fendant on that interpretation. But, in view of the evi-
dence, we do not understand that to have been the mean-
ing of the judge, and we do not think that the jury can
have understood that to have been his meaning. The
plaintiff was not a stranger to the defendant, even if
there was no contract between them. He had sent eel
skins in the same way four or five times before, and they
had been accepted and paid for. On the defendant's
testimony, it is fair to assume that, if it had admitted
the eel skins to be over twenty-two inches in length, and
fit for its business, as the plaintiff testified, and the jury
found that they were, it would have accepted them; that
this was understood by the plaintiff; and, indeed, that
there was a standing offer to him for such skins. In
such a condition of things, the plaintiff was warranted
in sending the defendant skins conforming to the re-
quirements, and even if the offer was not such that the
contract was made as soon as skins corresponding to its
terms were sent, sending them did impose on the defend-
ant a duty to act about them; and silence on its part,
coupled with a retention of the skins for an unreason-
able time, might be found by the jury to warrant the
plaintiff in assuming that they were accepted, and thus
to amount to an acceptance. See Bushnell v. Wheeler,
15 Q. B. 442; Benjamin on Sales, 162, 164; Taylor v.
Dexter Engine Co., 146 Mass. 613, 615. The proposition
stands on the general principle that conduct which im-
ports acceptance or assent is acceptance or assent in the
view of the law, whatever may have been the actual state
of mind of the party,—a principle sometimes lost sight
of in the cases. * * *
Question 56: (1)- Did the court hold that silence was in it-
self acceptance in this case, or evidence of acceptance, for the
jury to pass upon? Ordinarily could an offeror infer accept-
ance from the mere silence of the offeree ?
110
CONTRACTS
(2) D ordered certain goods to be delivered on certain dates.
P changed the dates and returned the order to D. D received
the changed order and made no reply. P afterwards sued D for
breach of contract. Is there a contract ? (Drucker v. Oppen-
heimer, 165 N. Y. § 284.)
Case 57. Cole-Mclntyre-Norfleet Co. v. A. S. Hollo-
way, 141 Tennessee Reports, 679, 214 S. W. 817, 7 A. L.
R. 1683.
Facts: Stated in the opinion.
Point Involved: Whether silence by a firm upon an
order received by a traveling salesman, whose authority
is merely to communicate such offers to his house for
acceptance, constitutes acceptance by such house.
Lansdex, Ch. J., delivered the opinion of the court:
"This case presents a question of law, which, so far as
we are advised, has not been decided by this court in its
exact phases. March 26, 1917, a traveling salesman of
plaintiff in error solicited and received from defendant
in error, at his country store in Shelby county, Tennessee,
an order for certain, goods, which he was authorized to
sell. Among these goods were fifty barrels of meal. The
meal was to be ordered out by defendant by the 31st
day of July, and afterwards 5 cents per barrel per month
was to be charged him for storage.
"After the order was given, the defendant heard noth-
ing from it until the 26th of May, 1917, when he was in
the place of business of plaintiff in error, and told it to
begin shipment of the meal on his contract. He was
informed by plaintiff in error that it did not accept the
order of March 26th, and for that reason the defendant
had no contract for meal.
"The defendant in error never received confirmation
of rejection from plaintiff in error, or other refusal to
fill the order. The same traveling salesman of plaintiff
in error called on defendant as often as once each week,
and this order was not mentioned to defendant, either
by him* or by his principals, in any way. Between the
day of the order and the 26th of May, the day of its
OFFER AND ACCEPTANCE
111
alleged rejection, prices on all of the articles in the con-
tract greatly advanced. All of the goods advanced about
50 per cent in value.
i'Some jobbers at Memphis received orders from their
drummers, and filled the orders or notified the purchaser
that the orders were rejected; but this method was not
followed by plaintiff in error.
"The contract provided that it was not binding until
accepted by the seller at its office in Memphis, and that
the salesman had no authority to sign the contract for
either the seller or buyer. It was further stipulated that
the order should not be subject to countermand.
"It will be observed that plaintiff in error was silent
upon both the acceptance and rejection of the contract.
It sent forth its salesman to solicit this and other orders.
The defendant in error did not have the right to counter-
mand orders and the contract was closed if and when
it was accepted by plaintiff in error. The proof that
some jobbers in Memphis uniformly filled such orders
unless the purchaser was notified to the contrary is of
no value because it does not amount to a custom.
"The case, therefore, must be decided upon its facts.
The circuit court and the court of civil appeals were both
of opinion that the contract was completed because of
the lapse of time before plaintiff in error rejected it.
The time intervening between the giving of the order
by defendant and its alleged repudiation by plaintiff in
error was about sixty days. "Weekly opportunities were
afforded the salesman of plaintiff in error to notify the
defendant in error of the rejection of the contract, and
of course, daily occasions were afforded plaintiff in error
to notify him by mail or wire. The defendant believed
the contract was in force on the 26th of May, because
he directed plaintiff in error to begin shipment of the
meal on that day. Such shipments were to have been
completed by July 31st, or defendant to pay storage
charges. From this evidence the circuit court found as
an inference of fact that plaintiff in error had not acted
within a reasonable time, and therefore its silence would
112
CONTRACTS
be construed as an acceptance of the contract. The ques-
tion of whether the delay of plaintiff in error was rea-
sonable or unreasonable was one of fact, and the circuit
court was justified from the evidence in finding that the
delay was unreasonable. Hence the case, as it comes to
us, is whether delay upon the part of plaintiff in error
for an unreasonable time in notifying the defendant in
error of its action upon the contract is an acceptance of
its terms.
"We think such delay was unreasonable, and effected
an acceptance of the contract. It should not be forgotten
that this is not the case of an agent exceeding his am
thority, or acting without authority. Even in such cases
the principal must accept or reject the benefits of the
contract promptly and within a reasonable time. Wil-
liams v. Storm, 6 Coldw. 207.
"Plaintiff's agent in this case was authorized to do
precisely that which he did, both as to time and sub-
stance. The only thing which was left open by the con-
tract was the acceptance or rejection of its terms of
plaintiff in error. It will not do to say that a seller of
goods like these could wait indefinitely to decide whether
or not he will accept the offer of the proposed buyer.
This was all done in the usual course of business, and
the articles embraced within the contract were consum-
able in the use, and some of them would become unfitted
for the market within a short time.
"It is undoubtedly true that an offer to buy or sell is
not binding until its acceptance is communicating to
the other party. The acceptance, however, of such an
offer, may be communicated by the other party either
by a formal acceptance, or acts amounting to an accept-
ance. Delay in communicating action as to the ac-
ceptance may amount to an acceptance itself. When the
subject of a contract, either in its nature or by virtue
of conditions of the market, will become unmarketable
by delay, delay in notifying the other party of his de-
cision will amount to an acceptance by the offerer. Other-
wise, the offerer could place his goods upon the market,
OFFER AND ACCEPTANCE
113
and solicit orders, and yet hold the other party to the
contract, while he reserves time to himself to see if the
contract will be profitable.
''Writ denied.
"A petition for rehearing having been filed, the follow-
ing response was handed down on September 20, 1919:
"An earnest petition to rehear has been filed, and we
have re-examined the question with great care. The
petition quotes the text of 13 C. J. p. 276, as follows:
'An offer made to another, either orally or in writing,
cannot be turned into an agreement because the person
to whom it is made or sent makes no reply, even though
the offer states that silence will be taken as consent, for
the offerer cannot prescribe conditiors of rejection, so
as to turn silence on the part of the offeree into accept-
ance.'
"And further: 'In like manner mere delay in accept-
ing or rejecting an offer cannot make an agreement.'
"It is also said that diligent search reveals only one
case holding in accord with the court's decision of this
case, and that case is Blue Grass Cordage Co. v. Luthy
& Co., 98 Ky. 583, 33 S. W. 835, and it is said this case
was overruled by the later case of L. A. Becker Co. v.
Alvey, 27 Ky. L. Rep. 832, 86 S. W. 974. We have ex-
amined both of those cases, and we do not think either
is authority on the question at issue. In the first case
the contract was admittedly executed, and the suit was
for damages for its breach. The second case does not
refer to the first, and is upon another branch of con-
tracts. The quotation from C. J. contemplates the case
of an original offer, unaccompanied by other circum-
stances, and does not apply to this case, where the parties
had been dealing with each other before the contract,
and were dealing in due course at the time.
"It is a general principle of the law of contracts that,
while an assent to an offer is requisite to the formation
of an agreement, yet such assent is a condition of the
mind, and may be either express or evidenced by circum-
stances from which the assent may be inferred. Hart-
114
CONTRACTS
ford & N. H. R. Co. v. Jackson, 24 Conn. 514, 63 Am.
Dec. 177; 6 R. C. L. 605; 13 C. J. 276; 9 Cyc. 258. And
see the cases cited in the notes of these authorities. They
^rll agree that acceptance of an offer may be inferred from
/ silence. This is only where the circumstances surround-
ing the parties afford a basis from which an inference
may be drawn from silence. There must be the right
and the duty to speak, before the failure to do so can
prevent a person from afterwards setting up the truth.
We think it is the duty of a wholesale merchant, who
sends out his drummers to solicit orders for perishable
articles, and articles consumable in the use, to notify his
customers within a reasonable time that the orders are
not accepted; and if he fails to do so, and the proof shows
that he had ample opportunity, silence for an unreason-
able length of time will amount to an acceptance, if the
offerer is relying upon him for the goods.
"The petition to rehear is denied.
Question 57: A business concern sends out a travelling sales-
man to solicit orders for it, does the travelling salesman have
authority to close contracts ? Suppose he takes an order and the
concerns does not notify the offeror of its rejection, is this fail-
ure an evidence of acceptance by it?
(Note to Case 57: On this point the courts are not agreed.
See Senner v. Gera Mills, 173 N. Y. Suppl. 265, to the contrary.
Also Gould v. Cates Chair Co., 147 Ala. 629. However, one can-
not help but feel that from a commercial standpoint the house
that sends out its salesman to obtain orders and transmit to it
for acceptance or rejection should be bound to notify the orderer
within a reasonable time. Otherwise, he is at a great disad-
vantage. If this house will not accept he must look elsewhere
for his purchases. Certainly business men generally expect to
have confirmation or rejection, and the law, to serve business
needs, ought to impose this duty on the offeree in cases of this
kind. Of course it is true generally that a mere failure to reply
cannot be construed into an acceptance. There is no rule of law
more generally accepted than that. But in the travelling sales-
men cases, the commercial house has sent out its salesmen to
solicit the offers, and that should certainly impose on it some duty
OFFER AND ACCEPTANCE
115
of affirmative action, either of acceptance or rejection. But
probably it would be better to say that the silence was evidence
of acceptance, not acceptance itself.
In the case above, the court seems to feel that the provision
that the order is not subject to countermand is binding. Of
course it is not binding. If the order was a mere offer (as it
was) the offeror could withdraw it at any time before acceptance.
It is the general rule that travelling salesmen have no author-
ity to close contracts.)
CHAPTER 9.
OFFER AND ACCEPTANCE (2) VALIDITY OF
ASSENT THEREIN.
§ 65. (Contracts, Sec. 33.) Introduction.
(Note: Circumstances of an offer and acceptance may make
them void or voidable. On the face of the language an offer is
made, and there is an acceptance to it. But the atmosphere is be-
clouded or poisoned. There may have been mistake, fraud,
duress or undue influence. I stand by and hear A offer B his car
for $500, and hear B accept the offer. I say, '' There is a con-
tract.'' But later B comes to me and tells me that A had threat-
ened him with personal injury unless he accepted. Then I say,
"That changes matters.
We have:
A. Extrinsic circumstances defeating contractual intent.
B. Circumstances of undue advantage rendering contract void-
able.)
A. Extrinsic Circumstances Defeating Contractual
Intent.
§ 66. Fraud in the inception or execution.
§ 67. Mistake.
§ 66. Fraud in the inception or execution.
Case 58. Bliss v. N. Y. C. & H. R. R. Co.
Facts: Plaintiff, Bliss, sues the Railroad Co. for dam-
ages arising out of personal injuries. In defense, the
Railroad Company produces a receipt signed by Bliss
for $17.00 which in terms is a settlement of the claim.
Plaintiff testifies that immediately after the accident he
went to the superintendent's office. He further testified:
 When I was conducted into the superintendent's office,
a gentleman sitting at the desk inquired the cost of my
116
FRAUD, MISTAKE, ETC.
117
trousers and hat, and I replied '$12 for the trousers and
$5 for the hat.' He told me to take a seat and produced
two papers. He passed me one saying, 'This is merely
a form' and the second he said was a receipt for the
trousers and hat. I signed them and proceeded. I did
not read the papers. They were not read to me. I was
rattled, dazed, at the time. I first knew of these papers
when the trial commenced yesterday. I first knew the
contents of these papers in detail when I read them this
morning.''
Point Involved: Whether there is a contract when
the signature to the paper containing the evidence of the
alleged^ contract was procured by fraud as to the con-
tents of the paper.
Allen-, J. "* * *
"* * # 2. The defendant contends that there was
no sufficient evidence to be submitted to the jury of fraud
on the part of its agent in procuring the release and
receipt. The evidence in favor of the plaintiff on this
point was, in substance, that in the accident he had re-
ceived a shock which had finally resulted in serious dam-
age to him; that he bore marks of the direct injury upon
his face; that his mind was rattled and dazed at the time;
that while he was in this condition, about an hour and
a half after the accident, in the office of the defendant's
superintendent, the defendant's agent prepared the two
papers for him to sign, and passed the release to him,
saying, 'This is merely a form,' and said that the second
paper was merely a receipt for the trousers and hat;
that both of these statements were false; and that he
signed both papers without reading them, or knowing
their contents. The witnesses for the defense gave a
fuller account of what took place at this interview, with
particulars which the plaintiff denied to be true, or
denied having any remembrance of. The defendant's
agent testified that nothing was allowed by way of pay-
nients for personal injuries, and that no claim was
made for such injuries. Upon this evidence it might
118
CONTRACTS
be argued in behalf of the plaintiff that he supposed
he was receiving payment merely for the injuries to
his clothing, but did not understand that he was cut-
ting himself off from a claim for personal injuries; that
if he was in fact rattled and dazed in mind, the defend-
ant's agent would probably have observed it; and that
the insertion of the words 'also injury to person,' in the
receipt for the damages to his clothing, and the taking
of the release of all claims whatever in consideration of
the payment of seventeen dollars, and in view of the
declaration of the defendant's agent to the plaintiff,
tended to show fraud. The weight of argument and evi-
dence was for the jury. All that we need say #is that
the conclusion of the jury was warranted. Freedly v.
French, 154 Mass. 339; Peaslee v. Peaslee, 147 Mass.
171, 180; 0 'Donnell v. Clinton, 145 Mass. 461; Trambly
v. Richard, 130 Mass. 259.
Question 58: "What was plaintiff's explanation of his release
in this case. Is it a question for the judge or jury? If plaintiff
signed the release under a mistake as to its contents caused by
fraud of defendant's agent was the release void or voidable?
Case 59. Maxfield v. Schwartz, 45 Minnesota Reports,-
150, 47 N. W. 448.
Dickinson, J.: "* * * While, in the ordinary
business transactions of life, men are expected to exer-
cise reasonable prudence, and not to rely upon others,
with whom they deal, to care for and protect their inter-
ests, this requirement is not to be carried so far that the
law shall ignore or protect positive, intentional fraud
successfully practiced upon the simple minded or un-
wary. As between the original parties, one who has
intentionally deceived the other to his prejudice is not
to be heard to say, in defense of the charge of fraud,
that the innocent party ought not to have trusted him.
See authorities above cited. It is true that, upon obvious
grounds of policy and necessity, written instruments exe-
cuted by the parties for the purpose of expressing and
showing the agreements entered into by them are not
FRAUD, MISTAKE, ETC.
119
to be avoided, except by clear, strong, and satisfactory
evidence. McCall v. Bushnell, 41 Minn. 37, 42 N. W.
Rep. 545. But this relates to the subjects of proof, not
of pleading, which is the question now before us.
Question 59: If A presents a paper to B telling B it is a re-
ceipt, and it is in fact a release, and B signs without reading, is
B's carelessness any reason for holding B to the release agree-
ment ? Why ?
Case 60. Carlisle & Cumberland Bank v. Bragg,
(1911) 1 King's Bench, 489.
Facts: Suit upon a document purporting to be a con-
tinuing guaranty by Bragg, defendant, up to the amount
of £150, of the payment by Rigg to the plaintiffs of any
sum which might become due. Defense, by Bragg that
he signed no such guaranty, or if he did, his signature
was fraudulently procured by Rigg who falsely repre-
sented to Bragg that the paper was an insurance paper.
The evidence was that Rigg had been requested by the
Bank to get a guaranty to cover overdrafts. That Rigg
had previously asked Bragg to sign an insurance paper,
and on the day the paper in question was signed Rigg
told Bragg that the former paper had got wet and blurred
and he wanted him to sign another. That Bragg, sup-
posing the presented paper to be an insurance paper to
the same effect as the previous one, had signed it with-
out reading it. That Rigg then forged the signature
of an attesting witness to the paper and delivered it to
the bank who extended credit to Rigg on the faith thereof.
Point Involved: Whether if a person is induced by
fraud to sign a paper which he would otherwise not have
signed, and upon which, therefore, his mind does not con-
tractually operate, he is estopped to set up his defense
against an innocent third party who relies on such paper.
Whether his failure to read when he could have done so
operates to estop him as against such third party.
Whether there may be a distinction in this regard be-
tween a plaintiff who asserts rights under a non-nego-
120
CONTRACTS
tiable paper and a holder in due course of negotiable
paper (the paper in this case being non-negotiable.)
Vaughan William, L. J.: "In my opinion the judg-
ment of Pickford, J. in this case was quite right. He
held that the finding of negligence by the jury was im-
material, and he did so after discussing the case of Foster
v. Mackinnon, and coming to the conclusion that the
doctrine there laid down as regards negligence really
has reference to the particular case of a negotiable in-
strument, to an action on which the defence that the
defendant was induced to sign the instrument by fraud
and misrepresentation as to its nature is set up as against
a bona fide holder for value. As I understand it, that
doctrine is limited to negotiable instruments, and that
was really the ground of the judgment of Pickford, J.
in this case. Now let me deal with the matter apart from
any question of negotiable instruments. In this case the
finding of the jury is that the signature of the defendant
to this document was obtained by fraud. The jury were
asked: 'Was the defendant induced to sign the guar-
antee by the fraud of RiggT They answered that he
was. They then were asked: 'Did the defendant know
that the document which he signed was a guarantee?'
They answered in the negative. It seems to me that on
those findings alone the defendant would be entitled to
say in respect of this guarantee that it was not, in con-
templation of law, signed by him. His signature was
obtained by fraud, and it is manifest, on the evidence
and the findings of the jury, that he was not intending
to sign any such document. What he was intending to
sign was some document with reference to insurance.
^ ^
"It appears to me that under the circumstances of this
case the mere fact that the jury have found that there
was negligence on the part of the defendant does not
raise such an estoppel as prevents the defendant from
setting up the defence that he never signed the guarantee
and that his signature to the document was obtained from
FRAUD, MISTAKE, ETC.
121
him by fraud; that he did not know of its nature, or
intend to sign a document of that description. If the
document in question had been not a guarantee, but a
bill of exchange, and the question had arisen what was
the position of a holder for value without notice of the
fraud, the matter might have been different, because the
law merchant, and now the statute law, puts persons who
in such circumstances take bills of exchange and such
like instruments in the position that they have to prove
that they gave value for the bill or other like instrument
honestly, but, if they prove that, it does not matter that
it was originally procured by fraud.
"The only other thing which I wish to say is on the
question of negligence. I do not know whether the jury
understood that there could be no material negligence
unless there was a duty on the defendant towards the
plaintiffs. Even if they did understand that, in my opin-
ion, in the case of this instrument, the signature to which
was obtained by fraud, and which was not a negotiable
instrument, Pickford, J. was right in saying that the
finding of negligence was immaterial. I wish to add for
myself that in my judgment there is no evidence what-
soever to show that the proximate cause of the plaintiffs'
advancing money on this document was the mere signa-
ture of it by the defendant. In my opinion, the proxi-
mate cause of the plaintiffs' making the advance was that
Rigg fraudulently took the document to the bank, having
fraudulently altered it by adding the forged signature
of an attesting witness, and but for Rigg having done
those things the plaintiffs would never have advanced
the money at all. Under the circumstances I think that
the appeal fails and must be dismissed.
Kennedy, L. J.: "I am of the same opinion. The mat-
ter has been already so fully dealt with upon both the
points raised that I need not say very much. I entirely as-
sent to the exposition which has been given of the law with
regard to non est factum as a defence. The principle
involved, as I understand it, is that a consenting mind
122
CONTRACTS
is essential to the making of a contrapt, and that in such
a case as this there was really no consensus, because there
was no intention to make a contract of the kind in ques-
tion. The argument for the plaintiffs on this point was
largely based upon the judgment in the case of Foster
v. Mackinnon, but to my mind it clearly appears from
the judgment in that case itself—and I think that it is
made still clearer on comparing that case with Swan
v. North British Australasian Co.—that that judgment
must be read as specifically referring, so far as it
turns on negligence, to the case of a negotiable instru-
ment, the importance of the distinction between which
and other instruments for the present purpose is insisted
upon very clearly in the case of Swan v. North British
Australasian Co. both in the Court below and in the
Exchequer Chamber. As regards the reasoning upon
which I think that this appeal ought to be dismissed, I
should be quite content myself to accept the judgment
of Pickford, J. I think that he was right on both of the
points of view from which he regarded the case. In the
first place I do not think that, on the facts of the case, the
so-called negligence of the defendant, which was really
induced by the fraudulent action of Bigg, was negligence
which can help the plaintiffs, because it was not negli-
gence in the breach of any duty to the plaintiffs, the
bank, or to any class of persons, as might have been the
case if the document had been a negotiable instrument;
and secondly I am of opinion that the so-called negligence
which is said to raise an estoppel in favor of the plain-
tiffs was not truly the proximate cause of the damage
in respect of which the plaintiffs are suing: it was at the
most an act or an omission (in whichever way you like
to look at it) on the part of the defendant which was
induced by fraud, and which would have produced no
effect at all, had it not been for the independent and
subsequent act of the fraudulent person Rigg in taking
this document, making it perfect by the forgery of the
signature of an attesting witness, and handing the docu-
ment to the plaintiffs, with a representation that it came
FRAUD, MISTAKE, ETC.
123
from the defendant and had been duly signed by him.
Looking at the case, therefore, from either of the points
of view taken by the learned judge below, I think that
it was rightly decided by him, and therefore this appeal
should be dismissed.
Question 60: What was the document upon which suit was
brought in this case? Who brought it, and against whom?
What were the facts under which the signature was procured?
Was the paper in question negotiable? Did the court think that
the failure of defendant to read might have made him liable if
the paper were negotiable and suit were brought by an innocent
purchaser of such paper ? What is the liability of a person on
a paper whose contents he does not know where the contents have
not been fraudulently misrepresented to him?
(Note to Case 60. In a suit by an assignee of a non-negotiable
document, clearly the signer of the paper would have the same
defense against such assignee as he would have had against the
assignor because an assignee takes no better title than the as-
signor and he knows he runs that risk when he acquires the as-
signment. In that case we have a situation like this:
B (the defrauded) to R) (the defrauder)
C^ (the transferee)
But in the instant case we have
B (the defrauded)) . ,\
„ , ; Vpromisors to C (innocent)
R (the defrauder) j
But the court thought that even in that case B owed no duty to
C because he did not know that C was involved. But see the
same subject in case of Negotiable Paper, post.)
(Note: This defense of fraud in the procurement while un-
doubtedly a good defense if in fact true, must be carefully
watched. It has been said that it is "an overworked defense.
Undoubtedly signers of instruments, having no other defense,
have fabricated this one as a way out. It appears to the editor
that there must be numerous cases where this defense is asserted
when in fact the defendant did know what he signed.)
§ 67. (Contracts, Sec. 35.) Mistake.
Case 61. Riegel v. Amer. Life Ins. Co., 153 Pa. 134.
Facts: One L bad an insurance policy on his life in
the A. L- Ins* Oo. in favor of R, his creditor. L dis-
124
CONTRACTS
appeared and R kept up the premiums. Finally, finding
the matter burdensome, R surrendered the policy to the
insurance company and took out a paid-up policy in a
much less sum in return therefor. As a matter of fact,
L was 5ead at the time of the agreement. Both parties
had acted on the assumption that he was alive. This
is a suit brought to have that settlement set aside and
give R the full benefit of the former policy.
Point Involved: If an agreement is made based on a
mutual mistake as to the condition or existence of the
subject matter, does a contract result?
Mr. Justice Sterrett: "* * * The general rule
is that an act done or a contract made, under a mistake
of a material fact is voidable and relievable in equity.
The fact of course must be material to the act or contract
* * *. The principle is illustrated by familiar ex-
amples, employed by text writers, thus: A agrees to
buy a certain horse from B. It turns out that the horse
is dead at the time of the bargain, though neither party
is then aware of the fact. The agreement is void.
i i # * * *
"It cannot be doubted that in exchanging the old for
the new policy both parties acted on the basis that Leisen-
ring was then alive. * * *
"* * * And it is now adjudged and decreed that
the contract under which said exchange of insurance
policies was made be rescinded, that the paid-up policy
for $2,500 be surrendered and cancelled, and that the
original policy of insurance be reinstated, as of the date
of its surrender; and that the defendant company pay
to the plaintiff the sum of $6,000. * * * 
Question 61: What was the mistake of fact in this case?
What right had Riegel on the old policy at the time it was sur-
rendered ? Did his acceptance of a new policy and the cancella-
tion of the old bar his right upon the old ? Why ?
Case 62. * Raffles v. Wichelhaus, 2 H. & C. Reports
(Eng.), 906 (1864).
Declaration: For that it was agreed between the
plaintiff and the defendants, to wit, at Liverpool, that
FRAUD, MISTAKE, ETC.
125
the plaintiff should sell to the defendants, and the de-
fendants buy of the plaintiff, certain goods, to wit, 125
bales of Surat cotton, guaranteed middling fair mer-
chant's Dhollorah, to arrive ex "Peerless from Bom-
bay; and that the cotton should be taken from the quay,
and that the defendants would pay the plaintiff for the
same at a certain rate, to wit, at the rate of 1 d. per
pound, within a certain time then agreed upon after the
arrival of the said goods in England.—Averments: that
the said goods did arrive by the said ship from Bombay
in England, to wit, at Liverpool, and the plaintiff was
then and there ready and willing and offered to deliver
the said goods to the defendants, &c. Breach: that the
defendants refused to accept the said goods or pay the
plaintiff for them.
Plea: That the said ship mentioned in the said agree-
ment was meant and intended by the defendants to be
the ship called the '' Peerless, which sailed from Bom-
bay, to wit, in October; and that the plaintiff was not
ready and willing and did not offer to deliver to the de-
fendants any bales of cotton which arrived by the last-
mentioned ship, but instead thereof was only ready and
willing and offered to deliver to the defendants 125 bales
of Surat cotton which arrived by another and different
ship, which was also called the "Peerless, and which
sailed from Bombay, to wit, in December.
Demurrer, and joinder therein.
Milward, arguing in support of the demurrer.—The
contract was for the sale of a number of bales of cotton of
a particular description, which the plaintiff was ready to
deliver. It is immaterial by what ship the cotton was to
arrive, so that it was a ship called the '' Peerless.'' The
Words "to arrive ex 'Peerless,'  only mean that if the
vessel is lost on the voyage, the contract is to be at an end.
(Pollock, C. B.—It would be a question for the jury
whether both parties meant the same ship called the
"Peerless.") That would be so if the contract was for
the sale of a ship called the "Peerless; but it is for
the sale of cotton on board a ship of that name. (Pollock,
126
CONTRACTS
C. B.—The defendant only bought that cotton which was
to arrive by a particular ship. It may as well be said,
that if there is a contract for the purchase of certain
goods in warehouse A., that is satisfied by the delivery
of goods of the same description in warehouse B.) In
that case there would be goods in both warehouses; here
it does not appear that the plaintiff had any goods on
board the other 1' Peerless.'' (Martin, B.—It is imposing
on the defendant a contract different from that which he
entered into. Pollock, C. B.—It is like a contract for the
purchase of wine coming from a particular estate in
France or Spain, where there are two estates of that
name.) The defendant has no right to contradict by
parol evidence a written contract good upon the face of it.
He does not impute misrepresentation or fraud, but only
says that he fancied the ship was a different one. Inten-
tion is of no avail, unless stated at the time of the con-
tract.
Mellish (Cohen with him), in support of the plea.—*
There is nothing on the face of the contract to show that
any particular ship called the  Peerless was meant; but
the moment it appears that two ships called the "Peer-
less were about to sail from Bombay there is a latent
ambiguity, and parol evidence may be given for the pur-
pose of showing that the defendant meant one "Peerless
and the plaintiff another. That being so, there was no
consensus ad idem, and therefore no binding contract.
Per Curiam. There must be judgment for the defend-
ants.
Judgment for the defendants.
Question 62: (1) What did the plaintiff sue for in this case ?
What was defendant's defense? How did the court hold?
(Note: The above case is an illustration of the use of a
demurrer in pleading. The demurrer tests the legal sufficiency
of the pleading. Here the plaintiff sued for damages arising
out of defendant's alleged refusal to accept goods ordered by
defendant. The defense was that defendant contracted for.
goods to arrive by Peerless No. 1, but plaintiff tendered goods
FRAUD, MISTAKE, ETC.
127
arriving by Peerless No. 2. Plaintiff demurred to this plea in-
stead of answering or denying it. In other words plaintiff
claimed the plea made no legal defense. This presented the issue
on the pleadings. No evidence was received. The court decided
the plea made a good legal defense.)
Case No. 63. Indiana Fuel Supply Co. v. Indianapolis
Basket Co., 84 Northeastern Reporter (Ind.) 776.
Facts: "* * * This action was brought by appel-
lant before a magistrate to recover the contract price of
coal, the appellee contending as a defense, among other
things, (1) that because of a misunderstanding between
the buyer and the seller as to the grade of coal the con-
tract called for, the buygr having in mind Indiana domes-
tic egg coal, double screened, and the seller having in
mind Indiana steam egg coal, screened but once, that the
minds of the contracting parties never met and that there
was therefore no contract between them; * * *
Rabb, Justice: "Mutual assent is necessary to the
formation of every contract, and any mistake of the par-
ties by which one of the contracting parties has in mind
one thing as the subject matter of the contract, and the
other party has in mind something entirely different, and
where the terms of the contract are such that it will
mean either the one or the other, there is no meeting
of the minds of the contracting parties, and therefore no
contract. If in this case the terms of the contract entered
into by the parties would properly describe domestic egg
coal, and could be understood by either of the parties as
meaning domestic egg coal, and would also describe steam
egg coal, and could be understood by either of the parties
as meaning steam egg coal, and if one of them had in
mind when he contracted for egg coal the higher grade of
coal, and the other had in mind when entering into the
contract the lower grade of coal, and each party believed
that by the terms of the contract he was contracting for
the particular kind of coal he had in mind, then no con-
128
CONTRACTS
tract was entered into between the parties. 24 A. & E.
Ency. of Law, P. 1034, and cases cited.''
Question 63: What was the suit about and the defense? Was
it a good defense ?
Case 64. Butler v. Moses, 43 Ohio Stat. 166, 1 N. E.
316.
Facts: Butler had bolting cloth for sale. Bolting cloth
is a silk fabric 40 inches wide and of foreign manufacture
and is worth from $2.00 to $6.00 a yard, according to
fineness. Moses wrote Butler for prices and Butler re-
plied: "Yours of yest'y to hand this morning and in
answer I would say that I have the bolting cloth, and
will send it to you and you can Vise what you want and
account to me for what you need at 5 cts. a yard that Gale
would charge you. Gale was a man in Cleveland who
sold bolting cloth. Moses ordered some of the cloth. He
used 201/2 yards and sent Butler $1.03 to pay for same,
claiming that Butler had offered it for 5c a yard, and
refused to pay more. Butler sues.
Point Involved: That a mistake was made by one
party in the terms used cannot be taken advantage of by
another party who knows of the mistake. That a person
cannot take advantage of a clerical error where he knows
it to be such.
Follett, J. "* * * What did Butler offer when
he wrote, 'If you desire, will send them to you, and you
can use what you want, and account to me for what you
need at 5 cts a yard that Gale would charge you? Gale
was known by the parties to be a dealer in bolting-cloth,
and what he would charge was easily ascertained. What
Gale would charge was referred to as a standard of price.
There is no other reason why Gale's name was men-
tioned, or why what he would charge was referred to.
And on examination of all the card contains, it is clear
that Butler did not make an unqualified offer to sell the
cloth at five cents per yard, as neither five cents nor ten
FRAUD, MISTAKE, ETC.
129
cents per yard conld be what Gale would charge; but his
offer was to charge either the same as Gale would charge,
or more than Gale would charge, or less than Gale would
charge.
"In the circumstances the latter meaning was so mani-
fest that Prior, on reading the card, saw its true intent,
and told Moses that Butler's offer was to sell the cloth for
five cents a yard less than Gale would charge him, and
that it was not to sell at five cents a yard. And Moses, by
thus sending for the cloth and using it, is bound by the
true offer thus explained and known to him. But if
Moses' claim be true, that he did not accept of the offer to
sell for five cents a yard less than Gale would charge him,
the minds of Butler and Moses never 'assented to the
same thing in the same sense,' and no contract was made
by them for the sale of this cloth. And in this view, as
Moses has taken Butler's cloth, and put it to Moses' use,
Moses is liable to Butler for the value of the cloth so
used. In this view, Moses would not be entitled to the
discount of five cents per yard which Butler gave him.
In either view of this case, Moses is liable to Butler for all
that was claimed in the petition in the court of common
pleas, and the charge of the court was not to the prejudice
of Moses.
Question 64: (1) What was the mistake in Case 64? "Was
it a mistake that the other party could take advantage of ? Why ?
(2) A offered B lumber at $20 a thousand feet in five car-load
lots. He meant to say $25 a thousand feet. B accepts. Is A
bound? (Western Union Tel. Co. v. Flint River Lumber Co.,
114 Ga. 576.)
Case 65. Wood v. Boynton, 64 Wis. 265.
Facts: Wood found a small uncut diamond worth $700
to $1,000. Thinking it was a topaz she sold it for $1.00
to Boynton, who also thought it was a topaz and was ig-
norant of its true character. When Wood discovered that
the stone was in fact a diamond she tendered back the
130
CONTRACTS
$1.00 with interest and demanded possession. Boynton
refused and Wood brought suit.
Question: If there is a mutual mistake as to the quad-
ity and value of the subject matter of an agreement, does
such mistake affect the validity of the contract ?
Taylor, J.:  * # * There is no pretense as to mis-
take in the identity of the thing sold. It was * * *
exhibited to the vendee before the sale was made, and
the thing sold was delivered to the vendee when the pur-
chase price was paid. * * * When this sale was
made the value of the thing sold was open to the investi-
gation of both parties; neither knew its extrinsic value,
and, so far as the evidence in this, case shows, both sup-
posed that the price paid was adequate. * * *
(Judgment for defendant)
Question 65: Was the mistake in this ease as to identity, ex-
istence, or value? Does mistake by both the parties as to the
value of a thing sold effect the contract?
(Note to Case 65: There is room for difference of opinion on
this case. It is clearly true that a mere mistake as to value is of
no effect. But that generally is applied in cases where the
parties have no doubt as to the thing they are selling and buy-
ing, for example, a book, not known to be a rare copy.)
B. Circumstances of Undue Advantage Rendering Con-
tract Voidable.
(a) Fraud in the inducement or consideration.
(b) Duress.
(c) Undu^ influence.
(d) Disaffirmance and ratification of contracts voidable for foregoing
reasons.
(a) Fraud in the Inducement or Consideration.
§ 68. Fraud in the inducement defined.
§ 69. Express statements of fact as fraud.
§ 70. Opinions and predictions not fraud.
§ 71. Active concealment as fraud.
FRAUD, MISTAKE, ETC.
131
§72. Silence as fraud.
§ 73. Same. Tacts not discoverable.
§ 74. Same. Contracts uberrimae fidei.
§75. Same. Relationships of trust and confidence.
§76. Summary of what constitutes fraud.
Sec. 68. (Contract, § 36.) Fraud in the Inducement or
Consideration Defined.
Case 66. Nat. Cash Reg. Co. v. Townsend, 137 N.
C. 652.***
Facts: Plaintiff Townsend bought a cash register on
the statement that its use would save the expense of a
bookkeeper and a half of a clerk's time. He now alleges
that these assertions are false and seeks to rescind the
sale on the ground of fraud.
Point Involved: Is a statement of an opinion or a com-
mendation a fraudulent representation? Generally, what
constitutes fraud?
Browx, J.: "* * * The material elements of fraud,
as laid down by the text writers, are, first, misrepresenta-
tion or concealment; second, an intention to deceive, or
negligence in uttering falsehoods with intent to influence
the actions of others; and third, the success of the deceit
in influencing the action of the other party. To constitute
legal fraud, which will warrant the rescission of a contract,
there must be a false representation of a material fact.
There are cases in the books where courts of equity have
afforded relief from the consequences of innocent mis-
representation. Contracts induced thereby have in some
instances, and under peculiar circumstances, been set
aside; but in all the cases the misrepresentation was of a
material and subsisting fact. No particular rule can be
laid down as to what false representation will constitute
fraud, as this must necessarily depend upon the facts of
each case, the relative situation of the parties, and their
means of information. But all the authorities are to the
effect that where the false representation is an expression
of commendation, or is simply a matter of opinion, the
132
CONTRACTS
courts will not interfere to correct errors of judgment.
Walsh v. Hall, 66 N. C. 236. The law will not give relief
unless the misrepresentation be of a subsisting fact. Hill
v. Gettys, 135 N. C. 375, 47 S. B. 449. What has been
called 'promissory representation,' looking to the future,
as to what the vendee can do with the property, how much
he can make on it, and, in this case, how much he can
save by the use of it, are on a par with false affirmations
and opinions as to the value of property, and dajuot gen-
erally constitute legal fraud. Benjamin, Sales, 7th ed.
483 et seq., Gordon v. Parmelee, 2 Allen, 212; Long v.
Woodman, 58 Me. 52, and cases cited. Mr. Clark, in his
work on Contracts, states, in substance, that commenda-
tory expressions or exaggerated statements as to value
or prospects, or the like, as where a seller puffis up the
value and quality of his goods, or holds out flattering
prospects of gain, are not regarded as fraudulent in law.
Pp. 332-334. It is the duty of the purchaser to investigate
the value of such expressions of commendation. He can-
not safely rely upon them. If he does he cannot treat it
as fraud, either for the purpose of maintaining a deceit,
or for the purpose of rescinding a contract at law or in
equity. Saunders v. Hatterman, 24 N. C. (2 Ired. L.) 32;
37 Am. Dec. 404; 14 Am. & Eng. Enc. Law, p. 34, and
cases cited. Mr. Kerr, in his work on Fraud and Mistake,
at page 83, says: 'A misrepresentation to be material
should be in respect of an ascertainable fact, as distin-
guished from a mere matter of opinion. A representa-
tion which merely amounts to a statement of opinion
* * * goes for nothing, though it may not be true, for
a man is not justified in placing reliance on it.' Again:
'man who relies on such affirmations made by a person
whose interest might so readily prompt him to invest the
property with exaggerated value does so at his peril, and
must take the consequences of his own imprudence.'
# * # > >
"It is possible that, if the defendant and his clerks
persevere in their efforts to master this machine, he may
agree with his brother that 'the cash register is a good
FRAUD, MISTAKE, ETC.
133
thing.' But if it turns out that he has sustained loss,
not from any mechanical defect in the machine, he must
attribute it to his own negligence and indiscretion. He
did not exercise that diligence in making inquiry which
the law expects of a reasonable and careful person. Vigi-
lantibus et non dormientibus jura subveniunt.
Question 66: What are the material elements in fraud?
What was the representation in this case ? Why does it not con-
stitute fraud?
Sec. 69. (Contracts § 37.) Express Statements of Fact
as Fraud.
Case 67. Haener v. McKenzie, 188 Mich. 27, 154 N. W.
59.
Facts: Plaintiff sues for damages caused by the pur-
chase by him from defendant of a farm in Alabama. He
alleges that defendant called upon him in Detroit and
represented he had some very fine land to sell in Ala-
bama, that it was choice stump land, of very fine black
loam with clay sub-soil, high and dry, free and clear of
underbrush, and had no mire or boggy portions and was
very fertile and would produce 200 bushels of sweet pota-
toes to the acre. That in fact said land was marshy, low and
miry and covered with underbrush teeming with poison-
ous snakes, and that the representation as to sweet pota-
toes was absolutely false, and the land was utterly unfit
for agricultural purposes. Plaintiff bought the land un-
der contract and paid down $400 which is a part of the
damages he now claims.
Point Involved: What statements are statements of
fact as distinguished from opinions or seller 's talk?
Stone, J. "* * * We cannot agree with appellant's
counsel that all of the representations testified to were
* seller's talk, pure and simple.' Recognizing the rule
that a seller has a right to praise his property and to
give his opinion concerning it, we think that the rule
cannot be extended to embrace false representations of
134
CONTRACTS
alleged facts in a case, which may be and were relied upon
by the purchaser, and became an inducing cause of the
transaction. Manifestly, the representation claimed that
the land was high and dry, and good agricultural land,
without mire, swamp, or boggy portions, was a material
representation of a fact within our numerous decisions.
See collection of our decisions in the above-cited case on
page 595 of 167 Mich., 133 N. W. 623; Hall v. Duplex-
Power Car Co., 168 Mich. 634-641, 135 N. W. 118; Allen
v. Talbot, 170 Mich. 664-668, 137 N. W. 97; Pratt v.
Allegan Cir. Judge, 177 Mich. 558, 562, 143 N. W. 890;
Merlau v. Kalamazoo Cir. Judge, 180 Mich. 393,147 N. W.
503.
Question 67: What statements were made in the above case?
Were they statements of fact or opinion? Was the contract
voidable or binding?
Case 68. Biewer v. Mueller, 254 111. 315.
Facts: Biewer owned certain lots in Chicago, which
he conveyed to Mueller for certain hotel property situ-
ated in Logansport, Indiana. A suit brought by a third
party was pending at the time, which sought to establish
a lien on the Logansport property. As security against
the possible successful outcome of this suit, Mueller gave
Biewer two deeds to Minnesota property, which Biewer
had never seen, and which Mueller represented to be
worth $16,000, subject to a $4,000 mortgage. As a matter
of fact, this land was not worth $4,000, the amount of the
incumbrance upon it.
Point Involved: Can value ever be stated as a fact
rather than an opinion f Under what circumstances ?
Mr. Justice Dunn: * *
' 'It is argued for the appellants that the value of the
property was equally open to the investigation of both
parties and was a matter of opinion, against the false
statement of which equity will not relieve. It is true
that Biewer might have gone to Minnesota and seen the
FRAUD, MISTAKE, ETC.
135
land, but it is not true that the parties had, at the time
the trade was made, equal means of knowledge. Mueller
owned the land, had seen it and would be presumed to
know something of its value, while Biewer had never seen
the land, which was in a distant state. One cannot, by
taking advantage of such a situation, induce another to
accept his false statement of a fact and escape the conse-
quences of his fraud by saying the other had no right to
believe him. The property about the misrepresentation
of the value of which complaint is made was not the
property directly involved in the trade. It was collateral
to the principal transaction, part of whose terms it was
designed to secure, and the representation was not made
to induce the appellee to purchase the property, but to
accept it as security. The general rule is that statements
as to the value of a business or of property, made to in-
duce one to buy or to invest money, are treated as expres-
sions of opinion, only, and if so intended and understood
do not constitute fraud, in the absence of any concealment
or misrepresentation of material, extrinsic facts. 'The
reason of the rule is that such statements are expressions
of opinion; but where they are made with the intention
that they shall be understood as statements of fact, and
not as the expressions of opinion, they will constitute
fraud.' (Leonard v. Springer, 197 111. 532; Murray v.
Tolman, 162 id. 417; Allen v. Hart, 72 id. 104.) The
false statement of value was here made by Mueller, hav-
ing superior means of knowledge, and was relied upon as
a matter of fact and not opinion. It constituted fraud,
which violated the agreement entered into partly in reli-
ance upon it.''
Question 68: Is the statement as to value a statement of
opinion or fact, generally speaking? May it ever be a state-
ment of fact? When? Was it so in this case?
§ 70. (Contracts, Sec. 38.) Opinions and predictions
not fraud.
Case 69. Brady v. Cole, 164 111. 116.
Me. Justice Phillips: "* * * It is not sufficient
that Cole made statements that she was making a good
136
CONTRACTS
trade and bettering her condition and that she could sell
enough lots off the tract of land purchased by her to pay
for the house. Those statements were mere matters of
opinion and the mere expression of an opinion held by
a party cannot, standing alone, be held a misrepresenta-
tion. * * * The reason of this rule is that while the
person to whom the representations were made has a
right to rely upon them, he is assumed to be equally able,
from his own opinion, to come to as correct a decision as
the other party, and therefore cannot claim to be misled
by such opinion. Promises for the future and hope of
realizing speculative profits are not present fraud.
# * * > >
Question 69: (1) What were the facts in this case and what
did the court decide ? Is this statement of value, a statement of
opinion or fact ?
(2) A sold B a bond upon A's assertion that it was "A No.
1 Bond,'' and the property covered '' was good security.'' The
bonds were not worth what B paid A for them. He sues for
damages. Has he a case? (Deming v. Darling, 148 Mass. 504.)
(See also National Cash Reg. Co. v. Townsend, supra).
§ 71. (Contracts Sec. 39.) Active Concealment as Fraud.
Case 70. Weikel v. Sterns, 142 Ky. 513, 134 S. W. 908,
34 L. R. A. N. S. 1035.
Facts: See the opinion.
Point Involved: Whether active concealment of mate-
rial facts (not mere silence), to keep them from being
discovered, is fraud.
Hobsox, C. J.: "Practically the only question made
on the appeal is that the court should have peremptorily
instructed the jury to find for the defendant under the
evidence. The facts shown are these: Weikel owned a
lot at the corner of Park and Frankfort avenues, in the
city of Louisville. On the front of the lot he built a
drug store, with a residence flat overhead. On the rear
FRAUD, MISTAKE, ETC.
137
of the lot he had a stable. The sewage from the drug
store and the flat overhead was run into a pit which he
had dug at the back of the lot, under the stable. After
some years he tore the stable away, and erected where it
stood a dwelling house; and this was the property which
he sold Sterns, about the time the house was finished, and
before it had been occupied. The pit referred to, when he
tore the stable away, was full. He had it cleaned out
about a foot below the level of the cellar which he dug,
leaving about 8 feet of the pit full of sewage, in the middle
of the cellar, and this he covered over with clay; the pipe
from the drug store building still emptying into the pit.
In this condition of things, he sold the property to Sterns,
telling him nothing of the pit or the pipe running into it.
The tenant which Sterns put in the property vacated it in
two weeks on account of the odor, and he was unable to
get any other tenant to move into the house. Finally,
after some months he discovered the existence of the pit,
had it cleaned out, had the pipe disconnected, and had the
pit filled with clay. After this he had no trouble, and this
action was brought for the damages he had sustained in
the meantime.
"It is insisted for Weikel that an action for deceit does
•not lie unless the fraud was knowingly practised, or there
was an intentional suppression of facts, where the de-
fendant was in duty bound to disclose them. Kerr on
Frauds, 382-384; Shive v. Merritt, 31 Ky. L. Rep. 978,
104 S. W. 368. But a man must be presumed to intend the
necessary consequences of his own voluntary act. The
voluntary doing of an act which necessarily results in
injury to another, where the party knows the facts and
had reason to know that the injury will result, will sustain
an action for fraud. 20 Cyc. Law & Proc. p. 2738. It is
not necessary that a misrepresentation in words he made.
The house which Weikel had built was for a residence.
He knew, when he sold it to Sterns, that Sterns was
buying it to rent to another as a residence. He knew the
pit full of sewage was in the cellar, and a reasonable man,
situated as he was, must have known that such a pit, with
138
CONTRACTS
pipe running into it carrying in water and more sewage
every day in a cellar under a house, would render that
house unfit for a residence. To sell such a house without
disclosing the situation, when the purchaser would have
no means of knowing the facts, from the pit being covered
up as it was, was to practise a fraud upon him.
f<It is insisted that Weikel acted in good faith and with-
out knowledge of the real condition of things; but the
proof shows that he knew enough facts to put a reason-
able man on notice, and when he sold an innocent pur-
chaser the house, causing him a loss by reason of the con-
cealment of the facts, the loss should fall on him, and not
on the purchaser. We rest our judgment on the ground
that the facts which he knew were sufficient to apprise a
man of ordinary prudence of the truth, and to impose
upon him the duty to inform the purchaser of the situa-
tion which he had concealed from him. Jordan v. Pickett,
78 Ala. 331; Cardwell v. McClelland, 3 Sneed, 150; Minor
v. Sharon, 112 Mass. 477, 17 Am. Rep. 122.
'1 Judgment affirmed.
(Note: The above case might also be supported on the ground
that the facts known to one (even though they hadn't been con-
cealed by him) were not discoverable by the other.)
Question 70: Griffith having a stock of old dry goods and
wishing to sell same to Strand for much more than it was worth,
put layers of new goods in the various boxes over the old goods,
and by various wilful devices succeeded in keeping Strand from
examining the goods. Strand bought the goods at about 10 times
their worth. Has he a case? (Strand v. Griffith, 97 Fed. 854.)
§ 72. (Contracts, Sec. 40.) Silence as fraud.
Case 71. Guaranty Co. v. Liebold, 207 Pa. 399.
Facts: The Guaranty & Trust Co. sued Liebold on a
contract to purchase real estate from him. The land
went up in value about 50% after the Trust Company
secured an option on Liebold's land, because of the de-
FRAUD, MISTAKE, ETC.
139
cision of the Standard Steel Car Co. to locate its plants
in that neighborhood.
"One of the requests of the defendant was that the
court find 'that at the time the option was secured a
company known as the Standard Steel Car Company con-
templated coming to Butler to establish a large manufac-
turing plant; that Mr. Reiber (president of plaintiff com-
pany) had knowledge of this matter, and while defendant
had heard of the coming of some contemplated company,
his knowledge was indistinct and indefinite, and the cer-
tainty of its coming was known to the plaintiff who with-
held this knowledge from defendant. The answer was:
Refused. The rumor that some company proposed estab-
lishing a manufacturing plant in or near Butler was
known to both Mr. Reiber and the defendant, Mr. Liebold,
at the time the option was taken, to wit, March 25, 1902,
but the certainty of its coming was neither known to the
plaintiff nor the defendant.' ''
Point Involved: Whether mere silence by one party to
a contract of material facts known to him and discover-
able upon investigation by the other is fraud.
Me. Justice Brown : "* * * Suppose Reiber had
known definitely that the plant was to be established in
Butler, and Liebold had been ignorant of this, was it the
duty of the former to disclose such information to the
latter, and can it be that without such disclosure, his con-
tract with Liebold is not enforceable in equity? In this
commercial age options are daily procured by those in
possession of information from which they expect to
profit, simply because those from whom the options are
sought are ignorant of it. When the prospective seller
knows as much as the prospective buyer, options can
rarely, if ever, be procured, and the rule that counsel for
appellant would have us apply would practically abolish
them. The prospective buyer seeks an option instead of
at once entering into a contract for the purchase of land,
because, no matter what information he may possess ex-
clusively, he is unwilling to act upon it until it becomes a
140
CONTRACTS
certainty. In the meantime, on the contingency of its
becoming so, he makes his contingent bargain to pur-
chase. This is fair in law and in morals: Hershey v.
Keembortz, 6 Pa. 128; Harris v. Tyson, 24 Pa. 347. If
the appellee concealed anything it was' his duty to dis-
close, or said anything to mislead or deceive the appellant,
this rule, of course, would not apply; but they dealt at
arm's length, as men always do under such circumstances,
each trying to make what was supposed to be the best
bargain for himself at the time. This was the right of
each of the parties, and on this point the appellant can-
not be heard to complain, * * * 
Question 71: Is mere silence by one bargainor about facts
that the other doesn't know about fraud ? Why ?
§ 73. (Contracts, Sec. 41.) Silence As Fraud—Facts
Not Discoverable.
Case 72. Grigsby v. Stapleton, 94 Mo. 423.
Facts: Suit for the contract price of 100 head of cattle.
Defense, that the seller knew and did not disclose to the
buyer, who did not know, that the cattle had  Texas
Fever, a latent disease not readily discoverable on in-
spection.
Point Involved: If a seller knows of a defect in the
thing sold, and the defect is of a character not ascertain-
able by the buyer on reasonable inspection, is the seller's
mere silence with respect to such defect a fraud on the
buyer?
Black, J.: "* * * Caveat emptor is the general
rule of the common law. If defects in the property sold
are patent and might be discovered by the exercise of
ordinary attention, and the buyer has an opportunity to
inspect the property, the law does not require the vendor
to point out defects. But there are cases where it be-
comes the duty of the seller to point out and disclose
latent defects. * * * When an article is sold for a
particular purpose the suppression of a fact by the ven-
dor, which fact makes the article unfit for the purpose
FRAUD, MISTAKE, ETC.
141
for which it was sold, is a deceit; and, as a general rule a
material latent defect must be disclosed when the article
is offered for sale, or the sale will be avoided. 1 Whart.
on Cont., sec. 248. The sale of animals which the seller
knows, but the purchaser does not, have a contagious
disease, should be regarded as a fraud when the fact of
the disease is not disclosed, Cooley on Torts, 481. Kerr
says: 'Defects, however, which are latent, or circum-
stances materially affecting, the subject matter of a sale,
of which the purchaser has no means, or at least has no
equal means of knowledge, must, if known to the seller, be
disclosed.' Kerr on Fraud and Mis. (Bump's ed.) 101.
"There is no claim in this case that the defendant
knew these cattle were diseased. It seems to be con-
ceded on all hands that Texas fever is a disease not easily
detected, except by those having had experience with it.
The cattle were sold to defendant at a sound price. If,
therefore, plaintiff knew they had the Texas fever, or
any other disease materially affecting their value upon
the market, and did not disclose the same to the defend-
ant, he was guilty of a fraudulent .concealment of a latent
defect. It is not necessary to this defense that there
should be any warranty or representations as to the
health or condition of the cattle. Indeed, so far as the
case is concerned, if the cattle had been pronounced by
some of the cattlemen to have the Texas fever, and after
knowledge of that report came to plaintiff, some of them
to his knowledge died from sickness, then he should have
disclosed these facts to the defendant. They are circum-
stances materially affecting the value of the cattle for the
purposes for which they were bought, or for any other
purpose, and of which defendant, on all the evidence, had
no equal means of knowledge.
"To withhold these circumstances was a deceit in the
absence of proof that defendant possessed such informa-
tion.
Question 72: "What was the fact that was not disclosed by
the contracting party in Case 72? Was the failure to disclose
fraud ? Why ?
142
CONTRACTS
Case 73. The Clandeboye, 70 Fed. 631.
Facts: The facts are stated in the opinion.
Question: Whether if one of the contracting parties,
having from his superior position, knowledge of facts
that are practically inaccessible to the other, and which
materially affect the contract, merely remains silent as
to such facts (making no misstatements and doing noth-
ing otherwise to conceal such facts, or otherwise mislead-
ing) he is by his mere suppression of the truth guilty
of fraud.
Seymour, District Judge: "The material facts of the
case are as follows: The Clandeboye, a large and valu-
able British steamer, had become disabled by breakage
of machinery, and had arrived off the Little Bahama
Islands. Her mate had been sent by a ship's boat for
assistance, and had on the 15th of May, 1894, arrived at
Savannah. In pursuance of telegraphic instructions
cabled to him by the owners, he had engaged the services
of the Morse of New York, then, however, lying at the
port of Philadelphia, which had agreed to proceed forth-
with to the Little Bahamas and tow the Clandeboye to
Vera Cruz, her port of destination, for the sum of $5,000.
Leo Lomm, the libellant, part owner and master of the
tug Dauntless, lying at the time at its home port of
Brunswick, Gfa., having learned from the Savannah pa-
pers of the arrival at that port of the mate of the
Clandeboye, and of the condition and location of that
vessel, on the 17th of May telegraphed, through his
agents, to Savannah, and received a reply stating that
the tug Morse of New York had been chartered to go to
the assistance of the Clandeboye. The distance from
New York—and that from Philadelphia is about the same
—to Stranger's Cay, where the Clandeboye was lying,
is more than 1,000 miles. From Brunswick the distance
is about one-third as great. Captain Lomm's boat was
lying idle. He concluded that he could beat the Morse
in a race to the Clandeboye, and that, the master of the
latter not knowing of the employment of the Morse, he
FRAUD, MISTAKE, ETC.
143
could obtain a profitable job of salvage. The telegram
announcing the employment of the Morse by the Clande-
boye's owners reached Brunswick at a little after 3
P. M. of the 17th. Shortly after dark of the same day
the Dauntless started for- the Bahamas. She arrived
at Stranger's Cay before noon of the 19th. Her mas-
ter had the interview, and made with the master of
the Clandeboye the contract, which is a matter in liti-
gation, immediately thereafter, and in a couple of hours
the vessels left for Newport News, one in tow of the
other. Between three and four days afterward the Morse
reached the spot where the Clandeboye had been lying
at anchor, to find that she had gone. The conversation
between the masters of the steamer and of the tug at
Stranger's Cay contains the contract entered into be-
tween them and the words that led up to it. * * *
The material facts in the testimony are that Captain
Lomm told Captain Strickland of the arrival of his mate
in Savannah, but did not tell him of the employment of
the Morse for his relief.
"The result of the enterprise of Captain Lomm will be
disastrous to the owners of the Clandeboye if the decree
of the District Court is allowed to stand. Captain Lomm
declined to take the Clandeboye to Vera Cruz, the port
to which her cargo was consigned, and did tow her to
Newport News, where she was repaired. Fifteen hundred
tons of her cargo had to be unloaded and then reloaded
before she proceeded to Vera Cruz. Her owners were
compelled to pay to the owners of the Morse the sum of
$1,900 for the services of that tug, and salvage compen-
sation amounting to $10,000—double what the Morse had
agreed to charge for towing the Clandeboye to Vera
Cruz—has been awarded to the Dauntless. But the mas-
ter of the steamship, in charge of his vessel, and not in
communication with his owners, was fully empowered to
contract with the owners of the Dauntless. The contract
made was binding, unless invalidated by the conduct of
Captain Lomm in concealing the fact that the owners of
the Clandeboye had engaged the services of the Morse.
# * *
144
CONTRACTS
"The arrangement entered into between the two mas-
ters constituted a contract, and is subject to the principle?
which regulate the validity of contracts. If valid, the
courts of admiralty are bound to enforce it; if not, to set
it aside, in accordance with the general rules affecting all
contracts. The law of contracts requires of the parties
to them mutual good faith. Is there any principle of mer-
cantile law by which that obligation of good faith which
required Captain Lomm to inform Captain Strickland
of the hiring of the Morse is relaxed, and is not of so
stringent a force as to make the omission fraudulent!
* * * The general rule, both of law and equity, in
respect to concealments, is that mere silence with regard
to a material fact which there is no obligation to divulge
will not avoid a contract. Thus if A, knowing that there
is a mine in the land of B, of which B is ignorant, should
contract to purchase the land without divulging the fact,
it would be a valid contract, although the land were sold
at a price which it would be worth without the mine,
because A is under no legal obligation, by the nature of
the contract, to give any information thereof. Fox v.
Macreth, 2 Brown, Ch. 400, 1 White & T. Lead. Cas. eq.
*172. 'Without some such general rule the facilities of
sale would be greatly impeded, and there would be no
security to the vendor' or to the vendee. Story, Cont.
P. 517.
"It will be noticed that the general rule of law is a
requirement of good faith in mutual dealings, and that
the doctrine of caveat emptor is an exception to such
requirement, founded upon special reasons, viz., the ne-
cessities of commerce, and the impossibility of so limit-
ing any other doctrine as to do justice. As Chief Justice
Marshall says, 'it would be difficult to circumscribe the
contrary doctrine within proper limits.' The necessities
of commerce require that enterprise should be encour-
aged by allowing diligence at least its due reward, and
not interfering with any proper and reasonably fair com-
petition for intelligence. Any other course would set
the active and the slothful upon an equality. 'Vigilant-
ibus non dormientibus jura subveniunt.'
FRAUD, MISTAKE, ETC.
145
"Even more weighty is the second reason given in
support of the doctrine. The law works with blunt tools.
Fallible memories, prejudiced statements, intentional
falsehood, the bias .of self-interest, ignorance, and stupid-
ity, are all concomitants of much of the testimony from
which she has to make up her judgments. General rules,
applicable to the majority of cases, but sometimes hav-
ing an oppressive bearing upon particular ones, make
up the principles upon which, of necessity, she founds
her decisions, for the law must be workable. It must be
comprehensible to men who live under its rule, and must
not be so complex as to overburden the memory with
minutiae. Further, were it open, in all cases of contracts,
for a dissatisfied party to cry off, by saying that the other
party had known better than he the value of the subject-
matter, or the market price, or some other extrinsic cir-
cumstance, there would be no finality in human dealings,
and the only limitation to the litigation that would ensue
would be that imposed by the diminution of business
caused by such want of finality and certainty.
"But caveat emptor * * * is not applied (1) to
cases of active fraud, one variety of which consists in
misrepresentation of facts, including what is often equiv-
alent, partial statements; it is not applied (2) to cases
in which trust is implied by reason either of the relations
to one another of the parties, or the nature of the con-
tract; nor (3) to cases in which, in the absence of laches
in the party injured, the persons dealing with one an-
other do not deal upon mutually equal terms, by reason
of there being special knowledge in the possession of
one party which is inaccessible to the other.
(1.) The case of actual or implied misrepresentation
needs no illustration.
(2.) That of trust includes all the known fiduciary
relations,—such as those of attorney and client, guard-
ian and ward, agent and principal, and generally of all
who stand in the relation of trustee and cestui que trust.
It also includes dealings with regard to all matters which
frprn their nature demand mutual confidence. * * *
146
CONTRACTS
(3.) The case of information possessed by one party
and absolutely unobtainable by the other, though of rarer
occurrence, is one in which the enforcement of the rule
of good faith is fully as imperative as it is in the two
classes of cases first mentioned. It is perhaps not prop-
erly an exception to the, doctrine of caveat emptor, but
rather a case outside of its terms. The purchaser can-
not look out for what he cannot have knowledge of.
"The case at bar is the first of the kind that has come
before a court of admiralty, but it is as striking a one
as could be imagined or invented. It is one in which
one party to the bargain has knowledge of a fact which,
if known to the other, would have prevented the making
of the contract. The ignorance of the fact on the part
of the second party is one which cannot be made a sub-
ject of controversy, and this ignorance was known to the
party suing upon the contract. To give him the benefit
of it, to the injury of the claimants, would be, in our
opinion, a startling violation of the fundamental prin-
ciple of all law, that equity is equality. We think that
the agreement between the masters of the two vessels,
made in the case at bar, is infected with all three of
the vices stated, and is, therefore, not within the doctrine
of caveat emptor. It must, therefore, be declared void
under the principle that requires good faith in mutual
dealings.
"(1.) Without placing as much stress upon the point
as upon the other two, we yet think it may be fairly held
that in telling a part, but not the whole, of the truth to
Captain Strickland, Captain Lomm was guilty of that
suppressio veri which the law calls fraud. * * *
 (2.) The relation of salvor and saved, while not one
of the fiduciary relations generally referred to in the law
books, and accurately defined, as well as classified, is
yet a fiduciary one. * * *
"(3.) Were the other reasons of declaring the con-
tract void absent, we should unhesitatingly do so on the
third ground, viz., because the parties were not dealing
FRAUD, MISTAKE, ETC.
147
on terms of equality. There was on the part of Captain
Lomm an intentional suppression of a material fact, in
relation to which he was informed, while Captain Strick-
land had not access to any means of obtaining informa-
tion of it. Looking at the position of the two parties to
the bargain from another point of view, there appears
to have been a striking inequality between them. The
master of the Clandeboye had, when the Dauntless ar-
rived at Stranger's Cay, been for nearly four weeks in a
disabled vessel. He had lain helpless at his anchorage
for eleven days. His only assistant, who was a navigator
(the mate of the vessel), was absent, and he was alone in
authority over the Clandeboye. He was suffering from
the pressure of anxiety, responsibility and delay. The
master of the Dauntless, aware of all the circumstances,
intent solely upon gain, fresh from home, with a mind
disengaged and at ease, had an unfair advantage over
him. In the short period- during which he considered
and agreed to accept the services proffered to him, Cap-
tain Strickland can hardly be supposed to have had the
time or grasp of the facts that would have enabled him
to have drawn all the inferences from the fact of his
mate's opportunities in Savannah that have been imag-
ined by counsel. During that hurried interview between
the masters of the two vessels, it doubtless confusedly
occurred to the master of the Clandeboye that his mate
was trying to do something for him, and that tugs would
be at hand in a short time, prepared to tow him some-
where. Probably he thought of the nearest ports. His
conversation shows that thoughts of this kind were in
his mind. He was anxious to get away, and with the
words 'first come, first served,' he made terms with Cap-
tain Lomm, whose tug had arrived first. But it would
be unjust to suppose that he expected or had in his mind
any thought of the possible existence of what was actually
the fact, viz., a contract under which a powerful tug had
been employed by his owners to tow him to the place to
which he desired to be taken (Vera Cruz), and was al-
ready on the way to Stranger's Cay, near the Little Ba-
148
CONTRACTS
hamas, where he was lying. We see no reason to doubt
his statement that, if he had known of the employment
of the Morse, he would not have employed the Dauntless.
The parties were not dealing on equal terms, and their
contract cannot be enforced. * * . * 
Question 73: In Case 73 what was the material fact which the
Captain of the Clandeboye was ignorant of the knowledge of
which would be material to his decision? Why was failure to
disclose that fact fraud in this case ?
(Note: To make failure to disclose a fact fraud it is not
necessary that the fact be 'absolutely inaccessible' to the other.
It is enough if it be practically inaccessible. See the Texas fever
case.)
§74. (Contracts, Sec. 42.) Silence as fraud—Contract
one uberrimae fidei.
(Note: Contracts of guaranty, suretyship, and insurance are
of a nature which calls for disclosure of material facts. In such
cases there is a risk. The risk is not what the promisee may
succeed in inducing the promisor to believe is the risk. The
promisor undertakes only to cover the risk according as they both
know it to be. Hence, the promisee must disclose. If he knows
of defaults by a party to be bonded; or facts that make a fire risk
or life risk greater to the insurer, he must make these known.)
§ 75. (Contracts, Sec. 43.) Silence as fraud—Relation-
ship of trust and confidence.
Case 74. The Clandeboye, supra.
(Note: See cases in the Subdivision on Corporations for
fiduciary relationship existing between Director and Corpora-
tion, and Director and Stockholder.)
§ 76. (Contracts, Sec. 44.) Summary of what consti-
tutes fraud.
(Note: Fraud rendering contract voidable consists in a false
representation of fact made to be acted on and actually acted on
by the person to whom the representation is made to his damage.
Mere opinions and predictions are not fraud.
Active concealment of material fact is fraud.
FRAUD, MISTAKE, ETC.
149
Mere silence is not fraud; unless facts are not discoverable by
the other by such reasonable diligence as we should expect him
to exercise if he wanted to know; or unless contract in its nature
is one made on the assumption of full disclosure; or unless the
contract is between those who occupy a relationship of trust and
confidence.)
b. Duress.
§77. (Contracts, Sec. 45.) Duress defined—Its effect.
Case 75. Galusha v. Sherman, 81 N. W. (Wis.) 495.
Point Involved: What is meant by the term duress?
What tests have been applied!
Makshall, J.: * * It (duress) is a branch of
the law, that, in the process of development from the
rigorous and harsh rules of the ancient common law, has
been so softened by the more humane principles of the
civil law, and of equity, that the teachings of the older
writers on the subject, standing alone, are not proper
guides. The change from the ancient doctrine has been
much greater in some jurisdictions than in others. There
are many adjudications, based on citations of authorities
not in themselves harmonious, and many statements in
legal opinions based on the ancient theory of duress,
which together create much confusion on the subject, not
only as it is treated by text writers, but by judges in
legal opinions.
 Anciently, duress in law by putting in fear could exist
only where there was such a threat of danger to the
object of it as was deemed sufficient to deprive a constant
or courageous man of his free will, and the circumstances
requisite to that condition were distinctly fixed by law;
* * *
 Early in the development of the law, the legal stand-
ard of resistance that a person was bound to exercise
for his own protection was changed from that of a con-
stant or courageous man to that of a person of ordinary
firmness. * * *
 Duress, in its broad sense, now includes all instances
where a condition of mind of a person caused by fear of
150
CONTRACTS
personal injury or loss of limb, or injury to such per-
son's property, wife, child, or husband, is produced by
the wrongful conduct of another rendering such person
incompetent to contract with the exercise of his free will
power, whether formerly relievable at law on the ground
of duress or in equity on the ground of unlawful com-
pulsion.
"The true doctrine of duress, at the present day, both
in this country, and England, is that a contract obtained
by so oppressing a person by threats regarding his per-
sonal safety or liberty, or that of his property, or of a
member of his family, as to deprive him of the free exer-
cise of his will and prevent the meeting of minds neces-
sary to a valid contract, may be avoided on the ground
of duress, whether the oppression causing the incom-
petence to contract be produced by what was deemed
duress formerly, and relievable at law as such, or wrong-
ful compulsion remediable by an appeal to a court of
equity. The law no longer allows a person to enjoy,
.without disturbance, the fruits of his iniquity, because
his victim was not a person of ordinary courage; and no
longer gauges the acts that shall be held legally sufficient
to produce duress by any arbitrary standard, but holds
him, who, by putting another in fear, shall have produced
in him a state of mental incompetency to contract, and
then takes advantage of such condition, no matter by
what means such fear be caused, liable at the option of
such other to make restitution to him of everything of
value thereby taken from him. * * *
Question 75. (1.) Define duress; (2.) What was the ancient
test, the later test and present day test of duress?
(3.) What effect has duress upon a contract?
Case 76. International Harvester Co. v. Voboril, 187
Fed. 973.
Facts: The Harvester Company sued Anna Voboril
on her promissory notes which were given by her to pay
the debts of her husband. Her defense was that her sig-
nature was obtained through threats by representatives
FKAUD, MISTAKE, ETC.
151
of the Company, that, unless she signed, her husband
would be arrested and imprisoned. It was contended
that even if these threats were made, they would con-
stitute no duress, because the husband had committed
no crime for which he could be arrested. It appeared
that Mrs. Voboril was an ignorant foreigner, the mother
of seven children, and at the time pregnant with an
eighth.
Point Involved: Whether a mere threat to arrest a
near relative who has committed no crime can constitute
duress if as a matter of fact the contracting party was,
owing to the circumstances, peculiarly susceptible to fear
in that regard.
Hook, Circuit Judge: "* * * It is contended,
* * *, that even if the threats were made they could
not in law have caused duress, because defendant's hus-
band had committed no offense, there was no officer pres-
ent to make the arrest, and no warrant had been issued
or proceeding commenced against him. The contention
is untenable. Duress may be caused by threats of a crim-
inal prosecution of a husband, wife, child, or other near
relative of the person whose action is thereby controlled,
though no crime has in fact been committed or prosecu-
tion begun. If the contracting party has been so put in
fear as to be deprived of the free will power essential to
contractual capacity, the transaction thereby induced may
be avoided. A valid contract implies mutual voluntary
assent of the parties; and if one of them overcomes the
mind and will of the other by moral compulsion, and so
obtains his concurrence, though the form and shell of a
contract exist the very essence of it is wanting.
 Susceptibility to coercive influence is not uniform,
and, in determining the question of duress, sex, age, state
of health, family conditions, etc., may be considered with
the other circumstances. In the case at bar the plaintiff
had no claim against the defendant. The debtor was her
husband, who had failed in business. Primarily she was
neither legally nor morally responsible. The repr.esenta-
152
CONTRACTS
tives of the plaintiff sought to obtain her guaranty of his
obligations and to bind her separate estate for their pay-
ment. She was of Bohemian extraction and apparently
ignorant of business affairs. She was the mother of
seven children, the eldest of whom was 14 years of age,
and was pregnant with an eighth. We must assume from
the verdict and evidence that threats were made to have
her husband arrested and jailed unless she signed and
guaranteed the notes, and we cannot say as matter of law
they were insufficient under the circumstances to deprive
her of that freedom of will essential to voluntary action.
All men appreciate how susceptible the mind of a wife
and mother is to such influence, and how she may be
coerced to give up her property when the liberty of hus-
band and father is believed to be at stake. It should be
mentioned in this connection that the court excluded some
of the testimony as to the condition of the defendant
and the state she was put in by the threats, which should
have been admitted. This bore upon the vital feature
of the defense.
Qusstion 76: (1) What was the threat in this ease? Why
was an inquiry into the condition, circumstances and personality
of defendant material?
(2) A student has criticized this case by saying that the
statement that the plaintiff was the mother of seven children, the
eldest of which was 14, and was pregnant1 with an eighth, was
"jury talk, and should be disregarded. Do you agree with
this criticism ? Why ?
Case 77. Spaids v. Barrett, 57 111. 289.
Me. Justice Thornton : "* * *
"Upon the first question authorities differ. All prom-
ises made and contracts entered into, where there is
duress of the person, may be avoided. The reason is,
that the person is induced to do the act by restraint of
his liberty, or menace of bodily harm. But it has been
held that an agreement, made under duress of goods, is
not void, and that the person thus circumstanced must
exert himself and resist the compulsory influence, when
FRAUD, MISTAKE, ETC.
153
his property is in danger. We can not appreciate the
difference. Liberty and life are justly dear to all men,
and so is the exclusive right to possess, dispose of, and
protect from destruction, our property. We can not for-
get the fact that the desire for property is a strong and
predominant characteristic of man, in organized society.
An act done, prompted by this desire to preserve, and
impelled by fear of the destruction of goods, is not volun-
tary. It is an act of compulsion. In Fashay v. Fergu-
son, 5 Hill, 158, Bronson, J. said: 'I entertain no doubt
that a contract procured by threats, or the destruction
of property, may be avoided on the ground of duress.
It wants the voluntary assent of the party to be bound
by it. Why should the wrong-doer derive advantage
from his tortious act?' 
Question 77: Is a promise made under 'duress of property'
voidable? Why?
Case 78. Kronmeyer v. Buck, 258 111. 586.
Facts: Buck was engaged in the sale of building ma-
terial. Kronmeyer was in his employ, and was author-
ized to receive cash. He was accused of embezzling
$10,000 of this money, and threatened with jail unless
the matter was adjusted. Kronmeyer executed a deed
to Buck. There was a $1,500 mortgage on the property.
He was told he would have to clear this up. He there-
upon went to his sister Mrs. Staehle and told her that
he would have to go to jail if she would not sign a $1,500
note for him, whereupon she did so. The note was then
discounted by Buck at the bank. Kronmeyer and his
sister bring this suit to set aside the deed and to obtain
the amount of the note. He denies that he was guilty
of embezzlement, claims he was in a highly nervous state
of mind owing to the recent death of his wife, and made
the settlement in fear of imprisonment, and under the
influence of hard threats. (Other facts appear in the
opinion.)
Point Involved: Is a contract procured under threat
of criminal prosecution binding?
154
CONTRACTS
Mr. Justice Vickers delivered the opinion of the court:
<<* * * no hesitation whatever in holding
that the execution of the note by Mrs. Staehle was pro-
cured by duress. She was an innocent third party.
There can be no pretense that she was indebted to Buck
in any amount. The first intimation that she had of any
trouble was when her brother approached her in a highly
excited manner and told her Buck claimed he had been
stealing from him and that unless he got this note exe-
cuted he would have to go to jail. She signed the note
to keep her brother from going to jail and under the
belief that if she did sign it he would be saved from im-
prisonment and prosecution. It is but natural that she
would cling to her brother and seek to aid him in his
trouble under the pressure of his importunities, which
were not rendered the less forceful and overpowering
by the presence of McNaughton [Buck's attorney]. Mrs.
Staehle testifies that the only reason she executed the
note was to save her brother from the impending prose-
cution. While no promise of immunity was expressly
made, yet it is perfectly clear that both she and Kron-
meyer were influenced by the understanding which was
clearly to be implied, that if the matter was adjusted
satisfactorily Kronmeyer would not have to go to jail
or be prosecuted. Miller v. Miner Lumber Co., 98 Mich.
160; 57 N. E. Rep. 101.
"The execution of the note and deed by Kronmeyer
stands upon a different footing. Duress is not avail-
able as a defense against a note or other instrument
executed by one who is, in fact, guilty of misappropriat-
ing the money of another, although the execution of the
instrument is obtained by threatened prosecution, if the
instrument is executed in payment of a debt honestly due.
In such case the law regards the existence of a debt, and
not the threatened prosecution, as the consideration. The
authorities support the proposition that where a deed
or mortgage is executed to secure an amount of money
actually due as the result of transactions having a crim-
inal aspect, equity will not set aside such conveyances
FRAUD, MISTAKE, ETC.
155
even though their execution was procured by threats
of criminal prosecution. (Briggs v. Withey, 24 Mich.
136; Rood v. Winslow, Walk. Ch. 342; Betts v. Village
of Reading, 93 Mich. 79, 52 N. W. Rep. 940; Beath v.
Chapoton, 115 id. 506, 73 id. 806. In Bodine v. Morgan,
37 N. J. Eq. 426, a father and son were charged with
fraudulently taking and appropriating business orders.
The father settled and gave a mortgage of $5,000. The
court said: 'But further, the threat to arrest him for
the unlawful appropriation of their goods and orders to
his use unless he should indemnify them, constituted, if
it was made, no duress, and if the mortgage had been
given under the pressure of such a threat it would not
have affected its validity.' But in all these cases where
conveyances have been upheld which were executed by
a defaulter or embezzler in settlement of his shortage
there was no question about the existence of the debt to
pay or secure which the conveyance was executed. The
case at bar does not fall within the rule of the foregoing
authorities, for the reason, as we have already sought
to show, the evidence of the existence of the debt is ex-
tremely doubtful, and there is no evidence that tends
to prove the existence of a debt of more than $17. The
evidence in this record shows that McNaughton accused
Kronmeyer of embezzlement. Kronmeyer denied the
charge. McNaughton told him that he did not expect
him to confess his guilt but that he had the proof of his
guilt, and exhibited to him certain memoranda, giving
dates and amounts, by which he said he was able to prove
he had stolen. If Kronmeyer was, in fact, innocent, and,
when confronted with a charge of this kind by a lawyer
whom he had always regarded as a friend, executed the
instruments in question to avoid a prosecution for a
crime which he had not committed, then there was both
fraud and duress and a total failure of consideration.
* * #
"We are not unmindful of the rule of law announced
in the line of cases of which McKinley v. Watkins, 13
111. 140, Honeyman v. Jarvis, uo id. 318, and Pool v.
156
CONTRACTS
Docker, 92 id. 501, are illustrations, to the effect that a
compromise of a doubtful right is a sufficient considera-
tion to support a promise even though it may afterwards
turn out that the right is on the other side, where there
is neither actual nor constructive fraud, and the parties,
acting in good faith for the purpose of settling a matter
in dispute, come to a final agreement. The case at bar
does not fall within that rule. In order to bring the case
within the rule of these and other like cases it is indis-
pensable that the controversy should he honestly inaug-
urated and that perfect fairness and good faith should
characterize the conduct of the party seeking to uphold
the compromise agreement. It requires only a brief refer-
ence to the evidence in this case to show that it cannot
be upheld as a compromise of a matter honestly in dis-
pute between two parties.
Question 78: For what purpose, by whom and against whom
was this suit brought ? State the facts under which the deed was
given and the note signed. Was the note by the sister avoid-
able by her ? Why ? Should the court have set aside the deed
of the alleged defaulter if he had really been in default ? If not
in default ? Why ? Where there is a compromise of a disputed
claim is it binding ? Why was this not such a case ?
c. Undue Influence.
§78. (Contracts, Sec. 46.) Undue influence defined—
Its effect.
Case 79. Mors v. Peterson, 261 111. 532.
Facts: Sarah Mors and others, as heirs and devisees
of Mrs. Elizabeth Spruill, deceased, file their bill against
Clarissa Peterson to set aside a deed executed by Mrs.
Spruill to Clarissa Peterson, August 23, 1911, conveying
to her 190 acres of land estimated to be worth $50 per
acre. The bill alleged that fraud, and undue influence
was practiced on Mrs. Spruill, as well as her mental in-
capacity, as grounds for relief. Mrs. Spruill died April
23, 1912, aged 80 years. Her husband had been dead
20 years and she never had any children. During the
FRAUD, MISTAKE, ETC.
157
last 10 years of her life Mrs. Spruill lived at the home
of the defendant, Clarissa Peterson, who was her niece,
and paid her for keeping her. During the last years of
her life she gradually declined and required constant
attention which was rendered by Miss Peterson who also
toward the last took charge of all of Mrs. Spruill's busi-
ness generally. Just before the death of Mrs. Spruill,
Miss Peterson called up an attorney and had him pre-
pare a deed, which was then signed. Other facts appear
in the opinion.
Point Involved: The nature of undue influence. IJn-
der what circumstances it will be presumed; what evi-
dence required to overcome the presumption when enter-
tained?
Mr. Justice Vickers: "* . * * The evidence as to
the mental condition of Mrs. Spruill during the last few
years of her life is conflicting. It cannot be said that
the weight of the evidence shows that her mental powers
were more impaired than would ordinarily be expected
in one of her age and condition of health. The evidence
on this point shows that she had the physical and mental
weakness that is usually incident to old age. Her mental
condition is proper to be considered as strengthening the
inference of undue influence which the law draws from
an established fiduciary relation. The constant and inti-
mate association of appellant with this feeble and help-
less old lady for the last ten years of her life gives rise
to an irresistible conclusion that there was trust and con-
fidence on the one hand and influence and domination on
the other. While the bill sets out all the circumstances
connected with the execution of the deed and alleges un-
due influence and mental incapacity and prays for a can-
cellation of the deed, it is not, strictly speaking, a bill,
as appellant's counsel appear to treat it, for the rescis-
sion of a contract on the ground of mental incapacity of
the party to enter into it. The bill alleges a state of
facts which are fully established by the proof, which
show that a fiduciary relation existed between these par-
158
CONTRACTS
ties; that while such relation existed the deed in question
was executed without any adequate consideration; that
by said deed appellant acquired title to real estate worth
between $9,000 and $10,000, and the bill calls on the ap-
pellant to rebut the presumption which the law draws
from the fiduciary relation established, and show, by clear
and convincing proof, that she acted with good faith and
did not betray the confidence reposed in her. The decree
below canceling this deed is merely an adjudication that
appellant has wholly failed to remove the suspicions
which necessarily grow out of the nature of the transac-
tion and the relation of the parties.
 Courts of equity have refused to set any bounds to
the circumstances out of which a fiduciary relation may
spring. It not only includes all legal relations, such as
guardian and ward, attorney and client, principal and
agent, and the like, but it extends to every possible case
in which a fiduciary relation exists in fact, and in which
there is confidence reposed on one side and resulting
domination and influence on the other. (Beach v. Wil-
ton, 244 111. 413.) It is not necessary that the relation
and duties involved be legal. They may be either moral,
social, domestic, or merely personal. (Roby v. Colehour,
135 111. 300; Walker v. Shepard, 210 id. 100.) When a
confidential or fiduciary relation is established between
parties, courts of equity scrutinize very closely any trans-
action or contract between the parties by which the dom-
inant party secures any profit or advantage at the ex-
pense of the person under his influence. All transactions
between parties in this relation are presumptively fraud-
ulent and void, and before a court of equity will permit
such contract to stand, the proof must be clear and con-
vincing and satisfy the conscience of the chancellor that
good faith has been exercised and that the confidence
reposed in the beneficiary of the contract has not been
betrayed by him. Beach v. Wilton, supra, and authori-
ties there cited.
"The circumstances connected with the execution of
the deed in question, as disclosed by the evidence, are:
Appellant called upon an attorney and had him prepare
FRAUD, MISTAKE, ETC.
159
a deed. After having the deed written up, the appellant
telephoned Sidney Bagley and asked him to come over
to the house. Bagley was a justice of the peace. He went
to appellant's house and after consulting with appellant
a notary public was called. The matter of executing the
deed was discussed by appellant, Bagley and the notary
public. The deceased was in another room. After the
matter had been talked over among the three parties
Bagley entered the sickroom where the old lady was and
presented the deed to her and she made her mark, and
thereupon Bagley placed a silver dollar in her hand,
which had been given him a few minutes before by ap-
pellant. J. E. Keisling, the notary public, says that after
the deed was executed it was read over to Mrs. Spruill,
and Bagley says that he asked her, before she made her
mark to the deed, if she wanted to give the land, or deed
the land, to appellant, and was answered, 'Yes.' There-
upon the notary added his certificate of acknowledgment
and the deed was handed to appellant. Before the exe-
cution of this deed Mrs. Spruill had made a will in which
she disposed of all her property, including the land in
controversy. By her will appellant was given ll/20ths
of the estate and the balance was disposed of among
other relatives.
"When all of the circumstances surrounding this trans-
action are considered we can come to no other conclusion
than that reached by the court below, that there was
here an unusually intimate fiduciary relation existing
between these parties, and that the conveyance to appel-
lant of substantially all of the property that the deceased
owned must be held to be the result of a violation of the
confidence and trust reposed by this old lady in appel-
lant. At all events, the evidence introduced on behalf
of appellant fails to convince us, any more than it did the
chancellor below, that this transaction is free from any
suspicion of undue influence.
"The deed contains a covenant on the part of appellant
that she would take care of Mrs. Spruill as long as she
lived and provide her with a good home, board, food,
shelter and care during her life. Appellant contends that
160
CONTRACTS
even though the court properly set aside the deed it was
error to set it aside unconditionally, without requiring
the payment to appellant of reasonable compensation
for taking care of the old lady from the time the deed
was executed until her death. The evidence shows that
notwithstanding this covenant in the deed appellant con-
tinued to demand of Brown compensation for taking care
of the old lady at the rate of $10 per week under her
contract. Numerous letters written by appellant to
Brown demanding money are in the record. The last of
these was about two weeks before the death of Mrs.
Spruill. This evidence shows that appellant was relying
on her contract for compensation for taking care of the
deceased, and that she did not furnish her a home, board,
food and shelter as a consideration for the conveyance.
If appellant has any claim against the estate, under her
contract with Brown, for compensation she has not been
deprived of that by the decree in this case. There was
no error in the decree in this respect.
 There being no error in the decree of the circuit court
of Fayette county it will be affirmed.—Decree affirmed.
Question 79: What is undue influence? What is its effect
upon a contract? Under what circumstances is undue influence
presumed ? In such cases is the presumption rebuttable ? How ?
Was there undue influence in this case?
(d) Disaffirmance and Avoidance of Contracts Voidable
for Foregoing Reasons.
§ 79. (Contracts, Sec. 47.) Conditions of disaffirmance.
Case 80. Naugle v. Yerkes, 187 111. 358.
Mr. Justice Hand: "* * * One who desires to
rescind a contract for fraud must act promptly and at
once tender back what he has received under the contract,
and if he remains silent or in any way recognizes the
validity - of the contract after discovering the alleged
fraud, he is bound thereby.
Question 80: If one desires to set aside a contract voidable for
fraud, must he give back what he has received? Would this
also be true of contracts voidable for duress and undue influence \
FRAUD, MISTAKE, ETC.
161
(Note: Conditions of disaffirmance: In order to disaffirm a
contract voidable for fraud, duress or undue influence, the party
seeking to set aside the contract must show:
(1) That he has not ratified the contract by acquiescence or
by any words or conduct.
(2) That he has restored, offered to restore or now offers to
restore what he received. His inability to restore is generally
no excuse.)
§ 80. (Contracts, Sec, 48.) Ratification.
Case 81. Burwash v. Ballou, 230 111. 34.
Me. Chief Justice Hand: "* # *
"The sale of the stock in question was made on July
15, 1903, and the bill was not filed until August 3, 1904.
In the bill of complaint appellant alleged that shortly
after the payment of the second note, which fell due Sep-
tember 15, 1903, and which presumably was paid when
due, he was put upon inquiry as to the conspiracy and
fraudulent agreement entered into between the appel-
lees and others, whereby complainant was induced and
persuaded to purchase said seven thousand shares of
stock; and again, that about February 1, 1904, complain-
ant was for the first time informed and became aware
that some of the representations and statements made to
him by appellees were false. The rule is, that a party
who desires to rescind a sale for fraud must act promptly;
that he cannot be permitted to stand passively by and
speculate as to the result of an investment, especially
an investment in mining stock, which usually fluctuates
in value, and, after the future has disclosed his invest-
ment was a mistake, rescind the contract of purchase for
fraud and recover back the consideration paid for the
stock. Greenwood v. Fenn, 136 111. 146; Follett v. Brown,
188 id. 244; Coolidge v. Rhodes, 199 id. 24; Brymes v.
Sanders, 93 IT. S. 55.
Question 81: Is delay in withdrawing from a voidable contract,
a ratification of it? What were the facts in the above case and
did they amount to ratification?
162
CONTRACTS
Case 82. Tarkington v. Purvis, 128 Ind. 182.
Facts: On August 15, 1887, Jos. S. Tarkington, ex-
changed his interest in the firm of T. H. Ellis & Co.,
hardware dealers, for certain real estate and $600 in
cash, with Sanford B. Purvis, who agreed to pay Tark-
ington's share of the firm's indebtedness. Tarkington
falsely represented that the assets of the firm were large-
ly in excess of its liabilities. As a matter of fact, the
reverse was true, so that Tarkington's interest was of
no value whatever. On August 27th Purvis discovered
the fraud practiced upon him and immediately demanded
rescission, tendering back all he had received. On Au-
gust 30, Purvis received $341 in cash out of proceeds
arising from a sale of some of the assets of the firm,
such sale being evidently made to prevent waste of the
assets. On September 1st, he again demanded rescission,
offering also this $341 collected by him. It is contended
that in dealing with the partnership property in the man-
ner shown the plaintiff ratified the contract.
Point Involved: What facts constitute ratification of
a fraudulent contract? Dealing with the subject matter
as ratification.
Mitchell, J.: '' The doctrine is fully established that
a contract induced by fraud is only voidable, and if one
who has been defrauded after discovering the deceit
acquiesces in the sale either by express words or by any
unequivocal act, such as treating the property as his own,
with an intent to condone the fraud, he will be deemed
to have elected to affirm the contract, and he cannot after-
wards rescind. One who, uninfluenced by the fraud, deals
with the property as his own, after having fully dis-
covered that fraud has been practiced upon him in the
contract or transaction by or through which he acquired
the property, thereby waives his right to rescind. St.
John v. Hendrickson, 81 Ind. 350; Higham v. Harris,
108 Ind. 246, 5 West. Rep. 643; Worley v. Moore, 97 Ind.
15; Doherty v. Bell, 55 Ind. 205; Gatling v. Newell, 9
Ind. 572; Comparet v. Hedges, 6 Blackf. 416; Shaeffer
v. Sleade, 7 Blackf. 179; Benjamin, Sales, sec. 675.
FRAUD, MISTAKE, ETC.
163
"Equivocal acts, however, which do not clearly evince
a purpose, with complete knowledge of the fraud to re-
tain the property as his own, will not defeat the right
of the person defrauded to rescind. The act must be
unequivocal and must show an election to retain the prop-
erty, after discovering the deceit, before the right to
rescind is gone.
"In the present case the right to claim a rescission
had been fully perfected by the appellee, by tendering
back everything that had been received, and by offering
to place the fraudulent vendor in statu quo. That the
plaintiff below afterwards received money arising from
the sale of some of the assets of the firm in no way mili-
tates against his right to compel the rescission since it
does not appear that the property was sold in the course
of the business of the firm, and the money received was
fully accounted for without loss to the appellant. One
who has perfected his right to rescind a fraudulent con-
tract cannot lose it by merely taking care of the property
received, or by preserving it in case it is of a perishable
nature, unless what he does is done with the intent to
confirm the contract. He is not bound to preserve per-
ishable property, but if he acts in good faith in prevent-
ing reasonable apprehended loss or destruction and waste
of the property, his perfected right of rescission will
not be lost in a court of equity, if he fairly accounts for
the property without loss to the vendor, and places him
in statu quo as nearly as may be. Pierce v. Wilson, 34
Ala. 596; Neblett v. Macfarland, 92 U. S. 101 (23 L. ed.
471); Wharton, Cont. sec. 285.
"Where subsequent acts are relied upon as a defense
in a case where fraud is clearly established, it is said the
act must stand upon the clearest evidence, and must
evince a purpose to waive or forgive the fraud, and must
amount to a clear election not to rescind. If what is done
is merely for the purpose of saving the plaintiff from
further loss, without any purpose to give up whatever
right' he may have either at law or in equity to rescind,
the right or rescission will not be affected. Montgomery
164
CONTRACTS
v. Pickering, 116 Mass. 227; Morse v. Royal, 12 Ves. Jr.
355-373.
< Question 82: As a general rule if a party who has a right to
.avoid a contract for fraud, deals with it as his own,'may he after-
wards disaffirm? Why? In the above case what qualifications
are made of this rule?
(Note: Remedies for Fraud. In the current chapter, the
subject of fraud or deceit is treated from its effect upon the
binding character of the contract, and the thought developed
that the contract is voidable only and not void, and becomes
binding by ratification, and thereafter the right to rescind is
gone. Rescission may, of course, be by way of defense in a suit
brought upon the contract against the defrauded party, if he
has not ratified the contract.
But a defrauded party has, at his election, in lieu of rescission
an action in tort for the deceit, alleging damages, and recovering
judgment for actual injury sustained, for instance in case of a
purchase of property, the difference in the property as repre-
sented and as it is.)
CHAPTER 10.
CONSIDERATION.
k. Theory and Nature.
B. Examples of Consideration.
A. Theory and Nature.
§ 81. Consideration defined; a necessary element in simple contract.
§ 82. Inadequacy of consideration.
§ 81. Consideration defined; a necessary element in
simple contract.
Case 83. Rann v. Hughes, 7 Term Reports (Eng.),
346.
Facts: A suit against an administratrix upon a writ-
ten promise by her, not under seal, to pay a debt of the
deceased, no consideration appearing to support her
promise.
Point Involved: Is a written, unsealed promise, which
causes no detriment to the promisee, that is, in response
to which the promisee parts with nothing, and in no
way sustains a change of condition, enforceable?
Loed Chief Baeon Skinnee: "* * * It is un-
doubtedly true tha-t every man is by the law of nature
bound to fulfill his engagements. It is equally true that
the law of this country supplies no means, nor affords
any remedy, to compel the performance of an agreement
made without sufficient consideration; such agreement is
nudum, pactum ex quo non oritur actio; and whatsoever
may be the maxim in the civil law, it is in the last men-
tioned sense only that it is to be understood in our law.
* * *
 All contracts are by the law of England distinguished
into agreements by specialty, [contracts under seal] and
165
166
CONTRACTS
agreements of parol [contracts not under seal]; nor is
there any such third class as counsel have endeavored
to maintain as contracts in writing. If they be merely
written and not specialties, they are parol and a con-
sideration must be proved. * * *
(Held: The defense of no consideration was good.)
Question 83: What, in early English law, were the two great
classes of contracts ? If a promise was in writing and not under
seal, was it enforceable ? What would have to be true of it to be
enforceable ?
(Note: Whether a promise under seal is enforceable without
consideration in modern law, is a question deferred for later dis-
cussion. See Chapter 12. As most commercial contracts are not
under seal, and as there is a modern tendency to ignore the
distinction between sealed and unsealed agreements we may our-
selves ignore it for the present and simply consider in this chap-
ter that a promise not under seal is not enforceable without con-
sideration.)
Case 84. Page, Contracts, Sec. 274, 276.
"A valuable consideration is some legal right acquired
by the promisor in consideration of his promise, or for-
borne by the promisee in consideration of such promise.
A common form of stating the same principle is that a
valuable consideration for a promise may consist of a
benefit to the promisor, or a detriment to the promisee.
"The use of 'benefit' and 'detriment' in this connec-
tion need explanation. While correct if properly under-
stood, it is liable to misconstruction. 'Benefit' does not
refer to any pecuniary gain arising out of the transac-
tion nor 'detriment' to any pecuniary loss. * * *
'Benefit' as used in this rule means that the promisor
has, in return for his promise, acquired some legal right
to which he would not otherwise have been entitled;
'detriment' means that the legal right which he would
otherwise have been entitled to exercise. * * * 
(276) "* * * We observe that in most cases that
something that is the 'benefit' to the promisor, is also a
'detriment' to the promisee, the former acquiring what
CONSIDERATION
167
the latter parts with. This, however, is not necessary.
It is sufficient if there is a 'benefit' to the promisor, with-
out any 'detriment' to the promisee, * * *. It is
equally sufficient if there is a 'detriment' to the promisee
without any'benefit'to the promisor. * * *
Question 84: Define consideration? What is the legal mean-
ing of the word 'benefit,' and 'detriment'? Is it necessary that
there be both ?
(Note to Case 84: A consideration may he simply thought of
merely as a "detriment to the promisee. It is generally of no
moment whether it is a benefit to the promisor. Notice the case
of Hamer v. Sidway, post, as an illustration. When we say it is
a detriment to the promisee we simply mean that a party to
whom a promise has been made (that is, a promisee) may en-
force it if he has sustained a legal detriment, that is, has given
up something to which he is legally entitled (or promised to
give it up). This promisee may be also a promisor. It is that
fact which confuses the student. If he is also a promisor, why
not a detriment to the promisorf Because he is enforcing a
promise made to him and not by him. He may show the promise
made by him as the consideration for the promise made to him.
The making of this promise, or its performance, is the detriment
which he sustains as promisee. He may of course not be a
promisor as where his side was merely an act or where he is no
longer promisor because he has performed.)
Case 85. Hamer v. Sidway, 124 N. Y. 538.
Facts: A, uncle of B, promised B, who was then a
minor, that if B would refrain from drinking, using to-
bacco, swearing and playing cards or billiards until 21
years of age, he would pay B $5,000. To this B assented.
The promisor is now dead and one Sidway, who has
secured B's claim, seeks to enforce it against the exe-
cutor of A's estate.
Point Involved: If one induces another by a promise
of reward to pursue a certain way of life, which is of no
benefit of the promisor and possibly of much actual bene-
fit to the promisee, does the acceptance of such promise
constitute a legal detriment to such promisee f
168
CONTRACTS
Parker, J.: "The defendant contends that the con-
tract was without consideration * and therefore
invalid. He asserts that the promisee * * * was
not harmed but benefited; and insists that * * un-
less the promisor (the uncle) was benefited, the contract
was without consideration. * * * Courts will not
ask whether the thing which forms the consideration
does in fact benefit the promisee or a third party, or is
of any substantial value to anyone. It is enough that
something is promised, done, forborne, or suffered by
the party to whom the promise is made as consideration
for the promise made to him. Anson's Prin. of Con. 63.
'In general a waiver of any legal right at the request
of another party is a sufficient consideration for a prom-
ise.' Parsons on Contracts, 444.
"Now, applying this rule to the facts before us, the
promisee used tobacco, occasionally drank liquor, and
he had a legal right to do so. That right he abandoned
for a period of years upon the strength of the promise
of the testator that for such forbearance he would give
him $5,000. * * *»
Question 85: What was the promise in Case 85 which was
sought to be enforced? What was the consideration for it?
What of the argument that the promisee was benefited by what
he did ? And the argument that the promisor was not benefited1
§ 82. (Contracts, Sec. 50.) Inadequacy of consideration.
Case 86. Nelson v. Brassington, — Wash. —, 116 Pac.
629.
Facts: A sold a business to B under an agreement
that A should not enter into a competing business in a
prescribed area. The price agreed to be paid under the
contract was merely the fair cash value of the tangible
property. In a suit to enforce the restraint the defend-
ant claims that there was no consideration for the agree-
ment.
Point Involved: Whether the court will inquire into
the adequacy of the consideration agreed upon by the
parties.
CONSIDERATION
169
Fullerton, J.: "* * *
''The trial court found that the fair market value of
the several articles of personal property sold by the
respondent to the appellant approximated the sum paid
as the consideration for the sale, and hence concluded
that there was no consideration for the remaining part
of the agreement not to enter into business within the
prohibited territory. But this is not the correct test.
Courts in transactions of this kind do not inquire into
the adequacy of the consideration. This, in the absence
of fraud or over-reaching, is solely the business of the
parties. The court inquires only into the legality of the
consideration, not whether the party to be bound made
an improvident bargain.''
Question 86: A desires to sell his store business to B. The
cash value of the inventory is $1,000. B says "I will buy the
business and pay you $1,000 if you will agree not to compete
within a three mile radius for 5 years. A agrees and the busi-
ness is sold. Is there consideration for the promise not to
compete ? Will the court question the adequacy of a considera-
tion in determining whether a contract is valid?
(Note: Nominal consideration. Where there is a nominal
consideration, as for instance "one dollar, its inadequacy is
immaterial as in other cases, but it is a pertinent question
whether the dollar was really a consideration or a mere recital.
Sometimes contracts recite that "in consideration otf $1.00 each
to the other paid.'' This does no harm if there is in fact other
consideration, but its recital seems foolish, for each dollar offsets
the other, although many lawyers use such a phrase. (See
Williston on Contracts, Sec. 115.)
B. Examples of Consideration.
§ 83. Consideration may consist in promise or act.
§ 84. Past act.
§ 85. Performance of, or promise to perform, obligations imposed by law.
§ 86. Promise to perform unexecuted contract.
§ 87. Part payment of debt as consideration for release of balance.
§ 88. Compromise of disputed claim.
§ 89. Forbearance of suit.
§ 90. Consideration in subscriptions.
170
CONTRACTS
§ 83. (Contracts, Sec. 51.) Consideration may consist
of promise or act.
Case 87. American Cotton Oil Co. v. Kirk, 68 Fed. 791.
Facts: This was an agreement to sell 10,000 barrels
of oil at a stipulated price, in such quantities per week
as the buyer might desire. Action for the breach of the
alleged contract:
Point Involved: A promise is a valid consideration
if of sufficient certainty to be enforceable. What consti-
tutes sufficient certainty? Is a promise to sell as the
other may desire a consideration?
Bunn, District Judge: "* * * There are several
questions * * * but we have found it necessary to
determine but one, and that is whether the contract
* * * is a valid contract for the sale and delivery of
10,000 barrels of oil, or is it invalid for want of mutu-
ality in its provisions? A promise on the part of the
defendant to sell and deliver 10,000 barrels, without a
corresponding agreement on the part of the plaintiffs
to purchase and receive it, would clearly be void for
want of mutuality. Where, in this contract, as testified
to by the plaintiffs, is there any agreement to order and
receive 10,000 barrels? It is clear that the time of order-
ing, as well as the quantity, is left wholly to the discretion
of the plaintiffs. Deliveries are to be made per week,
as Kirk & Company desire. But suppose Kirk & Com-
pany do not desire, and do not order, or order in such
quantities as would require a hundred years to complete
the delivery,—is there any way open to the defendant to
put plaintiffs in default? We think not, and that there
is no mutuality of promise for the sale of a definite or
ascertainable quantity of oil. Suppose the plaintiffs had
decided upon ordering six barrels of oil per week or one
barrel for every working day. That would require 32
years for the fulfillment of the contract. And we can
discover no way, by the terms of the contract, whereby
the defendant could put the plaintiffs in default for fail-
ure to order more oil each week, because the amount and
CONSIDERATION
171
times of ordering are left wholly to the plaintiffs. If
the market price of oil should fall below the contract
price, then, according to their contention as to the terms
of the contract, the plaintiffs could purchase their supply
of oil elsewhere and at the lower price, resorting to the
contract when, and only when, the price stated was lower
than the market price—and this without respect to time.
Such a contract is one-sided, and without mutuality. If
the contract had been that the plaintiffs should order and
receive, and the defendant should ship, all the oil which
would be required in the plaintiff's business for a definite
period, not exceeding 10,000 barrels, there would be a
mutual obligation. The plaintffs could not, in such case,
order oil from other sources, and could be put at fault
for not ordering and receiving all which was reasonably
required to run their plant. The case would then come
within the principle of National Furnace Company v.
Keystone Manufacturing Company, 110 111. 427. In that
case the National Furnace Company agreed to sell to the
Keystone Company all of certain quality of pig iron,
known as Lake Superior charcoal iron, which the Key-
stone Company would need, use or consume in its busi-
liess during the coming season from July 9, 1879, to
July 1, 1880, such amount supposed by the parties to be
about 700 tons. This was held to be a good contract. The
Court says: 'It cannot be said that the appellee (Key-
stone Company) was not bound by the contract. It has
no right to purchase iron elsewhere for use in its busi-
ness. If it had done so, appellant might have maintained
an action for breach of the contract.'
"In the case at bar, there was no agrement on the
part of plaintiffs to purchase from defendant all the oil
they required in their business. They might order as
little as they pleased, and supply the bulk of what they
needed from other sources. The contract had the effect
merely to bind the plaintiffs to receive and pay for at
the stipulated price all the oil which might be shipped
upon their order, from time to time, by the defendant,
172
CONTRACTS
not exceeding 10,000 barrels. Further than that it can
have no binding force, for want of mutuality. * * *
Question 87: "Was there any obligation in this case for Kirk
& Co. to buy any oil from American Cotton Oil Co. ? What was
the promise of Kirk & Co. 1 Why was it not a contract ? What
illustration is stated by the court as an enforceable agreement ?
§ 84. (Contracts, Sec. 52.) Past Act
Case 88. Mills v. Wyman, 3 Pick. (Mass.) 207.
Facts: Defendant's adult son fell sick among Strang-
ers. Plaintiff cared for him. Defendant hearing of this
promised to pay plaintiff for what he had done, but
afterwards refused. This is a suit to enforce defendant's
promise.
Point Involved: Is a promise to pay for a past act,
gratuitously performed, enforceable as a contract?
Parker, C. J.: '' General rules of law established for
the protection and security of honest and fair minded
men, who may inconsiderately make promises without
any equivalent, will sometimes screen men of a different
character from engagements which they are bound in
fora conscienticB to perform. * * * The rule that a
mere verbal promise, without any consideration, cannot
be enforced by action, is universal in its application and
cannot be departed from to suit particular cases in which
a refusal to perform such a promise may be disgraceful.
'' The promise made in this case appears to have been
made without any legal consideration. The kindness
and services toward the sick son of the defendant were
not bestowed at his request. The son was in no respect
under the care of the defendant. He was twenty-five
years old, and had long left his father's family. On his
return from a foreign country he fell sick among
strangers, and the plaintiff acted the part of the good
Samaritan, giving him shelter and comfort until he died.
The defendant, his father, * * * promises in writ-
ing to pay the plaintiff for expenses he had incurred.
But he has determined to break his promise.
CONSIDERATION
173
"It is said that a moral obligation is a sufficient con-
sideration to support an express promise, * * *; but
* * * we are satisfied that the universality of the rule
cannot be supported, * * *. The cases of debts
barred by the statute of limitations, or debts incurred
by infants, or debts of bankrupts, are generally put for
illustration of the rule. Express promises founded on
such pre-existing equitable obligations may be enforced;
there is a good consideration for them; they merely re-
move an impediment created by law to the recovery of
debts honestly due, but which public policy protects the
debtors from being compelled to pay. * * * In all
these cases there is a moral obligation founded upon an
antecedent valuable consideration. * * *,y [The
Court holds this promise to raise merely a moral and
not a legal obligation and therefore unenforceable.]
Question 88: What was the promise in Case 88? Was it en-
forceable? Why? Is the refusal to enforce any injustice to the,
plaintiff in this case ?
§ 85. (Contracts, Sec. 53.) Performance of, or promise
to perform, obligations imposed by law.
Case 89. Hogan v. Stophlet, 179 111. 150.
Facts: Hogan was sheriff of P. County. A building
belonging to Stophlet having been destroyed by an in-
cendiary fire, Stophlet offered a reward for the appre-
hension and conviction of the culprit. Hogan now sues
to recover the reward.
Point Involved: If the law imposes on one a duty to
do a certain thing, is the performance of that duty suffi-
cient to support a promise by another to pay for it?
Me. Justice Magruder : '' * * * It being true, that
it was the official duty of the appellant as sheriff to
make the arrest of the guilty party, and that the fees,
which he is entitled to charge for the performance of
his official duties are fixed by law, it follows upon well
established principles that the appellant was not entitled
to the reward sued for in this case. It is against public
174
CONTRACTS
policy to allow a man to recover a reward for doing his
duty as a public officer. * * * A promise to pay an
officer a reward for doing what it is his duty to do under
the law is a promise without any consideration to sup-
port it. * * *
"The claim that extra services have been rendered fur-
nishes no warrant in such cases for the charge of extra
compensation. * * * If a constable for making ex-
traordinary efforts to perform an ordinary official act,
* * * may collect by law a compensation beyond
what the statute allows for the act, any other officer may
do the same; and sheriffs, legislators and judges might
* * * find their ' extraordinary efforts' in the market
to be had by the highest bidder. This is a sickening and
revolting view of the subject.
"There are some decisions * * * to the contrary
* * * where the officer arrested the offender beyond
his territorial jurisdiction. * * *
Question 89: (1) Upon what two grounds did the court in
Case 89 deny the plaintiff his case ?
(2) A is a fireman whose sworn duty is to do his utmost to
put out fires. B's house takes fire and B offers a reward of $500
if A will rescue B's wife who is on an upper story in the burning
building. A at the risk of his life accomplishes the rescue. Can
he force B to pay the reward ?
§86. (Contracts, Sec. 54.) Promise to perform
unexecuted contract.
Case 90. Johnson's Adm'r v. Seller's Adm'r, 33 Ala.
265.
Facts: Johnson agreed to teach school at Camden and
bring his wife as an assistant. Afterwards, threatening
not to bring her, he was promised additional compen-
sation to do so. The promisor now refuses to pay the
additional compensation.
Point Involved: If one induces a promise of extra
benefit by threatening to break his contract unless such
benefit is forthcoming, is there any consideration for the
promise?
CONSIDERATION
175
Walker, J.: "* * * The ninth and tenth charges
assert the proposition that if Johnson contracted to bring
and associate his wife with him in teaching school and
then refused to comply with that contract, a promise by
Sellers to give him $2,500, in order to induce him to com-
ply, would be without consideration. In our judgment
these charges are correct. Johnson by his contract was
legally bound to bring his wife to teach in the school if
the contract was such as the charge supposes. He had
no right to violate that contract and compensate the
injured party in damages. * * *
4'If two parties make a contract, one of them may
waive the performance of the contract by the other, and
assume some new and additional obligation as the con-
sideration for the performance by the other. Such obli-
gation would be binding.
it * * * -g competent for the parties to a contract
to waive their rights growing out of it as originally
made, and engraft upon it new terms. * * *
Question 90: State the facts, the question presented and the
court's decision in the above case.
(Note: It is generally agreed that a mere promise by one to
perform his contract is not a consideration to support a promise
to pay him additional compensation for so doing. Such cases
arise where one party refuses to go on with his contract unless
some greater inducement is offered than that for which he under-
took to perform. Yet, consistently with this doctrine, the parties
to a contract may always agree to modify its terms, or to aban-
don it altogether and then make a new contract.
In some states the doctrine has had an exception made to it,
as shown in the following case.)
Case 91. Linz v. Shuck, 106 Md. 220.
Facts: Plaintiff made a written contract to dig a eel-
lar for defendant for $500. After beginning work, he
discovered a large quantity of soft mud beneath the sur-
face of the ground, the existence of which was unsus-
pected by either party, and which made the digging of
the cellar much more expensive and difficult. Plaintiff
alleges that he then refused to complete the contract and
that defendant thereupon induced him to do so by prom-
176
CONTRACTS
ising to pay the additional expenses caused by draining,
etc.
Point Involved: Whether when one is under a contract
to do certain work, and in doing it, certain difficulties
arise that were unforeseen by both parties, a promise to
pay additional compensation for the completion of the
contract is enforceable.
Boyd, J.: '' * * * The principal question in the
case is whether the plaintiff was entitled to recover for
the additional costs and expenses incurred * * *
(here the court sets out plaintiff's fifth 'prayer'). That
prayer seems to have followed quite closely tffe language
used in King v. Duluth, M. and N. R. Co., 61 Minn. 487,
63 N. W. 1105, which case, notwithstanding unfavorable
criticism by some writers, in our opinion announces a
principle which is not only just and equitable, but is
easily reconcilable with the general rule that a promise
to do or actually doing that which a party to a contract
is already under legal obligation to do, is not a valid con-
sideration to support the promise of the other party to
the contract to pay additional compensation for such per-
formance. * * * When two parties make a contract,
based on supposed facts which they afterwards ascertain
to be incorrect, and which would not have been entered
into by one party had he known the actual conditions
which the contract required him to meet, not only courts
of justice, but all right thinking persons must believe the
fair course for the other party to the contract to pursue
is either to relieve the contractor of going on with his
contracts or to pay him additional compensation. If
the difficulties be unforeseen, and such as neither party
contemplated or could have from the appearance of the
thing to be dealt with anticipated, it would be an ex-
tremely harsh rule of law to hold that there was no legal
way of binding the owner of property to fulfil a promise
made by him to pay the contractor such additional sum
as such unforeseen difficulties cost him, * * *
Question 91: (1) What is the doctrine of Case 91? Is it in
force in all states ?
CONSIDERATION
177
(2) Assuming there had been no additional promise in the
above case, would the contracter have been guilty of breach had
he abandoned the contract on account of such unforeseen diffi-
culty ?
(Note to Case 91: In a few states the doctrine of the above
case has been adopted. It is known as the '' Minnesota doctrine.''
It is a doctrine difficult to support on the theory of considera-
tion, and it is not recognized in most of the states. The student
must not get the impression that the above contract was not en-
forceable as originally made. An abandonment would have been
a breach.)
§87. (Contracts, Sec. 55.) Part payment of debt as
consideration for release of balance.
(a) Part Payment of Liquidated Debt—General Rule.
Case 92. Pinnell's Case, 5 Coke, 117 (1600).
Facts: Pinnell sued the defendant on a bond for the
payment of 8 1. 10 s. alleged to be due on the bond. De-
fendant pleaded that at Pinnell's request, before the
day the debt was due, he paid Pinnell, the plaintiff, 5 1.
2 s. 2 d. which amount Pinnell accepted in full of the
8 1. 10 s. (Note that he doesn't say he paid it in full,
but merely that plaintiff accepted it in full,—probably
a mere error in pleading, but, under the strict ruling
of the court, with disastrous consequences as the de-
cision shows.)
Point Involved: Whether payment of a lesser sum
than owing can be a consideration for a promise to re-
lease the balance.
By the Court : "And it was resolved by the whole
Court, That Payment of a lesser Sum on the Day in
Satisfact. of a greater, cannot be any Satisfaction for
the whole, because it appears to the Judges that by no
Possibility, a lesser Sum can be a Satisfaction to the
Plaintiff for a greater Sum: But the Gift of a Horse,
Hawk, or Robe, &c. in Satisfaction is good. For it shall
be intended that a Horse, Hawk, or Robe, &c. might be
178
CONTRACTS
more beneficial to the Plaintiff than the Money in Re-
spect of some Circumstance, or otherwise the Plaintiff
would not have accepted of it in Satisfaction. But when
the whole Sum is due, by no Intendment the Acceptance
of Parcel can be Satisfaction to the Plaintiff: But in
the Case at Bar it was resolved, that the Payment and
Accejjtance of Parcel before the Day in Satisfaction of
the whole, would be a good Satisfaction in Regard of
Circumstance of Time; for Peradventure Parcel of it
before the Day, would be more beneficial to him than the
whole at the Day, and the Value of the Satisfaction is
not material: So if I am bound in 20 1. to pay you 10 1.
at Westminster, and you Request me to pay you 5 1. at
the Day at York, and you will accept it in full Satisfact.
of the whole 10 1. it is a good Satisfact. for the whole:
For the Expences to pay it at York, is sufficient Satis-
faction; But in this Case the Plaintiff had Judgment for
the insufficient Pleading; for he did not plead that he
had payed the 5 1. 2s. 2d. in full Satisfaction (as by the
Law he ought) but pleaded the Payment of Part gen-
erally; and that the PI. accepted it in full Satisfaction.
And always the Manner of the Tender and of the Pay-
ment, shall be directed by him who made the Tender or
Payment, and not by him who accepts it. And for this
Cause Judgment was given for the Plaintiff.
''See Reader 26 H. 6. Barre 37. in Debt on a Bond of
10 1. the Defendant pleaded, that one F. was bound by
the said Deed with him, and each in the whole, and that
the Plaintiff had made an Acquittance to F. bearing Date
before the Obligat. and delivered after, by which Acquit-
tance he did acknowledge himself to be paid 20s. in full
Satisfaction of the 10 1. And it was adjudged a good
Bar; for if a Man acknowledges himself to be satisfied
by Deed [instrument under seal], it is a good Bar, with-
out any Thing received. Vide. 12 R. 2, Barre 243. 26
H. 6 Barre 37, & 10 H. 7, &c.
Question 92: How much did defendant originally owe in this
case. What is his defense ? Suppose the money had been both
paid and accepted in full payment, would the defense of set-
CONSIDERATION
179
tlement have been good? Why? Name some circumstances that
would have made the lesser payment a good satisfaction of the
entire debt.
(Note to Case 92: The proposition that payment of a lesser
sum than is due can not support a promise to release the entire
debt is the great weight of authority. The rule has, however,
been judicially repudiated in the case of Clayton v. Clarke, 74
Miss. 499; 37 L. R. A. 771, and has been changed by statute
in some states (Alabama, Georgia, Maine, North Carolina, Ten-
nessee and Virginia). It has also in all jurisdictions been con-
fined to the narrowest limits. See following cases.)
(b) Any Advantage In Addition to Part Payment of
Debt.
Case 93. Herman v. Schlesinger, 114 Wis. 382.
Facts: Schlesinger owed the Plankington Bank $78,-
878.32 and interest thereon. The Plankington Bank be-
came insolvent and made an assignment to Wm. Plank-
ington for the benefit of his creditors, and Plankington
was subsequently succeeded by I. M. Bean, who was in
turn succeeded by Herman, the plaintiff in this suit.
Herman, as such assignee, represents that Schlesinger
made a settlement with Plankington for $1,486, half to
be paid in 60 days, and the other half in eight months,
and claims that the same was fraudulent and without
consideration. It appeared in evidence that Schlesinger
was indebted to various parties for about $3,000,000, was
insolvent, and had no property out of which any part
of the indebtedness could have been realized, that he
offered this compromise to enable him to keep out of
bankruptcy (in which case nothing would have been
realized by his creditors), and that he agreed that all
collateral held by the assignee as security could be held
absolutely for the benefit of the creditors of Plankington
Bank. The court held the settlement effective and Her-
man appeals to this court.
Point Involved: That the rule that a lesser amount
received in full payment of a debt will not discharge
the debt is a rule of doubtful justice and will not be ap-
180
CONTRACTS
plied whenever the debtor sustains any further disad-
vantage than the payment of the debt or the creditor
receives any additional advantage.
Marshall, J.: u* * *
"The question is presented, somewhat outside the
cause of action set forth in the complaint, of whether the
settlement complained of is void for want of considera-
tion. Counsel for respondent make no objection to the
proposition being considered, and we will not suggest
any that might have been put forward if such exist. It
is elementary that the mere acceptance, by a single cred-
itor, of a part of an undisputed claim in settlement of
the whole, does not preclude a subsequent, legitimate
demand for the balance thereof. Continental Nat. Bank
v. McGeoch, 92 Wis. 286, 310, 66 N. W. 606; Otto v.-
Klauber, 23 Wis. 471; Lathrop v. Knapp, 27 Wis. 214,
225; Davenport v. First Cong. Society, 33 Wis. 387, 391;
Lerdall v. Charter Oak L. Ins. Co., 51 Wis. 426, 429,
8 N. W. 280. It is also elementary that where a cred-
itor obtains some advantage, or promise thereof, that
may possibly be realized in addition to the part payment
by the debtor, for a release of the latter's indebtedness,
there is a good accord and satisfaction, effectually ex-
tinguishing the same, regardless of how small the amount
actually paid upon it may be. Continental Nat. Bank
v. McGeoch, supra. Applying that to this case, the settle-
ment in controversy cannot be impeached for want of
consideration. The contract of settlement was obviously
drawn with care, having in mind the legal essentials
thereof in order to preclude any subsequent claim against
respondent for any further sum upon the indebtedness.
Absolute title to property held by the assignee as se-
curity only, was conveyed to him, and the right of re-
spondent to the benefit of the federal bankruptcy laws
was waived in the former's favor. There was some ad-
vantage involved in those concessions. Absolute o\pier-
ship of the collateral in place of a holding thereof as
security was of itself an advantage. Admit that it was
CONSIDERATION
181
of slight, almost trifling character, yet it must be held
to have been sufficient to make a good accord and satis-
faction. Independently of authority, it would seem that
the giving up of the valuable right of respondent to the
benefit of the federal bankruptcy laws was a substan-
tial consideration and sufficient to support the settle-
ment. Counsel for respondent cite us to Hinckley v.
Arey, 27 Me. 362, where it was so decided. The rigorous
rule of the common law, permitting a person to receive
part of an undisputed, presently due indebtedness, pre-
tending to accept the same in satisfaction of the whole
indebtedness, the debtor parting with the amount paid
with that understanding, and then change front and sue
for the balance of such indebtedness on the ground that
the release thereof was void for want of consideration,
is so little favored by courts that it is commonly held
not to apply where anything, whether of advantage to
the creditor or disadvantage to the debtor, can be rea-
sonably said to stand for that part of the indebtedness
not measured by an equivalent in money actually paid
to the creditor. The common-law rule has been abolished
by statute in Alabama, Georgia, Maine, North Carolina,
Tennessee and Virginia, and perhaps some other states.
In Connecticut it has not been recognized by the courts.
Ford v. Hubinger, 64 Conn. 129, 29 Atl. 129. In the other
states where no statute exists to the contrary, it is be-
lieved the rule is adhered to in form, but there is ap-
parently a progressive disposition to disregard it in
spirit. It is said that there is sufficient consideration
moving with the part payment to release an indebted-
ness to take the transaction out of the common-law rule,
if the debtor does anything which he is not bound by
law to do, or omits to do anything which he has a right
to do, to the advantage, in any appreciable degree, of
the creditor, or the disadvantage of himself; that the
consideration, in addition to money paid, 'may consist
of anything which might be a burden to the one party
or benefit to the other.' Watson v. Elliott, 57 N. H.
182
CONTRACTS
511; Jaffray v. Davis, 124 N. Y. 164, 26 N. E. 351; Mad-
dux v. Bevan, 39 Md. 485.
Question 93: What elements'were present to take the case
out of the general rule that a lesser amount cannot discharge
a greater even if so agreed?
Case 94. Melroy v. Kemmerer, 218 Pennsylvania Re-
ports, 381, 11 L. R. A. N. S. 1018.
Facts: The debtor being in failing circumstances
offered his creditor 30 per cent of his debt as a payment
in full, otherwise he would go through bankruptcy. The
proposition was accepted and the 30 per cent paid. This
is a suit for the balance.
Point Involved: Whether, if a creditor accepts less
than his full debt in full satisfaction from a debtor who
is on the verge of bankruptcy, who agrees to give that
amount and avoid bankruptcy, there is a good discharge
of the entire debt.
Mitchell, C. J.: ' 'It was said in Ebert v. Johns, 206
Pa. 395, 55 Atl. 1064, that the rule that the acceptance
of a smaller sum for a debt presently due, though agreed
and expressed to be payment in full, is not a good accord
and satisfaction, was a deduction of scholastic logic, and
was always regarded as more logical than just, and hence
any circumstance of variation is sufficient to take a case
out of the rule. As illustrations of such circumstances
of variation, it has been held that payment a day, or
even an hour, before the debt is due, or at a different
place, or of a certainty in amount where the amount of
the debt is uncertain, or payment' of even a part by a
third person, or additional security of any kind, such
as the indorsement of a note by a third person, or pay-
ment in chattels or anything other than money, will be
a good discharge of the whole by way of accord and
satisfaction. Note to Cumber v. Wane, 1 Smith, Lead.
Cas. 357. And see a full collection of the more recent
cases in the note to Puller v. Kemp, in L. R. A. 785.
The rule itself is founded on the want of consideration
CONSIDERATION
183
for the agreement. As a part can never be equal to the
whole, payment of a part of a debt presently due gives
the creditor nothing that he was not entitled to, and
deprives the debtor of nothing he was not bound to part
with before, and therefore there is no consideration.
The logic is unimpeachable, but it fails to take into con-
sideration the practical importance of the difference be-
tween the right to a thing and the actual possession of
it. As said in Ebert v. Johns, supra, 'To a merchant
with a note coming due, $5,000 before 3 o'clock today,
which will save his commercial credit, may well be worth
more than $20,000 tomorrow, after his note has gone to
protest.' If the debt is not due till tomorrow, the pay-
ment of the lesser sum, under all the- cases, will be a
good accord and satisfaction; but if the debt was due
yesterday, but the debtor can only pay part of it today,
the benefit to the creditor of getting that part now, rather
than the whole when it is too late, is just as great, and
whatever conclusion the scholastic logic and theoretical
reasoning may lead to, the importance of the practical
result is a matter for the creditor to decide for himself,
and, having so decided and got the benefit of it, justice
and common honesty ought to hold him to his agreement.
For this reason, the force of which is universally ac-
cepted, the courts, so far as they could without sacrifice
of the maxim of stare decisis, have brought the law into
closer accord with modern business principles.
"Tn the present case the debtor, being in failing cir-
cumstances and contemplating bankruptcy, offered the
plaintiffs 30 per cent of his debt as a settlement in full.
The plaintiffs dissuaded him from going into bankruptcy,
accepted his alternative offer, received the money, and
closed the account. They have now brought this suit for
the balance. In the absence of any express decision in
this state on this point, the learned judge below did not
feel at liberty to depart from the general rule. We have
no such hesitation. The exact point is whether the debt-
or's relinquishment of his intention to seek a discharge
in bankruptcy, and his payment of 30 per cent instead,
184
CONTRACTS
constitute a sufficient consideration to bind the creditor
to the agreement. On that point we have no doubt. A
valuable consideration may consist in some right, in-
terest, or benefit to one party, or some loss, detriment,
or responsibility resulting, actually or potentially, to
the other. Bouvier's Law Diet. 'If there is any advan-
tage to the creditor, the law will not weigh the adequacy
of the consideration.' Fowler v. Smith, 153 Pa. 639, 25
Atl. 744. The accord in this case was good on both
branches. By it the creditors got a sum certain, instead
of the chances of an uncertain dividend in bankruptcy.
On the other hand, the debtor assumed the responsibility
of paying a sum certain, whether his assets were suffi-
cient or not, and gave up his right to a release of his
future assets, and to a discharge from his whole debt,
without regard to the sufficiency of his present assets.
"The decisions on this exact point in other states are
not numerous, but the general trend is uniform to the
result we have reached. In Hinkley v. Arey, 27 Me. 362,
it was said by Tenney, J., 'In this case the plaintiff was
informed that the defendant contemplated taking the
benefit of the bankrupt act, which was then in force.
If this intention had been carried out, the plaintiff would
lose the whole debt, beyond what he might receive as a
dividend; and the latter, judging from his letter, he did
not consider as very valuable. To save himself from
a greater loss under the law, he agreed upon the terms
of composition offered. The defendant, upon the agree-
ment and payment to Hubbard, took no further steps
to obtain relief under the bankrupt law.' It was accord-
ingly held that the accord and satisfaction were good.
The same ruling was made in Dawson v. Beall, 68 Ga.
328. And in Ourtiss v. Martin, 20 111. 557, 578; Engbret-
son v. Seiberling, 122 Iowa, 522, 64 L. R. A. 75, 101 Am.
St. Rep. 279, 98 N. W. 319, and Rice v. London & N. W.
American Mortg. Co., 70 Minn. 77, 72 N. W. 826, the
courts went still farther, and held the satisfaction valid
where the debtor was insolvent or in failing circum-
stances, though there was no express intention to seek
CONSIDERATION
185
a discharge in bankruptcy. In the last-named case it
was held that an agreement on behalf of the estate of
a debtor supposed to be insolvent was good, though it
turned out in fact that it was solvent. And in Petti-
grew Mach. Co. v. Harmon, 45 Ark. 290, the principle
that part payment by a third person makes the accord
valid was held to govern, where the third person was
one to whom the debtor had assigned his assets for the
payment of his debts. On principle and on authority,
therefore, the agreement in the present case was bind-
ing; and, there being no dispute on the material facts,
the defendant's sixth point, asking for binding instruc-
tions, should have been affirmed.''
Question 94: What were the facts, the question presented and
the decision of the court in the above case?
(Note: The exact question presented in this case has seldom
been raised, and there are very few authorities on the point.
See note to the above case in 11 Lawyer's Reports Annotated,
New Series, on page 1024, citing as in accord with the above case,
Engbretson v. Seiberling, 122 Iowa 522; Seegmiller v. Kelley,
(Iowa) 99 N. W. 1131; Herman v. Schlesinger, 114 Wis. 382;
Rice v. London & N. W. Am. Mort. Co., 70 Minn. 77. Contra,
Beaver v. Fulp, 136 Ind. 595.)
Case 95. Varney v. Connery, 77 Me. 527.
Virgin, J.: "If a debtor gives, and the creditor re-
ceives, in full satisfaction of the debt, a note indorsed
by a third person for a less sum than the amount of
the debt, it is a good accord and satisfaction to bar a
subsequent suit by the creditor to recover the baalnce
of the debt. Boyd v. Hitchcock, 20 Johns. 76; Dolvear
v. Arnold, 10 How. Pr. 529; Brooks v. White, 2 Met.
283; S. C. 37 Am. Dec. & note, 98. And a subsequent
promise to pay the balance is not binding. Phelps v.
Dennett, 57 Maine, 491. So that even if the case does
not come within the provisions of R. S., c. 82, § 45, the
verdict is not for that reason against law.
Question 95: What was received in settlement in this case?
If it was a good settlement, why would a subsequent promise to
pay the debt not be binding ?
186
CONTRACTS
Case 96. Harper v. Graham, 20 Ohio, 106.
Facts: Graham obtained a judgment against Harper
for $1,716.86 and costs. Harper being hard np, proposi-
tions of compromise were made and finally Graham's
lawyers proposed that
Harper should pay on the judgment.... $500.00
Attorney's fees 100.00
which was to be paid and received in full satisfaction.
Harper thereupon paid $656.44 in specie and Graham's
lawyers gave him a release in full.
This is a suit for the balance.
Ranney, J.: "* * * As stated by Alderson, B., in
Sibner v. Tripp, 15 Mee. & Welsb. 37: 'If you substitute
for a sum of money a piece of paper, or a stick of sealing
wax, it is different, and the bargain may be carried out
in its full integrity. A man may give in satisfaction of
a debt of £100, a horse of the value of five pounds, but
not five pounds.' In this case it was held that the accept-
ance of the negotiable security of the debtor himself, by
the creditor, was in law a satisfaction of a debt of greater
amount. This decision was made as late as 1846, and
the learned judge from whom I have quoted, ventures
to intimate in respect to the whole subject, that 'the
courts might very well have held the contrary, and have
left the matter to the agreement of the parties.' We see,
then, that the payment of a less sum than is due, the
day before a debt falls due, will discharge it—payment
at another place than is stipulated will do so—the de-
livery of a collateral article of any value will do so—
the acceptance of the debtor's note with security, the
note of a third person, or even the negotiable note of
the debtor himself, will do so; and yet the payment of
as much money in hand as is called for by such note,
will have no such effect!—although it is demonstrable
that the utmost the creditor can get from such note can
Costs
56.44
Total
$656.44
CONSIDERATION
187
not exceed the amount that he gets in hand in the other
case, without trouble, delay, or expense. It may seem
to some persons, not having a great veneration for those
institutions of antiquity, for which no reason can be
given, that a rule so effectually undermined, and having
neither rhyme nor reason to support it, ought to be at
once overruled and the whole matter placed upon the
footing of reason and common sense. Especially, as the
exigencies of modern commerce frequently compel the
most deserving men, with the aid of friends, to com-
promise their debts for less than the amount due—an
operation mutually beneficial to both debtor and cred-
itor, as the creditor gets a part, where otherwise he would
lose the whole, and the debtor is left free to commence
again with the hope of better success. These consider-
ations will necessarily arise whenever it becomes neces-
sary to decide the general question. In this case we
aspire to nothing higher than to follow in the footsteps
of the sages of the law, and hold this one of the cases
'taken out' of the rule.
Question 96: What was the amount of the original debt in
this case? The amount paid and the agreement under which it
was paid? Was that agreement effective? Why? Did the
court depart from the general rule that a payment of part
'cannot operate as a satisfaction of the whole, or did it say the
facts made an exception to the rule ?
(c) Debt Unliquidated.
Case 97. Snow v. Griesheimer, 220 111. 106.
Facts: There was a dispute between the parties as
to the amount of rent due from G. to S. on account of
certain repairs made by G., the tenant, for which he
claimed S., as landlord, promised to reimburse him. G.
sent checks to S., marking them as in "full payment.
S. received and banked the checks but insisted that they
were only received on account, and afterwards sued for
the balance claimed.
Point Involved: If the amount of a debt is in dispute,
is an agreement to accept in full settlement an amount
188
CONTRACTS
less than the full amount claimed by the creditor sup-
ported by a good consideration? Is the acceptance and
retention of a check an acceptance of the terms on which
it is sent, notwithstanding protests to the contrary?
Mr. Chief Justice Cartwright delivered the opinion
of the Court: "* * * The law is that where the
amount due a creditor is ascertained and not in dispute
the payment by the debtor and acceptance by the cred-
itor of a less sum will not operate as a satisfaction of
the demand, but if the amount due is unliquidated or
there is a bona fide dispute as to how much is due, a
payment of the amount claimed by the debtor to be due,
in full settlement, if accepted by the creditor is a satis-
faction of the claim. It is not necessary that the debtor
shall pay more in that case than he admits to be due,
and if a check for such sum is offered in payment of a
disputed account, it must be accepted by the creditor
upon the terms upon which it is offered or must be re-
jected. If a check is offered in full payment of the de-
mand, an acceptance will satisfy the demand although
the creditor protests at the time that it is not all that is
due him or that he does not accept it in full satisfaction
of his claim. * * *•
Question 97: (1) If a check for a lesser amount than that
which is claimed is sent in full payment can the creditor retain
the check and claim the balance of his original claim? Would
it make any difference in your answer whether the claim was
"liquidated or "unliquidated"? Why? What is an unliqui-
dated claim?
(2) A claims that B ow,es him $750. B admits a liability hut
in good faith claims that he owes $500. He pays A $500 under
an agreement that A will release the entire debt. A sues for
$250, and claims that as to the $500 the amount was liquidated
because conceded. Is the settlement a bar to the entire claim
or would it be necessary to have the settlement reach into the
disputed territory?
(Note to Case 97. An unliquidated claim is one the amount
of which is not a mere matter of calculation, that is to say, it is
CONSIDERATION
189
a claim in which the amount is reducible to. exactness only by
agreement of the parties or the verdict of a jury or finding of a
court. It may be a claim arising out of contract or commission
of tort. Generally speaking, claims for damages for breach of
contract are unliquidated, and all claims for damages arising out
of commission of tort are unliquidated. Where-an amount other-
wise certain, that is liquidated, is subject to bona fide dispute,
as in the reported case, the claim becomes unliquidated. A set-
tlement of an unliquidated claim is binding. A settlement of a
liquidated claim for a less amount than the amount due is not
binding, as we have seen in the foregoing cases, unless some
additional disadvantage to debtor, or advantage to creditor
exists, and in that case the additional advantage, although
slight, will take the case out of the rule.
A check for a lesser amount sent in payment of a liquidated
claim, may therefore safely be retained, for although retained
on the condition on- which sent, there is no consideration; but if
the amount is unliquidated, the acceptance of the check will bar
future recovery of the balance.
In answer to Q. 97 (2), there is a difference of opinion. Does
the sum accepted have to pass into the disputed territory in
order to amount to satisfaction ? Logically, yes; for that amount
is liquidated; but equitably and justly, no. The rule itself
being one of such doubtful wisdom, the exceptions to it ought to
be made as numerous as possible even if they are illogical. And
the court so holds in the above case.' But in Whittaker Chain
Tread v. Standard Auto Supply Co., the court held that where
the debtor claimed that only $30.01 was due, but the creditor
claimed $80.03, settlement in full for $30.01 was without con-
sideration.
. (d) Composition by Debtor with Creditors.
Case 98. Bell v. Baxter, 86 N. Y. 195.
Facts: The debtor agreed with all his creditors, and
they with each other, to accept a certain per cent in
settlement of their claims.
Point Involved: Whether an agreement by a debtor
with his creditors, and they with him and with each other,
to accept a part of their debts in full settlement, is
binding.
190
CONTRACTS
Earl, J.: * * An agreement to discharge the
whole of a debt upon receiving payment of a portion is
nudum pactum and not binding. Brit to this general rule
there are some exceptions, one of which is a composition
agreement, where the creditors agree to take a portion
of their debts in satisfaction of the whole. In such a
case the agreement of each creditor is said to furnish a
consideration for the agreement of every other creditor
who becomes a party to the composition agreement.
Each creditor enters into a new agreement with the
debtor, the consideration of which is the forbearance
by all the other creditors who become parties to the com-
position to insist upon their claims in full. * * * 
Question 98: What is a composition by a debtor with his
creditors ? How does it differ from the case of a debtor settling
with one creditor or settling with various creditors independent-
ly of each other? Is a composition legally effective? Does it
make any difference whether the debts are liquidated or un-
liquidated? Why, in such a case where not so in settlement
with one debtor?
§ 88. (Contracts, Sec. 56.) Compromise of disputed
claim.
Case 99. McKinley v. Watkins, 13 111. 140.
Facts: McKinley and Watkins traded horses. A
month or two after the trade the horse which Watkins
got died from an unsoundness that existed when the trade
took place. It did not appear that McKinley was guilty
of any deceit or that he made any warranty with respect
to the horse being sound. Watkins complained to Mc-
Kinley, and McKinley promised to give him $50 or a
$50 horse if he would not sue. This suit was brought
to recover such $50. The trial court instructed the jury,
4'If the jury believe from the evidence that there was a
horse trade between Watkins and McKinley, out of which
a difficulty had grown, and that Watkins was threaten-
ing to sue McKinley, and not deceiving him by any mis-
representations, and that McKinley rather than be sued
promised Watkins that he would pay him $50, then said
CONSIDERATION
191
promise is binding, and this regardless of the question
as to whether McKinley would or would not have been
liable in the suit which Watkins was threatening to bring
against him. The jury found for Watkins, and Mc-
Kinley appeals.
Point Involved: Was the above instruction a good
statement of the law?
Trumbull, Justice : "* * * The only question in
the case is as to the propriety of this instruction, and
in one point of view it is clearly erroneous. It assumes
that the defendant would be bound by his promise,
whether assented to by the plaintiff or not. Unless the
plaintiff were bound on his part not to do the act which
formed the consideration of the promise of the defend-
ant, the agreement was void for want of mutuality. The
promise of defendant to pay $50 if plaintiff would not
sue him was incomplete till accepted by the plaintiff.
Chitty on Contracts, 13.
"A mere offer, not assented to, constitutes no con-
tract; for there must be not only a proposal, but an
acceptance thereof. Story on Contracts, Par. 377, 378.
"The instruction in other respects is very nearly, if
not quite, correct. It assumes that, in order to support
the promise, there must have been a horse trade between
the parties, out of which a difficulty had arisen, and
the plaintiff-was threatening to sue the defendant, and
not deceiving him by any misrepresentations. If by this
is to be understood that the plaintiff must in good faith
have supposed that he had a good cause of action against
the defendant, growing out of the horse trade, the in-
struction is strictly proper. It is immaterial whether
the plaintiff could have recovered in such action or not.
If he honestly supposed that he had a good cause of
action, the compromise of such right was a sufficient
consideration to uphold a contract fairly entered into
between the parties, irrespective of the question as to
who was in the right. It has often been decided that
the compromise of a doubtful right is a sufficient con-
192
CONTRACTS
sideration for a promise; and it is immaterial on whose,
side the right ultimately turns out to be, as it must al-
ways be on one side or the other, because there can be
but one good right to the same thing. Taylor v. Patrick,
I Bibb, 168; Russel v. Cook, 3 Hill, 504; Moore v. Fitz-
water, 2 Band. 442; O 'Keson v. Barclay, 2 Penn. Bep.
531.
"If the plaintiff was threatening to sue on a claim
which he knew was wholly unfounded, and which he was
setting up as a mere pretense to extort money from
the defendant, a contract founded on a promise not to
sue in such a case would be utterly void. In order to
support the promise there must be guch a claim as to
lay a reasonable ground for the defendant's making the
promise, and then it is immaterial on which side the
right may ultimately prove to be. Edwards v. Baugh,
II Mees. & Wels. Bep. 641; Perkins v. Gay, 3 Serg. &
Bawle, 331.
"The judgment of tbe circuit court is reversed, and
the cause remanded for new trial.
Question 99: What was lacking in the instruction of the court
that made it an erroneous statement of the law ? If that element
had been supplied would the agreement have been binding? In
a compromise of a claim is the question whether the claim would
have been successful in a law suit, of any consequence? Sup-
pose the claimant makes a claim as a mere pretense to extort
money, knowing there is no foundation for it, is a compromise of
such a claim valid ?
§ 89. (Contracts, Sec. 57.) Forbearance of suit as good
consideration.
(Note: A promise to forbear suit, for a definite period is a
good consideration, as there is a right to sue at once, regardless
of merits of the case if the claim is in good faith. Generally held
also that an agreement to forbear without any statement as to
time is a good consideration as a reasonable time will be implied;
although some authorities are contra, holding the time of forbear-
ance must be definite.)
CONSIDERATION
193
§90. (Contracts, Sec. 58.) Consideration in subscrip-
tions.
(Note: Subscriptions, or promises to contribute, are of two
general sorts: charitable; and business subscriptions. A chari-
table subscription is generally looked upon as an offer only, and
not contractual, until accepted by the beneficiary by doing some
act upon the faith of it. Until that time, it can be withdrawn,
and death or insanity before such act will revoke it. (See Case
51, supra.) However, mutual subscriptions, made in reliance
upon each other, have been upheld as upon sufficient considera-
tion. See extensive note, 48 Lawyers' Reports Annotated, new
series, page 783.
Business subscriptions, as to the stock of a corporation may
become effective upon acceptance.)
CHAPTER 11.
LEGALITY OF CONTRACTS.
A. Legality of contract an essential element.
B. Particular classes of illegal agreements.
A. Legality of Contract an Essential Element.
§91. (Contracts, Sec. 59.) Illegal agreements void.
(Note by editor: If legality is an essential element in con-
tract, obviously an illegal agreement is not a contract, and it is
incorrect to speak of an illegal contract. Inasmuch, however, as
that phrase has usage and is convenient to carry the idea that an
agreement is contractual except for its illegality we may not only
tolerate its use, but in fact recognize its convenience.
The editor has thought that a more logical treatment than that
attempted here would be to differentiate more definitely between
contracts of a positively illegal character and those merely un-
enforceable because against sound public policy. Such a distinc-
tion is at any rate worthy of notice. Among contracts (or
stipulations in contracts) not enforceable as being against public
policy would be contracts in restraint of trade and agreements
inflicting penalty for breach (treated under Interpretation of
Contracts in this book.)
B. Particular Classes of Illegal Agreements.
1. Contracts whose objects or tendencies are in violation of law or opposed
to public policy.
2. Contracts illegal because of manner of formation.
1. Contracts whose objects are in violation of law or
opposed to public policy.
§ 92. Contracts in restraint of trade.
§ 93. Contracts of monopolistic tendency.
§ 94. Contracts limiting liability.
194
LEGALITY OF CONTRACTS
195
§ 95. Usurious contracts.
§ 96. Wager contracts.
§ 97. Contracts tending to corrupt the public service.
§ 98. Agreements in restraint of marriage.
§92. (Contracts, Sec. 60.) Contracts in restraint of
trade.
Case 100. Harris (defendant) v. Theus (complain-
ant), — Ala. —, 10 L. R. A. N. S. 204.
Facts: Theus purchased from Harris certain leases
of pine land at or near Geneva, Alabama, for turpentine
purposes, and erected a distillery for the manufacture
of turpentine. In the contract it was provided that Har-
ris would not engage in the turpentine business at any
point within 10 miles of the town of Geneva so long as
Theus should be engaged in said business in Geneva.
Theus files his bill setting forth that Harris has not ob-
served this agreement and asks for an injunction.
Point Involved: That a court of equity will enforce
by injunction an agreement in partial restraint of trade,
if reasonable, when entered into in connection with the
sale of a business.
Denson, J., delivered the opinion of the court:
"It may be conceded as being the general rule in all
the states, as well as in England, that contracts in general
restraint of trade are void as against public policy.
* * * In determining what is the public policy in
this regard, we have, however, to take into account cer-
tain contracts which restrain trade. It is of public inter-
est that everyone may freely acquire and sell and trans-
fer property and property rights. A tradesman, for
example who has engaged in a manufacturing business,
and has purchased land, installed a plant, and acquired
a trade connection and good will thereby, may sell his
property and business, with its good will. It is of public
interest that he shall be able to make such a sale at a
fair price, and that his purchaser shall be able to obtain
by his purchase that which he desired to buy. Obviously,
the only practical mode of accomplishing that purpose
196
CONTRACTS
is by the vendor's contracting for some restraint upon
his acts, preventing him from engaging in the same busi-
ness in competition with that which he has sold. His
contract to abstain from engaging in snch competitive
business is a contract in restraint of trade, but one which
* * * has been recognized as not inimical to, but per-
mitted by, public policy. Therefore, while the public
interest may be that trade in general shall not be re-
strained, yet it also* permits and favors a restraint of
trade in certain cases. Contracts of this sort, which have
been sustained, and enforced by courts, have been gen-
erally declared to be such as restrain trade, not generally,
but only partially, and no more extensively than is rea-
sonably required to protect the purchaser in the use and
enjoyment of the business purchased, and are not other-
wise injurious to the public. This is the doctrine recog-
nized in the courts of many of the states, including our
own court. 9 Cyc. Law & Proc. p. 529, and cases cited
in note 70; 24 Am. & Eng. Enc. Law, 2d ed. p. 850; Mc-
Curry v. Gibson, supra; Tuscaloosa Ice Mfg. Co. v. Wil-
liams, 127 Ala. 110, 50 L. R. A. 175, 85 Am. St. Rep.
125, 28 So. 669; Trenton Potteries Co. v. Oliphant, supra.
i (# * *
 It is made to appear * * * that crude gum is an
article that is purchased by those engaged in the naval
stores business and that one engaged in the business at
or near Geneva may obtain, and does purchase the gum
from persons within a radius of ten miles from Geneva
* * * so that the place fixed by the covenant within
ten miles of Geneva, considered in connection with the
nature of the business and the purpose of the contract
soems to afford only a fair protection to the interests
of the covenantee without being so large as to interfere
with the interests of the public. * * * [Agreement
upheld.]
Question 100: (1) Is a contract in restraint of trade when
made by itself void? "Why? If it is made-in connection with a
sale of a business is it valid? Why? In the latter case is it
LEGALITY OF CONTRACTS
197
necessary to place any limitations upon the agreement not to
compete? Why?
(2) A plans to establish a mill to compete with B's mill.
B hears of this and in order to keep A out of the territory
proposes to pay A a certain annuity if he will not establish the
mill. A agrees to this and refrains from establishing the mill.
He sues for the annuity. Has B any defense ?
Case 101. TiHinghast v. Boothby, 20 Rhode Island
Reports, 59.
Bill in equity to restrain respondent from practising
dentistry in the county of Providence. Heard on de-
murrer to the bill.
Per Curiam. "This bill seeks to restrain the defend-
ant from violating the terms of his agreement by which
he was employed to work for the complainant, as a den-
tist, with a stipulation that he would not, after the ter-
mination of the contract, 'either directly or indirectly
carry on or be employed or concerned in the practice
of dentistry in the county of Providence, Rhode Island.'
"The ground urged upon demurrer to the bill is that
the restrictions are unreasonable. It was decided in
French v. Parker, 16 R. I. 219, that such a contract was
valid though unlimited as to time; and in Herreshoff v.
Boutineau, 17 R. I. 3, and in Oakdale Co. v. Garst, 18 R.
I. 484, that the reasonableness of a restriction in a con-
tract is the test of its validity. There is no manifest
unreasonableness in the contract before us, and hence
there is no ground apparent in the bill upon which we
can declare it to be invalid.
"The demurrer is overruled.
Question 101: Is a contract in restraint of trade that is un-
limited in point of time valid? What was the territorial re-
striction in the above case, and what did the court say about its
apparent reasonableness?
Case 102. Hall Mfg. Co. v. Western Steel & Iron
Works, 227 Fed. 588, L. R. A. 1916 C. 620.
Facts: This is a bill brought by the Hall Mfg. Co.
against the Western Steel & Iron Works to enjoin breach
198
CONTRACTS
of agreement not to compete. The facts are stated in
the opinion.
Point Involved: The development of the law of agree-
ments in restraint of trade; whether an agreement not
to compete can be unlimited in time and space where
the business bought is of such a character as to reason-
ably require a general restraint to protect the buyer-in
the acquisition of the good will.
Baker, Circuit Judge : ' 'This appeal is from a decree
dismissing appellant on final hearing.
"Facts, counted on in the bill and established by the
proofs, may be summarized as follows:
"Appellant, an Iowa corporation, located at Monticello,
was engaged in making wire stretchers, hoisting blocks,
stake irons, weed pullers, and similar farm appliances,
and in selling them generally wherever there was a de-
mand.
"Appellee, Western Steel & Iron Works, a Wisconsin
corporation, located at De Pere, was engaged in making
farm gates, trowels, spades, etc. It was organized in
1905. Prior to November 26, 1910, it also made and sold
post hole augers and diggers—diggers since 1905 and
augers since the beginning of 1909.
"During the summer and fall of 1910 appellee was
financially embarrassed, its property was under mort-
gage, and it was in pressing need of ready money. It
solicited appellant to buy its digger and auger business,
which amounted to about half of its total business. Offi-
cers of appellee visited Monticello, officers of appellant
examined the property at De Pere, and meetings were
had at Milwaukee. On November 26, 1910, appellee sold
and conveyed to appellant everything pertaining to the
digger and auger business, machinery, tools, dies, finished
and unfinished stock, orders, patents, and 'the good will
of the business.' Collateral to the sale of the good will
appellee covenanted 'to render such assistance as it rea-
sonably can in introducing it (appellant) to the trade
and in forwarding to it any orders it may receive for
LEGALITY OF CONTRACTS
199
augers and diggers after December 10, 1910,' and 'not
again to go into the manufacture of post hole augers and
diggers.'
"At the time of the sale, when appellee's business in
diggers was five years old and in augers two, it had
marketed these articles in thirty-four of the United
States and in two Canadian provinces. In considerable
regions these articles cannot be used. Appellee's sales
were entirely to jobbing houses. In addition to seed that
had already brought forth fruit, appellee through adver-
tisements, commission men, and the outstretched hands
of jobbers had sown other seed, so that we may take the
fact to be in accordance with the admitted representa-
tion of appellee's treasurer that appellee was trying to
sell wherever there was a demand and that by reason-
able attention the trade could be expected to extend
'throughout all parts of the United States and Canada
where augers and diggers can be used.' So it is evident
that appellee was selling and was covenanting to protect
a national and international good will.
"Appellant paid the agreed price $13,500, less deduc-
tions, provided for in the contract, of about $3,000 for
appellee's failure to turn over the stipulated amount of
orders. The evidence in the record warrants the con-
elusion that appellee under the contract obtained about
double the fair selling value of its worn machinery, tools,
etc., and that appellant would not have purchased the
physical property apart from the good will of the busi-
ness and appellee's protective covenants.
"This purchase was made by appellant because diggers
and augers would fit in well with the lines of farm ap-
pliances it was already making and selling. Neither be-
fore nor afterwards was appellant a party to any com-
bination or agreement for fixing prices or restraining
competition. And consumers have been able to purchase
diggers and augers at prices as low as formerly, under
competition of the same number of independent manu-
facturers doing business throughout the country.
"Appellant began promptly to manufacture and mar-
200
CONTRACTS
ket the same seven styles that appellee had been snp-
plying to the trade, and under the same seven names,
which, except as to 'Ideal' and 'Western,' for which pat-
ents were assigned to appellant, had become generic
names of styles on which patents had expired.
"Within a month or so appellee, with its mortgage
discharged and its financial embarrassment relieved, be-
gan to manufacture all its former open styles under the
old names, and to sell them wherever it could. When
appellant learned of this conduct, some six months later,
it protested; and, its protest being defied, this suit was
begun.
"Appellee Jenny was made a defendant under allega-
tions that patents owned by appellee company stood in
his name and had not been assigned as provided for in
the contract. These averments are not sustained, and
the decree as to Jenny will be affirmed.
"Appellee in its answer justified its conduct under an
alleged rescission. But as the proofs showed that ap-
pellee was holding onto the purchase price and had made
no offer to restore the status, the contract must be con-
sidered alive.
* # #
"Is appellant remediless? The trial court so decided
because the protective covenants are without limitation
of either time or place.
"In the first reported case, that of John Dier, decided
in 1415, Year Book 2 Hen. Y, 5, covenants were held to
be unenforceable, no matter how limited in time and
place. Hull, J., said:
 'In my opinion you might have demurred upon him,
that the obligation is void, inasmuch as the condition is
against the common law; and (per Dieu) if the plaintiff
were here he should go to prison till he paid a fine to
the king.'
"During the generations when an artisan had to pass
through apprenticeship into a guild, when he was tied
to his trade and place by statutes forbidding him to leave
his parish under pain of pillory or prison, when if he
LEGALITY OF CONTRACTS 201
could not stand where he was rooted he would become
a public charge, it may have been right enough for the
king's courts to see no public interest but the artisan's
ability to pay taxes and serve the king. If, however,
fifteenth century doctrines of absolutism were to govern
in twentieth century conditions of democracy, a victim
of a covenantor's perfidy might well prefer to settle his
legal rights by the fifteenth century wager of battle. But
the glory of the common law is its inherent power of
growth, its adaptability to new and enlarged conditions
of life, its respondence to higher standards of social and
business ethics. And so during the centuries naturally
there were developments and departures with respect to
this ancient doctrine. It took the courts a long time to
get beyond testing the validity of a restrictive covenant
purely by the presence or absence of limitations. If a
restraint was unlimited as to both time and place, or
was unlimited as to place though not as to time, it was
unenforceable; if limited as to both time and place, or
if limited as to place, though not as to time, it was valid.
"But, beginning about 1830, the advent of the factory
system, multifold new machines, railroads, steamships,
fast mail and express service, telegraphs, telephones,
wireless, trolleys, automobiles, aeroplanes, lessening
space, shortening time, offering continually new and
widening avenues for both labor and capital, emphasized
a point of view that had been suggested in somewhat
earlier times; and that is that the validity of a restrictive
covenant should be tested by determining whether on
the facts of the particular case the restraint is greater
than is reasonably necessary for the protection of the
purchaser of the business and good will. The history
of the development, with its waves of progress and reces-
sion, may be traced in England and our own country
in the following cases: Dier's Case (1415) supra; Ips-
wich Taylor's Case (1615) 11 Coke, 53; Broad v. Jollyfe
(1621) Cro. Jac. 596; Mitchell v. Reynolds (1711) 1 P.
Williams, 181; Bunn v. Guy (1803) 4 East, 190; Horner
v. Graves (1831) 7 Bing. 735; Whittaker v. Howe (1841)
202
CONTRACTS
3 Beavan, 383; Mallan v. May (1843) 11 M. & W. 653;
Price v. Green (1847) 16 M. & W. 346; Tallis v. Tallis
(1853) 1 El. & El. 391; Harms v. Parsons (1862) 32
Beavan, 329; Leather Cloth Co. v. Lorsont (1869) 39
L. J. Ch. 86; Hagg v. Darley (1878) 47 L. J. Ch. 567;
Rousillon v. Rousillon (1880) 49 L. J. Ch. 338, 14 Ch. D.
351; Baines v. Geary (1887) 35 Ch. D. 154; Mills v. Hun-
ham (1891) 1 Ch. 576; Badische Anilin und Soda Fabrik
v. Schott Segner & Co. (1892) 3 Ch. 447; Nordenfelt
v, Maxim-Nordenfelt Guns and Ammunition Co. (1849)
App. Cas. 535, 63 L. J. Ch. 908; Dubowski & Sons v.
Goldstein (1896) 1 Q. B. 478; Underwood v. Barker
(1899) 1 Ch. 300; Haynes v. Boman (1899) 2 Ch. 13;
Lamson Pneumatic Tube Co. v. Phillips (1904) 91 L.
T. 363; Dowden & Pook, Limited v. Pook (1904) 1 K. B.
45; Henry Leetham & Sons, Limited v. Johnstone-White
(1907) 1 Ch. 322; Mason v. Provident Clothing & Supply
Co., Ltd. (1913) A. C. 724; Nevanas & Co. v. Walker
& Foreman (1914) 1 Ch. 413; Oregon Steam Navigation
Company v. Winsor (1873) 20 Wall. (87 U. S.) 64, 22
L. Ed. 315; Diamond Match Co. v. Roeber (1887) 106
N. Y. 473, 13 N. E. 419, 60 Am. Rep. 464; Fowle v. Park
(1883) 131 U. S. 88, 9 Sup. Ct. 658, 33 L. Ed. 67; Gibbs
v. Consolidated Gas Co. of Baltimore (1888) 130 U. S.
396, 9 Sup. Ct. 553, 32 L. Ed. 979; Carter v. Ailing (C.
C. 1890) 43 Fed. 208; United States Chemical Co. v.
Provident Chemical Co. (C. C. 1894) 64 Fed. 946; Har-
rison v. Glucose Sugar Refining Co. (1902) 116 Fed. 304,
53 C. C. A. 484, 58 L. R. A. 915; National Enameling &
Stamping Co. v. Haberman (C. C. 1903) 120 Fed. 415;
Knapp v. S. Jarvis Adams Co. (1905) 135 Fed. 1008,
70 C. C. A. 536; Prame v. Ferrell (1909) 166 Fed. 702,
92 C. C. A. 374; Marshall Engine Co. v. New Marshall
Engine Co. (1909) 203 Mass. 410, 89 N. E. 548.
■'Tested by the rule of reason, a restrictive covenant
is not necessarily valid because it is limited in time and
place. Logically the corollary follows that by the same
rule of reason a restrictive covenant is not necessarily
invalid because it is unlimited in time and place. A re-
LEGALITY OF CONTRACTS
203
straint of 500 miles and 50 years on a village doctor,
who had only a local practice, would be unreasonable,
because not reasonably necessary to the protection of his
successor, while a general covenant by Pears Soap Com-
pany should be enforced (at least to the extent of the
decreeing court's reach) because the good will of the
business is world-wide and of expected indefinite con-
tinuance.''
(Agreement upheld, and decree below in favor of de-
fendant, reversed.)
Question 102: (1) "What was the nature and extent of the
business of the appellee (seller) in Case 102? What was the
agreement in respect to the sale of the good will and the extent
of the seller's agreement not to go into business again?
(2) What was the subsequent conduct of the seller which
led to this suit ?
(3) What did the trial court hold ?
(4) What was the early doctrine as to contracts in restraint
of trade unlimited as to space? Did the reasonableness of an
unlimited restraint make the agreement valid ?
(5) Was this point of view afterwards changed? Why?
( (6) What two illustrations were given by the court in which
in its opinion a contract in general restraint would be in the first
case invalid and in the second case valid?
(Note: In L. R. A. 1916 C at p. 628, in a note to above case,
the annotator says: '' but in modern times the good will of a
business frequently extends beyond the confines of a state or even
a country, and occasionally it is world wide. In such case, unless
the contract on some other ground is objectionable, as, for ex-
ample, tending to promote a monopoly or impairing the public
interest, the test as to its validity is not the question whether
or not it is in general or partial restraint of trade, but rather
whether or not in its scope it is broader than necessary to protect
the purchaser and the business and good will he has purchased.
And it may be confidently asserted that where uninfluenced by
statute, and with the exception noted, a covenant, although in
general restraint of trade, will be sustained where it is ancillary
to a contract to secure the full enjoyment of which the covenant
is reasonably necessary.")
204
CONTRACTS
(Note: Divisibility of agreement in restraint of trade. See
note on this point in 24 Lawyers Reports Annotated, new series,
page 942. The point is this: If an agreement is in restraint
of trade and the restraint agreed upon is more than reasonably
necessary to protect the buyer in the acquisition of the good
will, will the court enforce the agreement so far as reasonable
and not enforce it as to the rest, or will it fall in its entirety?
In the first place, the agreement may have been made divisible
by the parties as, for instance, an agreement by the seller not
to engage in such business in the city of X, or the county of X,
or the counties of X, Y and Z, or the state of X. Supposing that
some of these restraints are void, the others or other will stand
and be enforced. But suppose the restraint was merely (with-
out division by the parties) not to engage in business in the
state of X and this was unreasonable. Would the court divide
the agreement and enforce it as to the city of X? There have
been decisions that the court will so divide it, but the weight of
authority is that if the parties have made no division, the courts
cannot do so for them and the entire agreement falls.)
§93. (Contracts, Sec. 61.) Contracts of monopolistic
tendency.
Case 103. The Distilling & Cattle Feeding Co. v. Peo-
pie, 156 111. 448.
Facts: This was a quo warranto proceeding brought
by the Attorney General against the Distilling and Cat-
tie Feeding Co., alleging that it existed by reason of an
agreement for the creation of monopolistic trust entered
into and composed by various corporations and individ-
uals for the purpose of stifling competition and creating
monopoly. The proceeding was brought for the purpose
of dissolving the said trust on the ground that it was
illegal.
Point Involved: Is a combination for purposes of
monopoly illegal?
Mk. Justice Bailey: "There can be no doubt, we
think, that the Distillers' and Cattle Feeders' Trust,
which preceded the incorporation of the defendant, was
an organization which contravened well-established prin-
LEGALITY OF CONTRACTS
205
ciples of public policy, and that it was, therefore, illegal.
No one who intelligently considers the scheme of this
trust, as detailed in the information, can for a moment
doubt that it was designed to be, and was in fact, a com-
bination in restraint of trade, and that it was organized
for the purpose of getting control of the manufacture
and sale of all distillery products, so as to stifle com-
petition, and to be able to dictate the amount to be manu-
factured and the price at which the same should be sold,
and thus to create, or tend to create, a virtual monopoly
in the manufacture and sale of products of that char-
acter. No other business principles can be suggested
upon which the development of such an elaborate and
far-reaching scheme can be accounted for. No rational
purpose for such organization can be shown consistent
with an intention to allow business to run in its normal
channels, to give competition its legitimate operation,
and to allow both production and prices to be controlled
by the natural influence of supply and demand, and the
results, as shown by the information, were such as might
be anticipated. The trust obtained possession of nearly
all the distilleries and of nearly the entire distillery
product of the United States, thus enabling it to dictate
prices and the amount of production, and to thus draw
to itself the substantial control of the distillery business
of the country.
11 Combinations of this character have been frequently
made the subject of judicial investigation within the last
few years, and while the proceeding has most generally
been against some one of the corporations entering into
the trust, the courts, so far as they have had occasion
to speak on the subject at all, have held such trusts to
be illegal.
Question 103z (1) What was the purpose of the above suit?
By whom was it brought? What was tin object of the combina-
tion involved? What did the court say with reference to the
legality of such combinations?
(2) What is the nature of monopoly? Suppose an auto-
mobile manufacturer by his skill, industry and integrity vir-
206
CONTRACTS
tually secures.the market for the class of cars he sells, has he a
monopoly? Distinguished between such a case and the above
case.
§ 94. (Contracts, Sec. 62.) Contracts limiting liability.
Case 104. Checkley v. I. C. R. Co., 257 Illinois Re-
ports, 491.
Facts: Checkley sues the railroad company to recover
damages for loss of a warehouse and its contents by fire
caused by negligence of employees of defendant. De-
fense that the warehouse was rented by plaintiff from
defendant under a lease which provided: "All risks of
loss, injury and damage by fire, however caused, and
whether or not caused by the negligence of the lessor,
its agents or servants, being hereby assumed by the
lessee. The plaintiff argues that this provision is
against public policy.
Point Involved: Whether a landlord and tenant can
validly agree that the tenant shall assume the risk of
the landlord's negligence. Whether a common carrier
can contract against loss by its own negligence (a) in
respect to acting in its capacity of a common carrier;
(b) in respect to action outside of such capacity.
Me. Justice Vickees: "* * *
'' The rule is well established by decisions in this State
and elsewhere, that any contract by which a common
carrier of goods or passengers undertakes to exempt
himself from liability for loss or damage arising from
the negligence of himself or his servants is void as
against public policy. Such contracts, if sustained, would
relieve the carrier from its essential and important du-
ties to the public growing out of the character of its
employment and tend to defeat the foundation principle
on which the law of common carriers is based,—that is,
the securing of the highest care and diligence in the per-
formance of the important duties to the public. It has
accordingly been very generally accepted as a sound
principle of the common law, that any general stipuke-
LEGALITY OF CONTRACTS
207
tion in a carrier's bill of lading or receipt by which the
consignor or consignee is made to assume the risks of
conveyance, or any special risks like those of fire and the
like, will always be read with an implied exception of in-
juries or damage resulting from the want of ordinary
care on the part of the carrier or his servants. This gen-
eral doctrine is supported by numerous authorities, many
of which are collected and cited by Cooley on Torts (3d ed.
p. 1479). But the lease by appellee of a portion of its
right of way for a warehouse does not relate to any of
the duties imposed by the law upon appellee as a common
carrier. The public is in no way concerned in this trans-
action, nor is it a matter of public interest whether the
loss of the property destroyed by fire shall fall on one
party rather than on the other. The situation is entirely
different between the loss of this warehouse and its con-
tents and the loss of goods entrusted to a carrier for
transportation. In the latter case the public has an in-
terest which is conserved by holding the carrier to a
strict accountability for its negligence or that of its serv-
ants, and this for the plain reason that the public is
compelled to employ the carrier to transport goods. Any
member of the public is liable to require the services
of a common carrier, and the carrier is under the legal
duty of serving the public indiscriminately. Not so in
regard to leasing a part of its right of way for a ware-
house or an elevator. While the railroad company has
the power to make such lease if it does not interfere with
its duties to the public, it is in no sense required to do
so. No one could compel a railroad company, by manda-
mus, to lease its right of way for such purposes. It
relates to a matter that is entirely within the discretion
of the railroad company. In testing the validity of the
lease under consideration, the circumstances that one
party to it is a railroad corporation and engaged in the
service of the public as common carrier is not of con-
trolling importance. Indeed, it is difficult to see that it
is of any importance whatever. Page, in his late work
on Contracts, in section 368, lays down the rule as fol-
208
CONTRACTS
lows: "The rule that a common carrier cannot, by con-
tract, relieve himself from liability for the negligence
of himself or his employees has no application to pro-
visions in leases given by such carrier for buildings
owned by him on or near the right of way, exempting
him from liability for loss by fire.'
"The precise question now under consideration does
not appear to have been heretofore presented to this
court, but it has been decided in a number of other juris-
dictions in accordance with the rule above stqted by
Page. Among the cases where leases of the same general
character as the one here involved have been valid and en-
forcible the following may be cited: Hartford Fire Ins.
Co. v. Chicago, Milwaukee and St. Paul Railway Co.,
175 U. S. 91; King v. Southern Pacific Railroad Co.,
109 Cal. 96; 29 L. R. A. 755; Stephens v. Southern Pacific
Railroad Co., 109 id. 86; 50 Am. St. Rep. 17; 29 L. R. A.
751; Griswold v. Illinois Central Railroad Co., 90 Iowa,
265; 24 L. R. A. 647; 57 N. W. Rep. 843; Greenwich Ins.
Co. v. Louisville and Nashville Railroad Co. (Ky.) 56
L. R. A. 477; Wabash Railway Co. v. Ordelheide, 172
Mo. 436; Rutherford v. Wabash Railroad Co., 147 Mo.
441; Northern Pacific Railway Co. v, McClure, 9 N. Dak-
73; 47 L. R. A. 149; 81 N. W. Rep. 52. The cases above
cited all involved, either directly or indirectly, the valid-
ity of contracts, most of them leases like the one involved
here, which purported to exempt the railroad company
from liability for fires happening through the negligence
of its servants. There is no well considered case that
has come to our notice to the contrary. Some expres-
sions may be found to the general effect that any con-
tract by any person which assumes to place another party
at the mercy of his own faulty conduct is void as against
public policy, but such a statement of the rule of the law is
too general and sweeping to receive judicial sanction. A
fire insurance policy issued to anyone which purported to
insure his property against his own willful and inten-
tional burning of the same would manifestly be con-
demned by all courts as contrary to a sound public policy,
LEGALITY OF CONTRACTS
209
but it is not unlawful for insurance companies to issue
policies which, will protect property against a loss caused
by the negligence of the assured. That is probably the
most fruitful cause of fire losses. A common carrier own-
ing property may obtain insurance against loss by fire
resulting from the negligence of himself or his servants,
and a stipulation may lawfully be entered into between
the carrier and the owner of the goods by which the car-
rier is to have the benefit of such insurance procured
thereon by the owner. If the owner of goods about to
be transported insures them against loss by fire in transit,
the carrier may make a-lawful contract with the shipper
that after having paid the owner for the loss under its
general common law liability it may maintain an action
against the insurance company and collect the insurance
by way of indemnity for the loss sustained. (Phoenix
Ins. Co. v. Erie Transportation Co., 117 U. S. 312; Wager
v. Providence Ins. Co., 150 id. 99; Hartford Ins. Co. v.
Chicago, Milwaukee and St. Paul Railway Co., supra.)
If appellee had owned the warehouse and its contents in
question it could have lawfully insured the same for its
own benefit, and such insurance contract might have pro-
tected appellee from loss or damage caused by fire orig-
mating through the negligence of its servants. If such
a contract, which is one of indemnity, merely, is valid,
why may not appellee lawfully protect itself from dam-
age arising from the same course by a stipulation with
its tenant1? There appears to be no distinction, either
upon reason or authority, for upholding the contract in
one case and declaring it void in the other.''
Question 104: (1) Is it competent for a common carrier to
contract against liability for loss arising out of its negligepce
in connection with its duties as a common carrier ?
(2) If one person leases property to another under a contract
whereby the lessee assumes all risk of loss, even that arising from
the lessor's own negligence, is such provision valid?
(3) Can a common carrier bring itself within this rule?
Why?
210
CONTRACTS
§ 95. (Contracts, Sec. 63.) Usurious contracts.
Case 105. Planters' Nat. Bank v. Wysong & M. Co., 12
American Lawyers Reports, 1416.
Walker, J., delivered the opinion of the court:
 There are three principal questions raised in this
case: First, was there usury? Second, if so, can it be
recovered by way of counterclaim? Third, is the action
barred by the statute ?
 First. If a bank loans $2,000, at 6 per cent interest,
with the understanding and agreement that it shall retain
$500 of the amount as a deposit of the borrower in the
bank, which shall not be subject to his check or his with-
drawal of it, but remain on general deposit under control
of the bank, it is evident that the bank is charging and
receiving 7y<± per cent interest, or iy2 per cent in excess
of the legal rate of interest. The transaction has not even
the merit of being an ingenious device to hide or conceal
the usury, for it is perfectly apparent what the legal ef-
feet is, as the borrower is paying 6 per cent on $2,000,
when he is to receive only $1,500. The usury is plain and
palpable, and there can be no doubt of the intent, on the
part of the bank, to violate the law against the payment
of excessive interest, or usury. There are, generally
speaking, four elements of usury: (1) A loan or forbear-
ance of money, either express or implied; (2) upon an
understanding that the principal shall be or may be re-
turned; (3) and that for such loan or forbearance a
greater profit than is authorized by law shall be paid
or agreed to be paid; (4) entered into with an intention
to violate the law. The fourth element may be implied
if all the others are expressed upon the face of the con-
tract; the other three must be established by a sufficiency
of evidence. The transaction in question clearly em-
braces all of these elements. The usury is indisputable.
29 Am. & Eng. Enc. Law, 2d ed. p. 509, states that 'in the
case of loans or discounts by a bank at the highest legal
rate of interest, a provision that the proceeds of the loan
or discount or any part thereof shall be kept as a deposit
LEGALITY OF CONTRACTS
211
in the bank during the period or a portion of the period
of the loan renders the transaction usurious, for the rea-
son that the borrower thus pays interest on money which
he does not receive or have the use of.' 
Question 105: What was the agreement in Case 105? What
are the four elements of usury? Was the charge in this case
usurious ?
(Note to Case 105. (1) What is usury f Usury is the charg-
ing a higher rate for the use of money than the' law permits.
This rate varies in different states. Any device by which such
greater rate is obtained constitutes usury, although called a
"commission or any other name. One who lends money for
another may, however, charge a commission for his efforts al-
though the borrower thereby pays in interest and commission a
greater sum than the legal rate. Deducting beforehand the full
legal interest is not usury.
(2) Penalty for charging usury. Usury once paid cannot be
reclaimed. An apparent exception to this is where one is com-
pelled to pay usury to a purchaser of negotiable paper where
the usury is hidden. The penalty for charging usury is a civil
penalty, and enforceable only at the defense of the borrower
when sued on the loan and when he makes that defense. The
penalty varies with the jurisdiction from loss of the excess in-
terest to loss of principal.)
Case 106. Bowman v. Neely, 137 111. 443, 27 N. E. 758.
Mr. Justice Shope delivered the opinion of the court:
"The plaintiff below, John Neely, filed his claim in the
county court of Jersey county, against the estate of
Joshua Neely, deceased, upon a promissory note, as fol-
lows:
*$3481.31 Jerseyville, 111., Feb. 12, 1876.
'One year after date, for value received, I promise to
pay to the order of John Neely thirty-four hundred eighty-
one 31/100 dollars, with ten per cent interest from date,
at the banking house of Cross, Carlin & Co., interest pay-
able annually, and if not so paid, to become the principal,
and to bear the same rate of interest.
'Joshua Neely.'
212
CONTRACTS
"On the note were the following indorsements: 'Oct.
4,1879, received two thousand dollars on this note;' 'Paid
$300, (three hundred dollars,) Nov. 28,1883;' 'Paid upon
the within Feb. 20, 1886, $1000 by M. E. Bagley.'
"The county court allowed the claim, but refused to
allow interest upon the interest. On claimant's appeal
the cause was tried in the circuit court without a jury,
and the court allowed and rendered judgment for the
principal and interest, and interest upon interest, as pro-
vided in the note. The administrator appealed to the
Appellate Court for the Third District, where the judg-
ment of the circuit court was affirmed. The case is
brought to this court by the further appeal of the ad-
ministrator.
It is not contended that the note provides for the pay-
ment of usurious interest, or that a sum in excess of the
legal rate was reserved therein. The question presented
is, whether the interest on the note, if not paid when due,
according to the terms of the note, (that is annually,) be-
came principal, and drew interest, and whether such in-
terest upon the interest is collectible,—that is, whether
compound interest can be contracted to be paid. It is
conceded that the interest was not paid when due, or was
not paid annually from the date of the note, and it is
shown by the two judgments of the county and circuit
courts, that a difference of something in excess of $500
will be made if interest upon overdue interest is allowed.
It was said in Leonard v. Villars' Admr. 23 111. 377: 'To'
compute interest upon interest after its maturity, has by
all courts, whether exercising equity or common law ju-
risdiction, been held to be compound interest, and in vio-
lation of law.' It is clear that the contract is here for
compound interest. This question has been considered
by this court, and we have uniformly held that compound
interest is not recoverable in this State. In*4he late case
of Drury v. Wolfe et ux., 134 111. 294, it was said: 'The
general rule recognized by this court is, parties can not be
bound, by any contract made before interest is due, for
the payment of compound interest,'—citing Leonard v.
LEGALITY OF CONTRACTS
213
Villars' Admr. supra; Harris v. Bressler, 119 111. 467;
Bank v. Davis, 108 id. 633, and other cases.
"It may therefore be regarded as the settled law of
this State, whatever may be the rule elsewhere, that par-
ties to a contract can not stipulate in advance for the pay-
ment of interest upon interest. An exception to this rule
is made in respect of interest-bearing coupons attached to.
bonds or other securities for the payment of money. By
commercial usage, such coupons, when payable to bearer,
have the legal effect of promissory notes, by the law mer-
chant, and possess the attributes of negotiable paper.
Jones on Railway Securities, sec. 320, and cases cited.
See, also, Aurora City v. West, 7 Wall. 105; Clark v. Iowa
City, 20 id. 583; Miller v. Town of Berlin, 13 Blatch. 245;
Evertson v. Bank, 4 Hun, 692; 66 N. Y. 14; Partridge v.
Bank of England, 9 Q. B. 396. They are written contracts
for the payment of a definite sum of money on a given
day, and pass from hand to hand, by commercial usage,
as negotiable paper, and it is for this reason that they
have been sustained.
"In the case of coupons the interest is not compounded
indefinitely, and that is one of the reasons given by the
courts for excepting them from the operation of the gen-
eral rule, and it is said that interest is not here sought
to be compounded indefinitely, but only upon the annual
interest upon the principal sum as it fell due and re-
mained unpaid. This is undoubtedly true, but it is here
reserved or contracted to be paid in the same instrument,
and the commercial usage before referred to, in respect of
detached coupons, or which may be detached, and pass as
independent commercial paper, can not apply. As said in
Drury v. Wolfe, supra: 1 There is therefore no authority
in this (the rule in respect of interest-bearing coupons)
for holding that interest may be compounded indefinitely,
or at all, in cases where the payment of the interest is
not secured by some negotiable instrument, independent
of the instrument whereby the original indebtedness is
promised to be paid.'
"The contract not being usurious, it follows that appel-
214
CONTRACTS
lee was entitled to recover the principal and simple inter-
est at the rate fixed by the note, being the legal rate at
the time of its execution, less the payments that had been
made, but not interest upon interest, and that the circuit
court erred in rendering judgment therefor. The judg-
ments of the Appellate and Circuit courts will be re-
.versed, and the cause remanded to the circuit court for
retrial, in conformity with the views here expressed.
Judgment reversed.
Question 106: Was the charge for the use of the money
usurious in Case 106? What was the illegality claimed by the
borrower ? Did he prevail ? In what cases can interest be com-
pounded? Did the lender get any interest in this case? Why
was the statutory penalty for charging usury not applied?
(Note: "Compounding interest is charging interest upon
interest, and whether valid or not, is not usury, which consists
in charging a greater rate of interest than the law allows. There-
fore statutory penalties for charging usurious rates, as for in-
stance, loss of all interest, do not follow an attempt to compound
interest. That is to say, the compounding, if considered in-
valid, is merely unenforceable and carries no penalty.
The above case holds that parties cannot, before interest is
due, agree that interest if unpaid, shall bear interest unless it
is done by way of setting forth the interest in interest coupons.
This seems to be the general rule. But the contrary doctrine
has also been upheld in a few jurisdictions. (Georgia, Tennes-
see, Texas, Mississippi.) See note on the subject with full col-
lection of authorities in 33 Lawyers Reports Annotated, new
series, p. 296.
It is valid to add the interest to the debt to itself bear in-
terest after the interest has accrued, if the parties so agree. But
without agreement interest can never be compounded.)
§ 96. (Contracts, Sec. 64.) Wager agreements.
Case 107. Bernard v. Taylor, 23 Oregon, 416.
Facts: Suit by Bernard to recover from a stakeholder
the sum of $650 deposited by Bernard as a wager on the
outcome of a footrace, and demanded by him of the stake-
holder before the race was run.
LEGALITY OF CONTRACTS
215
Point Involved: Whether a wagering agreement is
valid. Whether the court will relieve one from the conse-
quences of his illegal treatment.
Lord, C. J.: '' * * * The first contention for the
defendant is that wagers or wagering contracts upon
indifferent subjects are valid in this state, by force of the
common law, except when prohibited by statute. There
can be no doubt that wager contracts upon indifferent
matters are valid at common law. * * * But all
wagers that tended to a breach of the peace, or to injure
the feelings, character or interests of third persons, or
which were against the principles of morality or of
sound policy, were void at common law. * * * And
all wagers in contravention of the positive provisions of
any statute are also void. Of late years by legislation
and judicial decision the hostility to wagers of every
nature has been marked. This is doubtless due to the
increase of, betting and the evil consequences resulting
therefrom. * * *
(The court allowed the recovery of the money from
the stakeholder on the ground that the suit was to re-
scind an illegal agreement from which plaintiff attempted
to withdraw while it was entirely executory on the other
side. See Subdivision D, post, this chapter, for a discus-
sion of this principle.)
Question 107: "Were wagers illegal by the common law?
What is the law now ? If one deposits money for wagering pur-
poses with a stakeholder, can he recover it back if he demands
it before the money is paid over to the other party by the
stakeholder ?
Case 108. Pope v. Hanke, 155 111. 617.
Facts: Suit on notes. Defense, that they were given in
settlement of a gambling transaction, consisting in a spec-
ulation on the future price of grain. The court found
that the transaction consisted in the form of contracts
for the future sale and delivery of grain, but with the
understanding that no grain was to be called for or de-
216
CONTRACTS
livered, but a settlement was to be effected between the
parties on the basis of the difference between the con-
tract rate and the market price on the day of delivery.
Point Involved: Whether an agreement in form of a
sale of property, but in spirit a speculation on the future
price of such property, is valid.
Mr. Justice Magruder delivered the opinion of the
Court: "* * * The transactions * * * were mere
speculations upon the future prices of grain. The con-
tracts for the delivery and sale of grain in the future
were not made with the intention that any grain should be
received or delivered, but with the understanding that
each transaction should be settled by the payment of the
difference between the contract price and the market
price at the time fixed. It is well settled that all such
contracts are mere wagers or gambling contracts and
are void. * * * Such is the law of Missouri where
the notes sued on are admitted to have been executed.,
* * * In Crawford v. Spencer, 92 Mo. 498, the Su-
preme Court of Missouri said: ' The law is now settled
that a sale of goods to be delivered in the future is
valid—though there is an option as to the time of deliv-
I ery and though the seller has no other means of getting
I them than to go into the market and buy them; but if
| under the guise of such a contract, valid on its face, the
! real purpose and intention of the parties is merely to
! speculate on the rise or fall of prices, and the goods
are not to be delivered, but the difference between the
contract and market price only paid, then the transac-
tion is a wager and the contract is void.' Such also is
the law in Illinois, where the present suit has been
brought. * * *
"This intention (merely to speculate) may be estab-
lished not merely by the assertions of the parties, but
by all the attending circumstances. (Defendant) had a
mill at Trenton, but its capacity was only 200,000 bushels
per annum; and yet * * * the volume of transac-
tions between the parties * * * amounted in a
LEGALITY OF CONTRACTS
217
period of a little more than three months, to 2,190,000
bushels of wheat, 1,240,000 bushels of corn, and 60,000
bushels of oats. * * * The question of intention is
a question for the jury, to be determined by a considera-
tion of all the evidence. * * * 
Question 108: Is a contract to sell goods to be delivered
in the future valid? Even if at time of sale seller doesn't own
the goods ? "Why was the transaction in the above case
invalid ?
Sec. 97. (Contracts, Sec. 65.) Contracts tending to
corrupt the public service.
Case 109. Mills v. Mills, 40 N. Y. 543.
Facts: A contracted with B "that he would give all
the aid in his power and spend such reasonable time as
may be necessary, and generally use his utmost influence
and exertions to procure the passage into a law of the
said bill heretofore introduced into the senate, etc. He
now sues for his fees. Defense, that the agreement was
illegal.
Point Involved: Whether an agreement to use influ-
ence and to exert one's self to secure the passage of a
particular law in behalf of private interests is against
public policy.
Hunt, C. J., delivered the opinion of the Court:
"* * * It is not suggested that the plaintiff was a
professional man whose calling it was to address legis-
lative committees. It is not suggested he had any claims
of right, which he proposed to advocate. * * * To
procure the passage of such a law for the benefit of the
defendant he undertook to use his utmost influence and
exertions. This contract is void as against public poh
icy. It is a contract leading to secret, improper and
corrupt tampering with legislative action. * # * It
is not necessary to adjudge that the parties stipulated
for corrupt action, or that they intended that secret and
improper resort should be had. It is enough that the
218
CONTRACTS
contract tends directly to those results. It furnishes a
temptation to plaintiff to resort to corrupt means or im-
proper devices to influence legislative action. * * *
Question 109: What was the above agreement ? Why invalid?
Is it material whether any harm was actually accomplished?
Case 110. Kansas City Paper House v. Foley Rwy.
Print Co., 85 Kan. 678, 39 L. R. A., new series, 747.
Facts: The K. C. Paper House sued the Foley Rwy.
Printing Co. upon a promissory note. The defendant
claimed a credit of $500, which it claimed the plaintiff
owed Foley, the President of the defendant, and which
such President had transferred to it. The only question
involved was the validity of this $500 credit. The con-
tract upon which Foley claimed this credit was made
by the plaintiff company with Foley, under which Foley
was to sell paper and other material to the state, the
evidence going to show that his compensation was to he
contingent upon his success.
Point Involved: The legality of contracts of agency
by which the agent is to sell goods to a public body, his
compensation depending on his success.
Mason, J.:  * * * There was some evidence that
the contract contemplated a payment for the exertion
of personal and political influence upon members of the
executive council, and that the services rendered were
of that character. If that was the case, the contract was,
of course, void. But there was also testimony that Foley
was employed simply as an ordinary salesman, because
of his experience in using and buying paper and other
material handled by the plaintiff, and that his efforts
were in accordance with that employment, and were con-
fined to exhibiting samples and 'talking up' the goods
and the responsibility of the house. If that was the case
the contract was valid. In this aspect the question is
merely one of fact to be decided by a tribunal which
sees and hears the evidence (the court below).
"The evidence suggested, but perhaps did not abso-
LEGALITY OF CONTRACTS
219
lutely determine, that Foley's compensation was to be
contingent upon the procuring of the state contract.
There is a conflict of judicial opinion as to whether that
circumstance should stamp the contract as illegal. * * *
(Here the court reviews certain cases holding such
contracts on commission illegal, but distinguishes such
cases by showing that they involve some additional ele-
ment, such as personal and corrupt influence with the
members of the governmental body.)
"The fact that the compensation of a salesman, em-
ployed to sell goods to the public, depends upon his sue-
cess may tend to show a purpose to use illegal means,
or a probability that such means will be used; but we
do not think that it should be regarded as conclusive in
either point, nor that in and of itself it should be deemed
to characterize the employment as illegal. (Citing au-
thorities.) * * * Many of the cases in these collec-
tions involve contracts for influencing legislation, which
are not entirely analogous to those for the sale of goods,
and may well be regarded as subject to a more stringent
rule. * * *
Question 110: (1) State the facts, the point involved and
the Court's decision in the above case.
(2) What element would render such a contract illegal?
(3) The Court says that contracts to procure legislation are
subject to a more stringent rufe than contracts to secure the
sale of goods to the government. Why?
§ 98. (Contracts, Sec. 66.) Agreements in restraint of
marriage.
(Note: Agreements that tend to restrain marriage are against
public policy and void. Gifts of property on condition the done,e
do not marry are generally upheld.)
2. Contracts Illegal Because of Manner of Formation.
§ 99. Sunday agreements.
§ 100. Contracts made without required license.
220
CONTRACTS
§ 99. (Contracts, Sec. 67.) Sunday agreements.
Case 111. Richmond v. Moore, 107 111. 429.
Facts: This was a contract of employment for service
alleged to have been broken. Damages were asked for
such breach. Defense: That the supposed contract Was
void, being made on Sunday.
Point Involved: Whether a contract made on Sunday
is illegal.
Mr. Justice Walker delivered the opinion of the
Court: "The common law did not prohibit the making
of such contracts. In Drury v. Deputaire, Taunt. 136,
Lord Manfield * * * said: 'It does not appear that
the common law ever considered these contracts as void
which were made on Sunday.' Judgment was accord-
ingly given for the price of a horse sold on that day.
* * # The doctrine that contracts made on Sunday
are void depends, therefore, alone on statutory enact-
ments, and in various states of the Union the statutes
vary in language or substance. * * *
"The 29th Car. II, Chap. 257, seems to be the basis
of the various enactments of the Union. It is this:
' That no tradesman, artificer, workman, laborer, or other
person whatsoever, shall do or exercise any worldly la-
bor, business or work on the Lord's day.' It contains
exceptions of which are works of necessity or charity.
* * * The offense by that statute is the performance
of labor or business, and by ours it is the disturbance of
the peace and good order of society. (The Court holds
the Illinois statute to be a more liberal statute than the
English statute, and decided that the above contract is
enforceable. In many states, however, the statute is a
virtual adoption in its strictness of the British statute.)
Question 111: Was a contract made on Sunday invalid by
the common law? What English statute made such contracts
invalid? What exceptions were made? Do the states of the
Union have similar statutes?
LEGALITY OF CONTRACTS
221
§100. (Contracts, Sec. 68.) Agreements made with-
out required license.
Case 112. Buckley v. Humason, 50 Minnesota, 195.
Facts: Defendants sold to August K. Barnum certain
leasehold property, situated in Chicago, called the Ogden
Flats, in exchange for property in St. Paul, valued at
$175,000. Plaintiff Buckley was employed by defendants
as their broker at Chicago, and he there procured the
purchaser and acted as their agent in the transaction.
This suit is for $4,375 commission for his services. An
ordinance was in force in the City of Chicago, that it
should be unlawful for any person to exercise within
the city the business of real estate broker without a
license, and provided the amount to be paid, and sub-
jected violators to a pecuniary penalty for each violation.
Plaintiff had no such license during the negotiation and
exchange.
Point Involved: Whether one who is engaged without
a license in a business in which the government requires
a license for purposes of regulation can recover his fees
under agreements made by him while so unlicensed.
Vanderburgh, J.: 11 * # * The particular transac-
tion in question was therefore in violation of law, unless
he was duly licensed, which was not shown. On the con-
trary, the answer alleges, and it stands admitted, for
want of a reply, that the plaintiff was not duly licensed
as a broker. The plaintiff cannot, therefore, recover his
commissions. Hustis v. Pickands, 27 111. Ap. 270; John-
son v. Hulings, 103 Pa. St. 501; Holt v. Green, 73 Pa.
St. 198.
1 'Business transactions in violation of law cannot be
made the foundation of a valid contract; and the general
rule is that where a statute makes a particular business
unlawful generally, or for unlicensed persons, any con-
tract made in such business by one not authorized is
void. * * *
Question 112: What was the claim for in this case? Defense
thereto? Court's decision?
222
CONTRACTS
(Note to Case 112: The above decision is in lin,e with the
weight of authority. See Ames v. Gilman, 51 Mass. 239 (un-
licensed attorney at law cannot recover fees) ; Deaton v. Lawson,
40 Wash. 486, 2 L. R. A. N. S. 392 (unlicensed physician can-
not recover fees) ; Levison v. Boas, 150 Cal. 185, 12 L. R. A.
N. S. 575 (unlicensed pawnbroker cannot claim fees or lien on
pledges). It is brought out by the cases on this subject that
wher,e there is a law penalizing an act it impliedly prohibits it,
and contracts based thereon are void.)
C. Intent to Put to Illegal Use Avails of Legal Contract.
§ 101. (Contracts Sec. 69.) Knowledge by one of
other's intent to commit crime.
(a) Knowledge of the Other's Intent to Commit Offense
of Lesser Magnitude.
Case 113. Graves v. Johnson, 179 Mass. 53.
Facts: A sold liquors to B, knowing that B intended
to resell contrary to law, but he was wholly indifferent
what use B made of the liquors. This is a suit for the
price of such liquors.
Point Involved: Whether a contract in other respects
fully in compliance with law is rendered illegal merely
because one of the parties thereto, otherwise not in
fault, knows that the other intends to make use of the
results of the contract to commit a crime of lesser magni-
tude.
Holmes, C. J., delivered the opinion of the Court:
u* * * jn our 0pjni0n a saie otherwise lawful is not
connected with subsequent unlawful conduct by the mere
fact that the seller correctly divines the buyer's unlawful
intent closely enough to make the sale unlawful. * * *
The defendant [B] was free to change his mind, and
there was no communicated desire of the plaintiff's to
co-operate with the defendant's present intent. * * * 
Question 113: (1) State the facts, the question presented
and the decision of the Court in the abov,e entitled case.
LEGALITY OF CONTRACTS
223
(2) A, owning a house, leases it to B, knowing that B intends
to use it for illegal or immoral purposes, but he does nothing to
encourage or assist such illegal purpose, and is indifferent what
use B makes of the premises. Is the lease void ? Can A recover
the rent?
(Note: Answer to Question (2). On this point there is some
conflict of authority. See the late cases of Ashford v. Mace, —
Ark. —, 39 L. R. A. N. S. 1104, and Harbison v. Shirley, 139
Iowa 605, 19 L. R. A. N. S. 662, holding that the landlord's
knowledge, if there is no connivance of any sort, will not make
the lease void. The first case bases its decision on the ground
that uses of premises for gambling and bawdy house purposes
are classed as offenses of lesser magnitude within the distinctions
taken by the cas,es. But many courts hold such leases void.
There would seem to be a distinction between a sale of goods in
which the vendor parts with all property and control and a
rental of premises of which he remains the landlord. See Fields
v. Brown, 188 111. 111. The subject is governed by statute in
some states.)
(b) Knowledge of the Other's Intent to Commit Offense
of Greater Magnitude.
Case 114. Hanauer v. Doane, 12 Wall. 342.
Facts: Suit to recover the price of supplies and com-
missary stores for the Confederate army. Defense, ille-
gality. The lower court instructed the jury that the
seller's knowledge of defendant's purpose was immate-
rial. Appeal.
Point Involved: Whether a contract in other respects
fully in compliance with law is rendered illegal merely
because one of the parties thereto, otherwise not in fault,
knows that the other intends to make use of the results
of the contract to commit a crime of "greater magni-
tude.
Mr. Justice Bradley delivered the opinion of the
Court:  * * * In this instruction we think the judge
erred. With whatever impunity a man may lend money
or sells goods to another who he knows intends to devote
224
CONTRACTS
them to a use * * * of inferior criminality, he can-
not do it * * * when he knows or has every reason
to believe that such money or goods are to be used for the
perpetration of a heinous crime, and that they were pro-
cured for that purpose. * * * Can a man furnish
another with the means of committing murder or any
abominable crime, knowing that the purchaser procures
them and intends to use them for that purpose and then
pretend that he is not a participator in the guilt? Can
he wrap himself up in his own selfishness and heartless-
ness and say, 'What business is that of mine? Am I
the keeper of another man's conscience?' No one can
hesitate to say that such a man * * * is almost, if
not quite, as guilty as the principal offender.
"No crime is greater than treason. * * *
Question 114: State the facts, the question presented and the
decision of the Court in the above case.
(c) Assistance in Carrying Out Illegal Design.
Case 115. Kohn v. Milcher, 43 Fed. E. 641.
Facts: K. & A. were wholesale liquor dealers at Rock
Island, Illinois. M. was a druggist at Atlantic, Iowa,
holding a permit to sell spirituous liquors for medicinal
purposes. Under cover of this permit and in violation
of law, M. was virtually engaged in a saloon business,,
obtaining his liquor from K. & A. M. was required to
make monthly statements to the authorities, and in these
he falsified the amounts of his sales and profits. K. &
A. knew of M. 's illegal practices, and in order to aid him
in the same furnished him from time to time two sets
of invoices, one showing the true purchase price, and
the other, which he might show to the authorities, a
higher, fictitious price. They also shipped a part of the
liquors to M. under a fictitious name, and also enclosed
a part of the liquors in boxes and barrels, labeling them
as containing hardware, crockery, etc. K. & A. bring
suit for unpaid purchase price of some of these goods.
Defense, illegality.
LEGALITY OF CONTRACTS
225
Point Involved: Whether a contract that would other-
wise be legal is rendered illegal by the purpose of one
party to make an illegal use thereof, accompanied with
an encouragement or connivance in such illegal use by
the other party.
Shikas, J., delivered the opinion of the Court: "To
recover the balance due from defendant and resulting
from transactions of the nature indicated, the plaintiffs
now ask the aid of this Court:
"It is refused. * * *
"The statute of Iowa expressly forbids a registered
pharmacist from selling intoxicating liquors as bever-
ages. * * * The plaintiffs and defendant combined
together to evade this statute, resorting to fraud and
perjury to accomplish that purpose. * * * The
ground upon which the plaintiff's right of action for the
liquors sold is defeated is that the plaintiffs sold the
liquors to the defendant, * * * well knowing that the
statute of Iowa * * * forbade such pharmacist from
selling intoxicating liquors as a beverage, and in order
to aid defendant in evading the statute they forwarded
the liquors in concealed packages, to a fictitious con-
signee, and furnished false invoices as a protection to
defendant in making the false statement sworn to by
him, thus actively aiding defendant in the commission
of perjury as well as in other violations of law. * * *
"The conclusion reached is that plaintiffs cannot main-
tain their action.
Question 115: State the facts, the question presented and the
Court's decision in the above case.
D. Judicial Remedies in Illegal Agreements.
§102. No remedy by "way of enforcement in any case.
§ 103. No remedy by way of rescission.
§ 104. Exception: Parties not in equal guilt.
§ 105. Exception: Defendants contract wholly executory.
§ 106. Exception: Where statute allows rescission.
226
CONTRACTS
§ 102. (Contracts, Sec. 70.) No remedy by way of en-
forcemeat in any case. ("Ex turpi contractu non ori-
tur actio.")
Case 116. Goodrich v. Tenney, 144 111. 422.
Facts: Suit brought to enforce an accounting for and
payment of money alleged to have been earned by serv-
ices performed under a contract found by the court to
have been made for an illegal purpose.
Point Involved: "Whether the Court will enforce an
illegal agreement.
Me. Justice Shope : "* * * Courts of Justice will
not enforce the execution of illegal contracts, nor aid
in the division of profits of an illegal transaction between
associates. Neustadt v. Hall, 58 111. 172: It is there said,
'In the language of Lord Ellenborough, we will not
assist an illegal transaction in any respect; we leave
the matter as we find it. * * *' It may be insisted
that it is unjust as between the parties for Tenney to
raise the question, and very dishonest * * * for
him to take advantage of it, but the contract being illegal,
no rights can be enforced under it. * * * The maxim,
'ex turpi contractu non oritur actio' (out of an illegal
contract no action arises), applies in all such cases, and
neither party if in pari delicto (in equal guilt) can have
assistance in courts of justice in enforcing the contract.
And the objection may be made by a party in pari delicto,
for the defense is not allowed because the party raising
the objection is entitled to the relief, but upon princi-
pies of public policy and to conserve the public wel-
fare. * * *
Question 116: Does the court even enforce an illegal agree-
ment? Suppose it should appear to the court agreement was
illegal, although that point was not made by the defendants
would the court consider the point waived, or raise it on its own
motion ?
LEGALITY OF CONTRACTS
227
§103. (Contracts, Sec. 71.) No remedy by way of
rescission. . ("Allegans suam turpitudinem non est
audiendus.")
Case 117. Chapman v. Haley, 80 S. W. (Ky.) 190.
Facts: Suit by Haley to recover of Chapman $300
alleged to have been paid to Chapman for investment
purposes. The evidence disclosed that Chapman agreed
with Haley that if Haley would pay him $300, he would
sell him $3,000 in "good money, that the parties met
in a small room in Cincinnati.to carry out the agreement;
that Haley paid Chapman the $300 and Chapman went
out to get the $3,000 promising to return in a few min-
utes, but that he did not come back. Haley testified that
he thought the $3,000 was all right, except that he under-
stood there was something wrong about the numbers.
But the court says "that appellee [Haley] fully under-
stood that under the contract he was to purchase counter-
feit money, cannot be doubted.
Point Involved: Whether the court will lend its aid
to compel repayment of money (or surrender of any
property) parted with under an illegal agreement not
performed by the other side.
Barker, J.:  * * * It is unnecessary to say that
this conspiracy between these two men to purchase coun-
terfeit money constituted an illegal contract and was
void. * * * The question as to whether or not ap-
pellee who was equally guilty with appellant, can recover
the money paid by him in pursuance of this criminal con-
spiracy, is the first question for adjudication?
"In the case of Kimbrough v. Lane, 11 Bush, 556, the
contraqt was for the payment of $3,000 to secure the dis-
mission of an indictment against Lane for a felony. In
affirming a judgment dismissing the petition in the ac-
tion wherein it was sought to recover the $3,000, this
court said: 'It is sufficient to say on this point that
the rule of law inhibiting such contracts was not made
for the benefit of the obligors. The courts will not en-
228
CONTRACTS
force such contracts because they are levelled at the
safety and repose of society. * * * If money is paid
upon such a contract, the courts will not aid in recover-
ing it back. They will leave both parties in the exact
position in which they have placed themselves.' 
Question 117: (1) State the facts in the above case and
the rule applied.
(2) A desired to open up a place of business as a pool room
and for bookmaking purposes. The object of his business was
forbidden by ordinance, but the public authorities in violation
of such ordinance were accustomed to grant licenses. A paid
$500 for such a license for one year, which was granted him. He
then began the illegal business. The authorities thereupon closed
it up. He sues to recover the money. Can he recover? "Why?
(3) A being desirous of procuring the office of clerk of a
police court sent $20 to B asking B in consideration thereof to
use his influence to get A nominated. B used the money to de-
feat A's nomination. A sues to recover the money. What
result? (Liness v. Hesing, 44 111. 113.)
§104. (Contracts, Sec. 72.) Exception. Parties not in
equal guilt.
Case 118. Duval v. Wellman, 124 N. Y. 156.
Facts: Plaintiff sues as assignee of Mrs. E. Guion,
a widow, ''who in her search for a husband sought the
advice and aid of the defendant, who was the owner and
publisher of a matrimonial journal called 'The New York
Cupid' and the proprietor of a matrimonial bureau in
New York City. Mrs. Guion testified that she paid
defendant $5.00 as a registration fee and later $50 under
an agreement that it was to he returned to her if no hus-
hand were found, but that $50 additional was to be paid
if she married any gentleman introduced by defendant.
Later, Mrs. Guion, finding no one satisfactory among
those introduced to her demanded back her $50, which
was refused. Suit to recover such $50.
Point Involved: If a person enters into an illegal
agreement with another person who is the more blame-
LEGALITY OF CONTRACTS
229
worthy of the two by reason of his imposition upon, or
undue influence over the first party, or by reason of his
greater guilt in violating public policy, will the court
assist the first party to withdraw from the contract?
Brown, J.: "* * * The five learned judges who
have delivered opinions in the case have agreed that
the contract between the parties was void, and this con-
elusion appears to be ably supported by authority.
* * #
u* * * rp-^g Refenciailt however, succeeded in
the lower court on the application of the rule that a court
will not lend its aid to either of the parties to an illegal
or fraudulent contract, either by enforcing its execution
if it be executory, or by rescinding it, if it be executed.
 Public policy has dictated the adoption of this rule,
but it has its limitations, and when the parties are not
equally guilty, or when the public interest is advanced
by allowing the more excusable of the two to sue for
relief, the courts will aid the injured party by setting
aside the contract and restoring him, so far as possible
to his original position. (1 Pomeroy's Equity, sec. 403;
1 Story's Equity, sec. 300.)
<<* * * jn many such cases relief from the con-
tract will be afforded to the least guilty party when he
appears to have acted under circumstances of imposition,
hardship, or undue influence, and especially where there
is a necessity of supporting public interests or a well
settled policy of the law, whether that policy be declared
in the statutes of the state or be the outgrowth of the
decision of the courts.
u-* * * Accordingly many cases may be cited where
relief has been granted from contracts which partook
of the character of marriage brokerage agreements. The
cases are collected in Pomeroy's Equity Jurisprudence,
in a note to section 931; in Fonblanques Eq. (B. I., ch. 4,
Par. 10, 11), and Bacon's Abridgment, Title Marg. and
Divrs. (541 et seq.), and need not be cited here.
"In two of the cases referred to, money paid under
230
CONTRACTS
the contract was recovered back. (Smith v. Bruning, 2
Vern. 392; Goldsmith v. Bruning, 1 Eq. Cases Abr. 89.)
"The question in this and kindred cases, therefore,
must always be whether the parties are equal in guilt.
Obviously cases might arise where this would clearly
appear and where the court would be justified in so hold-
ing as a matter of law, as where there was an agreement
between two, having for its purpose the marriage of
one to a third party, the parties would be so clearly in
pari delicto that the courts would not aid the one who
had paid money to the other in the promotion of the
common purpose, to recover it back. Such a case would
partake of the character of a conspiracy to defraud. So
if two parties entered into a partnership to carry on
such a business as defendant conducted, the courts would
not lend their aid to either to enforce the agreement
between them.
"But where a party carries on a business of promoting
marriage as the defendant appears to have done, it is
plain to be seen that the natural tendency of such busi-
ness is immoral and it would be so clearly the policy of
the law to suppress it and public interest would be so
greatly promoted by its suppression, that there would be
no hesitation upon the part of the courts to aid the party
who had patronized such a business by relieving him
or her from all contracts made, and grant restitution of
any money paid or property transferred. In that way
only could the policy of the law be enforced and public
interests promoted.
"Contracts of this sort are considered as fraudulent
in their character and parties who pay money for the
purpose of procuring a husband or wife will be regarded
as under a species of imposition or undue influence.
"The subject is classed by all text writers under the
head of constructive or implied fraud, and it is upon
the application of rules which belong to that branch of
the law that the cases have been decided to which I have
referred.
"We are of opinion, therefore, that it was error to
legality of contracts
231
hold as a legal conclusion that the parties to the contract
in question were equal in guilt.''
Question 118: What was the contract in Case 118? For what
purpose was the suit brought ? Why did the court not enforce
the rule that it will not give relief to a party in an illegal
contract ?
§105. (Contracts, Sec. 73.) Exception: Defendant's
contract wholly executory.
Case 119. Johnson v. Russell, 37 Cal. 670.
"If the parties to an illegal wager repent and desire
to withdraw before the wager has been decided, let them
be encouraged to do so by allowing them to recover their
stakes from each other, or from the stakeholder, if one
has been employed. In times of political excitement per-
sons may be provoked to make wagers which they may
regret in their cooler moments. No obstacle should be
thrown in the way of their repentance, and if they retract
before the bet has been decided, their money ought to
be returned to them. But persons who allow their stakes
to remain until after the bet has been decided, and the
result has become generally known, are entitled to no
such consideration. Their tears, if any, are not repent-
ant tears, but such as crocodiles shed over the victims
they are about to devour. To allow them to recover is
not to reward repentance—not to promote the public
good; for as to that, the mischief has already been done,
but to reward hypocrisy and promote the private inter-
ests of such as are found willing to violate not only the
law of the land, but the law of honor also. After the
money has been lost and won, and the result generally
known, neither party ought to be heard in a Court of
Justice.
"The judgment is affirmed.
Question 119: What exception to the general rule did the
court make in this case? Why?
(Note: "Where money has been paid or goods have been
delivered in part performance of an illegal agreement, the
232
CONTRACTS
money or payment for the goods may be recovered so long as
the illegal part of the agreement is wholly unexecuted, unless
the whole agreement involves serious moral turpitude. Wil-
liston on Contracts, Sec. 1788. This exception does not ap-
pear to have been definitely worked out and there might be
a considerable difference of opinion as to whether given cases •
fall within the rule or within the exception.)
§ 106. (Contracts, Sec. 74.) Exception: Where statute
allows rescission.
Case 120. Rice v. Wins low, 182 Mass. 273.
Facts: Suit brought to declare void a negotiable
promissory note and a mortgage given in security there-
of. There was a statute in Massachusetts giving a party
a right to avoid his contracts and recover back any money
paid or property parted with, in gambling transactions.
Point Involved: The right to rescind contracts of ail
illegal nature where the statute so provides.
Morton, J.: "* * * The contracts (in question)
were clearly wagering contracts, and, as such, illegal.
* * * and prior to the passage of statute 1890, Ch.
437, the plaintiff would not have been entitled to recover
any sums paid by him in the course of their performance,
or to have any security that he had given declared void.
* * * But the object of that statute was to discredit
and discourage such transactions by giving the losing
party the right to avoid his contracts and to recover
back any payment made or the value of anything de-
livered. * * *
Question 120: "What relief was asked in Case 120? Would
it have been allowed had there been no statute?
§ 107. Where contract partly legal, partly illegal.
Case 121. Bixby v. Moore, 51 New Hampshire, 402.
Facts: Moore kept a saloon in which he illegally Sold
liquors. He also in connection therewith operated a
billiard hall legally. He employed Bixby to render serv-
LEGALITY OF CONTRACTS
233
ices in and about the billiard hall and in selling the liquor.
Bixby sued for his compensation.
Point Involved: Whether a contract the consideration
for which is partly legal and partly illegal, and indivisible
in its nature, can be enforced as to the legal part.
Smith, J., delivered the opinion of the Court: "* * *
The plaintiff would have been entitled to the reasonable
worth of his entire services if no part of them had been
rendered in an illegal business. It must be conceded he
cannot recover for his services in the sale of liquor;
but he claims a portion of his services was rendered in
a legal employment and that he can recover the value of
that portion. * * *
"If the consideration for the defendant's promise to
pay the plaintiff a reasonable compensation was the
plaintiff's promise to perform both classes of services,
the illegal as well as the legal, it is clear the defendant's
promise cannot be enforced. A contract is invalid if any
part of the consideration on either side is unlawful.
"The questions arising in this case—what services did
the plaintiff agree to perform? Was it an entire con-
tract? W7ere there separate contracts upon separate
considerations as to the legal and illegal services?—are
all questions of fact. * * * In the present case,
however, there is no room for but one conclusion:
* * * the plaintiff made an entire promise to perform
both classes of service; this entire promise * * *
formed an entire consideration * * * and a part
of this indivisible consideration was illegal. (Certain
cases) cited by the plaintiff are not in point. In those
cases the different articles sold were valued separately
in the sale. * * * It is not contended that it is cus-
tomary to pay saloon tenders separate prices for sweep-
ing, for building fires, for acting as billiard markers, and
for selling liquor. * * *
Judgment for defendants.
Question 121: (1) State the facts, the question presented
and the decision of the Court in the above case.
CONTRACTS
(2) Suppose in this case Moore had had two separate places,
and had employed Bixby for $10 a week, to work in the forenoons,
at the place legally conducted and $10 a week to work in the
afternoons in the place illegally conducted. Do you think he
could have recovered for his legal employment?
CHAPTER 12.
FORM AND EVIDENCE OF CONTRACTS.
A. The Formal Contract or Contract under Seal.
B. Contracts Required by Law to be in Writing.
C. Contracts Not Enforceable Unless in Writing.
D. The Parol Evidence Rule.
§108. (Contracts, Sec. 76.) General statement.
(Note: Knowing now the elements that we must have to make
a simple contract, whether oral, written or implied, we may now
turn our attention to a consideration of the form and evidence of
the contract, and the requirements as to form and evidence.)
A. The Formal Contract or Contract Under Seal.
§ 109. Definition of sealed instrument.
§ 110. Effect of seal in early law.
§ 111. Instruments requiring seal at common law.
§ 112. Modern legislation in respect to sealed instruments.
§ 109. (Contracts, Sec. 77.) Definition of sealed
instrument.
Case 122. Warren v. Lynch, 5 Johnson's New York
Reports, 238 (1810).
Facts: Lynch made and delivered a promissory note
in usual form except that he signed it  Thomas Lynch
(L. S.), payable to order of Hopkins Robertson. Plain-
tiff, Warren, having acquired the note sues Lynch who
claims that the note is not a negotiable instrument for
the reason that it bears a seal and that Warren there-
fore cannot maintain a suit on it as a negotiable instru-
ment and is subject to defenses that would have been
good against the party from whom he acquired it. War-
ren claims, however, that by the law of New York where
235
236
CONTRACTS
the instrument is payable, a mere scrawl is not a seal,
and therefore the letters "L. S. mean nothing.
Point Involved: Whether under the common law
(then in force on that point in New York) a scrawl "L.
S. was a seal.
Kent, C. J.: "We have never adopted the usage pre-
vailing in Virginia and some other states of substituting
a scrawl for a seal; * * *
"A seal, according to Lord Coke (3 Inst. 169), is wax
with an impression. * # * A scrawl with a pen is
not a seal and deserves no notice. The law has not, in-
deed, declared of what precise materials the wax shall
consist; and whether it is a wafer or any other paste
or matter sufficiently tenacious to adhere and receive
an impression is perhaps not material. But the scrawl
has no one property of a seal. * * * The policy of
the law consists in giving ceremony and solemnity to
the execution of important instruments by means of which
the intention of the parties is more certainly and effect-
ually fixed and frauds less likely to be practiced upon
the unwary. # * *
Question 122: (1) Were the letters "L. S.M (locus sigilli—
place of the seal) sufficient under the common law to make a
seal? What was the form of the seal under the common law?
Was the note in the above case a sealed instrument? Why?
Would it be a sealed instrument under the law in New York
today?
Case 123. Ankeny v. McMahon, 4 Illinois Reports, 12.
Fadts: A suit in ejectment. A paper was offered in
evidence by defendant which plaintiff objected to as not
being under seal as the law required. It had after the
signature the letters "L. S. which were printed on
the form used.
Point Involved: That under the practice and statutes
in Illinois (and now practically all states) a seal may
be in the form of a scrawl or scroll and such scrawl or
scroll may consist in the letters "L. S. printed upon
the paper.
CONTRACTS UNDER SEAL
237
Treat, Justice: "* * * The paper in question is
described in the body of it, as sealed with the seals of
the parties, and the letters 'L. S.' are in print opposite
the names of Ankeny and Logan, respectively. The first
section of ' An act concerning practice' provides 'that
any instrument of writing, to which the maker shall affix
a scrawl ])j way of seal, shall be of the same effect, to
all intents, as if the same were sealed.' This statute
gives equal solemnity to instruments to which signers
affix their scrawls, as to those which they affix their seals
by impression on wax or other tenacious substance. But
it is urged that to give them the dignity of sealed instru-
ments, the scrawls should be actually affixed by the sign-
ers. We do not perceive any good reason for this dis-
tinction. The printing of the scrawl, or the characters
representing a seal, is as legible and durable as if made
with a pen by the party, the only other usual mode of
affixing a scrawl by way of seal; and it equally indicates
the intention of the signer as to the character of the
instrument. * * #
"If he places his signature opposite a scrawl already
made, he thereby adopts it and makes it his own. These
views are strengthened by reference to the decisions in
1 McLean, 462; 2 Blackf. 322; and 3 Blackf. 162.
.# * * ? >
Question 123: In what form may a seal consist under modern
statutes? If the seal is printed upon the contract before sig-
nature, is it a good seal ?
(Note by Editor: In Chancellor Kent's opinion in Case No.
122 (not completely given) he argues that the object in requir-
ing a seal was not to designate the parties, as argued by some,
but to give solemnity to the execution of important instruments
by requiring a certain ceremony, namely, the use of the wax
and the impression thereon by means of a seal. He was, there-
fore, of the opinion that a scrawl with a pen is not a seal "and
deserves no notice. Legislatures have, however, differed with
him by providing that a seal may be by way of scrawl. It
does appear to the editor to be true that the addition of the let-
ters "L. S. whether written or printed serve no practical pur-
238
CONTRACTS
pose in the law. It is believed to be a fact that the average lay-
man who signs a document could not tell a minute afterwards
whether it was sealed or unsealed. Why should the law persist
in maintaining an idle ceremony that means nothing?)
\
§ 110. (Contracts, Sec. 78.) Effect of Seal in Early Law.
Case 124. Rann v. Hughes, 7 Term Reports, 350
Facts: Suit against an administrator on a written
promise to pay certain debts of the deceased for which
promise there was no consideration. It was contended
that as the promise was in writing, although not under
seal, a consideration was not necessary to support the
promise.
Point Involved: Whether a contract in writing and
not under seal must have consideration. Character of
• promise under seal.
Lord Chief Baron Skinner: "All contracts are by
the law of England distinguished into agreements by
i specialty [contracts under seal] and agreements by parol
[contracts not under seal] ; nor is there any such third
class as counsel have endeavored to maintain, as con-
tracts in writing/ If they be merely written and not
specialties, they are parol and a consideration must be
proved.''
Question 129: What was the point in issue? What did the
Court decide? What great division of contracts did the Court
make? What is the vital point of distinction?
(Note: Contracts under seal are also called contracts by "spe-
cialty, and simple contracts are also called contracts "by
parol.'' The word '' parol'' is used in law in a number of mean-
ings. In this connection it means any contract not under seal,
whether in writing or not. It is often also used in other connec-
tions as synonymous with '' oral,'' and sometimes as synonymous
with extrinsic, as in the law of evidence.)
Case 125. Walker v. Walker, 13 Ired. (N. C.) 335.
Pearsons, J.: "We are not aware of any rule of law
by which a consideration is inferred from the fact of
CONTRACTS UNDER SEAU
239
the execution of a sealed instrument. No consideration
is necessary in order to give validity to a deed (an in-
strument under seal). It derives its efficacy from the
solemnity of its execution—the act of sealing and de-
livery, not upon the idea that a seal imports a consider-
ation, hut because it is his solemn act and deed and is
therefore obligatory. * * * The general rule is that
a deed is valid without a consideration. * * * 
Question 125: What is the rule of law announced by the
above decision ?
(Note: It is often said by Courts and text writers that a
contract under seal is binding because it imports a consideration,
or because the party is estopped to deny a consideration. But
the true rule is that by common law a contract under seal was
enforceable because it was under seal and not because a consid-
eration cannot be denied. This is shown by the fact that histor-
ically promises under seal were enforced before the theory of
consideration was evolved. It would be just as logical to say
that promises upon consideration were binding because a consid-
eration imports a seal. The truth is that by common law, there
were two sorts of contractual promises, the one under seal, en-
forceable because under seal, and promises upon consideration,
enforceable because upon consideration. The latter contract has
become the characteristic contract of modern times.
There were certain contracts by ancient law that needed to be
under seal, as deeds of conveyance, bonds and powers of attor-
ney. But any instrument could be put under seal and such
seal gave its legal character. )
Case 126. Wm. Herbert Page, Contracts, Sec. 13.
"The modern theory that contract is an agreement
enforceable at law has disarranged common classifica-
tions based on the form of action. However, since the
common law classification went back to the beginning
of the common law itself, it survives to this day, though
the original reason for its existence has long since van-
ished. The simple contract, though the last to be devel-
oped, is now looked upon at modern law as the contract
par excellence. It is the representative type of contract
240
CONTRACTS
at modern law, and possesses all the elements requisite
therefor, since it is an agreement which by reason of its
consideration, the law will enforce. Whether the simple
contract is expressed or implied makes no difference ex-
cept as to the evidence by which it is to be proved, as
long as it is a genuine agreement. Contracts under seal
are genuine contracts since they are agreements which,
by reason of their form, are enforceable at law. They
do not possess the same elements as simple contracts;
for they require form which simple contracts do not;
and do not require consideration which simple contracts
do, but they are included under the definition of con-
tract. By reason of the abolition of private seals in
many jurisdictions, and the requirement of a considera-
tion even in contracts under seal this class of contracts
has lost its original importance.
Question 126: (1) What is the important type of contract
at the present day ?
(2) What does this author say as to necessity of consid-
eration in simple contracts? Is it necessary whether contract
is expressed or implied?
§ 111. (Contracts, Sec. 79.) Instruments requiring seal
at common law.
(Note: Under the common law, deeds conveying the fee; or
creating freeholds; must be under seal. Bonds required seals.
Any instrument not requiring a seal could be put under seal and
thereupon took the characteristics of a sealed instrument.)
§ 112. (Contracts, Sec. 80.) Modern legislation in re-
spect to sealed instruments.
(Note: Legislation concerning private seals may be classified
as follows: (A) Legislation in respect to the form of bringing
suit, abolishing the distinction between sealed and unsealed in-
struments in this regard. (B) Legislation in respect to the form
of the seal. In almost every jurisdiction a seal may be by way
of a scrawl, written or printed. (C) Legislation whereby want
or failure of consideration can be shown in a court of law. (D)
STATUTE OF FRAUDS
241
Legislation abolishing all distinction between sealed and unsealed
documents.)
B. Contracts Required by Law to Be in Writing'.
§ 113. (Contracts, Sec. 81.) Certain kinds of contracts
must be in writing in order to be effectual.
(Note: Certain kinds of contracts must be made in (not
merely evidenced by) writing, e. g., voluntary conveyances of
real estate; negotiable promises; acceptances of bills of exchange
by drawee; bonds; assignments of patents; promises interrupt-
•ing the running of the statute of limitations; etc.)
C. Contracts Not Enforceable Unless in Writing.
A. Nature and object of statute of frauds.
B. The cases within the statute.
C. What amounts to compliance with statute.
(a) Nature and Object of Statute of Frauds.
§ 114. The statute of frauds.
§ 115. The text of the statute of frauds.
§ 116. The statute relates to the enforcement, not the validity of contracts.
§ 114. (Contracts, Sec. 82.) The statute of frauds.
(Note: General observations on the statute of frauds.
(1) Date: The statute was enacted April 16, 1677. See as
to date and authorship Article in 26 Harvard Law Review by
Professor George P. Costigan.
(2) Subject matter: We are accustomed in contracts to con-
sider the fourth and seventeenth sections of the statute of
frauds. Causten Browne in the Preface to the First Edition
of his work on the Statute of Frauds (1857) says: "The mul-
tifarious provisions of the Statute of Frauds appear to group
themselves in these several classes: 1. The creation and transfer
of estates in land, both legal and equitable, such as at common
law could be effected without deed; 2. Certain cases of contracts
which at common law could be made by oral agreement; 3. Addi-
tional Solemnities in cases of wills; 4. New liabilities imposed
in respect of real estate held in trust; 5. The disposition of
242
CONTRACTS
estates per auter vie; 6. The entry and effect of judgments and
executions. * * * The (first) three classes have this in com-
mon that they all pertain, in one way or another, to the subject
of written evidence. * * * In contract we are concerned
only with the fourth and seventeenth sections and may therefore
consider for our purposes that the statute is composed only of
those two sections.
(3) The relation• of the statute to the general subject of
frauds. The statute of frauds is unfortunately entitled. It is
"an Act for Prevention of Frauds and Perjuries. Its pre-
amble is more fortunate, stating that it is enacted for the "pre-
vention of many fraudulent practices which are commonly en-
deavored to be upheld by perjury and subornation of perjury.
But even this creates a wrong impression. The statute, as far as
contracts is concerned, is a statute calling for a kind of evidence
in the proof of contracts. The motive was to avoid the accom-
plishment of fraud by the commission of perjury. But the
general subject of fraud in contracts was untouched. Hence,
it is better to remind the student to forget that the statute of
frauds has anything to do with frauds and to think of it only
as a statute requiring a certain kind of evidence for certain
classes of contracts. The Blue Sky Law is a statute of frauds,
but nobody calls it such; the Bulk Sales Act is a statute of
frauds, but it does not go by that name. These and other stat-
utes are just as much "statutes of frauds as the statute which
monopolized that title.
(4) The statute in the American States. The English Stat-
ute of Frauds has become, apparently an interwoven part of
American law. It is in force generally throughout the Ameri-
can jurisdictions. The 17th section (Sales) has been incor-
porated in the Uniform Sales Act. The weight of authority seems
to be that it is a statute serving a good purpose, notwithstand-
ing in some sources it has been "so much deplored. Hence,
its vitality. It is, of course, true that the statute has been fre-
quently used, as a technical defense, by a person who has made
a contract and ought to perform it. No rule of law operates
always justly. But the reason for the rule may nevertheless be
a reason of justice.
When we are studying the 4th and 17th sections of the old
English Statute of Frauds we are studying modern American
Law. Of course we use the modern cases. But the statutory ex-
STATUTE OF FRAUDS
243
pression remains largely as originally enacted. It is of course
true that the references ''4th section and "17th section are
retained for purposes of conveniences to indicate which group of
contracts we are referring to. That is to say in any state, the 4th
section might be re-enacted as Section 1 (or any other section)
and the 17th section (as modified) is in fact Sec. 4 of our Sales
Act.)
§ 115. (Contracts, Sec. 83.) Text of the English statute
of frauds (Sections 4 and 17).
Case 127. Statute of Frauds and Perjuries, 29 Car.
n, Ch. 3, Sec. 4.
"For the prevention of many fraudulent practices
which are commonly endeavored to be upheld by Perjury
and Subornation of Perjury, Be it enacted * * *
"Sec. 4. That no action shall be brought (P) whereby
to charge any executor or administrator upon any spe-
cial promise to answer damages out of his own estate;
(2) or whereby to charge the defendant upon any special
promise to answer for the debt, default or miscarriage
of another ^prson; (3) or to charge any person upon
any agreement made upon consideration of marriage;
(4) or upon any contract for the sale of lands, tenements
or hereditaments, or any interest in or concerning them;
(5) or upon any agreement that is not to be performed
in the space of one year from the making thereof; unless
the agreement upon which such action shall be brought,
or some memorandum or note thereof, shall be in writ-
ing and signed by the party to be charged therewith,
or some other person thereunto by him lawfully author-
ized.''
"Sec. 17. That no contract for the sale of any goods,
wares and merchandise, for the price of ten pounds ster-
ling or upwards, shall be allowed to be good, except the
buyer shall accept part of the goods so sold, and actually
receive the same or give something in earnest to bind
the bargain, or in part payment, or that some note or
memorandum in writing of the said bargain be made
244
CONTRACTS
and signed by the parties to be charged by snch con-
tract, or their agents thereunto lawfully authorized.'
Question 127: State in your own language the classes of
contracts covered by Sections 4 and 17 of the English statute
of frauds.
(Note: The above statute is substantially in force in the
American States, the verbiage itself being for the most part
retained. By the Uniform Sales Act [Division IV, post] the
17th section is virtually re-enacted, with a change of price to
$500, which is in force in some states. The commonest price sub-
stituted in the American Acts is $50.00.)
§ 116. (Contracts, Sec. 84.) The statute relates to the
enforcement, not the validity of contracts.
Case 128. Bird v. Munroe, 66 Maine, 337 (1877).
Facts: Suit on a contract of sale of ice alleged to have
been made on March 2,1874, and broken about March 10,
1874. The written evidence produced to prove the con-,
tract was made and signed by defendants March 24,1874.
Point Involved: Whether the writing rejmired by the
statute of frauds is an essential element in the contract,
or merely the evidence by which such contract must be
proved.
Peters, J.: "* * * Then the defendant next con-
tends that, even if the writing signed by the parties was
intended by them to operate retrospectively as of the
first named date, as a matter of law, it cannot be per-
mitted to have that effect and meet the requirements of
the sfatute of frauds. * * * The point raised is,
whether in view of the statute of frauds, the writing
shall be considered as constituting the contract itself,
or at any rate any substantial portion of it, or whether
it may be regarded as merely the necessary legal evi-
dence by means of which the prior unwritten contract
may be proved. In other words, is the writing the con-
tract, or only evidence of it? We incline to the latter
view.
STATUTE OF FRAUDS
245
''Another idea gives weight to the argument for the
position advocated by the plaintiffs, and that is that such
a construction of the statute upholds contracts accord-
ing to the intention of the parties thereto, while it, at the
same time fully subserves all the purposes for which the
statute was created. It must be borne in mind that verbal
bargains for the sale of personal property are good at
common law. Nor are they made illegal by the statute.
Parties can execute them if they mutually please to do
so. The object of the statute is to prevent perjury and
fraud. Of course perjury and fraud cannot be wholly
prevented; but, as said by Bigelow, J. (Marsh v. Plyde,
3 Gray, 331) "a memorandum in writing will be as ef-
fectual against perjury, although subsequent to the mak-
ing of a verbal contract, as if it had been executed at
the moment when the parties consummated their agree-
ment by word of mouth. We think it would be more
so. A person would be likely to commit himself in writ-
ing with more care and caution after time to take a
second thought. The locus penetentiae remains to him.
"It is clear from the foregoing cases, as well as from
many more that might be cited, that the statute does not
forbid parol contracts, but only precludes the bringing
of actions to enforce them, as said in Thornton v.
Kemper (5 Taunt. 786, 788), 'the statute of frauds throws
a difficulty in the way of evidence.' In a case already
cited, Jervis, C. J., said: 'the effect of the section is not
to avoid the contract, but to bar the remedy upon it,
unless there be writing.' See analogous case of McClel-
lan v. McClellan, 65 Maine, 500. 
Question 128: Does the statute of frauds require that a con-
tract be made, in writing. When was the writing signed by the
defendant made in this case in respect to the formation of the
contract ? Why was it held sufficient to meet the requirements
of the statute of frauds? Was the statute of frauds a good
defense in this case ?
Case 129. Rann v. Hughes, 7 Term Rep. (Eng.) 350.
Facts: Another portion of this case is set out as Case
No. 121 in which the Court held that even if an agreement
246
CONTRACTS
was in writing a consideration was nevertheless requisite
to make it enforciblevif it was not under seal. The further
point was urged that while this might be true of written
contracts generally the statute of frauds made the con-
tracts therein referred to enforcible if merely in writ-
ings though without consideration. As to this the Court
said:
The Lord Chief Baron: "* * * But it is said
that the Statute of Frauds takes away the necessity of
any consideration in this case; the Statute of Frauds
was made for the relief of personal representatives and
others, and did not intend to charge them further than
by the common law they were chargeable. His Lordship
here read those sections of the statute which relate to
the present subject. He observed that the words were
merely negative, and that executors and administrators
should not be liable out of their own estates, unless the
agreement upon which the action was brought, or some
memorandum thereof, was in writing and signed by the
party. But this does not prove that the agreement was
still not liable to be tried and judged of as all other agree-
ments merely in writing are by the common law, and
does not prove the converse of the proposition, that
when in writing the party must be at all events liable.
* * * > >
Question 129: What was the argument plaintiff made above?
How did the court rule thereon?
(b) The Cases Within the Statute.
§ 117. Promises of executors and administrators.
§ 118. Promise to answer for the debt, default or miscarriage of another
person.
§ 119. Promises in consideration of marriages.
§ 120. Contracts for the sale of lands or any interest in or concerning
them.
§ 121. Contracts that cannot be performed within a year from the making
thereof.
§ 122. Contracts for the sale of goods, wares and merchandise for a cer-
tain price or upwards.
STATUTE OF FRAUDS
247
§ 117. (Contracts, Sec. 85.) Promises of executors and
administrators to personally answer for the debts of
the estate of the decedent are not enforceable unless
proved by written evidence signed by the party sought
to be charged.
Case 130. Bellows v. Sowles, 57 Vermont, 164 (1884).
Facts: Bellows brought suit against Sowles, setting
up that he, the plaintiff, was a relative of Hiram Sowles,
deceased and being unprovided for in the will, threat-
ened to contest the same upon the ground that it had
been procured from the deceased by undue influence;
that the defendant the executor under the will, being
the husband of the principal beneficiary, had promised
plaintiff $5,000 to forbear the contest, and the plaintiff
had assented thereto and had accordingly forborne; yet
the defendant disregarding the promise, had failed and
refused to pay plaintiff the said amount. The defendant
claims that this promise if made, is unenforceable be-
cause not in writing as required by the statute of frauds.
Point Involved: Whether the promise by the executor
to pay an heir for refraining from contesting a will, is
a promise to pay for a debt of the estate of the testator,
and therefore by the provisions of the statute of frauds
not enforceable unless evidenced by writing signed by
such executor, or whether it was a direct primary under-
taking by the executor, not included within the statute of
frauds, and therefore binding though oral.
Powers, J.: "Counsel for the defendant have de-
murred to the declaration in this case upon two grounds:
first, that the consideration alleged is insufficient; sec-
ondly, that the promise not being in writing comes within,
and is therefore not enforceable under, the statute of
frauds.
"It has been so often held that forbearance of a legal
right affords a sufficient consideration upon which to
found a valid contract, and that the consideration re-
quired by the statute of frauds does not differ from that
248
CONTRACTS
required by the common law, it does not appear to us to
be necessary to review the authorities or discuss the prin-
ciple. As to the second point urged in behalf of the de-
fendant, the case presents greater difficulties. * * *
*' The best understanding of the statute is derived from
the language itself, viewed in the light of the authorities
which seem to us to interpret its meaning as best to at-
tain its object. That clause of the statute under which
this case falls, reads: 'No action at law or in equity
shall be brought * * * upon a special promise of an
executor or administrator to answer damages out of his
own estate.'
a # * *
"The promise must be to 'answer damages out of his
own estate.' This phraseology clearly implies an obliga-
tion, duty or liability on the part of the testator's estate
for which the executor promises to pay damages out of
his own estate.
({# # *
"Apply this rule to this case. Here, the main pur-
pose of the promisor was not to answer damages (for
the testator) out of his own estate, but was entirely to
subserve some purpose of the defendant. The matter
did not affect the estate. * * * There exists, there-
fore, in this case no sufficient, actual, primary liability
to which this promise could be collateral. * * * The
plaintiff would be deprived of his legal right to contest
the will, by a party who has reaped all the benefit of
the transaction, and is shielded from responsibility by
a technicality. We do not believe that this was the re-.
suit contemplated by the statute. * * *
Question 130: (1) What promise did the executor make in
the above case?
(2) What two defenses were made to the plaintiff's claim?
What is the answer to each of those defenses ?
(3) State a case that would have come within this clause
of the statute of frauds.
STATUTE OF FRAUDS
249
§ 118. (Contracts, Sec. 86.) Promises to answer for the
debts, defaults or miscarriages of another are not en-
forceable unless proved by written evidence signed by
the party sought to be charged.
Case 131. Jones v. Cooper, 1 Cowper's Reports, 227.
Facts: An oral promise by defendant upon goods be-
ing delivered by plaintiff to Smith, in these words UI
will pay you if Smith will not. Defense, the statute of
frauds.
Point Involved: Whether the promise by a third per-
son to a creditor to pay if the debtor does not .must be
in writing under the statute of frauds.
Lord Mansfield: "We are all of opinion upon the
authority of the cases in the books, that the promise by
the defendant in this case, to pay if Smith did not, is a
collateral undertaking within the statute of frauds; and
it is so clear it would be misspending time to go through
the cases, or to say much about it.''
Question 131: State the above case.
Case 132. Marr v. B. C. R. & N. Rwy. Co., 121 Iowa,
117.
Facts: Plaintiff, Marr, kept a boarding house in
Cedar Rapids, and claims that in April, 1901, the Rwy.
Co. made an oral contract with her that she should board
at least 60 of the Company's employees for a period of
six months, and they agreed to furnish her at least that
number. That she agreed to take such boarders at the
price named, but that the Company sent her only about
20 boarders, and that in June, they refused to send her
any more boarders. The statute of frauds was pleaded.
Point Involved: Whether the agreement by the Com-
pany with the plaintiff that the Company would pay her
if she should board a number of employees to be fur-
nished by the Company, was a promise to answer for the
debt of another and therefore not enforceable unless in
writing.
250
CONTKACTS
"* * * It is said in the first place that the oral
contract sued upon was within the statute of frauds,
there being no written or competent evidence to estab-
lish the same. * * *
"But, * * * the objection is not well taken. The
agreement was with the company to board its employees,
and plaintiff was to be paid by the company. There was
no promise to answer for the debt, default or miscar-
riage of another. * * *
Question 132: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) A, being a stranger in the City of Chicago and desiring
to obtain board at a certain hotel, has his friend B come to the
hotel and promise the manager that if A does not pay his hotel
bill, he, B, will pay it. A leaves without paying his bill and the
hotel sues B. B pleads that he is not bound on his promise
because it was not in writing as required by the statute of
frauds. Would you distinguish this case from the case above?
Why?
(3) A desires to open up a retail store and for that purpose
to procure goods from the M. Wholesale House. He goes to the
M. House in company with his friend B, a merchant who already
has a line of credit with the M. Wholesale House. B makes an
oral statement which, in a suit afterwards brought by the
Wholesale House against B (A becoming insolvent) is alleged by
the House, to have been in these words: '' Let A have goods up
to $500 and charge it to my account, but which is alleged by
A to have been: "Let A have goods up to $500 and if he doesn't
pay, you may look to me. What substantial difference would
the different statements make?
(Note: If one promises to pay for goods procured by an-
other, it is evident he may thereby either incur a primary debt
of his own, or a debt that is merely collateral to the debt of
another. As an extreme illustration, A finds a tramp on the
street and asks M to let him have a new suit of clothes and
charge it to A. Clearly this is not a promise to answer for the
debt of another, as M looked solely to A, as his debtor, no mat-
ter who else might have been benefited. So the party to whom
the goods were delivered might be a responsible merchant, and
STATUTE OF FRAUDS
251
yet M might look entirely to the sponsor. In such a case the
statute of frauds is no defense. But if any credit is extended to
the other, then the promise is to answer for the debt of another
and is not enforceable unless in writing and signed.)
Case 133. Lusk v. Throop, 189 Illinois Reports, 127.
Mr. Justice Magruder delivered the opinion of the
court: "* * * If the plaintiff's books show that the
defendant was not originally indebted there, but that
the goods were charged against the person receiving
them, this fact if unexplained by other circumstances,
would be strong evidence going to show that credit was
given the person receiving the goods: * * * But it
is not conclusive evidence of such fact. * * * It
might be rebutted by other evidence of a more convinc-
ing character and this is a question for the consideration
of the jury to be determined from all the circumstances
of the case. * * *
Question 133: To what extent does the Court decide that
the merchant's book entries may show to whom credit was
given ?
Case 134. Warren (defendant) v. Smith (plaintiff),
24 Texas Reports, 484.
Facts: The evidence of Smith, the plaintiff, tended
to prove that Royalls & Jackson owed Smith, the plain-
tiff, a sum of money and that these parties being present
and also Warren, Warren orally agreed to pay Smith
the amount owed him by Royalls and Jackson, and Smith,
the plaintiff, agreed to this and thereupon released Roy-
alls and Jackson of their debt. Defendant, Warren,
claims the statute of frauds as a bar.
Point Involved: Whether a promise to assume an-
other's debt under an arrangement with the creditor and
the debtor by which the original debtor is released upon
such assumption is within the statute of frauds.
Bell, J.: * * It is well settled that the clause
of'tthe statute of frauds which relates to promises to
252
CONTRACTS
answer for the debt, default or miscarriage of another
person, has reference to promises which are distinctively
collateral to the undertaking of the party originally li-
able. If the promise to answer for the debt of another
is collateral only, and if the original liability continues
to subsist, the collateral promise is within the statute;
but if, by the new promise, the original liability is extin-
guished, then the new promise is not within the statute,
which need not be in writing. * * *
Question 134: What were the facts, the question presented
and the Court's decision in the above case?
Case 135. Spadone v. Reed and Thompson, 7 Bush's
Reports (Ky.) 455.
Facts: Spadone sued Reed as his original debtor and
Thompson as beneficiary of an alleged agreement where-
by Thompson agreed with Reed to pay Reed's debt to
Spadone.
Point Involved: Whether a promise to a debtor to pay
his debt to the creditor, is a promise within the statute
of frauds.
Judge Lindsay : "* * * The statute of frauds can-
not be made available as a defense to this action. The
promise of Thompson to pay the debt of Reed was not
made to Reed's creditor, but directly to Reed himself
and therefore can be enforced though not in writing.
Question 135: What were the facts, the question presented
and the Court's decision in the above case?
§ 119. (Contracts, Sec. 87.) Promises in consideration
of marriage are not enforceable unless proved by writ-
ten evidence signed by the party sought to be charged.
Case 136. Austin v. Kuehn, 211 Illinois, 113.
Statement of Facts: C. M. A. files her claim against
the estate of J. E. Baker, alleging a promise by Baker
to pay her $7,500 when she should marry a certain per-
STATUTE OF FRAUDS
253
son whom she afterwards in consideration thereof did
marry.
Point Involved: That a promise made in considera-
tion of marriage is not enforceable unless in writing.
Me. Justice Wilkins delivered the opinion of the
Court: "* * * The Statute of Frauds provides:
'No action shall be brought whereby to charge * * *
any person upon any agreement made upon considera-
tion of marriage * * * unless the promise or agree-
ment upon which said action shall be brought, or some
memorandum or note thereof, shall be in writing and
signed by the party to be charged therewith, or some
person thereunto by him lawfully authorized. Saylor
(a witness) testified that deceased, * * * gave wit-
ness a card with the name 'James E. Baker' printed on
one side of it and on the other '$7,500.' This card was
not produced in evidence, and even if it had been, it was
not such an agreement, note or memorandum, in writing,
as is required by the foregoing statute. The alleged
promise being oral and given originally in consideration
of marriage, was within the statute of frauds and no
action could be maintained upon it. * * * 
Question 136: State the facts, the question presented and the
Court's decision in the above case.
Case 137. Withers v. Richardson, 5 T. B. Monroe, 94.
Judge Mills: "This is an action of assumpsit on a
promise to marry, and a verdict and judgment for the
plaintiff below; to reverse which, this writ of error is
prosecuted.
"* * *~The defendant pleaded that the contract
was in parol only, and relied on the statute * * *
(of frauds). * * * It has never been held that the
words of the statute 'any agreement made upon con-
sideration of marriage' meant or included promises to
marry. It would be imputing to the legislature too great
254
CONTRACTS
an absurdity, to suppose that they had enacted that all
our courtships, to be valid, must be in writing. * * * 
Question 137: Does the statute of frauds cover mutual prom-
ises to marry?
§ 120. (Contracts, Sec. 88.) Contracts for the sale of
lands or any interest in or concerning them are not
enforceable unless proved by written evidence signed
by the party sought to be charged.
Case 138. Kirkeby v. Erickson, 90 Minnesota Reports,
299.
Facts: Suit for damages for breach of an oral con-
tract whereby plaintiff sold defendant growing wild
grass to be cut by the defendant. Defense, the statute
of frauds.
Point Involved: "Whether a sale of growing wild grass
to be cut by the vendee, is a contract creating an inter-
est in real estate and therefore not enforceable unless
in writing.
Collins, J.: *' * * * The grass which was the sub-
ject of the oral contract was a part of the plaintiff's
real estate, and the agreement was void, because it at-
tempted to create an estate in land, and was not in writ-
ing. * * * At common law, grasses growing from
perennial roots are regarded as fructus naturales, and
while unsevered from the soil, are considered as per-
taining to the realty. * * * In this particular case,
the right of the defendant to enter upon plaintiff's prem-
ises for the purpose of cutting and removing the grass
was implied from the fact of the sale. * * * Such a
case must be distinguished from one where the vendor of
the property sold is to sever it from the soil himself.
Verbal sales of that character have been frequently up-
held as not within the statute. * * *
Question 138: Was the subject-matter of the above contract
personal or real property? Was the 4th section a defense?
STATUTE OF FRAUDS
255
Case 139. Dorris v. Kings, 54 S. W. Rep. (Tenn.) 683.
Statement of Facts: Suit upon an alleged contract
whereby defendants agreed to furnish plaintiffs all the
merchantable timber on defendants' lands, cut into saw-
logs of the proper length for manufacture into lumber.
Defense, the statute of frauds.
Point Involved: Whether a contract to sell logs to be
furnished and delivered by the seller from timber now
growing, is a contract creating an interest in real estate,
or a contract to sell personal property.
Barton, J.: "* * * This, as we understand the
law, is simply an executory contract to sell and deliver
certain personal property. It does not purport to be
a contract selling them (Dorris & Sons) certain trees
standing on the land, nor giving them a license to go upon
the land to get certain trees, but is a contract on the part
of the defendants to sever or cut and deliver all the
merchantable timber. In the case of New York & E.
T. Iron Co. v. Green County Iron Co., 11 Heisk. 434,
* * * Judge Freeman, * * * said: 1 This was a
contract for the sale of personalty; that is, an agree-
ment to sell the timber designated. But the property
did not pass with the timber until it could be used or
received by the purchaser,—at any rate, not until cut
and corded, as it was to be paid for by the cord as used.'
* * * This case is much stronger. * * * We think
that the portion of the contract for the breach of which
this suit was brought, was clearly only an executory con-
tract for the sale and delivery of severed timber, per-
sonal property, and therefore not within the statute of
frauds. * * *
Question 139: What was the contract in Case 139? Did the
4th section of the statute of frauds apply? Why?
Case 140. Bull v. Griswold, 19 111. 631.
Point Involved: Whether a sale of growing crops is
a sale of real estate.
256
CONTRACTS
Caton, C. J.:  * * * Growing crops are so far
personalty that they may be sold and transferred by
parol. * * * They partake of realty, no doubt, so
far as to pass by a deed of the land as incident to it,
and so it is with many other articles which are well
settled to he personal property, as fixtures of trade or
machinery erected for mechanical purposes. If the wheat
was sold by parol by the defendant to the plaintiff, that
vested in him a good title.
Question 140: (1) Are growing crops considered as real
property or personal property so far as a sale of the crop is
concerned ?
(2) What is the rule where the land is sold upon which the
crops are growing, if there is no reservation of such crops ?
(3) To what other property did the court liken growing
crops ?
(4) Distinguish this case from Case 139.
(Note as to short term leases: Short term leases, generally
in the American statutes, for the term of one year, or in some
states for three years, are excepted from the operation of the
statute. The question arises whether this provision is to be con-
strued in connection with the provision of the statute in refer-
ence to contracts that are not to be performed within a year
from the making thereof. That is, if an oral lease for one year
is valid by the statute, is such lease enforceable if it is to com-
mence in futuro, so that it cannot be completed for more than
a year. Some of the statutes provide that a lease for one year
from the making thereof, need not be in writing, but most of
the statutes omit that phrase. It is held in some jurisdictions
that a lease to commence in futuro must end within a year from
the time it is made, otherwise it is unenforceable for any period.
See Wheeler v. Frankenthal, 78 111. 124. But other cases hold
that a lease for the full year, though to begin in the future, is
valid. See Young v. Dake, 5 N. Y. 463.)
§ 121. (Contracts, Sec. 89.) Contracts that cannot be
performed within a year from the making thereof are
not enforceable unless proved by written evidence
signed by the party sought to be charged.
STATUTE OF FRAUDS
257
Case 141. Chase v. Hinkley, 126 Wis. 75.
Facts: A sued B for $39.00 for services rendered to
B. B's defense was that A contracted to work for him
for one year, hut worked only a short time and broke
his contract by quitting without cause. The evidence
showed that in October, 1904, A orally agreed to work
for B for one year beginning the following Monday; that
A began work and performed services of the reasonable
value (as on an implied contract) of $39.00 and then quit.
A maintains that B cannot prove the alleged contract
by way of defense, the same being oral and therefore
within the statute of frauds.
Point Involved: Whether a contract for service which
cannot be performed within a year from the making
thereof, must be in writing in order to be proved in a
judicial proceeding.
Marshall, J.: '' * * * The excess of two days was
just as efficient as a longer period to render the agree-
ment void under * * * (the statute of frauds).
* * * The fact that the period of service agreed upon
was to extend for one year from the time the perform-
ance commenced does not take the case out of the stat-
ute, for, where performance is to commence in the future,
for the purposes of the statute the period to be con-
sidered is that beginning w7ith the date of the agreement
■* * # >>
Question 141: What were the facts, the question presented
and the Court's decision in the above case ?
Case 142. Warner v. Texas & Pacific R. Co., 164 U. S.
418.
Facts: "This was an action brought May 9, 1892, by
Warner against the T. & P. R. Co., upon a contract made
in 1874, by which it was agreed between the parties that,
if the plaintiff would grade the ground for a switch, and
put on the ties, at a certain point on the defendant's
railroad, the defendant would put down the rails, and
258
CONTRACTS
maintain the switch for the plaintiff's benefit for ship-
ping purposes, as long as he needed it. The defendant
pleaded that the contract was oral and within the statute
of frauds, because it was 'not to be performed within
one year from the making thereof, * * *•' 
Point Involved: Whether a contract that may be per-
formed within a year (though the possibility be remote),
is a contract covered by the language of the statute of
frauds "not to be performed within a year, in other
words whether the statute requires contracts that may
be performed within a year but may take longer than
that time, or simply contracts that cannot be performed
within a year to be in writing.
Me. Justice Gray: "In the earliest reported case in
England upon this clause of the statute regard seems
to have been had to the time of actual performance in
deciding that an oral agreement that, if the plaintiff
would procure a marriage between the defendant and a
certain lady, the defendant would pay him fifty guineas,
was not within the statute; Lord Holt saying: ' Though
the promise depends upon a contingent, the which may
not happen in a long time, yet, if the contingent happen
within a year, the action shall be mairftainable, and is
not within the statute.' Francamv. Foster, (1692) Skin.
326; S. C., Holt, 25.
"A year later, another case before Lord Holt pre-
sented the question whether the words, 'agreement not
to be performed within one year,' should be construed
as meaning every agreement which need not be performed
within the year, or as meaning only an agreement which
could not be performed within the year, and thus, ac-
cording as the one or the other constructions should be
adopted, including or excluding an agreement which
might or might not be performed within the year, with-
out regard to the time of actual performance. The latter
was decided to be the true construction.
(Here the Court discusses numerous authorities.)
"In the case at bar, the contract between the railroad
STATUTE OF FRAUDS
259
company and the plaintiff, as testified to by the plaintiff
himself, who was the only witness upon the point, was
that, if he would furnish the ties and grade the ground
for the switch at the place where he proposed to erect
a sawmill, the railroad company would 'put down the
iron rails and maintain the switch for the plaintiff's bene-
fit for shipping purposes as long as he needed it.'
"The parties may well have expected that the contract
would continue in force for more than one year. It may
have been very improbable that it would not do so; and
it did, in fact, continue in force for a much longer time.
But they made no stipulation which, in terms, or by rea-
sonable inference, required that result. The question
is not what the probable, or expected, or actual per-
formance of the contract was, but whether the contract,
according to the reasonable interpretation of its terms,
required that it should not be performed within the year.
No definite term of time for the performance of the con-
tract appears to have been mentioned or contemplated
by the parties, nor was there any agreement as to the
amount of lumber to be sawed or shipped by the plain-
tiff, or as to the time during which he should keep up
his mill.
"The contract of the railroad company was with, and
for the benefit of, the plaintiff personally. The plain-
tiff's own testimony shows (although that is not essen-
tial) that he understood that the performance of the
contract would end with his own life. The obligation
of the railroad company to maintain the switch was in
terms limited and restricted by the qualification 'for the
plaintiff's benefit for shipping purposes as long as he
needed it,' and no contingency which should put an end
to the performance of the contract, other than his not
needing the switch for the purpose of his business, ap-
pears to have been in the mouth or in the mind of either
party. If, within a year after the making of the con-
tract, the plaintiff had died, or had abandoned his whole
business at this place, or for any other reason had ceased
to need the switch for the shipping of lumber, the rail-
260
CONTRACTS
road company would have been no longer under any obli-
gation to maintain the switch, and the contract would
have been brought to an end by having been fully per-
formed.
"The complete performance of the contract depend-
ing upon a contingency which might happen within the
year, the contract is not within the statute of frauds as an
' agreement which is not to be performed within the space
of one year from the making thereof.' 
Question 142: (1) State the facts in, the above case, the
question presented and the Court's decision.
(2) A orally agrees to support B for life. B is fifty years
of age and in fair health. Is the contract enforceable? (Heath
v. Heath, 31 Wis. 223.)
§ 122. (Contracts, Sec. 90.) Contracts of sale of goods,
wares and merchandise, of a certain price or upwards
are not enforceable unless (1) in writing and signed,
or (2) there is part delivery and acceptance, or, (3)
there is part payment.
(Note: For cases on this section of the statute see Subdivi-
sion "Sales.")
(c) What Amounts to Compliance with Statute.
§ 123. The memorandum and the signature.
§ 124. Compliance by delivery and acceptance in sales of personal property.
§ 125. Compliance by payment or part payment in cases of sales of per-
sonal property.
§126. Contracts for "work and labor not within the statute.
§ 127. The statute of frauds and the Uniform Sales Act.
§ 123. (Contracts, Sec. 91.) The memorandum and the
signature.
Case 143. Louisville Asphalt Varnish Company 7.
Lorick & Lawrence, 29 South Carolina Reports, 533
(1888).
Facts: They are set forth in the opinion.
Point Involved: If a memorandum is made and signed
by party to be charged after the contract is made, is it
STATUTE OF FRAUDS
261
sufficient to satisfy the statute of frauds'? If there are
a number of papers constituting the memoranda, to what
extent must they show internally their own connection?
Specifically, will a written and signed attempted cancel-
lation by a party to a contract supply the evidence
against him under the statute of frauds ?
Mr. Justice McIver: '' This is an action to recover
the sum of $83.05, the price of certain varnish and paint
alleged to have been sold by plaintiff to defendants. The
defense was a general denial. At the trial the plaintiff
offered testimony tending to show that on the 16th of
October, 1885, one of its traveling salesmen, Hutchin-
son by name, took from Moore, a clerk of defendants,
who, it is admitted had authority to give the order, a
verbal [oral] order for articles specified in the account
sued on, which Hutchinson immediately entered in his
memorandum book as follows: (Here follows an item-
ization, signed 'H. L. Hutchinson, salesman.')
"On the same day a copy of this order was sent by
mail by said salesman to plaintiff who received it on
the 19th of October, 1885 * * *. On the 17th of
October, 1885, the defendants wrote to plaintiffs as fol-
lows:
 'Louisville Asphalt Varnish Co., Louisville,
 'Gents: Don't ship paint ordered through your
salesman. We have concluded not to handle it.'
"This letter, however, was not received by plaintiff
until after the goods had been shipped; and upon its
receipt plaintiff wrote defendants, saying, 'That the ship-
ment had gone before the request to cancel was received.'
When the goods arrived in Columbia the defendants de-
clined to receive them, but what became of them, the
testimony does not show.
"At the close of plaintiff's testimony defendants moved
for a non-suit, which was granted upon the ground that
section 2020, General Statutes (Statutes of Frauds), was
fatal to a recovery. Plaintiff appeals upon the several
grounds set out in the record, which make these two ques-
262
CONTRACTS
tions: 1st. Whether there was such a note or memoran-
dum in writing of the bargain as would satisfy the re-
quirements of section 2020 of the General Statutes. 2nd.
If not, whether there was such an acceptance and actual
receipt of the goods as would take the case out of the
operation of that section.
"It is quite certain that there was no formal agree-
ment in writing, signed by the parties to be charged, for
the sale of the goods in question, and we think it equally
certain that there was no single instrument or memoran-
dum in writing sufficient to satisfy the requirements of
the statute; for the letter of the defendants, copied above,
did not specify the necessary particulars as to quantity,
nature, and price of the goods, which were the subjects
of the alleged contract of sale, and the copy of the order
sent by the salesman to the plaintiff, which did contain
all the necessary particulars, was not signed by the de-
fendants. It is plain, therefore, that neither one of these
papers standing alone, would be sufficient. But as it is
well settled that the whole agreement need not appear
in a single writing, but may be made out from several
instruments or written memoranda, referring one to the
other, and which, when connected together, are found to
contain all the necessary elements, the precise, practical
question in this case is whether the letter of defendants
can be connected with the written order sent by the sales-
man so that the two together may constitute a sufficient
note or memorandum in writing to satisfy the require-
ments of the statute.
"It seems to us, therefore, that the letter of defendants,
taken, as it must be, in connection with the order sent to
plaintiffs by the salesman, to which it expressly referred,
and which was in writing, and specified all the necessary
particulars as to price, quantity, quality, and time of
payment constituted a sufficient note or memorandum in
writing of the bargain to take the case out of the statute
of frauds. In the absence of any evidence that any other
order was given, the language of the letter—'Don't ship
Statute of frauds
263
paint orders through your salesman'—must necessarily be
regarded as referring to the order of which a memoran-
dum in writing was taken at the time by the salesman,
and a copy thereof immediately forwarded to the plain-
tiff, who at once filled the order and shipped the goods
to the defendants. This is a stronger case than that of
Beckwith v. Talbot, supra, for there the letter of the de-
fendant simply referred to the agreement, without indi-
eating when or how it had been made, while here the letter
refers to a particular article  ordered through your
salesman, and we hear of no other order through the
salesman or in any other way. The only necessity for
any parol evidence at all (if, indeed, there was any) was
to identify the order sent by the salesman, and for this
purpose, as we have seen, such evidence would be com-
petent.
"Suppose the plaintiff had^ on the 16th of October,
1885, written a letter to defendants, proposng to sell them
the articles mentioned in the salesman's order, in the
quantities there stated, and at the prices and on the
time there mentioned, and that defendants had replied
by letter, simply saying, 'I accept your offer,' without
repeating the particulars as to quantity, price, &c., it
could not be doubted that although defendant's letter—
the only paper which they signed—did not contain in
itself the necessary particulars of the bargain, yet the
two letters, taken together, would be held a sufficient
compliance with the statute. It seems to us that the
transaction here in question was, in principle, practically
the same as that in the supposed case, and we think
there was error in holding that the contract sued on
was void under the statute of fraud.
"We do not see how it is possible to regard the letter
of the defendants as a denial of the order given to the
salesman by their clerk, Moore, who, it was conceded,
had authority to give the order; for the only testimony
upon the subject is that of the salesman, who says dis-
tinctly that Moore gave him the order, and he entered
it in his memorandum book, and there is no evidence to
264
CONTRACTS
the contrary. Moore was not examined as a witness. It
is true that, after the controversy between these parties
had arisen, the defendants, in a letter as late as 31st
December, 1885, addressed to the attorney who had been
consulted by the plaintiff, do repudiate the purchase,
but that is not the letter relied upon by plaintiff to estab-
lish the contract. On the contrary, the one relied on is
that of the 17th October, 1885, which has been copied
above, and the question is, whether the last mentioned
letter can be regarded as a denial of having given the
order. The manifest purpose of that letter was to coun-
termand the order, and this necessarily presupposed
that the order had been given. The terms used clearly
show this—'Don't ship the paint ordered through your
salesman. We have concluded not to handle it.' This
clearly means that the paint had been ordered, but that
defendants had subsequently changed their minds and
'concluded not to handle it;' and we don't see how it can
be construed to mean anything else. We have, then, an
admission in writing that an order for the goods in ques-
tion through the salesman had been given, and we have
the order referred to likewise in writing, and the two
together fully satisfy the requirements of the statute.
"Under the view which we have taken of the first
question raised by this appeal, the second question be-
comes immaterial, and need not therefore be considered.
"The judgment of this court is, that the judgment of
the Circuit Court be reversed, and that the case be re-
manded to that court for a new trial.
"Mr. Justice McGowan concurred.
Question 143: (1) When in respect to the making of the con-
tract was the memorandum and signature made in this case?
Was it made for the purpose of supplying the seller with evi-
dence needed by him? Did it nevertheless accomplish that pur-
pose? May the writing required by the statute of frauds con-
sist in a number of writings ?
(2) If writing No. 1 made by A contains the statement of
the contract but is not signed by X, and X then signs writing No.
2 which does not contain the details of the contract, what must
STATUTE OF FRAUDS
265
be true of writing No. 2 in order to construe it in connection
with writing No. 1, so that by such connection X may be held to
have signed writing 1 ?
Case 144. Western Metals Co. v. Hartman Co., 303
Illinois Keports, 479 (1922).
Facts: Western Metals Co. (plaintiff), dealers in scrap
metal in Cleveland, Ohio. Hartman Ingot Metal Co.,
dealers in ingot brass in Chicago. Presidents of both
companies met in Cleveland where there was an oral
sale of scrap brass by Western Metals Co. to the Hart-
man Co. Following this conversation the Western Metals
Co., the seller, sent to the Hartman Co., the buyer, a con-
firmation upon a printed blank. This read:
'1 Confirmation
THE WESTEBN METALS COMPANY
Corner Detroit & Center Streets, Cleveland, Ohio
Sales Order No. 2053 Date, November 2, 1918
Sold to Hartman Ingot Metal Co., Chicago, Illinois.
(Here follow terms and description.)
Following the receipt of this confirmation the Hartman
Co. wrote the following letter:
 Chicago, 111., Nov. 8, 1918.
Western Metals Co., Cleveland, Ohio.
Gentlemen:—We will absolutely refuse to accept any
shipment of metals until such a time as you are notified
by us to the contrary, owing to the fact that we are badly
congested here at the present time. Trusting you will
give this matter your attention, we are,
Yours very truly,
Hartman Ingot Metal Co.,
John Hartman.''
Further correspondence followed, but it may be as-
sumed for our purposes that the above letters consti-
tuted the contract between the parties.
The seller brought suit. The statute of frauds was
pleaded, and in the trial court the plaintiff got judgment
266
CONTRACTS
against the buyer for $4,500. The buyer appealed to the
Appellate Court which reversed the decision, and the
case is brought by the seller to the present court on fur-
ther appeal.
Mb. Chief Justice Thompson: * *< That an
oral contract of sale was made in Cleveland is finally
established by the verdict of the jury, the judgment of the
superior court and the action of the Appellate Court in
reversing the judgment of the superior court without re-
manding and without making a finding of fact different
from the finding of the trial court. The Appellate Court
found that the action was barred because of the pro-
visions of section 4 of the Uniform Sales act, commonly
called the Statute of Frauds. This section provides: 'A
contract to sell or a sale of any goods * * * of the
value of $500 or upwards shall not be enforceable by ac-
tion * * * unless some note or memorandum in
writing of the contract or sale be signed by the party to
be charged or his agent in that behalf.' (Hurd's Stat.
1921, p. 2855.)
"It is not necessary in order to take the contract of
sale out of the Statute of Frauds that there be a formal
written contract, nor is it necessary that the written mem-
orandum be complete in one writing. (Ullsperger v.
Meyer, 217 111. 262.) It is well established that a com-
plete contract, binding under the Statute of Frauds, may
be gathered from letters, writings and telegrams between
the parties relating to the subject matter of the contract
and so connected with each other that they may be fairly
said to constitute one paper relating to the contract,
though only one of the writings may be signed by the
party to be charged. No particular form of language is
necessary to constitute the memorandum requisite to
satisfy the requirements of the statute. Any kind of a
writing, from a solemn deed down to mere hasty notes or
memoranda from which the intention of the parties may
be gathered, as in other contracts, will be sufficient. (Mc-
Connell v. Brillhart, 17 111. 354; Lasher v. Gardner, 124
STATUTE OF FRAUDS
267
id. 441; Flegel v Dowling. (Ore.) 102 Pac. 178.) It is
equally well established that the signed writing or writ-
ings must refer expressly to the other writing, or the
several writings must be so connected, either physically
or otherwise, as to show by internal evidence that they
relate to the same contract. (Wood v. Davis, 82 111. 311;
Kopp v. Reiter, 146 id. 437; Peck v. Vandemark, 99 N. Y.
29, 1 N. E. 41; White v. Breen, 106 Ala. 159, 32 L. R. A.
127.) A paper signed by the party to be charged cannot
be incorporated in a paper not signed by him by a ref-
erence in the latter. The signed paper must refer to the
unsigned paper in clear and distinct terms. (27 Corpus
.Juris, 263.) Oral evidence is inadmissible to connect the
several papers or show that they relate to the same trans-
action. Oral evidence can only bring together the differ-
ent writings. It cannot connect them. They must show
their connection by their own contents. The connection
must be apparent from a comparison of the writings
themselves. (25 R. C. L. 680; 2 Page on Contracts, 2285;
29 Am. & Eng. Ency. of Law,—2d ed.—850; Cunha v.
G-allery, 29 R. I. 230, 69 Atl. 1001.) After the several
writings connect themselves together into one complete
memorandum, parol proof is proper to show that the sev-
eral writings apply to the subject matter of the suit and
not to some other sale. This is equally so in case the
complete memorandum is contained in one writing. The
rule with respect to the admission of parol proof is the
same whether the memorandum is to be found on one
paper or on several papers which connect themselves
together. The wisdom of the rule forbidding the use of
oral evidence to show the connection between the several
papers is at once apparent. If it is necessary to use oral
evidence to show that the papers are parts of one con-
tract of sale then the contract becomes partly oral and
partly written, and we have then introduced alb the mis-
chiefs which the Statute of Frauds and Perjuries was
intended to prevent. The line must be established some-
where, and that line has been wisely established at a
definite point. If we break across this line and permit
268
CONTRACTS
the use of some oral evidence to connect the writings
then we introduce into the law confusion and uncertainty,
because no one will then know how much oral evidence
will be permitted to join the several writings in a given
case. We think the established rule a wise one and will
not depart from it.
Turning now to the several writings in the case at bar,
what do we find to connect them? It must be apparent
to anyone that the correspondence admitted the existence
of a contract of sale, but that is not the question for us
to decide. That question is already settled by the jndg-
ment of the Appellate Court. The only question presented
to us is whether there is a memorandum of this contract
of sale, complete in all its terms and signed by defendant
in error. There is no contention that such a memoran-
dum exists unless the letters signed by it are so connected
with the confirmation dated November 2, 1918, as to
make the confirmation and the letters a memorandum
sufficient to satisfy the requirements of the statute. The
correspondence will be examined in vain in an effort to
find the slightest reference to the confirmation. At no
time does defendant in error admit that the confirmation
correctly states the terms of the contract. In fact, de-
fendant in error does not even admit in its correspond-
ence the existence of the confirmation. Conceding that
its letters admit the existence of the oral contract of sale,
there is nothing in the letters, or in any paper to which
the letters refer, that states any of the terms of the con-
tract. It is unquestionably the law that the memorandum
upon which it is sought to charge a party to a contract
must state the contract with such certainty that its essen-
tials can be known from the signed writing, or by some
reference contained in the signed writing to some other
writing, without recourse to parol proof to supply the
essential elements of the contract or to supply the con-
necting links between the signed writing and some other
writing or writings. It is clear that the correspondence
offered in evidence in this case does not meet these re-
quirements.
STATUTE OP FRAUDS
269
"The judgment of the Appellate Court is affirmed.
44 Judgment affirmed. v
Question 144; What was the memorandum in this case? Was
it signed by plaintiff? By defendant? If the buyer's letter
had said "Referring to your confirmation, Sales Order No.
2053, we want to say that we have decided to rescind same,
would the statute of frauds have been a good defense by the
buyer? Why? What is necessary, according to this case, to
enable the plaintiff to connect up the writings?
If in this case the buyer had sued the seller would the
memorandum of the seller have been sufficient to hold it under
the statute of frauds, if signed by such seller? If there was
no signature by the seller other than the use of its bill head
or letter head would that be a sufficient signature to hold it
upon?
Case 145. Clason v. Bailey, 14 Johnson's Reports (N.
Y.) 484 (1817).
Facts: Bailey & Voorhees sued Clason for damages
arising out of Clason's refusal to receive rye sold to
Clason by Bailey & Voorhees. The statute of frauds was
relied on as a defense:
1. Because the contract was not signed by Baker &
Voorhees, the plaintiffs;
2. Because it was written with lead pencil instead of
pen and ink.
Points Involved: Whether both parties, or which
party, must sign the agreement or memorandum; whether
the signature may be by agent; whether it must be at
the bottom of the memorandum, and whether it may be
by lead pencil.
The Chancellor: 44Isaac Clason employed John
Townsend to purchase a quantity of rye for him. He, in
pursuance of this authority, purchased of Bailey & Voor-
hees 3,000 bushels at $1.00 per bushel, and at the time of
closing the bargain he wrote a memorandum in his memo-
randum book in the presence of Bailey & Voorhees in
these words:
 'February 29, bought for Isaac Clason of Bailey &
270
CONTRACTS
Voorhees 3,000 bushels of good merchantable rye, deliv-
erable from the 5th to the 15th of April next, at $1.00
per bushel, and payable on delivery. * * *'
"It is admitted Olason signed this contract by the in-
sertion of his name by his authorized agent in the body
of the memorandum. * * * It is a point settled that
if the name of a party appears in the memorandum and
is applicable to the whole substance of the writing and is
put there by him or his authority, it is immaterial in
what part of the instrument the name appears, whether
at the top, in the middle or at the bottom. * * *
Clasonfs name was inserted in the contract by his author-
ized agent, and if it were admitted that the name of the
other party was not there by their direction, yet the bet-
ter opinion is * * * that it is sufficient if the agree-
merit be signed by the party to be charged.
a* * * Clason, who signed the agreement, and is
the party sought to be charged, is, then, according to the
authorities, bound by the agreement and he cannot set
up the statute in bar.
"The remaining objection is that the memorandum
was made with a lead pencil. The statute requires a
writing. It does not undertake to define with what instru-
ment or with what material the contract shall be written.
* * * ^ jlas peen admitted * * * that printing
was writing within the statute, and * * * that
stamping was equivalent to signing and * * * that
making a mark was subscribing within the act.
"The statute of frauds * * * did not require any
solemn and formal instrument. It only required a note
or memorandum, which imports a writing done on the
spot in the moment and hurry and tumult of commercial
business. A lead pencil is generally the most accessible
and convenient instrument of writing on such occasions
and I see no reason why we should wish to put an inter-
diet on all memoranda written with a pencil. * * *
Question 145: What person actually makes the memorandum
in this case? Was the signature of defendant in the body or at
the bottom of the memorandum and what did the court say on
STATUTE OF FRAUDS
271
that point ? Did it matter whether plaintiff's name was signed
or not ? Why ? Is a lead pencil signature sufficient ? A rubber
stamp signature ?
Case 146. Love v. Harris, 156 N. C. 88, 72 S. E. 150,
36 L. R. A. N. S. 927.
Walker, J.:  * * * When a sale is made at auc-
tion, the auctioneer is the agent both of the vendor and
the vendee. It has been said that until the fall of the
hammer, he is the agent of the vendor, but when the
property is struck oft to the purchaser by the auctioneer
he then becomes the agent of the vendee. The vendor
employs the auctioneer to make the memorandum of sale,
and the buyer, by bidding, sanctions the authority of the
officer [auctioneer] to do so. He therefore has the power
to sign the memorandum so as to bind the vendor by the
terms of the sale. * * *
"It is not necessary that the vendee's name should be
subscribed to the memorandum, but it is sufficient if it
appears in the body of the instrument, and the intention
is manifested thereby to bind the vendee by the instru-
ment. Mr. Smith, in his work on Contracts, 7th ed., at
marginal page 93, states the law very clearly in regard
to this matter, when he says: 'There is a third point
common to all the five contracts mentioned in the fourth
section; it is with regard to the signature. The words are,
you will recollect, 'signed by the party to be charged
therewith, or some other person thereunto by him law-
fully authorized.' The signature, it is obvious, is most
regularly and properly placed at the foot or end of the
instrument signed; but it is decided in many cases that,
although the signature be in the beginning or middle of
the instrument, it is as binding as if at the foot, although,
if not signed regularly at the foot, there is always a
question whether the party meant to be bound by it as it
stood, or whether it was left so unsigned because he re-
fused to complete it. But when it is ascertained that he
meant to be bound by it as a complete contract, the stat-
ute is satisfied, there being a note in writing showing the
272
CONTRACTS
terms of the contract, and signed by him. Therefore,
where, in the case of the sale of a quantity of cotton yarn,
a bill of parcels was sent by the seller to the purchaser,
headed: 'London, 24th Oct., 1812. Messrs. John Schnei-
der & Company, bought of Thomas Norris & Company,
agents, cotton yarn and piece goods. No. 3, Freeman's
Court, Cornhill.' Following this was a list of the articles
sold, the particulars, quantities, and prices. It was held,
in an action for not delivering the yarn, to contain a suf-
ficient memorandum to satisfy the requirement of the
statute as to the signature of the party to be charged.
In this case, the whole of the heading of the bill of parcels
was printed, except the words, 'Messrs. John Schneider
& Company.' But as it was then given out to the other
contracting party by the party to be charged, recognizing
the printed name as much as if he had subscribed his
mark to it, he had recognized and avowed it as his signa-
ture.' The auctioneer's memorandum in this case was
made at the very time of the sale and was written on the
notice, and this was sufficient to make a complete con-
tract of sale, the memorandum being physically attached
to the notice, or so connected with it as to constitute a
sufficient reference to it, and so that they may be read to-
gether as parts of one and the same paper; the latter
being an offer to sell the property (describing it), and the
memorandum on the notice being an acceptance of the
offer upon the terms contained therein.
Question 146: (1) Whose agent for purposes of making a
sale is the auctioneer? Is he the agent of the offeree for any
purpose ?
(2) What does the court say about the necessity of the sig-
nature being at the foot of the memorandum ? If not at the foot,
what point might be raised ? How would that point be overcome
to satisfy the statute of frauds ?
(Note: If X appoints A to make a contract with Y, ordi-
narily, any memorandum and signature by A would not be eon-
sidered a signature by Y or his agent, for A is not agent of Y.
But in two classes of cases the agent of one party is usually con-
sidered also the agent of the other for the purpose of making
STATUTE OF FRAUDS
273
the memorandum and signature required by the statute of
frauds. These classes of cases are those of auctioneers and
brokers.)
§ 124. (Contracts, Sec. 92.) Compliance by delivery in
acceptance in sales of personal property.
(Note: See Sales, Chapter 40 post, for cases. This section
heading is placed here to call attention to the fact that under
the 17th Section, the statute of frauds is satisfied, that is, suit
may be successfully maintained so far as the statute of frauds
is concerned, although there is no writing, if there has been
a delivery and acceptance of the goods, or a part of them.)
§ 125. (Contracts, Sec, 93.) Compliance by payment or
part payment in case of sales of personal property.
(Note: See Sales, Chapter 40 post, for cases. This section
heading is placed here to call attention to the fact that under
the 17th Section the statute of frauds is satisfied, that is, suit
may be successfully maintained so far as the statute is con-
cerned, although there is no writing, if there has been a pay-
ment or part payment.)
§ 126. (Contracts, Sec. 94.) Contracts for work and
labor, not within the statute.
(Note: See Sales, Chapter 40 post, for cases. This section
heading is placed here to call attention at this time to the fact
that if goods are specially made up to the order of a party,
not being readily disposable on the market to others, the stat-
ute of frauds does not apply.)
§ 127. (Contracts, Sec. 95.) The statute of frauds and
the uniform sales act.
(Note: The Uniform Sales Act, adopted in many states and
hereafter considered in Division D, reaffirms and re-enacts with
modification, the 17th Section of the English Statute of Frauds.
See Sales, Division D, post.)
D. The Parol Evidence Rule.
§ 128. The parol evidence rule defined/
§ 129, Parol evidence rule permits contracts partly in writing and partly
oral.
274
CONTRACTS
§ 130. Parol evidence rule permits proof of customs.
§ 131. Evidence not precluded by parol evidence rule.
§ 128. (Contracts, Sec. 96.) The parol rule defined.
(Editor's Note: When a contract is reduced to writing
whether because the law requires it, or merely because the
parties desire it to be in that more permanent form, the law
considers that it is in that writing that the expression and evi-
dence of the contract is to be found, and therefore will not
permit the introduction of oral or extrinsic evidence, whether
of utterances prior to, or at the time of the writing, to add to,
contradict or in any manner to change the written language.
Otherwise the writing, instead of being a permanent expression
of the contract, would be, at most, a prima facie evidence there-
of, subject to mutilation by the oral testimony of the parties.
If one puts his contract in written form it is deemed that such
writing is his contract, that it was so intended, and that there
it must be found and not elsewhere. This is known as the parol
evidence rule. For application of this rule see following cases.)
Case 147. Seitz v. Brewers' Refrigerating Co., 141
U. S. 510.
Facts: The Brewers' Refrigerating Machine Co. sued
Seitz on a written contract by which it agreed to supply
and put in operation in defendant's brewery, a No. 2
refrigerating machine, of its own construction, for a cer-
tain price to be paid on certain terms. Seitz defends on
the ground, first, that there was an implied warranty
that the machine would accomplish certain purposes;
second, that, at any rate, there was a collateral oral war-
ranty that the machine would accomplish those purposes.
As to the first point the court decided that under the
term's of the sale, defendant having gotten the very
thing he bargained for, there was no implied warranty
of fitness for any particular purpose; and further di-
rected that the oral warranty, even if made, was not
admissible in evidence because of the parol evidence rule.
Point Involved: Whether if a contract of sale is in
writing of an apparently ^complete form, the court can
receive evidence that an oral warranty was made as a
part of that contract.
PAROL EVIDENCE RULE
275
Mr. Chief Justice Fuller: "* * * The position
of the plaintiff in error is, in the first place, that the
evidence on his behalf tended to show an agreement be-
tween himself and defendant in error, entered into prior
to or contemporaneously with the written contract, inde-
pendent of the latter and collateral to it, that the machine
purchased should have a cerain capacity and should be
capable of doing certain work, that the machine failed
to come up to the requirements of such independent parol
contract; that this evidence was competent; and that the
case should therefore have been left to the jury.
"Undoubtedly the existence of a separate oral agree-
ment as to any matter on which a written contract is
silent, and which is not inconsistent with its terms, may
be proven by parol, if under the circumstances of the
particular case it may properly be inferred that the
parties did not intend the written paper to be a complete
and final statement of the whole of the transaction be-
tween them. But such an agreement must not only be col-
lateral, but must relate to a subject distinct from that to
which the written contract applies; that is, it must not be
so closely connected with the principal transaction as to
form part and parcel of it. And when the writing itself
upon its face is couched in such terms as import a com-
plete legal obligation without any uncertainty as to the
object or extent of the engagement, it is conclusively
presumed that the whole engagement of the parties, and
the extent and manner of their undertaking, were reduced
to writing. Greenl. Ev. 275.
 There is no pretense here of any fraud, accident or
mistake. The written contract was in all respects unam-
biguous and definite. The machine which the company
sold, and which Seitz bought, was a No. 2 size refrigerat-
ing machine, as constructed by the company, and such
was the machine that was delivered, put up and operated
by the brewery. A warranty or guaranty that the ma-
chine should reduce the temperature of the brewery to
40 degrees Fahrenheit, while in itself collateral to the
sale, which would be complete without it, would be part
276
CONTRACTS
of the description and essential to the identity of the
thing sold; and to admit proof of such an engagement by
parol would be to add another term to the writen con-
tract, contrary to the settled and salutary rule of this
subject.
(Note to Case 147: On a sale of personal property, there are
certain implied warranties unless negatived by the writing.
Thus, in the case above there would no doubt be an implied
warranty of title in the seller, and an implied warranty of
merchantability (no unusual, hidden defects of construction).
Therefore had the defense been that the machinery was defective,
the parol evidence rule would not have precluded the evidence,
unless there was a written provision covering that point. De-
fendant's point, however, was that the machine, admittedly prop-
erly constructed should accomplish certain specific purposes in
his plant. There was no implied warranty that it would for
the reason that Seitz got the very machine he bargained for.
It was none of the seller's business that it would not accomplish
a particular object. The parol evidence rule would-not keep out
proof of the implied warranty of fitness for particular purpose,
but the order by the buyer of a "known, described and definite
article, is fulfilled by a delivery of the thing ordered, whether
it fulfils the buyer's object or not, for by his order he has relied
on his own judgment. Hence, Seitz was thrown back on the
argument that there was an express warranty on that point.
But here he was met by the parol evidence rule which excluded
the evidence because it would add to a written contract seem-
ingly intended to be complete.)
Question 147: What was the suit about in this case? What
defenses were made to the suit ?' Why did the court keep out
the proof of an oral warranty? AVas proof of an implied war-
ranty admissible? Was there such an implied warranty in this
case ?
Case 148. Professor John H. Wigmore, A Treatise
on the System of Evidence in Trials at Common Law,
Section 2425.
"When parties negotiate at a distance by letters and
telegrams,—first an offer, then a declination, then a re-
vision of the offer, then a halt upon an important term*
PAROL EVIDENCE RULE
277
afterwards an offer of its concession in return for the
concession of some prior term now to be changed, and
finally an acceptance of this concession, and thus an end
of the negotiations,—where are the terms of this con-
tract to be found? Obviously, in this congeries of letters
and telegrams, as mutually modifying and complement-
ing each other. The whole of the contract is not in any
one document. Nor, on the other hand, does the whole of
any one document (probably) represent a part of the
contract, because some of its terms have been impaired
and replaced by other documents in the series. Nor can
it be said that there is a series of legal acts, each one in-
dependent, successively modifying the preceding ones;
for each letter and telegram is merely tentative and pre-
paratory, and there exists no legal act {ante 2401, 2404)
until the final assent is given. That assent, when it comes,
adopts and vivifies the entire mass, which until then was
legally inchoate only. The process was not unlike the
fall of cards in the play of a trick at whist; the total
effect cannot be determined till the last card has fallen,
and no one card exhibits in itself the effect of the trick;
yet, when all are played, the second card may prove to
be the decisive factor and may remain unimpaired by
any later play.
On the other hand, if instead of leaving the net effect
of the negotiations to be gleaned from the mass of writ-
ings, a single document is finally drawn up to replace
them and to embody their net effect, and is signed or
otherwise adopted by the parties, this document will now
alone represent the terms of the act. Instead of leaving
the wheat mingled with the chaff, the wheat has been
definitely selected and set apart in a single mass. The
wheat existed there, no less before than now, but it has
now been placed in a single receptacle by itself.
"The process of embodying the terms of a legal act in
a single memorial may be termed the integration of
the act, i. e., its formation from scattered parts into an
integral documentary unity. The practical consequence
of this is that its scattered parts, in their former and
278
CONTRACTS
inchoate shape, have no longer any legal effect; they are
replaced by a single embodiment of the act. In other
words: When a legal act is reduced into a single memo-
rial, all other utterances of the parties on that topic are
legally immaterial for the purpose of determining what
are the terms of their act.
Question 148: Show how a written contract may be arrived at
to make previous correspondence immaterial.
§ 129. (Contracts, Sec. 97.) Parol evidence rule permits
proof of contract partly in writing and partly oral.
Case 149. Forsyth Manufacturing Co. v. Castlen, 112
Ga. 199.
Facts: Castlen brought suit against the Forsyth Mfg.
Co. on the following contract: "This agreement made
and entered into this 25th day of April, 1898, by and be-
tween the Forsyth Manufacturing Company of the first
part, and A. W. Castlen of the second part, both of the
county of Monroe and the state of Georgia, witnesseth:
that the party of the first part hereby agrees to pay the
party of the second part six cents per pound for one
hundred and fifty bales of lint cotton, to be delivered
at the warehouse of the said Forsyth Manufacturing
Company on the Central Railroad, just above Forsyth, in
good merchantable order, at times below set forth. The
party of the second part hereby agrees to deliver at the.
place above designated one hundred and fifty bales of,
lint cotton, said cotton to be delivered to the Forsyth
Manufacturing Company as follows: Fifty bales in Sep-
tember, fifty bales in October and,fifty bales in November,
1898, at the place above set forth, and in good merchant-»
able order, all bales to weigh more than 450 pounds each,
and should the party of the second part fail or refuse to
furnish the full amount of fifty bales each month, as
above set forth, then the, second party forfeits one-half
cent per pound for each pound not delivered at the end
of each month of the fifty bales. Castlen was a cotton
planter, and the contract made was entered into upon
PAROL EVIDENCE RULE
279
his land and upon which cotton was growing. The
plaintiff Castlen tendered cotton according to his con-
tract, but it was refused on the ground that it was not
raised on- Castlen's land. The defendant now offers to
prove that there was a contemporaneous oral agreement
that the cotton should be raised on Castlen's land.
Point Involved: That a contract reduced entirely to
writing cannot be modified by parol evidence. Specific-
ally, that if goods are sold un^er a contract completely
reduced to a writing which under the circumstances and
upon the face of the contract seems complete, a collateral
agreement that such goods shall be grown by the seller
cannot be considered. Herein of the question when a
contract is to be deemed wholly, and when partially, re-
duced to writing.
Cobb, J.:  * * * When parties have reduced the
agreement between them to writing, they must abide by
the terms of the writing, whatever they may be, and
nothing in the writing can be contradicted or varied by
parol evidence. If, however, 'a part of a contract only
is reduced to writing (such as a note given in pursuance
of a contract), and it is manifest that the writing was not
intended to speak the whole contract, then parol evidence
is admissible.' Civil Code No. 3675 (1). 'To bring a
case within the rule admitting parol evidence to complete
an entire agreement of which a writing is only a part,
two things are essential. First, the writing must appear
on inspection to be an incomplete contract; and second,
the parol evidence must be consistent with and not con-
tradictory of the written instrument.' * * * And a
party is at liberty 'to prove the existence of any separate
oral agreement as to any matter on which a document is
silent, and which is not inconsistent with its terms, if
from the circumstances of the case the court infers that
the parties did not intend the document to be a complete
and final statement of the whole of the transaction be-
tween them.' * * # It appears from the authorities
above cited that in order to render parol evidence admis-
280
CONTRACTS
sible for the purpose of making complete an incomplete
contract, the fact that the contract is incomplete must
appear upon the face of the contract by reason of a
patent ambiguity, or, although apparently complete on
its face, in the light of evidence showing the circum-
stances surrounding the parties at the time the contract
was executed, a latent ambiguity is made to appear.
* * * There are many decisions by this court relat-
ing to this subject, but it, would be useless to refer to or
cite all of them. Enough have been cited to show that
this court has recognized the rule, that in order to allow
parol evidence to be admitted to show a collateral agree-
ment it must appear, either from the contract itself or
from the surrounding circumstances, that the contract
is incomplete, and what is sought to be shown as a col-
lateral agreement must not in any way conflict with or
contradict what is contained in the writing. An exami-
nation of the cases decided by this court will show, we
think, that this rule has been steadfastly adhered to.
There may be some confusion in regard to the way in
which it has been applied in some cases, and possibly
there have been erroneous applications of the rule; but
no case has been called to our attention where there has
been any departure from this rule.
"It follows from what is above said, that the court
did not err in refusing to allow the defendant to prove,
as a collateral agreement between himself and the plain-
tiff, that the cotton specified in the contract was to be
raised on the lands of the plaintiff. The contract be-
tween the parties evidenced by the writing calls for a
certain number of bales of cotton of a certain description
and for no particular cotton. It is clear that, so far as
the terms of the contract are concerned, the parties did
not intend that the plaintiff should be limited to cotton
raised by him. It was a plain and unambiguous con-
tract for the delivery of any cotton, answering to the
description specified in the contract, which the plain-
tiff might see fit to offer to the defendant at the times
specified in the contract. Such being the legal effect
PAROL EVIDENCE RULE
281
of the paper, parol evidence tending to show that the
real contract was that the cotton was to be raised on the
land of the plaintiff, contradicted, varied and altered
the terms of the written instrument.
Question 149: "What was the. oral agreement offered in evi-
dence in this case? Would the court permit it to be considered?
Why ?
§ 130. (Contracts, Sec. 98.) Parol evidence rule permits
proof of customs.
Case 150. Walls v. Bailey, 49 N. Y. 464.
Facts: Suit brought to recover a balance alleged to
,be due to plaintiffs for plastering defendant's house. The
work was done under a written contract quoting prices
at so much "per square yard. Plaintiffs did the work
and charged defendant for the work done without deduct-
ing for cornices, base boards, doors or ivindows, claiming
that it was a general custom not to deduct such spaces
in determining the amount of space covered.
Point Involved: "Whether a general custom known or
which by reason of its general acceptance must be taken
to have been known by both parties, enters into a written
contract made by them which contains nothing inconsist-
ent with such custom.
Folgek, J.: "The contract between the parties was in
writing. By it the plaintiffs were to furnish the material
for the plastering work of the defendant's house, and
to do the work of laying it on. The defendant was to pay
them for the work and material a price per square yard.
Of course the total of the compensation was to be got by
measurement. But when the parties came to determine
how many square yards there were, they differed. The
query was, the square yards of what? Of the plaster
actually laid, on, or of the whole side of the house calling
it solid, with no allowance for the openings by windows
and doors ?
"And it is not to be said of this contract, that it was
so plain in its terms as that there could be but one con-
282
CONTRACTS
elusion as to the mode of measurement, by which the num-
ber of square yards of work should be arrived at. It is
in this case as it was in Hinton v. Locke (5 Hill, 437).
There the work was done at so much per day. The par-
ties there differed as to how many hours made a day's
work. That is, what should be the measurement of the
day? And there, evidence of the usage was admitted,
not to control any rule of law, nor contradict the agree-
ment of the parties, but to explain an ambiguity in the
contract? And the proof showing a usage among car-
penters that the day was to be measured by the lapse of
ten hours, it was held a valid usage; and the contract was
interpreted in accordance with it.
i t * * *
4'So in the case before us. How shall the number of
the square yards of work done be ascertained, is not so
determinately reached by the language of the contract
as that the law can say there was but one method in the
minds of the parties, and this is it.
"And from the cases above cited, it appears that the
meaning of words may be controlled and varied by
usage; even when they are words of number, length or
space, usually the most definite in language.
"Every legal contract is to be interpreted in accord-
ance with the intention of the parties making it. And
usage (with a limitation hereafter noticed), when it is
reasonable, uniform, well settled, not in opposition to
fixed rules of law, not in contradiction of the express
terms of the contract, is deemed to form a part of the
contract, and to enter into the intention of the parties.
"The jury in the case before us, have found the exist-
ence of the usage contended for by the plaintiffs, and
upon evidence which well sustains the finding. The same
evidence shows that the usage was uniform, continuous
and well settled. Nor was it one which was in opposition
to well settled principles of law, or which was unreason-
able. * * *
"It would seem, however, that upon principle, for a
PAROL EVIDENCE RULE
283
party to be bound by a local usage, or a usage of a par-
ticular trade or profession, he must be shown to have
knowledge or notice of its existence. (Id.) For upon
what basis is it that a contract is held to be entered into
with reference to, or in conformity with, an existing
usage? Usage is engrafted upon a contract or invoked
to give it a meaning, on the assumption that the parties
contracted in reference to it; that is to say, that it was
their intention that it should be part of their contract
wherever their contract in that regard was silent or ob-
scure. But could intention run in that way unless there
was knowledge of the way to guide it? No usage is ad-
missible to influence the construction of a contract unless
it appears that it be so well settled, so uniformly acted
upon, and so long continued, as to raise a fair pre-
sumption that it was known to both contracting parties,
and that they contracted in reference thereto. (See Rush-
forth v. Hadfield, 7 East, 224.) There must be some proof
that the contract had reference to it, or proof arising out
of the position of the parties, their knowledge of the
course of business, their knowledge of the usage, or other
circumstances from which it may be inferred or presumed
that they had reference to it. (Bodfish v. Fox, supra,
p. 96).
Question 150: Is proof of a custom admissible to show the
meaning of a contract? Why does not the introduction of such
custom offend the parol evidence rule? What must be shown
to be true of the custom before it can be considered to apply to
the contract ?
§ 131. (Contracts, Sec. 99.) Evidence not forbidden by
parol evidence rule.
(a) Subsequent alteration of written contract by oral agreement.
(b) Oral proof of circumstances rendering contract voidable.
(c) Mistake preventing contract.
(d) Clerical error in reducing to writing.
(e) Illegality.
(f) That a contract was delivered on condition.
284
CONTRACTS
(a) Subsequent Alteration of Written Contract by Oral
Agreement.
Case 151. John H. Wigmore, Evidence, Sec. 2441.
"The general rule now under consideration rests on
the assumption that a specific transaction has been em-
bodied exclusively in a single document. All distinct
and separate transactions may therefore be established
and availed of, whenever they are in themselves valid.
Now a transaction subsequent in time must always be a
separate transaction. The rule of exclusion [the parol
evidence rule] can only apply to negotiations contem-
poraneous in time or prior, but incomplete. Where a
document for example, is executed on July 1, it may he
held to embody the final and exclusive result of nego-
tiations before and up to the time of execution; but a
transaction on August 1 must be a separate one and there-
fore can never be excluded, so far as the effect of the
document of July 1 is concerned. It may be that some
rule of form will sometimes make the transaction of
August 1 invalid in itself (as when a writing is required
by the statute of frauds) or where a parol release [i. e.
not under seal] will not discharge a sealed contract;
but the present rule can interpose no obstacle. In par-
ticular, any subsequent agreement altering, waiving, dis-
charging, or otherwise novating a prior transaction is
not excluded by reason of the prior transaction having
been reduced to writing.''
Question 151: Does the parol evidence rule prevent the proof
of a subsequent oral alteration of a written contract? Might
such subsequent oral alteration be ineffective for some other rea-
son than that of the parol evidence rule? Example?
(b) Oral Proof of Circumstances Rendering Contract
Voidable.
(Note: Inasmuch as we have in this hook cases upon the
effect of mistake, fraud, duress, undue influence upon contracts,
in all of which it is assumed that if such conditions exist the
contract is void or voidable, it seems unnecessary to set out any
PAROL EVIDENCE RULE
285
further cases at this point. Hence, attention is merely called
to the fact that parol evidence does not prevent proof of state-
ments of a fraudulent nature, situations of duress, undue in-
fluence and mistake. All such situations may be made to appear
in evidence though they tend to make the written agreement,
which is apparently binding, unenforceable.)
(c) Mistake Preventing Contract.
(See note just above.)
(d) Clerical Error in Reducing to Writing.
Case-152. The German Fire Ins. Co. (defendant) v.
Gueck et al. (plaintiff), 130 111. Rep. 345 (1889).
Facts: This was a bill in equity brought for the pur-
pose of reforming an insurance policy issued by the de-
fendant company. Complainants claim two mistakes,
first, that their agent was named as the insured whereas
it was intended that the plaintiffs should be so named,
and, second, that the property insured was misdescribed.
Fire having occurred, the company resists the payment
of the insurance.
Point Involved: If a mutual mistake of a clerical
nature is made in reducing a contract to writing will
a court receive parol evidence of the fact of the mistake
and if convinced thereof, reform the contract and enforce
it as so reformed?
Mk. Justice Craig delivered the opinion of the court:
"If the contracting parties to a policy of insurance
make a mistake in the description of the premises, or
in the names of the insured, a court of equity, upon
proper proof, has jurisdiction to reform the contract and
correct the mistake, as held in Keith v. Globe Ins. Co.,
52 111. 518, and Home Ins. Co. of Texas v. Myer, 93 id.
271. Here, the land upon which the house was located
was described as being in section 5, instead of section
20. .The parties never owned or pretended to own land
in section 5, and had no intention of insuring a house
in that section. The intention of Fisher, the agent Oj.
286
CONTRACTS
the insurance company, and the intention of Gueck, who
was acting for the complainants, was to insure the house
which Fisher had erected in section 20 for Mrs. Wil-
helmina Gueck, and the evidence leaves no room for doubt,
that by mutual mistake section 5 was written in the policy,
when the intention was to write section 20 therein.
Question 152: (1) If there is a clerical mistake in reduc-
ing a contract to writing so that it fails to express what the
parties really agreed on, will the parol evidence rule prevent
proof of the real agreement of the parties ?
(2) What was the mistake in the above case? Did the
Court permit evidence to correct the error?
(3) Suppose because of a misdescription by the insured, un-
known to the insurance company, a policy was written on the
wrong premises being the premises intended to be insured by the
insurance company, though not by the insured, would the Court
reform the policy ? Why ?
(e) Illegality.
Case 153. Manufacturers & Merchants Inspection
Bureau v. Everwear Hosiery Co., — Wis. —, 138 N. W.
624.
Facts: Suit upon a contract made between plaintiff
and defendant for services rendered. Judgment in the
trial court for plaintiff. Defendant appeals and claims
that the lower court erred in excluding evidence offered
by the defendant to the effect that the contract, legal
upon its face, was in fact against public policy.
Timlin", Justice : 11 * * *
"After the plaintiff rested, the defendant recalled its
vice president as a witness in its behalf, and offered
evidence, whereupon the court made substantially the
same rulings. The witness then further testified that
after June 29, 1910, he had conversations with a repre-
sentative of the plaintiff relative to the contract in ques-
tion. Being asked what the conversations were, counsel
for plaintiff interposed an objection on the ground that
the testimony sought to be elicited was incompetent, etc.,
PAROL EVIDENCE RULE
287
and tended to vary the contract. Although this ruling
was correct so far as the evidence attempted to merely
vary the writing by proving a different binding and con-
trolling oral contract, there is another ground upon which
the evidence first above ruled out might have been ad*
missible. Parol evidence is competent to show that a
writing apparently good on its face is a mere cover for
an illegal transaction; in other words, to show illegality.
Twentieth Century Co. v. Quilling, 130 Wis. 318 110,
N. W. 174.
■ "The exact contract to which the oral evidence is di-
rected we must presume to be that pleaded in the answer.
This is stated as follows: 'It was agreed that the plain-
tiff should render secret service to the defendant in and
about the plant of said defendant, * * * for the pur-
pose of detecting acts of larceny and embezzlement of
the goods in the factory of said defendant, to apprehend
the person or persons guilty thereof, to report the same
to the defendant, and to produce to this defendant or
its officers the person or persons guilty of such acts with
the stolen goods in their possession.' The contingency
was as follows: If the plaintiff should be successful in
its investigation by in fact detecting such acts of larceny
and embezzlement as aforesaid, and apprehending the
person or persons guilty thereof, and reporting the same
to this defendant, and producing them before this de-
fendant with the stolen goods in their possession, in such
case the defendant should pay, etc. To 'apprehend the
.persons guilty' must be either to arrest them by regular
process of law or privately. To produce to the defendant
or its officers the person guilty, with stolen goods in his
possession, could only be done by inducing some person
to make confession and appear before the defendant's
officers, or to forcibly take persons there. The whole
tendency of the contract is to induce the promisee, in
order to earn his money, to make charges against and
fasten upon other persons charges of larceny and em-
bezzlement, and then, in addition to this, to assume the
character of public officers, and apprehend such persons,
288
CONTRACTS
and bring them before the officers of the defendant with
the stolen goods, not on their person, but in their pos-
session. We cannot assume the defendant was making
this contract for the purpose of satisfying idle curiosity.
It had some serious motive. If the plaintiff performed
as required by the contract, it became the public' duty
of the defendant to make complaint and institute a pub-
lie prosecution, and to give in the name of plaintiff or
its employees as witnesses. It might, on the other
hand, have intended to settle privately with the guilty
person and suppress the public prosecution, but in either
case the tendency of the contract is to the commission
of unlawful acts on the part of the parties to it, either
a contract to procure evidence to produce a certain re-
suit or to iliduce the making of charges by the plaintiff
in order to earn his fee, or to provide for traffic by plain-
tiff and defendant with persons guilty of larceny to the
private profit of defendant. Further evidence may re-
lieve this contract of its illegal features or confirm its
illegality, but sufficient appears in the pleading to admit
oral proof of the real consideration of the contract and
to permit that introduction of the defense of illegality.
Question 153: Why was the real agreement in this ease il-
legal? Did the illegality appear on the face of the contract?
Why did the trial court exclude the offered evidence ? Why did
the upper court rule that such evidence should have been al-
lowed ?
(f) That a Contract was Delivered on Condition.
(Note: We may use the word 'condition' in the law of con-
tracts to denote, either, that the entire contract is not to be ef-
fective except upon a certain condition; or, that an effective con-
tract has some conditional provision in it. For illustration, I
give you a promissory note upon condition you are to use it if
by 10 o 'clock tomorrow I have come into some advantage, other-
wise you are to destroy it; in this case the note is never delivered
to be effective as a note unless something happens. It is in your
hands, as a piece of paper but not as a note. But suppose 1
give you my note for money borrowed due July 1st, with an oral
ORAL AND IMPLIED CONTRACTS 289
'condition' agreed upon at the same time that unless I have sold
my house by that time, you will extend the note one year. The
first sort of condition is orally provable; the condition just illus-
trated varies the terms of the written agreement and cannot be
proved.)
E. Oral and Implied Contracts.
§ 132. Oral contracts.
§ 133. Implied contracts.
§ 132. (Contracts, Sec. 100.) Oral contracts.
(Note: Any contract may be oral, unless some statute requires
it to be in writing. The question of the proof of such oral con-
tract is an entirely separate question. Oral contracts are ob-
viously not so enduring in form, and there might be a difficulty
of proof. But, also, there might not be. What classes of con-
tracts must be in writing ? We have already covered that sub-
ject. Any contract not required by statute to be in or proved
by writing, may be oral and proved by oral evidence. And if it
may be oral, it also may be implied.)
§133. (Contracts, Sec. 101.) Contracts implied in fact.
Case 154. Hertzog v. Hertzog, 29 Pa. St. 465.
Facts: Suit brought by John Hertzog to recover from
the estate of his father compensation for services ren-
dered the latter in his life time. Plaintiff became 21 in
1825, but continued to reside with his father, who was a
farmer, and to labour for him, until 1842. No express
contract to pay him anything was proved.
Point Involved: Generally, of the definition and na-
hire of implied contracts and the evidence to prove them.
Specifically, whether a son who resides at the home of
Ms father and works for him, having no express contract
with the father, can, after the work has been done, claim
ail implied promise to compensate him for such services.
Loweie, J.:  'Express contracts are, where the terms
of the agreement are openly uttered and avowed at the
time of the making; as, to deliver an ox or ten loads of
290
CONTRACTS
timber, or to pay a stated price for certain goods. Im-
plied are such as reason and justice dictate; and which,
therefore, the law presumes that every man undertakes
to perform. As, if I employ a person to do any business
for me, or perform any work, the law implies that I
undertook and contracted to pay him as much as his
labour deserves. If I take up wares of a tradesman
without any agreement of price, the law concludes that
I contracted to pay their real value.'
"This is the language of Blackstone, 2 Comm. 443,
and it is open to some criticism. There is some loose-
ness of thought in supposing that reason and justice
ever dictate any contracts between parties, or impose
such upon them. All true contracts grow out of the in-
tentions of the parties to transactions, and are dictated
only by their mutual and accordant wills. When this
intention is expressed, we call the contract an express
one. When it is not expressed, it may be inferred, im-
plied, or presumed from circumstances as really existing,
and then the contract, thus ascertained, is called an im-
plied one. The instances given by Blackstone are an
illustration of this.
"But it appears in another place, 3 Comm. 159-166,
that Blackstone introduces this thought about reason and
justice dictating contracts, in order to embrace, under
his definition of an implied contract, another large class
of relations, which involve no intention to contract at
all, though they may be treated as if they did. Thus,
whenever, not our variant notions of reason and justice,
but the common sense and common justice of the coun-
try, and therefore the common law or statute law, im-
pose upon any one a duty, irrespective of contract, and
allow it to be enforced by a contract remedy, he calls
this a case of implied contract. Thus out of torts grows
the duty of compensation, and in many cases the tort
may be waived, and the action brought in assumpsit.
"It is quite apparent, therefore, that radically differ-
ent relations are classified under the same term, and;
this must often give rise to indistinctness of thought.';
ORAL AND IMPLIED CONTRACTS 291
And this was not at all necessary; for we have another
well authorized technical term exactly adapted to the
office of making the true distinction. The latter class
are merely constructive contracts, while the former are
truly implied ones. In one case the contract is mere
fiction, a form imposed in order to adapt the case to a
given remedy; in the other it is a fact legitimately in-
ferred. In one, the intention is disregarded; in the other,
it is ascertained and enforced. In one, the duty defines
the contract; in the other, the contract defines the duty.
"We have, therefore, in law three classes of relations
called contracts.
"1. Constructive contracts, which are fictions of law
adapted to enforce legal duties by actions of contract,
where no proper contract exists, express or implied.
"2. Implied contracts, which arise under circumstances
which, according to the ordinary course of dealing and
the common understanding of men, show a mutual in-
tention to contract.
"3. Express contracts, already sufficiently distin-
guished.
"In the present case there is no pretense of a construe-
tive contract, but only of a proper one, either express or
implied. And it is scarcely insisted that the law would
imply one in such a case as this; yet we may present
the principle of the case the more clearly, by showing
why it is not one of implied contract.
"The law ordinarily presumes or implies a contract
whenever this is necessary to account for other relations
found to have existed between the parties.
"Thus if a man is found to have done work for an-
other, and there appears no known relation between them
that accounts for such service, the law presumes a con-
tract of hiring. But if a man's house takes fire, the
law does not presume or imply a contract to pay his
neighbors for their service in saving his property. The
common principles of human conduct mark self-interest
as the motive of action in the one case, and kindness
in the other; and therefore, by common custom, com-
292
CONTRACTS
pensation is mutually counted on in the one case, and
in the other not.
<<* # * party whx) relies upon a contract must
prove its existence; and this he does not do by merely
proving a set of circumstances that can be accounted for
by another relation appearing to exist between the
parties.
"Every induction, inference, implication, or presump-
tion in reasoning of any kind, is a logical conclusion de-
rived from, and demanded by, certain data or ascertained
circumstances. If such circumstances demand the con-
elusion of a contract to account for them, a contract is
proved; if not, not. If we find, as ascertained circum-
stances, that a stranger has been in the employment of
another, we immediately infer a contract of hiring, be-
cause the principles of individuality and self-interest,
common to human nature, and therefore the customs of
society, require this inference.
"But if we find a son in the employment of his father,
we do not infer a contract of hiring, because the prm-
ciple of family affection is sufficient to account for the
family association, and does not demand the inference
of a contract. And besides this, the position of a sod
in a family is always esteemed better than that of a
hired servant, and it is very rare for sons remaining in
their father's family even after they arrive at age, to
become mere hired servants. If they do not go to work
or business on their own account, it is generally because
they perceive no sufficient inducement to sever the family
bond, and very often because they lack the energy and
independence necessary for such a course; and they leave
very seldomly because their father desires to use them
as hired servants. Customarily no charges are made for
boarding and clothing and pocket-money on one side, or
for work on- the other; but all is placed to the account
of filial and parental duty and relationship.
'1 Judging from the somewhat discordant testimony in
the present case, this son remained in the employment
of his father until he was about forty years old; for we
ORAL AND IMPLIED CONTRACTS
293
take no account of. his temporary absence. While liv~
ing with his father, in 1842, he got married, and brought
his wife to live with him in the house of his parents.
Afterwards his father placed him on another farm of
the father, and very soon followed him there, and they
all lived together until the father's death in 1849. The
farm was the father's and it was managed by him and
in his name, and the son worked on it under him. No
accounts were kept between them, and the presumption
■is that the son and his family obtained their entire liv-
ing from the father while they were residing with him.
"Does the law, under the circumstances, presume that
the parties mutually intended to be bound, as by con-
tract, for the service and compensation of the son and
his wife? It is not pretended that it does. But it is
insisted that there are other circumstances besides these
which, taken together, are evidence of an express con-
tract for compensation in some form, and we are to
examine this.
"In this court it is insisted that the contract was that
the farm should be worked for the joint benefit of the
father and son, and that the profits were to be divided;
hut there is not a shadow of evidence of this. And more-
over it is quite apparent that it was wages only that was
•claimed before the jury for the services of the son and
his wife, and all the evidence and the charge point only
in that direction. There was no kind of evidence of the
annual products.
"Have we then any evidence of an express contract
of the father to pay his son for his work or that of his
wife? We concede that, in a case of this kind, an express
.contract may be proved by indirect or circumstantial
^evidence. If the parties kept accounts between them,
these might show it. Or it might be sufficient to show
that money was periodically paid to the son as wages;
or, if there be no creditors to object, that a settlement
for wages was had, and a balance agreed upon. But
there is nothing of the sort here.
Question 154: Upon what fact did the son base his claim in
the above case? Did he have any evidence aside from the fact
294
CONTRACTS
that he worked for his father, that the father had agreed to
pay for such work? Did the Court allow his claim? Why?
What is a contract implied in fact? In law (constructive
contract)?
(Note: The sort of obligation described by the Court as
arising out of constructive contract, that is to say not out of
true contract, is perhaps, better called, quasi-contract, or con-
tract implied in law. A contract implied in fact is a true con-
tract, that is to say, the minds of the parties have really met
in contractual intent, as where I order groceries from a store,
saying nothing about price or payment. A true contract ex-
ists, as much as though I put the promise to pay in language.
Whenever, as the Court says, there is a situation between parties,
the reasonable explanation of which is that of contractual rela-
tionship (as in the case of ordering the groceries) we infer or
imply a contract between them, unless the evidence in fact
shows there was no contract, but if the more reasonable explana-
tion is some other relationship, as that of filial duty, neighbor-
liness and the like, there is no inference of contract.)
F. Contracts Implied in Law or Quasi-Contracts.
§ 134. (Contracts, Sec. 102.) Definition of quasi-
contracts.
(Note: The law allows recovery in a contract form of action
in some cases where there is in fact no contract. It is said in
these cases, the law will imply a contract. But the real reason
for calling certain obligations contractual, when in fact they do
not arise out of contract, was to permit suit under the forms of
suit established for contract cases. This is unfortunate and
leads to 'indistinctness of thought.'
'Quasi contracts' or 'contracts implied in law' exist in cases
in which the defendant is 'unjustly enriched' at the plaintiff's
expense and ought to pay, yet he has not promised to pay, and
has committed no tort; although the theory has been extended
to certain tort cases in which the plaintiff may 'waive the tort
and sue in contract.'
The following are examples of quasi-contracts:
1. Cases in which money is paid or other property parted
with under a mistake of fact, as where by an error in calculation,
a person pays more than he owes. He may recover the surplus.
ORAL AND IMPLIED CONTRACTS 295
2. Money paid under mistake of law, cannot be recovered
unless paid under protest, it being necessary for the payor to
make the payment to protect himself, as for instance, money
paid to a telephone company when the charge is not lawful; or
a tax paid under protest, where the charge is improper.
3. Cases in which a benefit is conferred by plaintiff under
a contract broken by him. As where he builds a part of a house,
thus enriching the defendant, but breaks his contract in failing
to, finish. There is more to be said on this point later.
4. Cases in which money is paid or property parted with
under an unenforceable contract, as where the plaintiff has paid
$500 under an oral agreement to buy real estate, and the de-
fendant refuses to go on and relies on the statute of frauds.
The plaintiff can recover the $500.
5. Certain classes of tort cases, in which the plaintiff might
sue in tort, but has some advantage in suing in contract, as where
the defendant has taken his personal property wrongfully, and
the plaintiff sues on an implied promise to pay the reasonable
value therefor.)
PART II
THE INTERPRETATION OF CONTRACTS
Chapter 13. General Rules of Interpretation.
Chapter 14. Interpretation in Respect to Time of Per-
formance.
Chapter 15. Interpretation of Provisions as to Penalties
or Liquidated Damages.
CHAPTER 13
GENERAL RULES OF INTERPRETATION
§ 135. The governing principle in construction of contracts.
§ 136. General rules of construction.
§ 135. (Contracts, Sec. 103.) The governing principle
in construction of contracts.
(Having- the contract formed, what does it meanf The mean-
ing may be clear so that there is nothing to interpret or con-
strne. Bnt it may require interpretation, the language used be-
ing susceptible of different meaning. The Court tries in such
cases to find out the intention of the parties and enforce the
contract according to such intention. That is the governing
principle in the construction of contracts.)
§ 136. (Contracts, Sec. 104.) General rules of con-
struction.
(Note: See Commercial Law Series, Vol. 1, Sec. 104.)
296
CHAPTER 14
CONSTRUCTION IN RESPECT TO TIME OF
PERFORMANCE
§ 137. In a court of law, time is of the essence.
§ 138. Time of performance in a court of equity.
§ 137. (Contracts, Sec. 105.) In a court of law, time is
of the essence.
Case 155. Cleveland Rolling Mill v. Rhodes, 121 U.
S. 255. '
Facts: The C. R. M. agreed to sell to Rhodes, a mer-
chant at Chicago, the entire product of 14,000 tons of
iron ore to be shipped as rapidly as possible during the
season of navigation, in 1880, or such part as remained
to be shipped on the opening of navigation in 1881. The
C. R. M. shipped about 8,421 tons in 1880 and had on
hand for shipment in 1881 at the opening of navigation
3,506 tons. It was not ready to fulfill its contract until
nearly two months after the season opened in 1881.
Rhodes refused to receive the shipments made in 1881.
Point Involved: "Whether a provision in a contract
as to the time for performance is to be construed literal-
ly, so that an unreadiness to perform at the very time,
will (unless waived by the other side) constitute a breach.
Mr. Justice Gray: . "In a case decided upon much
consideration at the last term, the general rule was stated
as follows: In the contracts of merchants time is of
the essence. The time of shipment is the usual and con-
venient means of fixing the probable time of arrival with
a view to providing funds to pay for the goods, or of
fulfilling contracts with third persons. * # *
"When a merchant agrees to sell and to ship to the
rolling mill of the buyer a certain number of tons of
297
2&8
CONTRACTS
pig iron at a certain time, both the amount of iron and
the time of shipment are essential terms of the agree-
ment, the seller does not perform his agreement by ship-
ping part of the amount at the time appointed and the
rest from time to time afterwards, and the buyer is not
bound to accept any part of the iron so shipped. * * *
The necessary conclusion is that the defendant was jus-
titled in refusing to accept any of the iron shipped in
1881.
Question 155: "What do we mean by the words "time is of
the essence"? Is it of the essence in contracts? Illustrate by
above case.
§ 138. (Contracts, Sec. 106.) Time of performance in
a court of equity.
Case 156. Smith v. Brown, 10 111. 309.
Treat, C. J.:  * * * The general rule in equity
is, that time is not necessarily deemed of the essence of
the contract, unless the parties have expressly so re-
garded it, or it necessarily results from the nature and
circumstances of the contract. The parties may make
time of the essence of their agreement, and when this
clearly appears to have been their intention, and no pecu-
liar circumstance has intervened to prevent or excuse
a strict performance, it must be so considered and treated
in equity. The right to make such agreements cannot
be denied, and it is the duty of the courts to enforce
them, as made, and not to make new contracts for the
parties. The real intention of the parties must govern
and that is to be determined from the contract and sur-
rounding circumstances.
Question 156: Is time of the essence in a court of equity?
(Note: See Sec. 106 in Vol. 1, Commercial Law Series.)
CHAPTER 15
INTERPRETATION OP PROVISIONS AS TO PENAL-
TIES OR LIQUIDATED DAMAGES
§ 139. In explanation.
§ 140. Damages difficult to ascertain and amount reasonable.
§ 141. Larger sum than debt payable in event of default.
§ 142. Certain sum payable for breach of any of seVeral covenants of vary-
ing importance.
§ 143. Forfeiture of amounts paid.
§ 139. (Contracts, Sec. 107.) In explanation.
(Note: A word of explanation seems necessary as an introduc-
tion to this somewhat confusing subject. We are to consider
whether a sum which is named in a contract as payable in the
event of non-performance, is named as "liquidated damages
or as a "penalty. What do these terms mean? For instance,
suppose that A contracts with B that B shall work for him for
one certain week for a compensation of twenty-five dollars, and
in the event of his failure to carry out the contract, that he
shall pay A, $100. B defaults. Can A recover the $100 ? We
will find that if the courts would say that A could recover, they
would call the $100 "liquidated damages, but if they would
decide he could not recover the $100, but must prove his actual
damages they would call the $100 a "penalty. Now we may
notice, first, that the $100 may or may not have any reference
to A's actual damages, according to circumstances, and that
A's damages may or may not be readily ascertainable according
to circumstances.
What is the purpose of the law in awarding damages ? It is to
put the injured party as near as may be in the position in which
he would have been had the other party carried out his con-
tract. Ordinarily there is no provision in the contract as to the
measure of damages and the court will apply the rules of law
established to the end of giving the injured party the damages
he has actually sustained. Suppose, however, the parties do
mention a sum as payable in the event of breach. The enforce-
299
300
CONTRACTS
ment of that sum may give damages that are out of all propor-
tion to the damages actually sustained. On the other hand, it
may be a reasonable agreement entered into by the parties for
the purpose of obviating the necessity of proving damages which
may be very difficult if not impossible of ascertainment. Where
such a provision is made, the; law favors its construction as a
penalty, that is, not enforceable as damages, but it also recog-
nizes that the provision is a wise one and enforceable, where the
nature of the contract makes the proof of damages difficult and
the sum named is reasonable, that is, appears to have been put in,
not arbitrarily, but, with some reference to the damages that
would be actually suffered.
At common law a provision as to an amount payable in a bond
or other contract was enforceable without respect to the damages
actually sustained. In the case of bonds, courts of equity estab-
lished a jurisdiction to relieve against the penalty thereof and to
inquire into the damages, by providing that the amount of the
penalty of the bond should stand as security, but that execution
should not issue except for the damages, caused by breach. By
an English statute (8 and 9 Wm. Ill) the law courts were
directed to follow the rule of the equity courts, and today the
penalty of the bond is never considered as recoverable except in
so far as it represents actual damages.
Now it is apparent that even in the extreme ease of a penal
bond, the law court regarded the provision as to the penalty as
expressing the intention of the parties that such sum was to be
recoverable, and allowed such sum to be recovered, yet that sum
is not now recoverable, and today, knowing, as we do, the legal
effect of a penal bond, the obligor never intends to pay nor the
obligee to receive the penalty named. It provides merely a means
of security. The actual damages must be proved.
In other contracts the difficulties appear: Shall a sum that
is stated as payable if the contractus not performed, be regarded
as a penalty and not enforceable, or shall it be taken as the
agreed damages of the party injured? The courts often say that
the intention of the parties will control. But we are met with
two difficulties; first, how to ascertain the intention of the par-
ties, and, second, suppose that the intention, when ascertained,
violates all rules of damages and defeats justice. As a matter of
fact, it is a good deal of a fiction to say that the cofirts will apply
the intention of the parties. There are certain rules that help ns
LIQUIDATED DAMAGES
301
to arrive at the solution whether to allow the sum mentioned to
represent the damages, or not to represent the damages. And
in arriving at that solution we are often violating the intention
that is expressed as plain as words can express anything. But
in a more fundamental way, it is their intention which controls.
That is to say, was their real intention (no matter what they
say) to impose a punishment for breach of contract, or to really
forecast probable damages in event of breach. If the former,
the sum mentioned is not binding and is called a penalty. If the
latter, it is enforced and is called liquidated damages.
A few illustrations out of the great number that are reported
in the books are given below under several headings and will
serve to throw light on this subject.)
§140. (Contracts, Sec. 108.) Damages difficult to as-
certain and amount reasonable.
Case 157. Wallis Iron Wks. v. Monmouth Park Assn.,
55 N. J. L. 132.
Facts: The W. I. W. agreed to complete a grand-
stand for a race course by a certain day or pay $100 a
day for every day thereafter that it remained incom-
plete,  which said sum * # # is hereby agreed upon
* * * as the damages * * * an(j not by way of
penalty. When plaintiff sued, defendant claimed a
right to reduce the sum recoverable by $100 for every
day's delay.
Point Involved: That an amount named as payable
for every day's delay in a building construction contract,
is enforceable if the damages agreed upon are reason-
able in respect to all the circumstances.
Dixon, J.: In the present case the default consists
of a breach of a single covenant. * * * It is plain
that the loss to result from such a breach is not easily
ascertainable. The magnitude and importance of the
grandstand may be inferred from its cost, $133,000. It
formed a necessary part of a very extensive enterprise.
* * * Its worth depended upon the success of the en-
tire venture. How far the non-completion of this edifice'
302
CONTRACTS
might affect that success * * * were topics for con-
jecture only. The conditions therefore seem to have been
such as to justify the parties in settling for themselves
the measure of compensation. The stipulations of parties
for specified damages on a breach of a contract to build
have frequently been enforced by the Courts. * * *
"In the case at bar we have no data for saying that
$100 a day was unconscionable. * * * 
Question 157: (1) Were damages of an easily determined
sort in this case, if not agreed upon? (2) What elements were
considered to determine the reasonableness of the sum agreed
upon? Was the sum of $100 a day in this case a penalty or
liquidated damages?
Case 158. Advance Amusement Co. v. Franke, 268 111.
519.
Me. Justice Caetee delivered the opinion of the court:
"Defendant in error [Advance Amusement Company]
brought suit in the municipal court of Chicago to recover
$2,500 deposited by it with plaintiff in error [Franke]
pursuant to certain provisions of a lease between said
parties entered into March 11,1912, as to a theater build-
ing in Chicago for a term ending February 28, 1917, at
a rental of $350 per month. By reason of default and
failure to pay rent for December and a portion of that
for November, 1912, the lessor [Franke] after giving
the statutory five days' notice, brought suit for the pos-
session of the premises and obtained judgment therefor
December 17, 1912. On a trial in the municipal court
without a jury, a judgment was entered in that court
against said landlord [Franke] and in favor of said
amusement company, for the sum of $2,500 so deposited,
less the amount of rent that had accrued and remained
unpaid at the date of the termination of the lease. That
judgment, on appeal to the Appellate Court, was affirmed.
The case has been brought here on petition for certiorari.
"The first question urged here is whether the $2,500
. deposited with plaintiff in error [defendant] should be
LIQUIDATED DAMAGES
303
considered liquidated damages, or, as held by the Appel-
late Court, a penalty. Section II of the lease between
the parties provided that said sum was 'to be held by
the party of the first part as security for the faithful
performance by the party of the second part of the cov-
enants and agreements in this rider and in the indenture
of lease to which this rider is attached contained, to be
kept and performed by said party of the second part,
which said sum of twenty-five hundred dollars ($2,500)
shall be applied by said party of the first part as rental
reserved for the said premises for each of the last seven
and one-seventh months of the term herein demised, pro-
vided that prior to the application of each of said month's
rental said second party shall not be in default in any
of the terms, covenants and conditions in this rider or
in the indenture of lease to which it is attached con-
tained, to be kept and performed by said party of the
second part. Party of the first part covenants and agrees
to pay or cause to be paid to party of the second part,
its successors or assigns, interest at the rate of five per
cent (5%) annually on the said sum of twenty-five hun-
dred dollars ($2,500), so long as said sum of $2,500 shall
remain in the hands of the said party of the first part
undisposed of, under the terms of this rider and the
indenture of lease to which it is attached.' By section
12 it was further covenanted and agreed that 'in the
event that the indenture of lease to which this rider is
attached shall be terminated by reason of a breach by
party of the second part of any of the terms and condi-
tions in said indenture of lease contained, by said party
of the second part to be kept and performed, then and
in such event the party of the first part may, at his op-
tion, retain as and for full liquidated damages the said
sum of $2,500 or such portion thereof as may at such
time be in the hands of the party of the first part under
the terms hereof, and thereafter the party of the second
part shall have no further right, claim or interest in and
to the said sum of $2,500 or any part thereof.'
"As was said by this court in Gobble v. Linder, 76
304
CONTRACTS
111. 157, no branch of the law is involved in more ob-
scurity by contradictory decisions than whether a sum
named in an agreement to secure performance will be
treated as liquidated damages or a penalty, and as each
case must depend upon its own peculiar and attendant
circumstances, general rules of law on this question are
often of little practical utility. While the intention of
the parties on this question must be taken into consider-
ation, the language of the contract is not conclusive. The
courts of this State, as well as in other jurisdictions, lean
towards a construction which excludes the idea of liqui-
dated damages and permits the parties to recover only
damages actually sustained. (Scofield v. Tompkins, 95
111. 190; Radloff v. Haase, 196 id. 365; Bilz v. Powell,
38 L. R. A. (N. S.) 847, note.) This court has said that
the rules deducible from the cases may be stated as fol-
lows: 'First, where by the terms of a contract a greater
sum of money is to be paid upon default in the payment
of a lesser sum at a given time, the provision for the
payment of the greater sum will be held a penalty; sec-
ond, where by the terms of a contract the damages are
not difficult of ascertainment according to the terms of
the contract and the stipulated damages are unconscion-
able, the stipulated damages will be regarded as a pen-
alty; third, within these rules parties may agree upon
any sum as compensation for a breach of contract.'
(Poppers v. Meagher, 148 111. 192.) This and all other
courts seem to agree upon the principle that a stipulated
sum will not be allowed as liquidated damages unless
it may be fairly allowed as compensation for the breach.
(1 Sedgwick on Damages,—9tli ed.—sec. 407, and cases
cited.) We have frequently said that courts will look
to see the nature and purpose of fixing the amount of
damages to be paid, and if it appears to have been in-
serted to secure the prompt performance of the agree-
ment it will be treated as a penalty and no more than
actual damages proved can be recovered. (Westfall v.
Albert, 212 111. 68, and case cited.) In general, a sum
of money in gross, to be paid for the non-performance
LIQUIDATED DAMAGES
305
of an agreement, is considered as a penalty. Tayloe v.
Sandiford, 7 Wheat. 13; 1 Sedgwick on Damages, (9th
ed.) sec. 402.
"No lease or contract precisely like the one here in
question seems to have been passed on by this court.
Decisions from other jurisdictions, especially of the
courts of New York, have been cited by counsel on both
sides. In none of them did the contracts present the
same question as the one here. Even if they did, at the
most such decisions would only be advisory and not
controlling. If not in conflict with general rules, the
court seeks to give effect to the real intent of the par-
ties in determining whether a stipulation in a contract
is a penalty or liquidated damages.
"The lease specifically states that this sum of $2,500
was deposited to be held by the party of the first part
'as security.' There is nothing in any other part of the
contract that conflicts with this statement. On the con-
trary, the entire contract, read together, is in full har-
mony with the conclusion that said sum was held as se-
curity. There is nothing in the nature of this contract
that would make it especially difficult to ascertain the
amount of damages for its breach, as there is in that
class of cases where one has agreed to give his personal
services to another for a certain length of time and repu-
diates the contract, or where one has sold out the good
will of a business with the agreement not to enter into
the same kind of business in a specified number of years
or within a limited territory. The proof in this record
shows that there was no special difficulty in proving the
actual damages. Furthermore, it seems quite clear from
reading all the terms of this contract together, that the
parties did not intend to agree that this sum was liqui-
dated damages, for one of the provisions was that the
first party might, 'at his option, retain' said sum. This
provision is not consistent with the view that the parties
adjusted in advance the damages that might arise by
any breach of contract. The argument of counsel for
plaintiff in error would require the holding that the $2,500
306
CONTRACTS
should be retained as liquidated damages whether the
lease was violated less than a year before it expired the
same as if it were violated within a few months after it
was entered into. Such a construction of the contract
violates the great fundamental principle which underlies
our whole system,—'that of compensation; the great ob-
ject of this system is to place the plaintiff in as good a
position as he would have had if his contract had not
been broken.' (1 Sedgwick on Damages,—9th ed.—sec.
406, p. 779.) To put this construction upon it, under
circumstances that might readily arise, would work great
oppression and hardship. In the light of the circum-
stances in this case the Appellate Court rightly held this
sum a penalty and not liquidated damages.
Question 158: (1) In this case did the court consider that
the $2,500 was a "penalty or "liquidated damages (2) what
practical difference did it make in the case whether the court
called it the one or the other? (3) What is the great fundamen-
tal principle underlying the law of damages in breach of contract
cases? Are the parties permitted by their agreement to violate
this principle?
§ 141. (Contracts, Sec. 109.) Larger sum than debt pay-
able in event of default.
Case 159. Goodyear Co. v. Selz, Schwab & Co., 157
111. 186.
Facts: Suit on a contract for the monthly rental of
certain machines to be computed on each month's out-
put, payable on the first day of the month next follow-
ing with a provision that if paid before the 15th of the
month a discount of 50 per cent was to be allowed.
Point Involved: Whether the provision for the pay-
ment of a larger sum than the debt in the event the debt
is not paid when due, is enforceable.
Me. Chief Justice Wilkin: "The following proposi-
tions seem to be sustained by the authorities: 'Where
a large sum, which is not the actual debt, is agreed to
be paid in case of a default in the payment of a lesser
LIQUIDATED DAMAGES
307
sum which is the actual debt, such larger sum is always
a penalty. But the rule is otherwise where a less sum
is to he taken for a greater if paid at a certain time.'
(5 Am. & Eng. Ency. of Law, 26.) 'Where the larger
sum mentioned is the actual debt, and a smaller sum has
been agreed upon as a release if paid under stated con-
ditions, the failure to comply with the easier terms gives
the creditor the right to enforce payment of the larger
sum.' In doubtful cases courts have inclined to treat
the stipulation as a penalty. (Ibid 27.)
"The controlling question in the case then is, what
did the parties intend should be the actual rental for
the machines—which sum was to be the actual debt?
Manifestly, the draftsman of the lease intended it to be
susceptible of the construction placed upon it by appel-
lant, but it by no means follows that the parties who
executed it so understood it or should be bound by that
construction. We cannot construe the fifth paragraph
as providing for a discount for prepayment of the debt.
That a discount of 50 per cent should be made on the
debt for a prepayment of but fifteen days is contrary
to all business experience, and most unreasonable. The
rent accruing for one month became due and payable
on the first day of the calendar month following. Cer-
tainly the parties did not intend that there should be
then due and payable more than 50 per cent of the sched-
ule rate. Only that amount was payable at any time
between the first and fifteenth of the month. It is to
be presumed that it was the intention of the parties to
secure to the lessor the payment of reasonable compen-
sation for the use of its machines, and no more. , That
compensation could not be one dollar if paid on the fif-
teenth, but double that amount if paid the next day.
Therefore, to hold that it was intended, in a case like
this, that the rent should be $599.27 one day and $1,198.53
the next, except as an inducement to prompt payment
of the lesser sum, is unreasonable.
"Our conclusion is, that the fifty per cent clause of
the instrument should be construed as requiring the pay-
308
CONTRACTS
ment of fifty per cent of the rent or royalty specified
in the schedule for all boots and shoes made during one
month to he paid on the first day of the next, and if
not paid on or before the fifteenth of that month, the
whole amount of the schedule rates to become payable.
In other words, by the terms of the contract, properly
construed, the actual debt was $599.27, and the agree-
ment to pay double the amount is in the nature of a
penalty to insure the prompt payment of the sum actu-
ally agreed to be paid. Longworth v. Askran, 15 Ohio
St. 370, is an authority sustaining this construction of
the lease.
[Held: The larger sum payable being a penalty was
not recoverable.]
Question 159: (1) A sells a machine for $100 to B under
an agreement that B shall have 30 days credit, the price to he
increased 50% if B does not pay within the 30 days.
(2) A sells B a machine for $100, 30 days credit, 2% dis-
count for payment within the 30 days.
What price can A get in both of these cases?
§142. (Contracts, Sec. 110.) Certain sum payable for
breach of any of several covenants of varying impor-
tance.
Case 160. Wilhelm v. Eaves, 21 Oregon Beports, 194.
Facts: This case involved the breach of an agree-
ment whereby Eaves agreed to appoint Wilhelm as
superintendent of a certain market and Wilhelm agreed
to perform various duties as such superintendent, to
keep the market clean and wholesome, to appoint special
night watchmen, to keep open certain hours, etc. And
the parties bound themselves "in the penal sum of $200,
"as fixed, settled and liquidated damages to be paid by
the failing party to the other. Eaves discharged Wil-
helm and he brought suit but proved no actual damages
relying upon this provision in the agreement.
Point Involved: That if a contract provides for the
payment of a certain amount of money in the event of
LIQUIDATED DAMAGES
.309
the breach of any of several undertakings, which are of
varying importance so that the actual damage would
differ in each case, the sum will be deemed a penalty
and the actual damages must be proved.
Bean, J. : "* * * The decision of the question as
to whether a given sum, provided in the contract, to be
paid on a breach thereof, shall be considered as liquidated
damages or as a penalty is often inherently difficult and
there is much apparent conflict in the adjudged cases.
The words 'liquidated damages' are not at all conclusive
as to the character of the stipulation * * * and the
Courts are not bound by the language used by the par-
ties * * * and the tendency of the Courts is in favor
of an interpretation which makes the sum a penalty.
"While it is usually said that the intention of the par-
ties * * * is to govern in cases of this kind, 'such
intention * * * is determined by very latitudinary
construction. To be potential and controlling that a
stated sum is liquidated damages, that such must be fixed
as the' basis of compensation and substantially limited
to it; for just compensation is * * # the measure of
damages. * * * Parties may liquidate the amount
by previous agreement; but where a stipulated sum is
evidently not based on that principle, the intention to
liquidate damages will either be found not to exist or
will be disregarded, and the stated sum treated as a
penalty. * * *'
"* * * There may be deduced certain general rules.
* * * One of these rules is that when a contract spec-
ifying one certain sum as liquidated damages contains
various stipulations * * * and the damages from
the breach of some of which would be easily ascertain-
able # * * (and not as to the others), the stipulated
sum will be regarded as a penalty and not liquidated
damages, though the language of the parties be the
strongest that could be employed to evince a contrary
intent. * * *
'' This rule is decisive of this case. This contract pro-
310
CONTRACTS
vides (for payment of $200 in case of breach). If then,
this be regarded as liquidated damages, that precise sum
would be recoverable for the breach of any of the cov-
enants, however unimportant, or however easily the dam-
ages for a breach thereof could be ascertained * * *
the stipulated sum must be construed as a penalty (and
actual damages assessed). * * *
Question 160. Was the sum stated in this case a "penalty
or "liquidated damages"? Why?
§ 143. (Contracts, Sec. 111.) Forfeiture of amounts
paid.
(Note: Whether an amount paid in performance of a con-
tract, as in an installment contract, can be retained as liqui-
dated damages, if so agreed, depends on whether the provision
is or is not reasonable.)
PART III
OPERATION OF CONTRACTS
Chapter 16. Operation as to Parties.
Chapter 17. Beneficiaries to Contracts.
Chapter 18. Assignment of Contracts.
Chapter 19. Interference with Contractual Relationship
by Third Parties.
CHAPTER 16
OPERATION AS TO PARTIES
§ 144. (Contracts, Sec. 112.) General rule.
(Note: A contract has been defined in the first part of this
subject as a certain type of agreement between parties. It ere-
ates obligations that are voluntarily assumed between persons,
each of whom has chosen the other as the party with whom he
will deal. We may accordingly state it to be the general rule
that a contract operates to confer according to its tenor, rights
and obligations upon the parties to such contract and upon no
other person. A party to the contract has the right to enforce
it, and he is bound by it. But no other party can claim rights
under such contract; and no other party is bound by its obliga-
tions. To this general rule there are certain very important ex-
ceptions to be treated in the following chapters.)
311
CHAPTER 17
BENEFICIARIES TO CONTRACTS
§ 145. General statement.
§ 146. Incidental beneficiary cannot sue.
§ 147. Beneficiary may sue ■when.
§145. (Contracts, Sec. 113.) General statement.
(Introductory note: The right of a beneficiary who is not a
party to a contract to sue thereon, has occasioned much discus-
sion and much difference of opinion. It would not be advisable
to attempt to review the authorities or; to give anything like a
general treatment of the subject here. With various qualifica-
tions, it seems fairly generally settled in the majority of the
American states that one not a party to a contract but who will
be benefited by the performance thereof, may sue if he is ex-
pressly mentioned or described in the contract as one upon whom
a benefit is intended by the parties to be directly conferred by the
contract or if he is what we may term a creditor beneficiary;
that is one to whom an obligation is owing which is affected by
the contract; but that any person who is merely incidentally
affected, no matter in what measure, may not sue. Certain other
rules have been followed in some cases as that a '' donee bene-
ficiary may sue, but it does not seem wise to attempt an exten-
sive discussion of the subject for our purposes. See the follow-
ing cases.)
§ 146. (Contracts, Sec. 114.) Incidental beneficiary
cannot sue.
(See case in following section.)
§ 147. (Contracts, Sec. 115.) Beneficiary may sue when.
Case 161. Pennsylvania Steel Co. v. N. Y. City R. Co.,
198 Federal Reports, 721, at p. 749.
312
BENEFICIARIES
313
Noyer, Circuit Judge * In England and in
some of the states, the rule is adhered to that the only
persons who can sue upon a contract are the parties;
that a third person for whose benefit a contract is made
cannot maintain an action upon it. The reason of the
rule is said to be that there is no privity between the
contracting party making the promise and the third per-
son and that consideration does not move directly from
the latter. The rule has the merit of simplicity but is
calculated to permit injustice. It is founded, too, upon
wholly artificial distinctions. There is no real and sub-
stantial reason why, if the parties to a contract recog-
nize the interest of a third person in it and desire and
intend to give him a right of action upon it, they should
not be able to do so. And the prevailing doctrine in this
country is contrary to the English rule. It is generally
held, subject to qualifications, that a third person may
sue upon a promise made to another for his benefit.
Sometimes the right is based by the courts upon pro-
visions in codes giving 'the real party in interest' the
right to prosecute suits. Sometimes it is based upon
the theory of a trus.t; the promisor being regarded as
a trustee for the third party. Sometimes it is based
upon the theory of agency; the promisee in the contract
being considered the agent of the third party who adopts
his acts in suing upon the contract. But whatever may
be the correct theory one thing is essential to the right
and that is that the third person be the real promisee
—that the promise be made to him in fact although not
in form. It is not enough that the contract operate to
his benefit. It must appear that the parties intend to
recognize him as the primary party in interest and as
privy to the promise.
Question 161: Upon what various theories is a beneficiary
allowed to sue upon a contract? Whatever the theory, what is
essential to permit a beneficiary to a contract (who is not a
party to such contract) to sue upon it?
314
CONTRACTS
Case 162. Lawrence v. Fox, 20 New York Reports,
268.
Facts: One Holly, at the request of the defendant
loaned him $300, stating at the time that he owed that
sum to the plaintiff for money borrowed of him; and
that he had agreed to repay it on the following day, and
the defendant as a part of the transaction and in con-
sideration for the loan agreed to pay the money to the
plaintiff. This is a suit against the defendant by the
beneficiary of that agreement, to which he was not a
party, and the defense is that not being a party thereto,
and there being no privity of contract between plaintiff
and defendant, plaintiff cannot sue on the agreement
proved.
Point Involved: Whether a beneficiary to a contract
between other parties, by which an obligation running
to such beneficiary from one of the parties, is assumed
by the other, can be enforced in a suit by the beneficiary.
H. Gkay, J.: '' * * * As early as 1806, it was an-
nounced by the Supreme Court of this state * * *
'That where one person makes a promise to another for
the benefit of a third person, that third person may main-
tain an action on it.' 
Question 162: What was the agreement in this case? Was
the beneficiary allowed to sue?
(Note: Where a vendee assumes the debts of the vendor, the
creditor is generally allowed to sue the vendee as beneficiary of
such agreement.)
CHAPTER 18
ASSIGNMENT OF CONTRACTS
§ 148. General statement.
§ 149. Power to assign mere contractual rights.
§ 150. Power to assign contractual obligations.
§ 151. Power to assign contractual rights when coupled with personal con-
fidence and liability.
§ 152. Contractual rights to be acquired in future not assignable.
§ 153. Effect of assignment as to assignor.
§ 154. The assignee as the successor to the title of the assignor.
§155. Effect of assignment as to other party (debtor.)
§ 156. What constitutes assignment, drafts, checks, orders, etc.
§ 157. Assignment by operation of law.
§ 148. (Contracts, Sec. 116.) General statement.
(Note: Does a contract operate to empower either party
thereto to assign rights or obligations thereunder? If so, to
what extent, how is such assignment effected, and what results
follow from an attempted exercise of the power?
We must notice that the assignment might he made or at-
tempted either with or without the consent of the other party
to the contract. Obviously, it is the case of the lack of consent
that presents difficulty, and when we speak of the power to as-
sign rights or obligations we generally assume that the consent
of the other party to the contract has not been obtained.
The transfer may be of rights or obligations. B employs A
for a stated period on a salary. We have the following rights
and obligations:
On A's part: Obligation to work for B. Eight to salary on
doing the work.
On B's part: Right to A's services. Obligation to pay salary.
Here A might attempt to transfer either his right to a salary
or his obligation to perform services, or both. As his power
of transfer might differ in the one case from that of the other,
it becomes necessary to analyze in any case the nature of the
thing attempted to be assigned.)
315
316
CONTRACTS
§ 149. (Contracts, Sec. 117.) Power to assign mere con-
tractual rights.
(Note: A right under a contract is assignable by one party
to a contract, even without the consent of the other party to the
contract, if it is a mere right to money or goods, and by such
assignment the contractual obligations, duties and credit of the
assignor are unaffected. The right of a merchant to assign his
book accounts, of an employee to assign his salary, are good
examples. But in any case the right to assign may be forbidden
by the contract itself. See following case and cases under fol-
lowing, sections.)
Case 163. Mueller v. Northwestern University, 195
Illinois Reports, 236 (1902).
Facts: Sammis made a contract with Northwestern
University whereby he agreed to furnish and put in place
the marble and mosaic work in the Illinois Trust & Sav-
ings Bank Building owned by Northwestern University,
for the sum of $27,344. The contract provided ''that
the contractor shall not sell, assign, transfer or set over
this contract, or any part thereof, or interest therein,
unto any person or persons whomsoever, without the
consent, in writing, of the architects previously had and
obtained thereto, and any such sale, assignment or trans-
fer without such written consent of the architects, first
obtained thereto, shall be absolutely null and void.
Sammis assigned money due under this contract to Muel-
ler, who claims that Northwestern University paid over
sums to Sammis after receiving notice of the assign-
ment, and also claims other money still unpaid by North-
western University.
Point Involved: Whether a party to a contract can
effectually make an assignment of moneys due there-
under which will operate to give the assignee a right
to hold the debtor for such money where the assignor has
in the contract agreed not to assign without the consent
of the debtor.
Me. Justice Hand delivered the opinion of the Court :
"It is first contended, the assignment to Mueller being
ASSIGNMENT
317
in express violation of the terms of the contract, as
against the University the assignment is void, and that
Mueller is entitled to no relief by virtue of said assign-
ment, as against the University. * * * The rule is
laid down in Volume 2 of American and English En-
cyclopedia of Law (2nd Ed., p. 1035) that the parties
to a contract may in terms prohibit its assignment, so
that an assignee cannot succeed to any rights in the con-
tract by virtue of the assignment to him and the rule
thus announced is well supported by the authorities.
(The court reviews the authorities and discusses other
points raised by Mueller and decides against Mueller.)
Question 163: What was the University's defense to Muel-
ler's claim as assignee of money due from the University? Did
the defense prevail ? Why ?
§ 150. (Contracts, Sen. 118.) Power to assign con-
tractual obligations.
Case 164. Sloan v. Williams, 138 111. 43.
Facts: Dupuy, an attorney at law, made a contract
with Williams by which Dupuy was to conduct suits,
procure releases, etc., in order to perfect the title to cer-
tain lots owned by Williams. Dupuy before the perform-
ance of his part of the contract, purported to assign to
Sloan all his interest therein. Sloan complains that Wil-
liams has refused to carry out his part of the contract.
Point Involved: Whether an obligation to render serv-
ices can be assigned without the consent of the party to
whom such services are to be rendered.
Mr. Justice Magruder : '' * * * The main ground
(of defense) is that the contract is one that calls for the
personal services and skill of one of the parties thereto,
and, therefore, not assignable. We think this objection
is well taken. Dupuy was a lawyer * * * and, by
the terms of the contract, was required to make use of
his professional skill in perfecting the title to the lots by
instituting and carrying on legal proceedings * * *
and by the use of other methods. * * * A party
318
CONTEACTS
who thus agrees to use his personal skill and knowledge,
and has been contracted with by reason of the trust and
confidence placed in him personally, cannot, while the
agreement is still executory, substitute another in his
place by assignment, in order to perform the service,
without the consent of the other contracting party.
* # * It is true that after the contract has been exe-
cuted by the person * * * he may assign the right
to recover compensation. * * *
Question 164: What did Dupuy attempt to assign in this
case ? Did the other party to the contract have to recognize the
assignment ? Why ?
§ 151. (Contracts, Sec. 119.) Power to assign contrac-
tual rights when coupled with personal confidence and
liability.
Case 165. Demarest v. Dunton Lumber Co., 161 Fed-
eral Reports, 264.
Facts: The facts are stated in the opinion.
Point Involved: The assignability of a contract to
purchase lumber involving also the credit and individ-
uality of the purchaser.
"Ward, Circuit Judge : '4 The plaintiff sues as assignee
of a contract dated December 11, 1900, between W. E.
Kelly & Co. and the Dunton Lumber Company, and com-
plains that the defendant has failed and refused to de-
liver to him lumber covered by the contract. Under the
contract the lumber company sold to Kelly & Co. the
entire cut of white pine lumber for 1901, except so much
as it should need for its retail trade in the city of Rum-
ford Falls, agreeing to retain, not the best of the lumber,
but only an average grade for that trade. Delivery was
to be f. o. b. cars at Rumford Falls, Kelly & Co. to pay
within 10 days from date of invoice. The logs were to
be cut in lengths of 12, 14, and 16 feet; but Kelly & Co.
agreed to accept some lumber shorter than 12 feet, not
less than 8 feet, and some longer than 16 feet. The
ASSIGNMENT
319
trial judge held that this contract was not assignable,
and that, therefore, the plaintiff had no right of action.
 While the authorities do not differ as to the principle
that a contract personal in its nature cannot be assigned
by one party without the consent of the other, they differ
in the application of the principle; the question in each
case being whether the contract is personal or not. The
law on the subject for the federal courts has been laid
down by the Supreme Court in Arkansas Smelting Com-
pany v. Belding Mining Company, 127 U. S. 379, 8 Sup.
Ct» 1308, 32 L. Ed. 246, in which Mr. Justice Gray said:
 'At the present day, no doubt, an agreement to pay
money, or to deliver goods, may be assigned by the per-
son to whom the money is paid or the goods are to be
delivered, if there is nothing in the terms of the contract,
whether by requiring something to be afterwards done
by him, or by some other stipulation, which manifests
the intention of the parties that it shall not be assignable.
But every one has a right to select and determine with
whom he will contract, and cannot have another person
thrust upon him without his consent. In the familiar
phrase of Lord Denman: "You have the right to the
benefit you anticipate from the character, credit, and
substance of the party with whom you contract.'' Hum-
ble v. Hunter, 12 Q. B. 310, 317; * * *' The rule
upon this subject, as applicable to the case at bar, is well
expressed in a recent English treatise: 'Rights arising
out of contract cannot be transferred, if they are coupled
with liabilities, or if they involve a relation of personal
confidence such that the party whose agreement conferred
those rights must have intended them to be exercised
only by him in whom he actually confided.' Pollock on
Contracts, 425.
"The contract under consideration is not merely for
the sale of personal property for cash, but implies con-
fidence in Kelly & Co., because they were to have 10
days' credit after title to the lumber passed to them,
and because the. amount of lumber shorter or longer than
the lengths provided for in the contract which they were
320
CONTRACTS
to accept was not fixed. So, also, the amount of lumber
the lumber company needed for its retail trade was not
fixed, and that amount, as well as the grade of lumber
retained, were subjects which the lumber company might
have been willing to leave open with Kelly & Co., but
not with their assigns. The rights of Kelly & Co. were
coupled with liabilities and involved personal confidence.
See, also, Snow v. Nelson (C. C.), 113 Fed. 353. * * *
"The judgment is affirmed.
Question 165: B agreed with K, a cake manufacturer to sup-
ply K all the eggs required in K's business for one year; K agree-
ing not to buy elsewhere during that period; statements of
account to be rendered every 14 days, B to draw for the amount
at two months from date of delivery. K thereafter purchased
another company and then transferred the old and new business
to a new company of whose shares he held all but seven. When
B heard of the amalgamation he refused to supply the eggs to
the new company to which K had assigned the contract. Is B
guilty of breach in so doing ?
§ 152. (Contracts, Sec. 120.) Contractual rights to be
acquired in future not assignable.
Case 166. Mulhal v. Quin, 1 Gray's Reports (Mass.),
105.
Facts: An attempted assignment of rights to arise
under a contract expected to be made, but not yet made,
with the City of Boston.
Point Involved: Can one assign his rights under a
contract not made at the time of the attempted assign-
ment?
Shaw, C. J.: "* * * There was no subsisting en-
gagement under which wages were to be earned, and it
depended altogether upon a. future engagement, whether
anything would ever become due. * * *
"None of the cases go so far as to hold that the mere
possibility * * # of earning wages * * * em-
ployment at a future time is capable of being assigned.
The dnbt may be conditional, uncertain as to amount or
ASSIGNMENT
321
contingent, but * * * must be an actual or possible
debt, due or to become due. * * * 
Question 166: State the rule of this case.
Case 167. Mallin v. Wenham, 209 Illinois Reports,
252.
Facts: M was employed by A & Company at a salary
of $100 per month. He had no definite contract of em-
ployment, but was employed by the month. He could
have quit or A & Company could have discharged him at
any time without liability. To secure a loan from W
he executed an instrument stating:  I do hereby trans-
fer, assign and set over to C. F. Wenham * * * all
salary or wages due or to become due me from Armour
& Co. * * *'' M now contends that this assignment
was invalid.
Point Involved: The assignability of wages to be
earned under an existing contract of employment of in-
definite duration.
Me. Justice Ricks: "* * * An assignment of
wages to be earned in the future under an existing em-
ployment is valid. # * It is not necessary that
there be an express hiring for a definite time, but the
existence of the employment at the time of the assign-
ment is sufficient. In the case at bar, appellant was
* * * in the actual employment of Armour & Com-
pany at a fixed price per month. It is true that such
employment was not of any definite duration, and ap-
pellant might abandon the same at any time or his em-
ployer might discharge him. The subject matter of the
contract had but a potential existence, but it was such a
property right as might legally be disposed of. * * *,f
Question 167: Was the assignment in this case valid? Why?
Distinguish between this and foregoing case.
§153. (Contracts, Sec. 121.) Effect of assignment as to
assignor.
Case 168. Grommes v. St. Paul Trust Co., 147 111. 634.
Facts: A was B's tenant. With B's consent he trans-
ferred his lease to R, who entered into possession and
322
CONTRACTS
for a time paid rent and then defaulted. B snes A for
accruing rent.
Point Involved: "Whether the lessee continues liable
on the lease (as surety) on its assignment with the con-
sent of the lessor.
Mr. Justice Magruder: "* * * Nor did the sale
of the saloon by the tenant to Rose, nor the acceptance
of rent from the latter by the landlord operate as a dis-
charge (of the original lessees). The assignee of a lease-
hold estate is liable for the rent accruing. * * * In
case the rent is not paid by the assignee as it becomes due,
an action may be sustained against the lessee therefor;
and it makes no difference in this respect that the lessor
may have received rent from the assignee and accepted
him as a tenant in the premises. * * * If there be
not a substitution of the assignee in place of the original
lessee, and a clear intent to make a new contract with the
former and to discharge the latter from further liability
under the lease, both will be held liable to the lessor.''
Question 168: State the rule set forth in Case 168.
§ 154. (Contracts, Sec. 122.) The assignee as the sue-
cessor to the title of the assignor.
Case 169., Bank v. Bynum, 84 North Carolina Reports,
24.
Facts: Bynum & Daniel signed an instrument (found
by the court to be non-negotiable) setting forth contract
between Bynum & Daniel and Taylor Manufacturing
Co. and promising to pay a sum of money for goods pur-
chased. The Taylor Mfg. Co. for value sold and assigned
this instrument to the Bank, the plaintiff in this case.
The Bank sues, and Bynum & Daniel defend that at the
time of the assignment the assignor (The Taylor Mfg.
Co.), was indebted to Bynum & Daniel in the sum of
$305.15, which they now seek to set off in the suit. The
bank was innocent of this counterclaim when it acquired
the claim.
Point Involved: Whether an assignee of a right under
ASSIGNMENT
323
a contract, who gives value, and has no notice of any
defense affecting the right acquired by him is subject to
the same defenses, set-offs and counterclaims that the
obligor could have made against the assignor if there
had been no assignment.
Ashe, J.:  * * * In the early history of the law,
the transfer of all choses in action, including bills and
notes, were forbidden by the common law, the rigid rule
of which was first relaxed by the use of bills of exchange,
which was the result of commercial convenience; and
hence the law on this subject is termed the "Law Mer-
chant. Promissory notes were first made negotiable in
England, like inland bills of exchange, by the statute of
3 and 4 Anne, ch. 9, and in this state by our act of 1862,
which is a literal copy of that statute. But to attain the
negotiability intended to be conferred by that act, it
must possess all the attributes of an inland bill of ex-
change as to certainty, &c., and if it should lack any of
its essential qualities, it would still be a common law
instrument and subject to the principles of law that in
regard to choses in action. As for instance, where a non-
negotiable note is assigned, the action at law must be
brought by the assignee in the name of the assignor; and
the assignee is put by the assignment in no better condi-
tion than the assignor; and only steps into his shoes, and
the note assigned is subject to all the equities and de-
fenses which existed between the original parties before
notice of the assignment; and it made no difference
whether the note was assigned before or after maturity.
The rule that the endorsee of a bill or note before ma-
turity takes it freed from all equities and defenses, ex-
cept endorsed payments, is a principle of the Law Mer-
chant, and applies to negotiable instruments, but has no
application to notes that are not negotiable. Where an
action is brought on a note of the latter class by the
assignee in the name of the assignor, the rule is that the
equities set up by the defendant against the assignee must
be such as subsisted at the time the defendant received
notice of the assignment. 1 Danl. Neg. Instr., 555; 1 Par-
324
CONTRACTS
sons, 46; Harris v. Burweele, 65 N. C. 584. But the com-
mon law rule that an action by the assignee of a paper
that is not negotiable must be brought in the name of the
assignor has been changed in this state by Sec. 55 of the
Code, so as to enable him to sue in his own name, but
without prejudice to any set-off or other defense exist-
ing at the time of or before notice of assignment period.
This section, it will be seen, makes no change whatever in
the law, except as to allowing the assignee to sue in his
own name, instead of that of the assignor.
 There is no error, and the judgment of the Superior
court of Wilson must be affirmed.
"No error. Affirmed.
Question 169: (1) What was the "rigid and early rule of
the common law as to right of a party to assign a contract right
held by him against another? What exception was made by the
"law merchant"? If a non-negotiable note is assigned, does the
assignee take any risks that a transferee of negotiable paper
does not take ? In what form did an assignee of a non-negotiable
right have to bring his suit ? Does the statutory change permit-
ting an assignee to sue in his own name give such assignee any
greater rights of substance than he had before ?
(Note: As to the fact that a transferee of negotiable paper
must take under certain conditions (i. e. as a holder in due
course) in order to stand in a position superior to that of the
transferor see Negotiable Paper, Chapter 58 post.
The fact that an assignee is subject to same defenses as his
assignor is shown by this old requirement that the assignee must
maintain his action in the name of his assignor. Thus if A owes
(apparently) B a sum of money, say $100, and B assigns his
right to C and C sues A, the suit is entitled B (to use of C) vs.
A. Therefore A can say, I have a defense against B (the nomi-
nal plaintiff). Statutes permitting C to sue A are simply stat-
utes of simplification in pleading and do not enlarge the rights
of the assignee.)
§ 155. (Contracts, Sec. 123.) Effect of assignment as to
other party (debtor).
Case 170. Skobis v. Ferge, 102 Wisconsin Deports,
122, 78 N. W. 426.
ASSIGNMENT
325
Dodge, J.:  * * * The next and much more dis-
puted question is whether or not the Board of Regents
is liable to these assignees, or any of them. The authori-
ties are overwhelming, and almost without dissent, that
no assignment of a chose in action can have any effect
upon the debtor or fundholder, or interfere with his deal-
ing with the fund until brought to his notice. Spain v.
Hamilton's Ex'rs, 1 Wall. 604; Ward V. Morrison, 25 Vt.
593; Loomis v. Loomis, 26 Yt. 198; Schilling v. Mullen
(Minn.) 56 N. W. 586; Mowry v. Crocker, 6 Wis. 326.
The substitution of a new creditor is in derogation of
the rights of the debtor, and was strictly prohibited by
the ancient rules of the common law. It is only by re-
laxation of those rules, in reference to the convenience
of trade, that such assignments have been recognized at
all, and now enable a direct suit where the entire claim
is assigned to one assignee, which formally, in equity, can
now be at law, by virtue of such statutes as Sec. 2605,
Rev. St. 1898. Bank v. McLoon, 73 Me. 498; Little v. City
of Portland, 26 Ore. 235, 37 Pac. 911; Chatman v. Plum-
mer, 36 Wis. 262, 266. The fact, however, of such substi-
tution of a new creditor, must, in order to make the debtor
liable to the assignee, be brought home to the debtor with
much exactness and certainty before he has paid the
debt. The rule of notice to him is much more stringent
than that which may defeat the title of a purchaser of
a chose in action or of real estate. The latter is free to
purchase or refuse to purchase, as he chooses; and there-
fore it is his duty, before acting, to trace out any reason-
able doubt, and inform himself of the true facts as soon
as anything arises to put him on inquiry. But the debtor
is not so situated. He must pay to his original creditor
when the debt is due, unless he can establish affirmatively
that some one else has a better right. The notice to him,
therefore, must be of so exact and specific a character as
to convince him that he is no longer liable to such original
creditor, and to place in his hands the means of defense
against him, or at least the information necessary to
interplead the assignee. Christmas v. Russell, 14 Wall.
326
CONTRACTS
69, 84; Brady v. Loring, 70 111. App. 191; In re Tichener,
35 Beav. 317. In no case could general information that
his creditor was likely to borrow on the credit of the
debt, or that he had in other instances borrowed upon it,
nor any mere suspicion that he might have made assign-
ment to others, alone place the debtor in the predicament
of paying his original creditor, at the peril of being held
liable to any one who might prove to be an assignee.
Question 170: To prevent the debtor from paying the origi-
nal creditor, what must the assignee do ? If the debtor has some
general and vague information that the creditor may have
assigned or might assign his claim, must the debtor trace down
the information and verify it in order to protect himself against
liability before paying the original creditor?
§ 156. (Contracts, Sec. 124.) What constitutes assign-
ment, drafts, checks, orders, etc.
(Note: A negotiable bill of exchange, that is, an order by A
on B to pay C, or order a certain sum of money and charge to
A's account is not an assignment of any rights against B. It
is drawn on A's general credit, and B may honor the order and
pay it and hold A for reimbursement, whether there is any
fund or not. And this even though it refers to a fund, provided
it is not a direction to pay out of the fund, in which latter case
it would not be a negotiable bill of exchange. So, a check is not
an assignment of the funds of the drawer in the bank. In other
words in case of a negotiable bill of exchange or check the
drawee is not liable to the payee or other holder until accept-
ance (though he may be liable to the drawer). See Negotiable
Paper, for further discussion.)
§ 157. (Contracts, Sec. 125.) Assignment by operation
of law.
(Note: The phrase "assignment by operation of law is used
to indicate that a successor to the original party to the contract
(or his assignee) becomes entitled to the right by reason of the
happening of some fact other than voluntary assignment of the
party entitled to the right. Thus a trustee in bankruptcy, a
conservator of an insane person, an administrator or executor
ASSIGNMENT
327
may become entitled to enforce rights acquired by the person
for whom he stands as representative or successor in title. Gen-
erally speaking all rights to money or property or to damages to
the estate pass to such successor. But rights that are personal
in nature are terminated.)
CHAPTER 19
INTERFERENCE WITH CONTRACTUAL RELA-
TIONSHIPS BY THIRD PERSONS
§ 158. Duty not to interfere with contract rights.
§ 159. Contract for indefinite period.
§ 160. Prevention of future contracts.
§ 158. (Contracts, Sec. 126.) Duty not to interfere with
contract rights.
Case 171. London Guarantee Co. v. Horn, 206 111. 493.
Facts: This is a suit brought by Gustave Horn against
the L. G. Co. to recover damages alleged to have been
caused him by the defendant in procuring his discharge
by Arnold, Schwinn & Co. of Chicago, as a foreman of the
frame department of its -bicycle factory. He alleged that
he was injured while operating a milling machine and
that he had a claim on that account against Arnold,
Schwinn & Co.; that his employers carried insurance
against loss by damage claims of employees, and that the
insurance company procured his discharge because he
would not settle at a small amount offered by it. He
was not employed for any particular time and could have
been discharged by his company at any time and for any
reason, without liability on the employer's part, but he al-
leged and produced evidence tending to prove that the
sole reason he was discharged was the interference of the
insurance company.
Point Involved: Whether a person has a cause of ac-
tion for damages against another who interferes to pro-
cure his discharge by his employer, even though he was
not employed for any particular time, and could have
been rightfully discharged at any time by his employer,
the reason for such interference being his refusal to
328
INTERFERENCE WITH CONTRACTS 329
settle a cause of action upon which the party procuring
discharge was liable as insurer? Infer entially, whether a
third person is liable who maliciously interferes to cause
a breach of any contract, and what constitutes malice
therein?
Me. Justice Scott : "* * * We have been favored
with most elaborate and exhaustive briefs by counsel for
both parties. The case principally relied upon by counsel
for appellant is that of Alleft v. Flood, 67 L. J. Q. B. 119,
decided by the House of Lords in 1897. This case has
excited a wide discussion, and was considered at length
by this court in Doremus v. Hennessy, 176 111. 608. In
this English case certain boiler-makers, members of a
trade union, in common employment with the plaintiffs,
who were shipwrights, members of a rival organization,
working on wood, objected to working with the latter on
the ground that in a previous employment they had been
engaged on iron work, it being contrary to the regulations
of the union to which the boiler-makers belonged for ship-
wrights to do work of that character. Allen, as a repre-
sentative of the boiler-makers, saw the manager of their
employer, to whom he stated that if the shipwrights, who
were engaged from day to day, were not dismissed, the
boiler-makers would leave their work or be called out by
their union. The shipwrights were thereupon discharged
and brought an action against Allen. Their right to re-
cover was denied, principally upon the ground that every
workman has a right to exercise his own option with
regard to the persons in whose society he will agree to
continue to work, and that when the employer was con-
fronted with a situation where he would lose the services
either of the boiler-makers or the shipwrights, he had the
right to elect which class of workmen to discharge, and
electing to discharge the shipwrights, both he and the
boiler-makers were within their legal rights and no cause
of action arose.
a * * *
"In Quinn v. Leathern, App. Cas. of 1901, p. 495 (de-
330
CONTRACTS
cided by the House of Lords), Lord Macnaghten, in
speaking of Allen v. Flood, stated that its head-note
might well have run in these words: 'An act which does
not amount to a legal injury cannot be actionable because
it is done with bad intent,' and in this case last referred
to it is said, that ' it is a violation of legal right to inter-
fere with contractual relations recognized by law, if there
be no sufficient justification for the interference.'
"We are of opinion that the contention of appellant
in the case at bar, to the effect that competition in trade,
employment 'or business is such a justification, is in ac-
cord with the authorities. This view finds support in the
case of Chambers v. Baldwin, 15 S. W. Rep. 57, where it
was held that a party to a contract for the sale of goods
cannot maintain an action against one who maliciously,
and with design to injure him and to benefit himself by
becoming a purchaser in his stead, advises and procures
the other party to break the contract.
< t * * *
"In our judgment the cases cited by appellant, in so
far as they lend support to its theory, will be found to be
cases where the party who secured the discharge of the
employee was in some way in competition with that em-
ployee in the business or work in which the employee was
then engaged, or was a member of some organization
which was in competition with the employee or some or-
ganization to which that employee belonged, and the fact
that such competition existed has been treated by some of
the courts as justification for the act of the defendant in
bringing about the discharge. * * * While it is true
that the temporal interests of Horn and appellant were
involved in the negotiations between them, we believe that
the authorities which look upon competition as a justifica-
tion for the act of one party in securing the discharge of
an employee have regarded the term in a more restricted
sense, and given to the term 'competition' its ordinary
meaning and signification. This conclusion is certainly
warranted by the reasoning in Doremus v. Henessy,
supra, where this court discusses competition as a defense
INTERFERENCE WITH CONTRACTS 331
to an action of this character. It cannot be held that ap- ;
pellee and appellant were, in any ordinary sense of the
term, in competition with each other, it is also to be ob- .
served that the injury which it was sought to visit upon
Horn was not primarily to subject him to a deprivation
of his employment, but was to compel him to surrender a
right not connected with his employment. If the only
object of appellant had been to secure appellee's dis-
charge for the purpose of obtaining his position for an-
other, or for the reason that the employment of appellee
by Arnold, Schwinn & Co. in some way conflicted with the
right of appellant, or some organization to which it be-
longed, to obtain the same or similar employment, a very
different question, and one not now before this court,
would be xjresented, and Allen v. Flood, swpra, and other
cases of that character cited by appellant, would then be
worthy of greater consideration.
"It is further contended on the part of appellant, that
while the evidence may have shown that it was animated
by malice, in the ordinary acceptation of the term, toward
Horn, the proof fails to show any legal malice. In. this
connection it is argued that appellant had the right to
have Horn discharged under the terms of the contract, or
if it did not have that right, that it seriously and in good
faith believed that it had, and that it is thereby relieved
of any imputation of malice. There is no provision in the
policy which by the wildest stretch of the imagination
could be held to give any such right to appellant, and its
conduct in attempting to secure a settlement of this claim
shows it to have been animated by a wanton disregard of
the rights of the appellee. He was first told by the attor-
ney of appellant that unless he settled for a trifling
amount appellant would have him discharged by Arnold,
Schwinn & Co.,—a threat to do that which this attorney
must have known his client had no right to do. After-
ward Robinett, the agent for the company, made the same
threat, and upon his attention being called to the fact
that the policy gave him no power to require Horn's dis-
charge he said to Arnold, Schwinn & Co.: 'If you don't
332
CONTRACTS
discharge him I will have to cancel this policy today. I
am here to bring this case to a focns today, and if you
refuse to lay him off I will cancel it.' When Mr. Robinett
made this threat, which resulted in appellee's discharge,
he was making a threat to do an unlawful thing,—to do
a thing which appellant, by the terms of the contract, had
no right to do. The contract provided only for its can-
cellation upon five days' notice. It is not pretended that
any such notice had been given, but Robinett secured
Horn's discharge by threatening to cancel the contract
' today.' We think it perfectly apparent that the attorney
for appellant, and its agent, Robinett, each sought to
bring about, and finally did bring about, the discharge of
appellee by threatening to do acts which each, respec-
tively, knew he had no right to, do.
"Malice, in its legal sense, means a wrongful act done
intentionally, without just cause or excuse; the willful
violation of a known right. (19 Am. & Eng. Ency. of
Law,—2d ed.—p. 623.) Were the acts of appellant wrong-
ful?
< < * * *
"Arnold, Schwinn & Co. had the undoubted right to dis-
charge Horn whenever it desired. It could discharge him
for reasons the most whimsical or malicious, or for no
reason at all, and no cause of action in his favor would
be thereby created; but it by no means follows that while
relations between Arnold, Schwinn & Co. and Horn were
pleasant, and while, as the evidence shows, it was the
expectation of the company that Horn would continue in
its employ 1 all the year around,' that the interference of
appellant, whereby it secured the employer to exercise a
right which was given it by the law, but which, except for
the action of appellant, it would not have exercised, is not
actionable.
u * * #
"In our own State, the case of Doremus v. Hennessy
is first reported in 62 111. App. 391. Plaintiff there kept
a laundry office, where she received clothing which her
patrons desired to have laundered. She would then pro-
INTERFERENCE WITH CONTRACTS 333
cure persons operating laundries to do the work and re-
turn the garments to her for delivery to her customers.
The defendants were members of the Chicago Laundry-
man's Association. She charged, by her declaration, that
the defendants, by false representations and by threats
and intimidation, induced certain parties who had been
doing the work for her to break their contracts and en-
gagements with her. The Appellate Court, after stating
that it is now well established that in civil actions the
conspiracy is not the gravamen of the charge but may be
pleaded and proved in aggravation of the wrong, de-
clares the law to be, that an action may be maintained for
the malicious interference with the business of another,
his occupation, profession or way of obtaining a liveli-
hood, and affirmed a judgment of $6,000 in favor of the
plaintiff. The case came to this court, where it is re-
ported in 176 111. 608. The judgment of the Appellate
Court was affirmed, and it appears from the statement of
facts made by this court that with some of the persons
who did work for her the arrangement was that they
would do her work as long as the laundry association did
not interfere, and that these persons, among others with
whom she had contracts for specific periods, were induced
by threats made by the laundry association to cease con-
nection in business with appellee. Appellants contended
that their acts were not mere malicious acts, done solely
with the intent to injure plaintiff's business, but were in
the line of legitimate competition. It was there said by
this court (p. 614): 'No persons, individually or by com-
bination, have the right to directly or indirectly interfere
or disturb another in his lawful business or occupation,
or to threaten to do so, for the sake of compelling him to
do some act which, in his judgment, his own interest does
not require. Losses willfully caused by another, from
motives to malice, to one who seeks to exercise and enjoy
the fruits and advantages of his own enterprise, industry,
skill and credit, will sustain an action. It is clear that it
is unlawful and actionable for one man, from unlawful
motives, to interfere with another's trade by fraud or mis-
334
CONTRACTS
representation, or by molesting his customers or those
who would be customers, or by preventing others from
working for him or causing them to leave his employ by
fraud or misrepresentation or physical or moral intimida-
tion or persuasion, with an intent to inflict an injury
which causes loss.' It is true that in the additional
opinion delivered upon the petition for rehearing Mr. Jus-
tice Phillips distinguishes the case of Allen v. Flood, by
pointing out the fact that in the latter case there was no
contract the breach of which was induced by the defend-
ant, while in the Doremus case contracts existed in which
the plaintiff had a property right and which were broken
as a result of the actions of the defendants; but, as we
have already seen, the clear weight of authority is to
the effect that where the contract is one of employment, it
is immaterial whether it is for a fixed period or is
one which is terminable by either party at will, both
parties being willing and desiring to continue the em-
ployment under that contract for an indefinite period.
"We therefore conclude, both upon reason and author-
ity, that where a third party induces an employer to
discharge his employee, who is working under a contract
terminable at will, but under which the employment
would have continued indefinitely, in accordance with the
desire of the employer, except for such interference, and
where the only motive moving the third party is a desire
to injure the employee and to benefit himself at the ex-
pense of the employee by compelling the latter to surren-
der an alleged cause of action, for the satisfaction of
which, in whole or in part, such third party is liable, and
where such right of action does not depend upon and is
not connected with the continuance of such employment,
a cause of action arises in favor of the employee against
the third party.
Question 171: (1) What facts constituted the basis of
Horn's claim against the Guaranty Company ?
(2) Could Horn's employer have discharged him at any
time, and did this affect Horn's case against the Guaranty Com-
pany ?
INTERFERENCE WITH CONTRACTS 335
(3) What was the case of Doremus v. Hennessy referred to
in the opinion ?
(4) Did Horn recover in this case? Did his recovery against
the Guaranty Company affect his other suit for damages against
Arnold, Schwinn & Co.?
(5) Plaintiff sues, alleging that for 10 years and more past
he has been a barber, engaged in business in Howard Lake, Min-
nesota. That his business was prosperous; that defendant for
12 months last past has maliciously endeavored to destroy
plaintiff's business, and has persistently and systematically at-
tempted to prejudice plaintiff's customers against him; that de-
fendant is a man of large means, and a banker by profession,
that defendant in pursuance of his design to injure plaintiff set
up a barber shop, and hires a barber to operate it, the said bar-
ber paying no rent. Plaintiff asks $10,000 damages. Defendant
demurs (i. e.—alleges he need not answer because conceding for
purposes of argument that all plaintiff says is true, plaintiff has
made out no legal case against him.) How should the court de-
cide? (Tuttle v. Buck, 107 Minn. 145.)
§ 159. (Contracts, Sec. 127.) Contract for indefinite
period.
(Note: See London Guarantee Co. v. Horn, supra.)
§ 160. (Contracts, Sec. 128.) Prevention of future
contracts.
Case 172. Lewis v. Bloede, 202 Federal Reports, 7.
Connor, District J.: "* * * it is no answer to
plaintiff's complaint to say that there was no certainty
that the contract would have been made. * * * It is
enough to show that there is a reasonable assurance, con-
sidering all the circumstances, that a contract would
have been made.''
Question 172: If C maliciously prevents the making of a
future contract between A and B, is C liable to the injured
party ?
PART IV
DISCHARGE 0E CONTRACTS
Chapter 20. Discharge by Performance, Tender and
Breach.
Chapter 21. Discharge by Other Means than Perform-
ance or Breach.
Chapter 22. Remedies of the Parties.
CHAPTER 20
DISCHARGE BY PERFORMANCE, TENDER
AND BREACH
§161. Meaning of phrase "discharge of contracts.
§ 162. Of the performance which will discharge contracts.
§163. Contracts to be performed "to satisfaction'.
§ 164. Breach.
§ 165. Effect of acceptance of defective performance.
§ 166. Performance or tender required of one party before he can require
performance by the other.
§ 167. Breach in case of severable contract.
§ 168. Application of payments.
§ 169. Anticipatory breach.
§ 161. Meaning of phrase "discharge of contracts.
(Note: Assuming a contract has been entered into, not void-
able, or, if voidable, not avoided, that is to say, assuming that
there is a contractual obligation upon a person, how may he dis-
charge the obligation? Obviously if he performs, he discharges
it, but there are other manners of discharge. Discharge may
possibly be- by
1. Performance,
2. Tender of performance,
3. Breach,
336
PERFORMANCE AND TENDER; BREACH 337
4. Impossibility of performance,
5. Agreement,
6. Waiver,
7. Merger,
8. Operation of law,
9. Alteration.)
§ 162. (Contracts, Sec. 130.) Of the performance which
will discharge contracts.
Case 173. Bowes et al. v. Shand et al., 2 App. Cas.
(Eng.) 455.
Facts: Shand agrees to sell B a cargo of rice, under
a contract, which as construed by the Court, required S
to put the rice on board the 4 'Rajah of Cochin in Madras
in March and April, for shipment to London. The rice
was put on board in February, and B refused to accept
it. This "was an action for damages caused by such re-
fusal.
Point Involved: Whether a party may, without re-
spect to its importance, insist on every term of his con-
tract.
Lord Blackburn:  * * * It was argued * * *
that it was enough that it was rice and that it is imma-
terial when it was shipped. * * * If you contract to
sell peas, you cannot oblige a party to take beans. If
the description of the article tendered is different in any
respect, it is not the article bargained for * * *. I
think in this case what the parties bargained for was
rice, shipped at Madras, or the coast of Madras. Equally
good rice might have been shipped a little to the north or
a little to the south of the coast of Madras. I do not
quite know what the boundary is, and probably equally
good rice might have been shipped in February as was
shipped in March, or equally good rice might have been
shipped in May was shipped in April, and I dare say
equally good rice might have been put on board another
ship as that which was put on board the 'Rajah of
338
CONTRACTS
Cochin.' But the parties have chosen, for reasons best
known to themselves, to say: We bargain to take rice,
shipped in this particular region, at that particular time,
on board that particular ship, and before the defendants
can be compelled to take anything in fulfillment of that
contract, it must be shown not merely that it is equally
good, but that it is the same article that they have bar-
gained for—otherwise they are not bound to take it.
Quetsion 173: What is the rule stated in the above case?
Case 174. Nolan v. Whitney, 88 N. Y. 648.
Facts: Michael Nolan contracted to do the mason
work in the erection of two buildings in Brooklyn for
$11,700 to be paid in installments as the work progressed.
The last installment of $2,700 was payable 30 days after
completion and acceptance of the work. The work was
to be performed to the satisfaction and under the direc-
tion of an architect, whose certificate was necessary be-
fore any payment could be claimed. All installments
were paid except the last, for which this suit was brought.
The defense was that the contract was not performed as
agreed and that the architect's certificate had not been
obtained. The referee found that Nolan substantially
and in good faith complied with the contract, but that
there were trivial defects for which a deduction of
$200.00 should be made. Whitney appeals.
Point Involved: Whether a party under contract to
construct a building according to plans and specifications
involving minute details, can recover on the contract at
the contract price, with a deduction for error, when he
has not performed literally, but has performed substan-
tially and in good faith.
Earl, J.: '1 It is a general rule of law that a party
must perform his contract before he can claim the con-
sideration due him upon performance; but the perform-
ance need not in all cases be literal and exact. It is suffi-
cient if the party bound to perform, acting in good faith,
and intending and attempting to perform his contract,
PERFORMANCE AND TENDER;BREACH 339
does so substantially, and then he may recover for his
work, notwithstanding slight or trivial defects in per-
formance, for which compensation may be made by an
allowance to the other party. Whether a contract has
been substantially performed is a question of fact de-
pending upon all the circumstances of the case to be
determined by the trial court. * * * According to
the authorities cited, under an allegation of substantial
performance, upon the facts found by the referee, Nolan
was entitled to recover unless he is barred because he
failed to get the architect's certificate, which the referee
found was unreasonably and improperly refused. But
when he had substantially performed his contract, the
architect was bound to give him the certificate, and his
refusal to give it was unreasonable, and it is held that an
unreasonable refusal on the part of the architect in such
a case to give the certificate dispenses with the neces-
sity.''
Question 174: "What is the doctrine of substantial per,
formance ?
§163. (Contracts, Sec. 131.) Of the performance of
contracts which by their terms are to be to the satis-
faction of the other party.
Case 175. Brown v. Foster, 113 Mass. 136.
Facts: Suit to recover the price of a suit of clothes
which the tailor agreed to make up to the customer's sat-
isfaction. Defense, that he was not satisfied.
Point Involved: Whether one who has contracted that
another shall make him a suit of clothes "to his satis-
faction may reject the clothes with no other reason than
that he is not satisfied.
Devens, J.: 11 There was evidence at the trial to show
that the contract between the parties was an express con-
tract and by the terms of it the plaintiff agreed to make
and deliver to the defendant, upon a certain day a suit of
clothes which were to be made to the satisfaction of the
340
CONTRACTS
defendant. The clothes were made and delivered upon
the day specified, but were not to the satisfaction of the
defendant, who declined to accept, and promptly returned
the same. If the plaintiff saw fit to do work upon ar-
tides for the defendant and to furnish materials there-
for, contracting that the articles when manufactured
should be satisfactory to the defendant, he can recover
only upon the contract as it was made; and even if the
articles furnished by him were such that the other party
ought to have been satisfied with them, it was yet within
the power of the opposite party to reject them as unsat-
isfactory. It is not for any one else to decide whether a
refusal to accept is or is not reasonable, when the con-
tract permits the defendant to decide himself whether the
articles furnished are to his satisfaction. Although the
compensation of the plaintiff for valuable services and
materials may thus be dependent upon the caprice of
another, who unreasonably refuses to accept the articles
manufactured, yet he cannot be relieved from the con-
tract into which ho has voluntarily entered. * * *
Question 175: (!) Would the defense that the defendant
was not satisfied have been good if there had been nothing said
as to satisfaction?
Case 176. Duplex Safety Boiler Co. v. Garden, 101
N. Y. 387.
Facts: Contract to alter boilers for Gf., payment to be
made only when Gf. was  satisfied that the boilers as
changed were a success. The work was done in a work-
manlike manner; but defendant, Gf., claimed he was not
satisfied.
Point Involved: Whether one who has contracted that
another shall do work of a mechanical character to his
satisfaction, can aver in full defense for not accepting the
work simply that he is not satisfied.
Danfokth, J.: "* * * In the case before us the
work required was specified, and was completed; * * *
If there was full performance on the plaintiff's part,
PERFORMANCE AND TENDER; BREACH 341
nothing more could be required, and the time for pay-
ment had arrived; for * * * 'that which the law will
say a contracting party ought in reason to be satisfied
with, that the law will say he is satisfied with.'
"Another rule has prevailed where the object of the
contract was to gratify taste, serve personal convenience,
or satisfy individual preference. # * * A different
case is before us.
Question 176: (1) In what respect does this case differ
from the one above? Are they opposed in principle?
(2) Apply the principles of the above eases to the following
contracts to be performed to the other's satisfaction:
(a) Laying a roof: (McNeil & Armstrong, 81 Fed. 943).
(b) Painting a portrait: (Pennington v. Howland, 21 R. I.
65).
(c) Making a statue: (Zaleski v. Clarke, 44 Conn. 218).
(d) Grading a dock: (Keeler v. Clifford, 165 111. 544).
(Note: These cases must not be confused with cases in which
articles are sent for trial to be accepted if satisfactory or if the
recipient desires to keep them. In such a case, of course, there
is an absolute right of rejection.)
§164. (Contracts, Sec. 132.) Of the performance that
will not discharge and therefore constitutes breach.
(Note: Obviously, less than performance (substantial per-
formance) is breach unless (1) there is acceptance of defective
performance as full performance; or (2) there is some other ex-
cuse than that of performance recognized by law as a valid dis-
charge. See following sections.)
§ 165. (Contracts, Sec. 133.) Effect of acceptance of
performance which does not fulfill requirements of
terms.
Case 177. Smith v. Aiker, 102 N. Y. 87.
Facts: Suit brought to recover for balance due on a
building contract. This contract provided for the pro-
duction by the contractor of the architect's certificate
before the owner was obliged to accept the building or
342
CONTRACTS
pay the balance due'. No such certificate was produced.
The evidence showed, however, and the jury found that
the owner accepted the work.
Point Involved: Whether a provision in the contract
for the benefit of the party sued could be set up as a
defense by him, where the evidence discloses that he
freely accepts the performance without insisting on such
benefit.
Danforth, J.: um * * It was contended on the
trial * * * that a recovery could not be had without
the production of the architect's certificate. * * *
(The Court below) held, and so instructed the jury, that
the defendant could waive the stipulations he had intro-
duced into the contract for his own benefit and that if
he had accepted the house as under a complete contract,
the plantiff would be entitled to recover, although no
certificate had been given, and even if the architect was
not satisfied. That was the principal question presented;
it was, we think, rightly decided. * * *
"Judgment for plaintiff affirmed.
Question 177: What does the above case decide?
(Note: See Cases on Sales for a development of the subject
of acceptance as waiver of breach. It is there brought out that
one who accepts who has an opportunity to reject, may thereby
forego his right to afterwards reject and yet may still save his
right to have damages for the breach. But the acceptance may
also show a waiver of damages. Circumstances govern.)
Case 178. Elliott v. Caldwell, 43 Minn. 357.
Facts: E. and others agreed to build for C. a dwelling
house. C. resists payment according to the contract be-
cause-the house as built was materially different from
the one called for by the plans. The evidence was taken
before a referee, who found that E. and the others materi-
ally deviated from the contract in numerous particulars
both in work and materials.
Point Involved: Whether a retention of a benefit which
PERFORMANCE AND TENDER;BREACH 343
one has no option to restore can be considered as ac-
ceptance.
Mitchell, J.: "* * * They are not mere slight
defects or omissions, which may be remedied without
difficulty so as to give defendants substantially the build-
ing they bargained for, but they are of a substantial
nature, which run through the whole work, and are now
incapable of correction and render the house substan-
tially different from and inferior to the one which plain-
tiffs contracted to build. * * * Neither were they
the result of mistake or oversight, but intentional and
even fraudulent. * * *
"* * * In the case of a building on land under a
contract which the builder fails to complete, or which he
completes in a manner not conforming to the contract
* * * the mere fact of the building remaining on the
land, and that the owner resumed possession and enjoys
the fruits of the labor, is not such an acceptance as alone
will imply a promise to pay for it; for the possession of
the land necessarily involves possession of the buildings
in their existing state, and the owner has no option in
rejecting them.
Question 178: What are the facts, the question presented
and the Court's decision in the above case?
{Note upon right of plaintiff who has broken his contract to
recover on a quasi contractual basis for benefits conferred. In
this note the editor suggests his obligation to Professor Frederic
C. Woodward's text on Quasi Contracts, Chapter X.
Assume that a person has not substantially performed his con-
tract, and has no legal excuse for non-performance (such as im-
possibility of performance) and is therefore guilty of breach.
He has, however, conferred a benefit upon the other party. In
arriving at the amount of this benefit, clearly the defendant's
damages must be considered. It is conceivable that a builder
has put a $5,000 foundation upon a person's land, and yet by
breach of his contract in not completing the building he may
have actually damaged the other party in excess of the benefit
conferred. With this understood, it is still conceivable and, in
344
CONTRACTS
fact likely, that the other party is enriched in most cases by the
work done by a party before he broke his contract. Does the
party breaking the contract have no redress? If he cannot sue
on the contract, is he not entitled to some compensation for the
value of the actual benefit conferred 1 Now this breach is either
wilful, or not unlful. If he wilfully breaks his contract, we may
look less kindly upon him than if he unwillingly breaks the con-
tract and perhaps give him a remedy in one case and not in
the other. (Examples of unwilling breach are: Inability to get
material; inability to get help; where those contingencies have
not been provided against in the contract.)
Professor Woodward classifies contracts for purposes of his
discussion as: service contracts; buildings and like contracts;
contract for sale of goods; contracts for payment of money.
Service contracts: In these contracts the breach is wilful.
Discontinuance of the service because of death, illness, and the
like, would not be breach, but discharge by impossibility of per-
formance. The weight of authority is that an employee who
wilfully breaks his contract of service cannot recover for the
service actually rendered. Stark v. Parker, 2 Pick. 267 (Mass.)
is a leading authority on this point and is generally followed.
But a minority view is that of Britton v. Turner, 6 N. H. 481,
which took the view that justice required an allowance of recov-
ery. This view has been followed in Iowa, Kansas, Nebraska,
South Dakota and Texas cases. It is generally felt, however,
that to allow a recovery in such cases is to encourage breach of
contract. If the employee is discharged, i. e., doesn't quit of his
own accord, and the discharge is merited, there is a '' closer divi-
sion of authority although on principle the same reasoning
would seem to apply to both situations.
Building and like contracts. Here the breach may be wilful
or not wilful. If wilful, the majority view is, no recovery. If
not wilful the majority view is he may have a quasi contractual
recovery, that is, a recovery for the actual benefit conferred
which we measure by disregarding the contract price and taking
into consideration the damages, if any, caused by the breach.
But some states deny any recovery.
Contracts for sale of goods. The weight of authority allows
recovery where the buyer retains the' goods and thus accepts
where he might reject. There seems to have been little distinc-
tion made between wilful and not wilful breach in such cases.
PERFORMANCE AND TENDER; BREACH 345
Contracts for payment of money. Where a person pays money
for goods or lands and then defaults in further payment, thereby
breaking his contract, can he recover what he has paid? Fre-
quently this contingency is expressly provided for (as that it
shall be retained as liquidated damages). If not, the weight
of authority denies recovery.
In conclusion it may be said that it is impossible with exact-
ness to state the law on the question under discussion in a brief
note of this character. The general state of the law, however,
has been given.)
§ 166. (Contracts, Sec. 134.) Performance or tender of
performance required of one party before he can re-
quire performance by the other.
Case 179. Kingston v. Preston, as cited in argument
in 2 Doug. 689.
"It was an action of debt, for non-performance of cove-
nants contained in certain articles of agreement between
the plaintiff and defendant. The declaration stated:
That, by articles made the 24th of March, 1770, the plain-
tiff, for the considerations thereinafter mentioned, cove-
nanted, with the defendant, to serve him for one year and
a quarter next ensuing, as a covenant-servant, in his
trade of a silk-mercer, at £200 a year, and in considera-
tion of the premises, the defendant covenanted, that at
the end of the year and a quarter, he would give up his
business of a mercer to the plaintiff, and a nephew of the
defendant, or some other person to be nominated by the
defendant, and give up to them his stock in trade, at a
fair valuation; and that, between the young traders, deeds
of partnership should be executed for 14 years, and, from
and immediately after the execution of the said deeds, the
defendant would permit the said young traders to carry
on the said business in the defendant's house. Then the
declaration stated a covenant by the plaintiff, that he
would accept the business and stock in trade, at a fair
valuation, with the defendant's nephew, or such other
person, etc., and execute such deeds of partnership, and,
further, that the plaintiff should, and would, at, and
346
CONTRACTS
before, the sealing and delivery of the deeds, cause and
procure good and sufficient security to be given to the
defendant, to be approved of by the defendant, for the
payment of £250 monthly, to the defendant, in lieu of a
moiety of the monthly produce of the stock in trade, until
the value of the stock should be reduced to £4000. Then
the plaintiff averred, that he had performed, and been
ready to perform, his covenants, and assigned for breach
on the part of the defendant, that he had refused to sur-
render and give up his business, at the end of the said
year and a quarter. The defendant pleaded, 1. That the
plaintiff did not offer sufficient security; and 2. That
he did not give sufficient security for the payment of the
£250, etc. And the plaintiff demurred generally to both
pleas. On the part of the plaintiff, the case was argued
by Mr. Butler, who contended, that the covenants were
mutual and independent, and, therefore, a plea of the
breach of one of the covenants to be performed by the
plaintiff was no bar to an action for a breach by the
defendant of one of which he had bound himself to per-
form, but that the defendant might have his remedy for
the breach of the plaintiff, in a separate action. On the
other side, Mr. Grose insisted, that the covenants were
dependent in their nature, and, therefore, performance
must be alleged: The security to be given for the money,
was manifestly the chief object of the transaction, and it
would be highly unreasonable to construe the agreement,
so as to oblige the defendant to give up a beneficial busi-
ness, and valuable stock in trade, and trust to the plain-
tiff's personal security (who might and, indeed, was ad-
mitted to be worth nothing), for the performance of his
part. In delivering the judgment of the court, Lord
Mansfield expressed himself to the following effect:
There are three kinds of covenants: 1. Such as are
called mutual and independent, where either party may
recover damages from the other, for the injury he may
have received by a breach of the covenants in his favor,
and where it is no excuse for the defendant, to allege a
breach of the covenants on the part of the plaintiff. 2.
PERFORMANCE AND TENDER; BREACH 347
There are covenants which are conditions and dependent,
in which the performance of one depends on the prior
performance of another, and, therefore, till this prior
condition is performed, the other party is not liable to
an action on his covenant. 3. There is also a third sort
of covenants, which are mutual conditions to be per-
formed at the same time; and, in these, if one party was
ready, and offered, to perform his part, and the other
neglected, or refused, to perform his, he who was ready,
and offered, has fulfilled his engagement, and may main-
tain an action for the default of the other; though it is
not certain that either is obliged to do the first act. His
Lordship then proceed to say, that the dependence, or in-
dependence, of covenants, was to be collected from the
evident sense and meaning of the parties, and, that, how-
ever transposed they might be in the deed, their pre-
cedency must depend on the order of time in which the
intent of the transaction requires their performance.
That, in the case before the court, it would be the greatest
injustice if the plaintiff should prevail: The essence of
the agreement was, that the defendant should not trust
to the personal security of the plaintiff, but, before he
delivered up his stock and business, should have good
security for the payment of the money. The giving such
security, therefore, must necessarily be a condition prece-
dent. Judgment was accordingly given for the defend-
ant, because the part to be performed by the plaintiff
was clearly a condition precedent.
Question 179: What breach of contract did plaintiff allege in
this case? What was the defense? How did plaintiff reply to
the defense? Was the defense good? Why?
§167. (Contracts, Sec. 135.) Breach of one part of a
severable contract not a breach of the contract.
Case 180. Hill v. Balkcom, 79 Ga. 444, 5 S. E. 200.
Blandford, J.: ''Hill brought his action against Balk-
com upon a contract in which he, Hill, had agreed to
348
CONTRACTS
teach. Balkcom's children, together with other children,
for nine months for $45. The court below held that inas-
much as he showed he did not teach but 8y2 months, he
could not recover. To this ruling Hill excepted, and this
is the error complained of here.
"We think the court below was right in its ruling. Had
the suit been upon a quantum meruit [a contract implied
in law or quasi contract] it would have presented a very
different question. But where the action was upon the
contract itself, inasmuch as he showed he had not per-
formed his part of the contract, he, of course, could not
recover. * * * A contract is either entire or sever-
able. If it be severable, a party who has performed a
portion thereof, may recover for that portion from the
other contracting party, and an entire contract may he
apportioned. For instance, if Hill had agreed to teach
this school for 9 months at $5 per month, the contract
could have been apportioned, although he had failed to
teach for the full term agreed upon. * * *''
Question 180: What was Hill to do in this case before he
could claim the payment? If he had sned not on the contract
but on a quantum meruit ("as much as he deserves") did the
Court think it might have allowed him something? In that
case would a recovery by him have been allowed (his breach
being wilful) by the weight of authority? If his contract had
been to teach for $5 per month for 9 months payable monthly
and he had taught 43/2 months, could he have recovered $20
for the 4 months? $2y2 for the half month?
(Note: The question whether a contract is entire so that a
breach of a part is a breach of the whole, or severable (or
divisible) is one of the hard questions in the law.
"The governing principle is the manifested intention of the
parties in view of the nature of the contract and the usages
of business—that is, their intention to have performance of the
contract in parts and have the performance of a part on one
side the price or exchange of a corresponding price on the
other. If the payment of a lump sum is to be made for several
articles, the contract is necessarily indivisible. Contracts of
service for a specified term are held severable when ^e wages
PERFORMANCE AND TENDER; BREACH 349
or salary can be construed as payable at specified shorter
periods, and generally the mere fact that a rate for a shorter
period is stated seems enough to warrant such a construction
(Williston on Contracts, 1920, Sec. 862). In the note to Case
178 in which the right of a person to recover for services per-
formed when guilty of a breach, we assumed that he was suing
for breach of an indivisible contract or an indivisible part of
a divisible contract. Of course if one sues for performance of
a part when he is guilty of breach of the whole, he is responsible
in damages for his breach.
For cases upon sales of personal property upon installments,
see "Sales, Sec. 366.)
§ 168. (Contracts, Sec. 136.) To what one of a number
of contracts performance relates—Application of pay-
ments.
(Note: It Is the rule as to a voluntary payment by a debtor,
the debtor has the right in making the payment to direct its
application as among several debts, but if he does not so direct,
the creditor may apply it as he chooses, that is, to an unsecured
claim rather than a secured claim, to an older claim, etc.)
§ 169. (Contracts, Sec. 137.) Breach of contract by re-
nunciation prior to time of performance.
Case 181. Hochster v. De La Tour, 2 El. & Bl. 678.
Facts: Plaintiff, in April, 1852, agreed to serve de-
fendant, as courier, for three months from June 1, 1852,
on certain terms. May 11, 1852, defendant wrote plain-
tiff he had changed his mind and would not employ
plaintiff. May 22nd plaintiff brought suit. Defendant
claimed that there could be no breach until time of per-
formance, and that until that time, he should have oppor-
tunity to change his mind and decide to perform.
Point Involved: Whether an executory contract can be
treated by the promisee as broken by the promisor before
the time for performance.
Lord Campbell, C. J.: "* * * But it is surely
much more rational and more to the benefit of both par-
"ties that after the renunciation of the agreement by the
350
CONTRACTS
defendant the plaintiff should be at liberty to consider
himself absolved from any future performance of it, re-
taining his right to sue for any damage he has suffered
from the breach of it. Thus, instead of laying out money
in preparations which must be useless he is at liberty to
seek service under another employer, which would go in
mitigation of the damages to which he would otherwise
be entitled for a breach of the contract. It seems strange
that the defendant, after renouncing the contract and
absolutely declaring that he will never act on it, should
be permitted to object that faith is given to his assertion,
and that an opportunity is not left to him of changing
his mind. * * *
Question 181: Can a contract be broken by a party thereto
before the time has come to perform it?
Case 182. Kadish v. Young, 108 111. 170.
Facts: On December 15, 1880, Y. agreed to sell to K.
100,000 bushels of No. 2 barley at $1.20 per bushel, to be
delivered in January, 1881. On December 16, 1880, K.
gave notice that he would not receive the barley. Y.
nevertheless treated the contract as still subsisting and
on January 12, 1881, tendered the warehouse receipts to
K., who refused to accept. Thereupon Y. sold the barley
on the market, at less than $1.20 per bushel, and sued K.
for the loss. K. contends that Y. should have acted on
his renunciation and attempted to sell the barley in De-
cember, when barley was higher, and thus have dimin-
ished the damages in whole or part.
Point Involved: The same question as above. With
the additional point whether the other party must act
upon the attempted renunciation or may hold the con-
tract open; and the consequences of so doing.
Mr. Justice Scholfield : "But the well settled doc-
trine of the English Courts is, that a buyer cannot thus
create a breach of contract upon which the seller is bound
to act. * * *
'' The question came before this Court in Fox v. Kitton,
PERFORMANCE AND TENDER; BREACH 351
19 111. 519, whether, where a party agrees to do an act at
a future time, and before the day arrives he declares he
will not keep his contract, the other party may act on
such declaration and bring an action before the day ar-
rives; and it was held * * * that he may. * * *
(Quoting from an English case) 'The notice (that he
will not receive the wheat) amounts to nothing until the
time when the buyer ought to receive the goods, unless
the seller acts on it in the meantime, and rescinds the
contractJ * * * 'He keeps the contract alive for
the benefit of the other party as well as his own, * * *
and enables the other party not only to complete the con-
tract, if so advised, notwithstanding his previous repudi-
ation of it, but also to take advantage of any superven-
ing circumstances, which would justify him in declining
to complete it.'
"* * * If appellees (Y.) had then the barley on
hand and had acted on appellant's notice, and accepted
and treated the contract as then broken, it would, doubt-
less, then have been their duty to have resold the barley
upon the market, precisely as they did in January, and
have given the appellants credit for the proceeds of the
sale. * * *
Question 182: What does the Court decide in this case with
reference to the necessity of acting upon an anticipatory breach,
and the consequences ensuing upon either a failure to so act, or
such action?
CHAPTER 21
DISCHARGE OF CONTRACTS BY OTHER MEANS
THAN PERFORMANCE OR BREACH
§ 170. Discharge by impossibility of performance.
§ 171. Discharge by alteration of written instrument.
§ 172. Discharge by novation.
§173. Discharge by merger.
§ 174. Discharge by agreement.
§ 175. Discharge in bankruptcy.
§ 176. Discharge by statute of limitations.
§ 170. (Contracts, Sec. 138.) Discharge by impossibil-
ity of performance.
Case 183. Walker v. Tucker, 70 111. 526.
Facts: Contract to work a certain coal mine during
the continuance of a lease, in a good and workmanlike
manner. Breach alleged and suit brought thereon. Plea
by the defendant to the effect that the working of the
mine had become a hardship and unprofitable.
Point Involved: "Whether hardship and burden caused
by performing a contract is an excuse for its non-per-
formance? What constitutes impossibility?
Mr. Justice Scholfield : "* * * The plea alleges
that 'on the said 15th day of September, 1871, the mines
became and were wholly exhausted and incapable of
yielding, when worked in a good and workmanlike man-
ner, and with reasonable skill, care, diligence and energy,
sufficient coal for working said mines,' etc. If the plea
had stopped short, after alleging that the mines became
and ivere wholly exhausted, it would have been good, but
the subsequent qualification shows that these words do
not mean exhausted of coal, but only exhausted of such
coal as was capable of yielding, 'when worked in a good
352
DISCHARGE OP CONTRACTS
353
and workmanlike manner, and with reasonable skill, care,
diligence, and energy, sufficient coal for working said
mines.' This might be, and yet the most valuable portion
of the mine remain untouched. * * * Courts must
enforce contracts as the parties make them. * * *
There is nothing in this instrument which authorizes a
suspension or abandonment of mining because it has be-
come unprofitable. * * *
Question 183: What was the defense in this suit? Did it
prevail? What plea would have prevailed? Is the fact that
a contract becomes unprofitable an excuse for not performing
it?
Case 184. Yerrington v. Green, 7 R. I. 589.
Facts: Contract to employ plaintiff as clerk and agent
of business in New York and Philadelphia for a certain
period. Death of the employer. Suit by the employee
against the administrators of the employer.
Point Involved: Whether the death of the employer
discharges the contract of employment.
By Coukt, Ames, C. J.: It is in general true that death
does not absolve a man from his contracts; but that they
must be performed by his personal representatives, or
their non-performance compensated out of his estate.
An exception to this rule, equally well established at both
the civil and common law is, that in contracts in which
performance depends upon the continued existence of a
certain person or thing, a condition is implied that the
impossibility of performance arising from the perishing
of the person or thing shall excuse the performance.
The implication arises in spite of the unqualified char-
acter of the promissory words, because, from the nature
of the contract, it is apparent that the parties contracted
upon the basis of the continued existence of the par-
ticular person or chattel. The books afford many illus-
trations of this reasonable mode of construing contracts,
de certo corpore, as the civil -law designation of them is,
in furtherance of the presumed and probable intent of
354
CONTRACTS
the parties. The most obvious cases are the death of a
party to a contract of marriage before the tinfe fixed
by it for the marriage; the death of an author or artist
before the time contracted for the finishing and delivery
of the book, picture, statue, or other work of art; the
death of a certain slave promised to be delivered, or of
a horse promised to be redelivered, before the day set
for delivery or redelivery; and the death of a master
or apprentice before the expiration of the term of service
limited in the indentures. The bodily disability from
supervening illness, as of an artist, from blindness, to
paint the picture contracted for, or of a scholar to re-
ceive the instruction his father had stipulated should
be received and paid for, has been held, for the like
reason, to excuse each from the performance of his con-
tract: Hall v. Wright, 1 El. B. & E.; Stewart v. Lor-
ing, 5 Allen, 306. The cases in support of these, and
other illustrations of the exception to the general rule,
are set down in the defendant's brief, and it is unneces-
sary to repeat them. Both at the civii and the common
law,, it is necessary that the party who would avail him-
self of this excuse for non-performance of the contract
should be without fault in the matter upon which he
relies as an excuse. The latest and most instructive
case upon this subject, so far as the discussion of the
principle of decision is concerned, is that of Taylor v.
Caldwell, decided by the queen's bench in May last, 8 L.
T., N. S., 356. In that case it was held that the parties
were discharged from a contract to let a music hall for
four specified days -for a series of concerts, by the ac-
cidental destruction of the hall by fire before the first
day arrived. The full and lucid exposition by Mr. Justice
Blackburn, who delivered the opinion of the court, of
the prior cases, and of the principle upon which they
had been decided, leaves nothing further to be desired
upon this subject.
Does the case at bar fall within the general rule or
within the exception we have been considering? This
must depend upon the nature of the contract—whether
DISCHARGE OF CONTRACTS
355
one requiring the continuing existence of the employer,
Keach, for performance on his part, or one which could,
according to its spirit and meaning, be performed by
the defendants, his administrators. The contract was
to employ the plaintiff as clerk and agent of the intestate
in his business in New York and Philadelphia ; and it
seems to us undoubted that the continued existence of
both parties to the contract proceeded, and if called to
their attention at the time of contract, must have been
contemplated as such by them. The death of the plain-
tiff within the three years would certainly have been a
legal excuse from the further performance of his con-
tract; since it was an employment of confidence and skill,
the duties of which, in the spirit of the contract, could
be fulfilled by him alone. If this be the law in applica-
tion to a covenant for ordinary service (Shep. Torch.
180), how much more in application to a contract for
service of such confidence and skill as that of a clerk
and agent for sale. On the other hand, this employ-
ment could continue no longer than the business in which
the employer was engaged and the plaintiff retained.
The intestate, when living, could by the contract have
required the services of the plaintiff in no other busi-
ness than that in which he had engaged him, and with
no other person than himself. It would seem, then, neces-
sarily to follow, that when the death of the employer
put a stop to this business, and left no legal right over
it in the administrators, except to close it up with the
least loss to the estate of their decedent, they were, by
the contract, bound no longer to employ the plaintiff, any
more than he to serve them. The act of God had taken
away the master and principal—the law had revoked
his agency, and stopped the business to which alone his
contract bound him; and if he would serve the adminis-
trators in winding up the estate, it must be under a new
contract with them, and under renewed powers granted
by them. Any other result than that this contract of
service was upon the implied condition that the employer,
as well as the employed, was to continue to live during
356
CONTRACTS
the stipulated term of employment, would involve us
in the strange conclusion that the administrators might
go on with the business of their intestate, in which the
plaintiff must continue with powers unrevoked by the
death of his principal, or that he, with new powers from
them, was bound by the contract to serve them as new
masters, and in a different service, and that they were
bound to grant him such, powers, and employ him for
the stipulated time in such service. The novelty of such
a claim, and the contradiction of well-settled principles
necessary to maintain it, justify the ruling of the judge
who tried the cause; and this motion must be dismissed
with costs, and judgment entered upon the verdict.
Question 184: What was the contract in question, and why
did the death of one party thereto discharge the obligation to
perform? Generally speaking, what contracts are discharged
by death?
Case 185. Booth v. Spuyten Duyvil Rolling' Mill Co.,
60 New York, 487.
Facts: Plaintiffs, having contracted to sell and de-
liver to N. Y. C. R. R. Co. 400 tons of rails with steel
caps, contracted with defendant December 27, 1867, to
furnish the caps, to be delivered April 1,1868. On March
10, 1868, the defendant's mill burned and he was unable
to furnish the caps. Plaintiff sues for breach and de-
fendant claims impossibility of performance.
Point Involved: Whether the destruction of shop,
machinery or tools in or by' which a contracting party
expects to execute his contract, which are not specified
by the contract as necessary for its performance, excuses
performance.
Church, C. J.:  * * * But the case is not within
the principle decided in Dexter v. Norton (47 N. Y. 62),
and the authorities upon which it was based. The prin-
ciple applies when it is apparent that the parties con-
templated the continued existence of a particular person
or thing which is the subject of the contract, as in the
DISCHARGE OF CONTRACTS
357
case of a Musical Hall destroyed by fire (3 Best & S.
826); in the case of an apprentice who became perma-
nently ill (4 C. P. 1. [L. R.]); and of a woman who, from
illness, was unable to perform as a pianist (6 Ex. 269
[L. R.]). In these and analogous cases a condition is
implied that the person or thing shall continue to exist.
In Dexter v. Norton {supra), this principle was applied
to relieve a party from damages for a failure to deliver
property which was burned without his fault, but it has
no application to a case of this character. There was
no physical or natural impossibility inherent in the nature
of the thing to be performed, upon which a condition
that the mill should continue can be predicated. The
article was to be manufactured and delivered and whether
by that particular machinery or in that mill would not
be deemed material. * * *
. Question 185: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) A makes two contracts with B: (a) to sell B A's horse
Dick; (b) to sell B 20 horses of a particular description. Before
the time for the performance arrives a contagious disease breaks
out among A's horses and kills the horse Dick and a herd of
40 horses out of which A expected to select the 20 other horses.
A is unable to buy any horses corresponding to the description
of the 20 horses. B sues A on both contracts. A pleads the
facts as stated. Is he excused? (Ontario Ass'n v. Packing Co.,
134 Cal. 21.)
(Note: Mere hardship is never impossibility. ["Walker v.
Tucker, supra] ; nor impossibilities caused by climatic condi-
tions that should have been foreseen and stipulated against, as
the freezing of a river in midwinter. [Engster v. West, 35 La.
Ann. 119.]
Impossibility is not a good defense, except where from the
nature of the contract it must have been contemplated by both
parties that the contract was to remain binding only in case
performance were possible. Thus, strikes, inability to get labor-
ers or building material, inability to accomplish results agreed
upon because of incapacity, etc., are not causes of discharge,
Unless they are provided for in the contract.)
358
CONTRACTS
Case 186. The Martin Emerich Outfitting Co. v.
Siegel, Cooper & Co., 237 Illinois Reports, 610.
Facts: Siegel, Cooper and Co. a corporation conduct-
ing a department store entered into a contract with the
Martin Emerich Outfitting Company, dealers in furni-
ture whereby the latter company was to have the use
of certain described space in the building occupied by
the department store to conduct a furniture department,
paying to the department store for use of said space
$500 a month and a percentage on sales above a certain
amount, said furniture to be sold being the property of
the outfitting company, but the furniture business to be
conducted as a department of the store under its name,
regulations, etc. The agreement was for a period of five
years, but during that period the building was destroyed
by fire, and Siegel, Cooper & Company moved into other
quarters. The outfitting company asked for space in the
new location and were refused, Siegel, Cooper & Co.
claiming that the fire had put an end to the contract.
Suit followed.
Point Involved: Whether the destruction of the build-
ing in which defendant carried on its business terminated
a contract with plaintiff for use of space in that build-
ing to conduct a department of such business.
Mr. Justice Dunn : "* * * In contracts to whose
performance the continued existence of a particular per-
son or thing is necessary, a condition is always implied
that the death or destruction of that person or thing
shall excuse performance. Thus contracts for perform-
ance of personal services terminate upon the death of
the party by whom the services are to be performed.
(Smith v. Preston, 170 111. 179.) A covenant by a lessee
of a coal mine to work the same for the period of ten
years under his lease is discharged by the exhaustion of
the mine (Walker v. Tucker, 70 111. 527). Under a con-
tract to place certain machinery in a particular build-
ing the building and machinery having been destroyed
by accidental fire before the completion of the contract,
DISCHARGE OF CONTRACTS
359
it was held that both parties were excused from further
performance of the contract (Appleby v. Myers, L. R.
2 C. P. 651; Siegel, Cooper & Co. v. Eaton & Prince Co.,
165 111. 550; Huyett & Smith Mfg. Co. v. Chicago Edi-
son Co., 167 111. 233.). A contract to let at a stated daily
price a music hall for giving a series of concerts was
held to be conditional upon the continued existence of
the hall and was put an end to by the destruction of
the hall by fire (Taylor v. Caldwell, 2 B. & S. 826); a
lease of rooms in a building is terminated by the de-
struction of the building by fire (Kerr v. Merchant's
Exchange Co., 3 Edw. Ch. 333; Alexander v. Dorsey, 12
Ala. 12; Winston v. Cornish, 5 Ohio, 477); and in case
a new building is erected having a similar space in the
same location as in the old building, the tenant is not
entitled to occupy it. Stockwell v. Hunter, 11 Mete. 456.
{Held: That the contract was for certain space in
a certain building and the destruction of the building
by fire discharged the contract between the parties.)
Question 186: Recite the contract in this case, why it was
not performed, the excuse for not performing it, and whether
such excuse was a sufficient legal excuse?
(Note: Effect of destruction of building on leased land as
terminating lease or abating the rent. A destruction of a build-
ing operates to discharge a lease upon the building, or a portion
of it, but if the lease is upon the land, the destruction of build-
ing upon the land, does not discharge the lease or abate the
rent in the absence of< provisions in the lease, or statute. And
a lease which describes the premises by street and number as
"78 West Lake Street is generally considered a lease of the
real estate and not merely of the buildings. Clearly leases of
apartments, flats, stores, etc., in buildings, are not leases of the
real estate and destruction, or impairment rendering premises
unsuitable terminates the lease, except as otherwise agreed.)
Case 187. Kelley v. Riley, 106 Mass. 339.
Facts: Suit for breach of promise of marriage. De-
fence that defendant was married when he made the
promise. The plaintiff was innocent of the fact.
360
CONTRACTS
Point Involved: Whether impossibility known to one
party but not known to the other discharges the contract.
Colt, C. J.: "The defendant is not permitted to
escape responsibility on the ground of his present legal
inability to perform a promise of marriage to an inno-
cent party. The damages to the plaintiff are certainly
not diminished by the consideration that the promise
was made under such circumstances. The strict rule that
a consideration to support a promise is insufficient, if
its performance is utterly and naturally impossible, is
met by the suggestion that, even if the future perform-
apce here is to be treated as utterly impossible, yet the
detriment or disadvantage which must necessarily result
to the unmarried; and that is a sufficient consideration
to bind the defendant.
Question 187: State the facts of this ease and the rule an-
nounced by it?
§ 171. (Contracts, Sec. 139.) Discharge by alteration of
written instrument.
(Note: Technically, by "alteration we mean the change of
the material terms of a written instrument by one party with-
out the consent of the other. Alteration discharges even if the
liability of the non-assenting party is lessened as where the
obligee in a bond reduces the amount thereof. A change by
mistake is not alteration. It is not material whether the altera-
tion is fraudulent or not. By some authorities an attempt to
correct an instrument is an alteration. The safest method in
that case is to get the consent of the other party. If an altera-
tion is not fraudulent, the written contract is discharged, hut a
suit, in quasi-contract can he maintained by the party making
the alteration for benefits bestowed (for instance where a note
is altered by the payee with no fraudulent intent, the payee
may recover the loan for which the note was given.)
§ 172. (Contracts, Sec. 140.) Discharge by novation.
(Note: Novation means substitution by agreement of the
parties. There is novation of terms, whereby the old terms be-
DISCHARGE OF CONTRACTS
361
cOme succeeded by the new, and novation of parties whereby
a new party is substituted for another. Novation of parties
differs from assignment in that in novation there is a complete
substitution of one party for another by agreement of all con-
cerned. As where A makes a contract with B, and subsequently
A, B and C agree that C shall be substituted in B's place.)
§ 173. (Contracts, Sec. 141.) Discharge by merger.
(Note: A contract may be discharged because it becomes
merged in to another later agreement or form of obligation.
Thus oral agreements become merged in later written agree-
ments intended to succeed them. Contract rights become
merged in judgments obtained upon them.)
§ 174. (Contracts, Sec. 142.) Discharge by agreement.
(Note: The parties to a contract may discharge it by agree-
ment. It was a rule of the common law, still followed in some
jurisdictions, that a contract under seal could not be changed
or modified by writing not under seal, although if the modifica-
tion had been acted upon the Court would not overthrow the
executed act.)
§ 175. (Contracts, Sec. 143.) Discharge in bankruptcy.
(Note: Bankruptcy discharges money indebtedness, mature
or immature, provided the bankrupt obtains his Discharge in
Bankruptcy. Bankruptcy operates as a breach of executory
contracts where the bankruptcy makes the performance im-
possible, even though time of performance has not yet arrived
at the term of bankruptcy.)
§176. (Contracts, Sec. 144.) Discharge by statute of
limitations.
(Note: The policy of the law is to discourage stale claims.
If one has a claim he ought to assert it while the evidence is
available and the witnesses obtainable. This policy is set forth
in statutes called 'statutes of limitations.' Such statutes are
good defenses, regardless of the merits of the case. The stat-
ute, however, must be affirmatively pleaded. A new promise
in writing may operate to start the statute running from the
362
CONTRACTS
date of the new promise. So keeping up interest on payments
or partial payments prevents the running. The statute runs not
from the inception of the contract but from the time when right
to sue exists.)
CHAPTER 22
REMEDIES OF THE PARTIES
A. Action for damages.
B. Bill for specific performance.
C. Injunction against breach.
A. Action for Damages.
§ 177. In general.
§ 178. Kinds of damages in contract cases.
§ 179. Rules for computing damages in contract cases.
§177. (Contracts, Sec. 145.) In general.
(Note: This is usually the only relief afforded a party for
breach of contract by the other. Whether he has any other
possibility of relief, he always has this one, and generally he
has no other.)
§ 178. (Contracts, Sec. 146.) Kinds of damages in
contract cases.
(Note: Damages are nominal, and compensatory. Nominal
damages are awarded when breach is proved, but no actual dam-
ages.)
§ 179. (Contracts, Sec. 147.) Rule for computing dam-
ages in contract cases.
Case 188. Hadley v. Baxendale, 9 Exch. R. 341.
Facts: Plaintiffs sued defendant as a common carrier
for the breach of a contract to carry a crankshaft which
was broken, and which the plaintiffs were sending to a
certain person to be repaired. Breach alleged: unjus-
tillable delay in carrying the shaft; damages claimed:
loss of profits for several days occasioned by not having
the crankshaft. There was no evidence that defendant
363
364
CONTRACTS
was informed or knew that loss of profits would follow
its failure to carry the goods in proper time. The judge
sent the case to the jury without instructing them whether
or not or upon what basis they could allow the loss of
profits, and the jury returned a verdict for £50, which
is £25 more than defendant admits he is liable to pay.
Defendant appeals.
Point Involved: The rule of damages to govern the
assessment thereof upon breach of contract. Specifically,
whether, in this case, the defendant under a contract to
carry plaintiffs' goods was liable, on breach of that con-
tract, for loss of profits sustained by plaintiffs in not
having such goods according to contract, defendant not
being informed that loss of profits would follow.
Aldersof, B.* * Now we think the proper
rule in such a case as the present is this: Where two
parties have made a contract which one of them has
broken, the damages which the other party ought to re-
ceive in respect of such breach of contract should be such
as may fairly and reasonably be considered either aris-
ing naturally, i. e., according to the usual course of things,
from such breach of contract itself, or such as may rea-
sonably be supposed to have been in the contemplation
of both parties, at the time they made the contract, as
the probable result of a breach of it. Now, if the special
circumstances under which the contract was actually
made were communicated by the plaintiffs to the de-
fendants, and thus known to both parties, the damages
resulting from the breach of such a contract, which they
would reasonably contemplate, would be the amount of
injury which would ordinarily follow from a breach of
contract under these special circumstances so known and
communicated. But, on the other hand, if these special
circumstances were wholly unknown to the party break-
ing the contract, he, at the most, could only be supposed
to have had in his contemplation the amount of injury
which would arise generally, and in the great multitude
of cases not affected by any special circumstances, from
REMEDIES OF THE PARTIES
365
such a breach of contract. For, had the special circum-
Stances been known, the parties might have specially pro-
vided for the breach of contract by special terms as to
the damages in that case; and of this advantage it would
be very unjust to deprive them. Now the above prin-
ciples are those by which we think the jury ought to be
guided in estimating the damages arising out of any
breach of contract. It is said, that other cases, such as
breaches of contracts in the non-payment of money, or
in the not making a good title to land, are to be treated
as an exception from this, and as governed by a con-
ventional rule. But as, in such cases, both parties must
be supposed to be cognizant of that well-known rule, these
cases may, we think, be more properly classed under
the rule above enunciated as to cases under known spe-
cial circumstances, because there both parties may rea-
sonably be presumed to contemplate the estimation of
the amount of damages according to the conventional
rule. Now, in the present case if we are to apply the
principles laid down, we find that the only circumstances
here communicated by the plaintiffs to the defendants
at the time the contract was made, were, that the article
to be carried was the broken shaft of a mill, and that
the plaintiffs were the millers of that mill. But how do
these circumstances show reasonably that the profits of
the mill must be stopped by an unreasonable delay in
the delivery of the broken shaft by the carrier to the
third person1? Suppose the plaintiffs had another shaft
in their possession put up or putting up at the time,
and that they only wished to send back the broken shaft
to the engineer who made it; it is clear that this would
be quite consistent with the above circumstances, and
yet the unreasonable delay in the delivery would have
no effect upon the intermediate profits of the mill. Or,
again, suppose that, at the time of the delivery to the
carrier, the machinery of the mill had been in other re-
spects defective, then, also, the same results would follow.
Here it is true that the shaft was actually sent back to
serve as a model for a new one, and the want of a new
366
CONTRACTS
one was the only cause of the stoppage of the mill, and
that the loss of profits really arose from not sending
down the new shaft in proper time, and that this arose
from the delay in delivering the broken one to serve
as a model. But it is obvious that, in a great multitude
of cases of millers sending off broken shafts to third
persons by a carrier under ordinary circumstances, such
consequences would not, in all probability, have occurred;
and these special circumstances were here never com-
municated by the plaintiffs to ,the defendants. It fol-
lows, therefore, that the loss of profits here cannot rea-
sonably be considered such a consequence of the breach
of contract as could have been fairly and reasonably
contemplated by both the parties when they made this
contract. For such loss would neither have flowed natur-
ally from the breach of this contract in the great multi-
tude of such cases occurring under ordinary circum-
stances, nor where the special circumstances which, per-
haps would have made it a reasonable and natural conse-
quence of such breach of' contract, communicated to or
known by the defendants. The judge ought, therefore,
to have told the jury that, upon the facts then before
them, they ought not to take the loss of profits into con-
sideration at all in estimating the damages. There must
therefore be a new trial in this case.
Question 195: What damages did the jury allow in this
case? Why did the court refuse to allow the verdict to stand in'
that regard? What evidence would entitle the jury to allow the
damages for loss of profits? If a party breaks a contract is he
liable for all damages caused by the breach ? For what damages
is he liable?
Case 189. Jordan v. Patterson, 67 Conn. 473.
Facts: Plaintiffs ordered of defendants about 12,000
undergarments to be delivered at certain times, etc. De-
fendants accepted the order. They furnished only about
160 dozen. Plaintiffs claim damages for loss of profits.
Point Involved: The measure of damages in case of
a breach by the seller of a contract to sell articles of
merchandise.
REMEDIES OF THE PARTIES
367
Andkews, C. J.:  * * * The general intention of
the law giving damages in an action for the breach of
the contract like the one here in question is to put the
injured party, so far as it can be done by money, in the
same position that he would have been in if the contract
had been performed. In carrying out this general in-
tention, it must be remembered that the altered position
to be redressed must be one directly resulting from the
breach. * * * In an action like the present one
* * * the general rule is that the plaintiff is entitled
to recover in damages the difference at the time and
place of delivery between the price he had agreed to
pay and the market price, if greater than the agreed
price. * * # This, of course, implies that there is a
market for such goods, where the plaintiff could have
supplied himself. If there is no such market, then the
plaintiff should have recovered the actual damages which
he suffered. There may be, and often there are, special
circumstances, other than the want of a market, sur-
rounding a contract for the sale and purchase of goods,
by reason of which, in case of a breach, the loss to a
vendor for their non-delivery is increased. * * * It
must be remembered also * * * that any damages
which the plaintiff by reasonable diligence on his part
might have avoided, are not to be regarded as the proxi-
mate result of defendant's acts. In the present case,
the plaintiffs claimed that at the time of delivery there
was no market in which they could procure such goods
as the defendants were to deliver to them. This was a
fact which might be proved by the testimony of any per-
son who had knowledge on the subject. And if it was
true, the plaintiffs could not by any diligence on their
part have relieved themselves by such purchase from
any portion of the damages which they suffered. • * * *
"It is alleged in the complaint that by reason of the
default of the defendants, the plaintiffs had been obliged
to pay large damages to their vendees for their failure
to deliver to them the goods so'bargained to them, and
they offered evidence to prove such a payment to one
of their vendees. * * * In restoring an injured
368
CONTRACTS
party to the same position he would have been * * *
it is necessary to take into account losses suffered, as
much as profits prevented. And whenever the loss suf-
fered or the gain prevented results directly from a cir-
cumstance which may reasonably be considered to have
been in the contemplation of the parties when entering
into the contract, the plaintiff should be allowed to prove
such loss. * * *
Question 189: (1) "What is the object of the law in allowing
damages for breach of contract?
(2) By what circumstances are the damages measured in
the above case? (a) When the goods have market value? (b)
When they have no market value?
(3) Is the plaintiff bound to keep the damages down? How
and to what extent ?
Case 190. McKinley v. Goodman, 67 111. Ap. 374.
Facts: G. was a cook and caterer and was employed
by M. to run a lunch counter at Bay City, Michigan. She
claimed that her contract with M. was for a term from
June 15 to September 1, 1894, and that after working
one month she was wrongfully discharged.
Point Involved: The duty of an employee wrongfully
discharged to reduce the damages by seeking employ-
ment elsewhere.
Mr. Presiding Justice Boggs: * * The,meas-
ure of damages of the plaintiff, if found entitled to re-
cover, is the agreed or contract price during the unex-
pired period, less any sum the plaintiff has earned, or
might have earned, by the exercise of reasonable effort
to obtain other employment in the same line or general
nature of business. * * *
"* * * Appellee was not required to hunt for em-
ployment in occupations different in their general nature
and character from her avocation. * * *
Question 190: What is the duty of an employee wrongfully
discharged to seek employment elsewhere?
REMEDIES OF THE PARTIES 369
B. Bill for Specific Performance.
§ 180. General rule.
§ 181. Contracts for sale of realty or interest thereon.
§ 182. Contracts for sale of personal property.
§ 183. Contracts for personal services.
§ 180. (Contracts, Sec. 148.) General rule.
(Note: The general rule is that a Court will not grant
specific performance of contracts. The party must seek his
remedy for damages in a court of law. Specific performance is
awarded only in cases in which damages are not considered an
adequate remedy. See following sections.)
§ 181. (Contracts, Sec. 149.) Contracts for the sale of
real estate or an interest therein.
Case 191. Kitchen v. Herring, 42 North Carolina Re-
ports, 190.
Facts: Bill for specific performance of contract to
sell some timber land. Defendant contends that inas-
much as the land is chiefly valuable on account of the
timber, it is practically a sale of timber and specific per-
formance ought not to be awarded.
Point Involved: Whether a court will award specific
performance of a contract to sell real estate.
Peakson, J.: "* * * The principle in regard to
land [i. e. that equity will award specific performance
of contracts for its sale] not because it was fertile or
rich in minerals, or valuable for timber, but simply be-
cause it was land—a favorite and favored subject in
England and every country of Anglo Saxon origin. Our
constitution gives to land pre-eminence over every other
species of property; and our law whether administered in
courts of law or equity, gives it the same preference.
* # * The principle is, that land is assumed to have
a peculiar value, so as to give an equity for a specific
performance, without reference to its quality or quantity.
* * * j >
Question 191: Is there in every instance in contracts for the
purchase of real estate, a right of specific performance? What
370
CONTRACTS
is the principle on which this right is based? Why did defend-
ant claim that the general rule of law did not apply in his case ?
Was he sustained by the court?
(Note: If a contract is harsh or unjust, a court of equity
may refuse specific performance on ihat ground; but merely
because defendant did not get all that the land is worth is no
ground for refusing plaintiff specific performance.)
§ 182. (Contracts, Sec. 150.) Contracts for sale of
personalty.
Case 192. Cud v. Rutter, 1 P. Williams, 570.
The defendant, in consideration of two guineas paid
down, did by note under hand agree to transfer 1000 1.
South-Sea stock at a fixed price at the end of three weeks;
the plaintiff on the day demanded the stock, and offered
to pay the price; but on the defendant's insisting that
he would only pay the difference, and not transfer the
stock, the plaintiff brings this bill for a specific perform-
ance, and to have the stock assigned.
Objected, That the compelling a specific execution of
contracts must be allowed to be discretionary in this
Court, and there was not a single instance or precedent,
where it had been done in such a case as this; that the
plaintiff was put to no inconvenience, since the defendant
had offered, and by his answer continued to offer, to
pay the difference; that the plaintiff might for asking
have the same quantity of stock anywhere upon the ex-
change. Indeed, had the agreement been for a house
or land, which might be a matter of moment and use, in
that case (supposing all things to have been fairly trans-
acted), there might be some reason why equity should
execute such agreement; but in a matter of so little con-
sequence as the present case, there could be no neces-
sity for this Court to interpose.
Cur': The plaintiff ought to have an execution of
the contract; for the agreement is a fair one, and in
writing, and part of the money paid. Suppose the whole
money had been paid, should not equity have executed it?
if so, where is the difference betwixt a great sum and
REMEDIES OF THE PARTIES
371
a small one? if the agreement had been to transfer stock
or pay the difference, this might have looked like stock-
jobbing; but the plaintiff, as is proved in the cause, re-
fused to let the note be so penned, notwithstanding that
the defendant had desired it. Decreeing an execution
of such an agreement, is beating down and preventing
stock-jobbing. Wherefore let the defendant transfer
1000 1. South-Sea stock accounting for the dividends,
and paying the costs; and let the plaintiff pay the de-
fendant interest for the money from the time that it
ought to have been paid, according to the contract.
But afterwards on an appeal, the Lord Chancellor
Parker reversed this decree, delivering his opinion with
great clearness, that a court of equity ought not to exe-
cute any of these contracts, but to leave them to law,
where the party is to recover damages, and with the
money may if he pleases buy the quantity of stock
agreed to be transferred to him; for there can be no dif-
ference between one man's stock and another's. It is
true, one parcel of land may vary from, and be more
commodious, pleasant, or convenient than another parcel
of land, but 1000 1. South-Sea stock, whether it be A.
B. C. or D.'s is the same thing, and in no sort variant;
and therefore let the plaintiff, if he has a right, recover
in damages with which when received, he may buy the
stock himself.
Question 192: What is the relief prayed for in this case?
Was it granted? Why?
(£Tote : It is the general rule that contracts for the sale of per-
sonal property will not be specifically enforced. Damages only
will be awarded. But see the following case for exception.)
Case 193. P. & F. Corbin v. Tracy, 34 Conn. Reports,
325.
Facts: Bill in equity brought to compel the specific
performance of a contract to assign a patent right.
Point Involved: Generally, when courts will decree
the specific performance of a contract; whether a con-
tract to assign a patent right will be specifically enforced.
372
CONTRACTS
Carpenter, J.: "Under the motion in error, it is ob-
jected that the petitioners have not made out a case for
the interference of a conrt of equity; that courts of equity
in this state will not interfere to enforce agreements to
sell personal property unless the circumstances are such
as to make a trust, because there is in such a case a
remedy at law by an action for damages.
"The objection assumes that there is a distinction in
questions of this character between real and personal
property. If any such distinction exists it does not go
to the extent claimed.
"The ground of the jurisdiction of a court of equity
in this class of cases, is, that a court of law is inadequate
to decree a specific performance and can relieve the in-
jured party only by a compensation in damages, which
in many cases would fall far short of the redress which
the situation might require. Whenever, therefore, the
party wants the thing in specie and he cannot otherwise
be fully compensated courts of equity will grant him a
specific performance. They will decree the specific per-
formarice of a contract for the sale of lands, not because
of the peculiar nature of the land, but because a party
cannot be adequately compensated in damages. So in
respect to personal estate; the general rule that courts
of equity will not entertain jurisdiction for a specific
performance of agreements respecting goods, chattels,
stocks, choses in action, and other things of a merely
personal nature, is limited to cases where a compensa-
tion in damages furnishes a complete and satisfactory
remedy. 2 Story's Eq. Jur. sees. 717, 718.
'' The jurisdiction, therefore, of a court of equity does
not proceed upon any distinction between real estate and
personal estate, but upon the ground that damages at
law may not, in the particular case, afford a complete
remedy. 1 Story's Eq. Jur. sees. 716, 717, 718, and cases
there cited; Clark v. Flint, 22 Pick. 231. When the rem-
edy at law is not full and complete, and when the effect
of the breach cannot be known with any exactness, either
because the effect will show itself only after a long time,
REMEDIES OF THE PARTIES 373
or for any other reason, courts of equity will enforce
contracts in relation to personalty. 3 Parson on Con-
tracts. (5th Ed.) 373.
"An application of these principles to the case before
us, relieves us of all difficulty. The contract relates to a
patent right the value of which has not been tested by
actual use. All the data by which its value can be esti-
mated are yet future and contingent. * * * In any
event its value cannot be known with any degree of exact-
ness until after the lapse of time. * * * On the
whole, we are satisfied that justice can only be done in
a case like this by a specific performance of the contract.''
Question 193: (1) To what sort of remedy is a court of
law (as distinguished from a court of equity) mainly confined?
(2) "What is specific performance? (3) On what grounds will
it be granted? (4) Will a decree for specific performance be
granted in case of contracts to sell real estate? (5) In case of
contracts to sell personal property? (6) In case of contracts to
render personal services?
(2) A contracts with B to sell B 100 bushels of wheat. Can
A compel the specific performance of this contract? Why?
§ 183. (Contracts, Sec. 151.) Contracts for personal
services.
(Note: Specific performance of such contracts will not be
awarded.)
C. Bill for Injunction.
§ 184. (Contracts, Sec. 152.) Whether the court will
enjoin breach of contract.
Case 194. Set out as Case 55, supra.
Question 194: As a general rule will courts enjoin the breach
of a contract? When will such breach be enjoined? Did the
court enjoin the breach of the contract in the above case?
DIVISION C
PRINCIPAL AND AGENT
DIVISION C
PRINCIPAL AND AGENT
Part I. Nature and Formation of Agency.
Part II. The Duties and Liabilities Arising Out of the
Agency.
Part III. Professional Agents.
Part IV. Termination of Relationship.
PART I
NATURE AND FORMATION OF AGENCY
Chapter 23. Definitions.
Chapter 24. Capacity of Parties and Power of Delega-
tion.
Chapter 25. The Appointment of the Agent.
Chapter 26. Authorization by Ratification.
377
CHAPTER 23
DEFINITIONS
§ 185. Nature of agency.
§ 186. The responsibility of the principal or master.
§ 187. The principal and agent as one person.
§ 188. Kinds of agencies.
§185. (Agency, Sec. 1.) Nature of agency.
Case 195. Mechem, Agency, Sec. 25, 26 and 36.
"Sec. 25. Agency defined. The word agency when
used in its broad meaning as pointed out in the preceding
chapter indicates the relation which exists when one per-
son is employed to act for another. In this aspect, it
has, in our modern law, three chief forms: 1. the re-
lation of principal and agent; 2. the relation of master
and servant, or in the more modern phrase, the relation
of employer and employee; and 3. the relation of em-
ployer or proprietor and independent contractor. All
of these have some points of similarity, hut at the same
time many aspects of real distinction.
"Of the three forms here suggested the one with which
this work has chiefly to do, is the first or the relation
of principal and agent. At the same time the three re-
lations, and particularly the first two, are so closely
related, and the actor in these first two forms so fre-
quently acts in both capacities or so largely combines
them both in his own person that it is convenient and
often desirable to consider them side by side. More-
over, even though they be distinct, the rules which govern
one relation are so frequently identical with those which
apply to the other, that one statement will suffice for
both; and illustrations may be freely drawn from either
field. * * *
"Sec. 26. Principal and agent. The relation of prin-
cipal and agent, or the relation of agency in the narrower
sense in which it is chiefly employed in this work, is the
legal relation which exists where one person, called the
agent, is authorized—usually by the act of the parties,
but occasionally perhaps, by operation of law, to repre-
378
DEFINITIONS
379
sent and act for another, called the principal, in the con-
tractual dealings of the latter with third persons. The
distinguishing features of the agent may briefly he said
to he his representative character and his derivative au-
thority. * * *
"Sec. 36. How agent compares with servant. The
distinction between the relation of principal and agent
and that of master and servant is not always easy to
define. As has been seen, the relation of principal and
agent is of comparatively late development in our law;
it was preceded by the relation of master and servant,
and from the law respecting that relation, the earliest
precedents concerning agents were drawn. The two re-
lations are therefore very closely allied, and it is some-
times said they are not distinguishable. Nevertheless,
notwithstanding this common origin, it is entirely pos-
sible to distinguish them, the line of distinction seems
in the main to be a logical and natural rather than a
purely artificial one; and there can be no doubt that now
for many years there has been developing a body of
law known as the law of agency or of principal and agent
and that a distinction between this relation and that
of master and servant has come to be generally recog-
nized. It is upon the basis of this fact that the present
discussion proceeds and an attempt is made to show
what the line of demarcation is thought to be.
"The characteristic of the agent is that he is a busi-
ness representative. His function is to bring about,
modify, affect, accept performance of, or terminate, con-
tractual obligations between this principal and third per-
sons. To the proper performance of his functions, there-
fore, it is absolutely essential that there shall be third
persons in contemplation between whom and the prin-
cipal, legal obligations are to be thus created, modified
or otherwise affected by the acts of the agent.
"The function of the servant on the other hand, as
his name suggests, is the rendition of service,—not the
creation of contractual obligations. He executes the com-
mands of his master, chiefly in reference to things, but
occasionally with reference to persons when no con-
tractual obligation is to result.
380
AGENCY
Question 195: (1) In what three possible situations may
one person, employ another to act for him ?
(2) When does the relation of principal and agent exist?
(3) What distinguishes a servant from an agent ?
(4) May the same person be employed under one contract to
perform acts that are those of service, and acts that are those of
agency?
(5) P employs A to take charge of a small store owned by P.
A's duties are (a) to purchase goods; (b) to sell goods; (c) to
keep the store in order; (d) to keep a set of books; (e) to
collect accounts. In which of these cases is he agent, and which
servant ?
(Note : The words '' agent'' and '' agency'' are frequently
loosely used. A person will be spoken of as having an "agency
when he carries the goods of another person although he buys
and resells such goods and carries his own accounts. Thus, it
will be said that John Doe has the agency for the "Excelsior
tires, when in no respect is he really employed by the Excelsior
Tire Co., and in no respect has any authority to contract in the
name of that Company. He is a mere retailer with a contract
under which he buys and resells Excelsior Tires. But on the
other hand he might indeed have an agency.)
Case 196. Echols, Defendant v. State, 158 Alabama
Reports, 48.
Facts: Echols "was indicted for the crime of embezzle-
ment and convicted in the lower court. The charge
against him was that he, "being an agent, servant or
clerk of affiant (the prosecuting witness), embezzled or
fraudulently converted to his own use money to about
the extent of $18.00. The evidence was that Echols was
a tailor and agreed to make a suit of clothes for the
prosecuting witness for part cash and part future pay-
ment. That the part cash ($18.00) was paid, that de-
fendant Echols wrongfully refused to deliver the clothes
without a further payment and also refused to return
the $18.00.
(Note: The crime of embezzlement is the crime of fel-
oniously appropriating to one's own use funds which one has
in his possession belonging to another, as the case of an agent
who takes the funds which he has in charge. It differs from
theft or larceny which are crimes involving wrongful taking. Id
DEFINITIONS
381
embezzlement the taking is lawful, but the appropriation is
felonious.)
Point Involved: What circumstances constitute one an
agent ? Is a tailor who contracts to make a suit of clothes
for a customer an agent (or servant) or is he an inde-
pendent contractor? Is money paid on account by the
customer for such suit of clothes the money of the cus-
tomer in the hands of the tailor, or is it the tailor's
money?
Simpson", J.: "This Court said in discussing a former
statute # * # that an agent is 'one who undertakes
to transact some business or to manage some affair for
another, by the authority and on account of the latter
and to render an account of it;' also that ' "agent so
employed in this section, imports a principal, and im-
plies employment, service, delegated authority to do
something in the name and stead of the principal.' Pul-
lam v. State, 78 Ala. 31, 34, 56, Am. Rep. 21. The rela-
tion of principal and agent did not exist between the
prosecutor and the defendant, but the relation of seller
and purchaser. The defendant did not undertake to do
anything in the name and stead of the prosecutor. The
money was not placed in his hands to be used or cared
for, and accounted for to the prosecutor, but was paid
to him in part settlement for a suit of clothes, and thereby
became the money of the defendant to use as he pleased.
Whatever other liability or penalty the defendant may
have incurred, he could not be convicted of embezzlement
on the facts of this case. # * *
Question 196: C makes a contract with A, whereby A is to
furnish the cloth and make C a suit of clothes for a specified
price. A employs E, a journeyman tailor in his shop, and sends
the coat out to M, a coat maker, to be made in M's shop. A
sends X, a clerk, to buy the cloth for the suit from Y. Are any
of these parties, agents or servants of C ? What is the relation-
ship to A, of E, of M, of X and of Y ?
Case 197. Singer Mfg. Co. (Defendant) v. Rahn
(Plaintiff), 132 United States Reports, 518.
Facts: Katie Rahn sued the Singer Mfg. Co. for dam-
ages for personal injuries sustained by the alleged neg-
382
AGENCY
ligence of one Corbett who sold defendant's sewing
machines, using a horse and wagon furnished by the
Singer Company. The provisions of the contract are
set forth in the opinion below. The plaintiff, Balm,
claims that Corbett was an agent (or servant) of the
Singer Company and that they are liable for his negli-
gence in doing his work. The Singer Company claims
that Corbett was not employed by it, but merely was an
independent contractor.
Point Involved: What facts determine where one is
an agent (or servant) or independent contractor?
Gray, J.: "The general rules that must govern this
case are undisputed, and the only controversy is as to
their application to the contract between the defendant
company and Corbett, the driver, by whose negligence
the plaintiff was injured.
"A master is liable to third persons injured by negli-
gent acts done by his servant in the course of his em-
ployment, although the master did not authorize or know
of the servant's act or neglect, or even if he disapproved
or forbade it. Philadelphia & Beading Bailroad v. Derby,
14 How. (U. S.) 478, 486. And the relation of master
and servant exists whenever the employer retains the
right to direct the manner in which the business shall be
done, as well as the result to be accomplished, or, in other
words, 'not only what shall be done, but how it shall be
done.' Bailroad Co. v. Hanning, 15 Wall. (U. S.) 649,
656.
"The contract between the defendant and Corbett,
upon the construction and effect of which this case turns,
is entitled 'Canvasser's Salary and Commission Con-
tract.' The compensation to be paid to Corbett by the
company, for selling its machines, consisting of a ' selling
commission' on the price of machines sold by him, and
'a collecting commission' on the sums collected of the
purchasers, is uniformly and repeatedly spoken of as
made for his 'services.' The company may discharge
him by terminating the contract at any time, whereas
he can terminate it only upon ten days' notice. The com-
pany is to furnish him with a wagon; and the horse and'
DEFINITIONS
383
harness«to be furnished by him are 'to be used exclusive-
ly in canvassing for the sale of said machines and the
general prosecution of said business.'
"But what is more significant, Corbett 'agrees to give
his exclusive time and best energies to said business,'
and is to forfeit all his commissions under the contract,
if, while it is in force, he sells any machines other than
those furnished to him by the company, and he 'further
agrees to employ himself under the direction of the said
Singer Manufacturing Company, and under such rules
and instructions as it or its manager at Minneapolis
shall prescribe.'
"In short, Corbett, for the commissions to be paid
him, agrees to give his whole time and services to the
business of the company; and the company reserves to
itself the right of prescribing and regulating not only
what business he shall do, but the manner in which he
shall do it; and, if it saw fit, might instruct him what
route to take, or even at what speed to drive.
"The provision of the contract, that Corbett shall not
use the name of the company in any manner whereby the
public or any individual may be led to believe that it is
responsible for his actions, does not and cannot affect
its responsibility to third persons injured by his negli-
gence in the course of his employment.
"The circuit court therefore rightly held that Corbett
was the defendant's servant, for whose negligence in the
course of his employment, the defendant was responsible
to the plaintiff. * * *
Question 197: (1) State in detail what facts led the Court
to determine that the salesman was an agent or servant.
(2) A desiring to construct a house on his land procures B,
a building contractor, to do the work which is to be completed
to the satisfaction of A's architect. B contracts with various
parties to do particular parts of the work. One of these is C,
an employing painter, who is to do all the painting for a certain
lump price. D, a painter, works for C. By his negligence he
injures M. Is C, B, or A liable ?
Case 198. Kingan & Co. v. Silvers, 13 Ind. App. 80.
Facts: Suit against W. F. Silvers and James Silvers
upon a note made by the Silvers to order of Kingan &
384
AGENCY
Co. The complaint set forth the note and alleged that
it had been procured from defendants by plaintiffs'
traveling salesman, one Nichols, an agent employed to
sell goods, but having no authority to take notes or make
settlements for plaintiffs. That said salesman being
about to go to Lebanon, Indiana, to take orders for goods,
was instructed to procure a promissory note from de-
fendants for $388.03 on account of an indebtedness to
plaintiff; that he did procure such note and afterwards
and without plaintiffs' knowledge he altered it by erasing
"after maturity and inserting "from date so that
the note was made by its terms to bear 8% from date
instead of after maturity, that plaintiffs claim on the
note in its original condition, repudiating Nichols ' act
in altering the note.
Defense (in form of demurrer) that the complaint
shows that plaintiffs by their agent are guilty of a pur-
poseful and material alteration of the note and there-
fore have no right thereupon.
Point Involved: The difference between an agent and
a servant; what sort of duties make one an agent, and
what, a servant; the power of the agent and the servant
to represent the principal for contractual purposes with
third persons.
Lotz, J.:  * * * The most effectual means of pre-
serving the integrity of such instruments are the rule
that a material alteration destroys the instrument so
that no recovery can be had upon it either in its original
or altered condition, and the rule that no recovery can
be had upon the original consideration if the change he
made for a fraudulent purpose. * * *
"* * * The change in the note was not made by
the plaintiffs' order or direction, but it entrusted certain
business to another as its agent, and such person made
the alteration. If the alteration was made by the agent
while in the transaction of the principal's business, and
in the scope of his authority, then the act of the agent is
the act of the principal,—"qui facit per alium, facit per
se.
"* # * If he was the plaintiffs' agent and the act
DEFINITIONS
385
was within the scope of his authority, then his act must
be deemed the act of the plaintiffs, and the law is with
the defendants. If his position was that of a mere
stranger to the note then the law is with the plaintiffs.
t<# # * ^ time Nichols made the alteration of
the note, was he the agent or servant of the plaintiff in
respect to his duties pertaining to said note. * * *
Nichols was the agent of the plaintiff * * * to pro-
cure the note. * * * Did his relation as agent cease
when he obtained the note, or did it continue until the
note was delivered to the plaintiff? * * * This leads
to the inquiry who are agents and who are servants? In
the primitive conditions of society the things which were
(he subjects of sale and trade were few in number. There
was little occasion for any one to engage in commercial
transactions, and when it did become necessary the busi-
ness was generally transacted by the parties thereto in
person. But the strong and powerful had many servants
who were usually slaves. The servants performed menial
and manual services for the master. As civilization ad-
vanced the things which are the subjects of commerce
increased, and it became necessary to perform commer-
cial transactions through the medium of other persons.
The relation of principal and agent is but an outgrowth
or expansion of the relation of master and servant. The
same rules that apply to the one generally apply to the
other. There is a marked similarity in the legal conse-
quenees flowing from the two relations. It is often diffi-
cult to distinguish the difference between an agent and a
servant. Agents are often denominated servants and
servants are often called agents. The word 'servant' in
its broadest meaning includes an agent. There is, how-
ever, in legal contemplation a difference between an agent
and a servant. The Romans, to whom we are indebted
for many of the principles of agency, in the early stages
of their laws used the terms mandatum (to put into one's
hands or confide to the discretion of another) and ne-
gotium (to transact business or to treat concerning pur-
chases) in describing this relation. Story Agency, sec-
tion 4. Agency, properly speaking, relates to commer-
cial or business transactions, while service has reference
386
AGENCY
to actions upon or concerning things. Service deals with
matters of manual or mechanical execution. An agent is
the more direct representative of the master and clothed
with higher powers and broader discretion than a serv-
ant. Mechem Agency, sections 1 and 2.
"The terms 'agent' and 'servant' are so frequently
used interchangeably in the adjudications that the reader
is apt to conclude that they mean the same thing. We
think, however, that the history of the law bearing on
this subject, shows that there is a difference between
them. Agency in its legal sense always imports com-
mercial dealings between two parties by and through the
medium of another. An agent negotiates or treats with
third parties in commercial matters for another. "When
Nichols was engaged in treating with the defendants con-
cerning the note he was an agent. When the note was
delivered to him it was in law delivered to the plaintiff
and-he ceased to treat.or deal with the defendants. All
his duties concerning the note then related to the plain-
tiff. It was his duty to carry and deliver it to the
plaintiff. In doing this he owed no duty to the defend-
ants. He ceased to be an agent because he was not re-
quired to deal further with third parties. He was then
a mere servant of the plaintiff charged with the duty of
faithfully carrying and delivering the note to his master.
When Nichols made the alteration in the note he was the
servant and not the agent of the plaintiff. * * *
"Modern jurisprudence properly and justly limits the
liability of the master to the acts of his servant done
within the scope of the employment. There is still
substantial and just grounds for the principle that the
master is liable for the wrongful acts of his servant.
No liability arises against the master for the wrongful
acts of his servant unless the servant has perpetrated an
injury upon either the person or property of another.
Nichols was the servant of the plaintiff when he made
the alteration of fhe note. But did he inflict any injury
upon the property of the defendant? Certainly not. The
injury, if any, was inflicted by the servant upon the prop-
erty of his own master, and not upon the property of
the defendants. * * * The principle that the master
DEFINITIONS
387
is liable for the tortious acts of his servant committed
in the line of the employment has no application to the
facts of this case, for no injury was done to the defend-
ant's property.
Question 198: (1) What were the facts in this case, the
question presented and the Court's decision?
(2) What is the nature of the duties that make one an agent ?
A servant?
(3) For what purpose was Nichols an agent, and for what
a servant in this case ?
§ 186. (Agency, Sec. 2.) The responsibility of the
principal or master.
(Note : The cases under the other appropriate sections render
none necessary here. The idea underlying the relationship of
Principal and Agent and Master and Servant is that the Prin-
cipal, or Master, is responsible for that which he has employed
the Agent or Servant to do, as though he had done it himself.
It is the principal's act, done through the agency of another.
Two maxims frequently are quoted to express this fundamental
idea of Agency <(Qui facit per alium facit per se and "Re-
spondeat superior.")
§187. (Agency, Sec. 3.) The principal and agent as
one person.
(Note: The theory of the law is that the act of the agent or
servant is the act of the principal or agent. When the agent qr
servant does the act, the principal or master does it. It is his
act. See remarks of Holmes, J. in Case No. 211 post, and re-
marks of Peters, J. in Lyon & Co. v. Kent, Case No. 199 post.)
§ 188. (Agency, Sec. 4.) Kinds of agencies.
(Note: Agents are classified
(1) From standpoint of extent of authority into
(a) General agents;
(b) Special agents.
(2) From standpoint of responsibility of agent to principal
(a) Agents del credere;
(b) Agents not del credere.
(3) From standpoint of skill or profession
(a) Non-professional agents;
(b) Professional agents.)
CHAPTER 24
CAPACITY OF PARTIES AND POWER OF
DELEGATION
§ 189. (Agency, Sec. 5.) In general.
(See cases in following sections.)
A. Power to be principal or agent as dependent upon capacity to contract.
B. Power to be principal or agent as dependent upon nature of act in-
volved.
A. Power to Be Principal or Agent as Defendant Upon
Capacity to Contract.
§ 190. General rule as power to be principal.
§ 191. Minors as principals.
§ 192. Corporations as principals.
§ 193. Power to act as agent.
§ 190. (Agency, Sec. 6.) General rule as power to be
principal.
Case 199. Lyon & Co. v, Kent, 45 Alabama Reports,
656.
Peters, J.: ''It is the undoubted law of agency, that
a person may do through another what he could do him-
self in reference to his own business and his own prop-
erty; because the agent is but the principal acting in
another name. The thing done by the agent is, in law,
done by the principal. This is axiomatic and funda-
mental. It needs no authorities to support it. Qui facit
per alium, facit per se. Broom's Maxims, marg.; 1 Par-
sons' Contract, 5th Ed., p. 39 et seq.; Story's Agency,
sec. 440. And to this it may be added, that an agent in
dealing with the property of his principal must confine
388
CAPACITY OF PARTIES
389
his acts to the limit of his powers; otherwise the pfin-
cipal will not be bound. * * * And it is also the
duty of one dealing with an agent to know what his
powers are, and the extent of his authority.
Question 199: (!) Generally speaking, may one do any
business act through another that he might personally do ?
(2) Has an agent any more power than the principal gives
him?
§ 191. (Agency, Sec. 7.) Minors as principals.
(Note: See Case No. 21 in Contracts.)
§ 192. (Agency, Sec. 7.) Corporations as principals.
(Note: See powers of corporations under title Corporations,
Division G post.)
§ 193. (Agency, Sec. 9.) Power to act as agent.
Case 200. Lyon & Co. v. Kent, 45 Ala. 656.
Peteks, J.: 1' * * * Any one, except a lunatic, im-
becile, or child of tender years, may be an agent for
another. It is said by an eminent author and jurist,
that 'it is by no means necessary for a person to be sui
juris, or capable of acting in his or her own right, in
order to qualify himself or herself to act for others.
Thus, for example, monks, infants, femes covert, persons
attainted, outlawed or excommunicated, villeins and
aliens may be agents for others.' Story's Agency, 6, 7, 9.
So, a slave, who is homo non civilis, a person who is but
little above a mere brute in legal rights may act as the
agent of his owner or his hirer. Powell v. The State,
27 Ala. 51; Stanley v. Nelson, 28 Ala. 514.
Question 200: Why may a person act as agent when he is
without power to do the same act as principal ?
(Note: The power to act as agent is of course to be distin-
guished from the power to make a binding contract of agency.
390
AGENCY
If I employ a child to buy goods for me on my credit I am
bound if he follows out his authority, but the child could of
course disaffirm his employment with me at any time.)
B. Power to Be Principal or Agent as Defendant Upon
Nature of Act Involved.
§ 194. Appointment of agent for illegal purpose.
§ 195. Acts not delegable because general public policy forbids.
§ 196. Personal duties imposed by contract not delegable.
§ 194. (Agency, Sec. 10.) Appointment of Agent for
Illegal Purpose.
Case 201. Mills v. Mills, 40 New York Beports, 543.
(Set out as Case No. 109, supra.)
§ 195. (Contracts, Sec. 11.) Acts not delegable because
general public policy forbids.
(Note: Some acts may not be delegated because of their per-
sonal nature. Public officers cannot delegate judicial and discre-
tionary powers; directors and trustees cannot delegate their
powers except as matters of administration. Citizens cannot
delegate power to vote at the polls; an agent cannot delegate the
personal duties he has been employed to perform.)
§ 196. (Contracts, Sec. 12.) Personal duties imposed by
contract not delegable.
(This is exemplified by cases, post, on duties of agent.)
CHAPTER 25
THE APPOINTMENT OF THE AGENT
A. Authorization by act of party.
B. Authority conferred by law.
A. Authorization by Act of Party.
§ 197. In general.
§ 198. Formalities required in appointment of agent.
§ 199. Elements essential in appointment of agent.
§ 197. (Agency, Sec. 13.) In general.
Case 202. Central Trust Co. v. Bridges, 57 Federal
Reports, 753.
Facts: Proceedings to foreclose a mortgage on rail-
road property. Petitions filed in the proceedings by
certain creditors to establish and enforce mechanic's
liens against the property involved, under a statute giv-
ing principal contractors mechanic's liens. To come
within the benefit of this statute, it is necessary for the
creditors to show that they were main contractors, not
subcontractors, that is, that they contracted directly with
the railroad (acting through its agents) and not with
those who as independent contractors had contracts with
the railroad. That is to say, the petitioner Bridges must
show that when he contracted with Eager, with whom
he dealt, Eager was acting as an agent of the railroad
company, for if Eager was simply a general or independ-
ent contractor, then Bridges' contract was with Eager
and not with the railroad company, and Bridges was
a subcontractor and not a main contractor.
Point Involved: That one will not be deemed as the
principal of another in the other's contracts with third
persons, except upon facts showing, either that he had
391
392
AGENCY
actually conferred authority upon the person acting as
agent or has apparently done so.
Taft, J.:  * * * The theory upon which the mas-
ter and the learned Court below held that all the inter-
vening petitioners dealt directly with the Knoxville
Southern Railroad Company as principal contractors
was that Eager was an agent of the railroad company
in making the contracts. One may be liable for the acts
of another as his agent on one of two grounds: first, be-
cause by his conduct or statements he has held the other
out as his agent; or, second, because he has actually con-
ferred authority on the other to act as such. The master
reported to the Court below that in no case did Eager,
under or in the name of the Knoxville Southern Railroad
Company, make any contract with any one doing work
or furnishing material for the road; that the men who
contracted with Eager knew very little of Eager, saw
him only occasionally, made no inquiry into his real
relation to the company, what interest he had in it, or
how he obtained money to carry on the work. In sub-
stance, the master reported that the intervening peti-
tioners believed they were dealing with Eager as princi-
pal contractor. The proof fully sustains this conclusion.
"It follows, necessarily, that Eager was not the agent
of the company in contracting with the petitioners for the
construction of the road unless the company had in fact
conferred authority upon him to act as its agent in the
matter. An agency is created—authority is actually
conferred—very much as a contract is made, i. e., by an
agreement between the principal and agent that such a
relation shall exist. The minds of the parties must meet
in establishing the agency. The principal must intend
that the agent shall act for him, and the agent must in-
tend to accept the authority and act on it, and the inten-
tion of the parties must find expression either in words
or conduct between them. * * *
"* * * In the case at bar, the master fully admits
there was no holding out of agency in Eager by the coim
APPOINTMENT
393
pany. His finding that an agency in fact existed rests
simply on the influence which Eager had over the com-
pany and not in the intention of either that Eager should
act as its agent in the construction of the road, and his
conclusion is reached in the face of the fact which he
fully admits, that they both intended Eager to be an
independent contractor. The master's conclusion cannot
be supported. * * *
Question 202: "What would it have been necessary for the
claimants to show in this case in order to establish that Eager
could bind the company as its agent ?
(Note: 4We will notice hereafter that the actual conferring
of the authority may be done by previous appointment or by
ratification. But in either case the authority of the agent must
be in some way traced back to the principal's acts or statements.)
§198. (Agency, Sec. 14.) Formalities required for ap-
pointment of agent.
(.a) As required by statute of frauds.
(b) To execute instruments under seal.
(a) As Required by Statute of Frauds.
(Note: The 4th and 17th Sections of the Statute of Frauds
made contracts of various sorts unenforceable unless there was
evidence in writing signed by the party sought to be charged or
by his agent thereunto lawfully authorized. The memorandum
and the signature could be by agent and it was not necessary
that the authority of the agent be in writing. If P appointed A
to make a contract with C, which was covered by the statute of
frauds, it was a defense if P sued C, or if C sued P, that the
plaintiff had no sufficient written evidence signed by the de-
fendant (or his agent), but it was no defense that the agent's
authority was not in writing. This is still the law unless, by local
statute, certain forms of authority must be in writing, as for
instance, in Illinois, that a contract to sell real estate is not
enforceable against the seller unless not only there is written
evidence of the contract but written authority to the agent.)
394
AGENCY
(b) To execute Instruments Under Seal.
Case 203. Hanford v. McNair, 9 Wend. (N. Y.) 54.
Facts: This case is a suit brought on a contract under
seal executed in the principal's name by an agent whose
authority to make the contract was not under seal.
Point Involved: Whether an agent having authority
to bind his principal on a contract under seal must for
that reason have his authority under seal.
Sutherland, J.: ''It is an insuperable objection to the
plaintiff's recovery in this action, that no competent au-
thority from the defendant to Bush is shown to execute
the covenant on which the suit is found. An agent cannot
bind his principal by deed [instrument under seal] unless
he has authority by deed to do so. The only exception to
the rule that the authority to execute a deed must be by
deed, is where the agent or attorney fixes the seal of the
principal in his presence and by his direction. * * *
Question 203: "What was the rale as announced in this case
(being the common law rale as to the requisite character of an
authority to execute an instrument under seal) ?
(Note: This rule would not apply in states in which the
character of an instrument under seal has been destroyed by
legislation. Many modern cases also hold that where an agent
is appointed by appointment not under seal to execute a contract
not under seal, his addition of a seal may be treated as a super-
fluity and the contract regarded as an unsealed agreement.
An agent need not have authority in writing to execute a con-
tract in writing, unless in some particular cases, the local statute
requires it.)
(Note: The suggestion in the case that if the agent or attor-
ney fixes the seal of the principal in the principal's presence and
by his direction the authority need not be under seal, is based up-
on the law that a person who in the presence and at the direc-
tion of another merely does some manual act, he is not really
that person's agent but a "mere mechanical aid or instrument
or "a mere tool. (Mechem on Agency, 2nd Ed., Sec. 63.)
APPOINTMENT
395
§ 199. (Agency, Sec. 15.) Elements essential in appoint-
ment of agent.
(Note: An agency is generally, but not necessarily con-
tractual, as between principal and agent. There need be no con-
sideration. A friend of mine may act as my agent gratuitously.
To be a binding agreement between principal and agent, there
must of course be the elements of contract.)
B. Authority Conferred by Law.
§ 200. In general.
§ 201. Authority of wife to bind husband.
§202. Authority of child to bind parent.
§ 203. Statutory liability for family expenses.
§ 200. (Agency, Sec. 16.) In general.
(Note: Where the one person has a legal power to bind
another on contracts by reason of a legal relationship existing,
the situation is not one of true agency. In this connection, one
should keep in mind the distinction between the power conferred
by law, and the power that may exist in fact. Thus a wife has
a certain power, conferred by law, to bind her husband for the
price of necessaries procured by her. But this same wife might
have other authority or apparent authority than the authority
conferred by law.)
§ 201. (Agency, Sec. 17.) Authority of wife to bind
husband.
(Note : By common law, a wife may bind the husband for her
necessaries. If the husband is supplying, the articles although
of the sort that would otherwise be necessaries, are not neces-
saries. The husband cannot deprive his wife of this authority;
although she loses it by living apart from him by her own fault.
The merchant must take the risk as to whether she is actually
supplied.)
§ 202. (Agency, Sec. 18.) Authority of child to
bind parent.
Case 204. Hunt v. Thompson, 3 Scammon's Illinois
Reports, 179, 36 American Decisions, 538.
396
AGENCY
Wilson, C. J.: "This is an action against the father,
for clothes furnished his infant son, under the following
circumstances, as appears from the bill of exceptions. In
the fall of 1838, the son, with the approbation of his
father, who resided in Kentucky, came to Jacksonville, in
this State, upon a visit to his friends in that vicinity. He
was suitably provided with apparel for the occasion; but
before the next spring, to which time he prolonged his
visit, his clothes became considerably worn, and some of
them too small, and the plaintiff made him a suit of
clothes, for which this action is brought. It also appears,
that the youth did not live with his friends, but took
boarding at a tavern in Jacksonville, and contracted this
and other debts, which his friends considered extrava-
gant and of which they informed his father, who immedi-
ately gave notice, by letters, that he would not pay his
son's debts; but it does not appear that the plaintiff in the
Court below had notice of this fact. Heretofore the
father had always furnished his son with clothes suitable
to his circumstances, which were easy.
i i * * #
"That a parent is under obligation to provide for the
maintenance of his infant children, is a principle of nat-
ural law; and it is upon this natural obligation alone, that
the duty of a parent to provide his infant children with
the necessaries of life rests; for there is no rule of munici-
pal law enforcing this duty. The claim of the wife upon
the husband, for necessaries suitable to his rank and for-
tune is recognized by the principles of the common law,
and by statute. A like claim to some extent, may be en-
forced in favor of indigent and infirm parents, and other
relatives, against children, &c., in many cases; but, as a
general rule, the obligation of a parent to provide for his
offspring, is left to the natural and inextinguishable affec-
tion which Providence has implanted in the lowest breast
of every parent. * * * But either an expressed prom-
ise, or circumstances from which a promise by the father
can be inferred, are indispensably necessary to bind a
APPOINTMENT
39?
parent for necessaries furnished his infant child by a
third person.
"In this case, it is not pretended that the defendant
gave any express authority for, or sanction to the con-
tract with the plaintiff. What then, are the circumstances
from which such authority can be inferred? Certainly
not from the bare circumstances that the son was in
want of the clothes, and that they were suitable to the for-
tune and condition in life of the father. To sanction such
a doctrine, would be, in numerous instances, which can be
readily imagined, subject a parent to the payment of the
debts of a prodigal son, contracted without his approba-
tion, and even against his will. Where the child lives
with the parent, who takes upon himself the office of min-
istering to his necessities, even though his provision
should be inadequate, yet he would not be liable to an-
other who might supply the deficiency, because the under-
taking of the parent excludes the idea of authority in an-
other, and the law will not sanction the interference of a
stranger with parental authority or economy. And if the
son is not to be regarded as a member of his father's fam-
ily, while staying at Jacksonville, then in order to render
the father liable for clothes furnished him, it should be
shown that his prolonged residence, which rendered the
clothes necessary, was at the instance of the father; for
a child, by voluntarily abandoning the home of his father
or remaining abroad against his consent, forfeits his
claim to support, and those who credit him, even for
necessaries, must look to him for payment; and it is no
excuse that such persons were not aware that the child
was acting contrary to the will of the father; for it is the
duty of those who give credit to an infant, to know the
precise situation at their peril. If it had been proved
that it was by the command of the defendant, that this
son remained abroad until additional clothes became
necessary, and he neglected to provide them; an authority
in one who should supply his omission of duty, might well
be presumed, as the necessity was occasioned by his own
act. But no such exercise of authority, on the part of the
398
AGENCY
father, is shown; nor is it reasonable to presume, that
because he allowed a son between 15 and 18 years of age,
to visit his friends, that he gave him authority to take
boarding at a tavern, for five or six months, and until he
should outgrow his clothes, or wear them out, and then
purchase others at will. The fact that the defendant had
previously provided his son with sufficient apparel, and
that he was not informed of any deficiency at the time
referred to, not only exonerates him from the imputation
of a dereliction of duty, but affords a strong presumption
that it was not with his approbation that his son remained
abroad until he became destitute of clothes. Another cir-
cumstance against the imputation of authority to furnish
the son with clothes, on the credit of his father, is that'
so soon as he was informed of the conduct of his son, by
his friends, who considered it extravagant and improper,
he notified them that he would not be answerable for his
debts.
Question 204: Does a child have any authority implied by law
to bind his parent upon contract? May such authority be im-
plied in factf State some circumstances under which it would
be so implied. Would the son, himself, have been liable in this
case if he had been sued ?
§ 203. (Agency, Sec. 19.) Statutory liability for
family expenses.
(By statute in some states either parent may be liable
for articles bought for family or household use by any
member of the family, and so used).
CHAPTER 26
AUTHORIZATION BY RATIFICATION
A. Definition and essentials.
B. What constitutes ratification.
A. Definition and Essentials.
§ 204. Meaning of ratification.
§ 205. Essentials to ratification.
§204. (Agency, Sec. 20.) Meaning of ratification.
(Note: Ratification in Agency means that a person in whose
name a contract has been made by a person without authority so
to bind the first person, supplies that authority by his subse-
quent affirmation by word or conduct. See following cases.)
§205. (Agency, Sec. 21.) Essentials to ratification.
Case 205. Keighley, Maxstead & Co., Defendants, v.
Durant, Plaintiff. Law Reports, 1901, Appeal Cases, 240
(Eng.).
Facts: Roberts in his own name and apparently and
actually in his own behalf contracted to buy corn from
Durant. The next day K. M. & Co. contracted with
Roberts to take the corn with him on joint account. De-
livery of the corn being tendered and acceptance refused
Durant sues K. M. & Co. on the theory that K. M. & Co.
made Roberts their agent by ratification.
Point Involved: Whether, if A makes in his own name
and apparently and actually on his own behalf a contract
with B, and afterwards A makes a contract with C for C
to take the benefit thereof, B can hold C as a party to
the contract on the theory of ratification.
Earl of Halsbury, L. C.:  My Lords, there are here
no facts really in dispute in this case. Roberts made a
contract on his own behalf and without the authority of
399
400
AGENCY
anybody else. The contract was made and the parties
to it ascertained, and I am of the opinion that upon no
principle known to the law could the present appellants
be made parties to that contract. They could, of course,
make another contract in the same terms if they pleased,
but it would not be this contract. It is suggested by the
judgment of the Court of Appeal as possible that what
is described as ratification might if the parties had so
pleased, make the contract, which was one made between
A and B, to include C, as one of the contracting parties.
I think such a suggestion is contrary to all principle, and
for it there is no decision which calls for your Lordships
to override it. * * * The parties to the contract who
have already bound themselves by it, are just as much
part of the contract as any other part of the contractual
obligations entered into.
"I confess I do not see the relevancy of the argument
that the contract might be made in the name of an un-
known principal, and that such principal may sue and be
sued, though the name was not given at the time the
contract was made. The fact is that in such a case the
contract is made by him, and the disclosure afterwards
does not alter or affect the contract actually made. Here
it would alter the contract afterward and make it a differ-
ent contract. * * *
Lord McNaghten : "My Lords, I am of the same
opinion.
11 # * *
 As a general rule, only persons who are parties to a
contract, acting either by themselves, or by an authorized
agent, can sue or be sued on a contract. A stranger can-
not enforce the contract, nor can it be enforced against
a stranger. That is the rule; but there are exceptions.
The most remarkable exception, I think, results from the
doctrine of ratification as established in English law.
That doctrine is thus stated by Tindall, C. J., in Wilson
v. Tumman (1843, 6 M. & G., at p. 242): 'That an act(
done, for another, by a person not assuming to act for
himself, but for such other person, though without any
RATIFICATION
401
precedent authority whatever, becomes the act of the
principal, if subsequently ratified by him, is the known
and well established rule of law. In that case the princi-
pal is bound by the act, whether it be for his detriment or
disadvantage, and whether it be founded on a tort or on
a contract, to the same effect as by, and with all the conse-
quences that follow from, the same act done by his pre-
vious authority.' And so by a wholesome and convenient
fiction, a person ratifying the act of another, who without
authority, has made a contract openly and avowedly on
his behalf, is deemed to be, though in fact he was not a
party to the contract. Does the fiction cover the case of
a person who makes no avowal at all, but assumes to act
for himself and no one else ? If Tindall, C. J. 's statement
of the law is accurate, it would seem to exclude the case
of a person who may intend to act for another, but at the
same time keeps his intention locked in his own breast.
u* * * ought the doctrine of ratification to be
extended to such a case? On principle I should say cer-
tainly not.* * *
Question 205: (1) What was Chief Justice Tindall's defini-
tion of ratification ? Why was there no ratification in this case ?
(2) A, of the firm of A and B, bought goods in his own name
and without B's knowledge, expecting to use such goods in
another partnership to be formed with C. The firm of A and B
did, not dissolve as expected, and A and B afterwards used the
goods so bought by A. Is B liable in a suit by A's vendor for
the price of,the goods? (13 Manitoba L. Rep. 147, 2 Brit. R. C.
254.)
Case 206. Combs v. Scott, 94 Massachusetts Reports,
493.
Facts: Suit by plaintiff against defendant on the the-
ory that defendant ratified a contract made by a supposed
agent of defendant in defendant's name. The court in-
structed the jury to the effect that there was no ratifica-
tion of the agent's act by the defendant if the defendant
was ignorant of the facts unless the ignorance of such
facts arose from defendant's negligence. The act alleged
to be ratified was a past and completed act at the time of
402
AGENCY
the alleged ratification. Judgment having been entered
against defendant, he appeals to the present court for re-
versal on the ground that the lower court improperly in-
structed the jury.
Bigelow, C. J.: "* * * The general rule is per-
fectly well settled, that a ratification of the unauthorized
acts of an agent, in order to be effectual and binding on
the principal, must have been made with a full knowledge
of all material facts, and that ignorance, mistake or mis-
apprehension of any of the essential circumstances re-
lating to the particular transaction alleged to have been
ratified will absolve the principal from all liability by
reason of any supposed adoption of or assent to the pre-
viously unauthorized acts of an agent. We know of no
qualification of this rule such as was engrafted upon it iri
the instructions given to the jury in the present case.
Nor, after considerable research, have we been able to
find that such qualification has ever been recognized in
any approved text writer or adjudicated case. And, upon
consideration, it seems to us to be inconsistent with sound
principle.
 Ratification of a past and completed transaction, into
which an agent has entered without authority, is a purely
voluntary act on the part of the principal. No legal obli-
gation rests upon him to sanction or adopt it. No duty
requires him to make any inquiries concerning it. Where
there is no legal obligation or duty to do an act, there can
be no negligence in an omission to perform it. The true
doctrine is well stated by a learned text writer: 'If I
make a contract in the name of a person who has not
given me an authority, he will be under no obligation to
ratify it, nor will he be bound to the performance of it.?
1 Livermore on Agency, 44. See also Paley on Agency,
171, Note o. Whoever, therefore, seeks to procure and
rely on a ratification is bound to show that it was made
under such circumstances as in law to be binding on the
principal, especially to see to it that all material facts
were made known to him. The burden of making in-
quiries and ascertaining the truth is not cast on him who
RATIFICATION
403
is under no legal obligation to assume a responsibility, but
rests on the party who is endeavoring to obtain a benefit
or advantage for himself. This is not only just, but it is
practicable. The needful information or knowledge is
always within the reach of him who is either party or
privy to a transaction which he seeks to have ratified,
rather than of him who did not authorize it, and to the
details of which he may be a stranger.
"We do not mean to say that a person can be wilfully
ignorant or purposely shut his eyes to means of informa-
tion within his own possession and control, and thereby
escape the consequences of a ratification of unauthorized
acts into which he has deliberately entered; but our opin-
ion is that ratification of an antecedent act of an agent
which was unauthorized cannot be held valid and binding,
where the person sought to be charged has misappre-
hended or mistaken material facts, although he may have
wholly omitted to make inquiries of other persons con-
cerning them, and his ignorance and misapprehension
might have been enlightened and corrected by the use of
diligence on his part to ascertain them. The mistake at
the trial consisted in the assumption that any such dili-
gence was required of the defendants. On this point, the
instructions were stated in a manner which may have led
the jury to misunderstand the rights and obligations of
the parties. Exceptions sustained.
Question 206: What was the instruction given by the lower
court in this case ? Did the upper court sustain the instruction ?
What qualification did the Court suggest? Was the act in this
case by the agent and by the third party completely executed?
If it had not been do you think that could make a difference ?
Case 207. Ehrmantraut v. Robinson et al., 52 Minn.
333.
Facts: Suit for rent of a certain hall for lodge pur-
poses used by Nora Grove, No. 23, II. A. 0. D., an unin-
corporated association of which defendants were mem-
bers. In May, 1886, Robinson and Larson, two of the
defendants, and directors of the lodge, without authority,
procured the lease in question. In July, 1886, the mem-
404
AGENCY
bers of the association, including the defendants, entered
into possession of the premises, and continued to hold
meetings there until some time in the fall when the so-
ciety disbanded. The lease was never acted on by the
society at any of its meetings, and some of the defendants
never knew what the terms of the lease were; but they
did know that some lease had been entered into.
Point Involved: Whether continuing to receive the
benefits under an executory contract made by an agent,
of the existence of which contract one knows, but as to
whose contents he chooses to remain in ignorance, is rati-
ficatioijL of the unknown terms.
Mitchell, J.: "* * *
"Of course, a benevolent or social club or association
of this kind is not a partnership, in any proper sense of
that term. The members are liable, if liable at all, for
the acts of their associations, on the ground of principal
and agent, and not of partnership. Hence, it is undoubt-
edly true that only those members who authorized or sub-
sequently ratified the acts of these trustees in taking this
lease would be bound by it. Bates, Partn. 75; Lindl.
Partn. 50; Story, Partn. 144; Flemyng v. Hector, 2 Mees.
& W. 172; Ash v. Guie, 97 Pa. St. 493.
"But it is true that all the members who subsequently
ratified the act are liable, and in our opinion the act of
Hervin and Wilson amounted to a ratification.
"It is sometimes said that, to constitute a ratification
of an unauthorized act of an agent, the principal must
have had knowledge of all the material facts. As to a
past and completed transaction, this would be generally
true, but there are many cases where the conduct of the
principal may amount to a ratification, although he may
not know all the facts as to the unauthorized act of the
agent in his behalf. He may ratify by voluntarily assum-
ing the risk without inquiry, or he may deliberately ratify
upon such knowledge as he possesses, without caring for
more. Lewis v. Read, 13 Mees. & W. 834; Kelley v. New-
buryport & A. H. R. Co., 141 Mass. 496 (6 N. E. Rep. 745).
"Where, as in the present case, the defendants Hervin
RATIFICATION
405
and Wilson had notice that an unauthorized contract had
been made in their behalf for the use of these premises,
it was their duty, before accepting its benefits, to ascer-
tain what the terms of that contract were. By going into
possession, and enjoying the use of the premises, without
any attempt to ascertain the terms of the lease under
which they entered, they must be held to have deliberately
intended to take the risk of ratifying upon such knowl-
edge as they had.
Question 207: (1) State the above case showing whether the
Court's holding is consistent with the rule that ratification is
predicated upon knowledge of the facts by the ratifier.
(2) Why was it material in this case to consider whether or
not the lodge was a partnership ? Why in your opinion was it
not a partnership ?
Case 208. Hawkins v. McGroarty, 110 Missouri Re-
ports, 546.
Facts: See the first paragraph of the opinion.
Point Involved: Generally, whether if the law requires
a certain formality in the appointment or authorization
of the agent, the act of the agent done without such for-
mality, may be ratified by the principal with any less
formality than that required by such law. Specifically,
whether the requirements of the Missouri statute of
frauds requiring the authorization of an agent to sell
lands to be in writing, affords a defense to a principal
who is sued on the theory of verbal ratification.
Brace, J.: "By an act approved March 19, 1887, the
statute of 'frauds and perjuries,' section 2513, Revised
t Statutes, 1879, was amended by adding the following
clause to that section: 'And no contract for the sale of
lands made by an agent shall be binding upon the princi-
pal unless such an agent is authorized in writing to make
said contract.' This is an action in the nature of a bill
in equity to specifically enforce the written contract of
an agent in the name of his principal for a sale of land
made by the agent, not within the terms of such agent's
written authority, upon the ground of a verbal ratifica-
tion of such sale by the principal after he was informed
406
AGENCY
thereof. In the facts of the case there is no element of
equitable estoppel. Plaintiff's evidence tended at most
only to prove that the defendant, when informed by letter
of the sale, did not manifest to the agent any disapproba-
tion thereof, but directly thereafter sold to another per-
son.
' * The trial court ruled that the written authority must
authorize the agent to make the contract which he does
make, in order to bind the principal and unless it does so
the ratification thereof must be in writing to bind him,
citing Story on Agency (9 ed.) sec. 242, and Dispatch
Line v. Mfg. Co., 12 N. H. 205, 37 Am. Dec. 203, in
which it was held that1 a ratification of an act done by one
assuming to be an agent relates back, and is equivalent to
a prior authority. When, therefore, the adoption of any
particular form or mode is necessary to confer the an-
thority in the first instance, there can be no valid ratifica-
tion except in the same manner.'
"At common law, where a contract is required to be
under seal, a ratification must also be under seal. 1
American & Eng. Encyclopedia of Law, 536; Story on
Agency, sec. 49, and authorities in note 3; Mechem on
Agency, sec. 137, and authorities note 6, same page. And
upon the same principle the last author, stating the gen-
eral rule, says, 'If, therefore, sealed authority was in-
dispensable, sealed ratification must be shown- and if
written authority was required, written ratification must
appear.' Sec. 136.9'
(Held: That if the law requires certain formalities in the
appointment of an agent, ratification cannot occur without such
formalities for this would render such law of no effect. The'
court suggested, however, that there might be conduct amount-
ing to a legal estoppel, that is to say, conduct which would ren-
der the alleged principal's repudiation inequitable.)
Question 208: What did the statute of Missouri require in
reference to the appointment of an agent to sell real estate ? Did
the agent in Case 208 have such authority? What was the suit
for? How did complainant attempt to get around the statute?
RATIFICATION
407
How did the court answer this attempt? What did the court
say about estoppel? Was there such estoppel in this case?
B. What Constitutes Ratification.
§ 206. Express ratification.
§ 207. Silence as ratification.
§ 208. Batification by receiving benefits.
§ 209. Batification by bringing suit.
§206. (Agency, Sec. 22.) Express ratification.
Case 209. Taylor v. Connor, 41 Mississippi Reports,
722.
Shackleford : * * It is well settled that a
party charged as principal shall adopt or repudiate the
act of the pretended agent altogether; he cannot sepa-
rate it, as by ratifying what is beneficial to himself only,
and repudiating the remainder; * * * Such recogni-
tion or adoption may be either express of implied; ex-
press, as by words, spoken or in writing; implied, as from
the conduct of the principal or party charged as such; for
instance as by receiving the benefit of the act, and holding
it after knowledge of the facts.
Question 209: In what various ways may a person charged
as principal ratify what has been done in his behalf ?
§207. (Agency, Sec. 23.) Silence as ratification.
Case 210. Ward v. Williams, 26 111. 447.
Point Involved: Whether merely remaining silent (i. e.
receiving no benefits and expressing no dissent) when
one learns that an agent has done an unauthorized act in
his behalf, is ratification.
Caton, C. J.: •
"The counsel in their arguments agree upon the cor-
rect principle of law as to the ratification of unauthorized
acts, done by one in the name of another. In general
where an agent is authorized to do an act, and he trans-
cends his authority, it is the duty of the principal to re-
pudiate the act as soon as he is fully informed of what
has been done in his name, by the agent, else he will be
408
AGENCY
bound by the act as having ratified it by implication:
but where a stranger in the name of another does an
unauthorized act, the latter need take no notice of it
although informed of the act thus done in his name, and
he shall only be bound by an affirmative ratification.''
Question 210: Is silence of the principal when he learns of
the unauthorized act, ratification by him?
(Note: Obviously, the only safe course for an alleged princi-
pal to take if he does not wish to ratify, is to repudiate. Some
cases say there is no merit in the distinction taken in the case
above.)
§ 208. (Agency, Sec. 24.) Ratification by receiving
benefits.
Case 211. Dempsey v. Chambers, 154 Mass. 330.
Facts: Suit is to recover damages for the breaking of
a plate glass window. The glass was broken by the negli-
gence of one McCullock, while delivering some coal which
had been ordered of the defendant by the plaintiff. It
was found by the trial court as a fact that McCullock was
not the defendant's servant when he delivered the coal
and broke the window, but that the defendant afterwards
ratified the delivery of the coal. Judgment in the trial
court for plaintiff. Defendant appeals.
Point Involved: "Whether an unauthorized tort com-
mitted as a part of an act done on behalf and in the name
of another, but not at the time authorized by another can
be ratified and whether it is so ratified by the ratification
of the act of which it is a part.
Holmes, J.: "* * *
"It is hard to explain why a master is liable to the ex-
tent that he is for the negligent acts of one who at the
time really is his servant, acting within the general scope
of his employment. Probably master and servant are
'famed to be all one person,' a fiction which is an echo
of the patria potestas and of the English frank-pledge.
Byington v. Simpson, 134 Mass. 169, 170, 45 Am. Ref.
314; Fitz. Abr., tit. Corone, fil, 428. Possibly the doc-
RATIFICATION
409
trine of ratification is another aspect of the same tradi-
tion. The requirement that the act should be done in the
name of the ratifying party, looks that way: * * *
 Doubts have been expressed, which we need not con-
sider, whether this doctrine applied to a case of a bare
personal tort: Adams v. Freeman, 9 Johns. 117, 118;
Andersdn and Warburton, JJ., in Bishop v. Montague,
Cro. Eliz. 824. If a man assaulted another in a street
out of his own head, it would seem rather strong to say
that if he merely called himself my servant, and I after-
wards assented, without more, our mere words would
make me a party to the assault, * * * Perhaps the
application of the doctrine would be avoided on the
ground that the facts did not show an act done for the
defendant's benefit: Wilson v. Barker, 1 Nev. & M. 409;
4 Barn. & Adol. 614, et seq.; Smith v. Lozo, 42 Mich. 6.
* * *
"But the language generally used by judges and text-
writers, and such decisions as we have been able to find,
is broad enough to cover a case like the present when
the ratification is established: (citing numerous authori-
ties).
'' The question remains whether the ratification is estab-
lished. As we understand the bill of exceptions, McCul-
lock took on himself to deliver the defendant's coal for his
benefit and as his servant, and the defendant afterward
assented to McCullock's assumption. The ratification
was not directed specifically to McCullock's trespass,
and that act was not for the defendant's benefit if taken
by itself, but it was so connected with McCullock's em-
ployment that the defendant would have been liable as
master if McCullock really had been his servant in deliv-
ering the coal. We have found hardly anything in the
books dealing with the precise case, but we are of opinion
that consistency with the whole course of authority re-
quires us to hold that the defendant's ratification of the
employment established the relation of master and serv-
ant from the beginning, with all its incidents, including
the anomalous liability for his negligent acts: See
Coomes v. Houghton, 102 Mass. 211, 213, 214; Cooley on
410
AGENCY
Torts, 128,129. The ratification goes to the relation and
establishes it ab initio. The relation existing, the master
is liable for torts which he has not ratified specifically
jnst as he is for those which he has not commanded, and
as he may be for those which he has expressly forbidden
* # * 7 J
Question 211: (1) State the facts, the question presented
and the Court's decision in this case.
(2) A purporting to represent P, sells B a quantity of goods.
He is guilty of fraud in making the sale. P recognizes the
order and supplies the goods. Is P liable in damages for A's
fraud? Under what circumstances?
Case 212. Eberts v. Selover, 44 Mich. 519.
Facts: The facts appear in the opinion.
Point Involved: Whether a principal whose agent has
exceeded his authority can adopt and ratify part of such
act and reject the remainder.
Cooley, J.:  This is an action brought to recover the
subscription price of a local history. The subscription
was obtained by an agent of the plaintiffs, and defendant
signed his name to a promise to pay ten dollars on the
delivery of the book. This promise was printed in a little
book, made use of for the purpose of obtaining such sub-
scriptions, and on the opposite page, in sight of one sign-
ing, was a reference to 'rules to agents,' printed on the
first page of the book. One of these rules was that 'no
promise or statement made by an agent which interferes
with the intent of printed contract shall be valid,' and
patrons were warned under no circumstances to permit
themselves to be persuaded into signing the, subscription
unless they expected to pay the price charged.
"From the evidence it appears that when Schenck, the
agent, solicited his subscription the defendant was not
inclined to give it, but finally told the agent he would
take it provided his fees in the office of justice, then held
by him, which should accrue from that time to the deliv-
ery of the book should be received as an equivalent. The
agent assented, and defendant signed the subscription,
RATIFICATION
411
receiving the same time from the agent the following
paper:
 'Coldwater, April 29, '78.
 'Mr. Isaac M. Selover gives his order for one copy of
our history, for which he agrees to pay on delivery all
the proceeds of his office as justice from now till the
delivery of said history.
 'Eberts & Abbott, per Schenck.'
"The plaintiffs claim that the history was duly deliv-
ered, and they demanded the subscription price, repudi-
ating the undertaking of the agent to receive anything
else, as being in excess of his authority and void. The
defendant relies on that undertaking, and has brought
into court $4.27 as the amount of his fees as justice for
the period named. This statement of facts presents the
questions at issue so far as they concern the merits.
"It may be perfectly true, as the plaintiffs insist, that
this undertaking of the agent was in excess of his au-
thority; that the defendant was fairly notified by the
entries in the book of that fact, and that consequently the
plaintiffs were not bound by it, unless they subsequently
ratified it. Unfortunately for their case, the determina-
tion that the act of the agent in giving this paper was
void does not by any means settle the fact of defendant's
liability upon the subscription.
"The plaintiffs' case requires tnax they shall make out
a contract for the purchase of their book. To do this, it
is essential that they show that the minds of the parties
met on some distinct and definite terms. The subscrip-
tion standing alone shows this, for it shows, apparently,
that defendant agreed to take the book and pay therefor
on delivery the sum of ten dollars. But the contempo-
raneous paper given back by the agent constitutes a part
of the same contract, and the two must be taken and con-
sidered together. Bronson v. Green, Walk. Co. 56; Dud-
geon v. Haggart, 17 Mich. 275. Taking the two together
it appears that the defendant never assented to any pur-
chase except upon the terms that the plaintiffs should
accept his justice fees for the period named in full pay-
ment for the book. If this part of the agreement is void,
412
AGENCY
the whole falls to the ground, for defendant has assented
to none of which this is not a part. When plaintiffs dis-
covered what their agent had done, two courses were
open to them; to ratify his contract, or to repudiate it.
If they ratified it, they must accept what he agreed to
take. If they repudiated it, they must decline to deliver
the book under it. But they cannot ratify so far as it
favors them and repudiate so far as it does accord with
their interests. They must deal with the defendant's
undertaking as a whole and cannot make a new contract
by a selection of stipulations to which, separately, he
never assented.
Question 212: What was the agent's authority in this cafe?
How was it exceeded ? Why was there not ratification 1
§ 209. (Agency, Sec. 25.) Ratification by bringing suit.
Case 213. Bailey v. Partridge, 134 111. 188.
Facts: Plaintiff's traveling salesman sold the samples
with which he had been provided, and received the price
thereof, appropriating it to his own use. Plaintiff con-
tended he had no authority to make the sale, but brought
suit for the price thereof based on the sale.
Point Involved: Whether suit on an unauthorized con-
tract made by an agent is a ratification of such contract.
Me. Justice Ckaig: "But it may be said that Holmes
was not empowered by the plaintiffs to sell the goods,
—that he merely held the samples as a means to solicit
orders. A sufficient answer to this position is, that the
acts of plaintiffs since the sale may be regarded as rati-
fication. Where the owner whose goods have been sold
without authority, sues the purchaser for the amount of
the contract price for which the goods were sold, the sale,
although unauthorized, will be regarded as ratified.
"In the case under consideration, as soon as plaintiffs
learned of the sale they made out a bill according to the
contract price, presented it to the defendants, and de-
manded payment for the goods. This was followed by
the present action in assumpsit to collect the amount for
which the goods were sold. If therefore, Holmes made
RATIFICATION
413
the sale without direct authority, these acts of the plain-
tiffs after full knowledge of the sale, may be treated as
a ratification of the sale made by Holmes.' The case then
stands in this position: Holmes had possession of the
goods, claiming the right to sell; he called on defendants
and they bought the goods; he delivered the goods, col-
lected the pay, and gave defendants a receipt acknowl-
edging full payment. Plaintiffs first deny authority to
sell, but by their acts concede the power of sale, but deny
authority to collect for the goods. This they can not do.
The power of sale or the sale without authority, subse-
quently ratified, carried with it the implied power to
receive payment. Had the sale been repudiated by the
plaintiffs, and an action brought to recover the goods, a
different question would arise. But that course was not
pursued.''
Question 213: When the agent sold the goods, what did his
principals do? Why was ratification of the sale, a ratification
of the collection of the price ? What courses could the plaintiffs
have pursued to protect themselves?
(Note: It must not be inferred from this case that if an
agent has authority to sell he has also authority to receive the
price. He has implied authority to receive the price in some
cases of sale, and in some others, not. In this case he had
authority to receive the price if he had authority to sell, ac-
cording to the rules developed hereafter. Therefore, if the
principals ratified his authority to sell they ratified the pay-
ment.)
C. Results of Ratification
§210. (Agency, Sec. 26.) Ratification cures original
defect.
(Note: When the principal having actual or constructive no-
tiee of the facts, ratifies, he is thereafter bound, as though there
had been previous authority, to the third person on the con-
tract, and to the agent for his compensation. He cannot re-
voke the ratification.)
§211. (Agency, Sec. 27.) Ratification is irrevocable.
(See note in the last section.)
PART II
THE DUTIES AND LIABILITIES ARISING
OUT OF AGENCY
The Duties and Liabilities of the Principal
to the Agent.
The Duties and Liabilities of the Agent to
the Principal.
The Duties and Liabilities in Contract of a
Disclosed Principal to Third Persons
(the Authority of the Agent).
Undisclosed Principals.
Principal's Liability for Torts of Agent.
The Duties and Liabilities of the Agent to
the Third Person.
CHAPTER 27
THE DUTIES AND LIABILITIES OF THE
PRINCIPAL TO THE AGENT
§212. The agent's right to compensation.
§ 213. When compensation considered earned.
§ 214. Agent's rights to damages where principal wrongfully revokes.
§ 215. Agent's right to compensation when, he himself is guilty of breach
of contract.
§216. Agent's right of compensation where he abandons service without
. his own fault.
§ 212. (Agency, Sec. 28.) The agent's right to compen-
sation.
Case 214. Huber Mfg. Co. v. "Watson, 19 Ky. L. R.
864.
Facts: Suit to recover certain commissions alleged to
have been earned by Watson as agent for Huber Mfg-
414
Chapter 27.
Chapter 28.
Chapter 29.
Chapter 30.
Chapter 31.
Chapter 32.
DUTIES TO AGENT
415
Co. in selling threshing machines and engines. Watson
was employed under a written contract which gave him
a certain commission, payable as payments were made,
except it was provided "no commission to be allowed or
paid * * * on sale of goods where foreclosure pro-
ceedings at any time become necessary. Watson made
a sale of certain engines to Gallagher Bros, and a mort-
gage was taken to secure the purchase price. This mort-
gage was foreclosed. The present suit is upon certificates
which were issued to Watson when the sale was made,
payable to Watson upon the same dates that the install-
ments on the engine fell due.
Point Involved: That the agent's right in compensa-
tion is determined by his contract.
Paynter, J.: "* * * The only question in this
case is whether or not Watson is bound by the contract
which he made with his principal. It is written in unmis-
takable terms that he is not to be paid a commission for
his services if it becomes necessary for the company to
institute foreclosure proceedings. Whether it was a wise
contract for him to make is not for us to determine. He
was charged with the responsibility of determining that
question for himself before it was executed. The com-
pany knew that proceedings to enforce its lien in the
courts were necessarily expensive. * * * The com-
pany wanted him (the agent) to make sales to solvent
persons, and those who would pay it without the neces-
sity of instituting legal proceedings to enforce payment.
The provision in question was to the advantage of the
company in that it made the agent careful as to whom
he made sales. When the agent agreed to accept the
compensation provided for in the contract he took the
risk that his right to it would fail if foreclosure pro-
ceedings became necessary.
Question 214: What was the written agreement in this case
as to compensation? Was it binding?
416
AGENCY
§ 213. (Agency, Sec. 29.) When compensation con-
sidered earned.
Case 215. Fox v. Ryan, 240 111. 391.
Facts: Fox sues to recover $4,000 as commissions
claimed to have been earned by him as agent in selling
Ryan's mining stock. Ryan procured a purchaser who
entered into a contract, but the contract was never car-
ried out by the purchaser.
Point Involved: Whether a broker to sell who pro-
cures a purchaser who is accepted by and enters into a
contract with the seller, is entitled to his commission if
the purchaser refuses to perform the contract.
Me. Chief Justice Farmee: "* * * The second
proposition asked by the appellant was, that merely pro-
curing a person to enter into a contract for the purchase
of property does not entitle a broker to commissions
unless such person was ready, willing and able to make
the payments, including deferred payments, named in
the contract. The Court modified this proposition by
adding, 'unless the defendant accepted the purchaser.'
The proposition as modified was correct. Where a broker
is employed to sell property by the owner, if he pro-
duces a purchaser within the time limited by his authority
who is ready, willing and able to purchase the property
upon the terms imposed by the seller he is entitled to
his commissions, even though the seller refuses to per-
form the contract on his part. In such case, however,
it is necessary for the broker to prove the readiness,
willingness and ability of the purchaser to take the prop-
erty on the terms proposed. But where the seller accepts
the purchaser and enters into a valid contract of sale
with him, the broker's commission is earned whether
the purchaser subsequently fails to perform his contract
and make the payments agreed upon or not. There are
cases in other States holding otherwise, but in Wilson
v. Mason, 158 111. 304, this Court refused to follow those
DUTIES TO AGENT
417
cases, denominating them as extreme and exceptional,
and said, on page 311: 'The true rule is, that the broker
is entitled to his commissions if the purchaser presented
by him and the vendor, his employer, enter into a valid,
binding and enforceable contract. If after the making
of such a contract, even though executory in form, the
purchaser declines to complete the sale and the seller
refuses to compel performance, the broker ought not to
be deprived of his commissions. He has done all that
he can do when he produces a party who is able, and
in binding form offers, to purchase upon the proposed
terms. An agreement by a real estate broker to pro-
cure a purchaser not only implies that the purchaser shall
be one able to comply, but that the seller and the pur-
chaser must he bound to each other in a valid contract.
So where the agreement of the real estate broker is to
make a sale, his commission is earned when a contract;
is entered into which is mutually obligatory upon the
vendor.and vendee, even though the vendee afterwards
refuses to execute his part of the contract of sale or
purchase.
Question 215: (1) A authorizes B, a real estate broker, to
sell his property on certain specified terms. B procures C, but
A refuses to deal with C. On what conditions, if any, can B com-
pel A to pay him a commission ?
(2) A authorizes B, a real estate broker, to sell his property
on certain specified terms. B procures C, with whom A makes
a contract of sale. C is, however, financially irresponsible and
fails to perform his contract. Is B entitled to his commissions ?
(3) A advises B, a broker, that he wants to sell his home
and directs C to procure him a buyer. No terms are, however,
proposed, as A wants to bargain with the prospective buyers.
B procures C, who offers A a good price but.A refuses to sell to
him. C is ready, willing and able to buy at a good market price.
Is B entitled to his commission ?
(4) Suppose in the case last stated A had accepted C and
made terms with him and entered into a contract. Would B
be entitled to his commissions ?
418
AGENCY
§ 214. (Agency, Sec. SO.) Agent's right to damages
where principal wrongfully revokes.
Case 216. Doherty v. Shipper & Block, 250 Illinois
Reports, 128.
Facts: E. Doherty was employed by defendant, for a
period of eighteen weeks at $25.00 per week, payable
weekly. At the end of the 9th week she was discharged
without cause (as she claimed). At the end of the fol-
lowing week she brought suit before a Justice of the
Peace for her week's wages and recovered a judgment
for $25.00. This judgment was paid. She now sues at
the end of the entire term for the eight additional weeks
covered by her contract. Defendant contends that the
suit before the justice bars her right to prosecute any
subsequent suit.
Point Involved: Generally of the right of a wrongfully
discharged employee to damages; specifically whether
such employee can bring repeated suits for installments
of salary that would have fallen due under the contract;
whether on any theory the employee has more than one
right of suit for his discharge.
Mr. Justice Hand: "The sole question raised in this
Court and argued in the briefs filed by the respective
parties is, was the first judgment rendered by the justice
of peace a bar to this action?
"It is well settled that in case an employee is dis-
charged without cause before the term of his employ-
ment has expired and he has been paid in full up to
the time when he is discharged, he may treat the con-
tract of hiring as continuing and bring an action for a
breach of the contract of employment against his em-
ployer for discharging him, and if the suit is not com-
menced, or if commenced before but not tried, until his
term of employment has expired, he may recover the
contract price of his wages, less what he has earned or
by reasonable diligence could have earned in other em-
ployment subsequent to his discharge. (Mount Hope
DUTIES TO AGENT
419
Cemetery Ass'n v. Weidenmann, 139 111. 67.) There is
a class of cases which holds this remedy is not exclusive,
but that, in addition to such remedy, the employee, where
his wages by the terms of the contract, are payable in
installments, may bring an action for each installment
of wages as it falls due, subsequent to his wrongful dis-
charge, and that the recovery on one installment is not
a bar to the recovery on subsequently accruing install-
ments. (Gandell v. Pontigny, 4 Camp. 375.) The re-
covery for each installment of wages allowed in the class
of cases referred to, as it falls due, is based upon the
theory of constructive service, and while the right of a
recovery was thus permitted for a time in England and
in the courts of some of the States in the Union, that
theory of recovery has been abandoned in England (Arch-
ard v. Horner, 3 C. & P. 349; Smith v. Hayward, 7 Aid.
& Ell. 544; Fewings v. Tisdal, 1 Exch. 295); and quite
generally in this country. James v. Allen County, 44
Ohio St. 226; Howard v. Daly, 61 N. Y. 362; Richardson
v. Eagle Machine Works, 78 Ind. 422; Olmstead v. Bach
& Son, (Md.) 22 L. R. A. 74.
<<• * * We have examined the numerous cases
bearing upon the subject which have been cited in the
briefs, and are of the opinion that upon principle the
only action which logically can be maintained, upon the
facts of this case, against the appellee, is an action for
the breach of the contract of employment growing out
of the wrongful discharge of the appellant, and that all
damages resulting from such breach must be recovered
in one action, and that after one recovery has been had
that recovery is a bar to all future actions based upon
the contract of employment or growing out of the rela-
tion of employer and employee by reason of the wrong-
ful discharge of the appellant.
"We think the doctrine of constructive service, as ap-
plied to a case like this and where used as a basis of
recovery, is illogical and unsound. The court has uni-
versally held that the proper measure of damages in a
case like this is the contract price, less what the employee
420
AGENCY
earned or conld have earned. That being so, if the dis-
charged employee can find employment it is his duty to
accept it. How can it then be said that while he is per-
forming service for another person he is constructively
engaged in the employ of the employer by whom he was
discharged? * * * We therefore conclude that the
judgment recovered before the justice of the peace was a
complete bar to the subsequent action.
Question 216: (1) "What is the doctrine of constructive
service? Does it prevail? Why?
(2) Assuming the plaintiff's discharge to have been wrong-
ful how many law suits could she successfully maintain? On
what theories?
(3) If plaintiff had not been discharged could she bring
successive suits for salary due as the same fell due ?
§215. (Agency, Sec. 31.) Agent's right of compensa-
tion where he himself is guilty of breach of contract.
(See note under Case 178, supra.)
§216. (Agency, Sec. 32.) Agent's right of compensa-
tion when he abandons service without his own fault
or that of principal.
(See note under Case 184, stipra.)
CHAPTER 28
THE DUTIES AND LIABILITIES OF THE AGENT
TO THE PRINCIPAL
A. The agent's obligation of good faith.
B. Duty to obey instructions, use care and skill, etc.
A. Agent's Obligation of Good Faith.
§ 217. Duty of agent to use good faith, general rule.
§ 218. Agent cannot secretly represent both parties.
§ 219. Agent cannot buy from, or sell to, self.
§ 220. An agent cannot take secret profits and benefits.
§217. (Agency, Sec. 33.) Duty of agent to use good
faith.
Case 217. Keighler et al. v. Savage Mfg. Co., 12 Mary-
land Reports, 383.
Lb Grand, Chief Justice: "* * * Its paramount
and vital principal is good faith; without it the relation
of principal and agent cannot exist; and so sedulous-
ly is this principal guarded that all departures from
it are esteemed frauds upon the confidence bestowed.
* * * ft
Question 217: State the rule of this case.
§ 218. (Agency, Sec. 34.) Agent cannot secretly repre-
sent both parties.
Case 218. Gann v. Zettler, 3 Georgia Appeals, 589.
Facts: Facts are stated in the second paragraph of
the opinion.
Point Involved: Whether it is a breach of duty for an
agent without the consent of his principal, to represent
421
422
AGENCY
also the other party to the transaction; whether an agent
in so acting forfeits his right to his fee.
Powell, J.: "It is recorded of Him 'who spake as
never man spake' that seeing the multitudes, he went
up into a mountain; and when he was set his disciples
came unto him, and he opened his mouth and taught them,
saying * * * 'No man can serve two masters: for
either he will hate the one, and love the other; or else
he will hold to the one, and despise the other.' So, also,
is our law. Civil Code, sees. 3010, 3011, 3014, 3018.
Whosoever, having undertaken the service of his master,
counsels with another and agrees also in those same
things wherewith he has been trusted, cannot claim the
reward promised by his master, unless he makes it plain
that he has not acted privily, hut that his master was
consenting thereto (citing cases).
"In this case a woman owning a house placed it with
an agent, instructing him to sell it for her for $1,500. A
man desiring to buy the house, but not for cash, hired
this agent to become also his agent to buy it of the woman
through other means, making known to him that he was
willing to give, in exchange for the woman's house, a
piece of land which he owned and $1,200 in notes. The
agent not telling the woman that he had become the agent
of the man, got from her an agreement to take, in ex-
change for her house, the man's land, and notes for
$1,000; and she therewith also consented that if the agent
could get the man to give more than this sum, he should
have it for his pay. However, before the trade was
ended, the woman, having obtained knowledge that the
man had already offered to give more than the land and
the $1,000 which had not been told her, put the agent
aside and dealt directly with the man, to her better ad-
vantage. The agent, learning of these things, sued her
for $200; and the judge gave judgment in her favor.
"Judgment affirmed.
Question 218: What was the agent employed to do in this
case? What did he do that was not known to his principal?
AGENT'S DUTIES
423
Why was that opposed to duties ? Did he lose his right to his
fee on that account ?
Case 219. Rice v. Wood, 113 Mass. 133.
Facts: Suit by plaintiffs as real estate brokers to re-
cover a commission from defendant for disposing of cer-
tain stocks in exchange for real estate. The plaintiffs
were at the same time employed by certain parties to
sell or exchange their real estate. Through the instru-
mentality of plaintiffs, an exchange was effected. Plain-
tiffs were to receive a commission from defendants, and
also from the owners of the real estate, defendant know-
ing this at the time, but the real estate owners did not
know of it. The defendant contends that plaintiffs can-
not recover, because they violated their duties as agents
with the other party to the contract, the real estate
Owners.
Point Involved: Whether an agent employed by A
to sell his property on a commission who without A's
knowledge contracts in the same matter with B to repre-
sent and receive a fee from B, who has full knowledge
of all the facts, can recover his fee from B.
Devens, J.: "* * *
"If this were an action by the plaintiffs against the
owner of the real estate, for commissions earned in dis-
posing thereof, the decision of this court in Farnsworth
v. Hemmer, 1 Allen, 494, would be conclusive against the
claim, upon the ground that the plaintiffs, if such facts
should be proved, had entered into a relation inconsistent
with the confidence reposed in them by such owner, andi
placed themselves in a position antagonistic to his inter-
ests. This case presents, however, the question whether,
conceding that the plaintiffs could not recover their com-
missions from the owner of the real estate, they may not
recover those they claim to be entitled to from the de-
fendant, as he knew fully, at the time of entering into
his contract, the relation in which the plaintiffs stood
to the third party.
424
AGENCY
'' It was the duty of the plaintiffs to get the highest
price for the real estate that conld be obtained for it in
the market; while the contract between the plaintiffs and
the defendant was an indncement to the plaintiffs to
effect a sale to the defendant, even if it was on lower
terms than might have been obtained from others, be-
cause they thereby secured their commissions from both
parties. It was therefore an agreement which placed
the plaintiffs under the temptation to deal unjustly with
the owner of the real estate. Walker v. Osgood, 98 Mass.
348.
/'Contracts which are opposed to open, upright and
fair dealing are opposed to public policy. A contract by
which one is placed under a direct inducement to violate
the confidence reposed in him by another is of this char-
acter. * * * No one can be permitted to found rights
upon his own wrong, even against another also in the
wrong. A promise made to one in consideration of doing
an unlawful act, as to commit an assault or to practice
a fraud upon a third person, is void in law; and the law
will not only avoid contracts the avowed purpose or ex-
press object of which is to an unlawful act, but those
made with a view to place, or the necessary effect of
which is to place, a person under wrong influence, and
offer him a temptation which may injuriously affect the
rights of third persons. Nor is it necessary to show that
injury to third persons has actually resulted from such
a contract, for in many cases where it had occurred this
would be impossible to be proved. The contract is avoid-
ed on account of its necessarily injurious tendency. Ful-
ler v. Dame, 18 Pick. 472. # * *
Question 219: (1) State the facts, the question presented
and the Court's decision in the above case, giving the reasons.
(2) A was an expert judge of pianos. B, being about to
purchase a piano, requested A as his friend and gratuitously
to examine a piano which C was attempting to sell to P Cb
secretly promised A a fee if the piano was sold to B. A be ed '
the piano a good instrument and he recommended it a B!
bought it. B has never complained and is entirely satisfied Lth1
AGENT'S DUTIES
425
the piano. A sues C for the fee promised. Can he recover?
(Bollman v. Lewis, 41 Conn. 581.)
§219. (Agency, Sec. 35.) Agent cannot buy from or
sell to self.
Case 220. Blank v. Aronson, 187 Federal Reports,
241.
Facts: Suit in equity by Aronson against Blank to
set aside a conveyance by Aronson. Aronson employed
Blank to find a purchaser for a tract of land owned by
him in Barnes County, North Dakota. Blank thereupon
produced Elmer W. Fish, as a proposed purchaser at the
price of $14 per acre, which Blank represented was all
that he could get. On December 3, 1906, a contract of
sale was entered into between Aronson and Fish for that
price, Fish agreeing to pay $2,300 in cash, and $2,000
more on or before December 1, 1907, when the deed was
to be given, and to give his notes, secured by mortgage,
for the balance. On November 1, 1907, Blank appeared
to be Fish's assignee of the right to purchase, and Aron-
son accordingly made the deed to him. Aronson now
charges that when Blank acted as his agent, he had a
personal interest in the purchase which was concealed
from Aronson.
Point Involved: Whether an agent employed to sell
real estate has the right without the consent of the prin-
cipal, to purchase it himself.
Adams, Circuit Judge: 11* * *
"* * * If the charge found in the bill is sustained
by the proof, the sale ought to be annulled. There is
119 principle of law, equity or morals more universally
irecognized than this: that an agent must be faithful to
his principal in the discharge of the duty which he under-
takes. He cannot purchase for himself that which his
duty requires him to sell for his principal. 'Emptor emit
tpiam minimo potest, venditor vendit quam maximo po-
kest.' His own interest is a constantly acting force in-
Slicing him to unfaithfulness in the discharge of the duty
426
AGENCY
undertaken by him. As said by the Supreme Court of
the United States in Michoud v. Grirod, 4 How. 503, 554,
L. Ed. 1076:
'1 i The general rule stands upon our great moral obli-
gation to refrain from placing ourselves in relations
which ordinarily excite a conflict between self interest
and integrity. * * * It therefore prohibits a party
from purchasing on his own account that which his duty
or trust requires him to sell on account of another.'
'' These salutary principles have been repeatedly laid
down and enforced by this court. * * *
[The court here considers the evidence.]
1 'On these findings it is clear that defendant while
acting as the paid agent of complainant to serve him
faithfully in finding a purchaser for his land, had a secret
agreement or understanding with Fish, with whom he
negotiated the sale, and who ostensibly became the pur-
chaser, that he the defendant should have a substantial
interest in the trade. This, under the authorities cited
entitled complainant to rescind the sale, and to a restora-
tion of the title upon complying with the established rule
in equity to place the defendant in statu quo. * * *
"But it is contended that complainant did not prompt-
ly and unevasively rescind the sale after being advised
of defendant's fraud. The well settled rule on this sub-
ject is that one entitled to rescind a contract on the
ground of fraud must announce his purpose to do so
promptly, unconditionally and unevasively upon the dis-
covery of the fraud practiced upon him. * * *
"The learned trial judge * * * found distinctly
this to have been done. # * * 
Question 220: In what manner did the agent in this case
accomplish the purchase himself? "Why did he violate a duty
in that regard? Was his purchase voidable or void? Did the
principal ratify in this case? Was it of any moment whether
the agent did in fact pay as much himself as he would have
obtained from a third person ?
AGENT'S DUTIES
427
§220. (Agency, Sec. 36.) An agent cannot take secret
profits and benefits.
Case 221. Davis v. Hamlin, 108 Illinois Reports, 39.
Facts: Bill in equity brought by John A. Hamlin
against William I. Davis, asking that Davis be held to
hold a lease on the Grand Opera House in Chicago for
benefit of Hamlin. Hamlin had been lessee of said thea-
tre. This lease was to expire April 23, 1883, and it was
Hamlin's intention to renew the lease. In 1880 he se-
cured the services of Davis, as general business man-
ager for $50 per week and 10% of% the profits. Davis
procured the lease before the expiration of the old one.
Point Involved: Whether an agent who procures a
lease upon the premises of the principal, to begin after
the expiration of the present lease, is entitled to the
benefit thereof, or whether the principal can have that
benefit if he desires it.
Mr. Chief Justice Sheldor: "* * * In the em-
ployment of an agent, the principal bargains for the dis-
interested skill, diligence and zeal of the agent for his
own exclusive benefit. Upon entering into the employ
of Hamlin, there rested upon Davis the duty of fidelity
to his employer's interest, and of acting for the further-
ance and advancement of the business in which he was
engaged, and not in its injury. We view the whole con-
duct of Davis in regard to the lease in question as vio-
lative of the duty of the relation in which he stood to-
ward Hamlin. * * *
 Public policy, we think, must condemn such a trans-
action as that in question. To sanction it would hold
out a temptation to the agent to speculate off from his
principal to the latter's detriment. Davis very well
knew that his employer would be willing to pay a much
higher rent than that at which he obtained the lease
and that he could dispose of the lease to Hamlin at a
large profit to himself, and such means of knowledge
Was derived from his position as agent. If a manager
428
AGENCY
of a business were allowed to obtain such a lease for
himself there would be laid before him the inducement
to produce in the mind of his principal an under-estimate
of the value of the lease, and to that end, may be, to
mismanage so as to reduce profits, in order that he might
more easily acquire the lease for himself..
Question 221: Upon what grounds did the court believe that
it would be against public policy to permit this agent to retain
the benefit of this lease?
B. Duty to Obey Instructions, Use, Care and Skill, etc,
§ 221. Duty of agent to <5bey instructions.
§ 222. Duty of agent to use care and skill.
§ 223. Agent's duty of personal performance.
§ 224. Whether agent is selected to perform or to obtain agent to perform,
§ 225. Same subject applied to collections by banks.
§ 221. (Agency, Sec. 37.) Duty of agent to obey
instructions.
Case 222. Johnson v. New York Central Transp. Co.,
33 N. Y. 610.
Facts: Action against a railroad company for loss of
hemp. The loss did not occur on the defendant's line,
but took place after the goods had been delivered to a
connecting carrier, defendant's contract of carriage sim-
ply covering its own line. The consignors had, however,
given instructions as to the connecting carrier and these
were disobeyed by the initial carrier, the defendant.
Point Involved,: The duty of the agent to obey the
instructions of his principal.
Porter, J.: "The defendant undertook to transport
the flax to Albany, and to forward it thence to New York
by the People's Line of steamboats. On the refusal of
that line to receive it, the defendant's obligation as a
carrier ceased; and if it incurred any further liability,
it was in the character of agent for the owner of the
property. In the absence of instructions as to the mode
of transportation from Albany, it owed no duty to the
AGENT'S DUTIES
429
plaintiff, beyond the delivery of the property, in the
usual course of business, to safe and responsible carriers
for transmission to its destination: Brown v. Dennison,
2 Wend. 593; Van Santvoord v. St. John, 6 Hill, 157. But
when the forwarding agent is instructed as to the wishes
of his principal, and elects to disregard them, he is guilty
of a plain breach of duty. When he sends goods in a
mode prohibited by the owners, he does it at his own
risk, and incurs the liability of insurer: Ackley v. Kel-
logg, 8 Cow. 225.
"It appears in the present case that the contract was
made with the freight agent of the defendant, who sug-
gested that it would be better to forward the hemp by
tow-boat from Albany; but the plaintiff replied, in sub-
stance, that it was so late in the season that he would
not send it, unless it could go by the People's Line. This
proof tends to show that the defendant received the prop-
erty with an express understanding that the hemp was
not to be forwarded to New York unless by the People's
Line. If this was so, the defendant was clearly liable.
On the refusal of the steamboat proprietors to receive
the property, the company should either have communi-
cated the fact to the plaintiff, and awaited further in-
structions, or it should have relieved itself from liability,
by depositing the hemp for safe-keeping in a suitable
warehouse: Forsyth v. Walker, 9 Pa. St. 148; Goold
v. Chapin, 20 N. Y. 259 (75 Am. Dec. 398); Fisk v. New-
ton, 1 Denio, 451 (43 Am. Dec. 649).
"There is a class of cases in which an agent is justi-
fied by an unexpected emergency in deviating from his
instructions, where the safety of the property requires
it. In this instance no such exigency arose. The only
inconvenience which would have resulted to the owner
from compliance by the carrier with his known wishes
would have been mere delay in transmitting the hemp to
market; and he had notified the company that he would
rather submit to this delay than to the hazard of tow-
boat transportation, at the close of the season of navi-
gation. The primary duty of the agent is to observe the
430
AGENCY
instructions of his principal, and when he departs from
these, he must he content with the voluntary risk he
assumes: 1 Parsons on Contracts, 69; Forrester v.
Boardman, 1 Story, 43; Acklev v. Kellogg, 8 Cow. 223.''
Question 222: (1) What instructions were given to the
agent in this case? Why couldn't the agent follow the instruc-
tions? What was its duty in that event?
(2) What did the Court say about a class of cases in which
an agent is justified in disobeying instructions?
(Note to above case: In some states a carrier which accepts
goods destined to a point beyond the terminus of its own line,
undertakes the liability of a common carrier for the entire dis-
tance, unless it affirmatively stipulates otherwise. In other
states (as in the case above), its duty is that of carrier only
while the goods are upon its own line, its further obligation be-
ing merely that of a forwarder, that is, to deliver the goods
to a responsible connecting carrier or to the carrier designated
by the consignor. The interstate commerce acts of the United
States now make a carrier which accepts interstate shipments
liable as a carrier for the entire distance.)
Case 223. Wilson v. Wilson, 26 Pennsylvania St. 393.
Facts: Thomas Wilson sued Matthew C. Wilson to
recover the sum of $300. Matthew, residing in Pennsyl-
vania, had in his hands $300, belonging to Thomas re-
siding in North Carolina. Thomas wrote,4'You can send
inclosed in letter in $50's or $100 notes on par hanks,
* * *. Only be careful and send it carefully folded
up and sealed. The defendant purchased 18 bills chief-
ly in denominations of $5, $10 and $20, and one of $100
and enclosed the same in a letter carefully folded and
sealed and properly addressed and stamped. This letter
never reached its destination.
This suit is brought on the ground that defendant by
disobeying instructions assumed the risk.
Point Involved: Whether a direction to send money
in a particular way, imposes on an agent who sends it
in another manner, the risk of loss.
AGENT'S DUTIES
431
Lewis, C. J.: "The primary obligation of an agent,
whose authority is limited by instructions, is to adhere
faithfully to those instructions, in all cases to which they
ought properly to apply: Story on Agency, 192. He is
in general bound to obey the orders of his principal ex-
actly, if they be imperative and not discretionary; and,
in order to make it the duty of a factor to obey an order,
it is not necessary that it should be given in the form of
a command. The expression of a wish by the consignor
may fairly be presumed to be an order: Story on Con-
tracts, 359, Brown v. McGran, 14 Peters, 494. It is true
that instructions may be disregarded in cases of extreme
necessity arising from unforeseen emergencies, or if per-
formance becomes impossible, or if they require a breach
of law or morals: Story on Agency, 194. These are,
however, exceptional cases. There may, perhaps, be
others which have been sanctioned by adjudications,
founded on the principle that the departure complained
of was not material. But the general rule is as indicated
in what has been said, and the case before the Court is not
brought within any of the exceptions. To justify a de-
parture from instructions, where a loss has resulted from
such deviation, the case must be brought within some
of the recognized- exceptions. It is not sufficient that
the deviation was not material if it appear that the party
giving the instructions regarded them as material, unless
it be shown affirmatively that the deviation in no manner
contributed to the loss. * * * As between vendor
and vendee, the right of property and the consequent
risk vests on delivery of the goods purchased to the
designated carrier, packed, and directed according to
usage or instructions. But if a different method of pack-
ing and directing, or a different carrier than the one
designated, be adopted by the vendor, he assumes the
risk in case of loss, unless it be shown that his devia-
tion in no way contributed to the loss. Where the goods
are stolen, how can this be shown? In sending bank-
notes by mail, it is manifest that while a large package
Would attract the attention and care of honest agents
432
AGENCY
on the route, it might tempt the cupidity of dishonest
ones. The party who proposes to take the risk of this
method of remittance has a right to weigh the advan-
tages and disadvantages of the money to he remitted in
notes of $100 or $50, the debtor has no right to increase
the size of the package by remitting in notes of $10 or
$5. There was error in permitting the jury to find that
the departure from instructions was immaterial.
Question 223: (1) What did the Court hold in this case?
(2) State the exceptions suggested by the Court which would
justify a disregard of instructions.
(3) If the agent disregards instructions, is he liable for loss
which was not caused thereby?
§222. (Agency, Sec. 38.) Duty of agent to use care
and skill.
Case 224. Whitney v. Martin, 88 N. Y. 535.
Facts: Suit to recover a sum of money invested by
defendant's testator for plaintiff, in second mortgages,
the property not being of sufficient value to satisfy the
first mortgages. The deceased (whose executor is sued
herein) was an attorney at law and the agent of the
plaintiff and having money to invest for plaintiff invested
the same in second mortgages in New York City.
Point Involved: Generally, of the duty of an agent
to use care, prudence and skill. Specifically, the rule
applied to the case of an attorney at law having money
of his principal to invest who invests the same in second
mortgages with scant security.
Miller, J.: 11 * * * Although there was a contra-
diction in the testimony in regard to the testator's rela-
tion to the plaintiff, it was sufficient, nevertheless, to
warrant the conclusion that the testator was intrusted
by the plaintiff with making the loan, and the duty de-
volved upon him to see that the money was safely and
securely invested. The responsibility of an agent or at-
torney under such circumstances is beyond dispute and
the rule is well settled that the agent is not only bound
to act in good faith, but to exercise reasonable diligence
and such care and skill as is ordinarily possessed by
AGENT'S DUTIES
433
persons of common capacity engaged in the same busi-
ness. (Here the Court reviews the evidence showing that
the security was inadequate.) Loans under such cir-
cumstances are always hazardous and doubtful, and,
while the attorney or agent may be exonerated, where
the party had full knowledge of their existence and the
value of the property, it would be a very unsafe rule to
hold as a matter of law, that an agent would be justified
without an understanding by the party of the true char-
acter of the prior encumbrance, under circumstances like
these here presented.
"The right of an agent to advance funds on second
mortgages or security not of the first class may well be
questioned. (McQueen's Appeal Cases, 236.) And as a
general rule it may properly be laid down that it is
not prudent or safe to advance moneys on second mort-
gages where there are large prior encumbrance and espe-
cially where the personal security of the mortgagor is
in any way precarious. Such an investment is not a
first class one.' * * * And as this case is presented
upon the evidence, we are brought to the conclusion that
the agent exceeded his authority and was chargeable with
a want of proper care and skill in making the investment;
and for this neglect he is legally liable for the loss sus-
tained. * * *
Question 224: (1) State the duty of an agent to exercise
care, prudence and skill.
(2) Suppose in this case; the owner of the money had spe-
cifically directed the investment of the money in this particular
security. Would the agent be liable on the failure of the in-
vestment 1
(3) Suppose that the agent was not professional and was
known to have no experience or skill in such matters and claimed
none. Would this make any difference?
§223. (Agency, Sec. 39.) Agent's duty of personal
performance.
Case 225. Eldridge v. Holway, 18 Illinois, 445.
Facts: Eldridge gave a power of attorney to Cobb
appointing Cobb his attorney in fact to start suits in
434 AGENCY
forcible detainer against all persons unlawfully in pos-
session of Eldridge's real estate in Chicago. Cobb
for this purpose employed Kales, an attorney to serve
a notice of demand upon the defendant Holway to quit
possession of Eldridge's property, the notice being signed
in Eldridge's name by Cobb as his attorney in fact. A
suit for possession of the premises based upon this de-
mand being subsequently instituted, Kales testified that
he served the notice, to which the defendant objected
upon the ground that under the power of attorney, Kales
had no authority to serve the notice and therefore no
notice had really been served upon him. The lower court
upheld this contention. Plaintiff appeals.
Point Involved: What acts an agent must do per-
sonally, and what he may delegate to others to do for
him.
Scates, C. J.: "An attorney in fact of plaintiff em-
ployed an attorney at law in this case who served the
written notice and demand of possession. The court ex-
eluded the evidence upon the ground that delegated au-
thority cannot be delegated.
"This is true as a general principle, when properly
applied to the classes of cases where personal confidence
is reposed, and skill, judgment, etc., are involved. Story
on Agency, Sees. 12,13,14. * . * * Some powers arise
by implication as incidents to others, and are essential
to their exercise. So, in' the performance of a general
or special agency, many acts are to be performed, of
an indifferent nature, which may as well be done by one
person as another, and which an agent might find it ex-
tremely inconvenient to be compelled to perform per-
sonally. The maxim withholding the power of sub-
delegation of authority only has place where there is
an object, an end to be gained—where the interest of
the principal may be neglected or injured by substitu-
tion. When from the nature of the act to be done, there
can be no difference the principle cannot apply.
"Such is the case here. There is neither confidence,
AGENT'S DUTIES
435
skill, discretion or judgment required to deliver a. writ-
ten notice, and make oath of it which could prevent the
employment of any one by an agent. The service of
declarations in ejectment, notices to take depositions,
and a great variety of acts now done by attorneys' clerks
and others would fall under the same rule contended for,
and compel attorneys to do such acts personally.
'' An attorney may serve such notice and demand, and
we perceive no reason why an agent to bring-suit may
not employ an attorney. Agents, as such, cannot appear
in court for parties. Where agents are not licensed as
attorneys, they must employ attorneys to appear for the
client in the court.
"The act here falls strictly within a class which may
be done by such supposed subdelegation. It is rather
the true and only mode of acting out an agency where
an attorney becomes necessary, than a subdelegation of
power.
"Had the agency here been an attorneyship, it might
present another question—one involving a question of
confidence reposed, or skill and judgment—which could
not be transferred. But the agency does not appear to
be of that character.
- "Judgment reversed and case remanded.
Question 225: (1) "What is the meaning of the maxim "that
which is delegated cannot be delegated.
(2) Under that rule may an agent appoint another to do
any of the acts of agency? What ones?
(3) What was the act done by another than the agent in this
case?
(4) Under what other theory than that of delegation did the
court think the act in question might be supported ?
§ 224. (Agenay, Sec. 40.) Whether agent is selected to
perform or to obtain agent to perform.
(Note: The thought here is this: One may be employed to
do an act in which he may employ others to help him, but these
others are his agents or employees, and their* neglect or lack of
skill are attributable to the agent. As where a lawyer personally
436
AGENCY
employed to handle a matter, may have his assistants to attend
to details, as serving notices, etc. The lawyer is responsible.
But one may employ an agent to employ agents, the agents so
employed becoming the agents of the principal. See next
section.)
§ 225. (Agency, Sec. 41.) Same subject applied to
collections by banks.
Case 226. First National Bank of Pawnee City v.
Sprague, 34 Nebr. 318.
Facts: The facts appear in the opinion.
Point Involved: The liability of a bank receiving
negotiable paper for collection for the defaults of its
correspondent to whom by reason of the paper being
collectable in another place, it has with the owner's
knowledge, found it necessary to send such paper.
Post, J.: "On the 3d day of February, 1888, at Paw-
nee City, in this state, the defendant in error drew a
sight draft on Davis & Wedd, residing at Canon City,
Colo., of which the following is a copy: '$85.75. First
National Bank, Pawnee City, Neb., Feb. 3, 1888, Pay to
the order of First National Bank of Pawnee City, Neb.,
eighty-five and 75-100 dollars, with exchange and col-
lection charges; value received; and charge the same to
account of H. W. Sprague. To Mess. David & Wedd,
Canon City, Colo. No. C. 5238.' The said draft was
by the drawer left with the plaintiff in error at its bank-
ing house in Pawnee City for collection, and by it for-
warded for collection to the Exchange Bank of Canon
City, Colo., and by the latter collected in full from the
drawees. The last-named bank failed, and without hav-
ing remitted the proceeds of the said draft; and no part
thereof has been paid, either to the plaintiff or the de-
fendant in error. There is no controversy with refer-
ence to the facts on this branch of the case. Defendant
in error was a customer of the bank, and was in the habit
• 7
of shipping butter to parties at distant points, and mak-
ing sight drafts therefor payable to its order, credit being
AGENT'S DUTIES
437
given him for the proceeds thereof, when collected. It
further appears that defendant in error was permitted
by the bank to overdraw his account by reason of such
collections. It does not appear that plaintiff in error
was in the habit of making any charge for collecting
said drafts. With reference to the transaction in ques-
tion he testifies as follows: ' Question. Did you expect
them to charge you anything for collecting this draft?'
Answer. 'Not directly. I think not. If I had not been
doing my banking business with them, I would expect to
pay them; but as I was doing my business there, and
they charged two per cent for overdrafts, I supposed
they did this as a favor.' There is no pretense that the
bank in this case was guilty of negligence in forwarding
the draft, in the selection of its correspondent, or in
giving instructions to the latter with reference to the
collection, or remittance of the money when collected.
"The only question for consideration is whether the
plaintiff in error, in view of the facts stated, is answer-
able for the default of the bank at Canon City. The
Court, on its own motion, gave the following instruc-
tions: 'The Court instructs the jury that when a home
bank receives for collection merely a draft drawn upon
a person residing in another place, which draft, from
the nature of the business and general usage in such
cases, will have to be transmitted for collection to some
correspondent bank at the place where the debtor re-
sides, and for the collection of which draft the home bank
will receive only the customary exchange, in the absence
of any express agreement between the parties to the con-
trary, the home bank, if it exercises due and ordinary
care in selecting such correspondent bank, and transmits
such draft for collection to such correspondent bank, will
not be liable for the default or failure of such corre-
•spondent bank to remit moneys collected by it upon such
draft.' If this instruction correctly states the law ap-
plicable to the case, the motion for a new trial should
have been sustained. The courts, as well as text-writers,
differ widely upon the question presented. It is held by
438
AGENCY
the courts of the United States, New York, New Jersey,
Ohio, Indiana, Minnesota, and perhaps others, following
the English cases, that where a note or bill is received
for collection by a bank, and by it transmitted to a cor-
respondent at a distance for presentment and demand,
the latter is the agent of the transmitting bank only,
which will be liable for the defaults of its correspondent.
This view is also approved by Mr. Daniel in his work on
Negotiable Instruments (vol. 1, p. 324). The leading case
holding tbis is Allen v. Merchants Bank of New York,
22 Wend. 215, 34 Am. Dec. 314, in which by a vote of
14 to 10 senators, the opinion of Chancellor Walworth
in the same case was overruled, and which has since
then been followed and approved by the court of appeals
in numerous cases. It will be observed, too, that when
this rule was adopted by the supreme court of the United
States (Hoover v. WTse, 91 U. S. 308, 23 L. ed. 393)
dissenting opinions were filed by Justices Miller, Clif-
ford and Bradley. Mr. Freeman in a note to Allen v.
Merchants Bank of New York, 34 Am. Dec. 315, while
expressing a preference for the rule above stated says,
' The preponderance of authority is against the principal
case and in favor of the rule that the liability of a bank
taking a note or bill for collection, which is payable at
a distance, extends merely to the selection of a suitable
and competent agent at the place of payment, and to
the transmission of the paper to such agent with proper
instructions, and that the corresponding bank is the
agent, not of the transmitting bank but of the holder,
so that the transmitting bank is not liable for the default
of the correspondent where due care has been used in
selecting such correspondent.' The foregoing proposi-
tion is sustained by the following cases: (citing numer-
ous cases). * * * The doctrine of these cases is ex-
pressly approved in Morse on Banks & Banking, 3d ed.
chap. 17. A discussion of the reasons, which have often
been advanced by courts in support of the opposing views
of the question involved will not be profitable in this
connection. In our opinion, the rule stated in the vy
AGENT'S DUTIES
439
struction given by the Court and set out above is not
only in accord with the weight of authority, but is sus-
tained by reasons sounder in themselves and more in
consonance with the principles which underlie and deter-
mine the relations of principal and agent.
"This is believed to be a typical case, and to be fairly
illustrative of the method of making collections through
the agency of banks in this country at this time. "What-
ever may have been the reasons arising out of the busi-
ness methods existing at the time Allen v. Merchants
Bank of New York was decided for the rule adopted
therein, the reason for such a rule is wanting in view of
the present changed conditions. Banks, as a general rule,
have now no facilities for making collections at distant
points, not enjoyed by the business public at large.
Formerly they may have enjoyed a monopoly of infor-
mation relative to location, names and credit of banks
at distant or remote points. To-day, however, business
men, by means of the information derived from the press
and the numerous directories at their command, may
collect their bills through the medium of banks at the
place of payment as cheaply, safely and expeditiously
as their local bank. It is more convenient, and there-
fore more frequent, for customers to deposit drafts and
acceptance with their home banks for collection, paying
therefor the cost of exchange only. * *
Question 226: (1) "What is the duty of the bank in respect to
selecting correspondents? Is it liable for the default of the
correspondent ?
C. Liability of Agent to Principal for Defaults of Third
Person.
§ 226. (Agency, Sec. 42.) General rule.
(Note: Generally, an agent has no responsibility to the prin-
cipal for the defaults of the third person. That the third person
shall perform is no undertaking of his. The agent is an inter-
mediary only and does not become a party to the contract or an
insurer of performance.)
440
AGENCY
§227. (Agency, Sec. 43.) Del credere agencies.
(Note: A del credere agent is one who for a larger considera-
tion undertakes that the principal will suffer no credit losses
upon accounts for goods sold by the agent. The agent is respon-
sible to the principal upon the expiration of the period of credit
without payment by the debtor, and the principal need not first
sue the debtor. Nor is the promise within the statute of frauds.)
CHAPTER 29
THE DUTIES AND LIABILITIES IN CONTRACT OP
A DISCLOSED PRINCIPAL TO THIRD
PERSONS. (THE AUTHORITY
OF THE AGENT.)
§ 228. General rule.
§ 229. Unauthorized assertion by agent of his authority.
§ 230. Express, implied and apparent authority.
§ 231. Implied and apparent authority in general and special agencies.
§ 232. Construction of special appointments.
§ 233. Implied (or apparent) power of agent to borrow money.
§ 234. Implied (or apparent) power of agent to bind principal upon
commercial paper.
§ 235. Implied (or apparent) power of agent to sell personal property.
§236. Implied (or apparent) power of agent who has indicia of title
to sell goods.
§ 237. Implied (or apparent) power of agent to sell, to receive payment.
§ 238 Implied (or apparent) authority of selling agent to extend credit
on sales.
§ 239. Implied (or apparent) authority of buying agent to buy. on
credit.
§ 240. Implied (or apparent) power to warrant.
§ 241. Admissions of agent.
§ 242. Authority of agent to receive notice.
§ 228. (Agency, Sec. 44.) General rule.
(See also Central Trust Co. v. Bridges, supra, Case
202.)
Case 227. Law v. Stokes, 3 Yroom (N. J.) 249.
Facts: Suit brought to recover the amount of a bill
of goods sold by Law to Stokes. Defense: That the
goods were paid for by payment to Law's agent. Denial
that the person paid was plaintiff's agent to receive pay-
ment. Plaintiff, Law, was an importer of earthenware,
and Stokes a hotel keeper. Stokes on July 5,1865, bought
at Law's store earthenware amounting to $320.85 from
441
442
AGENCY
an agent by the name of Sheridan employed by Law to
sell goods on commission. Sheridan sold the goods on
credit to be paid on August 1, 1865. On July 6, 1865,
the goods were shipped, and a letter was sent by Law
to Stokes, which said, in part,  please remit amount
direct to me. Inclosed was a bill on the head of which
were the words, in red letters, "All remittances on ac-
count, or in settlement of bills must be made direct to the
principal; salesman not authorized to collect. On Au-
gust 16, 1865, defendant paid Sheridan for the goods at
defendant's hotel, taking receipt signed "J. B. Sheridan,
for Henry D. Law. Sheridan absconded with the
money. Defendant claims never to have seen the letter,
and the bill was handled by his son, who was his book-
keeper and who never read the bill head.
Point Involved: The authority of the agent as deter-
mined by the acts and notices of the principal in ap-
pointing him.
Depue, J.: "* * * A principal is bound by the
acts of his agent within the authority he has actually
given him, which includes not only the precise act which
he expressly authorizes him to do, but also whatever
usually belongs to the doing of it, or is necessary to its
performance. Beyond that, he is liable for the acts of
the agent within the appearance of authority which the
principal himself knowingly permits the agent to assume,
or which he holds the agent out to the public as possess-
ing. For the acts of the agent, within his express au-
thority the principal is liable, because the act of the agent
is the act of the principal. For the acts of the agent,
within the scope of the authority he holds the agent out
as having, or knowingly permits him to assume, the prin-
cipal is made responsible; because to permit him to dis-
pute the authority of the agent in such cases would be
to enable him to commit a fraud upon innocent persons.
In whichever way the liability of the principal is estab-
lished, it must flow from the act of the principal. And
AUTHORITY OF AGENT
443
when established, it cannot on the one hand be qualified
by the secret instructions of the principal nor on the
other hand be enlarged only by the unauthorized rep-
resentations of the agent. * * *
 Where an agent is intrusted with the possession of
goods, with an unrestrained power to sell (Higgins v.
Moore, 6 Bosw. 344) or payments are made over the
counter of the principal's store to a shopman accustomed
to receive money there for his employer (Kaye v. Brett,
5 Ex. 269), the authority to receive payment will be im-
plied in favor of innocent persons, because the principal
by his own act gives the agent an authority to receive
such payment. But if the principal forbids such pay-
ments, and requires all payments to be made to himself
personally, or to a cashier, and gives a customer notice
thereof, the customer would have no right to insist upon
the apparent rather than the real authority of the agent.
"In the case now before the Court, Sheridan had not
the possession of the goods. The sale was made on
credit, and the payment was made to him, not over the
plaintiff's counter at his place of business, but at de-
fendant's hotel. # * * (The Court, here, holds that
the weight of the evidence was that defendant got the
letter, but irrespective of that, defendant's son got the
bill head, and was defendant's agent in that respect, and
what he knew or should have known in respect to the
agent's limited authority was binding on the defendant.
Judgment for plaintiff. But regardness of that fact there
was, as shown by the court's reasoning above, no appar-
ent authority in the agent to collect the money under the
circumstances of the case.)
Question 227: (1) State the three classes of powers which
as stated by the Court, an agent may possess.
(2) May the principal qualify the power of the agent by
secret instructions?
(3) May the agent enlarge his authority by his own state-
ments ? Why ?
(4) When will the power to receive payment be implied?
444
AGENCY
§ 229. (Agency, Sec. 45.) Unauthorized assertions by
agent of his authority.
(Note: The case of Law v. Stokes, supra, and National
Bank of Peoria v. Nichols, post, as well as generally the other
cases in this chapter bring out clearly, that a person dealing
with an agent cannot rest his case upon the assertions by the
supposed agent as to his own authority. "An agent cannot
confer power upon himself, and therefore his agency or author-
ity cannot be established by showing what he said or what he
did. The source of authority is the principal, and the power
of the agent can be proved only by tracing it to that source in
some word or act of the alleged principal. It is of course
true, as a practical proposition, that people dealing with agents
do take the agent's word for his authority, but in the event
the principal repudiates, then the agent's authority must be
traced back to something the principal said or did by which
he conferred or apparently conferred the authority in question.
Any other doctrine would place it in any one's power to bind
others merely by claiming to be agent.)
§ 230. (Agency, Sec. 46.) Express, implied and appar-
ent authority.
(Note: Authority of an agent may be classified.)
1. Real authority.
a. Express, that is, stated in language oral or written.
b. Implied, that is, deduced from the express grant.
2. Apparent, that is, seeming, though perhaps not real.
§231. (Agency, Sec. 47.) Implied and apparent au-
thority in general and special agencies.
(See cases under next section.)
§232. (Agency, Sec. 48.) Construction of special
appointments.
Case 228. Wood v. McCain, 7 Alabama, 800, 42 Amer.
Decisions, 612.
Facts: Stedman, being about to leave the State gave
one Revis a letter of authority, calling Revis his '' general
AUTHORITY OF AGENT
445
agent, and authorizing him "to transact his business
in this State and delivered Revis accounts due Sted-
man for medical services rendered to various parties
"for settlement. One Wood was surety for Stedman
for certain indebtedness, and when Wood found that
Stedman had left the State, leaving the indebtedness
unpaid, he prevailed on Revis to assign the accounts
to him so that he might collect and hold the funds as
indemnity against his liability as surety. Wood, as such
assignee sues McCain a debtor to Stedman, and McCain
resists suit on the ground that Wood has no title to
the claim.
Point Involved: Whether a power generally to trans-
act another's business and to collect and settle accounts
receivable gives any power to assign such accounts to
principal's surety for his indemnity. Generally, of the
powers of universal, general and special agents.
"It is supposed by the counsel for the plaintiff in error,
that as Revis was the general agent of his principal, it
must be presumed he was authorized to make the assign-
ment in question. This conclusion is by no means a
necessary sequence from the premises. General, are
clearly distinguishable from universal agents, that is
from such as may be appointed to do all the acts, which
the principal can personally do and which he may law-
fully delegate the power to another to do. * Such a uni-
versal agency may potentially exist; but it must be of
the very rarest occurrence. And, indeed, it is difficult,'
says Mr. Justice Story, Go conceive of the existence of
such an agency, inasmuch as it would be to make such
an agent the complete master, not merely dux facti, but
dominus rerum, the complete disposer of all the rights
and property of the principal.' Such an unusual author-
ity will never be inferred from any general expressions,
however broad, but the law will restrain them to the
particular business of the party, in respect to which,
it is presumed, his intention to delegate the authority
was principally directed. Thus, if a merchant in view
of his temporary absence, should delegate to an agent
446
AGENCY
his full and entire authority to sell his personal prop-
erty, to buy any property for him, or on his account, or
to make any contracts, or to do any other acts whatso-
ever, which he could do if personally present—these gen-
eral terms would be limited to buying or selling, con-
nected with his ordinary business as a merchant; and
without some more specific designation, would not be
construed, to apply to a sale of his household furniture,
or library, or the utensils, provisions, and other neces-
saries used in his family; Story on Agency, 20, 21.
"The difference between a general and special agent,
is said to be this: The former is appointed to act in
the affairs of his principal generally, and the latter to
act concerning some particular object. In the former
case, the principal will be bound by the acts of his agent,
within the scope of the general authority conferred on
him, although those acts are violative of his private in-
structions and directions. In the latter case, if the agent
exceeds the special authority conferred on him, the prin-
cipal is not bound by his acts: Story on Agency, 114;
Paley on Agency, 199; Munn v. Commission Co., 15
Johns. 44, 54 (8 Am. Dec. 219). It is laid down, that
an agent employed to buy, has no authority to sell, and
vice versa: Story on Agency, 81, 82. So an agency for
the purpose of accepting or indorsing bills, or notes, does
not authorize the agent to purchase or sell goods for his
principal: Id. 84. And an authority to take a bond does
not in itself embrace the power to receive the money due
thereon: Id. 88; nor has an agent for the purpose of
receiving a debt, the power, ordinarily, to receive it in
anything else than money, and then only when it is ma-
tured: Id. 88, 89.
"In the case at bar, the general words are, 'to trans-
act his (the principal's) business in this state,' but as it
respects the books and accounts for medical services
rendered by Stedman, these words are restricted, by
declaring, that they were delivered to the agent 'for
settlement.' By this we are to understand, that Bevis
was to collect, or it may be, otherwise settle these de-
AUTHORITY OF AGENT
447
mands, with the persons from whom they were due. It
would require a most unwarrantable extension of terms,
to hold, that they conferred the power upon the agent,
to assign the hooks and accounts to a surety of his con-
stituent for his indemnity. The citations we have made
upon this point are pertinent, and most satisfactorily
show, that the assignment in question was not authorized
hv the power previously given. The assignment might,
perhaps, he further objected to, for the reason, that Revis
himself was an agent, with the power to settle the ac-
counts, and could not delegate his authority, or appoint
a subagent without the assent of his principal: 2 Kent's
Com., 4th ed., 633; 1 Livermore on Agency, 54, 64; Story
on Agency, 17; Solly v. Rathbone, 2 Mau. & Sel. 299;
Coles v. Trecothick, 9 Ves. 251.
Question 228: State the point involved in this case, and the
Court's decision.
(2) What is a "universal agency? a "general agency? a
"special agency?
(Note: It is laid down in the hooks generally, that "the
principal will be bound by the acts of a general agent, if the
latter acted within the usual and ordinary scope of the business
in which he was employed, notwithstanding he may have vio-
lated the private instructions which the principal may have
given him, provided the person dealing with such agent was
ignorant of such violation and the agent exceeded his authority.
* * * The authority of an agent being limited to a par-
ticular business does not make it special; it may be as general in
regard to that as though its range were unlimited. * * * A
special agent is one who is authorized to do one or more specific
acts, in pursuance of particular instructions or within restric-
tions necessarily implied from the act to be done. (Cruzan v.
Smith & Thompson, 41 Ind. 288.) On this distinction the cases
constantly base their reasoning whether an agent has or not cer-
tain apparent powers. But the true test is: what has the prin-
cipal said or done to give an appearance of power in the agent ?
If I appoint one to sell a horse, obviously he has no authority to
buy a horse; but if I make him the general manager of my busi-
ness of buying and selling horses, I give him an authority to do
448
AGENCY
all those acts and things which are usual in that business and
which are incidental thereto, and by the facts it might be found
that I had impliedly authorized him to buy for cash or on credit,
to make warranties in the sales made. This would be determined
by all the facts surrounding his appointment. In neither case
can I restrict his authority by secret instructions, inconsistent
with his apparent power. In the special agency few powers are
implied. In the general agency there are many implied powers.
But whatever power the agent has must be traced back to some-
thing done, said or written by the principal. See cases generally
in this chapter.)
§ 233. (Agency, Sec. 49.) Implied (or apparent) power
of agent to borrow money.
Case 229. Consol. Nat. Bank v. P. C. S. S. Co., 95 Cali-
fornia Reports, 1.
Facts: One Simpson was agent of the defendant
steamship company which conducted a marine freight
and passenger business along the Pacific Coast from
Mexico to Alaska. G. P. & Co. at San Francisco were
its general agents, but it had a local agent at each port
on the coast where it .did business, who was under the
control of the general agency. Simpson was one of these
local agents at the port of San Diego, and plaintiff con-
ducted a bank at that point. Simpson kept an account
at such bank in the name of "J. H. Simpson, Agent.
He deposited sums collected for defendants in this bank
and checked out over signatures signed  J. H. Simpson,
Agent, the greater portion of which were payable to
himself, and actually paid to him. On Oct. 1,1889, Simp-
son had overdrawn his account some $11,404.32, which
he was unable to pay and he was removed from his posi-
tion. Defendant is sued for this amount, with interest.
Point Involved: The circumstances that will raise an
implied or apparent authority on the part of an agent,
to borrow money'.
Vancliff, C.: "* * * If Simpson had actual or
ostensible authority to borrow money for the defendant,
AUTHORITY OF AGENT
449
the plaintiff is entitled to recover; otherwise not. This
is the ultimate and pivoted question of fact presented
for decision. Upon this question the trial court found
for the defendant, and I think the finding was justified
by the evidence.
"The evidence is positive that no express authority to
borrow money * * * was ever given * * *. But
counsel * * * contend, in substance, that such au-
thority was implied from the necessity of borrowing
money in order to carry on the business which Simpson
was employed and authorized to do. The evidence, how-
ever, strongly tends to prove that no such necessity ever
existed. * * *
"As to the implied power of an agent to borrow money
on account of his principal, the Court of Appeals, in
Bickford v. Menier, 107 N. Y. 490, said: 'If the trans-
action of the business absolutely required the exercise of
the power to borrow money in order to carry it on then
the power was impliedly conferred as an incident to the
employment; but it does not afford a sufficient ground
for the inference of such a power, to say the act proposed
was convenient or advantageous, or more effectual in the
transaction of the business provided for; but it must be
practically indispensable to the execution of the duties
really delegated in order to justify its inference from
the original employment. * * *'
"There is no evidence of ostensible authority.
(The court here goes into the evidence to show that the
defendant was not by conduct estopped to set up the
defense; that it never knew of Simpson's overdrafts;
that it had never in any way ratified overdrafts by him,
and that the merits of the case were with the defend-
ant.)
Question 229: When will the power to borrow money be im-
plied as illustrated by the facts of this case ?
Case 230. Merchants Nat. Bank of Peoria v. Nichols
& Shepard Co., 223 Illinois, 41.
Facts: Suit to recover $1023.60, the aggregate of 24
checks which created an overdraft to that amount. The
450
AGENCY
checks creating such overdraft were signed  Nichols &
Shepard Co. by W. H. Harte, Manager, Harte being
defendant's agent at Peoria. The facts were that the
defendant, to sell its threshing machinery, maintained
eleven agencies, established in various states; one of
these agencies was at Bloomington and then Peoria;
Harte was in charge and opened up a bank account at
Peoria in the defendant's name and with defendant's
knowledge. Harte had entire charge of the Peoria
agency, renting a building for the business, employing
assistants, fixing and paying salaries, having charge of
about fifteen traveling salesmen and one hundred local
agents, and paid all bills, and made sales, collections and
settlements. He was further authorized to collect all
money due defendant in his district, and received checks
and drafts, and endorsed them to the bank. The funds
with which he carried on the, business were received from
sales and settlements or sent to him by defendant.
Point Involved: The implied or apparent power of an
agent to borrow money on the facts given.
Me. Justice Cart weight : "* * * The payment of
the checks when there was no funds of the defendant in
the bank constituted a loan of the money paid, and de-
fendant never gave Harte any authority to borrow money
on its account by that money or any other. He was sup-
plied by the defendant with the necessary funds to exe-
cute the duties imposed upon him, and the only occasion
for overdrawing the account was his appropriation of
defendant's money. The.re is no claim that the power
was expressly given, but the argument is that the power
arose out of the nature of the agency and that plaintiff
had a right to assume the power existed. It is to be
remembered that persons dealing with an assumed agent
are bound, at their peril to ascertain not only the fact of
the agency, but the extent of the agent's authority. They
are put upon their peril, by the very fact that they are
dealing with an agent, and must, at their peril, see to it
that the act done by him is within his power. It is their
AUTHORITY OF AGENT
451
right and duty to ascertain the extent of his power, and
to determine whether his acts come within the power and
are such as to bind his principal. (Mechem on Agency,
§ 276, Reynolds v. Ferree, 86 111. 570; 1 Am. & Eng. Ency.
of Law,—2d ed.—987.) An agent cannot confer power
upon himself, and therefore his agency or authority can-
not be established by showing either what he said or did.
(Proctor v. Tows, 115 111. 138; Mullanphy Savings Bank
v. Schott, 135 id. 655.) The source of authority is the
principal, and the power of the agent can be proved only
by tracing it to that source in some word or act of the
alleged principal. In this case there was no evidence
tending to prove that the power to borrow money was an
incident of the agency. For such an act as that, an agent
must have express authority, or some power must be
expressly conferred upon him which cannot be otherwise
executed. The fact that the defendant carried on the
sale of its products through the medium of agencies dis-
tributed over the country would be no ground for a
conclusion that the various agents for making sales of
machinery and collecting the proceeds were clothed with
authority to borrow money. We held in the case of Jack-
son Paper Co. v. Commercial Nat. Bank, 199 111. 151, that
proof that an agent was the superintendent and manager
of a mill, having charge of buying material, hiring men
and manufacturing and selling paper, did not justify an
inference that he had authority to endorse checks, and
surely the same facts or the facts in this case would not
justify an inference that Harte had the more unusual
power to borrow money and pledge the credit of the
defendant.'*
Question 230: State the facts, the question presented and the
Court's decision in the above case.
§234. (Agency, Sec. 50.) Implied (or apparent) power
of agent to bind principal upon commercial paper.
Case 231. Graham v. United States Savings Inst., 46
Mo. 186.
Facts: The facts are given in the opinion.
452
AGENCY
Point Involved: "Whether an agent who has power to
receive payment has implied or apparent authority there-
from to cash the check payable to his principal's order.
Currier, J.: "This suit is brought to recover the
amount of two checks which were drawn on the defend-
ant by third parties in favor of the plaintiffs and made
payable to their order. The drawers delivered the checks
to the plaintiffs' collecting agent, one Dixon, in settle-
ment of certain bills which the latter had in charge for
collection, being bills due from the drawer of the checks
to the plaintiffs. 1 Dixon indorsed the plaintiff's firm
name upon the checks and presented them at the bank and
drew the money upon them, which he seems to have ap-
propriated to his own use, without rendering any account
thereof to the plaintiffs. Thus far there appears to be
no serious controversy about the facts.
"If Dixon had authority, general or special, to indorse
the checks in the manner stated, or the defendant was
authorized to pay them without the personal indorse-
ment of the plaintiffs, it is not contended that the defend-
ant would be liable in this action. The verdict of the jury,
however, negatives the supposition of the existence of
such express authority. The defendant nevertheless un-
dertakes to deduce the authority from the nature and
character of Dixon's general agency in making collections
and the transaction of business in behalf of the plaintiffs.
Their chief complaint of the action of the court below is
founded upon the refusal of the court to give the follow-
ing instruction, namely: 'If the jury believe from the
evidence that Charles Dixon was, at the times stated in
the petition, the clerk and collector of the plaintiffs, and
that, as such, he received from the plaintiffs, among other
accounts for collection, two accounts, one against Kramer
& Loth, and one against Erfort & Petring, and that he
was fully authorized and empowered to receive payment
of and receipt said bills or accounts, and that, in pursu-
ance of his duties and authority, he received in payment
of such accounts the checks set out by the petition, and
AUTHORITY OF AGENT
453
afterwards collected the money on said checks from the
defendant, in accordance with his authority to collect said
accounts, then they will find for the defendant.'
'1 The logic of this instruction is that Dixon was author-
ized to indorse and collect the checks since he was au-
thorized to receive them in lieu of cash in payment of the
bills he held for collection. The deduction is a non se-
quitur. The checks required the bank to pay the sums
therein specified to such person as the payee might direct.
But the payees never directed payments to be made to any
one, unless Dixon was their agent for that purpose; and
such agency is not inferable from the mere fact that he
was their agent in effecting the collection, nor from all
the facts recited in the instruction. His primary duty
was to collect the hills, not the checks given in adjust-
ment of the bills.
"The question presented is purely one of agency. Was
Dixon the plaintiffs' agent to indorse negotiable paper
given in settlement of debts due to his employers? He
was their agent to adjust such claims and receive the
amounts due upon them, and to do those subordinate and
incidental things usual and customary in the accomplish-
ment of the main purpose had in view, to-wit: the collec-
tion. That main purpose had been accomplished when he
had received the checks payable to his principals. His
duties as collector ceased at that point. His next duty
was to account with his employers for the proceeds of his
collections and turn over the checks to them, to be dis-
posed of as they might judge proper. The indorsement
of the checks was no necessary incident of the collection
of the accounts. The instruction was, in my opinion,
properly refused. So was the defendant's second instruc-
tion. It traveled out of the issue made by the pleadings.
At the instance of the defendant, the Court directed the
jury to find for it in case they found from the evidence
that Dixon was authorized to collect and receive pay-
ments of checks payable to plaintiffs at the time the
checks in question were presented and paid. This fairly
454
AGENCY
presented the real point in controversy, and in the form
selected by plaintiffs' counsel.
Question 231: (I) Has an agent who has power to receive
payment either in money or paper, implied power therefrom to
cash the negotiable paper made to his principal's order? Why?
(2) Was the agent in the above case a general or special
agent ?
§ 235. (Agency, Sec. 51.) Implied (or apparent) power
of agents to sell personal property.
(Note: See this subject developed in the Cases on Sales.)
§236. (Agency, Sec. 52.) Implied (or apparent) power
of agent who has indicia of title to sell goods.
(See cases in Sales.)
§ 237. (Agency, Sec. 53.) Implied (or apparent) power
of agent who has authority to sell to receive payment.
(See also Law v. Stokes, supra.)
Case 232. Greenhood v. Keaton, 9 111. Ap. 183.
Facts: The facts are stated in the opinion.
Point Involved: Under what circumstances an agent
has apparent power to receive payment of money owing
to his principal.
Lacey, J.: 1' This was a suit by appellant against ap-
pellee, brought for the purpose of recovering sixty dol-
lars, the price of a safe, sold by the former to the latter.
 Appellant was a safe-dealer in the city of Chicago,
and the appellee was about starting a hotel in the city
of Moline, 111.
"It appears from the evidence, and it is not disputed,
that on the 12th day of Nov., 1879, the appellant em-
ployed one George W. Berkley as an agent or broker to
travel over the country and take orders, and sell his
safe subject to the approval of appellant. When the
order was sent in, blank orders and drawings and other
AUTHORITY OF AGENT
455
papers were placed in the hands of Berkley. The order
contained a clause that the order was subject to the ap-
proval of the appellant. The authority of Berkley was
expressly limited to making sales of safes; he was only
to obtain orders to be sent to appellant subject to his
acceptance, and to be billed by him. Berkley was not
authorized to make collections; the plaintiff was to make
his own collections. In pursuance of this arrangement
Berkley started out in his employment, and on or about
the 15th of Nov., 1879, made sale of one of the safes to
appellee for $60, subject to the aproval of the appellant,
the appellee signing an order for the safe, directed to
the appellant at Chicago, in which it was expressly pro-
vided that the order was subject to the appellant's ap-
proval, and the order was sent to him in due course of
mail. When the order reached appellant at Chicago, it
was approved, and the safe duly shipped to appellee and
received by him. On the date of the shipment, Nov. 17,
A. D. 1879, a letter was sent accompanying it and asking
for a remittance for the amount. On the 25th of the
same month the appellee sent a letter to the appellant, an-
swering that the payment for the safe was to be in thirty
days which was considered cash.
"On the 26th of the same month the appellant answered
that order should have stated that it was to be 30 days,
but according to appellee's demand, asked him to remit
to them in thirty days after the date of the receipt of
the safe. The thirty days having expired, the appellants
drew a sight draft on appellee and sent it forward for
collection, to which the appellee replied that he had paid
for the safe on the 13th of December of the same year, to
G. W. Berkley, the appellant's agent, from whom he had
purchased the safe. At the time of the payment to Berk-
ley he had been out of appellant's employment about two
weeks. The only question is, had Berkley the power to
collect the money? If he had, then the judgment is cor-
rect; if he had not, then the plaintiff should recover.
"We think, under the circumstances, Berkley had no
power to collect the money from appellee, and that pay-
456
AGENCY
ment to Berkley by appellee did not discharge the debt
due appellant.
"The power 'to solicit' and take contracts does not
carry with it the power to collect. No prudent man could
reasonably infer from the facts disclosed in evidence,
that Berkley had the power to collect the price of the
safe. The rule here recognized is well laid down in
the following cases: Abrahams v. Weiller, 87 111. 179;
Clark v. Smith, 88 111. 298.
Question 232: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) From the above case and the case of Law v. Stokes,
deduce the rule as to the agent's apparent authority to receive
the payment of his principal's debts.
Case 233. Bailey v. Pardridge et al., 134 111. 188.
(Set out as Case 213, supra.)
§238. (Agency, Sec. 54.) Implied (or apparent) au-
thority of selling agent to give credit to buyer.
(Note: An agent who is authorized to sell property, is not
authorized thereby also, by that fact alone, to sell on credit.
Of course, the buyer, in such a case, would usually take small
risk, as he has parted with nothing. But the seller could re-
pudiate the transaction. And the agent would be liable for
the loss if it occurred. The right to sell on credit could be
established by proof of express authority so to sell or by
custom.)
§ 239. (Agency, Sec. 55.) Implied (or apparent) power
of buying agent to buy on credit.
Case 234. Komorowski v. Krumdick, 56 Wis. 23.
Facts: Grist was the agent of Krumdick and Muir to
buy wheat for them with cash furnished him for that pur-
pose. He bought wheat from Komorowski on credit, and
subsequently left the country without paying for the
wheat. Suit by Komorowski against Krumdick and Muir
for the price of the wheat. Further facts in the opinion.
AUTHORITY OF AGENT
457
Point Involved: "Whether an agent to buy has appar-
ent power to buy on credit, in the absence of other circum-
stances authorizing a reasonable belief that he had such
power.
Taylor, J.: "* * * The power of Grist as the
agent of the defendants was limited to purchases for
cash, and nothing else, and he was expressly prohibited
from taking wheat in store on their account. When, the
principal furnishes his agent, to buy on his account,
sufficient funds to make purchases, the law does not raise
any presumption that such agent may bind his principal
by a purchase on credit, but the contrary. And in such
case the principal will not be bound by a purchase made
on credit, unless he has knowledge of the fact, and does
something in ratification thereof, or unless it be shown
that it is the custom of the trade to buy upon credit. The
defendants furnished Grist the money to pay for all pur-
chases made by him on their account, and the evidence
tends to show that Grist did not deliver to them enough
wheat to cover the amount of their advance.
"There is nothing in the evidence tending to show that
the defendants held Grist out as having any other powers
as their agent than those expressly conferred upon him.
There is no evidence that the defendants had ever ratified
any purchase by Grist for them upon credit. There is no
evidence, in fact, that he ever made any purchase except
of the plaintiff upon credit. Nor is there any evidence
that an agent to purchase wheat for a principal at a given
place, and to ship the same to the principal at another
place has any implied authority to make the purchases
upon the credit of the principal. There is nothing in the
nature of the business itself, in the absence of any evi-
dence as to the custom of the trade, which would justify
a court in determining as a question of law that an agent
to purchase wheat or other grain may bind his principal
by a purchase on credit.
"An agent to buy wheat or other grain must, in order
to bind his principal, who furnishes in advance the funds
458
AGENCY
to make the purchases, buy for cash, unless he has express
power to buy upon credit, or unless the custom of the
trade is to buy upon credit; and in the absence of express
authority, or proof of the custom of the trade to buy
on credit, such agent cannot bind his principal by a pur-
chase upon credit of a principal. Paley on Ag. 161, 162;
Jaquest v. Todd, 3 Wend. 83; Schimmelpennick v. Bay-'
ard, 1 Pet. 264 ; Story on Ag. 225, 226; Berry v. Barnes,
23 Ark. 411; Stoddard v. Mclnvalin, 7 Eich, (S. C.) 525;
Whart on Ag., 186; Adams v. Boies, 24 Iowa 96; Tabor
v. Cannon, 8 Met. 456; Temple v. Pomroy, 4 Gray, 128;
Bank v. Bugbee, 1 Abb. Ch. App. 86.
"If the evidence is sufficient to show a sale upon' credit
to Grist as agent of the defendants, and that the wheat
was delivered to the defendants, and received by them of
Grist, still they would not be liable to the plaintiff unless
they received the wheat knowing it had been bought upon
credit, or they had received the wheat of Grist knowing
they had no funds in his hands at the time sufficient to
pay for the same. If they furnished money to their agent
sufficient at all times to pay for all the wheat they re-
ceived by him, they had the right to suppose that all the
wheat bought by Grist for them was paid for at the time
it was delivered to them, and, if he had not in fact paid
for it they would only be liable to the seller under the
circumstances above stated. * * *
"The judgment of the circuit court is reversed and the
cause remanded for a new trial.
Question 234: (1) Has an agent who is appointed to buy,
the apparent power for that reason alone, to buy on credit?
(Note: The Court in its statement that the agent has no
power to buy on credit unless he has express authority or it is
the custom of the trade, restricts the rule rather too much. Bjf
placing him in a position from the circumstances of which it
could be fairly and reasonably supposed he had that power, tW
principal could not assert that he did not have it.)
WW
AUTHORITY OF AGENT 459
§240. (Agency, Sec. 56.) Implied or apparent power
of agent having authority to sell, to warrant the thing
sold.
Case 235. Johns v. Jaycox, 67 Wash. 403.
Facts: Johns sues to recover the price of 200 calking
machines sold by him to Jaycox and Go. The machines
were purchased by Jaycox and Co. to give away to their
customers, upon a promise by Howard, the salesman
who made the sale, that the defendant would sell 25
records to each machine given away. This warranty
was reduced to writing. Defense: breach of warranty.
The agent had no express power to make the promise
in question. (The point of ratification was raised, and
disposed of by the Court against the purchasers.)
Point Involved: The apparent power of an agent hav-
ing authority to sell to warrant the thing sold.
Ellis, J.: "* * *
"There is much seeming confusion in the adjudicated
cases upon this question. There are decisions which hold
that an agent upon whom general authority to sell is con-
ferred will be presumed to have authority to warrant,
unless the contrary appears. Talmage v. Bierhause, 103
Ind. 270, 2 N. E. 716; Woodford v. McClenahan, 9 111.
85; Alpha Mills v. Watertown Engine Co., 116 N. C. 797,
21 S. E. 917; Dennis v. Ashley's Admr's, 15 Mo. 315;
Milburn v. Belloni, 34 Barb. 607; Manley v. Ackler, 76
^ Hun 546; Schuchardt v. Aliens, 1 Wall. 359.
"But an examination of those cases shows that, while
{ announcing a very broad rule, they in reality, when ap-
ti plied to the given facts, go only to the extent that the
implied power of warranty by the agent upon which a
Is purchaser may rely extends to those things necessary to
thorityot consummate the contract and usually incident thereto
flUto0 jflud1 and relating to the title, quality or condition of the thing
}tber „ J fit sold. In none of them was the rule actually applied as
"* authorizing warranties so extraordinary as that here
it * «
460
AGENCY
presented. A careful consideration of the authorities
cited in the briefs, as well as an independent search,
leads us to the conclusion that the rule laid down in 31
Cyc. as the one supported by the more numerous and
more recent decisions is also the one in consonance with
the better reason. It is as follows:
1' 1 The rule which is supported by the more numerous
and more recent decisions is that if in the sale of that
kind or class of goods which the agent is empowered to
sell it is usual in the market to give a warranty, the
agent may give that warranty in order to effect a sale,
and the law presumes that he has such authority; and
that if an agent with express authority to sell has no
actual authority to warrant, no authority can be implied
where the property is of a description not usually sold
with warranty. * * * The implied power of an agent
to warrant title and quality rests upon the necessity
and propriety of such warranties in the sale of goods.
It is not therefore to be extended to other warranties
of an extraordinary sort, however impossible the agent
may find it to make a sale without giving such warran-
ties.' 31 Cyc. 1353, 1355, 1356.
"The correct principle, briefly stated, is that an agent
under general employment to make sales is impliedly au-
thorized to employ only those means for the purpose usual
to the business, and that the purchaser cannot safely
assume that he has authority to make any extraordinary
guaranty or warranty, or one beyond the usage of the
business in which the agent is employed. Upton v. Suf-
folk County Mills, 11 Cush. 586, 59 Am. Dec. 163; Wait
v. Borne, 123 N. Y. 592, 25 N. E. 1053; Bierman v. City
Mills Co., 10 Misc. Rep. 140, 30 N. Y. Supp. 929; Hayner
& Co. v. Churchill, 29 Mo. App. 676; Palmer v. Hatch,
46 Mo. 585; Reese v. Bates, 94 Va. 321, 26 S. E. 865 ?
Waupaca Elec. Light & R. Co. v. Milwaukee Elec. R. &
Light Co., 112 Wis. 469; 88 N. W. 308; Troy Grocery
Co. v. Potter & Wrightington, 139 Ala. 359, 36 South. 12;
Anderson v. Bruner, 112 Mass. 14.
"The rule thus stated appeals to us as the one best
AUTHORITY OF AGENT
461
calculated to preserve that just balance which the law is
intended to maintain between a reasonable protection of
the principal from the unauthorized acts of his agent,
and a reasonable protection of the purchaser from an un-
warranted repudiation by the principal of the acts of the
agent. We have been cited to no authority, and a careful
search has revealed none, in which it has ever been held
that an agent employed to make sales at wholesale has
an implied authority not only to warrant the quality of
the thing sold but also to guarantee that the purchaser
will make sales thereof at retail in any particular amount
or at any given profit. A more extraordinary guaranty
can hardly be imagined. We can conceive of no sound
principle upon which such a holding could rest.''
Question 235: (1) State the question arising in this case
and the Court's decision.
(2) To what warranties would the apparent power of the
agent be confined?
(3) A had a horse which he desired to sell. He employed
B as his special agent to sell the horse, saying nothing about
warranties. B sold the horse on inspection to C, warranting
him to be sound. The horse was unsound. Can C recover
of B? (Brady v. Todd, 9 C. B. N. S. 592.)
(Note: The question of the apparent or implied power of
the agent to warrant must not ~be confused with the question
whether there is an implied warranty in a sale regardless of
whether it is made by principal or agent. Thus in the law of
Sales of Personal Property (Division C, post), we will find that
in a sale there may be certain implied warranties, and this is
determined by the character of a sale whether made by principal
or agent. Thus, a sale of goods carries with it the implied
warranty of title, goods sold by sample are impliedly warranted
to be equivalent to the sample, goods sold by description by a
manufacturer are warranted to be merchantable, etc. Our in-
quiry at this point is the power of an agent to expressly warrant
that the thing sold has virtues that are not implied from the
mere fact of sale. Undoubtedly, the courts themselves have not
, always kept this distinction in mind.
On the apparent or implied power of an agent to bind the
462
AGENCY
principal on an express warranty, the authorities are not m
strict accord. Some cases hold that in a general power to sell
there is a power to make usual warranties. Woodford v. Mc-
Clenahan, 9 111. 85. Other cases hold that from a mere power
to sell, unaccompanied with other circumstances giving the
agent apparent power to warrant, an agent has no apparent
power to make express warranties. Wait v. Borne, 123 N. Y.
603.)
§241. (Agency, Sec. 57.) Authority of agent to make
admissions binding upon principal.
Case 236. White v. Miller, 71 N. Y. 118.
Facts: Plaintiff sued defendant for breach of war-
ranty as to the character of cabbage seed. To prove the
defective character of the seed, plaintiff offered in evi-
dence a conversation alleged to have occurred between
plaintiff and the agent of defendant, with whom nearly
eight months before, the sale had been contracted. This
conversation was objected to as not binding on the de-
fend ant.
Point Involved: Under what circumstances the admis-
sions of an agent are binding upon his principal.
Andrew's, J.: '1 * * * The general rule is, that
what one person says out of court is not admissible to
charge or bind another. The exception is in cases of
agency, and in cases of agency the declarations of the
agent are not competent to charge the principal, upon
proof merely that the relation of principal and agent:
existed when the declarations were made. It must fur-
ther appear that the agent, at the time the declarations
were made, was engaged in executing the authority con-
ferred upon him, and that the declarations related to,'
and were connected with the business then depending,
so that they constituted a part of the res gestae. * * *
Question 236: If an agent makes an admission out of court
which is now testified to by some other witness, is the evidence
hearsay? Is it admissible? Under what circumstances?
AUTHORITY OF AGENT
463
§242. (Agency, Sec. 58.) Authority of agent to re-
ceive notice. Knowledge of agent as knowledge of
principal.
Case 237. Jenkins Bros. Shoe Co. v. G. V. Renfrew &
Co., 151 N. C. 323.
Facts: The shoe company sued defendants, as part-
ners, to recover an amount due it for goods sold and
delivered. Defendant T. J. Renfrow contends that he is
not liable on the ground that before the sale, to-wit, on
March 28, 1907, the partnership was dissolved, of which
the plaintiff had notice. The order was taken by the shoe
company's traveling salesman, April 4, 1907, from one of
the partners who succeeded to its business after the
dissolution, and the goods were delivered in May. The
traveling salesman testified he received notice when he
took the order. He did not communicate his knowledge
to his principal.
Point Involved: When notice to an agent is notice to
the principal; whether a traveling salesman in selling
goods has a duty to impart notice of dissolution of a part-
nership from whose successor he takes an order.
Manning, J.: "* * *
"In Mechem on Agency, sec. 721, the learned author
deduces the following rule from the authorities: 'The
law imputes to the principal and charges him with all
notice or knowledge relating to the subject-matter of the
agency which the agent requires or obtains while acting
as such agent and within the scope of his authority or
which he may previously have acquired, and which he
then had in mind, or which he had acquired so recently as
to reasonably warrant the assumption that he still re-
tained it. Provided, however, that such notice or knowl-
edge will not be imputed (1) where it is such as it is the
agent's duty not to disclose, and (2) where the agent's
relation to the subject-matter or his previous conduct
render it certain that he will not disclose it, and (3) where
the person claiming the benefit of the notice, or those
464
AGENCY
whom he represents, colluded with the agent to cheat or
defraud the principal.' There is no evidence in this case
bringing it within any of the exceptions named in the pro-
viso of the above rule. This Court, in Straus v. Spar-
row, 148 N. C. 309, quotes with approval this principle,
as stated in Cox v. Pearce, 112 N. Y. 637; 3 L. E. A., p.
563: ' 1. The failure of an agent to communicate to his
principal information acquired by him in the course and
within the scope of his agency is a breach of duty to his
principal; but as notice to the principal it has the same
effect as to third persons as though his duty had been
faithfully performed.' Mfg. Co. v. Rutherford, 64 S. E.
Rep. 444.
"If therefore, Horn was such an agent that notice to
him was notice to his principal, the plaintiff, then, under
the above authorities, it must follow that the plaintiff had
notice of the withdrawal of the defendant T. J. Renfrow
from the firm, and its dissolution before 15 May—be-
tween 6 and 15 May, as fixed by Horn. * * * "Was
Horn such an agent that notice to him was notice to his
principal? The evidence offered at the trial tends to
show that Horn was a traveling salesman of the plain
tiff, and defendants made all their purchases, extending
over several months, from plaintiff through Horn; that
he was the sole representative of plaintiff in the section
in which defendants did business, and visited their place
of business nearly every thirty days; that he reported
to plaintiff references given by new customers; that he
reported dissolutions of partnerships with whom plain-
tiff was dealing, and sometimes received payments for
bills due, when offered him by merchants, but that he was
not instructed to collect bills; that he in a general way
inquired about the condition of the business of those
with whom he was dealing for plaintiff.
<<# * * Our holding [is] that the evidence was suffi-
cient to support a finding that Horn was a competent
agent to receive notice, and that notice to him was notice
to the plaintiff, his principal. Horn was, by his course
of dealing and the scope and extent of his power, the
AUTHORITY OF AGENT
465
medium of negotiations between plaintiff and defendant
partnership.''
Question 237: Is notice to an agent notice to the principal?
What connection must there be between the agency and the
notice ?
CHAPTER 30
UNDISCLOSED PRINCIPALS
§ 243. General rule.
§ 244. First exception to rule.
§ 245. Second exception to rule.
§ 246. Third exception to rule.
§ 247. Fourth exception to rule.
§ 248. Where alleged undisclosed principal had not conferred authority.
§249. Undisclosed principal's right to hold third person.
§ 243. (Agency, Sec. 59.) General rule that the third
person can hold an undisclosed principal.
Case 238. Kayton v. Barnett, 116 N. Y. 625.
Facts: This action was brought to recover a balance
of the purchase price alleged to be due for certain prop-
erty sold by plaintiffs to defendants. On March 17,1881
plaintiffs sold and delivered to one Wm. B. Bishop sev-
eral machines and assigned to him letters patent for
$4,500. Bishop paid $3,000 on delivery, and afterwards
died insolvent without having paid the balance. Bishop
was defendants' agent, but defendants were undisclosed
at the time and plaintiffs dealt with Bishop as principal.
Point Involved: Whether when a person deals with
another who does not disclose his agency, the principal
may upon discovery be held on the contract with the
agent.
Follett, Ch. J.: When the goods are sold on credit
to a person whom the vendor believes to be the purchaser,
and he afterwards discovers that the person credited
bought as agent for another, the vendor has a cause of
action against the principal for the purchase-price. The
defendants concede the existence of this general rule hut
asserts that it is not applicable to this case, because, while
466
UNDISCLOSED AGENCY
467
Bishop and plaintiffs were negotiating, they stated they
would not sell the property to the defendants, and Bishop
assured them he was buying for himself and not for
them. It appears by evidence, which is wholly uncon-
tradicted, that the defendants directed every step taken
by Bishop in his negotiations with plaintiffs; that the
property was purchased for and delivered to the defend-
ants, who have ever since retained it; that they paid the
$3,000 towards the purchase-price, and agreed with
Bishop, after the notes had been delivered, to hold him
harmless from them. Notwithstanding the assertion of
the plaintiffs that they would not sell to the defendants,
they, through the circumvention of Bishop and the de-
fendants, did sell the property to the defendants, who
have had the benefit of it, and have never paid the re-
mainder of the purchase-price pursuant to their agree-
ment. Bishop was the defendants' agent, Bishop's mind
was, in this transaction, the defendants' mind, and so
the minds of the parties met, and the defendants having,
through their own and their agent's deception, acquired
the plaintiffs' property by purchase, cannot successfully
assert that they are not liable for the remainder of the
purchase-price because they, through their agent, sue-
ceeded in inducing the defendants to do that which they
did not intend to do, and, perhaps, would not have done
h'ad the defendants not dealt disingenuously.
Question 238: What is the rule as to the right of the third
person to hold an undisclosed principal ? Illustrate by the facts
of this case?
§244. (Agency, Sec. 60.) First exception to rule that
third person can hold undisclosed principal.
(Note: The third person cannot hold a principal who was
undisclosed at the time the contract was made where after dis-
covering the principal, he chooses to hold the agent. The facts
would show whether he had indeed made such an election,
and his failure to make any claim against the principal for a
Considerable period of time would in itself indicate an election
to' hold the agent.)
468
AGENCY
§ 245. (Agency, Sec. 61.) Second exception to rule that
third person can hold undisclosed principal.
Case 239. Laing v. Butler, 37 Hun (44 N. Y. Sup.)
144.
Facts: Suit to recover the sum of $867.23 as the con-
tract price of a quantity of hides sold by plaintiffs to
Edward F. Smith who was the undisclosed agent of the
defendants. Defendants had furnished Smith with the
money for the hides, but he bought upon credit.
Point Involved: "Whether an undisclosed principal who
has settled with his agent for the goods bought under the
agency, can be held by the third person after such settle-
ment.
Haight, J.; '' * * *
"We have thus briefly alluded to some of the authori-
ties both in England and in this country which bear upon
the question under consideration. They are the nearest
in point of any which we have been able to discover. From
them it appears to us that where an agent buys in his
own name, but for the benefit of his principal, without
disclosing the name of the principal the rule is that
the principal as well as the agent will be bound, provided
the goods are received by the principal, if the agent in
making the purchase acted within his power as agent;
but that this rule is subject to the following limitations
and exceptions: First, the purchase of the agent must
be within the power conferred upon him by his principal,
or it must be shown that the principal subsequently rati-
fied his acts. Second, if the principal furnished the agent
with the money with which to make the purchase before
the purchase, and the agent should, without his knowl-
edge, purchase the property upon credit without disclos-
ing his principal, that the principal will not be bound;
and, Third, where the purchase has been made by the
agent upon credit, authorized by the principal, but with-
out disclosing his name, and payment is subsequently
made by the principal to the agent in good faith before
UNDISCLOSED AGENCY
469
the agency is disclosed to the seller, then the principal
would not be liable. In the case under consideration, it
appears that the defendants authorized Smith to pur-
chase the hides for them; that they advanced the money
to him with which to make the purchases they had au-.
thorized. The plaintiff in selling hides to Smith, sold
to him upon his individual credit and promise to pay.
The case therefore appears to us to be, within the excep-
tions to the rule mentioned, and it consequently follows
that the plaintiff is not entitled to recover.''
Question 239: P supplies A with funds to purchase goods.
A, in his own name, acting apparently as principal buys the
goods from T on his own credit, supplies the goods to the
principal, and disappears with the money supplied by the
principal. T then learns of the agency and sues P. Can P be
held? Is it justice to T not to make P liable in such a case?
Why?
§ 246. (Agency, Sec. 62.) Third exception to rule that
the third person can hold an undisclosed principal.
(Note: Only a person named in a sealed instrument can
be held upon it. Hence, undisclosed principal could not be
held in such a case. No longer true where distinction between
sealed and unsealed instruments is broken down.)
§ 247. (Agency, Sec. 63.) Fourth exception to rule.
(Note: An undisclosed principal cannot be held upon ne-
gotiable paper signed by his agent as principal. Only a person
named or described in a negotiable instrument can be sued
thereon.)
§248. (Agency, Sec. 64.) Where alleged undisclosed
principal had not conferred authority.
(Note: The theory of liability of one as undisclosed prin-
cipal is that one is indeed at the time the act was done a real
principal, and therefore, being a party in interest ought to be
held. If he was not a principal, though he afterwards takes
the benefit of the act, he is not liable for that reason. An un-
disclosed principal cannot ratify.)
470
AGENCY
§ 249. (Agency, Sec. 65.) Undisclosed principal's right
to hold third person.
Case 240. Tutt v. Brown, 15 Ky. Reports, 1.
Facts: The facts are stated in the opinion.
Point Involved: The right of an undisclosed principal
to sue on the contract.
By the Couet, Owsley, J.:  George H. Tutt, the son
Ojf the plaintiff, Hansford Tutt, whilst in the service of
his father, and for his benefit, contracted with the de-
fendant, Brown, to transport in his father's wagon, a
quantity of bagging, to Colonel Pearce, near Huntsville,
at a stipulated price to be paid to the said Brown;
*. * * whilst contracting with Brown * * * noth-
ing was said by George H. Tutt about his being em-
ployed in the service of his father, nor does it appear
that Brown, at that time or for some time after the
bagging wTas transported to Pearce, knew that the service
was performed by the son for the benefit of the father.
"Brown failed to pay the said George H. Tutt the
price agreed * ■* # and this suit was brought [by
the father].
"On the trial in the court below, after the preceding
facts were in substance proved, the jury were instructed
by that court, that the plaintiff had no cause of action;
but that the right of suit was exclusively in the son,
George H. Tutt. Whether or not the court was correct
in so instructing the jury, is the only question presented
for decision of this court.
"That in moral justice, the plaintiff is entitled to the
price agreed to be paid by Brown for the transportation
of the bagging, is a proposition that none, it is presumed,
will pretend to controvert. The service, though per-
formed by George H. Tutt, the son, was not for his own
benefit, but for the benefit of the plaintiff, and in justice
the plaintiff is most indisputably entitled to the amount
which was agreed to be paid by Brown. Being, therefore,
sntitled to the price, it would seem to follow as a neces-
UNDISCLOSED AGENCY
471
sary consequence, upon general principles, that the
plaintiff is entitled to maintain an action to recover it;
for it is well settled, that as a general rule, the right of
property draws with it the right of action. The right of
the plaintiff to maintain his action, would be undeniable,
if, at, the time of contracting for the transportation
of the bagging, the son had made known to Brown his
true character as agent, and the promise of Brown had
been to pay the price to the plaintiff. In that case, the
contract of Brown, though made with his son, would,
in a legal sense, be considered a contract with the father,
and of course the father's right to sue for a violation of
the promise of Brown, would be unquestionable. But, at
the time of making the contract with Brown, the circum-
stance of the son being in the employment and acting
for the benefit of the father, was not made known to
Brown; and the question arises, whether or not that cir-
cumstance affects the right of the father to maintain
his action. The circumstance of the son's failing to dis-
close his true character certainly does not affect the jus-
tice of the father's claim for the price agreed to be paid
for the service. If the price had been paid by Brown to
the son, the son would be responsible for the amount,
and the right of the father to the price must be admitted
to be the same before it is paid to the son, that it would
be after received by him. By failing to disclose his true
character, the son may have imposed upon himself a
personal liability to Brown, which he would not otherwise
have been subject to; but he cannot have thereby de-
prived the father of the price agreed to be paid by Brown
for transporting the bagging. The right of the father
to the price is nevertheless the same, and for a violation
of that right by Brown, the law must be admitted to
afford him a remedy. The remedy which the law affords
does not, however, deprive Brown of any defense which
he might have against the demand, considered as belong-
ing to the son; for having contracted with the son with-
out a knowledge of his true character of agent, Brown
should be permitted to consider him as principal, so as
472
AGENCY
to allow him to avail himself of any defense to the action
by the principal, that would have been admissible against
the claim, if asserted by the son. Thus, in an analogous
case, Lord Mansfield observed, ' where a factor, dealing
for a principal, but concealing that principal, delivers
goods in his own name, the person contracting with him
has a right to consider him, to all intents and purposes,
as the principal; and though the real principal may ap-
pear, and bring an action upon that contract against the
purchaser of the goods, yet that purchaser may set-off
any claim he may have against the factor, in answering
to the demand of the principal.' Paley on Agency, 253.
"It is therefore the opinion of the Court, that the
court below erred in its instructions to the jury, and that
the judgment of that court must consequently be re-
versed with costs, the cause remanded, and a new trial
there had.
Question 240: Can a principal recover on contracts made by
the agent without disclosing the principal ? Why ?
Case 241. Kingsley v. Siebrecht, 92 Me. 23.
Facts: Suit by an undisclosed principal on a contract
in writing and required by the statute of frauds to be in
writing. Defense that the plaintiff cannot show by parol
evidence that he was the real principal.
Point Involved: Whether or not a contract which is
in writing and is required by the statute of frauds to be
in writing, made in the name of the agent, may be shown
to be the contract of an undisclosed principal.
Savage, J.: "* * * Two questions arise: (1) May
the undisclosed principal sue upon a contract made in
the name of her agent? and (2) Is it competent for the
undisclosed principal to show by parol that the party
appearing in the memorandum to be the contracting
party was her agent only and contracted in her behalf
and thus be enabled to maintain an action on the con-
tract?
"We think both questions must be answered in the
UNDISCLOSED AGENCY
473
affirmative. The authorities are numerous and decisive
that the contract of the agent is in law the contract of
the principal and the latter can come forward and sue
thereon, although at the time the contract was made the
agent acted and appeared to be the principal. * # *
 And the weight of authority, we think, sustains the
proposition that in case of a memorandum within the
statute of frauds, where the name of the agent only ap-
pears, it may be shown by parol who the principal is, in
support of an action by the latter.''
Question 241: State this case.
Case 242. Eldridge v. Finniger, 25 Oklahoma Reports,
28.
Facts: George C. Eldridge, trading as Eldridge Coal
Company, brings suit against Finniger for $25.30 for
coal sold to Finniger. Finniger admits the debt but
claims a set off for $23.00 for a suit of clothes made by
him for Lloyd Eldridge. At the time Finniger bought
the coal Lloy.d Eldridge was acting and described as
"Proprietor of the Eldridge Coal Co. and Finniger
supposed him to be the owner, there being nothing to
indicate the contrary. When he ordered the coal he did
so on an agreement that Lloyd would order a suit of
clothes, which was done, but they were never paid for.
Lloyd, as a matter of fact, was merely agent for Geo. C.,
who now sues as undisclosed principal.
Point Involved: Whether one who deals with another
as a principal, who has in fact an undisclosed principal,
can set off a claim against such agent when sued by the
principal. Or, more generally, is the undisclosed prin-
cipal's right against the third person subject to the state
of accounts between the third person and the agent ?
Turner, J.: "* * * If the purchaser of property
does not know and has not good reason to know that he
is dealing with the agent of the owner, he is justified in
treating the agent as owner. * * * In this case it
appears as stated, that defendant dealt with the agent
474
AGENCY
believing him to be the principal and made the contract
accordingly. As the principal, by this action, now seeks
to enforce said contract, he must take it as the agent
and purchaser left it. He must take his pay as the agent
agreed to receive it. # * #>> .
Question 242: State the facts and rule of this case.
Case 243. Kelly v. Thuey, 102 Mo. 522.
Facts: Suit by undisclosed principal, James T. Kelly,
to compel specific performance of a contract to convey
real estate entered into between Richard Thuey and wife,
as vendors with D. T. Kelly, as purchaser. The contract
provided the purchaser should pay $950 in cash when
deed delivered and $664 in three annual installments.
James T. Kelly claims to be the real principal.
Point Involved: Whether an undisclosed principal can
assert the right to compel the recognition of him as a
party to an executory contract involving personal credit
(or skill or other personal matter).
Black, J.: * * This broad doctrine, that when
an agent makes a contract in his own name only, the
known or unknown principal may sue or be sued there-
on, may be applied in many cases with safety and espe-
cially in cases of informal commercial contracts. But
it is certain it cannot be applied where exclusive credit
is given to the agent, and it is intended by both parties
that no resort shall be had by or against the principal
(Story on Agency, § 160 a) nor does it apply to those
cases where skill, solvency or any personal quality of
one of the parties to the contract is a material ingredi-
ent in it. Now in this case, the written contract is full,
complete and formal. It expresses just what the parties
thereto intended it should express. * * * To admit
parol evidence to show that D. T. Kelly acted as agent
of the plaintiff and then substitute or add the plaintiff
as a party is simply to make a new contract for the
parties. * * *
Question 243: (1) State the facts, the question presented
and the Court's decision in this case.
UNDISCLOSED AGENCY
475
(2) A offered to sell B a horse. B inquired if the horse
belonged to C. A said "No. B said that that being the case
he would take the horse, and the bargain was struck. Later, B
learns that the horse belongs to C and refuses to take the horse.
C sues on the contract. Recover? (Winchester v. Howard, 97
Mass. 303.)
(Note: Accord Cowan v. Curran, 216 111. 598.)
CHAPTER 31
PRINCIPAL'S LIABILITY FOR TORTS OF AGENT
§ 250. Authorized torts.
§ 251. Ratified torts.
§ 252. Liability for torts within scope of authority.
§ 253. What torts within scope of authority.
§ 250. (Agency, Sec. 66.) Authorized torts.
(Note: If the principal directs or authorizes the commis-
sion of the tort he is clearly liable.)
§251. (Agency, Sec. 67.) Ratified torts.
(Note: The principal is liable for the torts of the agent
committed as a part of an act afterwards ratified by the prin-
cipal. See Dempsey v. Chambers, supra.)
§252. (Agency, Sec. 68.) Liability for torts within
scope of authority.
(See cases under next section.)
§ 253. (Agency, Sec. 69.) What torts within the scope
of the authority.
Case 244. Lloyd v. Grace et ai., [1912] A. C. 716.
Facts: The facts are given in the opinion.
Point Involved: Whether a principal is liable for the
fraud of his agent, committed within the general scope
of the agent's duties, the principal taking no benefit from
said fraud, and in no way consenting to or ratifying the
same.
(Opinions of Earl of Halsbury, Lord MacNaghten,
Lord Atkinson and Lord Shaw, omitted.)
476
AGENT'S TORTS
477
"Earl Lorebtjrn: My Lords, the facts of this case,
except in immaterial points, are quite clear and undis-
puted.
"The appellant, Mrs. Lloyd, had bought some prop-
erty, and thus had come to know of the defendant, a
solicitor. She had doubts about having got her money's
worth, and went to the defendant's office to inquire.
When there she saw one Sandles, the defendant's man-
aging clerk, and was induced by him to give him instruc-
tions to sell or realize this property, and for that pur-
pose to give him the deeds and to sign two documents
which she neither read nor knew the tenor of, but which
put into Sandles' possession her interest therein. She
gave him the deeds as the defendant's representative.
Having got them and the signed documents, he dishon-
estly disposed of this lady's property and pocketed the
proceeds. That is the whole story as it is ilow either
found or admitted because it was incontestable. ,
"It is clear to my mind, upon these simple facts, that
the jury ought to have been directed, if they believed
them, to find for the plaintiff. The managing clerk was
authorized to receive deeds and carry through sales and
conveyances, and to give notices on the defendant's be-
half. He was instructed by the plaintiff, as the repre-
sentative of the defendant's firm,—and she so treated
him throughout—to realize her property. He took ad-
vantage of the opportunity so afforded him as the de-
fendant's representative to get her to sign away all that
she possessed and put the proceeds into his own pocket.
In my opinion there is an end of the case. It was a
breach by the defendant's agent of a contract made by
him as defendant's agent to apply diligence and honesty
in carrying through a business within his delegated
powers and entrusted to him in that capacity. It was
also a tortious act committed by the clerk in conducting
business which he had a right to conduct honestly, and
was instructed to conduct, on behalf of his principal.
"At the hearing the learned judge, no doubt with a
view to avoid the risk of a new trial in so small a case,
478
AGENCY
appears to have been prevailed upon to put no less than
six questions, with subdivisions making in all ten ques-
tions, to the jury. Some of them were quite immaterial.
Others were framed in order to raise a point of law sup-
posed to be affirmed by Willes J. in the case of Barwick
v. English Joint Stock Bank in a passage which ad-
mitted of more than one meaning. The meaning of the
answers depends upon how the jury understood the ques-
tions, and we were not told how they were explained to
the jury. That Sandles committed this fraud in order to
steal the money for himself is obvious, and any jury must
so find. That he did it in the sense in which Willes J.
means the word 'benefit' is not true upon the admitted
facts. Willes J. cannot have meant that the principal
is absolved whenever his agent intended to appropriate
for himself the proceeds of his fraud. Nearly every
rogue intends to do that.
"I have only to say, as to the authority of Barwiek
v. English Joint Stock Bank, that I entirely agree in the
opinion about to be delivered by Lord MacNaghten. If
the agent commits the fraud purporting to act in the
course of business such as he was authorized, or held out
as authorized, to transact on account of his principal,
then the latter may be held liable for it. And if the whole
judgment of Willes J. be looked at instead of one sen-
tence alone, he does not say otherwise.
Question 244: What were the facts in the above case, and
what did the Court hold ?
Case 245. Daniel v. Atlantic Coast Line R. R. Co.,
136 N. C. 517.
Facts: Daniel sues the R. R. Co. for damages caused
by his wrongful arrest and imprisonment. The R. R.
Co. had a station at Greenville, N. C. Daniel went to
said station to take passage on one of defendant's trains,
and finding the passenger depot closed, went to the
freight depot and was invited into the office by Atkinson,
the agent of the company. Atkinson was counting money
and putting it into a package. Atkinson then put the
AGENT'S TORTS
479
money in a drawer and locked it, and went out to sup-
per. Daniel in a few minutes went out after him, leaving
several people who were waiting there. When the train
arrived, plaintiff boarded it and went to Kinston, where
he was to change cars, and missing connections, went
to a hotel at Kinston. The agent at Greenville then
called up the agent, Meacham, at Kinston, whereupon
the agent at Kinston went with a policeman to the hotel,
and demanded entrance to Daniel's room. They made
a search for the money, and later arrested Daniel, tak-
ing him to the guard house, where he was later released.
On the following Sunday he was re-arrested on direc-
tion of the agent at Greenville. On the trial Daniel was
discharged. Atkinson's duties were to collect money for
freight, sell tickets to passengers, take care of the money
received, and forward same to company's treasurer.
The R. R. Co. claims that it is not responsible for the
arrest.
(Editor's note: It may be explained parenthetically
that one who causes the arrest of another is liable in
damages therefor when he acts without probable cause.
We may assume that there was no probable cause in this
case and that the company would be liable if the act was
within the scope of the agent's employment.)
Point Involved: Under what circumstances, if any, a
principal is liable for the tort of malicious prosecution or
false arrest by his agent, where he has not expressly
authorized such prosecution or arrest, and where he has
not expressly made it the agent's duty to prosecute or
arrest.
Walkeb,, J.: "The foregoing statement of the testi-
mony [here given in brief resume] is sufficient to pre-
sent the point upon which the case turns, namely, the
authority of the agent of the defendant to cause the
arrest to be made. We are not concerned so much with
the manner in which the arrest was made as we are with
the question whether the defendant, who was the prin-
cipal of Atkinson and Meacham, is to be charged with
480
AGENCY
liability for their tortious acts. That their conduct to-
ward the plaintiff was inexcusable, if not criminal, and
justly provokes the resentment of every good and law
abiding citizen against them, may be freely admitted.
* * * The excesses of Atkinson and Meacham do not
establish the defendant's liability. That can be shown
only by proof that the defendant authorized the acts to
be done, or that, after they were done, it ratified them.
# * * The plaintiff's sole contention is that what At-
kinson did at Greenville and Meacham at Kinston was'
within the line of their duty and the scope of their em-
ployment, and therefore they had implied authority from
defendant to do what they did, upon the theory, we sup-
pose, that every authority carries with it or includes in
it, as an incident, all the powers which were necessary,
proper, or usual as means to effectuate the purposes for
which it was conferred, and that consequently when an
agency is created for a specified purpose or in order to
transact particular business, the agent's authority by im-
plication embraces the appropriate means and power to
accomplish the desired end. * * * This is the gen-
eral rule and the doctrine of respondeat superior is a
familiar one. But in our opinion it has no application
to the facts of this case. If we should hold it is so broad
in its scope as to include a case like this, it would lead
to most dangerous consequences.
"For us to say that an agent can by his acts subject
his principal to liability in damages to any one injured
by his said acts done when he was not about his master's
business and had no express or implied authority to do
them, but was merely seeking to avenge a supposed
wrong already committed or to vindicate public justice,
would be carrying the doctrine of respondeat superior
far beyond its acknowledged limits. A servant entrusted
with his master's goods may do what is necessary to
preserve and protect them, because his authority to do
so is clearly implied by the nature of the service, but
when the property has been taken from his custody or
stolen and the crime has already been committed, it can-
AGENT'S TORTS
481
not be said that a criminal prosecution is necessary for
its preservation or protection. This may lead to the
punishment of the thief or the trespasser, but it certain-
ly will not restore the property or tend in any degree
to preserve or protect it. It is an act clearly without
the scope of the agency and cannot possibly be brought
within the limits of the implied authority of the agent.''
Question 245: If an agent who has charge or protection of
the principal's property falsely arrests person whom he charges
with having stolen it, is the principal liable? Was the principal
held liable in the above case? Why? (Compare with the fol-
lowing case.)
Case 246. Staples v. Schmidt, 18 R. I. 224.
Facts: The facts are stated in the opinion.
Point Involved: The responsibility of a principal for
a wrongful arrest by his salesman and custodian of a
customer suspected of '4 shoplifting.''
Douglas, J.: "The jury has substantially found in
this case that the defendant's salesman erroneously sus-
pecting the plaintiff of having stolen a package of spoons
from the store which was in his charge, detained her, sent
for a police officer and caused her to be sent to the police
station and there searched. * * *
u * * *
"* * * the defendants say that the acts here com-
plained of were not within the scope of their agent 's em-
ployment. It is obvious that in most cases the question
is one of fact. What are the limitations of an agent's
or a servant's authority depends generally upon the
things he is to do, the object he is set to accomplish, the
degree of discretion which the position where he is placed
and the exigencies of the occasion reasonably call for.
These are matters of common knowledge when they per-
tain to the ordinary occupations of men, matters of fact,
as well known to tbe jury as to the court, or inferences
of fact from well known or proven facts which it is as
much the province of the jury to draw as it is the province
482
AGENCY
of the court to carry out a principle of law to particular
deductions.
i i ^ %
4'Two principles seem to be recognized by the English
cases cited.
44First. That when a servant not specially appointed
to protect property arrests a person whom he supposes
to have stolen his master's goods, the servant must he
presumed to have acted in pursuance of his duty as a
good citizen and not in the scope of his employment as a
servant. This was strenuously urged by counsel in Ed-
wards v. London & North Western Railway Co., L. R.
5 C. P. 445, and was adopted by the court as the rule for
that case. We doubt its cogency as a rule of universal
application. The arrest of a thief is not an ordinary
necessity of commercial business. An attempt to steal
is an extraordinary event which puts the guardian of the
property to an instantaneous election of means to frus-
trate it. A clerk or salesman in such a case may ex
necessitate be invested with duties and powers which are
more germane to the scope of employment of an officer.
The opinions of the judges, however, are instructive in
this connection as showing assent to the converse of the
proposition, which is nearer the case at bar.
< i # * *
"It is quite true that the master would have had no
right to arrest and search an innocent person; but it is
equally true that he would have had the right to detain
a thief and to recapture his property from him. The
case, therefore, was one where the act, aside from any
excessive force, might be lawful or unlawful according
to whether the supposed circumstances were real or un-
real. The servant was left in a situation where he was
obliged to determine the fact and where his duty to his
master depended upon his decision. The decision was
his, as the substitute of the master, and the act was one
intended by him to be for his master's benefit and which
his duty required if the facts were as supposed. Hence,
as to third persons, it was the master's act. The crite-
AGENT'S TORTS
483
rion of the master's liability can never be whether the
act would have been lawful for the master to have done
in the circumstances as they actually existed.
"It remains to apply these principles to the case at
bar. The servant in this case was left with an assistant
in charge of his master's store. His ordinary duties un-
doubtedly were to show goods and to sell them to cus-
tomers. It was, however, equally his duty to protect his
master's property from pilfering. The acts complained
of were evidently done with that intention. The arrest
was for the purpose of searching for and recovering the
master's property, not with the object of punishing crime
against the public. The establishment was not a railroad
station where the multiplicity of employees confines each
one to a narrow round of duties, where special officers
are stationed to preserve order and detain criminals,-
nor a large dry goods emporium where detectives and
watchmen are employed to guard against thieves. The
servant here was salesman and custodian in one. What-
ever the master might do in the protection of his prop-
erty he expected his servant to do in his absence. If the
servant had seen the plaintiff take up and secrete the
package of spoons in question and had allowed her to
walk away with them unmolested, could anyone say that
he had not been derelict in his duty to his master? If
in the performance of this duty he mistook the occasion
for it, or exceeded his powers or employed an improper
degree of compulsion, the mistake and the excess must
be answered for by the master.
Question 246: (1) State the facts in this case, the question
presented and the Court's decision.
(2) The M. R. Co. employed A, as a ticket agent. M pur-
chased a ticket and paid therefor a coin, which the agent imme-
diately after taking, pronounced as counterfeit. On her refusal
to accept it back, he denounced her a counterfeiter and de-
tained her for arrest. Was the company liable? (Palmeri v.
M. R. Co., 133 N. Y. 261.)
(3) A conductor for the M. R. Co. caused the arrest of a
passenger for disturbing the peace. The arrest was wrongful.
Is the company liable? (Ruth v. St. L. T. Co., 98 Mo. Ap. 1.)
484
AGENCY
(4) A left home with the intention of going to It's store to
trade. Before she entered the store and while she was standing
looking into a show window, a detective employed by the com-
pany caused her arrest, accusing her of shoplifting. Is R liable ?
(Vrchotka v. Rothschild, 100 111. Ap. 268.)
Case 247. Joel v. Morrison, 6 C. & P. 501.
Facts: Plaintiff sues to recover damages, alleging
that as he was crossing on foot a public highway, a cart
and horse, under the care and direction of a servant
of the defendant, was driven negligently against him
and he was thrown down and injured. The evidence was
conflicting whether the servant was about his master's
business or on a journey of his own. The jury found
for the plaintiff.
Point Involved: Whether a master is liable when the
servant in driving a vehicle for the master, deviates from
the journey for his own purposes or goes on a journey of
his own.
Parke, B.: In instructing the jury said:
/'This is an action to recover damages for an injury
sustained by the plaintiff, in consequence of the negli-
gence of the defendant's servant. There is no doubt
that the plaintiff has suffered injury, and there is no
doubt that the driver of the cart was guilty of negli-
gence, and there is no doubt also that the master, if that
person was driving the cart on his master's business, is
responsible. If the servants, being on their master's
business, took a detour to call upon a friend, the master
will be responsible. If you think the servants lent the
cart to a person who was driving without the defendant's
knowledge, he will not be responsible. Or, if you think
that the young man who was driving took the cart sur-
reptitiously, and was not at the time employed on his
master's business, the defendant will not be liable. The
master is only liable where the servant is acting in the
course of his employment. If he was going out of his
way, against his master's business, he will make his
master liable; but if he was going on a frolic of his own,
AGENT'S TORTS
485
without being at all on his master's business, the master
will not be liable. As to the damages, the master is not
guilty of any offense, he is only responsible in law, there-
fore the amount should be reasonable.
Question 247: (I) Where the servant deviates from his
master's business, and commits a tort during such deviation is
the master liable ? What is the test ?
(2) A is employed as P's locomotive engineer. While the
engine is standing at a depot awaiting time for departure, A
blows the whistle as a practical joke to scare M's horse which is
standing near and on which M is riding. The horse runs away
and injures M. Is P liable?
(3) A employed by P as a bricklayer, observes S, against
whom he holds enmity, approaching. He hurls a brick at S and
injures him. Is P liable?
Case 248. Cunningham v. Castle, 111 N. Y. Suppl.
1056.
Facts: Defendant owned an automobile and employed
one Boes as his chauffeur. The chauffeur asked to bor-
row the machine to take a trip of his own and permission
being granted he went on the trip, and in the course
thereof he collided with and injured plaintiff. Plaintiff
sues defendant.
Clarke, J.: "* * *
' I
"From the foregoing cases we may deduce the follow-
ing rules as thoroughly established: First, that a master
is responsible for the negligence of his servant when
engaged about the master's business and within the scope
of his employment; second, that a master is not respon-
sible for the negligence of his general servant, if at the
time of the negligence he has become ad hoc the servant
of another, and engaged in the business of that other,
and under his direction and control; third, that the mas-
ter is not responsible for the negligence of his general
servant, if the negligent act was committed by the serv-
ant not in the prosecution of the master's business, but
in the course of some private enterprise of his own;
fourth, that even if, in the prosecution of that private
486
AGENCY
enterprise, the servant uses the instrumentalities of the
master for his own purposes, without the knowledge and
consent of the master, the master is not responsible.
"For the purpose of this discussion it must be con-
ceded that the chauffeur was not engaged in the master's
business, but was on a private pleasure trip of his own,
and was using therein the master's automobile with the
master's knowledge and consent. It is urged that the
automobile was a dangerous instrumentality, and that,
having been intrusted to the chauffeur, the liability of
the master still attached because of its dangerous char-
acter. The automobile is not necessarily a dangerous
device. It is an ordinary vehicle of pleasure and busi-
ness. It is no more dangerous per se than a team of
horses and a carriage, or a gun, or a sailboat, or a motor
launch. There is no evidence that the chauffeur was not
competent and qualified to run the machine. In fact,
he was employed by the defendant for that very pur-
pose. If a gamekeeper had borrowed his master's gun,
and had gone from the estate on a hunting expedition
of his own, and had negligently shot a man, would the
master be responsible because he was using that instru-
mentality, which might be dangerous if carelessly used—
the gun?
"I do not think that the question of the ignorance or
consent of the master has any bearing whatever upon his
liability. The fact that the servant has used the horses
or the automobile without his consent has probative force
upon the proposition as to whether or not the servant
was engaged in the master's business and was acting
within the scope of his employment. The question is
whether he was or not. If, without the knowledge of his
master, he took the car from the garage to a machine
shop to have it fixed, and an accident occurred, the fact
of the want of knowledge on the master's part would
not affect the liability, because the act would be within
the scope of the servant's employment and in the prose-
cution of the master's business. If the chauffeur were
granted a two weeks' vacation, and the master said to
AGENT'S TORTS
487
him: 'I am going off on a trip, and will not need the
machine. You may take it and use it for your own pleas-
ure while I am gone,' I cannot think that he would be
responsible for any negligence of the chauffeur during
that period.
.'<<#**
"I reach the conclusion that upon principle and au-
thority the charge was fatally erroneous in the matter
excepted to, and that a question of fact was presented
upon this evidence, which was whether the chauffeur at
the time of the injuries complained of was acting within
the scope of his employment. The testimony that he was
not so engaged, coming from the defendant and his chauf-
feur, must be considered as given by interested wit-
nesses, and the jury might have refused to be bound
by it; but nevertheless it should have been submitted
for their consideration. It may be that it would be wise
and in the public interests that responsibility for an
accident caused by an automobile should be affixed to the
owner thereof, irrespective of the person driving it, but
the law does not so provide.
Question 248: (1) State the facts in this case, the question
presented and the Court's decision.
(2) What rules as to liability did the Court lay down?
(Note: Three justices dissented in the Cunningham case,
arguing that as the chauffeur had to take the car to the garage,
the trip by him was a mere deviation from the route, and that
he was still during that trip in the owner's general employ,
responsible for the safety of the machine and in seeing it
properly housed, and they distinguished between this ease and
the case of the chauffeur taking the machine out for his own
purposes without his owner's permission.)
Case 249. Russell v. PaJentine Ins. Co., 63 Southern
Reports (Miss.) 644.
Facts: Russell sued the Insurance Co. and Klein, its
special agent, for malicious prosecution. Russell was
local agent for the company and fell behind in his ac-
counts. Klein's authority was to suspend, check up and
488
AGENCY
settle with local agents. He had Russell indicted for
embezzlement, and on the trial Russell was acquitted.
The present suit is brought by Russell who claims mali-
cious prosecution.
Point Involved: Whether a principal who appoints
an agent having authority to suspend, check up and settle
with local agents (or generally having authority to col-
lect and settle accounts), is liable for the tort of such
agent in maliciously prosecuting criminally a local agent
(or debtor).
Cook, J.: "* * *
"Mr. Klein was employed by the insurance company
to collect its claim against appellant, and he was author-
ized to employ all appropriate means to accomplish this
end; and, while the agent is employing appropriate means
to carry out his master's business, the master is respon-
sible for his acts. Certainly it cannot be said that a
criminal prosecution is a means appropriate to the col-
lection of debts. In Dally v. Young, 3 111. App. 39, it
is said: 'Where an agent institutes a malicious prose-
cution of his own head, and without the instigation or
directions of his principal, the latter will not be liable
for the same, unless he adopts and continues the same
with knowledge of all the circumstances.'
'1 Should we hold that appellee was responsible for the
acts of Klein, it would be to hold, when an authority to
collect a debt is shown, the law will imply the authority
to institute the criminal proceedings against the debtor
in case the debtor fails or refuses to pay. We do not
believe that this is sound in reason or in law.
Question 249: Is a principal liable for the agent's unauthor-
ized tort of malicious prosecution? What was the authority
in this case and what did the Court hold?
Case 250. Vowles v. Yakish et al., 179 N. W. (Iowa)
117 (1920).
Facts: Defendant Yakish was an insurance adjuster
of the defendant Insurance Company, Vowles had a
AGENT'S TORTS
489
policy of insurance upon a building and stock of groc-
eries. There was a loss by fire, and Yakish went about
to adjust the insurance. Vowles claims that Yakish ac-
cused Vowles in the presence of a third person of setting
the place on fire. Vowles sues Yakish and the company
for damages on account of the alleged slander.
Point InvolvedI: Whether an insurance adjuster, in
adjusting a loss, will render the principal, the insurance
company, liable for slander in charging the insured, in
the presence of others, of burning the property.
Stevens, J.: "* * *
"At the conclusion of plaintiff's testimony, the defend-
ant moved the court for a directed verdict upon the
ground, among others, that the evidence wholly failed
to show that, if the slanderous Words were in fact uttered
by the defendant Yakish, he was at the time acting within
the scope of his authority as an adjusting agent for the
insurance company. This presents the first question for
our consideration.
"It is not claimed by counsel that a corporation is
never liable for damages on account of slanderous utter-
ances of its agent, but that liability is imposed only when
the slander charged was uttered by the agent within
the scope of his authority, express or implied. This
question has been frequently discussed and passed upon
by the courts of other jurisdictions, but with consider-
able diversity of holding. While a few courts and text-
writers have' announced the doctrine that a corporation
is never liable for slanderous words uttered by its agent,
the overwhelming weight of authority is to the contrary.
The majority rule seems to be that if the agent acting
within the scope of his employment and in the actual
performance of the duties thereof touching the matter
in question utter a slander, though without the knowledge
of the corporation or with its approval, liability attaches.
* * *
"The test generally applied by the cases is: (a) Was
the person who uttered the slanderous words an author-
490
AGENCY
ized agent of the corporation? (b) If so, was he at the
time acting within the scope of his employment? And
(c) was the language charged used in the actual perform-
ance of his duties touching the matter in question? Other
courts have, however, held that a corporation is not liable
for slander uttered by its agent, unless it affirmatively
appears that the agent was expressly authorized thereby
to speak the slanderous words complained of, or subse-
quently approved or ratified the same. * * *
1 'The agency of the defendant Yakish to adjust the
loss for his co-defendant is admitted, and, while there
is direct conflict in the evidence as to whether any of
the language complained of was used upon either of the
occasions mentioned, the finding of the jury upon this
question has support in the evidence.
"The real question here to be determined is: "Was
the defendant, at the time he uttered the words com-
plained of, acting within the scope of his employment,
and in the actual performance of his duties touching the
subject-matter of the negotiations or transaction? The
mere fact that the defendant Yakish was at the time the
agent of the insurance company to adjust the loss, and
that the defamatory words were used during the nego-
tiations, does not establish liability on the part thereof.
* =& # J >
[The Court held that defendant Insurance Company •was
not liable. The Court thought that Yakish was acting merely
to ascertain the extent of the loss, and not the origin of the
fire. It said that if Yakish had been making an inquiry as to
the origin of the fire "a different question might arise. No
authorities are cited to support this distinction. A dissenting
opinion was filed. The dissenting judge thought such distinc-
tion of no value, and that the insurance company should be
liable. The case, with the dissenting opinion shows the diffi-
culty in some situations of determining when a tort should be
regarded as within the scope of the authority.]
Question 250: When is a principal liable for defamation
uttered by his agent ?
CHAPTEE 32
THE DUTIES AND LIABILITIES OF THE AGENT
TO THE THIRD PERSON
§ 254. (Agency, Sec. 70.) General statement.
(Note: The agent is not liable to the third person: Where
(1) he acts pursuant to his authority and (2) makes th^ con-
tract in his principal's name; and commits no tort.)
A. Liability of agent in contract.
B, Liability of agent in tort.
A. Liability of Agent in Contract.
(a) The agent warrants his authority.
(b) Agent having authority may bind himself.
(a) The Agent Warrants His Authority.
§255. (Agency, Sec. 71.) Warranty of authority by
agent.
Case 251. Thilmany v. Iowa Paper Bag Co. and Wm.
Daggett, 108 Iowa, 357.
Facts: Suit by Thilmany to recover the purchase
price of a carload of paper shipped to the Iowa Paper
Bag Co. The paper was shipped under a contract of
purchase by the Bag Company, and a guaranty of pay-
ment signed "Iowa National Bank, by William Daggett,
V. P. It is sought to hold Daggett on the theory that
he warranted his authority, the bank having no power
under its charter to make such a contract.
Point Involved: Whether an agent is responsible on
a contract made by him in excess of his actual or ap-
parent authority; limitations on the doctrine. Specif-
ically, whether an agent who seeks to bind a corporation
491
492
AGENCY
on a contract it has no power under its charter to make,
is personally liable.
Deemer, J.: 44Plaintiff claims that defendant Dag-
gett is liable on the written guaranty for two reasons:
First, because it is his individual contract, was intended
to bind hini as well as the bank, and was so received
and acted upon by appellant; second, for the reason that,
if he intended said guaranty or letter of credit to be
the obligation of the bank only, he was acting beyond
the scope of his authority as vice-president of the bank,
and failing to bind the bank, is himself liable; as an
agent who attempts to bind his principal by a contract
he had no authority as such agent to make.
C C -)£ ^
44 As to the second proposition, the rule has been broad-
ly stated over and over again that when an agent con-
tracts in excess of his authority, or acts without author-
ity, or assumes to have authority when he has none, or
for any reason fails to bind his principal, he is himself
bound. Winter v. Hite, 3 Iowa, 142; Allen v. Pegram,
16 Iowa, 163; Andrews v. Tedford, 37 Iowa, 314; Lewis
v. Tilton, 64 Iowa, 220. That this is the general rule
must be conceded, and, as applied to the facts of the
cited cases, it is correct. But like nearly every other
general rule, it is subject to exceptions, some of which
we will notice. The reasons generally given for the rule
are: First. That, as the agent assumes to represent
a principal, he cannot be heard to say that he had no
authority, or that there was in fact no principal to be
bound; for, if he assumes to represent another, he im-
pliedly warrants that there is such another, and thai
he has authority to represent him. If, then, there is no
principal, or the agent has no authority to act for him,
an action will lie for deceit or misrepresentation. Sec-
ond. The law assumes that the contract was intended to
bind someone, and, if the principal is not bound, the
contract must be that of the agent. This last rule is
generally applied to executed contracts. In such cases
AGENT'S LIABILITY
493
action will lie for benefits received by the agent. Some
cases go to the extent of rejecting all parts of the con-
tract relating to the obligation of the principal, and then
treat it as the personal contract of the agent. As illus-
trating this rule, see Byars v. Doors, 20 Mo. 284; Woodes
v. Dennett, 9 N. H. 55; Twerilliger v. Murphy, 104 Ind.
32 (3 N. E. Rep. 404). A third reason for the rule is
that the agent impliedly warrants his authority to act
for his principal, and if he has no such power, an action
lies for breach of warranty. Now, it is apparent, that
if the party with whom the agent contracts has notice
of the facts relating to the authority of the agent, and
is as fully advised as to his authority as the agent him-
self, there can be no action for deceit. And so the text
writers have generally stated this as an exception to
the general rule. Mechem on Agency, at sections 545
and 546, thus states the law: 'Sec. 545. * * * Of
course if the other party knew, or by the exercise of rea-
sonable care might have discovered, the want of author-
ity, he cannot recover. This implied warranty by the
agent of his authority must ordinarily be limited to its
•existence as a matter of fact, and not be held to include
a warranty of its adequacy or sufficiency in point of
law.' 'Sec. 546. Where Agent Discloses All the Facts
Relating to His Authority. Where, however, the agent,
acting in good faith, fully discloses to the other party
at the time all the facts and circumstances touching the
authority under which he assumes to act, so that the
other party from such information or otherwise, is fully
informed as to the existence and extent of his authority,
he cannot be held liable. It is material, in these cases,
that the party claiming a want of authority in the agent
should be ignorant of the truth touching the agency. If
he has full knowledge of the facts, or of such facts as
are sufficient to put him upon inquiry, and he fails to
: avail himself of such knowledge, or of the means of
knowledge reasonably accessible to him, he cannot say
lithat he was misled, simply on the ground that the other
^assumed to act as agent without authority. Of course,
494
AGENCY
if the agent conceals or misrepresents material facts,
to the detriment of the other party, he cannot claim ex-
emption.' Judge Story, in his valuable work on Agency,
(section 265) says: 'This doctrine, however, as to the
liability of the agent, where he contracts in the name
and for the benefit of the principal, without having due
authority, is founded upon the supposition that the want
of authority is unknown to the other party, or if known,
that the agent undertakes to guarantee a ratification of
the act by the principal. But circumstances may arise
in which the agent would not or might not be held to be
personally liable, if he acted without authority, if that
want of authority was known to both parties or unknown
to both parties.' Abundant authorities are cited by each
author in support of these propositions. The same
thought is equally applicable to the third reason above
given for the general rule. And it may be further said
that the implied warranty of the agent does not relate
to the power of the principal to enter into the particular
contract. He simply covenants that he has authority to
act for his principal, not that the act of the principal is
legal and binding. Hence it has been justly said that the.
contract must be one which the law would enforce against
the principal, if it had been authorized by him, else the
anomaly would exist of giving a right of action against
an assumed agent for an unauthorized representation of
his power to make the contract, when a breach of the
contract itself, if it had been, authorized, would have
furnished no ground of action against the principal.
[The court decides that on neither of the grounds con-
tended for, is Daggett liable. The party dealing with
Daggett as Vice President of the bank was bound in law
to know that Daggett as such Vice President could not
bind the bank on a commercial guarantee, the same not
being legitimate banking business.]
Question 251: (1) State the facts in this case, the specific
question presented and the Court's decision.
AGENT'S LIABILITY
495
(2) State in your own words the rule as to the liability of
an agent to a third person when that third person cannot hold
the principal because of lack of real or apparent authority. On
what reasons is the agent so held 1
(b) Agent Having Authority to Bind Principal May
Instead Bind Himself.
§ 256. General statement.
§ 257. Principal undisclosed.
§ 258. Agent bound; sealed instruments.
§ 259. Agent bound; negotiable paper.
§260. Agent bound; other contracts.
§ 261. Agent bound; no definite or responsible principal.
§ 256. (Agency, Sec. 72.) General statement.
(Note: An agent may of course, notwithstanding his author-
ity to bind his principal, bind himself, either because he is
careless, or because he is willing to contract on his own credit,
or because he does not disclose his principal. See following
sections.)
§ 257. (Agency, Sec. 73.) Principal undisclosed.
Case 252. Wheeler v. Reed, 36 111. 81.
Facts: Suit by Reed and others against Wheeler to
recover damages arising out of an alleged breach of
warranty in a sale of flour by Wheeler. Among other
defenses, Wheeler contended that he was not represent-
ing himslf but a principal. Plaintiffs testify that no
; principal was named or known at the time, though it
was known Wheeler was a broker. The transactions were
oral.
Point Involved: The liability of an agent as principal
where he does not disclose his principal.
BREESE, J.: <<***.
"The next question raised.by the appellant is, whether
the defendant made the warranty to bind himself, or on
behalf of a principal.
"We admit the rule to be as stated, where an agent
makes a contract and discloses at the same time his prin-
496
AGENCY
cipal, or the principal was known at the time by the other
party, the agent is not personally liable unless he makes
himself so, expressly; or it may be fairly inferred from
the nature of the contract itself and concurring circum-
stances. These are facts for the consideration of the
jury, and they have found there was no agency in this
sale. The account rendered shows the sale was made by
the defendant as principal. Nor does the proof show
that the broker, when he purchased, knew the principal.
He traded with the defendant as the principal, and so
the account of sales was made out and the receipt of
payment made.
"It would seem to us, this proof would enable the
defendant to recover in his own name, against the plain-
tiffs, had they failed to pay for the flour on delivery.
This is some test of the right of the plaintiffs to recover
against him, for a breach of his contract of warranty.
"The witness stated that the defendant did not dis-
close his agency; he supposed he was selling on cominis-
sion; did not know, when he bought, that one Burrows
was the proprietor of the flour, but supposed so; that
defendant had advanced upon it, and that Burrows was
running the mill.
"The rule is, that a vendor not disclosing his agency,
may be treated as a principal. This was held in Mills
v. Hunt, 20 Wend. 433, and is a settled rule. In that
case, the sale of the several articles was made by Mills,
Brothers & Co., and the bill of parcels made out in their
copartnership name, without disclosing the fact they were
acting as the agents of other parties. They were auc-
tioneers, and that fact was held not to be sufficient notice
to the purchasers that they were not selling their own
goods. The law was considered by the court of errors,
in that case, as well settled, that a vendor or purchaser,
dealing in his own name, without disclosing the name of
his principal, is personally bound by his contract; and
it makes no difference that he is known to the other
party to be an auctioneer or broker, who is usually em-
ployed in selling property as the agent for others. And
AGENT'S LIABILITY
497
the court further held, even when he discloses the name
of his principal, if he signs a written contract in his own
name merely, which does not show upon its face that
he was acting as the agent of another, or in an official
capacity in behalf of the government, he will be per-
sonally bound thereby. This rule has not been modified
or changed by any decision of this court. * * * -
"It is a settled rule in verbal contracts, if the agent
does not disclose his agency and name his principal, he
binds himself and becomes subject to all liabilities, ex-
press and implied, created by the contract and trans-
action, in the same manner as if he were the principal
in interest. Davenport et al. v. 0'Riley et al., 2 McCord,
198; Allen et al. v. Rostain, 11 Serg. & Rawle, 362, 375;
Mauri v. Hefferman, 13 Johns. 58, 77. And the fact
that the agent is known to be a commission merchant,
auctioneer, or other professional agent, makes no differ-
ence. "Waring v. Mason, 18 Wend. 426; Hastings v. Lov-
ering, 2 Pick. 214; and the case in 20th Wend. 431, Mills
v. Hunt, which we have already cited.
i ( *){• -X* ? J •
Question 252: (1) If an agent does not disclose his prin-
cipal when he makes a contract, is the agent liable? Does it
make any difference whether the person with whom he con*-
tracts knows that he is in fact an agent of an unknown prin-
cipal ?
(2) If the third person wished could he elect to hold the
principal ?
(Note: If the third person on discovering the principal elects
to hold him, the agent's liability ceases. See also the next
section for the liability of the agent on written contracts
where the principal is known but not properly named in a writ-
ten contract.)
Case 253. Siler v. Perkins, 126 Tennessee Reports,
380 (1912).
Facts: See the opinion.
Point Involved: That an agent, known to be acting
as such, is nevertheless personally liable if he does not
498
AGENCY
disclose his principal (the principal electing to hold the
agent).
Mk. Justice Buchanan : "* * *
"First. It is said that the proof shows that, as to
part of the stock sold, defendants Perkins and Gatliff
were not owners, but agents merely, and of what propor-
tion of the stock they were owners does not appear, but
that complainant knew that they were acting as agents
only in respect of part of the stock, and to sustain this
insistence they quote one of the complainant's answers
to this effect: 'I have always understood that Dr. Gat-
liff and Mr. Perkins and a man in Ohio were the prin-
cipal and largest owners of the stock.' And upon this
evidence is based the argument that defendants Perkins
and Gatliff were acting as agents for a disclosed prin-
cipal, and that their contract to pay complainant a com-
mission for the sale of the stock did not bind the agents
personally. The first answer to this contention is that
the record does not show that defendants Perkins and
Gatliff ever disclosed to complainant who their principals
were in respect to that portion of the stock of which they
were not themselves the owners; nor does it appear that
they ever disclosed to him how much of the stock they
owned individually, but it does clearly appear that the
defendants were assuming, in the making of the contract
sued on, to be acting for the holders of shares of the
entire capital stock, in the corporation, and that they
did sell and deliver, pursuant to negotiations conducted
by complainant under the contract sued on, all of that cap-
ital stock. It is clear that complainant, under the terms
of his contract with them, was made to understand that
they and each of them personally were bound to him for
the commissions which it was agreed that he should re-
ceive; that being the principal sum of the chancellor's
decree.
"The second answer to the first assignment of errors
is that while it is true as a general rule that in law 'an
agent who, acting within the scope of his authority, enters
AGENT'S LIABILITY
499
into contractual relations for a disclosed principal, does
not bind himself, in the absence of an express agreement
to do so,' yet it is also true that whether such an agent
does by such a transaction bind himself depends on the
intention of the agent and the person dealing with him,
and this intention must be gathered from the facts and
circumstances of each particular case. And it is the
disclosed intention that governs, and not some hidden
intention of the agent; and so the agent may become
personally liable, although this be contrary to his actual
intention, if he has in fact bound himself according to
the terms of the contract. And an agent who makes a
contract in his own name, without disclosing the identity
of his principal, renders himself personally liable, even
though the person with whom he deals knows that he
is acting as agent, unless it affirmatively appears that
it was the mutual intention of the parties to the contract
that the agent should not be bound. Cyc., vol. 31, pp.
1552 to 1555, inclusive, and Page on Contracts, sec. 975,
vol. 2.
 'When a purchase is made by an agent, in the name
and on the credit of the agent, for the principal not dis-
closed to the- seller, the latter may, upon discovering
the principal, treat the sale as a contract with the prin-
cipal, and hold him responsible for the price. The seller
may have his action for the price, at his election, against
the agent or against the principal; and this, though the
seller at the time supposed the agent to make the pur-
chase for himself, as principal. In such case, the con-
tract, though apparently and in form with the agent as
principal is in fact for the benefit of the principal, and
in the performance of the agency, and is the contract
of the principal. The law regards the reality rather
than the form.' Davis v. McKinney, 6 Cold. 17.
"But as a matter of course, when a third person con-
tracts with an agent with knowledge of that fact, and
also with knowledge of the principal for whom the con-
tract is made, then the contract, if it be within the scope
of the powers of the agent, is in law the contract of the
500
AGENCY
principal, and on such a contract the agent is not bound
unless in making the contract the third party gave credit
expressly and exclusively to the agent, and it was clearly
the intention of the agent to become liable in person.
Bailey v. Galbreath Bros., 100 Tenn. 602, 47 S. W. 84.
Question 253: On what ground did the defendants in this
case seek to avoid liability? What did the facts show in that
respect? What did the Court hold?
§ 258. (Agency, Sec. 74.) When agent bound on sealed
instruments by the form of his execution.
§§ 259, 260, 261. (Agency, Sees. 74, 75, 76.) Agent
bound by the form of his execution.
Case 254. Casco National Bank v. Clark, 139 New
York Reports, 307.
Facts: The facts are stated in the opinion.
Point Involved: In what form an agent should execute
a negotiable instrument of his principal in order not to
bind himself personally. Whether in this case the agent
by the form of his execution is personally bound.
Gray, J.: "The action is upon a promissory note in
the following form, viz.:
"It was delivered in payment for ice sold by the payee
company to the Ridgewood Ice Company, under a con-
tract between those companies, and was discounted by
the plaintiff for the payee, before its maturity. The ap-
pellants, Clark and Close, appearing as makers' upon
the note, the one describing himself as 'Prest.' and the
RIDGEWOOD
ICE
COMPANY
Brooklyn, N. Y., Aug. 2,1890.
$7,500. Three months after date,
we promise to pay to the order of
Clark & Chaplin Ice Company
seventy-five hundred dollars at
Mechanics Bank; value received.
E. H. Close, Treas.
John Clark, Prest.
AGENT'S LIABILITY
501
other as 'Treas.,' were made individually defendants.
They defended on the ground that they made the note
as officers of the Ridgewood Ice Company and did not
become personally liable thereby for the debt represented.
"Where a negotiable promissory note has been given
for the payment of a debt contracted by a corporation,
and the language of the promise does not disclose the
corporate obligation, and the signatures to the paper are
in the names of individuals, a holder, taking bona fide
and without notice of the circumstances of its making,
is entitled to hold the note as the personal undertaking
of its signers, notwithstanding they affix to their names
the title of an office. Such an affix will be regarded as
descriptive of the persons and not of the character of
the liability. Unless the promise purports to be by the
corporation, it is that of the persons who subscribe to
it ; and the fact of adding to their names an abbreviation
of some official title has no legal signification as qualify-
ing their obligation, and imposes no obligation upon the
corporation whose officers they may be. This must be re-
garded as the long and well-settled rule (Byles on Bills,
Sec. 36, 37, 71; Pentz v. Stanton, 10 Wend. 271; Taft v.
Brewster, 9 Johns. 334; Hills v. Bannister, 8 Cow. 31;
Moss v. Livingston, 4 N. Y. 208; De Witt v. Walton, 9 id.
571; Bottomley v. Fisher, 1 Hurlst. & Colt. 211). It is
founded in the general principle, that in a contract every
material thing must be definitely expressed, and not left
to conjecture. Unless the language creates, or fairly
implies, the undertaking of the corporation, if the pur-
pose is equivocal, the obligation is that of its apparent
makers.
"It was said in Briggs v. Partridge, 64 N. Y. 357, 363,
that persons taking negotiable instruments are presumed
to take them on the credit of the parties whose names
appear upon them, and a person not a party cannot be
charged, upon proof that the ostensible party signed, or
indorsed, as his agent. It may be perfectly true, if there
is proof that the holder of negotiable paper was aware,
when he received it, of the facts and circumstances con-
502
AGENCY
nected with its making, and knew that it was intended
and delivered as a corporate obligation only, that the
persons signing it in this manner could not be held in-
dividually liable. Such knowledge might be imputable
from the language of the paper in connection with other
circumstances; as in the case of Mott v. Hicks, 1 Cowen,
513, where the note read, 'the president and directors
promise to pay/ and was subscribed by the defendant
as 'president.' The Court held that that was sufficient
to distinguish the case from Taft v. Brewster, supra, and
made it evident that no personal engagement was entered
into or intended. Much stress was placed in that case
upon the proof that the plaintiff was intimately acquaint-
ed with the transaction out of which arose the giving of
the corporate obligation.
"In the case of the Bank of Genesee v. Patchin Bank,
19 N. Y. 312, referred to by the appellant's counsel, the
action was against the defendant to hold it as the indorser
of a bill of exchange, drawn to the order of ' S. B. Stokes,
Cas.,' and indorsed in the same words. The plaintiff
bank was advised, at the time of discounting the bill, by
the president of the Patchin Bank, that Stokes was its
cashier, and that he had been directed to send it in for
discount, and Stokes forwarded it in an official way to
the plaintiff. It was held that the Patchin Bank was
liable, because the agency of the cashier in the matter
was communicated to the knowledge of the plaintiff as
well as apparent.
"Incidentally, it was said that the same strictness is
not required in the execution of commercial paper as
between banks, that is in other respects, between indi-
viduals.
"In the absence of competent evidence showing or
charging knowledge in the holder of negotiable paper
as to the character of the obligation, the established and
safe rule must be regarded to be that it is the agreement
of its ostensible maker and not of some other party,
neither disclosed by the language, nor in the manner of
execution. In this case the language is 'we promise to
AGENT'S LIABILITY
503
pay,' and the signatures by the defendants Clark and
Close are perfectly consistent with an assumption by
them of the company's debt.
"The appearance upon the margin of the paper of the
printed name 'Ridgewood Ice Company' was not a fact
carrying any presumption that the note was, or was in-
tended to be, one by that company.
"It was competent for its officers to obligate them-
selves personally, for any reason satisfactory to them-
selves, and, apparently to the world, they did so in the
language of the note; which the mere use of a blank
form of note, having upon its margin the name of their
company, was insufficient to negative. * * *
Question 254: (1) Redraft the note in the above case so
that there would be no question that the corporation was liable
and that the president and treasurer were not liable.
Case 255. Barlow v. Cong. Soc., 90 Mass. 460.
Facts: Contract brought by the administrator of the
estate of Reuben Barlow against the Congregational So-
ciety in Lee, upon the following promissory note:
"$23.00. Lee, April 26, 1858. On demand I as treas-
urer of the Congregational Society, or my successors in
office, promise to pay Erastus Hall or order twenty-
three dollars, value received, with interest. Samuel S.
Rogers, Treasurer.
The declaration alleged that the defendants, for value
received by them, made the note by' Samuel S. Rogers,
their treasurer and agent, duly authorized; and that it
was duly indorsed to the plaintiff's intestate. The de-
fendants filed a general demurrer, which was overruled
in the superior court, and judgment rendered for the
plaintiff; and the defendants appealed to this court.
Point Involved: In what form an agent should execute
a negotiable instrument of his principal in order to bind
said principal. Whether the instrument set out in the
above facts binds the principal or the agent.
Gray, J.: "It is well settled in this commonwealth
that the question whether a principal or his agent is the
504
AGENCY
party liable upon a negotiable note or bill of exchange
must be ascertained from the instrument itself, at least
when both are in law capable of contracting and it is not
pretended that either has adopted the name of the other
as his own for the purpose of transacting business. This
exception to the general rule which governs other parol
(or unsealed) agreements is derived from the nature of
negotiable paper, which, being made for the very pur-
pose of being transferred from hand to hand, and of
giving to every successive holder as strong a claim upon
the maker as the original payee had, must indicate on
its face who the maker is; for any additional liability of
the principal, not expressed in the form of such a note
or bill, would not be negotiable; and any ambiguity aris-
ing upon the face of the writing in determining whether
it is the promise of the principal or of the agent, must,
on the ordinary principles of the law of evidence, be
solved without the aid of extrinsic testimony.
u* * * It has indeed been adjudged by the supreme
court of the United States, as well as by this court, that
on commercial paper payable to 'A. B., cashier,' the bank,
although not named in the instrument, might maintain an
action. * * * "Whether those decisions stand upon
the peculiar relation between a bank and its cashier, or
(as the opinions imply) upon a general right of any
principal to sue upon negotiable paper made to his agent,
we need not here inquire.
(i* * #
"All the decisions of this court upon unsealed instru-
ments since the case of Mann v. Chandler have required
something more than a mere description of the general
relation between the agent and the principal, in order to
make them the contracts of the latter. Thus an agree-
ment which declares the signers to be a committee of a
certain town, or trustees of a particular meeting-house,
and is signed with their own names, without addition,
is their individual contract. * * * So a promissory
note, in the body of which the principal is not named,
and which is signed by the agent in his own name, does
AGENT'S LIABILITY
505
not, by the mere addition to his signature of the words,
'trustee' or 'president' of a particular railroad corpora-
tion, become the note of the corporation.
u* * *
"Upon the question what words in a simple contract,
made by the hand of an agent of an individual or a pri-'
vate corporation, will bind the principal, the line of
distinction between the cases, even in the same court, is
very narrow.' Thus it is well settled that a promissory
note made by an agent, without naming his principal in
the body of it but signed 'For C. D., A. B.,' or 'A. B.,
agent for C. D.,' or 'A. B., for C. D.' is the note of C. D.
the principal. * * * But it seems to be equally well
settled in this court, and supported by English authority,
that the mere insertion of 'for,' or 'for and in behalf of'
the principal, in the body of the note, does not make it
the contract of the principal, if signed by the mere name
of the agent, without addition. * * * So a direction
in a bill of exchange drawn by an agent to place the
amount 'to the account' of his principal, has been held
not to exempt an agent, signing his own name without
addition, * * *.
u * * *
"The case now before the Court is stronger against thd
principal than any of these. The note is dated at Lee,
and calls the person who affixes the signature 'treasurer
of the Congregational Society,' thus distinctly naming
the Congregational Society in Lee, and showing who
the principal is; the promise contained in the note is
expressed to'be made by the writer 'as treasurer of' that
society; it does not promise a payment by the present
treasurer at all events, but by him ' or his successors in
office,' which could not be if the note were merely his
personal act, and not the act of the corporation whose
agent he was; and the designation of his office is repeated
after his signature. In short, the note not only names
the principal, describes the relation between the principal
and agent, and declares the note to be made in execution
506
AGENCY
of the agency, but it cannot take effect according to its
terms, except as the note of the principal.''
Question 255: (1) State how the note in this case read,
how it was signed, and whether the Court held the agent liable.
(2) What form of description of the principal in the body
of this note, and form of signature would have avoided all ques-
tion as to whether the principal and not the agent was liable
on this note? Redraft the note and signature in conventional
form showing that the trustee signed beyond a doubt merely as
agent.
Case 256. Higgins v. Senior, 8 Meeson & Welsby, 834.
Facts: The facts are stated in the opinion.
Point Involved: Whether an agent representing a dis-
closed principal, who executes a simple contract solely
in his own name, can show by parol evidence, that it was
not intended to bind him, the agent.
Pabke, B.: "The question in this case, which was
argued before us in the course of the last term, may be
stated to be, whether in an action on an agreement in
writing, purporting on the face of it to be made by the
defendant, and subscribed by him, for the sale and de-
livery by him of goods above the value of £10, it is com-
petent for the defendant to discharge himself, on an
issue on the plea of non assumpsit, by proving that the
agreement was really made by him by the authority of
and as agent for a third person, and that the plaintiff
knew those facts, at the time when the agreement was
made and signed. Upon consideration, we .think that it
was not: and that the rule for a new trial must be dis-
charged.
"There is no doubt, that where such an agreement is
made, it is competent to show that one or both of the
contracting parties were agents for other persons, and
acted as such agents in making the contract, so as to give
the benefit of the contract on the one hand to, and charge
with liability on the other, the unnamed principals: and
this, whether the agreement be or be not required to be
AGENT'S LIABILITY
507
in writing by the Statute of Frauds: and this evidence
in no way contradicts the written agreement. It does
not deny that it is binding on those whom, on the face of
it, it purports to bind; but shows that it also binds an-
other, by reason that the act of the agent, in signing
the agreement, in pursuance of his authority, is in law
the act of the principal.
"But, on the other hand, to allow evidence to be given
that the party who appears on the face of the instrument
to be personally a contracting party, is not such, would
be to allow parol evidence to contradict the written agree-
ment; which cannot be done. And this view of the law
accords with the decisions, not merely as to bills of ex-
change signed by a person, without stating his agency
on the face of the bill; but as to other written contracts,
namely, the cases of Jones v. Littledale, 6 Ad. & Ell.
486; 1 Nev. & A. 677, and Magee v. Atkinson, 2 M. &
W. 440. It is true that the case of Jones v. Littledale
might be supported on the ground that the agent really
intended to contract as principal: but Lord Denman, in
delivering the judgment of the Court lays down this as
a general proposition, ' that if the agent contracts in such
a form as to make himself personally responsible, he
cannot afterwards, whether his principal were or were
not known at the time of the contract, relieve himself
from that responsibility.' And this is also laid down in
Story on Agency, § 269. Magee v. Atkinson is a direct
authority, and cannot be distinguished from this case.
Question 256: If A represents P with authority to make a
contract with C and C knows A's authority and knows P's
identity and the contract is made in writing between A and C
who appear in such writing to be the contracting parties, can
A show, to avoid liability that he was in fact an agent and
C knew it?
§ 261. (Agency, Sec. 77.) Agent bound where no defin-
ite or responsible principal.
(Note: Where there is no definite or responsible principal,
as where a committee makes contracts for the benefit of an un-
508
AGENCY
incorporated lodge or other non-partnership body, the committee
is liable.)
B. Liability of Agent in Tort.
§ 262. (Agency, Sec. 78.) Agent responsible for his
torts.
Case 257. Baird v. Shipman, 132 111. 16.
Facts: The facts are given in the opinion.
Point Involved: The liability of the agent for his own
torts in connection with the agency.
This court adopts the opinion of the Appellate Court,
as follows:
Gaenett, P. J.:  This is an appeal from a judgment
for damages, founded on the alleged negligence of appel-
lants, by which the death of Joseph Garnett, appellee's
intestate, is said to have been caused. The place where
the injury happened was in a barn situated on premises
on Michigan Avenue, in Chicago, belonging to Aaron C.
Goodman, who was then, and for several years before,
a resident of Hartford, Connecticut. Appellants were
his agents for renting the premises during the years
1884 and 1885, and during both years were carrying on
the real estate business in Chicago. On the trial evidence
was given tending to show that they had, in fact, com-
plete control of the premises, with the residence and
barn thereon, repairing the same in their discretion, and
there was no proof that in such matters they received
any directions from the owner. The property was rented
by appellants to Emma R. Wheeler and A. R. Tillman
from April 1, 1884, to April 30, 1885, and to Emma B.
Wheeler from May 1,1885, to April 30,1886. Both leases
were in writing, and by the terms of each lease the
tenants covenanted to keep the premises in good repair.
The tenant in the last lease rented the premises to Nellie
E. Pierce, who occupied the same from April 28, to Sep-
tember, 1885. The evidence tends to prove that when
the lease was made to Emma R. Wheeler, the large car-
AGENT'S LIABILITY
509
riage door to the barn was in a very insecure condition,
and that appellants, through one Warner, the manager
of their renting department, verbally agreed with Mrs.
Wheeler to put the premises in thorough repair. Noth-
ing was done to improve the condition of the door, and
on June 12, 1885, while the deceased, an expressman by
occupation, was engaged in delivering a load of kindling
in the barn, for one of the parties living in the house,
the door, weighing about four hundred pounds, fell from
its fastenings, and injured him to such an extent that he
died the following day.
"Appellants make two points: First, that the verdict
is clearly against the weight of the evidence; second, that
they were the agents of the owner, Goodman, and liable
to him, only, for any negligence attributable to them.
 There is nothing more than the ordinary conflict of
evidence found in such cases, presenting a question of
fact for the jury, and the finding must be respected by
this court in deference to the well settled rule.
"The other point is not so easily disposed of. An
agent is liable to his principal only for mere breach of
his contract with the principal. He must have due regard
to the rights and safety of third persons. He can not, in
all cases, find shelter behind his principal. If in the
course of his agency, he is entrusted with the operation
of a dangerous machine, to guard himself from personal
liability he must use proper care in its management and
supervision, so that others in the use of ordinary care
will not suffer in life, limb or property. Suydam v.
Moore, 8 Barb. 358; Phelps v. Wait, 30 N. Y. 78.) It is
also his contract with the principal which exposes him to
or protects him from liability to third persons, but his
common law obligation is to us that which he controls
as not to injure another. That obligation is neither in-
creased nor diminished by his entrance upon the duties
of agency, nor can its breach be excused by the plea that
his principal is chargeable. Delaney v. Rochereau, 34
La. Ann. 1123.
"If the agent once actually undertakes and enters upon
510
AGENCY
the execution of a particular work, it is his duty to use
reasonable care in the manner of executing it, so as not
to cause any injury to third persons which may be the
natural consequences of his acts, and he can not, by
abandoning its execution midway, and leaving things in
a dangerous condition, by reason of his having so left
them without proper safeguards. Osborne v. Morgan,
130 Mass. 102. [Agent held liable.]
Question 257: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) A has a house in a tumble down condition. He con-
tracts with B to repair it. B never enters upon the performance
of the contract. C being rightfully on the premises is injured
by falling through a rotten plank. Is B liable ?
(3) In the case of Singer Mfg. Co. v. Rahn, Case No. 162
supra, would the agent have been liable had he been sued for
the tort of negligently driving the wagon to the plaintiff's dam-
age?
PART III
PROFESSIONAL AGENTS
CHAPTER 33
PROFESSIONAL AGENTS
A. Factors.
B. Brokers.
C. Auctioneers.
§§ 263 to 274. (Agency, Sees. 79 to 90.)
(Note: It does not seem feasible to give cases in this connec-
tion. See Sections 79 to 90 in Agency, Commercial Law Series.
For cases in regard to auctions see Sales. The following case
defining and distinguishing between factors and brokers is
given.)
Case 258. Turner v. Crompton, 21 North Dakota, 294.
Goss, Justice: li* * *
"The true definition of a broker seems to be that he
is an agent employed to make bargains and contracts
between other persons in matters of trade, commerce,
or navigation for a compensation commonly called brok-
erage. Or, to use the brief but expressive language of
an eminent judge, ' a broker is one who makes a bargain
for another and receives a commission for so doing.'
Properly speaking, a broker is a mere negotiator between
the other parties, and he never acts in his own name
but in the names of those who employ him. Where he
is employed to buy or to sell goods, he is not intrusted
with the custody or possession of them, and is not au-
511
512
AGENCY
thorized to buy or to sell them in his own name. He is
strictly, therefore, a middleman or intermediate nego-
tiator between the parties.'' Story, Agency, 28. Again
a broker is defined as 'one whose occupation it is to
bring parties together to bargain, or to bargain for
them, in matters of trade, commerce, or navigation; he
is essentially a middleman or go-between.' Mechem,
Agency, 13. 'He (a broker) differs from a factor
also, in that he does not ordinarily have the possession of
the property which he may be employed to sell, and that
his contracts are always made in the name of his em-
ployer. As will be seen, he is primarily the agent for
the first person who employs him, and he cannot, with-
out the full and free consent of both, be throughout the
transaction the agent of both parties.' Mechem, Agency,
U 927. Again: 'Brokers are agents who are engaged
to negotiate contracts for other persons relative to prop-
erty, with the custody of which they have no concern.
* * * He is a mere negotiator between the other par-
ties. It is the duty of a broker to bring the contracting
parties together for the purpose of making a contract,
or he may, if so authorized, make the contract for them.
* * * Merchandise brokers are those who negotiate
the sale of merchandise without having the possession
or control of it as factors have.' Reinhard, Agency,
21. 'The features which mainly distinguish a factor
from a broker are: The former is intrusted with the
possession, disposal, and control of the property, and
may sell it in his own name and bind the principal;
* * * the broker is, strictly speaking, a middleman,
or intermediate negotiator between the parties, and is
not in the fiduciary relation of an agent to his principal,
but must favor neither the one nor the other of the par-
ties between whom he effects a transaction.' 19 Cyc.
Law & Proc. p. 116.
The foregoing definitions are but illustrative of every
definition of the term 'broker,' which term is not de-
fined by our statute.
A 'factor' is defined by our statute as follows (Rev.
PROFESSIONAL AGENTS
513
Codes 1905): Section 5801: 'A factor is an agent who
is employed to buy or sell property in his own name,
and who is intrusted by his principal with the posses-
sion thereof, as defined in 5582.'
 'Section 5582. A factor is an agent who, in the pur-
suit of an independent calling, is employed by another
to sell property for him, and is vested by the latter with
the possession or control of the property, or authorized
to receive payment therefor from the purchaser1?
It will be noticed the two sections together as quoted
constitute the statutory definition of factor, and that a
factor may buy as well as sell property the subject of
the agency. But, in the absence of a statute as broad as
ours declaring that a factor may buy as well as sell prop-
erty, the courts have held the term 'factor' to apply to
a purchasing agent, as well as to one employed to sell
property. Price v. Wisconsin M. & F. Ins. Co., 43 Wis.
267, in an opinion by Chief Justice Ryan, to the effect
that 'a factor is an agent to buy or to sell.' A factor
may buy and sell in his own name as well as in the name
of his principal; a factor buying goods for his principal
in his own name is personally liable for the price. Story,
Agency, 110. To the same effect is McGraft v. Rugee,
60 Wis. 406, 50 Am. Rep. 378, 19 N. W. 530, and Beards-
ley v. Schmidt, 120 Wis. 405, 102 Am. St. Rep. 991, 98
N. W. 325.
Question 258: Define a broker, a factor. In what respects
does the factor differ from the broker ?
PART IV
TERMINATION OF RELATIONSHIP
Chapter 34. Termination by Act of Parties.
Chapter 35. Termination by Operation of Law.
CHAPTER 34
TERMINATION BY ACT OF PARTIES
§ 275. By terms of original agreement.
§ 276. By accomplishment of object.
§ 277. Bevocation by act of principal.
§ 278. Irrevocable agencies.
§ 279. When principal has right to revoke.
§ 280. Termination by agent.
§ 281. Notice of revocation to agent.
§ 282. Notice to third persons.
§ § 275, 276. (Agency, Sec. 91, 92.) By terms of orig-
inal agreement and accomplishment of object.
(Note: The agreement being carried out, the agency ends,
unless continued by further agreement.)
§ 277. (Agency, Sec. 92.) Revocation by act of
principal.
(Note: A principal has a power to revoke, even though he
has no right, except the agency is coupled with an interest. See
next section, and case thereunder.)
§ 278. (Agency, Sec. 94.) Irrevocable agencies.
Case 259. Chambers v. Seay, 73 Ala. 372.
Facts: The facts are stated in the opinion.
Point Involved: That powers coupled with an interest
or to effectuate a security are irrevocable. To inquire:
Whether the power in this case was such a power.
514
TERMINATION
515
Somerville, J.: "The main contention in this case
involves the right of the principal to revoke the agent's
authority to sell, so as to deprive the latter of his com-
missions.
"The agreement, which is the basis of this suit, is in
writing, bearing date February 28, 1878, and is signed
by both the plaintiff and defendant. Its substance is
briefly as follows: Seay was the owner of a tract of
land in Talladega county, valuable for the quantity of
iron ore it was known to contain. He placed this land
in the hands of Chambers for sale, subject to Seay's
ratification, if he (Seay) should 'deem the price to be
paid for said property sufficient to warrant a sale.'
Chambers, on his part, agreed to undertake the sale of
the land, and to this end undertook and promised to
transport specimens of ore taken from it to Binning-
ham, England, for inspection there; and also to advertise
the property in one respectable paper in each of the
cities of Birmingham and London, England. By way of
compensation for his services and expenses, it was stip-
ulated that Chambers should receive 'an undivided one-
fourth interest in the proceeds of sale when sold as afore-
said,' and his right to sell was made 'exclusive.'
"The evidence tends to show that Seay revoked the
agency of Chambers in January, 1880, and very, soon
afterwards himself sold the property to one (Hidden for
the sum of twenty thousand dollars. The circuit court
charged the jury, that the agreement in question was a
mere revocable agency, which could be recalled by the
principal, Seay, at any time before it had been executed
by his making a sale of the property; and if it was so
revoked prior to the sale made by Seay to Glidden, then
Chambers was not entitled to recover any commissions.
"The rule is not denied, that, in ordinary cases, a prin-
cipal, who has empowered an agent to sell, may at any
time before sale revoke the agent's authority. It is
equally true that the usual theory of commissions is, that
the agent is to receive them only in the event of success.
Wood's Mavne on Damages (Amer. Ed.), §§ 746-474.
516
AGENCY
4 4 It is argued that the present agreement does not coble
within this general rule, because it confers on the agent
a power coupled with an interest, and that such power is
irrevocable. It is a generally admitted proposition of
law, that a principal is not permitted to revoke the au-
thority of his agent, where such authority is coupled
with an interest, or where it necessary to effectuate a
security. Ewell's Evans on Agency, marg. page, 83*
These are the two established exceptions, which seem,
indeed, to be essentially similar in principle. It is con-
tended that the agency of the plaintiff, Chambers, comes
within the influence of the first exception, as being coupled
with an interest, and it was not competent, therefore,
for Seay to revoke it. It is not any interest, however,
that will suffice to render an agency irrevocable. An
interest in the proceeds of sale, or money derived from
the sale of the property by an agent, is not sufficient for
this purpose. Barr v. Schroeder, 32 Cal. 609; Hartley's
Appeal, 53 Penn. St. 212; Gilbert v. Holmes, 64 111. 549.
To be irrevocable, it seems now we*IT settled, that the
power conferred must create an interest in the thing
itself, or in the property which is the subject of the
power. In other words, 'the power and estate must he
united and co-existent,' and, possibly, of such a nature
that the power would survive the principal in the event
of the latter's death, so as to be capable of execution in
the name of the agent. Blackstone v. Buttermore, 53
Penn. St. 266; Bonney v. Smith, 17 111. 531; Mansfield v.
Mansfield, 6 Conn. 559; Hunt v. Rousmanier, 8 Wheat.
174; Evans on Agency (Ewell), marg. page, 83, note,
and p. 85; Raleigh v. Atkinson, 6 M. W. 670. In Hunt v:
Rousmanier, supra, such a power was defined by Chief
Justice Marshall to be one 'engrafted on an estate in
the thing itself.'
"The power conferred on Chambers was not of this
nature very clearly. He had no interest in the subject-
matter of his agency, the land itself. He was interested
only in the money to be derived as the proceeds of the
sale of the land, which could only be realized by the com-
TERMINATION
517
pletion of his agency, or by some negotiation which was
tantamount to it. He had parted with no money, or other
value, for the security of which the power of sale was
conferred in the agreement. He had risked in the ven-
ture of his agency only his. personal services and the
expenses incidental to its execution. The undertaking
to transport specimens of iron ore-to England, and to
advertise the lands there, may be embraced as a part of
the ordinary expense to be incurred in the usual course
of such an employment.. It is fair to presume that he
risked this much in view of the large compensation to be
reaped as commissions, in the event of a successful sale.
Simpson v. Lamb, 17 C. B. 603.
"It is insisted further that the agency is rendered
irrevocable by reason of the fact, that the power of sale
conferred on Chambers was stipulated to be exclusive.
This can not be stronger than the use of the word 'irre-
vocable,' which has been construed to fail of such a pur-
pose, unless the agency comes with the exceptions above
discussed. In the case of a naked power, an express
declaration of irrevocability will not prevent revocation.
McGregor v. Gardner, 14 Iowa, 326; Blackstone v. But-
termore, 53 Penn. St. 266.
"The chief difficulty arises in those cases where the
agent has incurred trouble and expense in the execution
of his agency, and has been prevented from effecting a
sale by the interference of his principal, whether by
revocation of his authority, or otherwise. It is not just,
it is true, for a principal to revoke an agent's authority
without paying him for labor and expense reasonably in-
curred in the course of the agent's employment. Unless
otherwise stipulated, the agent may, in a proper form of
action, ordinarily claim reimbursement for the value of
these. Evans' Agency (Ewell), marg. p. 83-84. So
where a sale of property is brought about by the adver-
tisements or exertions of a broker or agent, the broker
being the efficient cause of the sale, and the purchaser
being found through his instrumentality, he may often
recover his commissions. Sussdorf v. Schmidt, 55 N. Y.
518
AGENCY
319; Earp v. Cummins, 54 Penn. St. 394. These are men-
tioned as just qualifications of the general rule, to which
we have above adverted, touching the subject of the rev-
ocation of an agent's authority by his principal.
11 The pleadings in the present case, upon which it was
tried, are framed very clearly with reference to a re-
covery of the stipulated commissions promised to Cham-
bers, and the gravamen of the action is, in effect, alleged
to be the wrongful revocation of the agency by act of the
principal. We need not, for this reason, discuss the ques-
tion as to the plaintiff's right to recover for the value
of his services, or for expenses incurred. The first and
fifth counts were in assumpsit. Myers v. Gilbert, 18 Ala.
467. The demurrer for misjoinder was consequently well
taken, and was properly sustained by the courti
'' The rulings of the circuit court were in accordance
with the above views, and its judgment must be affirmed.
Question 259: (1) What was the power in this case?
. (2) What powers are irrevocable? Suppose in this case the
principal had had no right to revoke, would that have had any
bearing on the question whether the agency was revocable ?
(3) Does the declaration in an appointment that it is irre-
vocable make it so ?
(4) Would the fact that the agent had gone to expense in
the agency, of itself, make it irrevocable?
(5) A loaned B, $1,000, and as a part of the same transaction
appointed B his agent to collect debts due A, as security for the
loan. Could A revoke this authority?
§279. (Agency, Sec. 95.) When principal has right
to revoke.
Case 260, Huffman v. Paige-Detroit Co., 262 Fed. 116.
Facts: The facts are stated in the opinion.
Point Involved: That an agency may be created un-
der terms that make it revocable at will.
Hook, Circuit Judge. This was an action for damages
by Huffman against the Paige-Detroit Motor Car Com-
pany, a corporation of Michigan. The first count of his
TERMINATION
519
petition is for a breach of a written contract between
them by its wrongful cancellation prior to the specified
date of expiration. The second count is for enticing
away plaintiff's sub-agents in the automobile business.
The trial court sustained a demurrer to each count for
its failure to state a cause of action, and to both for a
misjoinder. A judgment for defendant followed. There
was a third count in the petition, but it is not now in
controversy.
(1) By the terms of the contract the defendant
granted to the plaintiff the exclusive right to sell Paige
automobiles in Nebraska and parts of Iowa and South
Dakota. Voluminous provisions defined the basis for
future dealings between the parties and their responsi-
bilities to each other and to third persons. Except for
an attempt to make their future relation purely that of
vendor and purchaser, and their transactions wholly in-
terstate in character, the contract is much like one of
agency. This aspect of it is emphasized by the control
which defendant reserved over the activities of the plain-
tiff through provisions for cancellation to which refer-
ence will presently be made. The defendant did not ob-
ligate itself to sell, nor plaintiff to buy, any specified
quantity of automobiles, nor was a determinable quantity
fixed in a mutually binding way by the requirements of
an established business. The defendant was expressly
exempted from such an obligation and from adherence
to the schedule of prices and discounts set forth. It was
free to decline shipments under the contract, and also
free to fix and change prices at will. The contract speci-
fied a time when it expired by limitation. The first count
of the petition charged that prior to that time the de-
fendant  without just cause terminated and cancelled
said contract. But aside from the provisions above
noted, indicating a lack of mutuality of obligation, the
contract expressly reserved to defendant the right of
cancellation when in its opinion the plaintiff was not
working the territory to the best advantage. By another
clause it was provided that, if the defendant "believes
520
AGENCY
that the dealer (the plaintiff) is not properly and dili-
gently pushing the sale of its cars, it hereby reserves the
right at its election, and without making itself liable in
any manner for any claim or action for damages,
* * * to cancel and terminate this agreement.
# * *  It is quite manifest that the contract merely
furnished a basis for future dealings to be observed no
longer than was mutually satisfactory. There was no
hard and fast commitment of either party, if he chose to
break away. Oakland Motor Car Co. v. Indiana Automo-
bile Co., 121 C. C. A. 319, 201 Fed. 499; Velie Motor
Car Co. v. Kopmeier Motor Car Co., 114 C. C. A. 284,
194 Fed. 324.
Question 260: For what was the suit brought in Case 260?
What was the provision as to cancellation of the contract ? "Was
it valid?
(Note: Where it is provided that the principal may dis-
charge the agent if service is unsatisfactory, the agency being
otherwise for a definite period of time, it is held by some cases
that the employer must act in good faith—not mere caprice in
discharging the agent, although there are authorities that the
principal is the sole judge of his dissatisfaction.)
§ 280. (Agency, Sec. 96.) Termination by agent.
(Note: The agent may quit at any time, but is liable for
damages for breaking his contract in doing so.)
§281. (Agency, Sec. 97.) Notice of revocation to
agent.
(Note: The agent is entitled to reasonable and fair notice.)
§282. (Agency, Sec. 98.) Notice to third persons.
Case 261. Clafin v. Lenheim, 66 New York Reports,
301.
Facts: Suit brought by Clafin & Co. v. L. S. Lenheim
for price of goods alleged to have been bought by Len-
heim, through his brother, H. S. Lenheim, as his agent.
TERMINATION
521
Defendant, H. S. L., had one store at Great Bend, Pa.,
and he conducted another store at Meadsville, Pa,, for
several years with his brother as the agent in charge,
who as such agent had bought goods from plaintiffs for
several years prior to July, 1867. Just prior to that date,
they sold a bill of goods to defendant at the Meadville
store amounting to about $8,000 and this was paid in
August, 1867, but there was a difficulty about the bill and
the parties ceased to deal with each other until October,
1869. The store at Meadsville was burned in July, 1867,
and defendant admits that the brother had authority be-
fore the fire, but claims at about that time it was re-
voked. In November and December, 1869, the brother
made the purchases that are now in controversy, making
them ostensibly as the agent of the defendant for the
Meadsville store.
Rapallo, J.: "* * *
"It is a familiar principle of law that when one has
constituted and accredited another his agent to carry on
a business, the authority of the agent to bind his prin-
cipal continues, even after an actual revocation, until
notice of the revocation is given; and, as to persons who
have been accustomed to deal with such agent, until
notice of the revocation is brought home to them. The
case of such an agency is analogous to that of a part-
nership, and the notice of revocation of the agency is
governed by the same rules as notice of the dissolution
of a partnership. As to persons who have been previ-
ously in the habit of dealing with the firm, it is requisite
that actual notice should be brought home to the creditor,
or at least, that the credit should have been given under
circumstances from which notice can be inferred.
a* * #
"But the court submitted to the jury the further ques-
tion whether, independently of the question of notice iu
fact, the circumstances were such as to put the plaintiffs
on inquiry as to whether the authority of the agent con-
tinued, and charged them that if they were, the plain-
522
AGENCY
tiffs were charged with notice of the facts which the
inquiry would have disclosed. In other words, the ques-
tion was submitted to the jury whether, although the
plaintiffs had no notice in fact, they had constructive
notice of the revocation of the agency.
u # * *
"The mere fact that the store at Meadville was burnt
did not indicate that the defendant intended to discon-
tinue business there; and if business had been promptly
resumed and purchases for that store renewed by the de-
fendant's brother, there could have been no reason, in
the absence of any notice from the defendant, to suppose
that the agency had been discontinued. The principal
feature in the case is the delay of two years and up-
wards between the fire and the resumption of purchases,
by the defendant's brother, for the Meadville store. But,
under the circumstances, this delay might well have been
attributed by the plaintiffs to the difficulty between them
and the defendant, in July and August, 1867, which re-
suited in the defendant suspending all dealings with the
plaintiffs, notwithstanding that he continued his business
at Great Bend. And when the defendant, in 1869, re-
sumed his dealings with the plaintiffs, without giving
them notice of any change in his business arrangements
with his brother, at Meadville, the plaintiffs were war-
ranted in believing that the suspension of the dealings of
the brother was attributable to the same cause which
had deterred the defendant himself from making pur-
chases; and when, immediately after the defendant him-
self resumed dealings, the brother applied to make pur-
chases as before, for the Meadville store, the plaintiffs
would not, naturally, attribute the suspension of deal-
ings for that store, in the meantime, to a revocation of
the agency, nor suspect that the brother was committing
a fraud. We must, in considering the portion of the
charge excepted to, assume, as we have assumed, that
no notice was given by the defendant to the plaintiffs
that he had discontinued his business at Meadville or
revoked the authority of his brother, and that the plain-
TERMINATION
523
tiffs knew nothing of it, for the charge expressly submits
the question of constructive notice, independently of the
question of notice in fact, and expressly states that the
jury are to pass upon it in case they find that there was
no notice in fact.
"We think that the circumstances existing at the time
of the sale of the goods in question were not sufficient
to constitute constructive notice of the revocation of the
agency, and that the case should have been submitted to
the jury only upon the question of notice in fact. In
this there is no hardship upon the defendant; it was his
duty, after he had accredited his brother for a series of
years as authorized to deal in his name and on his re-
sponsibility, when he terminated that authority, to notify
all parties who had been in the habit of dealing with his
agent, as the plaintiffs had been to his knowledge. This
was an act easily performed and would have been a per-
feet protection to him and prevented the plaintiffs from
being deceived. Justice to parties dealing with agents
requires that the rule requiring notice in such cases
should not be departed from on slight grounds, or dubious
or equivocal circumstances substituted in place of notice.
If notice was not in fact given, and loss happens to the
defendant, it is attributable to his neglect of a most usual
and necessary precaution.
Question 261: What is the rule as to the notice that must be
given of the termination of the agency?
CHAPTEE 35
TERMINATION BY OPERATION OF LAW
§ 283. Death of principal.
§ 284. Death of the agent.
§ 285. Insanity of one of the parties.
§ 286. By bankruptcy.
§ 287. War.
§283. (Agency, Sec. 99.) Death of principal.
(See Yerrington v. Greene, 7 E. I. 589, set out as Case
No. 184, supra.)
(Note: An exception to this rule is when the agency is
coupled with an interest.)
§ 284. (Agency, Sec. 100.) Death of agent.
(See Yerrington v. Greene, supra.)
(Note: An exception is in case of an agency coupled with
an interest.)
§285. (Agency, Sec. 101.) Insanity of one of the
parties.
(Same rule as in death.)
§ 286. (Agency, Sec. 102.) By bankruptcy.
(See subject of bankruptcy.)
§287. (Agency, Sec. 103.) Termination by war.
Case 262. Insurance Co. v. Davis, 95 U. S. 424.
Fads: Suit on policy of life insurance issued by New
York Life Ins. Co. of New York before the war on life of
524
TERMINATION
525
Sloman Davis of Virginia, containing a provision that
policy was to be void if premiums not promptly paid.
The company's agent in Virginia was once A. B. Garland,
who on the outbreak of the war became a Confederate
major. After the war the premiums were tendered to
him, but he declined to receive them.
Point Involved: Whether war terminates relation of
principal and agent between citizens of the hostile
powers.
Mr. Justice Bradley: "* * *
"But we deem it proper to consider more particularly
the question of agency, and the alleged right of tendering
premiums to an agent, during the war.
"That war suspends all commercial intercourse be-
tween the citizens of two belligerent countries or states,
except so far as may be allowed by the sovereign author-
ity, has been so often asserted and explained in this court
within the last fifteen years, that any further discussion
of that proposition would be out of place. As a conse-
quence of this fundamental proposition, it must follow
that no active business can be maintained, either person-
ally or by correspondence, or through an agent, by the
citizens of one belligerent with the citizens of the other.
The only exception to the rule recognized in the books,
if we lay out of view contracts for ransom and other
matters of absolute necessity, is that of allowing the pay-
ment of debts to an agent of an alien enemy, where such
agent resides in the same state with the debtor. But this
indulgence is subject to restrictions. In the first place,
it must not be done with the view of transmitting the
funds to the principal during the continuance of the war;
though, if so transmitted without the debtor's connivance,
he will not be responsible for it. Washington, J., in
Conn. v. Penn, Pet. C. Ct. 496; Buchanan v. Curry, 19
Johns. (N. Y.) 141. In the next place, in order to the
subsistence of the agency during the war, it must have
the assent of the parties thereto,—the principal and the
agent. As war suspends all intercourse between them,
526
AGENCY
preventing any instructions, supervision, or knowledge of
what' takes place, on the one part, and any report or ap-
plication for advice on the other, this relation necessarily
ceases on the breaking out of hostilities, even for the
limited purpose before mentioned, unless continued by
the mutual assent of the parties. It is not compulsory;
nor can it be made so, on either side, to subserve the ends
of third parties. If the agent continues to act as such,
and his so acting is subsequently ratified by the prin-
cipal, or if the principal's assent is evinced by any other
circumstances, then third parties may safely pay money,
for the use of the principal, into the agent's hands; but
not otherwise. It is not enough that there was an agency
prior to the war. It would be contrary to reason that a
man, without his consent, should continue to be bound
by the acts of one whose relations to him have undergone
such a fundamental alteration as that produced by a war
between the two countries to which they respectively be-
long; with whom he can have no correspondence, to whom
he can communicate no instructions, and over whom he
can exercise no control. It would be equally unreason-
able that the agent should be compelled to continue in
the service of one whom the law of nations declares to be
his public enemy. If the agent has property of the prin-
cipal in his posse'ssion or control, good faith and fidelity
to his trust will require him to keep it safely during the
war, and to restore it faithfully at its close. This is all.
The injustice of holding a principal bound by what an
agent, acting without his assent, may do in such cases, is
forcibly illustrated by Mr. Justice Davis, in delivering
the opinion of this Court in Fretz v. Stover, 22 Wall. 198.
In that case, the agent had collected in Confederate funds
the amount due on a bond. Having asserted that the
agent had no authority to do this, the learned Justice
adds: 'If it were otherwise, then, as long as the war
lasted, every Northern creditor of Southern men was at
the mercy of the agent he had employed before the war
commenced. And his condition was a hard one. Directed
by his government to hold no intercourse with his agent,
TERMINATION
527
and therefore unable to change instructions which were
not applicable to a state of war, yet he was bound by the
acts of his agent in the collection of his debts, the. same
as if peace prevailed. It would be a reproach to the law,
if creditors, without fault of their own, could be subjected
to such ruinous consequences.' These observations have
a strong bearing upon the point now under consideration.
''What particular circumstances will be sufficient to
show the consent of one person that another shall act as
his agent to receipt payment of debts in an enemy's coun-
try during war, may sometimes be difficult to determine.
Emerigon says, that if a foreigner is forced to depart
from one country in consequence of a declaration of war
with his own, he may leave a power of attorney to a
friend to collect his debts, and even to sue for them.
Traite des Assurances, vol. i, 567. But though a power
of attorney to collect debts, given under such circum-
stances, might be valid, it is generally conceded that a
power of attorney cannot be given, during the existence
of war, by a citizen of one of the belligerent countries
resident therein, to a citizen or resident of the other;
for that would be holding intercourse with the enemy,
which is forbidden. Perhaps it may be assumed that an
agent ante helium, who continues to act as such during
the war, in the receipt of money or property on behalf of
his principal, where it is the manifest interest of the latter
that he should do so, as in the collection of rents and other
debts, the assent of the principal will be presumed, unless
the contrary be shown; but that, where it is against his
interest, or would impose upon him some new obligation
or burden, his assent will not be presumed, but must be
proved, either by his subsequent ratification, or in some
other manner.
i < * * *
"We place our decision simply on the ground that the
agency of Garland was terminated by the breaking out
of the war, and that, although by the consent of the par-
ties it might have been continued for the purpose of re-
ceiving payments of premiums during the war, there is
528
AGENCY
no proof that such assent was given, either by the de-
fendant or by Garland; but that, on the contrary, the
proof is positive and uncontradicted, that Garland de-
clined to act as agent.
Question 262: What were the facts in this case and what did
the Court hold as to the effect of the war on the agency ?
DIVISION D
BAILMENTS, CARRIERS
AND SALES
DIVISION D
BAILMENTS, CARRIERS AND SALES
Subdivision I. Bailments and Carriers,
Subdivision II. Sales of Personal Property.
SUBDIVISION I
BAILMENTS AND CARRIERS
Chapter 36, Bailment defined.
Chapter 37. Rights and Obligations of Ordinary Bailees.
Chapter 38. Extraordinary Bailees.
Chapter 39. Bills of Lading and Warehouse Receipts.
531
CHAPTER 36
BAILMENT DEFINED
§ 288. Bailment defined.
§ 289. Kinds of bailments.
§ 290. How bailment differs from sale.
§ 291. Same subject in case of fungible goods.
§ 288. (Sales, Sec. 1.) Bailment defined.
Case 263. Wentworth v. Riggs, 143 New York Supple-
ment, 955.
Facts: Wentworth, the plaintiff, patronized defend-
ant's restaurant and hung his overcoat upon a hook pro-
vided for that purpose about two feet from him. No
regular checkroom was provided but there was a place
by the cashier's desk where valuables could be checked.
There were notices about the place "Not responsible for
hats, overcoats, umbrellas, etc., but plaintiff testified he
did not see these notices until after his coat was lost. The
coat was stolen and plaintiff sues the restaurant owner
for its value. He obtained judgment in the trial court and
defendant appealed to the higher court (139 N. Y. Suppl.
1082) where plaintiff's judgment was affirmed. Further
appeal to this court in which the court finds for defendant,
adopting the dissenting of Sealbury in the court below.
Point Involved: Whether the restaurant owner was a
bailee of the coat hung by the customer on the hook near
him; what constitutes one a bailee of another's property.
Sealbtjky, J.: "In view of the precautions taken by
the defendant to police and care for the property of his
patrons, I think it is evident that he cannot be held
liable for the loss of the overcoat upon any theory of
negligence unless there was a bailment. If the defend-
532
BAILMENTS DEFINED
533
ant is to be held liable at all, it can only be npon this
latter theory. Confusion has been engendered by cer-
tain cases, which seem to discuss constructive bailment
as if it were identical with constructive delivery. The
two things are distinct. Formerly, delivery was re-
garded as the essence of bailment. As this branch of
the law has developed, cases of constructive bailment
have been recognized covering cases where there had
been no delivery either actual or constructive, as where
one held the possession of a chattel under such circum-
stances that the law placed upon the person having the
possession of the chattel the obligation to deliver it to
another. The typical instance of such a constructive
bailment is where one sells a chattel to another, who
pays the price thereof, and the vendor refuses to de-
liver it to the vendee. Here the law implies the con-
tract of bailment, and holds the vendor answerable as
bailee. In such a case it is apparent that there has been
no delivery by the bailor to the bailee, and yet the bail-
ment exists constructively. All the other examples of
constructive bailment which are given in the books, as in
the case of a finder, of a captor or salvor, of an attaching
officer, are cases where the person having possession of
the chattel is held to be a bailee, although there has never
been either an actual or a constructive delivery of the
chattels to the bailee by the bailor. In other words, the
essential fact of legal significance in all these cases is
possession. It certainly is not delivery, for, in none of
these cases of constructive bailment, is there either an
actual or a constructive delivery.
"The older definitions of the term 'bailment' seem to
accentuate merely the necessity for the delivery. Chief
Justice Holt, in his celebrated opinion in Coggs v. Ber-
nard, 2 Lyd. Raym., 909, 1 Smith, Lead. Cas. 354, which
[is supposed to have laid the foundations of the English
{law of bailment, divides bailment into six different sorts
of classes and defines each. Delivery is in every case the
}essential element in Lord Holt's definition.
' .it* * * A[r> Schouler, in his American notes to
534
SALES
Coggs v. Bernard, in the ninth American Edition of
Smith's Leading Cases (volume 1, p. 400), quotes the
following definition of the term 4bailment' from Bou-
vier's Dictionary:
 4 A delivery of some chattel by one party to another,
to be held according to the special purpose of the delivery,
and to be returned or delivered over when that special
purpose is accomplished.'
"This definition includes within its scope constructive
bailment, whereas the earlier definitions of Holt, Jones,
Blackstone, Story, and Kent cover only cases of actual
bailment.
"1. In actual bailment there must be a delivery of the
chattels to the bailee or his agent. The delivery may be
either actual or constructive, (a) An actual delivery con-
sists in giving to the bailee or his agents the real posses-
sion of the chattel. Shindler v. Houston, 1 Denio (N. Y.)
48. (b) Constructive delivery comprehends all of those
acts, which although not truly comprising real possession
of the goods transferred, have been held constructions
juris equivalent, to the acts of real delivery, and in this
sense includes symbolical or substituted delivery. Shind-
ler v. Houston, swpra; Bolin v. Huffnagle, 1 Rawle (P.) 9;
35 Cyc. 189.
"In 5 Cyc. 165, in discussing the sufficiency of the de-
livery in order to constitute an actual bailment, it is said:
 'Such a full delivery of the subject-matter must he
made to the bailee as will entitle him to exclude for the
time of the bailment the possession of the owner, as will
make him liable as its sole custodian to the latter in the
event of his neglect or fault in discharging his trust with
respect to the subject-matter, and as to require a rede-
livery of it by him to the owner or other person entitled
to receive it after the trusts of the bailment have been
discharged. Where the delivery can be constructive only,
there must be an intention to transfer the possession of
the property.' * * *
"II. A constructive bailment arises where the person
having possession of a chattel holds it under such circum-
BAILMENTS DEFINED
535
Stances that the law imposes upon him the obligation of
delivering it to another.
"From the definition of the two subdivisions of actual
bailment, and from the definition of a constructive bail-
ment, there ought to be no difficulty in determining
whether there was in the case at bar a bailment of the
plaintiff's overcoat. Neither the defendant nor his agents
ever had the real possession of the overcoat, and there-
fore there was not an actual delivery of the coat. The
facts proved are inconsistent with the hypothesis that the
plaintiff intended to transfer to the defendant or his serv-
ants such a possession of the coat as would exclude for
the time of the bailment the possession of the owner.
The overcoat hung upon a hook within two feet of where
the plaintiff was sitting during the meal, and it does not
seem to be capable of dispute that during that time the
defendant did not have such a possession of it as to ex-
elude the possession of the plaintiff. If the plaintiff had
wished to reach his overcoat at any time during the meal,
either to take something from one of the pockets of the
coat or for any other purpose, he was entirely free to do
so, without requiring any act on the part of the defendant
or his servants. The presence of the hooks may be con-
strued into an invitation to the patron to hang his coat
upon them, but hanging the coat upon the hook cannot be
reasonably held to constitute a delivery of the coat to the
exclusive possession of the defendant. The hooks were
obviously placed there for the convenience of the patron,
provided he wished to retain possession of his coat. If
he wished to deposit the coat in the exclusive possession
of the defendant, he should have availed himself of the
accommodations which the defendant provided for that
purpose. If he had done this, the defendant would have
been liable. Buttman v. Dennett, 9 Misc. Rep. 462, 30
N. Y. Supp. 247. The frequency with which the plaintiff
was accustomed to visit the defendant's restaurant leaves
no room for doubt that he knew of the accommodations
provided by the defendant for caring for the hats, coats,
and other articles of his patrons.
536
SALES
"In the case at bar, it does not appear that the defend-
ant or any of his servants ever saw, much less received,
the overcoat. How the defendant, under all the circum-
stances disclosed, can be held to have had exclusive pos-
session of the overcoat is not clear to me. * * *
"The facts of this case, * * * seem to me to
establish that there was no actual bailment, because there
was neither an actual or constructive delivery of the coat.
That this is not a case of constructive bailment is appar-
ent from the fact that the defendant never had the actual
possession of the coat.
"It follows that there was neither an actual nor con-
structive bailment and, as there is no ground under the
facts in this case upon which the defendant's liability can
be predicated, the judgment should be reversed, and a
new trial ordered, with costs to appellant to abide the
event.
Question 263: Is delivery essential to bailment? What is
constructive delivery? Name some cases of bailment where
there is no delivery. Was there any bailment in this case?
Why ? Under what circumstances would there have been a bail-
ment?
From this case what conception of bailment do you get in re-
spect to possession and control by the bailee?
(Note: In Apfel v. Whyte's, Inc., 180 N. Y. S. 712 (1920)
the customer handed his coat to the waiter for the purpose of
having the waiter hang it on a hook near him, and not for pur-
pose of being checked. Held, citing above case, that restaurant
was not liable for theft of the coat, as the waiter did not really
take possession from the patron, but merely for his convenience
hung it up for him.)
Case 264. Powder Co. v. Burkhardt, 97 United States
Reports, 110.
Mr. Justice Hunt: "* * * It is contended that
the question of bailment or not is determined by the fact
whether the identical article delivered to the manufac-
turer is to be returned to the party making the advance.
Thus, where logs are delivered to be sawed into boards,
or leather to be made into shoes, rags into paper, olives
BAILMENTS DEFINED
537
into oil, grapes into wine, wheat into flour, if the product
of the identical articles delivered is to be returned to the
original owner in a new form, it is said to be a bailment
and the title never vests in the manufacturer. * * *
We understand this to be the correct exposition of the
law.''
Question 264: If material belonging to A is delivered to B
with the understanding that B must return the same material
in same or altered form, does B own the material or is he bailee ?
(Note: For further consideration of definition of bailment
see § 290 post.)
§289. (Sales, Sec. 2.) Kinds of bailments.
(Note: Bailments may be classified as follows, for the pur-
pose of denoting the various circumstances under which bail-
mcnts arise.
A. Ordinary Bailments.
1. Bailments for sole benefit of bailor.
2. Bailments for sole benefit of bailee.
3. Bailments for benefit of both bailor and bailee.
(a) Bailments of mere keeping (warehousemen, agents,
etc.).
(b) Bailments of carriage (private carriers).
(c) Bailments of goods delivered to do work upon.
(d) Bailments of goods delivered to do work with.
(e) Bailments for security (pledges).
(f) Bailments of vendor in possession after sale.
(g) Bailments of goods to be sold by bailee (consign-
ments).
4. Fortuitous bailments (finding, theft, salvage, etc.).
B. Extraordinary Bailments.
1. Innkeepers.
2. Common carriers.
§290. (Sales, Sec. 3.) How bailment differs from sale.
Case 265. Wilson v. Finney, 13 Johnson's Reports
(N. Y.), 358.
Facts: In June, 1812, plaintiff, Wilson, delivered to
defendant, Finney, six sheep, in consideration whereof
538
SALES
Finney agreed to return to plaintiff, at the end of a year,
an equal number of sheep, of equal value. Finney neg-
lected to deliver the sheep according to this agreement.
It appeared that four of the sheep had been taken (right-
fully or wrongfully) from Finney by one of Wilson's
creditors, as the property of Wilson. Wilson sued Fin-
ney for failing to deliver the sheep according to the
agreement and Finney had a judgment below. Wilson
appeals.
Point Involved: The distinction between a bailment
and a sale.
Per Curiam: "This judgment cannot be supported.
There is no color of depriving the plaintiff of a recovery
for the value of two sheep, as there is no pretense that
more than four were taken under the attachment against
him. But the plaintiff was entitled to recover for the
whole number. The property in the sheep, delivered
by the plaintiff, was changed and duly vested in the
defendant. He was under no obligation to return the
same sheep, but only those of equal value. They were at
his absolute disposal and risk.
"Judgment reversed.
Question 265: (1) Was there a sale of the sheep in this
case ? Why ?
(2) Suppose the agreement had been that Finney should
return the same sheep, and the sheep had been taken by Wil-
son's creditors or had died without Finney's fault. Would your
answer be different? Why?
Case 266. Austin v. Seligman, 18 Fed. 519.
Facts: Plaintiff delivered to Kempt & Co. certain
jewelers' sweepings, of the value of $4,292, to be refined,
and agreed to pay for the refining $320, Kempt & Co.,
after refining, to deliver to plaintiff the product thereof
or account for their value. Kempt & Co. did neither.
The plaintiff now sues defendant as successor of Kempt &
Co., alleging that they assumed the obligation. The ques-
tion arises under the pleadings in this case whether this
transaction was a bailment or sale, on the facts stated.
BAILMENTS DEFINED
539
Point Involved: Whether an agreement to return the
same goods received, or at the receiver's option to ac-
count for their value is a bailment or sale.
Wallace, J.: "* * * If the delivery of the sweep-
ings was a bailment, trover is an appropriate remedy,
because the title to the property remained in the plain-
tiff, and a demand and a refusal to return it to him by the
defendants is sufficient evidence of a conversion, whether
defendants were innocent purchasers or otherwise. But
the rule is well settled that when, by the terms of the
contract under which property is delivered by an owner
to another, the latter is under no obligation to return
the specific property either in its identical form or in
some other form in which its identity may be traced,
but is authorized to substitute something else in its place,
either money or some other equivalent, the transaction
is not a bailment, but is a sale or exchange. Here, the
agreement was that Kempt & Co. should return the re-
fined product of the sweepings or account for their
value, less the price for refining. They had an option
which was inconsistent with the character of a bailment.
Hurd v. West, 7 Cow. 752; Smith v. Clarke, 21 Wend.
83; Foster v. Pettibone, 7 N. Y. 433; Buffum v. Merry,
3 Mason 478; Chase v. Washburn, 1 Ohio St. 244; Ewing
v. French, 1 Blackf. 153. Schouler, Bailm. 5. * * * 
Question 266: (1) State the facts, the question presented
and the Court's decision.
(2) A delivers to B a large lot of leather to be made into
shoes, A to have shoes from the same leather. After the goods
are delivered to B, in whom is the title to the leather ? B makes
up the leather into shoes, and refuses to deliver the shoes to A.
Can A (on paying B's proper charges) obtain the shoes? Why?
(3) Same case except B agrees to deliver shoes out of the
same grade of leather. What is your answer? What would be
A's remedy?
Case 267. In re Columbus Buggy Co., 143 Fed. 859.
Facts: The Washburn-Lyle Implement Co. was ad-
judged a bankrupt, and certain goods were found in its
540
SALES
possession which it had obtained under a contract with
the Columbus Buggy Co. The trustee in bankruptcy took
possession of these goods, claiming them as assets
of the bankrupt's estate, and the Columbus Buggy Co.
claims them as belonging to it. The trustee's position
is that the goods were sold to the now bankrupt under a
conditional sale which under the Oklahoma laws is not
good as against creditors unless recorded. The Colum-
bus Buggy Co. claims that the bankrupt holds the goods
as mere agent or consignee of the Columbus Buggy Co.
and that title to said goods never passed conditionally or
otherwise, and therefore the transaction was not subject
to the conditional sales recording law. The material
terms of the contract were that the goods should be se-
lected from those of the Columbus Co. by the Washburn
Co. and should be shipped and billed to it as agent by
the Columbus Co. at the latter's wholesale prices, that
the Washburn Co. might sell the goods at such prices
as it saw fit and that it would pay to the Columbus Co. the
wholesale prices less 5 per cent discount for the goods if
sold in each month by the 10th day of the succeeding
month, that it would keep the goods insured for benefit
of the Columbus Co. and would bear all expenses of
freight, storage and hauling, that the contract should
continue in force one year and that unless it was renewed,
the Washburn Co. would, at its expiration return that
portion of the goods unsold and the Columbus Co. would
repay the freight which had been paid upon this portion
and that all goods should be on consignment and the title
should remain in the Columbus Co. and subject to its
order until they were sold and paid for in cash.
Sanborn, Circuit Judge (after reciting the facts):
"A conditional sale is one in which the vesting of the
title in the purchaser is subject to a condition precedent,,
or in which its revesting in the seller is subject to a fail-
ure of the buyer to comply with a condition subsequent.
"An agreed price, a vendor, a vendee, an agreement
of the former to sell for the agreed price and an agree-.
BAILMENTS DEFINED
541
ment of the latter to buy for and to pay the agreed
price are essential elements of a contract of sale. The
contract involved in this case has none of these charac-
teristics. The power to require the restoration of the
subject of the agreement is an indelible incident of a
contract of bailment. South Australian Ins. Co. v. Ran-
dell, L. R. 3 P. C. 101,108; 2 Kent's Com. x, 589; Powder
Co. v. Burkhar.dt, 97 U. S. 116, 24 L. Ed. 973; Sturm v.
Boker, 150 U. S. 312,14 Sup. Ct. 99, 37 L. Ed. 1093. This
contract contains a plain stipulation that the goods are
at all times subject to the order of the Columbus com-
pany until they are sold and that at the expiration of the
term of the contract the Washburn company will return
the goods which remain unsold. It was therefore a con-
tract of bailment for sale and it was not subject to the
statute of Oklahoma regarding conditional sales. One
of the most striking and familiar illustrations of its char-
acter is given by Chief Justice Gibson in McCullough v.
Porter, 4 Watts & S. (Pa.) 177, 39 Am. Dec. 68, where he
says:
 'Were I to put my horse in the custody of a friend,
to be sold for a designated sum, with permission to re-
tain whatever could be got beyond it, it would not be
suspected that I had ceased to own him in the meantime,
or that my friend would not be bound to return him, even
without a stipulation, should he have failed to obtain the
prescribed price.'
"A contract between a furnisher of goods and the
receiver that the latter may sell them at such prices as
lie chooses, that he will account and pay for the goods
sold at agreed prices, that he will bear the expense of
insurance, freight, storage and handling and that he will
kold the unsold merchandise subject to the order of the
furnisher discloses a bailment for sale and does not
evidence a conditional sale. It contains no agreement of
the receiver to pay any agreed price for the goods. It
\ is not, therefore, affected by a statute which renders un-
.recorded contracts for conditional sales voidable by cred-
Jtors and purchasers. The fact that such a contract pro-
542
SALES
vides that the receiver of the -goods may fix the selling
prices and may retain the difference between the agreed
prices of the accounting and the selling prices to recom-
pense him for insurance, storage, commission and ex-
penses does not constitute the contract an agreement of
sale. It still lacks the obligation of the receiver to pay
a purchase price for the goods and the obligation of the
furnisher to transfer the title to him for that price.
Sturm v. Boker, 150 U. S. 312, 14 Sup. Ct. 99, 37 L. Ed.
1093; John Deere Plow Co. v. McDavid (C. C. A.—) 137
Fed. 802; Metropolitan Nat. Bank v. Benedict Co., 20
C. C. A. 377, 380, 74 Fed. 12, 185; In re Gait, 56 C. C. A.
470, 473, 120 Fed. 64, 67; Union Stock Yards, etc., Co. v.
Western Land, etc., Co., 7 C. C. A. 660, 664, 59 Fed. 49,
58; Keystone Watchcase Co. v. Fourth National Bank,
194 Pa. 535, 45 Atl. 328; In re Flanders, 67 C. C. A. 484,
134 Fed. 560; Martin v. Stratton-White Co., 1 Ind. T.
394, 37 S. W. 833; National Bank v. Goodyear, 90 Ga.
711, 726, 16 S. E. 962; Barnes Safe & Lock Co., v. Bloch
Bros. Tobacco Co., 38 W. Ya. 158, 164, 18 S. E. 482, 22
L. R. A. 850, 45 Am. St. Rep. 846; National Cordage Co.
v. Sims, 44 Neb. 148, 153, 62 N. W. 514; Rosencranz &
Weber Co. v. Hanchett, 30 111. App. 283, 286; Harris v.
Coe, 71 Conn. 157, 41 Atl. 552, 554; W. O. Dean Co. v.
Lombard, 61 111. App. 94, 97; Norton & Co. v. Melick, 97
Iowa, 564, 566, 66 N. W. 780; Lenz v. Harrison, 148 111.
598, 36 N.E. 567, 569.
Question 267: (1) Why in this case was it material to de-
termine whether this was a conditional sale or a bailment?
(2) What did the court decide the transaction was? "Why?
Case 268. Arbuckle Bros. v. Kirkpatrick, 98 Tenn.
221, 36 L. R. A. 285.
Facts: Arbuckle Bros, made a contract with Kirk-
patrick & Co. by which they purported to appoint Kirk-
patrick & Co. their "special selling factor. It was pro-
vided in this agreement that the title to the goods de-
livered to K. & Co. should remain in A. Bros.; that the
goods should be billed to K. & Co. in K. & Co.'s name,
BAILMENTS DEFINED
543
"but only as our factors, and according to the laws re-
lating to factors and only at such prices and at such
terms as we may give you from time to time; that K.
& Co. should guarantee the sale of each consignment, and
the payment thereof, within sixty days from its date and
should assume all risk as to the credit of the parties, and
should make all collections for goods sold, that K. &
Co. should remit the full amount of each consignment
less commission by the end of such sixty days at the
price designated at the time of the consignment, whether
the whole of said consignment is sold or not, that cer-
tain discounts should be allowed on payments in ad-
vance, that if the full amount, less commissions, of any
consignment should not be paid, A. Bros, would draw
on K. & Co. and that certain prices were to be maintained.
K. & Co. became insolvent and made an assignment for
benefit of creditors. Arbuckle Bros, claim title to all
accounts for coffee sold, not yet collected, and moneys
held by K. & Co. from accounts collected. No goods are
now on hand subject to controversy. The assignee of
K. & Co. claims that the contract between A. Bros, and
K. & Co. was a contract by which title to all goods de-
livered thereunder passed on the delivery. A. Bros,
claim that K. & Co. were their agents and mere bailees,
and not purchasers of such goods.
Point Involved: Whether under the contract set forth
title passed to the goods delivered thereunder or whether
the sellers thereby retained title, with the consignee as
their agent.
Wilkes, J.: '' * * * Without attempting to run a
parallel between the present case and those which have
been cited and commented upon, we merely state some
of the more prominent features which we think charac-
terize this contract as one of sale, and not of agency.
It will be noted that under no circumstances were any
goods ever to be returned to Arbuckle Bros. All must
be paid for in sixty days, whether sold or not. There
is no stipulation to buy at the expiration of sixty days,
544
SALES
but the contract clearly contemplates a payment with-
out further bargain, when that time arrives, and implies
a present sale, on a credit of sixty days. Kirkpatrick &
Co. could sell when and on what time they chose; but no
matter how sales were made, the amount to be paid was
fixed in advance, whether sold or not, whether collected
or not. No account of sales was to be rendered. Ar-
buckle Bros, had nothing to do with Kirkpatrick & Co.'s
customers. They were not in privity with complain-
ants, and no credit was given to them. If cash was
taken, it was not to be kept separate. If notes were
taken Arbuckle Bros, had no concern in them. Kirk-
patrick & Co. were to have all advance in prices and
bear all declines. If the goods were destroyed by fire,
wind, or water, it was the loss of Kirkpatrick & Co., and
the insurance was optional, and only designed to place
them in position to account for the goods. Whether the
goods were carted, or stored, or insured was optional
with Kirkpatrick & Co., but, in any event, they were to be
credited therefor. They were allowed a sum for com-
missions, whether they sold or not and discount was to
be allowed for quick payment, as is usual in case of sales.
The course of dealing shows that the proceeds of sale
were not to be kept separate, but Kirkpatrick & Co.
remitted their check on general account, and it was ac-
cepted without question or comment. This was a virtual
agreement that Kirkpatrick & Co. might use the proceeds
as they chose, and account for them out of their general
funds. These features are all evidences of a sale, and
cover every risk, obligation, and duty that rests upon a
purchaser, and cover every right in handling the goods
that an owner could have, except, simply, the price was
to be sustained. This was evidently provided in order
to keep the price uniform—in all markets and stifle com-
petition. Kirkpatrick & Co. could sell in any territory,
in any amount, to any purchaser, on any terms, for cash
or credit, take notes or make accounts, and dispose of
the goods as absolutely and free of limitation as any
owner could, except they could not vary the price. In
BAILMENTS DEFINED
545
Nutter v. Wheeler, supra, it is said that a stipulation
that a vendee or consignee shall not sell below a fixed
price is a very common one made to prevent competition,
and has but little weight in determining the question of
sale or agency, and is consistent with either.
"We are of opinion that complainants cannot collect
from customers of Kirkpatrick & Co., but must look alone
to them, and not to purchasers from them; and we are
also of opinion that under the peculiar provisions of this
contract the relation of complainants to Kirkpatrick
& Co. was that of vendor to vendee, at least as to outsid-
ers, and persons to be affected by the relation, no matter
what the parties may have agreed or intended as between
themselves. The contract is certainly a remarkable one,
partaking in many of its provisions of a contract of
agency and in many others of a sale: It is evidently
intended as either or both, as might suit the convenience
or subserve the purposes of the complainants. It pur-
ports to be copyrighted; for what reason is not stated,
but the copyright is evidently procured on account of the
unusual and extraordinary provisions of the instrument
(if there be a copyright). In construing such a con-
tract, whenever it affects the rights of others it will be
so construed as to protect such rights and not to enable
the complainants to carry out any double purpose. In
view of its uncertainty and contradictory provisions, the
court will see that third persons are not prejudiced by
its construction.''
Question 268: What led the court in this case to describe
the transaction as a sale ?
Case 269. Excerpt from note in Lawyers' Reports An-
notated, 1917 B at p. 626.
"The question here raised is as to the character of
contracts which embody some provisions peculiar to con-
tracts of sale, and others peculiar to contract of consign-
ment or agency. In many of these contracts, owing to
the incorporation therein of provisions peculiar to each
of these classes of contracts, it frequently becomes a
546
SALES
difficult matter to determine whether a contract is in fact
one of sale, or consignment or agency. Much ingenuity
has been employed by consignors in framing contracts
to secure all the benefits, and at the same time avoid the
disadvantages, of contracts of sale, and also to secure
the benefits and avoid the detriments of agency contracts.
The result is a hybrid contract, frequently involving es-
sential elements both of sale and consignment contracts.
In construing them the essential elements of each char-
acter of contract are used as tests to determine the
character of the particular contract.
"In contracts of this character, as in other contracts,
however, the rule applies that, where the construction
of any part is involved in doubt, an understanding of its
meaning is to be sought in the light afforded by all the
other parts of the instrument. Even though one part
of the contract is somewhat repugnant to the remaining
portions, which is frequently the case in this class of
contracts, the true meaning of the contract as a whole
is to be ascertained and enforced. And the court will
construe such a contract as a whole, weighing all the
terms and provisions in connection with the reasonable
and natural results of its performance, in order to gain
a definite conception of the intention of the parties in
this regard.
'' For, of course, the intention of the parties as gathered
from the contents of the instrument as a whole, with
such light as in proper cases, may be shed thereon by
extrinsic proof as to their admissions and prior conduct
and dealings, will control the court in determining the
character of the contract. But it should be noted in this
connection that the intention of the parties cannot thus
control where to give effect to their express or implied
intent would be violative of the principles of law ap-
plicable to contracts of sale or of agency, for a contract
cannot be both. And while, as hereafter shown, the .ex-
press intent of the parties is not to be ignored, never-
theless that intent is governed and controlled by the actu-
al results accomplished by the contract.
BAILMENTS DEFINED
547
"The consignor cannot impose upon the consignee the
burdens, obligations, and risks of a purchaser without
at the same time exposing himself to the risks incident
to the passing of the title from him to the consignee;
nor can he impose upon the consignee these obligations
and risks, and evade the risks due to a change in title,
by asserting in the contract the expressed intention of
the parties that it is to be construed as one of agency
or consignment. And this pretense will not have the
effect of enabling him to evade the necessity of record-
ing the contract as one of conditional sale in order to
make it valid as to the consignee's creditors or subse-
quent purchasers, if the effect of the contract is to charge
the consignee as purchaser. Since the actual results of
the contract control in its construction, the real question
is as to the relation established between the parties by
the contract, and this question is usually one of law to
be determined from all its provisions, except that where
it is not clear whether a contract is one of sale or con-
signment for sale its interpretation becomes a mixed
question of law and fact, based upon the acts of the
parties thereunder. As hereinafter shown, the conduct
and dealings of the parties may be resorted to to deter-
mine the character of the contract, and under some cir-
cumstances these matters furnish the real test and are
decisive in this regard.''
Question 269: Why do contracts under which goods are de-
livered to another sometimes contain provisions which indicate
they are of sale and also of bailment? What advantage to the
seller to have it one of sale, or of bailor to have it one of bail-
ment? Can it be both bailment and sale? What should de-
termine which it is? Is the question which it is, sometimes
difficult to determine?
(Note: The editor has come to the conclusion that little can
be done in a book of this character to steer the student through
the mazes of the law on the subject at hand. The cases given
are cases in which the distinction is brought out between a bail-
ment and sale, and cases which clearly illustrate without much
room for argument that a bailment exists when goods are in the
548
SALES
hands of a person who mnst deliver those same goods to another,
in the same or altered form, or disposed of for him as owner,
while a sale exists where the goods do not have to be turned
over by the recipient, although he may have the right to re-
turn such goods.
(The note quoted from above indicates the troublesomeness of
the subject for lawyers and judges.)
§ 291. (Sales, Sec. 4.) Same subject in case of fungible
goods.
Case 270. Yockey v. Smith, 181 Illinois Reports, 564.
Facts: Suit in replevin brought by Smith against
Yockey to recover possession of 4,955 bushels of corn
and 211 bushels of oats which had been stored by Smith
in the elevators of Robert T. Harrington, and which
Yockey had seized as sheriff under an execution against
Harrington. Defense that the grain does not belong to
Smith, but to Harrington and is therefore rightfully
seized. Harrington was a grain dealer at Marseilles,
Illinois. He bought, shipped and sold grain on his own
account and received from farmers grain in store in his
elevators. Smith being the owner of about 3,000 bushels
of oats and 5,000 bushels of corn, hauled and stored it
in the elevators operated by Harrington, under an agree-
ment that it was to remain his grain, subject to his order,
and he was to pay a certain price per bushel for storage.
The grain was mixed with grain of the same quality
belonging to other depositors.
Point Involved: Whether a deposit of grain in a pub-
lie warehouse to be stored and mixed with other grain of
like quantity, under an agreement that the same or a
like quantity of the same kind of grain shall be held
subject to the order of the depositor, is a bailment or a
sale.
Me. Justice Ceaig:  * * * We think it is plain
that the proprietors of public warehouses, such as were
kept by Harrington, do not become debtors of the own-
BAILMENTS DEFINED
549
ers of the grain stored, but on the other hand, they are
custodians, charged with the duty to restore, in quantity
and quality, such grain as they may receive. This rule
is demanded for the safety and security of those who
entrust their grain to the keeping of persons engaged in
the public business of warehouseman. * * * 
Question 270: (1) If grain is deposited with a public ware-
houseman, to be mixed with grain of like quality, the same
quantity of like grain to remain at the depositor's order, in
whom is the title of the grain so stored?
(Note: This rule applies only to goods of a fungible charac-
ter (that is, goods made of units indistinguishable from the
units of similar masses) where by custom the goods may be
mixed and similar quantities restored. Compare with cases in
this chapter, supra.)
CHAPTER 37
RIGHTS AND OBLIGATIONS OF ORDINARY
BAILEES
§ 292. Bailee's duty of case.
§ 293. Use of property by bailee.
§ 294. Bailee's lien.
§ 295. The pledge.
§292. (Sales, Sec. 5.) Bailee's duty of care.
Case 271. Gray, defendant v. Merriam, plaintiff, 148
Illinois Reports, 179.
Facts: Merriam sues Gray and Kean as surviving
parties of Preston, Kean & Co., bankers, to recover the
value of 15 United States 4 per cent $1,000 bonds, claimed
to have been left with said firm and lost through the
firm's negligence. The bonds were kept as a special
deposit tied together and kept in the vault in which the
cash was kept, and were stolen by Ker, assistant cashier.
Ker had been speculating and Kean had conversations
with him about it and drew Ker's attention to the fact
it was against the rules of the bank, but the evidence
doesn't show that he insisted on him stopping it. The
trial court instructed the jury to the effect that the obli-
gation resting on the bank was to exercise only reason-
able and ordinary care; that what constitutes such care
is a question of fact for the jury to determine from the
evidence; that it will vary with the nature, value and
situation of the property; that the person who holds or
who has charge of the property of another is required
to exercise the care usually and generally deemed neces-
sary in the community for the security of a similar prop-
erty under like circumstances, and nothing more; that
if from the evidence the jury should find that defendants
did not exercise such care but were guilty of gross negli-
550
BAILEE'S DUTY
551
gence in their keeping by reason of which they were lost,
defendants are liable.
The judgment below was for the plaintiff. Defendants
appeal.
The defendants claimed that they were bailees without
consideration (gratuitous bailees), and that the above
instruction was wrong because if they kept without re-
ward they were bound only to use a slight degree of care.
Mr. Justice Magruder delivered the opinion of the
Court:
"The main error assigned is the giving of the first
instruction given by the trial court for the plaintiff. It
is claimed by plaintiff in error, that the defendant bank-
ers were gratuitous bailees, holding the bonds in con-
troversy as a special deposit for safe-keeping without
reward. The general rule is, that a gratuitous bailee is
liable only for gross negligence. (Story on Bailments,
sees. 62 and 79—9th ed.; Schouler's Bailments and Car-
riers—2d ed.—Sec. 35; Skelley v. Kahn, 17 111. 170.)
The instructions for both plaintiff and defendants require
the jury to find, that the defendants were guilty of gross
negligence in the keeping of the bonds, as a condition
to the right of recovery. But the objection made to plain-
tiff's instruction is the definition, which it gives of gross
negligence, in the use of the following clause. 'The want
of ordinary and reasonable care is in law termed gross
negligence.' Gross negligence has been defined to be
the absence or want of slight care or diligence. (Story
on Bailments, sees. 62, 64; Schouler's Bailm. & Carriers,
sees. 15, 35; M. C. R. R. Co. v. Carrow, 73 111. 348; C., B.
& Q. R. R. Co. v. Johnson, 103 id. 512.) But the portions
of the instruction, which precede and follow said clause,
are in harmony with much of the language used in the
text books and decisions. Schouler, in his recent work
on Bailments and Carriers (sec. 35), after announcing
that the gratuitous bailee is liable only for slight care
and diligence according to the circumstances and cannot
be held for loss or injury unless grossly negligent, says:
552
SALES
'This statement of the rule, though strongly buttressed
upon authority, fails at this day of universal approval
in our jurisprudence. * * * "Slight, "ordinary
and "great are terms they (some courts) wish to see
discarded; and they prefer judging of each case by its
own complexion.' The same author states, that, in the
main, gross negligence is a question of fact upon all the
evidence for the jury; and that what constitutes slight
diligence, or gross negligence is a question of fact upon
all the evidence for the jury; and that what constitutes
slight diligence, or gross negligence, will depend in each
case upon a variety of circumstances, such as the occupa-
tion, habits, skill and general character of the bailee, and
local custom and business usage. (Schouler on Bailm.
and Car. sees. 49, 50). Story, after stating the rule that,
when the bailment is for the sole benefit of the bailor,
the law requires only slight diligence on the part of the
bailee, subsequently adds that, in every case, good faith
requires a bailee without reward to take reasonable care
of the deposit; 'and what is reasonable care must mate-
rially depend upon the nature, value and quality of the
thing, the circumstances under which it is deposited, and
sometimes upon the character and confidence and par-
ticular dealings of the parties.' (Story on Bailm., sees.
23 and 62.)
"In Smith v. First National Bank in Westfield, 99 Mass.
605, which was an action against a bank for the con-
version or loss by gross negligence of valuable articles
deposited with it as a bailee without hire, the court said:
'This was a gratuitous bailment. The defendants are
liable only for want of ordinary care.'
"A deposit is a naked bailment of goods to be kept
for the bailor without recompense, and to be returned
when the bailor shall require it, while a mandate is a
bailment of goods without reward to be carried from
place to place, or to have some act performed about them.
(Story on Bailm., Sec. 4 and 5.) But a mandatory, like
a depositary, is said to be bound only to slight diligence
and responsible only for gross neglect. (Story on Bailm.,
sec. 174.) In Skelley v. Kahn, supra, we held that 'a
BAILEE'S DUTY
553
mandatory or bailee who undertakes without reward to
take care of the pledge, or perform any duty or labor,
is required to use in its performance such care as men
of common sense and common prudence, however inatten-
tive, ordinarily take of their own affairs, and they will
be liable only for bad faith or gross negligence, which
is an omission of that degree of care.' ''
[Held: That the bankers were liable if the jury found
that they did not use the care which would reasonably
be expected of them as bankers in keeping valuable
papers.]
Question 271: What was the subject of this bailment ? What
facts were alleged by plaintiff to show negligence by the bank?
Who determines what is due care? What was the defense?
What test of care did' the court apply? What was the result
of the suit?
(Note: It has been said in some cases that if the bailment is
for the sole benefit of the bailee as where he borrows, he is bound
to use a great degree of care, that is, is responsible if he is guilty
of slight negligence; if for the sole benefit of the bailor, he need
use only slight care, that is, is not responsible unless his negli-
gence is gross; and if for mutual benefit, he must use ordinary
care. But these tests seem unsatisfactory. What care would
we expect a person to ordinarily use under the circumstances?
What conduct shows good faith? These ought to be the tests.
If I ask a man to keep a book over night as a favor to me, 1
cannot under the circumstances expect him to go to the same
precautions that I might expect him to do if he borrowed it.
But if I put a bond with a bank, and it undertakes to keep it
for me, even though it gets no reward, I can expect it to use all
reasonable precaution for its safety. The case above approves
the true test, but unnecessarily says that lack of the care we
would expect the bank to use is gross negligenec. If it had
left out the word "gross it would have been better.)
§293. (Sales, Sec. 6.) Use of property by bailee.
Case 272. Kennedy v. Portman, 97 Missouri Appeals,
253, 70 Southwestern Reports, 1099.
Facts: Plaintiff sues for damages to goods stored
with defendant, caused by fire.
554
SALES
Gtoode, J.: "# * * If the contract was to store
the goods in one locality, and, without the consent of
the plaintiff, they were stored elsewhere, and damaged
or destroyed as a result of the failure of the defendants
to perform their contract of bailment as it was made,
a case for damages arose [without proof of negligence],
because when a bailee is intrusted with goods for a par-
ticular purpose, or to keep in a particular place, he is
responsible for loss caused by using them for a different
purpose or keeping them in a different place. * * *
Question 272: . If a bailee uses the bailment for an unauthor-
ized purpose, or stores it in another place than that agreed on,
is he liable for loss that occurs without negligence on his part?
§294. (Sales, Sec. 7.) Bailee's lien.
(Note: Under the common law, an ordinary bailee has a lien
upon property the value of which he has enhanced by work or
expense under the contract of bailment. For mere storage he
had no bailment except in case of warehousemen. Extraordi-
nary bailees (innkeepers and carriers) had a lien for their
charges. A pledgee has a lien arising out of the very nature of
the bailment. The lien is a specific lien, that is, covers the goods
delivered under that contract. It depends on possession by
bailee, and is waived or lost if the bailee voluntarily parts with
the goods. A bailee's lien is substantially the same and of the
same nature under statutes as under common law. But may be
extended to cover cases in which there was no common law lien.)
§ 295. (Sales, Sec. 8.) The pledge.
(Note: A pledge is a bailment of property as security for the
performance of some undertaking, usually the payment of a
debt. The word "pledge is used to describe the transaction
and the subject matter. The pledge may be of tangible personal
property, as a watch, or of intangible property) as, bills of
lading, stock certificates, etc.
The pledge differs from a mortgage in form and substance.
The pledgor remains the legal owner, but the pledgee takes
possession for purposes of security. Possession is essential.
BAILEE'S DUTY
555
The object of the pledge is to enable the pledgee to sell the
pledgee's property upon default. But, unless the contract so
provides, the pledgee need not sell, but may sue upon the debt.
The sale must be in good faith. And for this reason must be
at public sale unless the debtor consents to private sale. The
pledgee must not buy at his own sale.)
CHAPTER 38
EXTRAORDINARY BAILEES
§ 296. Public service business.
§ 297. Innkeepers.
§ 298. Common carrier defined.
§ 299. Common carrier's duty of indiscriminate service.
§ 300. Common carrier's duty to transport goods safely.
§ 301. Common carrier's duty to transport without delay.
§ 302. Freight and demurrage.
§ 296. (Sales, Sec. 9.) Public service businesses.
(Note: Businesses or callings may be divided into those that
are public ("touched with a public use") and those that are
private. '' Those in a public calling have always been under the
extraordinary duty to serve all comers, while those in a private
business may always refuse to sell if they please. So great a dis-
tinction as this constitutes a difference in kind of legal control
rather than merely one of degree. The causes of this division
are, of course, rather economic than strictly legal; and the rela-
tive importance of these two classes at any given time, therefore,
depends ultimately upon the industrial conditions which prevail
at that period. [Wyman, Public Service Corporations, Sec. 1.]
In this book we cannot develop this subject. It is mentioned to
show the character of the common carrier, and innkeeper, "ex-
traordinary or exceptional bailees. The public service corpora-
tion or person must serve all who come, must not discriminate
in price or conditions of service, and must serve at reasonable
rates. The state exercises unusual control, and in turn often
gives unusual privileges, as right to use streets and to take prop-
erty by eminent domain. The chief public service occupations
are those of
1. Common carriers of goods and persons.
2. Telegraph and telephone companies.
3. Gas and electric light companies.
4. Waterworks companies.
556
EXTRAORDINARY BAILEES 557
5. Elevators and "warehouse companies.
6. Innkeepers.)
§ 297. (Sales, Sec. 10.) Innkeepers.
(Note: The innkeeper is mentioned here as an exceptional
bailee. The law governing innkeepers is hardly a subject of gen-
eral business law. We may notice, however, that the liability
of the innkeeper for safety of his guest's goods is a strict one.
Statutes permit a qualification by posting notices to deposit such
valuables with the innkeeper. But the guest is entitled under
such statutes to keep with him the usual personal belongings.
The innkeeper has a lien for his charges.)
§ 298. (Sales, Sec. 11.) Common carrier defined.
(Note: There are common carriers of goods, common carriers
of passengers, and common carriers of both goods and passen-
gers. A carrier is a public or common carrier when he has
inade it his calling to carry for the public generally. Having
entered this calling he must serve the public indiscriminately
and subject to public control. He has undertaken a calling that
is "touched with a public interest. His business is one of
public service.
The carrier of goods may lawfully confine his business to
certain classes of goods, as light parcels; unless, as in case of a
railroad business, the general law requires service for all classes
of goods.)
§ 299. (Sales, Sec. 12.) Carrier's duty of indiscriminate
service.
Case 273. Missouri Pacific Rwy. v. Larrabee Mills, 211
United States Reports, 619.
Mr. Justice Brewer: "* * * While no one can
be compelled to engage in the business of common car-
rier, yet when he does so, certain duties are imposed
* * *. Whenever one engages in that business, the
obligation of equal service to all arises, and that obli-
558
SALES
gation, irrespective of legislative action or special man-
date, can be enforced by the courts.
Question 273: "What is the rule as to indiscriminate service
by carriers?
§ 300. (Sales, Sec. 13.) Common carrier's duty to
transport goods safely.
(Note: The common carriers' duty in respect to the safety
of the goods carried, as developed by the common law is as fol-
lows:
General rule. The carrier is an insurer, that is, absolutely
liable regardless of the question of care or lack of care on its
part.
Exceptions:
(1) Loss or damage by Act of God. An "Act of God is a
violent eruption of nature, not caused by man's intervention
and which could not be foreseen or guarded against. Earth-
quakes, violent storms, floods, lightning, are "Acts of God.
The Johnstown flood, the Ohio floods, the San Francisco earth-
quake and the loss by fire thereby caused were Acts of God. The
Chicago fire was not an Act of God. In case of loss caused by
Act of God the carrier is excused.
(2) Act of public enemy. If the goods are seized, destroyed
or damaged by a public enemy the carrier is not liable. A public
enemy is an organized force engaged in war upon the country.
Mobs are not public enemies.
(3) Loss or damage by inherent defect of thing carriedI. The
carrier in such case is not liable, but must, however, take all
reasonable precautions as icing, watering, etc., to protect the
thing carried according to its nature, and must furnish proper
facilities to enable the shipper to ship safely.
Limitation of liability. The carrier was permitted to limit
his common law liability to that of loss not caused by his neg-
ligence. That is to say, the carrier by special contract, assented
to by the shipper, could assume the liability of an ordinary
bailee, that of liability for loss caused by negligence only; but
the carrier was not permitted to avoid liability for loss arising
out of his negligence.
By Federal statute it is now provided that carriers of inter-
EXTRAORDINARY BAILEES
559
state shipments shall issue receipts of bills of lading and be
liable to the lawful holder thereof for loss or damage or injury
caused by the carrier or caused by any connecting carrier, to
which the property shall be delivered, and no limitation in any
such bill of lading or receipt exempting the carrier from liability
shall be valid to exempt it from any loss caused by it or by any
connecting carrier to which it delivers the goods. If the bill of
lading or receipt limits the amount of loss to a declared valua-
tion, same shall be binding in cases where the interstate com-
merce commission establishes rates dependent upon such agreed
valuation, except in case of ordinary live stock.
The carrier shall not provide a less time than ninety days
for giving notice of loss, four months for filing claim, or two
years for bringing suit, and if the loss is caused by its negli-
gence then no notice of loss or filing of claim shall be requisite
to recovery.)
§ 301. (Sales, Sec. 14.) Common carrier's duty to
transport without delay.
(The carrier is not an insurer of prompt shipment. It must
however exercise care to transport promptly. Delay is excused
by facts beyond its control.)
§ 302. (Sales, Sec. 15.) Freight and demurrage.
(Note: The word "freight is used to describe the goods
carried by a carrier and the charge made by it for carriage. It
has a right to make a reasonable charge and can lawfully insist
upon payment in advance. It has a lien on the goods for this
charge by virtue of which it can hold the goods and sell them.
Demurrage is a charge made for delay on the part of the
consignee of the goods removing them from the cars whereby
the cars are kept out of service. The carrier must give the owner
a reasonable time for removal and after that may make a de-
murrage charge.)
CHAPTER 39
BILLS OP LADING AND WAREHOUSE RECEIPTS
§ 303. Documents of title defined.
§ 304. Assignability at common law.
§ 305. Legislation upon documents of title.
§ 306. Bills and receipts are negotiable and nonnegotiable, as drawn.
§ 307. Legal meaning of negotiability as here applied.
§ 308. How negotiation of documents accomplished.
§ 309. Besults of transfer of document to transfer title to goods.
§ 310. Warranties of transferror.
§ 311. The use of documents as security.
S 312. Bight of transferee of negotiable document against the issuer
thereof.
§ 303. (Sales, Sec. 16.) Documents of title defined.
Case 274. Uniform Sales Act, Sec. 76.
 'Document of title to goods' includes any bill of
lading, dock warrant, warehouse receipt or order for the
delivery of goods, or any other document used in the
ordinary course of business in the sale or transfer of
goods, as proof of the possession or control, of the goods,
or authorizing or purporting to authorize the possessor
of the document to transfer or receive, either by indorse
or delivery, goods represented by such document.
Question 274: What are the three common forms of docu-
ments of title ? Is a bill of sale a document of title ? A certifi-
cate of stock a document of title?
(Note: The term "documents of title "is limited to such
documents as will authorize the holder to obtain specific goods
from whoever has possession of them, such possessor ordinarily
being a common carrier or a warehouseman.'' Millard v. Green,
94 Conn. 597, 110 Atl. 177. This definition is perhaps defective
in not conveying the idea that the party in possession of the
goods is the issuer of the document. The idea to be conveyed
is that goods are placed with another who thereupon issues a
560
DOCUMENTS OF TITLE
561
document that represents and calls for those specific goods (or a
similar quantity in case of fungible goods) ; it has three func-
tions (1) that of a receipt for the goods; (2) that of a contract
between the parties; (3) that of a symbol of the goods them-
selves for purpose of evidence of ownership and transfer.
Hence a bill of sale is not a document of title in the sense here
meant. The bill of sale shows a transfer of ownership by the
issuer of the bill of sale. The document of title is issued by the
recipient of the goods and such recipient is not the owner. Fur-
thermore in the further sale of the goods the bill of sale formerly
issued is not used but another (if any) is used. So a mere re-
ceipt issued by the recipient of goods is not a document of title,
although a document of title includes a receipt. So a certificate
of stock is not a document of title; nor is a negotiable instru-
ment. In other words bills of lading, warehouse receipts and
dock warrants are the true documents of title and the only ones
in general commercial use.)
§304. (Sales, Sec. 17.) Assignability at common law.
(Note:% Documents of title were assignable at common law.
There was no distinction between negotiable and non-negotiable
documents. The assignee had to notify the carrier or warehouse-
man that he had acquired the document to protect his title. In
view of our consideration of the subject under the Uniform Acts,
it is unnecessary to further develop this section.)
§ 305. (Sales, Sec. 18.) Legislation upon documents of
title.
(Note: Legislation upon the subject of Documents of Title is
covered by the Uniform Sales Act, the Uniform Bill of Lading
Act and the Warehouse Receipt Act. For the states in which
they are in force see Section infra. See also Federal Bills of
Lading Act.
§306. (Sales, Sec. 19.) Bills of lading and warehouse
receipts are negotiable and non-negotiable, as drawn.
Case 275. Uniform Sales Act, Section 27.
"A document of title in which it is stated that the
goods referred to therein will be delivered to the bearer,
562
SALES
or to the order of any person named in such document
is a negotiable document of title.
Question 275: What is a negotiable document of title? If
an issuer (carrier or warehouseman) stamps "non-negotiable
across a document of title otherwise negotiable, what is the
effect thereof (see note below) ?
(Note : Negotiable bills of lading are frequently called "order
bills and non-negotiable "straight bills. The Uniform Sales
Act, Sec. 30, provides that if a document is issued that would
otherwise be negotiable has placed upon it the words "non-
negotiable it may nevertheless be negotiated by the holder as a
negotiable document of title. The Federal Bills of Sales Act
provides that any provision in an order bill of lading, or in any
notice or tariff, that it is non-negotiable shall be null and void
and not affect its negotiability unless upon its face and in writ-
ing agreed to by the shipper.
By the Federal Act, a non-negotiable or straight bill shall be
plainly stamped "non-negotiable.")
§307. (Sales, Sec. 20.) Legal meaning of negotiability
as here applied.
(Note: Negotiable instruments (bills of exchange, promissory
notes and checks) as distinguished from negotiable documents of
title have a quality of negotiability which has been applied to
order or bearer documents of title. But the two classes of in-
struments (i. e. negotiable instruments and documents of title)
are essentially different, the one class representing general mone-
tary obligation of the issuer, the other representing a liability
to account for specific goods. Hence separate bodies of law for
each. The negotiable instruments law does not apply to docu-
ments of title and the laws governing documents of title do not
refer to negotiable instruments.
A negotiable instilment (bill of exchange, check, promissory
note) has three important characteristics distinguishing it from
a non-negotiable obligation. (1) mode of transfer (as by in-
dorsement or delivery); (2) a better right in the transferee than
in the transferror if he satisfies certain conditions; (3) no notice
necessary to the obligor or debtor that the instrument has been
transferred. These three qualities have been applied to nego-
tiable documents of title. See following comment.
DOCUMENTS OF TITLE
563
(1) Mode of transfer. A non-negotiable document of title
may be assigned but not negotiated. There should be a form of
assignment, not a mere indorsement. An indorsement of a non-
negotiable bill does not give the transferee the character or
rights of a holder of a negotiable document. He takes subject to
"equities and must notify the issuer of his acquisition. A ne-
gotiable document is transferred by indorsement of the consignee
and delivery, or if indorsed in blank by the consignee then by
mere delivery.
(2) Notice by transferee. Duty and rights of carrier re-
specting delivery of the goods. If a straight bill is issued the
carrier may deliver the goods to the person named therein
without requiring the production of the bill of lading, unless
it has received notice of its transfer. If an order bill is is-
sued, the carrier must require the production of the bill of
lading, for it must assume that, being negotiable, it may have
been negotiated. Therefore, if it delivers the goods to any
person who does not present the document of title, properly
indorsed, it is liable to any person to whom the document of
title is negotiated either before or after such delivery of the
goods.
(3) Transfer of document in breach of trust. If a document
is negotiable and is properly indorsed for transfer, a purchaser
in good faith and for value will take a good title notwithstanding
the breach of trust. That is, if A has a bill of lading issued to
his order, and indorses it to B, or indorses it in blank, and de-
livers it to B, for some special purpose and B, in breach of his
trust negotiates it to C, by indorsement and delivery, or if in-
dorsed in blank by A, then by mere delivery; C gets, if he pur-
chases for value and in good faith, a good title. But the act does
not so provide in case of a straight bill.
(4) Rights against carrier by person to whom bill trans-
ferred. If a negotiable bill is negotiated to a purchaser for
value in good faith such person acquires a right against the
carrier to deliver to him the goods therein described and this is
true notwithstanding the bill of lading really represents no
goods or misdescribes the goods provided it was issued by an
agent whose real or apparent authority is to issue bills of lad-
ing.)
§§ 308 to 312. (Sales, Sees. 21 to 25.)
(No comment or cases; see note above.)
SUBDIVISION II
SALES OF PERSONAL PROPERTY
Part I. Formation of Contract of Sale.
Part II. The Contract's Effect as Transferring Title.
Part III. The Performance of the Contract.
PART I
FORMATION OF CONTRACT OF SALE
Chapter 40. Definition and General Nature.
Chapter 41. Parties and Subject Matter.
Chapter 42. The Contracts Obligations as Affected by
Warranties.
564
CHAPTER 40
DEFINITION AND GENERAL NATURE
A. Definitions and Distinctions.
§ 313. Definitions.
§ 314. Consideration called the price.
§ 315. Conditional sales defined.
§ 316. Sales distinguished from gifts.
§ 313. (Sales, Sec. 26.) Definitions.
Case 276. Uniform Sales Act, Sec. 1.
"A contract to sell goods is a contract whereby the
seller agrees to transfer the property in goods to the
buyer for a consideration called the price.
 A sale of goods is an agreement whereby the seller
transfers the property in goods to the buyer for a con-
sideration called the price.
"A contract to sell or a sale may be absolute or con-
ditional.
 There may be a contract to sell or a sale between one
part owner and another.''
Question 276: Define a sale; a contract to sell.
(Note: A contract to sell is an executory agreement to
afterwards transfer title; a sale is a transfer of title.. The
phrase "contract of sale'' is broad enough to describe either.
The word sale is also more broadly used to include contracts
to sell. Cases defining a sale and distinguishing it from a
bailment are found under Sec. 290 supra.)
§314. (Sales, Sec. 27.) Consideration called the price.
Case 277. Phifer v. Erwin, 100 North Carolina Re-
ports, 59.
Point Involved: Whether it is essential to a contract
565
566
SALES
of sale that a fixed price be agreed upon, or may be left
to be fixed by inference or reference.
Smith, C. J.: "* * *
"The appellant's counsel insists that, assuming the
parties intended a sale, it was ineffectual to pass the prop-
erty in the goods, by reason of the want of a fixed and
agreed price. Such was the rule of the civil law, and
Mr. Justice Story, * * * says: 'It seems to be the
very essence of a sale that there should be a fixed price
for the purchase.'
"But the rule, established by repeated adjudications,
is not so rigorous, and the price may be left to be fixed
afterwards, by reference to market value, or by a desig-
nated person, or in any other way in which it may be
ascertained with certainty, and then the sale is effectual,
and the price determined; and especially is this so, when
the. thing is delivered to the purchaser. If nothing is
said at the sale and delivery, the sum to be paid is what
the goods are reasonably worth. 2 Benj. Sales, 102, 4
Am. Ed., in two volumes. It is only necessary to refer
to a definite standard, that the price may be made cer-
tain. 1 Parson Cont. 459.
'' The only material matter to give effect to a sale, and
the transfer of title, is to provide in the contract a definite
and sure means of arriving at the sum to be paid, and
when this is ascertained, it is the same as if it had been
definitely agreed upon at the time of the sale, and the
vesting of the property is referable to that time.
"It is otherwise, if the price is left open for future
adjustment between the parties, with no agreement, bind-
ing on each, as to how the price is to be ascertained,
and what it shall be.''
Question 277: (1) A agrees to deliver and B agrees to
accept and pay for a horse at a price to be later agreed on.
Is there a sale?
(2) Suppose the horse was actually delivered under the
agreement and kept by B, but no price was ever agreed on.
What rights has A?
DEFINITIONS; FORM
567
(3) A sale at a price to be determined by the market price
on a future day. Is there a valid contract ?
(4) A sale between A and B at a price to be determined
by C. Is there a contract?
(5) A sale with no price expressly agreed upon and no
way stated by which it can be fixed. Is there a contract?
(6) A sale of articles having a market price, and nothing
whatever said about price, is there a contract ?
Case 278. S. F. Bowser & Co. v. Marks, 96 Arkansas
Reports, 113, 32 L. R. A., new series, 429.
Facts: Suit to recover the price of an oil tank and
pump. Marks had bought of Bowser & Co. another oil
tank and pump of the same make two years previous, at
which lime the price was $45. Since that time the price
had advanced to $55.00, at which the article was regu-
larly selling. The defendant did not know of this ad-
vance. In ordering the pump nothing was said about
price. The tank was promptly shipped, and a statement
was mailed showing the price at $55.00. Defendant re-
fused to receive the goods and reshipped them to the
plaintiff who refused to receive them.
Point Involved: Whether the parties are to be deemed
to have agreed upon the price, where the buyer is mis-
taken as to price and nothing is said about price, and
the seller reasonably assumes that the buyer intends to
nay the current price.
Fkatjenthal, J.: "* * *
"If the parties have agreed to all the other elements
of the sale, and have made no reference to the price, then
the law will by implication fix the price, which will be
what the article is then reasonably worth. A contract
not only includes the things said or written, but also
terms and matters which, though not actually expressed,
are implied by law, and these are as binding as those
terms actually written or spoken.* * *
"It is urged by counsel for appellees that there was a
mistake in the price made by the parties, and that, on
568
SALES
this account, the contract was not assented to by both,
and therefore was not effective. It is contended that the
appellees understood the price to be $45, and that appel-
lant understood it to be $55. It is true that the appellees
may have entertained an unexpressed intention to pay
only $45 for the tank and pump. But an agreement is
established by the words used, and the law imputes to the
parties a meaning corresponding to those words. An
unexpressed state of mind of one of the parties cannot
effect the agreement as established by the words that
are employed. In this case there was no dispute or dis-
agreement about the price, and no misunderstanding by
either party thereto. There was simply no references
made to the price. It cannot be said, therefore, that
there was any mistake made as to the price. Tlie fact
that appellees had purchased the same kind of article at
a certain price in 1906 could not determine the price
thereof in 1908. If they had intended to make the offer
of purchase at the price paid in 1906, they should have
made an express stipulation in their offer to that effect.
Failing to name any price, the law implies that they
intended to pay for the oil tank and pump the price that
it was reasonably worth; and as to such an article as
this, that would be the current selling price thereof at
the time the offer to purchase it was accepted.
Question 278: If the parties do not mention a price, what
will be presumed as to price? Suppose there were no market
price and no price expressly agreed on, would there be a con-
tract? "Why didn't the mistake as to price in this case prevent
contract ?
§315. (Sales, Sec. 28.) Conditional sales defined.
(Note It is deemed desirable to add a separate chapter
on "conditional sales. See chapter 47A, post. As the word
is generally employed, a conditional sale is a sale accompanied
by a delivery to the buyer with a reservation in the seller of
title for purpose of securing the payment of the purchase
price.)
DEFINITIONS; FORM
569
§316. (Sales, Sec. 29.) Sales distinguished from gift.
(Note: A gift is a gratuitous transfer of personal prop-
erty by the owner to another for the purpose of vesting the
ownership in such other person. Delivery, actual or symbolic,
is essential to gift. A promise to make a gift is unenforceable.
If the promise to transfer is based upon a consideration it is
not a promise to give, for a gift is a transfer without consid-
eration.)
B. Form of Contract.
§317. Sale in "writing; oral or implied.
§ 318. Formalities required in certain cases. Provisions of the Statute
of Frauds and Uniform Sales Act.
§ 319. Statute of Frauds not applicable if price is less than a certain
amount.
§ 320. Statute of frauds no defense if payment has been made in whole
or in part.
§ 321. Statute of frauds no defense where there has been delivery and
acceptance of all or part of the goods.
§ 322. Statute of frauds no defense where there is a sufficient signed
memorandum.
§ 323. What is a contract of sale within the statute?
§ 317. (Sales, Sec. 30.) Sale in writing; oral; or
implied.
Case 279. Uniform Sales Act, Sec. 3.
 Subject to the provisions of this act and of any stat-
ute in that behalf, a contract to sell, or a sale, may be
made in writing (either with or without seal) or by
word of mouth, or may be inferred from the conduct of
the parties.
Question 279: Outside of specific statutory requirement, may
a contract of sale be oral? Implied?
§318. (Sales, Sec. 31.) Formalities required in certain
cases. Provisions of the Statute of Frauds and Uni-
form Sales Act.
(Note: The nature and purpose of the statute of frauds in
relation to contracts was considered generally in the subject
of contracts. It was there noticed that the 17th section of the
570
SALES
English Statute of Frauds relating to contracts of Sales of
Personal Property has been substantially re-enacted in the
American states. Attention was also drawn to the Sales Act
which substantially re-enacts the 17th Section of the Statute
of Frauds, the text thereof being set out as Case No. 281 below.
"The following should be observed with reference to this statute.
First: The provision concerns the enforcement and in no
sense the validity of the transaction. Therefore if the contract
of sale has been executed or if the defense (of the statute) is not
relied upon by the party sought to be charged, the provision has
no application.
Second: The statute does not apply at all if the goods are
sold for a less sum than a certain value, this value differing in
different states, * * *
Third: That a sale (of personal property) is enforceable not-
withstanding there is no writing
(a) If below the amount named;
(b) If a part payment has been made;
(c) If a part delivery has been made and received;
(d) If a sale is of goods to be specially made up for the
buyer (as hereinafter shown).)
Case 280. Uniform Sales Act, Sec. 4.
"A contract to sell or a sale of any goods or choses
in action of the value of $500 or upward shall not be
enforceable by action unless the buyer shall accept part
of the goods or choses in action or contract to be sold
or sold and actually receive the same, or give something
in earnest to hind the contract, or in part payment, or
unless some note or memorandum in writing of the con-
tract or sale be signed by the party to be charged or
his agent in that behalf.
"The provisions of this section shall apply to every
such contract or sale, notwithstanding the goods may be
intended to be delivered at some future time, or may
not at the time of such contract or sale be actually made,
procured, or provided, or fit or ready for delivery, or
some act may be requisite for the making or completing
thereof or rendering the same fit for delivery; but if the
goods are to be manufactured by the seller especially
for the buyer and are not suitable for sale to others m
DEFINITIONS; FOKM
571
the ordinary course of the seller's business, the provi-
sions of this section shall not apply.
"There is an acceptance of goods within the meaning
of this section when the buyer either before or after
delivery of the goods, expresses by words or conduct his
assent to becoming the owner of those specific goods.
Question 280: (1) Must a contract of sale be in writing ?
When is it necessary for a claimant (either seller or buyer) to
prove that there was a writing? By whom must such writing
be signed? Does signature mean a name at the bottom of the
writing ?
(2) If there is no writing (and the value is sufficient) what
may be proved to avoid the defense of the statute of frauds ?
(3) To what classes of contracts of sale does the statute have
no application?
(4) Does a writing, payment or delivery, made after the
contract was entered into satisfy the statute of frauds ?
§ 319. (Sales, Sec. 32.) Statute of frauds not applicable
if price is less than a certain amount.
Case 281. Baldy v. Parker, 2 B. & C. 37.
Facts: A went to the shop of B and Company, linen
drapers, and contracted for the purchase of various ar-
tides, each of which was priced below the amount named
in the statute of frauds, but the whole aggregated more
than that amount. He afterwards refused to take the
goods and when sued for the breach of the contract,
plead the statute of frauds. But it was contended that
the statute did not apply because each article was sepa-
rately priced at a sum below the statutory amount.
Point Involved: Whether a sale of various articles
separately priced is one entire sale or several sales with-
in the statute of frauds.
Bayley, Justice: "* # * The question is, whether
there was a separate contract for each article. The
statute (of frauds) was passed to guard against frauds
and perjuries; * * * the legislature thought that a
contract to the extent of 10 1. might be sufficient to induce
the parties to it to bring tainted evidence into Court.
572
SALES
Now it is conceded here that on the same day, and indeed
at the same meeting, the defendant contracted with the
plaintiffs for the purchase of goods to a much greater
amount than 10 1. Had the entire value been set upon
the whole goods together there cannot be a doubt of its
being a contract for a greater amount than 10 1., within
the seventeenth section of the statute; and I think that
the circumstance of a separate price being fixed upon
each article makes no such difference as will take the
case out of the operation of that law. It has been asked,
what interval of time must elapse between the purchase
of different articles in order to make the contract sepa-
rate, and the case has been put of a purchaser leaving
a shop after making one purchase and returning after
an interval of five or ten minutes and making another. If
the return to the shop were soon enough to warrant a
supposition that the whole was intended to be one trans-
action, I should hold it one entire contract within the
meaning of the statute.''
Question 281: If a person purchases several articles for sep-
arate prices, and the individual items are below the amount but
the aggregate above the, amount specified in the statute, does the
statute, apply ?
(Note: The price or value in different states at or above
which the statute applies, and below which it does not apply is
as follows:
In the following states, $500: Arizona, Alaska, Idaho, Illinois,
Massachusetts, Nebraska, Nevada, New Jersey, North Dakota,
Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah.
$2,500: Ohio.
$100: Connecticut, Michigan.
$50: Maryland, Minnesota, New York, Vermont, Wisconsin,
Wyoming, Oregon (exceeding the value of $50).
No amount specified: Iowa.)
§320. (Sales, Sec. 33.) Statute of Frauds no defense
if payment has been made in whale or part.
Case 282. Wier v. Hudnut, 115 Indiana, 525.
Facts: i'A sold "B 5,000 bushels of corn, the
transaction being entirely oral, and it was agreed that
DEFINITIONS; FORM
573
B should furnish sacks to A for use in sacking the corn
in part payment. These sacks were delivered by B. to A,
but when A had the corn ready for delivery B refused
to take it. Being sued, he pleaded the statute of frauds,
but A contended that there had been part payment, in
the actual delivery of the sacks, making the statute in-
applicable.
Point Involved: What will constitute payment to sat-
isfy the statute of frauds?
Elliott, J.: "* * * What the parties agree shall
constitute payment, the law will adjudge to be payment.
It is Competent for parties to designate by their contract
how and in what payment may be made. It is by no
means true payment can only be made in money; on
the contrary, it may be made in property or services.
In short, whatever the parties agree shall constitute pay-
ment will be regarded by the Courts as payment, pro-
vided the thing agreed upon is of some value. * * *
One of the old writers says that ' If all or part of the
money is paid in hand; or if I give earnest money albeit
it be but a penny,' the contract is valid. * * *
Question 282. If there is no writing signed by party sought
to be charged, what other fact will meet the defense of the stat-
ute of frauds?
Case 283. Walker v. Nussey, 16 M. & W. (Eng.) 302.
Parke, B.: "* * * The facts seem to be these.
The plaintiff owed the defendant a sum of 41. 14 s. 11 d.
The parties then verbally agreed that the plaintiff should
sell to the defendant goods above 10 1. in value. * * *
The plaintiff's debt to go in part payment, and the residue
to be paid by the defendant. No evidence was given of
the actual payment or discharge of the debt due from
the plaintiff, so all rested in the agreement merely.''
(The court holds that a mere agreement to apply an indebted-
ness in part payment is not enough. There must be an actual
application made, as by a receipt given, or executed discharge
made, a striking off to the other's credit by some overt act in
574
SALES
execution of the agreement to do so. For the statute requires
actual payment.)
Question 283: Why was there no payment in the above case?
§321. (Sales, Sec. 34.) Statute of Frauds no defense
where there has been delivery and acceptance of all or
part of the goods.
Case 284. Shindler v. Houston, 1 New York, 261.
Tacts: Suit for the price of a quantity of lumber.
Plaintiff was owner of about 2,070 feet of curled maple
plank scantling, which he had brought to Troy in a boat,
and which, after being inspected and measured, was piled
on the dock apart from any other lumber. Soon after
this the plaintiff and defendant met at the place where
the lumber lay. The plaintiff said to the defendant,
"What will you give me for the plank? The defend-
ant said he would give three cents a foot. The plaintiff
then asked, "What will you give for the scantling!
The defendant replied, "One and a half cents a foot.
The defendant then said, "The lumber is yours. The
defendant thereupon told the plaintiff to get the inspec-
tor's bill of it and carry it to Mr. House, who would pay
it. The next day the plaintiff having procured the in-
spector's bill presented it to House, who refused to pay
for it. There was no note or memorandum in writing,
nor was there any evidence of a delivery or acceptance
of the lumber, except as above stated. At the prices
agreed on, the lumber came to $52.51, no part of which
was ever paid.
Point Involved: What, constitutes a "delivery and
receipt within the meaning of the 17th section of the
statute of frauds!
Gardiner, J.: "As no part of the purchase money
was paid by the vendee, the contract above stated was
void (voidable) by the statute of frauds * * * un-
less the buyer 'accepted and received' the whole or part
of the property sold.
DEFINITIONS; FORM
575
"The object of the statute was not only to guard
against the dishonesty of parties and the perjury of wit-
nesses, but against the misunderstanding and mistakes
of honest men. If the contract is reduced to writing,
and 'subscribed by the parties to be charged thereby,'
this object is effectually attained. The writing becomes
its own interpreter. Where this is omitted but the vendee
has paid part of the price, or the vendor had delivered
and the buyer has accepted a portion or all of the prop-
erty, upon the strength of the agreement, these acts not
only indicate deliberation and confidence upon the part
of the contractors, but they furnish unequivocal evidence
of the existence of a contract of some sort between them,
although its terms and provisions must after all depend
upon the recollection of witnesses.
"The case before us is destitute of all such collateral
evidence. No acts of the party sought to be charged
are proved. We are presented with a naked verbal agree-
raent. The declarations relied upon as evidence, of a
delivery and acceptance constitute a part of the contract,
and of course are obnoxious to all the evils and every
objection against which it was the policy of the law to
provide.
"The acts of part payment, of delivery and accept-
ance mentioned in the statute are something over and
beyond the agreement of which they are a part perform-
ance, and which they assume as already existing. The
entire absence of such evidence distinguishes the present
case from all those that have been cited by the counsel
for the plaintiff in support of this action. * * *
"I am aware that there are cases in which it has been
adjudged, that where the articles sold are ponderous,
a symbolical or constructive delivery will be equivalent
in its legal effect to an actual delivery. The delivery
of a key of a warehouse in which goods sold are deposited,
furnishes an example of this kind. But to aid the plaintiff
an authority must be shown that a stipulation in the
contract of the sale, for the delivery of the key or other
indicia of possession will constitute a delivery and ac-
576
SALES
ceptance within the statute. No such case can be found.
The entire contract being void by the statute, the stipu-
lation in reference to a constructive delivery would fall
with the other provisions. * * *
"This, I apprehend, is the correct rule and it is obviqus
that it can only be satisfied by something done subse-
quent to the sale unequivocally indicating the mutual
intentions of the parties. Mere words are not sufficient
(3 Johns. 421). Declarations accompanying an act and
explanatory of it are undoubtedly admissible evidence,
as a part of the res gestae. * * *
"The language is unequivocal and demands the action
of both parties, for acceptance implies delivery, and there
can be no complete delivery without acceptance. The
defendant, however, said nothing and did nothing sub-
sequent to the agreement, except through his agent, to
repudiate the contract. There was consequently no evi-
dence of a delivery. * * *
Question 284: If a sale is above the statutory amount, and
there is no writing, and no part payment, what other fact,
if it exists will help the plaintiff to get the defense of the stat-
ute of frauds (if that statute is pleaded) out of the way? Did
it exist in this case? Why?
Case 285. United Hardware Co. v. Blue, 59 Florida
419(1910).
Facts: Plaintiff sued defendant, K. A. Blue, basing
has action on a bill of hardware sold to Blue, but which
Blue refuses to receive and pay for as goods purchased
of the plaintiff. Omitting statements of facts not ne,ces-
sary to recite here, the order was not in writing, but
consisted in a mere verbal arrangement. The goods
were afterwards delivered to an express company, prop-
erly addressed to defendant. Defendant pleads the stat-
ute of frauds.
Point Involved: Delivery to a carrier by the vendor
of goods sold, constituting for some purposes, delivery
to the vendee; does such delivery to and the receipt by
the carrier constitute a delivery and receipt within the
statute of frauds?
DEFINITIONS; FORM
577
Pabkhill, J.: "* * * No note or memorandum in
writing of the bargain or contract for the sale of the
goods in question was ever made or signed by or for the
defendant, neither did he give anything in earnest to
bind the bargain or in part payment. But it is contended
that the defendant buyer accepted the goods so sold and
actually received the same, making the contract good
under the statute. Our statute is like the Seventeenth
Section of 29 Charles II, and in order to bring a con-
tract for the sale of goods within this exception it is
necessary that the goods should have been received and
also accepted by the buyer. Even the delivery of the
goods to the buyer or the receipt of them by him, with-
out an acceptance, is not sufficient. Hinchman v. Lincoln,
124 U. S. 38, 31 L. Ed. 337, 8 Sup. Ct. Rep. 369. Some
act or conduct on the part of the buyer or his authorized
agent, maintaining an intention to accept the goods as
a performance of the contract, and to appropriate them,
is required to supply the place of a written contract, or
payment or part payment. * * *
"The plaintiff in error contends that 'delivery to the
common carrier was a delivery to the consignee.' But
our statute requires not only that the buyer should actu-
ally receive the goods, but that he shall accept the same
also. True, the acceptance and receipt of the goods
may be through an authorized agent, but a common car-
rier (whether selected by the seller or buyer) to whom
the goods are intrusted without instructions to do any
thing but to carry and deliver them to the buyer, as
was the case here, is no more than an agent to carry and
deliver the goods, and has no implied authority to do
the act required to constitute an acceptance and receipt
on the part of the buyer and to take the case out of the
statute. * * *
Question 285: What were the facts, the question presented
and the Court's decision in the above case ?
Case 286. Moore v. Love, 57 Mississippi, 765.
Statement of Facts: An oral sale of cotton was al-
leged. The statute of frauds being pleaded, the ques-
578
SALES
tion was whether there had been a sufficient delivery and
acceptance of part of the goods to satisfy the statute and
prevent the defense. The only evidence of a part de-
livery was that certain samples of the cotton were ex-
hibited and delivered at the time of the sale.
Point Involved: Whether the delivery and acceptance
of samples of the goods sold is a delivery and acceptance
of part of the goods within the statute of frauds.
Chalmers, J.: "* * * These facts do not meet the
requirements of a valid sale under the statute of frauds.
The cotton was worth more than $50. No part of the
purchase money was paid, no memorandum in writing
was made, and no portion of the goods were delivered
unless these samples were. The delivery and receipt of
samples, conceding that they took place, can only be held
a compliance with the statute of frauds when they are
considered and treated by both parties as constituting
a part of the goods sold, and as diminishing the quantity
of weight of such goods to the extent of their own bulk.
* * * Where they are treated by the parties as spec-
imens only of the goods sold, a delivery of them to the
buyer does not satisfy the requirements of the statute
of frauds.* * *
Question 286: Is the delivery and acceptance of a sample, a
delivery and acceptance of a part of the goods sold within the
statute of frauds?
§322. (Sales, Sec. 35.) Statute of frauds no defense
where there is a sufficient signed memorandum.
(Note: See Cases at pp. 260-272, supra.)
§ 323. (Sales, Sec. 36.) What is a contract of sale
within the statute.
(Note: See case 281 (Sec. 4. Uniform Sales Act) for
text of the statute.)
DEFINITIONS; FORM
579
Case 287. Goddard v. Binney, 115 Mass. 450.
Facts: A ordered of B, a carriage manufacturer, a
buggy, to be built specially for A, according to oral
specifications given, to include A's monogram and ini-
tials. B built the buggy. And on an attempt to charge
A on the contract, A plead the statute of frauds. The
question was whether this was a contract "for the sale
of gocds, and therefore within the statute, or a contract
for the manufacture of goods, and not within the mean-
ing of the statute.
Point Involved: What is a contract pf sale within
the meaning of the statute of frauds.
Ames, J., delivered the opinion of the courfi: "* * *
According to a long course of decisigns in New York,
and in some other states of the Union, an agreement for
the sale of any commodity not in existence at the time,
but which the vendor is to manufacture or to put into
condition to be delivered (such as flour from wheat not
yet ground, or nails to be made from iron in the vendor's
hands), is not a contract of sale within the meaning of
the statute. * * * In England, on the other hand,
the tendency of the recent decisions is to treat all con-
tracts of such a kind intended to result in a sale as sub-
stantially contracts for the sale of chattels; and the de-
cisions in Lee v. Griffin, 1 B. and S., 272, goes so far as to
hold that a contract to make and fit a set of artificial
teeth for a patient is essentially a contract for the sale
of goods and, therefore, is subject to the provisions of
the statute. * * *
"In this commonwealth a rule avoiding both these
extremes was established * * *. The effect of these
decisions we understand to be this, namely, that a con-
tract for the sale of articles then existing, or such as
the vendor in the ordinary course of his business manu-
factures or procures for the general market, whether on
hand at the time or not, is a contract for the sale of goods
to which the statute applies. But * * * if the goods
are to be manufactured especially for the purchaser, and
580
SALES
upon his special order, and not for the general market,
the case is not within the statute * * V
(The Uniform Sales Act adopts this last named view, called
the Massachusetts rule.)
Question 287: What is the. English rule, the New York rule
and the Massachusetts rule, as to whether a contract is one of
"sale or of "manufacture within the statute of frauds?
What is the rule adopted by the Uniform Sales Act ?
(Note; The Uniform Sales Act being now in force in New
York, the rule has been changed in that state to the M£ssachu-
setts rule.)
(Note: The original statute of frauds, 17th section, con-
tained no exception where the goods were to be made up by
the seller. Clearly if one orders goods from another to be made
up by the other out of material furnished by the maker, it is
a transaction in which title is to pass and is governed by the law
of sales, and therefore is a sale. The courts which took such a
situation out of the statute of frauds were legislating into the
statute a judicial amendment thereof. But now the Sales Act
puts the exception in the statute itself, that is, if the goods
are to be made especially for the seller and are not suitable for
sale to oth&rs in the ordinary course of the seller's business, the
statute does not apply; that is, as to such classes of transaction
there is no statute of frauds.)
CHAPTER 41
PARTIES AND SUBJECT MATTER
§ 324. Parties to sales.
§ 325. Sale of '' future gopds.
§ 326. Destruction or deterioration of the goods before the tnaking of the
contract.
§ 327. Destruction or deterioration after contract to sell of the subject
matter thereof.
§ 324. (Sales, Sec. 37.) Parties to sales.
Case 287a. Uniform Sales Act, Sec. 2.
''Capacity to buy and sell is regulated by the general
law concerning capacity to contract, and to transfer and
acquire property.
"Where necessaries are sold and delivered to an in-
fant, or to a person who by reason of mental incapacity
or drunkenness is incompetent to contract, he must pay
a reasonable price therefor.
"Necessaries in this section means goods suitable to
the condition in life of such infant or other person, and
to his actual requirements at the time of delivery.''
Question 287a: Does the sales act make any change in the
general law of contracts as to capacity of parties I
(Note: The cases involving sales to and by minors are found
under the subject Capacity of Parties in Contracts.)
§325. (Sales, Sec. 38.) Sale of "future goods.
Case 288. Uniform Sales Act, Sec. 5.
"(1) The goods which form the subject of a contract
to sell may be either existing goods, owned or possessed
by the seller, or goods to be manufactured or acquired
by the seller after the making of the contract to sell, in
this act called 'future goods.'
581
582
SALES
"(2) There may be a contract to sell goods, the ac-
quisition of which by the seller depends upon a contin-
gency which may or may not happen.
"(3) Where the parties purport to effect a present
sale of future goods the agreement operates as a con-
tract to sell the goods.''
Question 288: (1) Can one legally contract to sell goods not
now owned by him ? Goods yet to come into existence ?
(2) Can there be a transfer of title to future goods?
§§326 and 327. (Sales, Sees. 39, 40.) Destruction or
deterioration of the goods before the making of the
contract.
Case 289. Uniform Sales Act, Sees. 7 and 8.
Section 7. (Destruction of Goods Sold.) (1) Where
the parties purport to sell specific goods, and the goods
without the knowledge of the seller have wholly perished
at the time when the agreement is made, the agreement
is void.
(2) Where the parties purport to sell specific goods,
and the goods without the knowledge of the seller have
perished in part or have wholly or in a material part so
deteriorated in quality as to be substantially changed
in character, the buyer may at his option treat the sale—
(a) As avoided, or
(b) As transferring the property in all of the exist-
ing goods or in so much thereof as have not deteriorated,
and as binding the buyer to pay the full agreed price
if the sale was indivisible or to pay the agreed price
for the goods in which the property passes if the sale
was divisible.
Section 8. (Destruction of Goods Contracted to be
Sold.) (1) Where there is a contract to sell specific
goods, and subsequently but before the risk passes to
the buyer, without any fault on the part of the seller
or the buyer, the goods wholly perish, the contract is
thereby avoided.
(2) Where there is a contract to sell specific goods,
and subsequently but before the risk passes to the buyer,
PARTIES; SUBJECT MATTER 583
without any fault of the seller or the buyer, part of the
goods perish or the whole or a material part of the
goods so deteriorate in quality as to be substantially
changed in character, the buyer may at his option treat
the contract—
(a) As avoided, or
(b) As binding the seller to transfer the property in
all of the existing goods or in so much thereof as have
not deteriorated, and as binding the buyer to pay the
full agreed price if the contract was indivisible, or to
pay the agreed price for so much of the goods as the
seller, by the buyer's option, is bound to transfer if the
contract was divisible.
Question 289: (1) If the goods have perished when the
contract of sale is entered into, what is the effect upon the con-
tract ?
(2) If in such case they have deteriorated, what right has
the buyer ?
(3) If they are destroyed or deteriorate after the contract is
made, upon whom does the loss fall? (See Risk of Loss, post) ?
CHAPTER 42
THE CONTRACT'S OBLIGATIONS AS AFFECTED
BY WARRANTIES
§ 328. Definition of warranty.
A. Express Warranty
§ 329. What constitutes express warranty ?
§ 330. Whether alleged oral Warranty provable if contract in writing?
§328. (Sales, Sec. 41.) Definition of warranty.
(Note: Warranties in sales are either express, that is, stated,
(in writing or orally) ; or implied, that is, attached to the con-
tract of sale, as a part of it, l?y inference from the facts in the
case. The idea of warranty, whether express or implied, is that
it is an obligation which forms a part of the seller's contract
in. respect to the title, quality, capacity or condition of the
goods.)
A. Express Warranty.
§ 329. (Sales, Sec. 42.) What constitutes express
warranty.
Case 290. Uniform Sales Act, Sec. 12.
"Any affirmation of fact, or any promise by the seller
relating to the goods is an express warranty if the nat-
ural tendency of such affirmation or promise is to induce
the buyer to purchase the goods, and if the buyer pur-
chases the goods relying thereon. No affirmation of the
value of the goods nor any statement purporting to be a
statement of the seller's opinion only shall be construed
a warranty.
Question 290: Define express warranty. Is a statement of
the value of the goods a warranty? an expression of opinion?
Why?
584
WARRANTIES
585
(Note: The reader will at once note the resemblance between
•statements that constitute warranty and those that constitute
fraud. To constitute fraud or warranty a statement must be
one of fact, not of mere opinion. It ought to be noted in this
connection that a buyer may frequently have at his election a
case in tort for fraud or a case in contract for breach of war-
ranty. In a suit for fraud the seller's knowledge and conduct
becomes material. In a suit for breach of warranty, the seller's
intent to deceive, or lack thereof, is not material. "There is a
clear distinction between an action for fraud and deceit and con-
sequent damages and an action to recover upon a breach of war-
ranty which should not be overlooked. In the case of Rose et al.
v. Hurley, 39 Ind. 77, the distinction is clearly made in the fol-
lowing language: ' A warranty rests upon contract, while fraud
or fraudulent representations have no element of contract in
them, but are essentially a tort. When judges or law writers
speak of fraudulent warranty, the language is neither accurate
nor perspicuous. If there is a breach of warranty, it cannot be
said that the warranty was fraudulent, with any more propriety
than any other contract can be said to have been fraudulent, be-
cause there has been a breach of it. On the other hand, to speak
of a false representation as a contract or warranty or as tending
to prove a contract or warranty is a perversion of language and
of correct ideas. The subjects, however, are in many respects
closely connected and sometimes in a confused and unguarded
way. Warranties, while collateral to the principal purposes of
the contract, are a part of the contract.' '' McCarty v. Williams,
58 Ind. App. 440, 108 N. E. 370. Clearly it may be supposed
that in the majority of cases involving breach of warranty, the
seller was honest, but whether honest or dishonest, the question
is, did he make a contract, and if so, did he break it ? If he was
deceitful, and the buyer can so prove, he might sue in tort for
the damages caused by the fraud, or base his suit on theory of
breach of contract.)
(a) The Affirmation of Fact.
Case 291. Hobart v. Young, 63 Yt. 363.
Facts: Hobart bought of Young "one pair of black
(Pilot geldings) sound and kind. Upon getting the
horses home Hobart discovered one of them had a ring
bone, and he brings suit for breach of warranty.
586
SALES
Point Involved: Whether a description of an article
by the seller amounts to an affirmation of fact constitut-
ing a warranty. Whether the statement that a horse is
sound is a statement of fact or of opinion.
Howell, J.: '1 * * *
"An important question is, whether the words 'sound
and kind,' contained in the bill of sale, constitute an ex-
press warranty as matter of law.
"The law of warranty has undergone much change
since Chandelor v. Lopus, Cro. Jac. 4, decided in the
Exchequer Chamber in 1803. It was there held that an
affirmation that the thing sold was a bezoar-stone was no
warranty; for it is said, every one in selling his wares
will affirm that they are good, or that the horse he sells
is sound, yet, if he does not warrant them to be so, it is
no cause of action.
"But latterly courts have manifested a strong disposi-
tion to construe liberally in favor of the purchaser what
the seller affirms about the kind and quality of his goods,
and have been disposed to treat such affirmations as war-
ranties when the language will bear that construction,
and it is fairly inferable that the purchaser so under-
stood it. Stone v. Denny, 4 Met. 155; Hawkins v. Pem-
berton, 51 N. Y. 198. And now any affirmation as to the
kind or quality of the thing sold, not uttered as matter
of commendation, opinion, nor belief, made by the seller
pending the treaty of sale, for the purpose of assuring
the purchaser of the truth of the affirmation and of in-
ducing him to make the purchase, if so received and
relied upon by the purchaser, is deemed to be an express
warranty. And in case of oral contracts, it is the province
of the jury to decide, in view of all the circumstances
attending the transaction, whether such a warranty exists
or not. Foster v. Caldwell's Estate, 18 Yt. 176; Bond
v. Clark, 35 Vt. 577; Shippen v. Bowen, 122 U. S. 575.
'' But when the contract is in writing, it is for the Court
to construe it, and to decide whether it contains a war-
ranty or not. Wason v. Howe, 16 Vt. 525. And by the
WARRANTIES
587
great weight of recent authority, positive statements in
instruments evidencing contracts of sale, descriptive of
the kind, or assertive of the quality and condition, of the
thing sold, are treated as a part of the contract and re-
garded as warranties, if the language is reasonably sus-
ceptible of that construction and it is fairly inferable
that the purchaser understood and relied upon it as such.
"Thus, in Hastings v. Lovering, 2 Pick. 214, the sale-
note described the article as 'prime quality winter sperm
oil.' The plaintiff declared in assumpsit on a warranty,
and had judgment. In Henshaw v. Robins, 9 Met. 83, the
hill of particulars affirmed the article to be indigo. The
Court said that that imported an express warranty if it
was so intended, and that it must he taken to have been
so intended, as there was no evidence to the contrary. In
Brown v. Bigelow, 10 Allen 242, a case exactly in point,
these very words, sound and kind, were held to constitute
a general warranty of soundness. In Gould v. Stein, 149
Mass. 570 (s. c. 14 Am. St. Rep. 455), a bought and sold
note described the article as, ' Ceara scrap-rubber as per
sample, of second quality.' The Court said that it did not
admit of doubt that the note was intended to express the
terms of the sale, and that the contract of the parties was
to be found in what was thus written, read in the light
of the attendant circumstances. Held, a warranty that
the rubber was of second quality, and that the fact that
the plaintiff made such examination of it as he pleased,
did not necessarily do away with the warranty.
[Here the Court discusses numerous authorities.]
"In Barret v. Hall, 1 Atk. 269, the note was payable in
'good cooking-stoves.' The Court said that no definite
quality could be intended from the term good, and that
it imported nothing but opinion, and was no warranty,
and referred to Chandelor v. Lopus, Cro. Jac. 4, for au-
thority, which is no longer authority. But we do not say
that the Court was wrong in that case, for good is a very
common term of praise in trade, and as used in the note,
ascribed no particular quality to the stoves, and might
588
SALES
well be regarded in tbat case as mere matter of opinion
or commendation and as so understood by the parties.
"In Wason v. Rowe, 16 Vt. 525, the bill of sale said
the horse was 'considered sound.' Held, no warranty;
and with good reason, for 'considered' was no assertion
of a fact, but a mere expression of opinion.
"The more recent cases in this state recognize the gen-
eral rule that positive statements of fact by the seller
in respect of the kind or the quality of the thing sold that
constitute a part of the contract or form its basis and
that are fairly susceptible of such a construction, are to
be regarded as warranties.
"Thus, in Beals v. Olmstead, 24 Vt. 114, one of the
reasons given why the defendant's statements ought to
be regarded as warranties is, that they were made posi-
tively, and concerning matters as to which he was sup-
posed and professed to have knowledge; therefore, it is
said, he ought to expect to be bound by them. See also,
Drew v. Ellison, 60 Yt. 401; Enger v. Dawley, 62 Vt. 164.
"It is sufficiently certain as matter of construction that
the words 'sound and kind,' found in the bill of sale be-
fore us, were intended by the parties to be a part of the
contract of sale; and as such, it would be unreasonable
to construe them as an expression of mere opinion, when
they positively ascribe to the horses a condition and a
quality that the defendant assumed to know they pos-
sessed and that he had peculiar means of knowing
whether they possessed or not, while the plaintiff had no
such means. We think the words, reading the instrument
in the light of the attendant circumstances, clearly con-
stitute an express warranty of soundness, and that the
Chief Judge was right in so holding.
Judgment affirmed.
Question 291: (1) State the facts, the question presented
and the Court's decision in the above ease.
(2) Give six examples from this ease of descriptions that
were held to amount to warranties.
(3) Assume in this case that the seller did not know that the
horse had a ringbone. Would he then be considered to have
warranted ?
WARRANTIES
589
(4) Give two cases here that the Court said were rightfully
not considered warranties.
(b) Affirmation of Fact as Distinguished from Opinion
or Prediction.
Case 292. Bain v. Withey & Ottman, 107 Ala. 223.
Facts: Suits by Withey & Ottman against Bain on
promissory notes executed by Bain. Bain defends that
plaintiffs represented that they were the owners of a
valuable patent right, and that they would sell and con-
vey the same to him,' authorizing him to make, sell and
lease the right to use said patent in certain counties and
further represented that said patent was a useful and
beneficial invention; that said plaintiffs fraudulently con-
cealed from the defendant that said patent was useless
and worthless, while in fact said patent was of no value.
Point Involved: Whether the statement by the seller
that the thing sold was useful and beneficial, was a war-
ranty.
Cole max, J.: "* * * Neither of the pleas set up
a statement or representation as having been made by
plaintiffs, as to the stability or durability of the fence,
or its adaptability as a barrier to hogs, or to the cost of
construction, or any fact characteristic of a fence made
after the patent. The language of the plea in this respect
is, that plaintiffs represented it 'as a valuable and use-
ful improvement' but unaccompanied by the statement
of any fact which rendered it 'valuable and useful.' An
expression of this character, made with reference to a
patented improvement, standing by itself, not emphasiz-
ing a material fact, can be but the expression of an
opinion, upon which a purchaser has no right to rely;
and this is especially true when the patented improve-
ment is constructed and put on exhibition, and the pur-
chaser examines it for himself (citing cases). As stated
by Benjamin on Sales, 316, 'the vendor is at liberty to
praise his merchandise, in order to enhance its value, if
he abstain from a fraudulent representation of facts,
590
SALES
provided the buyer have a full and fair opportunity of
inspecting it, and no means are used for hiding the de-
fects.' A buyer may always protect himself by requir-
ing a warranty of such matters as (to which) he is un-
willing to take the risk on his own judgment. * * *
Question 292: (1) State the facts in this case, the question
presented and what the Court decided.
(2) "What did the Court suggest as statements that would
have constituted warranties.
(3) A sold B wheat, stating that it was "good wheat. Is
this a warranty? (Tex. Star Flour Mill' Co. v. Moore, 177 Fed.
744.)
(Note: We will find hereafter that in many sales there is an
implied warranty of merchantability, fitness for particular pur-
pose, etc. In the cases now considered, assume there is no implied
warranty.)
(c) The Reliance by the Buyer on the Affirmation.
Case 293. McCormick v. Kelly, 28 Minn. 135.
Facts: Suit brought against Kelley on a promissory
note given to McCormick for part of purchase price of a
harvester. Defense, a breach of warranty. The evidence
tended to prove that he got the machine before the har-
vest in 1878, on trial, that he used it to cut about 70 acres
of grain but that it did not work well, that he complained
about it, but was urged to keep it, and that he then pur1
chased it, relying on defendant's assertions that it was a
first class machine and would do good work, but knowing
of the defects of which he now complains. The Court
instructed the jury: "A vendor may warrant against a
defect that is patent and obvious. You sell me a horse,
and you warrant that horse to have four legs and he has
only three. I will take your word for it. The Court
then read from Addison on Contracts: "When a general
warranty is given on a sale, defects which were apparent
at the time of the making of the bargain and were known
to the purchaser cannot be relied on as a ground of action.
If one sells purple to another and saith to him 'This is
scarlet,' the warranty is to no purpose for that the other
WARRANTIES
591
may perceive this; and this gives no cause of action to
him. To warrant a thing that may be perceived at sight
is not good. After reading this quotation the Court
then said: ' * Gentlemen, that is not the law of this state.''
Defendant had a verdict and judgment, and McCormick
now appeals, alleging error in the instructions to the
jury.
Point Involved: "Whether a general express warranty
covers a known defect.
Dickinson, J.:  * * *
"The Court erred in these instructions to the jury. It
has always been held that a general warranty should not
be considered as applying to or giving a cause of action
for defects known to the parties at the time of making
the warranty, and both the weight of authority and reason
authorize this proposition, viz., that for representations
in the terms or form of a warranty of personal property,
no action will lie on account of defects actually known
and understood by the purchaser at the time of the bar-
gain. * * * In the nature of things one cannot rely
upon the truth of that which he knows to be untrue; and
to a purchaser fully knowing the facts in respect to the
property, misrepresentation cannot have an inducement
or consideration to the making of the purchase, and hence
could have been no part of the contract.
"It has often been said that a general warranty may
cover patent defects, and it has led to some misappre-
hension of the law. The proposition is strictly true, but,
as was said by the court in Marshall v. Drawhorn, supra,
it is ' confined to those cases of doubt and difficulty where
the purchaser relies on his warranty, and not on his own
judgment.' It has no application to the case of a pur-
chaser who knows the defects in the property and the
untruthfulness of the vendor's representations. We do
not, however, mean to say there may not be a warranty
against the future consequences or results from even
known defects.
Question 293: (1) State the facts, the question presented
and the Court's decision in the above case.
592
SALES
(2) What is the reason that a general warranty is not to be
considered as covering a known defect?
(3) A is about to purchase a horse. He notices what ap-
pears to him a defect in the horse's eye, but B, the seller, assures
him that the eye is. all right, and he will warrant it sound,
whereupon A purchases the horse. Can he recover if the eye is
unsound ?
(4) A sells B a horse which has a blind eye, and this B
could have discovered had he gone out to the barn about 20
feet away, where the horse was standing. He does not, however,
and relies on A's warranty that the horse is sound. Can he
recover for the blindness of the eye? (Thompson v. Bertrand,
23 Ark. 730 [Sale of a slave warranted to be sound whose un-
soundness would have been apparent on inspection].)
Case 294. Mitchell v. Pinckney, 127 Iowa, 696.
Facts: Plaintiff purchased of defendant 21 head of
cows. He now sues for breach of a warranty that they
were sound, alleging that they were afflicted with a con-
tagious disease. The Court on the evidence presented
instructed the jury the warranty need not be the sole
inducement to the purchase, but that it must have been
operative in causing the sale. This instruction is now
alleged on appeal as error. It is also claimed as error
that there was no positive evidence by plaintiffs that he
relied on the warranty.
Point Involved: "Whether the warranty must be the
sole inducement of the sale. Whether the purchaser has
the burden of proof of showing that he relied on the war-
ranty, or where, no evidence to the contrary, his reliance
may be presumed.
Deemer, J.: "But it is said that there is no evidence
that plaintiffs relied upon the warranty or representa-
tions, or that they induced the sale. The Court instruct-
ed, in effect, that the warranty need not be the sole in-
ducement to the purchase, but that it must have been
operative in causing the sale. This, of course, is the
law. Rose v. Meeks, 91 Iowa, 715; Tewkesbury v. Ben-
nett, 31 Iowa, 85; Powell v. Chittick, 89 Iowa, 513.
WARRANTIES
593
"But it is not necessary that proof of reliance thereon
be by the positive testimony of the buyer. It is sufficient
if, considering all the circumstances, such fact fairly
appears. Case Co. v. McKinnon, 82 Minn. 75 (84 N. W.
646); Ormsby v. Budd, 72 Iowa, 80. Indeed, we have
held that where the warranty is a part of the contract
of sale, and a part of the consideration of the purchase
price, the purchaser need not show by direct evidence
that he relied upon it, as the law will presume that he
did. Norris v. Kipp, 74 Iowa, 444.
Question 294: State how the purchaser may make a prima
facie ease that he relied on the warranty?
(Note:- While it is true that a statement to constitute a
warranty must be one that was meant to be relied upon and was
relied upon by the buyer, that rule would seem to mean hardly
more than this, that the case must show that the seller made the
statement for the purpose of making it a part of his obligation,
and that the buyer received it as such. If the buyer knows that
the statement is untrue, he cannot rely upon it. But if he does
not absolutely know, to the contrary, or is in doubt, he may
take the seller 's word for it. And it is in this sense only that he
must have relied upon it. "It is not necessary that it should
be true that the buyer would not have purchased but for the
warranty. If, in addition to the transfer of property, he can
for the same price or for a greater price, obtain the seller's
agreement to insure the quality of the goods, such agreement
goes with the goods as a part of the consideration, and the
buyer is entitled to the benefit of his bargain in this regard,
whether he would or would not have bought the goods without
this additional consideration. (McCarty v. Williams, 58 Ind.
Ap. 440, 108 N. E. 370.) )
Case 295. Smith v. Hale, 158 Mass. 178.
Facts: Alleged breach of warranty on the sale of a
buggy, to the effect that it would carry the purchaser and
her husband and "a hundred of meal. Three days
after the buggy was purchased a spring broke. The
seller asked the court to instruct the jury "that where a
purchaser inquires for himself, and acts upon his own
594
SALES
opinion he cannot say he has been misled by the false
statement of another; and if he inspects and examines
the articles for himself and selects it after exercising his
own judgment upon its character and quality, the vendor
only warrants that the article so far as he knows, is what
it appeared to be, at the time he sold it. The Court
refused to give this instruction and the plaintiff appeals,
alleging this refusal as error.
Point Involved: Whether an inspection by the pur-
chaser precludes his reliance upon an express warranty.
Allen, J.: "* * * The plaintiff's third request
does not contain a correct statement of the law applicable
to the case. * * * it is enough to say that, a pur-
chaser of an article may examine it for himself and ex-
ercise his own judgment upon it and at the same time
may protect himself by taking a warranty. The refusal
to give the instructions requested was entirely right.
Question 295: May there be an express warranty notwith-
standing the buyer examined the goods before he bought them?
Suppose the examination had actually made known to him the
defect now complained of?
§ 330. (Sales, Sec. 43.) Whether alleged oral warran-
ties provable if contract in writing.
(Note: See Seitz v. Brewers' Refrig. Co., 141 U. S. 510,
supra § 128. If the contract is put in written form with the
evident intention of including all the obligations of the seller
therein, the parol evidence rule would forbid the proof of the
alleged oral warranty. It will be remembered, however, that
the parol evidence rule does not forbid proof of fraud, if the
case is founded in tort, and if the facts show fraud.)
B. Implied Warranties.
§ 331. Doctrine of caveat emptor.
§ 332. Generally of the implied warranties.
§ 333. Implied warranties in express sales.
§ 334. The implied warranties of title.
WARRANTIES
595
§355. The implied warranties in a sale by description.
§ 336. Implied warranties in a sale by sample.
§ 337. The implied warranties of fitness for purpose bought.
§ 338. Warranties do not run with personal property.
§ 339. Eight of remote purchaser to sue in tort.
§ 331. (Sales, Sec. 44.) Doctrine of caveat emptor.
Case 296. Jones v. Just, L. R. 3 Queen's Bench, 197.
Mellor, J.: "* * * Where goods are in esse, and
may be inspected by the buyer, and there is no fraud
on the part of the seller, the maxim caveat emptor ap-
plies, even though the defect which exists in them is
latent, and not discoverable on examination at least where
the seller is neither the grower nor the manufacturer:
Parkinson v. Lee, 2 East, 314. The buyer in such a case
has the opportunity of exercising his judgment upon the
matter; and if the result of the inspection be unsatis-
factory or if he distrusts his own judgment, he may, if
he chooses, require a warranty. In such a case it is
not an implied term of the contract of sale that the goods
are of any particular quality or are merchantable.
Question 296: If I sell you an* automobile and do not ex-
pressly warrant it, do I impliedly undertake anything as to its
condition? What doctrine expresses the situation as to the
rights of the buyer? Suppose I am a manufacturer of auto-
mobiles, or a dealer in them, do I impliedly warrant that the
automobile is in good condition where the buyer inspects the
particular automobile that he buys? (See following note.)
(Note: Sale of specific article where seller is manufacturer
or dealer. The Sales Act (sec. 15(2) (3) ) provides, "Where the
goods are bought by description from a seller who deals in goods
of that description (whether he be the grower or manufacturer
or not) there is an implied warranty that the goods shall be
of merchantable quality. If the buyer has examined the goods,
there is no implied warranty as regards defects which such
examination ought to have revealed. It is suggested that the
salcsi act should go further and define what is meant by "sale
by 'description. Will it include a sale of specified goods
which are before the parties? If a buyer orders an automobile
596
SALES
of a certain description this is clearly a sale by description.
But suppose I buy from a manufacturer an automobile that
stands before us at the time of the sale and is inspected by
me. Clearly that case ought to carry with it the same implied
warranties that would exist in the former case except "as re-
gards defects which such examination ought to have revealed.
Such a case would seem to be essentially a sale by description
within the meaning of the sales act. We may say with assur-
ance that if a seller is neither grower, manufacturer or dealer
a sale of a specified article before the parties carries no implied
warranty of merchantability. The rule is caveat emptor. But
if the seller is manufacturer, grower or dealer, and it is ap-
parent the buyer relies upon the seller's situation as a manu-
facturer, grower or dealer in goods of that kind, there is an
implied warranty, except such defects as the examination shohld
have disclosed.)
§ 332. (Sales, Sec. 45.) Generally of the implied
warranties.
(See cases under following sections.)
§ 333. (Sales, Sec. 46.) Implied warranties in express
sales.
(Note: A contract of sale whether made orally or in writ-
ing will carry with it warranties by implication when the sale
is made under those situations described in the following sec-
tions. The parol evidence rule may exclude proof of express
warranties sought to be shown where the contract is entirely
in writing, but implied warranties attach, unless negatived by
the writing either by being expressly excluded, or by an express
warranty covering the same point.)
§ 334. (Sales, Sec. 47.) The implied warranties of title.
Case 297. Uniform Sales Act, Sec. 13.
"Implied warranties of title: In a contract to sell oi
a sale, unless a contrary intention appears, there is—
"(1) An implied warranty on the part of the seller
that in the case of a sale he has a right to sell the goods,
and that in a contract to sell he will have a right to sell
the goods at the time when the property is to pass.
"WARRANTIES
597
"(2) An implied warranty that the buyer shall have
and enjoy quiet possession of the goods as against any
lawful claims existing at the time of the sale.
 (3) An implied warranty that the goods shall be free
at the time of sale from any charge or encumbrance in
favor of any third person, not declared or known to the
buyer before or at the time when the contract or sale is
made.
 (4) This section shall not, however, be held to render
liable a sheriff, auctioneer, mortgagee or other person
professing to sell by virtue of authority in fact or law
goods in which a third person has a legal or equitable
interest.
Question 297: (1) Jones sells a horse to Smith. It has been
stolen by Jones, and the owner takes it from Smith. Has Smith
a ease against Jones if Jones did not expressly warrant that he
had title?
(2) Jones sells a horse to Smith upon which there is a re-
corded chattel mortgage which Smith could have discovered had
he looked up the records. The owner of the mortgage forecloses.
Has Smith a case against Jones if Jones did not expressly war-
rant against encumbrances?
(Note: A question that has caused some difference of opinion
is suggested by the case of Burt v. Dewey, 40 N. Y. 283. Plain-
tiff bought a horse from defendant. The horse had been stolen
from one Dysart. It did not appear in the case, however, that
Dysart had ever disturbed the plaintiff's possession or actually
put him to any loss. The court thought that inasmuch as Dysart
might pursue his remedy against others and get satisfaction or
might never enforce his claim against plaintiff, plaintiff could
not recover except nominal damages until he had sustained
actual damages.
There has been difference of opinion on this point. But the
weight of authority is that he cannot get substantial damages
until he has sustained them.)
§335. (Sales, Sec. 48.) The implied warranties in a
sale by description.
(1) When is sale by description?
(2) Warranty that goods shall correspond with description.
(3) Warranty in sales by description that the goods are merchantable.
598
SALES
(1) When Is Sale by Description.
(See note under section 331.)
(2) Warranty in Sales by Description that the Goods
Shall Correspond with the Description.
(Note: If goods are ordered by description clearly the buyer
need not receive goods of another description, but he may receive
them and sue on his warranty. It would seem that a warranty
,in a sale by description that the goods shall correspond with the
description is more in the nature of an express than an implied
warranty.)
(3) Warranty in Sale by Description that the Goods are
Merchantable.
Case 298. Uniform Sales Act, Sec. 15 (2) (3).
 (2) Where the goods are bought by description from
a seller who deals in goods of that description (whether
he be grower or manufacturer or not) there is an im-
plied warranty that the goods shall be of merchantable
quality.
"(3) If the buyer has examined the goods there is
no implied warranty as regards defects which such ex-
animation ought to have revealed.''
Question 298: What is the implied warranty where the goods
are bought of a seller who deals in goods of that kind? What
defects does such warranty not cover ?
Case 299. Reynolds et al. v. General Electric Co. et al.,
141 Fed. 551.
Facts: Suit by the General Electric Co. for pumps
sold and delivered to defendant. Defense a breach of
warranty arising out of a latent defect in the material.
The General Electric Co. was a manufacturer of electrical
machinery, but a mere dealer in the pumps, and defend-
ant knew this.
Point Involved: Whether one who is a dealer and not
a manufacturer warrants against latent defects in the
manufacture. (See also note following this opinion.)
WARRANTIES
599
Sanborn, Circuit Judge: "* * *
"It is said that an implied warranty arose from the
sale, to the effect that the pump should be fit and proper
for the pumping of water in the shaft of a mine, and that
this covenant was broken. If the pump was unfit to do
the work which machines of that nature ordinarily per-
form, that condition arose from latent defects in the
material of which it was constructed, or in the workman-
ship bestowed upon it, of which the plaintiff had no notice.
The electric company secured and delivered the article
of the known manufacture which the mines company had
selected, and which was described in the contract. A
manufacturer is charged by the law with notice of latent
defects in the design, materials, and construction of the
machines he makes which unfit them to perform the ordi-
nary work of such articles, because he furnishes the de-
sign, the materials, and the workmanship, and thus either
causes or permits the defects. Out of this state of facts
and an agreement of sale an implied warranty arises on
the part of the manufacturer that the machines he makes
are suitable for the general purposes for which such
articles are commonly used. Goulds v. Brophy, 42 Minn.
109, 112, 43 N. W. 834, 6 L. R. A. 392. But where such a'
purchaser buys of a dealer a definite machine of known
manufacture, which has been, or is to be, made by a
builder who is not the vendor, and the vendee knows this
fact, there is no implied warranty by the dealer, either
against latent defects or that the machine or article will
be suitable for the purpose for which such articles are
commonly used, because the purchaser has the same
knowledge and means of knowledge of these subjects as
has the dealer. The vendee knows that they both rely on
the character and reputation of the manufacturer. Bragg
v. Morrill, 49 Vt. 45, 47, 24 Am. Rep. 102; American
Forcite Powder Mfg. Co. v. Brady, 4 App. Div. 95, 97,
38 N. Y. Supp. 545; Gardner v. Winter (Ky.), 78 S. W.
143, 63 L. R. A. 647, 649.
Question 299: State the facts, the question presented and the
Court's decision in the above case.
600
SALES
(Note: The cases are in conflict as to whether one who is a
mere dealer warrants against latent defects. The case above is
one of a line of decisions holding that a dealer does not im-
pliedly warrant that the goods are merchantable. And that
line constitutes the present weight of authority. Another line of
cases adopts the contrary view, and that is the doctrine, also, of
the Uniform Sales Act, which expressly extends such liability to
a mere dealer. Even if the seller was not a manufacturer or
dealer such a warranty might exist if it is apparent the buyer
relied on the seller's judgment. Says Professor Williston (Sales,
Sec. 233, p. 310)-: "If the seller of specific goods is neither a
manufacturer nor a dealer, generally no warranty of specific
goods would be implied, but if the skill or judgment of the seller
were evidently relied on, there seems no reason why the nature
of the seller's occupation should make a difference, and the
Sales Act has adopted this idea.")
§ 336. (Sales, Sec. 49.) Implied warranties in a sale by
sample.
Case 300. Hanson v. Busse, 45 111. 497.
Facts: They are stated in the opinion.
Point Involved: What constitutes a sale by sample.
Me. Justice Laweence delivered the opinion of the
Court, wherein the facts are stated: * * But
the rule itself must be considered firmly settled in the
common law, that the vendor of goods which the pur-
chaser has at the time of purchase, the opportunity of
examining, is not responsible for defects of quality, in
the absence of fraud and warranty. * * *
"In the case before us the proof shows that the 110
barrels of apples were piled up in tiers at a railway
depot in Chicago. The purchaser went with the clerk
of the plaintiffs to look at them. They opened a couple
of barrels that stood on the floor. The purchaser was
lame from rheumatism and requested the clerk to climb
up and open a barrel on the top of the tiers. He did so,
and showed the defendant some apples which were in
good condition, and said they were all like that. * * *
The apples in the three barrels exhibited as samples were
WARRANTIES
601
unquestionably merchantable, or the defendant would
not have bought. It would be unreasonable to require
that he should have opened every one of the 110 barrels.
He had a right to rely on the samples shown to him, and
on the representations of the plaintiffs that the apples
were good.
Question 300: State the facts, the question presented and the
Court's decision in this case.
Case 301. Bierne v. Dord, 5 N. Y. 95.
Facts: Bierne and Burnside bought of defendant,
Dord, a quantity of French blankets. The blankets were
wrapped up in bales, and the sale was made at New
York in the warehouse at which the blankets were. Two
or three pairs of the blankets were exhibited at the time
and examined by the purchaser and found to be sound.
Nothing was said by either of the parties about the con-
dition of the other blankets, which could have been ex-
amined by the purchaser had he desired to inspect them.
Defendant's clerk, who made the sale, testified on the trial
that the blankets exhibited were taken promiscuously
from the bales and that he supposed all of the blankets
would correspond with them. Plaintiffs purchased
twenty-seven bales which were put by plaintiffs' direc-
tion on board a vessel bound for New Orleans and paid
for by plaintiffs. The blankets were in fact largely moth
eaten. The plaintiffs sue for damages, alleging breach
of warranty and had judgment below. Defendant
appeals.
Point Involved: Whether the exhibition of the
blankets under the circumstances and in the manner
stated, made the sale a sale by sample.
Jewett, J.:  * * * As a general rule, it is well
established, as well by our law as by the common law,
that where there is neither fraud nor express warranty
on the executed contract for the sale of a chattel, the
buyer takes the risk of its quality and condition. * * *
i ' There is, however, an exception * * # which al-
602
SALES
lows a warranty to be implied on a sale of goods by
sample, that the article is, in bulk, of the same kind and
equal in quality with the sample exhibited, in reference
to which the parties contracted. "When a contract for
the sale of goods is made by sample it amounts to an
undertaking on the part of the seller, with the purchaser,
that all the goods are similar both in nature and quality
to those exhibited. * * *
"But the mere circumstance that the seller exhibits a
sample, at the time of the sale, will not of itself make a
sale by sample, so as to subject the seller to liability on
an implied warranty as to the nature and quality of the.
goods; because it may be exhibited, not as a warranty
that the bulk corresponds to it, but merely to enable the
purchaser to form a judgment on its kind and quality.
If the contract be connected by the circumstances attend-
ing the sale, with the sample, and refer to it, and it be
exhibited as the inducement to the contract, it may be a
sale by sample; and then the consequences follows, that
the seller warrants the bulk of the goods to correspond
with the specimen exhibited as a sample. Whether a
sale be a sale by sample is a question of fact for the jury
to find from the evidence in each case; and to authorize
a jury to find such a contract * * * the evidence
must be such as to authorize the jury * * * to find
that the sale was intended by the parties as a sale by
sample. * * *
'1 That a personal examination of the bulk * * * is
not practicable or convenient, furnishes no sufficient
ground, of itself, to say that the sale is by sample
* * * (such) is doubtless a strong fact in reference
to the question of the character of the sale, whether it
was or was not made by sample. * * *
"New trial granted.
Question 301: (1) State the facts, the question presented
and the Court's decision in this case.
(2) How does this case differ in principle from the case im-
mediately preceding it ?
(3) Suppose, in this case, the seller had called on the buyer
WARRANTIES
603
with a French blanket and exhibited it as a sort of blanket
he desired to sell to the purchaser, the other blanket not being
present for inspection. Would there have been a sale by sample ?
§ 337. (Sales, Sec. 50.) The implied warranty of fitness
for purpose bought.
Case 302. Marbury Lumber Co. v. Steams Mfg. Co.,
32 Ky. L. Rep. 739.
Facts: The Stearns Mfg. Co. was engaged in the
maufacture of locomotive engines. The Marbury Lumber
Co. was engaged in the manufacture of lumber and had
at its plant a railroad 17 miles long on which it hauled
logs to the mill. Needing an engine to use for this pur-
pose it ordered of the Stearns Co. an engine to do the
work required, setting forth in the order the length of the
road, gauge of the track, weight of rails, fuel used, weight
of train, train mileage per day, number of cars to be
hauled, steepest grade, etc. The Stearns Co. accepted
the order and delivered an engine pursuant thereto, but it
was found inadequate to do the work required of it and
finally broke down. The Lumber Co. had given notice of
the alleged defects and requested the seller to take back
the engine. The engine company brings suit for the bal-
ance of the purchase price and defendant sets up its de-
fense and a counter claim.
Point Involved: Whether in a sale of property ordered
by the buyer for a particular purpose known to the seller,
there is an implied warranty that it is fit for that pur-
pose.
Judge Hobson delivered the opinion of the Court:
»* * * We think the case falls within the following
rule as laid down by Benjamin on Sales, § 988; 'where a
manufacturer or dealer contracts to supply an article
which he manufactures or produces or in which he deals,
to be applied to a particular purpose, so that the buyer
necessarily trusts to the judgment or skill of the manm
facturer or dealer, there is in that case an implied term
of warranty that it shall be reasonably fit for the pur-
604
SALES
pose to which it is to be applied (citing authorities). In
such a case the buyer trusts to the manufacturer or
dealer, and relies upon his judgment and not upon his
own.' * * * It [the plaintiff] understood precisely
what would be required of it and, knowing this, made the
engine for the specific purpose for which it was used.
Question 302: State the facts, the question presented and the
Court's decision in this case.
(2) A sold a heating plant to B, to be installed by A in B's
house. A put in a heating plant that was well made, but would
not heat B's house. B refused to accept the plant. A sues him.
Can he recover? (Ideal Heat. Co. v. Kramer, 127 la. 137.)
Case 303. Grand Ave. Hotel Co. v. Wharton, 79 Fed.
43.
Facts: The Hotel Co. was a Missouri corporation,
owning and conducting a hotel at Kansas City, Missouri.
B was a manufacturer of boilers, of whom the Hotel Co.
ordered two "Harrison Safety Boilers of 150 horse
power each. The order contained specifications of ma-
terial and construction. The boilers were duly sent,
well-made and of good material, and were set up for use.
It was found that the boilers were not available to use
with the water from the Missouri river on account of
the sediment therein. The Hotel Company contended
that as it was known for what particular purpose the
boiler was to be used and that it was to be supplied with
Missouri river water, there was a warranty that the
boilers would be fit for that purpose.
Point Involved: Whether there is an implied war-
ranty of fitness for particular purpose, where the buyer
orders a "known, described and definite article, and
gets what he ordered.
Loohren, District Judge, delivered the opinion of
the Court:
"1. Where a manufacturer contracts to supply an
article which he manufactures to be applied to a-particu-
lar use of which he is advised, so that the buyer neces-
WARRANTIES
605
sarily trusts to the judgment and skill of the manufac-
turer, there is an implied warranty that the article shall
be reasonably fit for the use to which it is to be applied.
(Citing cases.)
"2. But when a known, described, and definite article
is ordered of a manufacturer, although it be stated by
the purchaser to be required for a particular use, yet if
the known, described, and definite thing be actually sup-
plied, there is no implied warranty that it shall answer
the particular purpose intended by the buyer. (Citing
cases.)
"3. * * * Here the purchaser contracted for a
definite, well-known kind of boiler, its president having
then a boiler of the same kind in use. The specifica-
tions as to the size, form, material, and every detail were
minute, and embodied in the contract. The manufac-
turers were obligated to deliver exactly such boilers as
were described and contracted for, and could not, under
the contract, deliver anything different. There is no
claim that the boilers did not in every respect conform to
this contract and specifications, nor any claim that they
were defective, either in respect to workmanship or ma-
terial. The purchaser did not exact a warranty that the
boilers would operate with the muddy waters of the Mis-
souri river, and therefore assumed that risk itself.
Question 303: (1) What were the facts in this case, the ques-
tion presented and the Court's decision?
(2) What is the difference between this case and the case
immediately preceding? Why?
(3) Do you think there were any implied warranties in this
case ? What ?
Case 304. Peoria, etc., Co. v. Turney, 175 111. 631.
Facts: See the opinion.
Point Involved: Whether there is an implied war-
rahty of fitness for particular purpose where goods are
ordered by trade name.
Mr. Justice Phillips delivered the opinion of the
Court: "* * * It is also urged that the words 'Reed
606
SALES
City Lump Coal' in the contract, raised an implied war-
ranty of the quality of the coal. * * * These words
designated a certain kind of coal known in commercial
trade and with which appellant was familiar, as it had
used it prior thereto. Therefore, it having contracted
for that kind of coal, if it received what it contracted
for there was no implied warranty. The common law
is tersely stated in the English 'Sale of Goods Act,'
under Rule 14, 'that in the case of a contract for the sale
of a specific article under its patent or other trade name,'
there is no implied contract as to its fitness for any par-
ticular purpose for the reason, as stated in the authori-
ties that 'an undertaking as to fitness is not implied
where the buyer gets what he bargained for.' (Citing
cases.)
Question 304: State the facts, the question presented, the
Court's decision in the above case and the reasons therefor.
Case 305. Wiedeman v. Keller, 171 111. 93.
Facts: Defendant is a retail dealer in meats. Plain-
tiff called at his place of business and purchased a quan-
tity of pork to be used in her family. The pork turned
out to be unwholesome and unfit for use, making plain-
tiff and her family sick. Defendant did not know that
the meat was unwholesome. Plaintiff sues for damages.
Point Involved: Whether in a sale of goods by a
dealer for purposes of immediate consumption, there is a
warranty that it is fit for consumption.
Me. Justice Ceaig delivered the opinion of the Court:
"As a general rule, we think the decided weight of au-
thority in the United States is, that in all sales of meats
or provisions for immediate domestic use by a retail
dealer there is an implied warranty of fitness and whole-
someness for consumption. * * * In this case
* * * the appellee was a regular retail dealer, and as
such he sold the meat to appellant for domestic use, and
under the law as it seems to be settled in this country,
as the meat turned out to be unwholesome, he was liable,
WARRANTIES
607
although he was not aware that it was diseased when he
sold it to appellant.
"In an ordinary sale of goods the rule of caveat emp-
tor applies, unless the purchaser exacts of the vendor
a warranty. Where, however, articles of food are pur-
chased from a retail dealer for immediate consumption,
the consequences resulting from the purchase of an un-
sound article may be so serious and may prove so dis-
astrous to the health and life of the consumer that pub-
he safety demands that there should be an implied war-
ranty on the part of the vendor that the article sold is
sound and fit for the use for which it was purchased. It
may be said that the rule is a harsh one; but, as a gen-
eral rule, in the sale of provisions the vendor has so many
more facilities for ascertaining the soundness or un-
soundness of the article offered for sale than are pos-
sessed by the purchaser, that it is much safer to hold the
vendor liable than it would be to compel the purchaser
to assume the risk. * * *
Question 305: What is the rule where a dealer in food sells
same to a consumer as to dealer's undertaking as to quality ?
(2) A, not a dealer in meats, was leading a cow down the
street to pasture. B made an offer for the animal. A accepted
and B led the cow away. A knew that B wanted the cow to
butcher, but did not know the cow was diseased, which turned
out to be the fact, so that the meat had to be thrown away. A
sues for the price of the cow. Has B any defense?
Case 306. Nixa Canning Co. v. Lehman, etc., Grocer
Co., 70 Kan. 664.
Facts: The Canning Co. sold the Grocer Co. a quantity
of canned apples. The apples were put up in cans by
the Canning Co. for the purpose of selling them to mer-
chants. The sale to this Grocer Co. was by sample, the
sample cans being opened and examined by the buyer
before the purchase. The samples were apparently
sound and fit and were not in fact subject to any defect
that could have been discovered by reasonable examina-
tion. By reason of certain substances employed in the
608
SALES
canning process the apples purchased quickly spoiled,
The Grocer Co. sued the Canning Co. for damages.
Point Involved: Whether a manufacturer impliedly
warrants that goods sold by him are merchantable.
Mason, J., delivered the opinion of the Court: "The
Canning Co. contends that, where goods are sold by
sample, there is, in effect an express warranty of con-
formity to the sample and no other warranty as to quality
can be implied. This may be granted to be the ordinary
rule as to transactions between merchants, but where the
seller is also the manufacturer, there is an implied war-
ranty that the sample and goods sold are alike free from
latent defects not discoverable upon ordinary examina-
tion. * * * The Court then quotes from Kellogg
Bridge Co. v. Hamilton, 110 U. S. 108:  'In ordinary
sales the buyer has an opportunity of inspecting the
article sold; and, the seller not being the maker, and
therefore having no special or technical knowledge of
the mode in which it was made, the parties stand upon
grounds of substantial equality. * * * when the
seller is the maker or manufacturer of the thing sold, the
fair presumption is that he understood the process of its
manufacture, and was cognizant of any latent defect
caused by such process and against which reasonable dili-
gence might have guarded. ***>*** the de-
fendant by implication warranted that the process it em-
ployed did not involve the use of any deleterious sub-
stance the presence of which could not be detected by any
reasonable examination, but which would in a short time
render the fruit unfit for food, unmerchantable and
worthless.
Question 306: (1) State the facts, the question presented
and the Court's decision in this case.
(2) The A Automobile Co., a manufacturer of automobiles,
bought an automobile in exchange for one of its own make. It
then sold the second-hand machine to plaintiff. The crank shaft
broke shortly thereafter from a latent defect. Plaintiff sues for
damages and claims that defendant impliedly warranted the
merchantability of the car. Can he recover? Why?
WARRANTIES
609
Case 307. Waxd v. Great Atlantic & Pacific Tea Co.,
231 Massachusetts Reports, 90; 120 Northeastern Reports,
225.
Facts: Ward sues for breach of implied warranty as
to proper condition of goods sold. The defendant con-
ducted a retail grocery at Ipswich, Massachusetts. It
had for sale beans in sealed cans bearing this label:
 Grandmother's Brand A. & P. Beans and Pork with
sauce, contents 2 lbs. 1 oz. "Remove contents of this
can as soon as opened and place in earthenware dish.''
"The Great Atlantic & Pacific Tea Co., Incorporated, Dis-
tributors, N. J., U. S. A.
These cans of beans were purchased by defendant from
a canning company after canning. Defendant furnished
the labels. Defendant had no supervision over the proc-
ess of canning and no knowledge or means of knowledge
that any foreign substance was in the cans. The Canning
Co. was a reputable, independent concern. The can
bought by plaintiff qontained a small pebble and he bit
upon it and broke off his tooth.
Point Involved: Whether a dealer selling goods
canned by others of whose contents the dealer can make
no inspection impliedly warrants that the contents are
fit for the purpose for which purchased.
Rugg, C. J.:  * * * There appears to us to be
no sound reason for ingrafting an exception on the gen-
eral rule because the subject of the sale is canned goods,
not open to the immediate inspection of the dealer, who
is not the manufacturer, any more than of the buyer.
It doubtless •still remains true that the dealer is in a
better position to know and ascertain the responsibility
and reliability of the manufacturer than is the retail pur-
chaser. * * * Simply because it [the general rule]
may work apparent hardship in certain instances is no
reason for changing it to fit particular cases. It is a
salutary principle. It has become wrought into the fabric
of the law as the result of long experience. It may be as-
sumed that the affairs of mankind have become adjusted
to it. It has been recently adopted by the legislature in
610
SALES
codifying the law as to sales. It imposes liability in the
absence of an express contract between the parties gov-
erning the subject. It places responsibility upon the
party to the contract best able to protect himself against
original wrong of his kind, and to recoup himself in
case of loss, because he knows or comes in touch with the
manufacturer. In the case at bar the plaintiff had no
means of ascertaining the manufacturer from inspection
of the goods bought. The retail purchaser in cases of
this sort ordinarily would be at some disadvantage if his
only remedy were against the manufacturer.
Question 307: If a seller is a dealer who buys from a rep-
utable manufacturer, goods which are canned, and such goods
are defective for some reason, is the dealer liable to a consumer
who is injured by the use of such goods? Are there differences
of view on this subject?
(Note: On this point the authorities are not in entire ac-
cord. There was a dissenting opinion in the above case. But
the case is believed to express the sounder and growing view.)
§338. (Sales, Sec. 51.) Warranties do not run with
personal property.
(Note: A sells to B and B sells to C, B being independent,
intermediate party and not an agent of A. C has no rights of
contract against A, for he has not dealt in contract with A. If
he fastens a liability on A it must be in tort for negligence,
fraud, etc. A suit on a warranty is in contract. Hence C has
no right against A for breach of warranty. Some cases have in-
deed recognized such a right but they seem difficult to sustain
on principle. It is also true that A, as manufacturer, may even
though he markets through independent dealer, make announce-
ments and warranties that are intended to become legally ob-
ligatory upon him when acted upon by the purchaser.)
§ 339. (Sales, Sec. 52.) Right of remote purchaser to
sue in tort.
Case 308. Lebourdais v. Vitrified Wheel Co., 194
Mass. 341.
Facts: This was an action by Lebourdais for personal
injuries sustained by him on account of the bursting of
WARRANTIES
611
an emery wheel manufactured by defendant, and bought
by plaintiff's employer of a dealer to whom it bad been
sold by the defendant.
Point Involved: Whether the liability for selling a
defective article -extends to other persons than the imme-
diate purchaser.
Beailey, J.: "The manufacturer of an article of mer-
chandise which he puts upon the market ordinarily is not
responsible in damages to those who may receive injuries
caused by its defective construction, but to whom he
sustains no contractual relations, although by the exer-
cise of reasonable diligence he should have known of the
defect. If such an extended liability attached where no
privity of contract exists it would include all persons
however remote who had been damaged either in person
or property by his carelessness, and manufacturers as a
class would be exposed to such far reaching consequences
as to seriously embarrass the general prosecution of
mercantile business. In the usual course of trade upon
making a sale, as the article passes from the ownership
and control of the maker, it is held that when these cease
Ms liability also should be considered as ended. David-
son v. Nichols, 11 Allen, 514; Clifford v. Atlantic Cotton
Mills, 146 Mass. 47, 48; Glynn v. Central Railroad, 175
Mass. 510, 512. But where by reason of its nature the
article sold is commonly recognized as intrinsically dan-
gerous to life or property, among which gunpowder,
nitroglycerine and other highly explosive compounds,
naphtha and poisonous drugs are some familiar ex-
amples, if the seller without notice of their dangerous
or noxious qualities delivers them to a customer or to a
carrier who is ignorant of these properties, he is liable
not only to him, but to others to whom while in the exer-
cise of reasonable care they are the proximate cause of
injury. Davidson v. Nichols, 11 Allen, 514; Carter v.
Towne, 98 Mass. 567; Wellington v. Downer Kerosene
Oil Co., 104 Mass. 64; Norton v. Sewall, 106 Mass. 143;
Boston & Albany Railroad v. Shanly, 107 Mass. 568;
Turner v. Page, 186 Mass. 600; Oulighan v. Butler, 189
612
SALES
Mass. 287, 292; Flynn v. Butler, 189 Mass. 377, 388;
Thomas v. Winchester, 2 Seld. 397. A similar liability
exists where a caterer furnishes impure and unwhole-
some food by which the guests of his customer are made
sick, or where a manufacturer or vendor knowingly sells
for general use, without disclosing the existence of the
defect, a machine, mechanical instrumentality or other
article, which because of its defective construction or
condition when put out causes injury. Bishop v. Weber,
139 Mass. 411, 417; McDonald v. Snelling, 14 Allen, 290;
Flynn v. Butler, 189 Mass. 377; Lewis v. Terry, 111 Cal.
39; Huset v. Case Threshing Machine Co., 120 Fed. Rep.
865; Clarke v. Army & Navy Co-operative Society, (1903)
1 K. B. 155, 167. In all of these various transactions his
liability, does not rest on privity of contract, but the act
itself is deemed not only a legal wrong, but may be said
to be in violation of the duty he owed to those with whom
he dealt, as well as of the implied duty which he owes to
the community to refrain from the commission of acts
of negligence whereby injury follows to its members in
person or property. If damages are suffered he is re-
sponsible because they are such as reasonably should
have been foreseen, though the exact way in which the
accident is precipitated may be determined by a foreign
cause. McDonald v. Snelling, ubisupra; Flynn v. But-
ler, ubi supra; Huset v. Case Threshing Machine Co., ubi
supra; Lane v. Cox, (1897) 1. Q. B. 415, 417. It is within
the last exception, if the plaintiff has a right of action
against this defendant, that there it must be found.
[The Court held that the plaintiff did not properly state
his case in his pleadings, to give him a right of action.]
Question 308: (1) If A sells to B and expressly or im-
pliedly warrants merchantability of the article sold, and B re-
sells to C, can C sue A on the warranty? or assuming that a
warranty does not run to B, can it be construed to run to C ?
(2) On what theory or theories can a subpurchaser, or any
person other than the immediate vendee recover?
(3) A sues M, declaring that M knowing that one B was
a retailer of fluids to be burned in lamps for illuminating pur-
WARRANTIES
613
poses, and knowing that naphtha was explosive and dangerous
for such use, sold and delivered naphtha to B knowing that B
intended to retail it in his business, and that B, in ignorance
of its dangerous qualities, retailed a pint of such naphtha to A
to be burned in his lamp for illumination, and that the plaintiff,
in like ignorance, used the fluid and was burned. Can A recover
against M? (Wellington v. Downer Kerosene Oil Co., 104 Mass.
64.)
(4) A, druggist, negligently labeled a deadly poison as a
harmless medicine, and sold it to dealers who retailed it to their
customers. State right of customers to sue A? To sue retailers?
(Thomas v. Winchester, 2 Seld. 397.)
(5) A, a painter, purchased of M, a manufacturer of step-
ladders, and such ladder, in use by B, one of A's employes, broke
from a defect caused by M's negligence, and precipitated B to
the ground, injuring him. Can B recover against M ? (Schubert
v. J. B. Clarke Co., 49 Minn. 331.)
(6) Plaintiff bought a coat from Young Bros., his local deal-
ers, who bought it from the B. & S. Company, wholesalers, who
knew that the fur collars of such coats contained dyes that some-
times poisoned the skin of some wearers, but were worn with
safety by others. Plaintiff, who sustained poison by wearing
such coat, sues the B. & S. Co. in tort. Can he recover? (Ger-
kin v. Brown & Sehler Co., 143 N. W. (Mich.) 48.)
(7) Plaintiff purchased a bottle of Malt Nutrine from a
druggist, who procured it from a wholesaler, who procured it
from the manufacturer, who advertised it as wholesome. The
liquor was contaminated and plaintiff's wife was made sick and
his young son died. Can plaintiff recover against the manu-
facturer on theory of broken warranty? on theory of tort?
(Roberts v. Anheuser-Busch Brew. Ass'n, 98 N. E. (Mass.) 95.)
(Note: See a collection of authorities in Huset v. Case Thresh-
ing Machine Co., 120 Fed. Rep. 865.)
(Note: (Generally held that for mere negligence in prepara-
tion or manufacture, the seller is not liable to a remote pur-
chaser in tort, except in cases of an article to be used for food
or medicine, or an inherently dangerous article.)
PART II
THE CONTRACT'S EFFECT AS TRANSFERRING
TITLE
Chapter 43. Transfer of title between sener and buyer,
when rights of third persons not involved.
Chapter 44. Title and third person.
CHAPTER 43
TRANSFER OF TITLE BETWEEN SELLER AND
BUYER, WHEN RIGHTS OF THIRD PERSONS
NOT INVOLVED
§ 340. Meaning of phrase transfer of title.
§ 341. Goods unascertained.
§ 342. Goods ascertained.
§ 343. Eules for ascertaining intention of the parties. The first rule.
§344. Same: The second rule.
§345. Same: Third rule.
§ 346. Same: Fourth rule.
§ 347. Same: Fifth rule.
§ 348. Eeservation, upon shipment of title in seller.
§ 349. Bisk of loss.
§ 340. (Sales, Sec. 53.) Meaning of phrase "transfer of
title.
(Note: By the phrase '' transfer of title'' we mean the change
of ownership from seller to buyer. The contract of sale is for
the purpose of making the buyer the owner. "When does that
change occur?
A number of rules are used as tests. The rule that title to
unascertained or future goods is a rule that is not rebuttable.
In such a case title cannot pass until the goods are ascertained.
But if they are ascertained goods at the time of the sale, or be-
614
TRANSFER OF TITLE
615
come ascertained later, the rules are rules of presumption which
govern "unless a different intention appears. Generally such
different intention does not appear and the rules are applied.
The present chapter is concerned with title as between seller
and buyer. The right of a third person to ignore the true state
of the title is treated in the chapter following. However, it
must not be understood that as a general rule, third persons can
ignore the true state of the title. They can do so only in the ex-
ceptional cases noted in the chapter following. One of the im-
portant reasons for inquiring whether title has passed as be-
tween seller and buyer is to determine the present rights of
creditors of, or purchasers from, seller and buyer.)
§341. (Sales, Sec. 54.) Goads unascertained.
Case 309. Uniform Sales Act, Sec. 17 and Sec. 6.
(Sec. 17.) "Where there is a contract to sell unascer-
tained goods, no property in the goods is transferred to
the buyer unless and until the goods are ascertained, but
property in an undivided share of ascertained goods may
be transferred as provided in Section 6.''
(Sec. 6.) "(1) There may be a contract to sell or a
sale of an undivided share of goods. If the parties intend
to effect a present sale, the buyer by force of the agree-
ment becomes an owner in common with the owner or
owners of the remaining shares.
 (2) In the case of fungible goods, there may be a sale
of an undivided share of specific mass, though the seller
purports to sell, and the buyer to buy, a definite number,
weight or measure of the goods in the mass, and though
the number, weight or measure of the goods in the mass
is undetermined. By such a sale the buyer becomes owner
in common of such a share of the mass as the number,
weight or measure bought bears to the number, weight or
measure of the mass. If the mass contains less than the
number, weight or measure bought, the buyer becomes
the owner of the whole mass and the seller is bound to
make good the deficiency from similar goods unless a con-
trary intent appears.
(Note: Illustration under Sec. 17. If A sells to B six chairs
out of a group of 50 similar chairs, B cannot be said to be the
616
SALES
owner of any chairs until six chairs are in some way appropn-
ated to the sale as by setting apart, tagging or otherwise. This
might be done by A with B 's consent express or implied, or by B
with A's consent express or implied. But if A sold to B an un-
divided interest in all the 50 chairs, then the 50 chairs them-
selves being identified, A and B may, if the parties so intend,
become at once without further act, owners in common of all the
50 chairs.)
Case 310. Hahn v. Fredericks, 30 Michigan Reports, 223.
Facts: Fredericks sued Hahn to recover the price of
certain wood which was destroyed by fire before it had
been withdrawn by the purchasers. The wood bargained
for was 200 cords of hard wood out of a pile of between
350 and 400 cords in which was scattered a small amount
of soft wood. The wood was all piled in tiers on Port-
age lake, the six rows nearest the lake containing about
201 cords in which there were 11 or 12 cords of soft wood.
A fire destroyed the wood before there was any selection.
Plaintiffs sue for the purchase price on the theory that
title had passed to Hahn before the fire, and the loss
was therefore his.
Point Involved: Whether title can pass before the
goods that constitute the subject of the sale are specific-
ally ascertained.
Campbell, J.:  * * *
"The principal question in the case seems to be,
whether the sale actually attached to any two hundred
cords which could be identified before the fire.
"It is not claimed, and there is nothing to warrant
the notion, that the contract was intended to be severable,
or to attach to anything less than two hundred cords of
hard wood, and of no other wood^ There was no sale
of the first six piles as they stood, or of the hard wood
in the first six piles, independent of so much more as
would fill up the measure.
"Until an actual measurement, which was to be made
when the hard wood was removed from the piles and as
it was placed on the scows, it is evident that there could
TRANSFER OF TITLE
617
be no parcel identified to which a sale could attach as
complete. It was a bargain for a parcel yet to be meas-
ured out of a larger parcel of various qualities, and of
an extent not determined. The original measurement
was, under this contract, of no importance.
"We have found no authority which recognizes such
a transaction as a completed sale. It was not a sale in
gross of an entire parcel of wood, where the measure-
ment was only necessary to ascertain the quantity, as in
Adams Mining Co. v. Senter, 26 Mich. 73. Here the
measurement was necessary to complete the identifica-
tion, and to determine what wood was to belong to the
purchaser. Under such an arrangement it is well settled
that no title passes to any portion of the property until
it has been measured and thus identified and severed
from the rest. Dunlap v. Berry, 4 Scam. 327; Court-
right v. Leonard, 11 Iowa, 32; Young v. Austin, 6 Pick.
280; Merrill v. Hunnewell, 13 Pick. 213; Mason v. Thomp-
son, 18 Pick. 305; Scudder v. Worster, 11 Cush. 573;
Simmons v. Swift, 5 B. & C. 857; Rugg v. Minett, 11 E.
210; Shepley v. Davis, 5 Taunt. 617.''
Question 310: (1) State the facts, the question presented
and the Court's decision in this case.
(2) A sold B a quantity of shingles to be selected out of a
large mass, B to make the selection. Before B had selected the
shingles, B's creditors had a levy made on the quantity sold.
A sues the sheriff making the seizure for interfering with his
property. Will the action lie? (Goldberg v. Bussey, 47 S.
W. (Tex.) 49.)
Case 311. Kimberly v. Patchin, 19 N. Y. 330.
Facts: One Dickinson had in a warehouse two piles of
wheat, amounting to 6,249 bushels. John Shuttleworth
proposed to purchase 6,000 bushels of the wheat and a
memorandum was made out to that effect and the wheat
was left undisturbed in the warehouse. Shuttleworth
then sold the wheat to Patchin. Dickinson then sold the
two piles of wheat to a person from whom Kimberly de-
rived his claim of title. Patchin then got possession of
618
SALES
the wheat and Kimberly sues him for damages, on the
theory that Shuttleworth, whatever contract he might
have had, never had title, as the 6,000 bushels were never
ascertained and that title therefore could not be passed to
Patchin.
Point Involved: Whether title to goods of a fungible
nature can pass before the particular goods are ascer-
tained out of a larger mass owned by the seller, the par-
ties intending to actually transfer title.
Comstock, J.: '' * * * When Shuttleworth bought
the 6,000 bushels, that quantity was mixed in the store-
house with the excess and no measurement or separation
was made. The sale was * * * precisely of 6,000
bushels. On this ground it is claimed, on the part of
the plaintiffs, that in legal effect the contract was ex-
ecutory, in other words, a mere agreement to sell and de-
liver the specified quantity, so that no title passed by
the transaction. It is not denied, however, * * *
that the parties intended a transfer of title. The argu-
ment is and it is the only one which is plausible, that the
law overrides that intention. * * *
"It is a rule * * * that in order to make .an ex-
ecuted sale, so as to transfer a title from one party to
another, the thing sold must be ascertained. This is a
self-evident truth when applied to those subjects of prop-
erty which are distinguishable by their physical attri-
butes from all other things and therefore are capable of
exact identification. No person can be said to own a
horse or a picture unless he is able to identify the chat-
tel, or specify what horse or what picture belong to him.
"But property can be acquired and held in many
things which are incapable of such identification. * * *
Of this nature are wine, oil, wheat and other cereal
grains, and the flour manufactured from them. * * *
Where the quantity and the general mass from which it
is to be taken are specified, the subject of the contract
is thus ascertained, and it becomes a possible result for
TRANSFER OF TITLE
619
title to pass, if the sale is complete in all its other cir-
cumstances. * * *
"We are of opinion, therefore, both upon authority
and clearly upon the principle and reason of the thing
that the defendant under the sale to Shuttleworth, ac-
quired a perfect title to the 6,000 bushels of wheat.
# * *))
(Note: There are two lines of cases which hold opposite
views in sales of part of homogeneous (fungible) masses, one
line holding that title cannot pass until separation, though the
intention of the parties might have been to pass title, because it
is impossible to say what particular part the buyer owns. The
leading authority for this doctrine is perhaps Scudder v. Wor-
ster, 11 Cush. 573. The other doctrine, whose leading authority
is the case above, is sufficiently therein stated. It seems the
more sensible doctrine though the weight of authority seems
against it. The Uniform Sales Act, however, adopts it and it is
probably gaining ground. It is hardly necessary to say that
such a doctrine can only refer to sales of part of a homogeneous
or fungible mass, that is to say, a mass of goods such as grain,
oil, flour, etc., in which each unit is necessarily for practical pur-
poses like every other unit. Chairs, logs, etc., are not such
goods.)
Question 311: State the doctrine of the above case.
(2) A has a lot of logs on his place, numbering about 5,000.
He "sells to B 1,000 of the logs. Before any selection is made,
in whom is the title ? Why ?
§ 342. (Sales, Sec. 55.) Goods ascertained.
Case 312. Uniform Sales Act, Sec. 18.
 (1) Where there is a contract to sell specific or ascer-
tained goods, the property in them is transferred to the
buyer at such time as the parties to the contract intend
it to be transferred.
"(2) For the purpose of ascertaining the intention of
the parties, regard shall be had to the terms of the con-
tract, the conduct of the parties, usages of trade, and the
circumstances of the case.''
Question 312: When there is a contract to sell specific or as-
certained goods, state by general terms when title will pass.
620
SALES
§343. (Sales, Sec. 56.) Rules for ascertaining the in-
tention of the parties: the first rule.
Case 313. Uniform Sales Act, Sec. 19, Rule 1.
 [Unless a different intention appears.] Where there
is an unconditional contract to sell specific goods, in a
deliverable state, the property in the goods passes to the
buyer when the contract is made, and it is immaterial
whether the time of payment, or the time of delivery, or
both, be postponed. •
Question 313: Under what circumstances is title presumed
to pass when the contract is made ? Is this a rule of law or a pre-
sumption of fact?
Case 314. Rail v. Little Falls Lumber Co., 47 Minn.
422.
Facts: The following contract was made:
"I, Case Rail, hereby sell to the Little Falls Lumber
Co., 247 logs, marked 'C. R.' and stamped 'C. R.' and
scaling 60,300 feet, at $7.00 per thousand feet, to be de-
livered by me in the Mississippi River, the same being
now, etc. Payments to be made as follows (setting forth
certain installments). Part of these logs were de-
stroyed by fire before delivery. Case brought suit to re-
cover the installment due after the fire.
Point Involved: Whether by the'contract in question,
title had been passed, and as a consequence whether the
loss was upon the buyer.
Collins, J., delivered the opinion of the Court:
''The single question here presented is whether the con-
tract entered into between these parties was an executed
one, or simply executory. If the former, the title to the
logs * * * vested in the vendee corporation; the risk
attendant upon the title and the subsequent loss * * *
must be borne by it, unaffected by the fact that the vendor
was to make delivery in the Mississippi River.
u There is a seeming confusion in the decisions as to
when the title to personal property does pass on sale, but
it has arisen out of a failure clearly to distinguish
TRANSFER OF TITLE
621
tween general contracts for the sale of chattels of a cer-
tain kind and contracts for the sale of chattels, spe-
cifically ascertained and identified.
"* * * In the case at bar there should be no doubt
upon the undisputed facts, that the title vested in the
vendee at the date of the agreement. All the vendor's
logs lying at a certain point * * * the same being
duly marked and scaled were included in the writing
* * * (all the items) were stated with particularity.
* * * In every respect it was a completed contract
and the assent of both parties that the title should pass
was obvious. * * *
(The Court holds that as title had passed, the loss was
upon the purchasers and the deferred installments must
be paid.)
Question 314: (1) State the facts, the question presented
and Court's decision in the above case.
(2) At 9 o'clock on Sept. 5, A sold a carriage to B, giving B
an order on the liveryman in whose possession it was. At 12
o'clock an execution issued against the goods of A, and by gen-
eral law became a lien thereon. At 5 o 'clock on the same day
B came and took the carriage away. The constable now takes
the buggy under the execution. B brings replevin against the
constable. Can he recover? (Peterson v. Bostrom, 99 111. App.
210.)
§344. (Sales, Sec. 56.) Rules for ascertaining the in-
tention of the parties: the second rule.
Case 315. Uniform Sales Act, Sec. 19, Rule 2.
"[Unless a different intention appears.] Where there
is a contract to sell specific goods and the seller is bound
to do something to the goods for the purpose of putting
them into a deliverable state, the property does not pass
until such thing be done.
Question 315: State the above rule.
Case 316. Hamilton v. Gordon, 22 Ore. 557.
Facts: Suit to recover certain wheat as the property
of the plaintiffs. Gordon, the defendant, made a con-
622
SALES
tract with Hamilton & Ronrke, the plaintiffs, reading
that Gordon "hereby sells and agrees to deliver to Ham-
ilton & Rourke, in their warehouses or platform at Van-
sycle, Oregon, on or before October 1, 1891, all the grain
harvested by me on land described below; wheat sacked
in good merchantable sacks, the same being that certain
crop now harvested or to be harvested, etc.
Point Involved: Whether under the agreement by
which the seller was to harvest and sack grain, before
delivery to the buyer, title passed before such harvest-
ing and sacking was done.
Bean, J., delivered the opinion of the Court: "* * *
Whether an agreement concerning the sale and delivery
of goods * * * is to be treated as an executed or an
executory contract, and whether the thing which is the
subject of the contract becomes the property of the buyer
the moment the contract is concluded, or remains the
property of the vendor until the contract is fully executed,
is often a difficult and embarrassing question. * * *
As between the parties it is generally considered a ques-
tion of intention. * * * As a general rule where by
the agreement the vendor is to do anything with the prop-
erty for the purpose of putting it into deliverable condi-
tion or into that state which the purchaser is bound to
accept it, the performance of these things in the absence
of circumstances showing a contrary intention is taken to
be a condition precedent to the vesting of the property in
the buyer. * * *
u* * * *n cage grajn was -^0 fog harvested
and sacked 'in good merchantable sacks' by the vendor
in order to put it in deliverable condition and by him
conveyed to the warehouse or platform * * * at
Vansycle before plaintiffs were bound to accept or re-
ceive it or pay for the same.
"The contract is only a contract for the sale of a cer-
tain crop of grain; and if defendant has violated his
agreement by delivering only a part of the grain and re-
fusing to deliver the remainder, plaintiffs, if damaged,
TRANSFER OF TITLE
623
have their remedy, but not by an action to recover pos-
session of the property. * * *''
Question 316: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) A had a quantity of wood which B agreed to purchase,
A to chop the same into four-feet lengths. Before the wood was
chopped, A's creditors seized it under a writ of execution. B
claims the wood. Should he prevail? (Frost v. Woodruff, 54
111. 155.)
(Note: If the goods are specified, but weighing >or measur-
ing is to be done by the seller to ascertain the price, the goods be-
ing otherwise in a deliverable state, it is the rule in some states
that title does not pass until such weighing or measuring be
done. It is shown by Williston (Sales, Sections 267, 268, 269)
that this "rule was originally founded on a mistake, has no
principle behind it, and has already been abolished in some
states in this country without the aid of legislation.")
§345. (Sales, Sec. 37.) Rules for ascertaining the in-
tention of the parties; third rule.
Case 317. Uniform Sales Act, Sec. 19, Rule 3.
 [Unless a different intention appears.]
"(1) When goods are delivered to the buyer 'on sale
or return' or on other terms that have indicated an in-
tention to make a present sale, but to give the buyer an
option to return the goods instead of paying the price,
the property passes to the buyer on delivery, but he may
revest in the property in the seller by returning or tender-
ing the goods within the time fixed in the contract, or, if
no time has been fixed, within a reasonable time.
"When goods are delivered to the buyer on approval
or on trial or satisfaction, or other similar terms, the
property therein passes to the buyer—
"(a) When he signifies his approval or acceptance to
the seller or does any other act adopting the transac-
tion;
"(b) If he does not signify his approval or acceptance
to the seller, but retains the goods without giving notice
624
SALES
of rejection, then, if a time has been fixed for the return
of the goods, on the expiration of such time, and, if no
time has been fixed on the expiration of a reasonable
time. What is a reasonable time is a question of fact.
Question 317: State when title passes, if at all, under para-
graph 1 above; under paragraph 2.
Case 318. Foley v. Felrath, 98 Ala. 176.
Facts: Foley sued Felrath for $502.56 for goods sold.
Foley was a manufacturer of gold pens in New York
City. Being in Mobile, Alabama, he called on defendant
and sold a bill of goods, with right in defendant to return
some of the goods which he would select and return in
exchange for others. The goods were lost in transit to
Alabama by the Express Company. Plaintiff sues for
the purchase price.
Point Involved: Whether the sale was on approval or
sale and return, and accordingly on whom the loss was
pursuant to return.
Haralson, J.: "* * * In Allen, Bethune & Co. v.
Maury &. Co., supra [66 Ala. 17], we said: 'Where, how-
ever, goods are sold and delivered, the terms of sale being
specified, and the vendee reserves the right to reject or
return, the title passes, liable to be divested by the exer-
cise of this option to rescind expressed within a reason-
able time.' * * * An option to purchase if the party
to whom the goods are transferred should like is very
different from an option to return the goods if he should
not like them. * * * (Held that risk of loss was
on purchaser.)
Question 318: (1) In the above case was title in the seller
or purchaser at the time of the loss ?
(2) "What is the difference between a "sale on approval
and a "sale and return"? What important consequence fol-
lows upon the distinction?
Case 319. Pence v. Carney, 78 Ark. 123.
A, a jeweler, of Hot Springs, sent two diamond rings
to B "with the agreement and understanding that if she
TRANSFER OF TITLE
625
was pleased with same she should keep them and account
to the plaintiff at the above value, and if not pleased
would, within a reasonable time return them to A at
Hot Springs. These rings being lost before returned to
A, without fault of B, the question was upon whom, as
owner, the loss must fall.
Point Involved: The distinction between a shipment on
trial or satisfaction or approval and a sale and return.
McCulloch, J., delivered the opinion of the Court:
<<# # # XJnder the contract stated the title remained
in the seller and any loss or damage sustained from any
cause except negligence of the purchaser fell upon the
seller. * * * The distinction between the two classes
of contracts is concisely stated by the Supreme Court of
Massachusetts in Hunt v. Wyman (100 Mass. 198), as
follows: 'An option to purchase if he likes is essentially
different from an option to return if he should not like.
In one case the title will not pass until the option is de-
termined; in the other, the property passes at once, sub-
ject to the right to rescind and return' * * *
Question 319: (1) -Was the title in the seller or purchaser
when the loss occurred?
(2) On whom was the loss? Why?
§346. (Sales, Sec. 59.) Rules for ascertaining the in-
tention of the parties: fourth rule.
(See rule stated (Sales Act, Sec. 19 (4)) under next sec-
tion, cases under this section and under § 347 grouped
together.)
§347. (Sales, Sec. 60.) Rules for ascertaining the in-
tention of the parties: fifth rule.
(Note: Cases under this section and section above grouped
together.)
Case 320. Uniform Sales Act, Sec. 19, Rule 4.
"Rule 4. (1) Where there is a contract to sell unas-
certained or future goods by description, and goods of
626
SALES
that description and in a deliverable state are uncondi-
tionally appropriated to the contract, either by the seller
with the assent of the buyer, or by the buyer with the
assent of the seller, the property in the goods thereupon
passes to the buyer. Such assent may be expressed or
implied, and may be given either before or after the
appropriation is made.
"(2) "Where, in pursuance of a contract to sell, the
seller delivers the goods to the buyer, or to a carrier or
other bailee (whether named by the buyer or not) for the
purpose of transmission to or holding for the buyer, he
is presumed to have unconditionally appropriated the
goods to the contract, except in cases provided for in the
next rule and in section 20. This presumption is appli-
cable, although by the terms of the contract, the buyer is
to pay the price before receiving delivery of the goods,
and the goods are marked with the words 'collect on de-
livery' or their equivalents.
(See cases, post, and questions following.)
Case 321. Uniform Sales Act, Sec, 19, Rule 5.
11 [Unless a different intention appears.] If a contract
to sell requires the seller to deliver the goods to the buyer
or at a particular place, or to pay the freight or cost of
transportation to the buyer or to a particular place, the
property does not pass until the goods have been de-
livered to the buyer or reached the place agreed upon.
(Note: See cases post and questions following.)
(a) Title Passes Upon (and Not Until) Appropriation
of Goods to Contract (Unless a Contrary Intention
Appears).
Case 322. Mucklow, assignee of Royland, bankrupt, v.
Mangles, 1 Taunton Reports, 318.
Facts: Royland, a barge builder, contracted to build a
barge for Pocock out of materials furnished by Royland.
Pocock advanced some money on the barge before it was
begun and as the work proceeded he paid more. When
TRANSFER OF TITLE
627
the barge was nearly completed Pocock's name was
painted on the stern. Two days after the completion of
the work and before delivery of the barge to Pocock, the
sheriff, Mangles, defendant herein seized the barge on the
theory that it belonged to Royland to satisfy a debt
against Royland and gave it up to Pocock. The plaintiff,
being assignee in bankruptcy of Royland, claims that this
barge was Royland's property and sues the sheriff for
damages.
Point Involved: Whether the title to this barge made
of materials owned and furnished by the maker, had un-
der the circumstances passed to Pocock when the barge
was seized for Royland's debt.
Mansfield, Ch. J.: "The only effect of the payment
is, that the bankrupt was under a contract to finish the
barge; * * * and until the barge was finished we
cannot say it was so far Pocock's property that he could
have taken it away * *
Heath, J.:  * * * A tradesman often furnishes
goods which he is making in pursuance of an order given
by one person and sells them to another. If the first cus-
tomer has other goods made for him within the stipulated
time he has no right to complain; he could not bring
trover against the purchaser of the goods so sold. The
painting of the name on the stern in this case makes no
difference.
Held: That the title had not passed to Pocock at the
time of the seizure.
(Note: The above case is the leading "case to the effect that
unless a contrary intention appears, title to property built by
the seller does not pass until the work is complete and the prop-
erty turned over to the buyer and accepted by him, even though
he sees the property from time to time as the work progresses,
and even though he advances part or all of the purchase price,
whether so required by the contract or not. See note with au-
thorities in 10 Amer. & Eng. Anno. Cases, p. 140.)
j Question 322: A agreed to supply the materials and build a
j)oat for B, B to pay installments at definite periods as the work
628
SALES
progressed. When the boat was Pearly finished, A sold and de-
livered it to C. B sues C for the recovery of the boat. How
should the court decide? (Yukon River Steamboat Co. v.
Gratto, 69 Pac. (Cal.) 252.)
Case 323. Rohde and Others v. Thwaites, 6 BarnewaJl
& Cresswell's Rep. 388.
Facts: Suit for the price of 20 hogsheads of sugar,
alleged to have been sold by Rohde to Thwaites. On
Dec. 3, 1825, Rohde had in his warehouse on the floor in
bulk, a much larger quantity of sugar than would be re-
quired to fill 20 hogsheads, but no part was in hogsheads.
Defendant, Thwaites, saw the sugar in this condition
and made the contract in question. Four hogsheads were
filled up and delivered to defendant on December 10, and
a few days afterwards plaintiff filled up the remaining
16 hogsheads, and gave notice to the purchaser that they
were ready and for him to take them away, to which
reply was made that he would take them away as soon
as he could. Suit is brought for the price on the theory
that title had passed. Defendant contends that the
theory of the suit should be for damages for breach of
contract to transfer title.
Point Involved: Whether as to the 16 hogsheads there
was a sufficient appropriation by the seller with the con-
sent of the buyer to pass the title to the defendant.
Bayley, J.: '1 Where a man sells part of a large parcel
of goods, and it is at his option to select part for the
vendee, he cannot maintain any action for goods bar-
gained and sold, until he has made that selection; but as
soon as he appropriates part for the benefit of the vendee,
the property in the article sold passes to the vendee,
although the vendor is not bound to part with the pos-
session until he is paid the price. Here there was a
bargain, by which the defendant undertook to take twenty
hogsheads of sugar, to be prepared or filled up by the
plaintiffs. Four were delivered; as to them there is no
question, but as to the sixteen it is said, that as there was
no note or memorandum of a contract in writing sufficient
TRANSFER OF TITLE
629
to satisfy the statute of frauds, there was no valid sale
of them; and that the plaintiffs in their declaration hav-
ing stated their claim to arise by virtue of a bargain and
sale, cannot recover for more than the four hogsheads
which were actually delivered to and accepted by the
defendant; that in order to recover for the others they
ought to have declared specially, that, in consideration
that the plaintiffs would sell, the defendants promised to
accept them. In answer to this, it is said that there was
an entire contract for twenty hogsheads, and that the de-
fendant, by receiving four, had accepted part of the goods
sold within the meaning of the seventeenth section of the
statute of frauds. In fact, the plaintiffs did appropriate,
for the benefit of the defendant, sixteen hogsheads of
sugar, and they communicated to the defendant that they
had so appropriated them, and desired him to take them
away; and the latter adopted that act of the plaintiffs,
and said he would send for them as soon as he could. I
am of opinion, that by reason of that appropriation made
by the plaintiffs, and assented to by the defendant, the
property in the sixteen hogsheads of sugar passed to the
vendee. That being so, the plaintiffs are entitled to re-
cover the full value of the twenty hogsheads of sugar,
under the count for goods bargained and sold. The rule
for setting aside this writ of inquiry must therefore be
. discharged.''
Question 323: What was suit for in this case? What were
the facts? What did defendant contend? How did court hold?
Why?
Case 324. Bryans v. Nix, 4 Meeson & Welsbys Re-
ports, 775.
Facts: Plaintiffs sue defendants for conversion of
oats alleged to belong to plaintiffs and claimed by defend-
ants. The controversy arose as follows: One Tempany
was a shipper and exporter of grain at Longford, Ireland.
He shipped a cargo of oats on board boat No. 604, and
sent the bill of lading to plaintiffs, together with another
bill for oats on boat 54, but there were at that time no
630 SALES
oats on boat 54. This took place February 2. The boat
was partially loaded afterward for delivery to plaintiffs,
but Tempany changed his mind and sold the oats on boat
54 to defendants who got possession, and they are now
sued by plaintiffs who claim the oats as their own.
Point Involved: Whether partial appropriation of the
goods in receptacles furnished by the seller passes the
title to the goods so partially appropriated.
Parke, B.: *' * * *
"In our opinion, therefore, the plaintiffs had a com-
plete title to the cargo of the boat 604, at least on the
7th of February, when they complied with the condition
by accepting the bill; and before the 7th, no other title
as to the oats intervened; for the order to deliver them
to Walker, given on the 6th, was clearly executory only.
But the claim of the plaintiffs to the cargo of boat 54
stands on a very different footing.
"At the time of the agreement, proved by the bill of
lading or boat-receipt of the 31st January, to hold the 530
barrels therein mentioned for the plaintiffs, there were
no such oats on board; and consequently no specific chat-
tels which were held for them. The undertaking of the
boat-master had nothing to operate upon, and though
Miles Tempany had prepared a quantity of oats to put
on board, those oats still remained his property; he might
have altered their destination, and sold them to any one
else; the master's receipt no more attached to them, than
to any other quantity of oats belonging to Tempany. If,
indeed, after the 31st of January, these oats so prepared,
or any other like quantity, had been put on board to the
amount of 530 barrels, or less, for the purpose of fulfilling
the contract, and received by the master as such, before
any new title to these oats had been acquired by a third
person, we should have probably held, that the property
in these oats passed to the plaintiffs, and that the letter
and receipt, though it did not operate, as it purported to
do, as an appropriation of any existing specific chattels,
at least operated as an executory agreement by Tempany
and the master and the plaintiffs, and that when so put,
TRANSFER OF TITLE
631
the master should hold them on their account; and when
that agreement was fulfilled, then, but not otherwise, they
would become their property. But before the complete
quantity of 530 barrels was shipped, and when a small
quantity of oats only were loaded, and before any appro-
priation of oats to the plaintiffs had taken place, Tern-
pany was induced to enter into a fresh engagement with
the defendant, to put on board for him a full cargo for
No. 54, by way of satisfaction for the debt due to him;
for such is the effect of the delivery order of the 6th, and
the agreement with Walker, of the same date, to send the
boat-receipt for the cargo of that vessel. Until the oats
were appropriated by some new act, both contracts were
executory. On the 9th this appropriation took place, by
the boat-receipt for the 550 barrels then on board, which
Was signed by the master, at the request of Tempany;
Whereby the master was constituted the agent of the de-
fendant to hold those goods; and this was the first act by
which these oats were specifically appropriated to any
one. The master might have insisted on Tempany's put-
ting on board oats to the amount of the first bill of lading,
on account of the plaintiffs, but he did not do so.
Question 324: State the facts and the holding in the above
case.
(b) Delivery to Carrier or Other Bailee by Seller.
Case 325. Belz & Co., Plaintiff, v. McMorrow, De-
fendant, 173 Massachusetts, 8.
Facts: Belz & Co. was a corporation engaged in busi-
ness in Philadelphia and sold 10 hogsheads and 2 barrels
of ale to McMorrow to be shipped to him at Boston, the
buyer to pay the freight. The goods were shipped by
Phila. S. S. Co., bills of lading being made out to Mc-
Morrow. Suit by Belz & Co. for the purchase price.
Defense that the ale was sold at Boston without a license
required by law in Massachusetts. Plaintiff won in the
trial court and defendant appeals.
Point Involved: Whether title passed (i. e. sale was
made) at Philadelphia or Boston.
632
SALES
Holmes, J.: "* * * in view of defendant's pay-
ing the freight, it was entirely reasonable for the court
to find that the defendant's direction to deliver the ale
at his place of business * * * was meant only to
give the address of destination and neither had nor was
intended to have any effect on the question when title
passed. If this view be taken, then the case is governed
by the general rule that a shipment by a seller with an
independent common carrier, to the order of a buyer,
passes the title as soon as the carrier receives the goods.
Held: that the sale was made in Philadelphia and
title passed or sale made at that point.
(Note: The buyer upon the arrival of the goods has an op-
portunity of inspection, and may for cause reject. This right
of inspection, or test, upon arrival, does not preclude the title
from passing upon delivery to the carrier if in fact they are in
accord with the contract, even though by loss during transit,
the buyer never has the opportunity to inspect.)
Question 325: What was the seller suing for in this case?
What was the defense ? How did the court hold ? Why ?
Case 326. The Com. Title Insurance and Trust Com-
pany, Executor under will of George J. Roesch, deceased,
Plaintiff, v. William L. Gregson, Defendant, 303 Illinois
Reports, 458.
Facts: The defendant, Gregson, was a provision brok-
er in Chicago and one P. C. Reed was a broker in Phila-
delphia where Geo. J. Roesch was carrying on business
under name of Roesch Packing Company. On May 31,
1916, Gregson ordered from Reed as broker for Roesch
100 barrels family plate-beef at $17. Thereupon Roesch
got 100 barrels ready for shipment. Considerable cor-
respondence followed in which Roesch was advised and
agreed to ship to Christiama Food Com'n, Christiania,
Norway, on a through export bill of lading. Roesch,
however, unable to get a through bill, shipped the goods
to New York on a domestic bill, expecting to arrange
further shipping from that point. The goods were lost
TRANSFER OF TITLE
633
in transit to New York. Suit was brought by Roesch
for the purchase price on the theory title passed on ship-
ment and the loss as between seller and buyer, was the
buyer's loss. Defense, that Roesch did not follow ship-
ping instructions.
Point Involved: If the shipper defaults in carrying
out shipping instructions to which he has agreed, whether
risk of loss is on seller while goods in transit.
Mr. Justice Dunn: "* * * The sale was of un-
ascertained goods out of a larger quantity, and there
was no appropriation of goods to the contract with the
assent of the buyer, under which the property would pass
by virtue of section 19, rule 4, of the Uniform Sales act.
Roesch made no objection to the shipping instructions,
but agreed to take out a through export bill of lading, to
pay the freight in advance at the request of the buyer,
who stated that if Roesch could not do so the buyer would
himself make the arrangement. When Roesch made the
shipment he learned that he could not get a through bill
of lading at Philadelphia, and therefore he shipped the
goods upon a domestic bill and made arrangement for
a through bill upon their arrival in New York. Because
the goods did not arrive he was unable to procure the
through bill and was therefore unable to comply with
the shipping instructions.
"In order to relieve a vendor from responsibility for
the loss of goods delivered to a carrier for the vendee,
the law requires the vendor, unless otherwise authorized
by the vendee, to exercise due care and diligence to pro-
vide the vendee with a remedy against the carrier. (Staf-
ford & Bro. v. Walter S Skelton, 67 111. 83; Miller v.
Harvey, 221 N. Y. 54.) This rule of the common law
has also been declared by the Uniform Sales act, section
46 of which provides: ' (2) Unless otherwise authorized
by the buyer, the seller must make such contract with
the carrier on behalf of the buyer as may be reasonable,
having regard to the nature of the goods and the other
circumstances of the case. If the seller omit so to do,
634
SALES
and the goods are lost or damaged in course of transit,
the buyer may decline to treat the delivery to the carrier
as a delivery to himself, or may hold the seller respon-
sible in damages.' Roesch was 'otherwise authorized by
the buyer.' The shipping instructions, which by his ac-
ceptance of them and agreement to carry them out had
become a part of his contract, required him to procure
a through bill of lading. The contract which he made
with the railroad company would have been reasonable
if his contract with the buyer had not required him to
make a different contract, but the buyer having required
the delivery to the carrier to be under a specified con-
tract, the seller could not make a delivery which would
relieve him from responsibility unless he made such con-
tract. Whether he was bound to accept the shipping
instructions or not, he did accept them and agreed to
carry them out. Having failed to do so and. the goods
having been lost he was not relieved from responsibility,
but the buyer was authorized to decline to treat the de-
livery to the carrier as a delivery to himself.
' 'It is argued that Gregson ratified Roesch's act in
shipping on a domestic bill of lading by his letter of June
22, in which he stated that he understood that 'the
through bill of lading had to be taken out at New York
instead of Philadelphia, and, of course, if this is correct
this is the reason for delay.' This letter does not waive
the requirement of a through bill of lading but does
waive the delay occasioned by the inability to get it at
Philadelphia and the necessity of waiting for the arrival
of the beef in New York. Gregson had no reason to
suppose, at the time he wrote the letter, that the through
bill of lading would not be issued in New York. The
steamship was not to sail until the 24th, and on that
day Gregson telegraphed to Reed inquiring whether the
through bill of lading had been issued and exchanged
for the local. On June 25 he received a telegram from
Reed saying, 'Beef arrived on time, Roesch mailing local
bill of lading.' Gregson was not bound to treat the de-
livery of the beef to the Pennsylvania Railroad Company
TRANSFER OF TITLE
635
as a delivery to him, and the property not having passed
to him, he was not bound to pay for it.
Judgment of trial court affirmed that buyer is not liable
to the seller.
Question 326: From what point to what point was shipment
made in this case? When would title pass under the rule of
the case just preceding this one? Why did it not so pass in
this case ?
What is the rule as to the necessity of the seller making a
contract with the carrier in order to put the risk of loss on the
seller?
Case 327. City of Carthage v. Duvall, 202 Illinois Re-
ports, 234.
Facts: The City of Carthage by ordinance made il-
legal a sale of liquor in less quantities than five gallons,
and subjected the offender to a penalty. One Skidmore,
a resident of Carthage, ordered a gallon of whiskey from
the Dallas Transportation Co., dealing in liquor at Bur-
lington, Iowa. The company sent it by express, Collect
on Delivery, and Duvall, the agent of the express com-
pany, delivered it in Carthage to Duvall. The city prose-
cutes Duvall under the ordinance mentioned.
Point Involved: At what point title passes where un-
ascertained goods are purchased to be put on board cars
by the seller for delivery to the purchaser. Whether the
fact that the shipment is "C. 0. D. changes the rule.
Mr. Justice Hand delivered the opinion of the Court:
a* * * generai ruie frequently announced by this
Court is, that the delivery of personal property by the
seller to a common carrier to be conveyed to the pur-
chaser is a delivery to the purchaser, and that the title
to the property vests in the purchaser immediately upon
its delivery to the carrier. (Pike v. Baker, 53 111. 163;
Ward v. Taylor, 56 id. 494; Ellis v. Roche, 73 id. 280.)
Whether such rule applies where the property is con-
signed C. 0. D. is an open question in this court, but
upon principle and authority, where, as here, everything
636
SALES
which the seller has to do with the property has been
done at the time it is delivered to the carrier, we see no
reason why the title does not vest in the purchaser im-
mediately upon its delivery, although it is consigned
C. 0. D., or why the same rule should not be applied to
intoxicating liquor that is applied to other classes of
personal property. In several states (State v. O'Neil,
58 Vt. 140; State v. United States Express Co., 70 Iowa,
271; State v. Wingfield, 115 Mo. 428) the courts hold
that the title to intoxicating liquor when it is consigned
C. 0. D. does not vest in the purchaser until it is re-
ceived, accepted and paid for. The great weight of
authority, however, is the other way. * * * From
an examination of the authorities, we have reached the
conclusion that the sale to Skidmore was completed when
the liquor was delivered to the express company in Bur-
lington, and that no sale of the liquor was made by the
defendant to Skidmore in the city of Carthage.
Question 327: (1) At what point did title pass in Case
327?
(2) Shipper puts goods on board carrier for buyer, buyer to
pay charges, goods sent C. 0. D. Lost in transit. Shipper sues
buyer for purchase price. Can he recover ?
Case -328. Dentzel, Adm'r, of G. A. Dentzel, Deceased,
v. Island Park Asso. and others, 229 Pa, 403, 33 L. R. A.
N. S. 54.
Facts: Replevin by the seller of a carrousel to recover
it back from the buyer on the theory that title has not
yet passed to the buyer. The carrousel was shipped
"f. o. b. cars, Philadelphia (the point of shipment),
the buyer agreeing to pay freight charges. The contract
was that the buyer should pay $5,000, as follows: $250
on signing the agreement, $2,500 on the erection of the
machine in the park, and the balance in notes falling due
at different times thereafter. The seller agreed to fur-
nish a man to erect and place the carrousel in order.
The seller asserted dominion over the property after it
TRANSFER OF TITLE
637
reached its destination, and seeks to recover it back in
this suit, claiming that title has not yet passed.
Point Involved: When title passes where goods are
shipped f. o. b. point of shipment to the buyer. Whether
the fact that the goods are not yet paid for affects the
rule.
Stewabt, J.: "It is a general rule, not to be ques-
tioned, that when the contract in a sale of personal prop-
erty calls for delivery f. o. b. at some particular place,
and the seller there delivers the article in accordance
with the stipulations, the title to the property at once
passes to the buyer, unless otherwise provided. Schmertz
v. Dwyer, 53 Pa. 335; Bacharach v. Chester Freight Line,
133 Pa. 414, 19 Atl. 409; Dannemiller v. Kirkpatrick, 201
Pa. 218, 50 Atl. 928. The rule yields where the contract
reserves to the seller the right of property, notwithstand-
ing the delivery to the carrier. Since delivery is after all
a matter of intention of the part of the seller, even though
the contract calls for delivery f. o. b. cars at a designated
place of shipment, the seller may, before the delivery on
board the cars, stipulate with the carrier that the latter is
to carry it for him, thereby making the carrier the seller's
agent in receiving the property. This follows when the
seller takes from the carrier a bill of lading which secures
the shipper against delivery, at the point of destination,
to anyone except upon his order. When the contract,
however, as here, shows an agreement to deliver f. o. b.,
with nothing to qualify it, the law will presume a delivery
to have been in accordance with the stipulations, and
cast the burden on the seller if he assert the contrary.
There is not a particle of evidence in the case that this
burden was discharged. * * * [The Court ordered
judgment entered for the defendant.]
Question 328: (1) ' What is the plaintiff suing for in Case
328? What must he prove in respect to ownership in order to
prevail ? Who is the owner of the goods in question ? Why ?
(2) If goods are shipped f. o. b. point of shipment when
does title pass? Does it make any difference as to this rule
638
SALES
that the goods are not paid for if sold on credit? Could the
parties overcome this rule by provision to the contrary?
Case 329. Smith Co. v. Moscahlades, 183 New York
Supplement, 500.
Facts: The Smith Co. Ltd. sues George Moscahlades,
and others, for the sum of $13,040 being the unpaid bal-
ance of the purchase price of 400 casks of codfish which
the Smith Co. sold to the defendants. Plaintiff delivered
the fish on board of the S. S. Stephano at St. Johns on
Oct. 4, 1916, and two days later the S. S. while en route
to N. Y. was torpedoed and sunk by the German sub-
marine U-53. Plaintiff had procured marine insurance,
which did not include such a loss, on the shipment, and
no war risk insurance was obtained thereon. The goods
were to be shipped "c. i. f. New York. The points
litigated are: Was it the duty of the plaintiff to procure
war insurance on the consignment and if not, whether
it performed the contract in other respects.
Laughlin, J.: "* * * [This contract] is known as
a 'c. i. f.' contract, which is a well-known form of ship-
ping contract and means that the purchaser pays a fixed
price, for which the seller furnishes the goods and pays
the freight and insurance to the point of delivery, and
that all risk while the goods are in transit, are for the
account of the buyer.
''Under such contracts the seller fulfills all of his obli-
gations by putting the cargo on board and forwarding
to the purchaser a bill of lading and a policy of insur-
ance of the kind then current and customarily issued in
the trade and if the goods had not been paid for in ad-
vance it was customary to present a draft for the pur-
chase price, accompanied by the bill of lading and policy
of insurance and a credit slip for the insurance and
freight, if not actually paid for by the shipper which
documents were to be delivered to the purchaser on his
paying the draft, and the insurance is for the protection
of the purchaser who assumes all the risks after the goods
TRANSFER OF TITLE
639
have been placed on board; and this constitutes a delivery
by the seller under such a contract, and the title there-
upon passes to the buyer, even though it be stated in
the contract that delivery was to be made at the point
of destination. * * *
"The learned counsel for the respondents contends
that this contract was made here and that it is a New
York contract. Inasmuch, however, as he does not argue,
as was claimed on the trial, that under our Sales Act
(Personal Property Law (Consol. Laws, c. 41) art. 5)
title did not pass to the buyer, it is unnecessary to dis-
cuss at length the provisions of the Sales Act, and it is
sufficient to say that under the provisions of the Sales
Act such contracts remain as before, and the delivery
of the goods to the carrier is an unconditional appro-
priation thereof to the purposes of the contract, and title
passes to the buyer, even though the purchase price is
payable before the purchaser is entitled to the actual
delivery of the goods or the documentary evidence of
title, which in this case was a bill of lading to the order
of the seller, duly indorsed by it. Personal Property
Law, 100 (rule 4), 101,103(a), 108, 109, 110, 127; Sawyer
v. Dean, 114 N. Y. 469, 21 N. E. 1012; Glanzer v. J. K.
Armsby Co., 100 Misc. Rep. 476,165 N. Y. Supp. 1006.
"Rule 5 of said section 100 [Sales Act, Sec. 19] is in-
applicable, for a 'different intention appears,' and the
case falls within the express exception prescribed in said
section, where, as here, a 'c. i. f.' contract is made. As
already observed, the insurance in such a case is for the
benefit of the buyer, and the purchase price includes the
freight and insurance charges, which the seller must pay,
or for which he must give credit, and under such a con-
tract no inference is permissible that the seller is bound
to deliver at the point of destination. Mee v. McNider,
supra; Tregelles v. Sewell, supra; Smith Co., Ltd. v.
Marano (Supreme Court of Pennsylvania, January Term,
1920), 110 Atl. 94. See, also, White v. Schweitzer, 147
App. Div. 544, 132 N. Y. Supp. 644. In Smith Co., Ltd.,
v. Marano, supra, an action brought by this plaintiff to
640
SALES
recover the purchase price of fish consigned on the same
steamer to the defendant therein at Philadelphia, it was
held that the delivery on board the steamer was a com-
plete delivery and title passed, and that the c. i. f. con-
tract was unaffected by the Pennsylvania Sales Act (Act
May 19, 1915 (P. L. 543), which is the same as ours,
inasmuch as the hill of lading was only retained by the
shipper to secure performance of the purchaser's prom-
ise to pay.
''The only significance now attached to the claim that
this was a New York contract is that counsel for respond-
ents argues therefrom that the custom at New York with
respect to the nature of the insurance the shipper was
required to procure was controlling. That point was in-
sisted upon by the defendants on the trial, and on their
objections the court excluded considerable competent evi-
dence offered by the plaintiff to show that the universal
custom at St. Johns and current in the coastwise trade
between that port and New York at the time and at all
times prior to the sailing of the Stephano was for the
seller to procure only ordinary marine insurance, and
that such insurance only was procured and was cus-
tomarily accepted by purchasers in New York City. I am
of opinion that the contract was made at Newfoundland,,
for it became binding and effective only by the last tele-
gram sent by the plaintiff from St. Johns. St. Nicholas
Bank v. S. N. Bank, 128 N. Y. 26, 27 N. E. 849, 13 L. R.
A. 241; Shelby Steel Tube Co. v. Burgess Gfun Co., 8
App. Div. 444, 40 N. Y. Supp. 871; Burton v. United
States, 202 U. S. 344, 26 Sup. Ct. 688, 50 L. Ed. 1057, 6
Ann. Cas. 392; Hull Co. v. Marquette et al., 208 Fed. 260,
125 C. C. A. 460; Schenectady Stove Works v. Holbrook,
101 N. Y. 45, 4 N. E. 4; 7 American & English Encyclope-
dia of Law (2d Ed.) p. 138; Elliott on Contracts, 1115,
1116; Cyc. p. 670, 3.
"I do not, however, regard that as material, for it
seems to me quite plain that the custom and usage in
the light of which the contract is to be construed in
determining the nature of the insurance which it was
TRANSFER OF TITLE
641
the duty of the shipper to procure were the custom and
usage on the part of shippers, on whom the duty of pro-
curing the insurance devolved in this particular coast-
wise trade; and it would seem, therefore, that it was the
general custom and usage then current and followed by
shippers of such freight from St. Johns to New York,
which necessarily would imply the same custom and usage
on the part of the purchasers in New York in accepting
such insurance. Walls v. Bailey, 49 N. Y. 469, 10 Am.
Rep. 407; Donovan v. Standard Oil Co., 155 N. Y. 112,
49 N. E. 678; Robinson v. United States, 13 Wall. 363,
20 L. Ed. 653; Renner v. Bank of Columbia, 9 Wheat.
581, 6 L. Ed. 166; Guillon v. JDarnshaw, 169 Pa. 463, 32
Atl. 545; Star Glass Co. v. Morey, 108 Mass. 570; Moore
v. United States, 196 U. S. 157, 25 Sup. Ct. 202, 49 L.
Ed. 428; Cuthbert v. Cumming, 10 Excheq. 809, 11
Excheq. 405; Soper v. Tyler, 77 Conn. 104, 58 Atl. 699;
Howe v. Hardy, 106 Mass. 329; W. S. Job. & Co., Inc. v.
Cook Oil Co., 187 App. Div. 535, 175 N. Y. Supp. 878;
Atkinson v. Truesdell, 127 N. Y. 230, 27 N. E. 844.
Question 329: What are the meaning of the words "c. i. f. ?
Under such a contract what is the duty of the seller? If he
performs his duty when does title pass? Why did not the seller
have to procure insurance in the above case against the casualty
that befell?
(Note: In Orient Co. v. Brekke, (1913) 1 King's Bench,
531, the court held that when goods are purchased under a
c. i. f. contract such goods are not delivered in accordance with
the contract and buyer is not bound to accept them, or to pay
for them, even though they arrive safely, if the shipper did not
effect insurance upon them.)
§348. (Sales, Sec. 61.) Reservation, upon shipment of
title in seller.
Case 330. Uniform Sales Act, Sec. 20.
Section 20. (Reservation of Right of Possession or
Property When Goods Are Shipped.) (1) Where there
is a contract to sell specific goods, or where goods are
642
SALES
subsequently appropriated to the contract, the seller may,
by the terms of the contract or appropriation, reserve
the right of possession or property in the goods until
certain conditions have been fulfilled. The right of pos-
session or property may be thus reserved notwithstand-
ing the delivery of the goods to the buyer or to a carrier
or other bailee for the purpose of transmission to the
buyer.
(2) Where goods are shipped, and by the bill of lad-
ing the goods are deliverable to the seller or his agent,
or to the order of the seller or his agent, the seller thereby
reserves the property in the goods. But if, except for
the form of the bill of lading, the property would have
passed to the buyer on shipment of the goods, the seller's
property in the goods shall be deemed to be only for the
purpose of securing performance by the buyer of his
obligations under the contract.
(3) Where goods are shipped, and by the bill of lading
the goods are deliverable to the order of the buyer or
of his agent, but possession of tho- bill of lading is re-
tained by the seller or his agent, the seller thereby re-
serves a right to the possession of the goods as against
the buyer.
(4) Where the seller of goods draws on the buyer for
the price and transmits the bill of exchange and bill of
lading together to the buyer to secure acceptance or pay-
ment of the bill of exchange, the buyer is bound to return
the bill of lading if he does not honor the bill of exchange,
and if he wrongfully retains the bill of lading he acquires
no added right thereby. If, however, the bill of lading
provides that the goods are deliverable to the buyer or
to the order of the buyer, or is indorsed in blank, or to
the buyer by the consignees named therein, one who pur-
chases in good faith, for value, the bill of lading, or goods
from the buyer will obtain the property in the goods,
although the bill of exchange has not been honored, pro-
vided that such purchaser has received delivery of the
bill of lading indorsed by the consignee named therein,
TRANSFER OF TITLE
643
or of the goods, without notice of the facts making the
transfer wrongful.
Question 330: (1) What effect does shipment to the seller
or his agent have upon the passing of title ? In that case what
shall be deemed to be the purpose? (This becomes material in
' Risk of Loss' post.)
(2) What does Sec. 20 (3) provide?
(3) What is another way of reserving title? Would it be
safer for the shipper to use an order bill or a straight bill in
such a case ?
§349. (Sales, Sec. 61a.) Auction sales.
Case 331. Uniform Sales Act, Sec. 21.
Section 21. (Sale by Auction.) In the case of sale by
auction—
(1) Where goods are put up for sale by auction in
lots, each lot is the subject of a separate contract of sale.
(2) A sale by auction is complete when the auctioneer
announces its completion by the fall of the hammer, or
in other customary manner. Until such announcement
is made, any bidder may retract his bid; and the auc-
tioneer may withdraw the goods from sale unless the
auction has been announced to be without reserve.
(3) A right to bid may be reserved expressly by or
on behalf of the seller.
(4) Where notice has not been given that a sale by
auction is subject to a right to bid on behalf of the seller,
it shall not be lawful for the seller to bid himself or to
employ or induce any person to bid at such sale on his
behalf, or for the auctioneer to employ or induce any
person to bid at such sale on behalf of the seller or know-
ingly take any bid from the seller or any person employed
by him. Any sale contravening this rule may be treated
as fraudulent by the buyer.
Question 331: (1) When does title pass in a sales by auc-
tion?
(2) Who is the offeror and who the offeree in a sale by
auction ?
644
SALES
(3) May the bidder retract his bid? the auctioneer with*
draw the goods from sale ?
(4) May the seller secretly bid at his own sale?
Case 332. Anderson v. Wisconsin Rwy. Co., 107 Min-
nesota Reports, 296.
Facts: The Wisconsin Central R. Co. advertised
certain buildings for sale to be removed from certain
lands taken under condemnation proceedings. One An-
derson attended the sale, making certain bids and he
was outbid by a person who offered $675.00. Anderson
- then bid $680.00, but the auctioneer refused to accept it
on the ground that the raise was too small, and pro-
ceeded to sell the property to the last bidder at $675.00.
Anderson sues the R. R. Co. claiming damages, contend-
ing that the advertisements of the sale constituted an
offer which was accepted by the highest bidder at the
sale and, therefore, that a contract between the parties
became complete when Anderson bid $680.00.
Point Involved: When and how is a contract of sale
made where goods are sold at auction? Is the bid an
offer or an acceptancef
Elliott, J.: "The custom of selling goods at auc-
tion is as old as the law of sale. In Rome military spoils
were disposed of at the foot of the spear—sub hastio—
by auction, or increase. In later times we find a mode
of auction called a 'sale by the candle,' or by the 'inch
of candle,' which consisted of offering the property for
sale for such a length of time as would suffice for the
burning of an inch of candle. * * *
"In view of the general prevalence of the custom of
selling by auction, it is remarkable that no very, early
cases are found in the English reports. The parent case
of Payne v. Cave, 3 T. R. 148, was decided by Lord Ken-'
yon, Ch. J., sitting at Guildhall in 1788. The plaintiff
offered a distilling apparatus for sale, including a pewter*
worm, at public auction, on the usual conditions thati
the highest bidder should be the purchaser. There werd
TRANSFER OF TITLE
645
several bidders for the worm, of whom Cave, who bid
£40, was the last. The auctioneer dwelt on this bid for
some time, until Cave said: 'Why do you dwell? You
will not get more.' The auctioneer stated that he was
informed that the worm weighed at least 1,300 hundred-
weight, and was worth more than £40. The bidder then
asked him if he would warrant it to weigh so much, and
receiving an answer in the negative, he declared that he
would not take it. The worm was then resold on a sub-
sequent day for £30, and an action was brought against
Cave for the difference. Lord Kenyon ruled that the
bidder was at liberty to withdraw his bid at any time
before the hammer fell, and non-suited the plaintiff. On
motion to set aside the non-suit, it was contended that
a bidder is bound by the conditions of the sale to abide
by his bid, and could not retract; that the hammer is
suspended, not for the benefit of the bidder, or to give
him an opportunity for repenting, but for the benefit of
the seller; and that in the meantime the person who bid
last is a purchaser, conditional upon no one bidding
higher. But the Court thought otherwise, and held that
the auctioneer was the agent of the vendor, and that
the assent of both parties was necessary to make the
contract binding, and 'that is signified on the part of
the seller by knocking down the hammer, which was not
done here until the plaintiff had retracted.' 'An auc-
tion,' said the Court, 'is not inaptly called a locus po-
enitentiae. Every bidding is nothing more than an offer
on one side, which is not binding on either side until
assented to.' (Here the Court reviews numerous au-
thorities.) * * * On principle and authority the cor-
rect rule is, that an announcement that a person will
sell his property at public auction to the highest bidder
is a mere declaration of intention to hold an auction at
Which bids will be received; that a bid is an offer which
is accepted when the hammer falls; and until the accept-
ance of the bid is signified in some manner neither party
assumes any legal obligation to the other. At any time
before the highest bid is accepted, the bidder may with-
646
SALES
draw his offer to purchase, or the auctioneer his offer
to sell. The owner's offer to sell is made at the time
through the auctioneer, and not when he advertises the
auction sale. A merchant advertises that on a certain
day he will sell his goods at bargain prices; but no one
imagines that the prospective purchaser, who visits the
store and is denied the right to purchase, has an action
for damages against the merchant. He merely offers to
purchase, and if his offer is refused, he has no remedy
although he may have lost a bargain, and have incurred
expense and lost time in visiting the store. The analogy
between such a transaction and an auction is at least
close. As the advertisement in this case was a mere
statement of intention to offer the property for sale at
public auction to the highest bidder, the respondent's
bid did not complete either a contract of sale or a con-
tract to make a sale.
Question 332: (1) State the facts, the question presented
and the Court's decision in this case.
(2) What were the facts and the Court's decision in Payne
v. Cave?
Case 333. Pennock's Appeal, 14 Pennsylvania State,
446.
Facts: Sale of land by an administrator at public
auction under order of court. Bid in and sold to Abra-
ham Pennock and Jas. Sellers, Jr., who now file excep-
tions to the report of the administrator alleging that
they bid the sums reported by him by reason of the puff-
ing and false bids of other persons, in connivance with
the administrator.
Point Involved: Whether secret bidding by the owner
or his agent, is fraudulent.
Gibson, C. J.: "It is impossible to doubt the principle
of the civil law adopted by Lord Mansfield, in Bexwell
v. Christie. Good faith is an indispensable ingredient of
fair dealing; and it is impossible to imagine a purpose*
consistent with it, for which sham bidding is necessarily
TRANSFER OF TITLE
647
employed. The vendor may prescribe conditions of sale
which will enable him to retain the property should it
not come up to his price; and if he does not produce the
effect openly, wThy should he do it covertly? Common
honesty requires that all should be fair and above-board.
To screw up the price, as it has been aptly termed, by
secret machinery, can be no less than a fraud; and a
sham bidder can be used for no other purpose. The
decisions on the subject have fluctuated; but the largest
license allowed in any of them has been to employ a
single puffer; yet, whether there be one, or whether there
be twenty, the mischief is the same, except as to the
degree of it. It has been said that the employment of
a plurality discloses too clearly to be mistaken, not a
design to protect the property from being sacrificed, but
to give an artificial impulse to the sale of it. That touches
the honesty of the vendor's motive; but what have the
bidders to do with it? Should he actually think that
not less than twenty could protect it, the sale would
still be, according to all the cases, fraudulent and void.
* * * > >
Question 333: What complaint do the auction buyers make
in Case 333 ? Is their point well taken ?
Note: Sales advertised to be "urithout reserve": If the
sale is advertised to be without reserve, there is, according to
authorities (and it seems by the terms of the Sales Act), a con-
tract with the highest bidder that his bid will be accepted. But
the Sales Act does not directly say that title passes to the high-
est bidder, and it has been said that in such a case there was
merely a breach of contract. "In the Warlow case [1 El. & El.
295] it was held upon amendment, the action to recover damages
would lie because there had been no sale although it had been
promised ' without reserve,' the right of action for breach of con-
tract arising out of the last two words. In other words, the
action is not based on the theory that there was a sale, hut thai
there was no sale, in consequence whereof there was a breach oi.
a contract made by the auctioneer at the start of the auction sale
announced to be 'without reserve' with the person who should
648
SALES
prove to be the highest bona fide bidder at such sale. (Free-
man v. Poole, 37 R. I. 489, 93 Atl. 786, L. R. A. 1917 A. 63.)
§349. (Sales, Sec. 62.) Risk of loss.
Case 334. Uniform Sales Act, Sec. 22.
 Unless otherwise agreed, the goods remain at the
seller's risk until the property therein is transferred to
the buyer, but when the property therein is transferred
to the buyer, the goods are at the buyer's risk whether
delivery has been made or not, except that—
 (a) Where the delivery of the goods has been made
to the buyer, or to a bailee for the buyer, in pursuance
of the contract and the property in the goods has been
retained by the seller merely to secure performance by
the buyer of his obligation under the contract, the goods
are at the buyer's risk from the time of such delivery.
"(b) Where delivery has been delayed through the
fault of either buyer or seller the goods are at the risk
of the party in fault as regards any loss which might
not have occurred but for such fault.
(Note: See Case 330, paragraph 2 in this connection.)
Question 334: What is the general rule as to risk of loss?
What two exceptions?
Case 335. Burnley v. Tufts, 66 Miss. 48.
Facts: Tufts sold Burnley a soda water fountain on
installments, title to remain in Tufts until the last in-
stallment was paid. Before the last installment became
due, the soda water fountain was destroyed by fire with-
out the fault of either. Burnley claimed that he was not
liable to Tufts for the last installment, as Tufts still
held the legal title, and therefore risk of loss from fire
was on him.
Point Involved: Upon whom is the risk of loss in a
sale, in which possession is delivered to the purchaser,
title being reserved in the seller for purposes of security.
Cooper, J., delivered the opinion of the Court: "Burn-
ley unconditionally and absolutely promised to pay a
TRANSFER OF TITLE
649
certain sum for the property, the possession of which he
received from Tufts. The fact * * * (of destruc-
tion) does not relieve him of payment of the price agreed
upon. * * * The transaction was something more
than an executory conditional sale. The seller had done
all he was to do except receive the purchase price; the
purchaser had received all he was to receive. * * *
The contract made * * * imposed upon the buyer an
absolute promise to pay.''
Question 335: State the facts in this case and what the suit
is about. How did the court decide ?
Case 336. Maffei v. Ginnochio, 299 Illinois Reports,
254 (1921).
Facts: Ginnochio, Costa & Co., of Chicago, entered
into a contract with H. N. Maffei, of Naples, Italy, for
shipment by the latteV to the former of 300 bags No. 1
Sorrento walnuts and 300 bags of Mountain Naples wal-
nuts. The Sorrento walnuts were shipped and received
but the Mountain Naples were shipped on board a vessel
which was destroyed by a submarine. This suit is for
the price of this destroyed cargo. The purchaser argues
that the title never passed to the purchaser and loss
should be upon the seller because the bill of lading was
made out to the seller and had not been indorsed and
delivered.
Me. Justice Cabter: "* * *
''Under the common law, when a contract of sale cov-
ering the purchase price of merchandise provided sub-
;8tantially for delivery by carrier and payment at the
point of delivery and all insurance to be effected by the
purchaser, then the beneficial interest in the merchan-
dise passed to the buyer upon delivery of the merchandise
yto the carrier and risk of subsequent loss fell upon the
jjbuyer. * * * This rule has been substantially for-
iiulated in the Uniform Sales Act adopted in this state
frn Paragraph 2 of Rule 4 of Section 19 of that act. Para-
%aph (a) of Section 22 of that act provides: 'Where
650
SALES
delivery of the goods has been made to the buyer or to
a bailee for the buyer, in pursuance of the contract and
the property in the goods has been retained by the seller
merely to secure performance by the buyer of his oblh
gations under the contract, the goods are at the buyer's
risk from the time of such delivery. Paragraph 2 of
Section 20 of the act also provides 'where goods are
shipped.and by the bill of lading the goods are deliver-
able to the seller or his agent, or to the order of the seller
or his agent, the seller thereby reserves the property in
the goods. But if, except for the form of the bill of lading,
the property would have passed to the buyer on ship-
ment of the goods, the sellers property in the goods shall
be deemed to be only for the purpose of securing per-
formance by the buyer of his obligations under the con-
tract.' 
Held: That the risk was on the buyer. (Other points
were made in the case, and the facts are greatly boiled
down in the above statement. But on this point the case
as reported above seems fair and correct.)
Question 336: State briefly the facts in this case. What
was the decision as to risk of loss?
(Note: The two cases above show, that while the risk .of loss
generally attends the title, risk may be upon a purchaser be-
fore he gets the title in those cases in which the title would
have passed except for the reservation of title in the seller for
purposes of security.)
CHAPTER 44
TITLE AND THIRD PERSONS
§350. (Sales, Sec. 63.) Attempted sale by one not
owner. In general.
Case 337. Uniform Sales Act, Sec. 23.
 (1) Subject to the provisions of this act, where goods
are sold by a person who is not the owner thereof, and
who does not sell them under the authority or with the
consent of the owner, the buyer acquires no better title
to the goods than the seller had, unless the owner of
the goods is by his conduct precluded from denying the
seller's authority to sell.
 (2) Nothing in this act, however, shall affect—
"(a) The provisions of any factor's acts, recording
acts, or any enactment enabling the apparent owner of
goods to dispose of them as if he were the true owner
thereof.
,  (b) The validity of any contract to sell or sale under
any special common law or statutory power of sale, or
under the order of a court of competent jurisdiction.''
Question 337: A steals B's watch and sells it to C who
thinks the watch belongs to A. Does C get good title? Why?
A. When True Owner not Estopped to Assert Title.
§351. In general.
§ 352. In case of consignment for sale.
.§ 353. In case of bailment other than for sale.
§ 351. (Sales, Sec. 64.) In general.
(Note: The quotation of the Sales Act set forth as Case
No. 337, supra, states the law that where a person sells goods
651
652
SALES
that he does not own, the true owner .can assert his title to them
unless they were sold by a person who had real or apparent
authority from the owner to sell them, or unless the owner is
by his conduct precluded from stating that he is the owner.
The question of real and apparent authority to sell was dis-
cussed in agency. What amounts to an estoppel to assert own-
ership, both as against purchasers from and creditors of a sup-
posed owner, is to be considered here, including what we may
term statutory estoppel, i. e. failure to observe rules of law
established by statute governing this subject.)
§ 352. (Sales, Sec. 65.) In case of consignment for sale.
(Note: If one consigns goods to another for sale and gives
that other no further apparent ownership than the mere pos-
session necessary to the consignment, he may assert his title
against creditors of the consignee and against the trustee in
bankruptcy of the consignee. See § 290, supra.)
§ 353. (Sales, Sec. 66.) In case of bailment other than
for sale.
Case 338. Fawcett v. Osborne, 32 Illinois Reports, 411.
Facts: Suit at law brought to obtain the value of
2,000 sides of hemlock tanned sole leather. Fawcett,
Isham & Co. had made a contract with W. H. & F.
Stevens, by which the latter, who operated a tannery,
were to tan leather for F. I. & Co. The hides when
tanned were to be delivered to F. I. & Co. at New York
City. In September, 1856, Fletcher Stevens, of the
Stevens firm, shipped secretly, a large quantity of the
leather manufactured from the plaintiff's hides to places
other than New York City. Two thousand sides of this
leather were shipped to Chicago, and there sold by a
man who was in connivance with Stevens, to the defend-
ant who made payment therefor. Plaintiffs having
traced the leather into the hands of defendants demanded
its return, which was refused. The defense made is that
the sale under the circumstances to defendants vested
title in them.
Point Involved: Whether the fact that the owner of
the goods put the goods in the possession of a bailee to
TITLE AND THIRD PERSONS
653
do work thereupon estopped such owner to assert title
against an innocent purchaser to whom such bailee in
violation of his duty sold the goods.
Mr. Justice Breese delivered the opinion of the Court:
u* * * The* defendants contend that they bought the
property in good faith, in the regular course of business,
paying a full price in open market, and with no knowl-
edge of a want of title in their vendor, in whose posses-
sion the property was, when purchased by them. * * *
Assuming a name which did not belong to him, and in-
ducing his agent, Stanton, to d.o the same, the defend-
ants' vendor took this leather to Chicago, and there,
unknown to the business men of that city, or to his ven-
dee, the defendant here, with no evidence of title, docu-
mentary or mercantile, relying on his bare possession,
fraudulently, if not feloniously obtained, the defendants
become the purchasers of two thousand hides, of the esti-
mated value of near eight thousand dollars. The ordi-
nary inquiries and caution, usually exhibited in a large
sale like this, seem not to have been made or observed
in this transaction, and the question is plainly and dis-
tinctly raised, 'Has the real owner lost his title to the
property by the force of the facts proved?' * * * we
are satisfied that the plaintiffs had never parted with
the property in this leather, or bestowed the possession
of it upon anyone, with a view to a sale and disposal of
it; nor have they given * # * such evidence of a
right to sell it, as according to the custom of trade, and
the understanding of community usually accompanies the
authority for disposal. The defendant's vendor had but
a naked possession. This cannot prevail against the
right to the real owner, who is entitled to follow his prop-
erty, and reclaim it wherever found. The buyer should
have 'taken care' that the title .was in his vendor,—he
having no title, the defendants acquired none.
"The rule we have sanctioned may seem a rigid one,
and may involve purchasers in some perils, but it is a
Safeguard to the protection of the owners' rights in goods
654
SALES
and other property necessarily placed under the. tem-
porary control of others, and in their legal, though quali-
fied possession.
Question 338: Does merely placing property with another
for an honest purpose prevent the true owner from asserting
title against one who innocently buys from* such possessor?
What were the facts in this case and the court's decision ?
Case 339. Charles Moe Co. v. J. H. Logue Co., 108 111.
Ap. 128.
Facts: The facts appear in the opinion.
Me. Peesiding Justice Ball delivered the opinion of
the Court:  * * * October 18,1901, Logue, the pres-
ident of appellee, gave a diamond to one Stein, to show
to a prospective customer. It was not given Stein to
sell. He was to return it at 2 p. m. of the same day, as
another customer had the refusal of it. Instead of car-
lying out this agreement Stein pawned the stone to ap-
pellant for $100. Logue made demand on appellant for,
its return. The latter refused to comply unless the sum
it had loaned upon the diamond was repaid. There-
upon appellee brought replevin, and recovered a judg-
ment for $160, from which judgment this appeal was
taken.
"It is an elementary rule of the law of personal prop-
erty that no man can be deprived of it without his con-
sent, or by operation of law. Another fundamental rule
is that no one can sell a right which he does not have;
that the purchaser takes nothing more than the rights
of his vendor. "With us the exceptions to this last rule
arise only where the property is money or negotiable
paper. In all other cases the purchaser cannot retain
the property as against the owner unless it appear that
the seller, by sale and delivery to him, though induced
by fraudulent pretenses, had the indicia of title. Posses-
sion of personal property is indicative of title, but it is
not title; and that alone will not protect the purchaser
from the effects of a demand by the real owner.''
Question 339: (1) State the facts, the question presentee
and the Court's decision in the above case.
TITLE AND THIRD PERSONS
655
(2) A was a jeweler. B asked him to let him take two
diamond rings to his wife to see if she liked either one of them,
and he would return them in two hours. B took the rings under
this arrangement and pawned them to C. A brings replevin
against C. Can he recover? (Hatowski v. Cassriel, 153 111.
App. 239.)
(3) A having a diamond ring he wished to sell, entrusted
it to B, a street jewelry peddler, asking B to match it, or if he
could not do so, to obtain an offer for it (giving the jeweler no
express authority to sell it). B sold the stone wrongfully to C,
and absconded with the money. A brings replevin against C.
Can he recover? (Levi v. Booth, 58 Md. 305.)
Case 340. Biggs v. Evans (1894), 1 Q. B. 88.
Facts: The plaintiff was the owner of an opal matrix
table-top which he intrusted to an agent who was a dealer
in jewels and gems, and as a known part of his business
sold jewels and gems for other people. The table top was
intrusted to the agent on the terms it should not be sold
to any person nor at any price without the plaintiff's
authority and that the check received in payment should
be handed to the plaintiff intact.
Point Involved: Whether placing an article in the
hands of a dealer in such articles, who also sells them
for other people, to show to customers and secure offers
thereon, estops the true owner to set up his title as
against one to whom such article is sold in violation of
authority.
Wills, J., delivered the opinion of the Court:
>■"* * * In one sense every person who intrusts an
article to any person who deals in second-hand articles
of that description enables him, if so disposed, to com-
mit a fraud by selling it as his own. A man who lends a
book in a second-hand bookseller puts it into his power
'n the same sense, to sell it as his own. A man who
Entrusts goods for safe custody to a wharfinger, who
Hlso deals in his own goods, or in other people's goods
ntrusted to him for sale, in such a sense enables him to
tfOmmit a fraud by selling them to a customer. But such
656
SALES
a transaction clearly could not give a title to a purchaser
as against the owner.
Question 340: State the facts and the question presented and
the Court's decision in the above case, giving the illustrations
stated by the Court.
B. When True Owner is Estopped to Assert Title
Against Third Persons.
§ 354. In general.
§ 355. Allowing another to assert that he is owner.
§ 356. Clothing another with documentary indicia of title.
§ 354. (Sales, Sec. 67.) In general.
(Note: See cases under following sections.)
§ 355. (Sales, Sec. 68.) Allowing another to assert that
he is owner.
Case 341. O'Connor v. Clarke, 170 Pennsylvania Re-
ports, 318.
Facts: Suit brought by O'Connor to recover a wagon
belonging to him and purchased by Clarke from one
Tracy who had possession. Tracy's name was painted on
the wagon, as follows: "George Tracy, Piano Mover.
O'Connor directed this to be done for the purpose of
creating a public impression that Tracy was the owner.
Point Involved: Whether an owner is estopped to
assert title by allowing another who is in possession of
his personal property, to assert title to such property,
as against one who purchases such property in reliance
on such permitted assertions.
Sterrett, C. J., delivered the opinion of the Court:
"While the soundness of the general rule of law that a
vendee of personal property takes only such title or in-
terest as his vendor has and is authorized to transfer
cannot for'a moment be doubted, it is not without its
recognized exceptions. One of these is where the owner
has so acted with reference to his property as to invest
another with such evidence of ownership, or apparent
TITLE AND THIRD PERSONS 657
authority to deal with and dispose of it, as is calculated
to mislead, and does mislead, a good faith purchaser for
value. In such cases the principle of estoppel applies,
and declares that the apparent title or authority, for the
existence of which the actual owner was responsible, shall
be regarded as the real title or authority, at least so far
as persons acting on the apparent title or authority, and
parting with value, are concerned. Strictly speaking,
this is merely a special application of the broad equitable
rule that, where one of two innocent persons must suffer
loss by reason of the fraud or deceit of another, the loss
should fall upon him by whose act or omission the wrong-
doer has been enabled to commit the fraud.
Question 341: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) Suppose that Tracy, in driving the wagon, had negli-
gently injured a pedestrian, and such pedestrian had sued
O'Connor, the true owner; assuming that otherwise there was
no agency or employment, would the owner have been liable ?
§356. (Sales, Sec. 69.) Clothing another with docu-
mentary or record indicia of title.
(See also subject Document of Title.)
Case 342. Calais Steamboat Co. v. Scudder, 2 Black.
372.
Facts: Scudder, the administrator of John Van Pelt,
filed a bill against the Steamboat Company, claiming
title to 13/20 of the steamer Adelaide, as a part of the
estate of Van Pelt. Defense was that the defendants
were innocent purchasers for value from one William
Vanderbilt of New York City. The evidence showed
that John Van Pelt, of California, in 1853 employed Van-
derbilt, an engineer and constructor of steamers, to go
to New York and there make contracts and superintend
the construction of the steamer in question with Van
Pelt's money. The contracts were to be made in Van-
derbilt's name, and the builder's certificate was to be
taken and the enrollment at the custom house to be in
658
SALES
Vanderbilt's name. These instructions were given to
Vanderbilt by Van Pelt with the avowed purpose of
concealing his own name in the construction of the vessel,
he not wishing it to be known he had any interest in
the vessel. The vessel was built by Vanderbilt in his
name pursuant to these instructions. The Steamboat
Company, wishing a boat, saw this one advertised in the
daily papers, and after the usual negotiations as to price,
purchased it for the sum of $93,000.00, paying down
$88,000.00 cash.
Point Involved: Whether an owner who permits an-
other to put the record or documentary title in himself
is estopped to assert title as against innocent third per-
sons who purchase for value in reliance on such record
or documentary title.
Me. Justice Nelson delivered the opinion of the Court:
n* * * XJpon this simple statement of the case, it is
not to be doubted but that the legal title to this vessel
passed to the purchasers, for, although as between Van-
derbilt and Van Pelt, his principal, or the estate of Van
Pelt, the legal title could not avail, beyond a lien for his
services, or for any advances, yet, as it respects third
■persons, who have bought in good faith and for a valu-
able consideration, the rule is different. The question
then arises between two innocent parties, and the equity
of the case turns against the party who has enabled his
agent or any other person to hold himself forth to the
world as having not only possession, hut the usual docu-
mentary evidence of property in the article. * * *
'' The case furnishes a very strong illustration of this
principle. All the indicia of property in this vessel in
Vanderbilt existed from no fault of his, for he was clothed
with it by the express authority of the principal. Van
Pelt, therefore, took upon himself knowingly the respon-
sibility of vesting the property of the vessel in Vander-
bilt, as he must have known that it was in his power to
deal with it as owner. Besides, he was extensively en-
gaged in the business of steamboats in the waters of
TITLE AND THIRD PERSONS
659
California, and doubtless understood, in point of fact,
the responsibility he was assuming * * * and, we
may add, we are not sorry that we have come to a con-
elusion in favor of the innocent party who has acted upon
the evidence of the legal title of the party from whom
the purchase was made against the other innocent party
who had not only been instrumental in furnishing this
evidence, but has industriously concealed his own, and
thus turned the equity of the case against him. * * * 
Question 342: State the facts, the question presented and
the Court's decision in this case.
P appoints A his agent, and instructs A to store P's goods
and take out warehouse receipts in A's name as though A were
the owner. A borrows money from X who is innocent and gives
the warehouse receipts as collateral. Are X's rights superior
to P's?
C. When True Owner Prevented by Statute from
Asserting Title.
§ 357. In general.
§ 358. Effect of retention by seller after sale.
§ 359. Conditional sales. -
§ 360. Bulk sales of entire stock in trade.
§ 361. Transfers and pledges by factors.
§ 362, Chattel mortgages.
§ 357. (Sales, Sec. 70.) In general.
(Note: See following sections and cases thereunder.)
§357. (Sales, Sec. 71.) Effect of retention by seller
after sale.
Case 343. Twyne's Case, 3 Coke Reports, 80.
Facts: Pierce owed Twyne 400 1. and owed C 200 1.
C sued Pierce, and Pierce before judgment obtained made
a general conveyance to Twyne of all his goods and chat-
tels in satisfaction of the debt to Twyne. But Pierce
remained in possession of the goods and sold some, and
shore the sheep and marked them with his own mark.
C then got judgment against Pierce, and directed the
sheriff to seize the said goods of which Pierce remained
660
SALES
in possession. And Twyne forcibly opposed the seizure,
claiming the goods to be his own by virtue of the afore-
said conveyance. And Coke, the attorney general brought
an information against Twyne in the Star Chamber, and
the question was whether this transfer to Twyne was
good or fraudulent and void.
And it was Resolved
"1. That this gift [sale] had the signs and marks of
fraud because the gift is general without exception of his
apparel or of anything of necessity; for it is commonly
said, quod dolosus versatur in generalibus.
"2. The donor continued in possession and used them
as his own; and by reason thereof he traded and trafficked
with others, and defrauded and deceived them.
"3. It was made in secret, et dona clandestina semper
suspiciosa.
"4. It was made pending the writ.
"5. Here was a trust between the parties for the donor
(seller) possessed all, and used them as his proper goods,
and fraud is always apparelled with a trust, and a trust
is the cover of fraud.
"6. The deed contains that the gift was made honest-
ly, truly and bona fide.
6 C ^ -X*
'1 And because fraud and deceit abound in these days
more than in former times, it was resolved in this case
by the whole court, that all statutes made against fraud
should be liberally and beneficially expounded to suppress
the fraud.
<<• * # jjy the judgment 0f the whole court
Twyne was convicted of fraud, and he and all the others
[who helped him resist the sheriff] of a riot.
Question 343: "What was the charge against Twyne in this
case? Why was the transfer to Twyne deemed fraudulent by
the Court?
Case 344. Wilson v. Walrath, 103 Minnesota 412,21
L. R. A., new series, 1127.
Facts: One Spargo sold an automobile to "Wilson, who ]
paid full consideration therefor, but who agreed to allot?
TITLE AND THIRD PERSONS
661'
Spargo, who was an automobile sales agent, to retain
possession of the machine for demonstration purposes, as
Wilson had to be away from home for a time, and other-
wise would have had to store the machine. While in
such possession Spargo mortgaged the machine to Wal-
rath, who had no knowledge of the sale to Wilson. Wil-
son brings replevin proceedings. Walrath claims that
by allowing Spargo to remain in possession, the sale by
Spargo to Wilson became in law fraudulent and void
as to third persons relying on the evident ownership
indicated by such possession.
Point Involved: If a buyer in an absolute sale of
goods, permits the seller to remain in possession after
sale, and such seller during such possession resells to an
innocent purchaser [or has creditors whose liens accrue
during such possession] is the first sale to be disregarded
as a fraud upon such second seller [or such creditors] ?
If to be treated as fraudulent is it conclusively so, as a
matter of law, or is it merely presumptively so, leaving
the first buyer to show his honesty and good faith?
Elliott, J.:  * * *
"2. In the thirteenth year of Elizabeth, there was
enacted the famous statute which made all conveyances
not made bona fide and for value, with intent to injure
and delay or defraud the creditors, void as to such cred-
itors. Stat. 13 Eliz., chap. 5. A later statute extended
this protection to subsequent purchasers as well as cred-
itors. Stat. 27 Eliz., chap. 4. These statutes did not in
terms apply to personal property, but from the time of
Sir Edward Coke's decision in Twyne's Case, 3 Coke,
80b, 5 Eng. Rul. Cas. 2, sales of personal property, made
with intent to delay and defraud creditors or subsequent
purchasers, have been regarded as within the provisions
of the statutes. The question soon arose whether, under
these statutes, possession by the vendor was fraudulent
per se, and therefore conclusive, or merely presumptively
fraudulent. In Twyne's Case, in speaking of the indicia
i^f fraud, it was said that 'continuance of the possession
662
SALES
in the dono.r is the sign of trust for himself.' In Edwards
v. Harben, 2 T. R. 587, it was held that, 'if there be noth-
ing but the absolute conveyance, without the possession,
that, in point of law, is fraudulent.' For some time
thereafter this was the established rule in the English,
courts, but it was finally held that the proper construe
tion of the statute made such a conveyance presumpr
tively fraudulent only. Hale v. Metropolitan Saloon
Omnibus Co., 28 L. J. Ch. N. S. 777; Gregg v. Holland,
(1902) 2 Ch. 360. To clear up the difficulty which arose
under the statute, Parliament enacted the various bills
of sale acts, which are fully discussed and explained by
Lord Blackburn in Cookson v. Swire (1884) L. R. 9 App.
Cas. 653, 670. See also references to these acts and
decisions thereunder in notes to the fifth English edition
of Benjamin on Sales, p. 496, and appendix, p. 1029, and
in the note to Twyne's Case in 5 Eng. Rul. Cas. 27-39..
See also Mr. Bennett's note to-the sixth American edi-
tion of Benjamin on Sales, pp. 458-462, and Jones, Chat.
Mortg. §§ 320 et seq. In the United States, Edwards v.
Harben was followed by Chancellor Kent.in Sturtevant
v. Ballard, 9 Johns. 337, 6 Ann. Dec. 281, and by the
Supreme Court of the United States, in Hamilton v. Rns-
sell, 1 Cranch, 309, 2 L. ed. 118. But in "Warner v. Nor-
ton, 20 How. 488> 15 L. ed. 950, Mr. Justice McLean stated
that 'for many years past the tendency has been in Eng-.
land and in the United States to consider the question
of fraud as a fact for the jury, under the instruction of
the Court.' This is now the established doctrine of the
Court. Jewell v. Knight, 123 U. S. 426, 31 L. ed. 190,'
8 Sup. Ct. Rep. 193; Smith v. Craft, 123 U. S. 436, 31
L. ed. 267, 8 Sup. Ct. Rep. 196. See note to 18 L. R. A.
604.
'' Section 3496, Rev. Laws 1905, and the previous;
statutes which are embodied therein, were enacted for
the purpose of removing any doubts as to whether the;
retention of possession by the vendor is conclusive or;
only presumptive evidence of fraud. It provides in
express terms that such possession shall be presumed'
TITLE AND THIRD PERSONS
663
to be fraudulent and void as against subsequent pur-
chasers in good faith, unless those claiming under such
sale make it appear that the sale was made in good
faith, and without any intent to defraud such purchasers.
The effect is to cast upon the vendee the burden of rebut-
ting the statutory presumption of fraudulent intent by
proving his own good faith and want of knowledge of
fraudulent intent on the part of the vendor. Leqve v.
Smith, 63 Minn. 24, 65 N. W. 121. The statute controls
this case. If Wilson proved that he purchased the ma-
chine in good faith, without knowledge of any intent on
the part of Spargo to defraud his creditors or subsequent
purchasers, he was entitled to the possession of the prop-
erty. [Here the Court considers the evidence.]
4'It is not contended that there was any actual bad
faith on the part of Wilson. In his brief, the respondent
thus states his position: The sale was not accompanied
with immediate delivery and followed by an open and
continuous change of possession, within the meaning of
§ 3496 Rev. Laws 1905; and hence, 4 while in this case it
may be true that on April 25, 1906, appellant, in the ut-
most good faith, purchased the automobile, yet, from that
time on, the action of the appellant in permitting and
agreeing to allow Mr. Spargo, the vendor, to keep and use
that machine in exactly the same manner after the sale as
before, was a fraud per se upon any person who might
either purchase or take the same as security without
notice of the rights of a prior purchaser.' This is the
doctrine of Lanfear v. Sumner, 17 Mass. 110, 9 Am. Dec.
119, and the other cases of the group to which reference
has been made. As an abstract principle of law, that
doctrine is sound and controlling when applied to appro-
priate facts and conditions. But the effect which shall
be given to possession under the particular circum-
stances disclosed in this record is declared by the statute,
and the statute should not be disregarded and annulled
by the application of the doctrine of equitable estoppel.
Upon the evidence, Wilson sustained the burden which
664
SALES
the statute imposes upon him, and the finding of the
trial court was thus erroneous.''
Question 344: (1) State the facts in this case, the question
presented and what the Court held.
(2) What two doctrines are there on the effect of retention
by the seller of the goods sold?
(3) What was the early English statute? What did it pro-
vide ?
(4) What did Twyne's case hold? Edwards v. Harben?
Was the early English doctrine adhered to in England?
(5) In the above case, on whom was the burden of proof
in reference to good faith? Why? How was this burden sus-
tained ?
Case 345. Ticknor v. McClelland, 84 III. 471.
Facts: "A sold "B 135 acres of standing corn,
three stacks of hay, seven machines, four horses and
twenty-nine hogs. All of these items were selected and
segregated, but no possession was taken at the time.
Before "B took possession, "C, a creditor of "A,
had the property seized by the sheriff. The sheriff took
possession and "B brought replevin.
Point Involved: Same point as in above case; the
other view taken; whether the rule applies to growing
grain, ponderous articles, etc., not capable of immediate
removal.
Me. Chief Justice Sheldon delivered the opinion of
the Court: "As regards the standing corn and stacks
of hay, we consider the delivery of possession sufficient.
In case of the sale of standing crops, the possession is
in the vendee until it is time to harvest them, and until
then he is not required to take manual possession of
them. * * * Where goods are ponderous and inca-
pable of being handed over from one to another, there
need not be a manual delivery of them. * * * , As to
the rest of the property which was the subject of the
sale, it was that character of property that was capable
of being immediately and readily removed, and a differ-
ent rule governs.
TITLE AND THIRD PERSONS 665
"The policy of the law in this state will not permit the
owner of personal property to sell it, and still con-
tinue in the possession of it. Possession being one of
the strongest evidences of title to personal property, if
the real ownership is suffered to be in one, and the appar-
ent ownership in another, the latter gains credit as owner,
and is enabled to practice deceit upon mankind. It is the
well-established doctrine of this Court, that an absolute
sale of personal property, where the possession is per-
mitted to remain with the vendor, is fraudulent per se,
and void as to creditors and purchasers. * * *
"We can come to no other conclusion, than that suffer-
ing this portion of property, which was capable of being
readily removed, to remain with the vendor, as was done,
rendered the sale of it fraudulent in law, and void as to
creditors, and that it was subject to the levy of the exe-
cution.
Question 345: (1) State the facts, the question presented
and the Court's decision in this case.
(2) Is it in accord with Wilson v. Walrath?
(Note: Twyne's case is one of the celebrated leading cases
in Anglo-American law. It decided that the sale to Twyne was
void as against the seller's creditors because it appeared to be
a fraudulent sale. It had various signs of fraud, one of which
was the retention by the vendor, for it was an absolute sale.
But the question is: Is such retention an absolute legal fraud
on creditors and purchasers, or is it permissible for the buyer
to show that he was in fact guilty of no fraudulent intention?
The authorities divide on this point, some jurisdictions hold-
ing the former view, and some the latter.
The student frequently criticizes this rule as inconsistent
with the doctrine that a true owner is not estopped to assert title
by merely permitting another to have possession. But in those
cases a person has been an owner and in possession and yields
that possession to another for lawful purposes. To hold that
the real owner in such a case could not assert his ownership
because he had given possession to another would be an intoler-
able doctrine in a business world where such practices are so
numerous and so necessary. But if goods are sold by a per-
son who has been the owner, or are levied upon by the creditors
666
SALES
of such person, to permit an unknown claimant to pop up with
an old bill of sale saying that he was in faet the owner, would
certainly put it in the power of all owners to commit frauds
against creditors and purchasers by inventing fictitious bills
of sale to serve them in times of trouble.)
§359. (Sales, Sec. 72.) Conditional sales.
(Note: See chapter covering Conditional Sales.)
§ 360. (Sales, Sec. 74.) Bulk sales of stock in trade.
(Note: If A sells a hat to B upon credit and B resells the
hat to C, A has no claim against C, although C knows the hat
is unpaid for, unless C assumes and agrees to pay the price of
the hat to A. What is thus true of one hat is true of a stock
of hats. A, a wholesaler sells to B, a stock of hats on credit, B
resells the entire stock to C and decamps. A has no relief
against C unless C agreed to pay the debts of the business.
Clearly here is a situation lending itself to fraudulent con-
nivance between B and C. Therefore, without the aid of stat-
ute, a part of the law of fraudulent conveyances, built itself
up around sales of a stock in trade. Sales made under unusual
circumstances, that would put a prudent person on inquiry, as
without inventory, or hastily, or in the night time, or for in-
adequate considerations, or under any suspicious circumstances,
put a purchaser upon inquiry and chargeable with fraud, so
that creditors of the seller could treat the transaction as a fraud
upon them and therefore as to them void. But statutory relief
was still needed to discourage frauds by way of sales that
seemed to possess all the elements of regularity. Acts have
therefore been passed known as Bulk Sales Acts, which are
not uniform, but, so far a general description may be attempted
provide that if a person shall, otherwise than in the regular
course of trade, sell all of his stock in trade, or greater portion
thereof, the sale shall be void as to his creditors unless a cer-
tain notice, as, say, five days, shall be given to creditors of the
intended consummation. If the act is not complied with, the
goods may be attached or levied on in the hands of the pur-
chaser for the debts of the seller.
Such acts are in force in Alabama, Arizona, California, Colo-
rado, Connecticut, Delaware, District of Columbia. Florida,
TITLE AND THIRD PERSONS 667
Georgia, Illinois, Idaho, Indiana, Iowa, Kentucky, Louisiana,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Missis-
sippi, Montana, Nebraska, Nevada, New Hampshire, New Jer-
sey, New Mexico, New York, North Carolina, North Dakota,
Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Utah, Vermont, Virginia, Washington,
West Virginia, Wisconsin and Wyoming.)
§361. (Sales, Sec. 74.) Transfers and pledges by
factors.
(Note: Factors Acts are passed in a number of states to pro-
tect pledgees, lienors and purchasers who have dealt with fac-
tors to whose possession goods have been entrusted.)
§ 362. (Sales, Sec. 75.) Chattel mortgages.
(Note: The, chattel mortgage laws of the various states are
of course variant in their provisions, but in common they pro-
vide for the protection of the mortgagee against subsequent pur-
chasers and lienors by record of the chattel mortgage where he
does not take possession of the goods. Unless he so records or
takes possession, creditors and bona fide purchasers are not af-
fected by an unrecorded chattel mortgage.)
PART III
THE PERFORMANCE OF THE CONTRACT
Chapter 45. Obligations of the Parties.
Chapter 46. Eights of the seller upon non-performance
by buyer.
Chapter 47. Rights of the buyer upon non-performance
by seller.
CHAPTER 45
OBLIGATIONS OF THE PARTIES
§ 363. In general.
§ 364. Obligations in respect to time.
§ 365. Obligations in respect to place.
§ 366. Obligations in respect to quantity.
§ 367. Delivery to carrier as delivery to buyer.
§ 368. Buyer's right to examine the goods.
§ 369. "What constitutes acceptance by buyer.
§ 363. (Sales, Sec. 76.) In general.
(Note: A sale, being a contract, is governed by the general
law of contracts, and the obligations of a seller or buyer are
dependent upon his contract. "It is the duty of the seller to
deliver the roods and of the buyer to accept and pay for them
in accordance with the terms of the contract to sell or sale."—
Uniform Sales Act, Sec. 41.
The obligations in respect to warranties and transfer of title
have been considered.
See also following sections in this chapter.)
§ 364. (Sales, Sec. 77.) Obligations in respect to time.
Case 346. Uniform Sales Act, Sec. 43.
("Place, time and manner of delivery.")
668
OBLIGATIONS OF PARTIES
669
Section 43. (Place, Time and Manner of Delivery.)
(1) Whether it is for the buyer to take possession of the
goods or for the seller to send them to the buyer is a
question in each case on the contract, express or implied,
between the parties. Apart from any such contract, ex-
press or implied, or usage of trade to the contrary, the
place of delivery is the seller's place of business if he
have one, and if not, his residence, but in case of contract
to sell or a sale of specific goods, which to the knowledge
of the parties when the contract or the sale was made
were in some other place, then that place is the place of
delivery.
(2) Where by a contract to sell or a sale the seller is
bound to send the goods to the buyer, but no time for
sending them is fixed, the seller is bound to send them
within a reasonable time.
(3) Where the goods at the time of sale are in the
possession of a third person, the seller has not fulfilled
his obligation to deliver to the buyer unless and until
such third person acknowledges to the buyer that he holds
the goods on the buyer's behalf; but as against all others
than the seller the buyer shall be regarded as having re-
ceived delivery from the time when such third person
first has notice of the sale. Nothing in this section, how-
ever, shall affect the operation of the issue or transfer
of any document of title to goods.
(4) Demand or tender of delivery may be treated as
ineffectual unless made at a reasonable hour. What is
a reasonable hour is a question of fact.
(5) Unless otherwise agreed, the expenses of and in-
cidental to putting the goods into a deliverable state
must be borne by the seller.
Question 346: (1) Where is the place of delivery in a con-
tract of sale where no place is specified?
(2) If no time for delivery is specified what is the rule?
(3) Who must bear the expense of putting the goods in
deliverable state?
§365. (Sales, Sec. 78.) Obligation in respect to place.
(See Sec. 364 and Cases on Transfer of title.)
670
SALES
§ 366. (Sales, Sec. 79.) Obligations in respect to
quantity.
(1) Delivery of wrong quantity.
Case 347. Uniform Sales Act, Sec. 44.
Section 44. (Delivery of Wrong Quantity.) (1) Where
the seller delivers to the buyer a quantity of goods less
than he contracted to sell, the buyer may reject them, but
if the buyer accepts or retains the goods so delivered,
knowing that the seller is not going to perform the con-
tract in full, he must pay for them at the contract rate.
If, however, the buyer has used or disposed of the goods
delivered before he knows that the seller is going to per-
form his contract in full, the buyer shall not be liable for
more than the fair value to him of the goods so received.
(2) Where the seller delivers to the buyer a quantity
of goods larger than he contracted to sell, the buyer may
accept the goods included in the contract and reject the
rest, or he may reject the whole. If the buyer accepts the
whole of the goods so delivered he must pay for them at
the contract rate.
(3) Where the seller delivers to the buyer the goods
he contracted to sell mixed with goods of a different de-
scription not included in the contract, the buyer may ac-
cept the goods which are in accordance with the contract
and reject the rest, or he may reject the whole.
(4) The provisions of this section are subject to any
usage of trade, special agreement, or course of dealing
between the parties.
Question 347: If the seller sends less than he agrees must
the buyer accept? If he does accept what price must he pay?
Suppose more are sent than purchased, what is the rule?
Case 348. Perry v. Mt. Hope Iron. Co., 16 R. I. 318.
Facts: See the opinion.
Point Involved: Whether a tender of a larger amount
than the contract called for is a tender of fulfillment of
the contract.
Per Curiam: "The contract, for the breach of which
OBLIGATIONS OF PARTIES 671
this action was brought, was entered into in manner fol-
lowing, to-wit: The plaintiff offered the defendant some
nut and bolt shop scraps, saying he had 30 or 40 tons
to sell. The defendant offered to give 87y2 cents per hun-
dred weight if the plaintiff would deliver it on the defend-
ant's wharf. This offer of the defendant was accepted
the next day. The plaintiff carried to the defendant's
wharf 53 17/30 tons and tendered it to the defendant.
* * * At the trial the defendant * * * took the
objection that a tender of 53 17/30 tons was not a tender
in fulfillment of a contract of 30 or 40 tons. The jury
returned a verdict for the plaintiff and the defendant now
moves for a new trial. * * *
"We think the defendant1 is entitled to a new trial.
The contract for the sale of 30 or 40 tons would naturally
be understood to mean a contract for between 30 or 40
tons, or, at most, for a quantity not much exceeding 40
tons. Fifty-three tons is so much more than 40 tons
that we do not think that the jury were warranted in
finding that the defendant agreed to purchase that
amount. The cases cited for the defendant show that as
a general rule the buyer is entitled to refuse the whole
of the goods tendered if they exceed the quantity agreed
•on; and the vendor has no right to insist upon the buyer's
acceptance of all or upon the buyer's selecting out of a
larger quantity than delivered. * * *
Question 348: State the facts, the question presented and the
Court's decision in this case.
Case 349. Moore v. U. S., 190 U. S. 157.
Facts: A sold to the United States *' about 5,000 tons''
of coal to be delivered by a certain date at Honolulu. A
brought the coal in lots until he had delivered 4,634 tons.
He then in apt time delivered 366 tons more which the
United States refused to receive. A brought a claim
against the United States for breach of contract.
Point Involved: The amount of goods which the seller
can insist on the buyer receiving where the contract calls
for "about a certain quantity; meaning of "about
where it qualifies the amount contracted for.
672
SALES
Mr. Justice McKenna delivered the opinion of the
Court: "* * * the appellant agreed to deliver and
the United States agreed to receive 'about 5,000 tons' of
coal, delivery to commence with about 2,200 tons, to arrive
at Honolulu on or about the 1st day of October, 1898. By
the 7th of October delivery was made of 4,634 tons. About
a month subsequently appellant purchased 366 tons of
coal of a ship then in the harbor, and tendered the coal
to the United States in fulfillment of the contract to
deliver 5,000 tons. The United States refused to receive
it, and appellant sold it in the open market for $3,061,4
per ton less than $9, the contract price. This was the
best price which could be obtained, and the loss to appel-
lant was $1,120.87. The court of claims held that the
appellant was not entitled to recover. We think this was
error. The obligations of parties were reciprocal; one
to deliver, the other to receive, about 5,000 tons of coal,
and equally reciprocal is the liability for non-perform-
ance of the obligations. The only question can be, Is 366
tons less than 5,000 tons, 'about 5,000 tons?' We think
not. The difference is too great. We said in Brawley v.
United States, 96 U. S. 168, 172, * * * that in en-
gagements to furnish goods to a certain amount the
quantity specified is material and governs the contract.,
'The addition of the qualifying words, about, more or
less and the like, in such case, is only for the purpose of
providing against accidental variations arising from
slight and unimportant excesses or deficiencies in number,
measure, or weight.' * * *
"The record does not inform us why the United
States refused the tender, and we must assume that it had
no other justification than its supposed right under the
contract.
"Judgment reversed and cause remanded with direc-
tions to enter judgment for appellant (claimant) in the
sum of $1,120.87.
Question 349: State the facts, the defense raised and the
Court's decision in this case.
OBLIGATIONS OF PARTIES
673
Case 350. Robinson v. Noble's Adm'rs, 33 U. S. 181.
A sold B a quantity of goods, '' supposed to amount to
3,700 barrels then in the Steamboat Paragon, for which
B agreed to pay $1.50 per barrel. There were in fact only
3,105 barrels. B sued A for breach of his contract.
Point Involved: Whether when a lot of goods are sold
described as "supposed to amount to certain quantity,
the words are a statement of quantity or mere words of
identity or description.
Mr. Justice McLean delivered the opinion of the
Court, saying in part: "* * * The plaintiff's coun-
sel insist that Robinson was bound by this agreement to
deliver the number of barrels specified, subject only to a
reasonable qualification of the words ' supposed to amount
to thirty-seven hundred barrels' and that by this rule the
number could not be reduced below thirty-six hundred
barrels.
It is clear from the agreement that the amount of
freight was not ascertained, arid that Robinson did not
covenant to 'deliver any specific number of barrels. It
was conjectured there were thirty-seven hundred, and
the payment for the transportation was to be at the rate
of one dollar and fifty cents per barrel.
u # * *
"If Robinson had bound himself to deliver a certain
number of barrels and had failed to do so, Noble would
have been entitled to damages for such failure; but a
fair construction of the contract imposed no such obli-
gation on Robinson and consequently the breach assigned
in the declaration is not within the covenant.
£ C ^ ^ ^
"When the circumstances under which this contract
was made are considered, the contingencies on which
the delivery of the freight in some degree depended; the
reason is seen why cautions and indefinite language was
used in regard to the number of barrels in the contract.
674
SALES
And the result proved the caution was judicious.
Question 350: State the facts in this case, the question pre-
sented and the Court's decision.
(2) A sells B a heap of coal lying at the mouth of A's mine,
<f being about 100 tons. There are, in fact, only 80 tons. B
refuses to accept. Can A recover on the contract? Does this
case differ from Case No. 349? Suppose A had known there
were only 80 tons?
(2) Delivery in installments.
Case 351. (Delivery in Installments.) (1) Unless
otherwise agreed, the buyer of the goods is not bound to
accept delivery thereof by installments.
(2) Where there is a contract to sell goods to be deliv-
ered by stated installments, which are to be separately
paid for, and the seller makes defective deliveries in re-
spect of one or more installments, or the buyer neglects
or refuses to take delivery of or pay for one or more in-
stallments, it depends in each case on the terms of the
contract and the circumstances of the case whether the
breach of contract is so material as to justify the injured
party in refusing to proceed further and suing for dam-
ages for breach of the entire contract, or whether the
breach is severable, giving rise to a claim for compensa-
tion, but not a right to treat the whole contract as broken.
(Note: While it is a common form of sale to provide for
delivery in installments, and the cases are numerous, the editor
has not thought it wise in this book to attempt to set out any
cases owing to the likelihood of confusion to be caused thereby.
The rules are contained in the above quotation from the sales
act.)
Question 351: (1) Is a buyer bound to accept delivery in
installments ?
(2) If delivery is to be made in installments according to
the contract, and the installments are to be paid for separately,
what is the effect of a defective delivery of an installment upon
the right of the buyer to take future installments? the effect
OBLIGATIONS OF PARTIES
675
of the failure of the buyer to pay for any such installment upon
the duty of the seller to deliver subsequent installments?
§ 367. (Sales, Sec. 80.) Delivery to carrier as delivery
to buyer.
(Note: See Sections 56 to 62 supra.)
Case 352. Uniform Sales Act, Sec. 46.
''(1) Where, in pursuance of a contract to sell or a
sale, the seller is authorized or required to send the goods
to the buyer, delivery of the goods to a carrier, whether
named by the buyer or not, for the purpose of transmis-
sion to the buyer is deemed to be a delivery of( the goods
to the buyer, except in cases provided for in sction 19.
Rule 5, or unless a contrary intent appears.
"(2) Unless otherwise authorized by the buyer, the
seller must make such contract with the carrier on behalf
of the buyer as may be reasonable, having regard to the
nature of the goods and the other circumstances of the
case. If the seller omit so to do, and the goods are lost or
damaged in course of transit, the buyer may decline to
treat the delivery to the carrier as a delivery to himself,
or may hold the seller responsible in damages.
"(3) Unless otherwise agreed, where goods are sent
by the seller to the buyer under circumstances in which
the seller knows or ought to know that it is usual to in-
sure, the seller must give such notice to the buyer as may
enable him to insure them during their transit, and, if the
seller fails to do so, the goods shall be deemed to be at
his risk during such transit.
Question 352: A ships goods by express to B, B to pay ex-
press charges. Value of merchandise $1,000. A declares the
value to the carrier to be $50. The goods are lost in transit by
the fault of the carrier. What rights has B against A ? Why ?
§368. (Sales, Sec. 81.) Buyer's right to examine the
goods.
Case 353. Uniform Sales Act, Sec. 47.
Section 47. (Right to Examine the Goods.) (1) Where
goods are delivered to the buyer, which he has not pre-
676
SALES
viously examined, he is not deemed to accept them unless
and until he has had a reasonable opportunity of examin-
ing them for the purpose of ascertaining whether they are
in conformity with the contract.
(2) Unless otherwise agreed, when the seller tenders
delivery of goods to the buyer, he is bound, on request, to
afford the buyer a reasonable opportunity of examining
the goods for the purpose of ascertaining whether they
are in conformity with the contract.
(3) Where goods are delivered to a carrier by the
seller, in accordance with an order from or agreement
with the buyer, upon the terms that the goods shall not be
delivered by the carrier to the buyer until he has paid the
price, whether such terms are indicated by marking the
goods with the words '' collect on delivery,'' or otherwise,
the buyer is not entitled to examine the goods before pay-
ment of the price in the absence of agreement permitting
such examination.
Question 353: (1) What is the right of the buyer to ex-
amine the goods?
(2) A sells goods to B shipped by express C. 0. D. Is the
carrier bound to permit B to examine the goods? If he ac-
cepted delivery and paid the price would he subsequently have
the right to reject if examination revealed defects?
Case 354. Ziff Mfg. Co. v. Pastorino, 120 Wis. 176.
Facts: The facts appear in the opinion.
Point Involved'. The buyer having the right to test
the goods, what constitutes a reasonable test, and the con-
sequence of his making an unreasonable test?
Winslow, J.: 11 This is an action to recover the pur-
chase price of a barrel of vanilla sold by the plaintiff to
the defendants, who were wholesale manufacturers of
candy, under an agreement that if, upon fair test, it did
not prove satisfactory it might be returned. The defense
was that the vanilla was of poor quality and proved un-
satisfactory upon a test being made, and was returned. A
verdict for the plaintiff was directed on the ground that
OBLIGATIONS OF PARTIES
677
the evidence showed without dispute that the defendants
had accepted the vanilla by using in their business a far
larger amount than was reasonably necessary for testing
purposes. Examination of the evidence shows that the
direction was plainly right. It appeared without dispute
that a satisfactory test could be made by the use of a few
ounces; also that the defendants used from four to six
ounces daily in the manufacture of candy for a period of
more than six weeks, during which time they made and
sold about three tons of candy flavored with the vanilla,
although by their own admissions they discovered that it
was not satisfactory after making the first test. For
testing purposes they could only use such quantity as was
fairly and reasonably necessary to determine its quality.
Cream City Gr. Co. v. Friedlander, 84 Wis. 53, 54 N. W. 28.
When they went beyond this, as they unquestionably did
in this case, they made it their own, and lost the right of
rejection.
By the Court: "Judgment affirmed.
Question 354: What right of testing did the buyer have in
this case? Was the buyer liable for the price of the goods in
this case notwithstanding the quality was imperfect ? Why ?
§ 369. (Sales, Sec. 82.) What constitutes acceptance by
buyer.
Case 355. Uniform Sales Act, Sec. 48.
Section 48. (What Constitutes Acceptance.) The
buyer is deemed to have accepted the goods when he inti-
mates to the seller that he has accepted them, or when the
goods have been delivered to him, and he does any act in
relation to them which is inconsistent with the ownership
of the seller, or when, after the lapse of a reasonable time,
he retains the goods intimating to the seller that he has
rejected them.
Section 49. (Acceptance Does Not Bar Action for
Damages.) In the absence of express or implied agree-
ment of the parties, acceptance of the goods by the buyer
shall not discharge the seller from liability in damages
678
SALES
or other legal remedy for breach of any promise or war-
ranty in the contract to sell or the sale. But, if, after ac-
ceptance of the goods, the buyer fail to give notice to the
seller of the breach of any promise or warranty within a
reasonable time after the buyer knows, or ought to know
of such breach, the seller shall not be liable therefor.
Question 355: (1) In what three ways may acceptance by
buyer be shown ?
(2) May a buyer accept a defective performance and still
hold the seller for damages? Under what circumstances?
Case 356. Cream City Glass Co. v. Friedlander, 84 Wis.
53, 21 L. R. A. 135.
Facts: The Cream City Glass Co., manufacturers of
glass, bought from Friedlander a quantity of soda ash.
The ash was delivered and the buyer on receiving it ex-
amined it and found it water-soaked and at once notified
the seller that it was unfit for use, and that such soda ash
was held subject to the seller's orders. About a month
later, the ash being still uncalled for, the buyer used about
three-fourths of a ton to test whether it could be used in
making glass, and this test was unsatisfactory. The ash
had been paid for on its arrival before it was known to
be defective. This is a suit by the buyer for the recovery
of the money so paid.
Point Involved: Whether use of the property by the
buyer after his rejection amounts to an acceptance by
him. Whether a test after a rejection is a use of the
property within the meaning of the rule.
Winslow, J.: '1 * * * Assuming that the evidence
is sufficient to establish an implied warranty that the soda
ash in question was of a quality reasonably fit to be used
in the manufacture of glass, the question is, could the
plaintiff, after having decided that the material was
wholly unfit, and notified the defendant of its decision and
its rejection of the material, proceed to use three-quarters
of a ton of the material in making a practical test, and
still insist on its right of rejection? * * * But this
OBLIGATIONS OF PARTIES
679
test is plainly for the purpose only of enabling the pur-
chaser to decide whether the material conforms to the con-
tract. If the fact can be determined by inspection alone,
the test is not necessary, and the use of the material,
therefore, clearly unjustifiable. Now, in this case the
plaintiff's officers determined at once, and "upon inspec-
tion alone, that the material was unfit for their purposes,
and so notified the defendant, and rejected the entire lot.
They did not claim to need any test. They took their po-
sition definitely. After that act they could not deal with
the property in any way inconsistent with the rejection,
if they proposed to insist upon their right to reject.
Churchill v. Price, 44 "Wis. 540. They must do no act
which they would have no right to do unless they were
owners of the goods. Benjamin, Sales, 6th ed., § 703.
Under these rules it is evident the plaintiff had no right
to use up a quantity of the material several weeks after
the rejection. By the rejection it became defendant's
property, if such rejection was rightful. Plaintiff had no
right to use any part of it. It is claimed that the use was
simply for the purpose of providing evidence of unfitness
for the purposes of the trial of this case; but one has no
right to use his opponent's property for the purpose of
making evidence. The act was an unmistakable act of
ownership, and entirely inconsistent With the claim that
the material had been rejected, and was owned by defend-
ant. It follows that the judgment must be reversed.
Question 356: State the facts, the question presented and
the Court's decision in this case.
(2) A contracted with B to manufacture, sell and deliver to
R and put in running order a certain machine. A set up the
machine and put it in running order. B found it unsatisfactory
and notified A that he rejected the machine. He continued to
use it for three months, but continually complained of its defec-
tive condition. At the end of the three months he took it down
and notified A to come and get it. Has B lost his right to reject
the machine? (Brown v. Foster, 108 N. Y. 387.)
CHAPTER 46.
RIGHTS OF SELLER UPON NON-PERFORMANCE
§§370 to 384. (Sales Sections 83 to 97.) Cases fol-
low this note.)
(Note: By reason of lack of space and because the subject
may perhaps be as well treated by a summary as by any other
method, the rights of a seller, both judicial and non-judicial,
are here tabulated.)
Rights and Remedies of Unpaid Seller.
1. Goods not delivered, title not passed, buyer in de-
fault, right to rescind contract and sue for damages.
Here we assume the buyer is in default; the seller need
not go on but may sue for damages.
2. Goods not delivered, title not passed, buyer in de-
fault, right to rescind contract and sue for price. Gener-
ally in this case the seller cannot sue for the price, but
must sue for his .damages. But the sales act provides
that if the price is payable on a certain day irrespec-
tive of delivery or transfer of title, the seller may sue
for that sum, but if it appears before trial that the
seller is in default, that is a defense. Example: A
agrees to pay $100 July 1st, $100 September 1st, when
he is to get delivery. The first $100 is payable regardless
of performance of A's part. Also if in such a situation,
the goods cannot be resold for a reasonable price, the
seller may tender the goods, and then upon refusal by the
buyer may sue him for the purchase price; but in this
connection note that if the buyer notifies a seller to stop ;
performance, the buyer cannot go on and perform, but ,
his damages are measurable as of the time when he was
so notified. (
680
RIGHTS OF SELLER 681
3. Goods not delivered, title passed, buyer in default,
seller's lien. Although title has passed to the buyer, a
seller in possession has a lien, (a) where not sold on
credit, (b) where the buyer becomes insolvent before de-
livery. The seller loses this lien by delivery to the car-
rier (unless he reserves it by shipping to himself or his
agent, or retaining the bill of lading) or by delivery to the
buyer. To realize upon this lien the seller may (1)
rescind the contract; (2) re-sell the goods; (3) sue for
price.
4 Goods not delivered, title passed, buyer in default,
right of seller to re-sell. Seller having possession, may,
although title has passed, upon buyer's default, re-sell in
three cases: (1) goods perishable; (2) contract calls
for re-sale; (3) buyer in default more than a reasonable
length of time. Notice of re-sale nonessential, but safer
practice. If re-sale brings less than contract price, buyer
liable for deficiency; if more, seller need not account for
surplus. The seller may sell at public or private sale,
but must exercise reasonable care.
'"5. Goods not delivered, title passed, buyer in default,
right of seller to rescind. The seller need not re-sell but
may take the title back into himself where (1) contract so
provides; (2) where buyer in default an unreasonable
length of time. May then sue for his damages.
6. Goods undelivered, title passed, buyer in default,
seller's right to sue for purchase price. As the goods in
such case are the buyers, the seller may sue for the pur-
chase price. Obtaining judgment in such a case will not
destroy his lien on the goods. When the judgment is
paid, the buyer is entitled to the goods.
7. Goods delivered, title not passed, buyer in default,
right to sue for price or damages. The seller obviously
has this right if we assume he has fully performed. (See
Subject Conditional Sales, Chapter 47A.)
' 8. Goods delivered, title not passed, buyer in default,
right of seller to re-claim goods. Seller has this right.
fSee, also Chapter 47A, on Conditional Sales.)
9. Goods delivered, title passed, buyer in default,
682
SALES
seller's rights are to sue for damages. He cannot reclaim
goods.
10. Goods delivered to carrier, title passed, right of
seller to stop goods in transit. A buyer, although he has
waived his lien by delivery to a carrier, may re-assert
such lien during the transit of the goods, if the buyer be-
comes or is determined to be insolvent during the transit.
Goods are in transit when delivered to carrier until de-
livered by carrier to buyer or his agent, or until the car-
rier acknowledges to the buyer that he holds them in his
behalf, even though at the request of the buyer they are
to be shipped on to a further destination. When notified
by seller to stop in transit carrier must do so and deliver
goods to seller, at seller's costs, provided that if goods
are shipped under a negotiable bill of lading the carrier
can insist on its production for cancellation before turn-
ing over goods to seller. See Cases 358, 359.
11. Measure of seller's damages for buyer's refusal to
take delivery. The Sales Act, Sec. 64, provides. (1)
Where the seller wrongfully neglects or refuses to ac-
eept and pay for the goods, the seller may maintain an
action against him for damages for non-acceptance.
(2) The measure of damages is the estimated loss
directly and naturally resulting, in the ordinary course
of events, from the buyer's breach of contract.
(3) Where there is an available market for the goods
in question, the measure of damages is, in the absence of
special circumstances, showing proximato damage of a
greater amount, the difference between the contract price
and the market or current price at the time or times when
the goods ought to have been accepted, or, if no time was
fixed for acceptance, then at the time of the refusal to
accept.
(4) If, while labor or expense of material amount are
necessary on the part of the seller to enable him to fulfill
his obligations under the contract to sell or the sale, the
buyer repudiates the contract or the sale, or notifies the
seller to proceed no further therewith, the buyer shall be
liable to the seller for no greater damages than' the seller
RIGHTS OF SELLER
683
would have suffered if he did nothing towards carrying
out the contract or the sale after receiving notice of the
buyer's repudiation or countermand. The profit the
seller would have made if the contract or the sale had
been fully performed shall he considered in estimating
such damages.
(Note: Distinguish between the right to sue for the price,
which is. the amount agreed on (expressly or by implication),
and for damages. See above in this section for cases in which
seller may sue for the price.)
(Note: The following cases are illustrations of rules set forth
in the above note.)
(a) Unpaid seller's lien.
Case 357. Arnold v. Delano, 4 Cush. (Mass.) 33.
Facts: Delano sold Lowerly 65 cords of wood, and the
same was staked off and identified and Lowerly was to
come and get it within a year, and he had a license to come
on Delano's land for that purpose. Lowerly, before any
of the wood had been taken went into bankruptcy and
his assignee claimed the wood as against Delano, claiming
that title had passed and that all Delano had was a gen-
eral claim with other creditors against Lowerly's assets.
But Delano claimed a lien on the wood for the purchase
price.
Point Involved: Whether a seller has a lien on goods
of the buyer in his possession sold on credit where the
buyer becomes insolvent prio to his receipt of the goods.
Shaw, C. J., delivered the opinion of the Court:
u* * # when goods are sold and there is no stipula-
tion for credit or time * * * the vendor has * * *
a lien for the price; in other words he is not bound actu-
ally to part with the possession * * * without being
paid for them. The term lien imports that by the con-
tract of sale * * * the property has vested in the
buyer, because no man can have a lien on his own goods.
The very definition of a lien is a right to hold goods, the
684
SALES
property of another, in security for some debt, duty or
other obligation. * * * A lien for the price is inci-
dent to the contract of sale when there is no stipulation
therein to the contrary. * * # But * * . * when
a credit is given by agreement the vendee has a right to
the custody and actual possession on a promise to pay at
a future time. He may then take the goods away and into
his own actual possession; and, if he does so, the lien of
the vendor is gone, it being a right incident to the posses-
sion.
"But the law, in holding that a vendor, who has thus
given credit for the goods, waives his lien for the price,
does so on one implied condition * * * that the ven-
dee shall keep his credit good. If, therefore, before pay-
ment the vendee become bankrupt or insolvent and the
vendor still retains the custody of the goods, or any part
of them; * # * then his lien is restored and he
may hold the goods as security for the price. * # *
Question 357: (1) State the facts in the question presented
and the court's decision in this case.
(2) Does a seller from whom title has not passed have a lien?
Why? What is the effect of giving credit?
(3) Define a lien.
(b) Right of Stoppage in Transitu.
Case 358. Farrell v. R. & D. R. R. Co., 100 N. C. 390.
Facts: Farrell sold to A and B, a safe, on credit,
shipped over the R. & D. R. R. Co., from Philadelphia to
Durham, N. C. During the shipment, Farrell learned
that A and B were insolvent, and demanded of the rail-
road company a return of the safe, tendering freight and
other charges. The railroad company refused to return
the safe and claimed that before it had received the
notice, it had itself attached the safe as the property
of the consignee on a claim against such consignee, and
it claimed ownership of the safe through such attach-
ment proceedings. Farrell sued the railroad company.
Point Involved: The nature of the right of stoppage
in transitu; whether it precedes liens against the goods
of the buyer.
RIGHTS OF SELLER
685
Shepherd, J., delivered the opinion of the Court:
"The plaintiffs' action is based upon their alleged right
to stop the property in transitu. This right' arises solely
upon the insolvency of the buyer, and is based on the
plain reason of justice and equity that one man's goods
shall not be applied to the payment of another man's
debts. If, therefore, after the vendor has delivered the
goods out of his own possession and put them in the
hands of a carrier for delivery to the buyer (which
* * * is such a constructive delivery as devests the
vendor's lien) he discovers that the buyer is insolvent,
he may retake the goods, if he can, before they reach the
buyer's possession, and thus avoid having his property
applied to paying debts due to the buyer by other peo-
pie.' * * *
"The mere fact that (the buyers) were insolvent at
the time of the sale could not defeat the lien of the plain-
tiffs unless they knew of such insolvency. * * *
"An attachment or execution against the vendee does
no preclude the stoppage in transitu. * * *
"The vendor's right of stoppage in transitu is para-
mount to all liens against the purchasers.''
Question 358: (1) Between whom is the contest in this
case? Whose lien is superior? Do you think the lien of the
seller would be superior to the lien of the carrier for its freight
charges upon the goods in question?
(2) Suppose the buyer is insolvent when the goods are
shipped, does the shipper have a right to stop in transit?
Case 359. Re W. A. Paterson Co., 186 Fed. 629, 34
L. B. A. N. S. 31.
Facts: The Paterson Co. was a manufacturer of ve-
hides at Flint, Michigan. Manley was engaged in selling
vehicles at St. Louis, Missouri. Elder & Wood, who were
engaged in like business at Mammoth Springs, Arkansas,
ordered a carload of vehicles from Manley, in September,
1908. Manley thereupon ordered these vehicles from the
Paterson Company and directed it to ship to Elder &
Wood at Mammoth Springs, Arkansas. Afterwards, on
686
SALES
September 17, 1908, Manley directed the Paterson Com-
pany to ship these vehicles to him at St. Louis, Missouri.
On October 3, 1908, the Paterson Company shipped the
vehicles from Flint, Michigan, by rail to Manley at St.
Louis. The company procured a bill of lading naming
it as consignor and Manley as consignee. The Pater-
son Company sent the bill of lading to Manley, with the
invoice of the goods indicating that the goods were sold
to Manley for $1,018.75. On the arrival of the vehicles
at St. Louis, on October 7, 1908, Manley sent his clerk
to the office of the St. Louis & San Francisco E. E. Co.
at St. Louis, and he, by direction of Manley, surrendered
the bill of lading to the railroad company, which issued,
by direction of Manley, a bill of lading wherein Manley
was named as consignor and Elder & Wood, Mammoth
Springs, Arkansas, as consignees. Under this bill of lad-
ing, the goods were forwarded to Mammoth Springs, and
Manley sent an invoice of the vehicles to Elder & Wood
which indicated a sale from him to them for $1,304.25.
On October 10, 1908, Manley made a general assignment
for benefit of creditors. On October 13, 1908, the Pater-
son Co. and other creditors of Manley filed an involun-
tary petition in bankruptcy against him, upon which he
was subsequently adjudged a bankrupt. On the same
day the Paterson Co. telegraphed from Flint, Michigan,
to the agent of the St. L. & S. F. E. E. Co. at Detroit,
Michigan, to hold the car of vehicles for it, and at some
time after October 14, 1908, the railroad company re-
turned the vehicles to that company. The Paterson Co.
filed a claim against the bankrupt for $17,017.45 for the
purchase price of vehicles which it had sold to Manley
prior to the transaction in question, and this claim was
allowed. Thereafter a motion was made by the trustee
to expunge this claim unless the Paterson Co. would pay
back to the trustee the value of this carload of vehicles,
which it obtained after the petition in bankruptcy was
filed. This motion was granted and the Paterson Com-
pany appeals.
Point Involved: When the transit ceases during which
the right of stoppage may be exercised. ,
BIGHTS OF SELLER
687
Sanborn, Circuit Judge: "* * * [After reciung
the facts above given.]
/'But the right of stoppage m transitu ceases when the
transit between the vendor and purchaser ends. The
Paterson Company sold the vehicles to Manley. It sent
to Manley the bill of lading, which named him as con-
signee, and thereby gave him dominion and control over
the goods, and it invoiced them to him as the purchaser.
It never sold the goods to Elder & Wood, and was not in
any way in privity with them. Therefore, when Manley's
clerk, by his direction, surrendered the bill of lading to
the St. Louis & San Francisco Railroad Company at St.
Louis, the destination named in the bill, and reshipped
and rebilled them to Manley's purchaser, Elder & Wood,
the transit between the Paterson Company and its ven-
dee, Manley, ended and the right of stoppage in transitu
ceased. A. J. Neimeyer Lumber Co. v. Burlington & M.
River R. Co., 54 Neb. 321, 341, 342, 40 L. R. A. 534, 74
N. W. 670; Eaton v. Cook, 32 Vt. 59, 61; Rowley v. Bige-
low, 12 Pick. 307, 313, 314, 23 Am. Dec. 607; Memphis &
L. R. R. Co. v. Freed, 38 Ark. 614, 622; Treadwell v.
Aydlett, 9 Heisk. 388.
Question 359: (1) State this case.
(2) A sells goods to B, and sends them by freight to C, a
forwarder employed by B to send them on to a further point
when so ordered by B. B becomes insolvent while the goods are
in C's possession. A attempts to exercise his right to stop. Are
the goods still in transit? (Biggs v. Barry, Fed. Cas. 1402.)
(c) Resale by Seller; Right of Seller to Sue for Purchase
Price.
Case 360. Bagley v. Findlay, 82 111. 524.
Facts: Suit by Findlay, as seller, against Bagley, as
buyer, of certain goods for damages for refusing to re-
ceive the goods, the seller having tendered delivery to
the buyer. Part of the goods were in Milwaukee and part
in. Chicago. After the buyer refused to accept the goods,
the seller gave notice that he would proceed to resell them
and held the buyer responsible for the loss. The net
588
SALES
proceeds of the resale fell short of the contract price by
$1,629.86, not including $402.62 expenses for commissions
and charges. Judgment was entered for $1,629.86, and
defendant appeals.
Point Involved: The remedies of the seller where
buyer refuses to take the goods; right of resale;
Me. Justice Dickey: "When a vendee of goods, sold
at a specific price, refuses to take and pay for the goods
the vendor may store the goods for the vendee, give him
notice that he has done so, and then recover the full con-
tract price, or he may keep the goods and recover the
excess of the contract price over and above the market
price of the goods at the time and place of delivery, and
this means the market price of such goods in such con-
dition and in such quantity as the goods were at the time
for delivery. In such case, if goods are bought in large
quantities, the market price at retail is not the standard,
but the market price in large quantities; or the vendor
may, giving notice to the vendee, proceed to sell the
goods, in their then condition and quantity, to the best
advantage, and recover of the vendee the loss, if the
goods fail to bring the amount of the contract price. The
appellee adopted the latter course, and the only question
of fact presented is, were the goods sold to the best
advantage 1
"In such case, the vendor takes the position of agent
for the vendee, and is held to the same degree of care,
judgment and fidelity that is imposed by the law upon
an agent put in the custody of such goods in such con-
dition, with instructions to sell them to the best advan-
tage.
"Without reviewing the evidence in this case, it is
sufficient for us to say that the evidence fully sustains
the finding of the Court—that the goods were fairly sold,
with reasonable diligence, judgment and care.
"Appellant insists that the sale must, in such case, be
in the market where the goods are, and objects that the
goods stored in Milwaukee were sold in Chicago. The
RIGHTS OF SELLER
689
purchaser was found in Chicago, but he bought the goods
in their then condition in store in Milwaukee, and if these
goods were taken to Chicago at all, it was after the sale.
"The appellant has no just cause of complaint against
the finding of the Court. Upon the evidence shown in
the record, the Court below might, without impropriety,
have included in the assessment of damages the $402
expenses incurred by the appellee for commissions and
charges incurred in making the sale.
"Judgment affirmed.
Question 360: State the rule of damages as decided in this
case.
CHAPTER 47
RIGHTS OF BUYER UPON NON-PERFORMANCE
§§ 386 to 391. (Sales, Sections 99 to 104.) (Cases
following note.)
(Note: The following is a tabulation of the rights of the
buyer, where the seller is in default.)
The Rights and Remedies of the Buyer.
1. Goods not delivered, title not passed, seller in de-
fault, right to sue for damages. The buyer may sue for
damages in this situation. The Sales Act, Sec. 67 pro-
vides:
 (1) Where the property in the goods has not passed
to the buyer and the seller wrongfully neglects or refuses
to deliver the goods, the buyer may maintain an action
against the seller for damages for non-delivery.
 (2) The measure of damages is the loss directly and
naturally resulting in the ordinary course of events, from
the seller's breach of contract.
"(3) Where there is an available market for the
goods in question the measure of damages in the absence
of special circumstances showing proximate damages of
a greater amount is the difference between the contract
price and the market or current price of the goods at
the time or times when they ought to have been delivered,
or if no time was fixed then at the time of the refusal
to deliver.
2. Goods not delivered, title not passed, seller in de-
fault, buyer's right to specific performance. This is an
unusual remedy. See subject in contracts.
3. Title passed, goods not delivered, seller in default,
buyer's right to sue for goods themselves. As, by hypoth-
690
RIGHTS OP BUYER
691
esis, the goods belong to the buyer, he may if not in de-
fault, recover them by action of replevin, or sue for
damages.
4. Goods delivered or tendered to buyer, right to re-
fuse acceptance for breach of warranty. The buyer may
refuse to accept goods that are not as warranted, whether
the warranty be expressed or implied.
5. Same, right to reject after trial. The buyer may
reject in accordance with the rules heretofore discussed.
6. Same, buyers right to accept and retain and sue for
damages. The buyer may do this provided he so con-
ducts himself as to show no waiver. See Case 355.
Remedies for Breach of Warranty.
Case 361. Underwood v. Wolf, 131 111. 425.
Facts: Sale by Wolf to Underwood of certain ma-
chinery, to be erected on Underwood's premises, and to
meet certain requirements according to test. Suit to re-
cover the contract price of such machines. Defendant
claims a set-off by way of damages. Contention by the
plaintiff that by not rejecting the goods, defendant
waived his right to damages.
Point Involved: Whether the buyer may receive the
goods and sue on the breach of warranty.
Mr. Justice Magruder delivered the opinion of the
Court: "* * * Where there is a sale and delivery
of personal property in presenti with express warranty,
and the property turns out to be defective, the vendee
may receive and use the property and sue for damages
on a breach of warranty, or, when sued for the purchase
price, he may recoup such damages under the general
issue or set them up in a specified plea of set-off. This
is a well-settled rule. In the present case the contract is
executory; the title to the property did not vest in the
purchaser until the period for making the test had passed.
It has been held in some states that, where the contract
is thus executory and a time is fixed for making a test,
692
SALES
the acceptance and use of the property, after such time
has passed, amount to a waiver of the right to claim
damages for a breach of the warranty. But such is not
the law in this state. In the present case, the evidence
tends to show that the defendants took possession about
July 1, 1886, of the machines placed in their packing
house by the plaintiff, and had been using the same up
to the time of the trial of the cause in the Court below.
"We think that even where the contract is executory,
the claim for damages on account of a breach of the
warranty will survive the acceptance of the property.
* * * In Babcock v. Trice, 18 111. 420, there was an
executory contract for the sale and delivery of corn with
an implied warranty that it should be of a fair and mer-
chantable quality; it was there said: 'It is true that the
acceptance of corn under an executory contract, with
opportunity of inspection at the time of delivery, without
complaint, may raise a presumption that it was of the
quality contemplated by the parties, but it will not pre-
elude the party from showing and setting up the actual
defect in quality and condition. * * * He could
* * * under the general issue prove the facts out of
which the warranty arose, the breach and his damages
by way of recoupment. * * * 
Question 361: Can a purchaser, according to this case, accept
the goods, knowing that they are not as warranted and then
claim damages for the breach of warranty?
Case 362. North Alaska Salmon Co. v. Hobbs, Wall
& Co., 159 Cal. 380, 35 L. R. A., new series, 501.
Facts: The facts are stated in the opinion.
Point Involved: The right of a buyer of personal
property upon an express warranty to sue for breach of
such warranty where he has accepted the goods with
knowledge of the breach.
Shaw, J., delivered the opinion of the court:
"This is an appeal from an order denying the defend-
ant's motion for a new trial.
RIGHTS OF BUYER
693
"The action was brought to recover damages for the
breach of an express warranty in the sale of goods. The
plaintiff alleged that in November, 1903, plaintiff and
defendant agreed in writing that the defendant should
manufacture, sell, and deliver to plaintiff at the premises
of the American Can Company, in San Francisco, 120,000
salmon boxes, the defendant thereby expressly warrant-
ing that all said boxes should be of dry stock and free
from dampness, and further agreeing to deliver the same
between December, 1903, and April 10, 1904; that de-
fendant at the time knew that plaintiff required for its
business in salmon canning a large quantity of empty
cans packed in dry boxes for shipment to the canneries
of plaintiff on Bristol bay, by vessels to leave San Fran-
cisco on April 15th, 1904, so as to reach the canneries at
the opening of the fishing season of that year, which
would end about August 1st; that defendant delivered
93,000 boxes under the contract, from January 5, to
March 3, 1904, at the premises of the American Can
Company, for which plaintiff paid the contract price on
delivery. It is further averred that a large number of
boxes were not of dry stock nor free from dampness, and
because thereof the cans packed therein became rusty
and unfit for use, whereby the plaintiff was damaged
in the sum of $15,000. The cause was tried by a jury,
a verdict was rendered in favor of the plaintiff for $3,500,
and judgment was given accordingly.
"The evidence showed the making of the contract, as
alleged, that the plaintiff about the same time had en-
gaged the American Can Company to make a large num-
ber of cans to be packed in said boxes, and directed the
defendant to deliver the boxes to said can company for
that purpose; that the defendant knew that the can com-
pany was to pack the boxes with the cans for the plain-
tiff's use during the fishing season of 1904, and that it
was a matter of common knowledge that the plaintiff
would not be able to procure dry salmon boxes from other
dealers or factories in time for the fishing season, if the
defendant failed to deliver the boxes, or if the boxes
694
SALES
delivered were wet or damp. Plaintiff also proved the
delivery of 93,000 of the boxes and payment therefor at
the contract price. As the deliveries were made, the
boxes were inspected by plaintiff. At the beginning of
the delivery a number of the boxes were found to be not
of dry stock nor free from dampness, and the defendant
was immediately notified thereof, and promised that no
more of that quality should be delivered. Nevertheless,
a large number of the boxes subsequently delivered were
not of the quality warranted. They were all, however,
inspected by the plaintiff's servants, and were taken and
used by the plaintiff as cases, within which the cans were
packed and shipped to Bristol bay. The dampness of
the boxes caused a large number of the cans to become
rusty and unfit for use, whereby plaintiff suffered dam-
ages to the amount given by the verdict.
"The defendant asked the Court to instruct the jury
that, if the boxes delivered to plaintiff were damp at the
time of delivery, and that fact was visible and apparent
upon inspection, and the plaintiff was aware of the said
condition of the boxes, but nevertheless accepted them
and appropriated them to its own use without notifying
the defendant.at the time of receiving them, or within a
reasonable time thereafter, that they were not accepted
as fulfilling the contract, that the plaintiff thereby waived
any such defects, and could not recover damages on ac-
count of them. This instruction was refused, and the
Court instructed the jury that acceptance by the plaintiff
and payment of the purchase price did not relieve the
defendant from liability under its guaranty, and that, if
they should find that the boxes were wet and damp at the
time of delivery, and were accepted and paid for by the
plaintiff, they should render a verdict for such damages
as the evidence should show were caused by the wet and
damp condition of the boxes. The defendant contends
that the Court erred in refusing to give the instruction
asked by it, and in instructing the jury as above stated.
"The main question in the case, and the one which
controls the decision upon the merits, involves the right
RIGHTS OF BUYER
695
of a buyer of personal property upon an express war-
ranty of qudlity to recover damages for a breach of such
warranty, where he has accepted the goods with knowl-
edge of the defect in quality. The defendant contends
that the only remedy of the buyer in the case of an exec-
utory contract for the sale of goods with a warranty of
quality, where he obtains knowledge of a defect in the
quality at the time the goods are offered for delivery, is
to reject such goods and insist upon the due perform-
ance of the contract; or, if the discovery of the defective
quality is made after delivery, to immediately rescind
the contract and return, or offer to return, the goods
received, and sue for the money paid therefor. The
general rule applicable to all cases of sales of property
is that the buyer has an election of remedies for a breach
of a contract of warranty. If he knows of the defect
at the time performance is offered, he may refuse to
accept the goods, insist on due performance and sue for
damages for nonperformance, if further performance is
not duly offered, and if he has paid for the goods in
advance, he can recover the amount of money paid there-
on as part of the damages. If part performance has
been made, he may rescind the contract, restore what he
has received, and recover what he has paid. He need
not rescind, or reject the goods, however, but may stand
upon the contract, and, relying upon the warranty, may
take the goods offered and sue for the damages caused
by the breach.
i( * * *
"The defendant contends that there is a well-recog-
nized exception to this rule in cases where the defects in
the articles are obvious, or where the buyer knows of
them at the time of the acceptance of the goods. * * *
If one who buys goods upon an express warranty of
quality must refuse to receive them if he knows they
are defective at the time, and waives his right of action
on the warranty if he accepts them, the warranty would
be useless, since he would have the same right if he had
not taken the warranty, and his damage for nondelivery
696
SALES
of the goods would be practically the same in one case
as in the other, except in the one case where greater
damages are allowed by the Code. Civil Code, Sec. 3314.
"For these reasons we are of the opinion that the Court
correctly instructed the jury, and that the evidence suffi-
ciently sustains the verdict of the jury.''
Question 362: What were the main facts, the defendant's
contention and what the court held?
Case 363. Rogers v. Hanson, 35 Iowa, 283.
Facts: Sale of a machine, under express warranty,
for which the purchasers gave a mare valued at $100 and
their notes for $610. Warranty broken and judgment
rescinding the contract, and requiring a surrender of the
mare and notes. Appeal by seller.
Point Involved: Whether after receipt of the goods
under a warranty, the purchaser may, on breach of the
warranty, rescind the sale.
Day, J.: "IV. Next it is urged that the Court erred
in rendering a judgment rescinding the contract, and
requiring a surrender of the mare and notes. The au-
thorities are irreconcilably in conflict as to the right of
a purchaser with warranty, upon a breach of the war-
ranty to rescind the contract and recover the purchase
price. As a result of the authorities Parsons states that
the purchaser 'may return the goods forthwith, and if
he does so without unreasonable delay, this will be a
rescission of the sale, and he may sue for the price if
he has paid it, or defend against an action for the price,
if one be brought by the seller.' L. Parsons on Cont.
(5th ed.), 592. At the same time he concedes that 'some
authorities of great weight limit his right to return the
goods for breach of warranty to cases of fraud, or where
there was an express agreement to that effect between
the parties.' Id. 593. Upon the other hand, in Story
on the Law of Sales, it is stated that 'if the contract
be executed, and the goods be completely accepted, so as
to pass the property therein to the vendee, it is very
generally held that he cannot elect to rescind the contract,
RIGHTS OF BUYER
697
and return the goods, after actually receiving them, so as
to entitle him to bring an action for money had and re-
ceived; but he must declare specially on his warranty.'
Story on Sales (4th ed.), Sec. 421. But it is admitted
that in some states it is held otherwise. In Don v. Fisher,
1 Cush. 271, Shaw, C. J., said: 'It' (a warranty) 'is
not strictly a condition, for it neither suspends nor de-
feats the completion of the sale, the vesting of the thing
sold in the vendee, nor the right to the purchase money
in the vendor. And notwithstanding such a warranty
or any breach of it, the vendee may hold the goods, and
have a remedy for his damages by action. But to avoid
circuity of action a warranty may be treated as a con-
dition subsequent, at the election of the vendee, who may,
upon a breach thereof, rescind the contract, and recover
back the amount of his purchase money, as in case of
fraud.'
"Such is also the rule in Maryland. See Hyatt v.
Boyle, 5 Gill & Johns. 121; Franklin v. Long, 7 id. 407.
The same rule has been declared in Maine. See Marston
v. Knight, 29 Me. 341; see, also, Bryant v. Isburgh, 13
Gray, 607; Kurtzman v. Weaver, 20 Penn. St. 422; Scran-
ton v. Tilly, 16 Tex. 183.
"The doctrine of the Massachusetts cases, though, per-
haps, not sustained by the greater number of authorities,
is, to our minds, the more reasonable and just. We know
of no satisfactory reason why one who desires a good
article and is willing to pay a price which will command
it, should be required to keep an inferior article at a
lesser price. Such a construction of the law substitutes
for the party's contract an agreement which he did not
make, and requires him to accept an article which he
would not have purchased if he had known of its defects.
"The true rule, it seems to us, is to give the vendee his
option to retain the purchased article and recover the
damages sustained, or to restore it within a reasonable
time, and recover the price paid.
Question 363: May one who has received goods under an ex-
press warranty, afterwards on discovering a breach thereof,
698
SALES
return the goods or must he keep them and sue on the warranty ?
Are the authorities in harmony on this point ?
Case 364. Eichelroth v. Lang, 156 111. Ap. 108.
Facts: The facts are stated in the opinion.
Point Involved: Whether, if the contract provides
that the goods purchased shall be returned within a cer-
tain time in case they are not in fulfillment of the war-
ranty, the buyer's remedies for breach of warranty are
thereby limited.
Mr. Justice Puterbaugh: 'Upon an appeal of this
cause from a justice of the peace, appellee recovered judg-
ment against appellant in the circuit court for $138.16.
The suit is based upon a note dated June 22, 1908, pay-
able on or before September 1, 1908, to International
Harvester Company of America, for the sum of $130 with
six per cent interest and signed by appellant. The note
was given in payment for a binder sold to appellant by
appellee, who was the agent of the Harvester Company,
in April, 1908. The order for the binder contains the
following warranty:
 'International Harvester Company of America (in-
corporated) warrants the above machine to do good work,
to be well made of good materials, and durable if used
with proper care. If, upon one day's trial with proper
care, the machine fails to work well, the purchaser shall
immediately give written notice to International Har-
vester Company of America at 7 Monroe Street, Chicago,
Illinois, and to the agent above named, stating wherein
the machine fails, shall allow reasonable time for a com-
petent man to be sent to put it in good order and render
necessary and friendly assistance to operate it. If the
machine cannot be made to work well, the purchaser shall
immediately return it to said agent and the price shall
be refunded which shall constitute a settlement in full of
the transaction. Use of the machine after one day (or
harvesting more than twelve acres), or failure to give
written notice to said Company and its agent, or failure
to return the machine, as above specified, shall operate
RIGHTS OF BUYER
699
as an acceptance of the machine and fulfillment of this
warranty. No agent has power to change the contract of
warranty in any respect, and the above order can be
canceled only by said Company's Chicago office. This
express warranty excludes all implied warranties, and
said Company shall in no event he liable for breach of
warranty in an amount exceeding the purchase price of
the machine.
(Signed)  ' P. M. Long.
 'Dated the 22nd day of April, 1908.
 'Sold by E. 0. Eichelroth.'
 The evidence shows that appellee, who was the agent
of the International Harvester Company at Litchfield,
Illinois, procured the order and note in question; that
said note was afterward transferred by endorsement to
appellee; that the hinder was delivered to the son of
appellant and that he began to cut wheat with it about
noon on the same day; that the machine failed to operate
properly; that upon the first or second day after its
delivery, the trip hammer broke, whereupon appellant
notified appellee and requested him to call and examine
and repair the machine; that a few days later he called
upon appellant at his office in Litchfield, and complained
that the machine did not do good work, and that appellee
promised to send a man to repair the machine, and told
appellant to go ahead and use it in the meantime; that
appellant continued to use the machine through the har-
vest after which time appellee sent an agent out, who
attempted to adjust the same so that it would work sat-
isfactorily; that appellant claimed the machine failed
to do the work according to the warranty and offered to
return it to appellee, but that appellee refused to accept
the same and brought this suit.
"At the close of all the evidence the Court instructed
the jury to return a verdict for the plaintiff for the
amount of the note and interest.
j. "We do not think it necessary to determine whether or
got the claim of appellant that the machine failed to do
700
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good work as warranted, is established by the evidence,
for the reason that upon the alleged failure of the ma-
chine to work well after one day's trial, appellant failed
to comply with the terms of the contract by immediately
giving notice of such fact to either the Harvester Com-
pany or to appellee, or by returning the machine to ap-
pellee as agent within a reasonable time. The evidence
shows that no notice of any character was given to the
Harvester Company, and it does not appear that such
Company was ever advised of appellant's complaint that
the machine failed to work. The evidence further dis-
closes that instead of returning the machine to appellee
upon discovering its alleged defects, appellant kept and
used it the entire season, cutting in all about 100 acres
of grain.
"It is well settled where one seeks to enforce a war-
ranty imposing mutual and dependent obligations and
covenants, he who seeks to enforce it must show com-
pliance on his part before he can insist upon performance
by his adversary. The clauses in the warranty relative
to notice and return are material and substantial parts
of it, and are for the protection of the seller, and the
purchaser is no more at liberty to disregard them than he
is any other clause of his contract. "When appellant made
this contract he agreed that he would satisfy himself
within one day whether the binder worked to his satis-
faction and filled the warranty, and further that if it did
not, he would at once give the notice required by the con-
tract, and that if he failed to give such notice, such fail-
ure should operate as an acceptance of the machinery
and fulfillment of the warranty. The provisions in the
contract are plain, and need no construction. * * *
Question 364: State the defense in this case and how it was
disposed of.
(Note: Some courts make a distinction between general and
limited warranties in this class of cases. Thus a promise that
the machine is of a certain kind of material and that it must be
returned in case it does not work well upon a test being made
RIGHTS OF BUYER
701
contains (as said in these cases) two warranties, upon the breach
of one of which the goods must be returned, but for the breach
Of the other (defective material) there may be a suit for dam-
ages. Thus, McCormick Harvesting Co. v. Fields, 90 Minn.
161.)
Case 365. McCormick v. Dunville, 36 la. 645.
Facts: Sale of a machine, warranty that it will oper-
ate in a certain manner, and if it does not, seller will
take it back and refund money. Suit to recover price
of the machine. Cross-claim by defendant on breach of
warranty.
Point Involved: Whether, in case of a warranty with
right to return if the warranty is broken, the buyer may
keep the article and sue for damages from breach of
warranty.
; Day, J.: "* * * Plaintiff, through his agent,
agreed to take the machine back if it did not work as
warranted; but it does not seem that it was made a con-
dition of the defendant's right of recovery for a breach
of the warranty, that he should return or offer to return
the machine. In this respect the warranty differs from
that contained in Bomberger, Wright & Co. v. Greiner,
18 Iowa, 477, in which there was an express agreement
that the machine should be returned if it failed to work
as warranted. * * *
Question 365: How does this case differ -from the foregoing
case ?
Case 366. Sanford v. Brown Bros. Co., 208 N. Y. 90,
50 L. E. A. N. S. 778.
Facts: Suit brought to recover damages for breach of
a warranty in sale of fruit trees. The defendant is a
corporation engaged in the nursery business. Plaintiff
is a farmer. He had never had any experience in the
growing of peaches. He decided to plant 25 acres of
land in peach trees and bought the trees from defendant
Under a contract by which it was provided that if any of
702
SALES
the trees did not prove to be true to name, they were to
be replaced free. This took place in 1902. In 1905, "con-
cededly as early a date as discovery could be made,
2,700 of the trees were found to be of a different variety
than those ordered. Plaintiff sues for damages. De-
fendant contends that the plaintiff's exclusive remedy is
to have the trees replaced. It is conceded that there
was no fraud on the part of the seller.
Point Involved: That a contract providing a remedy
of the nature stated will be construed according to the
evident intention of the parties as shown by all the sur-
rounding facts and circumstances.
Hogan, J.: "It is alleged by counsel for appellant
that the language used in the contract, ' any stock which
does not prove to be true to name as labeled is to be
replaced free, or purchase price refunded,' should be con-
strued as a limited liability on the part of the defendant
for any damage resulting under the contract. In support
of the reasonableness of such construction stress was laid
upon the absence of fraud or misrepresentation in the
sale; that in view of the price, the trees, which were two
years old, substantially all budded, were sold, 8y2 cents
each, out of which defendant paid the expense of boxing,
freight, and agent's commissions, no nursery would or
could have sold trees at such a price and assume risk
greater than that specified in the contract, especially
when such dealer had no more means of knowing that
the variety of peaches were as labeled than that possessed
by the purchaser.
"The form of contract was furnished by the defendant,
and under well-established principles, any doubt as to
the meaning of the terms employed must be resolved in
favor of the plaintiff. The defendant was engaged in the
nursery business, for how long a time does not appear,
except by implication. Mr. Brown, the president of de-
fendant, testified that he had been in the nursery busi-
ness twenty-five or twenty-six years, and we may assume
that the defendant corporation succeeded, in whole or in
RIGHTS OF BUYER
703
part, to his business. The plaintiff was a farmer with-
out previous experience in the culture of peaches; he
could not discover for a period of three or four years
the variety of peaches, if any, the trees would hear.
When he purchased the trees, he was justified in relying
upon the superior knowledge of the defendant as to the
quality of the trees to he selected and furnished by de-
fendant. The defendant was chargeable with notice of
the purpose for which the trees were to be used, and also
had knowledge that the trees would not attain to the
bearing point for a period of three or four years, during
which time plaintiff would be required to devote his time,
together with labor and expense, to the cultivation of the
orchard. It would be unreasonable to hold, under the
terms of this contract, that at the end of three weeks,
should the trees prove valueless, the only obligation was
to furnish a supply of new trees, or refund the purchase
price. In such a case, while defendant would sustain a
loss to the extent of the original cost of the trees, the
loss to plaintiff in the use of land, expenses of cultivation,
etc., might prove very substantial.
"The judgment should be affirmed, with costs.
Question 366: (1) State the facts in this case, the question
presented and the Court's decision.
PART IV
CHAPTER 47A
CONDITIONAL SALES
§391a. The Uniform Conditional Sales Act.
(Note: There appears to be a great need for uniformity of
legislation in respect to conditional sales. The requirements of
the various acts preceding the Uniform Conditional Sales. Act
are far from uniform, and many questions have arisen that
are not covered by statute upon which there has been diversity
of opinion. The Uniform Conditional Sales Act is in force at
the time of this writing in a number of states. Each of its sec-
tions is set out below as a "Case, and some comment made
thereon.)
§391b. Definition of terms.
Case 367. Uniform Conditional Sales Act, Sec. 1.
1. Definition of Terms. In this Act "Conditional
sale means (1) any contract for the sale of goods under
which possession is delivered to the buyer and the prop-
erty in the goods is to vest in the buyer at a subsequent
time upon the payment of part or all of the price, or
upon the performance of any other condition or the hap-
pening of any contingency; or (2) any contract for the
bailment or leasing of goods by which the bailee or
lessee contracts to pay as compensation a sum substan-
tially equivalent to the value of the goods, and by which
it is agreed that the bailee or lessee is bound to become,
or has the option of becoming the owner of such goods
upon full compliance with the terms of the contract.
"Buyer means the person who buys or hires the
goods covered by the conditional sale, or any legal sue-
cessor in interest of such person.
704
CONDITIONAL SALES
705
:"Filing district means the sub-division of the state
in which conditional sale contracts, or copies thereof,
are required by this act to be filed.
"Goods means all chattels personal other than things
in action and money, and includes emblements, industrial
growing crops, and things attached to or forming a part
of land which are agreed to be severed before sale or
under the conditional sale.
"Performance of the condition means the occurrence
of the event upon which the property in the goods is to
vest in the buyer, whether such event is the performance
of an act by the buyer or the happening of a contingency.
"Person includes an individual, partnership, corpo-
ration, and any other association.
"Purchase includes mortgage and pledge.
"Purchaser includes mortgagee and pledgee.
"Seller means the person who sells or leases the
goods covered by the conditional sale, or any legal sue-
cessor in interest of such person.
Question 367: (1) A sells to B a set of books to be taken
possession of by B and paid for $3.00 per month for twelve
months, title retained in A until the last installment paid, at
which time B is to become the owner. What is this transaction
called ?
(2) A leases to B a piano for $20 a month, for a period of
twelve months and it is provided that upon the payment of the
last month's rent B shall be entitled to the piano. Is this a con-
difional sale and covered by the conditional sales act?
§ 391c. Primary rights of buyer.
Case 368. Uniform Conditional Sales Act, Sec. 2.
2. Primary Rights of Buyer. The buyer shall have
the right when not in default to retain possession of the
goods, and he shall also have the right to acquire the
property in the goods on the performance of the con-
ditions of the contract. The seller shall be liable to the
buyer for the breach of all promises and warranties, ex-
Press or implied, made in the conditional sale contract,
706
SALES
whether or not the property in the goods has passed to
the buyer.
Question 368: In a conditional sale, who has the right of
possession ? Does the fact that title is retained for purposes of
security prevent the buyer from enforcing warranties ?
§ 391d. Primary rights of seller.
Case 369. Uniform Conditional Sales Act, Sec. 3.
3. Primary Rights of Seller. The buyer shall be li-
able to the seller for the purchase price, or for install-
ments thereof, as the same shall become due, and for
breach of all promises made by him in the conditional
sale contract, whether or not the property in the goods
has passed to the buyer.
Question 369: State this section.
§391e. Conditional sales valid.
Case 370. Uniform Conditional Sales Act, Sec. 4.
4. Conditional Sales Valid Except as Otherwise Pro-
vided. Every provision in a conditional sale reserving
property in the seller after possession of the goods is
delivered to the buyer, shall be valid as to all persons,
except as hereinafter otherwise provided.
Question 370: If A sells property to B and gives B posses-
sion under the contract with reservation of title in A until the
purchase price is paid, are A's rights superior to liens of B's
creditors and the rights of purchasers from B? With what
proviso ?
§ 391f. Conditional sales void as to certain persons.
Case 371. Uniform Conditional Sales Act, Sec. 5.
5. Conditional Sales Void as to Certain Persons?
Every provision in a conditional sale reserving property
in the seller, shall be void as to any purchaser from o*
creditor of the buyer, who without notice of such pro-'
vision, purchases the goods or acquires by attachment
CONDITIONAL SALES
707
or levy a lien upon them, before the contract or a copy
thereof shall be filed within ten days after the making
of the conditional sale.
Question 371: Referring to question 370, what qualification
is now to be made by virtue of Paragraph 5 ?
(Note: In a majority of the states, filing of the contract of
conditional sale is provided for. Without such filing the seller
is not protected against creditors of the purchaser, and pur-
chasers from the purchaser unless they have actual notice.
By the Uniform Act, the seller has ten days protection with-
out filing.)
§ 391g. Place of filing.
Case 372. Uniform Sales Act, Sec. 6.
6. Place of Filing. The conditional sale contract or
copy shall be filed in the office, in
(the city), (county), (registration district) in which the
goods are first kept for use by the buyer after the sale.
It shall not be necessary to the validity of such condi-
tional sale contract, or in order to entitle it to be filed,
that it be acknowledged or attested. This section shall
not apply to the contracts described in Section 8.
Question 372: What is necessary to perfect the right of the
seller in a conditional sale as against creditors and purchasers?
Must the conditional sale contract be acknowledged or attested
in order to be entitled to record ?
§ 391h. Fixtures.
Case 373. Uniform Conditional Sales Act, Sec. 7.
7. Fixtures. If the goods are so affixed to realty, at
the time of a conditional sale or subsequently as to be-
come a part thereof and not to be severable wholly or
in any portion without material injury to the freehold,
the reservation of property as to any portion not so
severable shall be void after the goods are so affixed,
as against any person who has not expressly assented
jp the reservation. If the goods are so affixed to realty
708
SALES
at the time of a conditional sale or subsequently as to
become part thereof but to be severable without material
injury to the freehold, the reservation of property shall
be void after the goods are so affixed as against subse-
quent purchasers of the realty for value and without no-
tice of the conditional seller's title, unless the conditional
sale contract, or a copy thereof, together with a state-
ment signed by the seller briefly describing the realty
and stating that the goods are or are to be affixed thereto,
shall be filed before such purchase in the office where a
deed of the realty would be recorded or registered to
affect such realty. As against the owner of realty the
reservation of the property in goods by a conditional
seller shall be void when such goods are to be so affixed
to the realty as to become part thereof but to be sever-
able without material injury to the freehold, unless the
conditional sale contract, or a copy thereof, together with
a statement signed by the seller briefly describing the
realty and stating that the goods are to be affixed thereto,
shall be filed before they are affixed, in the office where
a deed would be recorded or registered to affect such
realty.
Question 373: If A sells machinery to B under a conditional
sales contract and B sells the real estate to C (including all
improvements and fixtures thereon) can A enforce his rights
against C, the purchaser?
(Note: It is generally held that an innocent purchaser of
real estate is not affected by the existence of conditional sale
contracts of which he has no notice, which affect fixtures that
are a part of the real estate. This section is intended to cover
such cases and provides a way in which such conditional vendor
may protect himself by putting the item upon the real estate
records.)
§ 391i. Railroad equipment.
Case 374. Uniform Conditional Sales Act, Sec, 8.
8. Railroad Equipment or Rolling Stock. No condi-,
tional sale of railroad, or street or interurban railwa^l
CONDITIONAL SALES
709
equipment or rolling stock shall be valid as against the
purchasers and creditors described in Section 5, unless
the contract shall be acknowledged by the buyer or at-
tested in like manner as a deed of real property, and
the contract, or a copy thereof, shall be filed or recorded
in the office of ; and unless when any
engine or car so sold is delivered there shall be then plain-
ly and conspicuously marked upon each side thereof the
name of the seller, followed by the word '' owner.''
(Note: Statutes covering the conditional sale of railroad
equipment and rolling stock now exist in most states. They
are somewhat similar to the above statute.)
§391j. Conditional sale of goods for resale.
Case 375. Uniform Conditional Sales Act, Sec. 9.
9. Conditional Sale of Goods for Resale. When
goods are delivered under a conditional sale contract
and the seller expressly or impliedly consents that the
buyer may resell them prior to performance of the con-
ditions, the reservation of property shall be void against
purchasers from the buyer for value in the ordinary
course of business, and as to them the buyer shall be
deemed the owner of the goods, even though the contract
or a copy thereof shall be filed according to the provision
of this act.
Question 375: A under conditional sale contract delivers to
B ten lawn mowers to be resold by T in the way of trade. A
to pay $10 a month until the last payment when he is to get
title. A properly records this conditional sale contract. B de-
faults in payment and sells a lawn mower to C in ordinary
course of trade. Can A retake from C ?
(Note: This section states a general rule of law.)
§ 391k. Filing.
Case 376. Uniform Conditional Sales Act, Sec. 10.
10. Filing. The filing officer shall mark upon the con-
/act or copy filed with him the day and hour of filing
710
SALES
and shall file the contract or copy in his office for public
inspection. He shall keep a separate book in which he
shall enter the names of the seller and buyer, the date
of the contract, the day and hour of filing, a brief de-
scription of goods, the price named in the contract and
the date of cancellation thereof; except that in entering
the contracts mentioned in Section 8 the shall
record either the sum remaining to be paid upon the con-
tract or the price of the goods. Such book shall be in-
dexed under the names of both seller and buyer. For
filing and entering such contract or copy the filing officer
shall be entitled to a fee of (ten cents), except that for
filing and entering a contract described in Section 8 the
shall be entitled to a fee of (one dollar).
Question 376: What are the provisions of this section?
§ 3911. Refiling.
Case 377. Uniform Conditional Sales Act, Sec. 11.
11. Refiling. The filing of conditional sale contracts
provided for in Sections 5, 6 and 7 shall be valid for a
period of three years only. The filing of the contract
provided for by Section 8 shall be valid for a period of
fifteen years only. The validity of the filing may in each
case be extended for successive additional periods of one
year from date of refiling by filing in the proper filing
district a copy of the original contract within thirty days
next preceding the expiration of each period, with a state-
ment attached signed by the seller, showing that the
contract is in force and the amount remaining to be paid
thereon. Such copy, with statement attached, shall be
filed and entered in the same manner as a contract or
copy filed and entered for the first time, and the filing
officer shall be entitled to a like fee as upon the original
filing.
Question 377: For how long a period does the record pro-
tect the seller?
(Note: It is an existing provision in some conditional sales
acts and chattel mortgage acts to prescribe short periods for the
CONDITIONAL SALES
711
validity of the record. This is for the purpose of rendering
search of the records unnecessary except for the period cov-
ered. There are no similar restrictions on real estate records.)
§391m. Cancellation of contract.
Case 378. Uniform Conditional Sales Act, Sec. 12.
12. Cancellation of Contract. After the performance
of the condition, upon written demand delivered person-
ally or by registered mail by the buyer or any other
person having an interest in the goods, the seller shall
execute, acknowledge and deliver to the demandant a
statement that the condition in the contract has been
performed. If for ten days after such demand the seller
fails to mail or deliver such a statement of satisfaction,
he shall forfeit to the demandant five dollars ($5.00)- and
be liable for all damages suffered. Upon presentation of
such statement of satisfaction the filing officer shall file
the same and note the cancellation of the contract and the
date thereof on the margin of the page where the con-
tract has been entered. For filing and entering the state-
ment of satisfaction the filing officer shall be entitled to
a fee of (ten cents), except that the shall be en-
titled to a fee of (fifty cents) for filing and entering a
statement of the satisfaction of a contract described in
Section 8.
Question 378: How is the conditional sale cancelled upon
the records ?
§ 391n. Sale or removal by buyer.
Case 379. Uniform Conditional Sales Act, Sec. 13.
13. Prohibition of Removal or Sale Without Notice.
Unless the contract otherwise provides, the buyer may,
without the consent of the seller, remove the goods from
any filing district and sell, mortgage or otherwise dis-
pose of his interest in them; but prior to the perform-
ance of the condition, no such buyer shall remove the
goods from a filing district in which the contract or a
copy thereof is filed, except for temporary uses for a
712
SALES
period of not more than thirty days, unless the buyer
not less than ten days before such removal shall give
the seller personally or by registered mail written notice
of the place to which the goods are to be removed and
the approximate time of such intended removal; nor prior
to the performance of the condition shall the buyer sell,
mortgage or otherwise dispose of his interest in the
goods, unless he, or the person to whom he is about to
sell, mortgage or otherwise dispose of the same, shall
notify the seller in writing personally or by registered
mail of the name and address of the person to whom his
interest in the goods is about to be sold, mortgaged or
otherwise transferred, not less than ten days before such
sale, mortgage or other disposal. If any buyer does so
remove the goods, or does so sell, mortgage or otherwise
dispose of his interest in them without such notice or in
violation of the contract, the seller may retake possession
of the goods and deal with them as in case of default in
payment of part or all of the purchase price. The pro-
visions of the section regarding the removal of goods
shall not apply, however, to the goods described in Sec-
tion 8.
§ 391o. Refiling or removal.
Case 380. Uniform Conditional Sales Act, Sec. 14.
14. Refiling on Removal. When, prior to the per-
formance of the condition, the goods are removed by the
buyer from a filing district in this state to another filing
district in this state in which such contract or a copy
there'of is not filed, or are removed from another state
into a filing district in this state where such contract or
copy is not filed, the reservation of the property in the
seller shall be void as to the purchasers and creditors
described in Section 5, unless the conditional sale con-
tract or a copy thereof shall be filed in the filing district
to which the goods are removed, within ten days after the
seller has received notice of the filing district to which
the goods have been removed. The provisions of this
section shall not apply, however, to the goods described
CONDITIONAL SALES
713
in Section 8. The provisions of Section 11 regarding the
duration of the validity of the filing and the necessity
for refiling shall apply to contracts or copies which are
filed in a filing district other than that where the goods
are originally kept for use by the buyer after the sale.
Question 380: "What must a seller do to protect himself
against creditors and purchasers of the buyer where the buyer
removes the goods to another filing district. Within what
time?
(Note: Similar provisions now prevail in some states aside
from this Act, although the time allowed is usually longer.)
§ 391p. Fraudulent injury, concealment.
Case 381. Uniform Conditional Sales Act, Sec. 15.
15. Fraudulent Injury, Concealment, Removal or Sale.
When, prior to the performance of the condition, the
buyer maliciously or with intent to defraud, shall injure,
destroy or conceal the goods, or remove them to a filing
district where the contract or a copy thereof is not filed,
without having given the notice required by Section 13,
or shall sell, mortgage, or otherwise dispose of such goods
under claim of full ownership, he shall be guilty of a
crime and upon conviction thereof shall be imprisoned
(in the county jail) for not more than (one year) or be
fined not more than ($500) or both.
Question 381: Under what conditions is the removal of the
goods by the buyer a crime?
§ 391q. Retaking possession.
Case 382. Uniform Conditional Sales Act, Sec. 16.
16. Retaking Possession. When the buyer shall be
in default in the payment of any sum due under the con-
tract, or in the performance of any other condition which
the contract requires him to perform in order to obtain
the property in the goods, or in the performance of any
promise the breach of which is by the contract expressly
made a ground for the retaking of the goods, the seller
714
SALES
may retake possession thereof. Unless the goods can be
retaken without breach of the peace, they shall be retaken
by legal process; but nothing herein shall be construed
to authorize a violation of the criminal law.
Question 382: If a buyer in a conditional sale does not make
the payments as agreed, and the conditional sale does not ex-
pressly give the right to retake the goods, has the seller the right
to retake the goods?
(Note: Inasmuch as a conditional sale is for purposes of
security, the retention of title being in the character of a lien,
the right to retake on default is an obvious remedy.)
§ 39 lr. Notice of intention to retake.
Case 383. Uniform Conditional Sales Act, Sec. 17.
17. Notice of Intention to Retake. Not more than
forty nor less than twenty days prior to the retaking,
the seller, if he so desires, may serve upon the buyer
personally or by registered mail a notice of intention to
retake the goods on account of the buyer's default. The
notice shall state the default and the period at the end
of which the goods will be retaken, and shall briefly and
clearly state what the buyer's rights under this act will
be in case they are retaken. If the notice is so served
and the buyer does not perform the obligations in which
he has made default before the day set for retaking, the
seller may retake the goods and hold them subject to the
provisions of Sections 19, 20 and 23 regarding resale,
but without any right of redemption.
Question* 383: What notice does the act provide for retak-
ing the goods? Does a seller have to give this notice if he re-
takes? Does the buyer have any right to redeem the goods if
they are retaken after notice?
§ 391s. Redemption.
Case 384. Uniform Conditional Sales Act, Sec. 18.
18. Redemption. If the seller does not give the no-
tice of intention to retake described in Section 17, be1
CONDITIONAL SALES
715
shall retain the goods for ten days after the retaking
within the state in which they were located when retaken,
during which period the buyer, upon payment or tender
of the amount due under the contract'at the time of re-
taking and interest, or upon performance or tender of
performance of such other condition as may be named
in the contract as precedent to the passage of the prop-
erty in the goods, or upon performance or tender of per-
formance of any other promise for the breach of which
the goods were retaken, and upon payment of the ex-
penses of retaking, keeping and storage, may redeem the
goods and become entitled to take possession of them
and to continue in the performance of the contract as
if no default had occurred. Upon written demand de-
livered personally or by registered mail by the buyer,
the seller shall furnish to the buyer a written statement
of the sum due under the contract and the expense of
retaking, keeping and storage. For failure to furnish
such statement within a reasonable time after demand,
the seller shall forfeit to the buyer ($10) and also be
liable to him for all damages suffered because of such
failure. If the goods are perishable so that retention for
ten days as herein prescribed would result in their de-
struction or substantial injury, the provisions of this
section shall not apply, and the seller may resell the
goods immediately upon their retaking. The provision
of this section requiring the retention of the goods within
the state during the period allowed for redemption shall
not apply to the goods described in Section 8.
Question 384: When the goods are retaken by the seller for
default by the buyer, what are the seller's rights of redemption?
Does he have these rights of redemption where the seller gives
notice ?
(Note: The reason that the act provides for redemption in
case of no notice to retake by seller, and no redemption if there
is notice, is because the buyer in either case has a period of time
wherein to re-instate himself.)
716*
SALES
§391t. Compulsory resale by seller.
Case 385. Uniform Conditional Sales Act, Sec. 19.
19. Compulsory Resale by Seller. If the buyer does
not redeem the goods within ten days after the seller
has retaken possession, and the buyer has paid at least
fifty per cent of the purchase price at the time of the
retaking, the seller shall sell them at public auction in
the state where they were at the time of the retaking,
such sale to be held not more than thirty days after the
retaking. The seller shall give to the buyer not less
than ten days' written notice of the sale, either person-
ally or by registered mail, directed to the buyer at his
last known place of business or residence. The seller
shall also give notice of the sale by at least three notices
posted in different public places within the filing district
where the goods are to be sold, at least five days before
the sale. If at the time of the retaking $500 or more
has been paid on the purchase price, the seller shall also
give notice of the sale at least five days before the sale
by publication in a newspaper published or having a
general circulation within the filing district where the
goods are to be sold. The seller may bid for the goods
at the resale. If the goods are of the kind described in
Section 8, the parties may fix in the conditional sale con-
tract the place where the goods shall be resold.
Question 385: When must a seller who has retaken the goods,
resell them. What must he do to make such sale valid? May
he buy at the sale himself ?
(Note: It has been decided in many states where this Act
was not in force that a seller may retake, peaceably or by re-
plevin, when the buyer is in default, and the buyer in that event
forfeits the payments he has already made. This is inequitable
in many cases where the buyer has paid a considerable sum,
and the purpose of this act, is to take away this right and re-
duce the damages to a logical and certain basis.
§ 391u. Resale at option of parties.
Case 386. Uniform Conditional Sales Act, Sec. 20.
20. Resale at Option of Parties. If the buyer has not
paid at least fifty per cent of the purchase price at the
CONDITIONAL SALES
717
time of the retaking, the seller shall not be under a duty
to resell the goods as prescribed in Section 19, unless
the buyer serves upon the seller, within ten days after
the retaking, a written notice demanding a resale, de-
livered personally or by registered mail. If such notice
is served, the resale shall take place within thirty days
after the service, in the manner, at the place and upon
the notice prescribed in Section 19. The seller may vol-
untarily resell the goods for account of the buyer on
compliance with the same requirements.
Question 386: If the seller need not resell under Section 19,
can the buyer compel him to resell under this section ?
§ 391v. Proceeds of resale.
Case 387. Uniform Conditional Sales Act, Sec. 21.
21. Proceeds of Resale. The proceeds of the resale
shall be applied (1) to the payment of the expenses there-
of, (2) to the payment of the expenses of retaking, keep-
ing and storing the goods, (3) to the satisfaction of the
balance due under the contract. Any sum remaining
after the satisfaction of such claims shall be paid to the
buyer.
Question 387: What shall the seller do with the proceeds of
the resale?
§391w. Deficiency on resale.
Case 388. Uniform Conditional Sales Act, Sec. 22.
22. Deficiency on Resale. If the proceeds of the re-
sale are not sufficient to defray the expenses thereof, and
also the expenses of retaking, keeping and storing the
i goods and the balance due upon the purchase price, the
seller may recover the deficiency from the buyer, or from
anyone who has succeeded to the obligations of the buyer.
Question 388: Has the seller the right to charge the buyer
for a loss arising out of the resale ? What are proper elements
in computing the loss ?
§ 391x. Rights where no resale.
Case 389. Uniform Conditional Sales Act, Sec. 23.
23. Rights of Parties Where There is no Resale.
Where there is no resale, the seller may retain the goods
718
SALES
as his own property without obligation to account to the
buyer except as provided in Section 25, and the buyer
shall be discharged of all obligation.
Question 389: Where there is no resale (in cases authorized
by the act) and the seller retakes the goods, what is the effect
upon the sellers' rights and remedies.
§ 39 ly. Election of remedies.
Case 390. Uniform Conditional Sales Act, Sec. 24.
24. Election of Remedies. After the retaking of pos-
session as provided in Section 16 the buyer shall be liable
for the price only after a resale and only to the extent
provided in Section 22. Neither the bringing of an action
by the seller for the recovery of the whole or any part of
the price, nor the recovery of judgment in such action,
nor the collection of a portion of the price, shall be
deemed inconsistent with a later retaking of the goods as
provided in Section 16. But such right of retaking shall
not be exercised by the seller after he has collected the
entire price, or after he has claimed a lien upon the
goods, or attached them, or levied upon them as the
goods of the buyer.
Question 390: If a seller sues for the price, may he also re-
take the goods? What limitations? If he retakes the goods
may he sue for the price ?
(Note: Aside from the provisions of this Act it is generally
held that if the seller sues for the entire purchase price, he
waives his right to retake the goods. This act changes that
view and gives the seller the right to sue and later to retake.)
§ 391z. Recovery of part payments.
Case 391. Uniform Conditional Sales Act, Sec. 25.
25. Recovery of Part Payments. If the seller fails
to comply with the provisions of Sections 18, 19, 20, 21,
and 23 after retaking the goods, the buyer may recover
from the seller his actual damages, if any, and in no
CONDITIONAL SALES
719
event less than one-fourth of the sum of all payments
Which have been made under the contract, with interest.
Question 391: When may the buyer recover from the seller
what he has paid?
§ 391aa. Waiver of statutory protection.
Case 392. Uniform Conditional Sales Act, Sec. 26.
26. Waiver of Statutory Protection. No act or agree-
ment of the buyer before or at the time of the making of
the contract, nor any agreement or statement by the
buyer in such contract, shall constitute a valid waiver of
the provision of Sections 18, 19, 20, and 25; except that
the contract may stipulate that on such default of the
buyer as is provided for in Section 16, the seller may re-
scind the conditional sale, either as to all the goods or as
to any part thereof for which a specific price was fixed in
the contract. If the contract thus provides for rescis-
sion, the seller at his option may retake such goods with-
out complying with or being bound by the provisions of
Sections 17 to 25 inclusive, as to the goods retaken, upon
crediting the buyer with the full purchase price of those
goods. So much of this credit as is necessary to cancel
any indebtedness of the buyer to the seller shall be so
applied, and the seller shall repay to the buyer on demand
any surplus not so required.
Question 392: May the parties by contract waive the pro-
teetion and requirements of this act?
§ 391bb. Loss and increase.
Case 393. Uniform Conditional Sales Act, Sec. 27.
27. Loss and Increase. After the delivery of the
goods to the buyer and prior to the retaking of them by
the seller, the risk of injury and loss shall rest upon the
buyer. The increase of the goods shall be subject to the
same conditions as the original goods.
Question 393: On whom is risk of loss in case of loss when
goods are in buyer's possession and while the title is still re-
served in the seller ?
720
SALES
(Note: Risk of loss is on the buyer according to the prevar
lent view. It is an exception to the rule that '' loss attends the
title for the goods are in equity and substance the buyer's, the
retention of the title being in the nature of a lien.)
APPENDIX TO DIVISION D
1. UNIFORM SALES ACT
PART I.
Formation of the Contract.
Section 1. (Contracts to Sell and Sales.) (1) A contract to sell goods
is a contract whereby the seller agrees to transfer the property in goods to
the buyer for a consideration called the price.
(2) A sale of goods is an agreement whereby the seller transfers the
property in goods to the buyer for a consideration called the price.
(3) A contract to sell or a sale may be absolute or conditional.
(4) There may be a contract to sell or a sale between one part owner
and another.
Section 2. (Capacity—Liabilities for Necessaries.) Capacity to buy
and sell is regulated by the general law concerning capacity to contract,
and to transfer and acquire property.
Where necessaries are sold and delivered to an infant, or to a person
who by reason of mental incapacity or drunkenness is incompetent to
contract, he must pay a reasonable price therefor.
Necessaries in this section means goods suitable to the condition in life
of such infant or other person, and to his actual requirements at the time
of delivery.
Section 3. (Form of Contract or Sale.) Subject to the provisions of
this act and of any statute .in that behalf, a contract to sell or a sale may
be made in writing (either with or without seal), or by word of mouth, or
partly in writing and partly by word of mouth, or may be inferred from
the conduct of the parties.
Section 4. (Statute of Frauds.) (1) A contract to sell or a sale of
any goods or choses in action of the value of five hundred dollars or upward
shall not be enforceable by action unless the buyer shall accept part of
the goods or choses in action so contracted to be sold or sold, and actually
receive the same, or give something in earnest to bind the contract, or
in part payment, or unless some note or memorandum in writing of the
contract or sale be signed by the party to be charged or his agent in
that behalf.
(2) The provisions of this section apply to every such contract or sale,
lotwithstanding that the goods may be intended to be delivered at some
"uture time or may not at the time of such contract or sale be actually
nade, procured, or provided, or fit or ready for delivery, or some act may
'6 requisite for the making or completing thereof, or rendering the same
721
722
SALES
fit for delivery; but if the goods are to be manufactured by the seller
especially for the buyer and are not suitable for sale to others in the
ordinary course of the seller's business, the provisions of this section shall
not apply.
(3) There is an acceptance of goods within the meaning of this section
when the buyer, either before or after delivery of the goods, expresses by
words or conduct his assent to becoming the owner of those specific goods.
Section 5. (Existing and Future Goods.) (1) The goods which form
the subject of a contract to sell may be either existing goods, owned or
possessed by the seller, or goods to be manufactured or acquired by the
seller after the making of the contract to sell, in this act called "future
goods.
(2) There may be a contract to sell goods, the acquisition of which
by the seller depends upon a contingency which may or may not happen.
(3) Where the parties purport to effect a present-sale of future goods,
the agreement operates as a contract to sell the goods.
Section 6. (Undivided Shares.) (1) There may be a contract to sell
or a sale of an undivided share of goods. If the parties intend to effect a
present sale, the buyer, by force of the agreement, becomes an owner in
common with the owner or owners of the remaining shares.
(2) In the case of fungible goods, there may be a sale of an undivided
share of specific mass, though the seller purports to sell and the buyer to
buy a definite number, weight or measure of the goods in the mass, and
though the number, weight or measure of the goods in the mass is undeter-
mined. By such a sale the buyer becomes owner in common of such a share
or the mass as the number, weight or measure bought bears to the number,
weight or measure of the mass. If the mass contains less than the number,
weight or measure bought, the buyer becomes the owner of the whole mass
and the seller is bound to make good the deficiency from similar goods unless
a contrary intent appears.
Section 7. (Destruction of Goods Sold.) , (1) Where the parties pur-
port to sell specific goods, and the goods without the knowledge of the seller
have wholly perished at the time when the agreement is made, the agree-
ment is void.
(2) Where the parties purport to sell specific goods, and the goods with-
out the knowledge of the seller have perished in part or have wholly or in a
material part so deteriorated in quality as to be substantially changed in
character, the buyer may at his option treat the sale—
(a) As avoided, or
(b) As transferring the property in all of the existing goods or in so
much thereof as have not deteriorated, and as binding the buyer to pay the
full agreed price if the sale was indivisible or to pay the agreed price for
the goods in which the property passes if the sale was divisible. v
Section 8. (Destruction of Goods Contracted to be Sold.) (1) Where
there is a contract to sell specific goods, and subsequently but before the
risk passes to the buyer, without any fault on the part of the seller or the
buyer, the goods wholly perish, the contract is thereby avoided.
(2) Where there is a contract to sell specific goods, and subsequently,
but before the risk passes to the buyer, without any fault of the seller or
the buyer, part of the goods perish or the whole or a material part of the
UNIFORM SALES ACT
723
goods so deteriorate in quality as to be substantially changed in character,
the buyer may at his option treat the contract—
(a) As avoided, or
(b) As binding the seller to transfer the property in all of the existing
goods or in so much thereof as have not deteriorated, and as binding the
buyer to pay the full agreed price if the contract was indivisible, or to pay
the agreed price for so much of the goods as the seller, by the buyer's
option, is bound to transfer if the contract was divisible.
Section 9. (Definition and Ascertainment of Price.) (1) The price
may be fixed by the contract, or may be left to be fixed in such manner as
may be agreed, or it may be determined by the course of dealing between
the parties.
(2) The price may be made payable in any personal property.
(3) Where transferring or promising to transfer any interest in real
estate constitutes the whole or part of the consideration for transferring or
for promising to transfer the property in goods, this act shall not apply.
(4) Where the price is not determined in accordance with the foregoing
provisions the buyer must pay a reasonable price. What is a reasonable
price is a question of fact dependent on the circumstances of each par-
ticular case.
Section 10. (Sale at a Valuation.) (1) Where there is a contract to
sell or a sale of goods at a price or on terms to be fixed by a third person,
and such third person without fault of the seller or the buyer, cannot or
does not fix the price or terms, the contract or the sale is thereby avoided;
but if the goods or any part thereof have been delivered to and appropriated
by the buyer he must pay a reasonable price therefor.
(2) Where such third person is prevented from fixing the price or
terms by fault of the seller or the buyef, the party not in fault may have
such remedies against the party in fault as are allowed by Parts IV and
V of this act.
Section 11. (Effect of Conditions.) (1) Where the obligation of either
party to a contract to sell or a sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or sale or
he may waive performance of the condition. If the other party has prom-
ised that the condition should happen or be performed, such first-mentioned
party may also treat the non-performance of the condition as a breach of
warranty.
(2) Where the property in the goods has not passed, the buyer may
treat the fulfillment by the seller of his obligation to furnish goods as
described and as warranted expressly or by implication in the contract to sell
as a condition of the obligation of the buyer to perform his promise to
accept and pay for the goods.
Section 12. (Definition of Express Warranty.) Any affirmation of fact
or any promise by the seller relating to the goods in an express warranty if
the natural tendency of such affirmation or promise is to induce the buyer
to purchase the goods, and if the buyer purchases the goods relying
thereon. No affirmation of the value of the goods nor any statement pur-
porting to be a statement of the seller's opinion only shall be construed
as a warranty.
724
SALES
Section 13. (Implied Warranties of Title.) In a contract to sell or a
sale, unless a contrary intention appears, there is—
(1) An implied warranty on the part of the seller that in case of a sale
he has a right to sell the goods, and that in case of a contract to sell he will
have a right to sell the goods at the time when the property is to pass.
(2) An implied warranty that the buyer shall have and enjoy quiet pos-
session of the goods as against any lawful claims existing at the time of
the sale.
(3) An implied warranty that the goods shall be free at the time of the
sale from any charge or incumbrance in favor of any third person, not de-
clared or known to the buyer before or at the time when the contract or
sale is made.
(4) This section shall not, however, be held to render liable a sheriff,
auctioneer, mortgagee, or other persons professing to sell by virtue of
authority in fact or law goods in which a third person has a legal or
equitable interest.
Section 14. (Implied Warranty in Sale by Description.) Where there
is a contract to sell or a sale of goods by description, there is an implied
warranty that the goods shall correspond with the description and if the
contract or sale be by sample, as well as by description, it is not sufficient
that the bulk of the goods corresponds with the sample if the goods do not
also correspond with the description.
Section 15. (Implied Warranties of Quality.) Subject to the provi-
sions of this act and of any statute in that behalf, there is no implied war-
ranty or condition as to the quality or fitness for any particular purpose
of goods supplied under a contract to sell or a sale, except as follows:
(1) Where the buyer, expressly or by implication, makes known to the
seller the particular purpose for which the goods are required, and it ap-
pears that the buyer relies on the seller's skill or judgment (whether he
be the grower or manufacturer or not), there is an implied warranty that
the goods shall be reasonably fit for such purpose.
(2) Where the goods are bought by description from a seller who deals
in goods of that description (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be of merchant-
able quality.
(3) If the buyer has examined the goods, there is no implied warranty
as regards defects which such examination ought to have revealed.
(4) In the case of a contract to sell or a sale of a specified article
under its patent or other trade name, there is no implied warranty as to
its fitness for any particular purpose..
(5) An implied warranty or condition aS to quality or fitness for a
particular purpose may be annexed by the usage of trade.
(6) An express warranty or condition does not negative a warranty
or condition implied under this act unless inconsistent therewith.
Section 16. (Implied Warranties in Sale by Sample.) In the case of
a contract to sell or a sale by sample:
(a) There is an implied warranty that the bulk shall correspond with
the sample in quality.
(b) There is an implied warranty that the buyer shall have a reason*
UNIFORM SALES ACT
725
able opportunity of comparing the bulk with the sample, except so far as
otherwise provided in section 47 (3).
(c) If the seller is a dealer in goods of that kind, there is an implied
warranty that the goods shall be free from any defect rendering them
unmerchantable which would not be apparent on reasonable examination
of the sample.
PART II.
Transfer of Property and Title.
Section 17. (No Property Passes until Goods are Ascertained.) Where
there is a contract to sell unascertained goods no property in the goods is
transferred to the buyer unless and until the goods are ascertained, but
property in an undivided share of ascertained goods may be transferred as
provided in section 6.
Section 18. (Property in Specific Goods Passes when Parties so In-
tend.) (1) Where there is a contract to sell specific or ascertained goods,
the property in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard
shall be had to the terms of the contract, the conduct of the parties, usages
of trade and the circumstances of the case.
Section 19. (Rules for Ascertaining Intention.) Unless a different in-
tention appears, the following are rules for ascertaining the intention of
the parties, as to the time at which the property in the goods is to pass
to the buyer.
Rule 1. Where there is an unconditional contract to sell specific goods,
in a deliverable state, the property in the goods passes to the buyer when
the contract is made, and it is immaterial whether the time of payment,
or the time of delivery, or both, be postponed.
Rule 2. Where there is a contract to sell specific goods and the seller
is bound to do something to the goods, for the purpose of putting them
into a deliverable state, the property does not pass until such thing be done.
Rule 3. (1) When the goods are delivered to the buyer "on sale or
return, or on other terms indicating an intention to make a present sale,
but to give the buyer an option to return the goods instead of paying the
price, the property passes to the buyer on delivery, but he may revest the
property in the seller by returning or tendering the goods within the time
fixed in the contract, or, if no time has been fixed) within a reasonable
time.
(2) When goods are delivered to the buyer on approval or on trial
or on satisfaction, or other similar terms, the property therein passes to the
buyer—
; (a) When he signifies his approval or acceptance to the seller or does
any other act adopting the transaction.
! (b) If he does not signify his approval or acceptance to the seller
but retains the goods without giving notice of rejection, then if a time
,jhas been fixed for the return of the goods, on the expiration of such time,
726
SALES
and, if no time has been fixed, on the expiration of a reasonable time.
What is a reasonable time is a question of fact.
Eule 4. (1) Where there is a contract to sell unascertained or future
go'ods by description, and goods of that description and in a deliverable
state are unconditionally appropriated to the contract, either by the seller
with the assent of the buyer, or by the buyer with the assent of the seller,
the property in the goods thereupon passes to the buyer. Such assent may
be expressed or implied, and may be given either before or after the appro-
priation is made.
(2) Where, in pursuance of a contract to sell, the seller delivers the
goods to the buyer, or to a carrier or other bailee (whether named by the
buyer or not) for the purpose of transmission to or holding for the buyer,
he is presumed to have unconditionally appropriated the goods to the con-
tract, except in cases provided for in the next rule and in section 20. This
presumption is applicable, although by the terms of the contract, the buyer
is to pay the price before receiving delivery of the goods, and the goods
are marked with the words "collect on delivery or their equivalents.
Eule 5. If the contract to sell requires the seller to deliver the goods
to the buyer, or at a particular place, or to pay the freight or cost of
transportation to the buyer, or to a particular place, the property does not
pass until the goods have been delivered to the buyer or reached the place
agreed upon.
Section 20. (Eeservation of Eight of Possession or Property when Goods
are Shipped.) (1) Where there is a contract to sell specific goods, or
where goods are subsequently appropriated to the contract, the seller may,
by the terms of the contract or appropriation, reserve the right of pos-
session or property in the goods until certain conditions have been fulfilled.
The right of possession or property may be thus reserved notwithstanding
the delivery of the goods to the buyer or to a carrier or other bailee for
the purpose of transmission to the buyer.
(2) Where goods are shipped, and by the bill of lading the goods
are deliverable to the seller or his agent, or to the order of the seller or
his agent, the seller thereby reserves the property in the goods. But if,
except for the form of the bill of lading, the property would have passed
to the buyer on shipment of-the goods, the seller's property in the goods
shall be deemed to be only for the purpose of securing performance by the
buyer of his obligations under the contract.
(3) Where goods are shipped, and by the bill of lading the goods are
'deliverable to the order of the buyer or of his agent, but possession of
the bill of lading is retained by the seller or his agent, the seller thereby
reserves a right to the possession of the goods as against the buyer.
(4) Where the seller of goods draws on the buyer for the-price and
transmits the bill of exchange and bill of lading together to the buyer to
secure acceptance or payment of the bill of exchange, the buyer is bound
to return the bill of lading if he does not honor the bill of exchange, and
if be wrongfully retains the bill of lading he acquires no added right
thereby. If, however, the bill of lading provides that the goods are de-
liverable to the buyer or to the order of the buyer, or is indorsed in blank,
or to the buyer by the consignee named therein, one who purchases in good
faith, for value, the bill of lading, or goods from the buyer will obtain
UNIFORM SALES ACT
727
the property in the goods, although the bill of exchange has not been hon-
ored, provided that such purchaser has received delivery of the bill of
lading indorsed by the consignee named therein, or of the goods, without
notice of the facts making the transfer wrongful.
Section 21. (Sale by Auction.) In the case of sale by auction—
(1) Where goods are put up for sale by auction in lots, each lot is the
subject of a separate contract of sale.
(2) A sale by auction is complete when the auctioneer announces its
completion by the fall of the hammer, or in other customary manner. Until
sUch announcement is made, any bidder may retract his bid; and the auc-
tioneer may withdraw the goods from sale unless the auction has been
.announced to' be without reserve.
(3) A right to bid may be reserved expressly by or on behalf of the
seller.
(4) Where notice has not been given that a sale by auction is sub-
ject to a right to bid on behalf of the seller, it shall not be lawful for
the seller to bid himself or to employ or induce any person to bid at such
sale on his behalf, or for the auctioneer to employ or induce aiiy person
to bid at such sale on behalf of the seller or knowingly take any bid from
the seller or any person employed by him. Any sale contravening this rule
ihay be treated as fraudulent by the buyer.
Section 22. (Risk of Loss.) Unless otherwise agreed, the goods remain
at the seller's risk until the property therein is transferred to the buyer,
but when the property therein is transferred to the buyer the goods are
at the buyer's risk whether delivery has been made or not, except that—
(a) Where the delivery of the goods has been made to the buyer, or
to a bailee for the buyer, in pursuance of the contract and the property
in the goods has been retained by the seller merely to secure performance
by the buyer of his obligation under the contract, the goods are at the
buyer's risk from the time of such delivery.
(b) Where delivery has been delayed through the fault of either buyer
or seller the goods are at the risk of the party in fault as regards any
loss which might not have occurred but for such fault.
Section 23. (Sale by a Person not the Owner.) (1) Subject to the
provisions of this act, where goods are sold by a person who is not the
owner thereof, and who does not sell them under the authority or with the
consent of the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct precluded
from denying the seller's authority to sell.
(2) Nothing in this act, however, shall affect—
(a) The provisions of any factors' acts, recording acts, or any enact-
ment enabling the apparent owner of goods to dispose of them as if he
were the true owner thereof.
(b) The validity of any contract to sell or sale under any special com-
mon law or statutory power of sale or under the order of a court of compe-
tent jurisdiction.
Section 24. (Sale by One Having a Voidable Title.) Where the seller
: of goods has a voidable title thereto, but his title has not been avoided at
the time of the sale, the buyer acquires a good title to the goods, provided
728
SALES
he buys them in good faith, for value, and without notice of the seller's
defect of title.
Section 25. (Sale by Seller in Possession of Goods Already Sold.)
Where a person having sold goods continues in possession of the goods, or
of negotiable documents of title to the goods, the delivery or transfer by
that person, or by an agent acting for him, of the goods or documents of
title under any sale, pledge, or other disposition thereof, to any person
receiving and paying value for the same in good faith and without notice
of the previous sale, shall have the same effect as if the person making the
delivery or transfer were expressly authorized by the owner of the goods
to make the same.
Section 26. (Creditors' Rights against Sold Goods in Seller's Posses*
sion.) Where a person having sold goods continues in possession of the
goods, or of negotiable documents of title to the goods, and such retention
of possession is fraudulent in fact or is deemed fraudulent under any rule
of law, a creditor or creditors of the seller may treat the sale as void.
Section 27. (Definition of Negotiable Document of Title.) A doeu*
ment of title in which it is stated that the goods referred to therein will
be delivered to the bearer, or to the order of any person named in such
document, is a negotiable document of title.
Section 28. (Negotiation of Negotiable Documents by Delivery.) A
negotiable document of title may be negotiated by delivery:
(a) Where by the terms of the document the carrier, warehouseman
or other bailee issuing the same undertakes to deliver the goods to the
bearer, or
(b) Where by the terms of the document the carrier, warehouseman or
other bailee issuing the same undertakes to deliver the goods to the order
of a specified person, and such person or a subsequent indorsee of the
document has indorsed it in blank or to bearer.
Where by the terms of a negotiable document of title the goods are
deliverable to a bearer or where a negotiable document of title has been
indorsed in blank or to bearer, any holder may indorse the. same to him-
self or to any other person, and in such ease the document shall thereafter
be negotiated only by the indorsement of such indorsee.
Section 29. (Negotiation of Negotiable Documents by Indorsement.)
A negotiable document of title may be negotiated by the indorsement of
the person to whose order the goods are by the terms of the document
deliverable. Such indorsement may be in blank, to bearer or to a specified
person. If indorsed to a specified person, it may be again negotiated by
the indorsement of such person in blank, to bearer or to another specified
person. Subsequent negptiation may be made in like manner.
Section 30. (Negotiable Documents of Title Marked "Not Negotia-
ble.") If a document of title which contains an undertaking by a car-
rier, warehouseman or other bailee to deliver the goods to the bearer, to a
specified person or order, or to the order of a specified person, or which
contains words of like import, has placed upon it the words "Not nego-
tiable,  non-negotiable'' or the like, such a document may nevertheless
be negotiated by the holder and is a negotiable document of title within
the meaning of this act. But nothing in this act contained shall be con-
strued as limiting or defining the effect upon the obligations of the cap
UNIFORM SALES ACT
729
rier, warehouseman, or other bailee issuing a document of title of placing
thereon the words "non-negotiable, or the like.
Section 31. (Transfer of Non-Negotiable Documents.) A document of
title which is not in such form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser or donee. A non-
negotiable document cannot be negotiated and the indorsement of such a
document gives the transferee no additional right.
Section 32. (Who May Negotiate a Document.) A negotiable docu-
ment of title may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the document
has been entrusted by the owner, if, by the terms of the document the
bailee issuing the document undertakes to deliver the goods to the order
of the person in whom the possession or custody of the document has been
entrusted, or if at the time of such entrusting the document is in such
form that it may be negotiated by delivery.
Section 33. (Eights of Person to Whom Document Has Been Nego-
tiated.) A person to whom a negotiable document of title has been duly
negotiated acquires thereby—
(a) Such title to the goods as the person negotiating the document to
him had or had ability to convey to a purchaser in good faith for value
and also such title to the goods as the person to whose order the goods
were to be delivered by the terms of the document had or had ability to
convey to a purchaser in good faith foT value, and
(b) The direct obligation of the bailee, issuing the document to hold
possession of the goods for him according to the terms of the document
as fully as if such bailee had contracted directly with him.
■ Section 34. (Rights of Person to Whom Document Has Been Trans-
ferred.) A person to whom a document of title has been transferred, but
not negotiated, acquires thereby, as against the transferor, the title to the
goods, subject to the terms of any agreement with the transferor.
If the document is non-negotiable, such person also acquires the right
to notify the bailee who issued the document of the transfer thereof, and
thereby acquire the direct obligation of such bailee to hold possession of
the goods for him according to the terms of the document.
Prior to the notification of such bailee by the transferor or transferee
of a non-negotiable document of title the title of the transferee to the
goods and the right to acquire the obligation of such bailee may be defeated
by the levy of an attachment or execution upon the goods by a creditor
of the transferor, or by a notification to such bailee by the transferor or
a subsequent purchaser from the transferor of a subsequent sale of the
goods by the transferor.
Section 35. (Transfer of Negotiable Document Without Indorsement.)
Where a negotiable document of title is transferred for value by delivery,
and the indorsement of the transferor is essential for negotiation, the trans-
feree acquires a right against the transferor to compel him to indorse the
document unless a contrary intention appears. The negotiation shall take
effect as of the time when the indorsement is actually made.
Section 36. (Warranties on Sale of Document.) A person who for
value negotiates or transfers a document of title by indorsement or delivery,
730
SALES
including one who assigns for value a claim, secured by a document of title
unless a contrary intention appears, warrants:
(a) That the document is genuine.
(b) That he has a legal right to negotiate or transfer it.
(c) That he has knowledge of no fact which would impair the validity
or worth of the document, and
(d) That he has a right to transfer the title to the goods, and that
the goods are merchantable or fit for a particular purpose, whenever such
warranties would have been implied if the contract of the parties had been
to transfer without a document of title the goods represented thereby.
Section 37. (Indorser not a Guarantor.) The indorsement of a docu-
ment of title shall not make the indorser liable for any failure on the part
of the bailee who issued the document or previous indorsers thereof to
fulfill their respective obligations.
Section 38. (When Negotiation not Impaired by Fraud, Mistake or
Duress.) The validity of the negotiation of a negotiable document of title
is not impaired by the fact that the negotiation was a breach of duty on
the part of the person making the negotiation, or by the fact that the owner
of the document was induced by fraud, mistake or duress to entrust the
possession or custody thereof to such person, if the person to whom the
document was negotiated or a person to whom the document was subse-
quently negotiated paid value therefor, without notice of the breach of
duty, or fraud, mistake or duress.
Section 39. (Attachment or Levy upon Goods for which a Negotiable
Document Has Been Issued.) If goods are delivered to a bailee by the
owner or by a person whose act in conveying the title to them to a pur-
chaser in good faith for value would bind the owner and a negotiable
document of title is issued for them they cannot thereafter, while in the
possessions of such bailee, be attached by garnishment or otherwise or be
levied upon under an execution unless the document be first surrendered to
the bailee or its negotiation enjoined. The bailee shall in no case be com-
pelled to deliver up the actual possession of the goods until the document
is surrendered to him or impounded by the court.
Section 40. (Creditors' Remedies to Reach Negotiable Documents.) A
creditor whose debtor is the owner of a negotiable document of title shall
be entitled to such aid from courts of appropriate jurisdiction by injunc-
tion and otherwise in attaching such documents or in satisfying the claim
by means thereof as is allowed at law or in equity in regard to property
which cannot readily be attached or levied upon by ordinary process.
PART III.
Performance of the Contract.
Section 41. (Seller Must Deliver and Buyer Accept Goods.) It is the
duty of the seller to deliver the goods, and of the buyer to accept and pay
for them, in accordance with the terms of the contract to sell or sale.
Section 42. (Delivery and Payment are Concurrent Conditions.) Unless;
otherwise agreed, delivery of the goods and payment of the price are con-
UNIFORM SALES ACT
731
current condition; that is to say, the seller must be ready and willing to
give possession of the goods to the buyer in exchange for the price and
the buyer must be ready and: willing to pay the price in exchange for the
possession of the goods.
Section 43. (Place, Time and Manner of Delivery.) (1) Whether it
is, for the buyer to take possession of the goods or for the seller to send
them to the . buyer is a question depending in each case on the contract,
express or implied, between the parties. Apart from any such contract,
express or implied, or usage of trade to the contrary, the place of delivery
is the seller's place of business if he have one, and if not, his residence,
hut in case of contract to sell or a sale of specific goods, which to the
knowledge of the parties when the contract or the sale was made were in
some other place, then that place is the place of delivery.
..(2). Where by a contract to sell or a sale the seller is bound to send
the goods to the buyer, but no time for sending them is fixed, the seller
is,bound to send them within a reasonable time.
(3) Where the goods at the time of sale are in the possession of a
third person, the, seller has not fulfilled his obligation to deliver to the buyer
unless and until such third person acknowledges to the buyer that he holds
the goods on the buyer's behalf; but as against all others than the seller
the buyer shall be regarded as having received delivery from the time when
such third person first has notice of the sale. Nothing in this section, how-
eyer, shall affect the operation of the issue or transfer of any document
of title to goods.
,,(4) Demand or tender of delivery may be treated as ineffectual unless
made at a reasonable hour. What is a reasonable hour is a question of
fact. :
(5) Unless otherwise agreed, the expenses of and incidental to putting
the goods into a deliverable state must be borne by the seller.
Section 44. (Delivery of Wrong Quantity.) (1) Where the seller de-
livers to the buyer a quantity of goods less than he contracted to sell, the
buyer may reject them, but if the buyer accepts or retains the goods so
delivered, knowing that the seller is not going to perform the contract in
full, he must pay for them at the contract rate. If, however, the buyer
has used or disposed of the goods delivered before he knows that the seller
is going to perform his contract in full, the buyer shall not be liable for
more than the fair value to him of the goods so received.
(2) Where the seller delivers to the buyer a quantity of goods larger
than he contracted to sell, the buyer may accept the goods included in
the contract and reject the rest, or he may reject the whole. If the buyer
accepts the whole of the goods so delivered he must pay for them at the
contract rate.
(3) Where the seller delivers to the buyer the goods he contracted to
sell mixed with- goods of a different description not included in the con-
traet, the buyer may accept the goods which are in accordance with the
.contract and reject the rest, or he may reject the whole.
, (4) The provisions of this section are subject to any usage of trade,
^special agreement, or course of dealing between the parties.
, : Section 45. (Delivery in Installments.) (1) Unless otherwise agreed,
732
SALES
the buyer of the goods is not bound to accept delivery thereof by install-
ments.
(2) Where there is a contract to sell goods to be delivered by stated
installments, which are to be separately paid for, and the seller makes
defective deliveries in respect of one or more installments, or the buyer
neglects or refuses to take delivery of or pay for one or more installments,
it depends in each case on the terms of the contract and the circumstances
of the case whether the breach of contract is so material as to justify the
injured party in refusing to proceed further and suing for damages for
breach of the entire contract, or whether the breach is severable, giving
rise to a claim for compensation, but not to a right to treat the whole con-
tract as broken.
Section 46. (Delivery to a Carrier on Behalf of the Buyer.) (1)
Where, in pursuance of a contract to sell or a sale, the seller is authorized
or required to send the goods to the buyer, delivery of the goods to a car-
rier, whether named by the buyer or not, for the purpose of transmission
to the buyer is deemed to be a delivery of the goods to the buyer, except
in cases provided for in section 19, rule 5, or unless a contrary intent
appears.
(2) Unless otherwise authorized by the buyer, the seller must make
such contract with the carrier on behalf of the buyer as may be reasonable,
having regard to the nature of the goods and the other circumstances of
the case. If the seller omit so to do, and the goods are lost or damaged
in course of transit, the buyer may decline to treat the delivery to the'
carrier as a delivery to himself, or may hold the seller responsible in
damages.
(3) Unless otherwise agreed, where goods are sent by the seller to
the buyer under circumstances in which the seller knows or ought to know
that it is usual to insure, the seller must give such notice to the buyer as
may enable him to insure them during their transit, and, if the seller fails
to do so, the goods shall be deemed to be at his risk during such transit.
Section 47. (Right to Examine the Goods.) (1) Where goods are
delivered to the buyer, which he has not previously examined, he is not
deemed to accept them unless and until he has had a reasonable oppor-
tunity of examining them for the purpose of ascertaining whether they
are in conformity with the contract.
(2) Unless otherwise agreed, when the seller tenders delivery of goods
to the buyer, he is bound, on request, to afford the buyer a reasonable
opportunity of examining the goods for the purpose of ascertaining whether
they are in conformity with the contract.
(3) Where goods are delivered to a carrier by the seller in accordance
with the order from or agreement with the buyer, upon the terms that the
goods shall not be delivered by the carrier to the buyer until he has paid
the price, whether such terms are indicated by marking the goods with the
words "collect on delivery, or otherwise, the buyer is not entitled to
examine the goods before payment of the price in the absence of agreement
permitting such examination.
Section 48. (What Constitutes Acceptance.) The buyer is deemed to
have accepted the goods when be intimates to the seller that he has accepted
them, or when the goods have been delivered to him, and he does any act
UNIFORM SALES ACT
733
in relation to them which is inconsistent with the ownership of the seller,
or when, after the lapse of a reasonable time, he retains the goods intimat-
ing to the seller that he has rejected them.
Section 49. (Acceptance Does not Bar Action for Damages.) In the
absence of express or implied agreement of the parties, acceptance of the
goods by the buyer shall not discharge the seller from liability in damages
or other legal remedy for breach of any promise or warranty in the con-
tract to sell or the sale. But, if, after acceptance of the goods, the buyer
fail to give notice to the seller of the breach of any promise or warranty
within a reasonable time after the buyer knows, or ought to know of such
breach, the seller shall not be liable therefor.
Section 50. (Buyer is not Bound to Return Goods Wrongly Delivered.)
Unless otherwise agreed, when goods are delivered, to the buyer, and he
refuses to accept them, having the right so to do, he is not bound to return
them to the seller, but it is sufficient if he notifies the seller that he refuses
to accept them.
Section 51. (Buyer's Liability for Bailing to Accept Delivery.) When
the seller is ready and willing to deliver the goods, and requests the buyer
to take delivery, and the buyer does not within a reasonable time aftei
such request take delivery of the goods, he is liable to the seller for any
loss occasioned by his neglect or refusal to take delivery, and also for a
reasonable charge for the care and custody of the goods. If the neglect or
refusal of the buyer to take delivery amounts to a repudiation or breach of
the entire contract, the seller shall have the rights against the goods and
on the contract hereinafter provided in favor of the seller when the buyer
is in default.
PART IV.
Rights of Unpaid Seller. Against the Goods.
Section 52. (Definition of Unpaid Seller.) (1) The seller of goods
is deemed to be an unpaid seller within the meaning of the act—
(a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument has been
received as conditional payment, and the condition on whieh it was received
has been broken by reason of the dishonor of the instrument, the insolvency
of the buyer, or otherwise.
(2) In this part of this act the term "seller includes an agent of
the seller to whom the bill of lading has been indorsed, or a consigner or
agent who has himself paid, or is directly responsible' for, the price, or any
other person who is in the position of a seller.
Section 53. (Remedies of an Unpaid Seller.) (1) Subject to the pro-
visions of this act, notwithstanding that the property in the goods may
have passed to the buyer, the unpaid seller of the goods, as such, has—
(a) A lien on the goods or right to retain them for the price while
he is in possession of them;
(b) In case of the insolvency of the buyer, a right of stopping the
goods in transitu after he has parted with the possession of them;
734
SALES
(e) A right of resale as limited by this act;
(d) A right to rescind the sale as limited by this act.
(2) Where the property in goods has not passed to the buyer, the un-
paid seller has, in addition to his other remedies, a right of withholding
delivery similar to and coextensive with his rights of lien and stoppage
"in transitu where the property has passed to the buyer.
Section 54. (When Eight of Lien May be Exercised.) (1) Subject
to the provisions of this act, the unpaid seller of goods who is in posses-
sion of them is entitled to retain possession of them until payment or tender
of the price in the following cases, namely:
(a) Where the goods have been sold without any stipulation as to
credit;
(b) Where the goods have been sold on credit, but the term of credit
has. expired;
(e) Where the buyer becomes insolvent.
(2) The seller may exercise his right of lien notwithstanding that he
is in possession of the goods as agent or bailee for the buyer.
Section 55. (Lien after Part Delivery.) Where an unpaid seller has
made part delivery of the goods, he may exercise his right of lien on the
remainder, unless such part delivery has been made under such circum-
stances as to show an intent to waive the lien or right of retention.
Section 56. (When Lien is Lost.) (1) The unpaid seller of goods
loses his lien thereon—
(a) When he delivers the goods to a carrier or other bailee for the
purpose of transmission to the buyer without reserving the property in the
goods or the right to the possession thereof;
(b) When the buyer or his agent lawfully obtains possession of the
goods;
(c) By waiver thereof.
(2) The unpaid seller of goods, having a lien thereon, does not lose
his lien by reason only that he has obtained judgment or decree for the
price of the goods.
Section 57. (Seller may Stop Goods on Buyer's Insolvency.) Subject
to the provisions of this act, when the buyer of goods is or becomes
insolvent, the unpaid seller who har parted with the possession of the
goods has the right of stopping them in transitu, that is to say, he may
resume possession of the goods at any time while they are in transit, and
he will then become entitled' to the same rights in regard to the goods as
he would have had if he had never parted with the possession.
Section 58. (When Goods are in Transit.) (1) Goods are in transit
within the meaning of section 57—
(a) Prom the time when they are delivered to a carrier by land or
water, or other bailee for the purpose of transmission to the buyer, until
the buyer, or his agent in that behalf, takes delivery of them from such
carrier or other bailee;
(b) If the goods are rejected by the buyer, and the carrier or other
bailee continues in possession of them, even if the seller has refused to
receive them back.
(2) Goods are no longer in transit within the meaning of section 57—
UNIFORM SALES ACT
735
(a) If the buyer, or his agent in that behalf, obtains delivery of the
goods before their arrival at the appointed destination;
(b) If, after the arrival of the goods at the appointed destination, the
carrier or other bailee acknowledges to the buyer or his agent that he
holds the goods on his behalf and continues in possession of them as bailee'
for the buyer or his agent; and it is immaterial that a further destination
for the goods may have been indicated by the buyer;
(c) If the carrier or other bailee wrongfully refuses to deliver the
goods to the buyer or his agent in that behalf.
(3) If the goods are delivered to a ship chartered by the buyer, it is
a question depending on the circumstances of the particular case, whether
they are in the possession of the master as a carrier or as agent of the
buyer.
(4) If part delivery of the goods has been made to the buyer, or his
agent in that behalf, the remainder of the goods may be stopped in transitu,
unless such part delivery has been made under such circumstances as to
show an agreement with the buyer to give up possession of the whole of
the goods.
Section 59. (Ways of Exercising the Eight to Stop.) (1) The unpaid
seller may exercise his right of stoppage in transitu either by obtaining
actual possession of the goods or by giving notice of his claim to the car-
rier or other bailee in whose possession the goods are. Such notice may
be given either to the person in actual possession of the goods or to his
principal. In the latter case the notice to be effectual, must be given at
such time and under such circumstances that the principal, by the exercise
of reasonable diligence, may prevent a delivery to the buyer.
(2) When notice of stoppage in transitu is given by the seller to the
carrier, or other bailee in possession of the goods, he must redeliver the
goods to, or according to the directions of, the seller. The expenses of such
redelivery must be borne by the seller. If, however, a negotiable document
of title representing the goods has been issued by the carrier or other bailee,
he shall not'be obliged to deliver or be justified in delivering the goods to
the seller unless such document is first surrendered for cancellation.
Section 60. (When and How Eesale may be Made.) (1) Where the
goods are of a perishable nature, or where the seller expressly reserves the
right of resale in case the buyer should make default, or where the buyer
has been in default in the payment of the price an unreasonable time, an
unpaid seller having a right of lien or having stopped the goods in transitu
may resell the goods. lie shall not thereafter be liable to the original
buyer upon the contract to sell or the sale or for any profit made by such
resale, but may recover from the buyer damages for any loss occasioned
by the breach of the contract or the sale.
(2) Where a resale is made, as authorized in this section, the buyer
acquires a good title as against the original buyer.
(3) It is not essential to the validity of a resale that notice of an inten-
tion to resell the goods be given by the seller to the original buyer. But
where the right to resell is not based on the perishable nature of the goods
or upon an express provision of the contract or the sale, the giving or fail-
ure to give such notice shall be relevant in any issue involving the question
736
SALES
whether the buyer had been in default an unreasonable time before the
resale was made.
(4) It is not essential to the validity of a resale that notice of the time
and place of such resale should be given by the seller to the original buyer.
(5) The seller is bound to exercise reasonable care and judgment in
making a resale, and subject to this requirement may make a resale either
by public or private sale.
Section 61. (When and How the Seller May Rescind the Sale.) (1)
An unpaid seller having a right of lien or having stopped the goods in
transitu, may rescind the transfer of title and resume the property in the
goods, where he expressly reserved the right to do so in case the buyer
should make default, or where the buyer has been in default in the payment
of the price an unreasonable time. The seller shall hot thereafter be liable
to the buyer upon the contract to sell or the sale, but fnay recover from
the buyer damages for any loss occasioned by the breach of the contract
or the sale.
(2) The transfer of title shall not be held to have been rescinded by an
unpaid seller until he has manifested by notice to the buyer or by some
other overt act an intention to rescind. It is not necessary that such overt
act should be communicated to the buyer, but the giving or failing to give
notice to the buyer of the intention to rescind shall be relevant in any
issue involving the question whether the buyer has been in default an
unreasonable time before the right of rescission was asserted.
Section 62. (Effect of Sale of Goods Subject to Lien or Stoppage in
Transitu.) Subject to the provisions of this act, the unpaid seller's right
of lien or stoppage in transitu is not affected by any sale, or other dis-
position of the goods which the buyer may have made, unless the seller
has assented thereto.
If, however, a negotiable document of title has been issued for goods,
no seller's lien or right of stoppage in transitu shall defeat the right of
any purchaser for value in good faith to whom such document has been
negotiated, whether such negotiation be prior or subsequent to the notifi-
cation to the carrier or other bailee who issued such document, of the
seller's claim to a lien or right of stoppage in transitu.
PART V.
Actions for Breach of the Contract.
Section 63. (Action for the Price.) (1) Where, under a contract to
sell or a sale, the property of the goods^ has passed to the buyer, and the
buyer neglects or refuses to pay for the goods according to the terms of
the contract or the sale, the seller may maintain an action against him for
the price of the goods.
(2) Where, under a contract to sell or a sale, the price is payable on
a day certain, irrespective of delivery or of transfer of title and the buyer
wrongfully neglects or refuses to pay such price, the seller may maintain an
action for the price, although the property in the goods has not passed,
and the goods have not been appropriated to the contract. But it shall
UNIFORM SALES ACT
737
be a defense to such an action that the seller at any time before judgment
in such action has manifested an inability to perform the contract or the
sale on his part or an intention not to perform it.
(3) Although the property in the goods has not passed, if they cannot
readily be resold for a reasonable price, and if the provisions of section 64
(4) are not applicable, the seller may offer to deliver the goodh to the
buyer, and, if the buyer refuses to receive them, may notify the buyer that
the goods are thereafter held by the seller as bailee for the buyer. There-
after the seller may treat the goods as the buyer's and may maintain an
aetion for the price.
Section 64. (Action for Damages for Non-Acceptance of the Goods.)
(1) Where the buyer wrongfully neglects or refuses to accept and pay
for the goods, the seller may maintain an aetion against him for damages
for non-acceptance.
(2) The measure of damages is the estimated loss directly and naturally
resulting, in the ordinary course of events, from the buyer's breach of
contract.
(3) Where there is an available market for the goods in question, the
measure of damages is, in the absence of special circumstances, showing
proximate damage of a greater amount, the difference between the contract
price and the market or current price^ at the time or times when the goods
ought to have been accepted, or, if no time was fixed for acceptance, then
at the time of the refusal to accept.
(4) If, while labor or expense of material amount are necessary on
the part of the seller to enable him to fulfill his obligations under the con-
traet to sell or the sale, the buyer repudiates the contract or the sale, or
notifies the seller to proceed no further therewith, the buyer shall be liable
to the seller for no greater damages than the seller would have suffered if
he did nothing towards carrying out the contract or the sale after receiving
notice of the buyer's repudiation or countermand. The profit the seller
would have made if the contract or the sale had been fully performed shall
be considered in estimating such damages.
Section 65. (When Seller May Eescind Contract or Sale.) Where the
goods have not been delivered to the buyer, and the buyer has repudiated
the contract to sell or sale, or has manifested his inability to perform his
obligations thereunder, or has committed a material breach thereof, the
seller may totally rescind the contract or the sale by giving notice of his
election so to do to the buyer.
Section 66. (Aetion for Converting or Detaining Goods.) Where the
property in the goods has passed to the buyer and the seller wrongfully
neglects or refuses to deliver the goods, the buyer may maintain any action
allowed by law to the owner of goods of similar kind when wrongfully
converted or withheld.
Section 67. (Action for Failing to Deliver Goods.) (1) Where the
property in the goods has not passed to the buyer, and the seller wrong-
fully neglects or refuses to deliver the goods, the buyer may maintain an
action against the seller for damages for non-delivery.
(2) The measure of damages is the loss directly and naturally result-
ing in the ordinary course of events, from the seller's breach of contract.
(3) Where there is an available market for the goods in question, the
738
SALES
measure of damages in the absence of special circumstances showing proxi-
mate damages of a greater amount, is the difference between the contract
price and the market or current price of the goods at the time or times
when they ought to have been delivered, or, if no time was fixed, then at
the time of the refusal to deliver.
Section* 68. (Specific Performance.) Where the seller has broken a
contract to deliver specific or ascertained goods, a court having the powers
of a court of equity may, if it thinks fit, on the application of the buyer,
by its judgment or decree direct that the contract shall be performed
specifically, without giving the seller the option of retaining the goods on
payment of damages. The judgment or decree may be unconditional, or
upon such terms and conditions as to damages, payment of the price and
otherwise, as to the court may seem just.
Section 69. (Remedies for Breach of Warranty.) (1) Where there
is a breach of warranty by the seller, the buyer may, at his election—
(a) Accept or keep the goods and set up against the seller, the breach
of warranty by way of recoupment in diminution or extinction of the
price;
(b) Accept or keep the goods and maintain an action against the seller
for damages for the breach of warranty;
(c) Refuse to accept the goods, if #the property therein has not passed,
and maintain an action against the seller for damages for the breach of
warranty;
(d) R'escind the contract to sell or the sale and refuse to receive the
goods, or if the goods have already been received, return them or offer to
return them to the seller and recover the price or any part thereof whieh
has been paid.
(2) When the buyer has claimed and been granted a remedy in any
one of these ways, no other remedy can thereafter be granted.
(3) Where the goods have been delivered to the buyer, he cannot rescind
the sale if he knew of the breach of warranty when he accepted the goods,
or if he fails to notify the seller within a reasonable time of the election
to rescind, or if he fails to return or to offer to return the goods to the
seller in substantially as good condition as they were in at the time the
property was transferred to the buyer. But if deterioration or injury of
the goods is due to the breach of warranty, such deterioration or injury
shall not prevent the buyer from returning and offering to return the goods
to the seller and rescinding the sale.
(4) Where the buyer is entitled to rescind the sale and elects to do
so, the buyer shall cease to be liable for the price i pon returning or offering
to return the goods. If the price or any part thereof has already been
paid, the seller shall be liable to repay so much thereof as has been paid,
concurrently with the return of the goods, or immediately after an offer
to return the goods in exchange for repayment of the price.
(5) Where the buyer is entitled to rescind the sale and elects to do so,
if the seller refuses to accept an offer of the buyer to return the goods,
the buyer shall thereafter be deemed to hold the goods as bailee for the
seller, but subject to a lien to secure the repayment of any portion of the
price which has been paid, and with the remedies for the enforcement of
such lien allowed to an unpaid seller by section 53.
BILLS OF LADING ACT
739
(6) The measure of damages for breach of warranty is the loss directly
and naturally resulting, in the ordinary course of events, from the breach
of warranty.
(7) In the case of breach of warranty of quality, such loss, in the
absence of special circumstances showing proximate damage of a greater
amount, is the difference between the value of the goods at the time of
delivery to the buyer and the value they would have had if they had
answered to the warranty.
Section 70. (Interest and Special Damages.) Nothing in this act shall
affect the right of the buyer or the seller to recover interest or special
damages in any case where by law interest or special damages may be
recoverable, or to recover money paid where the consideration for the
payment of it has failed.
2. UNIFORM CONDITIONAL SALES ACT.
This is set out as Chapter 47a, supra.
3. UNIFORM BILLS OF LADING ACT.
(Adopted in Alaska, Connecticut, Idaho, Illinois, Iowa, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, North Carolina,
New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,
Vermont, Washington, Wisconsin, United States.)
sees.
1-10. Issue of bills of lading.
11-27. Obligations and rights of carriers upon their bills of lading.
28-43. Negotiation and transfer of bills.
44-50. Criminal offenses.
551-56. Interpretation.
Section 1. Bills of lading issued by any common carrier shall be gov-
ered by this Act.
Sec. 2. Every bill must embody within its written or printed terms:
(a) The date of its issue,
(b) The name of the person from whom the goods have been received,
(c) The place where the goods have been received,
(d) The place to which the goods are to be transported,
(e) A statement whether the goods received will be delivered to a
specified person, or to the order of a specified person,
(f) A description of the goods or of the packages containing them
which may, however, be in such general terms as are referred to in section
23, and
(g) The signature of the carrier.
A negotiable bill shall have the words '' order of'' printed thereon
immediately before the name of the person upon whose order the goods
received are deliverable.
A carrier shall be liable to any person injured thereby for the damage
caused by the omission from a negotiable bill of any of the provisions
required in this section.
740
SALES
Stec. 3. A carrier may insert in a bill, issued by him, any other terms
and conditions, provided that such terms and conditions shall not—
(a) Be contrary to law or public policy, or
(b) In any wise impair his obligation to exercise at least that degree
of care in the transportation and safe-keeping of the goods entrusted to
him which a reasonably careful man would exercise in regard to similar
goods of his own.
Sec. 4. A bill in which it is stated that the goods are consigned or
destined to a specified person, is a non-negotiable or straight bill.
Sec. 5. A bill in which it is stated that the goods are consigned or
destined to the order of any person named in such bill, is a negotiable or
order bill.
Any provision in such a bill that it is non-negotiable shall not affect
its negotiability within the meaning of this Act.
Sec. 6. Negotiable bills issued in this State for the transportation of
goods to any place in the United States on the continent of North America,
except Alaska, shall not be issued in parts or sets.
If so issued the cafrier issuing them shall be liable for failure to deliver
the goods described therein to any one who purchases a part for value
in good faith, even though the purchase be after the delivery of the goods
by the carrier to a holder of one of the other parts.
Sec. 7. When more than one negotiable bill is issued in this State
for the same goods to be transported to any place in the United States
on the continent of North America, except Alaska, the words "duplicate
or some other word or words indicating that the document is not an original
bill shall be placed plainly upon the face of every such bill, except the
one first issued. A carrier shall be liable for the damage caused by his
failure so to do to any one who has purchased the bill for value in good
faith as an original, even though the purchase be after the delivery of
the goods by the carrier to the holder of the original bill.
Sec. 8. A non-negotiable bill shall have placed plainly upon its face
by the carrier issuing it '1 non-negotiable  or  not negotiable.''
This section shall not apply, however, to memoranda or acknowledgments
of an informal character.
Sec. 9. The insertion in a negotiable bill of the name of the person
to be notified of the arrival of the goods shall not limit the negotiability
of the bill, or constitute notice to a purchaser thereof of any rights or
equities of such person in the goods. (
Sec. 10. Except as otherwise provided in this Act, where a consignor
receives a bill and makes no objection as hereinafter provided to its terms
or conditions, neither the consignor or any person who accepts delivery
of the goods, or any person who seeks to enforce any provision of the bill,
shall be allowed to'deny that he is bound by such terms and conditions,'
so far as they are not contrary to law or public policy.
Sec. 11. A carrier, in the absence of some lawful excuse, is bound
to deliver goods upon the demand made either by the consignee named
in the bill for the goods, or if the bill is negotiable, by the holder thereof,
if such demand is accompanied by—
(a) An offer in good faith to satisfy the carrier's lawful lien upOS
the goods, :
BILLS OF LADING ACT
741
(b) An offer in good faith to surrender, properly indorsed, the bill
which was issued for the goods, if the bill is negotiable and
(c) A readiness and willingness to sign, when the goods are delivered,
an acknowledgment that they have been delivered, if such signature is
requested by the carrier.
In case the carrier refuses or fails to deliver the goods in compliance
with a demand by the consignee or holder so accompanied, the burden
shall be upon the carrier to establish the existence of a lawful excuse for
such refusal or failure.
Sec. 12. A carrier is justified, subject to the provisions of the three
following sections, in delivering goods to one who is—
(a) A person lawfully entitled to the possession of the goods, or
, (b) The consignee named in a non-negotiable bill for the goods, or
(c) A person in possession of a negotiable bill for the goods by the
terms of which the goods are deliverable to his order, or which has been
endorsed to him or in blank by the consignee or by the mediate or im-
mediate indorsee of the consignee.
Sec. 13. Where a carrier delivers goods to one who is hot lawfully
entitled to the possession of them, the carrier shall be liable to any one
having a right of property or possession in the goods if he delivered the
goods otherwise than as authorized by subdivisions (b) and (c) of the
preceding section; and, though he delivered the goods as authorized by
either of said subdivisions, he shall be so liable if prior to such delivery
he—
(a) Had been requested, by or on behalf of a person having a right
of property or possession in the goods, not to make such delivery, or
(bl Had information at the time of the delivery that it was to a
person not lawfully entitled to the possession of the goods.
A request or information to be effective within the meaning of this
section must be given to an officer or agent of the carrier, the actual
or apparent scope of whose duties includes action upon such a request
or information, and must be given in time to enable the officer or agent
to whom it is given, acting with reasonable diligence, to stop delivery
of the goods.
Sec. 14. Except as provided in section 27, and except when compelled
by legal process, if a carrier delivers goods for which a negotiable bill
had been issued, the negotiation of which would transfer the right to the
possession of the goods, and fails to take up and cancel the bill, such
carrier shall be liable for failure to deliver'the goods to any one who
for value and in good faith purchases such bill, whether such purchaser
acquired title to the bill before or after the delivery of the goods by
the carrier, "and notwithstanding delivery was made to the person entitled
: thereto.
Sec. 15. Except as provided in section 27, and except when compelled
by legal process, if a carrier delivers part of the goods for which a nego-
jtiable bill had been issued and fails either—
; (a) To take up and cancel the bill, or
(b) To place plainly upon it a statement that a portion of the goods
ihas been delivered, with a description, which may be in general terms,
dther of the goods or packages that have been so delivered or of the
742
SALES
goods or packages which still remain in the carrier's possession, he shall
be liable for failure to deliver all the goods specified in the bill, to any
one who for value and in good faith purchases it, whether such purchaser
acquired title to it before or after the delivery of any portion of the goods
by the carrier, and notwithstanding such delivery was made to the person
entitled thereto.
Sec. 16. Any alteration, addition or erasure in a bill after its issue
without authority from the carrier issuing the same, either in writing or
noted on the bill, shall be void, whatever be the nature and purpose of the
change, and the bill shall be enforceable according to its original tenor.
Sec. 17. Where, a negotiable bill has been lost or destroyed, a court
of competent jurisdiction may order the delivery of the goods upon satis-
factory proof of such loss or destruction and upon the giving of a bond
with sufficient surety to be approved by the court to protect the carrier
or any person injured by such delivery from any liability or loss, incurred
by reason of the original bill remaining outstanding. The court may also
in its discretion order the payment of the carrier's reasonable costs and
counsel fees.
The delivery of the goods under an order of the court as provided in
this section, shall not relieve the carrier from liability to a person to
whom the negotiable bill has been or shall be negotiated for value without
notice of the proceedings or of the delivery "of the goods.
Sec. 18. A bill upon the face of which the word "duplicate or some
other word or words indicating that the document is not an original bill
is placed plainly shall impose upon the carrier issuing the same the liability
of one who represents and warrants that such bill is an accurate copy
of an original bill properly issued, but no other liability.
See. 19. No title to goods or right to their possession, asserted by a
carrier for his own benefit, shall excuse him from liability for refusing
to deliver the goods according to the terms of a bill issued, for them, unless
such title or right is derived directly or indirectly from a transfer made
by the consignor or consignee after the shipment, or from the carrier's
lien.
Sec. 20. If more than one person claims the title or possession of
goods, the carrier may require all known claimants to interplead, either
as a defense to an action brought against him for non-delivery of the
goods, or as an original suit, whichever is appropriate.
Sec. 21. If some one other than the consignee or person in possession
of the bill, has a claim to the title or possession of the goods, and the
carrier ha? information of such claim, the carrier shall be- excused from
liability for refusing to deliver the goods either to the consignee or person
in possession of the bill, or to the adverse claimant, until the carrier has
had a reasonable time to ascertain the validity of the adverse claim or
to bring legal proceedings to compel all claimants to interplead.
See. 22. Except as provided in the two preceding sections and in see-
tion 12, no right or title of a third person unless enforced by legal process
shall be a defense to an aetion brought by the consignee of a non-negotiable
bill or by the holder of a negotiable bill - against the carrier for failure
to deliver the goods on demand.
Sec. 23. If a bill of lading has been issued by a carrier or on his ,
BILLS OF LADING ACT
743
behalf by an agent or employee the scope of whose actual or apparent
authority includes the issuing of'bills of lading, the carrier shall be liable
to—
(a) The consignee named in a non-negotiable, or
(b) The holder of a negotiable bill,
Who has given value in good faith relying upon the description therein
of the goods, for damages caused by the non-receipt by the carrier or a
connecting carrier of all or part of the goods or their failure to correspond
with the description thereof in the bill at the time of its issue.
If, however, the goods are described in a bill merely by a statement
of marks or labels upon them or upon packages containing them, or by
a statement that the goods are said to be goods of a certain kind or
quantity, or in a certain condition, or it is stated in the bill that packages
are said to contain goods of a certain kind or quantity or in a certain
condition, or that the contents or condition of the contents of packages
are unknown, or words of like purport are contained in the bill, such state-
ments, if true, shall not make liable the carrier issuing the bill, although
the goods are not of the kind or quantity or in the condition which the
marks or labels upon them indicate, or of the kind or quantity or in the
condition they were said to be by the consignor. The carrier may, also,
by inserting in the bill the words "shipper's load and count or other
words of like purport, indicate that the goods were loaded by the shipper
and the description of them made by him; and if such statement be true,
the carrier shall not be liable for damages caused by the improper loading
or hy the non-receipt or by the misdescription of the goods described
in the bill.
Sec. 24. If goods are delivered to a carrier by the owner or by a
person whose act in conveying the title to them to a purchaser for value
in good faith would bind the owner and a negotiable bill is issued for
them, they cannot thereafter, while in the possession of the carrier, be
attached by garnishment or otherwise, or be levied upon under an execu-
tion, unless the bill be first surrendered to the carrier or its negotiation
enjoined. The carrier shall in no such case be compelled to deliver the
actual possession of the goods until the bill is surrendered to him or im-
pounded by the court.
See. 25. A creditor whose debtor is the owner of a negotiable bill shall
he entitled to such aid from courts of appropriate jurisdiction by injunc-
tion and otherwise in attaching such bill, or in satisfying the claim by
means thereof as is allowed at law or in equity in regard to property
which can not readily be attached or levied upon by ordinary legal process.
Sec. 26. If a negotiable bill is issued the carrier shall have no lien
(on the goods therein mentioned, except for charges on those goods for
, freight, storage, demurrage and terminal charges, and expenses necessary
for the preservation of the goods or incident to their transportation sub-
sequent to the date of the bill, unless the bill expressly enumerates other
charges for which a lien is claimed. In such case there shall also be a
lien for the charges enumerated so far as they are allowed by law and
;the contract between the consignor and the carrier.
See. 27. After goods have been lawfully sold to satisfy a carrier's
ien, or because they have not been claimed, or because they are perish-
744
SALES
able or hazardous, the carrier shall not thereafter be liable for failure tc
deliver the goods to the consignee or owner of the goods, or to a holdei
of the bill given for the goods when they were shipped, even if such bill
be negotiable.
Sec. 28. A negotiable bill may be negotiated by delivery where, by
the terms of the bill, the carrier undertakes to deliver the goods to the
order of a specified person, and such person or a subsequent indorsee
of the bill has indorsed it in blank.
Sec. 29. A negotiable bill may be negotiated by the indorsement of the
person to whose order the goods are deliverable by the tenor of the bill.
Such indorsement may be in blank or to a specified person. If indorsed
to a specified person, it may be negotiated again by the indorsement of
such person in blank or to another specified person. Subsequent nego-
tiations may be made in like manner.
See. 30. A bill may be transferred by the holder by delivery, accom-
panied with an agreement, express or implied, to transfer the title to the
bill or to the goods represented thereby.
A non-negotiable bill can not be negotiated and the indorsement of such
a bill gives the transferee no additional right.
See. 31. A negotiable bill may be negotiated by any person in posses-
sion of the same, however such possession may have been acquired if, by
the terms of the bill, the carrier undertakes to deliver the goods to the order
of such person, or if at the time of negotiation the bill is in such form
that it may be negotiated by delivery.
Sec. 32. A person to whom a negotiable bill has been duly negotiated
acquires thereby—
(a) Such title to the goods as the person negotiating the bill to him
had or had ability to convey to a purchaser in good faith for value, and
also such title to the goods as the consignee and consignor had or had
power to convey to a purchaser in good faith for value, and
(b) The direct obligation of the carrier to hold possession of the goods
for him according to the terms of the bill as fully as if the carrier had
contracted directly with him.
Sec. 33. A person to whom a bill has been transferred but not nego-
tiated acquires thereby as against the transferor, the title to the goods,
subject to the terms of any agreement with the transferor. If the bill is
non-negotiable, such person also acquires the right to notify the carrier
of the transfer to him of such bill, and thereby to become the direct
obligee of whatever obligations the carrier owed to the transferor of the
bill immediately before the notification.
Prior to the notification of the carrier by the transferor or transferee of a
non-negotiable bill, the title of the transferee to the goods and the right
to acquire the obligation of the carrier may be defeated by garnishment
or by attachment or execution upon the goods by a creditor of the trans-
feror, or by a notification to the carrier by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the goods by the
transferor.
A carrier has not received notification within the meaning of this sec-
tion unless an officer or agent of the carrier, the actual or apparent scope;
of whose duties includes action upon such a notification, has been notified!
BILLS OF LADING ACT
745
and no notification shall be effective until the officer or agent to whom it
is given has had time with the exercise of reasonable diligence to com-
municate with the agent or agents having actual possession or control of
the goods.
Sec. 34. Where a negotiable bill is transferred for value by delivery,
and the indorsement of the transferor is essential for negotiation, the
transferee acquires a right against the transferor to compel him to indorse
the bill, unless a contrary intention appears. The negotiations shall take
effect as of the time when the indorsement is actually made. This obliga-
tion may be specifically enforced.
Sec. 35. A person who negotiates or transfers for value a bill by in-
dorsement or delivery, including one who assigns for value & claim secured
by a bill, unless a contrary intention appears, warrants—
(a) That the bill is genuine,
(b) That he has a legal right to transfer it,
(c) That he has knowledge of no fact which would impair the validity
or worth of the bill, and
(d) That he has a right to transfer the title to the goods, and that
the goods are merchantable or fit for a particular purpose whenever such
warranties would have been implied, if the contract of the parties had been
to transfer without a bill the goods represented thereby.
In the case of an assignment of a claim secured by a bill, the liability
of the assignor shall not exceed the amount of the claim.
Sec. 36. The indorsement of a bill shall not make the indorser liable
for any failure on the part of the carrier or previous indorsers of the
bill to fulfill their respective obligations.
Sec. 37. A mortgagee or pledgee, or other fyolder of a bill for security
who in good faith demands or receives payment of the debt for which sucli
bill is security, whether from a party to a draft drawn for such debt
or from any other person, shall not be deemed by so doing to represent
or to warrant the genuineness of such bill or the quantity or quality of
the goods therein described.
Sec. 38. The validity of the negotiation of a bill is not impaired by
the fact that such negotiation was a breach of duty on the part of the
person making the negotiation, or by the fact that the owner of the bill
was deprived of the possession of the same by fraud, accident, mistake,
duress or conversion, if the person to whom the bill was negotiated, or
a person to whom the bill was subsequently negotiated, gave value therefor,
in good faith, without notice of the breach of duty or fraud, accident,
mistake, duress or conversion.
Sec. 39. Where a person having sold, mortgaged, or pledged goods
which are in a carrier's possession and for which a negotiable bill has
been issued, or having sold, mortgaged, or pledged the negotiable bill
representing such goods, continues in possession of the negotiable bill,
ihe subsequent negotiation thereof by that person under any sale, pledge,
)r other disposition thereof to any person receiving the same in good
-aith, for value and without notice of. the previous sale, shall have the
iame effect as if the first purchaser of the goods or bill had expressly
Authorized the subsequent negotiation.
1 Sec 40 Where goods are shipped by the consignor in accordance with
746
SALES
a contract or order for their purchase, the form in which the bill is
taken by the consignor shall indicate the transfer or retention of the
property or right to the possession of the goods as follows:
(a) Where by the bill the goods are deliverable to the buyer or to
his agent, or to the order of the buyer or Of his agent, the consignor
thereby transfers the property in the goods to the buyer.
(b) Where by the bill the goods are deliverable to the seller or to
his agent, or to the order of the seller or of his agent, the seller thereby
reserves the property in the goods. But if, except for the form of the
bill, the property would have passed to the buyer on shipment of the
goods, the seller 's property in the goods shall be deemed to be only for the
purpose of securing performance by the buyer of his obligations under
the contract.
(c) Where by the bill the goods are deliverable to the order of the
buyer or his agent, but possession of the bill is retained by the seller or
his agent, the seller thereby reserves a right to the possession of the
goods, as against the buyer.
(d) Where the seller draws on the buyer for the price and transmits
the draft and bill together to the buyer to secure acceptance or pay-
ment of the draft, the buyer is bound to return the bill if he does not
honor the draft, and if he wrongfully retains the bill he acquires no added
right thereby. If, however, the bill provides that the goods are deliver-
able to the buyer, or to the order of the buyer, or is endorsed in blank
or to the buyer by the consignee named therein, one who purchases in
good faith, for value, the bill or goods from the buyer, shall obtain the
title to the goods, although the draft has not been honored, if such pur-
chaser has received delivery of the bill indorsed by the consignee named
therein, or of the goods, without notice of the facts making the transfer
wrongful.
Sec. 41. Where the seller of goods draws on the buyer for the price
of the goods and transmits the draft and a bill of lading for the goods
either directly to the buyer or through a bank or other agency, unless a
different intention on the part of the seller appears, the buyer and all
other parties interested shall be justified in assuming:
(a) If the draft is by its terms or legal effect payable on demand or
presentation or at sight, or not more than three days thereafter (whether
such three days be termed days of grace or not), that the seller intended
to require payment of the draft before the buyer should be entitled to
receive or retain the bill.
(b) If the draft is by its terms payable on time, extending beyond
three days after demand, presentation or sight (whether such three days
be termed days of grace or not), that the seller intended to require accept-
ance, but not payment of the draft before the buyer should be entitled
to receive or retain the bill.
The provisions of this section are applicable whether by the terms of
the bill the goods are consigned to the seller, or to his order, or to the
buyer, or to his order, or to a third person, or to his order.
See. 42. Where a negotiable bill has been issued for goods, no seller's
lien or right of stoppage in transitu shall defeat the rights of any pur-
chaser for value in good faith to whom such bill has been negotiated,
whether such negotiations be prior or subsequent to the notification to the
BILLS OF LADING ACT
747
carrier who issued such bill of the seller's claim to a lien or right of stop-
page in transitu. Nor shall the carrier be obliged to deliver or justified in
delivering the goods to an unpaid seller unless such bill is first surrendered
for cancellation.
Sec. 43. Except as provided in section 42, nothing in this Act shall
limit the rights and remedies of a mortgagee or lienholder whose mortgage
or lien on goods would be valid, apart from this Act, as against one
who for value and in good faith purchased from the owner, immediately
prior to the time of their delivery to the carrier, the goods which are
subject to the mortgage or lien and obtained possession of them.
Sec. 44. Any officer, agent, or servant of a carrier, who with intent
to defraud issues or aids in issuing a bill knowing that all or any part
of the goods for which such bill is issued have not been received by such
carrier, or by an agent of such carrier or by a connecting carrier, or are
not under the carrier's control at the time of issuing such bill, shall be
guilty of a crime, and upon conviction shall be punished for each offense
by imprisonment in the State penitentiary not exceeding five years, or
by a fine not exceeding five thousand dollars, or by both.
Sec. 45. Any officer, agent, or servant of a carrier, who with intent
to defraud issues or aids in issuing a bill for goods knowing that it
contains any false statement, shall be guilty of a crime, and upon con-
viction shall be punished for each offense by imprisonment in the State
penitentiary not exceeding one year, or by a fine not exceeding one thou-
sand dollars, or by both.
Sec. 46. Any officer, agent, or servant of a carrier, who with intent
to defraud issues or aids in issuing a duplicate or additional negotiable
bill for goods in violation of the provisions of section 7, knowing that a
former negotiable bill for the same goods or any part of them is out-
standing and uncancelled, shall be guilty of a crime, and upon conviction
shall be punished for each offense by imprisonment in the State penitentiary
not exceeding five years, or by a fine not exceeding five thousand dollars,
or by both.
Sec. 47. Any person who ships goods to which he has not title, or
upon which there is a lien or mortgage, and who takes for such goods a
negotiable bill which he afterwards negotiates for value with intent to
deceive and without disclosing his want of title or the existence of the lien
or mortgage, shall be guilty of a crime, and upon conviction shall be pun-
ished for each offense by imprisonment in the State penitentiary not
exceeding one year, or by a fine not exceeding one thousand dollars, or
by both.
Sec. 48. Any person who with intent to deceive negotiates or transfers
for value a bill knowing that any or all of the goods which by the terms
of such bill appears to have been received for transportation by the carrier
which issued the bill, are not in the possession or control of such carrier,
or of a connecting carrier, without disclosing this fact, by causing said
fact to be endorsed shall be guilty of a crime, and upon conviction shall
be punished for each offense by imprisonment in the State penitentiary
not exceeding five years, or by a fine not exceeding five thousand dollars
or by both.
Sec. 49. Any person who with intent to defraud secures the issue by
a carrier of a bill knowing that at the time of such issue, any or all of
748
SALES
the goods described in such bill as received for transportation have not
been received by such carrier, or an agent of such carrier or a connecting
carrier, or are not under the carrier's control, by inducing an officer, agent,
or servant of such carrier falsely to believe that such goods have been
received by such carrier, or are under its control, shall be guilty of a
crime, and upon conviction shall be punished for each offense by im-
prisonment in the State penitentiary not exceeding five years, or by a
fine not exceeding five thousand dollars, or by both.
See. 50. Any person who with intent to defraud issues or aids in issu-
ing a non-negotiable bill without the words "not negotiable placed
plainly upon the face thereof, shall be guilty of a crime, and upon con-
viction shall be punished for each offense by imprisonment in the State
penitentiary not exceeding five years or by a fine not exceeding five thou-
sand dollars, or by both.
Sec. 51. In any case not , provided for in this Act the rules of law
and equity, including the law merchant, and in particular the rules relat-
ing to the law of principal and agent, executors, administrators and
trustees, and to effect of fraud, misrepresentation, duress or coercion,
accident, mistake, bankruptcy or other, invalidating cause shall govern.
Sec. 52. This Act shall be so interpreted and construed as to effectuate
its general purpose to make uniform the law of those states which enact it.
Sec. 53. (1) In this Act, unless the context or subject matter otherr
wise requires—
"Action includes counter claim, set-off, and suit in equity.
'' Bill'' means bill of lading.
"Consignee means the person named in the bill as the person to whom
delivery of the goods is to be made.
 Consignor means the person named in the bill as the person from
whom the goods have been received for shipment.
 Goods means merchandise or chattels in course, of transportation,
or which have been or are about to be transported.
"Holder or a bill means a person who has both actual possession of
such bill and a right of property therein.
"Order means an order by indorsement on the bill.
"Owner does not include mortgagee or pledgee.
"Person includes a corporation or partnership or two or more per-
sons having a joint or common interest.
To "purchase includes to take as mortgagee and to take as pledgee.
'' Purchaser'' includes mortgagee and pledgee.
'1Value'' is any consideration sufficient to support a simple contract.
An antecedent or pre-existing obligation, whether for money,' or not, con-
stitutes value where a bill is taken either in satisfaction thereof or as
security therefor.
(2) A thing is done "in good faith, within the meaning of this
Act, when it is in fact done honestly, whether it be done negligently or not.
See. 54. The provisions of this Act do not apply to bills made and
delivered prior to the taking effect thereof.
Sec. 55. All Acts or parts of Acts inconsistent with this Act are hereby
repealed.
Sec. 56. This Act may be cited as the Uniform Bills of Lading Act.
DIVISION E
NEGOTIABLE
INSTRUMENTS
DIVISION E
LAW OF NEGOTIABLE INSTRUMENTS
Part I. General Nature and History.
Part II. The Formation of the Contract.
Part III. Operation of the Contract.
Part IV. Discharge of Negotiable Paper.
PART I
GENERAL NATURE AND HISTORY
Chapter 48. General Description of Negotiable Paper.
Chapter 49. Negotiability of Various Instruments.
Chapter 50. History and Origin.
751
CHAPTER 48
GENERAL DESCRIPTION OF NEGOTIABLE
INSTRUMENTS
§ 392. Meaning of word '' negotiable.
§ 393. Peculiarities of negotiable paper.
§ 392. (Nego. Instru., Sec. 1.) Meaning of word
"negotiable.
(Note: To get generally before us the technical meaning of
negotiability as applied to money obligations, the following brief
statement is made:
We already know that credits, that is, rights to receive money,
are assignable. Thus if A owes money to B, B may assign his
right against A to C. This operates to put C in B's shoes in re-
spect to the right to enforce the claim against A. C, however,
is no better off than B (in the absence of anything done or said
by A to mislead C). C takes the right subject to all the
"equities"; that is, A may make the same defenses against C
that he could have made against B, had B sought to enforce the
claim, whether these defenses be payment, breach of contract,
fraud, or otherwise. This is true even if C relied on the terms
of the original contract between A and B, which have been later
modified without C's notice. Obviously, A has a right not only
to originally contract with B, but at any time later to modify
the contract, or make advance payments on it without danger
of having to account to C unless A has already been notified of
C's rights.
If B assigns to C, obviously C must notify A of the assign-
ment in order to charge A and hold A to account to C.
We therefore have two outstanding facts in case of assign-
ment. (1) the assignee is clothed only with the rights of the
assignor; (2) the assignee must give notice to the debtor.
The transfer of a negotiable instrument is upon a different
basis. C, a transferee, may take a right against A, though B
752
GENERAL DESCRIPTION
753
have no such right, and C does not have to notify A that he has
acquired the paper.
Of course this is a very general statement, but will serve to
start us on our way.)
§ 393. (Nego. Instru., Sec. 2.) Peculiarities of nego-
tiable paper.
(Note : Negotiable paper has the following peculiarities:
(1) A quality of transferability as above described.
(2) Days of grace (now usually abolished).
(3) A presumption of consideration (which may be overcome
by proof, except as against a "holder in due course").)
CHAPTER 49
NEGOTIABILITY OF VARIOUS INSTRUMENTS
§§ 394 to 405. (Nego. Instru., Sees. 3 to 14.)
(Note: It seems unwise to attempt cases at this point to
show the negotiability of various types of instruments before we
have discussed essential elements. Nevertheless it also seems de-
sirable that the reader should be introduced to the different
types of paper with which this subject is concerned. With that
end in view, the following tabulation is given, with illustration
of the commoner forms of negotiable paper. Of course forms
frequently appear throughout the cases.)
A. Promissory Notes.
(1) Promissory notes defined.
Case 394. Uniform Negotiable Instrument Law. Sec.
184.
"A negotiable promissory note within the meaning of
this act, is an unconditional promise in writing, made by
one person to another, signed by the maker, engaging to
pay on demand or at a fixed or determinable future time,
a sum certain in money, to order or to bearer. When a
note is drawn to the maker's own order, it is not com-
plete until indorsed by him.
Question 394: Define a promissory note.
(2) Form of general promissory note.
$10.00 Chicago, August 15, 1923
Thirty days after date I promise to pay to the order
of John Doe, Ten Dollars, at Commonwealth State Bank,
Chicago, Illinois, with interest at the rate of six per cent
per annum from date hereof.
Value received. Richard Roe.
754
GENERAL DESCRIPTION
755
(3) Special types of promissory notes,
(a) Collateral note.
$100. Chicago, 111., Aug. 15th, 1923.
Thirty days after date, for value received, The Eichard Eoe Manufactur-
ing Company promises to pay to the order of John Doe One Hundred ($100)
Dollars, at , with interest at the rate of six per cent, per
annum after date, having deposited with this note as collateral security
for the payment of this note, and every other liability or liabilities, either
direct or contingent, now owing or which may hereafter be owing, whether
now or hereafter contracted, of the undersigned, or any of them (including
all liabilities of any partnership created while the undersigned or any of
them may have been or be a member thereof), to said payee, or to the legal
holder hereof, the following property, viz.: Certificate No. 16 of Preferred
Stock of Jones-Smith Corporation, representing 25 shares, par value $2,500;
market value, $2,000.
With the right on the part of the said payee or the legal holder hereof
from time to time to call for additional security of such kind and value as
will be satisfactory to said payee or the legal holder hereof, and on failure
to respond, or if in the judgment of said payee, or the legal holder hereof,
said security, or any additions thereto or substitutes therefor or any part
thereof, shall have depreciated in value, then the whole of this note shall be
deemed immediately payable at the election of the said payee or the legal
holder hereof, with full power in said payee or the legal holder hereof
on maturity of this note, either by its terms or by election as aforesaid,
or on the non-payment of any of the other liabilities above mentioned,
to at any time, and from time to time, sell, assign and deliver the whole
of said property and all additions thereto and substitutes therefor, or
any part of said property, additions and substitutes, at any public or
private sale, at the option of said payee, or the legal holder hereof,
and without advertising the same and without notice to the undersigned,
or any of them, and with the right of said payee or the legal holder
hereof, to be a purchaser at any public sale or sales; and in the event
of any sale or purchase hereunder no matter by or to whom made, all
notice thereof, and any and all equity or right of redemption, whether
before or after sale hereunder is hereby expressly waived; and, after de-
ducting all legal and other costs and expenses, including reasonable
attorneys' fees, from the proceeds of such sale or sales to apply the
remainder on any one or more of said liabilities, whether due or not,
as said payee or the legal holder hereof shall deem proper (making rebate
of interest on any demands not matured), and return the surplus, if any, to
the undersigned, or any of them. Said payee or the legal holder hereof,
may at its, his or their discretion enforce the collection of said security,
additions thereto and substitutes therefor by suit or otherwise, and may
surrender, compromise, release, renew, extend or exchange all or any of
the same. Said payee or the legal holder hereof is hereby authorized
and empowered at any time to apply to the payment of any liability or
liabilities, whether the same be due or not, of the undersigned, or any of
756 NEGOTIABLE INSTRUMENTS
them, to said payee or to the legal holder hereof (including any liability
or liabilities of any partnership created while the undersigned, or any of
them, may have been or be a member thereof), whether the same be
due or not, all property, real or personal, of every kind and description,
including balances, credits, collections, moneys, drafts, checks, notes, bills,
or accounts (whether on hand or in transit) of the undersigned, or any
of them.
The Eichard Eoe Manufacturing Company.
Address By Eichard Eoe,
President.
(See also a simpler form in Case 439.)
(b) Judgment Note.
$ 100 Chicago, August 15, 1923
Sixty days——after date for value received I- promise to Pay
to the order of John Doe One Hundred ($100) Dollars at
Commonwealth State Bank, Chicago, III., with interest at 6 per
cent per annum after date hereof until paid.
And to secure the payment of said amount 1 hereby authorize, irre-
vocably, any attorney of any Court of Eecord to appear for me in
such Court, in term time or vacation, if not paid at maturity, and confess a
judgment without process, in favor of the holder of this Note, for such
amount as may appear to be unpaid thereon, together with costs and
Ten dollars attorney's fees, and to waive and release all errors
which may intervene in any such proceedings, and consent to immediate exe-
cution upon such judgment, hereby ratifying and confirming all that
——my said attorney may do by virtue hereof.
Eichard Eoe.
No Due
B. Bills of Exchange and Checks.
(1) Bill of Exchange Defined.
Case 395. Uniform Negotiable Instruments Law, Sec.
126, 129.
"A bill of exchange is an unconditional order in writ-
ing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is ad-
dressed to pay on demand, or at a fixed or determinable
future time, a sum certain in money, to order or to
bearer.
'' An inland bill of exchange is a bill which is, or on its
GENERAL DESCRIPTION
757
face purports to be, both drawn and payable within this
state. Any other bill is a foreign bill. Unless the con-
trary appears 011 the face of the bill the holder may treat
it as an inland bill.''
Question 395: Define a bill of exchange; an inland bill; a
foreign bill.
(2) Form of Bill of Exchange.
$ 100 Chicago, August 15, 19£S
Thirty days after date—Pay to the order of John, Doe One
Hundred ($100) Dollars.
Value received and charge the same to account of
—John Smith.
To Diehard Roe Manufacturing Company.
No
(3) Check Defined.
Case 396. Uniform Negotiable Instruments Law, Sec.
185.
 A check is a bill of exchange drawn on a bank payable
on demand.
(4) Special types of bills of exchange and checks,
(a) Trade acceptance.
758 NEGOTIABLE INSTRUMENTS
(b) Cashier's check.
The Commonwealth State Bank. No.
Chicago, 111., Aug. 15 1923
Pay to Order of John Doe Ten Dollars.
Cashier's Check.
Cashier.
C. Instruments not covered by negotiable instruments
law.
(Note: The negotiable instruments law covers only instru-
ments payable in money. Other instruments may have a cer-
tain limited quality of negotiability, but are not within our
present discussion. For transferable qualities of Bills of Lad-
ing and Warehouse Receipts see Sales. For transferability of
Certificates of Stock see Subject "Corporations.")
CHAPTER 50
History and Origin of Negotiable Paper.
§ § 406 and 407 (Nego. Instru. Sections 15 and 16).
(Note: Foreign bills of exchange were introduced into Eng-
land from the Continent at an early period, the time of which
is uncertain. Inland bills and notes came into use in England
about the middle of the 17th Century. The statute of 3rd and
4th Anne, c. 9, made promissory notes negotiable after a de-
cision by Lord Holt which cast doubt upon their negotiability.
The common law built up the general theory of negotiability
of bills, notes and checks. The Uniform Negotiable Instruments
Act, now in force in almost every American Jurisdiction, codified
that law.)
759
PART II
THE FORMATION OF THE CONTRACT
Chapter 51. Expression—Negotiable form (1) Formal
requisites.
Chapter 52. Same (2) Provisions which do not prevent
negotiability.
Chapter 53. Execution and delivery.
Chapter 54. Consideration for execution.
Chapter 55. The formation of the contract of the ac-
ceptor.
Chapter 56. The formation of the contract of parties for
accommodation or for honor.
CHAPTER 51
EXPRESSION. NEGOTIABLE FORM (1) FORMAL
REQUISITES
§ 408. In general.
§ 409. Writing and signature.
§ 410. Unconditional promise or order.
§ 411. Sum certain.
§ 412. Payment in money.
§ 413. Demand paper.
§ 414. Fixed or determinable future time.
§ 415. In general of words of negotiability.
§ 416. When payable to order.
§ 417. When payable to bearer.
§ 418. Drawee named or indicated.
§ 408. (Nego. Instru. Sec. 17.) In general.
(Note: The instrument, to have the characteristic of nego-
tiability must he in proper form. The intent of the parties to
760
FORMAL REQUISITES
761
make the instrument negotiable is determined entirely by the
form in which it has been drawn.
If it has not this form required by the law it falls outside
of the law of negotiable paper—on the other side of the line,
no matter how closely it may approximate the form. Form,
therefore, is of the utmost importance in negotiable paper.
A thought to bear in mind in this connection is that the
negotiability of an instrument is to be determined entirely
from the face of it without necessity of inquiry elsewhere. If
you bring me a paper and ask me whether it is negotiable or not,
my answer requires no investigation into the circumstances.
By its form, it is negotiable or not negotiable. Of course, it
may not be enforceable, by reason of circumstances not appear-
ing on its face, but its classification as a negotiable or non-
negotiable instrument is to be determined by its form, and by
its form alone.)
Case 397. Negotiable Instruments Act, Sec. 1.
"An instrument to be negotiable must conform to the
following requirements:
"1. It must be in writing and signed by the maker or
drawer;
"2. Must contain an unconditional promise or order
to pay a sum certain in money;
"3. Must be payable on demand or at a fixed or de-
terminable future time;
"4. Must be payable to order or to bearer; and
"5. Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein with
reasonable certainty.
Question 397: State the essential characteristics of negoti-
able paper.
A. "It Must Be in Writing and Signed by Maker or
Drawer
§409. (Nego. Instru. Sec. 18.) Writing and signature.
Case 398. Geary v. Physic, 5 B. & C. (England) 234.
Facts: Suit was brought by an indorsee of a promis-
sory note against the maker. The indorsement was in
762 NEGOTIABLE INSTRUMENTS
pencil; and it was contended that this was not a good
writing within the law of negotiable paper.
Bailey, J.:  * * * I think that a writing in pen-
cil is a writing within the meaning of that term at com-
mon law, and that it is a writing within the custom of
merchants. I cannot see any reason why, when the law
requires a contract to be in writing, that contract shall be
void if it be written in pencil. * * * 
Question 398: State the above case.
(Note: Obviously the provisions that the instrument must be
signed by maker or drawer does not preclude the execution of
the instrument by an agent. Also the signature may be a
fictitious or assumed one.)
Case 399. Janes v. Home Furn. Co., 41 N. Y. Supp. 71.
Facts: Stated in the opinion.
Point Involved: Whether within the law of negotiable
paper an instrument may be validly indorsed (or signed)
by the use of a fictitious name.
Hatch, J.:  Separate actions were brought upon three
promissory notes. The notes, which were made payable
to the order of 'National Publishing Company,' and were
signed by the defendant through its president, were each
in the same form, excepting the dates and amounts. The
defendant is a domestic corporation, having its place of
business in Brooklyn. The National Publishing Company
is a name assumed by plaintiff in carrying on his busi-
ness, and represents nothing beyond that assumption. It
is conceded that the notes were each given for a valuable
consideration received by the defendant from the plain-
tiff, but the claim is made that the notes were made pay-
able to a company that had no existence, and that, there-
fore, the paper was fictitious; and that as the indorse-
ment was fictitious and spurious no title passed to the
notes. This defense savors of delay and the use of legal
remedies to prevent collection of a bona fide debt. The
notes were as much payable to Jones when they were
made payable to the name under which he carried on his
FORMAL REQUISITES
763
business as though he had been named therein. It was
not in legal contemplation a fiction, but it was the plain-
tiff under this business name and represented him. When
the notes were made and delivered to plaintiff under
these conditions they created a liability against the de-
fendant in plaintiff's favor.
Question 399: (1) Does the requirement that a negotiable
instrument must be signed by the maker or drawer preclude
the use of a fictitious or assumed name ?
(2) If John Brown signs a note, for some reason using, to
designate himself, the name of Harry Jones, can John Brown
be sued on this instrument?
(3) A works for a certain company and is known as em-
ployee No. 12. He borrows money from a fellow employee and
gives his note beginning "I promise to pay and signed "12.
Can the maker of this note be held thereon? (Brown v. Bank,
6 Hill 443.)
B. "Must Contain an Unconditional Promise or Order.
§410. (Nego. Instru. Sec. 19.) Unconditional promise
or order.
(1) In general.
(2) Reference to transaction or consideration.
(3) Indication of fund, etc.
(1) In General.
Case 400. White v. Gushing, 88 Maine, 339.
Facts: The plaintiff, White, as indorsee of an order,
sued defendant, Cushing, as the maker thereof, and it
became material for the purpose of the suit to inquire
whether the order was a negotiable bill of exchange.
The order reads as follows:
"120. Dover, Oct. 27th, 1893.
Piscataquis Savings Bank.
Pay James Lawlor, or order, One Hundred and Twenty
iDollars and charge same to my account on Book No.....
(Signed) J. N. Cushing.
^'Witness:
764
NEGOTIABLE INSTRUMENTS
The bank book of the depositor must accompany this
order.
Point Involved: Whether the provision in an order
to the effect that it is payable on condition of the pro-
duction of a bank book, renders it non-negotiable.
Foster, J.: "* * * the objection that is raised to
the negotiability of this instrument is * * * that it
is subject to such a contingency as necessarily embar-
rasses its circulation and imposes a restraint upon its
negotiability by means of these words contained upon the
face of the order: ' The bank book of the depositor must
accompany this order.' Although these words are upon
the face of the order below the signature of the drawer,
they were there at the time of its inception, became a sub-
stantive part thereof and qualified its terms as if they
had been inserted in the body of the instrument. * * *
Without these words, the order is payable absolutely
* * * With them the order is payable only upon a
contingency or condition and that is, upon the production
of the drawer's bankbook. * * * It cannot therefore
be regarded as payable absolutely and without any con-
tingency that would embarrass its circulation. The
drawer has it in his power to defeat its payment by with-
holding the bank book. * * * It was the necessity of
certainty and precision in mercantile affairs and the in-
convenience that would result if commercial paper was
encumbered with conditions and contingencies that led to
the establishment of an inflexible rule that to be nego-
tiable they must be payable absolutely and without any
condition or contingencies, to embarrass their circula-
tion. * * *
Question 400: A promissory note otherwise in regular form
had indorsed upon it '' this note is given on condition that if
any dispute shall arise between Mr. Hartley and Lady Wreyi
respecting the goods sold, the note to be void. Is the note
negotiable? Hartley v. Wilkinson, 4 M. & S. 25.
FORMAL REQUISITES
765
(2) Reference to Transaction or Consideration as Af-
fecting Absolute Character of Promise or Order.
Case 401. Uniform Negotiable Instruments Act, Sec. 3.
 An unqualified order or promise to pay is uncondi-
tional within the meaning of this act, though coupled
with: * * * 2. A statement of the transaction which
gives rise to the instrument.
Question 401: State this provision of the Neg. Instr. Law.
Case 402, Hereth et al v. Meyer, 33 Ind. 511.
■ Facts: Suit by indorsee against the maker of a note,
containing the clause "This note given for a patent
right. Defense, that the note was secured by the orig-
inal payee through fraud, and that it is not negotiable
because of the clause mentioned, and that, therefore, the
indorsee is subject to the defenses that could have been
made against the payee.
Point Involved: Whether a statement in a note of the
consideration for which it was given, affects its nego-
liability.
Downey, J.: * * This Court knows judicially,
from its own records, that numerous and great frauds are
practiced upon the unwary in the sale of patent rights,
and it is probable this is another to be added to the num-
ber. But when a party purchasing such a right has ex-
ecuted his note, governed, as this one is, by the same law
which governs inland bills of exchange, and when that
npte has passed, by indorsement into the hands of a bona
fide holder for value, new and important rights arise,
which the law must protect. * . * *
"Mercantile paper, by legal inference, imports a con-
sideration. But if this implication is strengthened by a
statement on the face of the paper that there was a con-
sideration and in what the consideration consisted, can
it be said that this shall impair or degrade the character
: of the security ?
. "If it be stated in the note that it is given for a tract of
766
NEGOTIABLE INSTRUMENTS
land, a span of horses, or a 'patent right,' can it be said
that such statement takes away from the instrument its
negotiable character according to the law merchant and
opens up to the maker every defense which he might have
had if the note had remained in the hands of the payee?
We are satisfied that such is not the law.
Question 402: Why does the statement of the consideration
not affect negotiability?
(Note: By local statute a note stating on its face that it is
given for a particular kind of consideration may be non-nego-
tiable for reasons of public policy. Thus it is provided in the
New York, Ohio, and Indiana law (enacted in Indiana after the
above case was decided) that notes given for patent rights shall
so state that fact upon their face and shall thereupon pass to
purchasers subject to all defenses that would be good against
the orginal holder; if such statement is omitted the note is un-
enforceable between the parties, but good in the hands of a
holder in due course (innocent purchase for value before matu-
rity) New v. Walker, 108 Ind. 365. So in some states a note
secured by chattel mortgage must so state upon its face, and
the purchaser is subject to defenses.)
Case 403. Siegel v. Bank, 131 111. 569.
Facts: Siegel, Cooper & Co., merchants of Chicago,
contracted with D. Dalziel, for street car advertising to
be placed by him, and gave in consideration for his un-
dertakings the following note:
"$300. Chicago, March 5, 1857.
On July 1,1887, we promise to pay D. Dalziel, or order,
the sum of three hundred dollars, for the privilege of
one framed advertising sign, size — x — inches, one end
of each of one hundred and fifty-nine street cars of the
North Chicago City Railway Co., for a term of three
months, from May 15,1887.
Siegel, Cooper & Co.
and the maker defended that the instrument was not ne-
gotiable because of the statement of the transaction of
the face of the instrument and that therefore the bank
FORMAL REQUISITES
767
ought to be liable to the defense of non-performance to
which Dalziel would have been subject, were he still the
holder.
Point Involved: Whether a statement of the consider-
ation for which a note is given makes it non-negotiable,
and therefore subjects the holder to the defenses good
against his transferror.
Mr. Chief Justice Shope delivered the opinion of the
Court:
"The first question presented is, is this instrument ne-
gotiable?—and this question has been answered affirma-
tively by the circuit and appellate courts. The appellate
court having affirmed the judgment in favor of the plain-
tiff, the case is brought here by appeal, upon certificate
of importance granted by that Court.
"It appears, that before the time when the privilege
of advertising was to commence, Dalziel forfeited any
right he may have acquired to use the cars in the manner
indicated, and the privilege specified never was furnished
appellants; and it is insisted that the instrument is a
simple contract, only, and that therefore the same defense
—failure of consideration—is available against .the in-
dorsee of the paper for value, and before due, as might
be interposed against such paper in the hands of the
payee. It is also insisted, that the instrument shows, on
its face, that payment depended upon a condition prece-
dent to be performed by the payee, and therefore the in-
dorsee took it with notice, and by the failure of the payee
to perform the condition, no right of recovery exists in
the indorsee. It is not contended that the indorsee had
any other notice than that contained in the instrument
itself, and it is apparent that at the time of its indorse-
ment, which was the day of its execution, no right to the
consideration had accrued to the makers. It is a promise
to pay a certain sum of money at a day certain, for a con-
sideration thereafter to be rendered, and depends for its
Validity upon the implied promise of the payee to furnish
fthe consideration at the time and in the manner stipu-
768
NEGOTIABLE INSTRUMENTS
lated,—that is, it is a promise to pay a sum certain on a
particular day, in consideration of the promise of the
payee to do and perform on his part. A promise is, a
valuable consideration for a promise.
"But the question remains, whether the statement or
the recital of the consideration on the face of the instru-
ment impairs its negotiability, and in this instance,
amounts to a condition precedent. The mere fact that the
consideration for which a note is given is recited in it,
although it may appear thereby that it was given for or in
consideration of an executory contract or promise on the
part of the payee, will not destroy its negotiability, un-
less it appears, through the recital, that it qualifies the
promise to pay, and renders it conditional or uncertain,
either as to the time of payment or the sum to be paid.
 * * * Nor is there anything in the recital of the
consideration to put the indorsee upon inquiry at the time
the indorsement was made. Indeed, it is clear that at
that time no inquiry would have led to notice that Dalziel
would fail to comply with his contract on the 15th of May
thereafter, when the term was to commence. All that the
recitals would give notice of was, that the note was given
in consideration of an agreement on the part of the payee
that the privilege of advertisement named should be en-
joyed by the makers for three months, from May 15,1881
Giving to the language employed its broadest possible
meaning, it cannot be construed as notice to the indorsee
of the future breach of the contract by Dalziel. The pre-
sumption of law would be, that the contract would be
carried out in good faith, and the consideration pei?-
formed as stipulated. The makers had put their promiS:
sory note into the hands of Dalziel upon an expressed: con-
sideration which they were thereafter to receive, and for
the performance of which they had seen fit to rely upon
the undertaking of Dalziel, and we are aware of no rule by
which they can hold this indorsee for value, before diK
and before the time of performance was to begin, chatgO-
able with notice that the promise upon which the makers
FOEMAL REQUISITES
769
relied would not be kept and performed. Wade on Notice,
sec;< 94a; Loomis v. Maury, 15 N. Y. 312; Davis v. Mc-
Cready, supra.
Question 403: (1) What was the defense raised in this case ?
Did it prevail? Why?
(2) M employs A to work for him for one year from January
1st, 1923, to December 31st, 1923, at a salary of $200 a month
payable monthly. On January 2, 1923, M delivers to A, 12
promissory notes in otherwise negotiable form, maturing re-
spectively on the last day of successive calendar months through-
out the year 1923. On the first note there is the statement
"For January, 1923, salary, on the second note "For Feb-
ruary, 1923, salary, and so on for each note. On January
3, 1923, A sells and indorses all these twelve notes to the bank
and on January 4, 1923, quits work. The bank sues M on these
notes as they fall due. Is the bank entitled to recover ?
Case 404. Mott v. Havana Nat. Bank, 22 Hun (N. Y.)
354.,,:
Facts: Suit upon the following note:
"$450.00. New York, October 15, 1875.
Fourteen and one-half months after date, I promise to
pay to the order of the American Engine Company, $450
at seven per centum; at the Havana National Bank at
Havana, N. Y., value received, being in part payment for
a, portable engine, which engine shall be and remain the
property of the owner of this notej until the amount se-
(cured hereby is fully paid.
No.... due Jan. 4, 1877. Feed L. Nighthaet.
:i This note was endorsed before maturity to the plaintiff
Mott, and bore also the endorsement of Gilbert Wood-
ward as accommodation endorser for Nighthart. The
note was sent the defendant bank for collection and the
bank is now sued for failure to notify the indorser. De-
fense that the note described is not negotiable and that
therefore the indorser was not entitled to notice of non-
payment within the rules governing negotiable paper.
y Point Involved: Whether the statement in the note of
the fact that it was given for the purchase of a particu-
770 NEGOTIABLE INSTRUMENTS
lar article of property, and that the title thereto was
retained in the seller until full payment of the indebted-
ness, destroyed its negotiability.
Talcott, P. J., delivered the opinion of the Court:
(i* * * The-note in this case was an agreement to pay
the money specified in it to a certain payee, on a day cer-
tain, and contained all the requisites of a negotiable prom-
issory note; and the addition of the statement of the con-
sideration, to-wit, the engine, with the statement that it
was to remain the property of the owner until the note
was paid, did not render it non-negotiable.''
Question 404: State the facts, the question presented and the
Court's decision in the above case.
(Note: Chicago Rwy. Equipment Co. v. Merchants Nat.
Bank, 136 U. S. 268; Choate v. Stevens, 116 Mich. 28; W. W.
Kimball Co. v. Mellen, 80 Wis. 133; accord. Contra: Sloan v.
McCarty, 134 Mass. 245.)
Case 405. Klots Throwing Co. v. MTrs ComT Co.,
179 Fed. 813.
Facts: Note set out below was made by defendant
Klots Throwing Machine Co., to the payee therein named
and by such payee endorsed and delivered for value be-
fore maturity to the Manufacturers Commercial Com-
pany. The maker refused to pay the note on the ground
that the payee had not performed the contract for which
the note was given, and claims that the present holder is
subject to such defense, though purchasing without notice
thereof, on account of the claim that the note is non-nego-
tiable. The note read as follows:
"$3,166.00. New York, January 15th, 1906.
Six months after date we promise to pay to the order
of the Regenerated Cold Air Company, Thirty One Hun-
dred and Sixty Six 0/100 dollars at 487 Broadway, New
York City, with interest at six per cent, per annum.
FORMAL REQUISITES
771
Value received, subject to a contract between maker
and payee of October 25,1905.
No. .,.. Due July 15th, '06.
Klots Throwing Company,
H. D. Klots, President.
Point Involved: Whether a note otherwise negotiable
in form is rendered non-negotiable by the statement
therein that it is  subject to a contract between the par-
ties.''
Noyes, Circuit Judge, delivered the opinion of the
Court: "* * * In our opinion when a note contains
special stipulations, and its payment is subject to contin-
gencies, it fails to possess the character of a negotiable
instrument, and is subject in the hands of an assignee to
any defense which would be available if it were still held
by the original payee. * * * let us suppose that the
note in question contained the following stipulation:
'This note in the hands of all holders is subject to all de-
fenses which would be available to the maker based upon
the contract between the maker and the payee of October,
1905, in the same manner and to the same extent as if it
were held by the payee. * * *'
"The real inquiry in the present case is whether the
promise in the note should be treated as a substantial
equivalent of the suppositious promise we have examined.
Manifestly, if the provision * * * merely constitutes
notice of the existence of the contract, and not of the
breach thereof, it would not affect negotiability. But
the evident purpose of the parties was to go further,
and make it subject to and to impress upon it the de-
fenses to which the maker would be entitled under the
contract. The assignee took it in that condition. To de-
prive the maker of those defenses, upon the ground of
the negotiability of the note, would work great injustice,
and we think we are not required to reach such a result.
As between the maker and payee of a note, payment is as
a matter of law, subject to existing equities and defenses,
772 NEGOTIABLE INSTRUMENTS
even in the absence of any statement to that effect in the
note. It is not too much to hold that when a promise is
expressly limited by a provision in the note itself, as-
signees should take it subject to snch limitation. * * *
4'In American Exchange Bank v. Blanchard, 7 Allen,
333, an instrument containing a promise to pay a stipu-
lated sum at a fixed time, 'subject to the policy' was held
in a suit by the indorsee, not to be a negotiable promis-
sory note because the promise was not absolute. The
Court said: '* * * To determine whether at its
maturity any money would become due upon it, it would
be necessary to have recourse to the policy therein re-
ferred to, and to ascertain whether any loss had occurred
which would constitute a valid claim against the com-
pany. * * *'
"* * * We reach the conclusion that the note in
question was not negotiable. * * *
Question 405: (1) Between what parties is the suit in Case
405? What defense is sought to be made against the plaintiff?
Upon what question does the admissibility or inadmissibility of
this defense depend? What is the clause that is in question?
How did the Court decide ?
(2) A note otherwise in usual form read, "This note secured
by G. W. Davis note, copy of contract hereto attached and made
a part of this note. Negotiable and payable at South East Mis-
souri Trust Co. If a person purchased this note from the
payee would he be subject to defenses that the maker h,as against
the payee? (Robertson v. Kochtizky, 217 S. W. (Mo.) 543.)
(Note: While there can be little doubt as to the effect upon
negotiability of "subject to a contract or "provided contract is
performed or any other provision that clearly qualifies the
promise, or incorporates a contract into the note, there has been
a difference of opinion as to the effect of such phrases as "per
contract and "as per contract. Are they mere references tn
the consideration or do they qualify ? In Strand Amusement Co.
v. Fox, 87 So. 322 (Ala.) "per contract written on margin
held not to affect negotiability. Three judges dissented. In
Continental Bank & Trust Co. v. Times Publishing Co., 142 La.
209, L. R. A. 1918B 632, "as per contract dated March 21,
FORMAL REQUISITES
773
1913, held to destroy negotiability. In National Bank v. Went-
worth, 218 Mass. 30, "Value received as per terms of contract
held not to destroy negotiability.)
(3)—Indication of Particular Fund, Account, Credit, etc.,
as Affecting Absolute Character of Promise or Order.
Case 406. Uniform Nego. Instrument Act, Sec. 3.
"An unqualified order or promise to pay is uncondi-
tional within the meaning of this act, though coupled
with: '
"1. An indication of a particular fund out of which
reimbursement is to be made, or a particular account to
be debited with the amount; * * *
"* * * But an order or promise to pay out of a
particular fund is not unconditional.
*
Question 406: State the above rule.
Case 407. First National Bank v. Lightner, 74 Kan.
736.
Facts: Suit against First National Bank of Hutchin-
son, Kansas, against George W. Lightner, on his accept-
ance of two orders mainly identical, of which one read as
follows:
"Hutchinson, Kansas, Aug. 10, 1903.
Gr. W. Lightner, Offerle, Kansas.
Dear Sir:
Pay to the order of the First National Bank of Hut-
chinson, Kansas, $1500 on account of contract between
you and the Snyder Planing Mill Company.
The Snyder Planing Mill Co.,
Per J. F. Donnell, Treasurer.
Accepted: G. W. Lightner.''
The question presented was whether this order was
"negotiable.
Point Involved: Whether an instrument otherwise
negotiable is rendered non-negotiable by the statement
that it is to be paid on account of a particular contract
stated to exist between drawer and drawee.
774
NEGOTIABLE INSTRUMENTS
Porter, J.: "* * * The main controversy is whether
the orders given by the planing mill company to the bank
and accepted by defendant are negotiable instruments.
It is true that no specific time of payment is mentioned
but that does not affect their validity as such instrn-
ments; and where no date is mentioned they are payable
on demand. * * * Each of them, therefore, pos-
sesses all the essential elements of a bill of exchange,
unless the words 'on account of contract between you
and the Snyder Planing Mill Company' make them pay-
able out of a particular fund, and conditionally, so that
the acceptance is thereby qualified.
'' The law is well settled that a bill or note is not nego-
tiable if settled out of a particular fund. * * * But
a distinction is recognized where the instrument is simply
chargeable to a particular account. In such a case it is
beyond question negotiable; payment is not made to de-
pend on the sufficiency of the fund mentioned, and it is
mentioned only for the purpose of informing the drawee
as to his means of re-imbursement. * * *
"The test in every case is said to be 'Does the instru-
ment carry the general personal credit of the drawer or
maker, or only the credit of a particular fund v * * *
"We are of opinion that these orders cannot be con-
strued as drawn upon a particular fund. * * * In
our views they were negotiable. * * *
Question 407: Did the fact that no time of payment is men-
tioned in the above instrument affect its negotiability? When
was it payable? What were the words which raised the ques-
tion of negotiability ? How did the Court dispose of this point ?
Why?
(2) A writes two law books for B Publishing Company, on a
royalty basis, one a Case Book and one a Text Book. He needs
funds, and draws a bill of exchange on B Publishing Co., con-
taining the words "and charge to my Case Book Royalty ac-
count. Do these words impair negotiability? Would the fact
that A might not have anything to his credit or the fact that
the publishing company might not honor the instrument enter
into the question of negotiability ?
FORMAL REQUISITES
775
Case 408. Meany v. Pool & McCord, 136 N. Y. 610.
Facts: See the opinion.
Clark, J.:  * * * The paper set out in the com-
plaint is not a negotiable instrument. * * * This in-
strument provides as follows: ' This amount to be paid
out of our profits on the 3 East 40th Street job.' Being,
therefore, a promise to pay out of a particular fund it is
not unconditional. * * *
Question 408: Was the above instrument negotiable? Would
the question whether the fund were sufficient or insufficient have
any bearing? Why?
Case 409. National Savings Bank v. Cable, 73 Con-
necticut Reports, 568.
Torrance, J.:  * * * The counterclaim also failed
to show any consideration for the order or its acceptance.
If the order had been negotiable, it might have been held
to import a consideration, but it is not negotiable. It is
payable out of a particular fund; it is to pay $300, or
what would be due on a specified book; the amount to be
paid is made to depend upon the adequacy of a specified
fund; such an order is conditional, and so not negotiable.
* * #f>
Question 409: Was the above instrument negotiable? Why?
Case 410. Warden v. Dodge, 4 Denio, 159.
Beardsley, J.:  * * * A promissory note must be
payable absolutely and not upon any contingency as to
time and event. * * *
"This was not such an engagement, for although the
promise was to make engagements at certain specified
times, the payments were to be made ' out of the net pro-
ceeds' 'of ore to be raised and sold' from a certain ore
bed. Here was a contingency; the fund might turn out to
be inadequate, in which case there would be no obligation
to pay at any time. It was not a promise to pay 'ab^o-
776
NEGOTIABLE INSTRUMENTS
lutely and at all events' as a (negotiable) promissory
note always is.
Question 410: Why was the above note not negotiable?
C. "* * * to Pay a Sum Certain in Money.
§411. (Nego. Instru., Sec. 20.) Sum Certain.
Case 411. Smith v. Nightingale, 2 Starkie, 375.
Facts: Suit was brought upon the following instru-
ment describing it as a negotiable promissory note.
 October 12, 1807.
"I promise to pay James Eastling, my head carter, the
sum of 641. with lawful interest for the same, three
months after date, and also all other sums which may
be due to him.
(Signed by defendant.)
It was objected that this note was not negotiable.
Lord Ellenborough was of the opinion that the in-
strument was too indefinite to be considered as a promis-
sory note; "it contained a promise to pay interest for a
sum not specified, and not otherwise ascertained than by
a reference to defendant's books; and since the whole
constituted one entire promise, it could not be divided
into parts.
Question 411: (1) State the matter in the above instrument
which rendered it non-negotiable.
(2) A made out a promissory note to B, or order, promising
to pay "500 and taxes. Is the note negotiable? (Smith v,
Myers, 207 111. 126.)
Case 412. Thorpe v. Mindemaii, 123 Wis. 149; 68 L.
B. A. 147.
Facts: Suit to foreclose a note and mortgage. The
note contained the following provision: "The payment
of this note is secured by a mortgage of even date here-
with on real estate. If default shall be made in the pay-
FORMAL REQUISITES
777
ment of interest, or in case of failure to comply with any
of the conditions or agreements of the mortgage collat-
eral hereto, then the whole amount of the principal shall,
at the option of the mortgagee or his representatives
or assigns (notice of such option being hereby expressly
waived) become due and payable without any notice
whatever. The mortgage referred to contained the
usual provisions that the mortgagor (the maker of the
note) should pay all taxes, and should keep the property
insured, or in default thereof the mortgagee might pay
such insurance and add the same to the amount of the
note, etc. This note was transferred to the present holder
by an indorsement on the back of the note, as follows:
"For value received, I hereby sell, transfer and assign
the within note, and the interest coupons thereto attached,
to Josephine Thorpe, without recourse.
Defense: That the note was without consideration,
and that it is non-negotiable and that the plaintiff, there-
fore took it, subject to that defense.
Point Involved: Whether a provision in a note that it
is secured by a real estate mortgage which contains pro-
visions rendering amount of sum payable uncertain,
makes the note payable for a sum uncertain, on the
ground that both instruments are one transaction and
must be construed together.
Winslow, J.:  * * * The general rule that agree-
ments contemporaneously executed and pertaining to the
same subject matter are to be construed together is so
familiar and so frequently acted upon that it needs only
to be stated. The question how far, if at all, this rule
imports into a promissory note the collateral agreements
contained in an accompanying mortgage, is the question
to be considered in this case. * * * This is a de-
iidedly revolutionary proposition. If it be true both the
Jusiness world and the courts have been sadly in error
'or many years. * * * If all the agreements con-
' ained in every mortgage are, as matter of law, imported
ento the note these propositions would not be true, for
if '
778 NEGOTIABLE INSTRUMENTS
the general rule (except as changed by statute) is that
negotiable instruments cannot be bound up and fettered
with collateral agreements for the doing of other things
besides the payment of money, and retain their nego-
tiable character. Upon the principle contended for, the
most simple real estate mortgage would deprive the note
which it secured of its negotiable character, because it
would import into the note one or more collateral agree-
ments which are not for the payment of money. Fortu-
nately, it is not necessary to give so violent a shock to
the well understood principles of law governing the nego-
tiability of notes and mortgages. The appellant's con-
tention really results from a confusion of ideas. They
lay down the well-understood proposition that contem-
poraneous instruments relating to the same subject-
matter are to be construed together, and conclude that
it follows that a note and mortgage, though separately
executed, are one instrument, and that the note is that
instrument. The rule that instruments are to be con-
strued together does not lead to this result. Construing
together simply means that, if there be any provisions
in one instrument limiting, explaining, or otherwise af-
fecting the provisions of another, they will be given effect
as between the parties themselves and all persons charged
with notice, so that the intent of the parties may be car-
ried out, and the whole agreement actually made may be
effectuated. This does not mean that the provisions of
one instrument are imported bodily into another, con-
trary to the intent of the parties. They may be intended
to be separate instruments, and to provide for entirely
different things, as in the very case before us. The note
is given as evidence of the debt and to fix the terms and
time of payment. It is usually complete in itself,—a
single, absolute obligation. The purpose of the mort-
gage is simply to pledge certain property as security for
the payment of the note. The agreements which it con-
tains ordinarily have no bearing on the absolute engage-
ments of the note, but simply relate to the preservation
of the security given by its terms; such as the payment
FORMAL REQUISITES
779
of taxes, the insurance of houses, and the like. While
the two instruments will be construed together wherever
the question as to the nature of the actual transaction
becomes material, this does not mean that the mortgage
incorporated into the note, nor that the collateral agree-
ments to pay the taxes, or to insure the property, or that
the mortgagee might insure in case of default by the
mortgagor and have an additional lien therefor, become
parts of the note. These agreements pertain to another
subject, namely, the preservation intact of the mortgaged
property. The promise to pay is one distinct agreement,
and, if couched in proper terms, is negotiable. The
pledge of real estate to secure that promise is another
distinct agreement, which ordinarily is not intended to
affect in the least the promise to pay, but only to give
a remedy for failure to carry out the promise to pay.
The holder of the note may discard the mortgage entirely,
and sue and recover on his note; and the fact that a
mortgage had been given vTith the note, containing all
manner of agreements relating simply to the preserva-
tion of the security, would cut no figure. A pleading
alleging such facts would be stricken out as frivolous or
irrelevant.''
Question 412: Why is a reference in a note to a mortgage or
trust deed, given to secure the note, and which contains provi-
sions that may increase the extent of the security by indefinite
amounts, without effect to destroy the negotiability of the note ?
Case 413. Uniform Negotiable Instruments Act, Sec. 2.
"The sum payable is a sum certain within the mean-
mg of this act, although it is to be paid:
"1. With interest; or
"2. By stated installments; or
"3. By stated installments with a provision that in
default in payment of any installment, or of interest,
the whole shall become due; or
"4. With exchange whether at a fixed rate, or at the
mrrent rate; or
780
NEGOTIABLE INSTRUMENTS
"5. "With costs of collection or an attorney's fee in
case payment shall not he made at maturity.''
Question 413: (1) Suppose a note is for payment of $500
"with interest stating no rate, does this provision make the
note non-negotiable ?
(2) A note to pay $1,000, by two installments, that is on
the first of May, 1924, and first of November, 1924, the whole
$1,000 to become due if default made in payment of first in-
stallment. Is the note negotiable?
(3) "The only point raised is whether the instruments sued
on are negotiable promissory notes. They are promises to pay
specified sums of money in St. Paul, 'with current exchange on
New York City,' and the only question is whether this provision
as to exchange renders the amount payable uncertain? (Hast-
ings v. Thompson, 54 Minn. 184.) How would you answer this
question ?
(4) A note for five hundred dollars, with payment of "rea-
sonable attorney's fees if note not paid at maturity. Con-
tended that this clause destroys negotiability. Is this position
well taken?
§ 412. (Nego. Instru., Sec. 21.) Payment in money.
Case 414. Roberts v. Smith, 58 Vermont, 492.
Facts: Suit on a note: "November 17, 1849. Two
years from date for value received I promise to pay J. S.
King or bearer one ounce of gold.
"(sd) E. P. Smith.
Defense: That the note is not negotiable, and cannot
be sued on as such.
Point Involved: Whether an instrument not payable
in money is negotiable.
Veasey, J.: "* • * * such an instrument is not
negotiable because not payable in money. * * * It is
but a promise to pay, that is, deliver, a certain amount
of merchandise definite in amount. Because gold enters
into the composition of money, we cannot assume tlia1
'an ounce of gold' is money, or that it has a fixed an(|
unvarying value. * * * Although it has the form di
a promissory note, it is not such, and cannot be treaty
FORMAL REQUISITES
781'
as such in pleading. It must be treated as a simple con-
tract for the delivery of merchandise. * * *
Question 414: Is the above note negotiable? Why?
Case 415. Martin v. Chauntry, 2 Strange Reports
(Eng.) 1271.
"The Court held on error from C. B. that a note to
deliver up horses and a wharf, and pay money at a par-
ticular day could not be counted on as a note within the
statute; and therefore reversed the judgment.
Question 415: What did the instrument in this case provide?
Was it negotiable? Why?
Case 416. Matthews v. Houghton, 11 Maine Reports,
377.
Facts: Suit on the following note:
"Madison, July 31, 1826.
"For value received, I promise to pay Jacob Matthews
or order forty-five dollars in grain, at the market price
next January, or forty dollars in two years from next
January and interest. (sd) Nathan Houghton.
Mueller, C. J.: "# * * There can be no possible
doubt as to the character of the note, clearly it is not a
negotiable note. * * *
Question 416: Who had the option (the maker or holder) in
paying the money or delivering the grain? Was the instrument
negotiable ?
Case 417. Hodges v. Schuler, 22 N. Y. 114.
Facts: Suit by the indorsee of a note against the
indorsers. The note read as follows:
RUTLAND AND BURLINGTON RAILROAD
COMPANY.
"No. 253. $1,000.00
"Boston, April 1, 1850.
"In four years from date for value received, the Rut-
&nd and Burlington Railroad Company promises to pay
« Boston, to Messrs. W. S. and D. W. Staler, or order,
782 NEGOTIABLE INSTRUMENTS
$1,000, with interest thereon, payable semi-annually, as
per interest warrants hereto attached, as the same shall
become due; or upon the surrender of this note, together
with the interest warrants not due to the treasurer, at
any time until six months of its maturity, he shall issue
to the holder thereof ten shares in the capital stock in
said company in exchange therefor, in which case interest
shall be paid to the date to which a dividend of profits
shall have been previously declared, the holder not being
entitled to both interest and accruing profits during the
same period. '' (Signed)''
Defense: That the defendant is not liable as indorser
according to the rules of negotiable paper, for the default
of the principal maker, because the paper sued on is not
negotiable, being for the payment of money or stock, in
the alternative.
Point Involved: Whether a promise in the alternative
to pay money or do something else at the option of the
holder, destroys negotiability of an instrument otherwise
negotiable.
Weight, J.: "The single question is, whether the de-
fendants can be held as indorsers. It is insisted that
they cannot, for the reasons, first, that the instrument
set out in the complaint, is neither in terms nor legal
effect a negotiable promissory note, but a mere agree-
ment; the indorsement in blank of the defendants, oper-
ating, if at all, only as a mere transfer, and not as an
engagement to fulfill the contract of the railroad company
in case of its default; * * *.
' * The instrument on which the action was brought has
all the essential qualities of a negotiable promissory note.
It is for the unconditional payment of a certain sum of
money, at a specified time, to the payee's order. It is not
an agreement in the alternative, to pay in money or rail-
road stock. It was not optional with the makers to pay
in money or stock and thus fulfill their promise in eithew
of two specified ways; in such case, the promise woulfti
have been in the alternative. The possibility seems tin
FORMAL REQUISITES
783
have been contemplated that the owner of the stock might,
before its maturity, surrender it in exchange for stock,
thus canceling it and its money promise; but that promise
was nevertheless absolute and unconditional, and was as
lasting as the note itself. In no event could the holder
require money and stock. It was only upon a surrender
of the note that he was to receive stock; and the money
payment did not mature until six months after the hold-
er's right to exchange the note for stock had expired.
We are of the opinion that the instrument wants none of
the essential requisites of a negotiable promissory note.
* * * The engagement of the railroad company was
to pay the sum of $1,000 in four years from date, and
its promise could only be fulfilled by the payment of the
money at the day named.''
Question 417: In what capacity was the defendant sought
to be held in this case ? "What was his defense ? How did the
Court dispose of it? Who (the maker or holder) had the option
given in the note?
Case 418. Negotiable Instruments Act, Sec. 6.
"The validity and negotiable character of an instru-
ment are not affected by the fact that:
i i # * *
"5. (It) designates a particular kind of current money
in which payment is made.''
Question 418: State the above provision.
Case 419. Hogue v. Williamson, 85 Tex. 553.
Facts: Suit on a note reading as follows :
"Saltillo, Jan. 25, 1888. On or before May 1, 1888, I
iromise to pay C. C. Hogue or order, One Thousand
lexican Silver Dollars.
(Sd) Geo. S. Williamson.
The plaintiff, Hogue, put in evidence this note and
roved the value in American money of Mexican silver
pilars. He then rested his case. The defendant put in
784
NEGOTIABLE INSTRUMENTS
110 testimony and asked judgment on the ground that
plaintiff had proved no case. [In suit on a simple non-
negotiable contract, the plaintiff must prove the consid-
eration and the breach by defendant before he has made
a prima facie case, but in a suit on a negotiable instru-
ment a prima facie case is made by the proof of the in-
strument sued on.] Defendant had judgment below and
plaintiff appeals to the present Court.
Point Involved: Whether an instrument which is pay-
able in foreign money is negotiable.
Gaines, J.: "* * *
"We are of the opinion that the instrument in question
is a promissory note. It is such in form and in substance,
unless the fact that the sum payable is expressed in Mex-
ican silver dollars should make a difference. Speaking
of the sum for which a bill of exchange must be drawn,
Mr. Chitty says: 'It may be the money of any country.'
Chitty, Bills & Notes, 160. Judge Story says: 'But,
provided the note be for the payment of money only, it
is wholly immaterial in the currency or money of what
country it may be payable. It may be payable in the
money or currency of England or France or Spain or
Holland or Italy or of any other country. It may l?e pay-
able in coins, such as in pounds sterling, livres, turnoises,
francs, florins, etc., for in all these and the like cases the
sum of money to be paid is fixed by the par of exchange,
or the known denomination of the currency with reference
to the par.' Story, Prom. Notes, Sec. 17. The same rule
is distinctly laid down in 1 Dan. Neg. Inst. Sec. 58, and
in Tiedeman, Commercial Paper, Sec. 29b. * * *
Question 419: What was the objection to the above instnl-
ment as negotiable paper ? How did the Court decide ? Give its
reason.
(Note: There is a doubt as to the negotiability of instru-
ments payable ''in currency  "in current funds,'' etc. Although
it is doubtful that such words serve any purpose, still partis
do use them and hence the law should be settled, and settle#
FORMAL REQUISITES
785
in favor of the negotiability thereof. Professor Biannan sug-
gests the following amendment to the Negotiable Instrument
Act: For "Designates a particular kind of current money in
which payment is to made. (Section 6(5).
Substitute:
"Is payable in currency or current funds or designates a
particular kind of current money in which payment is to be
made. The words ' currency,' ' current money' or ' current funds'
shall mean such circulating media as are legal tender or are
lawfully and actually circulating at par with legal tender at the
time and place of payment.")
D. "Must be Payable on Demand or at a Fixed or
Determinable Future Time.
§413. (Nego. Instru., Sec. 22.) Demand paper.
Case 420. Uniform Negotiable Instruments Act, Sec. 7.
"An instrument is payable on demand:
"1. Where it is expressed to be payable on demand
or at sight, or on presentation; or
"2. In which no time for payment is expressed.
' "Where an instrument is issued, accepted or indorsed
when overdue, it is, as regards the person so issuing,
accepting or indorsing it, payable on demand.
Question 420: When is a negotiable instrument payable on
demand ?
(Note: The editor has observed that it is a very common
fallacy for the student to say that a note in which no time of
payment is expressed is non-negotiable; and also to say that an
undated instrument is non-negotiable. It should be emphasized
that such instruments are not for these reasons non-negotiable,
although perhaps in some cases not drawn with care.)
Case 421. Hall v. Toby, 110 Pa. St. 318.
Facts: Suit on the following note :
"551.50. Warren, Aug. 18, 1879.
"For value received, I promise to pay to Wm. Toby,
or order, five hundred and fifty-one 50/100 dollars with
interest.
(endorsed by Toby) Orris Hall.
786
NEGOTIABLE INSTRUMENTS
Per Curiam: "This note was negotiable, * * *
As no time of payment was therein expressed, the law
adjudges the money to be payable immediately. A right
of action accrued at once and would be barred by the
Statute of Limitations at the expiration of six years
thereafter * * *
Question 421: What was the alleged defect in this instrn-
ment and how did the Court dispose of the objection?
(Note: As to when demand paper is considered overdue, see
cases, post.)
§ 414. (Nego. Instru., Sec. 23.) Fixed or determinable
future time.
Case 422. Negotiable Instruments Act, Sec. 4.
"An instrument is payable at a determinable future
time, within the meaning of this Act, which is expressed
to be payable;
"1. At a fixed period after date or sight; or
"2. On or before a fixed or determinable future time
specified therein; or
"3. On or at a fixed period after the occurrence of a
specified event, which is certain to happen, though the
time of happening be uncertain.
"An instrument payable upon a contingency is not
negotiable and the happening of the event does not cure
the defect.
Question 422: In what cases is an instrument payable at a
determinable future time?
Case 423. Mattison v. Marks, 31 Michigan, 421.
Cooley, J.: "* * * The objection to this instru-
ment is, that it promises to pay a certain sum of money
'on or before' a day named; and this it is said is not a
promise to pay on a day certain and consequently can-
not be a promissory note. * * * It seems to us that
this note is payable at a time certain. It is payable cer-
tainly and at all events, on a day particularly named;
FORMAL REQUISITES
787
and at that time, and not before, payment might be en-
forced against the maker. It is impossible to say that
this paper makes the payment subject to any contingency,
or puts it upon any condition. The legal rights of the
holder are clear and certain; the note is due at the time
fixed and is not due before. Thus the maker may pay
sooner if he shall choose this option, but this option, if
exercised, would be a payment in advance of the legal
liability to pay, and nothing more. Notes like this are
common in commercial 'transactions, and we are not
aware that thfeir negotiable quality is ever questioned in
business dealings. * * * 
Question 423: If paper is payable "on or before a definite
date is it non-negotiable for that reason ? To whose advantage—
maker or holder—does this provision operate ?
Case 424. Cook v. Colehan, 2 Strange's Reports
(Eng.) 1217.
"On error from C. B. a note to pay A, or order (a cer-
tain sum) six weeks after the death of the defendant's
father, for value received, was held to be a negotiable
note within the statute 3 Ann. c. 9, for there is no con-
tingency whereby it may never become payable, but it
is only uncertain as to time, which is the case of all bills
payable at so many days after sight. In communi banco
it held three arguments, and was held good upon a solemn
resolution delivered by Chief Justice Willes.
Question 424: A note payable in terms a certain time after a
named person's death—is it negotiable? Why?
Case 425. Kelley v. Hemingway, 13 Illinois Reports,
60.
Facts: Suit by an indorsee on a note payable when
the payee is '' twenty-one years old.'' Evidence offered
that he had arrived at that age.
Treat, C. J.: "* ** * If the terms of the instru-
ment leave it uncertain whether the money will ever be-
come payable it cannot be considered as a promissory
788 NEGOTIABLE INSTRUMENTS
note. * * * Thus a promise in writing to pay a sum
of money when a particular person shall be married, is
not a promissory note, because it is not certain that he
will ever be married. * * * So of a promise to pay
when a particular ship shall return from sea, for it is not
certain the ship will ever return. # * * In all such
cases the promise is on a contingency that may never
happen. * * *
a* * * rp^ £a(,.f. payee lived till he was
twenty-one years of age makes no difference. It was not
a promissory note when made, and it could not become
such by matter ex post facto. * * *
Question 425: (1) When was the above instrument pay-
able ? Was it negotiable ? Did the happening of the event affect
its character as a negotiable instrument?
(2) Might this instrument be good as a non-negotiable con-
tract ? What else would have to appear ?
(3) Is the following instrument negotiable?
"Chicago, July'12, 1887.
"To A. B.:
"Please pay to M. N., or order, for stone in your building,
$600, in installments as follows: $200 when first floor joists are
in; $200 when building is ready for roof; $200 when stoops are
finished; and charge same to my account.
"(sd.) C. D.
Case 426. Gliddenv. Henry, 104 Ind. 278.
Facts: A note provided that the payee or holder might
extend the time of payment indefinitely as they saw fit,
thus giving the payee or holder the power to prevent, if
so desired, the maturing of the note.
Point Involved: Whether the provision in a note that
the holder may extend the time of payment at his pleas-
ure renders the instrument non-negotiable.
The Court: * * From an inspection of the
note it is impossible to tell when it may mature because
it is impossible to know what extension may have been,
or may hereafter be, agreed upon. No definite time is
fixed, nor is the maturity of the note dependent upon an
FORMAL REQUISITES
789
event that must inevitably happen. The condition is not
that something may happen, or be done, that will mature
the note before the time named, thus leaving that time
as fixed and certain, if the thing do not happen, or be
not done; but the condition is that the time named-may
be displaced by another, uncertain and indefinite time,
as the parties may agree.
. "This distinguishes the case from some of the cases
cited by appellee, which hold that so long as a definite
time of payment, as fixed in the note remains fixed and
certain, the note retains its negotiability, although by
certain agreed conditions it may be matured before that
time. The case here is also distinguishable from another
class of cases which hold that the time of payment may
be dependent upon an event that must inevitably happen,
such as the death of the maker, the coming of the seasons,
etc. The precise question involved here has been passed
upon by the supreme courts of Iowa and Michigan, and
in each case it was held that the condition destroyed the
negotiability of the note.
"We conclude from the foregoing that the notes in suit
are not negotiable under the statute as inland bills of
exchange, and that, therefore, whatever defenses appel-
lant might have set up and made available as against
Nugen, the payee, he may set up and make available as
against appellee. * * *
*' The judgment is reversed with costs.''
Question 426: "Why was it material in the above case to
determine whether the note was negotiable or non-negotiabie?
Was it negotiable? Why?
Case 427. First National Bank of Pomeroy v. Buttery,
17 N. D. 326; 16 L. R. A., n. s., 878.
Facts: Suit on a note due Oct. 1, 1903, but containing
the following provisions: '' The makers on and indorsers
herein severally waive presentment of payment and no-
tice of protest and consent that the time of payment may
be extended without notice.
. Point Involved: Whether this provision destroyed
negotiability.
790 NEGOTIABLE INSTRUMENTS
Spalding, J.: '' * * * There is an apparent con-
flict of authorities as to whether this or similar agree-
ments render the note non-negotiable. * * * The
doctrine of the courts seems to be that when the maker's
promise will at some time he absolutely enforceable and
where the event and time and duty of payment is one
over which the holder will have entire control, there is no
such uncertainty regarding it, as renders the note non-
negotiable. * * *
Moegan, Chief Justice, dissenting: "I am unable to
concur * * #. From the face of the note it seems to
me conclusive that it does not show when the note may
become due and payable * * *. It does not seem to
me to be a sound conclusion to say that the note states
a fixed day of payment when it also states that the day
stated may not represent the date of payment if the stipu-
lation as to extension that follows is put into effect. The
note cannot be said to be a demand note, as by its very
terms, it is not such. * * * On principal and author-
ity the note should be held non-negotiable.''
Question 427: What was the provision in this note that
brought its negotiability into question? Was the note held ne-
gotiable or not? Is the decision in conflict with Glidden v.
Henry ? Do you think the decision of the Court or the dissent-
ing opinion the stronger?
(Note: The language in the above note is doubtless caused
by a misconception of the purpose of similar language properly
applied. It seems unquestionable that the proper purpose of
such a provision is that indorsers, drawers, or guarantors, waive
presentment for payment, notice of dishonor and protest, to
which they would otherwise be entitled, and also consent that
the holder may grant the debtor an extension without releas-
ing them. But comes a person who says "Let us have it in-
elude the maker also, thus using a phrase that evidently serves
no purpose and throws doubt upon negotiability.)
Case 428. Stitzel v. Miller, 250 111. 72.
Facts: Suit by an indorsee on a note containing the
following provision: "We also agree that in case said
FORMAL REQUISITES
791
note is not paid at maturity, that it is at the option of the
holder hereof to extend, as he deems proper, the payment
of the above note, and that said extension shall not in
any manner release one or either of us from the pay-
ment hereof, Defendant contends that the note sued on
as a negotiable instrument is not negotiable on account
of this provision, and that therefore the indorsee could
not bring suit thereon in his own name according to the
rules of negotiable paper.
Point Involved: Whether the instrument sued on is
rendered non-negotiable by the provision stated.
Mk. Justice Caetee: "* * *
"The contention that said quoted words gave the holder
the authority to extend the note as he pleased; that it
could not be known what extensions he might grant, and
that therefore the time when the note become due and
payable was uncertain and indeterminate, rendering the
note non-negotiable, cannot be sustained. The note ex-
pressly provides that such option to extend can be exer-
cised only upon the failure of the payors to make pay-
ment at its maturity. The time of payment is certain.
The note is dated February 22, 1908, and payable one
year thereafter. * * *
Question 428: "What were the provisions of this note ? What
reasons did the Court give for holding it negotiable ?
■ (Note: It is certainly questionable whether a holder could ex-
tend time of payment without the consent of the maker. The
obvious purpose of this provision is as explained in the prior
note.)
Case 429. First National Bank of New Windsor v.
Bynum, 84 N. C. 24.
Ashe, J.: "* * *
"But there is another serious objection to the claim
set up for the negotiability of this instrument. It stipo
lates that the payee shall have power to declare the notf
due at any time they may deem the note insecure, eves
792 NEGOTIABLE INSTRUMENTS
before the maturity of the same. This divests it of the
quality of certainty in the time of payment. * * *
The time of payment may be hastened at the option of
the payees and is therefore uncertain. * * *
Question 429: A note providing that the holder shall have
the option to declare its maturity at any time he deems himself
insecure—is it negotiable ?
Case 430. Nickel! v. Bradshaw, 94 Ore. 580, 183 Pac.
12.
Facts: A note given by R. H. Bradshaw to order of
Effie May Terrell, and by her indorsed to Belle Nickell
was payable five years from date but also contained the
provision '' due if ranch is sold or mortgaged.''
Point Involved: Whether the quoted language do-
stroys negotiability.
Harris, J. delivered the opinion of the Court: '' * * *
"The provisions of the Negotiable Instrument Law
(L. 0. L. 6017, 5834, and 5837)/are only declaratory of
the law merchant as it existed in most jurisdictions; and
hence judicial opinions expressed before the enactment
of the statute are not without weight in the solution of
the problem confronting us. Rossville State Bank v.
Heslet, 84 Kan. 315, 33 L. R. A. (N. S.) 738, 113 Pac.
1052, 3 R. C. L. 907, 8 C. J. 135; Eaton & G. Com. Paper,
213. If the words, 'due if ranch is sold or mortgaged,'
are omitted from the instrument, it concededly becomes
a negotiable promissory note within the meaning of 6017,
L. O. L., because it contains a promise to pay 'five years
from date,' which is, speaking as of the date of the note,
a fixed future time. If, on the other hand, the words,
'five years from date,' are erased, the paper is admit-
tedly transformed into a non-negotiable instrument, be-
cause it then becomes payable 'if ranch is sold or mort-
gaged,' which, if standing alone and viewed by itself,
was, at the time of the execution of the instrument, ft
'contingency' within the meaning of 5837, L. O. L.
are not permitted, however, to cancel any word fouJ^j
FORMAL REQUISITES
793
in the instrument, and hence the whole of the paper must
be considered in determining whether the instrument is
or is not negotiable. Finley v. Smith, 165 Ky. 445, L.
R. A. 1915F, 777, 780,177 S. W. 262. It will be observed
that the writing does not in express terms say that the
debt becomes due if the ranch is sold or morgaged before
'five years from date,' and yet such is the obvious intent
and meaning of the whole writing. The debt becomes due
at all events 'five years from date,' and the debt cannot
extend beyond that fixed, certain, and definite period, be-
cause the moment the five-year period ends that debt is
due, and any other interpretation of the writing would
completely nullify the words 'five years from date,' but,
if the ranch is sold or mortgaged prior to the expiration
of that fixed future time, then the promisor agrees to
pay the debt at the time of such sale or mortgage. Dob-
bins v. Oberman, 17 Neb. 163, 22 N. W. 356.
"The words, 'due if ranch is sold or mortgaged,' do not
extend the date of payment, but upon the contrary they
serve only to accelerate the maturity of the debt. Stated
broadly, the overwhelming weight of authority is to the
effect that, where a note is made payable on a definite
day and also contains promise to pay at an earlier time,
the instrument is not rendered non-negotiable by the ac-
celeration cause. Kiskadden v. Allen, 7 Colo. 206, 3 Pac.
221; Walker v. Woollen, 54 Ind. 164, 23 Am. Rep. 639;
Charlton v. Reed, 61 Iowa, 166, 47 Am. Rep. 808,16 N. W.
64; Dobbins v. Oberman, supra; Ernst v. Steckman, 74
Pa. 13, 15 Am. Rep. 542; Joergenson v. Joergenson, 28
Wash. 477, 92 Am. St. Rep. 888, 68 Pac. 913; Chicago
R. Equipment Co. v. Merchants' Nat. Bank, 136 U. S.
268, 34 L. ed. 349, 10 Sup. Ct. Rep. 999; Smith v. Nelson
Land & Cattle Co., 128 C. C. A. 512, 212 Fed. 56; White
v. Hatcher, 135 Tenn. 609,188 S. W. 61; Bright v. Offield,
[81 Wash. 442, 143 Pac. 159; Utah State Nat. Bank v.
i Smith, 180 Cal. 1, 179 Pac. 160; First Nat. Bank v. Bar-
rett,-52 Mont. 359, 157 Pac. 951; Siegel, C. & Co. v. Chi-
cago Trust & Sav. Bank, 131 111. 569, 7 L. R. A. 537, 19
■ Am St. Rep. 51, 23 N. E. 417, 3 R. C. L. 908; Selover,
794 NEGOTIABLE INSTRUMENTS
Neg. Inst. 2d ed. 70; Eaton & G. Com. Paper, 220. See
also Page v. Ford, 65 Or. 450, 469, 45 L. R. A. (N. S.) 247,
131 Pac. 1013, Ann. Cas. 1915A, 1048. The books con-
tain a variety of cases involving acceleration clauses.
More common illustrations are found in instruments
which provide that a default in the payment of interest
or in the payment of an instalment shall mature the debt.
Other familiar examples are furnished by adjudications
where a series of notes have been given for a single debt,
with a provision in each note that default in the payment
of any shall mature all the unpaid notes. While nearly
all the courts have decided that a default in the payment
of interest or in the payment of an instalment, or a fail-
ure to pay one of a series of notes, is such an acceleration
clause as does not destroy the negotiability of an instru-
ment, yet there are recorded instances where courts have
held that acceleration clauses of the kind mentioned im-
pair the negotiability of instruments otherwise nego-
tiable.
 As already stated, the general principle has been firm-
ly established, in despite of occasional dissenting voices,
that an acceleration clause does not necessarily destroy
the negotiability of an instrument. The chief difficulty,
however, is encountered whenever an attempt is made
to formulate a rule by which to determine the validity
of all acceleration provisions; and it is probably impos-
sible to formulate, even in the most general language,
any rule which will include all acceleration provisions
that have been held sufficient, and at the same time serve
as a safe and certain guide in all jurisdictions. This
difficulty is neither greater nor less now than it was prev-
ious to the adoption of the Negotiable Instruments Law.
For example, there is a class of cases dealing with instru-
ments having provisions to the effect that, if at any time
the holder of the note deems himself insecure, he may
declare the debt due; or to the effect that the holder may,
if he deems himself insecure, call upon the maker for
additional security when the value of the security givea
at the time of the execution of the writing becomes im-
FORMAL REQUISITES
795
paired, and if the maker fails to respond with additional
security the holder may declare the debt due. The ad-
judications assignable to this class are divided in their
views; but the majority of the cases decided under the
provisions of the Negotiable Instruments Law, as well
as the majority of those decided in jurisdictions where
the Negotiable Instrument Law had not yet been adopted,
have ruled that this kind of a condition in an accelera-
tion clause renders the instrument non-negotiable. Rey-
nolds v. Vint, 73 Or. 528, 144 Pac. 526; Western Far-
quhar Mach. Co. v. Burnett, 82 Or. 174, 178, 161 Pac.
384; Holliday State Bank v. Hoffman, 85 Kan. 71, 35
L. E. A. (N. S.) 390, 116 Pac. 239, Ann. Cas. 1912D, 1;
Puget Sound State Bank v. Washington Paving Co., 94
Wash. 504, 162 Pac. 870; First Nat. Bank v. Bynum,
84 N. C. 24, 37 Am. Rep. 604; Carroll County Sav. Bank
v. Strother, 28 S. C. 504, 6 S. E. 313; Kimpton v. Stude-
.baker Bros. Co., 34 Idaho, 552, 125 Am. St. Rep. 185, 94
Pac. 1039, 14 Ann. Cas. 1126; Brght v. Offield, 81 Wash.
[ 442, 143 Pac. 159; First Nat. Bank v. Russel, 124 Tenn.
\618,139 S. W. 734, Ann. Cas. 1913A, 203. Contra: Empire
liNat. Bank v. High Grade Oil Ref. Co., 260 Pa. 255, 103
lAtl. 602; Finley v. Smith, 165 Ky. 445, L. R. A. 1915F,
is 777, 177 S. W. 262; Kennedy v. Broderick, L. R. A. 1915B,
t472, 132 C. C. A. 381, 216 Fed. 137. The cases holding
i that an instrument is not negotiable if it contains a clause
mgiving the holder the right to declare the debt due if he
[[''kerns himself insecure are based primarily upon the ob-
f 'ection that the date of maturity is placed wholly under
is, he control of the holder, is completely dependent upon
nuis whim or caprice, and is independent of any act done
Bnt;<r omitted by the maker; and, if there is the further
iftfipulation that the maker will furnish added security
;at>hen called upon, then there is, of course, an affirmative
Promise of the maker to do an act in addition to his
Promise to pay money. Puget Sound State Bank v.
Washington Paving Co., 94 Wash. 504, 162 Pac. 874;
Wolliday State Bank v. Hoffman, 85 Kan. 71, 35 L. R. A.
796 NEGOTIABLE INSTRUMENTS
(N. S.) 390, 116 Pac. 239, Ann. Cas. 1912D, 1; White
v. Hatcher, 135 Tenn. 609, 612, 188 S. W. 61.
"It is apparent from what has already been said that
some jurisdiction go further than others in their ap-
proval of acceleration clauses; and consequently a rule
containing language as broad as the rule in some juris-
dictions would be too broad for others, and a formula
which is only broad enough for the latter would not be
broad enough for the former. In this jurisdiction, the
holding in Reynolds v. Vint, 73 Or. 528,144 Pac. 526, and
in Western Farquhar Mach. Co. v. Burnett, 82 Or. 174,
161 Pac. 384, condemns acceleration clauses which are
entirely under the control of the holder, and completely
dependent upon his whim or caprice, independent of any
act of the maker; but, since neither of those decisions
condemns all acceleration clauses, we have no hesitancy
in declaring that we prefer to keep company with the
majority of the other jurisdictions by giving approval
to certain kinds of acceleration clauses. What we deem
to be the better rule is best expressed by language found
in Ernst v. Steckman, 74 Pac. 13,15 Am. Rep. 542, where
a note, payable 'twelve months after date (or before, if
made out of the sale of W. S. Coffman's Improved Broad-
cast Seeding Machine),' was held to be negotiable. In
concluding the opinion the court there said: ' The prin-
ciple to be deduced from the authorities is this: To con-
stitute a negotiable promissory note, the time or the event
for its ultimate payment must be fixed and certain; yet
it may be made subject to contingencies, upon the hap-
pening of which, prior to the time of its absolute pay-
ment, it shall become due. The contingency depends upon
some act done or omitted to be done by the maker, or
upon the occurrence of some event indicated in the note;
and not upon any act of the payee or holder, whereby
the note may become due at an earlier day.'
'' The principle which was expressed in Ernst v. Steck-
man was subsequently reiterated and applied by the Su-
preme Court of the United States in the leading and
oft-cited case of Chicago R. Equipment Co. v. Merchants']
FORMAL REQUISITES
797
Nat. Bank, 136 IT. S. 268, 34 L. ed. 349, 10 Sup. Ct. Rep.
999. Further exemplification of this principle may be
found in the following precedents where the facts in
some instances were exactly like and in all instances
were analogous to the facts presented here: Kiskadden
v. Allen, 7 Colo. 206, 3 Pac. 221; Elliott v. Beech, 3 Mani-
toba L. R. 213; Walker v. Woollen, 54 Ind. 164, 23 Am.
Rep. 639; Charlton v. Reed, 61 Iowa, 166, 47 Am, Rep.
808, 16 N. W. 64; Dobbins v. Oberman, 17 Neb. 163, 22
N. W. 356; Joergenson v. Joergenson, 28 Wash. 477, 92
Am. St. Rep. 888, 68 Pac. 913. The ruling in Reynolds
v. Vint, 73 Or. 528, 144 Pac. 526,- is not inconsistent with
the adoption of the principle stated in Ernst v. Steck-
man, 74 Pa. 13, 15 Am. Rep. 542; White v. Hatcher, 135
Tenn. 609, 612, 188 S. W. 61; First Nat. Bank v. Russell,
124 Tenn. 618, 139 S. W. 734, Ann. Cas. 1913A, 203;
Bright v. Offield, 81 Wash. 442, 143 Pac. 161; Joergenson
v. Joergenson, 21 Wash. 477, 481, 92 Am. St. Rep. 888,
68 Pac. 913; Holliday State Bank v. Hoffman, 85 Kan.
71, 35 L. R. A. (N. S.) 390,' 395, 116 Pac. 239, Ann. Cas.
1912D, 1; Clark v. Skeen, 61 Kan. 526, 49 L. R. A. 190,
78 Am. St. Rep. 337, 60 Pac. 327. The note signed by
;,Bradshaw conforms with the requirements of 5837, L.
f 0. L., and is a negotiable promissory note. Utah State
,tNat. Bank v. Smith, 180 Cal. 1, 179 Pac. 160; Bright v.
J Offield, 81 Wash. 442, 143 Pac. 159.
fr "The respondent has argued that the debt represented
.by the note automatically became due when the convey-
^ance was made to Frederick T. Lewis on January 18,
^1913; but the answer is that the thoroughly established
j;and indeed almost universal, if not the universal, rule
^.s that the acceleration clause is not self-executing, but it
.,nerely confers an option upon the holder to treat the
llebt as due. Belloc v. Davis, 38 Cal. 243, 251; White v.
? latcher, 135 Tenn. 609, 616,188 S. W. 61; Clark v. Skeen,
<>1 Kan. 526, 49 L. R. A. 190, 78 Am. St. Rep. 337, 60 Pac.
^27; First Nat. Bank v. Parker, 28 Wash. 234, 237, 92
Am' St Rep. 828, 68 Pac. 756; Keene Five Cent Sav.
Aaiik v. Reid, 59 C. C. A. 225, 123 Fed. 221; Gillette v.
798 NEGOTIABLE INSTRUMENTS
Hodge, 95 C. C. A. 205, 170 Fed. 314; Chicago R. Equip-
ment Co. v. Merchants' Nat. Bank:, 136 U. S. 268, 284, 34
L. ed. 349, 354, 10 Sup. Ct. Rep. 999.
Question 430: (1) If the words "due if ranch is sold or
mortgaged are eliminated from the above case, is it negotiable?
(2) If the only provision as to maturity is "due if ranch is
sold or mortgaged is the note negotiable?
(3) Is it the purpose of the words "due if ranch is sold
or mortgaged'' to extend the time of payment or to accelerate it ?
(4) According to the weight of authority and to this case
do the accelerating words "due if ranch is sold or mortgaged
when otherwise there is a definite time of payment destroy nego-
tiability ?
(5) "What, according to this case is the weight of authority
as to provisions that authorize the maker to call for additional
security if he deems himself insecure and in default of the
production of such security declare the note due ?
(6) Where a provision as to acceleration is contained in a
note, does it automatically execute itself, or give the holder an
option ?
(Note: Accelerating clauses such as the one in question do
not destroy negotiability according to the above case and the
weight of authority. A divergence of view prevails in reference
to the right to declare the note due if additional collateral is
called for and not produced. It seems unfortunate that the
sponsors of the Uniform Act did not see fit to include in the
Act some definite provision on this point.)
E. Must be Payable to Order or to Bearer.
§415. (Nego. Instru., Sec. 24.) In general.
Case 431. Negotiable Instruments Act, Sec. 1.
"An instrument to be negotiable * * * must be
payable to order or to bearer.''
Question 431: What are '' words of negotiability'' ? Are they
essential to negotiability?
Case 432. Wettlaufer v. Baxter, 125 S. W. Rep. (Ky.)
741
Facts and Point Involved: Stated in opinion.
FORMAL REQUISITES
799
Carroll, J.: "In the state of New York, on July 3,
1905, the Buffalo Carriage Top Company executed to
Newton J. Baxter, the following note:
 'January 15, 1906, after date we promise to pay to
Newton J. Baxter, $250 at 58 Carroll Street, Buffalo,
N. Y.' On the back of the note Newton J. Baxter wrote
his name and before its maturity, it was discounted by
appellant, Wettlaufer, and delivered to him by Baxter.
When the note fell due it was presented to the Buffalo
Carriage Top Company for payment and payment re-
fused. Thereupon the note was protested by a notary
and notice of its dishonor mailed to Baxter. * * *
Baxter declining to pay the note, suit was brought on
it against him. * * *
"The contention of counsel for Baxter is that the note
was not a negotiable instrument. * * *
(<# * # In an article in 7 Cyc, page 606, by a well
known writer on commercial paper it is said: ' The usual
form of negotiable paper is a provision for payment to
"order or "bearer. ' These and similar words are in
general necessary to its negotiability, * * *. Bills
payable to bearer were formerly held to be non-nego-
tiable, as being without words of transfer; but they are
now recognized as negotiable and transferable by de-
livery. Making an instrument payable 'to the order of' a
certain person is the same as to such person ' or order,'
and in like manner to a person named 'or bearer' is the
same in effect as 'to bearer.' Without words of nego-
liability, purchasers take the bill or note subject to all
defenses which were available between the original par-
ties, and if it was originally non-negotiable, as against
the original parties, it will not be rendered negotiable by
subsequent transfer in negotiable form.' * * *
a* * * This note in our opinion, which was pay-
able to Baxter alone, and did not contain the words
'to order' or 'bearer' was not a negotiable instrument.
* * *>>
Question 432: What was the objection raised to the nego-
tiability of this instrument ? Upon what facts did the suit arise ?
How did the Court dispose of the objection?
800 NEGOTIABLE INSTRUMENTS
§ 416. (Nego. Instru., Sec. 25.) When instrument pay-
able to order.
Case 433. Negotiable Instruments Act, Sec. 8.
"It may be drawn payable to the order of:
 1. A payee who is not maker, drawer, or drawee;
"2. The drawer or maker; or
"3. The drawee; or
"4. Two or more payees, jointly; or
"5. One or some of several drawees; or
"6. The holder of an office for the time being.
"When the instrument is payable to order the payee
must be named or indicated therein with reasonable cer-
tainty.
Question 433: In what various ways may an instrument be
payable to order?
Case 434. Zander v. N. Y. Security & Trust Co., 78
N. Y. Supp. 900.
Facts: In this case there was a suit brought upon an
instrument promising to pay to one Caroline Zander, "or
to her assigns. Further facts appear in the opinion.
Point Involved: Whether an instrument payable to
one or his assigns may be regarded as payable to order.
"It is alleged by the complaint, and admitted by the
demurrer that on or about-July 11, 1901, the plaintiff
deposited with the defendant the sum of $500, and re-
ceived therefor the following certificate or receipt:
 'The New York Security and Trust Company, New
York, July 11, 1901, has received from Caroline Zander
the sum of five hundred dollars, of current funds, upon
which the said company agrees to allow interest at the
annual rate of three per cent, from this date, and on five
days' notice will repay, in current funds, the like amount
with interest, to the said Caroline Zander or her assigns,
on return of this certificate, which is assignable only on
the books of the company.'
"Then followed provisions as to the reduction of dis-
continuance of interest, not material here,
FORMAL REQUISITES
801
 Plaintiff always remained the owner of the certifi-
cate; has never assigned it, or any part thereof, or in
anyway indorsed or transferred it, or any interest there-
in. Before August 9, 1901, she lost or inadvertently
destroyed the certificate, and though she has diligently
searched, she has been unable to find it, and on August
9, 1901, she notified defendant of the loss of the certif-
icate. She has duly demanded of defendant the issue
of a new certificate or the payment of the amount of the
deposit. The demurrer is stated to be interposed merely
for the purpose of enabling the defendant to insist that
the plaintiff shall be required to give the security speci-
fied in section 1917, Code Civ. Proc. That section refers
to lost negotiable paper, and the question which presents
itself is, therefore, whether or not the certificate of de-
posit given by defendant is negotiable. Section 20, c. 612,
Laws 1897, known as the 'Negotiable Instruments Law,'
declares that an instrument, to be negotiable, 'must be
payable to order or to bearer' and in this respect is mere-
ly declaratory of the law of negotiable paper as it existed
before the passage of the statute. The papers which
were before the Court in the cases principally relied upon
by defendant conformed to the foregoing definition, and
in each case the decision turned upon the fact that the
lost receipts were payable to 'order,' which circumstances
was held to render them negotiable instruments, and to
require that indemnity be given before judgment upon
them could be rendered. Frank v. "Wessels, 64 N. Y.
155; Read v. Bank, 136 N. Y. 454, 32 N. E. 1083, 32 Am.
St. Rep. 758. The receipt or certificate in the present
case is not negotiable. The money represented by it is
payable, not 'to order or bearer,' but to the plaintiff 'or
her assigns.' It is therefore what is known to the law
as a 'non-negotiable instrument.' In an action upon a
lost or destroyed instrument of this description, it is not
necessary that the plaintiff should .give or tender in-
demnity.''
Question 434: (1) Why was it material in this case to con-
sider whether this instrument was negotiable? What was its
802 NEGOTIABLE INSTRUMENTS
alleged defect as a negotiable instrument ? What did the court
decide ?
(2) Why should the law provide that the holder of nego-
tiable paper should give bond in case of loss thereof, and not
the holder of non-negotiable paper?
§ 417. (Nego. Instru., Sec. 26.) When instrument pay-
able to bearer.
Case 435. Uniform Negotiable Instruments Act, Sec. 9.
"The instrument is payable to bearer:
'' 1. When it is expressed to be so payable; or
"2. When it is payable to a person named therein or
bearer; or
"3. "When it is payable to the order of a fictitious or
non-existing person, and such fact was known to the per-
son making it so payable; or
"4. When the name of the payee does not purport to
be the name of any person; or
"5. When the only or last endorsement is an endorse-
ment in blank.''
Question 435: When is an instrument payable to bearer?
Case 436. Willetts v. Phoenix Bank, 2 Duer, 121.
Facts: Suit on four checks, one being '' to the order of
1658, and three to the order of "bills payable.
Oakley, C. J.:  * * * The law is well settled that
a draft payable to the order of a fictitious person, inas-
much as title cannot be given by indorsement, is in judg-
ment of law payable to bearer. * * *
Question 436: How were these checks payable? Were they
negotiable ? Why ?
Case 437. Bartlett v. First Nat. Bank, 247 111. 490.
Facts: This was a suit commenced by Bartlett, Frazier
& Carrington agains.t the First National Bank of Chicago,
to recover the amount of 135 drafts drawn by B. F. & C.
by their agent, R. L. Walsh, upon themselves, to the order
of various persons, and fraudulently indorsed by said
FORMAL REQUISITES
803
Walsh in the names of the payees and paid to Walsh by
State Bank of Reddick and to said Bank by First National
Bank of Chicago, and to First National Bank of Chicago
by B. F. & C., plaintiffs herein.
Point Involved: Whether an instrument drawn to the
order of a payee by a name which represents an actual
person, but who was not intended to have and never had
any interest in said instrument, is payable to a fictitious
person and therefore payable to bearer.
Me. Justice Hand: "* * * It appears from the
record that Bartlett, Frazier & Carrington were engaged
in the buying of grain in the city of Chicago, and at
numerous places in the country; that in 1904 they were
running an elevator at Reddick; that R. L. Walsh was
the manager of the Reddick elevator; that he bought
grain from the farmers residing in that vicinity and paid
them for their grain by delivering to them drafts drawn
upon banks in the following form, which were furnished
R. L. Walsh by Bartlett, Frazier & Carrington:
'No Bartlett, Frazier & Carrington. $.
Pay to the order of
Dollars for bushels and lbs. of
Bartlett, Frazier & Carrington,
By , Agent.
To Bartlett, Frazier & Carrington, Chicago, Illinois.'
"The blanks were filled up by R. L. Walsh with the
farmers' names, the amount due them for grain and the
kind of grain purchased. The drafts were cashed by
the State Bank of Reddick, and by that bank forwarded
to the First National Bank of Chicago, and by that bank
collected of Bartlett, Frazier & Carrington. In the year
1905, to accommodate the farmers and to meet competi-
tion, R. L. Walsh would fill out the drafts, as above indi-
cated, for grain and pay the farmers for their grain in
cash, and then, without authority, endorse the drafts
with the farmers' names and obtain the amounts of the
drafts from Bartlett, Frazier & Carrington by putting
the drafts through the banks. * * *
804
NEGOTIABLE INSTRUMENTS
"In November, 1906, it was discovered by the appel-
lants that R. L. "Walsh, by means of issuing drafts with-
out receiving any grain therefor and endorsing them in
the names of the payees and procuring the cash there-
on from the State Bank of Reddick and passing them
through the First National Bank of Chicago, had oh-
tained some $12,500 in cash, which he converted to his
own use.
"The appellants base their claim of Lability against
the First National Bank of Chicago upon, the contention
that the drafts by R. L. Walsh were forgeries. * * *
It is undoubtedly the general rule that when a drawee
pays a draft to an endorser who derives title to the draft
through a prior forged endorsement he may recover back
the money so paid. (First Nat. Bank v. Northwestern
Nat. Bank, 152 111. 296.)
"The drafts drawn by R. L. Walsh in the name of the
appellants against themselves were all made payable to
some person who resides near Reddick, or bearer, and in
the sense that there were such individuals as payees the
payees named in the drafts were not fictitious persons.
At the time, however, Walsh drew said drafts he did not
intend that the persons whose names he inserted as
payees in said drafts should have any interest in said
drafts, or that said drafts should ever be delivered to
said payees, or that said payees should endorse said
drafts in order to receive payment therefor or for the
purpose of negotiating the same. In the eye of the law,
therefore, the payees named in said drafts were not bom
fide payees but mere fictitious persons. Said drafts were
therefore, in law, payable to bearer, and were transfer-
able, therefore, by delivery, and upon their receipt by
the appellee payment thereof could be enforced against
the appellants by the First National Bank of Chicago
without claiming through the said forged endorsements
but as the holders of negotiable paper made payable to
bearer. * * * The First National Bank did not,
therefore, make out its title to said drafts through a
forged endorsement, and, appellants could not, therefore,
FORMAL REQUISITES
805
recover back the money paid to the bank on said drafts.
* * * > >
Question 437: Were the above instruments payable to
bearer? Why? What effect did this have on the question
whether the indorsements were forgeries?
(Note : If paper is order paper it cannot be negotiated except
upon the indorsement of the payee of the instrument or the
payee of the indorsement. If bearer paper it may be negotiated
by delivery. And in that connection it is to be always remem-
bered that paper is bearer paper no matter whether it is order
paper on its face or not, if the only or last indorsement is an
indorsement in blank. See further of this, under the subject
of negotiation.)
F. ' 'Where the Instrument is Addressed to a Drawee he
Must be Named or Otherwise Indicated Therein with
Reasonable Certainty.
§418. (Nego. Instru., Sec. 27.) Meaning of provision.
(No cases.)
CHAPTER 52
EXPRESSION—NEGOTIABLE FORM (2) PROVI-
SIONS AND OMISSIONS NOT AFFECTING
NEGOTIABILITY
§ 419. In general.
§ 420. Provision authorizing sale of collateral security.
§ 421. Keferenee to mortgage given as security.
§ 422. Provision authorizing confession of judgment.
§ 423. Waiving benefit of exemption and similar laws.
§ 424. Effect of affixing seal.
§ 42-5. Omission of date.
§ 426. Ante-dating and post-dating.
§ 427. Technical rules of construction.
§ 419. In general.
Case 438. Uniform Negotiable Instruments Act, Sec. 5.
"An instrument which contains an order or promise
to do an act in addition to the payment of money is not
negotiable.
'' But the negotiable character of an instrument other-
wise negotiable is not affected by a provision which:
'' 1. Authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
"2. Authorizes a confession of judgment of the instru-
ment be not paid at maturity; or
"3. Waives the benefit of any law intended for the ad-
vantage or protection of the obligator; or
"4. Gives the holder an election to require something
to be done in lieu of payment of money.
"But nothing in this section shall validate any pro-
vision or stipulation otherwise illegal.
Question 438: (See the following cases and questions.)
806
EFFECT OF PROVISIONS
807
§ 420. (Nego. Instru., Sec. 29.) Provision for sale of
collateral security.
Case 439. Perry v. Bigelow, 128 Mass. 129.
Facts: Contract on the following promissory note
signed by the defendant and endorsed by payee:
"$5,000. St. Louis, Mo., January 11, 1877.
"Four months after date I promise to pay to Frank F.
Iglehart, cashier, or order, at the banking house of Bar-
tholew, Lewis & Co., in St. Louis, Mo., five thousand dol-
lars, for value received, negotiable and payable without
defalcation or discount, and with interest from maturity
at the rate of ten per cent per annum, I having deposited
with him as collateral security the following described
certificates of the capital stock of the Scotia Lead Mining
Company, No. 40 for 25 shares; 41 for 25 shares; 42 for
25 shares; 43 for 50 shares; 44 for 130 shares, and 39 for
25 shares, aggregating 280 shares. And hereby authorize
him to sell the same at public or private sale or otherwise
at his option, on the non-performance of this promise,
without notice, and authorize him to use, transfer or hy-
pothecate, the same at his option, he being required, on
payment of the amount loaned as specified herein, and
at any time before said collateral security shall have been
sold, or surrender the same.''
(Remainder of facts omitted.)
Ames, J.: "The defendant's written contract was a ne-
gotiable promissory note, requiring him to pay a certain
sum of money at a definite time.
Question 439: What does this case decide?
§421. (Nego. Instru., Sec. 30.) Reference to mortgage
given as security.
(See Case No. 412, supra, also note to Case No. 430 supra.)
808 NEGOTIABLE INSTRUMENTS
§ 422. Provision authorizing confession of judgment.
Case 440. Wisconsin Yearly Meeting vs. Babler, 115
Wisconsin Reports, 289.
Facts: This was an action in equity, brought by re-
spondent, a corporation, to set aside the sale and transfer
to the appellant of a certain promissory note and mort-
gage, which was the property of the respondent and to
recover the possession of the same. The note contained
a power of attorney which authorized a confession of
judgment at any time thereafter, whether due or not.
Point Involved: Whether a power of attorney to con-
f ess judgment at any time on the note whether due or not,
renders the note non-negotiable.
Wixslow, J.: 4' It is entirely clear from the evidence
in the case and from the findings of fact that the note and
mortgage were the property of the plaintiff corporation,
and that no express authority had ever been given to
Sears to sell them. Those being the facts, the defendant,
Babler, could acquire no title to the note by this trans-
action with Sears unless the note was negotiable paper,
or unless Sears had either the apparent ownership or
apparent authority to sell it, so that the corporation
would be estopped to deny the act. It is quite certain
the note was not negotiable, because by the power of at-
torney it contained judgment could be entered upon it at
any time after its date, whether due or not. Thus the
time of payment depends upon the whim or caprice of the
holder, and is absolutely uncertain. This deprives the
note of its negotiabilty. * * * Ch. 356, Laws of 1879
(the Negotiable Instruments Law), provides that the ne-
gotiable character of an instrument is not affected by a
provision authorizing a confession of judgment if the
instrument is not paid at maturity. Sec. 1675—5, subd. 2.
Upon familiar principles of statutory construction this
provision makes a note like the present non-negotiable.
# * *77
Question 440: What is a judgment note ? Does it necessarily
make a note non-negotiable? What was the holding in this case?
EFFECT OF PROVISIONS
809
When will a confession of judgment clause have no effect on
negotiability ?
(Note: In Illinois, a provision authorizing a confession of
judgment at any time (even before maturity) does not destroy
negotiability. The N. I. L. as adopted in Illinois recognizes the
local practice and states that the negotiability of an instrument
is not affected by a provision authorizing a confession of judg-
ment, leaving out "if not paid at maturity.")
§423. (Nego. Instru., Sec. 32.) Waiver of benefit of
exemption laws.
Case 441. Zimmerman v. Anderson, 67 Pa. 421.
Facts: Suit on following note:
"$125.00. Town of Buffalo, March 25th, 1868.
'' Six months after date I promise to pay to G. W. Lowe,
or order, one hundred and twenty-five dollars for value
' received, with interest, waiving the right of appeal and
of all valuation, appraisement, stay and exemption laws.
Moses Anderson.
It was contended the note was not negotiable.
Point Involved: Whether a waiver in an instrument
of benefit of exemption and similar laws, renders the note
non-negotiable.
Read, J.:  * * * But it is urged that the words
'waiving the right of appeal, an,d of all valuation, ap-
praisement, stay and exemption laws' destroy its ne-
gotiability. In what way? They do not contain any con-
dition or contingency but after the note falls due and is
unpaid, and the maker is sued, facilitate the collection by
waiving certain rights which he might exercise to delay or
impede it. Instead of clogging its negotiability it adds to
it,, and gives additional value to the note. * * *
Question 441: What did the court decide in this case ?
(Note: Whether the waiver of the exemption law is valid is
another question. Whether valid or not, it does not destroy
negotiability. In some states certain exemption laws intended
810
NEGOTIABLE INSTRUMENTS
to prevent the debtor from becoming a charge on the state can-
not be waived by the debtor, especially exemption in wages in-
tended not only for the debtor's benefit but also the benefit of
his family.)
§ § 424 to 426. (Nego. Instru., Sees. 33 to 35.) Seal,
omission of date, antedating and postdating.
Case 442. Uniform Negotiable Instruments Act, Sees.
6,10-13.
"Sec. 6. The validity and negotiable character of an
instrument are not affected by the fact that:
"1. It is not dated; or
'' 2. Does not specify the value given, or that any value
has been given therefor; or
'' 3. Does not specify the place where it is drawn or the
place where it is payable; or
"4. Bears a seal; or
"5. Designates a particular kind of current money in
which payment is to be made.
"But nothing in this section shall alter or repeal any
statute requiring in certain cases the nature of the con-
sideration to be stated in the instrument.
'' Sec. 10. The instrument need not follow the language
of this Act, but any terms are sufficient which clearly indi-
cate an intention to conform to the requirements hereof.
"Sec. 11. When the instrument or an acceptance or
any indorsement thereon is dated, such date is deemed
prima facie to be the true date of the making, drawing,
acceptance or indorsement, as the case may be.
'' Sec. 12. The instrument is not invalid for the reason
only that it is antedated or postdated, provided this is
not done for an illegal or fraudulent purpose. The per-
son to whom an instrument so dated is delivered acquires
the title thereto as of date of delivery.
"Sec. 13. When, an instrument expressed to be pay-
able at a fixed period after date is issued undated, or
where the acceptance of an instrument payable at a fixed
period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the in-
RULES OF CONSTRUCTION
811
strument shall be payable accordingly. The insertion of
ji wrong date does not avoid the instrument in the hands
of a subsequent holder in due course, but as to him, the
date so inserted is to be regarded as the true date.
Question 442: (1) If an instrument is otherwise properly
drawn, is it negotiable, if it
(a) Is not dated?
(b) Does not state the value or recite the words "value
received"?
(c) Does not specify place of drawing or of payment?
(d) Bears a seal?
(e) Specifies the kind of money in which payable?
(2) Is an instrument invalid because post-dated or ante-
dated ?
§ 427. (Nego. Intsru., Sec. 36.) Rules of construction.
Case 443. Uniform Negotiable Instruments Act, Sec.
17.
"Where the language of the instrument is ambiguous,
or there are omissions therein the following rules of con-
struction apply:
'' 1. Where the sum payable is expressed in words and
also in figures and there is a discrepancy between the two,
the sum denoted by the words is the sum payable; but if
the words are ambiguous or uncertain, reference may be
had to the figures to fix the aftiount.
"2. Where the instrument provides for the payment
of interest, without specifying the date from which inter-
est is to run, the interest runs from the date of the instru-
ment, and if the instrument is undated, from the issue
thereof.
"3. Where the instrument is not dated, it will be con-
sidered to be dated as of the time it was issued.
"4. Where there is conflict between the written and
printed provisions of the instrument, the written pro-
visions prevail.
"5. Where the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder may treat
it as either, at his election.
812 NEGOTIABLE INSTRUMENTS
"6. Where a signature is so placed upon the instru-
ment that it is not clear in what capacity the person
making the same intended to sign, he is to he deemed an
indorser.
"7. Where an instrument containing the words 'I
promise to pay' is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
Question 443: Recite the 7 rules of construction here set out.
CHAPTER 53
EXECUTION AND DELIVERY
§428 Delivery essential.
§429. Delivery presumed in favor of holder in due course.
§ 430. Incomplete instrument.
§431. Delivery of complete instrument containing uncancelled spaces.
§432. Execution by agent.
§428. (Nego. Instru., Sec. 37.) (Delivery essential.)
Case No. 444. Uniform Negotiable Instruments Act,
Sees. 15,16.
[Sec. 15.]  Where an incomplete instrument has not
been delivered it will not, if completed and negotiated,
without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed
thereon before delivery.''
[Sec. 16.] "Every contract on a negotiable instrument
is incomplete and revocable until delivery of the instru-
ment for the purpose of giving effect thereto. As between
immediate parties, and as regards a remote party other
than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority
of the party making, drawing, accepting or indorsing, as
the case may be; and in such case the delivery may be
shown to have been conditional or for a special purpose
only, and not for the purpose of transferring the property
in the instrument. But where the instrument is in the
lands of a holder in due course, a valid delivery thereof
yy all parties prior to him so as to make them liable to
dm, is conclusively presumed. And where the instru-
lent is no longer in the possession of party whose
ignature appears thereon, a valid and intentional de-
very by him is presumed until the contrary is proved.''
Question 444: (1) delivery essential to give a right of
it on negotiable paper? What is meant by delivery?
813
814 NEGOTIABLE INSTRUMENTS
(2) A makes out a complete note, signs it, and puts it in his
vault. B steals it and completes it by inserting his name as
payee and sells and indorses it to C, an innocent purchaser
before maturity. Has C any right against A on this paper?
Case 445. Mass. Nat. Bank v. Snow, 187 Mass. 159.
Facts: Suit against Snow as endorser of three promis-
sory notes signed H. G. and H. W. Stevens, payable to the
order of Snow, endorsed by Snow in blank and discounted
before maturity by the Mass. Nat. Bk., the plaintiff. The
notes were the notes, of one H. W. Stevens, who carried
oh business as H. G. & H. W. Stevens. Snow introduced
evidence to show that after the notes were made, Stevens,
the maker, took them from his possession, without Snow's
knowledge or consent and sold them to the plaintiff.
Point Involved: Whether a party whose signature ap-
pears on an instrument negotiable in form and so made
or endorsed as to pass by delivery, may be held liable on
such instrument by an innocent holder for value and be-
fore maturity who acquired his title from a thief or other
party lacking authority to deliver it.
Knowlton, C. J.:  This is an action of contract on
three promissory notes, signed H. G. and H. W. Stevens,
payable to the order of the defendant [Snow], indorsed
by him in blank and discounted by the plaintiff. They
severally bear date December 9, 1899, and the rights of
the parties are accordingly governed by the St. 1898, c.
533, sometimes called the negotiable instruments act,
which is now embodied in R. L. c. 73, Sections 18 to 212,
inclusive.
< i * * #
"The notes being indorsed in blank, were payable to
bearer within the meaning of the statute. R. L. c. 73, Sec.
26, cl. 5. When the notes were taken to the plaintiff for
discount Stevens was the bearer. R. L. c. 73, Sec. 207.
The presentation of such notes for discount raised a pre-
sumption of fact that the bearer was the owner of them:
Potte v. Prout, 3 Gray 502. * * *
"The defendant's contention that after the notes hadt
EXECUTION AND DELIVERY
815
been delivered to the defendant and endorsed by him they
were stolen by Stevens, brings us to the question whether,
under the negotiable instruments act, a holder in due
course of a note payable to bearer, that has been stolen,
can acquire a good title from the thief. Even before the
enactment of the statute, while the decisions were not una-
form, the weight of authority was in favor of an affirma-
tive answer to the question. * * *
"The following specific language of the statute touch-
ing this question, as well as its provisions in other sec-
tions, was intended to establish the law in favor of holders
in due course. 'But where the instrument is in the hands
of a holder in due course a valid delivery thereof by all
parties prior to him so as to make them liable to him is
conclusively presumed.' R. L. c. 73, Sec. 33. This con-
elusive presumption exists as well when the note is taken
from a thief as in any other case. Of course this rule does
not apply to an instrument which is incomplete. But in
reference to a complete, negotiable promissory note pay-
able to bearer, it is a wholesome and salutary provision.
# * #
Question 445: (1) In the above case who is the plaintiff?
Who, the defendant? In what capacity did Snow sign the
note? Did he voluntarily part with it? Who sold it to the
bank? Why was the hank entitled to believe that Stevens
was the owner of the note? If Snow had not indorsed the
note, and Snow's indorsement had been forged, would the
bank have obtained a good title ?
(2) S sued C on a promissory note made by C payable to F
and by F endorsed to S. S gave value, purchased the note
before it was overdue and had no notice of any defense or ir-
regularity. C defends that he wrote and signed the note merely
as a matter of amusement, with no intent to deliver it to F and
that F stole it. Is C's defense good as against S? (Shipley
>. Carroll, 45 111. 285.)
§429. (Nego. Paper, Sec. 38.) Delivery presumed in
favor of holder in due course.
(See above cases.)
816 NEGOTIABLE INSTRUMENTS
§ 430. (Nego. Instru., Sec. 39.) Incomplete Instrument.
Case 446. Melton v. Pensacola Bank & Trust Co., 190
Fed. 126.
Sanfobd, D. J.:  The fact that the name of the payee
was blank at the time the note was signed by the defend-
ants and delivered to Scudamore does not impeach its
validity in the hands of the plaintiff. An implied author-
ity was thereby given to Scndamore to fill in the name of
the payee, and even if he filled it in with the wrong name,
in violation of his agreement with the defendants (as to
which there is no evidence in the record) this would not
affect the title of the plaintiff, taking the note as holder
for value before maturity and without notice. See by
analogy, in the case of filling in a blank date, Goodman v.
Simonds, supra, 20 How. at page 361, 50 L. Ed. 934, and
Androscoggin Bank v. Kimball, 10 Cush. (Mass.) 373, and
other cases there cited as to the general authority given to
fill up blanks, by signing and delivering to an agent of an
instrument in which blanks are left.''
Question 446: "What was the alleged defect in the above note?
How did the court dispose of it?
Case 447. Uniform Negotiable Instruments Act, Sec.
14.
'' Where the instrument is wanting in any material par-
ticular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person
making the signature in order that the paper may be con-
verted into a negotiable instrument operates as a prima
facie authority to fill it up as such for any amount. Id
order, however, that any such instrument when completed
may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictlyi
in accordance with the authority given and within a rea-|
sonable time. But if any such instrument, after compM
tion, is issued or negotiated to a holder in due course it
EXECUTION AND DELIVERY
817
valid and effectual for all purposes in Ms hands, and he
may enforce it as if it has been filled up strictly in accord-
ance with the authority given and within a reasonable
time.''
Question 447: (See following cases.)
Case 448. Louis M. Greeley, "The New Illinois Nego-
tiable Instruments Act, Illinois Law Review, Vol. 2,
p. 145.
i i -Jf* ^
"Section 14. This section changes the law as generally
laid down in American cases, and conforms to the law as
originally established by the English cases and now em-
bodied in the English Bills of Exchange Act (from wMch
the Uniform Negotiable Instruments Law was largely de-
rived). The principle involved can be most quickly shown
by an example. The maker of a note payable to A which
is blank as to the amount, gives it to A with instructions
to fill in and negotiate it for an amount not exceeding
$100. A takes the note to B in its incomplete state and
offers to fill it in for $500 if B will purchase it for that
amount. B agrees. A fills in the note for $500 and in-
dorses it to B who pays the $500 to A. B has no notice of
the maker's instructions to A. A absconds. According to
most American cases B would be protected. It is held
that A, having lawful possession of the blank note, has
ostensible authority to fill in the blank for any amount
(in reason), and that a purchaser may rely upon this os-
^ tensible authority, where he has no actual notice that the
, authority has been exceeded. Huntington v. Branch
(Bank, 3 Ala. 186; Bank of Commonwealth v. Curry, 2
j Dana, 142; Fullerton v. Sturges, 4 Ohio St. 529; Page v.
f Moerell, 3 Keyes, 117, and see City of Chicago v. Gage, 95
,111. 593. According to the English cases, B, under the cir-
j'cumstances supposed, having actual knowledge that the
instrument was issued blank as to the amount, would not
' be protected. He would be deemed to take at his peril as
lE;o the extent of A's actual authority. Awde v. Dixon, 6
^xch. 869; Hatch v. Searles, 2 Sm. & Gif. 147; Hogarth v.
818
NEGOTIABLE INSTRUMENTS
Latham, 3 Q. B. D. 643. As above stated the English
rule is the one adopted in Section 14 of our new Act.
'' Both English and American cases are agreed that if
the note, in the case above supposed, had been filled in
before B took it, and B had no notice it was issued in
blank, B would be protected. Merritt v. Boyden, 191 111.
136; Young v. Ward, 21 111. 223. This principle also
finds expression in Section 14.
Question 448: Give the illustration here made by Professor
Greeley and state his solution of the question thereby presented.
§ 431. (Nego. Instru., Sec. 40.) Delivery of complete
instrument containing uncancelled spaces.
(Note: See post, §485.)
§ 432. (Nego. Instru., Sec. 41.) Form of signature—Ex-
ecution by agent.
Case No. 449. Uniform Sales Act, Sees. 18-23.
"(Sec. 18.) No person is liable on the instrument
whose signature does not appear thereon, except as herein
otherwise expressly provided. But one who signs in a
trade or assumed name will be liable to the same extent
as if he had signed his own name.
 (Sec. 19.) The signature of any party may be made
by a duly authorized agent. No particular form of ap-
pointment is necessary for this purpose; and the author-
ity of the agent may be established as in other cases
of agency.
 (Sec. 20.) Where the instrument contains, or a per-
son adds to his signature, words indicating that he signs
for or on behalf of the principal, or in a representative
capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing
him as agent, or as filling a representative character,
without disclosing his principal, does not exempt him
from personal liability.
EXECUTION AND DELIVERY 819
"(Sec. 21.) A signature by 'procuration' operates as
notice that the agent has but limited authority to sign,
and the principal is bound in case the agent in so signing
acted within the actual limits of his authority.
 (Sec. 22.) The indorsement or assignment of the in-
strument by a corporation or by an infant passes the
property therein, notwithstanding that from want of ca-
pacity the corporation or infant may incur no liability
thereon.
 (Sec. 23.) Where a signature is forged or made with-
out authority it is wholly inoperative, and no right to
retain the instrument or to give a discharge therefor or
to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of au-
thority.''
Question 449: (1) A and B compose the "Northwestern
Shoe Emporium, a partnership, and make and sign a note
which states that the "Northwestern Shoe Emporium promises
to pay, etc., and is signed "Northwestern Shoe Emporium, by
A. A and B are sued. B defends that his name is not on the
note. Are either or both liable (assuming that A had authority
to sign for B) ? (If the Northwestern Shoe Emporium had been
a corporation and A and B stockholders, could A and B be
sued personally on the note ?)
(2) What is the effect of a signature "by procuration"?
(3) P authorizes A to borrow money for P and execute
P's promissory note therefor. P makes out a note "I promise
to pay, etc., signed A, agent. Is P liable on this note? Is A?
(Note: The mere addition of words describing him [the
signer] as an agent or filling a representative character, without
disclosing his principal, does not exempt him from personal lia-
bility. This much is clear law. There is no confusion or differ-
ence of opinion on that point. But suppose he does in the lan-
guage of the note or signature "disclose his principal. The
act says: "Where the instrument contains or a person adds to
his signature words indicating that he signs for or on behalf of
820
NEGOTIABLE INSTRUMENTS
a principal or in a representative capacity, he is not liable on
the instrument if he was duly authorized. This language is
undoubtedly used to clear up the confusion that has heretofore
existed. To what extent it will accomplish that result remains
to be seen.
The conventional and safe way for an agent to execute any
paper for his principal to avoid responsibility on his own behalf
(where he has authority) is to name his principal in the body
of the instrument (although "I or "we is proper in a nego-
tiable instrument if properly signed) and to sign "John Smith
(principal) by Harry Jones, Agent, or "Smith Manufacturing
Company by John Smith, President. The business man should
adhere strictly to this form of signature in order to avoid
trouble.
Suppose, however, other forms of signature or execution are
used. Can we get some idea of the law governing them? A
quotation from Professor Brannan, "The Negotiable Instru-
ments Law, 1919, page 69, is given:
"The plain language of this section indicates that it was the
intention of the draftsman and the commissioners to clear up
the unnecessary and unpardonable confusion caused by the fail-
ure of some of the courts to exercise a little common sense and
to recognize mercantile usage. Much of the difficulty found in
this subject is purely manufactured and would not trouble a
business man for a moment. He would perceive no difference
between notes signed, 'The X Co. by A. Pres.' or signed 'The X
Co. A Pres.' or signed 'X Co. A. Pres.' or 'A, Pres. X Co.', or a
note reading 'The X Co. promises to pay' and signed 'A. Pres.'
Yet courts have been found to make distinctions in such cases.
For instance in Reeve v. First Bank, 54 N. J. L. 208, 23 Atl. 853,
16 L. R. A. 143, a note signed 'Warrick Glass Works, J. Price
Warrick, Prest.,' was properly held to be the note of the cor-
poration and not the note of Warrick or the joint note of War-
rick and the corporation. So also in Aungst v. Cregue, 72 Oh.
St. 551, 74 N. E. 1073. Whereas in McCandless v. Belle Plaine
Co., 78 Iowa, 161, 42 N. W. 635, 4 L. R. A. 396, it was held that
such a note is the note of the signer, that oral evidence was not
admissible to show that the corporation alone was intended, and
that both were liable. And in Day v. Ramsdell, 90 Iowa 731,
52 N. W. 208, a note reciting that 'We, the A. B. Co., promise to
pay,' but signed merely by two persons describing themselves as
EXECUTION AND DELIVERY
821
president and secretary, was held to be their individual obliga-
tion. In 17 Banking Law Journal, 305-306, it was properly said
that 'nine business men out of ten would regard such a note
as that of the company' and it would hardly be an exaggera-
tion to include the tenth man. * * * ")
CHAPTER 54.
CONSIDERATION FOR EXECUTION.
§ 433. Necessity for consideration.
§ 434. What may constitute consideration.
§ 435. Antecedent debt as consideration.
§ 436. Consideration presumed.
§ 437. Recital of consideration.
§ 438. Want of consideration and holder in due course.
§ § 433 to 438. (Nego. Instru., Sees. 42 to 47.)
Consideration.
Case 450. Uniform Negotiable Instruments Act, Sec. 6
and Sees. 24-29.
 (Sec. 6. (2)) The validity and negotiable character
of an instrument are not affected by the fact that * * *
it does not specify the value given, or that any value has
been given therefor.
i'(Sec. 24.) Every negotiable instrument is deemed
prima facie to»have been issued for a valuable considera-
tion, and every person whose signature appears thereon
to have become a party thereto for value.
"(Sec. 25.) Value is any consideration sufficient to
support a simple contract.
"2. An antecedent or pre-existing debt constitutes
value and is deemed such, whether the instrument is pay-
able on demand or at a future time.
'' (Sec. 26.) Where value has at any time been given
for the instrument, the holder is deemed a holder for
value in respect to all parties who became such prior to
that time.
 (Sec. 27.) Whether the holder has a lien on the in-
strument, arising either from contract or by implica-
tion of lgw, he is deemed a holder for value to the extent
of his lien.
822
CONSIDERATION FOR EXECUTION 823
"(Sec. 28.) Absence or failure of consideration is a
matter of defense as against any person not a holder in
due course, and partial failure of consideration is a de-
fense pro tanto, whether the failure is an ascertained and
liquidated amount or otherwise.
"(Sec. 29.) An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or in-
dorser, for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time
of taking the instrument knew him to be only an aecom-
modation party.''
Question 450: (1) A sues B on a negotiable promissory
note for $1,000 given by B to A's order. He presents in evi-
dence the note, proves its execution and delivery by B, and then
rests his case. B then moves the court to nonsuit A on the
ground that A has not made a case as he has not proved any
consideration. Is this contention good?
(2) Suppose in fact there was no consideration. Can B
plead and prove this to defeat the suit?
(3) Suppose there was in fact no consideration but the note
had been sold by the payee to C, a holder in due course. Can
the defense be made by B against C?
(4) What is meant by the statement that an antecedent debt
is value?
(5) A desires to borrow $500 from B. B is willing to loan
the money but is unsatisfied with A's financial standing, where-
upon A gets M to make a note to him, which A then indorses
to B. M signs this note as a. mere matter of friendship in order
to enable B to get the money. B knows that M gets nothing
for his act. A defaults, and B sues M. M pleads lack of con-
sideration and knowledge thereof by B when A transferred the
paper to him. Is the defense good? Why is this not a case
of lack of consideration? What is M called?
(Note: On the question of the necessity of, and what con-
stitutes consideration between transferror and transferee, see
subject of Negotiation, pest.)
CHAPTER 55
THE FORMATION OF THE CONTRACT OF THE
ACCEPTOR.
§ 439. In general.
§ 440. Definition of acceptance.
§ 441. How acceptance may or must be made.
§ 442. Acceptance presumed from retention.
§ 443. Kinds of acceptance.
§ 444. Effect of qualified acceptance.
§ 445. Acceptance of check.
§ 439. (Nego. Instru., Sec. 47a.) In general.
(Note: It seems logical to consider the formation of the con-
tract of the acceptor when we are considering the general subject
of the formation of the negotiable contract. The question
"when must there be presentment for acceptance in order to
charge drawer and indorsers is treated later. Also, later, is
treated the procedure which must follow upon dishonor by
non-acceptance.
It seems, perhaps, superfluous to suggest, that the student
should distinguish between the meaning of acceptance as here
used and its more general meaning of receipt of a satisfactory
delivery. For instance, suppose I owe you $100, and I say
"Will you accept my draft on Callaghan & Co."? You are
willing to take the draft and you present it to Callaghan & Com-
pany, and they say "we will accept this draft on us. The
second acceptance is of course the acceptance referred to here,
i. e., the contract of the drawee, by which he becomes bound on
the instrument. The reason for calling attention to this distinc-
tion is that the editor has found a confusion in student's minds
when approaching this subject.)
§ 440. (Nego. Instru., Sec. 48.) Definition of acceptance.
Case 451. Negotiable Instruments Law, Sec. 132.
"The acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer. The ac-
824
ACCEPTANCE
825
ceptance must be in writing and signed by the drawee. It
must not express that the drawee will perform his prom-
ise by any other means than the payment of money.''
Question 451: Define acceptance.
Case 452. Ballen & Friedman v. Bank of Krenlin, 130
Pac. Rep. 539 (Okla.).
Facts: Suit by Mike Ballen & Dave Friedman, a part-
nership, against Bank of Krenlin. Plaintiff's case was
that certain checks had been offered them as cash items
and they had inquired of the defendant as the bank on
which said checks were drawn, whether said checks were
good, that the bank had responded that they were and
that plaintiffs had therefore taken them. On demurrer
to petition.
Point Involved: Whether an oral statement by the
drawee of a check that the same is good, in response to
an inquiry by one in whose favor such checks are drawn
and who relies on the information before receiving them,
gives the holder any right against the bank on the check.
Generally, what constitutes an acceptance?
Rosser, C.: "This transaction occurred after the act
of March 20,1909 (Laws 1909, c. 24), commonly called the
Negotiable Instruments Law, had become the law in this
state. Section 185 of that act is as follows: 'A check is
a bill of exchange drawn on a bank on demand. Except
as herein otherwise provided, the provisions of this act
applicable to a bill of exchange payable on demand apply
to a check.' Section 132 of the act is as follows: ' The ac-
ceptance of a bill is the signification by the drawee of his
assent to the order of the drawer. The acceptance must
be in writing and signed by the drawee. It must not ex-
press that the drawee will perform his promise by any
other means than the payment of money.'
"It is contended by the plaintiffs that, as they were in-
formed, by the defendant's cashier, that the check was
good and acted upon that information, the bank is
estopped to deny liability, and is responsible for the
826 NEGOTIABLE INSTRUMENTS
amount of the checks. As a general proposition of law,
as applied to ordinary transactions, the plaintiff is un-
doubtedly correct; but the question here is whether the
ordinary principles of law in this regard apply to nego-
tiable instruments, including bank checks. It is believed
that they do not apply, at least in the absence of actual
fraud, which is not alleged in this case. The Negotiable
Instruments Law was intended to fix and settle the rights
of the parties, so far as they are affected by its operation.
Columbian Banking Company v. Bowen, 134 Wis. 218,
114 N. W. 451. Section 132 of that law, quoted above,
provides that the acceptance of a bill of exchange must
be in writing. Section 185, quoted above, provides that
checks shall be governed by the same rules as bills of ex-
change. Section 189 provides that a check of itself does
not operate as an assignment of any part of the funds
to the credit of the drawee with the bank, and that the
bank is not liable, unless and until it accepts or certifies
the check. The oral statement that the checks were good
was not a lawful acceptance, as required by the statute.
Neither was it a certification, because a certificate means
a declaration in writing, and a certificate must be in writ-
ing. * * *
"The equitable grounds under which plaintiffs claim
seem to be strong; but a consideration of all the facts
show that, even on equitable grounds, the bank is entitled
to consideration. Suppose that, when asked about the
checks, the drawer had to his credit in the bank an amount
sufficient to pay them. The bank would naturally answer
that the checks were good. They were good as the ac-
count then stood; and if other checks, sufficient to reduce
the balance below the face of those in controversy, had
not come in before they were presented, they would have
been paid. If no other checks had been issued, the bank
would have done the drawer a grave injustice if it had
answered that the checks were not good. Then, after
giving out the information, suppose other checks had
been presented. Under section 189 of the Negotiable In-
struments Law, the giving of the checks in suit did not
ACCEPTANCE
827
operate as an assignment of any part of the drawer's
fund. The bank conld not refuse to pay other checks that
were presented. The checks sued on had not been certi-
fied. The bank would have been liable to any person pre-
senting a check, unless they paid it. It is clear that to
require the bank to pay these checks would be to make it
responsible for having told the checks were good, without
any fraudulent intention, and at a time when its books
showed they were good. The inquiry was made concern-
ing the checks as such; and there is nothing in the petition
to indicate that either the plaintiffs or the bank had in
mind anything except the status of the drawer's account,
and certainly no contract, equitable or otherwise, except
as contained in the checks was contemplated by the
parties.
Question 452: (1) State the facts, the question presented
and the Court's decision.
(2) Suppose when the inquiry had been made the bank had
no funds of the drawer on deposit and knew the checks were not
good and made the statement fraudulently, would the holder
taking the bills on the faith of such statement have a case?
(See Van Buskirk v. State Bank of Rocky Ford, 35 Colo. 142,
83 Pac. 778.)
Case 453. Uniform Negotiable Instruments Act, Sec.
138.
"A bill may be accepted before it has been signed by
the drawer, or while otherwise incomplete, or when it is
overdue, or after it has been dishonored by a previous re-
fusal to accept, or by non-payment. But when a bill pay-
able after sight is dishonored by non-acceptance and the
drawee subsequently accepts it, the holder, in the absence
of any different agreement, is entitled to have the bill ac-
cepted as of the date of the first presentment.
Question 453: May a bill be accepted before complete? After
it is due ? Would acceptance in either case be a usual method
of acceptance?
828 NEGOTIABLE INSTRUMENTS
§ 441. (Nego. Instru., Sec. 49.) How acceptance may or
must be made.
(Note: See last two cases and three following cases.)
Case 454. Uniform Negotiable Instruments Act, Sec.
133.
"The holder of a bill presenting the same for accept-
ance may require that the acceptance be written on the
bill, and, if such request is refused, may treat the bill as
dishonored.
Question 454: In what form is the holder entitled to have
acceptance made? If such form of acceptance is refused, what
right has the holder? Whom could he then sue?
Case 455. Uniform Negotiable Instruments Act, Sees.
134,135.
"Where an acceptance is written other than upon the
bill itself, it does not bind the acceptor except in favor of
a person to whom it has been shown and who on the faith
thereof receives the bill for value.
"An unconditional promise in. writing to accept a hill
before it is drawn is deemed an actual acceptance in favor
of every person who, upon the faith thereof, receives the
bill for value.''
Question 455: May an acceptance be written other than on
the bill itself? Is the holder obliged to take such acceptance?
If acceptance is written other than on the bill itself who is en-
titled to the benefit of such acceptance ?
§442. (Nego. Instru., Sec. 50.) Acceptance presumed
from retention.
Case 456. Uniform Negotiable Instruments Act, Sec.
137.
"When a drawee to whom a bill is dishonored for ac-
ceptance destroys the same or refuses within twenty-four
hours after such delivery or within such other period as
the holder may allow, to return the bill accepted or non-
ACCEPTANCE
829
accepted by the holder, he will be deemed to have accepted
the same.''
Question 456: Is a drawee to be charged as an acceptor for
failure to return the bill to the holder?
(Note: This section has been greatly criticised. In Illinois
and South Dakota it is omitted from the Act. In Pennsylvania
it has been amended following the case of Wisner v. Bank, 220
Pa. 21, 17 L. R. A. N. S. 1266, which held that a drawee bank
was liable upon a check as acceptor if it merely failed to return
the check within twenty-four hours. In "Wisconsin, the words
are added "Mere retention of the bill is not an acceptance. It
seems an injustice to hold a drawee for merely failing to return
the hill. Mere retention is not refusal. Furthermore the com-
mon law rule was that the drawee had 24 hours in which to de-
cide whether he would accept or dishonor the bill. This pro-
vision cuts the time short and requires decision within 24 hours.)
§ 443. (Nego. Instru., Sec. 51.) Kinds of acceptance.
Case 457. Uniform Negotiable Instruments Act, Sees.
140,141, 142.
"[Sec. 140.] An acceptance to pay at a particular
place is a general acceptance unless it expressly states
that the bill is to be paid there only, and not elsewhere.
"[Sec. 141.] An acceptance is qualified which is:
"1. Conditional; that is to say, which makes payment
by the acceptor dependent on the fulfillment of a condi-
tion therein stated.
"2. Partial; that is to say, an acceptance to pay part
only of the amount for which the bill is drawn.
"3. Local; that is to say, an acceptance to pay only at
a particular place.
"4. Qualified as to time.
"5. The acceptance of some one or more of the drawees
but not of all.
 [Sec. 142.] The holder may refuse to take a qualified
acceptance, and if he does not obtain an unqualified ac-
ceptance, he may treat the bill as dishonored by non-
acceptance. Where a qualified acceptance is taken, the
830 NEGOTIABLE INSTRUMENTS
drawer and indorsers are discharged from liability on the
bill, unless they have expressly or impliedly authorized
the holder to take a qualified acceptance, or subsequently
assent thereto. When the drawer or indorser receives
notice of a qualified acceptance, he must within a reason-
able time express his dissent to the holder, or he will be
deemed to have assented thereto.
Question 457: (1) A, as drawee, writes across the bill "Ac-
cepted, payable at First National Bank and returns it to the
holder, who refuses to take such acceptance and treats the bill
as dishonored. Has it been dishonored ?
(2) In what ways may an acceptance be qualified?
(3) If the acceptance is qualified, must the holder content
himself with such acceptance ? What can he do ?
(4) What is the effect of a refusal to dissent upon receiving
notice of a qualified acceptance?
§ 444. (Nego. Instru., Sec. 52.) Effect of qualified
acceptance.
(See above Section.)
§ 445. (Nego. Instru., Sec. 53.) Acceptance of check.
Case 458. Uniform Negotiable Instruments Act, Sec-
tions 187, 188.
"Where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance.
"Where the holder of a check procures it to be accepted
or certified, the drawer and all indorsers are discharged
from liability thereon.''
Question 458: (1) A check was drawn on the 0. N. Bank
by J. L. to order of J. D. and indorsed by the payee to F. N.
Bank. F. N. Bank presented it to 0. N. Bank for certification.
0. N. Bank certified same. About an hour later 0. N. Bank
suspended and a receiver was appointed. F. N. Bank then
presented check to 0. N. Bank (or receiver) for payment. Same
refused. F. N. Bank sues J. L. the drawer. Is he liable? (First
Nat. Bank v. Leach, 52 N. Y. 350).
(2) If certification had been procured by drawer before
delivery, would your answer be the same?
CHAPTER 56
THE FORMATION OF THE CONTRACT OF PARTIES
FOR ACCOMMODATION AND FOR HONOR
§ 446. Accommodation party defined.
§ 447. Acceptance for honor.
§448. Payment for honor.
§446. (Nego. Instru., Sec. 54.) Accommodation party
defined.
Case 459. Negotiable Instruments Act, Sec. 29.
"An accommodation party is. one who has signed the
instrument as maker, drawer, acceptor or indorser, with-
out receiving value therefor, and for the purpose of lend-
ing his name to some other person. Such a person is
liable on the instrument to a holder for value, notwith-
standing such holder at the time of making the instru-
ment knew him to he only an accommodation party.''
Question 459: Define an accommodation party. In what
capacity does he sign? For what purpose? If he signs a note
as maker to a payee as accommodated party, is he liable to the
payee if the payee does not transfer the paper? Is he liable to
a person who takes the paper for value, if such person knows
that he signed for mere accommodation? "Why?
(Note: A person may be an accommodation party even
though he receives value for signing if he receives no value for
the instrument. Thus if I sign a note for $1,000 in order to lend
my credit to the payee, I am an accommodation party though
he pays me $10 for my act and I would not be liable to him on
the note.)
(Note: Marling v. Jones, 138 Wisconsin 82 held that an ac-
commodation maker may be held on the note by a person to
whom the accommodated party indorsed it for value even
though such purchaser took it after maturity and with knowl-
edge of its accommodation character,
831
832
NEGOTIABLE INSTRUMENTS
That this is a dangerous holding is recognized by the' same
Court in Comstock v. Buckley, 141 Wisconsin 228, in which the
Court said: "The rule in the Marling case that the true con-
struction of the contract authorized the accommodatee to bor-
row once on the accommodator's credit, even after the maturity
of the note, was recognized as highly burdensome to the latter
and fraught with much peril of inconvenience to commerce from
its naturally deterrent effect on the granting of such accom-
modations. The weight of authority, however, was found to be
so overwhelming as to overcome the countervailing considera-
tions.''
But there are decisions to the contrary which the Wisconsin
Court could have consistently followed, and thus rendered a
service to the commercial world. That the view of the Wisconsin
case is not compulsory under the Negotiable Instruments Act,
and contrary to the weight of authority is the belief of eminent
critics. In Illinois, by an addition to this section, a purchaser
after maturity may hold the accommodator if transfer after
maturity was intended. It is certainly unfortunate that the
sponsors of the act did not so phrase it as to leave no doubt as
to its meaning.)
§447. (Nego. Instru., Sec. 55.) Acceptance for honor.
Case 460. Uniform Negotiable Instruments Act, Sees.
161-170.
 [Sec. 161.] Where a bill of exchange has been pro-
tested for dishonor by non-acceptance, or protested for
better security and is not overdue, any person not being
a party already liable thereon, may, with the consent of
the holder, intervene and accept the bill supra protest for
the honor of any party liable thereon or for the honor
of the person for whose account the bill is drawn. The
acceptance for honor may be for part only of the sum for
which the bill is drawn, and where there has been an ac-
ceptance for honor for one party there may be a further
acceptance by a different person for the honor of another
party.
 [Sec. 162.] An acceptance for honor supra protest
must be in writing and indicate that it is an acceptance
for honor, and must be signed by the acceptor for honor.
ACCEPTANCE FOR HONOR 833
 [Sec. 163.] Where an acceptance for honor does not
expressly state for whose honor it was made, it is deemed
to bo an acceptance for the honor of the drawer.
"[Sec. 164.] The acceptor for honor is liable to the
holder and to all parties to the bill subsequent to the
party for whose honor he has accepted.
"[Sec. 165.] The acceptor for honor by such accept-
ance engages that he will, on due presentment, pay the
bill according to the terms of his acceptance: Provided,
it shall not have been paid by the drawee: And provided,
also, that it shall have been duly presented for payment
and protested for non-payment and notice of dishonor
given to him.
"[Sec. 166.] When a bill payable after sight is ac-
cepted for honor, its maturity is calculated from the date
of the noting for non-acceptance and not from the date
of the acceptance for honor.
"[Sec. 167.] Where a dishonored bill has been ac-
cepted for honor supra protest or contains a reference in
case of need, it must be protested for non-payment before
it is presented for payment to the acceptor for honor or
referee in case of need.
 [Sec. 168.] Presentment for payment to the acceptor
for honor must be made as follows:
"1. If it is to be presented in the place where the pro-
test for non-payment was made, it must be presented not
later than the day following its maturity.
"2. If it is to be presented in some other place than the
place where it was protested, then it must be forwarded
within the time specified in section 104.
 [Sec. 169.] The provisions of section 81 apply where
there is delay in making presentment to the acceptor for
honor or referee in case of need.
"[Sec. 170.] When the bill is dishonored by the ac-
ceptor for honor, it must be protested for non-payment
by him.''
Question 460: (1) What is acceptance supra protest? How
must it be made ?
£34
NEGOTIABLE INSTRUMENTS
(2) Where not stated, for whose honor is it presumed made?
(3) To whom is acceptor for honor liable? Provided what?
§ 448. (Nego. Instru. Act, Sec. 56.) Payment for honor.
Case 461. Uniform Negotiable Instruments Act, Sees.
171-177.
'' [Sec. 171.] Where a bill has been protested for non-
payment, any person may intervene and pay it supra
protest for the honor of any person liable thereon or for
the honor of the person for whose account it was drawn.
"[Sec. 172.] The payment for honor supra protest
in order to operate as such, and not as a mere voluntary
payment, must be attested by a notarial act of honor,
which may be appended to the protest or form an exten-
sion to it.
"[Sec. 173.] The notarial act of honor must be
founded on a declaration made by the payer for honor or
by his agent in that behalf declaring his intention to pay
the bill for honor and for whose honor he pays.
1' [Sec. 174.] Where two or more persons offer to pay
a bill for the honor of different parties, the person whose
payment will discharge most parties to the bill is to be
given preference.
"[Sec. 175.] Where a bill has been paid for honor,
all parties subsequent to the party for whose honor it is
paid, are discharged, but the payer for nonor is subro-
gated for, and succeeds to, both the rights and duties of
the holder as regards the party for whose honor he pays
and all parties liable to the latter.
 [Sec. 176.] Where the holder of a bill refuses to re-
ceive payment supra protest, he loses his right of recourse
against any party who would have been discharged by
such payment.
 [Sec. 177.] The payer for honor, on paying to the
holder the amount of the bill and the notarial expenses
incidental to its dishonor, is entitled to receive both the
bill itself and the protest.
Question 461: What is payment for honor? How is it made?
What is its effect on rights and liabilities ?
PART III
OPERATION OF THE CONTRACT
Chapter
57.
Negotiation.
Chapter
58.
Holder in Due Course.
Chapter
59.
Defenses Against Holder in Due Course.
Chapter
60.
The Obligations of the Parties.
Chapter
61.
Presentment for Payment and for Accept-
ance.
Chapter
62.
Notice of Dishonor.
Chapter
63.
Protest.
CHAPTER 57
NEGOTIATION
A. In General of Negotiation and Indorsement.
§ 449. Meaning of negotiation.
§ 450. Kinds of negotiation.
§ 451. How indorsement accomplished.
§ 452. Attempted partial indorsement.
§ 453. Effect of indonoement to transfer incidents.
§ 454. Presumptions as to indorsements.
§ 455. Miscellaneous rules concerning indorsements.
B. Kinds of Indorsements.
§ 456. Special indorsement.
§ 457. Blank indorsement.
§ 458. Qualified indorsement.
§ 459. Restrictive indorsement.
§ 460. Conditional indorsement.
A. In General of Negotiation and Indorsement.
§ 449. (Nego. Instru., Sec. 57.) Meaning of negotiation.
Case 462. Uniform Negotiable Instruments Act, Sec.
30.
835
836 NEGOTIABLE INSTRUMENTS
"An instrument is negotiated when it is transferred
from one person to another in such manner as to bon-
stitute the transferee the holder thereof; if payable to
bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder, com-
pleted by delivery.
Question 462: When is an instrument negotiated? If pay-
able to bearer, how may it be negotiated? (When is an instru-
ment payable to bearer?) If payable to order, how may it be
negotiated ?
(Note: To negotiate negotiable paper means to transfer it
to another in that manner which is sufficient under the law to
make the transferee the legal owner. A person may have what
may be termed equitable ownership as where the necessary in-
dorsement has been omitted and not be the legal owner. In
such a case although having the right to receive legal owner-
ship he has not the full benefits of a person to whom an instru-
ment has been legally negotiated. If an instrument is payable
to order and if in that case the only or last indorsement is not
in blank, the instrument cannot be negotiated except by indorse-
ment by the payee or other holder. If it is bearer paper, that
is payable to bearer, or to a specified person or bearer, or to an
impersonal payee, etc., or the only or last indorsement is in
blank, then, in all of such cases, the instrument may be nego-
tiated by mere delivery, although of course, for purposes of
giving additional credit, the indorsement of the transferor may
be added. In that case, not being necessary to negotiation, it
is not essential to the title of the holder, and therefore if forged,
does not affect his title.)
§ 450. (Nego. Instru., Sec. 58.) Kinds of negotiation.
(See note just preceding.)
§ 451. (Nego. Instru., Sec. 59.) How indorsement
accomplished.
Case 463. Uniform Negotiable Instruments Act, Sec.
31.
"The indorsement must be written on the instrument
itself or upon a paper attached thereto. The signature
NEGOTIATION
837
of the indorser, without additional words, is a sufficient
indorsement.''
Question 463: (1) A wrote a letter to B enclosing an unin-
dorsed promissory note, not payable to bearer. In the letter,
he stated that he thereby transferred and indorsed the instru-
ment to B. B sent the instrument back for indorsement but
before it was indorsed B learned of the fraud by which A had
obtained the note from the maker. Was the negotiation to B
complete before he learned of the fraud? Was B subject to the
defense ? Why ?
(2) May an indorsement ever be made elsewhere than on
the paper itself ? Why ?
Case 464. Markey v. Corey, 108 Mich. 184, 36 L. R. A.
117.
Facts: Markey, as indorsee, sues Corey, as indorser,
of a note transferred to him by the following writing on
the back thereof, signed by Corey:
"I hereby assign the within note to Matthew M.
Markey.''
Defense that Markey is not an indorsee, and cannot
sue in his own name as such, and that the alleged in-
dorser, the defendant, assumed no liability as indorser
within the rules governing commercial paper.
Point Involved: Whether a transfer of a note on the
back thereof in the language "I hereby assign is an
indorsement.
Long, J.:  * * *
"The usual mode of transfer of a promissory note is by
simply writing the indorser's name upon the back, or
by writing also over it the direction to pay the indorsee
named, or order, or to him or bearer. An indorsement,
however, may be made in more enlarged terms, and the
indorser be held liable as such. In Sands v. Wood, 1
Iowa, 263, the indorsement was, 'I assign the within note
to Mrs. Sarah Coffin.' In Sears v. Lantz, 47 Iowa, 658,
the indorsement on the note was, 'I hereby assign all my
right and title to Louis Meckley.' And in each case the
party so assigning was held as indorser, the Court in
838 NEGOTIABLE INSTRUMENTS
the latter case saying of Sands v. Wood: 'He used no
words that, in and of themselves, indicated that he had
bound or made himself liable in case the maker, after
demand, failed to pay the note. But it was held the law,
as a legal conclusion, attached to the words used the
liability that follows the indorsement of a promissory
note.' See, also, Duffy's Adm'r v. O'Connor, 7 Baxt.
498; Shelby v. Judd, 24 Kan. 166; Brotherton v. Street,
124 Ind. 599.
'' The language used in the assignment to the note in
suit does not negative the implication of the legal liability
of the assignor as indorser, and as the words are to be
construed, as strongly as their sense will allow, against
the assignor, he must be held as indorser. This rule is
fully supported in Hatch v. Barrett, 34 Kan. 230. See,
also, Adams v. Blethen, 66 Me. 19.
"It must be held, therefore, that the memorandum on
the note did not relieve Corey from his liability as in-
dorser.
'' The Court was not in error in admitting the contract
in evidence, as its purpose was to show that the note was
not in fact limited by its provisions, and those provisions
of the contract cited did not destroy the negotiability of
the note. (Daniel Neg. Inst., § 48.)—The judgment must
be affirmed.
The other justices concurred.
Question 464: State the point involved and the Court's deci-
sion.
(Note : There is a conflict of authority in this point, although
the weight of authority seems to be with the above case. See
Spencer v. Halpern, 62 Ark. 595, 36 L. R. A. 130 contra. It
need hardly be said that such phraseology is unfortunately used
in any case.)
Case 465. Leavitt v. Putnam, 3 N. Y. 494.
Hurlbut, J.:  * * *
"The note in the present case was upon its face trans-
ferable, and its character in respect to negotiability could
NEGOTIATION
839
only have been changed by an indorsement containing ex-
press words of restriction. The defendants' indorsement
was a full one, containing the name of the person in whose
favor it was made, but omitting the words ' or order,' the
legal effect of which was, nevertheless, to make the note
payable to him or his order, and his endorsement there-
fore was effectual to transfer the note to the plaintiff.
(Chitty on Bills, 136; Story on Prom. Notes, § 139.)
"I am of opinion that the judgment of the superior
court should be reversed, and a new trial awarded.—
Judgment reversed.
Question 465: If the note is negotiable on its face, must the
indorsement contain the words "to order"? If it omit such
words, is the negotiation restricted to the immediate indorsee;
or can it be further negotiated ?
(Note: It is a common error to suppose that an indorsement
must contain words "to order. Thus in a little booklet dis-
tributed by certain banks the statement is made that if a check
is indorsed "Pay to John Smith John Smith cannot further
negotiate the check but must deposit it for collection or cash it.
The very banks which issue this booklet are not observing this
statement of the booklet. "Pay to John Smith is not a re-
strictive indorsement.)
§ 452. (Nego. Instru., Sec. 60.) Partial indorsement.
Case 466. Uniform Negotiable Instruments Act, Sec.
32.
"The indorsement must be an indorsement of the en-
tire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount pay-
able, or which purports to transfer the instrument to two
or more indorsees severally, does not operate as a nego-
tiation of the instrument. But where the instrument has
been paid in part, it may be indorsed as to the residue.
Question 466: State the rule as here stated? If a part of
the sum in the instrument has been paid, can the instrument be
indorsed as to the residue ?
840 NEGOTIABLE INSTRUMENTS
§ 453. (Nego. Instru., Sec. 61.) Effect of indorsements
to transfer incidents.
(Note: The transfer by negotiation of a negotiable instru-
ment entitles the transferee to all the rights, titles and remedies
of the transferor, including right to collateral, etc.)
§§454, 455. (Nego. Instru., Sees. 62, 63.) Presump-
tions as to indorsements. Miscellaneous rules concern-
ing indorsement.
Case 467. Uniform Negotiable Instruments Act, Sees.
43 to 50.
 (Sec. 43.) Where the name of the payee or indorsee
is wrongly designated or misspelled, he may indorse
the instrument as therein described, adding, if he think
fit, his proper signature.
 (Sec. 44.) Where any person is under obligation to
indorse in a representative capacity, he may indorse in
such terms as to negative personal liability.
 (Sec. 45.) Except where an indorsement bears date
after the maturity of the instrument, every negotiation
is deemed prima facie to have been effected before the
instrument was overdue.
'' (Sec. 46.) Except where the contrary appears, every
indorsement is presumed prima facie to have been made
at the place where the instrument is dated.
"(Sec. 47.) An instrument negotiable in its origin
continues to be negotiable until it has been restrietively
indorsed or discharged by payment or otherwise.
"(Sec. 48.) The owner may at any time strike out
any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all in-
dorsers subsequent to him, are thereby relieved from
liability on the instrument.
 (Sec. 49.) Where the holder of an instrument pay-
able to his order transfers it for value without indorsing
it, the transferrer vests in the transferee such title as the
transferrer had therein, and the transferee acquires, in
addition, the right to have the indorsement of the trans-
NEGOTIATION
841
ferrer. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually
made.
"(Sec. 50.) Where an instrument is negotiated back
to a prior party, such party may, subject to the provi-
sions of this Act, reissue and further negotiate the same,
but he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.''
Question 467: (1) A check is intended for Albert Norton,
but is made out to "Alfred Norwood. Can Norton use this
check ?
(2) A check is made payable to "James Owen, admin-
istrator. What can Owen do to escape personal liability in
further negotiation.
(3) What is the presumption as to when an undated indorse-
ment was made with respect to maturity? Could the contrary
be shown to be the fact?
(4) N What is the presumption as to place of indorsement?
(5) May an instrument be negotiated after its- maturity?
What sort of indorsement before maturity will stop further
negotiation? (Note: The fact that a note continues negotiable
after maturity until discharged by payment or otherwise, is to
be connected with the fact that the transferee after maturity
is not a holder in due course if that becomes of any moment
on account of defenses sought to be made against the purchaser
by the party primarily liable.)
(6) What indorsements may be stricken out?
(7) Where indorsement is necessary to negotiation and is
omitted what rights has the transferee? When does he become
a holder in due course ?
Case 468. First Nat. Bk. v. McCullough, 50 Ore. 508,
17 L. E. A. (N. S.) 1105.
Facts: Suit by the bank on two notes. The bank
claims as indorsee under the following indorsement:
"Pay A. B. Nixon, or order, waiving demand and notice
of protest. H. L. Moody. Dixon was in fact cashier
of the bank. The bank claims that as the note was pay-
able to its cashier, it can sue thereon.
842
NEGOTIABLE INSTRUMENTS
Point Involved: Whether an indorsement to a cashier
in fact, if not stated to be cashier, may be considered
indorsement to the bank, if that was the intention.
Moore, J.: i i '* * * The rule to be extracted from
these decisions has been embodied in our statute known
as the 1 uniform negotiable instruments law' as follows:
1 Where an instrument is drawn or endorsed to a person
as "cashier or other fiscal officer of a bank or corpora-
tion, it is deemed prima facie to be payable to the bank
or corporation of which he is such officer, and may be
negotiated by either the indorsement of the bank or cor-
poration or the indorsement of the officer.' * * *
The clause just quoted and the decisions adverted to are
undoubtedly based on the theory that the employment of
the qualifying word 'cashier' or other designation of a
fiscal office, appended to the name of a payee or indorsee
of commercial paper, creates an ambiguity as to the real
party intended, to explain which parol evidence is admis-
sible to show who is the principal for whose benefit such
agent received or accepted the promise to pay a stipu-
iated sum of money. In the case at bar, however, no
official designation is added to Nixon's name and hence
no uncertainty is apparent * * # and parol evidence
is inadmissible to control or vary the terms of the writ-
in o- * * *
Question 468: What is the rule as to instruments drawn-pay-
able to or indorsed to a cashier ? What is lacking in the above
case to bring it within that rule ? In what way was the deficiency
sought to be overcome ? If the cashier had indorsed to the bank
would it have a good case ?
Case 469. Uniform Negotiable Instruments Act, Sec.
41.
"Where an instrument is payable to the order of two
or more payees or indorsees who are not partners, all
must indorse unless the one indorsing has authority to
indorse for the others.
Question 469: A note payable to order of John Smith and
his sister Grace Smith. An indorsement by John Smith. Has
the indorsee good title on any assumption 1
NEGOTIATION
843
B. Kinds of Indorsements.
§§ 456 to 460. (Nego. Instru., Sees. 64-68.)
Case 470. Uniform Negotiable Instruments Act, Sees.
.33 to 40.
'' (Sec. 33.) An indorsement may be either in blank or
special; and it may also be either restrictive or qualified,
or conditional.
"(Sec. 34.) A special indorsement specifies the per-
' son to whom or to whose order the instrument is to be
payable; and the indorsement of such indorsee is neces-
sary to the further negotiation of the instrument. An
indorsement in blank specifies no indorsee, and an in-
strument so indorsed is payable to bearer, and may be
negotiated by delivery.
 (Sec. 35.) The holder may convert a blank indorse-
ment into a special indorsement by writing over the sig-
nature of the indorser in blank any contract consistent
with the character of the indorsement.
"(Sec. 36.) An indorsement is restrictive which
either:
"1. Prohibits the further negotiation of the instru-
ment; or
"2. Constitutes the indorsee the agent of the indorser;
or
"3. Vests the title in the indorsee in trust for or to the
use of some other person. But the mere absence of words
implying power to negotiate does not make an indorse-
ment restrictive.
"(Sec. 37.) A restrictive indorsement confers upon
the indorsee the right:
"1. To receive payment of the instrument.
"2. To bring any action thereon that the indorser could
bring.
"3. To transfer his rights as such indorsee where the
form of the indorsement authorizes him to do so.
"But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
"(Sec. 38.) A qualified indorsement constitutes the
844 NEGOTIABLE INSTRUMENTS
indorser a mere assignor of the title to the instrument.
It may be made by adding to the indorser's signature the
words 'without recourse' or any words of similar import.
Such an indorsement does not impair the negotiable char-
acter of the instrument.
"(Sec. 39.) Where an indorsement is conditional, a
party required to pay the instrument may disregard the
condition, and make a payment to the indorsee or his
transferee, whether the condition has been fulfilled or
not. But any person to whom an instrument so indorsed
is negotiated, will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
"(Sec. 40.) Where an instrument originally payable
to or indorsed specifically to bearer is subsequently in-
dorsed specially it may nevertheless be further negotiated
by delivery; but the person indorsing specially is liable
as indorser to only such holders as make title through
his indorsement.
Question 470: (1) Define: special indorsement; blank in-
dorsement; restrictive indorsement; qualified indorsement; con-
ditional indorsement.
(2) How may a blank indorsement be changed ? "What effect
would this have on the manner of further indorsement ?
(3) What right has one to whom an instrument has been
restrictively indorsed ? Does the restrictive indorsement prohibit
further transfer.
(4) What is a qualified indorsement? Does such indorse-
ment restrict further transfer?
(5) What is a conditional indorsement? Does it restrict
further transfer? Who may disregard the condition?
(6) A note is payable to bearer. The bearer indorses it
specially to X. X transfers it to Y without indorsement. Does
Y have title ?
(Note: As to liability of general indorser and qualified in-
dorser and transferror without indorsement, see Liability of
Parties hereafter.)
(Note: Sec. 40 of the Negotiable Instruments Law, that
"Where an instrument payable to bearer is indorsed specially,
it may nevertheless be further negotiated by delivery, is con-
NEGOTIATION
845
trary to the general understanding of bankers and other busi-
ness men and seems inconsistent with the idea of a special in-
dorsement, and ought, it seems, to be expunged. The effect of
the language is that if an instrument is payable to bearer upon
its face, it may be negotiated without indorsement notwithstand-
ing before such negotiation it has been specially indorsed to the
party so transferring it. Thus: A note is payable to bearer.
The bearer indorses "Pay to X. Y. X. Y. transfers to A. B.
without indorsement. A. B. has good title.)
Case 471. Interstate Trust Co. et al. (Defendants) v.
United States National Bank (Plaintiff), 185 Pacific
(Colorado) 260.
Facts: The United States National Bank sued the de-
fendants, to recover from either or both the amounts
paid on eight checks aggregating $2680.16 which had
been paid to defendant, the First National Bank, for the
defendant the Interstate Trust Company. The checks
in question were deposited by George Kelston, who had
erased the name of the original payees and inserted his
own and then deposited them to his credit with Inter-
state Trust Company. The checks were indorsed by the
Trust Company as follows: "Pay to the order of any
Bank or Banker—previous indorsements guaranteed
and deposited to its credit with the First National Bank.
The latter hank indorsed the same "Received payment
through the Denver Clearing House and presented them
to plaintiff, the United States Bank, on whom the checks
were drawn who paid the checks through the Clearing
House. After discovering the fraud, the United States
Nat. Bank sues the defendants as indorsers.
Baily, J. delivered the opinion of the Court * * *
"It is urged by plaintiffs in error that the indorse-
ments: 'Pay to the order of any bank or banker—pre-
vious indorsements guaranteed,' made by the Interstate
Trust Company, and 'Received payment through the
Denver Clearing House,' by the First National Bank,
were collection, or restrictive indorsements, and that the
indorsers guaranteed nothing as to the genuineness or
846
NEGOTIABLE INSTRUMENTS
worth of the paper. A restrictive indorsement is such
only when it prohibits further negotiation of the paper,
constitutes the indorser merely the agent of the owner,
or vests the title in the indorsee in trust for, or to the
use of some other person. Rev. Stat. 1908, 4499. The
authorities are practically unanimous that indorsements
such as the ones under consideration can have no such
limited or restricted effect. Crawford Neg. Inst. 1916
ed. 78, 79, 130, 132; National Bank v. Bossemeyer, 101
Neb. 96, L. R. A. 1917 E, 374, 162 N. W. 503; First Nat.
Bank v. First Nat. Bank, 58 Ohio St. 207, 41 L. R. A.
584, 65 Am. St. Rep. 748, 50 N. E. 723; First Nat. Bank
v. First Nat. Bank, 4 Ind. App. 355, 51 Am. St. Rep. 221,
30 N. E. 808; Woods v. Colony Bank, 114 Ga. 683, 56
L. R. A. 929, 40 S. E. 720; New York Produce Exch.
Bank v. Twelfth Ward Bank, 135 App. Div. 52, 119 N. Y.
Supp. 988.
''In National Bank v. Bossemeyer, 101 Neb. 100, L.
R. A. 1917E, 374, 162 N. W. 503, the court, in discussing
the effect of the indorsement, 'Pay to any bank or banker;
all previous indorsements guaranteed,' said: 'Is the in-
dorsement restrictive?' Whatever may have been held
before the enactment of the Negotiable Instruments Act,
it is clear that the question must be determined by the
provisions of that statute, as follows: 'An indorsement
is restrictive which either : First, prohibits the further
negotiation of the instrument; or, second, constitutes the
indorsee the agent of the indorser ; or, third, vests the
title in the indorsee in trust for or to the use of some,
other person. But the mere absence of words implying
power to negotiate does not make an indorsement re-
strictive.'
 'There is nothing on the face of this indorsement
which prohibits the further negotiation of the instru-
ment, or constitutes the indorsee the agent of the in-
dorser or vests title in the indorsee in trust for or to the
use of some other person; and hence, by the most elemen-
tary principles of statutory construction, the plain mean-
ing of the language must be observed, and it must be held
that the indorsement was not restrictive.'
NEGOTIATION
847
"It is also urged by plaintiffs in error that by reason
of certain rules and regulations of the Denver Clearing
House, with which all banks are familiar, the indorse-
ments in question are taken to be collection indorsements
only, and therefore, regardless of what the law may be,
defendants in error are in effect estopped to deny that
the indorsements are collection indorsements only. It is
well settled, however, that unrestricted indorsement can-
not be varied, either by parol evidence, or evidence of
custom in business, for the reason that the statute defi-
nitely defines their meaning and controls their effect.
Martin v. Cole, 3 Colo. 113; Dunn v. Ghost, 5 Colo. 134;
Torbert v. Montague, 38 Colo. 327, 87 Pac. 1145; Corn
Exch. Bank v. Nassau Bank, 91 N. Y. 74, 43 Am. Rep.
655; Moody v. First Nat. Bank, 19 Tex. Civ. App. 278,
46 S. W. 660; State Bank v. Cumberland Sav. & T. Co.,
168 N, C. 605, L. R. A. 1915D, 1138, 85 S. E. 5; National
Bank v. Bossemeyer, supra; New York Produce Exch.
Bank v. Twelfth Ward Bank, 135 App. Div. 52, 119 N. Y.
Supp, 988.
Question 471: If an indorsement is restrictive, can the party
to whom so restrictively indorsed hold the indorser on the in-
dorsement? What was the indorsement in the above case? Was
it restrictive ? . -
(Note: There is a difference of opinion whether such an in-
dorsement is restrictive though weight of authority apparently
supports above view. See Note 10 A. L. R. p. 709.)
CHAPTER 58
HOLDER IN DUE COURSE
§ 461. Introduction.
§ 462. Who is holder in due course.
§ 463. Complete and regular instrument.
§ 464. Transferee must give value.
§ 465. Transferee must take in good faith.
§ 466. Transferee must acquire instrument before overdue.
§ 467. Indorsement requisite.
§ 468. Transferee of holder in due course as holder in due course.
§ 469. Burden of proof as to whether one is holder in due course.
§ 470. Amount recoverable by holder in due course.
§ 461. (Nego. Instru., Sec. 69.) Introduction.
(Note: It is important to appreciate what is connoted, by
the term ''holder in due course.
In the first place we should notice that one may acquire by
negotiation a good title to negotiable paper who is not a holder
in due course. That is, a negotiable instrument may be the
subject of a gift (there being consideration in its inception
between the original parties) and may be transferred after it
is mature. "We consider whether one is a holder in due course
in order to ascertain whether such holder is subject to the
"equities or defenses to which the party from whom he ac-
quired the paper would have been subject. If there are no
such equities or defenses to be raised, the holder may recover
although he cannot qualify as a holder in due course. The ques-
tion whether a holder is a holder in due course is material only
when defenses are sought to be raised against him which could
have been raised against the payee or other prior party.)
§ 462. Who is holder in due course.
Case 472. Uniform Negotiable Instruments Act, Sec.
52.
"A holder in due course is a holder who has taken
the instrument under the following conditions:
848
HOLDER IN DUE COURSE
849
"1. That it is complete and regular upon its face;
' "2. That he became the holder of it before it was over-
due and without notice that it had been previously dis-
honored, if such was the fact;
"3. That he took it in good faith and for value;
"4.. That at the time it was negotiated to him he had
no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.''
5 463. (Nego. Instru., Sec. 71.) To be a holder in due
course the holder must, acquire an instrument that is
complete and regular upon its face.
Case 473. In re Philpott's Estate, 169 Iowa Reports,
555, 151 N. W. 825.
Facts: Defendant is executrix of estate of C. H. Phil-
pott who on June 12, 1911, entered into a contract with
American-Canadian Land Company, a partnership, for
purchase of certain Texas lands and executed, among
others, the note described below. October 25, 1911, this
contract was cancelled by a written agreement and the
company agreed to return Philpott his notes. The re-
turn was never made. The plaintiff Leclerc acquired the
note and claims to be a holder in due course. The note
read that it was payable "on or before four — after
date. Defense that the claimant is not a holder in due
course because of the incompleteness on the face of the
note.
Evans, J.: "* * * It does not appear therein
whether it was to become payable four days, four months
or four years. * * * This note was not ' complete
and regular' upon its face * * * we think it quite
clear that this irregularity upon the face of the note
prevented its taker from being a holder in due course.
It could not be deemed a demand note. * * * 
Question 473: What was the irregularity of the note in ques-
tion? Was the purchaser a holder in due course?
850
NEGOTIABLE INSTRUMENTS
Case 474. Elias v. Whitney, 98 N. Y. Supp. 667.
Truak, J.:  The evidence showed that the check in
suit had been changed before it reached the plaintiff, and
that a mere inspection of the check showed snch change.
There is no evidence showing that the defendant author-
ized or assented to the alteration, but the appellant says
that he is 'a holder in due course,' and not a party to the
alteration, and that under Sec. 205 of the Negotiable
Instruments Law (Laws, 1897) p. 745 (c. 612), he may
enforce the payment of the check, according to its orig-
inal tenor. Sec. 91, p. 732, of the Negotiable Instruments
Law, states what constitutes a holder in due course. Ac-
cording to that section, a holder in due course is a holder
who has taken an instrument that is complete and reg-
ular on its face. This instrument was not complete and
regular on its face at the time the defendant took it. As
we have stated before, a mere inspection of the instru-
ment showed its defect, and, therefore, under subdivision
41 of the negotiable instruments law, plaintiff had notice
of an infirmity in the instrument at the time he took it.
Question 474: How was the above instrument irregular? Did
it prevent plaintiff from becoming a holder in due course ?
§ 464. (Nego. Instru., Sec. 72.) To be a holder in due
course the transferee must give value.
(Note: As to inadequacy of value as constituting no-
tice of defect, see next section.)
Case 475. Daniels on Negotiable Instruments, 6th Ed.;
Sec. 777, p. 902.
* * it has been said that 'the consideration for
the transfer must be full and fair as well as valuable'
(citing cases in foot note) while in another case it is said
that 'when a parting with value is proved the amount of
the consideration is not otherwise important than as
bearing on the question of actual or constructive notice'
(citing Gould v. Segee, 5 Duer, 260). This latter view
seems to us the correct one. The owner of a bill or note
HOLDER IN DUE COURSE
851
has as much right to sell it as he has to sell his horse.
The prior parties, by making it negotiable, have war-
ranted the right of the payee or indorsee to make title
to another.
"And if he does so at any price, the holder acquires
full rights and interests in the instrument, as against all
parties, unless he had notice of defects, or wilfully ab-
.stained from inquiry under circumstances which justify
the imputation of bad faith.''
Question 475: M makes a note to P, or order, for $400, the
note being in regular negotiable form. P sells and indorses to C
who has no notice of any defect or defense, who buys before
maturity and who gives $300 for the note. M has a good de-
fense against P if P sues on this note. C sues M. Has C ful-
filled the requirement that he must be a purchaser for value?
Might the amount he paid be material from any other stand-
point?
Case 476. Warman v. First National Bank, 185 Illi-
nois, 60.
Point Involved: "Whether one is a purchaser in due
course who on the acquisition of negotiable paper merely
credits the transferror with the amount agreed upon.
Mr. Justice Wilkin : li* * *
"We think the authorities fully sustain the proposition
that a bank does not become a purchaser of negotiable
paper by discounting the same for one not indebted to
it at the time, and merely placing the amount which the
.assignor is .to receive to his credit by ways of deposit. It
is well understood that by a general deposit in bank the
relation of debtor and creditor, merely, is created between
the bank and depositor; and if in this case the bank be-
came such a debtor to the rubber company, and if that
indebtedness continued to exist at the time of the trial,
it could have protected itself, if the defenses set up pre-
vailed against the notes, by refusing to pay the deposit,
and therefore could not claim the protection of being an
852
NEGOTIABLE INSTRUMENTS
innocent holder for value, or if it had paid any part of
the deposit it would he entitled to protection pro tanto.
Question 476: Was the bank a purchaser for value in this
case ? Suppose before receiving notice of the defense the bank
had honored the depositor's check on this account, would the
bank then be a purchaser for value ? To what extent ?
Case 477. Uniform Negotiable Instrument Law, Sec.
54.
"Where the transferee receives notice of any infirmity
in the instrument or defect in the title of the person
negotiating the same before he has paid the full amount
agreed to be paid therefor, he will be deemed a holder
in due course only to the extent of the amount theretofore
paid by him.
Question 477: M makes and delivers to P, the payee, a ne-
gotiable note in the sum of $500. P before maturity indorses
and sells to H the note for $500, $250 of which H pays down,
the other $250 to be paid in one week. Before the week expires
and before H has paid the second $250 he learns that M has a
defense against P of breach of contract by P. H then pays P
the second $250. How much can H recover against M ?
(2) In the same case suppose H bought the note for $250
only, and we assume that under the circumstances he bought in
good faith, i. e.,' that the discount was not such as to impair
his good faith, how much would he be entitled to recover?
(See § 470 post.)
(Note: This section introduces an inconsistency in the law,
namely that a holder in due course can recover full face value,
but a person who pays any part of the consideration agreed to
be paid after notice is a holder in due course only to the
extent of the amount theretofore paid by him. But it ap-
pears to the editor to be an inconsistency the removal of which
would do damage to other considerations of public policy.)
Case 478. Uniform Negotiable Instruments Law, Sec.
52 (4).
, "To constitute notice of an infirmity in the instrument
or defect in the title of the person negotiating the same,
HOLDER IN DUE COURSE
853
the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument
amounted to bad faith.''
(See following cases.)
§ 465. (Nego. Instru., Sec. 73.) To be a holder in due
course the transferee must acquire the paper in good
faith and with no notice of any infirmity in the instru-
ment or defect in the title of the person negotiating it.
Case 479. BradweU v. Pryor, 221 Illinois, 602.
Point Involved: Whether one who acquires negotiable
paper under circumstances that would excite suspicions
in the mind of a prudent man, is a holder in due course.
Mr. Justice Wilkix: "It is first insisted that the
Appellate Court committed error in holding that where a
party is about to receive a hill or note, and there are such
suspicious circumstances accompanying the transaction
or within the knowledge of the party as would induce a
prudent man to inquire into the title of the holder or into
the consideration of the paper, he is bound to make such
inquiry, and if he neglects to do so he holds the bill or
note subject to any equities which may exist between the
previous parties. The above holding of the Appellate
Court is based on the cases of Russell v. Hadduck, 3 Grilm.
233, and Sturges v. Metropolitan Nat. Bank, 49 111. 220,
and is undoubtedly supported by these authorities. But
since the holding in those cases the rule has been some-
what modified by the decisions of this Court and is not
sustained by courts generally throughout the country.
The rule now is, that the endorsee or assignee of com-
mercial paper who takes the same before maturity for a
valuable consideration, without knowledge of any defects
and in good faith, will be protected against the defenses
of the maker, and mere suspicion of defect of title or the
knowledge of circumstances calculated to excite suspicion
in the mind of a prudent man, or even gross negligence
854
NEGOTIABLE INSTRUMENTS
on liis part at the time of the transfer, will not defeat
his title. In other words, the only thing which will defeat
his title is bad faith on his part, and the burden of proof
is upon the person assailing his right to establish that
fact by a preponderance of the evidence. (Matson v.
Alley, 141 111. 284; Demis v. Horner, 165 id. 347; Merritt
v. Boyden, 191 id. 136; Murray v. Beckwith, 81 id. 43;
Shreeves v. Allen, 79 id. 553.) However harsh this rule
may, on first impression, seem to be, it is based upon the
policy of the law which gives full faith and credit to com-
mercial paper transferred before maturity, so that it may
circulate, as far as possible, with all the conveniences of
currency. We are of the opinion, therefore, that the
Appellate Court improperly announced in its opinion, as
the law of this state, the rule laid down in the earlier
cases of Russell v.' Hadduck, and of Sturges v. Metro-
politan Nat. Bank, supra.
Question 479: If a purchaser of negotiable paper is care-
less about making inquiry is that alone enough to make him
subject to defenses?
Case 480. McNamara v. Jose, 28 Washington, 461.
Facts: McNamara bought for $500.00 a promissory
note for $1,000.00 from the payee thereof, made by Alfred
Jose, the defendant. The maker was known by the pur-
chaser to be solvent, but the note, though held in Wash-
ington, was payable at Nome, Alaska, inaccessible for six
months in a year, and the note was not due for three
months, and the payee was in need of money. The note
had been procured by payee from the maker through
fraudulent representations. The maker had advertised
his defense to the note, but the purchaser was unaware of
this. The purchaser did not inquire of the maker as to
the note, though such maker was conveniently accessible.
The maker, defendant in this case, claims that the plain-
tiff cannot be considered an innocent purchaser.
Point Involved: Whether one who is offered paper at
a discount is thereby put on notice of the defect in the
title.
HOLDER IN DUE COURSE
855
Fullerton, J.: "The Negotiable Instruments Act of
this state (Laws 1899, p. 350, 52) defines a holder in due
course of a negotiable instrument to be one who has taken
the instrument under the following conditions:
 '(1) That it is complete and regular upon its face;
(2) that he became the holder of it before it was over-
due, and without notice that it had been previously dis-
honored, if such was the fact; (3) that he took it in good
faith and for value; (4) that at the time it was negotiated
to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.'
"The act further provides (Id. 56) that, Ho constitute
notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounted to bad
faith;' and (Id. 57), that 'a holder in due course holds
the instrument free from any defect of title of prior par-
ties, and free from defenses available to prior parties
among themselves, and may enforce payment of the in-
strument for the full amount thereof against all parties
liable thereon.' But, notwithstanding this act positively
provides that, to constitute notice of an infirmity , in a
negotiable instrument, the purchaser must have knowl-
edge of such facts that his action in taking the instru-
ment amounted to bad faith, we cannot think that the
legislature meant to say that the purchaser of a nego-
tiable instrument can shut his eyes to the surrounding
circumstances, remain in willful ignorance of facts which
would have made known to him the infirmities of the
instrument he purchases, and then, claim, because he had
no actual knowledge of such infirmities, that his title
thereto, is unimpeachable; but that it is still the rule that
willful ignorance and guilty knowledge alike involve the
result of bad faith. This, however, does not mean that
the holder's title is to be overthrown by slight circum-
stances. He does not owe to the party who puts the
paper afloat the duty of active inquiry in order to avert
856
NEGOTIABLE INSTRUMENTS
the imputation of bad faith. His rights are to be deter-
mined by the simple test of honesty and good faith, not
by a speculative inquiry into diligence or negligence.
Although he may have been negligent in taking the paper,
and omitted precautions which a prudent man would
have taken, nevertheless, unless he acted mala fide, his
title will prevail. Crawford, Negotiable Instruments
Law (2d ed.), p. 54.
11 'Suspicion of defect of title or the knowledge of cir-
cumstances which would excite suspicion in the mind of a
prudent man, or gross negligence on the part of the taker,
at the time of the transfer, will not defeat his title. That
result can be produced only by bad faith on his part.'
Murray v. Lardner, 2 Wall. 110.
"Tested by these rules, is there anything in the evi-
dence before us, which required the submission of the
cause to the jury? We think not. Laying aside the fact
that it was purchased at such a. large discount there is
nothing that even tends to show bad faith on the part of
the appellant, and this one fact loses much of its per-
suasiveness when it is remembered that the note is pay-
able at Cape Nome, which the Court judicially knows is
on the coast of Alaska, inaccessible for a greater portion
of the year, and not at any time in the line of regular
communication. It certainly would not be sought by in-
vestors in commercial paper so long as there was a pos-
sibility of their being compelled to enforce its payment
at that place. Again, the purchaser of a note at a dis-
count is not of itself, under ordinary circumstances evi-
dence of bad faith. When it is very large, that circum-
stance may be considered in connection with other
circumstances in determining the question of the pur-
chaser's good faith; but unless the consideration be mere-
ly nominal, or so grossly inadequate as to lead to the
conclusion that the purchase is made for the purposes of
speculating upon the chances of collection, it is not of
itself sufficient to justify a finding of bad faith.
Question 480: Why did the Court consider that the large
discount in this case was no evidence of bad faith on the part of
HOLDER IN DUE COURSE
857
the purchaser ? If there had been no defense to the note would
the amount paid by the holder be material?
Case 481. Knowlton v. Schultz, 71 Northwestern Rep,
(N. Dak.) 550.
Facts: Suit brought by plaintiff as indorsee of a note
made by defendants. The payee of the note was a lawyer
and procured it by making false statements as to the
result of a lawsuit. The note had been held by the payee
for over six months and had only four days to run when
the plaintiff acquired it, and was secured by chattel mort-
gage. Plaintiff, the indorsee, was also a lawyer with
offices adjoining the offices of the payee of the note.
Held: That the decision of the lower court that the
plaintiff had not shown he was a purchaser in good faith
would be sustained.
Case 482. Jones v. Gordon, L. R. 2 App. Cases 616.
Lord Blackburn: * * Farther, my Lords,
that I think it is right to say that I consider it to be
fully and thoroughly established that if value be given
for a bill of exchange, it is not enough to. show that there
was carelessness, negligence, or foolishness in not sus-
pecting that the bill was wrong, when there were cir-
cumstances that might have led a man to suspect that.
All these are matters that tend to show that there was
dishonesty in not doing it, but they do not in themselves
make a defense to an action upon a bill of exchange. I
take it that in order to make such a defense * * * it
is necessary to show that the person who gave value for
the bill, whether the value given be great or small, was
affected with notice that there was something wrong
about it when he took it. I do not think that it is neces-
sary that he should have notice of what the particular
wrong was. If a man, knowing that a bill was in the
hands of a person who had no right to it, should happen
to think that perhaps the man stole it, when if he had
known the real truth he would have found, not that the
858
NEGOTIABLE INSTRUMENTS
man had stolen it, but that he had obtained it by false
pretenses, I think that would not make any difference
if he knew there was something wrong about it when he
took it. If he takes it that way, he takes it at his peril.
"But then I think that such evidence of carelessness
or blindness as I have referred to may with other evi-
dence be good evidence upon the question which, I take
is the real one, whether he did know there was some-
thing wrong in it. If he was (if I may use the phrase)
honestly blundering and careless, and so took a bill of
exchange or a bank note when he ought not to have taken
it, still he would be. entitled to recover. But if the facts
and circumstances are such that the jury, or whoever
has to try the question, came to the conclusion that he
was not honestly blundering and careless but that he
must have had a suspicion that there was something
wrong, and that he refrained from asking questions, not
because he was an honest blunderer or a stupid man, but
because he thought, in his own secret mind,—I suspect
there is something wrong, and if I ask questions and
make further inquiry, it will be no longer my suspecting
it, but my knowing it, and I shall not be able to recover
—I think that is dishonesty. * *
§ 466. (Nego. Instru., Sec. 74.) To be a holder in due
course the transferee must acquire the instrument be-
fore it is overdue.
(1) In General.
Case 483. Fisher v. Leland et al., 58 Mass. 456.
Shaw, C. J.:  * * * But where a negotiable note
is found in circulation after it is due, it carries suspicion
on the face of it. The question instantly arises, why is
it in circulation,—why is it not paid t Here is something
wrong. Therefore, although it does not give the indorsee
notice of any specific matter of defense, such as set-off,
payment, or fraudulent acquisition, yet it puts him on
inquiry; he takes only such title as the indorser himself
HOLDER IN DUE COURSE
859
has, and subject to any defense which would be made, if
the suit were brought by the indorser. The note does not
cease to be negotiable; the indorsee takes title, and may
sue, but he is so far in privity with his indorser that he
takes only his title; and if the defendant could make any
defense against suit brought by such indorser, he can
make it against the indorsee. * * * 
Question 483: (1) Why does the purchaser of an overdue
note take it subject to the defenses?
(2) Is an overdue note still negotiable?
Case 484. Wilkins v. Usher, 123 Kentucky, 696.
Facts.: Suit by an indorsee of a note reading: '' One
day after date, we promise to pay, etc., and which the
indorsee purchased on the day after its date.
Defense: That the note was secured by the payee
(indorser to plaintiff) by fraud.
Point Involved: Whether a negotiable instrument
purchased on the day of its maturity is acquired in due
course.
HoBSoisr, C. J.: "* * * The note was dated Sep-
tember 21st. It was payable one day after date, on
September 22, but it was not overdue at any time on the
22nd. Sec. 52 provides among other things that the pur-
chaser of a note before it is overdue may be a holder for
value. Usher's purchase was made before the note was
overdue. * # *
Question 484: State the rule of this case.
(2) When is Demand Paper Overdue.
Case 485. Mitchel v. Catchings, 23 Fed. 710.
Facts: See the opinion.
Point Involved: When a demand note is to be consid-
ered as overdue from the standpoint of one who claims to
purchase in due course.
Brewer, J. (orally) : "In Mitchell v. Catchings, ac-
tion on a note for $5,000, there is really only one question,
860
NEGOTIABLE INSTRUMENTS
and that is, whether the plaintiff was a bona fide holder,
before due, of the note in controversy. In its inception
the note was a note given as security for option deals
—a pure gambling transaction—a note void as between
the parties beyond any question. The plaintiff claims to
be a bona fide holder before due. The note is a demand
note, dated November 13th, indorsed to plaintiff, De-
cember 6th. No demand was in fact made prior to trans-
fer. While it is true, a letter was written by McCormick,
of the firm of Smith, McCormick & Co., the payees of
the note, yet there was no presentment of the paper to
the maker, no demand within the rules of the law-mer-
chant. Twenty-three days elapsed between the making
of the paper and the transfer. Is that such length of
time that the Court is justified in presuming a demand,
and holding that the paper was taken overdue? The
books show it is a mixed question of law and fact as to
what is a reasonable time within which payment must
be made. In Daniel, Negotiable Instruments, quoting, I
think, from Parson's Notes and Bills, the author makes
use of an expression somewhat like this:
 1 That it is unquestionable that one day would not
be a reasonable time, and that five years would be an
unreasonable delay. Intermediate these times there is
nothing settled, and each case must be left to be deter-
mined upon its own peculiar circumstances.'
"This note was given as security for a continuing
transaction. In the contemplation of the parties, it was
not to be immediately paid. * * * Hence, as be-
tween the parties, it being contemplated that it was to
stand as security for a continuing transaction, and not
as paper which was to be immediately qollected and paid,
it does not seem to me that 23 days can be held to be
an unreasonable time. Counsel said in the argument
(I do not know whether correctly or not, for I have not
had time to examine) that no case can be found in the
books in which any period less than thirty days has
been held to be an unreasonable time. Applying the law
HOLDER IN DUE COURSE
861
as thus laid down in the books, I cannot hold that the
note was transferred after due. * * *
Question 485: (1) What was the time this note had been
outstanding? Was it overdue?
(2) Suppose a demand had actually been made one day
after the note was given, but this was unknown to the pur-
chaser, would the note be overdue as to him?
Case 486. Paine v. Central Vermont R. Co., 14 Fed-
eral, 269.
Facts: Plaintiff bought the demand note sued on
within 3 and 4 months after its date. There was nothing
due on the note when he bought it.
Point Involved: When a demand note is to be con-
sidered overdue.
Wheelek, D. J.: '' * * *
ti* * * g note was on demand, it was due
presently. It would have to be presented and paid ac-
cording to the usual course of business, if free from
defenses. The time would come when, if outstanding,
the presumption would be that it had been demanded, or
that a demand had been omitted because known to be
unavailing. If this time was such as to make it reason-
able to suppose that the note was outstanding because
it would not be paid, then the plaintiff was in fault in
taking it without inquiring of the maker. Whether the
lapse of time was such is a question of law. On this
question the authorities are not uniform, but no case
shows that more than three months can reasonably be
overlooked. Business paper would usually be adjusted
within that time, if regular. In this case the circum-
stance that the holder of the note was borrowing on dis-
advantageous terms, would lead directly to the inquiry
why he did not resort to the maker of the note when it
was due on demand. Had the plaintiff inquired, the
presumption is that he would have learned the truth,
and both would have been saved from loss. As he did
not inquire, it seems more just, as well as lawful, that
862
NEGOTIABLE INSTRUMENTS
he should take the risk brought about by the failure to
inquire, than that the defendant should.
< i # *
"The plaintiff must stand upon his rights acquired
by taking the note at the time and under the circum-
stances when he took it. The note was at that time over-
due, and he took it with the same obligation that it
carried in the hands of the person whom he took it of.
This principle that overdue paper is taken subject to
all defenses is so well settled in the law as to require no
citation of authorities to support it.
Question 486: How long had this demand note been out-
standing when plaintiff bought it? Did the Court think it was
overdue ? Why ?
Case 487. Anderson v. Elem, 208 Pacific (Kansas)
573.
Facts: See opinion.
Point Involved: When is a check (an instrument pay-
able on demand) overdue for purposes of negotiation?
Burch, J.:  The action was one by an indorsee of
a check to recover from the drawer. The plaintiff pre-
vailed, and the defendant appeals.
"The check was drawn on a bank in Wichita, was given
in a transaction concluded at night, in Wichita, and the
drawer stopped payment the next morning, before the
bank opened for business. Payment was stopped be-
cause consideration of the check failed. The check was
not presented for payment by the payee. He remained
in Wichita for several days, and was accessible to the
maker, who knew where he was, but who took no steps
to 'obtain possession of the check. The check was dated
October 20, 1919, and on November 14 it was cashed at
Salina, by a purchaser who had no knowledge of the
failure of consideration. When the check was presented
for payment, payment was refused.
"The law of the case is simple enough. A 'check' is
a bill of exchange, drawn on a bank, payable on demand.
HOLDER IN DUE COURSE
863
Neg. Inst. Act, Sec. 192; Gen. Stat. 1915, Sec. 6713. A
check must be presented within a reasonable time after
issue, or the drawer will be discharged from liability
#thereon to the extent of loss caused by the delay. .Neg.
"inst. Act, Sec. 193; Gen. Stat. 1915, Sec. 6714. This was
the law before passage of the Negotiable Instruments
Act. Gregg v. George, 16 Kan. 546; Mordis v. Kennedy,
23 Kan. 408, 33 Am. Rep. 169; Anderson v. Rodgers,
53 Kan. 542, 36 Pac. 1067, 27 L. R. A. 248; Noble v.
Doughten, 72 Kan. 336, 345, 83 Pac. 1048, 3 L. R. A.
(N. S.) 1167; Cox v. Bank, 73 Kan. 789, 85 Pac. 762.
 Under section 196 of the Negotiable Instruments
Act, a check does not amount to an assignment of funds.
Gen. Stat. 1915, Sec. 6717. A check, however, may prop-
erly be regarded between the parties as something of
an appropriation to the payee of so much money on
deposit in the bank, which, the payee may obtain by call-
ing for it. Gregg v. George, supra. Should the payee
delay presentment, and should the bank fail, the loss
falls on the payee. Should the drawer have no funds
on deposit to meet the check, or should he withdraw his
deposit before presentment, he can suffer no- injury by
delay in presentment, and is not discharged. Anderson
v. Rogers, supra. Stopping payment is equivalent to
withdrawing the deposit. The drawer of a check is prin-
cipal debtor, the person primarily liable and, unless he
suffers loss by delay, is not discharged if the check be
presented within the time prescribed by the statute of
limitations. Negotiation of a check as a bill of exchange
is one of the privileges of the payee, and the drawer
does not sutler loss, within the meaning of the Nego-
tiable Instruments Act, by the fact that the payee chooses
to transfer the paper, instead of presenting if for pay-
ment himself. In this instance, the defendant did not
suffer loss because of delay in presenting the check.
"If a check be negotiated to an innocent purchaser, it
stands on the same footing as other negotiable paper
with respect to defenses the drawer may interpose when
sued on the instrument. For purpose of negotiation, a
864 NEGOTIABLE INSTRUMENTS
check is not "due until presented for payment (Cox
v. Bank, supra), and one who acquires an unpresented
check a considerable time after it was issued may never-
theless be a holder in due course (Bull v. First Nat.
Bank of Kasson, 123 TJ. S. 105, 111, 8 Sup. Ct. 62, 31 L.
Ed. 97). Section 60 of the Negotiable Instruments Act
(Gen. Stat. 1915, Sec. 6580) requires that the time shall
not be unreasonable. What is a reasonable time depends
on a variety of facts and circumstances. Neg. Inst. Act,
Sec. 4; Gen. Stat. 1915, Sec. 6524; Investment Co. v. Ful-
ler, 105 Kan. 395, 184 Pac. 727.
'' The payee, W. B. Lynch, was a patron of the plain-
tiff's hotel in Salina. The plaintiff was in the habit of
cashing checks for his guests, and had cashed a $50.00
check for Lynch two weeks before he was asked to cash
the check sued on. The plaintiff testified as follows:
 'On the afternoon of November 14, 1919, W. B.
Lynch presented check marked "Exhibit A to me at
Planters' Hotel, asking me to cash same. I said to him
I did not have $200 in cash at the hotel. Mr. W. B. Lynch
asked me if I would cash same at the bank. I asked if
check was "good. Mr. J. P. Stanley was standing near at
that time and asked to look at the check, and said: "Mr.
Elem, of Wichita, Kan., is O. K., and is known to me per-
sonally. He is a real estate man of Wichita, and is worth
considerable money.'' He mentioned the sum, $50,000. So
I told Mr. Lynch to sign the check and I took it to the
Planters' State Bank, Salina, the same afternoon of No-
vember 14, 1919, and received $200 currency, with which
I returned to the hotel, and presented it to Mr. W. B.
Lynch.'
"Did the lapse of 24 days from the date the check was
issued, without more, necessarily give to it, in the eyes of
the plaintiff, or in law, the same appearance as that of a
dishonored draft, or of an overdue and unpaid promis-
sorynote?
"No question arises with reference to solvency of
the bank, or liability of parties other than the maker, or
the statute of limitations. It is perfectly true that a
HOLDER IN DUE COURSE
865
check is ordinarily to be regarded as an instrument for
present use; but the Negotiable Instrument Act did not
declare that a check is due at once, or that it must be pre-
sented, or put in course of collection, by the close of busi-
ness on the next business day after issue. A check is
not overdue, for purpose of negotiation, unless there has
been unreasonable delay in presenting it, and unreason-
able delay must be interpreted to mean such delay as to
make the check obviously stale.
"The facts are all before the court. It is essential to
uniformity that the court itself should determine ques-
tions of this character, and the court holds that the .time
elapsing between the issuing of the check and its nego-
tiation did not deprive the plaintiff of the rights of a
holder in due course.
"The proof was uncontradicted that the plaintiff had
no notice of infirmity in the instrument, and the circum-
stances under which he acquired it had no tendency to
indicate bad faith. Neg. Inst. Act, Sec. 63; Gen. Stat.
1915, Sec. 6583.
"The judgment of the district court is affirmed.
"All the Justices concurring.
Question 487: Against whom, by whom, and upon what is
the suit in this case ? What is the defense ? The reply to that
defense? Is such reply good?
Suppose the bank had failed during the 24 days, would the
maker have been liable? Under what circumstances would he
be liable in case of bank failure after he gave the check ?
(3) Installments Overdue, Interest Overdue.
Case 488. Kelley v. Whitney, 45 Wisconsin, 110.
Facts: Suit on note acquired by plaintiff as indorsee
before overdue, but at a time when interest was overdue
and unpaid. The defendants claimed payment to the
payee prior to the indorsement. The question presented
is whether the note is to be considered as overdue within
the rule making the purchaser of an overdue instrument
subject to defenses.
866
NEGOTIABLE INSTRUMENTS
Point Involved: Is a note to be considered as over-
dne to affect a purchaser with the equities thereof from
the fact that interest thereon is overdue and unpaid.
Cole, J.:  Can the plaintiff, under the circumstances,
claim the protection which the law affords a bona fide
purchaser of commercial paper for value, before rnatur-
ity? [Here the Court reviews certain former Wisconsin
decisions] * * # we deem it our duty to adhere to
the rule, that a purchaser for value of unmatured, com-
mereial paper, with interest overdue, is not, from that
fact-alone, affected with notice of prior equities or in-
firmities in the title.
Question 488: State the facts, the question presented and
the Court's decision in this case.
Case 489. Vinton v. King, 86 Mass. 562.
Facts: Action on a note dated April 26, 1858, as fob
lows:
'' Two years after date, by installments of $53 in every
six months after this date, until fully paid, I promise to
pay Peter Bruyett, or bearer, the sum of two hundred
and twelve dollars with interest in manner above stated.
 John King.
This note was acquired by the plaintiff about three
months after the first installment was overdue and un-
paid.
Defense: That the note was acquired by the payee by
duress.
Point Involved: Whether a note payable in install-
ments is to be considered as overdue so as to subject a
purchaser to the defenses against his transferror, from
the fact that one of the installments is overdue and un-
paid.
Metcalf, J.: # it being admitted law, that
he who takes a note after it is due takes it subject to all
objections and equities to which it was liable in the hands
of him from whom he takes it, and to the same defenses,
in a suit against the maker, which the maker might set up
HOLDER IN DUE COURSE
867
in an action against him by the payee; that the circum-
stances that a note is overdue makes it incumbent 011 the
party receiving it to satisfy himself that it is a good one,
and that if he omit so to do, lie must stand in the situ-
ation of him who was holder at the time it was due.
* * * But the ground assumed by the plaintiff is, that
in this case the note had not, within the rule of law on
this subject, come to maturity, and was not overdue and
dishonored before it was transferred to him, because the
time for payment of the last three installments had not
then come. The ground is not maintainable. As to the
first installment of $53 in six months, and interest on
$212, the note had come to maturity and was overdue and
dishonored when the plaintiff took it; and as to the
amount of that installment, it is not to be doubted that
the defendant may make the same defense against the
plaintiff, which he might have made against the payee.
And we are of the opinion that he may make the same de-
fense to the whole note. The note is a single contract to.
pay $212 in four half-yearly installments, and the plain-
tiff took it with notice on its face that, as to the first in-
stallment, the defendant might have a justifiable cause
for withholding payment, whatever that cause might be;
whether a cause which affected that installment only—as
airelease thereof by the payee, or a legal set-off against
him to the amount thereof—or a cause which, between
him and the payee, vitiated the whole note, as want or
failure of consideration, unlawful consideration, fraud or
duress. And if the payee had sued for the recovery of
the first installment, before the second was made payable,
the defendant might have defeated the action, by show-
ing that the note was wholly void and a judgment for
him, on such ground of defense, would have been con-
elusive against the> maintenance, by the payee, of a sub-
sequent action to recover the other installments. Black
River Savings Bank v. Edwards, 10 Gray, 387.
Question 489: Is a note to be considered overdue from the
standpoint of one who claims to be a holder in due course, if an
installment is to his knowledge overdue?
868
NEGOTIABLE INSTRUMENTS
Case 490. Gillette v. Hodge, 170 Federal, 313.
Facts: See the opinion.
Point Involved: Whether a note which provides that
if interest is not paid when due the whole note shall he-
come due is to be considered as overdue, so as to affect
a purchaser, from the fact that the interest is overdue
and unpaid.
Amidox, D. J.: "This was an action brought by Hodge
Bros., the defendants in error, against the plaintiffs in
error, on three promissory notes, dated April 13, 1903,
payable to Robert Burgess & Son, or order, respectively,
July 1, 1904, 1905 and 1906, with interest payable an-
nually. The notes contained a provision that default in
the payment of interest should cause the whole note to
become immediately due. The plaintiffs are private
bankers, who discounted the notes at the rate of 10 per
cent, on June 2, 1904, passing the proceeds to the credit
of the payee, who afterwards drew the same in full.
The answer interposes two defenses: First, that the
notes were given as the purchase price of a stallion, and
that the horse failed to comply with the warranties made
by the vendors; second, that the notes were handed to
the payees by the defendants upon an express agreement
that they should not be treated as delivered until the sig-
nature of four other persons named in the answer should
be obtained, and that, unless such signatures should be
obtained, the notes should be of no effect. To make these
defenses available, the defendants first sought to show
that the notes were dishonored at the time they were
acquired by the plaintiffs. Their main reliance for estab-
fishing this fact is the provision in the notes chat they
should become immediately due if there was default in
the payment of interest. The first year's interest was
due April 13, 1904. This installment of interest was,
therefore, past due on June 2d, when plaintiffs acquired
the notes; and it is urged that this fact, when combined
with the clause of the note just referred to, caused the
notec to mature April 13tv and that they were, therefore,
HOLDER IN DUE COURSE
869
dishonored at the time of the indorsement. The difficulty
with this contention is that the provision of the notes
upon which it is based is not self-executory. It simply
gave to the holder an option to declare the notes due for
default in the payment of interest. There is some conflict
injudicial decisions as to the effect of such a provision
(Hodge Bros. v. Wallace, 129 Wis. 84,108 N. W. 212, 116
Am. St. Rep. 938); but it was expressly ruled by the
Supreme Court of the United States in the case of Chi-
cago Railroad Equipment Co. v. Merchants' National
Bank, 136 U. S. 268, 10 Sup. Ct. 999, 34 L. Ed. 349, that
a similar provision did not of itself cause the notes to
mature upon default in the payment of interest. See,
also, Keene Five Cent Savings Bank v. Reid, 123 Fed.
221, 224, 59 C. C. A. 225; Crissey v. Morrill, 125 Fed. 878,
884, 60 C. C. A. 460. There being no statute in the state
of Minnesota, where the notes were given and payable,
affecting the subject, the decision of the Supreme Court
is controlling in federal courts, as the question relates
to a matter of general commercial law.
< i * * *
"On quite elementary principles, the judgment in this
case was right, and should be affirmed.''
Question 490: Upon what in this case did the maker of the
note contend that it was overdue. What did the Court hold in
that regard 1
(4) Overdue Paper Sold in Breach of Trust.
Case 491. Justice v. Stonecipher and others, 267 Illi-
nois Reports, 448; 108 N. E. Rep., 722.
Facts: Justice contemplating a somewhat extended
absence from his home entrusted to one Stonecipher cer-
tain promissory notes held by him as payee and executed
by various parties, all of which Justice, as payee, in-
dorsed in blank. Stonecipher borrowed $3,080 from
Bridgeport State Bank and pledged these notes as col-
lateral. They were past due when so pledged. Justice
870
NEGOTIABLE INSTBUMENTS
sues Stonecipher and the Bank claiming the bank has no
right to these notes as against him. The Bank had no
notice of any fraud or breach of trust on Stonecipher's
part.
Point Involved: If negotiable paper, so indorsed as
to be payable to bearer, is entrusted to a person for keep-
ing, and such person in breach of trust and without au-
thority transfers it for value to an innocent purchaser
(or pledgee) does the fact that such paper is overdue
when so transferred prevent the purchaser (or pledgee)
from obtaining good title thereto?
Me. Justice Cooke: "* * * In this case plaintiff
in error (Justice) testified that at Stonecipher's request
he indorsed the notes in order to put the title in Stone-
cipher that he might show anyone coming in to make pay-
ments that he had title to them. The plaintiff in error
therefore deliberately vested Stonecipher with all the
indicia of ownership. * * * the negotiability of
commercial paper does not cease with its maturity but it
can still be negotiated by indorsement. * * * the
mere fact that the notes were past due did not constitute
constructive notice to the bank that Stonecipher held
them for a special purpose or that there was any defect
in the title. {Held: Bank has title to the notes su-
perior to that of Justice.)
Question 491: Suppose in this case these notes had not been
indorsed by Justice, and Stonecipher had indorsed Justice's
name, would the bank thereby secure good title? Suppose that
the makers of these notes had paid them before they were trans-
ferred to the bank and the bank acquiring them after maturity
should sue the makers, could their defense of payment be made
against the bank?
(Note: This decision is undoubtedly correct. A purchaser
after maturity is not a holder in due course, and is therefore
subject to defenses that were good against his predecessor in
title. But there w7ere no defenses against this predecessor in
title. The notes were due and owing. No defenses are raised.
HOLDER IN DUE COURSE
871
If Stonecipher had presented the notes for payment to the
maker, they would have paid him as the apparent owner for
he was the party in possession of bearer paper. It is true,
Stonecipher's title was defective, being that of mere custodian,
but his apparent title was that of legal holder.)
§467. (Nego. Instru., Sec. 75.) To be a holder in due
course the negotiable instrument must be properly in-
dorsed to the holder unless bearer paper.
Case 492. Goshen Bank v. Bingham, 118 N. Y. 349.
Facts: The bank gave a check to Brown, who acquired
it by fraud. He transferred it in due course to Bingham
& Co. except the indorsement of the check (it not being
payable to bearer) was overlooked. Before the indorse-
ment was procured, Bingham & Co. had notice of the
fraud.
Point Involved: Whether one who acquires an instru-
ment which cannot be negotiated by delivery, without
the indorsement thereof is a holder in due course and
subject to all defenses of which he has notice prior to
such indorsement.
Parker, J.: "As against Brown, to whose order the
check was payable, the bank had a good defense. But it
could not defeat a recovery by a bona fide holder to whom
the check had been indorsed for value. By an oversight
on the part of both Brown and Bingham & Co. the check
was accepted and cashed without the indorsement of the
payee. Before the authority to indorse the name of the
payee upon the check was procured and its subsequent
indorsement thereon, Bingham & Co. had notice of the
fraud which constituted a defense for the bank as against
Brown. Can the recovery had be sustained?
"It is too well settled by authority, both in England
and in this country, to permit of questioning, that a pur-
chaser of a draft, or check, who obtains title without an
indorsement by the payee, holds it subject to all equities
and defenses existing between the original parties, even
though he has paid full consideration, without notice of
872 NEGOTIABLE INSTRUMENTS
the existence of such equities and defenses. Harrop v.
Fisher, 30 L. J. 283; Whistler v. Forster, 14 C. B. (N. S.)
246; Savage v. King, 17 Me. 301; Clark v. Callison, 7 111.
263; Haskell v. Mitchell, 53 Me. 468; Clark v. Whittaker,
50 N. H. 474; Calder v. Billington, 15 Me. 398; Lancaster
Nat. Bk. v. Taylor, 100 Mass. 18; Gilbert v. Sharp, 2
Lans. 412; Hedges v. Sealy, 9 Barb. 214-218; Franklin
Bank v. Raymond, 3 Wend. 69; Raynor v. Hoagland, 7
J. & S. 11; Muller v. Pondir, 55 N. Y. 325; Freund v. Im-
porters & Trades Bk., 76 Id. 352; Trust Co. v. Nat. Bank,
101 U. S. 68; Osgood v. Artt, 17 Fed. Rep. 575.
11 The reasoning on which this doctrine is founded may
be briefly stated as follows: The general rule is that no
one can transfer a better title than he possesses. An
exception arises out of the rule of the law-merchant, as
to negotiable instruments. It is founded on the commer-
cial policy of sustaining the credit of commercial paper,
being treated as currency in commercial transactions,
such instruments are subject to the same rule as money.
If transferred by indorsement, for value, in good faith
and before maturity, they become available in the hands
of the holder, notwithstanding the existence of equities,
and defenses, which would have rendered them unavail-
able in the hands of a prior holder.
'' This rule is only applicable to negotiable instruments
which are negotiated according to the law-merchant.
"When, as in this case, such an instrument is trans-
ferred but without an indorsement, it is treated as a
chose in action assigned to the purchaser. The assignee
acquires all the title of the assignor and may maintain an
action thereon in his own name. And like other choses
in action it is subject to all the equities and defenses ex-
isting in favor of the maker or acceptor against the prev-
ious holder.
"Prior to the indorsement of this check, therefore,
Bingham & Co. were subject to the defense existing in
favor of the bank as against Brown, the payee.
1' Evidence of an intention on the part of the payee to
indorse does not aid the plaintiff. It is the act of indorse-
HOLDER IN DUE COURSE
873
ment, not the intention, which negotiates the instrument,
and it cannot be said that the intent constitutes the act.
i'The effect of the indorsement made after notice to
Bingham & Co. of the bank's defense must now be con-
sidered. Did it relate back to the time of the transfer,
so as to constitute the plaintiffs holders by indorsement
as of that time ?
 While the referee finds that it was intended both by
Brown and the plaintiffs that the check should be in-
dorsed, and it was supposed that he had so indorsed it,
he also finds that Brown made no statement to the effect
that the check was endorsed; neither did the defendants
request Brown to indorse it. There was, therefore, no
agreement to indorse. Nothing whatever was said upon
the subject. Before Brown did agree to indorse the
plaintiffs had notice of the bank's defense. Indeed, it
had commenced an action to recover possession of the
check.
"It would seem, therefore, that having taken title by
assignment, for such was the legal effect of the trans-
action, by reason of which the defense of the bank against
Brown became effectual as a defense against a recovery
on the check in the hands of the plaintiffs as well, that
Brown, and Bingham & Co., could not, by any subsequent
agreement or act, so change the legal character of the
transfer as to affect the equities and rights which had
accrued to the bank. That the subsequent act of indorse-
ment could not relate back so as to destroy the interven-
ing rights and remedies of a third party.
"This position is supported by authority. Harrop v.
Fisher; Whistler v. Forster; Savage v. King; Haskell v.
Mitchell; Clark v. Whitaker; Clark v. Callison; Lancas-
ter Nat. Bank v. Taylor ; Gilbert v. Sharp, cited, supra 
Question 492: Why was the indorsement omitted in this
ease? Was it afterwards procured? When was it procured
with reference to the knowledge of the fraud by the holder?
When the indorsement was procured did it relate hack? Was
the holder subject to the defense in this case ?
874-
NEGOTIABLE INSTRUMENTS
Case 493. Osgood's Adm'rs v. Artt, 17 Fed. 575.
Facts: May 14, 1856, Artt, executed and delivered to
R. & M. Rwy. Co. his note, payable to the Company or
its order, for $2,500, in five years from May 10, 1856,
with interest, etc. As security therefore, he executed a
mortgage on real estate in Carroll County, Wisconsin.
Afterwards the R. Co. made its bond dated June 10,1856,
acknowledging indebtedness to and promising to pay
Charles Osgood or bearer $2,500, May 10, 1861, with
interest, etc., which contained a provision that to better
secure said bond the company "have assigned and trans-
ferred, and by these presents do assign and transfer to
the holder of the bond, the said note signed by Artt,
together with the mortgage on said real estate. The
Artt note, the bond and the mortgage were attached
together with eyelets. When these papers were delivered
to Osgood, there was no indorsement of the note, which
though afterwards secured in these words, "Racine &
Mississippi Railroad Company, by H. S. Durand, Presi-
dent, was not placed on said note until after Osgood
had learned that the note had been secured from Artt by
fraud, and that also there had been a failure of consid-
eration. Artt, contending that Osgood is not a holder in
due course, seeks to set up these defenses against him.
Osgood did not know of the defenses when he purchased
and received the notes, but learned of them before he
secured the indorsement.
Point Involved: As in the above case, with the addi-
tional question as to what constitutes an indorsement.
Haul ax, J.: "1. It is a settled doctrine of the law-
merchant that the bona fide purchaser for value of nego-
tiable paper, payable to order, if it be indorsed by the
payee, takes the legal title unaffected by any equities
which the payor1 may have as against the payee.
'' 2. But it is equally well settled that the purchaser, if
the paper be delivered to him without indorsement, takes,
by the law-merchant only the rights which the payee has,
and therefore takes subject to any defense the payor
HOLDER IN DUE COURSE
875
might rightfully assert as against the payee. The pur-
chaser in such case becomes only the equitable owner of
the claim or debt evidenced by the negotiable security,
and in the absence of defense by the payor, may demand
and receive the amount due and, if not paid, sue for its
recovery, in the name of the payee, or in his own name,
when so authorized by the local law.
"3. As a general rule the legal title to negotiable
paper, payable to order, passes, according to the law-
merchant, only by the payee's indorsement on the secur-
ity itself. The only established exception to this rule is
where the indorsement is made on a piece of paper, so
attached to the original instrument as, in effect, to become
part thereof, or be incorporated into it. This addition
is called, in the adjudged cases and elementary treatises,
an allonge. That device had its origin in cases where the
back of the instrument had been covered with indorse-
ments, or writing, leaving no room for further indorse-
ments thereon. But, perhaps, an indorsement upon a
piece of paper, attached in the manner indicated, would
now be deemed sufficient to pass the legal title, although,
there may have been, in fact, room for it on the original
instrument.
"4. But neither the general doctrines of commercial
law, nor any established exception thereto, make words
of mere assignment and transfer of such paper—con-
tained in a separate instrument, executed for a wholly
different and distinct purpose—equivalent to an indorse-
ment within the rule, which admits, the payor to urge, as
against the holder of an unindorsed negotiable security,
payable to order, any valid defense which he has against
the original payee.
"5. The transfer of the note in suit, by words of as-
signment in the body of the railroad company's bond,
did not, in the judgment of the Court, amount to an
indorsement of the note, although the bond, note and
mortgage were originally fastened together by eyelets.
The facts set out in the third plea, and sustained by the
special finding, constitute, therefore, a complete defense
876
NEGOTIABLE INSTRUMENTS
to the action, unless, as contended by plaintiffs, the sub-
sequent indorsement, in form, by the railroad company,
after Osgood was informed of Artt's defense, has rela-
tion back to the time when the former, without notice of
such defense, purchased the note for value then paid.
# # *
"I am of the opinion that the facts which came to
Osgood's knowledge prior to the indorsement, and which,
in substance, constitute the defense set out in the third
plea, furnished notice that the company had, by reason
of fraud and failure of consideration, lost its right to
demand payment of the note from Artt. By the indorse1-
ment, after such notice, Osgood could not acquire any
greater rights than the company possessed. He did not
become the holder of the note by indorsement, as required
by the law-merchant, until after he had notice that the
company could not rightfully pass the legal title, so as
to defeat Artt's defense.
 While the adjudged cases are not in harmony upon
some of these propositions, the conclusions indicated are,
in the opinion of the Court, consistent with sound reason,
and are sustained by the great weight of authority.
Question 493: What was the transfer relied on in this case
as equivalent to an indorsement ? In what physical manner
must the indorsement be made to satisfy the rule 1 What is an
allonge ?
§ 468. (Nego. Instru., Sec. 76.) Transferee of holder in
due course as holder in due course.
Case 494. Woodworth et al. v. Huntoon et al, 40 111.
131.
Facts: Purchase of a note negotiable in form, but past
due, from an indorsee thereof, who acquired it before
maturity. Defense that the note was in fact (though not
in form) usurious.
Point Involved: "Whether one who purchases under
circumstances (as after maturity) which would prevent
him from being a holder in due course if he purchased
HOLDER IN DUE COURSE
877
from one subject to defenses, but who takes from a holder
in due course, takes the title of his transferror.
Chief Justice Walker: "* * * A note, tainted
with a fraud or other infirmity, passing into the hands of
an innocent purchaser, not chargeable with notice, and
for a valuable consideration, he acquires it purged of the
defense, and any other person acquiring it of him sue-
ceeds to his rights in the same condition he held them.
A defense to the instrument in the hands of the original
holder, having been thus cut off, is not revived by the note
being again transferred. * * *
Question 494: (1) State the facts, the question presented
and the Court's decision in this case.
(2) A made a note payable to B or order and acquired by
B through fraud. B sold to C, a holder in due course. C
negotiated the note to D, who acquired the instrument after its
maturity, who gave no value, and who had notice of the fraud.
Can D enforce this note against A ?
Case 495. Andrews et aL v. Robertson, 111 Wise.
334.
Facts: The payee of the paper sued on was subject to
the defense of fraud. He transferred to another who
was a holder in due course, and then re-acquired it.
Point Involved: Whether such a party could invoke
the rule in favor of purchaser from a holder in due course
if he was formerly a holder against whom such defense
would have been available.
Marshall, J.:  * * * The further claim is made
that the plaintiffs are bona fide holders of the paper be-
cause they purchased it from their indorsee, who was
an innocent holder thereof, paying full value therefor,
and that the trial Court erred in refusing to permit proof
of such repurchase for value. In fact, they invoke the
familiar common-law rule, which has recently been added
to the statute law of the state, Sec. 1676-28, ch. 356, Laws
of 1899, that the holder of commercial paper may recover
on the strength of the title of a precedent innocent holder,
regardless of knowledge on his part of fraud which would
878
NEGOTIABLE INSTRUMENTS
defeat it in the hands of the payee named therein. Yer-
beck v. Scott, 71 "Wis. 59, 64. That rule is stated in the
books, particularly in judicial opinions, generally in such
a way as to lead one astray who is not familiar with the
law on the subject, as to the extent of its application. It
is not a universal rule. It does not apply to a case like
this, where the payee of the paper, being so circum-
stanced at the start that he cannot recover thereon,
transfers it to an innocent third party for value and sub-
sequently purchases it back for value. Under such cir-
cumstances the payee cannot lean for support on the inno-
cence of his vendee. His position is the same when he
comes into possession of the paper the second time as
when he first possessed it. One would say that must be
the law without reference to authority; otherwise a per-
son might become possessed of a promissory note of an-
other by the grossest of frauds and by selling it to an in-
nocent third person for value and subsequently repur-
chasing it enforce the same against the maker. The law
contains no such open door as that for the successful per-
petration of fraud. * * *
Question 495: How did this case differ in fact from the
one just preceding? Did this difference in fact produce a dif-
ferent outcome? Why?
§ 469. (Nego. Instru., Sec. 77.) Burden of proof as to
whether one is a holder in due course.
Case 496. Uniform Negotiable Instruments Law, Sec.
59.
'4 Every holder is deemed prima facie to be a holder in
due course; but when it is shown that the title of any per-
son who has negotiated the instrument was defective,
the burden is on the holder to prove that he, or some
other person, under whom he claims acquired title as
holder in due course. But the last mentioned rule does
not apply in favor of a party who became bound on this
instrument prior to the acquisition of such defective
title.
Question 496: M makes a note to order of P. P indorses to
H. H sues M. M seeks to set up a defense not good against
HOLDER IN DUE COURSE
879
H if he is a holder in due course. Does M have to prove H is
not a holder in due course or H have to prove that he is a
holder in due course ?
§ 470. (Nego. Instru., Sec. 78.) Amount recoverable
by holder in due course.
Case 497. Cromwell v. County of Sac, 96 United
States, 51.
Point Involved: Whether a purchaser for value is, in
the case of defense made by the party liable, to be limited
in his recovery to the amount paid by him.
Mr. Justice Field : "The plaintiff, therefore, holds the
bonds and the subsequent coupons as his vendor held
them, freed from all infirmities attending their original
issue. Nor is he limited in his recovery upon them, or
upon the other two bonds, as contended by counsel for
the county, to the amount he paid his vendor. Clark had
given full value for those he purchased, and could have
recovered their amount from the county, and hi's right
passed to his vendee. But independently of the fact of
such full payment, we are of the opinion that a purchaser
of a negotiable security before maturity, in cases where
he is not personally chargeable with fraud, is entitled to
recover its full amount against the maker, though he may
have paid less than its par value, whatever may have
been its original infirmity. We are aware of numerous
decisions in conflict with this view of the law; but we
think the sounder rule, and the one in consonance with
the common understanding and usage of commerce, is
that the purchaser, at whatever price, takes the benefit of
the entire obligation of the maker. Public securities, and
those of private corporations are constantly fluctuating
in price in the market, one day being above par and the
next below it, and often passing within short periods
from one-half of their nominal to their full value. Indeed,
all sales of such securities are made with reference to
prices current in the market, and not with reference to
their par value. It would introduce, therefore, incon-
880
NEGOTIABLE INSTRUMENTS
ceivable confusion if bona fide purchasers in the market
were restricted in their claims upon such securities to the
sums they had paid for them. This rule in no respect
impinges upon the doctrine that one who makes only a
loan upon such paper, or takes it as collateral security
for a precedent debt, may be limited in his recovery to
the amount advanced or secured.
Question 497: Is a holder in due course limited in his re-
covery to the amount paid him by in case there are defenses in
the paper to which by reason of the fact he is a holder in due
course, is he not subject? Why?
Case 498. Jefferson Bank v. C. W. L. Co., 123 S. W.
(Tenn.) 641.
Point Involved: Same as in above case. Construe-
tion of Negotiable Instruments Act.
Facts: Suit on a note acquired by the plaintiff, Jeffer-
son Bank, as indorsees of the payee, against the makers
the Chapman-White-Lyons Co.
Defense: That the note was executed by the defend-
ant's vice-president in the company's name for un-
authorized purposes, and secured by the payee with
knowledge thereof and by fraud and without consider-
ation. Defense, also, that the plaintiffs acquired the note
at discount and ought not, even if not subject to the
above defense, to recover more than it paid for it.
McAllister, J.: "* * * It is said, however, * * *
that in no event is the complainant entitled to recover
exceeding the amount it paid for the note, with interest.
It appears the decree below was for the full amount it
paid for said note with interest and attorney's fees
# * -guj. we are 0£ 0pini0n that this question is now
settled by Sec. 57 of the Negotiable Instruments Law
which provides that the innocent holder may enforce pay-
ment of the instrument for the full amount thereof
against all parties liable thereon.
Question 498: What does Uniform Negotiable Instruments
Law provide as to amount of recovery by holder in due course?
CHAPTER 59
DEFENSES AGAINST HOLDER IN DUE COURSE
A. Defenses Not Available Against Holder in Due
Course—Personal Defenses.
§ 471. In general.
§ 472. Payment before maturity.
§ 473. Set-off.
§474. Want of consideration.
§ 475. Failure of consideration and breach of contract.
§476. Fraud in consideration.
§ 477. Duress.
§ 478. Illegality of consideration.
§ 479. Lack of authority of agent known to payee.
§ 480. Lack of authority of partner.
§ 481. Lack of authority of corporate officer.
§471. (Nego. Instru., Sec. 79.) In general.
(Note: The general rule is that a holder in due course takes
free from equities and defenses between the original parties.
We have already emphasized the fact that the inquiry whether
one is a holder in due course becomes material only when the
title or right of the party from whom he acquired the paper is de-
fective. If A makes a note to order of B and C shows up as
the indorsee and owner thereof it is immaterial to A whether
C acquired the paper as a gift or for value, and if for value,
what value, and whether he got it before or after maturity,
unless A has defenses he would have made against B. Then C
must prove that he is a holder in due course in order to shut
out these defenses as against him. Paper would fall short of
its function as negotiable paper if it passed to purchasers sub-
ject to the adjustments between the original parties. But there
are some unusual defenses that even a holder in due course is
subject to.)
881
882
NEGOTIABLE INSTRUMENTS
§ 472. (Nego. Instru., Sec. 80.) Payment before
maturity.
Case 499. Wilcox, Gibbs & Co. v. Aultman, 64 Georgia,
544.
Facts: The facts are given in the opinion.
Point Involved: "Whether payment before maturity is
a good defense against a holder in due course.
Warner, Ch. J.: '' This was an action brought by the
plaintiffs against the defendant on a draft drawn by
him upon Messrs. Adams & Bareymore, payable to his
own order, and endorsed by himself, for the sum of
$88.70 dated January 20, 1870, and due on the 6th day
of November thereafter, * * *. The defendant
pleaded payment. * * *
"It appears from the evidence * * # that the
plaintiffs became the bona fide holders of the draft before
its maturity for a valuable consideration, * * * re-
ceiving the same from Lloyd & Sons. The defendant
testified that in the fall of 1870 he paid the draft to Lloyd
& Sons, who told him that they did not have it but would
get it and send him a receipt in three days, and gave de-
fend ant a receipt in full payment of the draft.
* * when the maker of a negotiable draft or
note pays it to one who has not the possession of the
paper at the time of such payment, so as to enable him to
take it up, but takes a receipt for the money so paid in-
stead of taking up his draft or note, such receipt will not
protect him from the payment of the draft or note, when
sued by a bona fide holder thereof before due. * * V
• Question 499: M makes a note to order of P for $500 due
three months after date. M pays the amount of the note to P
who says he will cancel the note and send it to M. Before its
maturity P sells the note to II who does not know that it has
been paid. Is P's plea of payment good against H? Suppose
H acquired after maturity, would it in that case be good against
H?
REAL DEFENSES
883
§ 473. (Nego. Instru., Sec. 81.) Set off.
(Note: The party liable on a negotiable instrument cannot
oppose "set offs or counterclaims against a holder in due
course.)
§ 474. (Nego. Instru., Sec. 82.) Want of consideration.
(Note: That the negotiable instrument is unsupported by
consideration, is not a defense against a holder in due course.
In this connection reference is made to the subject of accom-
modation paper, supra, Sec. 446.)
§475. (Nego. Instru., Sec. 83.) Failure of consider-
ation and breach of contract.
Case 500. First Nat. Bk. v. Skeen, 101 Mo. 683.
Facts: Suit on a note reading as follows:
"$417.00 Holden, Mo., July 7, 1884.
"For value received, on or before the first day of Sep-
tember, 1885, the undersigned promise to pay to the or-
der of the Springfield Engine & Thresher Company, four
hundred and seventeen dollars, payable at Farmers' and
Commercial Bank, Holden, Mo., with interest at eight
per cent, from date until due, and ten per cent, after due.
J. W. F Faucher,
W. A Skeek,
The pleadings set up that plaintiff was a purchaser
for value before maturity by indorsement from the
payees. Defendant offered evidence tending to show
that the note was given for machinery on a contract of
sale containing a warranty and that the consideration
for which the note was given had failed.
Point Involved: Whether failure of consideration can
be set up against a holder in due course.
Barclay, J.: «* * *
"The decision of the foregoing point leaves little fur-
ther to be said. Under the pleadings, the execution of
the note and its transfer to plaintiff- were admitted.
When the latter produced the note, it amounted to evi-
884 NEGOTIABLE INSTRUMENTS
dence tending to prove that it had been acquired before
maturity and for value. When plaintiff rested, defend-
ant by his own evidence established that plaintiff had
purchased the note, without notice of any failure of con-
sideration, before maturity. Thereafter, defendant's
offer to prove the failure of consideration was properly
rejected. It was irrelevant to the issues made by the
pleadings, in view of the facts already before the Court,
as disclosed by the proofs of both parties. In that state
of the case, the Court correctly directed the jury to re-
turn a verdict for plaintiff on the undisputed facts.
Question 500: Can failure or want of consideration be set
up against a holder in due course ?
(See also Siegel v. Bank Case 403, supra.)
§476. (Nego. Instru., Sec. 84.) Fraud in the consider-
ation.
Case 501. Grooms v. Olliffe, 93 Georgia, 789.
Facts: They are stated in the opinion.
Point Involved: Whether fraud in the inducement or
consideration for which the note was given is a good de-
fense against a holder in due course. The difference
between this fraud and 4'fraud in the procurement.
Lumpkin", J.: "Olliffe & Co. brought suit in a Justice's
Court upon a promissory note signed by Grooms, en-
dorsed by Outland and payable to Donaldson or bearer.
The defendants pleaded that the note was procured by
fraud, for that it was given for the purchase of a mare
sold to Grooms by one Warters, who represented that the
animal was perfectly sound in every respect, when in
point of fact she was, both before and at the time of pur-
chase diseased and totally worthless, all of which was
well known to Warters, who fraudulently made the rep-
resentations above mentioned for the purpose of deceiv-
ing Grooms and did thus deceive him into making and
delivering the note to Donaldson. [There was a statute
in Georgia making "fraud in the procurement a good
REAL DEFENSES
885
defense against every one. It was sought to make this
statute of avail in the present case. The Court decides
that fraud in the procurement does not mean the fraud
brought out in this case.] We feel very sure that the
words ("fraud in its procurement") were not intended
to apply to cases of deceit, bad faith, or false representa-
tions used and made for the purpose of inducing one to
enter into a contract, and to make and deliver his promis-
sory note, knowingly and intentionally as an evidence of
the same. It follows, we think, that fraud in these re-
spects does not affect a bona fide holder for value, who
obtains a negotiable promissory note before its maturity,
without notice of any defect or defense. Such holder will
be protected, even though the note was entirely wdthout
consideration, and was given as a result of the basest
fraud, practiced upon the maker in inducing him to make
the contract evidenced by the note.
Question 501: What is the difference between "fraud in
procurement'' and fraud in consideration or inducement ? What
were the facts constituting fraud in this case ? Is fraud of such
character a defense against a holder in due course?
§477. (Nego. Instru., Sec. 85.) Duress.
Case 502. Mack v. Prang, 79 N. W. 770, 104 Wis. 1.
Facts: A wife executed her note and a mortgage on
her separate property under threats of criminal prose-
cution of her husband for embezzlement. She was greatly
alarmed at these threats, had several fainting spells and
executed the note to save her husband from jail.
Point Involved: Whether duress is merely a personal
defense available as between the parties, but not good as
against a holder in due course.
Winslow, J.: "* * * There is some conflict in
the authorities upon, the question whether the defense
of duress by threats can be successfully urged against a
bona fide holder for value of a negotiable paper, but the
better opinion and weight of authority, is that such de-
886 NEGOTIABLE INSTRUMENTS
fense stands upon the same footing as the defenses which
may be made as between the original parties, but is cut
off when the paper reaches the hands of a bona fide
holder. Fairbanks v. Snow, 145 Mass. 153, 13 N. E. 596;
Bank v. Bntler, 48 Mich. 192,12 N. W. 36; Clark v. Pease,
41 N. H. 414; Beats v. Neddo, 1 McCrary, 206, 2 Fed. 41;
Martineau v. McCollum, 3 Pin. 455, 4 Am. & Eng. Ency.
Law (2d Ed.) p. 334. Duress which consists of threats
of imprisonment of a husband or child is a species of
fraud, which renders the contract made under its influ-
ence voidable only and not void. Bank v. Kusworin, 91
Wis. 166, 64 N. W. 843. If it be simply a voidable con-
tract, then it follows naturally that, when the contract
consists of negotiable paper, the defense is cut off by
transfer to a bona fide purchaser before maturity in the
same manner that other defenses 'upon the ground of
fraud are cut off. * * *
Question 502: State the facts in this case and whether the
defense of duress can be made as against a holder in due course.
§ 478. (Nego. Instru., Sec. 86.) Illegality of
consideration.
Case 503. Union Trust Co. v. Preston National Bank,
136 Mich. 460.
Facts: The question was whether the laws of Michi-
gan making it unlawful for any employe of a bank to
certify a check unless the amount thereof actually stood
to the credit of the drawer, made such check void in the
hands of a holder in due course.
Point Involved: Whether a negotiable instrument is-
sued in breach of the positive statutory law making the
act illegal, is enforceable in the hands of a holder in due
course.
Carpenter, J.: "* * * In accordance with these
principles, we would assume, and, as heretofore stated,
we do assume, that the legislature intended to make such
contract void between the parties; and we would likewise
REAL DEFENSES
887
assume that it did not intend, if the contract took the
form of negotiable paper, to affect its validity in the
hands of a bona fide holder. But plaintiff's counsel con-
tend that it is settled by authority that, when a contract
is prohibited and made a crime by statute, such a con-
tract, if it takes the form of negotiable paper, is void in
the hands of a bona fide holder; and they rely upon the
following authorities: * ■ * *
"* * * The decisions referred to do not sustain the
proposition for which they are cited. The section of
Daniel cited has reference to cases where an express
statutory provision declares a note void. We cannot fol-
low this authority without repudiating our own decision
of Vinton v. Peck, 14 Mich. 287, and the almost un-
animous authority of other courts,* * *
<<* * # yyb conclude, therefore, that, though the
making of a contract is prohibited and made a crime by
statute, yet that contract, if it takes the form of nego-
tiable paper, is valid in the hands of a bona fide holder
for value. * * *
"If the section is construed as the plaintiff contends—
if checks duly certified are void in the hands of bona fide
holders for value, because the amount thereof did not
stand to the credit of the drawer on the books of the
bank—this consequence follows: Certified checks, in-
stead of being, as heretofore, the negotiable paper of the
bank, and passing as current upon the faith of the bank's
credit, will pass, if at all, only upon the credit of the
particular bank official who certified it. Every person to
whom a certified check is offered will be called upon to
determine, not the credit of the certifying bank, not the
authority of the certifying official, but the integrity and
diligence of that official. Though one may have all con-
fidence in such integrity and diligence, he may hesitate
to take the check, because he fears that others to whom
he may wish to transfer it lack such confidence. It will
result, therefore, that certified checks, instead of being
regarded in commercial circles with credit and favor, as
heretofore, will be regarded with a degree of suspicion,
888
NEGOTIABLE INSTRUMENTS
and are likely to be discredited. If the legislature in-
tended this consequence—and they must have intended
it if they intended that the act should receive the con-
struction contended for by plaintiff—it seems strange
that they left their intent to be ascertained as a matter
of doubtful inference; it seems strange that they still
left to banks the power of certifying checks, without
any clear suggestion that such power was so greatly
limited. 'If the legislature intended the consequences
claimed, we should expect it to say so.' (Press Co. v.
Bank, 7 C. C. A., at page 249, 48 Fed. 322.)
(Note: Some forms of illegality, in some states, make a nego-
tiable instrument absolutely void for all purposes, but this is not
true unless the statute positively so declares.)
Question 503: If a negotiable instrument arises out of an
illegal transaction between A and B is a holder1 in due course
subject to the defense of illegality?
§479. (Nego. Instru., Sec. 87.) Lack of authority of
agent known to payee.
(Note: If a person signs as agent of another, the alleged
principal can of course repudiate as to all the world unless he
has actually conferred authority or created an appearance of
authority to do the act in question upon which the person in-
volved relied. If there was an agency in which a general power
to bind the principal on negotiable paper was actual or apparent,
then a particular instrument executed for improper purposes
(as for instance a personal loan to the agent) would be enforce-
able against the principal by a purchaser whose reliance on the
known authority led him to purchase the paper in question.)
§ 480. (Nego. Instru., Sec. 88.) Lack of authority of
partner.
Case 504. Dowling v. Exchange Bank, 145 U. S. 512.
Facts: Suit by holder in due course on note given by
a partner of a non-trading concern without the knowl-
edge or benefit of his co-partner. The Court below held
that the partners were liable on this note to the holder
REAL DEFENSES'
889
in due course, and so instructed the jury. The contention
of defendant is that a member of a non-trading partner-
ship is not liable upon the negotiable paper issued by a
co-partner, unless authority had been given in the par-
ticular instance, or unless the firm had so carried on its
business that it might be reasonably assumed that the
partner issuing the paper had authority from the other
to do so, and that this was a fact to be determined by the
juryy
Point Involved: The power of a member of a non-
trading partnership to bind the firm on its negotiable
paper, in favor of a holder in due course of such paper.
"It is not disputed that the execution by Edward P.
Ferry, in the name of P. H. White & Co., of the notes in
suit was without express authority of his partners, and
that neither of the notes was given or used in the busi-
ness of that firm. The primary question therefore is,
whether, for the protection of the plaintiff a bona fide
purchaser for value, it will be conclusively implied, as
matter of law, from the nature or course of the firm's
business, that Edward P. Perry had authority from his
partners to make those notes or either of them.
"Mr. Justice Clifford, speaking for the Court in Kim-
bro v. Bullitt, 22 How. 256, 268, said that 4 wherever the
business, according to the usual mode of conducting it,
imports, in its nature, the necessity of buying and selling,
the firm is then properly regarded as a trading partner-
ship, and is invested with all the powers and subject to
all the obligations incident to that relation,' citing among
other cases, Winship v. Bank of United States, 5 Pet.
529, 561. Mr. Justice Story said that the doctrine that
each partner may bind the firm by bills of exchange,
promissory notes and other negotiable instruments is
generally limited to partnerships in trade and commerce,
and does not apply to other partnerships unless it is
the common custom or usage of such business to bind
the firm by negotiable instruments, or it is necessary for
the due transaction thereof. Story on Partnership, sec.
102, a. * * *
890 NEGOTIABLE INSTRUMENTS
"It is very clear that the articles of agreement between
Ferry, White and Dowling did not create a partnership,
each member of which had, nnder the settled rales of
commercial law, and as between the firm and those deal-
ing with it, authority to give negotiable paper in its
name. The firm was of the class denominated in many
adjudged cases as non-trading or non-commercial firms,
the members of which could not he held, as matter of
law, and by reason of the nature of the partnership busi-
ness, to have authority to execute negotiable instruments
in the name of the firm.
"We quite agree with the learned judge who presided
at the trial that the liability of a partnership upon nego-
tiable instruments executed by one partner in the name
of the firm exists not only where the firm is a trading or
commercial partnership, but' where the actual course of
business pursued adopts the practice of issuing the mer-
cantile paper of the firm to accommodate its necessities
or convenience whenever the occasions occur.' But the
difficulty in this case is that the jury were not permitted
to determine, from a consideration of all the circum-
stances of the case, what, in view of the admitted nature
of the business of F. H. White & Co., was necessary and
proper to its successful operation, what was involved in
the usual and ordinary course of its management by
those engaged in it, or what should be inferred from the
actual course and conduct of the partnership, so far as
it was known, or ought reasonably to have been known,
to the parties sought to be charged with liability on the
notes in suit. We do not deem it necessary to make a
detailed statement of the numerous facts disclosed by
the evidence, or to suggest what inference might be
drawn from them. It is sufficient to say that the issue
as to whether the defendants were estopped to dispute
the authority of Edward P. Ferry to make the notes in
suit, in the name of F. H. White & Co., was one peculiarly
for the jury, under all the facts indicating the nature,
necessities, and course of business of the firm, and under
proper instructions from the Court as to the legal prin-
REAL DEFENSES
891
ciples by which they should be guided in determining
the case.
Question 504: (1) Does a partner in a trading partner-
ship have apparent authority to bind the firm for firm purposes
on negotiable paper ? If such paper is issued for other purposes,
can this be set up against a holder in due course?
(2) When can a holder in due course hold a partner in a
non-trading partnership on negotiable paper wrongfully issued
by his partner?
§481. (Nego. Instru., Sec. 89.) Lack of authority of
corporate officer.
Case 505. Alton Manufacturing Co. v. Garrett Bib-
lical Institute.
(Set out under § 757, post.)
B. Defenses Available Against a Holder in Due Course
—Real Defenses.
§ 482. Real defenses defined.
§ 483. Personal incapacity of defendant.
§ 484. Forgery.
§ 485. Material alteration.
§ 486. Fraud in execution.
§ 487. Illegality which under statute makes instrument void in every
person's hands.
§ 482. (Nego. Instru., Sec. 90.) In general.
(Real defenses are called real (re-al) "because they attach to
the res, i. e., the instrument itself, regardless of the merits or
demerits of the plaintiff. A purchaser for value without notice
is therefore powerless against a real defense. (Ames, Cases
on Bills and Notes, Vol. II, p. 811.) The real defenses are
defenses that go not to the merits or equity of the transaction
but consist in some extrinsic claim—lack of capacity, forgery,
alteration, etc. They are, we may say, unusual defenses if we
speak comparatively.)
892
NEGOTIABLE INSTRUMENTS
§ 483. (Nego. Instru., Sec. 91.) Personal incapacity of
defendant.
Case 506. Hosier v. Beard, 54 Ohio St. 398.
Facts: Beard while insane, but not yet so declared
judicially, gave a promissory note to one Glathart who
sold it in due course to Hosier, the present plaintiff. De-
fense, insanity at the time of the execution of the note.
Point Involved: Whether the maker of a note may
defend against a bona fide holder that he was insane
when he gave the note.
Williams, C. J.: "The material question then is
whether that rule of commercial law which protects nego-
tiable paper in the hands of a bona fide holder, who has
acquired it before its maturity, for value, is applicable
to such paper signed by persons who at the time were
non compos mentis, where there has been no ratification
of it; and that it is not, is well settled. Such paper being
invalid, except to the extent that it is founded upon a
consideration of necessaries, or other valuable consid-
eration, actually furnished, an action dissociated from
such consideration cannot be maintained upon it, when
the incapacity of the maker is shown; and the quality
of negotiability does not attach to it, though made nego-
tiable in form; and every holder of such paper is charge-
able in law with* notice of the status of the maker as it
existed at the time of its execution, and stands, there-
fore, in no better position, so far as his right of action
against the maker is concerned, than the payee from
whom he obtained it; and a want of actual knowledge,
when he received the note, of the maker's mental con-
dition when it was signed, makes no difference in that
respect. So far as we have been able to discover, the
authorities uniformly maintain that the paper of per-
sons non compos [insane], infants, and feme coverts
[married women] at common law, all resting upon much
the same principle, is not within the commercial rule
which protects a bona fide holder of a negotiable note,
REAL DEFENSES
893
received before it became due, from the defenses which
the maker might have made against the payee; and that,
in defense to such paper in the hands of such a holder,
the maker's incapacity to execute it may be shown.
Question 506: What was the point at issue in this ease ? Did
it prevail ? Why ?
(2) Suppose the maker in this case had been a minor. Would
the defense have prevailed?
§ 484. (Nego. Paper, Sec. 92.) Forgery.
Case 507. Ehrler v. Braun, 120 Illinois, 503.
Mulkey, J.:  * * * That the notes * * *
are forgeries we think is established by the decided
weight of evidence. * * * Conceding, then, as we
must, that the notes in the hands of the appellant are
forgeries, it is very clear that the fact that she is a bona
fide holder for value cannot avail her anything unless
appellee has so acted in •respect to them as to estop him
from interposing their original infirmity as a defence,
* # * > >
Question 507: Is forgery a good defense against a holder in
due course? Might there be circumstances under which the de-
fense would.not be good?
§485. (Nego. Instru., Sec. 93.) Material alteration.
Case 508. Merritt v. Boyden, 191 111. 136.
Facts: Suit was brought on a promissory note, read-
ing as follows:
"1300. Kewanee, Illinois, Oct. 4, 1897.
One year after date I promise to pay to the order of
ourselves thirteen hundred dollars at Kewanee, 111.
Value received, with interest at the rate of seven per
cent per annum.
(sd.) L. Silverman,
H. Clay Merritt.
Indorsed on back:
"L. Silverman.
H. Clay Merritt.
894
NEGOTIABLE INSTRUMENTS
Boyd en & Son paid $1300 for the note, acquired it be-
fore maturity and had no notice of any alteration. The
defense was based on the alternative of two theories:
(1) That the note as originally delivered contained the
figures "$100 in the margin, and the words "one hun-
dred dollars'' in the body of the note, and that the figures
"$100 were altered to read "$1300, and the word
"one before "hundred was erased, and the word
"thirteen inserted in its stead; or
(2) That the word "one was not in the body of the
note, hut that there was a blank space in which the word
"thirteen had been inserted.
The Court in the course of its opinion said: "First,
If the note was altered by (the first method) then the
alteration amounted to a forgery and appellant is not
liable on the note, even though appellees were bona fide
purchasers thereof for value without notice or knowl-
edge of the change. If the amount named in the note
is raised by erasing what is written, such alteration is
a material one, and the note is thereby vitiated so as
to become void. * * * Where a note is complete
at the time when it is signed by the maker, its subse-
quent alteration by raising the amount thereof through
obliteration of the same by the use of any chemical
process, or other ingenious device, without the knowl-
edge or consent of the maker, will discharge him from
liability upon the note. * * * (The Court found
this theory unsupported by the evidence.)
"The second theory of the defense * * * was
that, when he signed and endorsed the note, there was a
blank space before the word 'hundred' and that this
blank space was subsequently filled by inserting the word
'thirteen' therein without the knowledge or consent of
the appellant. * * * When the maker of the note
has, by careless execution of the instrument left room
for an alteration to be made by insertion without de-
facing the instrument or exciting the suspicion of a
careful man, and the instrument by reason of the op-
portunity thus afforded is subsequently filled up with a
REAL DEFENSES
895
larger amount than that which it bore at the time it
was signed, the maker will be liable upon it as altered
to any bona fide holder without notice. (This left the
contention that the marginal figures had been altered
to be disposed of. For even though the makers of the
note were negligent as to the body of the note, the mar-
ginal figures must have been erased and changed. As
to .that the Court said:) "The marginal figures have
been held to be not part of the instrument, but to be
intended merely as a convenient index, and as an aid to
remove ambiguity or doubt in the instrument itself. The
alteration or erasure of the marginal figures is an im-
material alteration and will not affect the rights of the
holder of the instrument.
Question 508: (1) What were the theories of the defense?
How were they disposed of ?
(2) What did the Court say with reference to .the duty of a
maker of negotiable paper to fill in blank spaces, so that the
check could not be easily altered? (For another view, see the
next case and note following same.)
Case 509. Broad Street Bank v. National Bank of
Goldsboro, 112 S. E. (N. S.) 11, 22 A. L. R. 1124.
Facts: One Massey, a man of business affairs and
living in Richmond, Virginia, well known there and
known to some of its banks, among them the Broad
Street Bank, on or about the 18th of June, 1918, was
in Goldsboro, and after regular banking hours went to
the defendant bank, the National Bank of Goldsboro
and requested Norwood as President of such Bank to
issue to him for New York Exchange checks for $2, $6,
$2 and $3 respectively, payable to said Massey. Nor-
wood wrote out said amounts in ink on ordinary bond
paper, not sensitized and without use of protectograph.
That Massey raised these drafts to the total sum of
$40,000, using a protectograph himself and negotiated
the drafts so altered to plaintiff bank (the Broad Street
Bank) for value. The Broad Street Bank sues the Na-
tional Bank of Goldsboro on the ground that in not using
896
NEGOTIABLE INSTKUMENTS
sensitized paper and a protectograph which are in com-
mon and usual use by banks, the payee of the drafts
was enabled thereby to alter them, and. drawer bank
should therefore be chargeable with the loss.
Hoke, Justice, * # * "the complaint alleges that
these checks for the smaller amounts were executed
on the ordinary paper of the bank with lithograph forms,
the spaces are filled out by writing in ink, signed by
the president of the defendant bank, and delivered to
the payee as completed instruments. And on these con-
trolling facts in the transaction, the great weight of
well considered authority on the subject is against the
liability which plaintiff now seeks to enforce [citing
cases].
[The court goes somewhat extensively into a review
of the cases which hold that an issuer of a completed
negotiable instrument is under no duty to cancel spaces
that are not filled up by the writing; and that, therefore,
a holder in due course who purchases the instrument
after the spaces have been fraudulently filled in, has no
case against the issuer, except upon the instrument as
originally drawn. The court concludes that these cases
are in accordance with the great weight of authority,
and concludes that upon their authority the defendant
bank in this case is not liable upon the facts presented.
Chief Justice Clark delivered a strong dissenting
opinion.]
(Note: The weight of authority is, as the above case sets
forth, that if a person issuing negotiable paper which is complete
in form, that is, is without blanks that are intended to he filled
up by the holder, but which has spaces in it which are un-
cancelled and in which a person may write additional words,
such person is not liable upon the instrument as fraudulently
altered by the filling in of such spaces. While this is the
weight of authority and is supported by three recent cases
which are decided under the Negotiable Instruments Act, it seems
to the writer that the minority view is the sounder and better
view, and that the courts who do adopt the majority view are
REAL DEFENSES
897
not recognizing a very great evil in our national life which
strenuous efforts are required to overcome. It is well known that
the losses by forgery and alteration run annually into vast sums
of money. Bankers and business men all recognize the fact
that issuers of negotiable instruments should exercise great
care in the drawing of the paper. Rules are promulgated such
as "Cancel out all blank spaces, etc. But comes along the
Court and says: "You do not have to cancel them out; you
do not have to presume that a forgery will be committed. You
are entitled to presume that men are honest and will not fraud-
ulently alter your paper. The New York Court says: "It
would be a stigma and reflection upon the character of the
mercantile community and constitute an intolerable reproach
of which they might well complain as without justification in
practical experience or the conducj; of business. That there are
miscreants who will forge commercial paper by raising the
amount originally stated in the instrument is too true. * * *
Well, if it be too true, let us seek to overcome it. Surely it is
little to ask of one who puts out paper that is intended to
circulate that by a flourish of his pen he cancel out spaces that
"miscreants may otherwise fill in. Alteration cannot be pre-
vented; but the ordinary precaution of erasing spaces is not a
hardship on any one. Surely if a corporation puts out a bond
issue we would expect skill and good workmanship in the form
and appearance of the bond. Negotiable instruments are bond
issues, and a little care in their execution to meet the well
known and growing evil of alteration may well be expected of
those who issue negotiable paper. The law ought to be pro-
gressive and do its part in fostering sound business customs.
The argument that a person need not anticipate that a crime
will be committed, and that it is the alteration and not the
leaving of the spaces which is the proximate cause cf the loss
would seem to apply equally to other situations to which it is
never applied. If one places a certificate of stock indorsed in
blank with a depositary for safe keeping, and the depositary
sells it in violation of his trust, why could it not be said and
with as great a show of indignation that the owner does not
need to anticipate such breach of trust? But it is said in such
cases the owner has clothed the other with apparent ownership
or apparent authority. True, but need he anticipate a breach of
trust or the commission of a crime? Yes, he must, and he loses
by that breach of trust or crime. If so, there, why not here?)
898 NEGOTIABLE INSTRUMENTS
§486. (Nego. Instru., Sec. 94.) Fraud in execution.
Case 510. Auten v. G-runer, 90 Illinois, 300.
Facts: Suit by indorsee of a note signed by defend-
ant. The payee of the note was a traveling peddler,
selling churns for $10.00, one of which defendant pur-
chased and was asked to sign a note for ten dollars at
six months as the price thereof. He read the note twice
and saw that it was for ten dollars. By some trick, that
he could not- explain, a note for $300 was inserted in
the stead of the note read by the defendant, and his
signature thereby obtained.
Point Involved: Whether fraud in the execution or
procurement, i. e., in the nature of a trick, by which the
signature is obtained to a different instrument than one
meant to sign, is a good defense against a holder in due
course.
Me. Justice Scott : "* * * Adhering as we do to
what has been said in our former decisions, as to the de-
gree of caution to be observed by the maker of negotiable
paper before he will be permitted to defend against his
note in the hands of an innocent assignee before matur-
ity on the ground it was obtained by fraud and circum-
vention, still, we think the evidence in this record does
not show defendant omitted to observe due care, or that
he was guilty of such negligence as ought, equitably, to
estop him from defending against the note in suit. He
bought a churn from a stranger for the use of his family,
for the sum of $10, and supposed he was giving his
note for that amount. Observing unusual care he twice
read the note and could discover nothing wrong about
it. That he was tricked into signing the note in con-
troversy was no fault of his, and he does not even know
how it was done.''
Question 510: What is fraud in the execution? Is it a good
defence against a holder in due course ? What duty or care is
on the maker ?
(Note: Where a person is induced to sign a negotiable in-
strument upon representations that it is an instrument of a
KEAL DEFENSES
899
different character, the rule in most states is, under statute in
some of them, that he is not liable if he was not negligent. This
is variously termed "fraud in the procurement, "fraud in
the execution, "fraud in the inception. What contsitutes
negligence is not so easy to state. Not reading it when one
could have read it, or not having it read, when one who cannot
read could have had it read by a third person, is generally con-
sidered negligence. But there are tricks and devices which
precaution cannot avail against. In some states, one is. liable
in any event without regard to care on the principle that if
loss must fall upon one of two innocent parties, let it fall upon
the one who made it possible. First Nat. Bank v. Johns, 22 W.
Va. 520.)
§487. (Nego. Instru., Sec. 95.) Illegality which under
statute makes instrument void in every person's hands.
Case 511. Alexander v. Hazelrigg, 123 Kentucky Be-
ports, 677, 97 S. W. 353.
Facts: Hazelrigg delivered to Desha Lucas the fol-
lowing instrument:
"1,592.90. Mt. Sterling, Ky., September 14, 1904.
Sixty days after date we jointly and severally promise
to pay to Desha Lucas or order, fifteen hundred and
ninety-two and 90/100 dollars, negotiable and payable
at the Montgomery National Bank, Mt, Sterling, Ky.,
value received, with interest at six percent per annum.
(Signed) John W. Hazelrigg.
Geo. Alexander & Co. bring suit upon this instrument
alleging that this note was indorsed by the payee, Desha
Lucas, and negotiated to plaintiff as a holder in due
course.
Defendant, Hazelrigg answers that "the note sued
on herein was executed to Desha Lucas in payment of
a bet or wager which was lost upon the result of a horse
race, and the consideration for the execution thereof
under the law of Kentucky, is vicious, illegal and void,
and which defendant relies on and in bar of any recovery
herein. Plaintiff demurred to this plea, that is, ques-
tions its legal sufficiency. The court sustained the plea
and entered judgment in favor of defendant. Plaintiff
appeals.
900
NEGOTIABLE INSTRUMENTS
Nunn, J.: "* * * It has been the policy of this
state to suppress gaming, and the statutes making gam-
ing contracts void are founded upon what the Legisla-
ture has for many years deemed to be sound policy. It
is inconceivable that the General Assembly, in the pas-
sage of the Act of 1904 [the Uniform Negotiable Instru-
ments Law] for the protection of innocent holders of
negotiable instruments intended to or did repeal Section
1955, Ky. St. 1903, which declares all gaming contracts
void. In our opinion, the disappointment now and then
of an innocent holder of a negotiable instrument would
not be as hurtful and injurious to the best interests of
the state as the removal of the bar from gaming con-
tracts. * * *
''For these reasons the judgment of the lower court
is affirmed.
Question 511: Was the plaintiff in the above case a holder
in due course? What defense was made? Did it prevail?
Why?
(Note: It is the general rule that a defense of illegality
that does not appear on the face of the note cannot be availed
of against a holder in due course. However, if the statute de-
clares the instrument void, it is not enforceable in any person's
hands. See Notes for Collection of Authorities in 4 American
and English Annotated Cases, p. 353 and 11 Idem. 1181.
The policy of these acts may well be questioned. To hold
that an innocent person who has bought an innocent looking
negotiable instrument can be confronted by the guilty party
with a complete defense seems to the editor the acme of in-
justice.)
CHAPTER 60
THE OBLIGATIONS OF THE PARTIES
§ 488. Of maker of note.
§ 489. Of drawer of bill or check.
§ 490. Of drawee of bill or check.
§ 491. Of acceptor.
§ 492. Of unqualified indorser.
§ 493. Warranty where negotiation by mere delivery.
§ 494. Contract of qualified indorser.
§ 495. Contract of irregular indorser.
§ 496. Order of liability among indorsers.
§ 488. (Nego. Instru., Sec. 96.) Obligation of maker of
note.
Case 512. Uniform Negotiable Instruments Act, Sec.
60.
"The maker of a negotiable instrument by making it
engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity
to indorse.''
Question 512: What does the maker of a note undertake?
Is his liability primary or secondary ?
Case 513. McMann et al. v. Walker, 31 Col. 261.
Facts: The plaintiff sues as indorsee of a note made
by defendant to the order of the Sprague Collection
Agency and by such payee endorsed to plaintiff. The
Sprague Collection Agency was a foreign corporation in
the state of Colorado and had not complied with the
foreign corporation law of the state of Colorado, requir-
ing compliance therewith before qualified to transact
business in that state. The defendant contends that the
note is invalid.
Point Involved: Whether the maker of a note can set
up as against the indorsee that the note is void because
901
902 NEGOTIABLE INSTKUMENTS
the payee corporation has not complied with the foreign
corporation laws.
Garbert, J.: "* * * The question is one which
has been discussed by the courts of several states, with
the result that the decisions on the subject are not al-
together harmonious. Whether or not the note in ques-
tion be invalid as between the maker and the payee is
a question upon which we express no opinion, because
that proposition is not involved, * * *. In this state
the general rule of law prevails that negotiable paper,
although invalid as between the original parties, is valid
as to third persons obtaining if for value before matur-
ity and without notice of its infirmities, unless so de-
clared by statute. * * * The defendant, by giving
a note which is not the subject of statutory enactment
thereby conclusively admitted as to third parties pur-
chasing before maturity and in good faith, the legal
existence of the payee, and its authority to take such
note and to negotiate and transfer it by endorsement.
* * #11
Question 513: By whom and against whom is the suit
brought in this case? The defense of the maker? The Court's
decision ?
§489. (Nego. Instru., Sec. 97.) Obligation of drawer
of bill or check.
Case 514. Uniform Negotiable Instruments Act, Sec.
61.
"The drawer, by drawing the instrument, admits the
existence of the payee and his then capacity to indorse;
and engages that on the presentment the instrument will
be accepted or paid, or both, according to its tenor, and
that, if it be dishonored, and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof
to the holder, or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in the
LIABILITY OF PARTIES
903
instrument an express stipulation negativing or limiting
his own liability to the holder.''
Question 514: (1) Can the drawer deny the existence of
the payee or his capacity to endorse ?
(2) Suppose the drawee refuses to accept or pay according
to the tenor of the instrument, can recourse be had to the drawer ?
Upon what condition?
§ 490. (Nego. Instru., Sac. 98.) Of drawee of bill or
check.
(Note: The drawee of a bill or check cannot be sued upon
it by the payee or other holder unless he accepts it. A bill
or check does not operate as an assignment of funds or credits,
being drawn upon the general credit of the drawer and not up-
on the credit of any fund. This is true although there is a
reference to a particular fund, unless it is payable out of a
fund or is a direction to pay a fund in which case it is not a
bill or check but an assignment which the assignee upon notice
may be bound to honor according to the law governing assign-
ments of rights.
A drawee of a bill or check may be liable to the drawer for
non-acceptance if thereby he violates a contract and injures the
credit of the drawer. A bank has a contractual duty to honor
checks drawn upon it so long as the depositor has in his check-
ing account sufficient funds to cover the check. For dishonor
of his check it is liable to the holder for damages, it being held
in some cases that depositor is entitled to substantial damages
without proof of actual damages, even if dishonor was by reason
of innocent mistake. (Schaffner v. Ehrman, 139 111. 109.) And
in other cases that he is entitled to only nominal damages unless
he proves actual damages if the dishonor was by reason of an
innocent mistake. (Schaffner v. Herman, 83 N. Y. Suppl. 447).
But in Wildenberger v. Ridgwood National Bank, 230 New
York 425 (1921) the depositor had ample funds to cover out-
standing checks, and the depositor's wife made a claim.to half
of the funds. The bank dishonored the checks by a statement
"account closed. The lower court held that plaintiff, the
depositor, was entitled to only nominal damages as he did not
prove any special damages. The upper court reversed this hold-
ing and said: "In this state the liability is for nominal damages
904
NEGOTIABLE INSTRUMENTS
and no more if the dishonor of the checks is the result of inno-
cent mistake. * * * We find nothing of accident or mistake
in the defendant's dishonor of these checks. It dishonored them
with full knowledge of the state of the accounts, setting one
risk against another, the risk of adverse claims against the risk
of broken contracts. Here was no heedless act, but one direct
and wilful. * * * Injury to credit and ensuing damage
might even then have been averted if the holders had been in-
formed in plain and direct words of the cause of the dishonor.
* * * The plaintiff was placed before his customers in the
attitude of a trader who had drawn worthless checks. * * *
Liability existing, we cannot say, as a matter of law that the
damages were merely nominal. The plaintiff was a trader.
Some injury to credit may therefore be inferred. The damages
to be awarded whether nominal or substantial must suffice for
reparation. It is for a jury to assess them.")
§ 491. (Nego. Instru., Sec. 99.) Obligations of ac-
ceptor of bill or check.
Case 515. Uniform Negotiable Instruments Law, Sec.
62.
"The acceptor by accepting the instrument engages
that he will pay it according to the tenor of his accept-
ance, and admits:
"1. The existence of the drawer, the genuineness of
his signature, and his capacity and authority to draw
the instrument; and
"2. The existence of the payee and his then capacity
to indorse.
Question 515: What are the acceptor's undertakings and
admissions in accepting the bill ?
Case 516. Price v. Neal, 3 Burrows, 1354.
Facts: Suit brought by Price against Neal. It was
proved on the trial that two bills were drawn, one of
which read as follows:
"Leicester, 22d November, 1760. Sir, six weeks after
date pay Mr. Rogers Ruding or order forty pounds, value
received for Mr. Thomas Poughfor; as advised by, Sir,
.LIABILITY OF PARTIES
905
your humble servant Benjamin Sutton. To Mr. John
Price, in Bush-lane, Gennon Street, London, indorsed,
etc.
The signature of Sutton, the supposed drawer, was
forged. Ruding, the payee indorsed the bill and it was
presented for payment by Neal, the holder who had paid
full value for the bills. The bills were paid by Price
to Neal, and Price now sues to recover back from Neal
the amount paid him.
Point Involved: Whether a drawee of a forged bill of
exchange, who pays the same to a bona fide holder for
value, can recover back the amount so paid on discover-
ing the forgery.
Lobd Mansfield: "But it can never be thought un-
conscientious in the defendant to retain this money
when he has once received it on a bill of exchange in-
dorsed to him for a fair and valuable consideration,
which he had bona fide paid, without the least privity or
suspicion of any forgery."—Verdict for defendant.
Question 516: Is a drawee who pays the bill drawn on him
entitled, according to this case, to recover back what he has
paid on the bill when he discovers that the bill was forged
and therefore he cannot charge it to the account of the sup-
posed drawer ?
(This English case decided in 1762 is a well known and lead-
ing case on the liability of the acceptor. But there were
divergent views on this point, but the N. I. L. has apparently
adopted the view of Price v. Neal. See next case.)
Case 517. National Bank of Rolla v. First National
Bank, 141 Missouri Appeals, 719.
Facts: Martin L. Chambers made out a check pay-
able to J. B. Ragan, on the National Bank of Rolla, and
forged the signature of H. W. Lennox thereto. The
said Chambers thereupon went to the First National
Bank of Salem and represented himself to be the payee
and endorsed the payee's name and secured the money,
the cashier knowing none of the parties and requiring
906
NEGOTIABLE INSTRUMENTS
no identification. The Bank of Salem thereupon indorsed
 Endorsements guaranteed. Pay any National or State
Bank or order. The First National Bank of Salem.
W. S. Bennett, Cashier, and sent the check to the
drawee bank. The cashier of such bank knew that the
signature was not that of Ragan but he knew Ragan
and Lennox had some dealings together and he noticed
that the indorsements were guaranteed by the Salem
Bank, and he thereupon remitted the money to the Salem
Bank. The cancelled check was then sent as a voucher
to Lennox and Lennox returned it as a forgery, and the
bank re-credited him with the amount. The Bank of
Rolla then wrote to the Bank of Salem and demanded
payment on the check on the ground that the Bank of
Salem had guaranteed the signatures. The Bank of
Salem responded that it would not pay inasmuch as it
considered itself not liable, whereupon this suit was
brought by the Bank of Rolla against the Bank of Salem.
Point Involved: Whether a drawee of a check or bill
who pays the same to a bona fide holder, can recover back
the amount it has paid upon such check being discovered
to be a forgery.
Gray, J. (after reviewing many authorities:  * * *
In addition to the authorities, the Negotiable Instru-
ments Act of 1905, contains the following sections:
'' 1 Sec. 62. The acceptor by accepting the instrument
engages that he will pay it according to the tenor of its
acceptance; and admits: the existence of the drawer, the
genuineness of his signature, and his capacity and au-
thority to draw the instrument; and the existence of the
payee and his capacity to endorse.
c t c ^ ^ ^ y
"The adoption in this and other states of our Nego-
tiable Instruments Law was for the purpose of having
in the statutory laws of the states a uniform law in re-
gard to commercial paper. * * * There was no ques-
tion upon which the courts were more in conflict than
upon the question involved in this case. After a careful
LIABILITY OF PARTIES
907
examination of the new law we are inclined to believe
that it was intended to adopt the law as declared in Price
v. Neal, supra.
Decision that the drawee bank having paid out upon
a check to which the drawer's name was forged could
not recover back the amount paid upon discovering the
forgery. The plaintiff, the drawee bank, contended,
however, that it had a right to rely on the guaranty of
the defendant bank "endorsement guaranteed, etc. (see
above) but the court met this argument with two ob-
jections, one that such an indorsement is a restrictive
indorsement being only for collection (see Section 459
herein for differences of opinion on that point), and the
other and more potent, that such a guaranty applies to
the holders and cannot be relied on by the drawee bank
for its protection, such drawee bank being bound to know
the signature of the drawer.
Question 517: Same question as in prior case. Further, does
the Negotiable Instruments Act adopt the view of Price v. Neal?
Why could not the drawee bank hold the indorsing bank on
the indorsement "Endorsement guaranteed"?
Case 518. National City Bank of Chicago v. National
Bank of the Republic of Chicago, 300 Illinois Reports,
103, 132 N. E. 832.
Thompson, J., delivered the opinion of the court:
"On January 4, 1915, the Jaekes-Evans Manufactur-
ing Company of St. Louis purchased a draft for $629.80
from the Broadway Savings. Trust Company of St. Louis,
drawn on the National City Bank of Chicago and pay-
able to the order of the Aanerican Sheet & Tin Plate
Company of Pittsburgh. On the same day the St. Louis
company inclosed the draft in a letter addressed to the
Pittsburgh company, and deposited the letter in a mail
box. Andrew H. Manning rifled this mail box and stole
the draft. He substituted his name for the name of the
American Sheet & Tin Plate Company. The alteration
of the draft was done with such skill that it could not
908
NEGOTIABLE INSTRUMENTS
be detected by inspection. January 9, Manning appeared
at Barnett Brothers' jewelry store, in Chicago, and
selected and agreed to purchase certain diamonds for
$600. In payment of the purchase price Manning ten-
dered to P. Barnett the altered draft for $629.80. Man-
ing, in the presence of Barnett, indorsed the draft in
blank, and Barnett, with the consent of Manning, took
the draft to the drawee, the National City Bank of Chi-
cago, and personally presented it to that bank for accept-
ance. The bank accepted the draft by writing across the
face of the draft these words and figures:
 'Accepted, payable through Chicago clearing house
55,055, Jan. 9, '15—The National City Bank of Chicago,
per G. D. Grim, Paying Teller.'
"The drawee also entered in its records the follow-
ing notation:
 'The National City Bank of Chicago. Certification
Debit. $629.80.
 'As shown by teller's stamp we certify & charge to
the account of Broadway Sav. Trust Co., St. Louis,
Makers number or date 5584 Order of Andrew H. Man-
ning.
 'No. 55,055 Asst. paper Jan. 9, 1915.
 'Customer will please call at bank & exchange this
slip for check described above.
N. C. B. 1/9/15.'
"The draft, with the acceptance written thereon, was
returned to Barnett, who returned to his place of busi-
ness. Barnett delivered the diamonds, of the fair retail
market value of $600, and $29.80 in money, and retained
therefor, with the consent of Manning, the draft so in-
dorsed and accepted. Thereafter Barnett indorsed the
draft to the order of the National Bank of the Republic,
and January 11, 1915, deposited the draft to the credit
of his account with said bank. January 12, 1915, the
National City Bank, the drawee, through the Chicago
clearing house, paid the National Bank of the Republic
the sum of $629.80 in payment of the draft. February
4,1915, the National City Bank returned to its customer,
LIABILITY OF PARTIES
909
the Broadway Savings Trust Company this draft, along
with other canceled paper for January. The draft was
received in St. Louis the following day, and the St. Louis
bank at once notified its Chicago correspondent, the
drawee, that the draft had been altered by changing the
name of the payee, and asked that its account be credited
with the amount of the draft. The drawee in turn noti-
fied the National Bank of the Republic of the alteration
and asked for reimbursement, which was refused. The
drawee voluntarily credited the account of the St. Louis
bank with the amount of the draft, and brought suit in
the circuit court of Cook county against the National
Bank of the Republic to recover the amount paid on this
draft. Judgment was rendered in favor of the drawee,
and that judgment was affirmed, on appeal by the ap-
pellate court for the first district.
"That court granted a certificate of importance, and
this appeal followed.
"In its last analysis the question presented for de-
cision is the liability of the accepter of a negotiable
instrument under 62 of the Negotiable Instruments Law
(Hurd 1919, p. 2029), which provides:
 'The accepter by accepting the instrument engages
that he will pay it according to the tenor of his accept-
ance, and admits:
 '1. The existence of the payee and his then capacity
to indorse.'
"The question presented, so far as we have been able
to determine, is one that has not been passed upon by
any court of last resort in this country. Judging from
the able briefs filed, counsel have given this case much
thought and they say that they have been unable to find
a case exactly in point. Counsel for appellee insists, how-
ever, that this case is controlled by First National Bank
v. Northwestern Nat. Bank, 152 111. 296, 26 L. R. A. 289,
43 Am. St. Rep. 247, 38 N. E. 739; Metropolitan Nat.
Bank v. Merchants' Nat. Bank, 182 111. 367, 74 Am. St.
Rep. 180, 55 N. E. 360, and State Bank v. Mid-City Trust
910
NEGOTIABLE INSTRUMENTS
& Sav. Bank, 295 111. 599, 12 A. L. R, 989, 129 N. E. 498.
We shall notice these decisions later.
 Illinois adopted the Negotiable Instruments Law in
1907. This'law was the result of an effort to codify the
law of negotiable instruments, and to establish uniform-
ity in this important branch of the law by securing the
adoption of the Code by all the states of the Union. In
1896 the commissioners appointed by the several states
finally agreed upon a draft of a bill to be recommended
to the several legislatures. This law—in a few cases
with some modifications, but generally in the form rec-
ommended—has been adopted in forty-six of the forty-
eight states of the Union. Prior to the adoption of the
act by the various states there was lack of uniformity
in the statutes of the states and in the decisions of the
courts with reference to the law merchant. This led to
great confusion in the conduct of business among the
merchants of the several states, and prompted the effort
to establish uniformity. The aim was to codify the law
rather than to reform it. In order to establish uniform-
ity it was necessary to change the law in some states,
but where these changes were made the Negotiable In-
struments Law generally lays down the rule which con-
forms to the weight of authority. The confused state
of the law before the adoption of the Negotiable Instru-
ments Law would naturally bring some of its provisions
in conflict with the statutes and decisions of the several
states. In construing the act the language ought to be
interpreted in such a way as to give effect to the bene-
ficent design of the legislature in passing an act for the
promotion of harmony in the law regarding negotiable
paper. The court must take the act as it is written, and
should give to the words used their natural and common
meaning. The law was enacted for the purpose of fur-
nishing in itself a certain guide for the determination
of all questions covered thereby relating to commercial
paper, and, so far as it speaks without ambiguity as to
any such question, reference to case law a>6 it existed
LIABILITY OF PARTIES
911
prior to the enactment is more likely to he misleading
than beneficial. If the provisions of the act harmonize
with the general principles of commercial law in force
before its enactment, those principles should be followed,
but if the language of the act conflicts with statutes or
decisions in force before its enactment the courts should
not give the act a strained construction in order to make
it harmonize with earlier statutes or decisions. If this
is done the very purpose of the act is defeated. In order
to keep the law as nearly as may be uniform, the courts
of all the states should keep in mind the spirit and ob-
ject of the law, and should give to the language of the
act a natural and common construction, so that all might
be more likely to come to the same conclusion.
 Section 62, hereinbefore quoted, so far as it applies
to the facts in this case, declares that the accepter by
accepting the instrument engages that he will pay the
instrument which he has accepted according to the tenor
of his acceptance, and admits the existence of the payee
and his then capacity to indorse. The instrument which
appellee accepted was payable 'to the order of Andrew
H. Manning.' By its acceptance it admitted that Andrew
H. Manning was in existence, and that Andrew H. Man-
ning at the time of acceptance was not suffering any
legal disability which would affect his ability to pass
title to the instrument accepted by means of indorse-
ment. According to the plain language of this section,
appellee, by its general acceptance, bound itself to pay
a draft for $629.80 payable to the order of Andrew H.
Manning. After the draft was accepted by appellee the
drawer was discharged from liability thereon. When
appellant took the draft it was complete and regular
upon its face. It had been duly accepted by the drawee.
It was taken in good faith and for value, and appellant
then had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it, and ap-
pellant was therefore a holder in due course. It relied
upon the general acceptance of appellee, and under the
912 NEGOTIABLE INSTRUMENTS
Negotiable Instruments Law was protected by it. This
construction of 62 is in accordance with that sound prin-
ciple which declares that where one of two innocent par-
ties must suffer a loss the law will leave the loss where
it finds it.
Question 518: Recite briefly the facts in this case showing
the legal question presented thereby and the outcome of the
case.
(Note: In putting the facts of this case for examination, the
editor received many replies that forgery is a real defense, and
therefore the accepting bank would not be liable. It is there-
fore, perhaps worthwhile to call attention to the fact that in
this case the forgery was committed before the acceptance, and
that if it had been committed afterwards, then the bank would
have had a good defense.)
§492. (Nega. Instru., Sec. 100.) Obligations of un-
qualified indorser.
Case 519. Uniform Negotiable Instruments Act, Sec.
66.
 Every indorser who indorses without qualification,
warrants to all subsequent holders in due course:
"1. The matters and things mentioned in subdivisions
one, two, and three, of the next preceding section; and
"2. That the instrument is at the time of his indorse-
ment valid and subsisting.
''And, in addition, he engages that on due presentment
it shall be accepted, or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored, and
the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any sub-
sequent indorser who may be compelled to pay it.
Question 519: (1) What does an unqualified indorser war-
rant in his capacity as vendor ?
(2) What is his contract as indorser?
(Note: One who negotiates negotiable paper may be looked
upon as a vendor of such paper and a contractor for financial
responsibility. The following outline indicates this thought:
LIABILITY OF PARTIES
913
A party negotiating a ne-
gotiable instrument has
1. The capacity of a vendor,
and as such vendor he warrants
capacity of prior parties, genu-
ineness of former signatures,
validity of instrument, etc.
2. The capacity of an indorser
if he indorses, unless he qualifies
his indorsement, and as such
indorser, he promises to pay
the instrument to subsequent
holders provided the proper
steps are taken to charge him,
etc.
§§493, 494. (Nego. Instru., Sees. 101, 102.)—Obliga-
tions of party negotiating by mere delivery, and of
qualified indorser.
Case 520. Uniform Negotiable Instruments Act, Sec.
65.
'1 Every person negotiating an instrument by delivery
or by a qualified indorsement, warrants:
"1. That the instrument is genuine and in all respects
what it purports to be.
"2. That he has a good title to it.
"3. That all prior parties had capacity to contract.
"4. That he has no knowledge of any fact which would
impair the validity of the instrument, or render it value-
less.
"But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
"The provisions of subdivision three of this section
do not apply to persons negotiating public or corporate
securities, other than bills and notes.
Question 520: (1) When one transfers an instrument by
delivery (i. e., without indorsement) and the maker fails to pay,
can such transferor be made to pay ?
(2) What does such a transferor warrant?
(3) What is the liability of one who indorses without re-
course ?
914 NEGOTIABLE INSTRUMENTS
Case 521. Challiss v. McCnim, 22 Kas. 157.
Facts: The plaintiff McCrum purchased, after its
maturity, a note which was indorsed to him "Without
recourse. W. L. Challiss. When plaintiff sued the
maker, the maker successfully interposed the defense of
usury and thereby defeated in part the payment of the
note. Thereupon McCrum brought this action against
his indorser.
Point Involved: Whether one who endorses "without
recourse can be held for the invalidity of the note!
Brewer, J.: "* * * the restriction is only as to
his liability as indorser and in no manner affects his rela-
tion to the paper as vendor. An unqualified indorsement
is the assumption of a conditional liability. * * *
"Without recourse does away with this conditional
liability. It leaves the indorsement simply as a transfer
of title, and the indorser liable only as vendor; yet it
leaves him a vendor and divests him of none of the lia-
bilities of the vendor. It makes the transaction the
equivalent of a delivery of paper payable to bearer and
transferable by delivery. Independent therefore of any
matter of indorsement, what implied warranty is there
in the transfer of a promissory note! Two things are
clear under the authorities: first, that there is an implied
warranty of the genuineness of the signatures; and sec-
ond, that there is no warranty of the solvency of the
parties * * *. But in the case at bar the signature
of the maker was genuine. The objection is that it was
never his legal obligation to the full amount of what
it purported to be. How far is there any implied war-
ranty in this respect! [Here the Court reviews'authorb
ties.] These authorities fully sustain the ruling of the
district court. * * * By all these authorities there
is an implied warranty against such a defect and the
vendor is liable for the breach thereof. * * *.
Question 521: What was the defect in the note in question]
In what manner did defendant sign? Was he held-liable!
LIABILITY OF PARTIES
915
Why? Does such an indorser warrant solvency.? Does he war-
rant genuineness of prior signatures?
Case 522. Dale v. Gear, 38 Conn. 15.
Facts: Dale as indorsee sues Gear as indorser on a
note. The defendant pleads as a defense that it was
orally agreed between them, that the defendant's liability,
should be as if he signed '4without recourse.
Point Involved: . Whether an indorser as against his
immediate indorsee can introduce parol evidence of an
agreement to qualify the indorsement.
Butler, C. J.: "We have given this case the con-
sideration which, as involving an important commercial
question, it has seemed to require, and we are of opinion
that the plea cannot be sustained on principle or by
authority.
"First, it is not sustainable on principle.
"The rule that parol evidence is not admissible to
contradict or vary a written contract is founded in the
highest principles of public policy and there is no class
&f contracts to which it should be more inflexibly applied
than to those connected with bills of exchange and
promissory notes. * * *
"But it has sometimes been claimed, and is claimed in
support of the plea in this case, that notwithstanding the
rule is so applied in favor of a bona fide holder to whom
the note has been negotiated, yet, as between the indorser
and the indorsee, the original parties to the contract of
indorsement, the rule should not be applied. But the
answer must be, that the contract of indorsement is
implied by law as clearly and perfectly from the blank
indorsement of a negotiable note, irrespective of any
contingency of negotiation as if written out in full when
indorsed. And if, a.s between the original parties, there
ds any equity existing dehors the instrument, which
should prevent the indorsee from enforcing the contract,
it must be set up as an equity.
•< There are four classes of cases in which as excep-
916
NEGOTIABLE INSTRUMENTS
tional cases, and as between the original parties, indorser
and indorsee, any relation, antecedent agreement, or
state of facts from which a controlling equity arises,
may be pleaded and proved by parol in bar of an action
on the warranty. Thus the relation of principal and
agent may be shown—for the agent takes no title or
warranty from the indorser, but holds as agent. So,
second, it may be shown, that the note was indorsed to
the holder for some special purpose and is holden in
trust, as where it is indorsed and delivered for collection
merely. Lawrence v. Stonington Bank, 6 Conn. 521, is an
example of this class of cases in our own reports. In
like manner, thirdly, the relation of principal and surety
may be shown, and that the indorsement was made at
the request and for the accommodation of the immediate
indorsee, for the relation forbids the enforcement of the
contract. Such was Case v. Spaulding, 24 Conn. 578.
So, fourthly, it may be shown that there was an equity
arising from an antecedent transaction including an
agreement that the note should be taken in sole reliance
on the responsibility of the maker and that it was in-
dorsed in order to transfer the title in pursuance of sucli
agreement, and that the attempt to enforce is a fraud.
Such was Downer v. Chesebrough, 39 Conn. 39. These
exceptions illustrate the rule. But this plea shows no
equity, trust, equitable relation, or equity connected with
an antecedent transaction constituting a consideration
for the agreement, or which would justify a court of
equity in interfering to prevent an enforcement of the
contract of warranty which the law implies. It presents
a naked case of an attempt to prove by parol that a
clear and unambiguous contract of warranty is not such,
and to contradict it in terms—to turn an indorsement
without restriction, before maturity into a restricted
[qualified] indorsement. Such a plea cannot be sus-
tained without a violation of essential principles.
Question 522: What is the rule of this case? What excep-
tions did the Court make?
(Contra to this case: True v. Bullard, 45 Nebr. 409.)
LIABILITY OF PARTIES
917
§495. (Nego. Instru., Sec. 103.) Obligation of party
indorsing irregularly, etc.
Case 523. Rockfield et al. v. First National Bank of
Springfield, 77 Ohio St. 311.
Facts: A note was made in the following form:
 $10,000. Springfield, Ohio, December 12, 1904. On de-
mand after date, we jointly and severally promise to pay
the First National Bank of Springfield, Ohio, or order,
at its hanking house, ten thousand dollars for value re-
ceived, with six per cent interest' after date. (Signed)
The Springfield, Charleston, Washington & Chillicothe
Railway Co., H. L. Rockfield, President; E. H. Ackerson,
Secretary. On the back of the note appeared these
names: "John Snyder, Frank Patterson, L. M. Goode,
E. H. Ackerson. The First National Bank brings suit
on this instrument against these parties whose names
are on the back of the notes, averring that such names
were on the note prior to its delivery. Defense, that the
defendants signed for accommodation only, receiving no
consideration, and that they were not notified by the
holder of the note of its non-payment by the maker at
maturity.
Point Involved: The nature of the undertaking of
parties irregularly endorsing a note before its delivery;
whether such parties are indorsers and as such entitled
to the notice of dishonor which the law requires to be
given to indorsers in order to charge them.
[
! Spear, J.: "* * * The theory of the defendants'
pleading is that Rockford and Snyder, by writing their
mames across the back of the note, became indorsers in
the commercial sense, and therefore entitled to notice of
jdemand at maturity of the maker and of non-payment,
trand, failing that, no liability attached. The theory of
iefche petition [of the plaintiff] is that these defendants,
'laving signed the note before delivery, must be held to
mve signed with the purpose of, giving it credit and of
tiding negotiability, and therefore stand as makers, and
ilthough their names appear on the back of the instru-
918
NEGOTIABLE INSTRUMENTS
ment, and they are in law sureties, yet they are not en-
dorsers in the commercial sense and therefore not
entitled to notice of demand and non-payment. This view
is the one adopted by the trial Court. * * * Which
is the correct view is the question we have. * * *
That the conclusion adopted by the lower courts is in
accord with the law as held in this state from early times
and with all the decisions of this Court thus far made
is conceded. * * *
"The statute referred to is the act of April 17, 1902,
known as the Negotiable Instruments Act. * * * By
the provisions of these sections * * * a person plac-
ing his signature upon an instrument otherwise than as
maker, drawer, or acceptor is deemed to be an indorser
unless he clearly indicates by appropriate words his in-
tention to be bound in some other capacity. Then follows
as to liability, this: Where a person not otherwise a
party to an instrument places thereon his signature on
blank before delivery, he is liable as indorser: (1) If
the instrument is payable to the order of a third person,
he is liable to the payee and all subsequent parties. (2)
If the instrument is payable to the order of the maker or
drawer, or is payable, to bearer, he is liable to all parties
subsequent to the maker or drawer. (3) If he signs for
the accommodation of the payee he is liable to all parties
subsequent to the payee. Every indorser who indorses
without qualification guarantees to all subsequent hold-
ers the genuineness of the instrument, the title, the ca-
pacity of previous parties to contract, etc., and engages
that on due presentment, the instrument shall be ac-
cepted or paid, or both, as the case may be, and that if
it be dishonored and the necessary proceedings on dis-
honor be duly taken, he will pay the amount thereof to
the holder or to any subsequent indorser who may be
compelled to pay it. Presentment for payment must be
made at a reasonable hour on a business day at a proper
place to the person primarily liable on the instrument,
or, if he is absent or inaccessible to the person found at
the place where the presentment is made. When such
LIABILITY OF PARTIES
919
instrument has been dishonored by non-acceptance or
non-payment notice of dishonor must be given to the
drawer and to each indorser and any drawer or indorser
to whom such notice is not given is discharged.
< i * # *
"It follows from these conclusions that by force of
sections * * * of the Revised Statutes of 1906, a
person who, being a stranger to a promissory note, places
his name on the back by blank indorsement, is an in-
dorser of the paper and cannot be held in any other ca-
pacity. As such, he is entitled in order to render him
liable, to notice of demand upon those who are primarily
liable, and failing such demand, and due notice to him,
he is discharged. The answer [of the defendant] there-
fore, stated a defense and the sustaining of the de-
murrer and rendering judgment for the bank upon the
note was! error."—Judgment reversed and cause re-
manded.
Question 523: (1) In what manner did the defendants in
this case sign ?
(2) What was their defense?
(3) On what theory did the plaintiff attempt to hold them?
(4) What did the bank omit to do that freed the indorsers
from liability ?
(5) What was the law of Ohio on this point prior to the
enactment of the Uniform Law in 1902 ? Would the defense
have been good prior to that date ? Why ?
(6) Did the Negotiable Instruments Act change the Ohio
law?
§496. (Nego. Instru., Sec. 104.) Order of liability
among indorsers.
Case 524. Uniform Negotiable Instruments Law, Sec.
68.
"As respects one another indorsers are prima facie
liable in the order in which they indorse; but evidence
is admissible to show that as between or among them-
Selves they have agreed otherwise.
Question 524: In what order are indorsers liable ?
CHAPTER 61
PRESENTMENT FOR PAYMENT AND FOR
ACCEPTANCE
§ 497. (Nego. Instru., Sec. 106.) In general.
(Note: Now we come to consider the procedure necessary to
fix liability of parties secondarily liable. Their liability, be-
ing of a secondary or contingent sort, must be fastened upon
them by certain procedure designed to furnish them immediate
information that the paper upon which they are secondarily
liable has been dishonored by the party who should, or was
expected to, honor it. Without this procedure the party sec-
ondarily liable is discharged, unless he has or does waive the
procedure, except in cases where such procedure is for reasons
to be stated not required or dispensed with.)
(Note: Sometimes the impression prevails that it is neces-
sary to sue a maker or acceptor before holding an indorser or
drawer. This is not correct. The indorser or drawer is liable
if the liability is duly fastened upon him by presentment for
payment, notice of dishonor, etc.)
A. Presentment for Payment to Parties Primarily
Liable.
§ 498. Not necessary to charge parties primarily liable.
§ 499. Presentment for payment necessary to charge parties secondarily
liable.
§ 500. What presentment sufficient.
§ 501. When presentment for payment not required.
§ 498. (Nego. Instru., Sec. 107.) Presentment for pay-
ment not necessary to charge parties primarily liable,
Case 525. Hyman v. Doyle, 103 N. Y. Suppl. 778. ,
Giegerich, J.: "* * * The only effect of qualify-
ing a promise to pay by a mere specifying of a demand
920
PRESENTMENT FOR PAYMENT
921
at a fixed time and place is that if the debtor is ready
with the money at that time and place, and no demand is
made, he is exonerated from paying costs and interests
for subsequent time, provided he keeps ready, pays the
money into court when sued, and pleads these facts in
his answer.
Question 525: (1) A makes B a note for $500 due one year
from date. B does not present the note to A at its maturity, but
presents it one year subsequently and then brings suit. Can A
set up the failure to present the note to him when it matured?
Can B collect interest for the two years? Could A in any way
stop the accruing interest after the payment of the note?
(2) What is the purpose of making a negotiable instrument
payable at a particular place?
(Note: It is never necessary to present a note to the maker
for payment ait maturity in order to charge a liability upon him.
This is true in respect to any party primarily liable. A proper
tender of the amount due on the note to the holder would stop
accruing interest after maturity. The purpose of making an
instrument payable at a particular place has its obvious ad-
vantages.)
§499. (Nego. Instru., Sec. 108.) Presentment for pay-
ment to party primarily liable necessary to charge
parties secondarily liable.
(Note: See the following sections. The party secondarily
liable is entitled to have the holder take certain steps to secure
payment from the party primarily liable, who as between all
parties ought to pay, in order to be in a position to apply for
payment to indorser or drawer. The first of these is present-
ment to the party primarily liable for payment, on the proper
day and in the proper manner.)
§500. (Nego. Instru., Sec. 109.) What presentment for
payment to party primarily liable is sufficient to charge
party secondarily liable.
(1) Presentment by Whom.
(Must be "By the holder or some person authorized to
receive payment in his behalf."—N. I. L., Sec. 72 (1) .)
922 NEGOTIABLE INSTRUMENTS
(2) Date and Hour of Presentment.
Case 526. Uniform Negotiable Instruments Act, Sec-
tions 72 (2), 75, 71, 85, 86.
''Sec. 72. (2) [Presentment must be made] 'at a,
reasonable hour on a business day.'
"Sec. 75. "Where the instrument is payable at a bank,
presentment for payment must be made during banking
hours, unless the person to make payment has no funds
there to meet it at any time during the day, in which
case presentment at any hour before the bank is closed
on that day is sufficient.
"Sec. 71. Where the instrument is not payable on de-
mand, presentment must be made on the day it falls due.
Where it is payable on demand, presentment must be
made within a reasonable time after its issue, except
that in a case of a bill of exchange presentment for pay-
ment will be sufficient if made within a reasonable time
after the last negotiation thereof.
"Sec. 85. Every negotiable instrument is payable at
the time fixed therein without grace. When a day of
maturity falls on Sunday or a holiday the instrument is
payable on the next succeeding business day. Instrm
ments falling due on Saturday are to be presented for
payment on the next succeeding business day, except
that instruments payable on demand, may, at the option
of the holder, be presented for payment before 12:00
o 'clock noon on Saturday when that entire day is not a
holiday.
'' Sec. 86. Where the instrument is payable at a fixed
period after date, after sight, or after the happening of
a specified event, the time of payment is determined by
excluding the day from which the time is to begin to run,
and by including the day of payment.''
Question 525: (1) During what hours must presentment be
made to the party primarily liable in order to hold the party
secondarily liable?
(2) If an instrument is payable on demand, what is the rule
as to time of presentment?
PRESENTMENT FOR PAYMENT 923
(3) Are days of grace allowed? If an instrument falls due
(a) on a holiday, (b) on Sunday, (c) on Saturday, what is
the rule as to day for presentment?
(Note: Various reasons for inquiring into delay in use of
check. Where a check is issued and it is not immediately used
by the payee or other holder the question of delay in the use
of such check may be material from a variety of standpoints,
with the answer as indicated.
1. The qqestion of delay for purpose of inquiring whether
the purchaser is a holder in due course and hence not subject,
or subject as the case may be, to defenses.
Example: M makes check to order of P which P indorses
and transfers to H 30 days after its date and its original issue.
A defense being set up against H in his suit against M, H qual-
ifies as holder in due course unless he bought after the instru-
ment was overdue.
Answer: It is sufficient if H buys within a reasonable time,
and 30, days would not usually be deemed an unreasonable
time for purposes of negotiation. See page 862, supra..
2. The question of delay in presenting check for payment
for purpose of inquiry whether drawer of check is discharged.
Example: M makes a check to order of P and P presents
check for collection three days after receiving same. In the
meantime the bank fails. Can H hold M on the check?
Answer: The maker of a check is discharged by delay in
presentment to the extent of the harm caused by the delay.
Ordinarily, therefore, he is not discharged because not harmed.
What is delay in this connection ?
The act provides "A check must be presented for payment
within a. reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss caused
by the delay. The decisions are to the effect that the check
should be presented for collection or deposited for collection
within the next business day after receipt, and otherwise the
drawer is discharged of harm by the delay. Gordon v. Levine,
80 N. E. 504 (Mass.) and cases therein cited. Negotiation of
the check does not extend the time for this purpose.
3. The question of delay in negotiating check or presenting
same for payment for purpose of inquiring whether indorser
of check is discharged by the delay.
Example: M makes check to order of P and P indorses to
924
NEGOTIABLE INSTRUMENTS
H. H delays presentment for payment for 10 days. Is P dis-
charged by the delay ?
Answer: The indorser is discharged by delay and the ques-
tion whether he is harmed or not is immaterial. Herein he
differs from no other indorser, the rnle being that harm is pre-
sumed. Who can tell whether he is harmed ? The fact that the
maker had no funds on deposit at any time so that if the check
had been immediately presented there would have been no
funds to meet it, is immaterial. Perhaps he would have de-
posited funds. We do not need to speculate. The indorser is
asked to pay another's debt and is entitled to an exercise of
diligence on the part of the holder.
There is another thought to bring out in this connection. The
law provides that if an instrument is payable on demand, pre-
sentment for payment must be made within a reasonable time
after its issue, except in the case of a bill of exchange as to
which presentment for payment is sufficient if made at a reason-
able time after the last negotiation thereof. This applies as
well to checks.
Literally, this means that no matter how stale a check be-
comes, it is sufficiently presented for payment if the party to
whom it is last negotiated presents it for acceptance within a
reasonable time after its negotiation to him. Sufficient for what'
purpose? Not to charge the drawer for as to him under the
other sections it must be presented within a reasonable time
after its issue. Hence we have the situation involving these
absurdities (they can hardly be called less) : A maker dis-
charged unless check presented for payment within reasonable
time after its issue; an indorser discharged unless presented a
reasonable time after his indorsement; unless it is further ne-
gotiated (no matter when), in which case he is liable if the
check is presented a reasonable time after its last negotiation,
in which case he is held, though without recourse, against the
drawer for such drawer is discharged. Perhaps the courts will
work out the law to avoid these injustices and inconsistencies.
Professor Brannan suggests this amendment: '' Where it is
payable on demand presentment must be made within a reason-
able time after its indorsement in order to charge the indorser,
and in case of a bill of exchange presentment for payment must
be made within a reasonable time after its issue in order to
charge the drawer.")
PRESENTMENT FOR PAYMENT 925
(3) Hour of Presentment.
(Sec. 72 (2), 75; N. I. L., supra.)
(4) Place of Presentment.
Case 527. Uniform Negotiable Instruments Law, Sees.
72 ( 3), 73, 87.
"Sec. 72. (3) Presentment for payment to be snf-
ficient must be made * * * at a proper place as
herein defined.
"Sec. 73. Presentment for payment is made at a
proper place: ,
"(1) Wbere a place of payment is specified in the in-
strument and it is there presented;
(2) Where no place is specified, but the address of the
person to make payment is given in the instrument and
it is there presented;
3. Where no place of payment is specified and no ad-
dress is given and the instrument is presented at the
usual place of business or residence of the person to
make payment;
4. In any other case if presented to the person to
make payment wherever he can be found, or if presented
at his last known place of business or residence.
"Sec. 87. Where the instrument is payable at a bank
it is equivalent to an order on the bank to pay the same
for the account of the original debtor thereon.''
Question 527: At what place must a negotiable instrument
be presented to the party primarily liable for payment in order
to hold the party secondarily liable ?
Case 528. Barnes v. Vaughn, 6 R. I. 259.
Facts: Suit against indorser. Defense, that proper
procedure has not been taken to charge him in that no
demand on the maker was made, at the proper place or
in the proper manner. The facts were that the note not
"being payable at any certain place by its terms was left
'for collection at a certain bank, and the cashier of the
926 NEGOTIABLE INSTRUMENTS
bank'sent a printed slip to the maker to come in and
pay it.
Bosworth, J.: "The defense to this suit is that no
legal and proper demand was made on the maker of the
note; and that therefore the indorser who is here sued
is discharged. The rule of the common law is that in
order to charge the indorser demand must be made on
the maker for payment on the very day on which the note
becomes due. In case the note on its face is made pay-
able at a particular place, as at a bank named, it is nec-
essary, and only necessary, to make demand at such
place; but if no place of payment is named in the note
at which the note is payable, it is necessary to present
the note to the maker personally or at his place of abode
or business before the indorser can be made chargeable.
* * * > >
Question 528: What was done in this case as presentment
for payment? Was it sufficient?
Case 529. German-American Bank of Rochester v.
Milliman, 65 N. Y. Suppl. 242.
Facts: Suit try an indorsee on a note against the
maker. The note was payable at Central Bank, whose
banking hours were from 10 A. M. until 4 P. M. On the
date of maturity the note was presented at the Central
Bank and refused, because of no funds there to pay it.
About 15 minutes to 4 Milliman deposited enough to pay
the note, and then went to plaintiff, the German Ameri-
can Bank, and informed the cashier of that fact. The
cashier informed him that the note had already gone to
protest and he would have to pay the protest fees. De-
fendant refused and this a suit against him on the note
for the amount thereof and protest fees and costs of
suit.
Point Involved: Whether the party liable on an in-
strument has all of the day of maturity till the close of
business hours or of banking hours if payable at a banij
to pay the instrument.
PRESENTMENT FOR PAYMENT 927
Sutherland, J.: [After reviewing many authorities]
"My conclusion is that the maker of this note in suit was
allowed, by commercial usage, until 4 o'clock, to deposit
at the Central Bank the money necessary to cover the
note; and such deposit having been made 15 minutes be-
fore 4 o'clock, the maker is not in default. Although
demand for the payment of the note was previously
made, and the note protested for non-payment, the pro-
test became of no avail on deposit of the amount of the
note and interest, and the maker cannot be compelled to
pay the protest fees thus incurred. I think this should
be held to be the rule whether we regard the protest of
the note earlier in the day as wholly bad or conditionally
good,—good on condition that the maker did not, before
the close of banking hours, fulfill his engagement by
making his account good at the bank where the note was
payable. * * * The judgment appealed from is
therefore modified so that plaintiff shall recover of the
defendant [the amount of the note with accrued interest
and without protest fees or costs of suit].
Question 529: What were the facts in this case, the point in
controversy and the Court's decision ?
(5) To Whom Presented.
Case 530. Uniform Negotiable Instruments Act, Sees.
76-78.
Sec. 76. Where the person primarily liable on the
instrument is dead, and no place of payment is specified,
presentment for payment must be made to his personal
representative if such there be, and if with exercise of
reasonable diligence, he can be found. v.
Sec. 77. Where the persons primarily liable on the
instrument are liable as partners, and no place of pay-
ment is specified, presentment for payment may be made
to any one of them, even though there has been a dis-
solution of the firm.
Sec. 78. Where there are several persons, not part-
ners, primarily liable on the instrument, and no place of
928 NEGOTIABLE INSTRUMENTS
payment is specified, presentment must be made to them
all.
Question 530: (1) If the person primarily liable on the in-
strument is dead, what is the rule?
(2) If the parties liable are partners, what is the rule?
(3) If they are not partners?
(6) Instrument Exhibited.
Case 531. Uniform Negotiable Instruments Law, Sec.
74.
''Sec. 74. The instrument must be exhibited to the
person from whom payment is demanded and when it is
paid must be delivered up to the party paying it.
Question 531: State the rule. See Case 528, supra.
§ 501. When presentment for payment to party pri-
marily liable not required in order to holder party
secondarily liable.
(1) Drawer No Right to Expect When.
Case 532. Uniform Negotiable Instruments Law,
Sec. 79.
'' Presentment for payment is not required in order to
charge the drawee where he has no right to expect or
require that the drawee or acceptor will pay the instru-
ment.
Question 532: State this rule.
(2) Accommodation to Indorser.
Case 533. Uniform Negotiable Instruments Law, Sec.
80.
"Presentment for payment is not required to charge
an indorser where the instrument was made or accepted
for his accommodation and he has no reason to expect
the instrument will be paid if presented.
Question 533: A for B's accommodation and in order to
enable B to obtain money from C, makes a note to B for $500,
PRESENTMENT FOR PAYMENT 929
B indorses this note to C. At maturity C makes no present-
ment to A. C afterwards sues B as indorser. Does the lack
of presentment excuse B ? Why ?
(3) Not Possible With Due Diligence.
Case 534. Uniform Negotiable Instruments Act, Sec.
81.
 Delay in making presentment for payment is excused
when the delay is caused by circumstances beyond the
control of the holder, and not imputable to his default,
misconduct or negligence. When the cause of delay
ceases to operate, presentment must be made with rea-
sonable diligence.
Question 534: When is delay in making presentment ex-
cused?
(4) Presentment for Payment Dispensed with When.
Case 535. Uniform Negotiable Instruments Act, Sec.
82.
''Presentment for payment is dispensed with:
"1. When after the exercise of reasonable diligence
presentment as required by this act can not be made.
"2. Where the drawee is a fictitious person.
"3. By waiver of presentment, express or implied.
. Question 535: When is presentment for payment dispensed
with,?
Case 536. Bessenger v. Wenzel, 125 N. W. 750
(Mich.)
Facts: The note in question was made by a corpora-
tion of which the indorsers were directors and managers,
and they knew that the corporation had no money to pay
the note and had assured the payee it could not be paid
at maturity. Moore, J., held that the necessity for pre-
sentment for payment was dispensed with by implied
waiver.
Question 536: What were the facts in this case and what did
the Court hold ?
§30 NEGOTIABLE INSTRUMENTS
B. Presentment of Bill for Acceptance.
§ 502. Presentment for acceptance necessary in certain cases.
§ 503. What presentment for acceptance sufficient.
§ 504. When excused.
§ 505. Eight of holder where bill not accepted.
§ 502. (Nego. Instru., Sec. 110.) Presentment for ac-
ceptance necessary in certain cases.
Case 537. Uniform Negotiable Instruments Law, Sec.
143.
"Presentment for acceptance must be made:
'' 1. Where the bill is payable after sight, or any other
case where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or,
"2. Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee.
"In no other case is presentment for acceptance neces-
sary in order to render any party to the bill liable.
Question 537: In what cases must presentment for accept-
ance he made?
(Note: Presentment for acceptance may be made in any-
other case.)
§ 503. (Nego. Instru., Sec. 111.) What presentment for
acceptance sufficient.
Case 538. Uniform Negotiable Instruments Act, Sec.
144, 145,146.
"Sec. 144. Except as herein otherwise provided, the
holder of a bill which is required by the next preceding
section to be presented for acceptance must either pre-
sent it for acceptance or negotiate it within a reasonable
time. If he fails to do so the drawer and all indorsers
are discharged.
'' Sec. 145. Presentment for acceptance must be made
by or on behalf of the holder at a reasonable hour, on a
business day, and before the bill is overdue, to the
drawee or some person authorized to accept or refuse
acceptance on his behalf; and,
"1. Where a bill is addressed to two or more drawees
who are not partners, presentment must be made to them
PRESENTMENT FOR ACCEPTANCE 931
all, unless one has authority to accept or refuse accept-
ance for all, in which case presentment may be made to
him only.
"2. Where the drawee is dead, presentment may be
made to his personal representatives.
"3. Where the drawee has been adjudged a bankrupt
or an insolvent, or has made an assignment for the bene-
fit of creditors, presentment may he made to him or to
his trustee or assignee.
"Sec. 146. A bill may be presented for acceptance on
any day on which negotiable instruments may he pre-
sented for payment under the provisions of sections 72
and 85 of this Act, When Saturday is not otherwise a
holiday, presentment for acceptance may he made before
12:00 o 'clock noon on that day.''
Question 538: When must a bill be presented for accept*
ance? If there are two or more drawees, must presentment
be made to all in order to charge indorsers and drawer? What
is the rule where drawee is dead ? Bankrupt ?
Upon what day must presentment be made?
§504. (Nego. Instru., Sec. 112.) When excused; delay
in presentment.
Case 539. Uniform Negotiable Instruments Act, Sees.
147, 148.
"[Sec. 147.] Where the holder of a bill drawn pay-
able elsewhere than at the place of business or residence
of the drawee has not time, with the exercise of reason-
■ able diligence to present the hill for acceptance before
presenting it for payment on the day that it falls due, the
1 delay caused by presenting the bill for acceptance before
presenting it for payment is excused and does not dis-
charge the drawers and indorsers.
"[Sec. 148.] Presentment for acceptance is excused
land a bill may be treated as dishonored by non-accept-
tance in either of the following cases:
"1. Where the drawee is dead, or has absconded, or
Iris a fictitious person or a person not having capacity to
liiontract by bill.
932
NEGOTIABLE INSTRUMENTS
"2. Where, after the exercise of reasonable diligence
presentment cannot be made.
"3. Where, although presentment has been irregular,
acceptance has been refused on some ground.
Question 530: "When is presentment excused? Delay ex-
cused ?
§ 505. (Nego. Instru., Sec. 113.) Right of holder when
bill not accepted.
Case 540. Uniform Negotiable Instruments Act, Sees.
149, 150, 151.
 [Sec. 149.] A bill is dishonored by non-acceptance:
"1. When it is duly presented for acceptance and such
an acceptance as is prescribed by this Act is refused or
cannot be obtained; or
"2. When a presentment for acceptance is excused and
the bill is not accepted.
"[Sec. 150.] Where a bill is duly presented for ac-
ceptance and is not accepted within the prescribed time,
the person presenting it must treat the bill as dishon-
ored by non-acceptance, or he loses the right of recourse
against the drawer and indorser.
 [Sec. 151.] When a bill is dishonored by non-accept-
ance, an immediate right of recourse against the drawers
and indorsers accrues to the holders, and no presentment
for payment is necessary.
Question 540: (1) When is a bill dishonored by non-accept-
tance ? .
(2) If non-accepted, what right has the holder?
CHAPTER 62
NOTICE OF DISHONOR
§ 506. Notice of dishonor necessary to charge drawer and indorser.
§ 507. What notice sufficient.
§ 508. When notice to drawer is excused.
§ 509. When notice to indorser is excused.
§ 510. When notice of dishonor waived.
§§506, 507. (Nego. Instru., Sees. 114, 115.)
Case 541. Uniform Negotiable Instruments Act, Sees.
89-108.
"[See. 89.] Except as herein otherwise provided,
when a negotiable instrument has been dishonored by
non-acceptance or non-payment, notice of dishonor must
be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is
discharged.
"[Sec. 90.] The notice may be given by on behalf
of the holder, or by or on behalf of any party to the in-
strument who might be compelled to pay it to the holder,
and who, upon taking it up, would have a right to reim-
bnrsement from the party to whom the notice is given.
 [Sec. 91.] Notice of dishonor may be given by an
agent, either in his own name or in the name of any party
entitled to give notice, whether that party be his prin-
cipal or not.
 [Sec. 92.] Where notice is given by or on behalf of
the holder, it inures for the benefit of all subsequent
holders and all prior parties who have a right of recourse
against the party to whom it is given.
 [Sec. 93.] Where notice is given by or on behalf of
a party entitled to give notice, it inures for the benefit of
the holder and all parties subsequent to the party to
whom notice is given.
933
934 NEGOTIABLE INSTRUMENTS
"[Sec. 94.] Where the instrument has been dishon-
ored in the hands of an agent, he may either himself give
notice to the parties liable thereon or he may give notice
to his principal. If he gives notice to his principal, he
must do so "within the same time as if he were the holder
and the principal upon the receipt of such notice, has
himself the same time for giving notice as .if the agent
had been an independent holder.
 [Sec. 95.] A written notice need not be signed, and
an insufficient written notice may be supplemented and
validated by verbal communication. A misdescription of
the instrument does not vitiate unless the party to whom
the notice is given is in fact misled thereby.
 [Sec. 96.] The notice may be in writing or merely
o^al and may be given in any terms which sufficiently
identify the instrument and indicate that it has been dis-
honored by non-acceptance or non-payment. It may in
all cases be given by delivering it personally or through
the mails.
"[Sec. 97.] Notice of dishonor may be given either
to the party himself or to his agent in that behalf.
 [Sec. 98.] Where any party is dead, and his death
is known to the party giving notice, the notice must be
given to a personal representative, if there be one, and
if with reasonable diligence he can be found. If there be
no personal representative, notice may be sent to the
last residence or last place of business of the deceased.
 [Sec. 99.] Where the parties to be notified are part-
ners, notice to any one partner is notice to the firm, even
though there has been a dissolution.
 [Sec. 100.] Notice to joint parties who are not part-
ners must be given to each of them, unless one of them
has authority to receive such notice for the others.
"[Sec. 101.] Where a party has been adjudged a
bankrupt or an insolvent, or has made an assignment for
the benefit of his creditors, notice may be given either to
the party himself or to his trustee or assignee.
 [Sec. 102.] Notice may be given as soon as the in-
strument is dishonored, and unless delay is excused as
NOTICE OF DISHONOR
935
hereinafter provided, must be given within the times
fixed by this act.
 [Sec. 103.] Where the person giving and the person
to receive notice reside in same place, notice must be
given within the following times:
1. If given at the place of business of the person to re-
ceive notice, it must be given before the close of business
hours on the day following.
2. If given at his residence, it must be given before the
usual hours of rest on the day following.
3. If sent by mail, it must be deposited in Lne postoffice
in time to reach him in the usual course on the day fol-
lowing.
"[Sec. 104.] Where the person giving and the per-
son to receive notice reside in different places, the notice
must be given within the following times:
1. If sent by mail, it must be deposited in the postoffice
in time to go by mail the day following the day of dis-
honor, or if there be no mail at a convenient hour on that
day by the next mail thereafter.
2. If given otherwise than through the postoffice, then
within the time that notice would have been received in
due course of mail, if it had been deposited in the post-
office within the time specified in the last subdivision.
"[Sec. 105.] Where notice of dishonor is duly ad-
dressed and deposited in the postoffice, the sender is
deemed to have given due notice, notwithstanding any
miscarriage in the mails.
 [Sec. 106.] Notice is deemed to have been deposited
in the postoffice when deposited in any branch postoffice
or in any letter box under the control of the postoffice
department.
"[Sec. 107.] Where a party receives notice of dis-
honor, he has, after the receipt of such notice, the same
time for giving notice to antecedent parties that the
holder has after dishonor.
 [Sec. 108.] Where a party has added an address to
his signature, notice of dishonor must be sent to that ad-
936 NEGOTIABLE INSTRUMENTS
dress; but if be bas not given sucb address, tben the
notice must be sent as follows:
1. Either to the postoffice nearest to his place of resi-
dence, or to the postoffice where he is accustomed to re-
ceive his letters; or,
2. If he lives in one place and has his place of business
in another, notice may be sent to either place; or,
3. If he is sojourning in another place, notice may be
sent to the place where he is sojourning.
But where the notice is actually received by the party
within the time specified in this act, it will be sufficient
though not sent in accordance with the requirements of
this section.
Question 541: (1) If a negotiable instrument is dishonored
by non-acceptance, what is necessary in order to hold drawer
and indorser?
(2) By or on behalf of whom may the notice be given?
(3) When the notice is given by or on behalf of the holder,
to whose benefit does it inure?
(4) If given by any one else entitled to give notice, to whose
benefit does it inure?
(5) If the instrument is dishonored in the hands of an agent,
to whom may he give notice ?
(6) Need the notice be in writing? Need it be signed?
(7) To whom may notice be given, in case of death of party?
In case of notice to partnership? In case of parties, jointly
named, but not partners? In case of notice to a bankrupt?
(8) Within what time must notice be given?
(9) Suppose notice is put in the post office and miscarries?
Is the party for whom the notice was meant bound?
(10) To what address must notice be sent?
Case 542. Thompson v. Williams, 14 Cal. 160.
Facts: The facts are stated in the opinion.
Points Involved: (1) What notice to an indorser is
sufficient in substance; (2) Where the indorser sought
to be held, indorsed after maturity, within what time
demand on the maker must be made to hold the indorser?
Cope, J.: '' This is an action on a promissory note by
the holder against the maker and indorser. The note i8
NOTICE OF DISHONOR
937
dated January 5, 1857, and by its terms, became due on
the following day. On the 26th of November, 1858, it
was indorsed by the payee to the present holder, who,
on the 29th of the same month, demanded payment of the
maker, and on the same day, verbally notified the in-
dorser of such demand, and that he would be held upon
his indorsement. The question is as to the sufficiency of
this notice.
"Mr. Justice Story, in his work on Promissory Notes
(Section 348), in speaking of the form of the notice of
dishonor to be given, or sent to the indorser, says: 'No
precise form of words is necessary to be used upon such
occasions. Still, however, it is indispensable that it
should either expressly, or by just and natural implica-
tion, contain, in substance, the following requisites: 1.
A true description of the note, so as to ascertain its
identity. 2. An assertion that it has been duly presented
to the maker at its maturity and dishonored. 3. That the
holder, or other person, giving the notice, looks to the
person to whom the notice is given for reimbursement
and indemnity.'
"The notice, in this case, was substantially as follows:
The plaintiff said to the defendant, Borland, the in-
dorser, that he had demanded payment of that note, and
desired to know what he intended to do about it. Bor-
land replied that he was not liable to pay. The plaintiff
then said that his name was upon it, and he should en-
deavor to make him liable; to which, Borland responded,
that he had lost by the arrangement, and could not be
held. The note was neither produced nor described, but
the Court below found, as a fact, that the defendant
knew what note was referred to, and this finding was
authorized by the circumstances, and his language and
conduct on the occasion.
"The object of the law in requiring a correct descrip-
tion of the note to be given in the notice to the indorser,
is, that he may be put upon notice of the extent of his
liability, and placed in possession of the material facts
necessary to enable him to secure the liability of others
938 NEGOTIABLE INSTRUMENTS
over to him, and his own reimbursement, upon payment
of the note. The rule was not intended to subserve a
technical purpose, but to promote substantial justice, and
when it sufficiently appears that the indorser, at the time
of receiving the notice, knew that particular piece of
paper was referred to, and could not have been preju-
diced by the failure to describe it, he cannot be permitted
to object that his information was not communicated in
a particular manner. This view was expressed by the
Supreme Court of the United States in Mills v. The Bank
of the United States (11 Wheat. 431). In that case,
there was a misdescription of the date of the note, and it
was contended that this defect in the notice was fatal to
the right of recovery against the indorser. But the Court
held that, under the circumstances, the notice was suffi-
cient, and the following are among the reasons given for
the decision: 'Under these circumstances, the Court laid
down a rule most favorable to the defendant. It directed
the jury to find the notice good, if there was no other
note, payable in the office at Chillicothe, drawn by Wood
& Ebert, and indorsed by the defendant. If there was
no other note, how could the mistake of date possibly
mislead the defendant? If he had indorsed but one note
for Wood & Ebert, how could the notice fail to be full
and unexceptional in fact?'
"The other objections to the sufficiency of the notice
are quite as easily disposed of. It was, of course, im-
possible for the plaintiff to show that the demand of
payment was made at the maturity of the note, for it
was indorsed to him long after it became due. He was
required to make the demand, not on any particular day,
but within a reasonable time, and it is not pretended
that he is chargeable with a want of diligence. It is con-
tended, however, that the time at which the demand was
made, should have been stated, and that the omission to
state it was a fatal defect in the notice. We do not think
so. A demand at any time before the notice was suffi-
cient; and of this the indorser was as well advised as the
plaintiff, for the facts were known to both, and the con-
NOTICE OF DISHONOR
939
elusion was purely a matter of law. There is no analogy
between this case and the case of a note indorsed before
it is due. In the latter case, the demand must be made
on the day the note matures, or the indorser will not be
liable; and to fix his liability, the notice must show that
the demand was made at the proper time. This is all
that the case of Wynn v. Alden (4 Denio, 163), amounts
to. This notice in that case, stated that the note was'
presented this day, and payment refused; but the notice
was not dated, and it was held to be defective, because it
was impossible to ascertain from the paper itself what
particular day was intended. The Court intimated, how-
ever, that the defect might have been cured by the intro-
duction of extraneous evidence.
"If much time had intervened between the demand
and notice, the question might have arisen, whether the
defendant was not by reason of the delay, released from
liability. But we do not see how that question could
have been determined by a reference to the notice itself;
we are not aware of the existence of any rule of law,
making the contents of a notice evidence of its service,
or the fact of service a part of its contents.
"The other requisites, that the demand was made of
the maker, that he refused to pay, and that the plaintiff
looked to the defendant for reimbursement and in-
demnity, were sufficiently stated in the notice. Any
other construction would be forced and unreasonable.
The necessary inference from the statement, that pay-
ment was demanded is, that it was demanded of the per-
son liable to pay, namely, the maker of the note. The
fact of non-payment is shown by necessary implication
in the declaration of the plaintiff, that he intended to
look for payment to the defendant.
"It follows, that the notice to the defendant was suffi-
cient, and the judgment of the Court below must be
affirmed.—Ordered accordingly.
Question 542: (1) In what did the notice in this case con-
sist? Was it sufficient?
940
NEGOTIABLE INSTRUMENTS
(2) What were the facts in Mills v. Bank? Was the notice
good in that case ?
(3) Where the indorsement is made after the note was due,
within what time must presentment for payment and notice of
dishonor be made in order to hold such indorser ?
Case 543. Amer. Nat. Bk. v. Nat. Fertilizer Co., 125
Tenn. 328.
Facts: Suit against the National Fertilizer Co. as in-
dorser. Defense, among others, that no notice was given.
The evidence as to this notice is given in the opinion.
Point Involved: Whether and under what circum-
stances notice by telephone is sufficient.
Neill, J.: "* * * The complainant insists that
notice was given. This is denied by defendant. The
treasurer of the company, Mr. E. W. Connell, who made
the indorsement for the fertilizer company, testifies un-
equivocally that no notice was received by him. Mr.
Rhea, the president, testifies to the same effect. Mr. Le
Seur, the cashier of the bank, says that he gave notice
by telephone. According to Sec. 96 of the Negotiable In-
struments Law, the notice may be 'in writing or merely
oral' and may 'in all cases be given by delivering it per-
sonally or through the mails.' We are of the opinion that
a notice by telephone would fall within the meaning of
this section, if it be clearly shown that the party to be
notified was really communicated with; that is, fully
identified as the party at the receiving end of the fine.
In this case, however, Mr. Le Seur is not clear that he
ever held any communication with Mr. Connell. He tes-
tifies that his talks were with a clerk, whose name is not
given; that he had several conversations with this clerk,
in which he left word for Mr. Connell, and he thinks he
succeeded one time in getting Mr. Connell. It is evident,
however, in his testimony, that he is. not confident in this
belief, while Mr. Connell is positive he did not receive
notice at all. It is said in Sec. 97 that notice of dishonor
may be given 'either to the party himself or his agent
in that behalf.' We do not undertake to define the mean-
NOTICE OF DISHONOR
941
ing of the expression * agent in that behalf.' We are of
opinion, however, that notice to a clerk, under the facts
stated, would not be sufficient; it not appearing that he
had communicated such notice to any one connected with
the management of the business.
Question 543: (1) Is notice of dishonor given by telephone
sufficient ? When ?
(2) Why in this case was the notice to the clerk not regarded
as sufficient? Could not notice to a clerk be sufficient under
certain circumstances without respect to whether he communi-
cated the notice to any one else ? What circumstances ?
Case 544. First Nat. Bk. v. Miller, 139 Wis. 126.
Facts: Suit against defendant as indorser of a note.
Defendant resided on a rural free delivery route and
this was known to the holder. All mail with postage
prepaid deposited before 9:25 A. M. reached defendant
the same day. The note was dishonored on Saturday,
February 24, 1906. Notice thereof, with insufficient post-
age was put in the mail the following Monday evening.
This mail was returned to the sender for lack of postage.
On the fifth day thereafter, between 6 and 8 P. M., the no-
tice was again posted, properly addressed and stamped.
Defendant refuses payment because he was not properly
notified of dishonor.
Point Involved: The time within which notice of dis-
honor by mail must be given.
Marshall, J.: "* * * The law relating to pro-
ceedings to fix the liability of an indorser of a promis-
sory note, in case of dishonor by the maker, was different
in some states than in others, and for harmony on that
as to time and manner of giving notice of dishonor to
the indorser it was provided by Sees. 1678-84 of the
Negotiable Instrument Statute that * Where the person
giving and the person to receive notice reside in differ-
ent places, the notice must be given * * * if sent
by mail' by depositing it 'in the postoffice in time to go
by mail the day following the day of dishonor, or, if
942
NEGOTIABLE INSTRUMENTS
there be no mail at convenient hour on that day, by the
next mail thereafter.' Here notice was not sent till after'
time for mail on the first secular day after dishonor
though there was ample opportunity to do so. The de-
parture time for the mail was between 9 and 10 o'clock
of such day. That was certainly a convenient time with-
in the meaning of the statute. No excuse is found in
the evidence for not depositing the notice with postage
fully paid so as to have reached the respondent by such
mail. The deposit on the evening of that day, after ordi-
nary business hours and long after the closing of the
mail for such day, as regards the route by which it must
have been known the notice would reach respondent, if
at all, clearly was too late. If that were not so, failure
to prepay the postage so notice would go out by the next
mail and failure to remedy the mistake after knowledge
thereof for several days thereafter released the indorser
beyond any possible question.
"By the Court.—Judgment affirmed
Question 544: Give the facts in this case showing why the
indorser was discharged.
Case 545. Oakley v. Carr, 66 Nebr. 751, 60 L. R. A.
431.
Facts: Suit by one Oakley as indorsee of a note
against Carr, as indorser. Defense that notice of dis-
honor was not given to Carr soon enough to fix his ha-
bility. The facts Avere that the note was made by one
Anderson, of Seward, Nebraska, to Carr, who is a resi-
dent of Lincoln, Nebraska, and indorsed by Carr in blank
to Oakley. It was deposited for collection with the First
National Bank of Lincoln, Avhich indorsed it "Pay any
Bank or Banker on order, (signing it) and sent it to
the bank at Seward. The maker of the note not being
found the note was protested by a notary public, and on
the same day- a notice of protest was sent to the maker,
another to First National Bank of Lincoln, and another
to John Carr, care of First National Bank of Lincoln,
all of these notices being put in the postoffice on the date
NOTICE OF DISHONOR
943
of maturity. This notice was forwarded to defendant
Carr and reached him the following day.
Point Involved: Whether an indorser is notified in
due time of dishonor to fix his liability to a subsequent
indorser where the holder has in proper time notified the
last indorser, and such indorser has within the time
allowed for him to receive notice notified the indorser
whom he seeks to hold.
Lobingieb, J.:"* * * At common 'law by the
weight of authority, the indorser of a dishonored note or
bill, was entitled to notice thereof on the day following
the dishonor, if he resided in the same town with the
maker; and if he resided elsewhere the notice was re-
quired to be posted by the first reasonable mail sent on
the day following dishonor. * * *
"But the same law merchant which required the notice
of dishonor to be given or sent on the day following non-
payment also limited the duty of the holder or protesting
officer in this regard to a notification of the last indorser,
who in turn was allowed an additional day to send notice
to the indorser immediately preceding him, and so on
until all had been notified; 3 Randolph, Com. Paper, Sec.
1261. Thus in the case before us the notary was not
legally bound to notify Carr at all. It would have been
sufficient had he simply sent the one notice to the First
National Bank, which was the last indorser, and the
latter would have had until the following business day to
notify Carr. As the bank received its notice on Satur-
day, it would, under this rule, have until the following
Monday to send its notice to defendant in error, for in
such cases the intervening Sunday is not to be counted.
Eagle Bank v. Chapin, 3 Pick. 180; Agnew v. Bank of
Gettysburg, 2 Harr. & G. 478; and many cases cited in
7 Century Dig. Sec. 1169.
"It is claimed, however, that this doctrine should not
be applied to a case like this, where the last indorser
had received and indorsed the note simply for collection.
It will be remembered that the indorsements themselves
944
NEGOTIABLE INSTRUMENTS
were not such as to disclose that the Lincoln Bank was
an indorsee for collection only. Carr had indorsed the
note in blank, and the Lincoln Bank had indorsed it
merely so that its correspondent might collect, and there
was nothing to indicate to the notary but that the Lincoln
Bank was the holder as well as the last indorser. But
aside from this, no authority is cited for the exception
contended for by plaintiff in error in the case of in-
dorsers who hold for collection only. On the other hand,
there is ample support for the proposition that it is suffi-
cient to notify such indorsers in the same way as other
last indorsers are notified, and that prior indorsers may
he held by virtue of the usual notice from them. Car-
mena v. Bank of Louisiana, 1 La. Ann. 369; Eagle Bank
v. Hathaway, 5 Met. 212; Brown v. Ferguson, 4 Leigh,
39, 24 Am. Dec. 707; Linn v. Horton, 17 Wis. 151; 3
Randolph, Com. Paper, Sees. 1241, 1262. Boyer v. Rich-
ardson, 52 Neb. 156, 71 N. W. 981, cited by defendant in
error, in no way conflict with the foregoing. The Court
there was simply considering the effect of an indorse-
ment for collection on the title to a note, and held that
such an indorsee acquired no right of action against a
prior indorser.
"But it is contended that the 'First National Bank'
has never so notified Carr. * * * They simply at-
tended to the courtesy of seeing that Carr finally got a
letter that was sent to them in their care, without even
knowing its contents.' If it had developed that the letter
which the hank delivered to Carr by its messenger was
not in fact a notice of dishonor, and none other had been
sent, he, of course, would have been released from lia-
bility. In taking the course it did, the bank might have
been assuming some risk, though it must be remembered
that its agent claimed to have mailed a separate letter to
Carr, and testified that it was their custom, out of ample
caution, to adopt in such cases both methods of notifica-
tion. But since the letter delivered to. Carr was complete
and sufficient notice of dishonor, we are unable to see
how it can profit defendant in error that it was not actu-
NOTICE OF DISHONOR
945
ally prepared by the clerks or officers of the Lincoln
Bank. The latter had a right to employ such agencies
as it saw fit, both in the preparation, and delivery of the
notice.''
I
Question 545: C, the holder of a note, presents it to M, the
maker, on the date of its maturity and M refuses payment. A
and B are indorsers thereon in the order named. M notifies B
in the time allowed; how long has B to notify A in order to
hold him ?
§§508-510. (Nego. Instru., Sees. 116-118.) Waiver of
notice; not required when; delay in giving notice; ex-
cused when, etc.
Case 456. Uniform Negotiable Instruments Act, Sees.
109-118.
"[See. 109.] Notice of dishonor may be waived,
either before the time of giving notice has arrived, or
after the omission to give due notice, and the waiver
may be express or implied.
 [Seci 110.] Where the waiver is embodied in the
instrument itself, it is binding upon all parties; but where
it is written above the signature of an indorser, it binds
him only.
 [Sec. 111.] A waiver of protest, whether in the case
# of a foreign bill of exchange or other negotiable instru-
ment, is deemed to be a waiver not only of a formal pro-
test, but also of a presentment and notice of dishonor.
 [Sec. 112.] Notice of dishonor is dispensed with
when after the exercise of reasonable diligence, it can-
not be given to or does not reach the parties sought to
be charged.
 [Sec. 113.] Delay in giving notice of dishonor is
excused when the delay is caused by circumstances be-
yond the control of the holder and not imputable to his
default, misconduct or negligence. When the cause of
delay ceases to operate notice must be given with rea-
sonable diligence.
"[Sec. 114.] Notice of dishonor is not required to
be given to the drawer in either of the following cases:
946
NEGOTIABLE INSTRUMENTS
'' 1. Where the drawer and drawee are the same person.
"2. Where the drawee is a fictitious person or a person
not having capacity to contract.
"3. Where the drawer is the person to whom the in-
strument is presented for payment.
"4. Where the drawer has no right to expect or re-
quire that the drawee or acceptor will honor the instru-
ment.
'' 5. Where the drawer has countermanded payment.
 [Sec. 115.] Notice of dishonor is not required to
be given to an indorser in either of the following cases:
"1. Where the drawee is a fictitious person or a person
not having capacity to contract and the indorser was
aware of the fact at the time he indorsed the instrument.
"2. Where the indorser is the person to whom the in-
strument is presented for payment.
"3. Where the instrument was made or accepted for
his accommodation.
"[Sec. 116.] Where due notice of dishonor by non-
acceptance has been given, notice of a subsequent dis-
honor by non-payment is not necessary, unless in the
meantime the instrument has been accepted.
"[Sec. 117.] An omission to give notice of dishonor
by non-acceptance does not prejudice the rights of a
holder in due course subsequent to the omission.
"[Sec. 118.] Where any negotiable instrument has
been dishonored it may be protested for non-acceptance
or non-payment, as the case may be, but protest is not
required except in the case of foreign bills of exchange.
Question 546: May notice of dishonor be waived? May the
waiver be implied ? May it be before or after the notice should
have been given?
(2) If the waiver is embodied in the instrument, does it
operate against all indorsers?
(3) If the party "waives protest, of what else is this a
waiver ?
(4) When is delay in giving notice excused?
(5) When is notice of dishonor not required: (a) to be
given drawer? (b) to be given indorser?
NOTICE OF DISHONOR
947
(6) Is protest required in case of promissory notes and in-
land bills? Upon what instrument is protest absolutely es-
sential? May it be given in other cases?
Case 547. Gove et al. v. Vining, 7 Mete. (Mass.) 212.
Suit by indorsees against the indorser on a promis-
sory note. Defense, that notice of dishonor was not
given. The facts were that the note was made by Alex-
ander Vining to Polly Vining and indorsed by Polly.
The present holder sent a demand on the maturity of
the note, to Alexander as maker to pay the note. The
messenger did not see Alexander, but handed the notice
to Polly, who read it, and then requested that there be
no suit on the note until Alexander could go down and
see the holder about it.
Point Involved: What amounts to an implied waiver
by an indorser of presentment for payment and notice
of dishonor.
Shaw, C. J.: "* * * the Court are of opinion that
when the indorser, shortly before the time when the note
becomes due, says to the holder that an arrangement for
its payment is about being made, and in direct terms or
by reasonable implication, requests the holder to wait or
give time, it amounts to an assurance that the note will
be paid—that the promisor or indorser will pay it—and
is a waiver of demand and notice. It tends to put the
holder off his guard, and induces him to forego making
a demand at the proper time and place; and it would
be contrary to good faith to set up such want of demand
and notice—caused perhaps by such forbearance—as a
ground of defense. * * *
Question 547: Was there waiver in this case? Explain?
CHAPTER 63
PROTEST
§ 511. Protest necessary to charge drawer and indorser of foreign bill.
§ 512. Who authorized to make protest.
§ 513. Time, place and manner of protest.
§ 514. Protest dispensed with or waived.
§§ 511-514. (Nego. Instru., Sees. 119-122.)
Case 548. Uniform Negotiable Instruments Act, Sec.
152.
"Where a foreign bill appearing on its face to be such,
is dishonored by non-acceptance, and when such a bill
which has not previously been dishonored by non-accept-
ance is dishonored by non-payment, it must be duly
protested for non-payment. If it is not so protested,
the drawer and indorsers are discharged. Where a bill
does not on its face purport to be a foreign hill protest
thereof, in case of dishonor, is unnecessary.
Question 548: When is protest necessary? Is it necessary on
an inland bill or a promissory note ? What is the effect of omit-
ting protest when necessary?
Case 549. Uniform Negotiable Instruments Act, Sec.
153.
'' The protest must he annexed to the bill or must con-
tain a copy thereof, and must be under the hand and seal
of the notary making it and must specify:
"1. The time and place of presentment.
"2. The fact that presentment was made and the man-
ner thereof.
"3. The cause or reason for protesting the bill.
"4. The demand made and the answer given, if any, of
the fact, that the drawee or acceptor could not be found.
Question 549: What are the requirements as to protest ?
948
PROTEST
949
Case 550. Uniform Negotiable Instruments Act, Sec.
154.
1 i Protest may be made by:
"1. A notary public; or,
"2. By any respectable resident of the place where the
bill is dishonored, in the presence of two or more credible
witnesses.
Question 550: By whom may protest be made?
Case 551. Uniform Negotiable Instruments Act, Sees.
155, 156.
"When a bill is protested, such protest must be made
on the day of its dishonor, unless delay is excused as
herein provided. When a bill has been duly noted, the
protest may be subsequently extended as of the date of
the noting.
"A bill must be protested at the place where it is
dishonored, except that when a bill drawn payable at the
place of business or residence of some person, other than
the drawee, has been dishonored by non-acceptance, it
must be protested for non-payment at the place where it
is expressed to be payable; and no other presentment for
payment to, or demand on, the drawee is necessary.''
Question 551: When must protest be made? Where?
Case 552. Uniform Negotiable Instruments Act, Sec.
158.
"WTien the acceptor has been adjudged a bankrupt or
an insolvent or has made an assignment for the benefit
of creditors, before the bill matures, the holder may
cause the bill to be protested for better security against
the drawer and indorsers.
Question 552: What is protest for better security?
Case 553. Uniform Negotiable Instruments Act, Sec.
159.
"Protest is dispensed with by any circumstances which
would dispense with notice of dishonor. Delay in noting
or protesting is excused when delay is caused by cir-
950 NEGOTIABLE INSTRUMENTS
cumstances beyond the control of the holder and not im-
pntable to his default, misconduct or negligence. When
the cause of delay ceases to operate, the bill must be
noted or protested with reasonable diligence.
Question 553: When will protest be dispensed with?
Case 554. Uniform Negotiable Instruments Act, Sec.
160.
 Where a bill is lost or destroyed, or is wrongly de-
tained from the person entitled to hold it, protest may
be made on a copy or written particulars thereof.
Question 554: How is protest made on lost or destroyed bill?
PART IV
DISCHARGE OF PAPER AND PARTIES THEREON
CHAPTER 64
DISCHARGE OF NEGOTIABLE PAPER
§ 515. Meaning of term '' discharge.''
§ 516. How negotiable paper discharged.
§ 517. Discharge of person secondarily liable.
§ 518. Not discharged by payment by party secondarily liable.
§ 519. Discharge by cancellation or alteration.
§ 520. Renunciation of rights.
§ 515. (Nego. Instru.., Sec. 123.) Meaning of term
discharge.
(See following sections.)
§ 516. How negotiable paper discharged.
Case 555. Uniform Negotiable Instruments Act, Sec.
119.
"A negotiable instrument is discharged:
"1. By payment in due course by or on behalf of the
principal debtor.
"2. By payment in due course by the party accom-
modated, where the instrument is made or accepted for
accommodation.
"3. By the intentional cancellation thereof by the
holder.
"4. By any other act which will discharge a simple
contract for the payment of money.
"5. When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
Question 555: Enumerate the various ways in which a nego-
tiable instrument may be discharged ?
951
952 NEGOTIABLE INSTRUMENTS
§ 517. (Nego. Instru., Sec. 125.) Discharge of persons
secondarily liable.
Case 556. Uniform Negotiable Instruments Act, Sec.
120.
"A person secondarily liable on the instrument is dis-
charged:
'' 1. By an act which, discharges the instrument.
"2. By the intentional cancellation of his signature by
the holder.
"3. By the discharge of a prior party.
"4. By a valid tender of payment made by a prior
party.
"5. By a release of the principal debtor, unless the
holder's right of recourse against the party secondarily
liable is expressly reserved, or unless the principal debt-
or be an accommodating party.
'' 6. By any agreement binding upon the holder to ex-
tend the time of payment, or to postpone the holder's
right to enforce the instrument, unless made with the
assent of the party secondarily liable, or unless the right
of recourse against such party is expressly reserved.
Question 556: Enumerate the various ways in which a per-
son secondarily liable is discharged.
§ 518. (Nego. Instru., Sec. 126.) Not discharged by
payment by party secondarily liable.
Case 557. Uniform Negotiable Instruments Act, Sec.
121.
"Where the instrument is paid by a party secondarily1
liable thereon, it is not discharged; but the party so pay-
ing it is remitted to his former rights as regards alii
prior parties, and he may strike out his own and all
subsequent indorsements, and again negotiate the instm->
ment, except:
"1. Where it is payable to the order of a third pen
son and has been paid by the drawer; and,
"2. Where it was made or accepted for accommoda'
tion, and has been paid by the party accommodated.
Question 557: State the provisions of this section.
DISCHARGE
953
§519. (Negro. Instru., Sec. 127.) Discharge by cancel-
lation or alteration.
(See also Sec. 485, supra.)
Case 558. Uniform Negotiable Instruments Act, Sees.
123, 124, 125.
"[Sec. 123.] A cancellation made unintentionally, or
under a mistake, or without the authority of the holder,
is inoperative; but where an instrument or any signature
thereon appears to have been cancelled, the burden of
proof lies on the party who alleges that the cancellation
was made unintentionally, or under a mistake or without
authority.
"[Sec. 124.] "Where a negotiable instrument is ma-
terially altered by the holder without the assent of all
parties liable thereon, it is avoided except as against a
party who has himself made, authorized or assented to
the alteration and subsequent indorsers.
"But when an instrument has been materially altered
and is in the hands of a holder in due course, not a party
to the alteration, he may enforce payment thereof ac-
cording to its original tenor.
"[Sec. 125.] Any alteration which changes:
"1. The date.
"2. The sum payable, either for principal or interest.
"3. The time or place of payment.
"4. The number and the relations of the parties.
"5. The medium of currency in which payment is to
be made.
"Or which adds a place of payment where no place of
Payment is specified, or any other change or addition
vhich alters the effect of the instrument in any respect,
s a material alteration.''
Question 558; (1) If a cancellation is made unintentionally,
hat is the effect?
(2) What presumption is made as to such cancellation?
(3) When an instrument is materially altered, what result
•llows ?
954 NEGOTIABLE INSTRUMENTS
(4) Can suit be brought on it in its original form: (a) by
the party altering it; (b) by a holder in due course?
(5) "What alterations are considered material?
§520. (Nego. Instru., Sec. 128.) Renunciation of
rights.
Case 559. Uniform Negotiable Instruments Act, Sec.
122.
'' The holder may expressly renounce his right against
any party to the instrument before, at, or after its matur-
ity. An absolute and unconditional renunciation of his
rights against the principal debtor made at or after the
maturity of the instrument, discharges the instrument.
But a renunciation does not affect the rights of a holder
in due course without notice. A renunciation must be
in writing, unless the instrument is delivered up to the
person primarily liable thereon.
Question 559: To constitute a renunciation of rights, what is
necessary ?
Case 560. In re George (1890), 4 Ch. D. 627.
Facts: M. A. Francis gave her note for £2,000 to
F. W. George, now deceased. Some hours before his
death George directed the promissory note to be brought
to him that he might destroy it. The note could not be
found. George then sent for the nurse and told her he
could not find the note, but that he wished to forgive the
debt, and made the nurse promise she would destroy the
note, and that she would testify that it was George's
wish that it should be destroyed, and that she should
write this down. Thereupon the nurse wrote this memo-
randum: "30th August, 1889. It is by Mr. George's
dying wish that the cheque for £2,000 money lent to Mrs.
Francis be destroyed as soon as found. Mr. George is
perfectly conscious and in his sound mind. (Signed)
Nurse T. After George's death the note was found by
the executors, and this is a proceeding to determine
whether it has been cancelled.
Powt Involved: What amounts to a legal renuncia-
tion of rights upon a negotiable instrument.
DISCHARGE
955
Chitty, J.: "* * * Then comes the question,
whether there is a 'renunciation' 'in writing' within Sec.
62, Sub-Sec. 1. I entertain no doubt of the integrity
and trustworthiness of the witnesses, and I entertain no
doubt also that it was the testator's intention to forgive,
or discharge this note in favour of the plaintiff. I am
quite satisfied with the evidence on this point. Sec. 62,
Sub-Sec. 1, says the renunciation must be in writing, un-
less the bill is delivered up to the ' acceptor,' and, change
ing the language to suit the present case, that would be,
unless the note is delivered up to the maker. The statute
contains provisions, for the cancellations of bills of ex-
change, and, therefore, of promissory notes also. So
that it is quite clear, that if this note had been in the
testator's possession at the time, he would have had it
destroyed: upon that point I entertain no doubt. I have,
however, to deal with the statute, which is not confined,
of course, to cases such as this, but is a statute as to
bills of exchange, and has a wide operation among mer-
cantile men; and I feel that I must be on my guard not
to allow any sympathy I may have with the plaintiff on
the facts of the case in any way to influence my judg-
ment in construing this section; because I might, if I
did give way on such a ground as that, be inflicting con-
siderable injury upon merchants and others.
"Now, it is plain that what must be in writing is an
absolute and unconditional renunciation of rights. It is
not necessary to put those words in; but that must be
the effect of the document. Then the document is not to
be a note or memorandum of the renunciation or of an
intention to do it, but it must be itself the record of the
renunciation. I am not called upon to say whether the
words,' the renunciation must be in writing,' involves the
signature; and I do not propose to say anything which
would tend to show it was my opinion that the renuncia-
tion in writing need not be signed. I see great danger
in holding that the signature is not required. I leave the
point wholly undetermined. This section, as has been
properly pointed out, does not, in terms, say that the
writing must be signed by the holder of the bill or note;
956 NEGOTIABLE INSTRUMENTS
and it does not, in terms, say that the writing may be
signed by anybody on his behalf—that is, by an agent;
and, no doubt, there are other sections where signature
is spoken of, and it must be the signature of the person
himself, or there may be cases where it is signed by the
agent, and provisions are made to that effect in the
statute. ,
"But now I take the document which I have before
me, and compare it with the statute. The facts are
these. [His Lordship then stated the facts as to the
writing of the memorandum by the nurse, and contin-
ued.] That memorandum was, no doubt, meant to be
evidence of his intention. The document is signed by
the nurse, and it was an authority to those concerned,
if the note had been found, to destroy it in his lifetime.
"But is that an absolute and unconditional renuncia-
cion in writing of the testator's rights on the note? Mr.
Romer's argument (to put it shortly) was this, that it
is final because it is stated it is Mr. George's dying wish,
and that it is immediate because the note was to be de-
stroyed as soon as found. But the real question, I think,
is this: is the direction to destroy the note as soon as
found an absolute and unconditional renunciation of the
rights on the note? I put the proposition in that way;
for I think it is the fairest way to state it in favour of
the plaintiff. I am now assuming that this is a writing
by the testator—an assumption that I am making in
favour of the plaintiff.
'' The pertinent question is, could not the testator, after
this paper had been signed by the nurse, have gone to
the bank, if he recovered, where he supposed the note to
be, to get it, or if it was found afterwards and brought
to the testator, could he not say, 'I have changed my
mind ?' I think he could. I think I am bound in point
of law to say that ho could.
"Having examined the case with all the care that I
think could be given to it, I am unable to come to the
conclusion that this was an absolute and unconditional
DISCHARGE 957
renunciation in writing such as is required by the
statute.
Question 560: Why was not the writing by the nurse in this
case considered a renunciation?
PART V
ADDED CHAPTERS ON BANKS AND SURETYSHIP
Chapter 65. Banks and Banking.
Chapter 66. Guaranty and Suretyship.
CHAPTER 65
BANKS AND BANKING
§§ 520-547. (Nego. Instru., Sees. 129-156.)
(Note: In the cases on Negotiable Instruments just preced-
ing are many cases that would properly fall under the heading
"Banks and Banking, particularly cases concerning checks.
In the present chapter it would be interesting to add cases upon
the general subject of banks and banking, but space does not
permit a general treatment. For a general elementary dis-
cussion reference is made to the text book on Negotiable In-
struments, Chapter 18.
The duty of the bank in respect to deposits for collection;
the liabilities and rights of the bank in reference to forged
and altered paper, including the question of the degree of care
in writing checks, the failure of the bank to honor checks drawn
by depositors on sufficient accounts, the negotiability of checks,
the liability of the bank on special forms of indorsement—these
and other subjects are covered by cases in other parts of this
book. Below is a case and a note appended thereto upon the
duty of the depositor to examine cancelled vouchers, and report
errors.)
Case 561. Hammerschlag Mfg. Co. v. Importers' &
Traders' Nat. Bank, 262 Federal, 266.
Rogers, Circuit Judge (after stating the facts): ''The
question which this case presents relates to the right of
958
DEPOSITOR'S DUTY
959
a bank which has paid raised checks to escape liability
for repayment of the amounts so paid by establishing
the negligence of the depositor in not examining the
passbook and vouchers returned to him by the bank, and
in not reporting to the bank without unreasonable delay
the errors discovered or which might have been dis-
covered.
"In the present case there was no forgery of signa-
tures. It is admitted that the signatures were all genu-
ine. The forgeries consisted in raising the amounts for
which the checks were originally drawn, and the altera-
tions were all made by the plaintiff's confidential book-
keeper. He had exclusive charge of the preparation of
the checks for signatures, and exclusive charge of the
presentation of the checks for signatures. After the
signatures were affixed, the bookkeeper would raise the
amount of the check and present it to the bank for pay-
ment. The alteration of checks by him began in August,
1913, and in June of that year the plaintiff had written
the following letter and given it to the bookkeeper, "Wil-
liam H. Hooper, who presented it to the paying teller
of the bank:
"New York, June 6, 1913.
"Importers' & Traders' National Bank, Broadway and
Murray Street, City—
Gentlemen: Please accept this letter as authority for
payment to our Mr. W. H. Hooper of checks presented
by him, drawn to the order of bearer—signature below.
Respectfully yours,
(Signed) Hammerschlag Mfg. Co.
J. D. Goldberg, Vice President.
Die. J.D.G/K.
(Signed) William H. Hooper.
: "Each one of the altered checks was altered by Hoop-
er, presented by him, and to him the money on all of
them was paid. The amount of the check as originally
drawn was erased by an ink eradicatof preparation, and
!as the raised amount was in the handwriting of the one
party who wrote the original check there was nothing in
960 NEGOTIABLE INSTRUMENTS
the appearance of the check to challenge attention. The
protectograph was not used, with a possible exception
of one or two of the checks, until after the alteration
in amount was made. No book containing checks and
stubs was used. The checks were drawn on voucher
forms, which were padded, and the amounts were en-
tered in the book as the book of original entry.
 (1) A depositor who sends his passbook to be writ-
ten up, and receives it back with his paid checks as
vouchers, is under an obligation to the bank to examine
and verify his passbook and vouchers, and report to the
bank the errors disclosed.
a * * *
"In Leather Manufacturers' Bank v. Morgan, 117 U.
S. 96, 6 Sup. Ct. 657, 29 L. Ed. 811 (1886), the rule is
laid down that the depositor is bound personally or by
an authorized agent and with due diligence to examine
the passbook and vouchers, and to report to the bank
without unreasonable delay any errors that may be dis-
covered; and if he fails to do so, and the bank is misled
to its prejudice, he cannot afterwards dispute the cor-
rectness of the balance shown by the passbook. It is
also held that, if the duty of the examination is dele-
gated by the depositor to the clerk guilty of the forgeries,
he does not so discharge his duty to the bank as to re-
lieve himself from loss.
"In Critten v. Chemical National Bank, 171 N. Y.
219, 63 N. E. 969, 57 L. R. A. 529 (1902), the rule is laid
down that a bank depositor owes to the bank the duty
of exercising reasonable care to verify the returned
vouchers by the record kept by him of the checks he has
issued, for the purpose of detecting forgeries and alter-
ations; and in that case the court held the bank depositor
chargeable with the knowledge of the fraudulent altera-
tion of checks possessed by his clerk to whom he in-
trusted the examination of vouchers, and with his negli-
gence or failure in the verification of the accounts, al-
though the clerk happened to be the one who made the
alterations, where the comparison of checks with the
DEPOSITOR'S DUTY
961
stubs in the checkbook would have disclosed such altera-
tion to an innocent party previously unaware of the
forgeries.
"In Morgan v. United States Mortgage & Security
Co., 208 N. Y. 218, 101 N. E. 871, L. E. A. 1915D, 741,
Ann. Cas. 1914D, 602 (1913), a trusted clerk in the em-
ploy of the trustees of an estate, and who was their
immediate agent in dealing with the bank, forged 28
checks, aggregating a large sum, which the bank paid.
Checks drawn on the account of the estate were signed
by a rubber stamp imprinting the words ' estate of David
P. Morgan,' and were authenticated by the actual signa-
ture of one of the trustees. The clerk who made the
deposits filled out the body of the checks, obtained from
the bank the passbook and vouchers and check list when-
ever the account was balanced, and employed in his
forgeries the simulated signature of the trustee Morgan.
An action was brought to recover the amount paid by
the bank on forged checks. The court held that there
could be no recovery; the rule being that a bank is per-
mitted to escape liability for repayment of amounts paid
out on forged checks, if it establishes that the depositor
has been guilty of negligence which contributed to such
payments and that it has been free from any negligence.
The negligence which the bank relied upon was the neg-
ligence of the trustees in not examining their passbook,
and list of vouchers, and thus discovering within a rea-
sonable time what they were being charged with. The
depositors were in the habit of making an examination,
but the examination was incomplete and ineffective. The
court declared that if they had examined the checklist
and passbook, and compared them with their own books,
they would have discovered at once the payment and
debit to their account of checks which they had not
drawn, and the forgeries would have been uncovered.
The trustees had relied for verification merely on a com-
parison of vouchers, without any effort to verify them
by comparison with the checklist or passbook.
"In Myers v. Southwestern National Bank, 193 Pa. 1,
962 NEGOTIABLE INSTRUMENTS
44 AtL 288, 7 Am. St. Rep. 672 (1899), the court recog-
nized the duty of the depositor to verify the settlement
of the bankbook, and held that he could not recover from
the bank the loss which he sustained by not doing so.
In that case the depositor intrusted to the confidential
clerk, who committed the forgeries, the duty of verify-
ing the passbook, and the court held the depositor clear-
ly responsible for the acts and omissions of his clerk
from the course of the duties with which he was intrusted.
< i * * *
1 '(2) In the instant case the bank deposit book was
balanced each month. After it was balanced it was re-
turned with the vouchers and the checklist; and on each
occasion when the passbook was returned there was
stamped in red ink on it the following notice:
 'The bank requests and expects that the depositors
will carefully examine their passbooks and vouchers each
time when returned to them, and that they will at once
notify the bank of any error in the account or balancing,
and especially to any objection on their part, for any
reason, to any voucher returned being charged against
them. The bank disclaims responsibility for any error
in the account as rendered, unless informed of it within
30 days after the return by it of the passbook and the
surrender of the vouchers.'
"No one in the plaintiff's company examined the re-
turned checks, but the bookkeeper who forged them.
"The outside accountant, as the record shows, made
a monthly examination. He checked up the vouchers
returned by the bank, and checked them up against the
bank list. Then he took the checks and checked them
against the general exhibit, which contained a record
of the number of the check, the date, the payee, and the
amount, and compared the amount with the entry in the
general exhibit. He took the deposits as listed by the
bank, and compared them with the deposits listed in the
general exhibit; and he took the balance as shown in the
general exhibit and the outstanding checks that did not
DEPOSITOR'S DUTY
963
come through, and found there was an agreement with
the balance as shown by the bank. Although he knew
there was a daily cash receipts book, he admitted that
he did not look at it; and he admitted that, if he had
compared it with the general exhibit book, the discrep-
ancies would have been immediately disclosed. He was
asked by the court whether there would have been any
trouble about it, and answered:
 'No; it would be very plain and obvious that there
was a defalcation or embezzlement.'
"Inasmuch as the examination which it was the duty
of the plaintiff to make involved, not simply the authen-
ticity of the signatures to checks, but the amount of
the checks, as to whether they had been raised or not,
that duty could not be performed with ordinary care
by looking at the entries in a secondary book and leaving
unopened the book of original entries. Such a method
of examination left the door wide open for such forgeries
as was practiced in this case, and the negligence of the
accountant is clearly attributable to the plaintiff; the
law being that, when a duty is cast upon any person,
that person may not absolve himself of his duty by dele-
gating the duty to some other person to perform. In
this case the duty clearly was not adequately performed.
When the plaintiff sent its passbook to defendant to be
balanced, it in effect demanded to be informed as to the
condition of its account, and, when the balanced pass-
book and the vouchers were returned, the silence of the
plaintiff respecting the returned vouchers and the entries
in the passbook amounted to an admission on its part
as to their correctness.
"The rigid responsibility imposed on banks must be
maintained. It is equally important, however, that de-
positors who make negligent examinations of the ac-
counts rendered to them by their banks should them-
selves sustain the losses which result from their own
and not the bank's carelessness, and which would have
been prevented if they themselves had exercised reason-
able care. The plaintiff seeks in this case to hold the
964 NEGOTIABLE INSTRUMENTS
bank responsible for the payment of checks raised by its
own employe, who was authorized by it to prepare the
checks and to obtain the money on them, and over whose
conduct no reasonable supervision was exercised.
'' The failure, however, of a bank depositor adequately
to examine his passbook and vouchers, and to give the
bank prompt notice of any errors he may discover, is no
defense to the depositor's right to recover the money
so paid from the bank, if the bank's officers, before pay-
ing the checks could have detected the forgeries, if they
had exercised reasonable care. This principle was de-
clard by the Supreme Court in Leather Manufacturers'
Bank v. Morgan, supra, where it was s^id:
 'Of course, if the defendant's officers, before pay-
ing the altered checks, could by proper care and skill
have detected the forgeries, then it cannot receive a
credit for the amount of those checks, even if the de-
positor omitted all examination of his account.'
"And this court so understood the decision and ap-
plied it in New York Produce Exchange Bank v.
Houston, 169 Fed. 785, 95 C. C. A. 251 (1909), as did
the Circuit Court of Appeals in the Sixth Circuit in
First National Bank v. Fourth National Bank, 56 Fed.
967, 971, 6 C. C. A. 183 (1893). This being the law, we
are brought to inquire whether in the instant case the
defendant bank, if it had exercised reasonable care in
examining the books, could have detected the forgeries.
If in the exercise of such care it might have detected
them, it must answer to the plaintiff for its failure to
do so. The proof is that the alterations in the checks
were so cleverly done that even the man who made them
could not himself detect them. * * * 
Held: That the bank could not be charged with the
amounts it had paid out on the altered checks because
the alterations were not such as the bank could on rea-
sonable examination detect, and the depositor was guilty
of negligence in not making proper examination detect-
DEPOSITOR'S DUTY
965
ing the forgeries and reporting them hack within a rea-
sonable time.
Question 561: (1) Aside from the question of the depositor's
negligence in discovering and reporting forgeries, is a bank
which pays a forged or altered check the loser thereby?
(2) What is the duty of a customer of a hank as to exam-
ination of statements and vouchers and reporting back to the
bank any errors or irregularities therein?
(Note: Upon the question involved in the above case there
is not complete accord. It is of course true that, disregarding
the question of the depositor's negligence in writing checks and
negligence in finding out and reporting errors, a bank that pays
out money on forged or altered checks cannot charge the sums so
paid against the depositor's account. The loss in such cases is
upon the bank and not upon the depositor.
It is also firmly established that if the depositor has his bank
book balanced or obtains statements and cancelled vouchers, it
is his duty to examine the same with reasonable diligence and
report discrepancies and errors.
But .it seems to be generally held that his failure to detect
and report forgeries can be availed of, by the bank only to the
extent that it was harmed thereby. Hence, if in January a
forgery is committed and the January statement is not examined
the bank may not detect a forgery in February by reason of such
inattention by the customer, but can this inattention help the
bank as to the January forgery? No absolute and universally
accepted answer can be given to that question.
The lesson for the business man is to use care and diligence
in getting statements and cancelled vouchers, in examining the
same, or if he has the same examined by others, to have some
system of supervising and checking, and in reporting errors to
the bank immediately.)
CHAPTER 66
GUARANTY AND SURETYSHIP
§§ 548-559. (Nego. Instru., Sees. 158-169.)
A. Guaranty and Suretyship Defined.
(Note: Contracts of Guaranty and Suretyship are contracts
by which the person called the guarantor or surety undertakes
to answer to a creditor or obligee for the debt or obligation of
another. It is essentially a lending of credit.
Suretyship is a form of contract whereby the surety under-
takes a primary liability of paying a debt or answering for the
default of another when the debt is due or the default occurs.
Guaranty is a form of contract whereby the guarantor con-
tracts to pay the debt of another if the other does not pay.
Each is to pay the debt or perform the obligation of another,
but one is an assumption of that debt or obligation in a primary
sense; the other in a secondary sense. That is to say, in the one
no diligence is required to collect of the principal debtor or
obligor, while in the other such diligence is required, unless ex-
cused.
But there is what is called 'absolute guaranty' (as on a lease)
where liability is instant upon default.)
B. The Validity of the Surety or Guarantors Offer,
(a) Fraud on Principal.
Case 562. Ettlinger v. National Surety Company, 221
N. Y. 467, 117 N. E. 945.
Facts: Ettlinger sues National Surety Company as
surety on a bond. Defense: fraud practiced on the
obligor.
Point Involved: Whether surety can take advantage
of fraud practiced on the surety's principal.
966
SURETYSHIP
96?
Andrews, J.: "* * * A contract induced by fraud
is not void. It is voidable at the option of the party
defrauded. If he elects to avoid the contract he can do
so only on condition of returning what he has received
under it. * * *
"If the principal could abide by the contract and the
surety repudiate it, the strange result would be produced
that the principal would retain the fruits of the contract
whilst the surety would avoid the obligation on the
ground of its invalidity. * * *
Question 562: May a surety avoid his obligation by showing
that the principal debtor or obligor was defrauded? Suppose
such principal debtor or obligor repudiated, would the surety
be bound then ?
(b) Fraud on the Surety.
Case 563. Copper Process Co. v. Chicago Bonding &
Ins. Co., 262 Federal Reporter, 266.
Facts: Copper Process Co. sues the Bonding Com-
pany on bonds given the Copper Process Co. to assure
performance by Bird Coal & Iron Company of certain
contracts for sale and delivery of pig iron. The Iron
Company defaulted on the contracts and this suit fol-
lowed. Defense by Surety Company that incorrect in-
formation had been given it in response to its question
whether the Copper Process Co. had advanced money
to the Bird Coal & Iron Co.
Point Involved: Fraud on surety by obligee as a de-
fense to surety.
Wooley, Circuit Judge: Holding "that the question
by the Surety Company as to advances raised a duty
on part of plaintiff to disclose fully all the facts upon
which the surety was seeking information.
(c) Personal Incapacity of Principal.
Case 564. Goodell v. Bates, and others.
Facts: Goodell sues on a bond. The bond was a
replevin bond signed by Adolphus and Fannie Putnam
968 NEGOTIABLE INSTRUMENTS
as principals, and William. R. Bates and Israel G. Bates,
as sureties. Bates alone defended. Evidence was of-
fered by way of defense that Fannie Putnam was a
married woman and a minor when she signed the bond.
The defendants asked for a ruling that the bond was
for this reason insufficient. Ruling was refused by the
trial court. On this and other points, Bates, the surety
appealed.
Held: That Bates being sui juris could not avoid
the bond because of the minority of the principal obligor.
Question 564: A surety signs a bond to cover a liability of
a corporation which the corporation has no authority to incur.
Can the surety defend on this ground? Maledon v. Leflore, 35
S. W. (Ark.) 1102.
(d) Incapacity of Surety.
(See Chapter 94 in Corporations, post.)
C. Remedies of Surety,
(a) Reimbursement from Principal Debtor.
(Note: A surety having paid the debt is entitled to re-im-
bursement. But he may recover only what he has paid. "The
rule is certainly too well settled to be controverted, nor is it
disputed, thrt the contract between the principal and the surety
is for indemnity only; and therefore if the surety discharges an
obligation for a less sum than its full amount, he can only claim
against the principal the sum so paid."—Southall v. Farish, 7
S. E. (Ya.) 534.)
(b) Contribution from Co-sureties.
Case 565. Washington v. Norwood, 128 Alabama Re-
ports, 383, 30 S. W. 405.
Facts: Suit by Washington to set aside a transfer
by Norwood to his son as a fraudulent conveyance made
to defeat Washington's claim. Washington and the elder
Norwood were co-sureties on an administrator's bond
and the administrator being in default in paying the
SURETYSHIP
969
heirs of the deceased estate which he was administer-
ing, Washington as surety on his bond paid the same
and seeks contribution and brings this bill to enforce
same by way of setting aside said alleged fraudulent
conveyance.
. Dowdell, J.: "* * ' *
"(1) An action to set aside a fraudulent conveyance
of lands at the suit of an existing creditor of the grantor
is a suit in equity for the recovery of lands and is gov-
erned by the statute of limitations. * * *
"(2) A surety is an existing creditor entitled to pro-
tection against a fraudulent conveyance made by his
co-surety at any time subsequent to the execution of the
common obligation. * * *
 (3) Such an action can in no case be maintained until
the cause of action accrues—until the demand becomes
due and payable. * * *
"(4) The right of action for contribution at law or
in equity accrues when one surety pays more than his
share of the common liability. * * *''
Held: That although more than ten years had elapsed
since the conveyance, the statute of limitations of ten
years did not begin to run until the surety had paid
more than his share. And this suit being within ten
years of such payment could be maintained.
(Note: The right of a surety to contribution is of equitable
origin and arises out of the general equitable principal of
equalization of burdens. The right arises when the surety has
borne more than his proportionate share. Originally a right
enforcible in equity, it became recognized by courts of law, but
the taking of jurisdiction by law courts has not deprived the
courts of equity of jurisdiction. In the law courts the rule is
that each surety is liable for his proportionate share, but in
equity if any of the co-sureties are insolvent or absent from the
jurisdiction, the solvent, available sureties must apportion the
liability among themselves.)
(c) Subrogation.
(Note: When a guarantor or surety pays the obligation
which the principal should have paid, he at once becomes entitled
970
NEGOTIABLE INSTRUMENTS
to have for his benefit all the funds, securities, liens, remedies,
equities and rights of every sort which the creditor or obligee
had against the principal. That is, if A is principal debtor^ B,
guarantor, or surety, and C, the obligee or creditor, and B pays
C, B for purposes of his security and re-imbursement becomes
entitled to enforce against A all remedies which C had against
A. Accordingly if C held any collateral, lien, judgment, mort-
gage, or security or remedy of any sort, B is entitled to the
same. This is called the right of subrogation. This right to be
subrogated does not arise out of any contract, but has its origin
in equity. For instance, if A and B are respectively principal
and surety on a note to C, secured by mortgage upon A's lands.
B, the surety, upon paying the debt to C, is entitled to foreclose
the mortgage.)
D. Discharge of Surety,
(a) By Discharge of Principal's Obligation.
(Note: The principal's obligation being discharged by the
principal, the liability of the surety or guarantor thereby ceases.
The right to release the principal debtor and save the rights
against the surety is discussed hereafter.)
(b) By Alteration of Bond or Contract.
(Note: It is well-settled that any alteration in the surety's
contract without his consent discharges him, even though the
alteration is in his favor. Thus if he executes a bond for $1,000
and the sum $1,000 is subsequently altered to $500, he can sue-
cessfully defend that he did not execute the five hundred dollar
bond, and is therefore liable on the bond neither as it was nor
as it is.)
(c) By Death of Principal.
(Note: This will discharge the surety or guarantor as to all
liabilities not yet incurred, except in those cases in which the
bond is given to be binding against defaults of heirs, personal
representatives or assigns.)
(d) By Death of Surety.
(Note: In cases of commercial continuing guarantees, that
is, covering indebtedness incurred over a period of time, the
SURETYSHIP
971
death of the guarantor discharges future liability. But in cases
of absolute suretyship, the death of the surety does not put an
end to the suretyship, but it continues throughout its term bind-
ing upon his estate or heirs.)
(e) By Extension of Time to Principal Debtor.
(Note: If the creditor extends additional time to debtor
without the surety's or guarantor's consent, the surety or
guarantor is thereby discharged. But this means a binding
agreement of extension, not a mere unenforcible promise to ex-
tend, or an extension without agreement. Unless there is such
binding agreement the surety is not discharged.
If the creditor in granting an extension of time to the debtor,
expressly reserves his rights against the guarantor or surety,
the guarantor or surety is not discharged, as this is construed to
mean that the extension is effective with the consent of the
surety.)
(f) By Failure to Use Diligence Against Obligor or
Principal Debtor.
(Note: This does not discharge guarantor or surety, unless,
as there is in some states, a statute requiring suit upon notice
given by the surety or guarantor.)
(g) By Release of Principal Debtor.
(Note: Release of principal debtor by creditor releases
surety, unless rights reserved against the surety.)
(h) By Relinquishment of Securt
(Note: If the creditor releases security held by him, he is
releasing something to which the surety or guarantor is en-
titled to be subrogated, and therefore he harms the surety by
such release, and the surety is thereby released to the extent he
is injured thereby.)
(i) By Failure to Report Defaults.
(Note: Failure of obligee to report defaults of principal to
the surety discharges the surety. This has its application in em-
ployee's liability bonds.)
APPENDIX TO DIVISION E
UNIFORM NEGOTIABLE INSTRUMENTS LAW.
(In force in all jurisdictions except Georgia and Porto Eico.)
Sees.
1-23. Form and interpretation.
30-50. Negotiation.
24-29. Consideration.
51-59. Eights of the holder.
60-69. Liabilities of parties.
70-88. Presentation for payment.
89-118. Notice of dishonor.
119-125. Discharge of negotiable instruments.
Bills of Exchange.
126-131. Form and interpretation.
132-142. Acceptance.
143-151. Presentation for payment.
152-160. Protest.
161-170. Acceptance for honor.
171-177. Payment for honor.
178-183. Bills in a set.
Promissory Notes and Checks.
184-189. Form, interpretation, acceptance, etc.
General Provisions
190-196. Definitions.
Title I.—Negotiable Instruments in General.
Article I.—Form and Interpretation.
Sec. 1. An instrument to be negotiable must conform to the following
requirements:
1. It must be in writing and signed by the maker or drawer.
972
NEGOTIABLE INSTRUMENTS ACT 973
2. Must contain an unconditional promise or order to pay a sum certain
in money.
3. Must be payable on demand or at a fixed or determinable future time.
4. Must be payable to the order or to bearer; and,
5. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
Sec. 2. The sum payable is a sum certain within the meaning of this
Act, although it is to be paid:
1. With interest; or
2. By stated installments; or
3. By stated installments, with a provision that upon default in payment
of any installment, or of interest the whole shall become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
5. With costs of collection or an attorney's fee, in case payment shall
not be made at maturity.
Sec. 3. An unqualified order or promise to pay is unconditional within
the meaning of this Act, though coupled with:
1. An indication of a particular fund out of which reimbursement is to
be made, or a particular account to be debited with the amount; or
2. A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not uncon-
ditional.
Sec. 4. An instrument is payable at a determinable future time, within
the meaning of this Act, which is expressed to be payable:
1. At a fixed period after date or sight; or
2. On or before a fixed or determinable future time specified therein; or
3. On or at a fixed period after the occurrence of a specified event,
which is certain to happen, though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the
happening of the event does not cure the defect.
Sec. 5. An instrument which contains an order or promise to do any
act in addition to the payment of money is not negotiable.
But the negotiable character of an instrument otherwise negotiable is
not affected by a provision which:
1. Authorizes the sale of collateral securities in case the instrument be
not paid at maturity; or
2. Authorizes a confession of judgment if the instrument be not paid
at maturity; or
3. Waives the benefit of any law intended for the advantage or protec-
tion of the obligor; or
4. Gives the holder an election to require something to be done in lieu
of payment of money.
But nothing in this section shall validate any provision or stipulation
otherwise illegal.
Sec. 6. The validity and negotiable character of an instrument are not
affected by the fact that:
1. It is not dated; or
2. Does not specify the value given, or that any value has been given
therefor; or
974
NEGOTIABLE INSTRUMENTS
3. Does not specify the place where it is drawn or the place where it
is payable; or
4. Bears a seal; or
5. Designates a particular kind of current money in which payment is to
be made.
But nothing in this section shall alter or repeal any statute requir-
ing in certain cases the nature of the consideration to be stated in the in-
strument.
Sec. 7. An instrument is payable on demand.
1. Where it is expressed to be payable on demand, or at sight, or on
presentation; or
2. In which no time for payment is expressed.
Where an instrument is issued, accepted or indorsed when overdue, it is,
as regards the person so issuing, accepting or indorsing it, payable on de-
mand.
Sec. 8. The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. It may be drawn
payable to the order of:
1. A payee who is not maker, drawer or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or more of several payees; or
6. The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty.
Sec. 9. The instrument is payable to bearer:
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or nonexisting per-
son and such fact was known to the person making it so payable; or
4. When the name of the payee does not purport to be the name of
any person; or
5. When the only or last indorsement is an indorsement in blank.
Sec. 10. The instrument need not follow the language of this Act, but
any terms are sufficient which clearly indicate an intention to conform to
the requirements hereof.
Sec. 11. When the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of
the making, drawing, acceptance or indorsement, as the case may be.
Sec. 12. The instrument is not invalid for the reason only that it is
ante-dated or post-dated, provided this is not done for an illegal or fraud-
ulent purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of date of delivery.
Sec. 13. Where an instrument expressed to be payable at a fixed period
after date is issued undated, or where the acceptance of an instrument
payable at a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the
NEGOTIABLE INSTRUMENTS ACT 975
instrument in the hands of a subsequent holder in due course, but as to
him, the date so inserted is to be regarded as the true date.
Sec. 14. Where the instrument is wanting in any material particular,
the person in possession thereof has a prima facie authority to complete
it by filling up the blanks therein. And a signature on a blank paper
delivered by the person making the signature in order that the paper may
be converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. In order, however, that any
such instrument when completed may be enforced against any person who
become a party thereto prior to its completion, it must be filled up strictly
in accordance with the authority given and within a reasonable time. But
if any such instrument, after completion, is negotiated to a holder in due
course it is valid and effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in accordance with the author-
ity given and within a reasonable time.
Sec. 15. Where an incomplete instrument has not been delivered it
will not, if completed and negotiated, without authority, be a valid con-
tract in the hands of any holder, as against any person whose signature
was placed thereon before delivery.
Sec. 16. Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect
thereto. As between immediate parties, and as regards a remote party
other than a holder in due course, the delivery, in order to be effectual,
must be made either by or under the authority of the party making, draw-
ing, accepting or indorsing, as the case may be; and in such case the
delivery may be shown to have been conditional or for a special purpose
only, and not for the purpose of transferring the property in instru-
Bient. But where the instrument is in the hands of a holder in due course,
a valid delivery thereof by all parties prior to him so as to make them
liable to him, is conclusively presumed. And where the instrument is no
longer in the possession of party whose signature appears thereon, a valid
and intentional delivery by him is presumed until the contrary is proved.
Sec. 17. Where the language of the instrument is ambiguous, or there
are omissions therein the following rules of construction apply:
1. Where the sum payable is expressed in words and also in figures and
there is a discrepancy between the two, the sum denoted by the words is
the sum payable; but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount.
2. Where the instrument provides for the payment of interest, with-
out specifying the date from which interest is to run, the interest runs
from the date of the instrument, and if the instrument is undated, from
the issue thereof.
3. Where the instrument is not dated, it will be considered to be dated
as of the time it was issued.
4. Where there is conflict between the written and printed provisions
of the instrument, the written provisions prevail.
5. Where the instrument is so ambiguous that there is doubt whether
it is a bill or a note, the holder may treat it as either, at his election.
6. Where a signature is so placed upon the instrument that it is not
976 NEGOTIABLE INSTRUMENTS
clear in what capacity the person making the same intended to sign, he is
to be deemed an indorser.
7. Where an instrument containing the words "I promise to pay is
signed by two or more persons, they are deemed to be jointly and severally
liable thereon.
Sec. 18. No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly provided. But
one who signs in a trade or assumed name will be liable to the same ex-
tent as if he had signed his own name.
Sec. 19. The signature of any party may be made by a duly author-
ized agent. No particular form of appointment is necessary for this pur-
pose; and the authority of the agent may be established as in other cases
of agency.
Sec. 20. Where the instrument contains, or a person adds to his
signature, words indicating that he signs for or on behalf of the prin-
cipal, or in a representative capacity, he is not liable on the instrument
if he was duly authorized; but the mere addition of words describing him
as agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Sec. 21. A signature by "procuration operates as notice that the
agent has.but limited authority to sign, and the principal is bound only
in case the agent in so signing acted within the actual limits of his
authority.
Sec. 22. The indorsement or assignment of the instrument by a cor-
poration or by an infant passes the property therein, notwithstanding that
from want of capacity the corporation or infant may incur no liability
thereon.
Sec. 23. When a signature is forged or made without the authority of
the person whose signature it purports to be is wholly inoperative, and
no right to retain the instrument or to give a discharge therefor or to
enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or
want of authority.
Article II.—Consideration.
Sec. 24. Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration, and every person whose signature
appears thereon to have become a party thereto for value.
Sec. 25. Value is any consideration sufficient to support a simple con-
tract.
2. An antecedent of pre-existing debt constitutes value and is deemed
such, whether the instrument is payable on demand or at a future time.
Sec. 26. Where value has at any time been given for the instrument,
the holder is deemed a holder for value in respect to all parties who be-
came such prior to that time.
Sec. 27. Where the holder has a lien on the instrument, arising either
from contract or by implication of law, he is deemed a holder for value
to the extent of his lien.
NEGOTIABLE INSTRUMENTS ACT 977
Sec. 28. Absence or failure of consideration is a matter of defense as
against any person not a holder in due course, and partial failure of con-
sideration is a defense pro tanto, whether the failure is an ascertained
and liquidated amount or otherwise.
Sec. 29. An accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser without receiving value there-
for, and for the purpose of lending his name to some other person. Such
a person is liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew him to be only an
accommodation party.
Article III.—Negotiation.
Sec. 30. An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the
holder thereof; if payable to bearer, it is negotiated by delivery; if pay-
able to order, it is negotiated by the indorsement of the holder, completed
by delivery.
Sec. 31. The indorsement must be written on the instrument itself or
upon a paper attached thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
Sec. 32. The indorsement must be an indorsement of the entire instru-
ment. An indorsement which purports to transfer to the indorsee a part
only of the amount payable, or which purports to transfer the instru-
ment to two or more indorsees severally, does not operate as a negotia-
tion of the instrument. But where the instrument has been paid in part,
it may be indorsed as to the residue.
Sec. 33. An indorsement may be either special or in blank; and it may
also be either restrictive or qualified, or conditional.
Sec. 34. A special indorsement specifies the person to whom or to whose
order the instrument is to be payable; and the indorsement of such in-
dorsee is necessary to the further negotiation of the instrument. An in-
dorsement in blank specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Sec. 35. The holder may convert a blank indorsement into special in-
dorsement by writing over the signature of the indorser in blank any con-
tract consistent with the character of the indorsement.
Sec. 36. An indorsement is restrictive which either:
1. Prohibits the further negotiation of the instrument; or
2. Constitutes the indorsee the agent of the indorser; or
3. Vests the title in the indorsee in trust for or to the use of some
other person. But the mere absence of words implying power to negotiate
does not make an indorsement restrictive.
Sec. 37. A restrictive indorsement confers upon the indorsee the right:
1. To receive payment of the instrument.
2. To bring any action thereon that the indorser could bring.
3. To transfer his rights as such indorsee where the form of the in-
dorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee
Under the restrictive indorsement,
978 NEGOTIABLE INSTRUMENTS
Sec. 38. A qualified indorsement constitutes the indorser a mere as-
signor of the title to the instrument. It may be made by adding to the
indorser's signature the words '' without recourse'' or any words of similar
import. Such indorsement does not impair the negotiable character of the
instrument.
Sec. 39. Where an indorsement is conditional, a party required to pay
the instrument may disregard the condition, and make a payment to the
indorsee or his transferee, whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is negotiated, will
hold the same, or the proceeds thereof, subject to the rights of the person
indorsing conditionally.
Sec. 40. Where an instrument payable to bearer is indorsed specially
it may nevertheless be further negotiated by delivery; but the person in-
dorsing specially is liable, as indorser to only such holders as make title
through his indorsement.
Sec. 41. Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.
Sec. 42. Where an instrument is drawn or indorsed to a person as
"Cashier or other fiscal officer of a bank or corporation, it is deemed
prima facie to be payable to the bank or corporation of which he is such
officer; and may be negotiated by either the indorsement of the bank or
corporation, or the indorsement of the officer.
Sec. 43. Where the name of the payee or indorsee is wrongly designated
or misspelled, he may indorse the instrument as therein described, adding,
if he thinks fit, his proper signature.
Sec. 44. Where any person is under obligation to indorse in a repre-
sentative capacity, he may indorse in such terms as to negative personal
liability.
Sec. 45. Except where an indorsement bears date after the maturity
of the instrument, every negotiation is deemed prima facie to have been
effected before the instrument was overdue.
Sec. 46. Except where the contrary appears, every indorsement is pre-
sumed prima facie to have been made at the place where the instrument is
dated.
Sec. 47. An instrument negotiable in its origin continues to be nego-
tiable until it has been restrictively indorsed or discharged by payment or
otherwise.
Sec. 48. The holder may at any time strike out any indorsement which
is not necessary to his title. The indorser whose indorsement is struck
out, and all indorsers subsequent to him, are thereby relieved from
liability on the instrument.
Sec. 49. Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the
transferee such title as the transferrer had therein, and the transferee
acquires, in addition, the right to have the indorsement of the transferrer.
But for the purpose of determining whether the transferee is a holder
in due course, the negotiation takes effect as of the time when the in*
dorsement is actually made.
NEGOTIABLE INSTRUMENTS ACT 979
Sec. 50. Where an instrument is negotiated back to a prior party, such
party may, subject to the provisions of this Act, reissue and further nego-
tiate the same, but he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.
Article IV.—Rights of the Holder.
Sec. 51. The holder of a negotiable instrument may sue thereon in
his own name and payment to him in due course discharges the instrument.
Sec. 52. A holder in due course is a holder who has taken the instrument
under the following conditions:
1. That it is complete and regular upon its face.
2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact.
3. That, he took it in good faith and for value.
4. That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.
Sec. 53. Where an instrument payable on demand is negotiated an un-
reasonable length of time after its issue, the holder is not deemed a
holder in due course.
Sec. 54. Where the transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating the same be-
fore he has paid the full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of the amount thereto-
fore paid by him.
Sec. 55. The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration or when he negotiates it in breach
of faith, or under such circumstances as amount to a fraud.
Sec. 56. To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the person to whom
it is negotiated must have had actual knowledge of the infirmity or defect,
or knowledge of such facts that his action in taking the instrument
amounted to bad faith.
Sec. 57. A holder in due course holds the instrument free from any
defect of title or of prior parties, and free from defenses available to
prior parties among themselves and may enforce payment of the instru-
ment for the full amount thereof against all parties liable thereon.'
Sec. 58. In the hands of any holder other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-
negotiable. But the holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affect-
ing the instrument, has all the rights of such former holder in respect to
all parties prior to the latter.
Sec. 59. Every holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person who has nego-
tiated the instrument was defective, the burden is on the holder to prove
that he or some person under whom he claims acquired the title as a
holder in due course. But the last mentioned rule does not apply in favor
980
NEGOTIABLE INSTRUMENTS
of a party who became bound on the instrument prior to the acquisition
of such defective title.
Article V.—Liability of Parties.
See. 60. The maker of a negotiable instrument by making it engages
that he will pay it according to its tenor, and admits the existence of the
payee and his then capacity to indorse.
Sec. 61. The drawer by drawing the instrument admits the existence
of the payee and his then capacity to indorse, and engages that on due
presentment the instrument will be accepted or paid, or both, according to
its tenor, and that if it be dishonored, and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it. But the drawer
may insert in the instrument an express stipulation negativing or limit-
ing his own liability to the holder.
Sec. 62. The acceptor by accepting the instrument engages that he will
pay it according to the tenor of his acceptance and admits:
1. The existence of the drawer, the genuineness of his signature, and
his capacity and authority to draw the instrument; and
2. The existence of the payee and his then capacity to indorse.
Sec. 63. A person placing his signature upon an instrument otherwise
than as maker, drawer or acceptor is deemed to be an indorser, unless he
clearly indicates by appropriate words his intention to be bound in some
other capacity.
Sec. 64. Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorser in
accordance with the following rules:
1. If the instrument is payable to the order of a third person he is
liable to the payee and to all subsequent parties.
2. If the instrument is payable to the order of the maker, or drawer,
or is payable to bearer, he is liable to all parties subsequent to the maker
or drawer.
3. If he signs for the accommodation of the payee, he is liable to all
parties subsequent to the payee.
Sec. 65. Every person negotiating an instrument by delivery or by a
qualified indorsement, warrants:
1. That the instrument is genuine and in all respects what it purports
to be.
2. That he has a good title to it.
3. That all prior parties had capacity to contract.
4. That he has no knowledge of any fact which would impair the validity
of the instrument, or render it valueless.
But when the negotiation is by delivery only, the warranty extends in
favor of no holder other than the immediate transferee.
The provisions of subdivision three of this section do not apply to per-
sons negotiating public or corporation securities, other than bills and notes.
Sec. 66. Every indorser who indorses without qualification, warrants to
all subsequent holders in due course:
NEGOTIABLE INSTRUMENTS ACT 981
1. The matters and things mentioned in subdivision one, two, three of
the next preceding section; and
2. That the instrument is at the time of his indorsement valid and
subsisting.
And, in addition, he engages that on due presentment, it shall be ac-
cepted or paid, or both, as the case may be, according to its tenor, and
that if it be dishonored and the necessary proceedings on dishonor be
duly taken he will pay the amount thereof to the holder, or to any subse-
■ quent indorser who may be compelled to pay it.
•Sec. 67. Where a person places his indorsement on an instrument nego-
tiable by delivery he incurs all the liabilities of an indorser.
,, See. 68. As respects one another, indorsers are liable prima facie in
the order in which they indorse, but evidence is admissible to show that as
between or among themselves they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to indorse jointly and severally.
Sec. 69. Where a broker or other agent negotiates an instrument with-
out indorsement, he incurs all the liabilities prescribed by section sixty-
five of this Act, unless he discloses the name of his principal, and the fact
that he is acting only as agent.
Article VI.—Presentment for Payment.
Sec. 70. Presentment for payment is not necessary in order to charge
the person primarily liable on the instrument but if the instrument, is,
by its terms, payable at a special place and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a tender
of payment upon his part. But except as herein otherwise provided, pre-
sentment for payment is necessary in order to charge the drawer and in-
dorsers.
Sec. 71. Where the instrument is not payable on demand, presentment
must be made on the day it falls due. Where it is payable on demand,
presentment must be made within a reasonable time after its issue, except
that in case of a bill of exchange, presentment for payment will be suffi-
cient if made within a reasonable time after the last negotiation thereof.
Sec. 72. Presentment for payment, to be sufficient, must be made:
1. By the holder, or by some person authorized to receive payment on
His behalf.
2. At a reasonable hour on a business day.
3. At a proper place as herein defined.
4. To the person primarily liable on the instrument, or if he is absent
or inaccessible, to any person found at the place where the presentment is
made.
Sec. 73. Presentment for payment is made at the proper place:
1. Where a place of payment is specified in the instrument and it is
there presented.
2. Where no place of payment is specified and the address of the per-
son to make the payment is given in the instrument and it is there
presented.
3. Where no place of payment is specified and no address is given and
982 NEGOTIABLE INSTRUMENTS
the instrument is presented at the usual place of business or residence of
the person to make payment.
4. In any other case, if presented to the person to make payment where-
ever he can be found, or if presented at his last known place of business
or residence.
Sec. 74. The instrument must be exhibited to the person from whom
payment is demanded, and when it is paid must be delivered up to the
party paying it.
Sec. 75. Where the instrument is payable at a bank, presentment for
payment must be made during banking hours, unless the person to make
payment has no funds there to meet it at any time during the day, in
which case presentment at any hour before the bank is closed on that day
is sufficient.
Sec. 76. Where the person primarily liable on the instrument is dead,
and no place of payment is specified, presentment for payment must be
made to his personal representative if such there be, and if with exercise
of reasonable diligence, he can be found.
Sec. 77. Where the persons primarily liable on the instrument are liable
as partners, and no place of payment is specified, presentment for pay-
ment may be made to any one of them, even though there has been a
dissolution of the firm.
Sec. 78. Where there are several persons, not partners, primarily liable
on the instrument, and no place of payment is specified, presentment must
be made to them all.
See. 79. Presentment for payment is not required in order to charge the
drawer where he has no right to expect or require that the drawee or ac-
ceptor will pay the instrument.
Sec. 80. Presentment for payment is not required in order to charge an
indorser where the instrument was made or accepted for his accommodation
and he has no reason to expect the instrument will be paid if presented.
Sec. 81. Delay in making presentment for payment is excused when the
delay is caused by circumstances beyond the control of the holder, and not
imputable to his default, misconduct or negligence. When the cause of
delay ceases to operate, presentment must be made with reasonable
diligence.
Sec. 82. Presentment for payment is dispensed with:
1. When after the exercise of reasonable diligence presentment as re-
quired by this Act can not be made.
2. Where the drawee is a fictitious person.
3. By waiver of presentment, express or implied.
Sec. 83. The instrument is dishonored by non-payment when:
1. It is duly presented for payment and payment is refused or can not
be obtained; or
2. Presentment is excused and the instrument is overdue and unpaid.
Sec. 84. Subject to the provisions of this Act, when the instrument is
dishonored by non-payment, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
Sec. 85. Every negotiable instrument is payable at- the time fixed
therein without grace. When a day of maturity falls on Sunday, or a
NEGOTIABLE INSTRUMENTS ACT 983
holiday, the instrument is payable on the next succeeding business day.
Instruments falling due on Saturday are to be presented for payment on
the next succeeding business day, except that instruments payable on de-
mand may, at the option of the holder, be presented for payment before
12:00 o'clock noon on Saturday, when that entire day is not a holiday.
Sec. 86. Where the instrument is payable at a fixed period after date,
after sight, or after the happening of a specified event, the time of pay-
ment is determined by excluding the day from which the time is to begin
to run, and by including the date of payment.
Sec. 87. Where the instrument is made payable at a bank it is equivalent
to an order to the bank to pay the same for the account of the principal
debtor thereon. (This section omitted in the Illinois law.)
Sec. 88. Payment is made in due course when it is made at or after
maturity of the instrument to the holder thereof in good faith and with-
out notice that his title is defective.
Article VII.—Notice op Dishonor.
Sec. 89. Except as herein otherwise provided, when a negotiable instru-
ment has been dishonored by non-acceptance or non-payment, notice of
dishonor must be given to the drawer and to each indorser, and any drawer
or indorser to whom such notice is not given is discharged.
Sec. 90. The notice may be given by or on behalf of the holder, or by
or on behalf of any party to the instrument who might be compelled to
pay it to the holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is given.
Sec. 91. Notice of dishonor may be given by an agent, either in his
own name or in the name of any party entitled to give notice, whether
that party be his principal or not.
Sec. 92. Where notice is given by or on behalf of the holder, it inures
for the benefit of all subsequent holders and all prior parties who have a
right of recourse against the party to whom it is given.
Sec. 93. Where notice is given by or on behalf of a party entitled to
give notice, it inures for the benefit of the holder and all parties subsequent
to the party to whom notice is given.
Sec. 94. Where the instrument has been dishonored in the hands of an
agent, he may either himself give notice to the parties liable thereon or
he may give notice to his principal. If he gives notice to his principal,
he must do so within the same time as if he were the holder, and the
principal, upon the receipt of such notice, has himself the same time for
giving notice ns if the agent had heen an independent holder.
Sec. 95. A written notice need not be signed, and an insufficient written
notice may be supplemented and validated by verbal communication. A
misdescription of the instrument does not vitiate the notice unless the party
to whom the notice is given is in fact misled thereby.
Sec. 96. The notice may be in writing or merely oral and may be given
in any terms which sufficiently identify the instrument and indicate that
it has been dishonored by non-acceptance or non-payment. It may in all
cases be given by delivering it personally or through the mails.
984 NEGOTIABLE INSTRUMENTS
Sec. 97. Notice of dishonor may be given either to the party himself
or to his agent in that behalf.
Sec. 98. Where any party is dead, and his death is known to the party
giving notice, the notice must be given to a personal representative, if
there be one, and if with reasonable diligence he can be found. If there
be no personal representative, notice may be sent to the last residence or
last place of business of the deceased.
Sec. 99. Where the parties to be notified are partners, notice to any
one partner is notice to the firm, even though there has been a dissolution.
See. 100. Notice to joint parties who are not partners must be given
to each of them, unless one of them has authority to receive such notice
for the others.
Sec. 101. Where a party has been adjudged a bankrupt or an insolvent,
or has made an assignment for the benefit of his creditors, notice may be
given either to the party himself or to his trustee or assignee.
Sec. 102. Notice may be given as soon as the instrument is dishonored,
and unless delay is excused as hereinafter provided, must be given within
the times fixed by this Act.
Sec. 103.' Where the person giving and the person to receive notice
reside in same place, notice must be given within the following times:
1. If given at the place of business of the person to receive notice, it
must be given before the close of business hours on the day following.
2. If given at his residence, it must be given before the usual hours
of rest on the day following.
3. If sent by mail, it must be deposited in the postoffice in time to
reach him in the usual course on the day following.
Sec. 104. Where the person giving and the person to receive notice
reside in different places, the notice must be given within the following
times:
1. If sent by mail, it must be deposited in the postoffice in time to go
by mail the day following the day of dishonor, or if there be no mail at a
convenient hour on that day by the next mail thereafter.
2. If given otherwise than through the postoffice, then within the time
that notice would have been received in due course of mail, if it had
been deposited in the postoffice within the time specified in the last sub-
division.
Sec. 105. Where notice of dishonor is duly addressed and deposited in
the postoffice, the sender is deemed to have given due notice, notwith-
standing any miscarriage in the mails.
Sec. 106. Notice is deemed to have been deposited in the postoffice
when deposited in any branch postoffice or in any letter box under the
control of the postoffice department.
Sec. 107. Where a party receives notice of dishonor, he has, after the
receipt of such notice, the same time for giving notice to antecedent
parties that the holder has after dishonor.
Sec. 108. Where a party has added an address to his signature, notice
of dishonor must be sent to that address ; but if he has not given such
address, then the notice must be sent as follows:
1. Either to the postoffice nearest to his place of residence, or to the
postoffice where he is accustomed to receive his letters; or,
NEGOTIABLE INSTRUMENTS ACT 985
2. If he lives in one place and has his place of business in another,
notice may be sent to either place; or,
3. If he is sojourning in another place, notice may be sent to the place
where he is sojourning.
But where the notice is actually received by the party within the time
specified in this Act, it will be sufficient though not sent in accordance
with the requirements of this section.
Sec. 109. Notice of dishonor may be waived, either before the time of
giving notice has arrived, or after the omission to give due notice, and the
waiver may be expressed or implied.
Sec. 110. Where the waiver is embodied in the instrument itself, it is
binding upon all parties; but where it is written above the signature of
an indorser, it binds him only.
Sec. 111. A waiver of protest, whether in the case of a foreign bill of
exchange or other negotiable instrument, is deemed to be a waiver not
only of a formal protest, but also of a presentment and notice of dishonor.
Sec. 112. Notice of dishonor is dispensed with when after the exercise
of reasonable diligence, it cannot be given to or does not reach the parties
sought to be charged.
Sec. 113. Delay in giving notice of dishonor is excused when the delay
is caused by circumstances beyond the control of the holder and not im-
putable to his default, misconduct or negligence.. When the cause of delay
ceases to operate notice must be given with reasonable diligence.
Sec. 114. Notice of dishonor is not required to be given to the drawer
in either of the following cases:
1. Where the drawer and drawee are the same person.
2. Where the drawee is a fictitious person or a person not having
capacity to contract.
3. Where the drawer is the person to whom the instrument is presented
for payment.
4. Where the drawer has no right to expect or require that the drawee
or acceptor will honor the instrument.
5. Where the drawer has countermanded payment.
Sec. 115. Notice of dishonor is not required to. be given to an indorser
in either of the following cases:
1. Where the drawee is a fictitious person or a person not having
capacity to contract and the indorser was aware of the fact at the time
he indorsed the instrument.
2. Where the indorser is the person to whom the instrument is presented
for payment.
3. Where the instrument was made or accepted for his accommodation.
Sec. 116. Where due notice of dishonor by non-acceptance has been
given, notice of a subsequent dishonor by non-payment is not necessary,
unless in the meantime the instrument has been accepted.
Sec. 117. An omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a holder in due course subsequent to the
omission.
Sec. 118. Where any negotiable instrument has been dishonored it may
be protested for non-acceptance or non-payment, as the case may be, but
protest is not required except in the case of foreign bills of exchange.
986 NEGOTIABLE INSTRUMENTS
Article VIII.—Discharge op Negotiable Instruments.
Sec. 119. A negotiable instrument is discharged:
1. By payment in due course by or on behalf of the principal debtor.
2. By payment in due course by the party accommodated, where the
instrument is made or accepted for accommodation.
3. By the intentional cancellation thereof by the holder.
4. By any other act which will discharge a simple contract for the
payment of money.
5. When the principal debtor becomes the holder of the instrument at
or after maturity in his own right.
Sec. 120. A person secondarily liable on the instrument is discharged:
1. By an act which discharges the instrument.
2. By the intentional cancellation of his signature by the holder.
3. By the discharge of a prior party.
4. By a valid tender of payment made by a prior party.
5. By a release of the principal debtor, unless the holder's right of
recourse against the party secondarily liable is expressly reserved.
6. By any agreement binding upon the holder to extend the time of
payment, or to postpone the holder's right to enforce the instrument,
unless made with the assent of the party secondarily liable, or unless the
right of recourse against such party is expressly reserved.
Sec. 121. Where the instrument is paid by a party secondarily liable
thereon, it is not discharged; but the party so paying it is remitted to his
former rights as regards all prior parties, and he may strike out his own
and all subsequent indorsements, and again negotiate the instrument, ex-
cept:
1. Where it is payable to the order of a third person and has been
paid by the drawer; and,
2. Where it was made or accepted for accommodation, and has been
paid by the party accommodated.
Sec. 122. The holder may expressly renounce his right against any
party to the instrument before, at, or after its maturity. An absolute
and unconditional renunciation of his rights against the principal debtor
made at or after the maturity of the instrument, discharges the instru-
ment. But a renunciation does not affect the rights of a holder in due
course without notice. A renunciation must be in writing, unless the
instrument is delivered up to the person primarily liable thereon.
Sec. 123. A cancellation made unintentionally, or under a mistake, or
without the authority of the holder, is inoperative; but where an instru-
ment or any signature thereon appears to have been cancelled, the burden
of proof lies on the party who alleges that the cancellation was made
unintentionally, or under a mistake or without authority.
Sec. 124. Where a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided except as against a
party who has himself made, authorized or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and is in the hands
of a holder in due course, not a party to the alteration, he may enforce
payment thereof according to its original tenor.
NEGOTIABLE INSTRUMENTS ACT 987
Sec. 125. Any alteration which changes:
, 1. The date.
2. The sum payable, either for principal or interest.
3. The time or place of payment.
4. The number or the relations of the parties.
5. The medium or currency in which payment is to be made.
Or which adds a place of payment where no place of payment is specified,
or any other change or addition which alters the effect of the instrument
in any respect, is a material alteration.
Title II.—Bills op Exchange.
Article I.—Form and Interpretation.
Sec. 126. A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requir-.
ing the person to whom it is addressed to pay on demand, or at a fixed
or determinable further time, a sum certain in money to order or to bearer.
Sec. 127. A bill of itself does not operate as an assignment of the funds
in the hands of the drawee available for the payment thereof, and the
drawee is not liable on the bijl unless and until he accepts the same.
Sec. 128. A bill may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or more drawees in the
alternative or in succession.
Sec. 129. An inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within this State. Any other
bill is a foreign bill. Unless the contrary appears on the face of the bill
the holder may treat it as an inland bill.
Sec. 130. Where in a bill drawer and drawee are the same person, or
where the drawee is a fictitious person, or a person not having capacity
to contract, the holder may treat the instrument at his option, either as a
bill of exchange or a promissory note.
Sec. 131. The drawer, of a bill and any indorser may insert thereon the .
name of a person to whom the holder may resort in case of need; that is
to say, in case the bill is dishonored by non-acceptance or non-payment.
Such person is called the referee in case of need. It is in the option of
the holder to resort to the referee in case of need, or not, as he may see fit.
Article II.—Acceptance.
Sec. 132. The acceptance of a bill is the signification by the drawee
of his assent to the order of the drawer. The acceptance must be in
writing and signed, by the drawoo. It must not express that the drawee
will perform his promise by any other means than the payment of money.
Sec. 133. The holder of a vbill presenting the same for acceptance may
require that the acceptance be written on the bill, and if such request is
refused may treat the bill as dishonored.
Sec. 134. Where an acceptance is written on a paper other than the
bill itself, it does not bind the acceptor except in favor of a person to
whom it is shown and who, on the faith thereof, receives the bill for value.
988 NEGOTIABLE INSTRUMENTS
Sec. 135. An unconditional promise in writing to accept a bill before
it is drawn is deemed an actual acceptance in favor of every person who,
upon the faith thereof, receives the bill for value.
Sec. 136. The drawee is allowed twenty-four hours after presentment
in which to decide whether or not he will accept the bill; but the accept-
ance, if given, dates as of the day of presentation.
Sec. 137. Where a drawee to whom a bill is delivered for acceptance
destroys the same or refuses within twenty-four hours after such delivery,
or within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted
the same.
Sec. 138. A bill may be accepted before it has been signed by the
drawer, or while otherwise incomplete, or when it is overdue, of after it
has been dishonored by a previous refusal to accept, or by non-payment.
But when a bill payable after sight is dishonored by non-acceptance and
the drawee subsequently accepts it, the holder, in the absence of any
different agreement, is entitled to have the bill accepted as of the date of
the first presentment.
See. 139. An acceptance is either general or qualified. A general
acceptance assents without qualification to the order of the drawer. A
qualified acceptance in express terms varies the effect of the bill as drawn.
Sec. 140. An acceptance to pay at a particular place is a general ac-
ceptance unless it expressly states that the bill is to be paid there only,
and not elsewhere.
Sec. 141. An acceptance is qualified which is:
1. Conditional; that is to say, which makes payment by the acceptor
dependent on the fulfillment of a condition therein stated.
2. Partial; that is to say, an acceptance to pay part only of the amount
for which the bill is drawn.
3. Local; that is to say, an acceptance to pay only at a particular place.
4. Qualified as to time.
5. The acceptance of some one or more of the drawees but not of all.
See. 142. The holder may refuse to take a qualified acceptance, and if
he does not obtain an unqualified acceptance, he may treat the bill as dis-
honored by non-acceptance. Where a qualified acceptance is taken, the
drawer and indorsers are discharged from liability on the bill, unless
they have expressly or impliedly authorized the holder to take a qualified
acceptance, or subsequently assent thereto. When the drawer or indorser
receives notice of a qualified acceptance, he must within a reasonable time
express his dissent to the holder, or he will be deemed to have assented
thereto.
Article III.—Presentment for Acceptance.
See. 143. Presentment for acceptance must be made:
1. Where the bill is payable after sight, or any other case where pre-
sentment for acceptance is necessary in order to fix the maturity of the
instrument; or,
2. Where the bill expressly stipulates that it shall be presented for
acceptance; or,
NEGOTIABLE INSTRUMENTS ACT 989
3. Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.
In no other case is presentment for acceptance necessary in order to
render any party to the bill liable.
Sec. 144. Except as herein otherwise provided, the holder of a bill
which is required by the next preceding section to be presented for
acceptance must either present it for acceptance or negotiate it within a
reasonable time. If he fail to do so, the drawer and all indorsers are
discharged.
Sec. 145. Presentment for acceptance must be made by or on behalf
of the holder at a reasonable hour, on a business day, and before the
bill is overdue, to the drawee or some person authorized to accept or
refuse acceptance on his behalf; and,
1. Where a bill is addressed to two or more drawees who are not
partners, presentment must be made to them all, unless one has authority
to accept or refuse acceptance for all, in which case presentment may be
made to him only.
2. Where the drawee is dead, presentment may be made to his personal
representative.
3. Where the drawee has been adjudged a bankrupt or an insolvent, or
has made an assignment for the benefit of creditors, presentment may be
made to him or to his trustee or assignee.
Sec. 146. A bill may be presented for acceptance on any day on which
negotiable instruments may be presented for payment under the pro-
visions of sections 72 and 85 of this Act. When Saturday is not other-
wise a holiday, presentment for acceptance may be made before 12:00
o'clock noon on that day.
Sec. 147. Where the holder of a bill drawn payable elsewhere than at
the place of business or residence of the drawee has not time, with the
exercise of reasonable diligence to present the bill for acceptance before
presenting it for payment on the day that it falls due, the delay caused
by presenting the bill for acceptance before presenting it for payment is
excused and does not discharge the drawers and indorsers.
Sec. 148. Presentment for acceptance is excused and a bill may be
treated as dishonored by non-acceptance in either of the following cases:
1. Where the drawee is dead, or has absconded, or is a fictitious person
or a person not having capacity to contract by bill.
2. Where, after the exercise of reasonable diligence presentmnt cannot
be made.
3. Where, although presentment has been irregular, acceptance has
been refused on some other ground. ^
Sec. 149. A bill is dishonored by non-acceptance:
1. When it is duly presented for acceptance and such an acceptance as
is prescribed by this Act is refused or can not be obtained; or,
2. When a presentment for acceptance is excused and the bill is not
accepted.
See. 150. Where a bill is duly presented for acceptance and is n&
accepted within the prescribed time, the person presenting it must treat
the bill as dishonored by non-acceptance, or he loses the right of re
course against the drawer and indorsers.
990 NEGOTIABLE INSTRUMENTS
Sec. 151. When a bill is dishonored by non-acceptance, an immediate
right of recourse against the drawers and indorsers accrues to the holders,
and no presentment for payment is necessary.
Article IV.—Protest.
Sec. 152. Where a foreign bill appearing on its face to be such "j
dishonored by non-acceptance, it must be duly protested for non-acceptance,
and where such a bill which has not previously been dishonored by non-
acceptance is dishonored by non-payment, it must be duly protested for
non-payment. If it is not so protested, tKe drawer and indorsers are dis-
charged. Where a bill does not appear on its face to be a foreign bill,
protest thereof, in case of dishonor, is unnecessary.
Sec. 153. The protest must be annexed to the bill or must contain a
copy thereof, and must be under the hand and seal of the notary making
it and must specify:
1. The time and place of presentment.
2. The fact that presentment was made and the manner thereof.
3. The cause or reason for protesting the bill.
4. The demand made and the answer given, if any, of the fact, that
the drawee or acceptor could not be found.
Sec. 154. Protest may be made by:
1. A notary public; or,
2. By any respectable resident of the place where the bill is dishonored,
in the presence of two or more credible witnesses.
Sec. 155. When a bill is protested, such protest must be made on the
day of its dishonor, unless delay is excused as herein provided. When a
bill has been duly noted, the protest may be subsequently extended as of
the date of the noting.
Sec. 156. A bill must be protested at the place where it is dishonored,
except that when a bill drawn payable at the place of business or residence
of some person, other than the drawee, has been dishonored by non-
acceptance, it must be protested for non-payment at the place where it is
expressed to be payable; and no further presentment for payment to, or
demand on, the drawee is necessary.
Sec. 157. A bill which has been protested for non-acceptance may be
subsequently protested for non-payment.
Sec. 158. Where the acceptor has been adjudged a bankrupt or an in-
solvent or has made an assignment for the benefit of creditors, before the
bill matures, the holder may cause the bill to be protested for better
security against the drawer and indorsers.
Sec. 159. Protest is dispensed with by any circumstances which would
dispense with notice of dishonor. Delay in noting or protesting is excused
when delay is caused by circumstances beyond the control of the holder
and not imputable to his default, misconduct or negligence. When the
cause of delay ceases to operate, the bill must be noted or protested with
reasonable diligence.
Sec. 160. Where a bill is lost or destroyed, or is wrongly detained from
the person entitled to hold it, protest may be made on a copy or written
particulars thereof.
NEGOTIABLE INSTRUMENTS ACT 991
Article V.—Acceptance for Honor.
Sec. 161. Where a bill of exchange has been protested for dishonor
by non-aeceptance, or protested for better security and is not overdue, any
person not being a party already liable thereon, may, with the consent
of the holder, intervene and accept the bill supra protest for the honor of
any party liable thereon or for the honor of the person for whose account
the bill is drawn. The acceptance for honor may be for part only of the
sum for which the bill is drawn, and where there has been an acceptance
for honor for one party there may be a further acceptance by a different
person for the honor of another party.
Sec. 162. An acceptance for honor supra protest must be in writing and
indicate that it is an acceptance for honor, and must be signed by the
acceptor for honor.
Sec. 163. Where an acceptance for honor does not expressly state for
whose honor it was made, it is deemed to be an acceptance for the honor
of the drawer.
Sec. 164. The acceptor for honor is liable to the holder and to all
parties to the bill subsequent to the party for whose honor he has accepted.
Sec. 165. The acceptor for honor by such acceptance engages that he
will, on due presentment, pay the bill according to the terms of his accept-
ance: Provided, it shall not have been paid by the drawee: And provided,
also, that it shall have been duly presented for payment and protested for
non-payment and notice of dishonor given to him.
Sec. 166. Where a bill payable after sight is accepted for honor, its
maturity is calculated from the date of the noting for non-acceptance and
not from the date of the acceptance for honor.
See. 167. Where a dishonored bill has been accepted for honor supra
protest or contains a reference in case of need, it must be protested for
non-payment before it is presented for payment to the acceptor for honor
or referee in case of need.
Sec. 168. Presentment for payment to the acceptor for honor must be
made as follows:
1. If it is to be presented in the place where the protest for non-pay-
ment was made, it must be presented not later than the day following its
maturity.
2. If it is to be presented in some other place than the place where it
was protested, then it must be forwarded within the time specified in
section 104.
Sec. 169. The provisions of section 81 apply where there is delay in
making presentment to the acceptor for honor or referee in. case of need.
Sec. 170. When the bill is dishonored by the acceptor for honor, it
must be protested for non-payment by him.
Article VI.—Payment for Honor.
Sec. 171. Where a bill has been protested for non-payment, any person
may intervene and pay it supra protest for the honor of any person liable
thereon or for the honor of the person for whose account it was drawn.
See. 172. The payment for honor supra protest in order to operate as
992
NEGOTIABLE INSTRUMENTS
such, and not as a mere voluntary payment, must be attested by a notarial
act of honor, which may be appended to the protest or form an extension
to it.
Sec. 173. The notarial act of honor must be founded on a declaration
made by the payer for honor or by his agent in that behalf declaring his
intention to pay the bill for honor and for whose honor he pays.
Sec. 174. Where two or more persons offer to pay a bill for the honor
of different parties, the person whose payment will discharge most parties
to the bill is to be given preference.
Sec. 175. Where a bill has been paid for honor, all parties subsequent
to the party for whose honor it is paid, are discharged, but the payer
for honor is subrogated for, and succeeds to, both the rights and duties
of the holder as regards the party for whose honor he pays and all parties
liable to the latter.
Sec. 176. Where the holder of a bill refuses to receive payment supra
protest, he loses his right of recourse against any party who would have
been discharged by such payment.
Sec. 177. The payer for honor, on paying to the holder the amount of
the bill and the notarial expenses incidental to its dishonor, is entitled to
receive both the bill itself and the protest.
Article VII.—Bills in a Set.
Sec. 178. Where a bill is drawn in a set, each part of the set being
numbered and containing a reference to the other parts the whole of the
parts constitute one bill.
Sec. 179. Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is, as between
such holders, the true owner of the bill. But nothing in this section
affects the rights of a person who in due course accepts or pays the part
first presented to him.
Sec. 180. Where the holder of a set indorses two or more parts to
different persons he is liable on every such part and every indorser subse-
quent to him is liable on the part he has himself indorsed, as if such
parts were separate bills.
Sec. 181. The acceptance may be written on any part and it must be
written on one part only. If the drawee accepts more than one part, and
such accepted parts are negotiated to different holds in due course, he is
liable on every such part as if it were a separate bill.
Sec. 182. When the acceptor of a bill drawn in a set pays it without
requiring the part bearing his acceptance to be delivered up to him, and
that part at maturity is outstanding in the hands of a holder in due
course, he is liable to the holder thereon.
Sec. 183. Except as herein otherwise provided, where any one part of a
bill drawn in a set is discharged by payment or otherwise, the whole bill
is discharged.
Title III.—Promissory Notes and Checks.
Article I.
Sec. 184. A negotiable promissory note within the meaning of this Act
is an unconditional promise in writing made by one person to another,
NEGOTIABLE INSTRUMENTS ACT 993
signed by the maker, engaging to pay on demand or at a fixed or determin-
able futufe time, a sum certain in money to order or to bearer. Where a
note is drawn to the maker's own order, it is not complete until indorsed
by him.
Sec. 185. A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on demand apply to a check.
Sec. 186. A check must be presented for payment within a reason-
able time after its issue, or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.
Sec. 187. Where a check is certified by the bank on which it is drawn,
the certification is equivalent to an acceptance.
Sec. 188. Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability there-
on.
Sec. 189. A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder, unless and until it accepts or certifies
the check.
Title IV.—General Provisions.
Article I.
Sec. 190. This Act shall be known as the Negotiable Instrument Law.
Sec. 191. In this Act, unless the context otherwise requires: "Ac-
ceptance means an acceptance completed by delivery or notification.
"Action includes counter-claim and set-off.
"Bank includes any person or association of persons carrying on the
business of banking, whether incorporated or not.
"Bearer means the person in possession of a bill or note which is
payable to bearer.
'' Bill'' means bill of exchange, and '' note'' means negotiable promis-
sory note.
"Delivery means transfer of possession, actual or constructive, from
one person to another.
"Holder means the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof.
"Indorsement means an indorsement completed by delivery.
"Instrument means negotiable instrument.
"Issue means the first delivery of the instrument, complete in form,
to a person who takes it as a holder.
"Person includes a body of persons, whether incorporated or not.
"Value means valuable consideration.
"Written includes printed and "writing includes print.
See. 192. The person "primarily liable on an instrument is the per-
son who, by the terms of the instrument, is absolutely required to pay the
same. All other parties are '' secondarily'' liable.
Sec. 193. In determining what is a "reasonable time or an "un-
reasonable time, regard is to be had to the nature of the instrument,
the usage of trade or business (if any) with respect to such instruments,
and the facts of the particular case.
994 NEGOTIABLE INSTRUMENTS
Sec. 194. Where the day, or the last day, for doing an act herein re-
quired or permitted to be done falls on Sunday or on a holiday, the act
may be done on the next succeeding secular or business day.
Sec. 195. The provisions of this Act do not apply to negotiable instru-
ments made and delivered prior to the passage hereof.
Sec. 196. In any case not provided for in this act the rules of the law
merchant shall govern.
DIVISION F
PARTNERSHIPS
DIVISION F
PARTNERSHIPS
Part I. General Nature and Formation of Partner-
ships.
Part II. Firm Name, Capital and Property.
Part III. Mutual Rights and Obligations of Partners.
Part IV. Rights of Third Persons against the Part-
ners.
Part V. Dissolution of the Partnership.
PART I
GENERAL NATURE AND FORMATION OF
PARTNERSHIPS
Chapter 67. The General Nature of Partnerships.
Chapter 68. The Partnership Agreement.
997
CHAPTER. 67
THE GENERAL NATURE OF PARTNERSHIPS
§ 560. Partnerships defined.
§ 561. The partnership not an entity.
§ 562. Partners co-owners.
§ 563. Association must be for financial profit.
§ 564. Test of partnership.
§ 565. Co-ownership, but no sharing of profits.
§ 566. Partnerships by estoppel.
§ 567. Doctrine of delectus personae.
§ 568. How partnership differs from corporation.
§ 569. Kinds of partnership.
§ 570. Kinds of partners.
§ 571. Sub-partnerships.
§560. (Partnerships, Sec. 1.) Partnerships defined.
Case 566. Uniform Partnership Act, Sec. 6.
"A partnership is an association of two or more per-
sons to carry on, as co-owners, a business for profit.
Question 566: Define a partnership?
(Note: To appreciate the definition of a partnership, the
various phases suggested by the section headings throughout
this chapter must be understood.)
§ 561. (Partnerships, Sec. 2.) The partnership not an
entity.
Case 567. E. I. Dupont Demours Powder Co. v. Jones
Bros, et al., 200 Fed. 638.
Facts: A partnership was composed of two partners,
and had its place of business in the county where one of
the partners resided, but the other partner resided in
another county. The Ohio law provided that a condi-
tional sale contract to be valid against bona fide pur-
chasers and mortgagees and creditors shall be filed with
998
GENERAL NATURE
999
the county recorder of the county where the party sign-
ing the instrument resides. The conditional sale in ques-
tion was signed in the partnership name by one of the
partners, and recorded in the county where the partner-
ship business was carried on, but not in the other county.
Jones Bros, went into a receivership and the receiver
sold the goods under an order of court. This is a suit
against the receiver for the proceeds of the sale by the
conditional vendor. The receiver claims that as to him,
as a representative of creditors, the conditional sale is
invalid because not properly recorded. It is contended
that under this statute and a statute permitting a part-
nership to sue and be sued in the firm name—a partner-
ship is made an entity, and that filing the contract in
the place of business of the partnership is filing it in
accordance with the law.
Point Involved: The nature of a partnership as an
entity or a relationship between parties.
Sater, D. J.: "* * * As regards the doctrine of
partnership entity, it may be observed that one concep-
tion of a partnership, arising out of the agreement on
which it is founded, is that it is an aggregation of per-
sons associated together to share its profits and losses,
owning its property and liable for its debts. Another
conception is that it is an artificial being, a distinct
entity, separate in estate, in rights, and in obligations,
from the partners who compose it. Re Bertenshaw, 157
ed. 363, 365, 85 C. C. A. 61, 17 L. R. A. (N. S.) 886, 13
Ann. Cas. 986. The intervener adopts the latter con-
ception, and relies on Curtis v. Hollingshead, 14 N. J.
Law, 402, 409, 410; Pooley v. Driver, L. R. 5 Ch. D.
■458, and Parsons on Partnership (4th Ed.) § 184, to
Which may be added the discussion in Bates on Partner-
ship, c. 8, § 170 et seq., and authorities cited in Re Telfer,
184 Fed. 224, 106 C. C. A. 366 (C. C. A. 6). In West v.
Valley Bank, 6 Ohio St. 168, 173, a firm is characterized
as an ideal mercantile person. This is the mercantile
conception of a partnership. Gilmore, Part. 114 et seq.
1000
PARTNERSHIPS
The legal conception, however, is -quite different. Gil-
more, Part. 117; Bates, Part. § 170. In Byers v. Schlupe,
51 Ohio St. 314, 38 N. E. page 121, 25 L. R. A. 649, the
attitude of a partnership in the eye of the law, as viewed
by the Ohio Court, is stated thus:
n 'The members of a partnership do not form a col-
lective whole, distinct from the individuals composing
it; nor are they collectively endowed with any capacity
of acquiring rights or incurring obligations. The rights
and liabilities of a partnership are the rights and lia-
bilities of the partners. 1 Lind. Part. 5. It is not a
creation in which the identity of the individual members
is merged and lost, in seeking to enforce against them
the obligations of the firm.'
'' The doctrine of partnership entity, in the sense that
a partnership is an ideal artificial person or being dis-
tinct from the individuals composing it, and in which the
identity of the individual members is merged and lost,
does not obtain in Ohio. Nor does the judicial recog-
nition of the doctrine of partnership entity change the
established rule fixing the substantive rights either of
the creditors of the partnership or of its individual mem-
bers. Re Telfer, 184 Fed. 230, 106 C. C. A. 366. The
partnership entity, after the enactment of the remedial
statute permitting it to sue or be sued in the firm name,
remained precisely the same as that prior to its passage,
plus the remedial right thereby conferred. Such enact-
ment does not affect the application of the statutory re-
quirement that a chattel mortgage [or conditional sale]
shall be filed with the recorder of the county where the
mortgagor resides at the time of its execution. The
same rule consequently applies as to the filing of such
an instrument in Ohio as in those states in which the
common-law rule is in force—the rule that actions affect-
ing partnerships must be brought in the name of or
against the individuals composing the same.
Question 567: Is the partnership an entity? How did the
question come to be raised in this case and how did the Court
decide ?
GENERAL NATURE
1001
. (Note: At the time of the drafting of the Uniform Partner-
;«hip Act, the question was precipitated whether the commis-
sioners should adopt an Act continuing in force the so-called
■ common-law theory of partnership, that of an association of
individuals, or should adopt the so-called entity theory, that a
partnership is a "juristic person. On the one side is the view
that the entity theory is not only the correct one and in accord
with business views, but is the theory supported by judicial
trend. On the other side, is the view that the entity theory is not
desirable and has insuperable difficulties in the way of its adop-
tion. The first draft of the Uniform Partnership Act was drawn
by Dean Ames on the entity theory. After the death of Dean
■ Ames, the committee directed a draft on the aggregate or com-
mon-law theory, and that draft was prepared by Dr. William
.Draper Lewis, the author of the present Act.
: One ground for the contention in favor of the entity theory is
that business men do in fact look upon a partnership as an
entity. Hence, the entity theory is said to be the mercantile
theory. But it seems to the editor there is confusion in this
thought. It is not believed that business men do look upon a
partnership as a legal entity. It is true they regard it, and
ought to regard it, as a business entity, but that is no reason
for saying either that they regard it as a legal entity, or that
it ought to be so regarded. For book-keeping purposes, every
business enterprise should be separated from other business
affairs and from social or family affairs. But this is just as true
■of a sole proprietorship as it is of a multiple proprietorship or
partnership. If A owns an unincorporated meat-market, he may.
in fact ought to, give it a definite capital, and. may draw a
salary from it, and he looks upon it as a business unit, but so
long as he keeps it unincorporated, no one would argue that
either he or his creditors look upon that business as a legal
entity. He well knows that he is personally liable, that the
property is his, and that he may sue his customers on their
accounts. But as soon as he takes in a partner, the argument
is advanced that it is in the minds of business men, an entity.
It is thought that this belief as to the view of business men on
this point is one of those persistent fallacies that has no basis
in fact.)
1002
PARTNERSHIPS
§§ 562, 563, 564. (Partnerships, Sees. 3, 4, 5.) Partners
are co-owners of a business carried on for financial
profit.
Case 568. Meehan v. Valentine, 145 U. S. 611.
Facts: Suit by Thomas J. Meehan, against Valentine
as executor of Perry, alleging Perry to have been a part-
ner with Counselman and Scott, under the firm name of
L. W. Counselman & Co., and seeking to charge Perry's
estate on promissory notes signed by the firm.
The plaintiff put in evidence the following agreement:
"L. W. Counselman, Albert L. Scott, Office of L. W.
Counselman & Co., Oyster and Fruit Packers, corner
Philpot and Will streets, Baltimore, Md., March 15,1880.
For and in consideration of loans made and to be made
to us by Wm. G. Perry, of Philadelphia, amounting in
all to the sum of $10,000, for the term of one year from
the date of said loans, we agree to pay to said Wm. Gr.
Perry in addition to the interest thereon, one-tenth of
the net profits over and above the sum of $10,000 on
our business for the year commencing May 1, 1880, and
ending May 1, 1881—i. e., if our net profits for said
year's business exceeds the sum of ten thousand dollars,
then we are to pay to said W. G. Perry one-tenth of
said excess of profits over and above the said sum of
ten thousand dollars; and it is further agreed that if
our net profits do not exceed the sum of ten thousand
dollars, then he is not to be paid more than the interest
on said loan, the same being added to notes at the time
they are given, which are to date from the time of said
loans, and payable one year from date. L. W. Counsel-
man & Co. This agreement was continued for future
years.
'' The plaintiff also offered in evidence six promissory
notes, amounting to $10,600, given by the firm to Perry
in the months of March, May, and June, 1884.
"The plaintiff also called Scott as a witness, who testi-
fied that the firm was composed of L. W. Counselman
and himself; who carried on a fruit, vegetable packing
GENERAL NATURE
1003
and oyster business in Baltimore; that Perry was in the
stationery business in Philadelphia; that the $10,000
mentioned in the agreement was paid by him to the firm,
receiving their notes for it, and remained in the business
throughout, no part of it having been repaid; that from
time to time he lent other sums to the firm, which were
repaid; that he was an intimate friend of the witness,
and visited him every few weeks, such visits not being
specially connected with the business, but business was
always talked on such occasions and the place of busi-
ness visited; that Perry annually received accounts of
profits and loss. After a showing that the firm had made
an assignment for benefit of creditors, these questions
and answers were made:
"Question: Mr. Counselman and yourself did owe this
$10,000 to the estate of Mr. Perry, did you? Answer:
They had my notes for it.
"Q. Did you or did you not owe it? A. It was capi-
tal he had in the business the same as ours. We owed it
to him, of course we owed it to him, if we did not lose it.
The Court below held that there was no evidence to
show that Perry was liable on such notes as a partner
and ordered a non-suit. Plaintiff brings the case to this
Court.
Mr. Justice Gray: 11* * *
"The requisites of a partnership arei that the parties
must have joined together to carry on a trade or ad-
venture for their common benefit, each contributing prop-
erty or services, and having a community of interest in
the profits. Ward v. Thompson, 22 How. 330, 334.
it* * *
"How far sharing in the profits of a partnership shall
make one liable as a partner has been a subject of much
judicial discussion, and the various definitions have been
approximate rather than exhaustive.
"The rule formerly laid down and long acted on as
established, was that a man who received a certain share
of the profits as profits, with a lien on the whole profits
1004
PARTNERSHIPS
as security for his share, was liable as a partner for the
debts of the partnership, even if it had been stipulated
between him and his co-partners that he should not be
so liable; but that merely receiving compensation for
labor or services, estimated by a certain proportion of
the profits, did not render one liable as a partner.
 Accordingly, this Court, at December term, 1860, de-
cided that a person employed to sell goods under an
agreement that he should receive half the profits, and
that they should not be less than a certain sum, was not
a partner with his employer. 'Actual participation in
the profits as principal,' said Mr. Justice Clifford inde-
livering judgment, 'creates a partnership as between the
parties and third persons, whatever may be their inten-
tions in that behalf, and notwithstanding the dormant
partner was not expected to participate in the loss be-
yond the amount of the profits,' or 'may have expressly
stipulated with his associates against all the usual inci-
dents to that relation. That rule, however, has no appli-
cation whatever to a case of service or special agency,
where the employe has no power as a partner in the firm
and no interest in the profits, as property, but is simply
employed as a servant or special agent, and is to receive
a given sum out of the profits, or a proportion of the
same, as a compensation for his services.' Berthold v.
Goldsmith, 24 How. 536, 542, 543. See, also, Seymour v.
Freer, 8 Wall. 202, 215, 222, 226; Beckwith v. Talbot, 95
U. S. 289, 293; Edwards v. Tracy, 62 Pa. St. 374; Burnett
v. Snyder, 81 N. Y. 550, 555.
"Mr. Justice Story, at the beginning of his Commen-
taries on Partnership, first published in 1841, said:
'Every partner is an agent of the partnership; and his
rights, powers, duties, and obligations are in many re-
spects governed by the same rules and principles as those
of an agent. A partner, indeed, virtually embraces the
character both of a principal and of an agent. So far as
he acts for himself and his own interest in the common
concerns of the partnership, he may properly be deemed
GENERAL NATURE
1005
a principal; and so far as lie acts for his partners, he
may as properly be deemed an agent. The principal dis-
tinction between him and a mere agent is that he has a
community of interest with the other partners in the
whole property and business and responsibilities of the
partnership; whereas an agent, as such, has no interest
in either. Pothier considers partnership as but a species
of mandate, saying contractus societatis, non secus ac
contractus mandati.' Afterwards, in discussing the rea-
sons and limits of the rule by which one may be charged
as a partner by reason of having received part of the
profits of the partnership, Mr. Justice Story observed
that the rule was justified and the cases in which it had
been applied reconciled, by considering that 'a partici-
pation in the profits will ordinarily establish the exist-
ence of a partnership between the parties in favor of
third persons, in the absence of all other opposing cir-
cumstances;' but that it is not 'to be regarded as any-
thing more than mere presumptive proof thereof, and
therefore liable to be repelled and overcome by other cir-
cumstances, and not as of itself overcoming or controlling
them;' and therefore that, 'if the participation in the
profits can be clearly shown to be in the character of
agent, then the presumption of partnership is repelled.'
And again: 'The true rule, ex aequo et bono, would seem
to be that the agreement and intention of the parties
themselves should govern all the cases. If they intended
a partnership in the capital stock, or in the profits, or in
both, then that the same rule should apply in favor of
third persons, even if the agreement were unknown to
them. And on the other hand, if no such partnership
were intended between the parties, then that there should
be none as to third persons, unless where the parties had
held themselves out as partners to the public, or their
conduct operated as a fraud or deceit upon third per-
sons.' Story, Partn. § § 1, 38, 49.
"Baron Parke (afterwards Lord Wensleydale) ap-
pears to have taken much the same view of the subject as
Mr. Justice Story. Both in the Court of Exchequer and
1006
PARTNERSHIPS
in the House of Lords he was wont to treat the liability
of one sought to be charged as a dormant partner for
the acts of the active partners as depending on the law
of principal and agent. Beckham v. Drake (1841), 9
Mees. & W. 79, 98; Wilson v. Whitehead (1842), 10 Mees.
& W. 503, 504; Ernest v. Nicholls (1857), 6 H. L. Cas.
401, 417; Cox v. Hickman (1860), 8 H. L. Cas. 268, 312,
ante* And in Cox v. Hickman he quoted the statements
of Story and Pothier from Story, Partn. § 1, above cited.
"In that case, two merchants and co-partners, becom-
ing embarrassed in their circumstances, assigned all
their property to trustees, empowering them to carry on
the business, and to divide the net income ratably among
their creditors (all of whom became parties to the deed),
and to pay any residue to the debtors, the majority of
the creditors being authorized to make rules for con-
ducting the business or to put an end to it altogether.
The house of lords, differing from the majority of the
judges who delivered opinions at various stages of the
case, held that the creditors were not liable as partners
for debts incurred by the trustees in carrying on the
business under the assignment. The decision was put
upon the ground that the liability of one partner for the
acts of his co-partner is in truth the liability of a prin-
cipal for the acts of his agent; that a right to participate'
in the profits, though cogent, is not conclusive, evidence
that the business is carried on in part for the person
receiving them; and that the test of his liability as a
partner is whether he has authorized the managers of
the business to carry it on in his behalf. Cox v. Hick-
man, 8 H. L. Cas. 268, 304, 306, 312, 313, nom. Wheat-
croft v. Hickman, 9 C. B. (N. S.) 47, 90, 92, 98, 99.
"This new form of stating the general rule did not at
first prove easier of application than the old one; for in
the first case which arose afterwards one judge of three
dissented (Kilshaw v. Jukes, 3 Best & S. 847), and in
the next case the unanimons judgment of four judges in
the common bench was reversed by four judges against
two in the exchequer chamber (Bullen v. Sharp, 18 C.
GENERAL NATURE
1007
B. [N. S.] 614, and L. R. 1 C. P. 86). And, as has been
pointed out in later English cases, the reference to
agency as a test of partnership was unfortunate and in-
conclusive, inasmuch as agency results from partnership
rather than partnership from agency. Kelly, C. B., and
Cleasby, B., in Holme v. Hammond, L. R. 7 Exch. 218,
227, 233; Jessel, M. R., in Pooley v. Driver, 5 Ch. Div.
458, 476. Such a test seems to give a synonym, rather
than a definition; another name for the conclusion, rather
than a statement of the premises from which the conclu-
sion is to be drawn. To say that a person is liable as a
partner, who stands in the relation of principal to those
by whom the business is actually carried on, adds noth-
ing by way of precision, for the very idea of partnership
includes the relation of principal and agent. * * *
"In other respects, however, the rule laid down in Cox
v. Hickman has been unhesitatingly accepted in England,
as explaining and modifying the earlier rule. In re Eng-
fish & Irish Society, 1 Hem. & M. 85, 106, 107; Mollwo v.
Court of Wards, L. R. 4 P. C. 419, 435; Ross v. Parkyns,
L. R. 20 Eq. 331, 335; Ex parte Tennant, 6 Ch. Div. 303;
Ex parte Delhasse, 7 Ch. Div. 511; Badeley v. Bank, 38
Ch. Div. 238. See, also, Davis v. Patrick, 122 U. S. 138,
151, 7 Sup. Ct. Rep. 1102; Eastman v. Clark, 53 N. H.
276, 16 Am. Rep. 192; Wild v. Davenport, 48 N. J. Law,
129, 7 Atl. Rep. 295, 57 Am. Rep. 552; Seabury v. Bolles,
51 N. J. Law, 103,16 Atl. Rep. 54, and 52 N. J. Law, 413,
21 Atl. Rep. 952; Morgan v. Farrell, 58 Conn. 413, 20
Atl. Rep. 614.
"In the present state of the law upon this subject, it
may, perhaps, be doubted whether any more precise gen-
eral rule can be laid down than, as indicated at the be-
ginning of this opinion, that those persons are partners
who contribute either property or money to carry on a
joint business for their common benefit, and who own
and share the profits thereof in certain proportions. If
they do this, the incidents or consequences follow that
the acts of one in conducting the partnership business
are the aets of all: that each is agent for the firm and for
1008
PARTNERSHIPS
the other partners; that each receives part of the profits
as profits, and takes part of the fund to which the cred-
itors of the partnership have a right to look for the
payment of their debts; that all are liable as partners
upon contracts made by any of them with third persons
within the scope of the partnership business; and tkat
even an express stipulation between them that one shall
not be so liable, though good between themselves, is in-
effectual as against third persons. And participating
in profits is presumptive, but not conclusive, evidence of
partnership.
"In whatever form the rule is expressed, it is univer-
sally held that an agent or servant, whose compensation
is measured by a certain proportion of the profits of the
partnership business, is not thereby made a partner, in
any sense. So an agreement that the lessor of a hotel
shall receive a certain portion of the profits thereof by
way of rent does not make him a partner with the lessee.
Perrine v. Hankinson, 11 N. J. Law, 215; Holmes v. Rail-
road Co., 5 Gray, 58; Beecher v. Bush, 45 Mich. 188, 7
N. W. Rep. 785, ante. And it is now equally well settled
that the receiving of part of the profits of a commercial
partnership, in lieu of or in addition to interest by way
of compensation for a loan of money, has of itself no
greater effect, Wilson v. Edmonds, 130 U. S. 472, 482,
9 Sup. Ct. Rep. 563; Richardson v. Hughitt, 76 N. Y. 55,
32 Am. Rep. 267; Curry v. Fowler, 87 N. Y. 33, 41 Am.
Rep. 343; Cassidy v. Hall, 97 N. Y. 159; Smith v. Knight,
71 111. 148, 22 Am. Rep. 94; Williams v. Soutter, 7 Iowa
435, 446; Smelting Co. v. Smith, 13 R. I. 27, 43 Am. Rep.
3; Mollwo v. Court of Wards, and Badeley v. Bank, above
cited.
"In some of the cases most relied on by the plaintiff,
the person held liable as a partner furnished the whole
capital on which the business was carried on by another,
or else contributed part of the capital and took an active
part in the management of the business. Beauregard v.
Case, 91 U. S. 134; Hackett v. Stanley, 115 N. Y. 625,627,
628, 633, 22 N. E. Rep; 745; Pratt v. Langdon, 12 Allen,
GENERAL NATURE
1009
544, and 97 Mass. 97, 93 Am. Dec. 61; Rowland v. Long,
45 Md. 439. And in Mollwo v. Court of Wards, above
cited, after speaking of a contract of loan and security,
in which no partnership was intended, it was justly ob-
served: 'If cases should occur where any persoils, under
the guise of such an arrangement, are really trading as
principals, and putting forward, as ostensible traders,
others who are really their agents, they must not hope
by such devices to escape, liability; for the law, in cases
of this kind, will look at the body and substance of the
arrangements, and fasten responsibility on the parties
according to their true and real character.' L. R. 4 P.
C. 438. But in the case at bar no such element is found.
"Throughout the original agreement, and the renewals
thereof, the sum of $10,000 paid by Perry to the partner-
ship, and for which they gave him their promissory notes,
is spoken of as a loan for which the partnership was to
pay him legal interest at all events, and also pay him
one-tenth of the net yearly profits of the partnership
business, if those profits should exceed the sum of $10,-
000. The manifest intention of the parties, as apparent
upon the face of the agreement, was to create the relation
of debtor and creditor, and not that of partners. Perry's
demanding and receiving accounts and payments yearly
was in accordance with his right as a creditor. There is
nothing in the agreement itself, or in the conduct of the
parties, to show that he assumed any other relation. He
never exercised any control over the business. The legal
effect of the instrument could not be controlled by the
testimony of one of the partners to his opinion that 'it
was capital he had in the business the same as ours; we
owed it to him; of course, we owed it to him if we did
not lose it.'
"Upon the whole evidence, a jury would not be justi-
fied in inferring, on the part of Perry, either 'actual
participation in the profits as principal,' within the rule
as laid down by this Court in Berthold v. Goldsmith, or
that he authorized the business to be carried on in part
for him or on his behalf, within the rule as stated in Cox
1010
PARTNERSHIPS
v. Hickman and the later English cases. There being no
partnership, in any sense, and Perry never having held
himself ont as a partner to the plaintiff or to those under
whom he claimed, the Circuit Court rightly ruled that
the action could not be maintained. Pleasants v. Fant,
22 Wall. 116; Thompson v. Bank, 111 TJ. S. 529, 4 Sup.
Ct. Rep. 689.—Judgment affirmed.
Question '568: (1) Is the fact that the parties share the
profits of a business conclusive to establish them partners so that
the act of one in the scope of the business will bind the others?
(2) What was the early test of a partnership?
(3) Is the agency test a good test? Why?
(4) In the above case, was Perry held as partner?
(5) What is the test of a partnership?
(6) If there is a partnership are all members liable on part-
nership transactions, whether the creditor knew of the partner-
ship or not?
(7) A had a farm which he wanted worked and entered into
an agreement with B that B should take possession and operate
the farm for a certain season, B to furnish his own utensils, and
A to have in lieu of a fixed rental one-third of the net profits of
the season. Is there a partnership ? (Randall v. Ditch et al.,
123 la. 582.)
(8) A had a store for which he desired a manager. He
employed B, giving B authority to conduct the store, sell goods
and replenish the stock. B conducted the store, buying goods
in A's name. B's compensation consisted entirely in a per-
centage of the profits. A failed. B is sued as a partner for
goods bought for the store. Is he liable? Why?
(Note: It was laid down by the early English cases that "He
who takes a moity of all the profits indefinitely shall, by opera-
tion of law, be liable for losses, if losses arise. Waugh v.
Carver, '2 H. Blackstone, 235; Grace v. Smith, 2 W. Blackstone,
998. In Cox v. Hickman, 8 House of Lord's Cases 268, decided
in 1860, this doctrine was declared unsound. Different tests
have been proposed, but the better view is that there is a part-
nership (no matter what name the parties give to the relation-
ship) when there is an intention to make each other co-owners
in a business conducted with a view to profit. There may be a
mutual interest in the profits without any co-ownership in. the
GENERAL NATURE
1011
business. Being mutual owners, and therefore all principals,
each is an agent for the other. If parties are actually partners,
they are liable whether at the time known to be so or not. Thus
a secret partner is liable for partnership indebtedness incurred
while he was actually a partner. If parties are interested in
the profits, but not actually partners, they are not liable, unless
there was a "holding out, that is unless the party is by his
representations or conduct estopped to say there is no partner-
ship. For exhaustive note entitled "Effect of agreement to
share profits to create a partnership, see 18 Lawyers Report
Annotated, new series, 963.)
(Note: Cox v. Hickman, referred to in the above case, is
pointed to by advocates of the "business trust as an early,
legally successful, venture in which the trust idea was em-
ployed to establish a business as a distinct unity without in-
corporation.)
Case 569. Ash v. Guie, 97 Pa. 493.
Facts: Suit brought against a large number of per-
sons as members of a Masonic lodge upon a certificate of
indebtedness which had been issued by the master and
the warden upon an indebtedness arising out of the erec-
tion of a building. These members were sought to be
held responsible as partners.
Point Involved: Whether the members of a benevo-
lent order, not formed for financial profit, are partners
and as such agents of each other within the scope of
partnership purposes.
Turnkey, J.: "One of the defendants, called by plain-
tiffs, testified: 'The full title of our lodge is Williamson
Lodge, No. 309, F. and A. M. F. and A. M. means Free
and Accepted Masons. The purposes of our lodge are
charitable, benevolent and social.' This is the evidence
as to the objects for which the association was formed,
and without proof of its constitution or rules respecting
admission of members and the management of its affairs,
it was held to be a common partnership. A partnership
has been defined to be a 'combination by two or more
persons, of capital or labor or skill, for the purpose of
1012
PARTNERSHIPS
business for tbeir common benefit.' It may be- formed,
not only for every kind of commercial business, but for
manufacturing, hunting, and the like, as well as for
carrying on the business of professional men, mechanics,
laborers, and almost all other employments. It would
seem that there must be a community of interests for
business purposes. Hence voluntary associations or
clubs, for social and charitable purposes, and the like,
are not proper partnerships, nor have their members the
powers and responsibilities of partners. Pars, on Part.
6, 36, 42.
"A benevolent and social society has rarely, if ever,
been considered a partnership. * * *
"Here there is no evidence to warrant an inference
that when a person joined the lodge he bound himself as
a partner in the business of purchasing real estate and
erecting buildings, or as a partner so that other members
could borrow money on his credit. The proof fails to
show that the officers or a committee, or any number of
the members, had a right to contract debts for the build-
ing of a tpmple, which would be valid against every mem-
ber from the mere fact that he was a member of the lodge.
But those who engaged in the enterprise are liable for
the debts they contracted, and all are included in suck
liability who assented to the undertaking or subsequently
ratified it. Those who participated in the erection of the
building by voting fgr and advising it, are bound the
same as the committee who had it in charge. And so
with reference to borrowing money. A member who sub-
sequently approved the erection or borrowing could be
held on the ground of ratification of the agents' acts.
We are of opinion that it was error to rule that all the
members were liable as partners in their relation to third
persons in the same manner as individuals associated for
the purpose of carrying on a trade. * * *
Question 569: (1) Why was the lodge not deemed to be a
partnership ?
(2) How could the members of this club have made theit-
selves liable for the acts of other members?
GENERAL NATURE
1013
I (Note: A provision by one co-owner indemnifying the other
against loss does not prevent a partnership. The test would be
whether they are really co-owners of a business carried on for
profit. That being' true, each is liable to third person for the
debts of the partnership, and such third person is not con-
cerned with matters of indemnity between themselves.)
§565. (Partnerships, Sec. 6.) Co-ownership but no
sharing of profits in a business.
Case 570. Uniform Partnership Act, Sec. 7 (2).
"Joint tenancy, tenancy in common, tenancy by en-
tireties, joint property, common property, or part owner-
ship does not of itself establish a partnership whether
such co-owners do or do not share any profits made by
the use of the property.''
Question 570: Can there be joint ownership of property and
also sharing in property and still no partnership? Why?
(Note: To establish a partnership and to make one liable for
the losses as a partner, more than mere joint ownership of prop-
erty must be shown. A partnership is a business venture.
There is a considerable confusion as to the distinction between
a "joint adventure and a partnership. It is frequently said
that a joint adventure is governed by the same rules as a part-
nership. If that is true in all respects then there is'no sense in
any distinction. In a note in one of the well known legal
periodicals the author says at one point that a partnership can-
not exist where there is joint interest in the profit of a
single act, as a partnership must be an interest in a business,
which signifies a series of acts. But in another place in the
same note he states that it has been decided that a partnership
may exist to do a single act where there is a community of
ownership and interest in the profits. We should realize that
there has been a good deal of difference of opinion as to what
constitutes a partnership, especially in the earlier cases. The
word "joint adventure has no settled meaning and contains
ho worth-while legal concept unless it is used to indicate a case
of community ownership in property (as distinguished from
business) in which there may or may not be an interest in the
profits, and which is not a partnership, and which creates in
1014
PARTNERSHIPS
itself 110 mutual agency and no liability for losses. It would
certainly seem that there can be a partnership in a single
venture if it is conducted as a business and it has been so held
in a number of cases. See also Lindley on Partnership, page
70, Edition of 1912.)
§566. (Partnerships, Sec. 7.) Partnerships by estoppel.
Case 571. Uniform Partnership Act, Sec. 16.
"(1) When a person by words spoken or written,
represents himself, or consents to another representing
him to any one as a partner in an existing partnership,
or with one or more persons not actual partners, he is
liable to any such person to whom such representation
has been made, who has on the faith of such representa-
tion, given credit to the actual or apparent partnership,
and if he has made such representation or consented to
its being made in a public manner he is liable to such
person, whether the representation has or has not been
made or communicated to such person so giving credit
by or with the knowledge of the apparent partner mak-
ing the representation or consenting to its being made.
(a) When a partnership liability results, he is liable
as though he were an actual member of the partnership.
(b) When no partnership liability results, he is liable
jointly with the other persons, if any, so consenting to
the contract or representation as to incur liability, other-
wise separately.''
Case 572. Thompson v. First National Bank, 111 U. S.
536.
Facts: Suit to hold one as a partner who had ap-
peared in public advertisements to be a partner, but who
was not really such. The "holding out was not known
to plaintiff at the time of the transaction.
Point Involved: Of the estoppel that will impose on
one the liability of a partner, when he is not really n
partner.
GENERAL NATURE
1015
"The Court was requested to instruct the jury that if
Thompson was not in fact a member of the partnership,
the plaintiff could not recover against him, unless it ap-
peared from the testimony that he had knowingly per-
mitted himself to be held out as a partner, and that the
plaintiff had knowledge thereof during its transaction
with the partnership. The Court declined to give this
instruction, and instead thereof instructed the jury, in
substance, that if Thompson permitted himself to be held
out to the world as a partner, by advertisements and
otherwise, as shown by the evidence, and to be introduced
to other persons as a partner, the plaintiff was entitled
to the benefit of the fact that he was so held out, and he
was estopped to deny his liability as a partner, although
the plaintiff did not know that he was so held out, and
did not rely on him for the payment of the plaintiff's
debt, or give credit to him, in whole or in part. This
Court is of opinion that the Circuit Court erred in the
instructions to the jury, and in the refusal to give the
instruction requested.
"A person who is not in fact a partner, who has no
interest in the business of the partnership and does not
share in its profits, and is sought to be charged for its
debts because of having held himself out, or permitted
himself to be held out, as a partner, cannot be made liable
upon contracts of the partnership except with those who
have contracted with the partnership upon the faith of
such holding out. In such a case, the only ground of
charging him as a partner is that, by his conduct in hold-
ihg himself out as a partner, he has induced persons deal-
ing with the partnership to believe him to be a partner,
and, by reason of such belief, to give credit to the part-
nership. As his liability rests solely upon the ground
that he cannot be permitted to deny a participation which,
though not existing in fact, he has asserted, or permitted
to appear to exist, there is no reason why a creditor of
the partnership, who has neither known of nor acted upon
1016
PARTNERSHIPS
the assertion or permission, should hold as a partner one
who nevePwas in fact, and whom he never understood or
supposed to be, a partner, at the time of dealing .with
and giving credit to the partnership. There may be
cases in which the holding out has been so public and so
long continued that the jury may infer that one dealing
with the partnership knew it and relied upon it, with-
out direct testimony to that effect. But the question
whether the plaintiff was induced to change his position
by acts done by the defendant or by his authority is, as
in other cases of estoppel in 'pais, a question of fact for
the jury, and not of law for the Court. The nature^and
amount of evidence requisite to satisfy the jury may
vary according to circumstances. But the rule of law is
always the same; that one who had no knowledge or be-
lief that the defendant was held out as a partner, and
did nothing on the faith of such a knowledge or belief,
cannot charge him with liability as a partner if he was
not a partner in fact.
Question 572: On what ground may one be held to he liable
as a partner to third persons, where he is not a partner in fact?
What are the essential elements in such a case?
§ 567. (Partnerships, Sec. 8.) Doctrine of delectus
personae.
(Note: All through the law of partnerships, we find it
emphasized with various results, that a partnership is an agree-
ment on a purely personal basis. This thought is expressed in
the latin phrase "delectus personae. As a result, no member
can without permission sell his share to either an outside per-
son or to one of the other partners. A may be willing to be a
partner with B and C, but not with B and D or with B alone.
So, death of a partner dissolves the firm. So the partner may
demand the highest good faith on the part of his co-partner.
See cases throughout this subdivision.)
GENERAL NATURE
1017
§ 568. (Partnerships, Sec. 9.) How partnership differs
from corporation.
(Note: The following are suggested as the important dis-
tinctions between partnerships and corporations:
, Partnership Corporation
1. Source of existence ?...... Agreement Charter
2. Entity? No Yes
3. Are shares transferable?... No Yes
4. Does death dissolve? Yes No
5. Is member agent of others? Yes No
6. Is liability of members lim-
ited to contributions?.... No Yes)
§569. (Partnership, Sec. 10.) Kinds of partnerships.
(a) Trading and non-trading partnerships.
(b) Limited and Unlimited partnerships.
(c) Joint stock companies.
(d) General and special partnerships.
(a) Trading and Non-trading Partnerships.
(Note: See Judge v. Braswell, post, case No. 581. Partner-
ships are known as those which are trading and those which are
non-trading. A trading partnership is one which as its main
business, buys and shells. It includes the great bulk of commer-
cial partnerships. A non-trading partnership does not buy and
sell as its main business, but only casually. It renders service.
Such are partnerships of lawyers, physicians, farmers, laundry-
men, hotelkeepers, and the like. The distinction is important
for this reason that in a trading partnership, i. e., one that buys
and sells, whether as manufacturer or dealer, there impliedly
exists in each partner all the powers that go with buying and
selling, such as granting and taking credit, giving notes, ae-
cepting bills of exchange, giving security, etc. See, post, the
authority of the partner. But if the firm is non-trading, then,
a reliance on some custom of the firm, or apparent authority
arising out of something more than the mere partnership rela-
tion must be shown to enable the third person to hold the other
partners. The following have been held to be non-trading part-
nerships:
1018
PARTNERSHIPS
Abstract, loan and real estate;
Buying and selling lands-
Conducting telegraph;
Keeping livery stable;
Practicing law;
Mining;
Farming;
Conducting theater;
Printing;
Publishing;
Architects;
Auctioneers.
See Collection of Authorities, Annotated Cases, 1916A, 206.)
(b) Limited and Unlimited Partnerships.
(The word "limited is applied sometimes to cases in which
by agreement between the members, one partner is assured
against loss; but more generally a limited partnership is meant
one organized under a Limited Partnership Act permitting a
limitation of liability by complying with the act in regard to
publication record, etc. See Chapter 78 post.)
(c) Joint Stock Companies.
Case 573. People v. Rose, 219, 111. 46.
Point Involved: The nature of a joint stock company.
Mr. Justice Magruder : "* * * A joint stock com-
pany is defined in the text books to be ' an association of
individuals for purposes of profit, possessing a common
capital, which is divided into shares, of which each mem-
ber possesses one or more, and which are transferable
by the owner. These associations, formed for business
purposes, were at common law, and, as a general rule
still are considered merely as partnerships, and their
rights and liabilities are in the main governed by the
same rules and principles which regulate commercial
partnerships.' (17 Am. & Eng. Ency. of Law [2d Ed.],
GENERAL NATURE
1019
pp. 636, 637.) While it is true that many companies,
called joint stock companies, have many of the essential
characteristics of a corporation, yet there is a distinction
between such companies and regularly organized cor-
porations, so-called. In 17 Am. & Eng. Ency. of Law,
(2d Ed.), p. 638, it is said: 1 In respect to their formation
there is a broad distinction betwen a corporation, tdch-
nically so called, which always owes its existence to the
sovereign power of the state, and a joint stock company,
which, being essentially a partnership, is brought into
being by the contracts of its members inter sese.' Coun-
sel refer to cases in other states, and in the Federal
courts, holding that joint stock companies possess many
of the characteristics of corporations, but the definition,
which characterizes them as partnerships, has been recog-
nized as correct, if not actually adopted, by the decisions
of the Illinois courts.
Question 573: What is a "joint stock company"? How does
it differ from an ordinary partnership ? How does it differ from
a corporation ? Is it a partnership ?
(Note: The words "joint stock company are also fre-
qnently used to describe a corporation.)
§ 570. (Partnerships, Sec. 11.)—Kinds of partners.
(Note: The following adjectives suggest the state of partici-
pation in the firm by partners.
Real partners: Those who are actually partners, whether
secret, active, silent or dormant.
Ostensible partners: Those who appear to outsiders to be
partners whether really so or not.
Active partners: Those who are active whether ostensible or
secret.
Silent partners: Those who take no part. May be ostensible
or secret.
Secret partners: Actual partners whose identity or existence
is not revealed to outsiders.
Dormant partners: Secret and silent. Sometimes used
synonymously with secret partner.)
1020
PARTNERSHIPS
§571. (Partnership, Sec. 12.) Subpartnerships.
(Note: ''Subpartnership is a word used to describe an ar-
rangement which a partner may have with a non-partner to
divide his share of the partnership profits. Such outside person
does not by reason of this arrangement become a partner in the
main partnership.)
CHAPTER 68
THE PARTNERSHIP AGREEMENT
§ 572. Agreement essential.
§ 573. Form required.
§ 574. Articles of Partnership.
.§ 575. Competency of parties to be partners.
§ 576. Consideration.
§ 577. Legality of object.
§§572, 573, 574. (Partnerships, Sees. 13, 14, 15.)
Agreement and form.
(Note: The partnership agreement may be oral or written.
If the oral agreement is for a partnership for more than one
year it is unenforceable under the statute of frauds. The
written agreement is usually referred to as "Articles of Part-
nership. Obviously such articles are highly desirable to set
forth the rights, liabilities, limitations, etc. Probably in many
partnerships the partner knows clearly to what extent he is to
share in profits, but is unaware of the proportion to which he
must contribute to capital loss if loss occurs, and would prob-
ably be greatly astonished if advised of his liability position in
that regard.)
Case 574. Harrill v. Davis, 168 Fed. 187, 22 L. R. A.
(N. S.) 1152.
Facts: Suit by Harrill, as trustee of Western Invest-
ment Company, against Davis and three others, as part-
ners under the name of "Coweta Cotton & Milling Com-
pany. Defendants deny personal liability, and assert
that the company was a corporation. "The patent and
indisputable facts in this case are that the four defend-
ants associated themselves together, and from June, 1902,
to December 22, 1902, actively engaged in purchasing
lumber, material and labor of the plaintiff, and in con-
structing a cotton gin under the name 'The Coweta Cot-
1021
1022
PARTNERSHIPS
ton & Milling Company,' and that during this time they
incurred more than $4,700 of the indebtedness of
$5,145.48, for which this action was brought. On Decern-
ber 22, 1902, they made their first real attempt to incor-
porate, and for the first time took on the color or appear-
ance of a corporation. On that day they filed articles of
incorporation with the clerk of the Court of Appeals, but
they never filed any duplicate of them with the clerk of
the judicial district in which their place of business was
located, as required by the statutes in order to constitute
them a legal corporation and to authorize them to do
business as such [under the Arkansas laws]. (From
the opinion of Judge Sanborn.)
Point Involved: That personal liability, as of part-
ners, will attach where parties associate themselves un-
der a fictitious name but do not at least constitute them-
selves a de facto corporation. Of the procedure neces-
sary in order to establish a de facto corporation.
Saxboen, C. J.:  * * * The general rule is that
parties who associate themselves together and actively
engage in business for profit under any name are liable
as partners for the debts they incur under that name. It
is an exception to this rule that such associates may es-
cape individual liability for such debts by a compliance
with incorporation laws or by a real attempt to comply
with them, which gives the color of a legal corporation,
and by the user of the franchise of such a corporation in
the honest belief that it is duly incorporated. When the
fact appears, as it does in the case at bar, by indisputable
evidence that parties associated and knowingly incurred
liabilities under a given name, the legal presumption is
that they are governed by the general rule, and the bur-
den is upon them to prove that they fall under some ex-
ception to it. Owen v. Shepard, 8 C. C. A. 244, 19 U. S.
App, 336, 59 Fed. 746; Wechselberg v. Flour City Nat.
Bank, 26 L. R. A. 470,12 C. C. A. 56, 60, 61, 24 TJ. S. App,
308, 64 Fed. 90, 94; Clark v. Jones, 87 Ala. 474, 6 So. 362.
"Counsel for the defendants argue with much force!
THE AGREEMENT
1023
and persuasiveness that they escape liability because
they became a corporation de facto, although they con-
cede that they never became a corporation de jure; and in
support of this position they cite, among other cases:
(Citing Cases.) But in every one of these authorities ar-
tides of incorporation had been filed under a general en-
abling act, or a charter had been issued, and there had
been a user of the franchise of the supposed corporation
which had been colorably created by the filing of the arti-
cles or the issue of the charter before the indebtedness in
question was created, while nothing of this nature had
been done before the debt for the $4,700, which we are
now considering, was incurred. The authorities which
have been recited rest upon the proposition that where
parties procure a charter or file articles of association
under a general law, thereby secure the color of a legal
incorporation, believe that they are a corporation, and
use the supposed franchise of the corporation in good
faith, and third parties deal with them as a corporation,
they become a corporation de facto and exempt from in-
dividual liability to such third parties, although there
are unknown defects in the proceedings for their incor-
poration. The statement of Morawetz on Private Cor-
porations, Vol. 2, at Sec. 748, upon which counsel seem
to rely, that 'if an association assumes to enter into a
contract in a corporate capacity, and the party dealing
with the association contracts with it as if it were a cor-
poration, the individual members of such association can-
not be charged as parties to the contract, either severally
or jointly or as partners. This is equally true whether
the association was in fact a corporation or not, and
whether the contract with the association in its corporate
capacity was authorized by the legislature or prohibited
by law, and illegal'—is too broad to be sound. Parties
who actively engage in business for profit under the name
and pretense of a corporation which they know neither
exists nor has any color of existence may not escape in-
dividual liability because strangers are led by their pre-
tense to contract with their pretended entity as a cor-
1024
PARTNERSHIPS
poration. In such cases they act as the agents of a prin-
cipal that they know does not exist, and they are liable
under a familiar rule, because there is no responsible
principal. 2 Kent, Com. 14th ed. 630; Queen City Furni-
ture & Carpet Co. v. Crawford, 127 Mo. 356, 364, 30 S. W.
163.
Question 574: (1) What is a de facto corporation?
(2) Why was there none in this case?
(3) State the facts in the case above, whether the parties
were here individually liable and why.
§ 575. (Partnerships, Sec. 16.) Competency of parties to
be partners.
(See Cases in Contracts, supra, as to general capacity
of minors, married women and insane persons to con-
tract.)
Case 575. Jennings v. Stannus, 191 Fed. 347.
Facts: For the purpose of claiming his exemptions
out of the partnership property, William A. Stannus of
the firm of Stannus & Son, bankrupt (there being no ex-
emption allowed to partners out of partnership prop-
erty), shows that the son is a minor, and contends that
this avoids the partnership.
Wolverton, D. J.: "* * *
"This disposes of the principal question. It remains
to determine whether the son being a minor avoids the
partnership relations. An infant's agreement to enter
into a co-partnership, like most other contractual obliga-
tions of his, is not void, but voidable only, and that at his
instance or within a reasonable time after arriving of
age. It is only such agreements as are not possible to be
regarded as beneficial to him which are null from the
beginning. Partnership obligations will not, however,
bind him personally, but are valid against the firm, and
are entitled to payment out of the partnership assets,
regardless of the minority of one of its members. These
principles are well settled by uniform trend Of authority;
Sparman v. Keim, 83 N. Y. 245; Dunton v. Brown, 31
THE AGREEMENT
1025
Mich. 182; Moley v. Brine, 120 Mass. 324; Page v. Morse,
128 Mass. 99; Gay v. Johnson, 32 N. H. 167; Bush et al.
v. Linthicum, 59 Md. 344; Ex parte Taylor, 44 Eng. Re-
print, 388; Goode & Benmon v. Harrison, 105 Eng. Re-
print, 1147; Bates, Law of Partnership, Vol. 1, §§142-
148.
"It follows that the partnership, where a member of
the firm is a minor, continues in all respects valid until
the minor has declared his privilege and has withdrawn
from the firm. So that in the present case, the son hav-
ing in no way, so far as the record discloses, declared his
withdrawal, the partnership of William A. Stannus &
Son continues valid and undissolved, except for the as-
signment in bankruptcy. Such being the case, the elder
Stannus cannot claim his exemption out of the partner-
ship property of William A. Stannus & Son.''
Question 575: If a minor is a member of a partnership may
he withdraw therefrom at any time and demand an accounting ?
Is his partnership agreement void or voidable ? Are partnership
obligations incurred while he was a member binding on him per-
sonally ? Are such obligations binding on the assets of the firm 1
Case 576. Adams v. Beall, 67 Md. 53.
Facts: The facts are stated in the opinion.
Point Involved: The right of an infant partner to
withdraw from the partnership and recover his capital.
Robinson, J.: "The appellee, while a minor, paid to
the appellant $2,900, as a consideration for being ad-
mitted as a partner in the appellant's business. The part-
nership continued for more than a year, and, finding it
unprofitable, the appellee, without formally dissolving
the partnership, withdrew from the business.. The ques-
tion in the case is whether the appellee is entitled to re-
cover of the appellant the money thus paid. His right
to disaffirm the partnership contract, and to avoid all lia-
bilities under it, including the partnership debts, is not
denied. Being an infant when the contract was made,
this is a privilege to which for his protection he is en-
1026
PARTNERSHIPS
titled. But when he seeks to recover money paid for a
consideration which he has enjoyed or has had the benefit
of, this presents quite another question. The $2,900 was
paid to the appellant in consideration of being admitted
as a partner in his business. He was admitted as a part-
ner, and continued to be a member of the firm for at least
a year. The business was not, it is true, a successful one,
but this, in the absence of fraudulent representations on
the part of the appellant, cannot affect the question. We
are dealing with a contract between an infant and adult,
executed on both sides, and upon the faith of which
money was paid by the infant for a consideration which
he has enjoyed. The privilege of infancy, says Lord
Mansfield in Zouch v. Parsons, 3 Burrows 1804, was in-
tended as a shield or protection to the infant, and not
to be used as the instrument of fraud and injustice to
others; and to hold that an infant has the right, not only
to withdraw from a partnership at his own pleasure, and
to subject the adult partner to the payment of all the
partnership debts, but has the right also to recover
money paid by him as a consideration for being admitted
into the partnership, would be, it seems to us, to extend
the privilege beyond any just principles upon which it is
founded.
a * * *
"We have quoted at length from the preceding cases,
because the question at issue is an important one> and
comes before us for the first time for decision. And while
fully recognizing the privilege which the law accords to
minors in regard to contracts made during their minor-
ity, yet, in a case like the present, where money is paid by
a minor in consideration of being admitted as a partner
in the business of the appellant, and he does become and
remains a partner for a given time, he ought not to be
allowed to recover back the money thus paid unless he
was induced to enter into the partnership by the fraudu-
lent representations of the appellant. * * *
Question 576: What was the suit in this case about? Did it
prevail ?
THE AGREEMENT
1027
(Note: Lindley says (Lindley on Partnership, 8th Ed., p.
91): "Moreover, notwithstanding the general irresponsibility of
an infant, he cannot, as against his co-partners, insist that on
taking the partnership accounts he shall be credited with profits
and not be debited with losses. * * * An infant partner
may avoid the contract into which he has entered, either before
or within a reasonable time after he becomes of age. If he
avoids the contract and has derived no benefit from it, he is
entitled to recover back any money paid by him * * *;
but he cannot do this if he has already obtained advantages un-
der the contract, and is unable to restore the party contracting
with him to the same position as if no contract had been entered
into.")
§576. (Partnerships, Sec. 17.) Consideration.
Case 577. Dale v. Hamilton, 5 Ha. 393.
Vice-Chancellor Wigram : "If one man has skiiI and
wants capital to make that skill available, and another
has capital and wants skill, and the two agree that the
one shall provide capital and the other skill, it is per-
fectly clear that there is a good consideration for the
agreement on both sides, and it is impossible for the
court to measure the quantum of value. The parties
must decide that for themselves.
Question 577: What is the consideration in a partnership
agreement ?
§ 577. (Partnerships, Sec. 18.) Legality of object.
(Note: If the firm is for an illegal purpose, as for instance
to smuggle goods, to deal in contraband, to conduct a gambling
house, etc., the agreement is not only unenforceable, but the
law will withhold its aid in making one partner account to the
other.)
PART II
FIRM NAME, CAPITAL AND PROPERTY
CHAPTER 69
NAME, CAPITAL AND PROPERTY
§ 578. Necessity of firm name.
§ 579. What firm name may consist of.
§ 580. Use of firm name.
§ 581. Distinction between firm capital and firm property.
§ 582. What constitutes firm property.
§ 583. Eeal estate as firm property.
§ 584. Nature of partner's interest in firm property.
§ 578. (Partnerships, Sec. 19.) Necessity of firm name.
(Note: A firm name is not absolutely indispensable. If
parties are actually partners, the fact that they have not adopted
any name will not prevent liability to third persons or any other
legal consequence of partnership.)
§ 579. (Partnerships, Sec. 20.) What firm name may
consist of.
Case 578. Crawford et al. v. Collins et al., 45 Barb.
269.
Facts: Suit on a bond given by defendants to "Union
Towing Company. Plaintiffs sue in their own proper
names, as partners constituting the partnership under
that name.
James, J.: "This action was properly brought in the
individual names of the plaintiffs; they were the persons
who composed the firm known as the "Union Towing
Company, the real owners of the debt and the legal
holders of the bond. The parties to a partnership may
■ 1028
NAME, CAPITAL AND PROPERTY 1029
give it just such name as they please, and all contracts,
obligations or notes made with or given to such firms
may be prosecuted in the individual names of its mem-
bers.
"It is different with corporations; but the Union Tow-
ing Company was not a corporation. * * *''
Question 578: (1) In the absence of statute, may the part-
ners adopt a fictitious name?
(2) Fow is suit brought by or against partners on a con-
tract executed in a partnership name that does not disclose the
names of all the partners ?
(3) A promissory note was given by W., P. and S., three
partners composing a partnership under the name of W. & P.
The three partners, W., P. and S. are sued thereon. S. defends
he was not a party to the note. Assuming hp is really a partner
and that the note is a partnership note, is his defense good?
(Swan v. Steele, 7 East. 210.)
Case 579. North v. Moore, 135 Cal. 621.
Facts: Suit by certain parties as partners trading
as Abrams Bros. Defense, that Abrams Bros, have not
complied with California law requiring every partner-
ship transacting business under fictitious name or a des-
ignation not showing the names of the persons inter-,
ested, to file with clerk of county court a certificate show-
ing real names and make publication thereof in some
newspaper, etc.
Point Involved: The necessity of complying with
statutory regulations enacted in some states with ref-
erence to use of firm name not showing the real names of
the parties interested.
Chipman, C.:  * * * The firm name might apply
equally to a partnership composed of two or more and
might embrace all or only some of the brothers by the
name of Abrams. The statute clearly defeats their
rights to maintain an action * *
Question 579: Under what authority was the defense made
in this case ? Why could not such defense have been made in the
case immediately preceding?
1030
PARTNERSHIPS
(Note: Such provisions are in force in some, but not in all
the states.)
§ 580. (Partnerships, Sec. 21.) Use of firm name.
Case 580. Hendren v. Wing, Stephens and Eggleston,
60 Ark. 561.
Facts: Suit to reclaim personal property mortgaged
to plaintiffs naming them as the Arkansas Machinery &
Supply Company. Defense, that this name is not the
name either of a natural person or a corporation.
Riddick, J.:  The Arkansas Machinery & Supply
Company is not a corporation, but it is the business
name of a firm of partners. The question for us to de-
termine is whether a chattel mortgage, executed to it, as
such partnership, is valid at law. The decisions in re-
gard to transfers of real estate to partnerships are based
on the old rule that 'a partnership, as such, cannot at
law be the grantee in a deed, or hold real estate.' Perce-
full v. Piatt, 36 Ark. 464. This rule does not apply to
personal property. On the contrary, a partnership, as
such, can at law be the vendee in a bill of sale or other
conveyance of personal property. The custom of the
country teaches us that this is so. The business of the
country is largely carried on by partners under part-
nership names which frequently do not contain the name
of any person. * * * A consideration of this fact
shows that there is a wide distinction between the rights
of partnerships at law, in regard to buying and selling
of personal property and the restrictions that prevail
there in regard to transfers of real estate * *
Question 580: (1) What was the question raised in this case ?
(2) Was the subject matter real or personal property?
(3) In the opinion of the Court did the nature of the prop-
erty as personal or real make a vital distinction?
Case 581. Percefull and wife v. Piatt, 36 Ark. 456.
Facts: Deed to real estate to George F. Lovejoy &
Co. Piatt sues in ejectment under this deed asserting
NAME, CAPITAL AND PROPERTY 1031
that he is the surviving partner of George F. Love joy &
Co., and as such surviving partner succeeds to the title
of the firm. An ejectment is an action at law on strictly
legal title without assistance from equitable claims.
Point Involved: In a deed of conveyance of real estate
to a grantee named by a partnership name not containing
the names of all of the partners, in whom is the legal
title under such deed 1
Eakin, J.: "* * *
"A partnership, as such, cannot, at law, be the grantee
in a deed, or hold real estate. The legal title must vest
in some person, and a partnership is not a corporation.
If the title be made to all the partners by name, they
hold the legal title as tenants in common, without sur-
vivorship. If to one partner alone, the whole legal title
vests in him, which is the case, also, where the title is
to a partnership name, which, as in this case, expresses
the name of one party only, with the addition of "& Co.
If the deed be to a name adopted as the firm style, which
includes the name of no party, it passes nothing in law.
The same occurs where the deed is to one already dead.
 Different rules prevail in equity, which considers the
real purpose of the acquisition, and, by the machinery
of trusts, converts real estate, held for partnership pur-
poses, into personalty, so far as may be necessary to set-
tie all the equities between the firm and its creditors,
and between the partners themselves. What is left, after
that, goes as real estate, equitably amongst all, regard-
less of the accidental position of the legal title. The case
before us does not require us to deal with these equities
at present.
"That Piatt was a surviving partner did not give him,
at law, any additional rights to lands held by both, even
if held as partnership property. There is no survivor-
ship in such estates at law. Upon the death of a partner,
the legal estate in a survivor remains as before. That
of the deceased goes to his heirs. Each holds' as trustee
of the partnership and of each other.
1032
PARTNERSHIPS
"And, where the whole legal estate was in the de-
ceased, it goes, all, to his heirs, and nothing to the sur-
vivor, save his equities. These principles are elementary,
and may be found in all the text-books.
"If, as he alleges, the lands were purchased by said
firm, at execution sale, and a deed taken from the sheriff
to the firm, it would have vested the whole legal title in
Lovejoy, whose name is the only one revealed by the firm
style. Gossett et al. v. Kent et al., 19 Ark. 602; Moreau
v. Safferans, 3 Sneed, 595; Wash, on R. Prop., vol. 1,
mar. p. 422.
"The purchase, by plaintiff, of Lovejoy's interest in
the judgment, had no effect on the title to the land ac-
quired under it. Nor could plaintiff acquire any title to
sustain the action by means of the deed from Lovejoy's
administrator executed after suit began.
"Conceding all that is stated in the complaint, there
is nothing in the pleadings or record upon which the
judgment can be supported. Even if the title had been
jointly in plaintiff and Lovejoy, it would not justify a
judgment for the whole in favor of the former as sur-
vivor.''
Question 581: What was the firm name in this case? How
did the firm acquire the property? Did the plaintiff recover?
Why?
Case 582. Uniform Partnership Act, Sec. 8 (3) (4)
and Sec. 10.
"Sec. 8. (3) Any estate in real property may be ac-
quired in the partnership name.
"Sec. 8. (4) A conveyance to a partnership in the
partnership name, though without words of inheritance
passes the entire estate of the grantor unless a contrary
intent appears.
(See also Sec. 10 in the Appendix 1, this Division.)
(Note: These sections introduce an innovation in partner-
ship law. The law has always been that a partnership although
it may own real property, could not take legal title in the part-
nership name. A conveyance to the partnership as such gave
NAME, CAPITAL AND PROPERTY 1033
it an equitable title, i. e. a right to a legal conveyance, but
not a legal title. How far the act will be followed is question-
able. The old and approved fashion of conveying title to a
natural person or a corporation will doubtless continue to be
used, regardless of this provision of the Act.)
§581. (Partnerships, Sec. 22.) Distinction between
firm capital and firm property.
Case 583. Lindley on Partnerships, 8th Ed. p. 382.
"By the capital of a partnership is meant the aggre-
gate of the sums contributed by its members for the
purpose of commencing or carrying on the partnership
business, and intended to be risked by them in that busi
ness. The capital of a partnership is not therefore the
same as its property; the capital is a sum fixed by the
agreement of the partners; whilst the actual assets of
the firm vary from day to day and including everything
belonging to the firm and having any money value.''
Question 583: Show the distinction between "capital of a
partnership and its '' property  ?
§§ 582, 583. (Partnerships, Sees. 23, 24.) What con-
stitutes firm property. Real estate as firm property.
Case 584. Robinson Bank v. Miller, 153 111. 244.
Facts: Suit to determine whether certain land be-
longed individually to partners or to the partnership.
The land was bought by the parties in undivided owner-
ship before the partnership was formed between them.
It was not bought with partnership funds, but with indi-
vidual funds, and entries were not made on the firm
books showing that the land was regarded as partner-
ship capital. The land was, however, used for firm pur-
poses, that of conducting a mill, and the firm paid for
repairs and new machinery on the mill.
Point Involved: When property is to be regarded as
firm property or the property of the partners in their
individual capacity.
1034
PARTNERSHIPS
Me. Justice Mageudee: "* * *
 "Whether real estate, upon which partnership trans-
acts its business, is firm property or the property of the
individual members of the firm, is oftentimes a difficult
question to determine, and one upon which the authori-
ties are not altogether uniform.
"The mere fact of the use of land by a firm does not
make it partnership property. (Gfoepper v. Ginsinger,
39 Ohio St. 429; Hatchett v. Blanton, 72 Ala. 423.) Nor
is real estate necessarily the individual property of the
members of a firm because the title is held by one member
or by the several members in undivided interests. (1
Bates on Law of Partnership, sec. 280.) Whether real
estate is partnership or individual property depends
largely upon the intention of the partners. The inten-
tion may be expressed in the deed conveying the land,
or in the articles of partnership; but when it is not so
expressed, the circumstances, usually relied upon to de-
termine the question, are the ownership of the funds
paid for the land, the uses to which it is put, and the
manner in which it is entered in the accounts upon the
books of the firm. (1 Bates on Law of Part. sec. 280; 2
Lindley on Part. marg. page 649; 17 Am. & Eng. Enc.
of Law, page 945, and cases in note.)
"Where real estate is bought with partnership funds
for partnership purposes, and is applied to partnership
uses, or entered and carried in the accounts of the firm
as a partnership asset, it is deemed to be firm property;
and, in such case, it makes no difference, in a court of
equity, whether the title is vested in all the partners as
tenants in common, or in one of them, or in a stranger.
(Parsons on Part.—4 ed.—sec. 265; 1 Bates on Law of
Part. sec. 281; Johnson v. Clark, 18 Kans. 157; 17 Am. &
Eng. Enc. of Law, page 948, and cases cited.) If the real
estate is purchased with partnership funds, the party
holding the legal title will be regarded as holding it sub-
ject to a resulting trust in favor of the firm furnishing
the money. In such case no agreement is necessary; and
NAME, CAPITAL AND PROPERTY 1035
the statute of frauds has no application. (Barker v.
Bowles, 57 N. H. 491; 1 Bates on Law of Part. sec. 281.)
"In the case at bar, the land was not purchased with
partnership funds. * * * Each partner here held
the title to an undivided one-third part of the property.
No entries were made upon the books of the firm, show-
ing that the real estate was treated as firm assets. The
evidence, however, does show that the property was
bought for the purpose of being used in the milling busi-
ness, and that, after its purchase, it was used for firm
purposes, and that the firm gave its notes to pay for the
repairs and for placing new machinery in the mill upon
the premises. Under these circumstances, was the land
partnership property, or the individual property of the
partners holding as tenants in common'?
"It cannot be said, that the land is firm property upon
the theory of a resulting trust, because the money of the
firm was not used to buy the property. Such a trust
might exist in favor of the firm, regarding it as a person,
if the partners had taken the legal title, and the firm had
advanced the purchase money. The trust must arise at
the time of the execution of the conveyance, and when
the title vests in the grantee. Such could not have been
the case here under the. facts stated. (Van Buskirk v.
Van Buskirk, 148 111. 9.) In view of the fact, that the
land was bought with individual, and not partnership,
funds, and was conveyed in undivided interests to the
several partners, and in the absence of any agreement
that it should be regarded as firm property, does the
conduct of the parties in afterwards forming a partner-
ship, and using the property for partnership purposes,
and repairing and improving the mill at the expense of
the firm, make the land firm property in a court of
equity? A negative answer to this question is found in
many authorities as will be seen by reference to the fol-
lowing: Alexander v. Kimbro, 49 Miss. 529; Thenot v.
Michel, 28 La. Ann. 107; Reynolds v. Ruckman, 35 Mich.
80; Parker v. Bowles, 57 N. H. 491; Thompson v. Bow-
man, 6 Wall. 316; Frink v. Branch, 16 Conn. 260; Wheat-
1036
PARTNERSHIPS
ley's Heirs v. Calhoun. 12 Leigh. 264; Sikes v. Work, 6
Gray, 433; Gordon v. Gordon, 49 Mich. 501; Moody v.
Rathburn, 7 Minn. 89; Paige v. Paige, 71 Iowa, 318; Par-
sons on Part. (4th ed.) sec. 266; Hanchett v. Blanton,
supra. The general doctrine of all these cases is, that
a purchase of the land with partnership funds is neces-
sary to make it firm property. Parsons in his work on
Partnership (4th ed.) says: 'Although it (real estate)
be held in the joint name of two or more persons, if there
be no proof that it was purchased with partnership funds
for partnership purposes, it will be considered as held
by them as joint tenants, or tenants in common; * * *
So, if not paid for by partnership funds, then it is prob-
ably his property who does pay for it, whatever use he
permits to be made of it.' (Sees. 265, 266.) In Han-
chett v. Blanton, supra, the Supreme Court of Alabama
says: ' Steering clear of all cases of fraud or of the use
by one partner, without the approbation of his associates,
of partnership funds in the acquisition of real estate, the
two facts must concur to constitute real estate partner-
ship property—acquisition with partnership funds, or on
partnership credit, and for the uses of the partnership.'
In Thompson v. Bowman, supra, the Supreme Court of
the United States says: 'In the absence of proof of its
purchase with partnership funds for partnership pur-
poses, real property standing in the names of several
persons is deemed to be held by them as joint tenants,
or as tenants in common.' (Buchan v. Sumner, 2 Barb.
Ch. 165.)
"There are cases which hold, that even though the
land was originally bought by the several partners with
their individual funds, and deeded to them as tenants in
common, yet it will be regarded in equity as firm prop-
erty where it is improved out of partnership funds for
firm purposes and actually used for such purposes, or
where the firm puts valuable and permanent improve-
ments upon it for firm purposes, and which are essential
to the firm. In some instances the land is held to be the
property of the partners, and the improvements to btf
NAME, CAPITAL AND PROPERTY 1037
the property of the firm. (1 Bates on Law of Part. sees.
281, 282.) The use of the property is not conclusive of
its character as real estate or personalty, but is only
evidence of the intention of the parties. (Idem, sec. 285.)
When the intention of the partners to convey the land
into firm property is inferred from circumstances, the
circumstances must be such as do not admit of any other
equally reasonable and satisfactory explanation. (Par-
sons on Part. sec. 267.) And where it is sought to show
a conversion of the land into personalty by agreement of
the partners, such agreement must be clear and explicit.
(17 Am, & Eng. Enc. of Law, page 954, and cases cited.)
"The weight of authority seems to us to support the
position that, where persons, who afterwards become
partners, buy land in their individual names, and with
their individual funds, before the making of a partner-
ship agreement, the land will be regarded as the individ-
ual property of the partners, in the absence of a clear
and explicit agreement subsequently entered into by them
to make it firm property, or in the absence of controlling
circumstances which indicate an intention to convert it
into firm assets. We do not think that an application of
this rule to the facts of the present case shows the real
estate here in controversy to be firm property. The testi-
mony proves affirmatively that there was no agreement,
written or verbal, to put the land into the firm as a firm
asset, and that it was treated by the parties as individual
property.''
Question 584: How was the land in the case above acquired?
Was it used for firm purposes? Were any funds of the part-
Hership used in reference to it? How? Did the Court hold it
to be partnership property?
Case 585. Uniform Partnership Act, Sec. 8 (1) (2).
"(1) All property originally brought into the part-
hership stock or subsequently acquired by purchase, or
otherwise, on account of the partnership is partnership
property.
1038
PARTNERSHIPS
 (2) Unless the contrary appears, property acquired
with partnership funds is partnership property.
§ 584. (Partnerships, Sec. 25.) Nature of partner's
interest in firm property.
Case 586. Uniform Partnership Act, Sees. 24, 25, 26.
"Sec. 24. The property rights of a partner are (1)
his rights in specific partnership property, (2) his inter-
est in the partnership, (3) his right to participate in the
management.
'' Sec. 25. A partner is co-owner with his partners of
specific partnership property holding as a tenant in part-
nership.
"Sec. 26. A partner's interest in the partnership is
his share of the profits and the surplus, and the same is
personal property.
PART III
MUTUAL RIGHTS AND OBLIGATIONS OF
PARTNERS
CHAPTER 70
RIGHTS OF PARTNERS IN MANAGEMENT OF
FIRM AND MUTUAL OBLIGATIONS
§ 585. Partner's right to be active participator.
§ 586. Right of majority to govern.
§587. General rule of conduct of partner.
§ 588. Partner cannot oppose his own interests to those of firm.
§ 589. Right of partner to deal openly with firm.
§ 590. Right of partner to sue firm.
§ 591. Right of partner to compensation, interest, etc.
§585. (Partnerships, Sec. 26.) Partner's right to be
active participator.
Case 587. Uniform Partnership Act, Sec. 18 (g).
"All partners have equal rights in the management
and conduct of the partnership business.
Question 587: A contributes $5,000, B, $1,000, C, his serv-
ices. At a meeting of the partnership a question comes up to be
voted upon, and A contends the voting power is 5 to 1 as be-
tween A and B and C no voice. Is he right?
(Note: Partners are not in simili casu with shareholders of
a corporation, but more comparable to a board of directors. Of
course a special agreement in any case would be binding. Some-
times partnerships are created with voting members and non-
voting members, and the voting power of voting members may
be specifically provided for.)
1039
1040
PARTNERSHIPS
§ 586. (Partnerships, Sec. 27.) Right of majority to
govern.
Case 588. Uniform Partnership Act, Sec. 18 (h).
"Any difference arising as to ordinary matters con-
nected with the partnership business may be decided by
a majority of the partners; but no act in contravention
of any agreement between the partners may be done
rightfully without the consent of all of the partners.
Question 588: In partnership business does the majority
govern ?
Case 589. Markle v. Wilbur et al., 200 Pa. 457.
Facts: Bill for an accounting. Tho bill set forth a
partnership among several parties for the purpose of
mining coal upon extensive lands leased by the firm. The
partnership was to begin January 1, 1890, and to con-
tinue for twenty years. The bill alleges that expendi-
tures were made and other acts done without authority.
Defendants answer that tho majority members consented
to such acts. A part of the head note to the case reads
as follows:
"The shares were divided into sixteenths, and the term
of the partnership was for twenty years. On a bill in
equity by two of the partners representing three and
one-half sixteenths against the other partners for an ac-
count, it appeared that one of the plaintiffs was a woman,
and the other was engaged in banking in a distant state.
Three of the defendants were practical men in the coal'
business and one of them who acted as manager or super-
intendent was an educated mining engineer of large ex-
perrence in his profession. The evidence showed no bad
faith or fraud in the management of the business. The
plaintiffs claimed that the defendants should account
for a very large expenditure on a tunnel over a mile
long, for the cost of a dwelling house for the superintend-
ent, for a salary of $10,000 a year of an assistant super-
intendent, and for various other matters of expenditure#
The evidence showed that the large expenditure for the
MUTUAL RIGHTS AND DUTIES 1041
tunnel was due to unforeseen conditions in the strata,
impossible to determine beforehand; that the house was
occupied by the superintendent who paid an annual
rental which equaled six per cent of its cost. As to other
• items explanation was made tending to show that they
were necessary to carry on the business successfully and
for a profit.
Point Involved: The power of the majority in a part-
nership to govern the conduct of the business.
Dean, J.:  * * * The rule laid down in Story
on Partnership, Sec. 123, is stated thus:
 'But another question may arise, and that is,
whether, in case of partnership, the majority is to govern
in case of a diversity of opinion between the partners as
to the partnership business and the conduct thereof, or
whether one partner can, by his dissent, arrest the part-
nership business, or suspend the ordinary powers and
authority of the other partners in relation thereto,
against the will of the majority where there is no stipu-
lation in the partnership articles to control or vary the
result (for if there be any stipulation that ought to
govern); the general rule would seem to be, that each
partner has an equal voice, however unequal the shares
of the respective parties may be; and the majority, act-
ing fairly and eebona fide, have the right and authority
to conduct the partnership business within the true scope
(hereof, and dispose of the partnership property, not-
withstanding the dissent of the minority.'
"Then our own view of the law as stated by our late
Brother Williams, in Clarke v. Slate Valley Railroad
Company, 136 Pa. 40S, is as follows:
 'This leads us to consider the manner in which the
business of a firm must be conducted. The firm must
have its origin in the mutual confidence reposed by the
persons who comprise it, in each other 's skill, integrity
and capacity. Its members are bound by the nature of
their compact to the exercise of good faith towards each
other and the common enterprise for which they have
1042
PARTNERSHIPS
united. Differences of opinion about questions of admin-
istration are to be anticipated.
 'It would be unreasonable to expect that all mem-
bers of a partnership should see alike upon all questions,
and, for that reason a mere difference of opinion about
the best thing to do, or the best way of doing it, does
not necessarily work a dissolution, or send the business
and assets of the firm to a receiver. It was the rule of
the common law that the contracts of partnership must
be governed, like other agreements, by the principles
of natural law and justice. It has accordingly been held
that, where a firm consists of more than two persons, the
majority, acting fairly and in good faith, may direct
the conduct of its affairs as long as they keep within the
purpose and scope of the partnership: 2 Bouvier's Inst.,
Sec. 1454; Story on Part., Sec. 123. In such case, the
minority must yield, so long as the majority do not
transcend or pervert the powers with which the firm has
been invested. If the number of partners should in any
given case be an even number and they should be evenly
divided in opinion, with no provision for such a contin-
gency in their articles, then it may be that, as to that
subject, the power of the firm to act is suspended so long
as the even division continues; and, if the subject be one
upon which action is essential to the purposes of the
partnership, such disagreement might work a dissolution
by rendering the further prosecution of the common
enterprise impossible. The same consequences could not
flow, however, from the dissent of a minority, because,
within the purpose of the partnership and for the pro-
motion of its interests, the majority have the right to
control.' 
[The Court upholds the acts of the majority.]
Question 589: To what extent may the majority in a partner-
ship control?
(2) How is the majority determined—by the number of
shares held, or by the number of partners ? Is the rule the same
as in the case of stockholders in a corporation ?
(3) This partnership being of a very extensive character
MUTUAL RIGHTS AND DUTIES 1043
and involving a big amount of money, do you think, that would
justify acts by the majority without the minority consent, which
woijld not be justified in a smaller concern?
§ § 587, 588. (Partnerships, Sees. 28, 29.) General rule
as to conduct of partner; duty not to oppose his own
interests to those of firm.
Case 590. Jones v. Dexter, 130 Mass. 380.
Facts: A bill was brought by Jones against Dexter
and two other parties for a settlement of the partnership
affairs. Jones and Dexter had been partners but the
firm had been dissolved and Jones had become insolvent.
Dexter some years later in order to close up the firm's
affairs advertised an auction sale of all the remaining
assets of the firm. Among these was an interest in a
whaling vessel which had been destroyed. This interest
was offered for sale and one LeBaron bid $12 and the
interest was sold to him for that price. It appeared that
LeBaron was acting for Dexter and assigned his interest
to Dexter. Later the sum of $1,564.00 was paid for the
interest in the vessel by the commissioners on the "Ala-
bama Claims. The complainant claimed as a partner
a share in this sum.
Point Involved: The good faith that is necessary for
each partner to show toward the other.
Soule, J.: "The general rule is familiar that a trus-
tee will not be permitted to make a profit out of the trust
property; and that if he purchases it, even at a public
auction, he will hold it for the benefit of the cestui que
trust, and, if any profit is made upon it, he must account
for it as trustee. Perry on Trust, Sec, 427. This rule
applies to cases where one deals with property as agent
for another, and to all' those cases in which confidence is
reposed, and one has it in his power, in a secret manner,
for his own advantage to sacrifice the interests which
have been entrusted to him. Story Eq. Jur. Sec. 323. In
all such cases, the cestui que trust has his election to
avoid the transaction which was intended to benefit the
1044
PARTNERSHIPS
trustee, and to treat the subject matter of the trust as
if no change had been made in its situation, so long as
the trustee has not disposed of the property to a bona
fide holder for value. Wyman v. Hooper, 2 Gray, 141.
''The application of this principle to the case at bar
is plain. The defendant Dexter was acting for himself
and his former partner, and the assignee in bankruptcy
of his partner, in closing up the affairs of the partner-
ship. When he undertook to sell the interest of the part-
nership in the Ocean Rover and its outfits and catchings,
he had no right, as against the other parties in interest,
to make a secret arrangement by which a stranger should
purchase the interest for him. And when the purchase
was made in accordance with that secret arrangement,
and the interest, after being conveyed to the purchaser,
was conveyed by him to Dexter in pursuance1 of the secret
arrangement, Dexter held it for the benefit of the part-
nership, and not for his personal benefit.
"We have assumed, in what we have said, that such
secret arrangement was made and acted on, because we
are of opinion that the agreed facts and evidence call
for a finding to that effect. Such finding is a sufficient
foundation for a decree against the defendants.
"It has already been decided that, inasmuch as the
debts which the plaintiff owed when he went into in-
solvency have been paid, and his assignee in insolvency
disclaims all interest in the subject matter of the suit,
and assents to the maintenance of the bill, the plaintiff,
if anyone, is entitled to the relief asked for. Jones v.
Dexter, 125 Mass. 469. The result is, that the decree
appealed from must be affirmed.''
Question 590: (1) What did the partner do in this ease that
was a wrong against the other partner ? What remedy did the
wronged partner have?
(2) "Four partners established a partnership for refining
sugar; one of them is a wholesale grocer and from his hush
ness is peculiarly cognizant with the variations in the sugar
market, and has great skill in buying sugar at a right and
proper time for the business. Accordingly the business of select-
MUTUAL RIGHTS AND DUTIES
1045
ing and purchasing the sugar for the sugar refinery is entrusted
to him. * * * Having according to his skill and knowledge
bought sugar at a time when he thought it likely to rise, and it
having risen and the firm being in want of some, he sells his
own sugars to the firm without letting the partners know that it
was his own sugar that was sold. Are the partners entitled
to this profit? Bentley v. Craven, 18 Beav. (Eng.) 75.
Case 591. Mitchell v. Reed, 61 N. Y. 123.
Facts: ' Suit brought to have a certain lease held by
one partner to be declared the property of the partner-
ship. The plaintiff and the defendant had entered into
a co-partnership in the hotel business operating the Hoff-
man House in New York. The partnership expired by
its terms on May 1, 1871, at which time also the lease on
the property terminated. The firm spent large sums of
money in improving the property and thereby increased
the rental value very much. In 1869 the defendant with-
out the knowledge of his co-partners obtained a new
lease of the Hoffman House in his own name for a term
commencing May 1, 1871, when the old lease expired.
Plaintiff contends that his acquisition of the lease should
be deemed for the benefit of the firm as a whole and that
he should be held as a trustee for the firm.
Earl, C.: 1' The relation of partners with each other
is one of trust and confidence. Each is the general agent
of the firm, and is bound to act in entire good faith to the
other. The functions, rights and duties of partners in
a great measure comprehend those both of trustees and
agents, and the general rules applicable to such char-
acters are applicable to them. Neither partner can, in
the business and affairs of the firm, clandestinely stip-
ulate for a private advantage to himself! Every advan-
tage which he can obtain in the business of the firm must
inure to the benefit of the firm. These principles are
elementary, and are not contested. Story, No. 174,175;
Collyer, 181, 182. It has been frequently held that when
one partner obtains the renewal of a partnership lease
secretly, in his own name, he will be held a trustee for
1046
PARTNERSHIPS
the firm as to the renewed lease. It is conceded that this
is the rule where the partnership is for a limited term,
and either partner takes a lease commencing within the
term; but the contention is that the rule does not apply
where the lease thus taken is for a term to commence
after the expiration of the partnership by its own limita-
tion, and whether this contention is well founded is one
of the grave questions to be determined upon this appeal.
"It is not necessary, in maintaining the right of the
plaintiff in this case, to hold that in all cases a lease thus
taken shall inure to the benefit of the firm, but whether,
upon the facts of this case, these leases ought to inure
to the benefit of this firm. I will briefly allude to some
of the prominent features of this case. These parties had
been partners for some years; they were equal in dig-
nity, although interest differed. The plaintiff was not
a mere subordinate in the firm, but so far as appears,
just as important and efficient in its affairs as the defend-
ant. They procured the exclusive control of the leases of
the property to terminate May 1, 1871, and their partner-
ship was to terminate on the same day. They expended
many thousand dollars in fitting up the premises, a por-
tion thereof after the new leases were obtained, and they
expended a very large sum in furnishing them. By their
joint skill and influence they built up a very large and
profitable business, which largely enhanced the rental
value of the premises. More than two years before the
expiration of their leases and of their partnership, the
defendant secretly procured, at an increased rent, in his
own name, the hew leases, which are of great value.
Although the plaintiff was in daily intercourse with the
defendant, he knew nothing of these leases for about a
year after they had been obtained. There is no proof
that the lessors would not have leased to the firm as
readily as to the defendant alone. The permanent fix-
tures, by the terms of the leases at their expiration,
belonged to the lessors. But the movable fixtures and
the furniture were worth vastly more to be kept and
used in the hotel than to be removed elsewhere. Upon
MUTUAL RIGHTS AND DUTIES 1047
these facts I can entertain no donbt, both upon principle
and authority, that these leases should be held to inure
to the benefit of the firm. If the defendant can hold
these leases, he could have held them if he had secretly
obtained them immediately after the partnership com-
menced, and had concealed the fact from the plaintiff
during the whole term. There would thus have been,
during the whole term, in making permanent improve-
ments and in furnishing the hotel, a conflict between his
duty to the firm and his self-interest. Large investments
and extensive furnishing would add to the value of his
lease, and defendant would be under constant temptation
to make them. While he might not yield to the tempta-
tion, and while proof might show that he had not yielded,
the law will not allow a trustee thus situated to be thus
tempted, and therefore disables him from making a con-
tract for his own benefit. Terwilliger v. Brown, 44 N.
Y. 237, and cases cited.
"It'matters not that the Court at special term found
upon the evidence that the improvements were judicious
and prudent for the purposes of the old term. The plain-
tiff was entitled to the unbiased judgment of the defend-
ant as to such improvements, uninfluenced by his private
and separate interest. But further, the parties owned
together a large amount of hotel property in the form of
furniture and supplies, considerably exceeding, as I
infer, $100,000 in value. Assuming that the partnership
was not to be continued after the 1st day of May, 1871,
this property was to be sold, or in some way disposed of
for the benefit of the firm and each partner owed a duty
to the firm to dispose of it to the best advantage. Neither
could, without the violation of his duty to the firm, place
the property in such a situation that it would be sacri-
ficed, or that he could purchase it for his separate benefit
at a great profit. Much of this property, such as mirrors,
carpets, etc., was fitted for use in this hotel, and it is
quite manifest that all of it would sell better with a
lease of the hotel, than it would to be removed there-
from. It is clear that one or both of these parties could
1048
PARTNERSHIPS
obtain advantageous leases of the hotel for a term of
years, and hence, if the parties had determined to dis-
solve their partnership, it would have been a measure of
ordinary prudence to have obtained the leases and trans-
ferred the property with the leases as the only mode of
realizing its value. This was defeated by the act of the
defendant, if he is allowed to hold these leases, and thus
place himself in a position where the property must be
largely sacrificed or purchased by himself at a great
advantage. This the law will not tolerate.
i( # * *
"It has long been settled by adjudications, that gen-
erally when one partner obtains the renewal of a part-
nership lease secretly, in his own name, he will be held a
trustee for the firm, in the renewed lease, and when the
rule is otherwise applicable, it matters not that the new
lease is upon different terms from the old one, or for
larger rent, or that the lessor would not have leased to
the firm. The law recognizes the renewal of a lease as
a reasonable expectancy of the tenants in possession and
in many cases protects this expectancy as a thing of
value. I will briefly notice a few of the cases upon this
subject. (Here the Court reviews numerous authorities.)
* # *
"* * * I therefore conclude that it makes no dif-
ference that these leases were obtained for a term to
commence after the partnership, by its own limitation,
was to determinate. I can find no authority holding that
it does, and there is no principle sustaining the distinc-
tion claimed. The defendant was in possession as a
member of the firm, and the firm owned the good will
for a renewal which ordinarily attaches to the possession.
By his occupancy, and the payment of the rent, he was
brought into intimate relations with the lessors; he be-
came well acquainted with the value of the premises, and
he took advantage of his position during the partner-
ship, secretly to obtain the new leases. He must hold
them for the firm.
Question 591: The defendant in this case conceded what with
reference to renewals of partnership leases ? How« did he seek to
MUTUAL EIGHTS AND DUTIES 1049
distinguish, this case from the rule admitted by him ? What did
the Court hold in answer thereto ? Show why the acquisition of
the lease in this case might be contrary to the other partner's
interest.
Case 592. Metcalf v. Bradshaw, 145 111. 124.
Facts: Complainant asks an accounting against de-
fendant alleging that they were partners in the- practice
of the law under an agreement that each should give his
time, talents and strength in prosecuting the interests of
the firm. During the term of the partnership the defend-
ant was appointed and acted as executor of several
estates receiving certain fees therefor which complainant
claims to be partnership earnings.
Point Involved: The duty of the partner to devote
his time to the business of the partnership and not to
compete with it or enter into activities derogatory to
his attention to the interests of the firm. Whether in
this case, specifically, acting as executor was practicing
law, the fees for which were to be considered partner-
ship earnings.
Bailey, C.J.: "* * *
"Whether the administration of these estates is to be
regarded as firm business, and the commissions received
by the defendant therefor as a part of the proceeds or
earnings of the business, must depend chiefly, if not
wholly, upon the construction to be placed upon the part-
nership articles. By those articles the complainant and
defendant associated themselves together 'for the pur-
pose of practicing law,' and they mutually promised to
give their time, talents, and strength ' to the prosecution
of the interest of the firm.' Each pledged himself not
to become a candidate for any political office, so as to be-
come involved in politics, during the continuance of the
firm, except by mutual consent: and it was agreed that
any omission to keep and observe these promises and
agreements by either party should justify the other in
dissolving the partnership. We think it too plain for
argument that accepting an appointment as executor or
administrator of a deceased person, and acting as such,
1050
PARTNERSHIPS
does not, as the term is ordinarily understood, pertain
to the practice of law. Persons accepting and performing
the duties of trusts of that character need not be lawyers,
and, as is well known, those who are appointed as execu-
tors or administrators are, in the great majority of cases,
men who do not belong to the profession. Their duties
are usually of a business, rather than a professional,
character. True the administration of estates frequently
requires legal advice, and often involves more or less of
litigation, but substantially the same may be said of all
other business pursuits, and especially of all positions
involving the execution of trusts. But men are ordina-
rily appointed to execute trusts because of the confidence
the donor of the trust has in the honor, integrity, and
business capacity of the appointee, rather than because of
his knowledge of legal principles, or his ability to carry
on litigation with success. At all events, the execution of
trusts is not, and never has been, regarded as a part of
the duties peculiarly pertaining to the legal profession,
or as constituting a part of what is ordinarily understood
as 'the practice of the law.' It cannot, therefore, with
any propriety, be claimed that the business transacted by
the defendant in his trust capacity, as executor or admin-
istrator of the estates in question, was a part of the firm
business, within the contemplation of the copartnership
articles, or that the commissions realized by him from
the execution of such trusts constituted a part of the
earnings or profits of the firm.
"We are not unmindful of the well-settled rule that
a partner will not ordinarily be permitted, for his own
profit, to enter into business in competition with his firm.
Thus he cannot, without the consent of his copartners,
embark in a business that will manifestly conflict with the
interests of his firm. Nor can he clandestinely use the
partnership property or funds in speculations for his
own private advantage, without being required to account
to his copartners for the property and funds thus used,
and for the profits. The general rule being that each
partner shall devote his time, labor, and skill for the
MUTUAL RIGHTS AND DUTIES 1051
benefit of the firm, he cannot purchase for his own use,
and for the purpose of private speculation and profit,
articles in which the firm deals, and, if he does so, the
profits arising therefrom may be claimed by the copart-
ners as belonging to the firm. 5 "Wait, Act & Def. 125.
Thus, as said in 1 Bates, Partn. Sec, 306: 'If a partner
speculate with the firm funds or credit he must account
to his copartners for the profits, and bear the whole
losses of such unauthorized adventures himself; and if he
go into competing business, depriving the firm of the
skill, time and diligence or fidelity he owes to it, so he
must account to the firm for the profits made in it. And
a managing partner will be enjoined from carrying on
the same business for his own benefit.' But the same
author says, a little further on, that a partner may traffic
outside of the scope of the business for his own benefit.
So, also, in Lindl. Partn. 312, the rule is laid down as fol-
lows: 'Where a partner carries on a business not con-
nected with or competing with that of his firm, his part-
ners have no right to the profits he thereby makes, even
if he has agreed not to carry on any separate business.'
"* * * In view of all the evidence, we are disposed
to hold that the only proper result is the one reached by
the Circuit Court in its decree, and the judgment of the
Appellate Court, affirming the decree, will be affirmed.
Question 592: (1) Was acting as executor by the defend-
ant practicing law requiring an accounting of the fees thereby
earned ?
(2) Did the Court think the defendant was violating his duty
in acting as executor ? Why ?
(3) If a partner engages in a competing business will his
profits be regarded as the profits of the firm ?
(4) If he engages in a non-competing business and thereby
neglects his partnership affairs will the profits he thereby makes
be considered partnership earnings? In such a case would he
be enjoined from carrying on such business?
(5) A. uses $500 of the firm money to put into a venture
for his own benefit and $500 to put into another venture for
his own benefit. In the one he makes a profit of $250. In the
1052
PARTNERSHIPS
other he loses $250. How much money must A. produce as
partnership money?
Case 593. Webb v. Fordyce, 55 la. 11.
Facts: See the opinion.
Point Involved: See the first paragraph of .the opin-
ion.
Rothrock, J.: 11 The sole question contended by ap-
pellant in this appeal is whether the defendant should
be held liable for such of the partnership funds as came
into his hands, and for which he could render no account
and as to which he could but testify generally that he
did not convert the same to his own use.
* * * Each checked out the funds of the partner-
ship at will, upon his own check, and it was the duty of
each to account to the firm for what he drew out. If the
defendant drew checks and obtained the money thereon
its expenditure was a matter peculiarly within his own
knowledge. The plaintiff was entitled to some showing
more than a general statement that the proceeds of the
checks were used for partnership purposes. 'All part-
ners having any charge of the business of the firm are
bound to keep constantly, regular, intelligible and accu-
rate accounts of all the business, and to give all the part-
ners at all time access to them and to the means of
verifying them.' Parsons on Partnership, p. 527.—
Affirmed
Question 593: Enlarge upon the duty of the partner to keep
accounts and the results from a failure to do so.
§ 589. (Partnerships, Sec. 30.) Right of partner to
deal openly with firm.
(The partner may sell to, buy from, and otherwise deal with
his partners. He cannot in a strict sense have any contract
with the firm as such, for he is a part of the firm. If he sues he
must sue the other parties or have an accounting in equity. In
dealing with the other members of the firm, he is in the position
of a fiduciary and must reveal all pertinent information.)
MUTUAL RIGHTS AND DUTIES
1053
§590. (Partnerships, Sec. 31.) Right of partner to
sue firm.
Case 594. Bullard v. Kennedy, 10 Cal. 60.
Facts: Suit at law by an assignee of a partner against
his co-partners.
Point Involved: Whether a partner can sue his co-
partners in a court at law or must go into equity and
ask an accounting.
Burnett, J.:  The only question arising in the case
is, whether the plaintiff can sue in this form?
"There was nothing in the constitution of this com-
pany which regulated the remedies of the shareholders,
as between themselves, and, therefore, the general law of
partnership must prevail (Coll. on Partn., Sec. 1115).
There having been no final settlement of the partnership
•accounts, and no balance struck, and no express promise
on the part of the individual members to pay their ascer-
tained portion of this amount to Sotzen and Goodnow,
they could not maintain assumpsit. As they could not
sue, it is difficult to see how their assignee could do so.
* * * This rule rests upon three grounds:
"1. The technical ground, that a man cannot, at the
same time, in the same suit, be both plaintiff and a de-
fendant.
"2. Because it would be useless for one partner to
recover that which, upon taking a general account, he
might be compelled to refund; and thus a multiplicity of
suits be permitted, where one would answer.
"3. The contrary rule would defeat the equitable
right of the other partners to set-off their advances
against those of plaintiff, and would force them to first
pay the amount, and then rely upon the individual re-
sponsibility of the partner for a return of his pro-
portion.''
Question 594: (1) Can a partner sue his co-partners in a
'court at law on a partnership account ?
(2) Does the Court suggest any exceptions?
1054
PARTNERSHIPS
(3) What are the grounds given by the Court?
(4) What is the partner's remedy?
§591. (Partnerships, Sec. 32.) Right of Partner to
Compensation, Interest, etc.
(1) Right to Compensation.
Case 595. Lindsay v. Stranahan, 129 Pa. St. 635.
Per Curiam : '1 There is but a single question in this
case: Is J. K. Lindsay, the plaintiff, entitled to compen-
sation for his services as a partner? It is conceded that
there was no express contract that he should be paid for
such services, and there is no principle better settled
than that the law will not imply a contract in such cases.
The reason is that the partner is but attending to his
own affairs. This rule is inexorable; as much so as that
between parent and child. Were it otherwise, we might
have a contest between the partners upon the settlement
of every partnership account, as to the value of their
respective services. It is true this principle may work
hardship in particular cases; almost every general rule
does, but that is a weak argument against the soundness
of the rule. When the co-partnership agreement con-
templates that one partner shall manage the business,
or do more than his share of the work, it is easy to pro-
vide for his compensation in the agreement itself; and if
no such stipulation is then made, as before said, the law
will not imply one. Even where a liquidating or sur-
viving partner settles up the business, it has been repeat-
edly held that he is not entitled to compensation for do-
ing so, although, in such case, he performs all the service:
Beatty v. Wray, 19 Pa. 516, 57 Am. Dec. 677; Brown v.
McFarland, 41 Pa. 129, 80 Am. Dec. 598; Hyger's Appeal,
62 Pa. 73, 1 Am. Rep. 382; Brown's Appeal, 89 Pa. 139.
"Judgment affirmed.
Question 595: If one partner does a greater amount of work
than another, is he entitled to compensation therefor? Why?
(Note: As to right of liquidating partner to compensation;
in the above case the Court states that a liquidating partner is
MUTUAL RIGHTS' AND DUTIES 1055
entitled to no compensation although he performs all the serv-
ices of liquidation. Clearly there could be an agreement for
compensation. The partnership act provides: [Sec. 18(f)] "No
partner is entitled to remuneration for acting in the partner-
ship business, except that a surviving partner is entitled to
reasonable compensation for his services in winding up the
partnership affairs.")
(2) Interest on Capital.
(Note: No such right unless agreed, but "a partner shall
receive interest on the capital contributed by' him only from
the date when repayment should be made.")
(3) Interest on Loans and Advances.
(Note: A difference of opinion has prevailed on this point.
The prevailing and sounder view is stated by the partnership
act "A partner who is the aid of the partnership makes any
payment or advance beyond the amount of capital which he
agreed to contribute, shall be paid interest from the date of the
payment or advance. Sec. 18(c).)
PART IV
THE PARTNERSHIP AND THIRD PERSONS
Authority of Partner to Represent Firm.
Liability of Partner for Torts of Co-part-
ner.
Rights of Third Persons against Incoming,
Outgoing and Secret Partners.
Remedies of Creditors.
CHAPTER 71
AUTHORITY OF PARTNER
§ 592. General statement.
§ 593. Recital of powers of partner in Uniform Law.
§ 594. Implied or apparent power of partner to buy and sell stock in trade.
§ 595. Implied or apparent power to sell otherwise than in usual course of
trade.
§ 596. Impiled or apparent power of parties to sell choses in action.
§ 597. Implied or apparent power of partner to buy or sell firm real estate.
§ 598. Power of partner to make warranties.
§ 599. Power to bind firm on negotiable paper.
§ 600. Power of partner to borrow money on firm credit.
§ 601. Power of partner to appoint agents and employ servants.
§ 602. Power of partner to settle, compromise, release, etc.
§ 603. Power of partner to settle individual debts with firm assets.
§ 604. Partner may be specially authorized to represent partners.
§ 605. Ratification.
§ 592. (Partnerships, Sec. 33.) General statement.
(Note: In this chapter is discussed the implied and apparent
power of a partner to represent his other partners, thereby bind-
ing himself and them, in contractual dealings with outsiders.
Every partner, being a principal in the business, and having, as
we have seen, a right to actively participate in the business, has
the actual right and power to do all of those acts which are
1056
Chapter
71.
Chapter
72.
Chapter
73.
Chapter
74.
AUTHORITY OP PARTNER 1057
necessary, incidental and nsual in carrying on its business, un-
less his power in that respect has been by his own consent and
agreement with his partners, limited. He has the apparent
power, that is, may be presumed by others to have all power,
to do those things which he would have actual power to do if
such actual power were not curtailed. And in any particular
instance he may, of course, have broader actual powers and
more apparent power than he would have in typical cases.
The usual course of conducting the business implies more in
trading than in non-trading partnerships, as we have heretofore
seen.)
Case 596. Judge v. Braswell, 76 Ky. 67.
Facts: Morris, Machen & Co. had a partnership
agreement for mining purposes, and '' said enterprise is
to embrace the purchase of the title to any coal or mining
lands in fee.''
Machen purchased without specific authority, certain
lands in the name of himself and partners, promising to
pay a certain price therefor. The other partners refused
to assent to the deal and are sued by the sellers.
Judge Coper: * * It seems to us that this
language is clear and explicit, and that the purchase and
sale of lands were within the scope of the partnership.
But the articles are equally explicit that no member of
the firm and no number of them less than the whole had
authority to buy lands for the firm.
"It is contended, however, that the purchase of lands
being within the scope of the partnership, each member
had implied authority to make purchases for the firm,
and that whatever may have been the rights and duties
of the partners inter esse, and the express limitation
upon their power contained in the written agreement
between them, third persons dealing with a single part-
ner, without notice of the private agreement between
them, can not be affected by it.
"This is undoubtedly true as to commercial partner-
ships; but it is a rule of the law merchant which has been
adopted into the common law, and rests for its support
1058
PARTNERSHIPS
upon the custom of merchants alone, and has no applica-
tion to non-commercial partnerships.
"Mr. Collyer says, 'The law of partnership, as admin-
istered in England, rests on a foundation composed of
three materials—the common law, the law of merchants,
and the Roman law,' and he traces the power of one part-
ner to bind his co-partners by a hill of exchange to the
law merchant. Again he says, 'The general principle
which governs all partnerships in trade is this, that each
individual partner constitutes the others his agents for
the purpose of entering into all contracts for him within
the scope of the partnership concern, and consequently,
that he is liable to the performance of all such contracts
in the same manner as if entered into personally by him-
self.' (Collyer on Partnership, 103.)
'' But the power of one partner thus to bind his co-part-
ners rests alone upon the usage of merchants, and does
not amount to a rule of law in any other than commercial
partnerships. (Story on Partnership, Sec. 126.)
'' In non-commercial partnerships one who seeks to
hold the firm bound upon a contract made by a single
member must be able to show either express authority, or
that such is the custom and usage of that particular
branch of business in which the firm is engaged, or such
facts as will warrant the conclusion that the partner had
been invested by his co-partners with the requisite au-
thority, the distinction being that in commercial part-
nerships the extent of a partner's power to bind the firm
is a question of law, while the power of a partner in a
non-commercial firm to bind his co-partners is a question
of fact.
'' Thus the business of a commercial partnership being
ascertained, and the nature of the contract made by a
single member, and the circumstances attending it being
known, the Court may generally determine, as matter of
law, whether the contract was within the scope of the
implied powers of a partner. Not so, however, in refer-
ence to a contract made by a member of a non-commercial
partnership.
AUTHORITY OF PARTNER
1059
"A partner in such a partnership does not generally
possess power to bind the firm, and consequently, the
extent of his powers is not fixed by the rules of law, but
each case is left to be decided upon its particular facts;
and in all such cases, in order to make out the liability of
the firm, it ought to be made out affirmatively by the
plaintiff that the partner had power to make the contract
in question. (Dickinson v. Valpy, 10 B. & C. 128; Levy
v. Pyne & Richards, 41 E. C. L. 249; Smith v. Sloan, 37
Wisconsin, 289.)
"In the cases at bar the authority of the partner mak-
ing the contract is not shown. The partnership articles
show that no such authority was thereby conferred; no
evidence was offered to prove that such authority had
been otherwise delegated, or that it was usual in such
partnerships for one partner to buy land in the name of
the firm, or that the existence of such authority was
necessary in order to carry on the business for which the
partnership was created, and we have seen that no such
power can be implied from the mere existence of the
partnership.
"We are therefore of the opinion that the Court erred
in rendering judgment against the appellants, and the
judgment, as to them, is reversed, and the cause is re-
manded with directions to dismiss the petition.
Question 596: (1) Where the firm is non-commercial (non-
trading) what must a third person show in order to hold a
partner on the acts of the other partner ?
(2) What does Mr. Collyer give as the foundation of Eng-
lish partnership law?
(3) Does a member of a commercial or trading partnership
have greater powers to bind the other members than in a non-
trading firm ? Why ?
§593. (Partnerships, Sec. 34.) Recital of powers in
Uniform Partnership Act.
Case 597. Uniform Partnership Act, Sec. 9.
"1. Every partner is an agent of the partnership for
the purpose of its business, and the act of every partner,
1060
PARTNERSHIPS
including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way
the business of the partnership of which he is a member
binds the partnership unless the partner so acting has in
fact no authority to act for the partnership in the par-
ticular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority.
"2. An act of the partner which is not apparently for
the carrying on of the business of the partnership in the
usual way does not bind the partnership unless author-
ized by the other partners.
"3. Unless authorized by the other partners or unless
they have abandoned the business, one or more, but less
than all of the partners have no authority to:
(a) Assign the partnership property in trust for
creditors or on the assignee's promise to pay the debts
of the partnership.
(b) Dispose of the good will of the business.
(c) Do any other act which would make it impossible
to carry on the ordinary business of the partnership.
(d) Confess a judgment.
(e) Submit a partnership claim or liability to arbi-
tration or reference.
4. No act of a partner in contravention of a restric-
tion on authority shall bind the partnership to persons
having knowledge of the restriction.
Question 597: (1) Has a partner power to do any act in
carrying on the business which all the partners acting together
could do? "What qualification?
(2) Has a partner power to make an assignment of the firm
assets for benefit of firm creditors?
(3) A partnership has a claim against X for $500. X claims
he owes only $250. A member of the firm proposes to X that
they submit the claim to M for arbitration. This is done and
M decides in X's favor. The firm sues X for $500. He intro-
duces this arbitration as a defense. Is it good?
§594. (Partnerships, Sec. 35.) Power of partner to
buy and sell stock in trade.
Case 598. Bond v. Gibson et al., 1 Campbell, 185.
AUTHORITY OF PARTNER
1061
Point Involved: Authority of partner in trading part-
nership to purchase goods dealt in by firm, and bind the
other partner; the fact that the partner so purchasing
said goods appropriates them to his own use, immaterial.
"Assumpsit for goods sold and delivered. It appeared
that while the defendants were carrying on the trade of
harness makers together, Jephson (one of the defend-
ants) bought of the plaintiffs a great number of bits to
be made up into bridles, which he carried away himself;
but that, instead of bringing them to the shop of himself
and his co-partner, he immediately pawned them to raise
money for his own use.
"Gazelee, for the defendant, Gibson, contended that
this could not be considered a partnership debt, as the
goods had not been bought on the partnership account
and the credit appeared to have been given to Jephson
only. He allowed the case would have been different, had
the goods once been mixed with the partnership stock,
or if proof had been given of former dealings upon credit
between the plaintiff and the defendants.
"Lord Ellenborough. Unless the seller is guilty of
collusion, a sale to one partner is a sale to the co-partner-
ship, with whatever view the goods may be bought and to
whatever purpose they may be applied. I will take it
that Jephson here meant to cheat his co-partner ; still the
seller is not on that account to suffer. He -is innocent
and he had a right to suppose that this individual acted
for the partnership.''
Question 598: Does a partner have apparent power to buy
stock in trade on partnership credit ? Is the firm bound in such
a case though the purchasing partner diverts the goods to his
own use?
§595. (Partnerships, Sec. 36.) Power of partner to buy
and sell otherwise than in usual course of trade.
Case 599. Lowman v. Sheets., 124 Ind. 417.
Facts: Temple ton and Sheets were partners in con-
ducting a stock farm for which they had acquired a herd
of brood mares. Without Sheets' knowledge, Templeton
purported to sell the entire herd to the plaintiff. Sheets
1062
PARTNERSHIPS
refused to deliver the property and Lowman brought
replevin.
Point Involved: Whether the member of a trading
partnership in his power to sell has the apparent au-
thority to sell out the entire property of the firm or the
property in which its capital is invested as permanent
equipment.
Coffey, J.: "It is contended by the appellant that
Templeton and appellee were partners, and that, as such,
either partner had the right to sell the property owned
by the firm and confer a good title, and that by his pur-
chase from Templeton he acquired the title to the whole
of the property in controversy and has a right to its
possession. We do not deem it necessary to decide
whether the contract between the parties was one of
partnership or not, as the appellant had no power to
sell the entire property, whether it was held as partner-
ship property or otherwise. The partnership, if one
existed, was not one in which the parties contemplated
a sale of the property here involved, but it was one in
which this property was to be kept for the purpose of
carrying on a particular business. In such case neither
party had the power to sell the entire property: Bates,
Partn. § 401; Hewitt v. Sturdevant, 4 B. Mon. (Ky.)
453; Cayton v. Hardy, 27 Mo. 536; Mussey v. Holt, 24,
N. H. 248; Hudson v. McKenzie, 1 E. D. Smith (N. Y.)
358. Mr. Bates, in his valuable work on partnerships,
in treating the subject in the section above cited, says:
'But I have no doubt but that the power of sale must
be confined to those things held for sale, and that the
scope of the business does not include the sale of the
property held for the purpose of business and to make
a profit out of it, and that this only is the true rule.'
* * * j >
Question 599: A and B were partners in training and racing
horses. A sold one of the horses. Is B bound by the sale?
(William v. Tam, 131 Cal. 64.)
AUTHORITY OP PARTNER 1063
§ 596. (Psurtnerships, Sec. 37.) Power of partner to
sell choses in action belonging to firm.
(Note: A chose in action, that is to say, a claim against an-
other, may be transferred hy a partner to an assignee, provided
it is assigned ostensibly in behalf of the firm and for its benefit
to one who takes in good faith.)
§597. (Partnerships, Sec. 38.) Power of partner to
buy and sell firm real estate.
(Note: Pcwer must be express. See Judge v. Braswell,
supra.)
§598. (Partnerships, Sec. 39.) Power of partner to
make warranties, guaranties and contracts of surety-
ship.
Case 600. Edwards v. Dillon, 147 111. 14.
Point Involved: "Whether a partner in a general trad-
ing partnership having authority to sell has authority
to make ordinary warranties.
Me. Justice Mageudee: "The firm of Levi Dillon &
Sons were dealing in Norman stallions. Each partner
has the power to sell these stallions, and there was in-
volved in such power of sale the further power to war-
rant the quality of the horse as to its fitness for the pur-
pose for which it was sold. Partners are considered as
sanctioning the contracts which they singly enter into in
the course of trade. By the act of entering into the
partnership, each partner is made the general agent of
his co-partners as to the firm business (Deckard v. Case,
5 Watts, 22). "Where a general agent is employed to
carry on a business the authority to sell, which is con-
ferred upon him, may carry along with it the power to
warrant, if it is usual, as it was here, to give a warranty
when making a sale in such a business. (Brady v. Todd,
9 0. B. N. S. 591; Biddle on Warranties in the Sale of
Chattels, Sees. 14 and 15.) A general agent employed to
carry on the business of horse-dealing for his employer
1064
PARTNERSHIPS
has an implied authority to warrant soundness when
making sale of a horse (2 Benj. on Sales, marg. pages
618-620; Sees. 830, 831).
Question 600: State what the Court held in this case.
Case 601. First Nat. Bank v. Farson, 226 New York
Reports, 220-225.
Collin, J.: The plaintiff recovered a judgment in the
amount of the face value of five bonds of the Eden Irriga-
tion and Land Company, in virtue of a guaranty executed
in the name, "Farson, Son & Co. The claim of the
defendants is that the member of "Farson, Son & Co.
who executed the guaranty, in executing it, exceeded his
authority. The findings of fact of the Trial Term were
unanimously affirmed by the Appellate Division.
The cardinal facts are: At the times involved, John
Farson, Sr., and the defendant John Farson were the
members of a general partnership in the name of Far-
son, Son & Company. They, as the partnership, carried
on the business of buying and selling bonds and other
securities. On or about April 10, 1908, a salesman of
the firm sold to the plaintiff the five bonds we have men-
tioned. Each bond was of one thousand dollars, was
dated January first, 1907, was payable January first,
1916, with interest payable semi-annually, and was otvned
by the partnership. The salesman, in negotiating the
sale, offered, on behalf of the partnership, under the
authorization of John Farson, Sr., to guarantee theprin-
cipal and interest of the bonds. In closing the sale the
cashier of the partnership, one Parrott, authorized there-
unto by John Farson, Sr., delivered to the plaintiff
through the mail a written instrument with the signature
"John Farson, Son & Co. made by John Farson, Sr.,
which contained, among other things, the stipulation:
"For value received, we hereby guarantee payment of
principal and interest promptly at maturity of the fol-
lowing bonds, namely: followed by a designation of
the five bonds. The acts of John Farson, Sr., were per-
AUTHORITY OF PARTNER
1065
formed by him purporting to act as a member of the
firm. The obligor in the bonds did not pay the prin-
cipal sum of them at maturity or at any time, or the
interest due upon them from July 1, 1915. In case the
defendant, John Farson, who is the surviving member
of the partnership, is liable to the plaintiff by reason
of the guaranty, William Farson is also liable by reason
of an agreement between him and John Farson. The
finding of the trial court, as a conclusion of the law,
"there is now due and owing from the defendants and
each of them to the plaintiff the principal sum of the
face value of the bonds and the unpaid interest, was
duly excepted to. We are to determine whether or not
the findings of fact sustain the conclusion of law and
the consequent judgment.
The partnership was a trading or commercial part-
nership. (Kimbro v. Bullitt, 22 How. (U. S.) 256, 268;
Pease v. Cole, 53 Conn. 53; Marsh v. Wheeler, 77 Conn.
449; 1 Bates on Partnership, 327.) Each partner pos-
sessed the powers the law attributes to a member of a
partnership of that nature. Each constituted the other
his agent for the purpose of entering into all contracts
for him, and for the partnership, within the scope of
the partnership business. The law of agency mainly,
although not exclusively, governs the relations of part-
ners to each other, and to the persons who deal with
the partnership. Each partner acts, as to himself, as a
principal, having a joint interest in the partnership prop-
erty, and, as to each other partner, as a general agent.
The implied powers of a partner rest in the usages and
business methods of those conducting commerce and
trade, and grew out of the necessities of commercial
business. They do not extend broadly to partners in
non-trading partnerships. As to third persons, the au-
thority to a partner must be found in the actual agree-
ment of the partners, or through implication, in the
nature of the business according to the usual and ordi-
nary course in which it is carried on by those engaged
in it in the locality which is its seat, or as reasonably
1066
PARTNERSHIPS
necessary or fit for its successful prosecution. If it can-
not be found in those, it may still be inferred from the
actual though exceptional course and conduct of the busi-
ness of the particular partnership itself, as personally
carried on with the knowledge, actual or presumed, of
the partner sought to be charged. The power or author-
ity of a partner in a commercial partnership is to be
tested and measured, when the actual agreements be-
tween the partners are unknown, by the ordinary usages
of and the methods customarily used in partnership con-
ducting a business like unto, or by the usages and meth-
ods of, his own partnership. Each partner is impliedly
empowered to conduct the business in the way usual to
that class of business, or to his partnership. (Partner-
ship Law (Cons. Laws, chapter 39), section 5; Winship
v. Bank of the United States, 5 Peters, 529, 563; Irwin
v. Williar, 110 U. S. 499, 505; Nemeth v. Tracy, 217
N. Y. 714; King v. Sarria, 69 N. Y. 24.)
The instant case does not involve, through the find-
ings or evidence or the briefs or argument of counsel,
a method or course of dealing peculiar to Farson, Son
& Company, or a ratification of or acquiescence in the
guaranty by John Farson, or an express or actual an-
thorization to John Farson, Sr., to execute it. The find-
ings present us with the facts: the existence of the part-
nership; the nature of its business; the sale and the
attendant circumstances; the execution of the guaranty
and the consequent liability. Those findings do not di-
rectly or by just and reasonable inference beget the
conclusion that persons engaged in the business of buy-
ing and selling bonds and other securities in the cities
of New York and Chicago, customarily and as an ordi-
nary usage in selling bonds owned by them, guaranteed
the payment of the principal and interest of the bonds.
The law has known and recognized certain transactions
and contracts of one partner as binding upon the other
partners and the partnership, because they were mani-
festly within the scope or objects of the partnership;
they were directly and reasonably if not necessarily,
AUTHORITY OF PARTNER 1067
incident to or connected with the business of the part-
nership. Thus a member of a trading or commercial
partnership has, through implication, the power to buy
and sell the articles dealt in, to borrow money for the
business and to give notes and checks of the partner-
ship, to transfer and indorse by the partnership the
notes and checks given the partnership, or enforce their
payment by actions at law, or hire and discharge em-
ployees. Those acts and others are within the general
usages and methods of those partnerships.
The only base upholding the implied authority of John
Farson, Sr., to execute the guaranty must, under the
findings of fact, arise from the general usages and meth-
ods of partnerships of its class. The guaranty executed
by John Farson, Sr., to the plaintiff has two elements:
the one, it guaranteed the payment of the debts of a
third party, namely, the Eden Irrigation and Land Com-
pany; the other, the debts or bonds were the property
of the partnership and the guaranty was made as a part
of and, presumably, to effect a sala of them. The first
element need not detain us, because it is a thoroughly
established rule of law that a partner has not implied
authority to bind his partner or the partnership by con-
tracts of guaranty or suretyship, either for himself in-
dividually or for third persons. (Laverty v. Burr, 1
Wend. 529; Foot v. Sabin, 19 Johns. 154; Bank of Fort
Madison v. Alden, 129 U. S. 372, 381; Butterfield v.
Hemsley, 78 Mass. 226; Rollins v. Stevens, 31 Me. 454.)
The second element requires more consideration. The
law does not know, and the courts cannot know or take
notice, that a general agent or a partner in making sales
of the property of the principal or partnership is im-
pliedly authorized by mere force of the agency to make
any guaranty or warranty in relation to the article.
Generally speaking, his implied authority, if he has it,
springs from the usage of the business in which the
principal or partnership is engaged. If in that business
it is usual to give the guaranty in making the sale, the
authority to sell carries with it the power to guarantee.
1068
PARTNERSHIPS
(Smith v. Tracy, 36 N. Y. 79; Wait v. Borne, 123 N. Y.
592, 604; Bierman v. City Mills Co., 151 N. Y. 482, 489;
Upton v. Suffolk Connty Mills, 11 Cush. 586; Waupaca
Electric Light & By. Co. v. Milwaukee Electric By. &
L. Co., 112 Wis. 469; First National Bank of Dubuque
v. Carpenter, Stibbs & Co., 41 Iowa, 518; Sweetser v.
French, 2 Cush. 309; Matter of Farmers' & Merchants'
Bank, 194 Mich. 200; Hollister Brother^ v. Bluthenthal
& Bickart, 9 Gfa. App. 176; Cockroft v. Claflin, 64 Barb.
464; Crist v. Turner, 175 App. Div. 664; Clarke v. Wal-
lace, 1 N. D. 407; Brady v. Todd, 9 C. B., N. S., 591.)
For a decision of contrary import, see McNeal v. Gos-
sard (6 Okla. 363). It is a general rule that the power
of an agent to bind the principal in contracts of guaranty
or suretyship can only be charged against the principal
by necessary implication, where the duties to be per-
formed cannot be discharged without the exercise of
such a power, or where the power is a manifestly neces-
sary and customary incident of the authority bestowed
upon the agent, and where the power is practically in-
dispensable to accomplish the object in view. Bickford
v. Menier, 107 N. Y. 490; Williams v. Dugan, 217 Mass.
526; Mechem on Agency, sections 389, 392; Merchants'
National Bank v. Nichols & Shepard Co., 223 111. 41.)
There is not a finding that in the business in which
Farson, Son & Company were engaged the usage of guar-
anteeing the payment of the bonds or securities sold
existed. The conclusion of law was ill-founded and in-
valid without it.
Undoubtedly, emergencies or extraordinary conditions
may arise in virtue of which the ordinary extent of the
authority of the agent will be enlarged. As I am recom-
mending the granting of a new trial, I refer to the rule:
When a party takes a guaranty, to which the partner-
ship name is signed, the burden of proof is on him to
show that the partner who signed such name had author-
ity, from one of the legitimate sources, so to do. Bollins
v. Stevens, 31 Me. 454; Herring, Farrell & Sherman v.
Skaggs, 62 Ala. 186; Sibley v, American Exchange Nat.
AUTHORITY OF PARTNER
1069
Bank, 97 Ga. 126; Standard Wagon Co. of Georgia v.
Few & Co., 119 Ga. 293, and cases above cited.)
I recommend that the judgment be reversed and a
new trial granted, with costs to abide the event.
Question 601: Upon what claim was the suit brought in this
case? What were the circumstances under which the claim
arose? What was the defense? Did it prevail? Why?
§599. (Partnerships, Sec. 40.) Power of partner to
bind firm on negotiable paper.
(See Dowling v. Exchange Bank, Case 504 supra.)
§600. (Partnerships, Sec. 41.) Power of partner to
borrow money on firm credit.
(Note: A partner has'apparent authority to borrow money
in behalf of the firm, if it is a trading firm. Lindley says (Lind-
ley on Partnership, 8th Ed., p. 167): "The sudden exigencies
of commerce render is absolutely necessary that such power
should exist in the members of a trading partnership and accord-
ing to a comparatively early case this power was clearly recog-
nized. (Lane v. Williams, 2 Vernon, 292) * * * .At the
same time, the implied power of borrowing money, like every
other implied power of a partner, only exists where the business-
is of such a kind that it cannot be carried on in the usual way
without such a power. If money is borrowed by one partner for
the declared purpose of increasing the partnership capital
(Fisher v. Taylor, 2 Hare, 218), or of raising the whole or part
of the capital agreed to be subscribed in order to start the firm
(Greenslade v. Dower, 7 B. & C. 635), or if the business is such
as is customarily carried on on ready money principles, e. g.,
mining on the cost book principle (Hawtayne v. Bourne, 7 M.
E. W. 595), or without borrowing, as in the case of solicitors
(Plummer v. Gregory, 18 Eq. 624), the firm will not be bound
unless some actual authority or ratification can be proved.")
§601. (Partnerships, Sec. 42.) Power of partner to
appoint agents and servants.
(This power exists when exercised for reasonable bene-
fit of firm.)
1070
PARTNERSHIPS
§ 602. (Partnerships, Sec. 43.) Authority of partner to
settle, release, receive payment, etc.
(Note: A partner has authority to receive payment of the
firm debts: Heart v. Walsh, 75 111. 200; unless there has been
an agreement to the contrary of which the debtor has notice:
Clark v. Lauman, 63 111. Ap. 132. So he has authority to settle
and release: Salmon v. Davis, 4 Binney (Penn.) 375, 5 Amer.
Dec. 410.)
§ 603. (Partnerships, Sec. 44.) Power of partner to
settle individual debts with firm assets.
Case 602. Blinns v. Waddell, 32 Gratt. 588.
Staples, J.:  * * * One partner cannot pledge or
sell the partnership property, in payment of his individ-
ual debts, without the consent of his co-partner; and the
title is not divested by such pledge or sale in favor of a
separate creditor, even though the latter may not know
it was partnership property. * #
Question 602: A, of the firm of A and B, owes a personal
debt to C of $100. He transfers to C certain partnership prop-
erty in payment of this debt. Can B recover this property?
Suppose C did not know it was partnership property when he
received it?
§ 604. (Partnersnips, Sec. 45.) Partner may be spe-
cially authorized to represent the firm.
(Note: The rule suggested in the title is obviously true and
requires little comment. It is for the purpose of merely calling
attention to the fact that in any case where implied or apparent
authority would otherwise be wanting, special authority may
exist.)
§ 605. (Partnerships, Sec. 46.) Ratification.
(Note: Same principles here apply as in agency. See also
following case.)
Case 603. Rock v. Collins, 99 Wis. 630.
AUTHORITY OF PARTNER
1071
Winslow, J.: "* * * 2. It is objected tbat the
chattel mortgage upon the logging outfit was invalid,
because made by one partner alone, without the knowl-
edge of his co-partner. The general power of one part-
ner to pay firm debts out of firm property in the ordi-
nary course of business is well established; and, if he
may pay a debt, no good reason is perceived why he
may not secure its payment by pledging or mortgaging
firm property. It has been held by this Court that one
partner may, in the absence of his co-partner, mortgage
the firm property to secure a bona fide partnership debt
(Hage v. Campbell, 78 "Wis. 573); also, that one partner
may make a valid voluntary assignment of the personal
property of the firm for the benefit of creditors where
the other partner has absconded (Voshmik v. Urquhart,
91 Wis. 513). There has been some diversity of opinion
upon the question whether one partner may, without the
consent of his co-partner who is accessible for consulta-
tion, mortgage the entire firm property to secure a firm
debt, when the effect of the mortgage would be to prac-
tically terminate the business of the firm, although the
weight of opinion seems to favor the validity of such a
mortgage. Jones, Chattel Mortgages, Sec. 46. But it
is certain that the subsequent acquiescence or consent
of the other partner would remove all question as to
the validity of the mortgage. Jones, Chattel Mortgages,
supra. Such acquiescence was proven in the present
case.''
Question 603: Does a partner have power to mortgage the
firm property to secure a firm debt ? Does he have authority to
mortgage the entire property of the firm? Is there a difference
of opinion on this question ?
(Note: Under partnership act and on general principles, it
would seem there is no power to mortgage entire firm assets
unless special circumstances exist.)
CHAPTER 72
LIABILITY OF PARTNER FOR TORTS OF
CO-PARTNER
§§ 606-609. (Partnerships, Sees. 47-50.) Torts of part-
ner; liability of other partners for.
Case 604. Wolf v. Mills, 56 111. 360.
Facts: See the opinion.
Point Involved: Whether one partner is liable to
third persons for the deceit of the other partner in the
sale of goods for the firm.
Mr. Justice Thornton: '.'The appellee brought an
action on the case, alleging that appellants sold him a
lot of sheep pelts, having on them a large quantity of
wool; and, with intent to defraud him, delivered other
and inferior pelts in quality, and deficient in the quantity
of wool. Appellee recovered a verdict.
"Wolf and Haber jointly owned the pelts at the time
of the sale. The proof is satisfactory that the pelts sold
averaged about five pounds of wool per pelt; and the
pelts delivered, only three pounds.
"As to the alleged fraud the evidence is conflicting.
One witness testifies positively, that he saw young Haber,
a son of appellant, change the pelts, and that he placed
light in place of the heavy pelts, soon after the sale.
This was contradicted by the son; but the weight of evi-
dence has been determined by a jury, and we shall not
disturb the finding, unless some principle of law has been
violated.
'' Appellants urge that, as there is no evidence to prove
the change, if made, was by the direction of Wolf, or by
any person in his employment or under his control, there-
1072
TORTS OF PARTNER
1073
fore he is not liable. The evidence does show that Wolf
& Haber were partners in the buying and selling of the
sheep pelts, and that young Haber was handling them
and throwing them from one pile to the other. The jury
were justified in the inference that this was in the scope
of the partnership business, as it was connected with the
joint property. It is improbable that the son would be
thus engaged, unless directed. The father must have
given him some instructions in regard to the exchange.
"There was then, no error in the following instruction
given for appellee: 'If the jury believe, from the evi-
dence, that the defendants sold the plaintiff a certain lot
of sheep pelts at an agreed price and that plaintiff has
paid such price, and that the defendants afterwards,
either in person, by their agents, servants, or employees
delivered to plaintiff a lot of sheep pelts in any respect
different from and inferior to those actually sold, in-
tending thereby to have the plaintiff believe they were
the same he had purchased, and intending to deceive and
defraud the plaintiff, then the jury are instructed to find
defendants guilty, and to assess as damages whatever
loss the evidence may show the plaintiff sustained
through such fraud and deceit.'
"A tortious act of one partner will often create a
liability against the firm. So a fraud, committed by one
partner, in the course of the partnership business, binds
the firm, even though the other partners have no knowl-
edge of, or participation in, the fraud.
"The jury might reasonably infer all that was neces-
sary to fix the liability of the firm.
"The judgment must be affirmed. •
Question 604: State the facts, the question presented and the
Court's decision in this case.
Case 605. Hess v. Lowrey, 122 Ind. 225.
Facts: Lowrey sues Luther W. Hess and Frank C-.
Hess, as co-partners, for damages caused by malpractice.
The alleged malpractice was committed by one of the
1074
PARTNERSHIPS
partners (who is now deceased) and it is sought to hold
the other liable.
Point Involved.
Mitchell, C. J.: "* * * That each partner is the
agent of the firm while engaged in the prosecution of the
partnership business, and that the firm is liable for the
torts of each, if committed within the scope of his agency,
appears to be well settled. Champlin v. Laytin, 18
Wend. 407, 31 Am. Dec. 382; Tucker v. Cole, 54 Wis.
539, 11 N. W. Rep. 703; Fletcher v. Ingram, 46 Wis.
191; Taylor v. Jones, 42 N. H. 25; Schwabacker v. Rid-
die, 84 111. 517; Story Partn. §§ 107-166; 1 Bates, Partn.
§ 461. 'It follows from the principles of agency, coupled
with the doctrine that each partner is the agent of the
firm, for the purpose of carrying on its business in the
usual way, that an ordinary partnership is liable in dam-
ages for the negligence of any one of its members in
conducting the business of the partnership.' 1 Lindl.
Partn. 299. Thus, in Hyrne v. Erwin, 23 S. C. 226, 55
Am. Rep. 15, which was an action against two physicians
for an injury resulting from the negligent and unskillful
setting of a broken arm, it was held that the act of one
within the scope of the partnership business was the
act of each and all, as fully as if each was present, par-
ticipating in all that was done, and that each partner
guaranties that the one in charge shall display reason-
able care, diligence, and skill, and that the failure of one
is the failure of all.
Question 605: (1) What was the tort for which defendant
was sought to be held in this case? Did the Court hold him
liable ?
(2) Defendants were partners in owning and operating a
coal mine. One of the defendants was manager of the mine and
it was under his personal superintendence. He allowed it to
get into an unsafe condition whereby an employee was injured.
Can the other defendant be held ? (Mellors v. Shaw, 1 B, & S.
437.)
TORTS OF PARTNER
1075
Case 606. Lathrop v. Adams, 133 Mass. 471.
Facts: Suit against defendants as co-partners of a
newspaper for publishing a libelous article concerning
plaintiff.
Point Involved: Whether one of the partners was
chargeable with this libel published without his knowl-
edge by the other partner.
Field, J.: * * But it has been established on
much consideration, as one of the general principles of
the law of agency, that the principal is liable civilly in
damages for the torts of his agent done for his benefit in
the prosecution of his business, and within the scope of
the agent's employment, and this rule has been extended
to wilful trespasses,- fraudulent misrepresentations, ma-
licious prosecutions and libels. * * *
"The logical difficulty of imputing the actual malice
Or fraud of an agent to his principal is perhaps less when
the principal is a person than when it is a corporation;
still the foundation of the imputation is not that it is
inferred that the principal actually participated in the
malice or fraud, but, the act having been done for his
benefit by his agent acting within the scope of his em-
ployment in his business, it is just he should be held
responsible for it in damages.
"As partners are the general agents of each other
and of the firm, within the scope of the business of the
partnership, we think a test of the question we are con-
sidering is the liability of the proprietor of a newspaper
in damages for a libel maliciously published without his
knowledge by his agent, whom he has trusted with the
management of his newspaper, and this we regard as
well settled. Shepheard v. Whitaker, L. R. 10 C. P. 502;
Dunn v. Hall, 1 Ind. 344; Andres v. Wells, 7 Johns, 260;
Perret v. New Orleans Times Newspaper, 25 La. An.
170; Storey v. Wallace, 60 111. 51. * * *
Question 606: What was the tort in this case committed by
the one partner for whicv the other was held liable ?
1076
PARTNERSHIPS
(2) What was the nature and scope of the firm business?
Do you think the Court would have been less likely to have held
the partner liable for the tort of libel had the business been of
a mercantile nature ? Why ?
Case 607. Rosenkrans v. Barker, 115 111. 331.
Facts: Suit brought by Barker against Rosenkrans
and Weber to recover damages for an alleged malicious
prosecution and false imprisonment. In 1882, Barker
resided in Iowa and was engaged in the jewelry business.
In the latter part of 1882 he bought a bill of goods of
Rosenkrans and Weber. When the bill was due $100
was paid, but the rest ($250) has never been paid.
Rosenkrans was then a resident of Milwaukee, Wiscon-
sin, but he was in partnership with Weber in Chicago.
Weber induced Barker to come to Chicago and caused
his arrest and detention for 10 or 12 hours. Rosenkrans
did not hear of this until long after until the case was
on appeal when he at once told his partner he was wrong
and that the appeal should not be prosecuted, and his
advice was followed and the appeal dropped.
Point Involved: Whether one partner is liable for
the wrongful arrest of a debtor to the firm, caused by
the other.
Ceaig, J.: "* * *
"It is, however, claimed by appellee that Rosenkrans
is liable upon either one of two grounds: First, because
those who caused the arrest were servants or agents of
Rosenkrans, acting within the scope of their agency;
second, the wrongful proceeding was instituted for
Rosenkrans, and in his name, and when he became aware
of what had been done he ratified it. Weber, who caused
the arrest of Barker, was not in fact a partner of Rosen-
krans, but he acted for his wife, who was the partner,
and, so far as the acts are concerned, they may be re-
garded as the acts of Rosenkrans' partner. In many
respects one partner is the agent of the other. In the
purchase and sale of goods within the scope of the part-
TORTS OF PARTNER
1077
(nership business the acts of one may be regarded as the
lacts of both. In such cases the one that transacts the
business acts for himself and in the capacity as agent of
the other, and in that capacity he binds himself and also
binds his partner. By entering into partnership each
party reposes confidence in the other, and constitutes
him his general agent as to all partnership concerns.
.Grow, Partn. 52. But the question involved here is not
■as to the liability of one partner for the contracts of the
.other, but it is whether one partner may be liable in
damages for the wrongs of the other. Mr. Collyer, in his
work on Partnership, §457, says: 'A learned writer
observes that though partners are in general bound by
the contracts, they are not answerable for the wrongs,
of each other; In general, acts or omissions in the course
of the partnership trade, or business, in violation of law,
will only implicate those who are guilty of them.' And,
in 1 Lindl. Partn. bk. 2, c. 1, § 4, the author says: 4 As a
rule, however, the wilful tort of one partner is not im-
putable to the firm. For example, if one partner mali-
ciously prosecutes a person for stealing partnership
property, the firm is not answerable unless all the mem-
bers are in fact privy to the malicious prosecution
"In Gilbert v. Emmons, 42 111. 143, where a question
arose as to the liability of one partner for the act of the
other in causing the arrest of a person charged with
larceny of money belonging to the firm, it was held that
the mere knowledge and consent of one partner that the
other should have the person accused arrested would not
render the partner so knowing and consenting liable to
an action for malicious prosecution; it was necessary
that the consent should be of such a character as to
amount to advice and co-operation. In Grund v. Van
Vleck, 69 111. 478, a question arose as to the liability of
one partner for the tort of the other, and it was held
that one partner cannot involve another in a trespass
unless in the ordinary course of their business, and in a
case where the trespass is in the nature of a taking which
is available to the partnership; and in such case, to ren-
1078
PARTNERSHIPS
der the partner liable who did not join in the commission
of the trespass, he must afterwards have concurred and
received the benefit of it. Here no part of the debt was
collected by the commencement or prosecution of the
proceedings against Barker, and it is not claimed that
a liability exists on account of receiving any benefit from
the arrest; and if Rosenkrans is to be held liable, it is
upon the ground that he was a member of the firm which
instituted the suit and caused the arrest. This under
the authorities cited, cannot be done [and there was no
ratification].''
Question 607: What was the tort in this case? What.was
the nature of the business? Was the other partner held liable?
(Note: The suggestion that a partner is not liable for the
wilful torts of his co-partner is inaccurate. Fraud, libel, etc.,
are wilful' torts. The question is not whether it is wilful, but
whether it is within the scope of the partnership.)
CHAPTER 73
EIGHTS OF THIRD PERSONS AGAINST INCOMING,
OUTGOING AND SECRET PARTNERS
§ 610. Liability of incoming partner.
§ 611. Liability of outgoing partner.
§ 612. Liability of secret partner.
§610. (Partnerships, Sec. 51.) Liability of incoming
partner.
Case 608. Karraker v. Eddleman, 101 111. Ap. 23.
Mr. Justice Creightou: "* * *
"A firm or copartnership as constituted after an in-
coming partner has become a member thereof cannot in
any case be held for the payment of a previously con-
tracted debt for which such incoming member has not
in some way become bound, and it is the clearly and
universally established doctrine, that a new partner, com-
ing into an existing firm, will not be liable in respect to
debts contracted by the firm previous to his entering it,
unless he assumes them, and the same rule applies where
one becomes a partner with another in business already
established. * * * The presumption always is that
such incoming partner does not assume the payment of
previously contracted debts 'but such presumption may
be rebutted by satisfactory proof of the contrary inten-
tion and agreement' * * * All the Illinois authori-
ties proceed upon the theory that to hold such partner
for such debt there must have been on his part a prom-
ise, agreement or intention to assume the debt, but we
regard it as well established that such promise, agree-
ment or intention may be proved by circumstantial evi-
dence, i. e., may be inferred by proof of such facts,
1079
1080
PARTNERSHIPS
and circumstances as clearly warrant such inference.
* # * ? >
Question 608: (1) Is an incoming partner liable for past in-
debtedness by his mere act of coming into the firm ?
(2) May creditors, hold him as a member of the firm where
he assumes such debts in his agreement with the other partners'?
(3) As such incoming partner was not in the firm when the
debt was created, why do you think that this assumption of
indebtedness should give the past creditors any right against
him ?
(4) How may this assumption of indebtedness be inferred?
Case 609. Uniform Partnership Act, Sec. 17.
"Sec. 17. A person admitted as a partner into an
existing partnership is liable for all the obligations of
the partnership arising before his admission as though
he had been a partner when such obligations were in-
curred except that his liability shall be satisfied only
out of partnership property.
(Note: This provision and Sec. 41 of the Act operates to
change or clear up existing law. By the common law (see Kar-
raker v. Eddleman, supra) if the firm of A and B owe creditors
X, and C is admitted, a new firm is formed and creditors Y of
that firm have priority over creditors X because creditors X
are not creditors of the new firm unless C assumed liability.
This meant that in cases of insolvency creditors X were with-
out remedy. The act lets in the old and new creditors on an
equal basis.)
§671. (Partnerships, Sec. 52.) Liability of outgoing
partner for debts created after his withdrawal.
Case 610. Austin v. Holland, 69 N. Y. 571.
Facts: Suit on a promissory note dated August 1,
1869, signed in the firm name of Dillon, Beebe & Co.
Holland is sought to be held as a member of such firm.
He denies that he was at that time a member of the firm.
Loveland received the note for services rendered by him
after Holland withdrew. A notice of dissolution was
INCOMING, OUTGOING, AND SECRET PARTNERS 1081
published in the Toledo papers where the firm carried
on business, and a copy was mailed to Holland at Detroit.
He testified he never received it.
Points Involved: Of the notice necessary to be given
by a retiring partner to safeguard against future in-
debtedness incurred by the other partner or partners;
of the distinction to be taken as to those who have dealt
with the firm and others; whether mailing a notice which
is never received by a customer is notice to him; whether
one who has been employed by the firm is entitled to the
notice required for customers.
Andrews, J.: "* * *
"The publication of notice of the dissolution of a part-
nership in a newspaper at the place where the business
was carried on is notice to all persons who had not had
prior dealings with the firm; and, if thereafter one of
the partners enters into a contract in the firm name
with a new customer or dealer, the other partners will
not be bound. The rule is different in respect to persons
who have dealt with the firm before the dissolution. The
rule in such cases in this state requires that, to relieve
a retiring partner from subsequent transactions in the
partnership name, notice of the dissolution must be
brought home to the person giving credit to the partner-
ship. If, in any way, by actual notice served, or by see-
ing the publication of the dissolution, or by information
derived from third persons, the party, at the time of the
dealing, is made aware of the fact that the partnership
has been dissolved, the contract will not bind the firm.
It is sufficient to exempt the firm from liability that the
person so contracting with a partner in the firm name
knew or had reason to believe that the partnership had
been dissolved, but this must appear and be found by
the jury, or else the contract will be treated as the con-
tract of the partnership: Ketcham v. Clark, 6 Johns.
(N. Y.) 144; 5 Am. Dec. 197; Graves v. Merry, 6 Cow.
(N. Y.) 701; 16 Am. Dec. 471; Vernon v. Manhattan Co.,
17 Wend. (N. Y.) 524; 22 Id. 183; Nat. Bk. v. Norton,
1082
PARTNERSHIPS
1 Hill (N. Y.) 572; Coddington v. Hunt, 6 Id. 595; Clapp
v. Rogers, 12 N. Y. 287; City Bank v. McChesney, 20 Id.
242; Bank of Commonwealtli v. Mudgett, 44 Id. 514; Van
Eps v. Dillage, 6 Barb. (N. Y.) 244; Mechanics' Bank v.
Livingston, 33 Id. 458. In Vernon v. The Manhattan Co.,
the chancellor says: 'But to exempt the copartners from
liability (on a contract with a previous dealer with the
firm), the jury must be satisfied that the person with
whom the new debt was contracted either had actual
notice that the copartnership was dissolved, or that facts
had actually' come to his knowledge sufficient to create
a belief that such was the fact.' The same rule is recog-
nized in the other cases cited, and by elementary writers:
3 Kent's Com. 607; Story on Part. sec. 161; Coll. on Part,
sec. 533; Lindley on Part. 337. Lindley says: 'Those
who have dealt with the firm before a change took place,
are entitled to assume, until they have notice to the con-
trary, that no change has occurred. * * * If notice,
in point of fact, can be established, it matters not by
what means for it has never been held that any particular
formality must be observed.' In this case, the jury have
found that the plaintiff did not receive the notice sent
by mail, and had no information of the dissolution of
the firm of Dillon, Beebe & Co. prior to the transaction
in question. The mailing of notice properly directed to
the party to be charged raises a presumption of notice
in fact, for it is presumed that letters sent by post to a
party, at his residence, are received by him in due course.
Best on Presumptions, Sec. 403. But this is a presump-
tion of fact, and not of law, and may be repelled by
proof; and, if the receipt of the letter in this case was
disproved, then the defendant failed to show the actual
notice required in order to exempt him from respon-
sibility, and the question whether the letter was received
was, we think upon the evidence, for the jury. The
learned counsel for the defendant has not referred as to
any case which decides that the mailing of a notice of
dissolution is in law equivalent to actual notice, and ex-
empts a retiring partner from liability to prior dealers
INCOMING, OUTGOING, AND SECRET PARTNERS 1083
on subsequent engagements in the firm name. Notice
by mail of the dishonor of commercial paper is in most
cases sufficient by the law merchant to charge an in-
dorser. It is a part of the contract that notice may be
given in this way, and it is not material in fixing the
liability of the indorser whether he receives it or not.
"But we think the rule requiring actual notice of the
dissolution of a partnership to prior dealers is a part of
the law of this state, and should not be departed from.
It may subject parties in some cases to inconvenience,
but the principle upon which the rule proceeds is that,
when one of two parties is to sustain injury from the
giving of credit, the one who originally induced it should
bear the loss, rather than the one who, without notice of
the change, relied upon the continued existence of the
partnership: Story on Part. Sec. 160; Wat. on Part. 384.
The judgment of the general term should be affirmed.''
Question 610: A, of the firm of A, B and C, retired there-
from. D is a customer. E has never dealt with the firm.
What notice must A give D in order to avoid the possibility of
being held on future debts 1 What notice must he give E ?
Suppose he mails a letter to E which E never gets; is this
notice ?
(Note: It has been held that in cases of dissolution of the
firm by bankruptcy of a member, death of a member, war,
notice by the other parties is unnecessary.)
§612. (Partnerships, Sec. 53.) Liability of secret
partners.
(The rule just noticed in the previous section does
not apply in case of secret partners, because parties
dealing with the firm after the withdrawal of the secret
partner do not extend credit to the secret partner. The
secret partner is liable for credit extended during his
existence in the firm.)
CHAPTER 74
REMEDIES OF CREDITORS
A. The Nature of the Partner's Liability to Third
Persons.
B. Remedies of Creditors.
A. The Nature of the Partner's Liability to Third
Persons.
§ 613. Partners are jointly liable for firm indebtedness.
§ 614. Partners liable in toto.
§ 613. (Partnerships, Sec. 54.) Partners are jointly
liable for firm indebtedness.
Case 611. Mason v. Eldred et al, 6 Wall. (U. S.) 231.
Field, J.: "* * *
"It is true that each copartner is bound for the entire
amount due on copartnership contracts; and that this
obligation is so far several that if he is sued alone, and
does not plead the non-joinder of his copartners, a re-
covery may be had against him for the whole amount
due upon the contract, and a joint judgment against the
copartners may be enforced against the property of each.
But this is a different thing from the liability which
arises from a joint and several contract. There the con-
tract contains distinct engagements, that of each con-
tractor individually, and that of all jointly, and different
remedies may be pursued upon each. The contractors
may be sued separately on their several engagements or
together on their joint undertaking. But in copartner-
ships there is no such several liability of the copartners.
The copartnerships £re formed for joint purposes. The
members undertake joint enterprises, they assume joint
1084
CREDITORS
1085
risks, and they incur in all cases joint liabilities. In all
copartnership transactions this common risk and liability
exist. Therefore it is that in suits upon these trans-
actions all the copartners must be brought in, except
when there is some ground of personal release from lia-
bility, as infancy or a discharge in bankruptcy; and if
not brought in, the omission may be pleaded in abate-
ment. The plea in abatement avers that the alleged
promises, upon which the action is brought were made
jointly with another and not with the defendant alone,
a plea which would be without meaning, if the copartner-
ship contract was the several contract of each co-
partner.''
Question 611: (1) A and B as partners become indebted
to C upon a partnership transaction. C sues A. What can A
do to abate the action? (Note: A plea in abatement is not a
defense to the merits. If decided against the plaintiff he may
amend and put the defendant to a defense upon the merits.)
(2) Assuming that C sued A and B and got judgment,
could A's property be taken in full satisfaction of the judgment?
(See following sections.) In that case could A require B to
contribute? (See following sections.)
(Note: It is a very common error to say that partners are
jointly and severally liable. They are jointly liable. In a
joint and several obligation the creditor may sue all or one.
But he must sue the partners jointly. Having his judgment he
may enforce it against the assets of the firm, or the individual
assets of any partner, for although the obligation is joint, the
liability of each to respond is entire (not several). It is from
the fact that any partner has an unlimited personal liability
that leads to the statement that liability is joint and several.
In certain states, statutes have made the liability joint and
several.
It is true that in tort cases a several liability exists, but this
is a general rule of torts.
The partnership act provides:
"See. 15. All partners are liable.
(a) Jointly and severally for everything chargeable to the
partnership under sections 13 and 14.
1086
PARTNERSHIPS
(b) Jointly for all other debts and obligations of the part-
nership, but any partner may enter into a separate obligation
to perform a partnership contract.
Sections 13 and 14 refer to cases of tortious character or
breach of trust.)
§ 614. (Partnerships, Sec. 55.) Partners liable in toto.
(Note: It is fundamental in partnership law that liability
of each partner is unlimited and that claims against the partner-
ship are collectible from his separate assets by way of execution,
that is if A, B and C, partners, owe X, $1,000, X getting a
judgment against A, B and C may have execution levied on A's
property to satisfy the judgment, whether B or C are insolvent
or not. In equity or bankruptcy the right of partnership credi-
tors to proceed against individual assets is hereafter stated.)
B. Remedies of Creditors.
(a) Where no Judicial Proceedings are in Progress to
distribute assets.
§ 615. Right of firm creditor against firm property.
§ 616. Right of firm creditor against individual property.
§ 617. Preference of creditors.
§ 618. Right of creditor of individual partner against firm assets.
(Note: The subject matter of the above sections is perhaps
better explained by a statement than by cases, although cases
follow this note as illustrations.
(a) Bight of firm creditor against firm property. A firm
creditor has no right against firm property unless he establishes
some lien upon it by contract, attachment, judgment, execution
or levy. If he gets a judgment against the partners he may levy
on their assets, which include, of course, the firm property. He
is not interested in the claims of other creditors, unless they
get prior or concurrent liens, or unless they put the firm in
bankruptcy (or other receivership). This is made clear by think-
ing of an individual indebtedness. Suppose John Smith has a
claim against Peter Jones in the sum of $1,000. Peter Jones
owns an automobile. Peter Jones also owes X, Y and Z various
amounts, they being general creditors, that is, having no security
or lien on this car, and no judgment. Smith obtaining judg-
CREDITORS
1087
ment may subject this car to the payment thereof. The other
claims are unestablished by judgment and when established may
theoretically be satisfied out of other assets, present or future.
X, Y and Z may put Jones into bankruptcy if he is insolvent
and has committed an act of bankruptcy, and thereby put all
the creditors, including Smith, before the court. But we are
not now assuming this to be done. Creditors of partners have
the same situation as creditors of individual so far as rights at
law are concerned.
(b) Bights of firm creditors against individual property.
A firm creditor of M, N and 0, partners, who gets a judgment
against M, N and 0 may take the joint assets of M, N and 0 or
the individual assets of M to satisfy his debt. If he is before
a court of equity or bankruptcy where all assets are marshalled
for distribution among all creditors, partnership and individual,
other rules prevail, but we are not now assuming that situation.
(c) Preference of creditors. A partnership may at law
prefer one creditor over another, and allow an individual
creditor to be preferred over partnership creditors. If bank-
ruptcy intervenes in apt time the preference may possibly be set
aside. And see, for preference of firm creditors over individual
creditors and vice versa in bankruptcy proceedings, the follow-
ing sections.
(d) Right of creditor of individual partner against firm
assets. A creditor of a member of a firm has no rights against
the firm assets, for such assets belong to the firm and not to the
individual. But he has a right against the member's interest
in the firm, which is what that member would get in case of
liquidation. Therefore if M, N and 0 own a stock of goods
worth $15,000, M's interest may actually be nil, for the firm
may owe $16,000. The individual creditor of M may reach this
interest whatever it is worth, and the Uniform Act provides for
a charging of this interest by the court and the appointment of
a receiver of his share of the profits. See Sec. 28 of the Act.
In all of the above discussion we are considering cases that
are not before a court of bankruptcy or other court of equity. In
that case all the assets and all the creditors are before the court
for purposes of equitable jurisdiction and other rules prevail.)
Case 612. Stout v. Baker, 32 Kan. 113.
Facts: Stout brings replevin against Baker, a sheriff,
to recover a buggy that Baker has seized under a judg-
1088
PARTNERSHIPS
ment against Stout and Wingert, copartners, and he
alleges that such buggy does not belong to Stout and
Wingert, but to him, Stout, personally.
Point Involved: Whether under a judgment against
partners, sued as partners, the individual property of
one of the partners may be taken to satisfy such judg-
ment.
Hurd, J.: "* * * We think an execution on.it
might be legally levied upon the partnership property
of both, or the individual property of either. * * * 
Question 612: State the facts, question presented and Court's
decision in this case.
Case 613. Newhall et al. v. Buckingham, 14 111. 405.
Facts: Newhall and Co. were creditors of Hoyt and
to enforce their debt sued out an attachment which was
levied upon the stock of goods of the firm of Hoyt and
Haskins. The sheriff took possession of the goods. Has-
kins shortly afterward made an assignment of the firm's
goods to Buckingham and Buckingham brings suit, con-
tending that the goods of the firm were wrongfully seized
for the individual debts of a member of the firm.
Point Involved: Whether a partner's interest in the
firm is subject to levy on execution; whether the sheriff
in selling such interest can take manual possession of
firm assets; whether he can seize some or must seize all
of the firm assets.
Treat, C. J.: "It was held in Bachurst v. Clinkard,
1 Shower, 173, that on an execution against one of two
partners, the sheriff might seize the partnership prop-
erty, and sell the share of him against whom the writ
issued. In Pope v. Haman, Comb. 217, Holt, C. J., said:
'Upon a judgment against one copartner, the sheriff may
take the goods of both in execution; and the other co-
partner hath no remedy at law, otherwise than by re-
taking the goods, if he can; for the vendee of the sheriff
becomes tenant in common with the other copartner.'
CREDITORS
1089
In Heydon v. Heydon, 1 Salk. 392, on an execution
against one partner, which had been levied on the part-
nership goods, the Court remarked: 'The sheriff must
seize all, because the moieties are undivided; for if he
seize but a moiety, and sell that, the other will have a
right to a moiety of that moiety; but he must seize the
whole, and sell a moiety thereof undivided, and the ven-
dee will be tenant in common with the other partner.'
In Parker v. Pistor, 3 B. & P. 288, an execution against
one partner was levied on the partnership goods, and
the partnership creditors moved the Court to give the
sheriff time to return the writ, until an account could be
taken of the claims against the firm; but the Court re-
fused the application on the ground, 'that it was a very
plain case at law, and that all the difficulties were to be
encountered in equity; that the safest line of conduct for
the sheriff to pursue was to put some person in posses-
sion of the defendant's share as vendee, leaving him and
the parties interested to contest the matter in equity.'
In the recent case of Johnson v. Evans, 7 M. & Gf. 240,
the Court uses this language: 'It is undoubtedly true,
that in order to make, and for the purpose of making,
the execution effectual against the share of the debtor
partner in the joint property, the sheriff must seize the
whole, the shares of fhe two partners being undivided.
Such seizure of the whole, it is obvious, arises from the
necessity of the case; just as if a man purchases an un-
divided moiety of a chattel that is indivisible, he cannot
in any way take possession of that moiety without taking
possession of the whole.'
"The English courts uniformly hold, that, on an execu-
tion against one partner, the sheriff may seize the part-
nership goods, and sell the share of the partner against
whom the process issued. As respects the property
taken, the partnership is dissolved, and the purchaser
becomes a tenant in common with the other partner. He,
however, acquires the share of the debtor partner sub-
ject to the right of the remaining partner, and through
him of the partnership creditors, to have the property
1090
PARTNERSHIPS
applied, so far as it may be necessary, to the payment
of the joint debts. But this right is an equitable one,
and cannot be enforced at law. The weight of authority
in the United States is decidedly the same way. * * *
"The cases of Morrison v. Blodgett, 8 N. H. 238, 29
Am. Dec. 653, and Deal v. Bogue, 20 Pa. St. 228, 57 Am.
Dec. 702, deny the right of the sheriff to seize the part-
nership goods on an execution against one partner. But
these cases are clearly against the current of the authori-
ties. They are innovations upon the well-established
legal rule; and are the result of attempts by courts of
law to administer a principle of equity. They virtually
prevent the individual creditors of a partner from sub-
jecting his share in partnership property to the payment
of their debts. What remedy have such creditors against
the share of their debtor in partnership goods, unless
the goods can be seized, and his interest in them sold on
execution? In order to sell that interest, the officer must,
for the time being, have the custody of the property.
A levy would be ineffectual, if the property is to remain
in the possession and subject to the control of another.
From the necessity of the case, the officer must be allowed
to reduce it into possession. The authority to sell a
chattel or any interest therein on execution, necessarily
includes the power to take possession thereof for the
purpose. There are, indeed, inconveniences growing out
of the seizure of partnership property for the individual
debts of a partner. They are, however, unavoidable.
They are incidents of this kind of title to property. They
must be borne, or separate creditors may be without any
effectual remedy for the collection of their debts. Their
debtor may have no individual estate, and still be entitled
to a large surplus in the joint estate after the affairs
of the partnership are adjusted. The same inconven-
iences may arise in the case of tenants in common of a
chattel; and yet the law is firmly settled, that on an exe-
cution against one of them, the sheriff may take exclusive
possession of the chattel in order to sell a moiety thereof.
Melville v. Brown, 15 Mass. 82; Reed v. Howard, 2 Mete.
CREDITORS
1091
36; Waddell v. Cook, 2 Hill, 47; Blevins v. Baker, 11
Iredell, 291. It is said in Douglass v. Winslow, supra,
'It may be inconvenient to other partners to have their
operations thus broken in upon, and partnerships vir-
tually dissolved; but it is a hazard to which they are
necessarily subjected, when they unite in business with
others incumbered with separate debts. Were the law
otherwise, a wide door would be open to delay and de-
fraud creditors. A man with funds to a very large
amount, half of which is due to others, has nothing to do
but to invest them in a partnership, and he may then
set his creditors at defiance, or oblige them to wait until
the partnership concerns are liquidated and closed by
the slow process of a court of chancery.' * * *
"In equity, a partner has the specific right to have
the partnership effects faithfully applied to the payment
of the partnership debts. The real interest of a partner
in the joint property, is a moiety of the surplus that
may remain after the joint debts are discharged. And
this interest is all that a purchaser acquires at a sale on
execution. He succeeds only to the rights of the debtor
partner. He takes the property burdened with the pay-
ment of the joint debts. The sheriff delivers the prop-
erty to the purchaser and the other partner as tenants
in common, subject to the incumbrance of a partnership
account. The account may be taken at the instance of
the purchaser or the other partner. Although there is
not a perfect agreement among the decided cases, the
better opinion seems to be, that a court of equity may
interfere by injunction to restrain a sale by the sheriff,
until the partnership account is taken, and the precise
interest of the debtor partner ascertained. 1 Story's Eq.
§678; Story on. Partnership, § 264; Place v. Sweetzer,
16 Ohio, 142; Cammack v. Johnson, 2 N. J. Eq. 163.
"This case is at law, and must therefore be decided
upon legal principles. Under our statute, whatever is
the subject matter of seizure and sale on execution, may
be taken in the proceeding by attachment, and held sub-
ject to sale on the judgment that may be recovered. The
1092
PARTNERSHIPS
sheriff had a clear right to seize the goods in question;
and he has equally the right to retain them until the suit
is determined. If it results in a judgment for attaching
creditors, he may sell the interest of Hoyt in the goods,
and deliver them to the purchaser and the assignee as
tenants in common, subject to the rights of the assignee
and of the creditors of the firm to have them applied, so
far as it may be necessary, to the satisfaction of the joint
debts. But these rights are to be asserted in equity.
A bill for the purpose may be filed by the purchaser, the
assignee, or any of the joint creditors.
"The circuit court erred in holding, that the assignee
was entitled to withdraw the goods from the custody of
the sheriff.
Question 613: (1) According to this case, if an individual
creditor has a judgment against one who is in partnership with
a third person, can the partnership property be seized under
execution ?
(2) Must all the partnership property be seized?
(3) What is sold under such seizure? How would such
interest be determined?
(b) When Equitable Proceedings are in Progress to
distribute assets.
§ 619. (Partnerships, Sec. 60.) Equitable rules for dis-
tribution of assets of insolvent partnership estate.
Case 614. Uniform Partnership Act, Sec. 40 (h) (i).
"When partnership property and the individual prop-
erties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on
partnership property, and separate creditors on individ-
ual property, saving the rights of lien or secured cred-
itors as heretofore.
"Where a partner has become bankrupt or his estate
is insolvent, the claims against his separate property;
shall rank in the following order:
"I. Those owing to separate creditors;
CREDITORS
1093
"II. Those owing to partnership creditors;
"III. Those owing to partners by way of contribu-
tion.
Case 615. National Bankruptcy Act (1898), Sec. 5 f.
"The'net proceeds of the partnership property shall
be appropriated to the payment of the partnership debts,
"and the net proceeds of the individual estate of each
partner to the payment of his individual debts. Should
any surplus remain of the property of any partner after
paying his individual debts, such surplus shall be added
to the partnership assets and be applied to the payment
of the partnership debts. Should any surplus of the
partnership property remain after paying the partner-
ship debts, such surplus shall be added to the assets of
the individual partners in the proportion of their re-
spective interests in the partnership.
Question 615: How are firm and individual assets marshalled
in bankruptcy for payment of firm and individual debts ?
Case 616. Rodgers v. Meranda, 7 Ohio St. 180.
Baetley, C. J.: "Two questions are presented for
determination in this case. 1. The first is, whether in
the distribution of the assets of insolvent partners, where
there are both individual and partnership assets, the in-
dividual creditors of a partner are entitled to be first
paid out of the individual effects, of their debtor, before
the partnership creditors are entitled to any distribution
therefrom. It is well settled that, in the distribution of
the assets of insolvent partners, the partnership cred-
itors are entitled to a priority in the partnership effects;
so that the partnership debts must be settled before any
division of the partnership funds can be made among
the individual creditors of the several partners. This is
incident to the nature of partnership property. It is a
right of a partner to have the partnership property ap-
plied to the purposes of the firm; and the separate in-
terest of each partner in the partnership property is his
1094
PARTNERSHIPS
share of the surplus after the payment of the partner-
ship debts. And this rule, which gives the partnership
creditors a preference in the partnership effects, would
seem to produce, in equity, a corresponding and correla-
tive rule, giving a preference to the individual creditors
of a partner in his separate property; so that partner-
ship creditors can, in equity, only look to the surplus of
the separate property of a partner, after the payment
of his individual debts; and, on the other hand, the in-
dividual creditors of a partner can, in like manner, only
claim distribution from the debtor's interest in the sur-
plus of the joint fund, after the satisfaction of the part-
nership creditors. The correctness of this rule, how-
ever, has been much controverted; and there has not
been always a perfect concurrence in the reasons as-
signed for it by those courts which have adhered to it.
By some, it has been said to be an arbitrary rule, estab-
lished from considerations of convenience; by others,
that it rests on the basis that a primary liability attaches
to the fund on which the credit was given—that in con-
tracts with a partnership, credit is given on the supposed
responsibility of the firm; while in contracts with a part-
ner as an individual, reliance is supposed to be placed
on his separate responsibility; 3 Kent Com. 65. And
again, others have assigned as a reason for the rule
that the joint estate is supposed to be benefited to the
extent of every credit which is given to the firm, and
that the separate estate is, in like manner presumed to
be enlarged by the debts contracted by the individual
partner; and there is consequently a clear equity in con-
fining the creditors, as to preferences, to each estate
respectively, which has been thus benefited by their
transactions; McCulloh v. Dashiell, 1 Harr. & Gill. (Md.)
96, 18 Am. Dec. 271. But these reasons are not entirely
satisfactory. So important a rule must have a better
foundation to stand upon than mere considerations of
convenience; and practically it is undeniable that those
who give credit to a partnership look to the individual
responsibility of the partners, as well as that of the firm;
CREDITORS
1095
and also, those who contract with a partner in his sep-
arate capacity, place reliance on his various resources
or means, whether individual or joint. And inasmuch
as individual debts are often contracted to raise means
which are put into the business of a partnership, and
also partnership effects often withdrawn from the firm
and appropriated to the separate use of the partners, it
cannot be practically true that the separate estate has
been benefited to the extent of every credit given to each
individual partner, nor that the joint estate has been
retained from the separate estate of each partner the
benefit of every credit given to the firm. Unsatisfactory
reasons may weaken confidence in a rule which is well
founded.
"What then is the true foundation of the rule which
gives the individual creditor a preference over the part-
nership creditor, in the distribution of the separate
estate of a partner? To say that it is a rule of general
equity, as has been sometimes said, is not a satisfactory
solution of the difficulty; for the very question is,
whether it be a rule of equity or not. In the distribution
of the assets of insolvents, equality is equity; and to say
that the rule which gives the individual creditor a prefer-
ence over the partnership creditor in the separate estate
of a partner is a rule of equality, does not still rid the
subject of difficulty. For leaving the rule to stand, which
gives the preference to the joint creditors in the partner-
ship property, and perfect equality between the joint and
individual creditors, is, perhaps, rarely attainable. That
it is, however, more equal and just as a general rule,
than any others which can be devised, consistently with
the preference to the partnership creditors in the joint
estate, cannot be successfully controverted. It orig-
mated as a consequence of the rule of priority of part-
nership creditors in the joint estate, and for the purposes
of justice became necessary as a correlative rule. With
what semblance of equity could one class of creditors,
in preference to the rest, be exclusively entitled to the
partnership fund, and, concurrently with the rest, en-
1096
PARTNERSHIPS
titled to the separate estate of each partner? The joint
creditors are no more meritorious than the separate cred-
itors; and it frequently happens, that the separate debts
are contracted to raise means to carry on the partner-
ship business. Independent of this rule, the joint cred-
itors have, as a general thing, a great advantage over
the separate creditors. Besides being exclusively en-
titled to the partnership fund, they take their distribu-
tive share in the surplus of the separate estate of each
of the several partners, after the payment of the sepa-
rate creditors of each. It is a rule of equity, that where
one creditor is in a situation to have two or more distinct
securities or funds to rely on, the Court will not allow
him, neglecting his other funds, to attach himself to one
of the funds, to the prejudice of those who have a claim
upon that, and no other to depend upon. And besides
the advantage which the joint creditors have, arising
from the fact that the partnership fund is usually much
the largest, as men in trade, in a great majority of cases,
embark their all, or the chief part of their property, in
it; and besides their distributive rights in the surplus of
the separate estate of the other partners, the joint cred-
itors have a degree of security for their debts and facili-
ties for recovering them, which the separate creditors
have not; they can sell both the joint and the separate
estate on an execution, while the separate creditor can
sell only the separate property and the interest in the
joint effects that may remain to the partners, after the
accounts of the debts and effects of the firm are taken
as between the firm and its creditors, and also as be-
tween the partners themselves. With all these advan-
tages in favor of partnership creditors, it would be gross-
ly inequitable to allow them to exclusive benefit of the
joint fund, and then a concurrent right with individual
creditors to an equal distribution in the separate estate
of each partner. What equality and justice is there in
allowing partnership creditors, who have been paid
eighty per cent, on their debts out of the joint fund, fp;1
come in pari passu with the individual creditors of one
CREDITORS
1097
of tlie partners, whose separate property will not pay
twenty per cent, to his separate creditors? How could
that be said to be an equal distribution of the assets of
insolvents among their creditors? It is true that an
occasional case may arise where the joint effects are
proportionably less than the separate assets of an in-
solvent partner. But, as a general thing, a very decided
advantage is given to the partnership creditors, not-
withstanding this preference of the individual creditors
in the separate property. And that advantage, arising
out of the nature of a partnership contract, is unavoid-
able. Some general rule is necessary; and that must
rest on the basis of the unalterable preference of the
partnership creditors in the joint effects, and their
further right to some claim in the separate property of
each of the several partners. The preference, therefore,
of the individual creditors of a partner in the distribu-
tion of his separate estate results as a principle of equity
from the preference of partnership creditors in the part-
nership funds, and their advantages in having different
funds to resort to, while the individual creditors have
but the one. * *
Question 616: Where the assets of the partnership and of
the partners are before the court of equity for distribution
among creditors, what according to this case are the rights of
firm creditors and of individual creditors ?
(Note: ThS rule of this case is the one adopted in the ma-
jofity of American states. In some, however, the rule is applied
that after the partnership assets have been exhausted by divi-
dends to the partnership creditors, the creditors may prove up
and participate with the individual creditors in the individual
assets.)
Case 617. Pahlman v. Graves, 2T6 111. 405.
Bkeese, J.: * #
"The general rule by which courts of equity are gov-
erned; in the administration of the assets of deceased
and insolvent partners, is, if there be partnership prop-
1098
PARTNERSHIPS
erty, and also separate property of a partner, the part-
nership debts are to be paid out of the proceeds of the
joint estate, and the individual debts are to be paid out
of the proceeds of the separate estate. The joint and
individual debts are to be kept distinct, and the assets
derived from the two estates are to be marshalled ac-
cordingly. The joint creditors have no claim on the fund
arising from the separate estate, until the individual
debts are satisfied, and on the other hand the separate
creditors can only seek payment out of the surplus of
the partnership effects, after the satisfaction of the joint
liabilities. Such is unquestionably the rule in equity
where there is a joint and separate estate to be dis-
tributed among joint and individual creditors. 1 Story
Eq. Jur. Sec. 675; 3 Kent's Com.-64; Story on Part.,
Sec. 363; Wilder v. Keeler, 3 Paige, 167; McCulloh v.
Dashiell, 1 Harris & Gill, 96.
"If, however, * * * there is no joint fund to
which the joint creditors can resort and no solvent part-
ner from whom payment can be enforced, they should be
allowed to participate equally, with the private creditors
in the estate of the deceased [or insolvent] partner.
Question 617: If there is no joint estate and no solvent
partner, what rights have the creditors, according to this case,
in equity, in the individual assets as against individual creditors ?
(See also next case.)
Case 618. Farmer's National Bank v. Ridge Avenue
Bank, 240 United States, 498.
Mr. Chief Justice White: "The essential facts
stated in the certificate of the court below are these:
The firm of William Gray & Sons and its three partners,
William J. Gray, Peter Gray and Alexander J. Gray
were adjudged bankrupts. The same person was ap-
pointed trustee of the four estates. It resulted from
charging separately against each estate the mere neces-
sary and unquestioned expense of administration that
there was nothing whatever in the estate either of the
partnership, of that of William J. Gray or of Peter Gray
CREDITORS
1099
^-indeed in the latter there was nothing to defray the
expenses of litigation. As to the estate of Alexander
J. Gray, after charging the expenses of administration
there remained $1,577.26. Creditors of the firm proved
their debts against it, the Ridge Avenue Bank of Phila-
delphia being among the number, while only one creditor,
the Farmers' & Mechanics' National Bank of Philadel-
phia, proved a debt against the individual estate of Alex-
ander J. Gray, that debt exceeding the total sum of the
estate. No creditor proved against the individual estate
of William J. Gray or that of Peter Gray. Under these
conditions, the dispute that arose was whether the estate
of Alexander J. Gray was to go wholly to the Farmers'
and Mechanics' National Bank, or was to be proportion-
ately applied to the individual and firm creditors because
of the absence of any firm estate for distribution. The
district court directed the fund to be distributed between
the Farmers' and Mechanics' National Bank, the credi-
tor of the individual estate, and the creditors of the firm
and the question of law which the court below propounds
to enable it to review this action of the District Court
is as follows:
 'When a partnership as such is insolvent and when
each individual member is also insolvent, and when the
only fund for distribution is produced by the individual
estate of one member, are the individual creditors of
such member entitled to priority in the distribution of
the fundi'
' [The court reviews the authorities and the Bank-
mptcy Act of 1898, and concludes that under that Act,
that 'the question propounded must be answered, yes.']
Question 618: What question was raised in this case? State
the facts to show the bearing of the question. How did the
Court answer? [In some of the states the rule would be other-
wise.]
Case 619. Case v. Beauregard, 99 U. S. 119.
Mr. Justice Strong: "* * * ,
"No doubt the effects of a partnership belong to it
as long* as it continues in existence, and not to the in-
1100
PARTNERSHIPS
dividuals who compose it. The right of each partner
extends only to a share of what may remain after the
payment of the debts of the firm and the settlement of
its accounts. Growing out of this right, or rather in-
eluded in it, is the right to have the partnership property
applied to the payment of the partnership debts in pref-
erence to those of any individual partner. This is an
equity the partners have as between themselves, and in
certain circumstances it inures to the benefit of the cred-
itors of the firm. The latter are said to have a privilege
or preference, sometimes loosely denominated a lien, to
have the debts due to them paid out of the assets of a
firm in course of liquidation, to the exclusion of the
creditors of its several members. Their equity, however,
is a derivative one. It is not held or enforceable in their
own right. It is practically a subrogation to the equity
of the individual partner, to be made effective only
through him. Hence, if he is not in a condition to enforce
it, the creditors of the firm cannot be. Rice v. Barnard,
20 Vt. 479, 50 Am. Dec. 54. Appeal of the York County
Bank, 32 Pa. St. 446. But so long as the equity of the
partner remains in him, so long as he retains an interest
in the firm assets, as a partner, a court of equity will
allow the creditors of the firm to avail themselves of
his equity, and enforce, through it, the application of
those assets primarily to payment of the debts due them,
when ever the property comes under its administration.
u* * * [The Court here states that certhin assign-
ments have been made, etc., whereby the partnership
assets, before, the filing of the suit, ceased to be such.]
"The effect of these transfers and act of fusion was
very clearly to convert the partnership property into
property held in severalty, or, at least, to terminate the
equity of any partner to require the application thereof
to the payment of the joint debts. Hence if, as we have
seen, the equity of the partnership creditors can be
worked out only through the equity of the partners, there
was no such equity of the partners, or any one of them,
as is now claimed, in 1869, when this bill was filed. No
CREDITORS
1101
one of the partners could then insist that the property
should be applied first to the satisfaction of the joint
debts, for his interest in the partnership and its assets
had ceased. * * * Unless therefore, the conveyances
of the partners in this case and the act of fusion were
fraudulent, the bank of which the complainant is receiver
has no claims upon the property now held by the New
Orleans and Carrollton Railroad Company, arising out
of the facts that it is a creditor of the partnership, and
was such a creditor when the property belonged to the
firm.
Question 619: In what way may the right of the partner-
ship creditor to subject the partnership assets to the payment of
his debt be lost?
Case 620. Ex parte Sillitoe, Glyn & Jameson's Re-
ports 382.
"The rule is that a partner in a firm, against which a
commission in bankruptcy issues, shall not prove in com-
petition with the creditors of the firm who are in fact
his own creditors; shall not take part of the funds to the
prejudice of those who are not only creditors of the firm,
but of himself.''
Question 620: The firm of M, N and 0 owes debts to A, B
and C and to 0, the debt to 0 being for money loaned. The
firm becomes bankrupt, 0 puts in his claim. Will the Court
allow it ? Why ?
PART V
DISSOLUTION OF PARTNERSHIPS
Chapter 75. Dissolution by Lapse of Time, Agreement
and Transfer of Partner's Interest.
Chapter 76. Death of Partner.
Chapter 77. Dissolution by Bankruptcy Proceedings
and by Judicial Decree.
CHAPTER 75
DISSOLUTION BY LAPSE OF TIME, AGREEMENT
AND TRANSFER OF PARTNER'S INTEREST
In general.
Dissolution by lapse of time.
Dissolution by mutual agreement.
Dissolution by transfer of partner's interest.
Liquidation upon dissolution for foregoing causes.
The accounting between the partners and distribution of assets.
§ 620. (Partnerships, Sec. 61.)
(Note : Partnerships may be dissolved:
1. By act of the parties:
(1) By lapse of time and accomplishment of object.
(2) By mutual agreement of the partners.
(3) By a transfer by a partner of his interest.
2. By act of law:
(1) Death of the partner.
(2) Bankruptcy of the partner.
3. By judicial decree:
(1) On account of internal dissensions.
(2) On account of partner's incapacity.
(3) On account of partner's misconduct.
(4) On account of financial failure of the enterprise.)
1102
§ 620.
§621.
§ 622.
§ 623.
§ 624.
§ 625.
Dissolution
§ 621. (Partnerships, Sec. 62.) Dissolution by lapse
of time or accomplishment of object.
Case 621. Howell v. Harvey, 5 Ark. 270.
Point Involved: Whether a party in a partnership at
will is entitled to withdraw without notice.
Lacy, J.: "In the present case the partnership was
to continue during the pleasure of the contracting par-
ties. It is therefore strictly a partnership at. will, and
subject to the rules that, govern such agreement. Chan-
cellor Kent says, that it is an established principle of
the law of partnership, that if it he without any definite
period, any party may withdraw at a minute's notice
when he pleases and dissolve the partnership. The exist-
ence of engagements with third persons will not prevent
the dissolution though their engagements will not be
affected by the act. He admits that cases may occur
where reasonable notice might be advantageous, but he
holds it not to be requisite, and he adds that a party
may, in a case free from fraud, choose an unreasonable
time for the dissolution. The exception he makes in a
case of fraud indicates to our minds that the rule is not
so unbending or universal, as it is laid down, unless the
limitation is intended to include those cases where the
renunciation is made in good faith and at a proper time.
As a general principle, contracts subsisting during pleas-
ure, are naturally and necessarily dissolvable by the mere
exercise of the will of either of the parties; and this is
the principle according to the civil law under ordinary
circumstances, and to such an extent is it carried that
a positive stipulation against the dissolution at the will
of either of the parties will be held utterly void, as in-
consistent with the true nature and intent of such rela,-
tion. In cases of equity, we think the true rule to be
this, that to enable one partner to dissolve at will the
partnership, two things must occur; first, the renuncia-
tion of the partnership must be in good faith, and sec-
1104
PARTNERSHIPS
ondly, it must not be made at an unreasonable time.
# * # >)
Question 621: Where a partnership may be dissolved at will,
what notice must either party desiring to withdraw give the
other ?
Case 622. Brown v. Leach, 178 New York Supplement,
322.
11 (1) A. B. Leach & Co. became joint adventurers with
the plaintiff in the enterprise, and A. B. Leach & Co.
could not exclude the plaintiff from the enterprise for
the purpose of securing the entire benefit of the profits to
itself. A joint adventure is subject to the same rules as
a technical partnership. Where the partnership has for
its object the completion of a specified piece of work, or
the effecting of a specified result, it will be presumed
that the parties intended the relation to continue until
the object has been accomplished. Until that time ar-
rives one partner cannot terminate the partnership and
continue the enterprise for his own benefit, nor can one
partner exclude the other without his consent. It may
be terminated at any time by consent, but the consent
must be mutual. Hardin v. Robinson, 178 App. Div. 724,
729, 162 N. Y. Supp. 631, affirmed 223 N. Y. 651, 119
N. E. 1047. When A. B. Leach notified the plaintiff that
he had elected to terminate the adventure, and that
either party was free to go on with the enterprise, plain-
tiff protested, and specifically and repeatedly notified
A. B. Leach that he could not use the incident of the
termination of the option to eliminate the plaintiff from
the situation and proceed with the matter for his sole
profit.
 Leach first attempted to put the plaintiff in default
by refusing to indorse the note for $100,000, and then
demanding that plaintiff advance the $100,000, then no-
tifying the plaintiff that he refused to exercise the
option, and significantly stating that either party could
continue the matter; then Levering, by representing that
Leach wras definitely out of tho matter, and that he must
DISSOLUTION
1105
•cake tip the matter with other parties, which was impos-
sible while the agreement with plaintiff was outstanding,
obtained from plaintiff a release therefrom. "We find
Levering, as soon as he could locate Leach, resuming ne-
gotiations. Not content to await Leach's return to the
city, Levering follows him to his golf club, on Sunday,
and exhibits to him the release that he has induced the
plaintiff to sign, and then resumes the enterprise, with
the understanding that Leach alone should receive the
profit.
!'•> ■■ (2) It is a well-settled rule that copartners and joint
adventurers owe the duty of utmost good faith to their
copartners and coadventurers, and that until the copart-
nership is terminated or joint adventure is abandoned a
copartner or joint adventurer cannot act for himself. If
he does, and thereby obtains for himself the benefits that
. otherwise would accrue to the partnership or joint ad-
venturers, he will be held liable in equity to account to
his copartner or coadventurers. May v. Hettrick Broth-
ers Co., 181 App. Div. 3, 13, 167 N. Y. Supp. 966; Stem
, v. Warren, 185 App. Div. 823, 831, 174 N. Y. Supp. 30.
1 'It is my opinion that A. B. Leach did not observe
that good faith with the plaintiff that the law requires
:of coadventurers, and that with full knowledge of the
conditions, and with the sole design of excluding the
plaintiff from participation in the profits of the enter-
prise, which the report of the engineer showed to be rea-
sonably certain, he ostensibly withdrew from the enter-
prise, knowing full well, not alone that without his as-
sistance the plaintiff could not carry out the contract of
June 27, 1917, but also that, in the limited time between
the notification of his withdrawal and the day when
large payments must be made upon the properties of the
Island Oil & Transportation Corporation, Levering
would be unable to arrange with others to finance the
corporation; that his refusal to go on with the enterprise
was for the purpose of eliminating plaintiff from par-
ticipation in the profits and securing them for himself.
1106
PAKT^EtfSHIPS
The defendants should be required to account to The
plaintiff for one-third of the profits of the transaction.
 Therefore the judgment and the findings inconsist-
ent with this opinion will be reversed, with costs to the
appellant, and an interlocutory judgment entered, re-
quiring the defendants to account for one-third of the net
profits received by them, or either or any of them, from
the transactions set forth in the complaint, and appoint-
ing a referee to take such account and to report to the
court at Special Term, with his opinion. Order contain-
ing findings and interlocutory judgment to be settled on
notice. All concur.
Question 622: Did this partnership exist for a specified,
period of time ? What was its object ? In what way did defend-
ant violate his duty to his partner?
§ 622. (Partnerships, Sec. 63.) Dissolution by mutual
agreement.
(Note: Obviously this is a method of dissolution.)
§ 623. (Partnerships, Sec. 64.) Dissolution by transfer
of partner's interest
(Note: It is said by the authorities that, a transfer by a
partner of his interest in the firm dissolves the partnership.
The Uniform Act provides: "A conveyance by a partner of
his interest in the partnership does not of itself dissolve the
partnership, nor, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the
partnership, to interfere in the management or the ad'ministria-
tion of the partnership interest or affairs, or to require any
information or account of partnership transactions, or to inspect
the partnership books; but it merely entitles the assignee do
receive in accordance with his contract the profits to which the
assigning party would otherwise be entitled. Sec, 27(1). .The
Commissioners on Uniformity explain this by stating that while
the authorities "on the whole state that mere assignment dis-
solves a partnership, "Many such assignments are mefifely hy
way of collateral security for a loan, the assigning paftne* in
nowise intending to end the partnership relation. If he ueg-
DISSOLUTION
1107
lects his personal relation the other partners may dissolve the
partnership under Sec. 31 of this Act. But the mere fact of
assignment without more should not be said in all cases to be an
act of dissolution.")
§624, 625. (Partnerships, Sees. 65, 66.) Liquidation
upon dissolution and distribution of assets.
Case 623. Uniform Partnership Act, Sec. 18 (a) (b)
(c) (d) (f).
"The rights and duties of the partners in relation to
the partnership shall be determined, subject to any
agreement between them, by the following rules:
"(a) Each partner shall be repaid his contribution,
whether by way of capital or advances to the partnership
property, and share equally in the profits and surplus
remaining after all liabilities, including those to part-
ners, are satisfied; and must contribute to losses, whether
of capital or otherwise, sustained by the partnership,
according to his share in the profits.
"(b) The partnership must indemnify every partner
ini respect to payments made and personal liabilities rea-
sonably incurred by him in the ordinary and proper con-
duct of its business, or for the preservation of its busi-
ness or property.
(c) A partner, who in the aid of the partnership
makes any payment or advance beyond the amount of
^capital which he agreed to contribute, shall be paid in-
terest from the date of the payment or advance.
"(d) A partner shall receive interest on the capital
contributed by him only from the date when repayment
should be made.
"(f) No partner is entitled to remuneration for act-
ing in the partnership business, except that a surviving
partner is entitled to reasonable compensation for his
services in winding up the partnership affairs.
Question 623: A partnership is formed composed of A, B,
and C, A contributing $10,000, B $5,000 and C his time and
skill. G is to get a salary of $300 a month. Each partner to
1108
PARTNERSHIPS
have y3 share of the profits. A loans the business $2,000. The
concern goes out of business with a capital loss of $5,000. That
is it has on hand, assets valued at $5,000. How shall the assets
be divided? Must any contribution be made by any partner?
Case 624. Uniform Partnership Act, Sec. 40.
"In settling accounts between the partners after dis-
solution, the following rules shall be observed, subject to
any agreement to the contrary:
"(a) The assets of the partnership are:
I. The partnership property;
II. The contributions of the partners necessary for
the payment of all liabilities specified in clause (b) oh
this paragraph.
(b) The liabilities of the partnership shall rank in
order of payment as follows:
I. Those owing to creditors other than partners.
II.' Those owing to partners other than for capital
and profits;
III. Those owing to partners in respect to capital;
IV. Those owing to partners in respect to profits.
(c) The assets shall be applied in the order of their
declaration in clause (a) of this paragraph to the satis-
faction of the liabilities.
(d) The partners shall contribute as provided by sec-
tion 18 (a) the amount necessary to satisfy the liabilities;
but if any, but not all, of the partners are insolvent, or,
not being subject to process, refuse to contribute, the.
other partners shall contribute their share of the liabil-
ities, and, in the relative proportions in which they share
the profits, the additional amount necessary to pay the
liabilities.
Case 625. Shea v. Donahue, 15 Lea (Tenn.) 160.
Facts: Suit for partnership accounting between Shea
and Donahue, partners under a written agreement for
one year '' as merchants in making, buying and selling
all kinds of tinware, stoves, pumps, etc. And it pro-
vided, "And to constitute a fund for the purpose
DISSOLUTION
1109
Timothy Shea has paid in as stock one thousand dollars,
which will constitute a common stock, to be used and
employed between us in buying goods, wares and mer-
chandise. John Donahue, being a practical workman and
having considerable experience in the above named busi-
ness, it is agreed that he will give the business his entire
personal attention and the benefit of his experience, to
place against the cash furnished by said Shea. We are
to bear the expenses and losses jointly and share the
profits equally. The capital stock is not to be withdrawn
by either party until the end of the term, but to be
employed as capital unless otherwise mutually agreed
between us in writing. The business was carried on
for about three years. On dissolution, Donahue claims
to be entitled to one-half of the capital advanced by Shea.
The chancellor decided that Donahue is entitled to no
part of the capital. He appeals.
Point Involved: Whether one who contributes his
time and skill is entitled on dissolution to a share in the
capital paid by the other partner.
Coopek, J.: "The contention of the defendant is, that
by the terms of the agreement he was entitled at the end
of one year to an equal share of the profits of the busi-
ness, and to one-half of the capital advanced by his part-
ner, and this, although it goes without saying he would
retain all his practical experience which was to be placed
against the cash furnished by his partner. But the agree-
ment is that the partners are only to 'share the profits
equally,' not the profits and the capital. And the profits
qf any business are only what remains after deducting
debts and expenses, and the capital paid in. Lindley on
Partn. 791, 806. The provision that the capital stock
shall constitute a common stock to be used in buying the
materials and wares of their trade, merely designates the
mode in which it is agreed that the capital shall be
invested. And the further provision that the capital
stock shall not be withdrawn by either party until the end
of the term, was only intended to restrain the partners
1110
PARTNERSHIPS
from drawing funds from the business so as to trench
upon the capital while the partnership continued. There
is nothing in the article of agreement to take the case
out of the ordinary one of a partnership in profit and loss
upon unequal capitals.
"Of course the articles of a partnership may expressly
provide for an equal division of the assets, upon a dis-
solution, notwithstanding an unequal advance of capital
by the respective partners. The same result may follow
a continuous course of dealing upon a basis which implies
such equal division. For if there is no evidence from
which any different conclusion as to what was agreed can
be drawn, the shares of all the partners will be adjudged
equal, upon the favorite maxim of chancery, that equality
is equity. But, as Mr. Lindley tells us, the rule is when
the partners have advanced unequal capitals, and have
agreed to share profits and losses equally, without more,
that each partner is entitled to his advance before divi-
sion, and a deficiency in the capital must be treated like
any other loss, and borne equally by the partners. Lind-
ley Partn. 807.
"The only authorities adduced by the learned counsel
of the defendant, in support of his contention in this
case, are to the effect that property brought into the part-
nership business by the members of the firm, or bought
with capital advanced, becomes partnership property,
and may be disposed of as such by one of the partners
under his general powers as a member of the firm. And
so it does beyond all question, for the very object of con-
tributing capital, either in property or money, is to
secure a partnership stock for the purpose of carrying on
the common business. But this fact has nothing to do
with the settlement between the partners of their ac-
counts at the end of the partnership. 'By the capital
of a partnership,' says Mr. Lindley, 'is meant the ag-
gregate of the sums contributed by its members for the
purpose of commencing or carrying on the partnership
business. The capital of a partnership is not therefore
the same as its property; the capital is a sum fixed by
DISSOLUTION
1111
the agreements of the partners, whilst the actual assets
of the firm vary from day to day, and include everything
belonging to the firm and having any money value.
Moreover, the capital of each partner is not necessarily
the amount due to him from the firm; for not only may
he owe the firm money, so that less than his capital is
■due to him, hut the firm may owe him money in addition
to his capital, e. g., for money loaned. The amount of
each partner's capital ought therefore always to be ac-
eurately stated, in order to avoid disputes upon a final
adjustment of accounts; and this is more important
where the capitals of the partners are unequal, for if
.there is no evidence as to the amounts contributed by
them, the shares of the whole assets will be treated as
equal. ' Lindley Partn. 610. [1 Ewell's Lindley, 2d Am.
Ed. 320.] The same author adds in another place:
'When it is said that the shares of partners are prima
facie equal, although their capitals are unequal, what is
meant is that the losses of capital, like other losses,
must be shared equally, but it is not meant that on a final
settlement of accounts capitals contributed unequally are
to be treated as an aggregate fund which ought to be
divided between the partners in equal shares.' Lindley,
Partn. 67. On the contrary, in his chapter devoted to
partnership accounts [2 Lindley, Partn. 2d Am. Ed. 402],
he expressly tells us that the assets of a partnership
should be applied as follows:
 '1. In paying the debts and liabilities of the firm
to non-partners.
 '2. In paying to each partner ratably what is due
from the firm to him for advances as distinguished from
capital.
 '3. In paying to each partner ratably what is due
from the firm to him in respect of capital.
 '4. The ultimate residue, if any, will then be divis-
ible as profit between the partners in equal shares, unless
the contrary can be shown.'
"In accordance with these principles, the following
decision has been made by the supreme court of New
1112
PARTNERSHIPS
York in a case cited in a note to page 610 of Lindley on
Partnership: 'Where by the terms of the agreement
the defendant furnished the capital stock, and the plain-
tiff contributed his skill and services, and the profits of
the copartnership were to be equally divided, the plain-
tiff is not entitled to any part of the capital stock on a
settlement of the affairs of the partnership. He has no
interest in any part of the capital excepting so far as in
the progress of the business the same may have been con-
verted into profits.' Conroy v. Campbell, 13 Jones &
Sp. 326. The case, it will be noticed, is exactly in point.
And to the same effect in principle are Whitcomb v. Con-
verse, 119 Mass. 38, 20 Am. Rep. 311, ante; Knight v.
Ogden, 2 Tenn. Ch. 473, and Shepherd, ex parte, 3 Tenn.
Ch. 189. No case has been found to the contrary.
"Chancellor's decree affirmed.
(Note: See Meechem's Elem. of Partn. §§ 305-308.)
Question 625: (1) If A contributes capital and B, skill and
time, is B entitled to any of the capital on dissolution ? "Why ?
(2) How are the assets of a partnership to be applied upon
a dissolution?
(Note : In Lindley on Partnership, 8th Ed., the author says:
"The only case that practically gives rise to difficulty is where
partners have advanced, or agreed to advance, unequal capitals,
and to share profits and losses equally.. If nothing more than
this is agreed, a deficiency of capital must be treated like any
other loss and the assets remaining after the payment of all debts
and advances must be distributed amongst the partners, or some
of them, as to put all on an equality. If in such case one partner
is insolvent and unable to contribute his share of the loss of
capital, the solvent partners are not bound to contribute for him,
but each partner is to be treated as liable to contribute an equal
share of such loss, and the assets are then to be applied in paying
to each partner ratably what is due to him in respect of cap-
ital.")
CHAPTER 76
DEATH OF PARTNER
§ 626. Effect of death of partner.
§ 627. Eights, titles and duties as between surviving partner and repre-
sentative of deceased partner.
§ 628. Devolution of title to firm real estate.
§ 629. Eights of creditors of firm against surviving partner and estate
of deceased partner.
§ 626. (Partnerships, Sec. 67.) Effect of death of
partner.
Case 626. Andrews v. Stinson, 254 111. 111.
Mr. Justice Carter: "* * *
"The principal point discussed in the briefs is whether
the two contracts executed by said executors and the
surviving partners, Hand and Stinson (in connection
with the authority granted in Andrews' will), constituted
a continuation of the old or the creation of a new part-
nership. The death of either partner is, ipso facto, from
the time of the death a dissolution of the partnership.
(Remick v. Emig, 42 111. 343; Nelson v. Hayner, 66 id.
487; Douthart v. Logan, 190 id. 243.) And this is the
general rule in other jurisdictions. (22 Am. & Eng. Ency.
of Law,—2d ed.—199, and cases cited ; 30 Cyc. 620, and
cases cited.) It is sometimes said that a stipulation in
the articles of partnership providiifg for its continua-
tion after the death of the partner is binding upon the
heirs or representatives of the deceased partner. Such
agreements may be binding upon the surviving partners
(22 Am. & Eng. Ency. of Law,—2d ed.—202), but it is
at the option of the representatives, and if they do not
consent, the death of the party puts an end to the part-
nership. (3 Kent's Com.—14th ed.—57, and note; Buck-
1113
1114
PARTNERSHIPS
ingham v. Morrison, 136 111. 437.) The surviving part-
ners, on the dissolution of the firm by the death of one
of the members, are charged with the duty of proceeding
at once to settle up the partnership estate. They be-
come trustees as to the deceased partner's interest, and
while there is a community of interest between them-
selves and the representatives of the deceased partner
in the adjustment of the partnership affairs, the part-
nership, for that purpose, only has a limited continuance.
(Nelson v. Hayner, supra; Douthart v. Logan, supra.)
If they continue business they do it at their own peril.
They have no lawful right to expend the money of the
firm in new enterprises, however necessary the expend-
iture may be to the conduct of the business. (Remick
v. Emig, supra.) While, a surviving partner in mercan-
tile business may make small purchases of material to
render the stock more salable, he has no power to make
large purchases intended to continue the business.
(Oliver v. Forrester, 96 111. 315.) The surviving part-
ners, under the law, are required to wind up and close
out the business, and, after paying the firm debts to
distribute the assets among the surviving partners and
the representatives of the deceased partner. 1 Woer-
ner's Am. Law of Administration (2d ed.), Sec. 124; 22
Am. & Eng. Ency of Law (2d ed.), 200; 30 Cyc. 636.
"Where there are provisions in the articles of agree-
ment or will for the continuance of the business after
the death of one of the partners, it is sometimes inaccu-
rately said that the death of the partner does not dissolve
the partnership. If the business is carried on after
death of the partner under such arrangement or by the
agreement of the heirs or personal representatives of
the deceased, there is, in effect and in law, a new part-
nership, of which the survivors and the executors or
heirs are the members, the new members becoming liable,
as the old, to the creditors of the firm. (22 Am. & Eng.
Ency. of Law,—2d ed.—201, and cases cited; 1 Woer-
ner's Am. Law of Administration,—2d ed.—Sec. 123;
Exchange Bank v. Tracy, 77 Mo. 594; McGrath v. Cowen,
DEATH OF PARTNER
1115
57 Ohio St. 385; Madison v. Farnham, 44 Minn. 95; Jones
& Cunningham's Pr.—2d ed.—82; Parsons on Partner-
ship,—3d ed.—*439. See also, 1 Bates on Partnership,
Sec. 52; Owens v. Maekall, 33 Md. 382.) A reference
to the authorities will disclose that while the above rule
of law is not followed in some jurisdictions, the weight
of authority, as well as sound reason, is in accord there-
with. Under this reasoning it must be held that the
agreements entered into by the executors and surviving
partners created a new partnership.
Question 626: "What was the principal point in this case?
What did the Court decide respecting it ? What effect does
death have on a partnership ? If the partnership articles pro-
vide that death shall not affect the firm, does this bind the ex-
ecutor or administrator? What is the duty of the surviving
partners? .
§627. (Partnerships, Sec. 68.) Rights, titles and duties
as between surviving partner, and representative of
deceased partner.
(See also Andrews v. Stinson.)
Case 627. Preston v. Fitch, 137 N. Y. 41.
Peckham, J.:  * * *
"It has been settled for many years that upon the
death of one partner the survivor becomes the legal
owner of the assets and has the exclusive right to sell
and dispose of them for the purpose of winding up the
partnership affairs, and the survivor does not take such
assets in the character of a trustee, but as survivor
holding the legal title. This was decided lately in the
case of Williams v. Whedon (109 N. Y. 333), and it has
been the acknowledged law for a long number of years.
But although the surviving partner thus takes the legal
title to the partnership assets, it is yet plain that they
come to him impressed with a certain kind of a trust
founded upon his duty to dispose of or realize upon such
assets and therefrom to pay the debts of the late firm
1116
PARTNERSHIPS
and to pay over the share of any balance that may then
remain and which may belong to the estate of such de-
ceased partner. In occupying this position it has been
said by some judges that the surviving partner is not a
trustee for the representatives of the estate of the de-
ceased partner and does not bear any fiduciary relations
to them. This, however, is more a question of exact
accuracy of expression than of difference of opinion as
to the real duties which a surviving partner owes to the
representatives of the estate of the deceased partner.
"It is admitted by all that certain rights are conferred
upon the representatives of the estate of a deceased
partner as against the survivor, and among them is a
right to call him to account with reference to his conduct
or administration of the assets of the late firm; also a
right to compel their application to .the payment of the
debts of the firm, and to summon him to an accounting
and to the payment to them of any balance that may be
due the estate.
"Lord Westbury in Knox v. Grye {supra), while say-
ing that the surviving partner was not a trustee within
the strict acceptation of that term, yet admitted that he
might be called a trustee so far as his obligations ex-
tended to the representatives of the estate of his de-
ceased partner, but that when these obligations had been
fulfilled, or discharged, or terminated by law, the sup-
posed trust was at an end. These obligations consist in
part at least in the gathering together of the assets of
the late firm, realizing upon them, paying the debts of
the firm, and, if there be a balance remaining, paying
the share due the estate of the deceased partner to the
representatives thereof. These are duties, all of which
the representatives of the estate of the deceased partner
have a plain interest in seeing performed, and while
Lord Westbury, in above-cited case from the House of
Lords, said the relations were not fiduciary, and Lord
Chancellor Hatherly (page 678) thought they were, there
DEATH OF PARTNER
1117
was no difference in the opinion that the survivor owed
these duties above spoken of.
Question 627: Upon the death of one partner who gets title
to the assets, of the firm ? What right has the personal represent-
ative of the deceased partner?
§ 628. (Partnerships, Sec. 69.) Devolution of partner-
ship real estate on death of partner.
Case 628. Darrow v. Calkins, 154 N. Y. 503.
Point Involved: To what extent real estate owned by
the partners as partners will on the death of the part-
ner be converted into personalty for the settlement of
the firm affairs. The doctrines of total and partial con-
version of partnership real estate.
Andrews, C. J.: "* * *
"The legal nature and incidents of land purchased by
a copartnership with copartnership funds is a subject
upon which great diversity of opinion exists in different
jurisdictions. The English rule, after many fluctuations,
has, as we understand the cases, come to be that lands
so purchased, whether purchased for or used for partner-
ship purposes or not, provided only that they were in-
tended by the partners to constitute a part of the part-
nership property, because ipso facto, in the view of a
court of equity, converted into personalty for all pur-
poses, as well for the purpose of the adjustment of the
partnership debts and the claims of the partners inter se
as for the purpose of determining the succession as be-
tween the personal representatives of a deceased part-
ner and the heir at law. Darby v. Darby, 3 Drew, 459;
Essex v. Essex, 20 Beav. 442; Lindl. Partn. (3rd Ed.) 61
et seq. This doctrine had its origin in England and is
said to have grown out of the peculiar law of inheritance
there, and to remedy the hardship of the rule which
excludes all but the eldest child from the inheritance, and
of the other rule which exempts real estate in the hands
of the heir from all but the specialty debts of the ancestor.
1118
PARTNERSHIPS
Fairchild v. Fairchild, 64 N. Y. 471; Shearer v. Shearer,
98 Mass. 114. * * * The general doctrine of 'out
and out' conversion adopted by the English courts has
not been followed to its full extent in this and many
other American states. There is no policy growing out
of our laws of inheritance or the exemption of lands from
liability for simple contract debts, which requires the
application of such a doctrine here. The lands of the
ancestor are assets for the payments of all debts, and the
persons who take by descent and under the statute of
distribution are substantially the same. The necessity
for an absolute conversion, supposed to be found in the
nature of a partnership interest, seems hardly sufficient
to justify a fiction which should deprive real estate of a
partnership of its descendible quality, when it is admitted
on all hands that partnership real estate, if the necessity
arises, is first subject to be appropriated in equity to the
discharge of partnership obligations and the adjustment
of the equities between the parties.
"The clear current of the American decision supports
the rule that, in the absence of any agreement, express or
implied, between the partners to the contrary, partner-
ship real estate retains its character as realty with all
the incidents that species of property possesses between
the partners themselves, and also between a surviving
partner and the real and personal representatives of a
deceased partner, except that each share is impressed
with a trust implied by law in favor of the other partner
that, so far as is necessary, it shall be first applied to the
adjustment of the partnership obligations and the pay-
ment of any balance found to be due from the one partner
to the other on winding up the partnership affairs. To
the extent necessary for these purposes the character of
the property is, in equity, deemed to be changed into
personalty. On the death of either partner, where the
title is vested in both, the share of the land standing in
the name of the deceased partner descends as real estate
to his heirs, subject to the equity of the surviving partner
to have it appropriated to accomplish the trust to which
DEATH OF PARTNER
1119
it was primarily subjected. The working out of the
mutual rights which grew out of the partnership relation
does not seem to require that the character of the prop-
erty should be changed until the occasion arises for a
conversion, and then only to the extent required. The
American rule commends itself for its simplicity. It
makes the legal title subservient in equity to the original
trust. It disturbs it no further than is necessary for this
purpose. The portion of the land not required for part-
nership equities retains its character as realty,, and it
leaves the laws of inheritance and descent to their
ordinary operation. It would be useless to review in
detail the authorities which seem to us to maintain what
has been called the ' American Rule.' We refer to a very
few of them. Buchanan v. Sumner, 2 Barb. Ch, 167;
Collumb v. Read, 24 N. Y. 505; Fairchild v. Fairchild,
supra; Shearer v. Shearer, supra; Shanks v. Klein, 104
U. S. 18. If, as sometimes happens, the title to part-
nership real estate is in the name of one of the partners
only, on the death of the other partner, his equitable title
descends to his heirs or goes to his devisees but subject
to the primary claims growing out of the partnership
relation. Fairchild v. Fairchild, supra; T. Pars. Partn.
No. 272. But the general principles to which we have
adverted are those applied in courts of equity in deter-
mining the character and incidents of partnership real
estate, in the absence of any agreement, express or
implied, between the partners on the subject.
§629. (Partnership, Sec. 70.) Rights of creditors of
firm as against surviving partner and estate of de-
ceased partner.
Case 629. Henry v. Caruthers, 196 111. 136.
Mr. Jijstice Boggs :  * * * At the common law a
demand against a co-partnership was regarded as a joint
debt, and after the death of one of the co-partners the
right of action at law was against the surviving partner
or partners. Equity, however, afforded a remedy against
1120
PARTNERSHIPS
the estate of the deceased partner in the event of the
insolvency of the surviving partner or partners. The
common law rule was subsequently modified, and the rule
established in equity that all partnership debts should be
deemed joint and several, and that a right of action ex-
isted at law against the surviving partners, and an elec-
tion also to proceed in equity against the estate of the
deceased partner, whether the survivors be insolvent or
not. Mason v. Tiffany, 45 111. 392; Doggett v. Dill, 108
id. 560.
(Note: It is the rule in most jurisdictions that the partner-
ship creditors cannot share with the individual creditors of the
deceased partner in the division of his estate, until the individual
creditors are satisfied, unless there is no living solvent partner
and no joint estate.)
CHAPTER 77
DISSOLUTION BY BANKRUPTCY AND COURT
DECREE
§ 630. Dissolution by bankruptcy. §§ 631-634. Dissolution by court decree.
§630. (Partnerships, Sec. 71.) Dissolution by
bankruptcy.
(Note: Bankruptcy dissolves the firm. The rights of credi-
tors has been treated supra.)
§ §631-634. (Partnerships, Sec. 72-75.) Dissolution by
court decree upon application of partner against the
other.
Case 630. New v. Wright, 44 Miss. 202.
Facts: Bill by a partner to dissolve a partnership
formed for a stated term of five years, on account of mis-
conduct of partner.
Point Involved: Will a court at the suit of one part-
ner decree a dissolution of the firm where it is shown
that the other partner is guilty of misconduct of a serious
character appertaining to partnership affairs.
Peyton, C. J.: 11 * * * The remaining question
for our decision is, did the Court err in overruling the
motion for the appointment of a receiver? 'It must be
admitted,' said the master of the rolls in Madgwith v.
Wimble, 6 Beavan, 495,' that when an application is made
for a receiver in partnership cases, the Court is always
placed in a position of very great difficulty. On the one
hand, if it grants the motion, the effect of it is to put an
end to the partnership, which one of the parties claims a
right to have continued; and on the other hand, if it
1121
1122
PARTNERSHIPS
refuses the motion, it leaves the defendant at liberty to
go on with the partnership, at the risk and probably at
the great loss and prejudice of the dissenting party.
Between these difficulties, it is not very easy to select
the course which is best to be taken, but the Court is
under the necessity of adopting some mode of proceeding
to protect, according to the best view it can take of the
matter, the interests of both parties.'
"In order to justify the dissolution of a partnership,
on the ground of misconduct, abuse, or ill-faith of one of
the parties, it is not sufficient to show that there is a
temptation to such misconduct, abuse, or ill-faith, but
there must be an unequivocal demonstration, by overt
acts or gross departures from duty, that the danger is
imminent, or the injury already accomplished: Story on
Partnership, 464, § 288. Where a concern of any char-
acter or kind, covering a partnership, is broken up by
controversial suits, and it is apparent that there can be
no agreement between the parties in interest for its con-
tinuance, a receiver will be appointed: Williams v. Wil-
son, 4 Sandf. (N. Y.) Chan. 379; Edwards on Receivers,
330. And a dissolution of a partnership may be granted
and a receiver appointed on account of the gross mis-
conduct of one or more of the parties: 1 Story's Eq. 635,
§ 672a. To authorize the appointment of a receiver there
must be some breach of the duty of a partner, or of the
contract of partnership: Harding v. Glover, 18 Yes.
281.
Question 630: Why was dissolution and a receiver asked for
in this case ? When will misconduct of a partner justify dissolu-
tion notwithstanding the term has not expired ?
(Note: A partnership may be dissolved for misconduct, for
financial failure with no relief in sight, and for inability of the
partners to work in reasonable harmony.)
PART VI
CHAPTER 78
LIMITED PARTNERSHIPS
§ 635. Definition.
§ 636. The Limited Partnership Act.
*
§ 635. Definition.
(Note: The definition of a limited partnership is that of a
partnership formed under a law compliance with which entitles
some (or perhaps all) of the partners to have a limited liability,
that is, a liability limited by the amount of their subscriptions,
both as to the partnership and its creditors. )
§636. (Partnerships, Sec. 77.) The Limited Partner
ship Act.
(Note: The Uniform Partnership Act has as yet not been
widely adopted, but inasmuch as most states recognize the prin-
ciple of the limited partnership, the statute will undoubtedly
have a wider recognition.
The cases under the various limited partnership acts, con-
struing local statutes, would hardly be worth consideration here.
There are practically no cases under the Uniform Act.
See the act set out in the Appendix to this Subdivision just
following the Uniform Partnership Act.
1123
APPENDIX TO DIVISION F
1. UNIFORM PARTNERSHIP ACT
(In force in the following states: Alaska, Idaho, Illinois, Maryland,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Pennsylvania,
Tennessee, Utah, Virginia, Wisconsin, Wyoming.)
PART I.
Preliminary Provisions.
Sec. 1. (Name of Act.) This Act may be cited as Uniform Partner-
ship Act.
Sec. 2. Definition of terms. In this Act "court includes every court
and judge having jurisdiction in the case.
'' Business'' includes every trade, occupation or profession.
"Person includes individuals, partnerships, corporations, and other
associations.
"Bankrupt includes bankrupt under the Federal Bankruptcy Act or
insolvent under any State insolvent Act.
"Conveyance every assignment, lease, mortgage, or encumbrance.
'' Eeal property'' includes land and any interest or estate in land..
Sec. 3. "Knowledge and "notice of facts. (1) A person'has
"knowledge of a fact with the meaning of this Act not only when he
has actual knowledge thereof, but also when he has knowledge of such
other facts as in the circumstances shows bad faith.
(2) A person has "notice of a fact within the meaning of this Act
when the person who claims the benefit of the notice.
(a) States the fact to such person, or
(b) Delivers through the mail, or by other means of communication, a
written statement of the fact to such person or to a proper person at
his place of business or residence.
Sec. 4. Rules of construction. The rule that statutes in derogation of
the common law are to be strictly construed shall have no application to
this Act.
(2) The law of estoppel shall apply under this Act.
(3) The law of agency shall apply under this Act.
(4) This Act shall be so interpreted and construed as to effect its
general purpose to make uniform the law of those states which enact it.
(5) This Act shall not be construed so as to impair the obligations of
any contract existing when the Act goes into effect, nor to affect any action
or proceedings begun or right accrued before this Act takes effect.
1124
UNIFORM PARTNERSHIP ACT 1125
See. 5. Application of rules of law and equity. In any case not pro-
vided for in this Act the rules of law and equity, including the law merchant,
shall govern.
PART II.
Nature of A Partnership.
•
Sec. 6. Partnership defined. (1) A partnership is an association of
two or more persons to carry on as co-owners a business for profit.
(2) But any association formed under any other statute of this State,
or any statute adopted by authority, other than the authority of this
State, is not a partnership under this Act, unless such association would
have been a partnership in this State prior to the adoption of this Act;
but this Act shall apply to limited partnership except in so far as the
statutes relating to such partnership are inconsistent herewith.
Sec. 7. Determination of existence of partnership. In determining
whether a partnership exists, these rules shall apply:
(1) Except as provided by section 16, persons who are not partners
as to each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint
property, common property, or part ownership does not of itself establish
a partnership, whether sueh co-owners do or do not share any profits made
by the use of the property.
(3) The sharing of gross returns does not of itself establish a partner-
ship, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived.
(4) The receipt by a person of a share of the profits of a business is
prima facie evidence that he is a partner in the "business, but no such in-
ference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner ;
(d) As interest on a loan, though the amount of payment vary with
the profits of the business;
(e) As the consideration for the sale of the good-will of a business or
other property by installments or otherwise.
Sec. 8. Partnership property. (1) All property originally brought
into the partnership stock or subsequently acquired, by purchase or other-
wise, on account of the partnership is partnership property.
(2) Unless the contrary intention appears, property acquired with
partnership funds is partnership property.
(3) Any estate in real property may be acquired in the partnership
name. Title so acquired can be conveyed only in the partnership name.
(4) A conveyance to a partnership in the partnership name, though
without words of inheritance, passes the entire estate of the grantor unless
a contrary intent appears.
1126
PARTNERSHIPS
PART III
Relations of Partners to Persons Dealing with the Partnership.
Sec. 9. Partner agent of partnership as to partnership business. (1)
Every partner is an agent of the partnership for the purpose of its busi-
ness, and the act of every partner, including the execution in the part-
nership name of any instrument, for apparently carrying on in the usual
way the business of the partnership of w"hich he is a member binds the
partnership, unless the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no such authority.
(2) An act of a partner which is not apparently for the carrying on
of the business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
(3) Unless authorized by the other partners or unless they have aban-
doned the business, one or more but less than all the partners have no
authority to:
(a) Assign the partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership;
(b) Dispose of the good-will of the business;
(c) Do any other act which would make it impossible to carry on the
ordinary business of the partnership;
(d) Confess a judgment;
(e) Submit a partnership claim or liability to arbitration or reference.
Sec. 10. Conveyance of real estate. (1) Where title to real prop-
erty is in the partnership name, any partner may convey title to such
property by a conveyance executed in the partnership name; but the
partnership may recover' such property unless the partner's act binds
the partnership under the provisions of paragraph (1) of section 9, or un-
less such property has been conveyed by the grantee or a person claiming
through such grantee to a holder for value without knowledge that the
partner, in making the conveyance, has exceeded his authority.
(2) Where title to real property is in the name of the partnership, a
conveyance executed by a partner, in his own name, passes the equitable
interest of the partnership, provided the act is one within the authority
of the partner under the provisions of paragraph (1) of section 9.
(3) Where title to real property is in the name of one or more but
not all the partners, and the record does not disclose the right of the
partnership, the partners in whose name the title stands may convey title
to such property, but the partnership may recover such property if the
partners' act does not bind the partnership under the provisions of
paragraph (1) of section 9, unless the purchaser or his assignee, is a
holder for value, without knowledge.
(4) Where the title to real property is in the name of one or more or
all the partners, or in a third person in trust for the partnership, a con-
veyance executed by a partner in the partnership name, or in his. own
name, passes the equitable interest of the partnership, provided the act
is one within the authority of the partner under the provisions of para-
graph (1) of section 9.
UNIFORM PARTNERSHIP ACT 1127
>' (5) Where the title to real property is in the names of all the partners
a conveyance executed by all the partners passes all their rights in such
property.
SeC. 11. Admissions of partner. An admission or representation made
by any partner concerning partnership affairs within the scope of his
authority as conferred by this Act, is evidence against the partnership.
Sec. 12. Notice to partner as notice to partnership—Fraud. Notice
to any partner of any matter relating to partnership affairs, and the
knowledge of the partner acting in the particular matter, acquired while
a partner or then present to his mind, the knowledge of any other partner
who reasonably could and should have communicated it to the acting
partner, operate as notice to or knowledge of the partnership, except in
the ease of a fraud on the partnership committed by or with the consent
of that partner.
, Sec. 13. Liability of partnership for acts of partners. Where, by
any wrongful act or omission of any partner acting in the ordinary course
of the business of the partnership, or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partner-
ship, or any penalty is incurred, the partnership is liable therefor to the
same extent as the partner so acting or omitting to act.
Sec. 14. Property of third person misapplied—Liability of partnership.
The partnership is bound to make good the loss:
(a) Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and
■'.(h) Where the partnership in the course of its business receives money
Or property of a third person and the money or property so received is mis-
applied by any partner while it is in the custody of the partnership.
Sec. 15. Joint and several liability of partners. All partners are
liable
(a) Jointly and severally for everything chargeable to the partnership
under sections 13 and 14.
' (b) Jointly for all other debts and obligations of the partnership; but
any partner may enter into a separate obligation to perform a partnership
contract.
Sec. 16. Representation of existence of partnership—Liability. (1)
When a person, by words spoken or written or by conduct, represents him-
self, or consents to another representing him to any one, as a partner in
an existing. partnership or with one or more persons not actual partners,
he is liable to any such person to whom such representation has been made,
who has, on the faith of such representation, given credit to the actual or
apparent partnership, and if he has made such representation or consented
to its being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person
so giving credit by or with the knowledge of the apparent partner making
the representation or consenting to its being made.
(a) When a partnership liability results, he is liable as though he were
an actual member of the partnership.
(b) When no partnership liability results, he is liable jointly with the
other persons, if any, so consenting to the contract or representation as to
incur liability, otherwise separately.
1128
PARTNERSHIPS
(2) When a person has been thus represented to be a partner in an
existing partnership, or with one or more persons not actual partners, he
is an agent of the persons consenting to such representation to bind them
to the same extent and in the same manner as though he were a partner
in fact, with respect to persons who rely upon the representation. Where
all the members of the existing partnership consent to the representation,
a partnership act or obligation results; but in all other cases it is the joint
act or obligation of the person acting and the persons consenting to the
representation.
Sec. 17. Admission of partner—Liability for obligations incurred before
admission. A person admitted as a partner into an existing partnership
is liable for all the obligations of the partnership arising before his
admission as though he had been a partner when such obligations were
incurred, except that this liability shall be satisfied only out of partnership
property.
Sec. 18. Eights and duties of partners in relation to partnership—Eules.
The rights and duties of the partners in relation to the partnership shall be
determined, subject to any agreement between them, by the following rules:
(a) Each partner shall be repaid his contribution, whether by way of
capital or advances to the partnership property and share equally in the
profits and surplus remaining after all liabilities, including those to
partners, are satisfied; and must contribute towards the losses, whether
of capital or otherwise, sustained by the partnership according to his share
in the profits.
(b) The partnership must indemnify every partner in respect of pay-
ments made and personal liabilities reasonably incurred by him in the
ordinary and proper conduct of its business, or for the preservation of its
business or property.
(c) A partner, who in aid of the partnership makes any payment or
advance beyond the amount of capital which he agreed to contribute,
shall be paid interest from the date of the payment or advance.
(d) A partner shall receive interest on the capital contributed by him
only from the date when repayment should be made.
(e) All partners have equal rights in the management and conduct of
the partnership business.
(f) No partner is entitled to remuneration for acting in the partner-
ship business, except that a surviving partner is entitled to reasonable com-
pensation for his services in winding up the partnership affairs,
. (g) No person can become a member of a partnership without the
consent of all the partners.
(h) Any difference arising as to ordinary matters connected with the
partnership business may be decided by a majority of the partners; but
no act in contravention of any agreement between the partners may be
done rightfully without the consent of all the partners.
Sec. 19. Partnership books—Place of keeping—Inspection. The part-
nership books shall be kept, subject to any agreement between the partners,
at the principal place of business of the partnership, and every partner
shall at all times have access to and may inspect and copy any of them.
Sec. 20. Information to legal representatives of partners—Furnishing.
Partners shall render on demand true and full information of all things
UNIFORM PARTNERSHIP ACT 1129
affecting the partnership to any partner or the legal representative of any
deceased partner or partners under legal disability.
Sec. 21. Profits of partners—Duty to account. (1) Every partner
must accQunt to the partnership for any benefit, and hold as trustee for
it any profits derived by him without the consent of the other partners
from any transaction connected with the formation, conduct, or liquidation
of the partnership or from any use by him of its property.
(2) This section applies also to the representatives of a deceased partner
engaged in the liquidation of the affairs of the partnership as the personal
representatives of the last surviving partner.
.Sec. 22. Partner's right to formal account. Any partner shall have
the right to a formal account as to partnership affairs:
(a) If he is wrongfully excluded from the partnership business or pos-
session of its property by his co-partners,
(b) If the right exists under the terms of any agreement,
(c) As provided by section 21,
(d) Whenever other circumstances render it just and reasonable.
Sec. 23. Continuation of partnership after expiration of time limit.
(1) When a partnership for a fixed term or particular undertaking is
continued after the termination of such terms or particular undertaking
without any express agreement, the rights and duties of the partners re-
main the same as they were at such termination, so far as is consistent
with a partnership at will.
(2) A continuation of the business by the partners or such of them as
habitually acted therein during the term, without any settlement or liquida-
tion of the partnership affairs, is prima facie evidence of a continuation
of the partnership.
PART V
Property Rights of A Partner..
Sec. 24. What are property rights of partners. The property rights of
a partner are (1) his rights in specific partnership property, (2) his in-
terest in the partnership, and (3) his right to participate in the manage-
ment.
Sec. 25. Partner as co-owner of partnership property—Incidents of
tenancy. (1) A partner is co-owner with his partners of specific part-
nership property holding as a tenant in partnership.
(2) The incidents of this tenancy are such that;
(a) A partner, subject to the provisions of this Act and to any agree-
ment between the partners, has an equal right with his partners to possess
specific partnership property for partnership purposes; but he has no right
to possess such property for any other purpose without the consent of his
partners.
(b) Aqpartner's right in specific partnership property is not assignable
except in connection with the assignment of the rights of all the partners
in the same property.
(c) A partner's right in specific partnership property is not subject
to attachment or execution, except on a claim against the partnership.
1130
PARTNERSHIPS
When partnership property is attached for a partnership debt the partners,
or any of them, or the representatives of a deceased partner, cannot claim
any right under the homestead or exemption laws.
(d) On the death of a partner his right in specific partnership prop-
erty vests in the surviving partner or partners, except where the deceased
was the last surviving partner, when his right in such property vests in
his legal representative. Such surviving partner or partners, or the legal
representative of the last surviving partner, has no right to possess the
partnership property.
(e) A partner's right in specific partnership property is not subject to
dower, courtesy, or allowances to widows, heirs, or next of kin.
Sec. 26. Interest of partner—Personal property. A partner's interest
in the partnership is his share of the profits and surplus, and the same is
personal property.
Sec. 27. Effect of conveyance of partner's interest. (1) A convey-
ance by a partner of his interest in the partnership does not of itself dis-
solve the partnership, nor, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the partnership,
to interfere in the management or administration of the partnership busi-
ness or affairs, or to require any information or account of partnership
transactions, or to inspect the partnership books; but it merely entitles
the assignee to receive in accordance with his contract the profits to which
the assigning partner would otherwise be entitled.
(2) In case of a dissolution of the partnership, the assignee is entitled
to receive his assignor's interest and may require an account from the date
only of the last account agreed to by all the partners.
Sec. 28. Judgments—Charging interest of partners—Eeceiver. (1) On
due application to a competent court by any judgment creditor of a
partner, the cqurt which entered the judgment, order, or decree, or any
other court, may charge the interest of the debtor partner with payment
of the unsatisfied amount of such judgment debt with interest thereon;
and may then or later appoint a receiver of his share of the profits, and
of any other, money due or to fall due to him in respect of the partnership,
and make all other orders, directions, accounts and inquiries which the
debtor partner might have made, or which the circumstances of the case
may require.
(2) The interest charged may be redeemed at any time before fore-
closure, or in ease of a sale being directed by the court may be purchased
without thereby causing a dissolution:
(a) With separate property, by any one or more of the partners, or
(b) With partnership property, by any one or more of the partners with
the consent of all the partners whose interests are so charged or sold.
(3) Nothing in this Act shall be held to deprive a partner of his right,
if any, under the exemption laws, as regards his interest in the partnership.
PART VI.
Dissolution and Winding Up.
Sec. 29. What constitutes dissolution. The dissolution of a partner-
ship is the change in the relation of the partners caused by any partner
UNIFORM PARTNERSHIP ACT 1131
ceasing to be associated in the carrying on as distinguished from the
winding up of the business.
Sec. 30. Continuance of partnership for winding up. On dissolution
the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.
Sec. 31. Causes of dissolution. Dissolution is caused:
(1) Without violation of the agreement between the partners,
(a) By the termination of the definite term or particular undertaking
specified in the agreement,
(b) By the express will of any partner when no definite term of
particular undertaking is specified,
(c) By the express will of all the partners who have not assigned their
interests or suffered them to be charged for their separate debts, either
before or after the termination of any specified term or particular under-
taking,
(d) By the expulsion of any partner from the business bona fide
in accordance with such a power conferred by the agreement between the
partners;
(2) In contravention of the agreement between the partners, where
the circumstances do not permit a dissolution under any other provision
of this section, by the express will of any partner at any time;
(3) By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in part-
nership;
(4) By the death of any partner;
(5) By the bankruptcy of any partner or the partnership;
, (6) By decree of court under section 32.
Sec. 32. Decree of dissolution—When entered. (1) On application by
or for a partner the court shall decree a dissolution whenever:
(a) A partner has been declared a lunatic in any judicial proceeding
or is shown to be of unsound mind,
(b) A partner becomes in any other way incapable of performing his
part of the partnership contract,
(c) A partner has been guilty of such conduct as tends to affect prej-
udicially the carrying on of the business,
(d) A partner wilfully or persistently commits a breach of the part-
nership or agreement, or otherwise so conducts himself in matters relating
to the partnership business that it is not reasonably practicable to carry
on the business in partnership with him,
(e) The business of the partnership can only be carried on at a loss.
(f) Other circumstances render a dissolution equitable.
(2) On the application of the purchaser of a partner's interest under
sections 28 or 29:
(a) After the termination of the specified term or particular under-
taking,
(b) At any time if the partnership was a partnership at will when
the interest was assigned or when the charging order was issued.
Sec. 33. Termination of partner's authority by dissolution. Except so
far as may be necessary to wind up partnership affairs or to complete
transactions begun but not then finished, dissolution terminates all author-
ity of any partner to act for the partnership.
1132
PARTNERSHIPS
(1) With respect to the partners,
(a) When the dissolution is not by the act, bankruptcy or death of a
partner; or
(b) When the dissolution is by such act, bankruptcy or death of a
partner, in cases where section 34 so requires.
(2) With respect to persons not partners, as declared in section 35.
Sec. 34. Liability of partner to co-partners. Where the dissolution is
caused by the act, death or bankruptcy of a partner, each partner is liable
to his co-partners for his share of any liability created by any partner
acting for the partnership as if the partnership had not been dissolved
unless
(a) The dissolution being by act of any partner, the partner acting
for the partnership had knowledge of the dissolution, or
(b) The dissolution being by the death or bankruptcy of a partner,
the partner acting for the partnership had knowledge or notice of the
death or bankruptcy.
Sec. 35. Authority of partner to bind partnership after dissolution.
(1) After dissolution a partner can bind the partnership except as pro-
vided in paragraph (3)
(a) By any act appropriate for winding up partnership affairs or com-
pleting transactions unfinished at dissolution,
(b) By any transaction which would bind the partnership if dissolu-
tion had not taken place, provided the other party to the transaction
(1) Had extended credit to the partnership prior to dissolution and
had no knowledge or notice of the dissolution; or
(II) Though he had not so extended credit, had nevertheless known of
the partnership prior to dissolution, and, having no knowledge or notice of
dissolution, the fact of dissolution had not been advertised in a newspaper
of general circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
(2) The liability of a partner under paragraph (lb) shall be satisfied
out of partnership assets alone when such partner had been prior to dis-
solution
(a) Unknown as a partner to the person with whom the contract is
made; and
(b) So far unknown and inactive in partnership affairs that the busi-
ness reputation of the partnership could not be said to have been in any
degree due to his connection with it.
(3) The partnership is in no case bound by any act of a partner after
dissolution
(a) Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up partner-
ship affairs; or
(b) Where the partner has become bankrupt; or
(c) Where the partner has no authority to wind up partnership affairs,
except by a transaction with one who
(I) Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of his want of authority; or
(II) Had not extended credit to the partnership prior to dissolution,
and, having no knowledge or notice of his want of authority, the fact of
UNIFORM PARTNERSHIP ACT 1133
his want of authority has not been advertised in the manner provided for
advertising the fact of dissolution in paragraph (lb II).
(4) Nothing in this section shall affect the liability under section 16
of any person who after dissolution repres&nts himself or consents to an-
other representing him as a partner in a partnership engaged in carrying
on business.
Sec. 36. Dissolution does not discharge existing liabilities. (1) The
dissolution of the partnership does not of itself discharge the existing
liability of any partner.
(2) A partner is discharged from any existing liability upon dissolu-
tion of the partnership by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the busi-
ness; and such agreement may be inferred from the course of dealing
between the creditor having knowledge of the dissolution and the person
or partnership continuing the business.
(3) Where a person agrees to assume the existing obligations of a
dissolved partnership, the partners whose obligations have been assumed,
shall be discharged from any liability to any creditor of the partnership
who, knowing of the agreement, consents to a material alteration in the
nature or time of payment of such obligation.
(4) The individual property of a deceased partner shall be liable for
all obligations of the partnership incurred while he was a partner but sub-
ject to the prior payment of his separate debts.
Sec. 37. Right to wind up partnership affairs. Unless otherwise agreed
the partners who have not wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not bankrupt, has the right
to wind up the partnership affairs: Provided, however, that any partner,
his legal representative, or his assignee, upon cause shown, may obtain
winding up by the court.
Sec. 38. Discharge of liabilities by partnership property—Rights of
partners. (1) When dissolution is caused in any way, except in contra-
vention of the partnership agreement, each partner, as against his co-
partners and all persons claiming through them in respect of their in-
terests in the partnership, unless otherwise agreed, may have the part-
nership property applied to discharge its liabilities, and the surplus applied
to pay in cash the net amount owing to the respective partners. But if
dissolution is caused by expulsion of a partner, bona fide under the part-
nership agreement, and if the expelled partner is discharged from all
partnership liabilities, either by payment or agreement under section 36
(2), he shall receive in cash only the net amount due him from the part-
nership.
(2) When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(a) Each partner who has not caused dissolution wrongfully shall
have,
I. All the rights specified in paragraph (1) of this section, and
II. The right, as against each partner who has caused the dissolution
wrongfully, to damages for breach of the agreement.
(b) The partners who have not caused the dissolution wrongfully, if
they all desire to continue the business in the same name, either by them-
1134
PARTNERSHIPS
selves or jointly with others, may do so, during the agreed term for the
partnership and for that purpose may possess the partnership property,
provided fhey secure the payment by bond approved by the court, or pay to
any partner who has caused the dissolution wrongfully, the value of his
interest in the partnership at the dissolution, less any damages recover-
able under clause (2a II) of this section, and in like manner indemnify
him against all present or future partnership liabilities,
(c) A partner who has caused the dissolution wrongfully shall have:
I. If the business is not continued under the provisions of paragraph
(2b) all the rights of a partner under paragraph (1), subject to clause
(2a II), of this section,
II. If the business is continued under paragraph (2b) of this section
the right as against his co-partners and all claiming through them in re-
spect of their interests in the partnership, to have the value of his interest
in the partnership, less any damages caused to his co-partners by the dis-
solution, ascertained and paid to him in cash, or the payment secured by
bond approved by the court, and to be released from all existing liabilities
of the partnership; but in ascertaining the value of the partner's interest
the value of the good-will of the business shall not be considered.
Sec. 39. Rescission of partnership contract for fraud—Rights of part-
ners. Where a partnership contract is rescinded on the ground of the
fraud or misrepresentation of one of the parties thereto, the party en-
titled to rescind is, without prejudice to any other right, entitled
(a) To a lien on, or right of retention of, the surplus of the partner-
ship property after satisfying the partnership liabilities to third persons
for any sum of money paid by him for the purchase of an interest in the
partnership and for any capital or advances contributed by him; and
(b) To stand, after all liabilities to third person have been satisfied,
in the place of the creditors of the partnership for any payments made
by him in respect of the partnership liabilities; and
(c) To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the partnership.
Sec. 40. Rules as to settling accounts after dissolution. In settling ac-
counts between the partners after dissolution, the following rules shall be
observed, subject to any agreement to the contrary:
(a) The assets of the partnership are:
I. The partnership property.
II. The contributions of the partners necessary for the payment of all
the liabilities specified in clause (b) of this paragraph.
(b) The liabilities of the partnership shall rank in order of payment,
as follows:
I. Those owing to creditors other than partners,
II. Those owing to partners other than for capital and profits,
III. Those owing to partners in respect of capital,
IV. Those owing to partners in respect of profits.
(c) The assets shall be applied in the order of their declaration in
clause (a) of this paragraph to the satisfaction of the liabilities.
(d) The partners shall contribute, as provided by section 18 (a) the
amount necessary to satisfy the liabilities; but if any, but not all, of the
partners are insolvent, or, not being subject to process, refuse to con-
UNIFORM PARTNERSHIP ACT 1135
tribute, the other partners shall contribute their share of the liabilities,
and, in the relative proportions in which they share the profits, the addi-
tional amount necessary to pay the liabilities.
(e) An assignee for the benefit of creditors or any person appointed
by the court shall have the right to enforce the contributions specified
in clause (d) of this paragraph.
(f) Any partner or his legal representative shall have the right to
enforce the contributions specified in clause (d) of this paragraph, to
the extent of the amount which he has paid in excess of his share of the
liability.
(g) The individual property of a deceased partner shall be liable for the
contributions in clause (d) of this paragraph.
(h) When partnership property and the individual properties of the
partners are in the possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate creditors
on individual property, saving the rights of lien or secured creditors as
heretofore.
(i) Where a partner has become bankrupt or his estate is insolvent
the claims against his separate property shall rank in the following order:
I. Those owing to separate creditors,
II. Those owing to partnership creditors,
III. Those owing to partners by way of contribution.
Sec. 41. Admission and retirement of partners—Assignment of interests
—Rights and liabilities. (1) When any new partner is admitted into an
existing partnership, or when any partner retires and assigns (or the repre-
sentative of the deceased partner assigns) his rights in partnership prop-
erty to two or more of the partners, or to one or more of the partners
and one or more third persons, if the business is continued without liquida-
tion of the partnership affairs, creditors of the first or dissolved partnership
are also creditors of the partnership so "continuing the business.
(2) When all but one partner retire and assign (or the representative
of a deceased partner assigns) their rights in partnership property to the
remaining partner, who continues the business without liquidation of part-
nership affairs, either alone or with others, creditors of the dissolved part-
nership are also creditors of the person or partnership so continuing the
business.
(3) When any partner retires or dies and the business of the dis-
solved partnership is continued as set forth in paragraphs (1) and (2)
of this section, with the consent of the retired partners or the representative
of the deceased partner, but without any assignment of his right in part-
nership property, rights of creditors of the dissolved partnership and of
the creditors of the person or partnership continuing thq business shall
be as if such assignment had been made.
(4) When all the partners or their representatives assign their rights
in partnership property to one or more third persons who promise to pay
the debts and who continue the business of the dissolved partnership,
creditors of the dissolved partnership are also creditors of the person or
partnership continuing the business.
(5) When any partner wrongfully causes a dissolution and the remain-
ihg partners continue the business under the provisions of section 38 (2b),
1136 PARTNERSHIPS
either alone or with others, and without liquidation of the partnership
affairs, creditors of the dissolved partnership are also creditors of the per-
son or partnership continuing the business.
(6) When a partner is expelled and the remaining partners continue
the business either alone or with others, without liquidation of the partner-
ship affairs, creditors of the dissolved partnership are also creditors of
the person or partnership continuing the business.
(7) The liability of a third person becoming a partner in the part-
nership continuing the business, under this section to the creditors of the
dissolved partnership shall be satisfied out of partnership property only.
(8) When the business of a partnership after dissolution is continued
under any conditions set forth in this section the creditors of the dis-
solved partnership, as against the separate creditors of the retiring or
deceased partner or the representative of the deceased partner, have a prior
right to any claim of the retired partner or the representative of the
deceased partner against the person or partnership continuing the business,
on account of the retired or deceased partner's interest in the dissolved
partnership or on account of any consideration promised for such interest
or for his right in partnership property.
(9) Nothing in this section shall be held to modify any right of
creditors to set aside any assignment on the ground of fraud.
(10) The use by the person or partnership continuing the business of
the partnership name, or the name of a deceased partner as part thereof,
shall not of itself make the individual property of the deceased partner
liable for any debts contracted by such person or partnership.
Sec. 42. Continuation of business after partner's retirement or death.
When any partner retires or dies, and the business is continued under any
of the conditions set forth in section 41 (1, 2, 3, 5, 6), or section 38 (2b),
without any settlement of accounts as between him or his estate and the
person or partnership continuing the business, unless otherwise agreed,
he or his legal representative as against such persons or partnership may
have the value of his interest at the date of dissolution ascertained, and
shall receive as an ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or, at his option or at
the option of his legal representative, in lieu of interest, the profits at-
tributable to the use of his right in the property of the dissolved part-
nership: Provided, that the creditors of the dissolved partnership as
against the separate creditors, or the representative of the retired or de-
ceased partner, shall have priority on any claim arising under this see-
tion, as provided by section 41 (8) of this Act.
Sec. 43. Accrual of right to account at date of dissolution. The right
to an account of his interest shall accrue to any partner, or his legal repre-
sentative, as against the winding up partners or the surviving partners or
the person or partnership continuing the business, at the date of dissolu-
tion, in the absence of any agreement to the contrary.
PART VII.
Miscellaneous Provisions.
Sec. 44. Eepeal. All Acts or parts of Acts inconsistent with this Act
are hereby repealed.
UNIFORM PARTNERSHIP ACT
1137
2. Uniform Limited Partnership Act.
(Ill force in following states: Alaska, Idalio, Iowa, Illinois, Maryland,
Minnesota, New Jersey, New York, Pennsylvania, Tennessee, Utah, Virginia,
Wisconsin.)
Sec. 1. What constitutes limited partnership—Liabilities. A limited
partnership is a partnership formed by two or more persons under the
provisions of section 2, having as members one or more general partners
and one or more limited partners. The limited partners as such shall not
be bound by the obligations of the partnership.
Sec. 2. Formation. (1) Two or more persons desiring to form a limited
partnership shall
(a) Sign and swear to a certificate, which shall state
I. The name of the partnership.
II. The character of the business.
III. The location of the principal place of business.
IV. The name and place of residence of each member; general and
limited partners being respectively designated.
V. The term for which the partnership is to exist.
VI. The amount of cash and a description of and the agreed value of
the other property contributed by each limited partner.
VII. The additional contributions, if any, agreed to be made by each
limited partner and the times at which or events on the happening of
which they shall be made.
VIII. The time, if agreed upon, when the contribution of each limited
partner is to be returned.
IX. The share of the profits or the other compensation by way of in-
come which each limited partner shall receive by reason of his contribu-
tion.
X. The right, if given, of a limited partner to substitute an assignee
as contributor in his place, and the terms and conditions of the substitution.
XI. The right, if given, of the partners to admit additional limited
partners.
XII. The right, if given, of one or more of the limited partners to
priority over other limited partners, as to contributions or as to compensa-
tion by way of income, and the nature of such priority.
XIII. The right, if given, of the remaining general partner or partners
to continue the business on the death, retirement or insanity of a general
partner, and
XIV. The right, if given, of a limited partner to demand and receive
property other than cash in return for his contribution.
(b) File for record the certificate in the office of [here designate the
proper office.]
(2) A limited partnership is formed if there has been substantial com-
plianee in good faith with the requirements of paragraph (1).
See. 3. Business which limited partnership) may carry on. A limited
partnership may carry on any business which a partnership without
limited partners may carry on, except [here designate the business to be
prohibited.]
Sec. 4. Contributions of limited partners. The contributions of a
imited partner may be cash or other property, but not services.
1138
PARTNERSHIPS
Sec. 5. Surname of limited partner, use of. (1) The surname of a
limited partner shall not appear in the partnership name, unless
(a) It is also the surname of a general partner, or
(b) Prior to the time when the limited partner became such the busi-
ness had been carried on under a name in which his surname appeared.
(2) A limited partner whose name appears in a partnership name con-
trary to the provisions of paragraph (1) is liable as a general partner to
partnership creditors who extend credit to the partnership without actual
knowledge that he is not a general partner.
Sec. 6. False statements in certificate—Liability. If the certificate
contains a false statement, one who suffers loss by reliance on such state-
ment may hold liable any party to the certificate who knew the statement
to be false.
(a) At the time he signed the certificate, or
(b) Subsequently, but within a sufficient time before the statement
was relied upon to enable him to cancel or amend the certificate, or to file
a petition for its cancellation or amendment as provided in section 25 (3).
Sec. 7. Limited partner not liable as general partner. A limited partner
shall not become liable as a general partner unless, in addition to the
exercise of his rights and powers as a limited partner, he takes part in
the control of the business.
Sec. 8. Admission of additional limited partners. After the formation
of a limited partnership, additional limited partners may be admitted upon
filing an amendment to the original certificate in accordance with the re-
quirements of section 25.
Sec. 9. Eights and powers of general partner—Limitations. (1) A
general partner shall have all the rights and powers and be subject to all
the restrictions and liabilities of a partner in a partnership without limited
partners, except that without the written consent or ratification of the
specific act by all the limited partners, a general partner or all of the
general partners have no authority to
(a) Do any act in contravention of the certificate,
(b) Do any act which would make it impossible to carry on the ordinary
business of the partnership,
(c) Confess a judgment against the partnership,
(d) Possess partnership property, or assign their rights in specific part-
nership property, for other than a partnership purpose,
(e) Admit a person as a general partner,
(f) Admit a person as a limited partner, unless the right so to do is
given in the certificate,
(g) Continue the business with partnership property on the death,
retirement or instanity of a general partner, unless the right so to do is
given in the certificate.
Sec. 10. Eights of a limited partner. (1) A limited partner shall
have the same rights as a general partner to
(a) Have the partnership books kept at the principal place of busi- .
ness of the partnership, and at all times to inspect and copy any of them.
(b) Have on demand true and full information of all things affecting
the partnership, and a formal account of partnership affairs whenever
circumstances render it just and reasonable, and
UNIFORM PARTNERSHIP ACT 1139
(e) Have dissolution and winding up by decree of court.
(2) A limited partner shall have the right to receive a share of the
profits or other compensation by way of income, and to the return of his
contribution as provided in sections 15 and 16.
Sec. 11. Liability of person erroneously believing himself limited part-
ner—Not general partner. A person who has contributed to the capital of
a business conducted by a person or partnership erroneously believing that
he has become a limited partner in a limited partnership, is not, by reason
of his exercise of the rights of a limited partner, a general partner with
the person or in the partnership carrying on the business, or bound by the
obligations of such person or partnership; provided that on ascertaining
the mistake he promptly renounces his interest in the profits of the busi-
ness, or other compensation by way of income.
Sec. 12. One person both general and limited partner. (1) A person
may be a general partner and a limited partner in the same partnership at
the same time.
(2) A person who is a general, and also at the same time a limited
partner, shall have all the rights and powers and be subject to all the
restrictions of a general partner; except that, in respect to his contribu-
.ion, he shall have the rights against the other members which he would
have had if he were not also a general partner.
See. 13. Loans and other business transactions with limited partner.
(1) A limited partner also may loan money to and transact other busi-
ness with the partnership, and, unless he is also a general partner, receive
on account of resulting claims against the partnership, with general
creditors, a pro rata share of the assets. No limited partner shall in
respect to any such, claim.
(a) Receive or hold as collateral security any partnership property, or
(b) Receive from a general partner or the partnership any payment,
conveyance, or release from liability, if at the time the assets of the
partnership are not sufficient to discharge partnership liabilities to persons
not claiming as general or limited partners.
(2) The receiving of collateral security, or a payment, conveyance, or
release in violation of the provisions of paragraph (1) is a fraud on the
creditors of the partnership.
Sec. 14. Relation of limited partners inter se. Where there are several
limited partners the members may agree that one or more of the limited
partners shall have a priority over other limited partners as to the return
of their contributions, as to their compensation by way of income, or as
to any other matter. If such an agreement is made it shall be stated in
the certificate, and in the absence of such a statement all the limited
partners shall stand upon equal footing.
Sec. 15. Compensation of limited partners. A limited partner may
receive from the partnership the share of the profits or the compensation
by way of income stipulated for in the certificate; provided, that after
such payment is made, whether from the property of the partnership or-
that of a general partner, the partnership assets are in excess of all
liabilities of the partnership except liability to limited partners on account
of their contributions and to general partners.
Sec. 16. Withdrawal or reduction of limited partner's contribution.
1140
PARTNERSHIPS
(1) A limited partner shall not receive from a general partner or out
of partnership property any part of his contribution until
(a) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions, have
been paid or there remains property of the partnership sufficient to pay
them.
(b) The consent of all members is had, unless the return of the con-
tribution may be rightfully demanded under the provisions of paragraph
(2), and
(c) The certificate is cancelled or so amended as to 3et forth the with-
drawal or reduction.
(2) Subject to the provisions of paragraph (1) a limited partner may
rightfully demand the return of his contribution
(a) On the dissolution of a partnership, or
(b) When the date specified in the certificate for its return has
arrived, or
(c) After he has given six months' notice in writing to all other mem-
bers, if no time is specified in the certificate either for the return of the
contribution or for the dissolution of the partnership
(3) In the absence of any statement in the certificate to the contrary
or the consent of all members, a limited partner, irrespective of the nature
of his contribution, has only the right to demand and receive cash in
return for his contribution.
(4) A limited partner may have the partnership dissolved and its affairs
wound up when
(a) He rightfully but unsuccessfully demands the return of his con-
tribution, or
(b) The other liabilities of the partnership have not been paid, or the
partnership property is insufficient for their payment as required by
paragraph
(la) And the limited partner would otherwise be entitled to the return
of his contribution.
Sec. 17. Liability of limited partner to partnership. (1) A limited
partner is liable to the partnership
(a) For the difference between his contribution as actually made and
that stated in the certificate as having been made, and
(b) For any unpaid contribution which he agreed in the certificate to
make in the future at the time and on the conditions stated in the certificate.
(2) A limited partner holds as trustee for the partnership
(a) Specific property stated in the certificate as contributed to him,
but which was not contributed or which has been wrongfully returned, and
(b) Money or other property wrongfully paid or conveyed to him on
account of his contribution.
(3) The liabilities of a limited partner as set forth in this section can
be waived or compromised only by the consent of all members; but a
waiver or compromise shall not affect the right of a creditor of a partner-
ship who extended credit or whose claim arose after the filing and before
a cancellation or amendment of the certificate, to enforce such liabilities.
(4) When a contributor has rightfully received the return in whole or
\n part of the capital of his contribution, he is nevertheless liable to the
UNIFORM PARTNERSHIP ACT 1141
partnership for any sum, not in excess of such return with interest, neces-
sary to discharge its liabilities to all' creditors who extended credit or
whose claims1 arose before such return.
Sec. 18. Nature of limited partner's interest in partnership. A limited
partner's interest in the partnership is personal property.
Sec. 19. Assignment of limited partner's interest. (1) A limited
partner's interest is assignable.
(2) A substituted limited partner is a person admitted to all the rights
of a limited partner who has died or has assigned his interest in a partner-
ship.
(3) An assignee, who does not become a substituted limited partner,
has no right to require any information or account of the partnership
transactions or to inspect the partnership books; he is only entitled to
receive the share of the profits or other compensation by way of income,
or the return of his contribution, to which his assignor would otherwise
be entitled.
(4) An assignee shall have the right to become a substituted limited
partner if all the members (except the assignor) consent thereto or if
the assignor, being thereunto empowered by the certificate, gives the assignee
that right.
(5) An assignee becomes a substituted limited partner when the
certificate is appropriately amended in accordance with section 25.
(6) The substituted limited partner has all the rights and powers,
and is subject to all the restrictions and liabilities of his assignor, except
those liabilities of which he was ignorant at the time he became a limited
partner and whch could not be ascertained from the certificate.
(7) The substitution of the assignee as a limited partner does not
release the assignor from liability to the partnership under sections 6 and
17.
Sec. 20. Effect of retirement, death or insanity of a general partner.
The retirement, death or insanity of a general partner dissolves the partner-
ship, unless the business is continued by the remaining general partners
(a) Under a right so to do stated in the certificate, or
(b) With the consent of all members.
Sec. 21. Death of limited partner. (1) On the death of a limited
partner his executor or administrator shall have all the rights of a limited
partner for the purpose of settling his estate, and such power as the de-
ceased had to constitute his assignee a substituted limited partner.
(2) The estate of a deceased limited partner shall be liable for all
his liabilities as a limited partner.
Sec. 22. Eights of creditors of limited partner. (1) On due applica-
tion to a court of competent jurisdiction by any judgment creditor of a
limited partner, the court may charge the interest of the indebted limited
partner with payment of the unsatisfied amount of the judgment debt; and
may appoint a receiver, and make all other orders, directions, and in-
quiries which the circumstances of the case may require.
(2) The interest may be redeemed with the separate property of any
general partner, but may not be redeemed with partnership property.
(3) The remedies conferred by paragraph (1) shall not be deemed
exclusive of others which may exist.
1142
PARTNERSHIPS
(4) Nothing in this. Act shall be held to deprive a limited partner of
his statutory exemption.
Sec. 23. Distribution of assets. (1) In settling accounts after dis-
solution the liabilities of the partnership shall be entitled to payment in
the following order:
(a) Those to creditors, in the order of priority as provided by law, ex-
cept those to limited partners on account of their contributions, and to
general partners,
(b) Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions,
(c) Those to limited partners in respect to the capital of their con-
tributions,
(d) Those to general partners other than for capital and profits,
(e) Those to general partners in respect to profits,
(f) Those to general partners in respect to capital.
(2) Subject to any statement in the certificate or to subsequent agree-
ment, limited partners share in the partnership assets in respect to their
claim for capital, and in respect to their claims for profits or for com-
pensation by way of income on their contributions respectively, in propor-
tion to the respective amounts of such claims.
See. 24. When certificate shall be cancelled or amended. (1) The
certificate shall be cancelled when the partnership is dissolved or all limited
partners cease to be such.
(2) A certificate shall be amended when
(a) There is a change in the name of the partnership or in the amount
or character of the contribution of any limited partner.
(b) A person is substituted as a limited partner.
(c) An additional limited partner is admitted.
(d) A person is admitted as a general partner.
(e) A general partner retires, dies, or becomes insane, and the busi-
ness is continued under section 20,
(f) There is a change in the character of the business of the partner-
ship,
(g) There is a false or erroneous statement in the certificate,
(h) There is a change in the time' as stated in the certificate for the
dissolution of the partnership or for the return of a contribution,
(i) A time is fixed for the dissolution of the partnership, or the return
of a contribution, no time having been specified in the certificate, or
(j) The members desire to make a change in any other statement in
the certificate in order that it shall accurately represent the agreement
between them.
Sec. 25. Requirements for amendment and for cancellation of certificate.
(1) The writing to amend a certificate shall
(a) Conform to the requirements of section 2
(la) As far as necessary to set forth clearly the change in the certificate
which it is desired to make, and
(b) Be signed and sworn to by all members and an amendment sub-
stituting a limited partner or adding a limited or a general partner shall
be signed also by the member to be substituted or added, and when a
UNIFORM PARTNERSHIP ACT 1143
limited partner is to be substituted, the amendment shall also be signed
by the assigning limited partner.
(2) The writing to cancel a certificate shall be signed by all members.
(3) A person desiring the cancellation or amendment of a certificate,
if- any person designated in paragraphs (1) and (2) as.a person who
must execute the writing refuses to do so, may petition the (here designate
the proper court) to direct a cancellation or amendment thereof.
(4) If the court finds that the petitioner has a right to have the
writing executed by a person who refuses to do so, it shall order the
[here designate the responsible official in the office designated in Section 2]
in the office where the certificate is recorded to record the cancellation or
amendment of the certificate and where the certificate is to be amended, the
court shall also cause to be filed for record in said office a certified copy of
its decree setting forth the amendment.
(5) A certificate is amended or cancelled when there is filed for record
in the office (here designate the office designated in section 2) where the
certificate is recorded.
(a) A writing in accordance with the provisions of paragraph (1) or
(2) or
(b) A certified copy of the order of court in accordance with the pro-
visions of paragraph (4).
(6) After the certificate is duly amended in accordance with this sec-
tion, the amended certificate shall thereafter be for all purposes the
certificate provided for by this Act.
Sec. 26. (Parties to actions.) A contributor, unless he is a general
partner, is not a proper party to proceedings by or against a partnership,
except where the object is to enforce a limited partner's right against or
liability to the partnership.
Sec. 27. (Name of Act.) This Act may be cited as the Uniform
Limited Partnership Act.
Sec. 28. Eules of construction. (1) The rule that statutes in deroga-
tion of the common law are to be strictly construed shall have no applica-
tion to this Act.
(2) This Act shall be so interpreted and construed as to effect its
general purpose to make uniform the law of those states which enact it.
(3) This Act shall not be so construed as to impair the obligations of
any contract existing when the Act goes into effect, nor to affect any
action or proceedings begun or right accrued before this Act takes effect.
Sec. 29. Rules for cases not provided for in this Act. In any case not
provided for in this Act the rules of law and equity, including the law
merchant, shall govern.
Sec. 30. Provisions for existing limited partnerships. (1) A limited
partnership formed under any statute of this State prior to the adoption
of this Act, may become a limited partnership under this Act by complying
with the provisions of section 2; provided the certificate sets forth
(a) The amount of the original contribution of each limited partner,
and the time when the contribution was made, and
(b) That the property of the partnership exceeds the amount sufficient
to discharge its liabilities to persons not claiming as general or limited
1144
PARTNERSHIPS
partners by an amount greater than the sum of the contributions of its
limited partners.
(2) A limited partnership formed under any statute of this State prior
to the adoption of this Act, until or unless it becomes a limited partner-
ship under this Act, shall continue to be governed by the provisions of
(here insert proper reference to the existing limited partnership Act or
Acts), except that such partnerships shall not be renewed unless so pro-
vided in the original agreement.
Sec. 31. (Acts repealed.) Except as affecting existing limited partner-
ships to the extent set forth in section 30 the Act (Acts) of (here designate
the existing limited partnership Act or Acts) is (are) here repealed.
DIVISION G
CORPORATIONS
DIVISION G
CORPORATIONS
Part I. Creation and Organization of Private Busi-
nesg Corporations.
Part II. Stock and Stockholders.
•Par i Hi. Directors and Officers.
Part IV. Creditors of a Corporation.
Part V. Powers of a Corporation.
Part VI. Sundry Topics.
PARTI
CREATION AND ORGANIZATION
Chapter 79. Definition and Nature of Corporations.
Chapter 80. Preliminary Observations in Organization
of Corporations.
Chapter 81. Charter and Organization.
Chapter 82. Promoters of Corporations.
1147
CHAPTER 79
DEFINITION AND NATURE OF CORPORATIONS
§ 6.37. Definition.
§ 638. The corporation as a distinct entity.
§ 639. The corporation as a person.
§ 640. Corporate entity not allowed to defeat responsibility of real princi-
pal.
§ 641. Corporations distinguished from partnerships.
§ 642. Reasons for the incorporation of business companies.
§ 643. Kinds of corporations.
§ 644. Purposes for which corporations may be formed.
§ 637. (Corporations, Sec. 1.) Corporations defined.
Case 631. Thomas v. Dakin, 22 Wend. (N. Y.) 9.
Facts: Thomas sues on three hills of exchange as
president of an association called The Bank of Central
New York, formed under a statute to authorize "the
business of banking. Defendant makes a technical de-
fense raising the question whether the bank is a corpo-
ration.
Point Involved: The definition and characteristics of
a body corporate.
Mr. Chief Justice Nelsoh: "* * * Are these as-
sociations [formed under the law in question] corpora-
tions 1 In order to determine this question, we must first
ascertain the properties essential to constitute a corpo-
rate body, and compare them with those conferred upon
the associations; for if they exist in common, or sub-
stantially correspond, the answer will be in the aifirma-
tive. A corporate body is known to the law by the
powers and faculties bestowed upon it, expressly or im-
pliedly, by the charter; the use of the term corporation
in its creation is of itself unimportant, except as it will
imply the possession of these. They may be expressly
1148
DEFINITIONS
1149
conferred, and then they denote this legal being as nn-
erringly as if created in general terms. It has been well
said by learned expounders, that a corporation aggregate
is an artificial body of men, composed of divers individ-
uals, the ligaments of which body are the franchises and
liberties bestowed upon it, which bind and unite all into
one, and in which consists the whole frame and essence
of the corporation. The 'Franchises and liberties,' or,
in modern language, and as more strictly applicable to
private corporations, the powers and faculties, which
are usually specified as creating corporate existence, are:
1. The capacity of perpetual succession; 2. The power
to sue and be sued, and to grant and receive in its cor-
porate name; 3. To purchase and hold real and personal
estate; 4. To have a common seal; and 5. To make by-
laws. * * * Any one comprehending the scope and
purpose of them, at this day, will not fail to perceive
that some of the powers above specified are of trifling
importance, while others are wholly unessential. For in-
stance, the power to purchase and hold real estate is no
otherwise essential than to afford a place of business;
and the right to use a common seal, or to make by-laws,
may be dispensed with altogether. For as to the one,
it is now well settled that corporations may contract by
resolution, or through agents, without seal; and as to
the other, the power is unnecessary, in all cases where
the charter sufficiently provides for the government of
the body. The distinguishing feature, far above all
others, is the capacity conferred, by which a perpetual
succession of different persons shall be regarded in the
law as one and the same body and may at all times act
in fulfillment of the objects of the association as a single
individual. In this way, a legal existence, a body cor-
porate, an artificial being, is constituted; the creation of
which enables any number of persons to be concerned in
accomplishing a particular object, as one man. "While
the aggregate means and influence of all are wielded in
effecting it, the operation is conducted with the simplic-
ity and individuality of a natural person. In this con-
1150
CORPORATIONS
sists the essence and great value of these institutions.
Hence it is apparent that the only properties that can be
regarded strictly as essential, are those which are indis-
pensable to mould the different persons into this artifi-
cial being, and thereby enable it to act in the way above
stated. When once constituted, this legal being created,
the powers and faculties that may be conferred are va-
rious—limited or enlarged, at the discretion of the legis-
lature, and will depend upon the nature and object of the
institution, which is as competent as a natural person to
receive and enjoy them. We may, in short, conclude by
saying, with the most approved authorities at this day,
that the essence of a corporation consists in a capacity:
1. To have a perpetual succession under a special name,
and in an artificial form; 2. To take and grant property,
contract obligations, sue and be sued by' its corporate
name as an individual; and 3. To receive and enjoy in
common, grants of privileges and immunities.
"We will now endeavor to ascertain with exactness the
powers, and attributes conferred upon these associations
by virtue of the statute. * * *
'' 1. Upon a perusal of these provisions, it will appear
that the association acquires the power to raise and hold
for common use any given amount of capital stock for
banking purposes, which, when subscribed, is made per-
sonal property, and the several shares transferable the
same and with like effect as in case of corporate stock;
to assume a common name under which to manage all
the affairs of the association; to choose all officers and
agents that may be necessary for the purpose, and re-
move and appoint them at pleasure. It will hence be
seen, that although the association may be composed of
a number of different persons, holding an interest in
the capital stock, its operations are so arranged that they
do not appear in conducting its affairs; all are so bound
together, so moulded into one, as to constitute but a
single body, represented by a common name, or names
(the knot of the combination), and in which all the busi-
ness of the institution is conducted by common agents.
DEFINITIONS
1151
In this way it purchases and holds real and personal
property, contracts obligations, discounts bills, notes,
and other evidences of debt, receives deposits, buys gold
and silver bullion, bills of exchange, etc., loans money,
sues and is sued, etc.
"This artificial being possesses the powers of per-
petual succession. Neither sale of shares, nor death of
shareholders affect it; if one should sell his interest, or
die, the purchaser or representative, by operation of
law, immediately takes his place. Sec. 19. Nor can the
insanity of a member work a dissolution. Id. Officers
and agents for conducting the business of the association
are secured. In case of vacancy, by death or otherwise,
the place may at once be filled. Sec. 18. For the entire
duration, therefore, of the association, and which may be
without limit, Sec. 16, Sub. 5, the whole body of share-
holders, though perpetually shifting, constitute the same
uniform, artificial being which is to be engaged through
the instrumentality of officers and agents in conducting
the business of the concern, and no member is personally
liable. Sec. 23. Then, as to the powers conferred, with-
out again specially recurring to them, it will be seen at
once that the associations possess all that are deemed
essential, according to the most approved authorities, to
constitute a corporate body. They have a capacity: 1.
To have perpetual succession under a common name and
in an artificial form; 2. To take and grant property, con-
tract obligations, to sue and be sued by its corporate
name, in the same manner as an individual; 3. To re-
ceive grants of privileges and immunities, and to enjoy
them in common. All these are expressly granted, and
many more, besides the general sweeping clause,1 to exer-
rise such incidental powers as shall be necessary to carry
on such business' (meaning the business of banking),
under which even the seal and right to make by-laws are
clearly embraced, if essential, in conducting the affairs
of the institution.
Question 631: (1) How does this opinion define a corpora-
tion?
1152
CORPORATIONS
(2) "What are the inherent powers of corporations?
(3) Did the Court decide that the company under considera-
tion was a corporation?
(Note: Of course it is unusual for any corporate officer to
sue or be sued in its behalf. Almost universally the corpora-
tion must sue and be sued in its own name as an individual.)
§ 638. (Corporations, Sec. 2.) The corporation as a
distinct entity.
Case 632. Parker v. Bethel Hotel Co., 96 Tenn. 252,
31 L. R. A. 706.
Facts: Lucius Frierson on August 28, 1886, pur-
chased from the other stockholders all the stock of the
Bethel Hotel Company, a corporation organized for hotel
purposes. Thereafter he used the property as his own,
leasing it, collecting the rents, etc. He held the prop-
erty in this manner for seven years during which there
were no stockholders' or directors' meetings and no cor-
porate activity. In January, 1892, he conveyed in his
own name by deed of trust all the property of the cor-
poration to one W. J. Webster, as an assignment for the.
benefit of his personal creditors. He had from time to
time borrowed money from various parties giving the
shares of stock held by him as security. In his deed of
assignment to Webster, he did not provide for these
creditors who held corporate stock. These creditors now
file a bill in equity to annul the trust deed to Webster, to
decree the dissolution of the hotel company, to sell its
property and distribute the proceeds among the various
holders of its stock. Frierson claims that the corpora-
tion was dissolved by the sale to him of all of the stock
and that he had an equitable title to all of its property
by reason of becoming the sole owner of its stock.
Point Involved: Whether a stockholder in a corpora-
tion owning all of its stock thereby becomes the owner of
all its property and can convey the same in his own name.
Generally of the distinction between a corporation and
its stockholders.
DEFINITIONS
1153
Bradford, J.: (After discussing the facts and holding
that the corporation had never been dissolved)  * * *
"Defendants insist that the alleged equitable estate of
Lucius Frierson in the property of the Bethel Hotel
Company did not depend alone upon the dissolution of
the corporation, but resulted also from the fact that he
was the sole owner of all its capital stock. The proposi-
tion is that, if one person owns all of the shares of stock
of a corporation which owes no debts, he, in virtue of
such ownership, becomes the equitable owner of all its
property, or at least may sell and dispose of it by deed,
if he chooses to do so. This proposition is argued by
counsel for defendants with force and ability, and is
supported by some authority. It has found favor with
the supreme court of Maryland, Swift & Smith, 65 Md.
428, 433, 57 Am. Rep. 336. But the decision of that
learned Court is opposed by the current of authority,
and seems to us to overlook and ignore certain principles
that are fundamental. A corporation and its share-
holders, are distinct legal entities. In Keith v. Clark, 4
Lea, 718, this Court held that notwithstanding the state
owned all of the stock in the Bank of Tennessee, 'the
bank and the state are entirely different legal entities;'
and in Lillard v. Porter, 2 Head. 177, it was said:' Stock-
holders are totally distinct from the corporation.' Tm-
portant consequences result from this rule. The share-
holders are neither responsible for the debts, nor the
torts of the corporation. In the absence of special cir-
cumstances, the shareholders cannot be parties, either
plaintiffs or defendants, in actions respecting corporate
rights, nor have they any title or interest in the property
of the corporation. ' Shareholders,' says Thompson, ' are
not joint tenants, or in any other sense co-owners of the
corporate property, either before or after its dissolution.
The title to it rests exclusively in the legal entity called
the corporation. A share of the capital stock merely
gives the right to partake according to the amount put
into the fund, of the surplus profits of the corporation,
and ultimately on the dissolution of it, of so much of the
1154
CORPORATIONS
fund thus created as remains unimpaired, and is not
liable for debts of the corporation.' 1 Thomp. Corp.
1071. As the shareholders have no direct interest in the
corporate property, they cannot convey the real estate of
the corporation, though all join in the deed. In Wheelock
v. Moulton, 15 Yt. 519, Redfield, J., stated the reasons for
the rule in his usual clear and accurate style. * * *
And in Humphreys v. McKissock, 140 U. S. 304, 35 L. ed.
473, Mr. Justice Field, discussing the same question,
said: 'The property of a corporation is not subject to
the control of individual members, whether acting sepa-
rately or jointly. They can neither encumber nor trans-
fer that property, or authorize others to do so. The
corporation—the artificial being created—holds the prop-
erty, and alone can mortgage or transfer it; and the
corporation acts through its officers, subject to the con-
ditions prescribed by law.' A very instructive case on
this question is Baldwin v. Canfield, 26 Minn. 43. The
facts of that case were very similar to those of this case
and the direct questions now under consideration were
passed upon. The opinion of the Court was in accord
with the cases above quoted.
Question 632: (1) How did the question in this case come
to be raised?
(2) Are the shareholders of a corporation liable for its
debts ? For its torts ?
(3) If a corporation owes a debt and is sued, are its stock-
holders necessary or proper parties to the suit? If it sues on
a debt owing to it, can or must its stockholders join in the suit?
(4) Are the shareholders joint owners of the corporate prop-
erty ?
(5) State the form in which a deed of the property of the
corporation should be made and signed.
(6) The A company is a public service corporation and has
the right of eminent domain. All of its stock is held by the
B company, a manufacturing company, not having such right.
The A company seeks to condemn M's land for its proper cor-
porate purposes, M defends on the ground .that as the B com-
pany owns all the stock, the proceedings are really by the B
DEFINITIONS
1155
company. Is this defense good? (Assume for the purposes of
this question that such ownership of stock is legal.)
Case 633. Peoples Pleasure Park Co. Inc. and others,
v. Rohleder, 109 Va. 439.
Facts: Suit to set aside a deed to the Peoples Pleas-
ure Park Co., Inc., averring that the said corporation is
composed exclusively of negroes, and setting up as
grounds therefor that the land was subject to a restric-
tion in former deeds as follows: "The title to this land
never to rest in a person or persons of African descent.
Cardwell, J.: *' * * *
"Aside from the question, whether or not appellee
could obtain the relief she asks against appellants—that
is, an annulment of the conveyance to appellant, Peoples
Pleasure Park Co., Inc.—on the ground that the restric-
tion on the right of alienation of any of the Fulton Park
land to 'a person or persons of African descent' or
'colored person' had been violated by a sale of a part of
the land to said appellant, the bill fails to allege facts
showing a violation of the restriction, and should have
been dismissed upon the demurrers thereto. Such a con-
veyance, by no rule of construction, vests the title to the
property conveyed in 'a, person or persons of African
descent.' * * *
"In Green's Brice, Ultra Vires (2nd Am. Ed.), §§ 1, 2,
it is said, that 'a corporation is a person which exists in
contemplation of law only, and not physically.'
"The same author, in commenting on Kyd's definition,
says: 'But sufficient stress is not laid upon that which
is its real characteristic in the eye of the law, viz., its
existence separate and distinct from the individual or
individuals composing it. * * * This is the one im-
portant fact. The members of a corporation aggregate,
and the one individual who is constituted a corporation
sole may, from their connection with such, have rights
and privileges, and be under obligations and duties, over
and above those affecting them in their private capacity;
1156
CORPORATIONS
but they get them by reflection, as it were, from the cor-
poration. They individually are not the corporation—
cannot exercise the corporate powers, enforce the cor-
porate rights, or be responsible for the corporate acts.
Question 633: Did the owner of this land violate the restric-
tion in the deed? Why?
(Note: All restrictions on the use of real estate are construed
strictly, and will not be extended by implication.)
Case 634. Russell v. Temple, 3 Davis Abridg. 108.
Facts: Thomas Russell died leaving surviving his
widow and several heirs at law. By the Massachusetts
law, the widow had a dower interest in the real estate of
the deceased, which was an estate for life in one-third
thereof, and an absolute ownership in one-third of his
personal property, the other two-thirds going to the
heirs. Russell had shares in a corporation which prin-
cipally owned real estate. It was contended on the part
of the widow that she should take absolutely one-third
of the shares as personal property, and on the part of the
heirs that she had but a dower interest (or life estate)
therein.
Point Involved: Whether the shares are personal
property regardless of the nature of the property owned
by the corporation.
< < * * * *
"For the heirs it was urged that these shares were
real estate, because it was said that the estates were real
in the corporations; annexed to the soil; and that if these
estates in the corporation were real, the estate of the
individual members in them followed their nature, and
were real; and that the frequent declarations of the
legislature declaring such shares personal estate, at least
show a doubt: that when one has a right to receive rent,
he has only a right to receive a sum of money; yet it does
not follow that his estate is not real estate, out of which
his rent issues.
DEFINITIONS
1157
"The judgment of the Court was, that these shares
were personal estate, and distribution was ordered ac-
cordingly. The principal reason of the decision appears
to be, because the Court considered that the individual
member, or shareholder, had only a right of action for a
sum of money, his part of the net profits or dividends.
And so the law has been held to be since this decision
was made.
Question 634: Why was it important for the heirs in this case
to establish that the assets were real estate? Did the Court so
hold?
§639. (Corporations^ Sec. 3.) The corporation as a
person.
Case 635. The Overland Cotton Mill Co. et al. v. The
People, 32 Colo. 263.
Facts: Suit to enforce a penal statute providing in
substance that any person who shall hire and employ a
child under fourteen years of age in any mill or factory,
shall be guilty of a misdemeanor and punished by fine.
Point Involved: Whether a corporation is a person
within a penal statute employing that word.
Chief Justice Gabbeet: "* * *
"The Overland Cotton Mill Company is a corporation
organized under the laws of this state, and it is argued
that, because the statute only says that 'any person' who
shall employ children under the age of fourteen years in
any mill or factory shall be deemed guilty of violating its
provisions, that, therefore, a corporation, in its capacity
as such, cannot be reached in a prosecution of this char-
acter. In other words, because the statute does not
specify corporations, that they are exempted from the
statutory provision on the subject of the employment
of children under the age of fourteen years. * * #
Prima facie, the word 'person,' in a penal statute which
is intended to inhibit an act, means 'person in law;' that
is, an artificial, as well as a natural, person, and there-
1158
CORPORATIONS
fore includes corporations, if they are within the spirit
and purpose of the statute. The Pharmaceutical Assn.
v. The London & P. S. A., Limited, 5 Appeal Cases
(Law Reports) 857; 7 Enc. of Law (2 Ed.) 841; 1 Clark
& Marshall's Private Corp., Sec. 252; Bishop's Stat.
Crimes (3 Ed.) Sec. 212; Stewart v. The Waterloo Turn
Yerein, 71 Iowa, 226.
 Whether corporations are included within the stat-
ute, depends largely upon its object. Pharmaceutical
Assn. v. London & P. S. A., Limited, supra. The purpose
of the statute, as indicated by its title, was to prohibit the
employment of children under fourteen years of age in
certain kinds of work. It is common knowledge that the
places which, by the statute, children under the age of
fourteen years are inhibited from working in, are oper-
ated largely by corporations. Whether such places were
operated by individuals or corporations could make no
difference with respect to the employment, for it would
be just as detrimental to the child in one instance as in
the other. * * * Corporations, therefore, are clearly
within the spirit and purpose of the statute, because its
ultimate object was to prevent children under a given
age from being employed in specified work.
"That the statute provides for imprisonment if the
fine imposed is not paid, is not an objection which a cor-
poration can urge against its enforcement. True, the
corporation cannot be imprisoned, but the fine can be
collected through the means provided for the collection
of money judgments. Commonwealth v. Pulaski Agr.
Assn., 92 Ky. 197.
Question 635: (1) When will a statute referring to "per-
sons be deemed to refer to corporations?
(2) When not?
(3) It was provided by law that the county judge should
upon application of persons paying one-third of the taxes on
real estate of a certain county, order a vote to be taken to ascer-
tain if the qualified voters desired the removal of the court
house. An application was made signed by certain parties pay-
ing one-third the taxes, and among the applicants and to make up
the requisite amount, certain corporations were included.
DEFINITIONS
1159
Should the judge order the vote? Crawford v. Supervisors, 87
Va. 110.
Case 636. In re Estate of Speed, 216 111. 23.
Facts: The Illinois Act of 1901, exempts from the
inheritance tax of Illinois property devised to the use of
religious, educational or charitable corporations. Fannie
Speed, deceased, by her will, devised certain real estate
in the city of Chicago to the Board of Education of the
Kentucky Annual Conference of the Methodist Episcopal
Church, a corporation of Kentucky, with power to form
an educational fund for the promotion of literature, edu-
cation and religion in Kentucky. It is sought to subject
the devise to the inheritance tax. The estate claims to
come within the exemption. The state of Illinois claims
that the exemption does not apply to foreign corpo-
rations.
Point Involved: Whether a state grant of immunities
or privileges can favor a domestic over a foreign cor-
poration without conflict with the provision of the federal
constitution: "The citizens of each state shall be en-
titled to all the privileges and immunities of the citizens
of the several states;'' whether a corporation is a citi-
zen within such provision.
Mr. Justice Boggs : "* * * It has frequently been
declared to be a well established principle of constitu-
tional law that a corporation is not a citizen within the
first clause of Sec. 2, of Article 4, of the Constitution of
the United States, which declares the citizens of each
state shall be entitled to all the privileges and immunities
of citizens of the several states. * * # A corpora-
tion is a 'person' within the meaning of the concluding
clause of the first section of the 14th amendment, which
declares that no state shall deprive any person of life,
liberty or property without due process of law or deny
to any person within its jurisdiction the equal protection
of its laws. # * *
Question 636: (1) Is a corporation a "citizen within the
provisions of the United States Constitution ?
(2) Is it a "person", within provisions using that word?
1160
CORPORATIONS
§ 640. (Corporations, Sec. 4.) Corporate entity not
allowed to defeat responsibility of real principal.
Case 637. State, ex. rel. Watson v. Standard Oil Co.,
49 Ohio St. 137.
Facts: Suit by the state of Ohio, upon the informa-
tion of Watson, its attorney general, to oust the Stand-
ard Oil Company of its right to be a corporation in the
state of Ohio, on the ground that it had abused its cor-
porate franchises by becoming a party to agreements
against public policy, namely, certain agreements con-
stituting it a "trust. Defendant answered: "That
said agreements were agreements of individuals in their
individual capacity and with reference to their individual
property, and were not nor were they designed to he
corporate agreements, and defendant denies that said
agreements have illegally affected it in its corporate ca-
pacity or that defendant has permitted its corporate
powers, business and property to be exercised, conducted,
and controlled in an illegal manner. The individuals
named in the trust agreement were the chief owners of
the stock of the Standard Oil Company, owning the
greater part of its stock.
Minshall, J.:  Three questions arise upon the plead-
ings: 1. Should the defendant, The Standard Oil Com-
pany, be regarded as a party in its corporate capacity,
to the agreement constituting the Standard Oil Trust.
2. Had the company power to become a party to such an
agreement. 3. If so, is the right of the state to demand
a forfeiture of its corporate franchises, or of the power
to make and perform such agreements, barred by lapse
of time.
"1. It will be observed, on reading the answer, that
while the defendant denies that it 'entered into or become
a party to either or both of the agreements in said peti-
tion set forth,' and also, 'denies that it has at any time
or in any manner acquiesced in, or observed, performed
or carried out either or both of said agreements,' it does
DEFINITIONS
1161
not deny the averment of the petition, that 'all of the
owners and holders of its capital stock, including all the
officers and directors of said company, signed said agree-
ments.' Nor could it have been the intention to do so, as
the answer proceeds to admit, 'that it,' the corporation,
'is informed and believes that the individuals named in
the agreement, being the same individuals who executed'
it, 'did enter into the agreements set forth' in the peti-
tion; claiming 'that said agreements were agreements of
individuals in their capacity and with reference to their
individual property, and were not, nor were they de-
signed to be, corporate agreements.' The claim is based
upon the argument, that the corporation is a legal entity
separate from its stockholders, that in it are vested all
the property and powers of the company, and can only
be affected by such acts and agreements as are done or
executed on its behalf by its corporate agencies acting
within the legitimate scope of their powers. That its
stockholders are not the corporation, that their shares
are their individual property, and that they may each and
all dispose of, and make such agreements affecting their
shares, as best suit their private interests; and that no
such acts and agreements of stockholders, subservient of
their private interests, can be ascribed to the company as
a separate entity, though done and concurred in by each
and all of its stockholders.
"The general proposition that a corporation is to be
regarded as a legal entity, existing separate and apart
from the natural persons composing it, is not disputed;
but that the statement is a mere fiction, existing only in
idea, is well understood, and not controverted by any one
who pretends to accurate knowledge on the subject. It
has been introduced for the convenience of the company
in making contracts, in acquiring property for corporate
purposes, in suing and being sued, and to preserve the
,limited liability of the stockholders, by distinguishing
between the corporate debts and property of the com-
Jany, and of the stockholders in their capacity as in-
9'ividuals. All fictions of law have been introduced for
1162
CORPORATIONS
the purpose of convenience and to subserve the ends of
justice. It is in this sense that the maxim in fictione
juris subsistit aequitas, is used, and the doctrine of fic-
tions applied. But when they are urged to an intent and
purpose not within the reason and policy of the fic-
tion they have always been disregarded by the courts.
Broom's Legal Maxims, 130. 'It is a certain rule,' says
Lord Mansfield, C. J., 'that a fiction of law shall never be
contradicted so as to defeat the end for which it was
invented, but for every other purpose it may be con-
tradicted.' Johnson v. Smith, 2 Burr. 962. 'They were
invented,' says Brinkerhoff, J., in Wood v. Ferguson, 7
Ohio St. 291, 'for the advancement of justice, and will
be applied for no other purpose.' And it is in this sense
that they have been constantly understood and applied in
this state. Hood v. Brown, 2 Ohio R. 269; Rossman v.
McFarland, 9 Ohio St. 381; Collard's Adm'r v. Donald-
son, 17 Ohio R. 266.
"No reason is perceived why the principles applicable
to fictions in general, should not apply to the fiction that
a corporation is a personal entity, separate from the
natural persons who compose it, and for whose benefit it
has been invented. * * ■ *
"Now, so long as a proper use is made of the fiction,
that a corporation is an entity apart from its share-
holders, it is harmless, and, because convenient, should
not be called in question; but where it is urged to an end
subversive of its policy, or such is the issue, the fiction
must be ignored, and the question determined, whether
the act in question, though done by shareholders, that is
to say, by the persons united in one body, was done sim-
ply as individuals and with respect to their individual
interests as shareholders, or was done ostensibly as such,
but, as a matter of fact, to control the corporation and
affect the transaction of its business, in the same manner
as if the act had been clothed with all the formalities of^
a corporate act. This must be so, because the stock-
holders having a dual capacity, and capable of acting in
either, and a possible interest to conceal their character
DEFINITIONS
1163
when acting in their corporate capacity, the absence of
the formal evidence of the character of the act, cannot
preclude judicial inquiry on the subject. If it were other-
wise then, in one department of the law, fraud would
enjoy an immunity awarded to it in no other.
 Therefore, the real question we are now to determine
is, whether it appears from the face of the pleadings,
giving effect to all the denials of fact contained in the
answer, that the execution of the agreement set forth in
the petition, should be imputed to the association of per-
sons constituting The Standard Oil Company of Ohio,
acting in their corporate capacity.''
[The rest of the opinion, being very lengthy, is omitted.
The Court decided that the Standard Oil Company was
a party to the trust agreements, and entered an order
"ousting the defendant from the right to make the agree-
ment set forth in the petition and of the power to perform
the same."]
Question 637: If the theory of corporate entity is made use
of in order to perpetrate a fraud on the law, will it be ignored ?
Why?
Case 638. Moore & Handley Hardware Co. v. Towers
Hardware Co., 87 Ala. 206.
Facts: Bill in equity, filed by the Towers Hardware
Co. against the Moore & Handley Hardware Co. for an
injunction restraining the second named corporation
from selling "plow stocks and plow blades in violation
of a contract made between the Towers Hardware Co.
and a partnership composed of J. D. Moore, B. F. Moore
and William A. Handley, who, as the bill alleged after-
wards formed the defendant corporation. The bill made
no showing of fraud. Defendant denies that it is in any
way responsible for the agreements or obligations of
fcaid partnership.
;, MCClellan, J.: "* * *
There is a class of contracts, however, which are
entered into between the promoters or prospectors of a
1164
CORPORATIONS
contemplated corporation and third persons, on the faith
of the corporation, intended to inure to its benefit, and
which in point of fact do inure to its benefit, on which
the corporation will be charged, even in the absence of an
express promise to perform, or ratification on the part of
the company after it is in esse; on 'the familiar prin-
ciple, that one who accepts the benefit of a contract,
which another volunteers to perform in his name, and
on his behalf, is bound to take the burden with the
benefit.'
"And in those cases where 'associates combine to-
gether to create a paper corporation, to cover a part-
nership or joint venture, and where the stockholders are
partners in intention,' and have resorted to the fiction of
separate corporate entity to free themselves from in-
dividual obligations which had attached to them, with
respect to the business they propose to carry on, prior
to the organization of the company, courts of equity,
when the ends of justice require it, will disregard and
look beyond the fiction of corporate entity, and hold the
corporation to a discharge of the liabilities resting on its
members; and this may be done, although some of the
shareholders had not originally incurred the obligation
sought to be enforced, provided they had notice of it
before entering the corporation, and participated in the
effort to avoid it. Davis Imp. "Wrought Iron W. W. Co.
v. Davis Wrought Iron W- Co., 20 Fed. Rep. 700; Beal
v. Chase, 31 Mich. 490, 395, 532.
'' The contract of Moore, Moore & Handley, sought to
be enforced against the Moore & Handley Hardware
Company was not an undertaking between promoters of
the company and third parties, nor made on the faith of
the corporation, nor intended to inure to its benefit, nor
did it inure, in point of fact, to the benefit of the corpo-
ration. It is not of that class of contracts which courts
enforce against corporations, on the ground that they
were made in the corporate name by anticipation, and
that the corporation received and accepted the benefits
resulting from them.
DEFINITIONS
1165
"There is no allegation of fraud made against the cor-
poration, or its shareholders, and the implication of the
fraudulent effect of the corporate action complained of
is denied. It is not shown that this is a mere * paper cor-
poration,' to cover a joint venture, in which the corpora-
tors are partners in intention, and have resorted to this
form for the purpose of evading and avoiding obligations
which they have taken upon themselves as individuals, or
for the purpose of evading the promise relied on here.
If these things had appeared in the case, we should not
hesitate to hold the corporation answerable for the in-
dividual obligation. But, in the absence of fraud, 'no
authorities have gone the length of holding that any con-
tract made with individuals, exclusively upon individual
credit, will become the contract of any future corporation
that may be formed for the more convenient management
and use of the benefits of it.' L. R. & Ft. S. R. Co. Cases,
supra.
"If the case of Beal v. Chase, supra, goes beyond this
doctrine, we can not indorse it. We do not think it does.
In that case, the corporation had been formed for the
purpose of violating a contract not to engage in a cer-
tain business. All the corporators were held to have
participated in this purpose. The business was to be
conducted by the corporation, in connection with the
promisor in his individual capacity. He had an interest
in it, both individually and as the principal shareholder
of the company; and the Court enjoined the corporation,
not generally, but from carrying on the business with or
for the individual contracting party. To put the case at
bar in line with that case, it would have to appear, not
only that the corporators organized for the purpose, and
with the intention of evading their .contract, through the
/separate entity of . corporate existence, but also that they
reserved an interest in the business distinct from their
interests as stockholders. None of these facts are shown.
The effect of allowing the injunction in this case to con-
tinue, would necessarily be to hold all future share-
holders in the corporation to the performance of a con-
1166
CORPORATIONS
tract which neither they nor the corporation had ever
entered into, and of which they may not even have had
notice. Such a result could only be justified on the
ground of bad faith in the creation of the company. To
thus hamper a bona fide corporation, would be in-
equitable, and have the effect of establishing a doctrine
fraught with much danger to corporate rights, powers
and property. * * *
Question 638: (1) If A in selling his business to B, agrees
with B that he will not compete, and then forms or enters a
competing corporation, is he violating his contract ?
(2) What does the Court say would be necessary to put
this case in line with the case of Beal v. Chase?
(Note : A contract that the sellers of a business will not com-
pete with the buyers ought to be so drawn as to preclude the
organization of a corporation by the sellers to engage in com-
petition. The above case, it seems to the editor, may well be
questioned. It looks like an obvious evasion of the agreement
not to compete.)
§641. (Corporations, Sec. 5.) Corporations distin-
gnished from partnerships.
(Note: See Sec. 568 supra.)
§ 642. (Corporations, Sec. 6.) Reasons for incorpora-
tions of business companies.
(Note: The main reasons for incorporation may be tabulated
as follows:
1. To secure limitation of personal liability.
2. To avoid liability for acts of associates.
3. To effect a permanent organization unaffected by death
or transfer.
4. To obtain capital and credit.
5. To bring about a more convenient method of holding
property, entering into contracts, suing and being sued, etc.)
DEFINITIONS
1167
§ 643. (Corporations, Sec. 7.) Kinds of corporations.
(Note: Corporations may be classified as follows:
(A) Public corporations, or those which are founded by the
government for public purposes.
(1) Municipal corporations, as cities and towns.
(2) Quasi-municipal, as counties, boards of edu-
cation, park boards, etc.
(B) Private corporations, or those which are owned by
private individuals, even though of a public nature.
(1) Stock corporations, or those which are or-
ganized for purposes of financial profit.
Here we place corporations of a strictly
private nature as well as railroads, and
all public service corporations having
privately owned capital stock.
(2) Non-stock corporations, or those not organ-
ized for private profit.
(a) Religious corporations.
(b) Charitable corporations. Lodges,
institutes of learning, pleasure
clubs, etc.)
Question 638: A partnership must be for financial profit;
must a corporation? Is a railroad a private or public corpora-
tion?
§ 644. (Corporations, Sec. 8.) Purposes for which
corporations may be formed.
(See the classification in the last section.)
Case 639. Re Co-Operative Law Co., 198 N. Y. 479.
Facts: Proceedings to determine whether the Co-
Operative Law Company was legally formed as a cor-
poration to engage in the practice of law.
Point Involved: Whether the practice of law is a
legitimate object of incorporation; generally, of the ob-
jects fcr which companies may be incorporated.
1168
CORPORATIONS
Vann, J.: "* * * The practice of law is not a
business open to all, but a personal right, limited to a
few persons of good moral character, with special quali-
fications ascertained and certified after a long course of
study, both general and professional, and. a thorough
examination by a state board appointed for that purpose.
"The right to practice law is in the nature of a fran-
chise from the state conferred only for merit. It cannot
be assigned or inherited, but must be earned by hard
study and good conduct. It is attested by a certificate of
the Supreme Court and is protected by registration. No
one can practice law unless he has taken an oath of office
and has become an officer of the court, subject to its
discipline, liable to punishment for contempt in violat-
ing his duties as such and to suspension or removal. It
is not a lawful business except for members of the bar
who have complied with all the conditions required by
statute and the rules of the courts. As these conditions
cannot be performed by a corporation, it follows that
the practice of law is not a lawful business for a corpo-
ration to engage in. As it cannot practice law directly,
it cannot indirectly by employing competent lawyers to
practice for it, as that would be an evasion which the
law will not tolerate. Quando aliquid prohibetur ex di-
recto, prohibetur et per obliquim. (Co. Lit. 223.)
* * *
"A corporation can neither practice law nor hire law-
yers to carry on the business of practicing law for it any
more than it can practice medicine or dentistry by hiring
doctors or dentists to act for it. (People v. Woodbury
JDermatological Institute, 192 N. Y. 454; Hannon v.
Siegel-Cooper Co., 167 N. Y. 244, 246.) The legislature
in authorizing the formation of corporations to carry on
'any lawful business' did not intend to include the work
of the learned professions. * * * Business in its
ordinary sense was aimed at, not the business or calling
of members of the great professions, which for time out
of mind have been given exclusive rights and subjected
to peculiar responsibilities. * * *
DEFINITIONS
1169
"These remarks are not intended to cover title guar-
anty companies, organized under the insurance law and
authorized to examine titles, guarantee the correctness
of searches and insure against loss by reason of defective
titles. (Sec. 170.) The searching of titles is open to all
and guaranty companies may employ either lawyers or
laymen to transact their business. It is not claimed that
they prosecute or defend the rights of others, but only
their own, including such as the contract to indemnify
gives them.
Question 639: (1) Can a corporation be organized to prac-
ticelaw? Why?
(2) Can a corporation be organized to examine titles to real
estate and issue guarantee policies, etc. ?
(3) Do you think it is practicing law for a trust company
to hire lawyers to draw wills for patrons?
CHAPTER 80
PRELIMINARY OBSERVATIONS IN ORGANIZA-
TION OF CORPORATIONS
§ 645. Whether to incorporate.
§ 646. Where to incorporate.
§ 647. Adoption of name.
§ 648. Questions of financing.
§ 649. Compliance with blue sky laws.
§§ 645 to 649. (Corporations, Sees. 9 to 13.)
(Note: See general discussion Chapter 2 in Commercial Law
Series, Volume on Corporations.)
1170
CHAPTER 81
CHARTER AND ORGANIZATION
§ 650. Necessity and general nature of charter.
§ 651. Power of state and federal government to grant charters.
§ 652. Power of state to alter and repeal charters.
§ 653. Form of charter—Special statutes.
§■654. Form of charter—Certificate under general law.
§ 655. Form of charter—illustration.
§ 656. De facto corporations.
§ 657, Amendment of charter.
§ 658. First meetings and elections of directors and officers.
§ 659. The by-laws.
§ 660. Opening of corporate books and records.
§650. (Corporations, Sec. 14.) Necessity and general
nature of charter.
(Note: A charter from the government is absolutely neces-
sary to corporate existence. See "De Facto Corporations, Sec.
656, and generally throughout this chapter.)
§ 651. (Corporations, Sec. 15.) Power of state and
federal governments to grant charters.
(Note: The Federal Government has no general power to
incorporate companies. Its power to incorporate companies is
governed by the general proposition that it may do such acts as
are reasonable to carry into effect the provisions of the federal
constitution, for instance, to incorporate National Banks. The
general power of incorporation is reserved to the states.)
§ 652. (Corporations, Sec. 16.) Power of state to alter
and repeal charters.
Case 640. Dartmouth College v. Woodward, 4 Wheat.
518.
Facts: The original charter of Dartmouth College
named 12 trustees ("the whole number of said trustees
1171
1172
CORPORATIONS
consisting, and hereafter forever to consist, of twelve
and no more") to constitute a body corporate to be
known by the name of The Trustees of Dartmouth Col-
lege. In 1816, the state of New Hampshire (where said
college was situated) passed a law to increase the num-
ber of trustees to 21, and to establish a board of 25 over-
seers, and to make other changes of a material nature
in the management of said college. The college or its
trustees did not assent to these laws.
Point Involved: Whether the charter is a contract
protected by the provision of the federal constitution
that no state shall pass any law impairing the obligation
of contracts.
Chief Justice Maeshall: "* * * A corporation
is an artificial being, invisible, intangible and existing
only in contemplation of law. Being the mere creature
of law, it possesses only those properties which the char-
ter of its creation confers upon it, either expressly or as
essential to its very existence. These are such as are
supposed best calculated to effect the object for which
it was created. Among the most important are immor-
tality, and if the expression may be allowed, individ-
uality; properties, by which a perpetual succession of
many persons are considered as the same and may act
as a single individual. They enable a corporation to
manage its own affairs and to hold property without the
perplexing intricacies, the hazardous and endless neces-
sity, of perpetual conveyances for the purpose of trans-
mitting it from hand to hand. It is chiefly for the pur-
pose of clothing bodies of men, in succession, with these
qualities and capacities, tjiat corporations were inventfed,
and are in use. By these means a perpetual succession
of individuals are capable of acting for the promotion of
the particular object, like one immortal being. * * *
[Here the Court, in a lengthy opinion, considers the ob-
jects of corporations, their public or private nature, the
purposes of the present charter, etc.]
"The opinion of the Court, after mature deliberation
CHARTER
1173
is, that this is a contract, the obligation of which can-
not be impaired, without violating the Constitution of
the United States. * * *
"2. We next proceed to the inquiry whether its obli-
gation has been impaired by those acts of the legislature
of New Hampshire. * * *
[The Court concludes that the amendatory acts passed
by the New Hampshire legislature impaired the obliga-
tions of the charter, and that such acts are therefore
unconstitutional and void.]
Question 640: (1) What prevented the legislature from hav-
ing the power to pass the law in question ?
(2) How did Chief Justice Marshall define a corporation?
(Note: This decision firmly established the law and it has
never been disturbed. There has, however, been a considerable
difference of academic opinion upon the soundness of its syl-
logisms.)
Case 641. Avondale Land Co. v. Shook, 170 Ala. 379.
Facts: Suit by minority stockholders to restrain the
majority stockholders from amending the charter of the
corporation. The exact character of the changes con-
templated is not indicated in the opinion, except that
they are of a private nature and evidently go to change
the objects of the corporation. The constitution of Ala-
bama in force when the original charter was secured
provided that all charters were subject to the state's
right to alter, amend or repeal, and the present change
is sought under a law passed under that provision.
Point Involved: To what extent a charter may be
changed by the majority stockholders against the dissent
of a minority stockholder, where the state reserves the
right to alter, revoke or amend any charter and a law is
enacted, giving the majority stockholders a right to alter
the charter.
Evans, J.:  * * *
 Since the decision of the case of Trustees of Dart-
mouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629,
1174
CORPORATIONS
it has been fully recognized in this country that the char-
ter of a private corporation is a contract within the
meaning of and under the protection of that clause in
the Constitution of the United States which provides that
'no state shall * * * pass any * * * law im-
pairing the obligations of contracts.'—Section 10, art. 1,
Const. U. S. But 'the charter of a corporation having
a capital stock is a contract between three parties, and
forms the basis of three distinct contracts. The charter
is a contract between the state and the corporation;
second, it is a contract between the corporation and the
stockholders; third, it is a contract between the stock-
holders and the state.'—Cook on Corporations 6th Ed.)
Sec. 492. The charter is under the protection of said
clause of the federal Constitution in all three of its
aspects as a contract.
'' Such being the case, many, if not all, of the different
states of the Union have protected themselves, as far as
they thought necessary from the effects of this provision
in the federal Constitution by reserving in their const!
tutions certain powers of altering, revoking, and amend^
ing the charters of private corporations thereafter to
be organized under the general laws of such states or
chartered by special act of the legislature of such states,
so that such reserved power would enter into and form
a part of the charter contract. This was done in the
constitution of 1875 of this state. The power to amend,
alter, or revoke the charter thus being made a part of
the charter contract, the exercise of this power by'the
state in the manner and to the extent contemplated could
not be considered as in violation of said Section 10 of
Article 1 of the Constitution of the United States. Those
who invest their money in such a corporation do it with
full knowledge of the power which the state has reserved
to alter, revoke, or amend its charter, and contract with
reference thereto. It thus becomes part of the contract.
* * * We quote with approval from Cook on Corpo-
rations (6th Ed.) Sec. 501,- the following: 'The extent
of the power of the legislature to amend a charter, where
CHARTER
1175
it has reserved that power, is not yet fully settled, and
is full of difficulties. There is a strong tendency in the
decisions, and a tendency which is deserving of the high-
est commendation, to limit the power of the legislature
to amend a charter under this reserved power. It should
be restricted to those amendments only in which the
state has a public interest. Any attempt to use this
power of amendment for the purpose of authorizing a
majority of the stockholders to force upon the minority
a material change in the enterprise is contrary to law
and the spirit of justice. Under such reserved power
the Legislature has only that right to amend the charter
which it would have had in case the Dartmouth College
Case had decided that the federal Constitution did not
apply to corporate charters. In fact, the historical origin
of this reservation of the right to amend was due to
the effort of the various states of the Union to escape
from the decisions in the Dartmouth College Case. By
this reserved right the restraint of the federal Consti-
tution is done away with. But the power to make a new
contract for the stockholders is not thereby given to
the Legislature. The Legislature may repeal the charter,
but cannot force a stockholder into a contract against
his will.' In the above quotation the author was speak-
ing of such general reservation of power as that con-
tained in the Constitution of Alabama of 1875. We hold
that the amendment attempted in this case is a material
and fundamental change from the original plan, bring-
ing in new fields of operation and involving greater
hazard.
"It follows from the foregoing that the power of
amendment in the Constitution of 1875 does not give the
Legislature this power to amend the charter of the Avon-
dale Land Company in the manner and to the extent
attempted by the majority stockholders, and therefore
no such power could be given by the Legislature to a
majority of the stockholders of said corporation; that
Section 3462 of the Code of 1907 can confer no greater
authority to amend said charter than was reserved by
1176
CORPORATIONS
the Constitution of 1875. Hence said Section 3462 can-
not confer the authority.
''We are therefore of opinion that it does appear from,
the averments of the bill of complaint that the attempt
of respondents to amend said charter (as set forth in
said bill of complaint) was beyond the power of a ma-
jority of the stockholders of said corporation when ob-
jected to by any stockholder.
Question 641: (!) After the decision in the Dartmouth Col-
lege case, how did the states accomplish the power to change
charters thereafter to be issued?
(2) What sort of changes (as stated by the Court in this
case) can be made as against the dissent of minority stockholders,
under the state's reserved power to alter and repeal, and under
the statutes giving the majority members the right to secure
changes of the charter ?
(Note: With reference to the right to change the charter
against dissenting shareholders, we must keep distinct (a) the
right of the state on its own initiative to pass laws amending or
abrogating charters, and (b) the right of majority shareholders
to apply to the state for and to receive changes in the charter.
The general law by which the state reserves its right to amend
charters issued after the enactment of such law, gives it the
right to pass laws requiring annual reports, to admit stock-
holders to inspect books, to keep certain sorts of books, to have
certain numbers or qualifications of directors, etc. The law by
which a certain majority may effect changes in the charter,
gives them the right to change the name, the objects, the number
of directors, etc. The extent to which the majority can bring
about such changes is not entirely clear under the authorities.
It would seem, for instance, unjust to allow the majority against
dissent of minority stockholders to change the object of a cor-
poration from that of manufacturing automobiles to that of
selling groceries, whether the point is raised as to whether the
dissenting stockholder simply cannot object, but may withdraw
from his share ownership, or whether he can be compelled to
accept the change. There are decisions (as the one above)
which limit the right of alteration very sharply to changes of
an immaterial nature or to changes of public importance, and
even in a change of public importance, it would seem there ought
CHARTER
1177
to be limitations. Suppose a statute is passed doubling the
liability of stockholders in existing corporations. Cases have
upheld this power (J. C. Somerville v. St. L. M. & M. C. 46 Mont„
268,127 Pac. 464, L. R. A. 1915B, 811 and note.)
§§ 653, 654. (Corporations, Sees. 17, 18.) Form of
charter—Special law; certificate under general law.
(Note: The early form of charter was that of a special or
private law creating a particular corporation. Many of the older
corporations, including those for profit and not for profit, oper-
ate under such charters. Now the various state constitutions
provide that no special or private act shall be passed where a
general law may be made applicable. In consequence whereof
general corporation laws are enacted under which incorporation
is provided for, the charter consisting of a certificate filed under
such general law. Compliance with such laws entitles the in*
corporators to a charter and the public officials have no disere-
tion to withhold it and judicial process may be resorted to to
compel issuance.
Where a certificate is issued or filed under the general law, the
certificate contains the name, the amount of capital stock, the
kinds and classes of stock, the objects of incorporation, etc.)
§655. (Corporations, Sec. 19.) Form of corporation—
illustration.
(See Commercial Law Series, Corporations, p. 41.)
§656. (Corporations, Sec. 20.) De facto corporations.
Case 620. Harrill v. Davis, 168 Fed. 187.
(Set out in Chapter 68, supra.)
Question 620: In this case why was there no corporation de
fact of
Case 642. Imperial Building Co. v. Board of Trade,
238 111. 100.
Facts: The law of Illinois forbade incorporation for
dealing in real estate. The Imperial Building Company
Was organized as a real estate company and compliance
with the Illinois general corporation law was attempted
1178
CORPORATIONS
and the Secretary of State, misinterpreting the law,
issued a certificate of incorporation to such company
(said certificate being void in law). The company then
in good faith proceeded to carry on business as a corpo-
ration. It rented certain of its premises to the Chicago
Open Board of Trade. Suit was brought against such
tenant for rent in arrear. Defendant pleaded "nul tiel
corporation (no such corporation). The Imperial
Building Company contends that it is at least a corpora-
tion de facto, and as such its existence as a corporation
cannot be questioned by any one except the state.
Me. Justice Farmer: "* * * It is next contended
that if appellant's charter he held void it is not subject
to be attacked collaterally and that appellee having
entered into a contract with appellant for the leasing of
the premises is now estopped to deny its corporate exist-
ence. The general rule is, that where there is an attempt
in good faith to organize under a law authorizing the
incorporation, and corporate functions are exercised,
this makes the organization a corporation de facto, and
its legality cannot be questioned collaterally or by one
who deals with it as a corporation. In such cases the
introduction in evidence of the charter and proof of
user, and that the party seeking to deny the legality of
the corporation dealt with it as a corporation, sufficiently
proves it a corporation de facto, and whether there may
have been some irregularities in perfecting the incor-
poration will not be inquired into. The legality of such
incorporation can only be attacked by the state in a direct
proceeding. * # *
"The appellee concedes that this is the rule as to de
facto corporations but contends that there can only he
a de facto corporation where there is a law under which
the corporation might legally be organized, but that if
there is no law authorizing the organization of such
corporation its non-existence or invalidity can be set up
collaterally. Cook on Corporations (Sec. 234) thus de-
fines a corporation de facto: 'The corporation is a de
CHARTER
1179
facto corporation where there is a law authorizing such
a corporation and where the company has made an
effort to organize under the law and is transacting busi-
ness in a corporate name.' In American Trust Co. v.
Minnesota and Northwestern Railroad Co., 157 111. 641,
it was contended on behalf of certain corporations that
had attempted a consolidation without any law author-
izing such consolidation, that the validity of the con-
solidation, when not questioned by the state, must be
sustained as against third persons and wrongdoers. The
Court held the rule of law was not as broad as contended
for, and said (p. 652): 'Where there is a de facto cor-
poration, its corporate existence, except in a few excep-
tional cases, cannot be questioned collaterally, and can
only be inquired into by the state and in a direct pro-
ceeding.' (Hudson v. Green Hill Seminary, 113 111. 618.)
But in order that there should be a de facto corporation,
two things are essential: First, there must be a law
under which the corporation might lawfully be created;
and second, user. Where the law authorizes a corpora-
tion, and there is an attempt, in good faith, to organize,
and corporate functions are thereupon exercised, there
is a corporation de facto, the legal existence of which
cannot ordinarily be questioned collaterally. * * *
[The Court held that the plea was good and that the
rent could not be recovered by the corporation suing as
such, as there was not even a corporation de facto.]
Question 642: (1) "What three things are essential to the
existence of a corporation de fact of
(2) "What is a corporation de jure f
(3) If there is a corporation de facto, who can question its
existence ?
(4) Where the defense is that the corporation is defectively
organized, what practical results follow in holding that it has
sufficiently complied with the law to constitute a corporation de
facto?
(5) What was lacking in the above case which made the
defense good that there was not a corporation de facto?
(6) Suppose the Imperial Building Company had been the
1180
CORPORATIONS
tenant and its members had been sued personally for the rent,
do you think they would have been liable? Could they have
asserted that the lease was that of the corporation and not their
own ?
(7) A corporation is chartered to carry on a safety deposit
vault business, a business for which incorporation may be had
under the law. It erects a 16-story building and puts in a small
vault in the basement, letting out the rest of the building to
tenants for general office purposes. A tenant is sued for the
rent. Would you distinguish between such a case and the case
above ? Why ?
(Note: The phrase "de facto corporation is unfortunate.
A "de facto corporation is a legal corporation. It has and
must have a charter. Without a charter there is no corporation
—de facto or otherwise. If a corporation has gone far enough
to be a de facto corporation, then it is legally a corporation and
as such may so act, and its members are not personally liable.
The distinction between de facto and de jure corporations gives
rise to the impression that there may be a corporation in fact
as distinguished from one in law. This is not true.)
§ 657. (Corporations, Sec. 21.) Amendment of charter.
(See Sec. 652 and note.)
§§ 658, 659, 660. (Corporations, Sees. 22, 23, 24.)
(Note: See Commercial Law Series, Sees. 22, 23, 24, also
Brinkerhoff Trust and Savings Co., 118 Missouri, 447, post.)
CHAPTER 82
PROMOTERS OF CORPORATIONS
§ 661. Promoters defined.
§ 662. Liability of stockholders or corporations for acts of promoters.
§ 663. Promoters in position of trust.
§§661, 662, 663. (Corporations, Sees. 25, 26, 27.)
Case 643. Cushion Heel Shoe Co. v. Hartt, 50 Law-
yers' Reports Anno., new series, 979 (Ind.).
Point Involved: The liability of a corporation for the
contracts of its promoters.
Spencer, J., delivered the opinion of the court:
'■■"It appears from the record in this case that in April,
1909, appellee, who was experienced in the manufacture
of shoes, inserted in a shoe journal an advertisement
for a shoe factory to locate in the city of Ft. Wayne.
Among the answers which he received thereto was one
from a man named Johnson, who was the patentee of a
certain cushion heel shoe. Johnson came to Ft. Wayne,
and with him appellee went to the president of the Com-
mercial Club, whom they interested in the proposition of
starting appellant company. Subscription lists were pre-
pared and appellee started out to get subscribers to the
undertaking. He testified that Johnson then promised
him the position of superintendent when the factory
should be established, and also promised that he (appel-
lee) should be paid for his time and money spent in
'securing the stock subscriptions; that after the company
Was organized, appellee talked with several of the direc-
tors and officers of appellant company and told them
that he expected to be paid for his services; that one of
the directors said to appellee: 'I believe you should be
1181
1182
CORPORATIONS
compensated. I have told the people, the directors, to
settle with you.' No testimony was introduced to show
that the board of directors ever acted on appellee's claim,
but it is his contention that, by accepting the results of
his services and receiving the benefits thereof, appellant
is now bound on an implied contract to pay for such
service.
"It is certain that, under ordinary circumstances, a
corporation cannot be successfully sued on a contract
made for its benefit by its projectors before its incor-
poration. Contracts of this character, however, are not
void, but voidable; and it is well settled in nearly all
jurisdictions-that, in so far as they are not ultra vires,
such contracts may become binding on the .corporation
if ratified by it, either expressly or by implication, after
its organization. Smith v. Parker, 148 Ind. 127-133, 45
N. E. 770; Bruner v. Brown, 139 Ind. 600-602, 38 N. E.
318; Davis & R. Bldg. & Mfg. Co. v. Hillsboro Creamery
Co., 10 Ind. App. 42, 37 N. E. 549; Tuttle v. Tuttle, 101
Me. 287-292, 64 Atl. 496, 8 Ann. Cas. 260; Battelle v.
Northwestern Cement & Concrete Pav. Co., 37 Minn. 89,
33 N. W. 327.
"But the rule that a corporation may be bound, like
any individual, by an implied contract, is limited in its
application to contracts in which the promoters of such
corporation are interested.
"We are aware that cases may be found which seem
to sustain appellee's position, but, as is suggested in
10 Cyc. at page 265, 'it is difficult to understand how
the corporation could be estopped by accepting benefits
which it had no power to reject, without uncreating it-
self.' We believe that the better reason and the weight
of authority support the holding that, in the absence of
statutory or charter provisions, a corporation will be
held liable for services rendered by its promoters before
incorporating only when, by express action taken after
it has become a legal entity, it recognizes or affirms such
claim. The evidence before us does not indicate such an
affirmance. In Tift v. Quaker City Nat. Bank, 141 Pa.
PROMOTERS
1183
550, 21 Atl. 660, as in this case, it was shown that the
plaintiff's claim was brought to the attention of the board
of directors after the defendant's incorporation, but that
no action was taken thereon. The Court held that 'mere
silence of the board of directors, or failure to object
when the claim was mentioned, is not such an act of rati-
fication as will bind the bank.' ''
Question 643: (1) Is a promoter the agent of the corpora-
tion?
(2) When will the corporation be liable for the acts of a
promoter ?
(Note: The rule is everywhere settled that corporations are
not liable for the contracts of its promoters merely because
made by the promoter. A promoter is not an agent for the future
corporation. The corporation may become liable by adopting
the act of the promoter. Such adoption may be either express,
or it may be implied where the corporation accepts property
which it has full liberty to decline (10 Cyc. 263). For mere
services, however, the better opinion seems to be that it will
not be liable merely because it receives the benefit, as it cannot
well decline it. The promoters are themselves liable on their
own contracts. The doctrine "respondent superior does not
apply, as the corporation, not being in existence, cannot be
the principal.)
Case 644. Yeiser and others v. U. S. Board & Paper
Co., 107 Fed. Rep. 340.
Facts: The corporation sues Yeiser and others to
annul certain certificates of stock alleged to have been
unlawfully obtained by certain parties (Yeiser being the
administrator of one of them, now deceased). It ap-
peared that these parties conceived the project of organ-
izing a corporation, obtaining subscriptions thereto and
with the proceeds to purchase a paper mill plant for the
company at an advanced price on an option secured by
them on the property, thereby realizing a considerable
profit. They secured this option at the sum of $75,000.
They then formed a company with a capital stock of
$100,000, subscribing for $25,000 of the stock, but not
1184
CORPORATIONS
paying therefor. Being all the subscribers of the stock,
they elected each other directors constituting the whole
board. Bell, one of their number, was authorized to
secure additional subscriptions. They then voted that
the corporation buy the property for $100,000. A pro-
spectus was then issued and subscriptions of $45,000 se-
cured. By manipulating matters the defendants secured
their $25,000 of stock, for nothing, and it is the validity
of this stock that is questioned as having been secured
through fraud on the other stockholders.
Severens, C. J.: "In this country the courts have
accepted the essential principle laid down in the English
cases, and hold, with scarcely any variation to the doc-
trine, that the promoter of a company stands in the re-
lation of a trustee to it, and those who become subscribers
to its stock, so long as he retains the power of control
over it. There is some difference of opinion, as there
is in the English cases, in regard to the time when he
becomes such promoter, within the meaning and opera-
tion of the rule. Some courts are of opinion that he is
chargeable with the duties of a trust when he enters into
the execution of the scheme which is intended to result
in the transfer of the property to a company to be orr
ganized and controlled by him. All, however, agree that
he comes within the rule when he begins to organize
the company, and that from that time he is bound to deal
openly and fairly, and in such a way as that those having
independent charge of the company, as well as those
who are induced to become subscribers to its stock, may
be fully advised of the relation he bears to the property
which he purposes to sell, in like manner as one who
assumes to act as the agent of another in the purchase
of property. * * *
"The company, as well as the stockholders, are en-
titled to the independent judgment of the trustee in re-
gard to the value of the property to be purchased, and
the price to be paid, as well as its fitness for the intended
use. It is said that the property is worth what the com-
PROMOTERS
1185
pany paid for it, and is adapted to the company's re-
quirements. It happens so. But this in no manner af-
fects the operation of the rule. * * *
'•■"The substance of the whole matter is that through
their breach of trust, they were enabled to get $25,000
of the company's stock without paying for it. It seems
to us that a decree annulling their title to it is an appro-
priate remedy. The decree- of the circuit court is
affirmed.
Question 644: (1) State the facts in this case, the question
presented and the Court's decision.
(2) Why was it immaterial that the company got its money's
worth?
Case 645. Lomita L. & W. Co. v. Robinson, 154 Cal.
36.
Facts: See the opinion.
Point Involved: The right of promoters to make a
secret profit on the property sold by them to the cor-
poration.
Angellotti, J.: "* * *
"As to defendants Freeman and Cline, the case, under
the authorities, is, of course, a clear one so far as the
$6,500 profit made by Freeman and shared by him in
part with the others is concerned. They were essen-
tially promoters of the corporation formed for the
avowed purpose of purchasing this property from one
other than themselves, and they misrepresented to those
whom they induced to join in the enterprise, and who
became with them subscribers to the stock of the pro-
posed corporation, the amount the corporation would be
required to pay in order to obtain the property, for the
purpose of making $6,500 secret profit from the sub-
scribers in the transaction, and this secret profit was in
fact made. The findings show that their plan from the
beginning was to form a corporation to purchase this
property, and that they practically procured its founda-
tion. As promoters of the corporation, they occupied a
1186
CORPORATIONS
fiduciary relation to their co-subscribers, and were bound
to truthfully declare to their associates any personal
interest that they had in the matter of the purchase.
Without such disclosure they could not legally profit at
the expense of their associates. If they were guilty of
any misrepresentation in the facts or suppression of
truth in relation to their personal interest in the pro-
posed purchase, the corporation is entitled to set aside
the transaction, or recover compensation for any loss
which it has suffered. * * *
Question 645: How was the second profit made in this case?
Were the promoters held liable?
PART II
STOCK AND STOCKHOLDERS
Chapter
83.
Definitions and Kinds of Stock.
Chapter
84.
Subscriptions to Stock.
Chapter
85.
Payment for Stock.
Chapter
86.
Rights of Stockholders.
Chapter
87.
r tockholders' Meetings.
Chapter
88.
Transfer of Stock.
Chapter
89.
Dividends.
CHAPTER 83
DEFINITIONS AND KINDS OF STOCK
§ 664. Definition of capital stock and share of stock.
§ 665. Common and preferred stock.
§ 666. Par and no-par stock.
§ 667. Unissued and treasury stock.
§ 668. The certificate of stock.
§ 669. The legal nature of shares of stock.
§664. (Corporations, Sec. 28.) Definition of capital
stock and shares of stock.
Case 646. State v. Morristown Fire Ass'n, 23 N.
J. L. 195.
Point Involved: The definition of capital stock; its
.distinction from the property of the corporation.
Chief Justice (Preen : "The phrase 'capital stock' as
employed in acts of incorporation, is never, that I am
aware, used to indicate the value of the property of the
company. It is very generally, if not universally, used
to designate the amount of capital to be contributed by
1187
1188
CORPORATIONS
the stockholders for the purposes of the corporation.
The amount thus contributed constitutes the 'capital
stock' of the company. The value of the stock may be
greatly increased by surplus profits or be diminished by
losses, but the amount of the capital stock remains the
same.
"The funds of the company may fluctuate. Its capital
stock remains invariable, save by legislative enactment.
This distinction between the value of the property of
incorporated companies and their capital stock is per-
fectly familiar.
Question 646: Define capital stock; how does it differ from
the property of the corporation ?
Case 647 Storrow v. Texas Consol. Comp. & Mfg.
Asso., 87 Fed. 612.
Swayne, D. J.: "* * *
"A share of stock has been defined to be a right which
its owner has in the management, profits, and ultimate
assets of the corporation; but he has no legal title to the
profits or property of the corporation until a dividend
is declared, and a division made on the dissolution of the
corporation. Common stock differs in many ways from
what is termed 'preferred stock.' The owner of the for-
mer is entitled to an equal pro rata division of the
profits, if there be any, but has no advantage of any other
shareholder or class of shareholders of common stock.
Preferred stock, on the other hand, generally entitles its
owner to dividends out of the net profits before and in
preference of the holders of the common stock. Gener-
ally, the rights, powers, and privileges of preferred,
stockholders depend upon the terms upon which it is
issued; preferred stock making a multiplicity of forms,
according to the desire or ingenuity of the stockholders,
and the necessity of the corporation itself. The percent-
age of preferred stock dividends is always fixed before
it is issued. It is a matter of contract, and may be made
cumulative, as it was in this case. Every holder of pre-
DEFINITIONS AND KINDS OF STOCK 1189
ferred stock, by its terms, was guaranteed.a dividend of
6 per cent per annum thereon to be paid out of the net
earnings of the association, which are properly the gross
receipts, less the expenses of operation, interest on debts,
and other liabilities payable first. The rest is the net
profits out of which the shareholders of preferred stock
should be paid the 6 per cent dividend. While it was
largely a matter of discretion with the board of directors
as to what use they would put the profits to, whether to
declare a dividend or use them in the business of the
company, there is a limit to this discretion; and the
courts will not allow the directors to use their powers
oppressively by refusing to declare a dividend while the
net profits and character of the business clearly warrant
it. This rule is applicable not only to the holders of the
common stock, but also to the preferred stock, which is
entitled, as a matter of right, to have a dividend declared
out of the net profits, if it can be shown that the directors
did not exercise reasonable discretion in withholding the
same. By the final dissolution of the corporation, the
holders of the preferred stock would be entitled to re-
ceive only the full face-value thereof, after which the
balance of the property would be equally divided among
the common stockholders.''
Question 647: (1) Define a share of stock.
(2) How does common differ from preferred stock?
§665. (Corporations, Sec. 29.) Common and preferred
stock.
Case 648. Spear v. Rockland-Rockport Lime Co., 113
Maine Reports 285, 93 Atl. 754.
Savage, C. J.: Bill in equity by a preferred stockholder,
for himself and in behalf of all other preferred stock-
holders, against the Rockland-Rockport Lime Company
and its directors, for the purpose of requiring a dec-
laration of "a dividend of 7 per cent., payable on the 1st
days of March and September of each year, with inter-
1190
CORPORATIONS
est on each dividend from the time it became due until
the date of the bill. The case comes before this court
on exceptions to the sustaining of the defendants' de-
murrer.
The facts stated in the bill, and which must be taken
on the demurrer to be true, are these: The defendant
corporation was organized in 1900 for the purpose of the
manufacture and sale of lime. Its capital stock of
$2,000,000 was divided into preferred and common stock;
and $825,000 of preferred, and $875,000 of common stock
have been issued. Each kind of stock was of the par
value of $100 a share.
On January 23,1901, the plaintiff purchased ten shares
of preferred stock, which he still owns. He received a
certificate of stock which contained an agreement:
"That the preferred stock is entitled, out of the net
earnings of the company, to a semiannual, preferential,
cumulative dividend at the rate of 7 per centum per
annum, and no more, payable on the 1st days of March
and September in each year, to be paid or provided for
before any dividend shall be set apart or paid on com-
mon stock; that in case of liquidation or dissolution, the
preferred stock shall be paid in full at par, together with'
accrued and unpaid dividends, before any payment is
made on the common stock, and so forth.
January 18, 1900, the defendant mortgaged its prop-
erty and franchise for $1,000,000, to secure the payment
of bonds, the proceeds of which, with that of the capital
stock gave it a working capital of $2,700,000. In April,
1901, it issued its debenture bonds for $1,000,000, from
which it realized the sum of $950,000, thereby increasing
the working capital to $3,650,000. Its net earnings to
and including 1910 are alleged to have been about $688,-
000. It is alleged that on December 31, 1910, the corpor-
ate assets amounted in value to $4,131,039.76, and its
liabilities, outside of capital stock, and including "un-
divided profits were $2,431,039.76; that the excess of
assets over liabilities is composed in part of the net earn-
ings, which have been applied by the directors to the in-
DEFINITIONS AND KINDS OF STOCK 1191
crease and enlargement of the company's plant, and
otherwise to the increases of its assets, instead of being
applied to the payment of dividends to preferred stock-
holders. The complainant alleges that he has duly de-
manded the sum which should have been due and payable
to him, but that the demand has not been complied with.
It is alleged that by the issue of debenture in April,
1901, it was intended wrongfully to create such a large
additional indebtedness as would deprive the preferred
stockholders of the dividends to which they were entitled;
that the refusal to declare dividends was for the purpose
of increasing the value of the plant, and of making the
. claim that the debenture bonds could not be paid at ma-
turity, if dividends on preferred stock were paid; that
no provision was made for the payment of the debenture
bonds; and that three days before they became due the
company announced that it was not in a position to pay
them.
Afterwards another corporation was organized, called
the Rockland & Rockport Lime Company. And on July
1,1911, the defendant sold all its assets, subject to the
first mortgage bonds, for $1,081,000, to one Kalloch, the
purchaser assuming all the debts, liabilities, and obliga-
tions of the company, and on the same day Kalloch sold
the assets to the Rockland & Rockport Lime Company.
And in this connection it is alleged that among the lia-
bilities assumed by Kalloch were undivided profits
amounting to $212,256.32.
The foregoing statement embodies the allegations in
the bill. And the question is whether upon such a state-
ment, assuming the allegations to be proved, there would
he any justification for equitable interference at the suit
of a preferred stockholder to compel a distribution of
dividends.
As a general rule, the officers of a corporation are the
sole judges as to the propriety of declaring dividends,
and the courts will not interfere with the proper exercise
of that discretion; yet, when the right to a dividend is
clear, and there are funds from which it can properly be
1192
CORPORATIONS
made, a court of equity will interfere to compel the com-
pany to declare it. Directors are not allowed to use their
power illegally, wantonly, or oppressively. Belfast & M.
Lake R. R. Co. v. Belfast, 77 Me. 445, 1 Atl. 362. The
rights of a preferred stockholder are enforceable in
equity against the company in accordance with the terms
of his contract. Hazeltine v. Belfast & M. Lake Railroad
Co., 79 Me. 411,10 Atl. 328, 1 Am. St. Rep. 330. And all
unfair discrimination between preferred stockholders
and common stockholders will he prevented. 1 Morawetz,
Priv. Corp., Sec. 280.
But even as to a preferred stockholder, unless his con-
tract otherwise provides or requires, the profits or net
earnings may be allowed to accumulate, and remain in-
vested in the business. The officers of a corporation are
invested with a discretionary power with regard to the
time and manner of distributing its profits. They may
use the profits for the development of the company's
business so long as they do not abuse their discretionary
power, or violate the charter, or the contracts made, as
to profits, with particular classes of stockholders. 1
Morawetz, Priv. Corp., Sections 276, 447.
The preferential rights of a preferred stockholder
arise from his contract, which in this case is found in
his stock certificate. His contractual rights the court
may enforce against the corporation and other classes of
stockholders. But, aside from his special contract, he
stands on no better footing than any other stockholder.
He can require the payment of dividends, when others
cannot, only in case and to the extent that dividends were
promised or guaranteed in his contract. Such dividends
he may require whenever the company has acquired
funds which may rightfully be used for the payment of
dividends. 1 Morawetz, Priv. Corp., Sec. 459.
Moreover, a preferred stockholder is not a creditor.
He is a stockholder, although his peculiar rights arise
from contract. He is a stockholder as to other creditors,
and his rights are subordinate to theirs. He cannot
claim dividends out of funds that are needed for, or that
DEFINITIONS AND KINDS OF STOCK 1193
properly should be applied to, the payment of debts.
Belfast & M. Lake R. R. Co. v. Belfast, supra. He is en-
titled to a dividend out of net earnings only.
The plaintiff: 's contract is that he shall be entitled, out
of the net earnings of the company, to a semiannual,
preferential, cumulative dividend, to be paid or pro-
vided for before any dividend is set apart or paid on the
common stock. And that is why it is called preferential.
By being cumulative, if net earnings at any dividend
period are insufficient to pay the contract dividend, it is
to be made up out of subsequent net earnings. And in
any event, upon liquidation or dissolution of the corpor-
ation, the contract goes on to say, the preferred stock-
holders are to be paid in full for their stock at par, with
all accrued and unpaid dividends, before stockholders re-
ceive anything. One feature of the contract remains to
be noticed. The contract was that the preferred stock-
holder was entitled, out of the net earnings, to "semi-
annual * * * dividends. The defendant contends
that, under this contract, the plaintiff was not entitled,
even if there were net earnings, to have dividends paid
for any half year, year, or series of years; that the
directors might use the net earnings for the development
of the business; and that there was but a single limita-
tion, namely, that the plaintiff must be paid all accrued
and unpaid dividends before anything is paid to com-
mon stockholders. In other words, it is claimed that
the defendant made no promise or guaranty to the plain-
tiff of any dividends to be paid out of net earnings, at
any particular time, and that it will have fully kept and
performed the obligation of its contract, if at any time,
past or future, it has paid or will pay the preferred divi-
dends before common ones are paid; that is, it may in-
definitely postpone payment. We are unable to concur
in this view. This contract, like all others, must be in-
terpreted in accordance with the expressed intention of
the parties, reading the contract in the light of its pur-
Poses and existing conditions and surrounding, circum-
stances. And, reading the contract in that way, we think
1194
CORPORATIONS
it obvious that, when the parties agreed that the plaintiff
was to be entitled, out of the net earnings, to a semian-
nual dividend, they intended that he should be entitled
to have a dividend paid semiannually if there were net
earnings. Such, we think, would be the ordinary accepta-
tion of the words used. And, if there is any ambiguity
in meaning, the contract should be construed more
strictly against the company. The phraseology was its
own, and it should be held to the significance which the
words would ordinarily imply to an investor.
It follows, therefore, that the plaintiff is now entitled
to cumulative dividends, if there are net earnings, and
if now there is any available fund out of which dividends
may properly be paid. Here lies the difficulty in the
plaintiff's case. It is alleged, that the net earnings to
December 21, 1910, were $688,000. It is also alleged that
these net earnings were applied by the directors to the
increase and enlargement of the plant, and "also to the
increase of the assets of the corporation, whereas they
should have been applied to the payment of dividends.
The plaintiff claims also that the company has $212,-
256.32 of "undivided profits, which should be applied
to dividends. This claim relates to the allegation re-
specting assets and liabilities on December 31, 1910. It
is alleged specifically that the value of the plant of the
corporation was $3,567,477.14, and that there were other
assets to the amount of $563,562.62; the whole amounting
to $4,131,039.76. The liabilities are alleged to be: First
mortgage bonds, $988,500; debenture bonds, $1,000,000;
interest accrued and unpaid, $33,094.13; accounts pay-
able, $113,689.31; mortgage note account, $80,000; con-
tingent reserve, $3,500. These items amount to $2,218,-
783.44. If to this be added the capital stock liability of
$1,700,000, the total liabilities amounted to $3,918,783.44.
And this amount deducted from the total assets leaves
a balance of $212,256.32, which is properly called "un-
divided profits,'' and which the plaintiff claims is a basis
for dividends. But it will be noticed that it is a book-
keeping item, entered to make a complete balance sheet.
DEFINITIONS AND KINDS OF STOCK 1195
It indicates, indeed, the excess of all assets over all liabil-
ities, and that is profit. But it does not indicate that
there is any fund immediately available for dividends.
And, as the net earnings had been $688,000, and as no
dividends had ever been declared, it shows that the net
earnings applied to the increase of the plant and other
assets, in excess of $212,256.32, had disappeared in a
shrinkage of the value of the plant and other assets.
But it is also alleged that six months later, July 1,1911,
the corporation sold "its entire property of every kind
and nature, including its accounts due and cash on
hand,'' through an intermediary, to another corporation,
for $1,081,000. This sale was subject to the first mort-
gage for $1,000,000. And the purchaser assumed all the
debts, liabilities, and obligations of the old corporation,
and agreed to pay the purchase price in debenture bonds.
The phraseology of the allegation leaves it uncertain
whether the assumption of debts, and so forth, was a con-
sideration additional to the $1,081,000, or whether the
debts were to be paid out of the $1,081,000. Counsel on
both sides have treated the question as if the latter al-
ternative were the true one; and we assume it to be so.
Plaintiff's counsel in argument criticizes this sale, but
the plaintiff's bill does not suggest any illegality in it.
It rather criticizes the directors for not having before
that time made provision for the extinguishment of the
debenture bonds, by payment, renewal, or otherwise.
It is not alleged that there was any fraud or want of good
faith in the sale, nor that the purchaser was not a bona
fide purchaser. It is not alleged that the property was
sold for less than its real value. And, even if there were
fraud and collusion, and if the directors abused their
discretion in making the sale, it is clear that the remedy
for such acts does not lie within the scope of this bill as
framed. This bill seeks only a declaration of a dividend,
and that presupposes a fund or other property out of
which it can be paid.
The concrete fact is that all the defendants' property
^as sold to a purchaser, who, under the allegations of
1196
CORPORATIONS
the bill, must be regarded as a bona fide purchaser, for
$1,081,000. No explanation is afforded by the bill of the
apparent shrinkage in the net assets of nearly $1,000,000
from December 31, 1910, to July 1, 1911. For present
purposes, on demurrer, we must take the statement as of
December 31, 1910, to be true. It may be that upon a
hearing it would appear that the assets were largely
overstated; or it may be that there was some other cause
of shrinkage. Whatever may be the explanation, the fact
remains that after the sale $1,081,000 in new debenture
bonds was all the property the corporation had. What-
ever may have been the duty of the corporation previ-
ously to make provision for dividends, it had made no
such provision. The plaintiff did not insist upon his
dividends, and did not undertake to compel the company
to pay them. And now at the end of the chapter there
is only $1,081,000 with which to pay debts and dividends.
The net profits had disappeared. The capital stock was
practically wiped out. The company owed $1,000,000 of
debenture bonds then overdue. Six months before it had
owed nearly $147,000, for unpaid interest and accounts
payable. There is no allegation and there is no presump-,
tion that this indebtedness had been reduced. The pro-
vision for the payment of the debenture bonds would
absorb $1,000,000 of the purchase price, leaving only
$81,000, even if there were no other indebtedness.
The plaintiff contends, however, that, as a preferred
stockholder, he should have had priority over the de-
benture bonds liability. We do not think so. Stock-
holders, even preferred stockholders, can have no prior-
ity over creditors. The debenture bonds were a lawful
indebtedness of the corporation, and were entitled to
payment, whether the corporation would be able to keep
its contract with the plaintiff for dividends or not. But,
if it were otherwise, the length of time that has elapsed
since the purchaser assumed the debts and agreed to pay
in new debenture bonds, and the nature of the transac-
tion itself, warrant the inference that the transaction is
completed, and that $1,000,000 of the purchase price has
DEFINITIONS AND KINDS OF STOCK 1197
long since passed, in one form or another, to the holders
of the old debenture bonds, and is not now held by the
defendant. And, if that be so, it is not available for
dividends.
The plaintiff also contends that there was no necessity
for providing for the payment of all the debenture bonds
when due, and relies upon Hazeltine v. Belfast & M. Lake
R. R. Co., 79 Me. 411, 10 Atl. 328, 1 Am. St. Rep. 330.
But that case is not like this one. There the corporation,
having a large current income, sought to set apart
enough of it as a sinking fund to pay the entire bonded
indebtedness which would become due many years later.
The court held that it was not necessary, as a legal prop-
osition, thus to provide for the payment of all the indebt-
edness at maturity, to the exclusion of dividends for pre-
ferred stockholders. But here we have a case where pre-
sumably the payment of the bonded indebtedness is an
accomplished fact. It is too late now to recall the pay-
ment. It is now immaterial whether it was necessary to
pay all of the old debenture bonds, if they are paid.
Upon the allegations, we would not be justified in saying
that the corporation now has any property in excess of
$81,000 available for dividends, and not that if there is
indebtness to be paid out of it.
It is true that the plaintiff alleges that  there is prop-
erty out of which a dividend can and should be paid,
but that indefinite statement must be interpreted, of
course, in connection with th.e definite statement of the
results of the sale of the property. There is nothing in
the bill to indicate what the property is, but counsel
argues that the $212,256.32 "undivided profits shown
in the trial balance is property. We have already dis-
cussed this question. Although there is a bookkeeping
item of "undivided profits, they certainly are not tan-
gible for dividend purposes.
If we assume that at the time of the sale there were no
debts except the debenture bonds, and this is the most
favorable assumption for the plaintiff that can be made
upon the allegations, and if we assume that the corpo-
1198
CORPORATIONS
ration still holds $81,000 of the purchase price, the bill
does not show a situation calling for the declaration of
a dividend. The corporation having sold all its property,
it has apparently "ceased to do business (Van Oss v.
Premier Petroleum Co., 113 Me. 180, 93 Atl. 72), and the
stockholders' remedy is rather by compelling it to be
wound up than by seeking dividends out of net earnings
which no longer exist (Laws of 1905, c. 85, as amended by
Laws of 1907, c. 137). When the entire assets have been
reduced to less than 10 per cent., at most, of the pre-
ferred stock, and the entire corporate plant has been
sold, the proper remedy is not dividends, but dissolution;
and, under the situation described in the bill, dissolution
is the only proper remedy, since in no other way can the
interests of all parties, including creditors, if any, be
safeguarded.
We hold, therefore, that upon proof of the facts alleged
in the bill, without more, the court would not be justified
in ordering the payment of a dividend to preferred stock-
holders, and for that reason the demurrer was correctly
sustained.
There is another good ground of demurrer. The plain-
tiff has not alleged in his bill that any application has'
been made to the directors to declare the dividend sought
for, nor is any reason alleged why such an application
would be ineffectual, if there were any funds to divide.
One or the other allegation is essential. Ulmer v. Maine
Real Estate Co., 93 Me. 324, 45 Atl. 40. The plaintiff
alleges that he has demanded payment of the amount due
by contract, as he claims, on his own stock. His suit is
brought for the benefit of all stockholders of his class,
and his demand for payment falls far short of an applica-
tion to have a dividend declared for the benefit of all.
Exceptions overruled.
Bill dismissed, with costs.
Question 648: (1) Can a preferred shareholder maintain a
suit to compel a dividend? What must he show?
(2) Have preferred shareholders any priority over subse-
quent bondholders or other creditors?
DEFINITIONS AND KINDS OF STOCK 1199
(Note: (1) Is preferred stock cumulative or non-cumula-
live? Cumulative unless otherwise agreed.
- (2) Does it participate with common t Yes, unless otherwise
provided.
(3) Is it preferred as to assetsf Not unless so provided.
(4) Does it vote? Yes, unless affirmatively deprived.
(5) General rights. The difficulty in comprehending the
nature of preferred stock passes away if we think of it simply
as a stock to the holders of which the other stockholders have
made certain guaranties. Preferred stockholders are stock-
holders, with no less right than other stockholders, except as
those rights are specially taken away, and with no more rights
except as those rights are added. Adding rights in itself sub-
tracts none, and adds no more than are added.
Of course the contract ought to be very carefully drawn.)
§666. (Corporations, Sec. 30.) Par and no par stock.
Case 649. Note, Columbia Law Review, p. 278.
"SHARES WITHOUT PAR VALUE. It is interest-
ing to note that there is nothing revolutionary or even
novel in the concept of corporate shares without nominal
or par value. In the joint stock companies of the Eliza-
bethan period in England, the forerunners of the modern
corporation, the share was used 'in the natural sense,
namely as an appreciable part of the whole undertaking,
not as a multiple of units of the capital.' Among the
corporations of the eighteenth century in America, a
number may be found issuing stock without par value.
Nor is the share without par value unknown in Conti-
nental Europe today. In Prussia, notably, provision
has been made for such stock in laws governing mining
corporations.
"A par valuation was undoubtedly first given to each
share of stock to denote that it represented money or
property of the corporation equal to that amount. Even
in cases, however, where stock with par value is fully
paid in cash or in property taken at its actual value,
practical experience has shown that it is quite impossible
to maintain a constant equilibrium between the nominal
1200
CORPORATIONS
capitalization of a corporation and its assets. A fortiori,
when such intangible and problematical assets as good
will and expectancies are capitalized, a share can repre-
sent only an aliquot part of the total assets, whatever its
par value may be. The nominal face value thus is almost
always a fiction and one which the courts themselves
disregard when recognition of it would be inequitable.
"Tn theory, it may well be that 'watering stock' ac-
complishes no evil, that an increase in the amount of out-
standing stock without a corresponding increase in assets
injures no one. That justification pre-supposes, how-
ever, that all purchasers of stock are insensible to the
magic of the stamped, the represented par value and
realize that what they are buying is nothing more nor
less than a proportional interest in the corporation. In
fact the represented value does influence the purchaser
and does oftentimes tend to bolster up the price of the
stock above its real value.
"A great discrepancy between the nominal capitaliza-
tion and the value of the holdings of a corporation fur-
nishes an opportunity to defraud inexperienced purchas-
ers. To such discrepancies may be traced much of the
popular mistrust and suspicion of corporations gener-
ally. The substitution for shares with a par value, of
shares with no nominal valuation, would put the investor
on guard, and would dispel misunderstanding on the part
of the public. Demagogy would lose part of its food.
'' From the viewpoint of the corporation, too, consider-
able advantage is to be derived from the use of shares
without par value. No longer will a corporation in need
of funds be obliged to increase its bonded indebtedness
simply because of the impossibility of disposing of stock
at its par value, as required by law generally. The new
stock may be disposed of at prices fixed from time to
time in a stipulated manner. Moreover the difficulties
attendant upon apportioning stock in case of a consolida-
tion or a reorganization are lessened.
"A movement started in New York in 1892 to effectu-
ate this reform resulted in a law enacted twenty years
DEFINITIONS AND KINDS OF STOCK 1201
later authorizing all corporations, except monied corpo-
rations or those under the jurisdiction of public service
commissions, to provide in their charters for the issuance
of stock without par value. Since then Canada and thir-
teen states, of which the latest is Massachusetts, have
provided for the issuance of non-par value stock.
"The scope of these statutes differs. Some have ex-
tended this privilege only to corporations other than
those of a fiduciary or quasi public character, feeling
doubtless that in such organizations the vice of the par
value is attenuated by more strict supervision. A hesi-
tancy to go the whole length is also shown in provisions
in many statutes that no stock preferred either as to divi-
dends or as to principal may he issued without par value.
"Various means are provided for fixing from time to
time the consideration for which this stock may be issued,
in place of the general rule that stock with par value
may not he sold at less than par. In New York, the
shares may be sold at 'their fair market value,' and in
the absence of fraud, the judgment of the board of direc-
tors as to such value shall be conclusive. When duly
issued the shares are deemed fully paid and are non-
assessable. A number of statutes require expressly that
before a corporation may begin business or incur debts,
its 'stated capital' must be fully paid in. If any liabil-
ities are incurred before this time or if such capital is im-
paired by the issuance of dividends therefrom, the direc-
tors are made personally, jointly and severally liable.
"There is no difficulty in determining the amount of
license or franchise taxes for corporations issuing stock
without par value. Some states provide that such shares
shall he taken to be, for this purpose alone, of a par value
of $100. In other states a fee of five cents is required for
each such share.
"It can hardly be claimed that the omission of a nom-
inal par value on corporation stock will entirely put an
end to inflation. The chief argument for such shares is
rather 'truthfulness.' It would be well to provide as
an additional precaution, that officers of corporations be
1202
CORPORATIONS
required to draw up estimates of their resources, plans
for future operations, etc., and publish them to stock-
holders at frequent intervals. For the accuracy of these,
they should be held accountable. The fears that stocks
without par value would not meet with the investor's
favor, at least until he is educated to an understanding
of their nature, appears to have been groundless. Stocks
of corporations organized under these statutes are quoted
on the exchange side by side with those with a par value
and are dealt in without seeming discrimination. The
number of corporations taking advantage of these
statutes is increasing, as confidence in the benefits of the
change is established. In New York in 1918, 168 cor-
porations were so organized.
"For the sake of uniformity, organization under these
statutes should be made compulsory, and not optional;
and there should be no distinction drawn between pre-
ferred and common stock, nor between 'monied' and
other corporations. It is confidently expected that shares
without par value will entirely supplant those with par
value, and thus another fiction which has outlived its
usefulness and serves only to obscure the real nature of
corporation shares will be abolished.
Question 649: (1) Why does this author think that par
value shares make "stock-watering possible? Does he think
that shares with "no par value would remedy this?
(2) When did the modern movement for law authorizing
no par stock begin ? Are the laws uniform?
(3) Are corporations with shares of no par value actually
being formed ? Are investors more cautious about putting their
money into them than in other corporations?
§ 667. (Corporations, Sec. 31.) Unissued and treasury
stock.
(Note: Unissued stock is stock authorized but not issued;
treasury stock is issued stock owned by the corporation and in
the treasury.)
DEFINITIONS AND KINDS OF STOCK 1203
§ 668. (Corporations, Sec. 32.) The certificate of stock.
Case 650. Chester Glass Co. v. Dewey, 16 Mass. 94.
Facts: Suit against Dewey on his stock subscription
and an assessment made on his share. Denial by de-
fendant that he is a stockholder, for several reasons, one
of which is, that he was never issued a certificate of stock.
Point Involved: Whether a stock certificate is essen-
tial to constitute one a stockholder.
Paekee, C. J.: "* * * It is insisted, secondly, that
he cannot be a member, without a certificate of his
share; it being provided by the general act upon this
subject that the stock shall be divided into shares, and
that certificates shall issue to the stockholders. But it
was not essential to the existence of the corporation, that
certificates should have been issued. The corporation
might be compelled, if there were a court of chancery,
to give certificates; but still for want of them the stock-
holders would not lose their rights. The defendant never
demanded a certificate. If he had and it had been re-
fused, perhaps he might have declined being a member.
But a certificate was, in fact, offered to him before his
action was brought.
Question 650: Can one be a stockholder in a corporation
without a certificate? Is he entitled to a certificate? How
could he compel its issuance ?
(Note: On the question of transfer of stock, forged and
stolen certificates, see post, chapter 88 in this part.)
§669. (Corporations, Sec. 33.) The legal nature of
shares of stock.
(Note: Shares of stock are intangible personal property.
See Case 634, supra.)
CHAPTEE 84
SUBSCRIPTION TO STOCK
§ 670. Form, manner and effect of subscribing to stock.
§ 671. Fraud in securing stock subscriptions.
§ 672. Subscriptions upon condition.
§ 670. (Corporations, Sec. 34.) Form, manner and
effect of subscribing to stock.
(Note: Subscriptions to stock may conceivably be by way of
acceptance of a proposition to sell, but we generally imply by
the term subscription, an offer to buy. Being an offer, it can
be withdrawn until acceptance, and if the corporation is not yet
in existence, there can be no acceptance until it comes into ex-
istence. Acceptance may be shown by conduct. In fact the
subscriber is generally simply treated as a stockholder, no ex-
press assent being shown.)
§ 671. (Corporations, Sec, 35.) Fraud in securing
stock subscriptions.
Case 651. Morgan v. Skiddy, 62 N. Y. 319.
(Set out as Case No. 687, post.)
Case 652. Gress v. Knight, 135 Ga. 60, 31 L. E. A.
N. S. 900.
Facts: November 23, 1907, the Bank of Wayland
made an assignment for the benefit of creditors, and re-
ceivers were appointed. Certain stockholders file peti-
tions alleging that they were induced to subscribe for
stock through fraudulent representations, and asking
for rescission of the stock subscription.
Point Involved: Whether a stockholder can be re-
lieved of his liability as a stockholder on the ground of
fraud, where since his subscription the rights of cred-
1204
SUBSCRIPTION TO STOCK
1205
itors have intervened and the corporation has become
insolvent.
Lumpkin", J., delivered the opinion of the Court: "In
England it is settled that after the commencement of
winding up proceedings against a corporation, an appli-
cation to be relieved from liability as a shareholder on
the ground of fraud practiced on him by agents of the
company in procuring the subscription comes Loo late.
"* * * A stockholder occupies a three-fold rela-
tion: First, to the corporation itself; second, to other
stockholders; and, third, to creditors of the corporation.
Fraud does not render a contract absolutely void, but
voidable. It remains valid until repudiated or avoided.
As between a stockholder and the corporation, unless
special circumstances alter the case, the general rule
that contracts obtained by fraud may be avoided by the
party defrauded applies to a stock subscription induced
by the fraud of the company through its authorized
agents. So, also, where only the rights of other share-
holders are affected, the company being solvent and 'a
going concern.' * # * But where the rights of cred-
itors are involved, the question is one of greater difficulty.
Some American decisions have announced in general
terms the rule laid down by the English courts; but in
most of them additional circumstances existed, such as
receiving benefits after knowledge or notice of the fraud,
acts done, after notice or knowledge, inconsistent with a.
disaffirmance, laches, estoppel, the intervening of rights
of innocent third parties, or the like. Thus, in Chubb
v. Upton, 95 U. S. 665, 667, 24 L. Ed. 523, 524, Mr. Justice
Hunt said: 'It has been several times adjudged in this
court that in an action by such assignee to recover unpaid
subscriptions upon stock in such an organization, the de-
fense of false and fraudulent representations inducing
such subscription cannot be set up, especially when the
subscriber has not been vigilant in discovering such
fraud, and in repudiating his contract.' It cannot be
1206
CORPORATIONS
easily determined just how far a rule laid down in gen-
eral terms would be applied in the absence of the facts
added to it under an 'especially.' In the case cited,
Chubb was sued by an assignee in bankruptcy of the
company. He sought to set up irregularities and infor-
malities in the increase of capital stock to which he be-
came a subscriber, and also fraud in the procurement of
his subscription. It appeared that he was president of a
branch of the company, took part in its meetings, paid
money on his stock, and at one time gave a proxy to
another person to attend and vote at a stockholders'
meeting at the main office. He made no effort to cancel
his subscription. The company incurred liabilities and
was adjudicated a bankrupt about fifteen months after
his subscription. Clearly he should not have been re-
lieved. In Upton v. Tribilcock, 91 U. S. 45, 23 L. Ed.
203, the shareholder had delayed repudiating his sub-
scription for three years and, until an assignee in bank-
ruptcy had been appointed, and there were other circum-
stances showing laches. Discussions of the subject will
be found in 2 Thomp. Corp. Sees. 1440, 1449; Upton v.
Englehart, 3 Dill. 496, Fed. Cas. No. 16,800; Farrar v.
Walker, 3 Dill. 506, Fed. Cas. No. 4,679 (reported un-
officially); Newton Nat. Bank v. Newbegin, 33 L. R. A.
727, and note (20 C. C. A. 339, 40 U. S. App. 1, 74 Fed.
135); Parker v. Thomas, 19 Ind. 213, 81 Am. Dec. 385,
401, note. A number of American decisions are to the
effect that where one subscribes to stock and the com-
pany proceeds to do business, incurs liabilities, and later
fails and is adjudged a bankrupt, or its assets are placed
in the hands of a receiver for the purpose of winding it
up, no rescission will be allowed, unless under excep-
tional circumstances. Thomp. Corp. Sec. 1450. * * *
"When a person becomes a stockholder of a corpora-
tion, he becomes a part of it. Its agents are, in a sense,
his agents. They go out and deal with the public. If
through their dealings debts are incurred, assuming both
the stockholder and the creditor to be innocent and that
one must suffer, the former, who put it in the power of
SUBSCRIPTION TO STOCK 1207
the agents to do the wrong, should suffer rather than
third parties who dealt with such agents. Civ. Code,
1895, Sec. 3940. As to creditors whose claims arose after
the stockholders became such, their rights are superior
to any right of rescission. The status of a stockholder
relative to creditors who became such after he took the
stock is not in all respects identical with that relative to
antecedent creditors. As to creditors whose debts were
created before he took the stock, questions of laches, acts
inconsistent with rescission, estoppel, etc., might arise.
The new stockholder may have permitted the increase
of indebtedness and the lessening of the assets with
which to pay. * * * When the facts are shown, it
can be made to appear whether a fraud was really per-
petrated on each of the interveners; whether there was
any lack of diligence in discovering such fraud, or un-
reasonable delay in seeking relief after its discovery,
whether there was any active participation by the inter-
veners in the management of the corporation, or whether
debts had been incurred after the intervener became a
stockholder, which either gave corporate creditors su-
perior equitable rights or estopped the intervener from
denying that he was a stockholder, and generally whether
his conduct was such as to prevent relief.''
Question 652: If the company becomes insolvent, does this
intervene to prevent the creditor from setting up the fraud by
which he was induced to subscribe ? Why ?
§ 672. (Corporations, Sec. 36.) Subscriptions upon
condition.
Case 653. Minneapolis Threshing Machine Co. v.
Davis, 40 Minn. 110.
Facts: Suit brought on a contract of subscription for
stock. Defendant gave his subscription in writing to a
promoter of the company, on the condition, orally stated,
that the promoter should make no use of it unless certain
other parties subscribed, who did not subscribe. The
other subscribers and the corporation was unaware of
1208
CORPORATIONS
this condition. The promoter violated the condition and
turned in the subscription. Defendant never took any
other part in the organization of the company except as
stated.
Mitchell, J.:  * * *
11 Under the elementary rule of evidence that a written
agreement cannot be varied or added to by parol, it is
not competent for a subscriber to stock to allege that
he is but a conditional subscriber. The condition must
be inserted in the writing to be effectual. This rule ap-
plies with special force to a case like the present, where
to allow the defendant now to set up a secret parol
arrangement by which he may be released, while his
fellow-subscribers continue to be bound, would be a fraud,
not only upon them, but upon the corporation which has
been organized on the faith of these subscriptions and
upon its creditors. The defendant of course does not
attempt to controvert so elementary a rule as the one
suggested, but contends that the effect of this evidence
was not to vary or contradict the terms of the writing,
but to prove that there was never any delivery of it,
and hence that there never was any contract at all, de-
livery being prerequisite to the very existence of a con-
tract. His claim is that the subscription paper was
given to and received by Janney merely as an escrow, or
as in the nature of an escrow, only to be delivered or
used upon the performance of certain conditions preced-
ent, and that until they were performed there could he
no valid delivery. * * *
'' This subscription agreement was not intended to be
the sole contract of defendant. It was designed to be
also signed by other parties, and from its very nature
defendant must have known this. Each succeeding sub-
scriber executed it more or less upon the faith of the
subscriptions of others preceding his. The paper pur-
ports on its face to be a completed contract, containing
all the terms and conditions which the subscribers in-
tended it should. When this agreement was presented to
SUBSCRIPTION TO STOCK
1209
others for subscription, defendant had not only signed
it in this form, but he had also done what, under the
facts, constituted, to all outward appearances at least, a
complete and valid delivery. He had placed it in the
proper channel according to the ordinary and usual
course of procedure for passing it over to the corpora-
tion when organized, and clothed Janney with all the
indicia of authority to hold and use it for that pur-
pose without any other or further act on his part, un-
trammelled by any condition other than those expressed
in the writing. In reliance upon this, others have not
only subscribed to the stock, but have since paid in a
large share of it. The corporation has been organized
and engaged in business, expending large sums of money,
and contracting large liabilities, all upon the strength
of these subscriptions to its stock, and in entire ignor-
ance of. this secret oral condition which defendant now
claims to have attached to the delivery. To permit de-
fendant to relieve himself from liability on any such
ground, under this state of facts, would be a fraud on
others who have subscribed and paid for stock, upon the
corporation which has been organized and incurred lia-
bilities in reliance upon the subscriptions, and on cred-
itors who have trusted it. The familiar principle of
equitable estoppel by conduct applies, viz.: Where a
person, by his words or conduct, wilfully causes another
to believe in the existence of a certain state of facts, and
induces him to act on that belief so as to alter his own
previous condition, he is estopped from denying the
truth of such facts to the prejudice of the other.''
Question 653: What was the defense in this case? Was it
allowed or not? Give the reasons.
CHAPTER 85
PAYMENT FOR STOCK
§ 673. Liability upon unqualified subscriptions.
§ 674. Medium of payment.
§ 675. Definition of 'watered stock.
§ 676. Liability of stockholders for payment of stock for benefit of
creditors.
§ 677. Calls for payment.
§ 678. Payment required by statute as a condition precedent.
§ 679. Forfeiture of stock for non-payment.
§ 673. (Corporations, Sec. 37.) Liability to corporation.
(Note: The liability to the corporation is governed by the
contract of subscription. On the question whether the corpo-
ration can question the sufficiency of the payment which it has
received from the stockholder, see post, this chapter.)
§§674, 675, 676. (Corporations, Sees, 38-40.) Medium
of payment, watered stock, rights of creditors.
Case 654. Wood v. Dummer, 3 Mason (IJ. S. Cir. Ct.)
108.
Facts: Plaintiffs bring their bill in equity, as holders
of banknotes of the Hollowell and Augusta Bank, against
defendants as stockholders of the same bank for pay-
ment of such notes on the ground of a fraudulent divi-
sion of the capital stock. The defendants denied the
fraud, but admitted the division. It appeared that the
bank divided three-fourths of its capital stock among
its stockholders without providing funds to pay for its
outstanding banknotes.
STORY, J.: "* * *
"It appears to me very clear upon general principles,
as well as the legislative intention, that the capital stock
1210
PAYMENT FOR STOCK
1211
of banks is to be deemed a pledge or trust fund, for the
payment of the debts contracted by the bank. The pub-
he, as well as the legislature, have always supposed this
to be a fund appropriated for such purpose. The indi-
vidual stockholders are not liable for the debts of the
bank in their private capacities. The charter relieves
them from personal responsibility and substitutes the
capital stock in its stead. Credit is universally given
to this fund by the public as the only means of repay-
ment. During the existence of the corporation it is the
sole property of the corporation and can be applied only
to its charter, that is, as a fund for the payment of its
debts, upon the security of which it may discount and
circulate notes. Why, otherwise, is any capital stock
required by our charters? If the stock may, the next
day after it is paid in, be withdrawn by the stockholders
without payment of the debts of the corporation, why
is its amount so studiously provided for and its payment
by the stockholders so diligently required? To me this
point appears so plain upon principles of law, as well
as common sense, that I cannot be brought into any
doubt that the charters of our banks make the capital
stock a trust fund for .the payment of all the debts of
the corporation. * * *
Question 654: What is the "trust fund doctrine as an-
nounced by this case?
(Note: Story's statement that capital stock of a corporation
is a trust fund has been severely criticized. Clearly it is not a
trust fund in any technical sense. The corporation absolutely
owns its money or other property and does not hold it in trust.
Nevertheless, the thought emphasized by Story is sound that the
capital is a fund paid in for a purpose and cannot be diverted
from that purpose to the injury of stockholders or creditors.)
Case 655. Bedford R. R. Co. v. Bowser, 48 Pa. St. 29.
Facts: Suit by the company to enforce Bowser's sub-
iscription. Defense, among other things, that the board
of directors released and cancelled the subscription.
Point Involved: Whether the board of directors have
1212
CORPORATIONS
power to release a subscriber and thus impair the capital
of the company.
Strong, J.:  * * * The directors of the company
then in office were its agents with limited powers, the
extent of which the defendant was bound to know. Their
duties were to conduct its affairs to the furtherance of
the ends for which the company was created. They had
no power to destroy it, to give away its funds, or to
deprive it of any of its means to accomplish the full
purpose for which it was chartered. The creditors were
not the only persons who had interests and rights at
stake. The stockholders who had paid their subscrip-
tions, or bought their stock, and the commonwealth by
whom the charter had been granted, were at least equally
interested. The railroad was unfinished, and the com-
monwealth had a right %to demand that all resources,
rights and credits of the company should be devoted to
its completion. * * * Directors of a railroad com-
pany are trustees for all stockholders, and in a very
just sense for the commonwealth. It is an abuse of their
trust, wholly unauthorized, and at war with the design
of the charter to single out some of the stock subscribers
and release them from their liability. * * *
Question 655: A corporation adopted a by-law that any mem-
ber could, on giving 30 days' notice, withdraw, and R, a stock-
holder, withdrew in accordance with this by-law and with the
assent of the officers. The corporation was then solvent. After-
wards becoming insolvent, a receiver was appointed and he
sued R. Could he recover? (Farnsworth, Receiver, v. Robbins,
36 Minn. 369.)
Case 656. Edwards v. Schillinger, 245 111. 231.
Facts: "The defendant in error, John B. Edwards,
trustee in bankruptcy of Schillinger Bros. Asphalt Com-
pany, a corporation, filed his bill in the Superior Court
of Cook County against the plaintiffs in error, Gustav
A. Schillinger, and A. C. Gumbiner, stockholders of the
corporation, to set aside a dmdena, declared by the
PAYMENT FOR STOCK
1213
directors in fraud of creditors and applied by the stock-
holders in payment of unpaid balances of their subscrip-
tions to the capital stock, and to compel plaintiffs in
error to pay the amount of their subscriptions repre-
sented by the fraudulent dividend certificates. * * *
At a meeting of the board of directors held in the City
of St. Louis, Missouri, on April 28, 1902, when the cor-
poration was wholly insolvent and unable to pay any
dividend whatever upon its stock, the directors, for the
purpose of relieving the stockholders from liability for
the unpaid portion of the stock held by them, pretended
to declare a dividend of $8,920.65, and authorized the
secretary to issue dividend certificates [to the stock-
holders and to issue to them certificates of fully paid
stock].
Point Involved: Whether a stockholder can be re-
lieved as to creditors of his liability upon his sub-
scription by a declaration of dividends made while the
corporation is insolvent and applied in payment of the
stockholder's liability.
Me. Justice Caetweight: "* * * A contract of
a corporation limiting the liability of its stockholders to
a portion of the par value of their stock is void both as
to creditors and the assignee in bankruptcy. * * *
Question 656: What was the scheme in this case to release the
stockholder's liability? Was it effective? Why?
Case 657. N. T. W. Co. v. Gilfillan, 124 N. Y. 302.
Facts: Suit by a judgment creditor of a corporation
to recover from defendant as a stockholder of such cor-
poration, pursuant to a statute, upon the ground that
the capital stock had not been paid in either in cash, or
in property fairly worth the par value of the stock is-
sued. Further facts in the opinion.
Point Involved: Whether stock is to be considered
as paid up so far as creditors are concerned when it has
been issued in exchange for property knowingly or fraud-
ulently overvalued by the corporation.
1214
CORPORATIONS
Yank, J.: 4'The substantial issue in this section was
whether the property procured in exchange for stock
was purchased at an over-valuation, not through error
of judgment, but in bad faith and to evade the statute
(Douglass v. Ireland, 73 N. Y. 100, 104).
"The trial judge instructed the jury that if they found
that the stock issued exceeded in amount the value of
the property taken in exchange for it and for which it
was issued, and that the trustees deliberately and with
knowledge of the real value of the property over-valued
it and paid in stock for it an amount which they knew
was in excess of its actual value, they must find for the
plaintiff. If the jury do not find this to be the fact,
then they will find for the defendant.
"The jury found a general verdict for the plaintiff,
and, as a special verdict, that the property purchased
at $300,000 was really worth but $75,000.
"The evidence in support of the verdict is sufficient,
if not overwhelming.
"The company was organized September 18,1884, with
a capital stock of $300,000, divided into 600 shares of
$500 each. Within less than a year thereafter it was
hopelessly insolvent, with all its property levied upon
under an execution issued on a judgment recovered by
the defendant, its president and a trustee from the out-
set. None of the stock was paid for in cash or otherwise
than by the transfer of a lot of unpatented inventions
of one Bliven. Two corporations had been previously
organized, with the defendant as a trustee in each, to
handle these inventions, one of which seems to have been
merely a corporation on paper that 'had no existence
in fact to amount to anything,' while the other was 'a
disastrous speculation.'
"The inventions were purchased by the corporation,
whose transactions are directly involved in this action,
substantially in the following manner, viz.: Bliven as-
signed them to the defendant, who, as trustee, trans-
ferred them to the company in consideration of the entire
capital stock, to be held by him in trust as follows, to-wit:
PAYMENT FOR STOCK
1215
200 shares for the benefit of the company itself; 100
shares, par value $50,000, for the defendant—(in pay-
ment of a debt of $15,000 owing him by Bliven); 10
shares, par value $5,000, for one Baxter (in payment of
an old debt of Bliven to him of $2,500); 27 shares ap-
parently given away to qualify persons as trustees and
to induce them to act; the remainder to Bliven or for his
benefit.
 According to the evidence, the jury made a liberal
estimate of the real value of the inventions when they
found that they were worth $75,000. The good faith of
the trustees, including the defendant, as one of the most
active in the transaction of this business, may be inferred
from the foregoing facts. If they honestly considered
the inventions worth $300,000, why was one-third of the
avails, $100,000 in stock, donated to the company by
Bliven? Why did the defendant accept of $50,000 in
stock in payment of a debt of $15,000 ? Why was $5,000
given to Dexter to pay $2,500 ? Why was $13,500 in stock
given to persons to induce them to become trustees?
Would $300,000 in money have been disposed of in this
way? The arrangement to thus dispose of the stock
was made before the purchase and became a part of it.
The facts were all known to the trustees, including the
defendant. They were apparently intelligent men, the
defendant being a physician. Although they testified
that they considered the inventions worth $300,000 or
more, the surrounding circumstances permitted the jury
to find, as the General Term said, that they 'were not
only worth less than the price agreed to be paid for
them, but it was so understood by the defendant and
the other parties to the transactions.' From these and
other significant facts, not recited, it is evident that a
case was presented for the consideration of the jury,
and that the motions to dismiss were properly denied.
"The merits are with the plaintiff, and when that is
the case the exceptions should be overruled, unless a
material and manifest error of law has been committed.
1216
CORPORATIONS
Question 657: (1) By what means was payment made in
this case ? Did the Court hold that such payments were sufficient
to constitute payments as against creditors?
(2) A company was organized with an authorized capital
stock of $500,000. This stock was fully paid up with $2 cash
and a breakfast food formula appraised at $499,998. The cor-
poration becomes insolvent. The trustee in bankruptcy sues the
stockholders. Can he recover? (Wood v. Sloman, 114 N. W.
(Mich.) 317.)
Case 658. Gillett v. C. T. & T. Co., 230 111. 373.
Me. Justice Scott delivered the opinion of the Court:
 First—It is contended by appellants that in accept-
ing certain property in payment of MacKaye's subscrip-
tion to the capital stock of the Columbian Celebration
Company to the amount of $1,999,600, the directors fixed
that value upon the property offered in the fair and
honest exercise of their judgment as to its worth, and
that the stock must therefore be regarded as fully paid
and non-assessable, even if the directors erred in their
judgment as to its value.
4' When the board of directors met on May 16, 1892,
the principal asset of the corporation was MacKaye's
subscription for stock to the amount above mentioned.
The law required the directors, in collecting that sub-
scrip tion, to obtain from MacKaye 'money or money's
worth' to the full amount of the subscription. (Cole-
man v. Howe, 154 111. 458; Garden City Sand Co. v.
Crematory Co., 205 id. 42.) 'Money or money's worth'
means cash or its equivalent. If the directors saw fit to
accept property in lieu of cash they could only take it
at its fair cash market value, if it was property which
had an ascertainable market value. If it had no ascer-
tainable market value, then the only price at which the
directors could purchase it was such price as could be
realized by selling it to others for cash.
"On the date last mentioned the directors of the cor-
poration entered into a contract with MacKaye, by which,
in satisfaction of his liability on his subscription, Mac-
Kaye transferred to the corporation the sole and exclu-
PAYMENT FOR STOCK
1217
,sive right to use eleven alleged new, useful and valuable
improvements in scenic art; also the right to use and
produce a ' spectatorio' or play, entitled 4 The Great Dis-
covery,' of which it is said MacKaye was the author, in
the States of Illinois, Indiana, Michigan, Minnesota,
Iowa and Missouri, for a period of fifteen years, bur-
dened with a ten per cent royalty reserved to MacKaye.
At the time the contract was made no application had
been made for a patent on any of the inventions. The
description of the inventions contained in the contract
is very general in character. With one or two excep-
tions the descriptions are not such as would enable the
reader to identify the invention. They consist usually
of the name given by MacKaye to the invention, followed
by a statement of the object of the invention. The play,
'The Great Discovery,' had not been written. At the
time MacKaye's subscription was so satisfied the direc-
tors were MacKaye, Butterworth, Crosley,- White and
Edmonds. Crosley did not attend the meeting of May
16,1892, and MacKaye did not vote upon the proposition
in reference to the payment of his subscription by the
transfer of the rights above enumerated. Those who
voted in favor of accepting the proposition were Butter-
worth, White and Edmonds. Butterworth was a co-
promoter with MacKaye, and a few days later, in accord-
ance with an arrangement effected prior to May 16,1892,
received from MacKaye a considerable portion of the
stock subscribed for by the latter. Edmonds was an
assistant to Butterworth, as secretary of the World's
Columbian Exposition. White was a clerk in the employ
of MacKaye and Butterworth, doing clerical work in con-
nection with the promotion of MacKaye's scheme. So
far as the transaction of business affecting the corpo-
ration was concerned, White and Edmonds were wholly
dominated by MacKaye and Butterworth. Edmonds
testified that he 'never formed any intelligent conclusion
as to the value of the patents,' referring to the inven-
tions the right to use which was transferred by the con-
tract; and further: 'I did not consider it (the MacKaye
1218
CORPORATIONS
proposition which was accepted) in the sense that 1
was going to put a lot of money in it myself, but I hon-
estly believed on May 16, 1892, that the resolution was
for the best interests of the company and was a good
proposition for it.' White says: 'I don't remember
making any inquiry, as a member of the board of direc-
tors or an officer, into the merits of these inventions.'
"It will no doubt be agreed that the rights transferred
to the corporation by the contract were without market
value. It was then the duty of the directors, before
accepting the rights transferred by this contract in pay-
ment of this large subscription, to ascertain whether
those rights had value, and if so, what the value was.
The natural and reasonable method to be pursued in
determining that question would have been to have ap-
plied to men not interested in the promotion of Mac-
Kaye's scheme, who were of wide experience in the pro-
duction of -great spectacular plays, for their views in
reference to the worth of the rights which MacKaye
proposed to transfer. No such investigation was made.
No other steps were taken to ascertain the value of the
rights MacKaye proposed to transfer, such as would
have been taken by directors seeking to deal honestly
and fairly with the assets of the corporation. It was
the duty of these directors to ascertain the value of these
rights precisely as they would have done had they in-
tended to invest money in such rights themselves, and
that they did not do. It is no doubt true that if the
directors, in the fair, honest and intelligent exercise of
their judgment, make a mistake and accept property at
a price greater than its real value, such cannot be re-
garded as a fraudulent over-valution of the property;
but that rule only applies where the transaction con-
stitutes a valid contract of bargain and sale, made in
good faith on the part of the directors and in the intelli-
gent exercise of the fair and honest judgment on their
part. There was no such transaction here. The trans-
fer to the corporation was a mere sham. It was, in fact,
a sale by MacKaye to MacKaye, and was, in law, a fraud.
PAYMENT FOR STOCK
1219
* * * It follows that MacKaye's stock subscription
remained wholly unpaid.
"Second—The certificates for MacKaye's stock recited
that the shares were 'fully paid and non-assessable,' and
the law is, that where stock is so issued and the holder
thereafter sells or assigns the same, and the assignee
acquires it in good faith and without notice that it has
not been fully paid, he cannot be made liable if, in fact,
the stock is not fully paid. (Coleman v. Howe, supra;
Sprague v. National Bank of America, 172 111. 149.) Ap-
pellants insist that, even if this stock was wholly unpaid,
they acquired it in good faith without notice of that fact,
and are therefore not liable. 'Notice,' in this eonnec-
tion, must be given the ordinary signification of that
term, and means knowledge that the stock was unpaid,
or knowledge of such facts as would have put an ordi-
narily prudent man upon inquiry, when the inquiry might
reasonably be expected to have led him to knowledge
that the stock was unpaid. (Russell v. Ranson, 76 111.
167.) Many of the appellants knew precisely how Mac-
Kaye had paid for his stock, and all of the appellants
acquired their stock, as they knew, within a few months
after the organization of this corporation. They ob-
tained it without giving any valuable consideration there-
for, except in a few instances where it is claimed that a
small percentage of the face value of the stock was paid
therefor by services rendered or by other methods, not
including cash actually paid at the time of the transfer
of the stock. The fact that the corporation had just
been organized, and that its stock was being transferred
without, or practically without, any valuable considera-
tion, was, we think sufficient to put a reasonably prudent
man upon inquiry, and that inquiry would, in our judg-
ment, have led to knowledge of the fact that the stock
was wholly unpaid.
Question 658: (1) "What, according to this case, constitutes
a bona fide valuation by directors?
(2) "When will a transferee of stock be deemed to have notice
that the stock is unpaid? Does the recital in the certificates
help him?
1220
CORPORATIONS
Case 659. First National Bank of Deadwood v. Grus-
tin Co. et al., — Minn. —61 L. E. A. 676.
Facts: Suit by the bank against the Gfustin Company
and the other defendants to compel payment of a debt to
the bank by enforcement of stockholder's liability. The
stock was issued partly at one-tenth of its par value,
and partly for nothing. The bank knew this when it
loaned the money which represents the present debt.
Point Involved: Whether a creditor can enforce stock-
holder's liability when he knew at the time he became
a creditor of the arrangement between the corporation
and the stockholder by which the stockholder was to
have no further liability to the company.
Mitchell, J.: "* * *
''While the courts have not always had occasion to
state the limitations upon the doctrine that 'the capital
is a trust fund for the benefit of creditors,' yet we think
that it will be found that in every case where they have
impressed a trust upon the subscription of the share-
holders it has been7 in favor of creditors becoming such
afterwards, and hence fairly to be presumed as relying
upon the amount of capital which the company was rep-
resented as having. We are referred to none, and have
found none, where any such trust has been enforced in
favor of creditors who have dealt with the corporation
with full knowledge of the facts. The reason is apparent,
for in such cases no fraud, actual or constructive, has
been committed on such creditors.
"If a corporation issued new shares after the claim
of a creditor arose, it is clear that the latter could not
have dealt with the company on the faith of any capital
represented by them. Whatever was contributed as cap-
ital in respect of the new shares was a clear gain to
the creditor's security. So, too, if a party deals with a
corporation with full knowledge of the fact that its nom-
inal paid-up capital has not in fact been paid for in
money or property to the full amount of its par value,
he deals solely on the faith of what has been actually
PAYMENT FOR STOCK
1221
paid in, and has no equitable right to insist on the con-
tribution of a greater amount of capital by the share-
holders than the corporation itself could claim as part
of its assets. Coit v. North Carolina Gold Amalgamat-
ing Co., 14 Fed. Kep. 12, S. C. 119 U. S. 343 (30 L. ed.
4201).
Question 659: State the doctrine of this case.
(Note: This doctrine is not universally assented to. In some
states, the knowledge of the creditor is immaterial. He can in
any event enforce the stockholder's liability to pay in full either
in money or money's worth.)
§677. (Corporations, Sec. 41.) Calls for payment.
(Note: Calls for payment are necessary to render stock due
if the agreement was a subscription subject to call. Such call is
made by the directors. In case of insolvency or bankruptcy no
call necessary.
§678. (Corporations, Sec. 42.) Payment as prereq-
uisite to corporate existence.
(Note. The statute of the state of incorporation may require
a certain percentage of payment before the corporation is author-
ized to proceed to business.)
§679. (Corporations, Sec. 43.) Forfeiture of stock for
non-payment.
(This is governed by statute.)
CHAPTER 86
RIGHTS OF STOCKHOLDERS
§ 680. (Corporations, Sec. 44.) In general.
(See cases following in this chapter.)
A. Rights Growing out of Stockholder's Relationship,
as such.
§ 681. Stockholder's rights to dividend.
§ 682. Eight to prevent ultra vires acts.
§ 683. Eight to prevent change in charter in material respects.
§ 684. Eight of stockholder to inspect corporate books and records.
§ 681. (Corporations, Sec. 45.) Stockholder's right to
dividend.
(See Spear v. Rockland-Rockport Lime Co., supra.)
§ 682. (Corporations, Sec. 46.) Right to prevent ultra
vires acts and to sue or defend in behalf of corpora-
tion.
Case 660. Hawes v. Oakland, 104 U. S. 450.
Facts: Complainant files his bill as a stockholder of
the Contra Costa Water Works Company against such
company, the city of Oakland, and the directors, alleging
that the company is furnishing the city of Oakland with
water for all purposes free of charge whereas by its
charter it is only required to furnish such city water
free for putting out fires and other cases of emergency,
that he has applied to the directors to stop this abuse
and that they decline to take any action. The company
defends by demurrer that the plaintiff as stockholder has
no power to maintain such a suit.
1222
RIGHTS OF STOCKHOLDERS 1223
Point Involved: Whether a stockholder can file a hill
to prevent ultra vires acts; what conditions are precedent
to his maintaining such hill.
Mr. Justice Miller: "* * *
"We understand that doctrine to be that to enable a
stockholder in a corporation to sustain in a court of
equity in his own name, a suit founded on a right of
action existing in the corporation itself, and in which the
corporation is the appropriate plaintiff, there must exist
as the foundation of the suit—some action, or threatened
action of the managing board of directors, or trustees
of the corporation which is beyond the authority con-
ferred on them by their charter or other source of organ-
ization; or such fraudulent transaction completed or con-
templated by the acting managers, in connection with
some other party or among themselves, or with other
shareholders as will result in serious injury to the cor-
poration; or to the interests of other shareholders; or
where the board of directors or a majority of them, are
acting for their own interests, in a manner destructive
of the corporation itself, or of the rights of the other
shareholders; or where the majority of shareholders
themselves are oppressively and illegally pursuing a
course in the name of the corporation, which is in viola-
tion of the rights of the other shareholders, and which
can only be restrained by the aid of a court of equity.
Possibly other cases may arise in which, to prevent ir-
remediable injury, or a total failure of justice, the Court
would be justified in exercising its powers, but the fore-
going may be regarded as an outline of the principles
which govern this class of cases. * * * He must
make an earnest, not a simulated effort, with the man-
aging body of the corporation, to induce remedial action
on their part, and this must be made apparent to the
Court.''
[The Court holds that a stockholder before filing such
a bill must attempt to get relief from the directors and
if possible from the stockholders, and show that his ef-
1224
CORPORATIONS
forts in that regard are unavailing, and that the com-
plainant in this case has made no such effort as is re-
quired to give him standing to file a bill.]
Question 660: (1) When can a stockholder sue or defend
in behalf of the corporation ?
(2) What course must the stockholder take to entitle him
to represent the corporation in such a suit?
(3) A filed a bill showing that the corporation in which he
was a stockholder was about to enter into an illegal trust, and
asked for an injunction. Will it be granted? (Harding v.
Amer. Glucose Co., 182 111. 551.)
Case 661. Babcock v. Farwell, 245 111. 41.
Me. Justice Dunn : "* * *
11 Since Babcock could not himself have maintained the
suit in his personal capacity, neither could his executor,
nor appellant as his legatee. By expressly waiving his
objections to the transactions now complained of, he de-
barred himself from seeking relief against them in his
own right. He could not, therefore, indirectly obtain
such relief by bringing suit in the right of the corpora-
tion or of other stockholders. A complainant cannot
maintain a bill, and obtain relief unless he has himself
sustained a wrong. The theory of a stockholder's suit is,
that the stockholder has sustained a wrong through the
injurious effect upon his stock of the wrong done to the
corporation. If he has himself consented to or partici-
pated in the acts constituting such wrong, or has waived
his right to object to them, he cannot afterwards main-
tain a bill, on account of such transactions, for the benefit
of the corporation or of other stockholders. (Burt v.
British Ass'n, 4 DeG. & J. 158; Brown v. De Young, 167
111. 549; Wells v. Northern Trust Co., 195 id! 288.)
Neither can an assignee pf stock maintain a suit in re-
gard to transactions with the corporation done or as-
sented to by his assignor. The purchaser of shares of
stock acquires no greater rights than his vendor. He
holds by the same title and subject to the same liability.
RIGHTS OF STOCKHOLDERS 1225
Shares of stock are merely choses in action, and the sue-
cessive owners acquire only the rights held by their
predecessors in title. Home Ins. Co. v. Barber, 67 Neb.
644; Venner v. Atchison, Topeka and Santa Fe Railroad
Co., 28 Fed. Rep. 581; Church v. Citizen's Railroad Co.,
78id. 526; * * V
Question 661: A, as stockholder in the M corporation, ac-
quiesces in wrongful conduct on the part of the directors in
managing the corporation. A assigns to B, who then for the
first time learns of the ultra vires acts, and files a bill to set
aside the acts. Will such bill obtain relief ?
§ 683. (Corporations, Sec. 47.) Right to prevent
change in charter in material respect.
(See Section 652, supra.)
§684. (Corporations, Sec. 48.) Right to inspect cor-
porate books and records.
Case 662. Venner v. Chicago City Ry. Co., 246 111. 170.
Mk. Chief Justice Vickers : "* * *
"There is a well recognized distinction between the
right of a stockholder to inspect the books and papers of
a corporation under the common law and an unlimited
right given by statute. Under the former the examina-
tion can only be compelled where the stockholder asks
it in good faith and for reasons connected with his rights
as stockholder. Where the right is conferred by statute
in absolute terms, the purpose or motive of the stock-
holder in making the demand for an inspection is not
material and he cannot be required to state his reasons
therefor. (Thompson on Corporations,—2d ed.—Sec.
4516.) The weight of American authority is to the effect
that where the right is statutory the stockholder need
not aver or show the object of his inspection, and it is
no defense under a statute granting the absolute right
to inspection to allege improper purposes or that the
petitioner desires the information for the purpose of
1226
CORPORATIONS
injuring the business of the corporation. A clear legal
right given by a statute cannot be defeated by showing
an improper motive. If this were so, the stockholder
would be driven from a certain definite right given him
by the statute to the realm of uncertainty and specu-
lation.''
Question 662: (1) To what extent did the common law give
a stockholder a right to inspect corporate records?
(2) What is the right by statute? Do the two differ?
B. Rights Growing out of Special Contracts made by
Corporation with Stockholders.
§ 685. (Corporations, Sec. 49.) Right of stockholder to
contract and deal with corporation.
(Note: A stockholder may contract with the corporation. He
is not contracting with himself. He may sell to it, buy from it,
etc. He must not be guilty of fraud. His control of the cor-
poration would enter into the question of fraud.)
§ 686. (Corporations, Sec. 50.) Same with respect to
stock subscription.
(Note: See Chapter 85.)
CHAPTEE 87
STOCKHOLDER'S MEETINGS
§§ 687-706. (Corporations, Sees. 51 to 70.)
Case 663. Warner v. Mower, et al, 11 Vermont Ee-
ports, 385.
Facts: Suit involving the title to property, plaintiff
claiming, under a deed of assignment executed by the
president of the company, and defendant claiming as
creditor under attachments made against the company
after such assignment. Defendant claims that the as-
signment by the president was void, because never prop-
erly authorized by the corporation. The facts were that
the regular annual meeting, in accordance with the by-
laws, was held April 5, 1837, the secretary having given
a general notice to all stockholders, but not stating the
business to be transacted; - that the meeting was ad-
journed by the stockholders present till April 19, 1837,
no further notice being given that at such adjourned
meeting the vote in question was taken. Defendant con-
tends that the vote was invalid to confer authority on
the president because of the lack of any notice of the
adjourned meeting, or if the notice of the original meet-
ing was good for the adjourned meeting, then that it
was insufficient in its substance, namely, that it did not
state the business to be uerformed.
T> T ( i * * *
Kedfield, J.:
"The authority of the president to make such convey-
ance depends altogether upon the vote of the corpora-
tion, at their annual meeting in the year 1837, held by
adjournment from the day fixed by the by-laws: It is
too well settled to require comment, that all corporations,
1227
1228
CORPORATIONS
whether municipal or private, may transact any business
at an adjourned meeting, which they could have done
at the original meeting. It is but a continuation of the
same meeting. Whether the meeting is continued with-
out interruption for many days, or by adjournment from
day to day, or from time to time, many days intervening,
it is evident it must be considered the same meeting,
without any loss or accumulation of powers. Schoff v.
Bloomfield, 8 Vt. R. 472.
"It is to be borne in mind, too, that a manifest dis-
tinction obtains between general stated meetings of a
corporation and special meetings. I know that stated
meetings may, nevertheless, be special, i. e., limited to
particular business. But stated meetings of a corpora-
tion are usually general, i. e., for the transaction of all
business within the corporate powers. Unless the object
of such meeting is restricted by express provision of the
by-laws, it would ordinarily be understood to be general;
and so every corporator would be bound to understand
it. But if the object of the meeting be limited by the
by-laws, it is then a special meeting, and no other bnsi-
ness could lawfully be transacted at such meeting, unless
special notice was given. Where the meeting is stated
and general, no notice is required, either of the time or
place of holding the meeting, or of the business to be
transacted. Angell & Ames on Corporations, 275. Such
is the general law of private corporations.
'' But as all corporations are entities of the law merely,
and exist and act solely in conformity to their charter
and by-laws, it is obvious that the force and effect of
every act of any particular corporation must depend
mainly upon the charter and by-laws of that corporation.
These are denominated the constitution and laws of the
corporation, and, like every other constitution and all
other laws, should receive such construction, as to effect
the probable intention of the framers. That intention
must be judged of as in other cases, by the words used
in reference to the subject-matter and circumstances of
each particular corporation.
STOCKHOLDER'S MEETINGS 1229
"The charter of this corporation provides for the first
meeting of the corporation specially, and that at that
meeting, and at all other meetings legally notified, they
may make and alter such by-laws as may be thought
necessary. There being thus no restriction in the char-
ter, in relation to meetings of the corporation, or the
business to be transacted, that subject will be governed
exclusively by the by-laws.
"Those by-laws provide for an annual meeting of the
corporation, to be holden at their counting room, on the
first Wednesday in April, of each year. Thus far the
time and place of the meeting is fixed, and there being
no restriction in regard to business, any and all business,
pertaining to the interest and powers of the corporation,
may be transacted. The annual meeting, of all others,
is the one when, not only usually, but always, all business
is expected to be transacted. And the common custom
of a country is of great force in the construction of
statutes, as well as contracts. * * *
"But there is no doubt that a corporation might pro-
vide that even stated meetings should be warned in a
particular manner, and that unless they were so warned,
no business could be transacted. This, in regard to spe-
cial meetings, is done in the present case, and I have
no doubt, as such special meetings rest solely upon the
notice given, for their authority, that the notice must be
such as is required by the by-laws, or the meetings would
be wholly without authority, and all business attempted
to be then done, would be of no binding force upon the
corporation. For the minority, if any, whether present
or absent, could not be bound, except in obedience to the
by-laws. For in that mode, and that only, have they
consented to be bound. Every member is entitled to
notice of special meetings unless the by-laws excuse it.
Kynaston v. Mayor of Shrewsbury, 2 Strange's R. 1051;
King v. Theoderic, 8 East's R. 543; 1 Strange's R. 385; 2
Burrow's R. 723; do 728; Stow v. Wise, 7 Conn. R. 219.
Question 663: (1) May a stated meeting be held without
notice, if none is required by charter or by-law?
1230
CORPORATIONS
(2) May a special meeting be held without notice?
(3) Must a notice of annual or other regular meeting state
what is to be done at the meeting ?
(4) Must a notice of a special meeting state the purposes for
which it is called ?
(5) If a meeting is properly noticed, must there be further
notice of any adjournment of such meetings ?
Case 664. Morrill v. Little Falls M'f'g Co., 53 Minn.
371.
Point Involved: As to what constitutes a quorum at a
stockholders' meeting (in the absence of express stipn-
lation); whether one stockholder can hold a meeting;
whether notice of a stated meeting is required when not
provided in the by-laws.
Mitchell, J.: "As affecting the validity of the deeds
executed in 1882, in behalf of the corporation, by Thayer
as president, the appellants assail the finding of the
Court as to the election of directors in August, 1881. The
grounds of objection are: First, that no notice was given
of the meeting; and, second, that it required a majority
of the shares of stock to constitute a quorum to hold a
meeting, or, in any event, that one person could not hold
a meeting, that at least two persons are necessary to
constitute a corporate meeting.
"As to the first point, all that is necessary to say is
that the by-laws fixed the time and place of holding the
meeting, and neither the charter nor the by-laws required
any notice to be given. Under such circumstances, the
rule is that the by-laws themselves are sufficient notice to
all the stockholders, and no further notice is necessary.
1 Mor. Priv. Corp., Sec. 479.
"The second objection is equally untenable. Where
the charter and by-laws of a corporation are silent on
the subject, the common-law rule is that such of the
shareholders as actually assemble at a properly convened
meeting, although a minority of the whole number, and
representing only a minority of the stock, constituted
STOCKHOLDER'S MEETINGS 1231
quorum for the transaction of business, and may express
the corporate will, and the body will be bound by their
acts. Cook, Stock & S., Sees. 607, 623; 2 Kent, Comm.
293; Mor. Priv. Corp., Sec. 476; Craig v. First Presby-
terian Church, 88 Pa. St. 42; Rex v. Varlo, Cowp 248;
Columbia Bottom Levee Co. v. Meier, 39 Mo. 53; Ex
parte Willcocks, 7 Cow. 402; Field v. Field, 9 Wend. 395.
"The contention of appellants that this rule applies
only to such organizations as towns, churches, and the
like, and not to stock corporations, finds no support
either in reason or authority. The correct distinction is
between a corporate act to be done by a select body, of a
definite number, as, for example, a board of directors or
trustees, and one to be performed by the constituent
members of the corporation. In the latter case a ma-
jority of those who appear may act. This distinction is
clearly made in several of the cases above cited, and also
in the leading case of Rex v. Bellringer, 4 Term. R. 810.
As was said by Lord Mansfield, in Rex v. Varlo (Cowp
248): 'It is in the nature of all corporations to do cor-
porate acts; and, when the power of doing them is not
specially delegated to a particular number, the general
mode is for the members to meet on the charter days, and
the major part who are present to do the act. But, when
there is a select body, it is a different thing, for then
it is a special appointment.' And, this being so, it is
immaterial whether the number present is only one or
more than one. It was held in Sharpe v. Dawes, 46 Law
J. Q. B. 104, followed reluctantly in another case, that
one person cannot constitute a quorum; that at least two
persons are necessary to hold a corporate meeting; but
this decision is based upon a narrow lexicographical
definition of the word 'meeting,' as the coming together
of two or more persons,—a reason that does not com-
mend itself to our judgment.
"Therefore, in our opinion, the Court was justified in
holding that the election of directors in 1881 was regular;
and it follows that the deeds executed in 1882 by Thayer,
1232
CORPORATIONS
the president elected by them, were the deeds of the
corporation.''
Question 664: What is a quorum in a stockholders' meeting
where there is no express regulation? Would the same hold true
of a director's meeting ? Why ?
(Note: Statutes or by-laws frequently require a majority to
constitute a quorum.)
Case 665. In re Mathiason M'f 'g Co., 122 Mo. Ap. 437.
Bland, P. J.: "* * *
'' The next question to be noticed is, should the motion
of H. W. Lammers, to set aside the election or first ballot
and take a new ballot for three directors, have been voted
upon by counting the number of shares of each voter,
or by a rising vote and count by the head, as was done.
•* * *
"Cook, in his volume 2 of his work on Corporations
(5 Ed.), Sec. 609, says:
 'At common law, in public or municipal corpora-
tions, each qualified elector has one vote, and only one.
This was a natural rule, since each duly qualified citizen
voted as a citizen and not as the holder of stock. But
the same rule should not apply to private corporations.
Stockholders are interested not equally, but in propor-
tion to the number of shares held by them.- Naturally
and reasonably each share should be entitled to one vote.
It has been held, however, that at common law each stock-
holder had but one vote, irrespective of the number of
shares held by him. Where the statutes are silent on the
subject, a by-law may give to each shareholder one vote
for each share up to ten, and may fix the proportion of
votes which he may cast in excess of that number.
 'Generally the charter or statutes prescribe that
each share of stock shall be entitled to one vote. And a
statutory or charter provision to this effect applies not
only to elections, but also to all other questions that may
come before the stockholders' meetings. An election to
STOCKHOLDER'S MEETINGS 1233
be held by a "majority of stockholders means a major-
ity in interest.' 
Question 665: The M. Corporation has 7 shareholders. A
owns 60% of the stock. Can he outvote the other 6 shareholders?
Case 666. Venner v. Chicago City Ry. Co., 258 111.
523.
Facts: Venner, as stockholder of Chicago City Rail-
way Company, files a bill for the purpose of having de-
clared void a certain agreement creating a voting trust
known as the Chicago City and Connecting Railways
Collateral Trust and enjoining the trustees from voting
any stock in the corporation.
Point Involved: Whether a trust among stockholders
in a corporation whereby they transfer their stock to
trustees as their proxies to vote for them according to a
trust agreement, is valid.
Mr. Justice Dum: "* * * The stockholders can
control the affairs of a corporation only through the
election of directors, and at every such election there is
necessarily a combination of shares upon the persons
elected. Such combination may be made at the time of
the meeting, but there is no reason why stockholders
may not agree beforehand to vote for certain persons as
directors, and often they must do so in order to elect
the persons desired. There is nothing in the law to pre-
vent the owners of a majority of the stock from giving
proxies to the same person. Unless restricted by its
terms or by some statutory provision a proxy confers
on the grantee a discretion, unlimited either in character
or duration, until revoked. A majority of the stock-
holders may therefore, by uniting in the same proxy,
confer upon an agent unlimited discretion to vote their
stock, and there is no policy of the law to prevent their
transferring the stock to a trustee with the like unre-
stricted power. It is the purpose for which the trust
was created which must determine its legality. Besides
1234
CORPORATIONS
those already cited, it has been decided in the following
cases, among others, that the pooling of stock by the
owners for the purpose of electing directors and officers
and controlling the management and business of the cor-
poration was not against public policy so long as no
fraud was committed or wrong done to the other stock-
holders: Ohio & Mississippi Railroad Co. v. State, 49
Ohio St. 668; Griffith v. Jewett, 9 Ohio Dec. (Reprint)
627; Weber v. Delia Mountain Mining Co., 14 Idaho,
404; Mobile & Ohio Railway Co. v. Nichols, 98 Ala. 92;
Hey v. Dolphin, 92 Hun, 230; Havemeyer v. Havemeyer,
43 Super. Ct. (N. Y.) 506; Brown v. Pacific Mail Steam-
ship Co., 5 Blatchf. 525. On the other hand, an agree-
ment is invalid whose object is not the benefit of all the
stockholders equally, but is some unfair advantage to the
parties to it, only, as where one of the parties is to have
a certain office at a certain salary, or the parties to the
agreement are to receive the profits to be made out of
certain contracts to be entered into by the management
under their direction, or the stock of the corporation is
to be voted or its affairs managed by the determination
of persons other than its stockholders or by a minority
of its own stockholders. (Guernsey v. Cook, 120 Mass.
501; Shepaug Voting Trust Cases, 50 Conn. 553; Kreissl
v. Distilling Co. of America, 61 N. J. Eq. 50; Cone v.
Russell, 48 Id. 208; White v. Thomas Inflatable Tire Co.,
52 Id. 178; Morel v. Hoge, 130 Ga. 625; Hafer v. New
York, Lake Erie & Western Railroad Co., 9 Ohio Dec.
[Reprint] 470.) Many of the cases relied upon by coun-
sel for the appellant 'are of this character, and were
founded on the principle that the owners of a majority
of the stock have no right to use their power to advance
their own private interests at the expense of the minor-
ity. In others the complaints were made by parties to
the agreement or purchasers from parties to the agree-
ment, claiming that the agreement was not binding upon
them, but was revocable at their pleasure. Cases of this
kind are not in point, for the appellant is not a party to
the trust agreement and cannot Complain of it's term
STOCKHOLDER'S MEETINGS 1235
unless his rights as a stockholder have been injuriously
affected by it or will necessarily be injuriously affected.
Question 666: (1) Is a voting trust among stockholders of
a corporation valid ?
(2) If the stockholders of competing firms join in a voting
trust, is the trust legal?
Case 667. In re Barker, 6 Wend. (N. Y.) 509.
Facts: The report reads as follows:
"An election of directors of the Mercantile Insurance
Company of New York was hold en on the 10th of Janu-
ary, 1831. Jacob Barker demanded to vote on 1,290
shares of stock standing in his name on the books of the
company, 1,255 in his own right and 35 as trustee for
his minor children. His vote was challenged, and the
challenge allowed by the inspectors. Had he been per-
mitted to vote on the whole number of shares standing
in his name, Samuel Hazard, and six other persons
named in the proceedings, who the inspectors certified
were duly elected, would not have been elected, but seven
other persons, for whom Jacob Barker offered to vote,
would have been elected in their stead; or had he been
permitted to vote only on the thirty-five shares held by
him as trustee, the effect would have been to have given
a majority of votes to four individuals, who were voted
for at the election as directors, and who were not re-
turned as elected over Samuel Hazard and five other
persons, who had an equal number of votes, and who
were returned duly elected. The objection to Barker's
voting on the 1,255 shares was that they were hypoth-
ecated to the company to their full value. The company
was incorporated in 1818. This case also presented the
question whether an alien stockholder of this company
has the right to vote by proxy: such vote having been
offered, and rejected by the inspectors.
By the court, Savage, Ch. J.: "In the case Ex parte
Holmes, 5 Cowen, 426, we set aside an election of di-
rectors of an insurance company, because a trustee had.
1236
CORPORATIONS
been allowed to vote upon stock belonging to the com-
pany; not because a trustee had been permitted to vote
instead of the cestui que trust, but for the reason that
the stock in that case could not be voted upon, being the
property of the company, controlled by its officers; and
we held, that neither within, the meaning of the charter
of the company, nor of the act under which the proceed-
ings were had, could it be tolerated, that the officers of
a moneyed institution should wield such stock, however
obtained, to control the result of an election of directors.
Such is the principle settled by that case, and what was
said in relation to the rights of a trustee or cestui que
trust to vote on stock standing in the name, of the trus-
tee, either generally or specially, in his representative
character, was said in reference to the peculiar circum-
stances of the case. The court never could have doubted
the right of a person to vote upon stock standing in his
name although held by him' in trust for another; the
legal estate is in him, and until divested by assignment,
either voluntary or compulsory, he is the only person
entitled to vote. Indeed, the case Ex parte Holmes, ad-
mits that if the stock stands in the name of the trustee
without expressing any trust, he has the right to vote.
Jacob Barker, therefore, was entitled to vote upon the
thirty-five shares holden by him as the trustee of his
minor children.
"He was also entitled to vote upon the 1,255 shares
standing in his name in his own right, although they
were hypothecated to their full value. So was the deci-
sion of the court in Ex parte Wilcocks, 7 Cowen, 402,
where we held, that until the pledge was enforced and
the title made absolute in the pledgeq, and the names
changed on the books, the pledgor should be permitted to
vote.
Question 667: (1) A owning certain certificates of stock
by will bequeaths them to B in trust for C, D, and B, who are
A's unmarried sisters. B has certificates made out to him as
trustee. Who can vote this stock? (The trust in this ease is
not a voting trust.)
STOCKHOLDER'S MEETINGS
1237
(2) If stock is pledged, can the pledgor or pledgee vote it?
(3) If a corporation owns its own stock, can it vote it?
Case 668. Market Street R. Co. v. Hellman, 109 Cal.
571.
Facts: Proceeding to contest the consolidation of cer-
tain corporations. Among many other points made, the
objection was raised that appears in the following
opinion:
Searles, Chancellor:  * * *
''In the case of the Omnibus Cable Company, 1,470
of its shares were owned by, and stood in the name of
Daniel Stein, who died, say, six months before the con-
sent was signed by his executors, and as the stock was
never transferred on the books to the names of such
executors it is contended they were not authorized to
consent. 'The shares of stock of an estate of a minor
or insane person may be represented by his guardian,
and of a deceased person by his executor or administra-
tor.' (Civ. Code, Sec. 313.)
"No transfer of the stock to the executors was neces-
sary to entitle them to vote it. Spelling on Corpora-
tions, at Sec. 380, says: 'In case of the death of a stock-
holder his administrator becomes, by operation of law,
vested with the legal title to the stock, and is entitled to
vote it at all elections without a transfer upon the stock-
book, * * * and the fact that the decedent held the
stock subject to a trust would not alter it. Upon the
death of a trustee of personal property the trust would
devolve upon his representative, and he becomes legal
owner as to all persons except the cestui que trust, and
the corporation has nothing to do with the equities be-
tween the immediate parties to the trust or between the
legal owner and third parties, as regards the rights of
voting.' (See cases cited by same author in footnote
to Sec. 380.)
Question 668: Can an executor vote stock owned by him as
such executor? Suppose that upon the books the stock still
stands in the name of the deceased, but the executor brings in
1238
CORPORATIONS
ample proof of his appointment and qualification as such exec-
utor, can he vote the stock?
Case 669. J. H. Wentworth Co. v. French, 176 Mass.
442.
Holmes, C. J.: "This is a petition for a writ of
mandamus declaring that Benjamin Dickerman, George
W. Dickerman, and Charles W. Boynton are the duly
elected directors, and that Benjamin Dickerman is the
duly elected treasurer and clerk, of the petitioning cor-
poration. Benjamin Dickerman is the holder of a certifi-
cate for 100 shares of stock in the company, which states
on its face that it is 'held as collateral for the note of
James H. Wentworth for $10,000, dated April 8, 1898.'
There has been no breach of the conditions of the pledge.
If Benjamin Dickerman had the right to vote on these
shares, then the persons named have been elected direc-
tors, treasurer and clerk, and, subject to certain ques-
tions to be dealt with, a peremptory writ ought to issue,
as in American Railway-Frog Co. v. Haven, 101 Mass.
398; otherwise the petition should be dismissed.
'' The corporation has to go by its record in determin-
ing the right to vote, and therefore, if a certificate of
stock shows a certain person to be a member, the corpo-
ration must recognize him as member, with the right to
vote as an incident to his membership. Crease v. Bab-
cock, 10 Met. 525, 546. National Bank v. Case, 99 U. S.
628, 631. Adderly v. Storm, 6 Hill, 624, 627. Franklin
Bank v. Commercial Bank, 36 Ohio St. 350, 355. Magru-
der v. Colston, 44 Md. 349, 356. Commonwealth v. Dal-
zell, 152 Penn. St. 217, 223. If the certificate holder is
a pledgee, it may be that before breach the pledgor will
be recognized in equity as the general owner for the pur-
pose of voting as for other purposes. But in such cases
the result has been worked out by compelling the holder
to give a proxy to the pledgor, and thus the conclusive-
ness of the record for corporate purposes has been left
unimpaired. Vowell v. Thompson, 3 Cranch C. C. 428.
Hoppin v. Buffum, 9 R. I. 513, 518,
STOCKHOLDER'S MEETINGS 1239
"The provision in Pub. Sis. c. 105, Sec. 25, by which a
certificate of stock issued as a pledge or the like shall
express the fact and the name of the pledgor 'who alone
shall be responsible as a stockholder,' goes back through
Gen. Sts. c. 68, Sec. 13, to St. 1838, c. 98, Sec. 3, and, it
would seem, may have been suggested by the case of
Crease v. Babcock, as the bill in that case was brought in
1837. When the requirements of that section are com-
plied with, the form of the certificate allows the pledgor
to be recognized as the member of the corporation for
the purpose of voting as well as for the purpose of fixing
responsibility, and under such circumstances the general
understanding is that he is the proper person to vote.
The statute in a different way reaches the result which
equity reached by compelling the pledgee to give a
proxy.''
(The Court holds that the statute of Massachusetts by
which the right of vote is put in the pledgor has not been
complied with and as the pledgee was the record stock-
holder he had a right to vote.)
Question 669: Does the pledgor or pledgee of stock have a
right to vote the pledged stock ?
Case 670. Rinnan v. Sullivan Co. Club, 50 N. Y.
Suppl. 95.
Rumsey, J.: The corporation has no power, by its
by-laws, to refuse to permit a delinquent stockholder to
vote upon its stock than it has to refuse him the privilege
of making a transfer of the stock. The right to vote
upon stock of a corporation is essential for the protection
of its owner. It is one of those inherent rights which
goes with the purchase of the stock, and, unless it is
limited by the articles of association, which authorized
the corporation to exclude from the right of voting a
person who is in arrears upon his stock, the right does
not exist. It cannot be arrogated by the corporation to
itself after the stock has been issued. It makes no differ-
ence, in this regard, whether the stockholder agrees to
1240 CORPORATIONS
take the stock subject to the by-laws of the corporation
or not. No by-law can be made which takes away from
a stockholder a right which is vested in him at the time
of the purchase of his stock.
Question 670: May a corporation deprive a stockholder of
his voting power because he is delinquent? Suppose he has
subscribed to abide by the by-laws, and a by-law is subsequently
passed attempting to deprive him of his voting power, is the by-
law binding on him ? "What if the by-law were already in force
when he became a stockholder?
CHAPTER 88
TRANSFER OF STOCK
§ 707. Transferability of stock.
§ 708. Method of transfer.
§ 709. By-laws and restrictions regulating transfer.
§ 710. Rights of transferee of stock sold without authority.
§ 711. Liabilities of transferee to corporation.
§ 712. Liability of transferee to creditors of corporation.
§ 713. Liability of transferor to transferee.
§§707, 708. (Corporations, Sees. 71, 72.) Transfer-
ability of stock. Method of transfer.
Case 671. Ernst v. Elmira Municipal Improvement
Co., 54 N. Y. Sup. 116.
Facts: Suit brought by owners of certain of the cap-
ital stock of Elmira Municipal Improvement Company to
enjoin the issue of certain preferred stock by it to certain
stockholders and to compel the company to recognize
and register a transfer of stock to the complainants,
purchased by them from registered stockholders. The
complaint alleges that the corporation has no power to
issue preferred shares against the dissent of common
stockholders.
Point Involved: The right of one acquiring stock
from a shareholder to compel the company to recognize
the transfer on its books, the right of such a one whom
the company has refused to recognize to be considered
a stockholder in fact; whether a corporation which has
issued common stock can afterwards issue preferred
stock without the unanimous consent of all the stock-
holders.
Laughlust, J.: "* * * The demurring defendants
contend that the plaintiffs' only remedy is an action at
1241
1242
CORPORATIONS
law to recover the value of the stock as damages for the
wrongful refusal to transfer the stock on the books of
the company and to issue new stock to the plaintiffs. It
is argued that the corporation owes no duty to the trans-
feree of stock and that there is no privity between him
and the company until he has become a stockholder on
its books. I cannot agree with the contention. * * *
It has long since been settled that an equitable action
may be maintained by a transferee of stock to compel the
company to transfer the stocks upon its books, and that
a wrongful refusal to transfer amounts to a waiver of
the statutory requirement and the corporation will not
be permitted to take advantage of its own wrong, but
the transfer will be deemed complete, and the company
will be bound to recognize it, precisely as if the entries
had been made upon the company's books. * * *
The plaintiffs are * * * entitled to have the trans-
fer entered on the books of the company and to have
new certificates of stock issued to them in their own
names, to the end that they may stand in the unques-
tionable position for the assertion and protection of their
rights and interests in the corporation, whatever such
rights and interests may be. * * *
"* * * jn tpg absence of a statutory provision of
law reserving such power, there can be no issue of pre-
ferred stock in a corporation to the prejudice and injury
of the owners of the common capital stock without their
unanimous consent. Each stockholder has a vested in-
dividual right in his proportionate share of the corpo-
rate property and of the profits of the business. Such
action cannot be impaired by the action of the directors,
or of any majority of the stockholders without his con-
sent. * * * It is well settled by authority that a
suit in equity will lie by a holder of common stock to
enjoin any unlawful or unauthorized issue of preferred
stock. * * *
Question 671: Answer the questions suggested in the '' Points
Involved in this case.
TRANSFER OF STOCK
1243
Case 672. Brisbane v. D. L. & W. R. Co., 32 N. Y.
Supreme, 438.
Appeal from a judgment, entered upon the trial of
this action at the Special Term.
The plaintiff brought this action to compel the defend-
ant to issue to him a certificate for ten of its shares to
which he claimed to be entitled as the transferee of ten
shares of the stock issued by a corporation to whose
rights and obligations the defendant is shown to have
since succeeded, or in case of the inability of the defend-
ant to issue such certificate for damages to the extent
of the value of such stock. This certificate, of which the
plaintiff was the transferee, was a certificate issued to
Samuel Benedict, and it contained the statement that he
was entitled to ten shares of the capital stock of the
corporation issuing it, transferable only on the books of
the company upon surrender of the certificate. Benedict
executed a power of attorney, indorsed upon the certifi-
cate, appointing the plaintiff his attorney irrevocable
to sell and transfer to the plaintiff the whole or any
part of the shares specified. This power was given on
the 1st day of January, 1856, but no transfer of the
shares was made under its authority during the lifetime
of Benedict. After his decease and in the year 1876 his
administrator procured a transfer of these shares upon
the books of the defendant to himself. The certificate
issued for the shares themselves was not and could not
he by him produced, and according to its terms he was
not entitled to the transfer of the shares which he caused
to be made, and the defendant it was claimed made it
without authority. It was for that reason held that the
defendant was liable to that extent to the plaintiff in this
action.
In the intermediate time a stock dividend of fifty per
cent had been declared in favor of these shares, and
further dividends in cash had also been specifically cred-
ited to them on the books of the defendant. This stock
dividend and the cash dividends, with the exception of
one of them, were credited to Benedict, who appeared
1244
CORPORATIONS
on the corporate books to be the owner of these shares,
and they were accordingly paid over to his administrator
at or about the time of the transfer of the shares them-
selves. The plaintiff insisted upon his right to recover
the value of the stock dividend and the amount of the
cash dividends paid to the administrator, but these por-
tions of his claim were rejected as not well founded by
the decision finally made in the action.
The court at General Term said: "His title to the
dividends rests upon a different basis from that of his
right to the shares themselves, for those shares could
not lawfully be transferred without the surrender of the
certificate which had been issued to authenticate the right
of the person named in it to them. But as long as the
books of the company contained evidence that the person
who received the certificate was still to be regarded as
the owner of the shares it had an authentic record upon
which it could lawfully act, and that determined the dis-
position which should be made of the dividends. Bene-
diet stood upon the books of the company as owner of
the shares. Nothing appeared to impeach his title; and
as they were only transferable upon the surrender of
the certificate, as long as that had not been done, no
other alternative existed than to regard him as still the
owner of the shares. To obtain the dividends upon the
shares he was not bound to produce the certificate which
had been issued for the stock, but he could do so upon
the fact of his recorded title as long as no evidence ap-
peared from which his right could be impeached or
questioned. Payment to him under such circumstances
would be a lawful and proper disposition of the divi-
dends. This was the view which was taken of the sub-
ject in Smith v. American Coal Company (7 Lans. 317),
and it is sustained by what was said upon the same sub-
ject in McNeil v. Tenth National Bank (46 N. Y. 325).
And it was also considered to be a settled principle of
law in Manning v. Quicksilver Mining Company, decided
by the court in March, 1881. (24 Hun, 360.)
"When Benedict died this right, as it appeared to
TRANSFER OF STOCK
1245
exist in him, passed to his administrator, who by virtue
of that relation, acquired the same title to the dividends
that Benedict could have asserted in case he had lived.
A payment to him was authorized by the evidence of title
standing upon the books of the corporation, and his fail-
ure at the time it was claimed to present the certificate
issued for the shares was not a circumstance subjecting
his title to suspicion, or justly rendering it a subject of
inquiry.
"If notice had been given by the plaintiff of his right
to receive the dividends accruing upon the shares, the
case would undoubtedly require a different determina-
tion.''
Question 672: Why was the defendant corporation held to
be liable to the plaintiff for issuing shares to the administrator
and not liable for having paid the dividends on such shares to
such administrator? Do you think the plaintiff could recover
in a suit against such executor for the dividends received by or
credited to him?
§ 709. (Corporations, Sec. 73.) By laws and regulations
restricting transfer.
Case 673. Brinkerhoff Trust and Savings Co. v. Home
Lumber Co., 118 Missouri Reports 447.
GIantt, P. J.: "In February, 1888, the Brinkerhoff-
Farris Trust and Savings Company loaned J. W. Cleland
$13,000 and accepted as collateral security, two cer-
tificates of stock in the Home Lumber Company, each
certificate calling for fifty shares, of the par value of
$100 per share. One certificate was numbered 40 and
bore the date of May 1, 1885, and the other was dated
April 12, 1886.
"The certificates were in the following form and were
alike, save as to the number and date:
CERTIFICATE OF STOCK
State of Missouri,
Home Lumber Company.
No. 40. 50 Shares.
1246
CORPORATIONS
"This is to certify that J. W. Cleland is proprietor of 50
shares of the capital stock of the Home Lumber Company, trans-
ferable only on the books of the company by said stockholder
or his attorney upon surrender Of this certificate.
Nevada, Mo., May 13, 1885.
J. W*. Cleland, President.
B. H. McDonald, Secretary.
Endorsed: J. W. Cleland.
"Cleland having defaulted in the payment of the note
for which the stock was security, the trust and savings
company sold it and, through its president, became the
purchaser thereof June 24, 1889, and afterwards, on
June 28, 1889, presented the two certificates to the lum-
ber company and asked to have the stock transferred to
it on the books of the lumber company, which was re-
fused because the lumber company asserted that Cleland
was indebted to it in the sum of $13,000 and it had a lien
on said stock by virtue of its "by-laws, and for the fur-
ther reason, that it claimed that, by another by-law,
Cleland was restricted from selling this stock to any out-
sider until he had first given the refusal to the board of
directors and the purchase thereof had been refused by
each and every member of the board.
'' The trust and savings company insisting that it had
no notice of such by-laws, and that they were void as to
it, brought this action as for a, conversion of the stock
alleging its value to be $11,000 on the twenty-eighth of
June, 1889, the date of the alleged wrongful conversion.
"The defendant, after a specific denial of the allega-
tions of the petition, made the following additional de-
fenses:
'' ' Further answering, defendant says that by article 12
of the by-laws of defendant, adopted in the year 1881,
it was provided, that no stockholder should sell or assign
any of his or her certificates of stock to any person not
already a stockholder unless he or she shall first have
offered the same to the board of directors and the pur-
chase thereof been refused by each and every member
thereof at the prices offered by any other person, and
TRANSFER OF STOCK
1247
that said Cleland never did offer said stock to said board
of directors, nor gave them, nor any stockholder, the
refusal thereof, and that plaintiff never was a stock-
holder of defendant
 'And, further, that on the first day of July, 1884,
the defendant duly adopted by-laws which provided,
among other things, that the stock of the company should
be transferred only on the books of the company, and any
transfer of the stock shall be subject to the lien of the
company thereon for any indebtedness due the company
from the holder thereof.
 'And that at the time of the alleged transfer of the
said stock by said Cleland to plaintiff, he was and still is
indebted to defendant to the amount of $5,000, now long
overdue, and that he is insolvent, and if plaintiff ever
procured said stock from him at all it was only a collat-
eral security for a loan, and with full notice of the said
by-laws:
 'Wherefore defendant avers that plaintiff had no
right to have said stock transferred to it, and that if it
should turn out that plaintiff is the holder of said Cle-
land's interest therein, then it is subject to the lien of
defendant for the $5,000 indebtedness aforesaid, and
also that in this event the court will adjudge it to be
subject to said lien, and order it sold for the payment
thereof, etc.'
"To this answer the plaintiff duly filed a reply saying
it had no knowledge nor information sufficient to form
a belief as to whether or not Cleland was indebted as
alleged, and denying that the shares of stock were sub-
ject to any indebtedness of Cleland's.
"The evidence tended to show that Cleland owned the
one hundred shares of stock; that it was paid up; that he
was indebted to the company about $13,000 when he
transferred the stock to the trust company. It appeared
from the proceedings of the board of directors in 1881,
and prior to the date of either certificate, that the board
adopted the following by-law:
 'Any shareholder shall not sell nor assign any of
1248
CORPORATIONS
his or her certificates of stock to any person not already
a stockholder unless he or she shall have first offered the
same to the board of directors and the purchase thereof
been refused by each and every member thereof at the
prices offered by any other person.'
"And on July 1, 1884, the board adopted the following
by-law:
 ' Article 10, section 1. The stock of this company
shall be transferred only on the books of the company,
and any transfer of stock shall be subject to the lien of
the company thereon for any indebtedness due the com-
pany from the holder. * * *'
"And the following resolution:
 'Resolved, that section 1, article 10, of the by-laws
first adopted, be Avritten or printed on all certificates of
stock of said Home Lumber Company, as a notice to
purchasers of said stock of the lien of the company for
any indebtedness of the holder thereof to the company.'
"Section 1 of article 10 of the by-laws was adopted
in July, 1884, and none of the stock in this controversy
was issued till May, 1885, and a portion in 1886, but ■
neither of these certificates had section 1, article 10,
either written or printed on it.
"The testimony fails to show any notice to plaintiff
of the existence of either of the by-laws mentioned, or
of Cleland's indebtedness to the lumber company prior
to taking the stock as security. And if it is to be bound
by them, it must result from an implied notice, growing
out of the nature of the security itself, or by the notice
acquired after the loan was made and before the sale
under the pledge. * * *
"The court declared the law to be that, unless plain-
tiff had notice of the indebtedness of Cleland, and the
by-laws of July 1, 1884, before it took the stock as collat-
eral, then it was not bound by said by-law; and refused
to declare the law to be that, if it had such notice before
buying the stock from Farris, it would be bound by it.
The court also refused to declare the law to be that, if
Cleland had not complied with the by-law requiring him
TRANSFER OF STOCK
1249
to first offer the stock to the company before selling it
elsewhere, the plaintiff could not recover.
 The court found the issue in favor of the plaintiff
and assessed the damages at the par value of the stock
and interest from date of demand. Motions for a new
trial and in arrest were duly made and overruled and ex-
ceptions were duly taken to the admission and exclusion
of evidence and giving and refusing instructions and the
case is brought to this court by appeal.
"1. The defendant is a business corporation organized
and existing under the provisions of article 8, chapter 21,
of Revised Statutes of 1879, and the general provision of
article 1, of said chapter 21, so far as applicable.
"By section 709, Revised Statutes, 1879, the directors
of a corporation like this are empowered to make 'by-
laws to direct the manner of taking the votes of stock-
holders on the question of increasing or diminishing
the number of directors or trustees, or of changing the
corporate name.' The power to make all other needful
or necessary by-laws is conferred upon the corporation
itself, and can only be exercised by the stockholders.
Rex v. Westwood, 7 Bing. 1; Bank v. Bank, 17 Mass. 33;
Carrbll v. Bank, 8 Mo. App. 249; State Savings Associa-
tion v. Printing Co., 25 Mo. App. 642; Albers v. Mer-
chants' Exchange, 39 Mo. App. 583.
"It was very clearly pointed out by Judge Hyden in
Carroll v. Bank, supra, that in the cases of Mechanics'
Bank v. Merchants' Bank, 45 Mo. 513, and Ins. Co. v.
Goodfellow, 9 Mo. 149, and Spurlock v. Railroad, 61 Mo.
326, the directors in each case, received their authority
to make the by-laws in question in those cases directly
from the legislature.
"It is very clear that the attempt of the directors of
the defendant company to adopt the by-laws, restricting
the rights of its stockholders to convey their stock to any
one until the said directors had refused to purchase it or
while indebted to the corporation, was without warrant
or authority of law, and as such is not binding, either
on the stockholders or those purchasing from them. The
1250
CORPORATIONS
company itself had no right to pass such a by-law. Moore
v. Bank, 52 Mo. 377.
"But it is claimed by appellant that the so-called by-
law and the resolution, although not valid as a by-law,
is nevertheless binding as a valid agreement on all who
were parties to it, and that, as Mr. Cleland was then the
president of defendant and a director, he was bound by
it, and that plaintiff, as a purchaser from Cleland, took
only an equity, and was chargeable with notice of this
lien, asserted by defendant, and that all the certificates
of stock are not negotiable papers, plaintiff cannot oc-
cupy the position of an innocent purchaser for value and
without notice.
"It is true that certificates or shares of stock are not
strictissimi juris negotiable paper, but they approximate
to it as nearly as practicable. In Bank v. Lanier, 11
Wall. 369, the supreme court of the United States said,
1 the power to transfer their stock is one of the most valu-
able franchises conferred by congress on banking associa-
tions. Without this power, it can readily be seen the
value of the stock would be greatly lessened, and, ob-
viously, whatever contributes to make the shares of the
stock a safe mode of investment, and easily convertible,
tends to enhance their value. * * * It is in obedi-
ence to this requirement that stock certificates of all
kinds have been constructed in a way to invite the con-
fidence of business men, so that they have become the
basis of commercial transactions in all the large cities
of the country, and are sold in open market the same as
other securities. Although neither in form nor char-
acter negotiable paper, they approximate to it as nearly
as practicable.'
"It has been uniformly ruled in this state, with the ex-
oeption of White v. Salisbury, 33 Mo. 150, that in the
absence of a legislative enactment restricting the trans-
fer of stock to any particular mode, the transfer is com-
plete on delivery of the certificate with power to trans-
fer and the payment of the purchase money, not only
between vendor and vendee, but when the corporation
TRANSFER OF STOCK
1251
has unjustifiably refused to make the transfer on its
books, against a creditor of the vendor who, without
notice of the transfer, attaches the stock. Ins. Co. v.
Groodfellow, 9 Mo. 149; Chouteau Spring Co. v. Harris,
20 Mo. 382; Moore v. Bank, 52 Mo. 337; Merchants'
Bank v. Richards, 74 Mo. 77, approving same case in 6
Mo. App. 454; Wilson v. Railroad, 108 Mo. 588. See,
also, Planing Mill v. Bank, 80 Tenn. 252; Johnston v.
Laflin, 103 U. S. 800; Webster v. Upton, 91 U. S. 65;
Bank v. Bank, 63 C'al. 359.
"So that we think it can now be safely affirmed that
when no restriction is placed upon transfer of stock by
the public law of the state, of which all are bound to take
notice, or the transferrer of the stock is not bound by a
valid contract of restriction of which the transferee or
assignee has notice, one who purchases a certificate of
stock, receives and pays for it, is not bound by any re-
striction or lien of which he lias no notice.
"The spirit of all modern legislation is opposed to
secret liens. At common law a corporation has no lien
on the stock of its stockholders for any indebtedness to
it. Accordingly, when such a lien is asserted, it should
clearly appear to be authorized by public law, or by a
duly adopted by-law, or valid agreement, of which the
purchasers of the stock have notice. None of these con-
ditions existed as to the stock in suit when it was trans-
ferred as security for plaintiff's loan, and consequently
plaintiff took it without being bound by so-called by-law
and resolution.
"By section 739, Revised Statutes, 1879, this stock was
expressly declared to be personal estate and transfer-
able in the manner prescribed by the by-laws and no
shares should be transferred until all previous calls
thereon should be fully paid. The only restriction on
the transfer by this section is upon the stock which was
not fully paid up; a restriction not applicable here, be-
cause this stock was fully paid up in the beginning. The
purpose of permitting the company to require a transfer
on the books was clearly to advise the company of the
1252
CORPORATIONS
change of ownership in order that only the owners of the
stock should participate in the corporate election, and to
enable the corporation to pay dividends without risk, or
make assessments upon the holders of its stock, but cer-
tainly it was not intended that under this power to regu-
late transfers, the company should create or reserve a
secret lien upon the stock. Without reference to its
quasi-negotiable character, the pledge or sale of this
stock was simply a pledge or sale of personal property,
and the pledgee or vendee, without notice of the lien,
took it discharged therefrom. He did not purchase a
mere equity in paper, but he purchased personal prop-
erty. If that property was bound by a lien of which he
had lawful notice, he took subject to it, and if lie had no
such notice he took it discharged therefrom. The mere
recital that 'it was only transferable on the books of the
company' was not notice, either of a restriction on sale',
or of a lien thereon.
"Nor are we impressed with the equity of defendant's
claim. It urges that it permitted Cleland to become in-
debted to it because he owned the stock, and yet it per-
mitted him to remain its ostensible owner, and exacted
neither pledge nor mortgage on it, although aware that
there was nothing on the face of the stock to indicate it
had, or claimed, a lien on it. Against an innocent sub-
sequent purchaser, there would seem to be little to com-
mend defendant's claim to a court of justice. Bullard
v. Bank, 18 Wall. 589; Driscoll v. Mfg. Co., 59 N. Y. 96;
Moore v. Bank, 52 Mo. 377.
11. But, upon another ground, we think plaintiff
ought not to be subject to the lien of Cleland's indebted-
ness. The defendant had attempted to adopt this by-law
and resolution, which required 'said section 1 of article
10' to be printed on the face of this stock, and yet issued
it afterwards without these conditions printed on it. Its
conduct in this respect can only be construed, as to all
subsequent purchasers of this stock as a waiver of its
by-law. By the clearest principles of right it is estopped
from asserting this lien now, as against the plaintiff, who
TRANSFER OF STOCK
1253
was without notice. Bank v. Pinson, 58 Miss. 421; Moore
v. Bank, 52 Mo. 377; Planing Mill v. Bank, 86 Tenn. 252;
Bank v. Bank, 63 Cal. 359; Bank v. Durfee, ante, p. 431.
"The court correctly declared the law to be that, un-
less plaintiff had notice of the indebtedness of Cleland
and of the by-law of July 1,1884, before it took the stock
as collateral, then it was not bound by said by-law, and
properly refused the instruction asserting a contrary
principle.
Question 673: What were the objections in the above case
made by the company to transferring the stock in question1?
Upon what facts did it support its contention? Upon what
grounds did the court find against the defendant?
§710. (Corporations, Sec. 74.) Shares transferred
without authority; lost, stolen and forged certificates.
Case 674. Jarvis v. Manhattan Beach Co., 148 N. Y.
652.
Facts: Defendant, The Manhattan Beach Co., had a
capital stock of $5,000,000 dividend into $50,000 shares of
$100 each. A large portion of the stock was issued and
the certificates listed on the N. Y. Stock Exchange, and
were subject to purchase and sale by the public. The
certificates were signed by the President and Assistant
Treasurer, and in order to guard against fraud counter-
signed and registered by the Central Trust Co., which
acted as registrar of transfers in order to authenticate
the genuineness of the certificates. The Manhattan
Beach Co. had an office in New York City where the trans-
fers of its stock were made, and a transfer clerk was em-
ployed there. September 30, 1882, this transfer clerk de-
livered to a firm of brokers in New York, in the ordinary
course of business, a certificate for 100 shares of the stock
of the Manhattan Beach Co. to be sold on account. This
certificate bore the genuine signatures of defendant's
president and assistant treasurer, and was countersigned
by Central Trust Company with certificate registration.
It certified that one B. Bignell was owner of 100 shares
of the capital stock of Manhattan Beach Co., and the
1254
CORPORATIONS
name of B. Bignell was indorsed under the blank form
of transfer and this signature purported to be witnessed
by the transfer clerk. This certificate was, in fact,
spurious, fabricated by the transfer clerk over the gen-
uine signatures of the officers, upon blanks used for issu-
ing genuine certificates. Bignell was. not owner of any
stock and did not sign the form of transfer. By the rules
of the stock exchange certificates sold there must either
stand in the name of some member and be indorsed in
blank by him, or else must be guaranteed by a member
of the exchange. The brokers who sold this certificate
were therefore obliged to guarantee that it was genuine.
To find out whether it was genuine they sent it by mes-
senger to Central Trust Co. and then to the transfer
office and were informed it was properly registered and
at the defendant's office that it was all right. They then
sold it and remitted the proceeds to the transfer clerk,
less commissions. About two years later they were
obliged to make the stock good, and this is a suit by
Jarvis, who represents the brokers as their assignee to
recover the loss thus sustained by the brokers. In 1884
the transfer clerk absconded and it was found he had
issued many fraudulent certificates. He had charge of
the stock ledger and transfer books, and no supervision
had been kept over him or examination made of his
books.
O'Briex, J.: (After stating the facts, substantially
as above.)
a* * *
1' The principles upon which a corporation may be held
liable to a bona fide holder of certificates of stock, fraudu-
lently issued or put in circulation by the wrongful or
criminal acts of its officers or agents, are quite well set-
tied. Numerous cases involving these questions have
received the attention of this Court and quite recently
some new features of such transactions have appeared.
(N. Y. & N. H. R. R. Co. v. Schuyler, 34 N. Y. 30; Fifth
Avenue Bank v. Forty-second Street, etc., R. R. Co.,
TRANSFER OF STOCK
1255
137 N. Y. 231; Manhattan Life Ihs. Co. v. Forty-second
Street, etc., R. R. Co., 139 N. Y. 146; Knox v. Eden
Musee, etc., Assn., 148 N. Y. 441.)
"The liability in such cases is determined by an appli-
cation of the general rules of law that govern the rela-
tions of principal and agent as developed and applied to
corporations, acting solely through such agencies. The
principal is liable to a third person in a civil action for
the fraud or other malfeasance of his agent, perpetrated
by the latter in the course of his employment, although
the principal did not authorize, justify or know of the
misconduct. In this case the certificate contained the
genuine signatures of three authorized officers or agents
of the defendant, namely the president, the assistant
treasurer and the registrar. The paper upon its face
was an assurance to the public, through the acts of its
officers, that a person named therein, whether a real or
fictitious person, was the owner of one hundred shares
of its capital stock. It had upon its face all the essential
evidence of genuineness, and it was presented to the
brokers for sale, apparently in proper form for transfer,
by the very agent of the defendant, that it had held out
to the public as the person who had the power to repre-
sent and act for it in making such transfer. When the
paper was delivered to the brokers by the transfer clerk,
having indorsed thereon what appeared to be a regular
transfer, it is difficult to see why it was not received by
them with every reasonable assurance that the defendant
was able to give, that the certificate was not only genuine
stock, but in a condition to be transferred upon the books
in favor of any one who should receive it in good faith.
The paper in fact, however, was nothing but a fictitious
and fraudulent device on the part of the transfer agent
which he had fabricated for purposes of his own, and
although the evidence tended to show that his frauds in
this respect could have been detected or prevented by the
exercise of reasonable diligence on the part of the de-
fendant's officers, yet, as the brokers knew, or ought to
have known, that he was dealing with himself in respect
1256
CORPORATIONS
to the certificate, it may very well be that this circum-
stance was sufficient to put them on their guard and to
impose upon them the duty of making some inquiry as to
its origin and validity. The paper came to them accred-
ited by the genuine signatures of the proper officers of
the defendant and countersigned by the registrar, whose
duty it was to guard against unauthorized or fraudulent
issues of the stock. These signatures carried with them,
to strangers at least, the very highest assurance of the
genuine character of the security. But we do not think
it is necessary in this case to decide what the liability of
the defendant would be in case it appeared that the
brokers took the certificate without inquiry, since the
proof tended to show that they were not negligent in that
respect. This was really the only question of fact con-
tested at the trial and submitted by the court to the
jury. While such certificates do not possess all the quali-
ties of commercial paper, they do possess some of them,
and innocent parties dealing in them will be protected
upon analogous principles and, in a proper case, will be
entitled to compel recognition as stockholders, where
power exists to issue new certificates or to indemnify if
there was not.''
Question 674: (1) State briefly the facts of this case and
the Court's decision.
(2) If the transfer clerk had forged the names of the three
officers, do you think the corporation would have been held?
Case 675. Chicago Edison Co. v. Fay, 164 111. 323.
Facts: Fay sues the Chicago Edison Co. to compel it
to issue to him 200 shares of its capital stock in lieu of
200 shares of such stock, belonging to him, which upon
forged assignments and without his authority had been
surrendered up to the company and cancelled and new
certificates issued to the assignees, who were innocent
purchasers or pledgees.
The circumstances were that in June, 1894, Fay went
to the seashore for the summer, leaving his office and
business affairs in Chicago in charge of Anderson, his
TRANSFER OF STOCK
1257
private secretary, giving Anderson a power of attorney
to draw and endorse checks and drafts on the Northern
Trust Co. He also directed Anderson to pay the last
installment on the Chicago Edison stock and receive and
keep the same, and this stock was by Anderson after-
wards paid for and delivered to Anderson made out to
Fay. Fay had had previous dealings with Slaughter &
Co., brokers and hankers, and they knew Anderson to he
Fay's private secretary and man of affairs. Anderson
sent one of the 100-share certificates to Slaughter & Co.
for them to sell, forging Fay's name to the blank form of
transfer. Slaughter & Co. took the certificate to the com-
pany and had it transferred on the books in two lots,
one certificate for 50 shares being issued in the name of
Slaughter & Co. and the other certificate being issued
in the name of the purchaser to whom Slaughter & Co.
had sold the same, and Slaughter & Co. then sent a check
to Anderson made out to Fay for approximately $12,000,
representing the amount for which they sold the 50 shares
and the amount advanced by them as a loan on the other
50 shares. Anderson, about two weeks later sent over
the other 100-share certificate and procured a further
loan of $8,000, Fay's signature being forged to this cer-
tificate as to the other. This certificate was surrendered
to the company and two certificates issued in its stead,
one for 25 shares to the purchaser and one for 75 shares
to Slaughter & Co. Anderson deposited to Fay's ac-
count all of the money so received, and then checked it
out for his own use by authority of his power of attorney
and then absconded. The Edison Company refuses to
.recognize Fay as a stockholder, and this is a bill to com-
pel such recognition. The Court below entered a decree
in Fay's favor.
Point Involved: Whether a stockholder can lose his
rights as such through a forged transfer of his stock by
another who is his agent for other purposes which forged
transfer has been recognized by the company and a trans-
fer made pursuant thereto on its books.
1258
CORPORATIONS
Mr. Justice Carter: "The decree below was right
* * * Appellant acted at its peril in cancelling Fay's
certificates of stock and in issuing to others other certifi-
cates therefor on the forged assignments. Forgery can
confer no rights or authority upon anybody. * * *
(Note: See also Fay v. Slaughter, wherein on this same set
of facts, Slaughter & Co. sued Fay for the money paid to the
agent, and the Court held that they could not recover.)
Question 675: (1) The M corporation issues a certificate
of stock to A. A's name is forged by his agent B, to the blank
power of attorney and form of transfer, and the certificate is
then sold to C. Has C any right as a stockholder?
(2) Same case. C takes the certificate to the company and
it takes up and cancels the certificate and issues a new one in
its stead, delivering the same to C, and C is put upon the books
as a stockholder as transferee of A's stock. Is A deprived of his
stock? Is C a stockholder or has he any rights against the
company ?
(3) Same case. C takes the new certificate which certifies
him as a stockholder and sells same to D. The original forgery
by B is discovered and the company refuses to recognize D or
give him any damages. D files a bill and asks for a decree estab-
fishing him as a stockholder, or in lieu thereof to give him
damages. Has he any remedy?
Case 676. Sarin v. Wilson, — Cal. —, 13 L. R. A. 605.
Facts: Plaintiff is owner of a 100-share certificate of
stock in a mining corporation issued to one H. B. Par-
sons and properly indorsed by him. An employee of
plaintiff stole the certificate and delivered the same to
the defendant as a broker to sell said stock for him. The
defendant made the sale and turned over the proceeds to
the thief. The defendant was ignorant of the theft and
acted in good faith. He is now sued for his alleged con-
version of defendant's property.
Point Involved: Whether a thief of stock certificates
so indorsed as to pass by delivery can give a good title
thereto to innocent purchasers.
I)e Haven, J.: "To hold the defendant liable, under
the circumstances disclosed here, may seem upon first
TRANSFER OF STOCK
1259
impression to be a hardship upon him. But it is a matter
of every-day experience that one cannot always be per-
fectly secure from loss in his dealings with others, and
the defendant here is only in the position of a person
who has trusted to the honesty of another, and has been
deceived. He undertook to act as agent for one whom it
now appears was a thief, and, relying upon his repre-
sentations, he aided his principal to convert the plain-
tiff's property into money, and it is no greater hardship
to require him to pay to the plaintiff the value of this
property than it would be to take it away from the inno-
cent vendee who purchased and paid for it. And yet it
is universally held that the purchaser of stolen chattels,
no matter how innocent or free from negligence in the
matter, acquires no title to such property as against the
owner, and this rule has been applied in this court to the
innocent purchaser of shares of stock. Barstow v. Sav-
age Min. Co., 64 Cal. 388; Sherwood v. Meadow Valley
Min. Co., 50 Cal. 413 * * *
Question 676: (1) In what shape was this property when
it was stolen, in respect to signatures ?
(2) Did the defendant get a good title? See next case and
note following it.
Case 677. Uniform Stock Transfer Act, Sec. 1, 5, 6, 7.
"Sec. 1. Title to a certificate and to the shares repre-
sented thereby can be transferred only,
 (a) By delivery of the certificate indorsed either in
blank or to a specified person by the person appearing by
the certificate to be the owner of the shares represented
thereby, or
"(b) By delivery of the certificate and a separate
document containing a written assignment of the cer-
tificate or a power of attorney to sell, assign or transfer
the same or the shares represented thereby, signed by
the person appearing by the certificate to be the owner
of the shares represented thereby. Such assignment or
power of attorney may be either in blank or to a specified
person.
"The provisions of this section shall be applicable al-
though the charter or articles of incorporation or code of
1260
CORPORATIONS
regulations or by-laws of the corporation issuing the
certificate and the certificate itself, provide that the
shares represented thereby shall be transferable only on
the books of the corporation or shall be registered by a
registrar or transferred by a transfer agent.
"Sec. 5. The delivery of a certificate to transfer title
in accordance with the provisions of Section 1, is effectual,
except as provided in Section 7, though made by one
having no right of possession and having no authority
from the owner of the certificate or from the person pur-
porting to transfer the title.
"Sec. 6. The indorsement of a certificate by the per-
son appearing by the certificate to be the owner of the
shares represented thereby is effectual, except as pro-
vided in Section 7 though the indorser or transferror
"(a) Was induced by fraud, duress or mistake, to
make the indorsement or delivery, or
"(b) Has revoked the delivery of the certificate, or
the indorsement, whether before or after the delivery
of the certificate, or
"(c) Has died or become legally incapacitated after
the authority given by the indorsement or delivery of the
certificate, or
"(d) Has received no consideration.
'' Sec. 7. If the indorsement or delivery of a certificate
(a) was procured by fraud or duress, or (b) was made
under such mistake as to make the indorsement or de-
livery inequitable, or, if the delivery of a certificate was
made (c) without authority from the owner, or after the
owner's death or legal incapacity, the possession of the
certificate may be reclaimed and the transfer thereof
rescinded, unless:
"(1) The certificate has been transferred to a pur-
chaser for value in good faith without notice of any facts
making the transfer wrongful, or
"(2) The injured person has elected to waive the
injury.''
Question* 677: (1) A has a certificate of stock in X Com-
pany reciting that he is the owner of 10 shares. He indorses
the power of attorney and form of transfer on the back and
TRANSFER OF STOCK
1261
puts it in his pocket. A pickpocket steals it from him and sells
and delivers the certificate to B, an innocent purchaser for value.
As between A and B who is stockholder in X Company ?
(Note: The above provisions assimilate indorsed certificates
of stock to negotiable bearer paper. The cases establish that if
one indorses stock in blank and hands it to an agent, the agent
may give a good title in violation of his trust if he sells to an
innocent purchaser for value, for the owner has clothed him with
apparent ownership and is estopped to assert his title. But if
the owner had not so delivered it, but had indorsed it in blank
and had it in his own possession then by earlier authorities (see
Sarin v. Wilson) a thief of such indorsed certificate could not
give good title to it, but the owner could recover it from such
thief. But by the Uniform Act quoted above a thief of a cer-
tificate so indorsed in blank by the person appearing therein to
be the owner can give good title thereto. Of course a certificate
upon which the indorsement of the owner is forged or written
without authority, cannot be transferred, for the purchaser then
traces his title through a forgery or through an unauthorized
indorsement.)
Case 678. Otis, Adm'r, v. Gardner, 105 111. 436.
Facts: Sheridan Wait, in his lifetime, was the owner
of 100 shares of stock in Calnmet & Chicago Canal &
Dock Co., of par value of $10,000 represented by certifi-
cates issued to him. Written on the back of each cer-
tificate was a blank assignment and power of attorney,
that would authorize the assignee to have the stock repre-
sented by such certificates formally transferred to him
on the books of the company. March 16, 1875, Wait in-
dorsed the certificates below the blank form of transfer
and delivered them to Chauncey T. Bowen, and Bowen
gave back a receipt reciting he had "borrowed the
stock and that it was to be returned on demand. The
purpose of this loan did not appear. Afterwards Bowen
wrongfully pledged these two certificates as collateral
security for the payment of his notes to Jefferson Card-
ner, the defendant in this case. The blank form of trans-
fer consisted in an assignment and a power of attorney.
Otis, as administrator of Wait, filed this bill against
Gardner and the corporation. The bill asked for a decree
1262
CORPORATIONS
that the stock he declared to belong to Wait's estate;
that the old certificate be cancelled, and a new certificate
be issued to the administrator by the company, and that
he be recognized as a stockholder on the books.
Point Involved: Whether placing in the hands of an
agent, a stock certificate, so indorsed that it may be
transferred by mere delivery, estops the true owner to
set np his title against an innocent purchaser or pledgee
for value of such certificate to whom such agent has with-
out actual authority transferred it.
Mr. Chief Justice Scott: "The intestate placed the
certificates in the hands of Chauncey T. Bowen, with a
blank assignment written thereon, authorizing an abso-
lute transfer of the stock to the assignee, under the by-
laws of the company. * * * It was pledged to Card-
ner, in the usual course of business, as collateral security
for the indebtedness of the holder, and was taken in good
faith, without the slightest knowledge that any one other
than the pledgor claimed or had any interest in the stock
represented by the certificates. As has been seen, the
certificates of stock were placed in the hands of Bowen
by the intestate in such condition they could be readily
sold or hypothecated by him, and if his assignee made
an improper use of them, the assignor, if living, could
get no relief against that which he deliberately author-
ized to be done, if it would affect injuriously an inno-
cent purchaser for value, and his personal representa-
tive can have no relief that could not be granted on a like
bill by the intestate, if living. The principle is, that
when one of two or more persons must suffer loss, upon
him whose conduct made it possible for loss to occur
should the consequences ultimately rest.
Question 678: What is the point involved in this case, oh
what facts did it arise, and how did the Court decide ?
§711. (Corporations, Sec. 75.) Liability of transferee
to corporation.
(Note: The transferee is liable to the corporation if he knows
the shares, are not paid up. If the shares recite they are fully
paid, a transferee may rely thereon.)
TRANSFER OF STOCK
1263
§712. (Corporations, Sec. 76.) Liability of transferee
to creditors.
Case 679. FrencH v. Harding, 235 Pa. St. 79.
Faci^: A proceeding was brought in the New Jersey
courts to establish the insolvency of the Agnew Com-
pany, collect its assets, enforce stockholders' liability on
unpaid stock so far as the indebtedness of the company
should require, pay off its creditors and wind up its busi-
ness. French was appointed receiver and brings suit in
the Pennsylvania court to enforce Harding's liability as
shareholder, the stock held by him having never been
paid for. Harding defends that he is not an original
subscriber, but a purchaser from a shareholder of stock
already issued; that he bought the stock in the market
through a broker at Philadelphia, and had no knowledge
said stock was unpaid.
Point Involved: "Whether a transferee of issued stock,
who does not know that it is unpaid, can be held for the
benefit of the creditors of the corporation.
Head, J.: '' * * *
"(1) From Cook on Corporations, Vol. 1, Sec. 50,
where may be found a. general discussion of this question,
supported by many notes and citations, we quote the
following: 'A bona fide purchaser, for value and with-
out notice, of stock issued by a corporation as paid up,
cannot be held liable on such stock in any way, either
to the corporation, corporate creditors or other persons,
even though the stock was not actually paid up as repre-
sented. * * * The law goes still further and holds
that where a person in open market, in good faith and
without notice, purchases certificates, such stock is to be
deemed "paid up in his hands, and he is protected as a
bona fide purchaser, even though there is nothing on the
face of the certificates stating that they are paid up. This
can now be laid down as the established rule. It is based
on sound public policy, favoring as it does the transfer
of personal property and the quasi-negotiability of stock
1264
CORPORATIONS
and discountenancing secret liens and constructive no-
tice.' * * *
Question 679: If A owns stock upon which he is liable for
payment to the corporation, does a transferee of his share become
liable ?
Case 679a. Edwards v. Schillinger, 230 111. 373.
(Set out as Case No. 655, supra.)
Question 663: Was the transferee held in this case? Why?
§713. (Corporations, Sec. 77.) Liability of transferror
to transferee.
Case 680. Burwash v. Ballou, 230 111. 34.
Me. Chief Justice Hand : "* * *'
"The International Copper and Gold Company was a
de facto corporation, and the appellant having purchased
its stock of the appellees, in a proceeding like this, no
warranty having been made by the appellees that the cor-
poration issuing such stock was a de jure corporation,
the appellant cannot escape the payment of the considera-
tion agreed to be paid by him for such stock, by showing
that the International Copper and Gold Company, which
issued said stock, was not legally organized, or that its
increase of stock of which that purchased by appellant
formed a part, was illegally issued. (Marshall v. Keach,
227 111. 35.) In Higgins v. Illinois Trust & Savings Bank,
193 111. 394, it was held that the vendor of stock in a cor-
poration impliedly warrants that the stock is genuine and
that he is the owner thereof and authorized to transfer
title, and- that if the assignee desires further protection
he must exact a special warranty. See also First Nat.
Bank of Sterling v. Drew, 191 111. 186.''
Question 680: What are the implied warranties of a seller of
corporate stock?
CHAPTER 89
DIVIDENDS
§ 714. Definitions and kinds.
§ 715. Declaration of dividends within discretion of directors.
§ 716. Payment of dividends.
§ 717. Who entitled to dividends.
§ 718. Dividends upon preferred stock.
§714. (Corporations, Sec. 78.) Definition and kinds.
Case 681. Eisner v. Macomber, 252 United States Re-
ports, 189.
Facts: This case arose under the Revenue Act of 1916,
which attempted to tax stock dividends as "income.
Held: that stock dividends are not income. A portion of
the opinion is given as containing a statement of the-
stockholders' relationship to the corporation and the
definition and nature of dividends.
Mk. Justice Pitney delivered the opinion of the Court:
K# * *
'"Can a stock dividend, considering its essential char-
acter, be brought within the definition? To answer this,
regard must be had to the nature of a corporation and
the stockholder's relation to it. We refer, of course, to
a corporation such as the one in the case at bar, organ-
ized for profit, and having a capital stock divided into
shares to which a nominal or par value is attributed.
"Certainly the interest of the stockholder is a capital
interest, and his certificates of stock are but the evidence
of it. They state the number of shares to which he is
entitled and indicate their par value and how the stock
may be transferred. They show that he or his assignors,
immediate or remote, have contributed capital to the en-
terprise, that he is entitled to a corresponding interest
1265
1266
CORPORATIONS
proportionate to the whole—entitled to have the property
and business of the company devoted during the corpo-
rate existence to attainment of the common objects—en-
titled to vote at stockholders' meetings, to receive divi-
dends out of the corporation's profits if and when de-
clared, and, in the event of liquidation, to receive a pro-
portionate share of the net assets, if any, remaining after
paying creditors. Short of liquidation, or until dividend
declared, he has no right to withdraw any part of either
capital or profits from the common enterprise; on the
contrary, his interest pertains not to any part, divisible
or indivisible, but to the entire assets, business, and
affairs of the company. Nor is it the interest of an
owner in the assets themselves, since the corporation has
full title, legal and equitable, to the whole. The stock-
holder has the right to have the assets employed in the
enterprise, with the incidental rights mentioned; but, as
stockholder, he has no right to withdraw, only the right
to persist, subject to the risks of the enterprise, and look-
ing only to dividends for his return. If he desires to
dissociate himself from the company, he can do so only
by disposing of his stock.
"For bookkeeping purposes, the company acknowl-
edges a liability in form to the stockholders equivalent >
to the aggregate par value of their stock, evidenced by
a 'capital stock account.' If profits have been made
and not divided, they create additional bookkeeping lia-
bilities under the head of 'Profit and loss,' 'undivided
profits,' 'surplus account,' or the like. None of these,
however, gives to the stockholders as a body, much less
to any one of them, either a claim against tjie going con-
cern for any particular sum of money, or a right to any
particular portion of the assets or any share in them un-
less or until the directors conclude that dividends shall
be made and a part of the company's assets segregated
from the common fund for the purpose. The dividend
normally is payable in money, under exceptional circum-
stances in some other divisible property; and when so
paid, then only (excluding, of course, a possible ad-
DIVIDENDS
1267
vantageous sale of his stock or winding-up of the com-
pany) does the stockholder realize a profit or gain which
becomes his separate property, and thus derive income
from the capital that he or his predecessor has invested.
"In the present case, the corporation had surplus and
undivided profits invested in plant, property, and busi-
ness, and required for the purposes of the corporation,
amounting to about $45,000,000, in addition to outstand-
ing capital stock of $50,000,000. In this the case is not
extraordinary. The profits of a corporation, as they
appear upon the balance sheet at the end of the year,
need not be in the form of money on hand in excess of
what is required to meet current liabilities and finance
current operations of the company. Often, especially in
a growing business, only a part, sometimes a small part,
of the year's profits, is in property capable of division;
the remainder having been absorbed in the acquisition of
increased plant; equipment, stock in trade, or accounts
receivable, or in decrease of outstanding liabilities.
When only a part is available for dividends, the balance
of the year's profits is carried to the credit of undivided
profits, or surplus, or some other account having like
significance. If thereafter the company finds itself in
funds beyond current needs, it may declare dividends
out of such surplus or undivided profits; otherwise it may
go on for years conducting a successful business, but re-
quiring more and more working capital because of the
extension of its operations, and therefore unable to de-
clare dividends approximating the amount of its profits.
Thus the surplus may increase until it equals or even ex-
ceeds the par value of the outstanding capital stock.
This may be adjusted upon the books in the mode
adopted in the case at bar—by declaring a 'stock divi-
dend.' This, however, is no more than a book adjust-
ment, in essence not a dividend but rather the opposite;
no part of the assets of the company is separated from
the common fund, nothing distributed except paper cer-
tificates that evidence an antecedent increase in the value
of the stockholder's capital interest resulting from an
1268
CORPORATIONS
accumulation of profits by the company, but profits so
far absorbed in the business as to render it impracticable
to separate them for withdrawal and distribution. In
order to make the adjustment, a charge is made against
surplus account with corresponding credit to the capital
stock account, equal to the proposed 'dividend;' the
new stock is issued against this and the certificates de-
livered to the existing stockholders in proportion to their
previous holdings. This, however, is merely bookkeep-
ing that does not affect the aggregate assets of the cor-
poration or its outstanding liabilities. It affects only the
form, not the essence, of the 'liability' acknowledged by
the corporation to its own shareholders, and this through
a readjustment of accounts on one side of the balance
sheet only, increasing 'capital stock' at the expense of
'surplus,' it does not alter the pre-existing proportion-
ate interest of any stockholder, or increase the intrinsic
value of his holding or of the aggregate holdings of the
other stockholders as they stood before. The new cer-
tificates simply increase the number of the shares, with
consequent dilution of the value of each share.
"A 'stock dividend' shows that the company's ac-
cumulated profits have been capitalized, instead of dis-
tributed to the stockholders or retained as surplus avail-
able for distribution in money or in kind should opportu
nity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone such realization,
in that the fund represented by the new stock has been
transferred from surplus to capital, and no longer is
available for actual distribution.
"The essential and controlling fact is that the stock-
holder has received nothing out of the company's assets
for his separate use and benefit; on the contrary, every
dollar of his original investment, together with what-
ever accretions and accumulations have resulted from
employment of his money and that of the other stock-
holders in the business of the company, still remains the
property of the company, and subject to business risks
which may result in wiping out the entire investment.
DIVIDENDS
1269
Having regard to the very truth of the matter, to sub-
stance, and not to form, he has received nothing that
answers the definition of income within the meaning of
the 16th Amendment.
"Being concerned only with the true character and
effect of such a dividend when lawfully made, we lay
aside the question whether in a particular case a stock
dividend may be authorized by the local law governing
the corporation, or whether the capitalization of profits
and proper business policy on the part of its manage-
ment, and a due regard for the interests of the stock-
holders. And we are considering the taxability of bona
fide stock dividends only.
"We are clear that not only does a stock dividend
really take nothing from the property of the corporation
and add nothing tox that of the shareholder, but that the
antecedent accumulation of profits evidenced thereby,
while indicating that the shareholder is the richer be-
cause of an increase of his capital, at the same time shows
he has not realized or received any income in the transac-
tion.
"It is said that a stockholder may sell the new shares
acquired in the stock dividend; and so he may, if he can
find a buyer. It is equally true that if he does not sell,
and in doing so realizes a profit, such profit, like any
other, is income, and so far as it may have arisen since
the 16th Amendment is taxable by Congress without ap-
portionment. The same would be true were he to sell
g6me of his original shares at a profit. But if a share-
holder sells dividend stock, he necessarily disposes of a
part of his capital interest, just as if he should sell a part
of his old stock, either before or after the dividend.
What he retains no longer entitled him to the same pro-
portion of future dividends as before the sale. His part
in the control o.f the company likewise is diminished.
Thus, if one holding $60,000 out of a total $100,000 of the
capital stock of a corporation should receive, in common
with other stockholders, a 50 per cent stock dividend,
and should sell his part, he thereby would be reduced
1270
CORPORATIONS
from a majority to a minority stockholder, having six
fifteenths instead of six tenths of the total stock out-
standing. A corresponding and proportionate decrease in
capital interest and in voting power would befall a min-
ority holder should he sell dividend stock; it being in the
nature of things impossible for one to dispose of any part
of such an issue without a proportionate disturbance of
the distribution of the entire capital stock, and a like
diminution of the seller's comparative voting power—
that 'right preservative of rights' in the control of a
corporation.''
t i ^ ^ ^ j y
Question 681: What is a stock dividend? Why is it not
"income to be taxed as such?
(Note: Whether a stock dividend was income under the
income tax law was the subject of much debate prior to the
above decision. The Supreme Court divided five to four, the
majority holding as above that a stock dividend is not income.
It seems exceedingly far fetched to say that a stock dividend
is income. The stockholder has no more than he had before.
What was before surplus is now capital and in issuing stock
dividends, there is a mere conversion of surplus into capital. It
is difficult to see how the stockholder has been enriched. He is
already enriched by belonging to a prosperous corporation. The
stock dividend doesn't enrich him.)
§ 715. (Corporations, Sec. 79.) Declaration of dividends
within discretion of directors.
(See Sec. 665 supra.)
§716, 717. (Corporations, Sec. 80, 81.) Payment of
dividends, who entitled.
Case 682. Goodwin v. Hardy, 57 Me. 143.
Point Involved: To whom dividends belong as be-
tween owners of stock when dividend 'is declared and
owner of stock when dividend is payable.
Appleton, C. J.:  * * * The stockholders have
no claim to a dividend until it is declared. Until that
DIVIDENDS
1271
time, it belongs to the corporation precisely as any other
property it may own. When a distribution of the funds
of a corporation, whether of the whole or of a part, is
ordered, it is to be made between those who, at that time,
are the owners of its stock. The law on this subject is
very clearly stated by Mr. Justice Sargent, in March v.
Eastern R. R. Co., 43 N. H. 520. 'The purchaser of a
share of a stock in a corporation,' he remarks, 'takes
the share with all its incidents, and among these is the
right to receive all future dividends,—that is, its pro-
portional share of all profits not then divided, and as
we understand the law and the usage of such corpora-
tions, it is wholly immaterial at what times and from
what sources these profits have been earned; they are
incident to the share, to which a purchaser becomes at
once entitled,, provided he remains a member of the cor-
poration until a dividend is made.' * * * 
Question 682: The M corporation has on May 20th undivided
profits sufficient to declare a 7% dividend. A is owner of stock
in M corporation. He sells it to B on May 20th. On May 21st
the corporation declares a dividend. The dividend is by its terms
made payable July 1st. On June 1st B sells to C, who owns until
after July 1st. "Who is entitled to the dividend?
§ 718. (Corporations, Sec. 82.) Dividends upon pre-
ferred stock.
(See § 665.)
PART III
THE DIRECTORS AND OFFICERS OF A
CORPORATION
CHAPTER 90
DIRECTORS
A. The Function and Composition of the Directorate.
B. The Responsibility and Rights of Directors.
C. Powers of Directors.
D. Directors' Meetings.
A. The Function and Composition of the Directorate.
§§719-722. (Corporations, Sees. 83-86.)
Case 683. Wight v. R. Co., 117 Mass. 226.
Gray, C. J.: "Although the directors of a railroad
corporation are usually chosen by the stockholders from
their own number, there is no rule of law that makes
the holding of stock an indispensable qualification of a
director, unless prescribed by some act of the legislature
or by-law of the corporation.'7
Question 683: May one not a stockholder be a director?
(Note: It is usual of course, to require that a stockholder be
a director, but in the absence of statutory provisions, or charter
or by-law requirement, a director need not be a stockholder.)
Case 684. Com. v. Hemingway, 7 L. R. A. (Pa.) 360.
Williams, J., delivered the opinion of the Court:
"In the case of Detwiller v. Com., ante, p. 357, in
which an opinion has been filed at the present term, we
1272
DIRECTORS
1273
have considered the question: 'Can a citizen of the
United States, who is not a citizen of Pennsylvania, be-
come a stockholder in the Farmers & Mechanics Institute
of Northampton County V We are now to push our
inquiries one step further, and determine whether one
who is not a citizen of'the United States, but is, and for
many years has been, a resident and property holder in
Pennsylvania and in Northampton County, can become
a stockholder in the same association; and whether, if
he may become a stockholder, he is entitled to vote as
such at the stockholders' meetings; and finally, whether
he may be legally elected a director of the association.
For the reasons given in Detwiller v. Com., supra, we
think he may become a stockholder. The stock being
personal property, he may acquire it by gift or purchase.
An alien could at common law buy personal goods, and
sell them; and, except in the case of an alien enemy, there
was no restriction upon trade with aliens. If he can
acquire the stock, he can acquire with it. all the rights
and privileges which its ownership confers, among which
is the right to have a voice in the control of the enter-
prise, and the selection of those who are to conduct its
affairs. He may therefore vote in the same manner, and
with the same effect, as any other stockholder may do.
Why may he not become a director? The office is not a
political one.
Question 684: May an alien be a stockholder ? A director ?
(Note: A stockholder may by the laws of all states be a
nonresident or an alien. Ordinarily by by-law or statute a
director must be a stockholder and it may be required that he
be a resident of the state.)
(Note: A director's title to his office may be contested in the
courts. The usual action is an action in a court of law (as dis-
tinguished from a court of equity) by quo warranto proceed-
ings. But a court of equity will take jurisdiction when the
affairs of the corporation are in such condition by reason of the
contest that immediate control by receivership or injunction or
otherwise is necessary.)
1274
CORPORATIONS
B. The Responsibilities and Rights of Directors.
§§ 723-725. (Corporations, Sees. 87-89.)
Case 685. Twin Lick Oil Co. v. Marbury, 91 U. S. 587.
Facts: Marbury was a stockholder and a director in
the complainant corporation. The corporation became
embarrassed in 1867 and borrowed $2,000 from Marbury,
for which a note was given secured by mortgage on all
of the property of the corporation. The property was
sold under the terms of the mortgage to effectuate the
security, and was bought in by defendant Marbury. This
bill is filed four years later to have Marbury declared a
trustee of such property and for an accounting of the
rents and profits. The bill charges that defendant
abused his trust relation to the company to take advan-
tage of its difficulties and to buy its property at a sac-
rifice, concealing material facts. The Court finds from
the evidence that defendant loaned the money in good
faith, and honestly for the assistance of the company,
and took reasonable security, and that when the money
was due there was no prospect of it being paid and the
property was then sold, as the only means whereby de-
fendant could get back his money, and that defendant
took no advantage of his position and made no conceal-
ment.
Point Involved: Whether a contract by a director
with a corporation is voidable or void; whether laches
will bar a suit by the corporation (or its stockholders)
to set aside a voidable contract by a director.
Me. Justice Miller: "* * *
"The first question which arises in this state of the
facts is, whether defendant's purchase was absolutely
void.
1 i That a director of a joint-stock corporation occupies
one of those fiduciary relations where his dealings with
the subject-matter of his trust or agency, and with the
beneficiary or party whose interest is confided to his
care, is viewed with jealousy by the courts, and may be
DIRECTORS
1275
set aside on slight grounds, is a doctrine founded on the
soundest morality, and which has received the clearest
recognition in this court and in others. Koehler v. Black
River Falls Iron Co., 2 Black. 715; Drury v. Cross, 7
Wall. 299; Luxenburg R. R. Co. v. Maquay, 25 Beav. 568;
The Cumberland Co. v. Sherman, 30 Barb. 553; 16 Md.
456. The general doctrine, however, in regard to con-
tracts of this class, is, not that they are absolutely void,
but that they are voidable at the election of the party
whose interest has been so represented by the party
claiming under it. We say, this is the general rule: for
there may be cases where such contract should be void
ab initio; as when an agent to sell buys of himself, and
by his power of attorney conveys to himself that which
he was authorized to sell. But, even here, acts which
amount to a ratification by the principal may validate
the sale.
"The present case is not one of that class. While it
is true that the defendant, as a director of the corpora-
tion, was bound by all those rules of conscientious fair-
ness which courts of equity have imposed as the guides
for dealing in such cases, it cannot be maintained that
any rule forbids one director among several from loan-
ing money to the corporation when the money is needed,
and the transaction is open, and otherwise free from
blame. No adjudged case has gone so far as this. Such
a doctrine, while it would afford little protection to the
corporation against actual fraud or oppression, would
deprive it of the aid of those most interested in giving
aid judiciously, and best qualified to judge of the neces-
sity of that aid, and of the extent to which it may safely
be given.
"There are in such a transaction three distinct parties
whose interest is affected by it; namely, the lender, the
corporation, and the stockholders of the corporation.
"The directors are the officers or agents of the cor-
poration, and represent the interests of that abstract
egal entity, and of those who own the shares of its stock.
One of the objects of creating a corporation by law is to
1276
CORPORATIONS
enable it to make contracts; and these contracts may be
made with its stockholders as well as with others. In
some classes of corporations, as in mutual insurance com-
panies, the main object of the act of incorporation is to
enable the company to make contracts with its stock-
holders, or with persons who become stockholders by the
very act of making the contract of insurance. It is very
true, that as a stockholder, in making a contract of any
kind with the corporation of which he is a member, is in
some sense dealing with a creature of which he is a part,
and holds a common interest with the other stockholders,
who, with him, constitute the whole of that artificial
entity, he is properly held to a larger measure of candor
and good faith than if he were not a stockholder. So,
when the lend or is a director, charged with others, with
the control and management of the affairs of the corpo-
ration, representing in this regard the aggregated inter-
est of all the stockholders, his obligation, if he becomes a
party to a contract with the company, to candor and fair
dealing, is increased in the precise degree that his repre-
sentative character has given him power and control
derived from the confidence reposed in him by the stock-
holders who appointed him their agent. If he should be
a sole director, or one of a smaller number vested with
certain powers, this obligation would be still stronger,
and his acts subject to more severe scrutiny, and their
validity determined by more rigid principles of morality,
and freedom from motives of selfishness. All this falls
far short, however, of holding that no such contract can
be made which will be valid; and we entertain no doubt
that the defendant in this case could make a loan of
money to the company; and as we have already said that
the evidence shows it to have been an honest transaction
for the benefit of the corporation and its shareholders,
both in the rate of interest and in the security taken, we
think it was valid originally, whether liable to be avoided
afterwards by the company or not.
"If it be conceded that the contract by which the de-
fendant became the creditor of the company was valid,
DIRECTORS
1277
we see no principle on which the subsequent purchase
under the deed of trust is not equally so. The defendant
was not here both seller and buyer. A trustee was inter-
posed who made the sale, and who had the usual powers
necessary to see that the sale was fairly conducted, and
who in this respect was the trustee of the corporation,
and must be supposed to have been selected by it for the
exercise of this power. Defendant was at liberty to bid,
subject to those rules of fairness which we have already
conceded to belong to his peculiar position; for, if he
could not bid, he would have been deprived of the only
means which his contract gave him of making his debt
out of the security on which he had loaned his money.
We think the sale was a fair one. The company was
hopelessly- involved beside the debt to defendant. The
well was exhausted, to all appearance. The machinery
was of little use for any other purpose, and would not
pay transportation. Most of the stockholders who now
promote this suit refused to pay assessments on their
shares to aid the company. Nothing was left to the
defendant but to buy it in, as no one would bid the amount
of his debt. * * *
"The doctrine is well settled, that the option to avoid
such a sale must be exercised within a reasonable time.
This has never been held to be any determined number
of days or years as applied to every case, like the statute
of limitation^, but must be decided in each case upon all
the elements of it which affect that question. There are
generally the presence or absence of the parties at the
place of the transaction, their knowledge or ignorance
of the sale and of the facts which render it voidable, the
permanent or fluctuating character of the subject-matter
of the transaction as affecting its value, and the actual
rise or fall of the property in value during the period
within which this option might have been exercised.
"In fixing this period in any particular case, we are
but little aided by the analogies of the statutes of limita-
tion; while, though not falling exactly within the rule as
to time for rescinding, or offering to rescind, a contract
1278
CORPORATIONS
by one of the parties to it for actual fraud, the analogies
are so strong as to give to this latter great force in the
consideration of the case. In this class of cases the party
is bound to act with reasonable diligence as soon as the
fraud is discovered, or his right to rescind is gone. No
delay for the purpose of enabling the defrauded party to
speculate upon the chances which the future may give
him of deciding profitably to himself whether he will
abide by his bargain, or rescind it, is allowed in a court
of equity.
Question 685: (1) In this case was the contract fair or
unfair ?
(2) Does the question whether it was fair or unfair decide
the right of the corporation or its stockholders to have it set
aside? (See Note:)
(Note: The rule worked out by the authorities as to con-
tracts made between a corporation and a director seems to be
this: That such a contract if made by the director through his
own vote or other action as the representative of the corporation,
is voidable, whether fair or not, at the instance of any stock-
holder who has not consented thereto, and who is not guilty of
laches in prosecuting his suit; that such a contract if made by
the director on the vote of other directors who compose the
majority, and who are not "dummies is voidable if not fair,
and if not made with the fullest disclosure of facts by the con-
trading director; but otherwise it is not voidable, but binding.)
Case 686. Klem v. Independent Brew. Ass'n, 231 111.
594.
Facts: The facts appear in the opinion.
Point Involved: That fraudulent acts by directors are
not validated by a ratification of stockholders, who are
controlled by the directors.
Me. Justice Farmee: "It is not to be tolerated that
the directors of a corporation owning and controlling a
majority of the stock shall be permitted to cause their
unlawful acts to be ratified by calling a stockholders'
meeting which they control as effectually as they do the
DIRECTORS
1279
board of directors and causing a majority of th3 stock
to be voted in favor of the ratification. If the acts com-
plained of were unaffected by any unlawful and fraudu-
lent motive and conduct and it were a question simply
whether the directors had exercised good judgment for
the best interests of the corporation, a different rule
would perhaps apply; for the directors and a majority of
stockholders have the right to control, direct and manage
the corporation. In this case, however, the directors
purchased from themselves property for an amount much
in excess of its value and this was a fraud upon the stock-
holders which could not be ratified nor condoned by a
stockholders' meeting at which a majority of the votes
cast in favor of the ratification were passed by or under
the control of the directors who were guilty of the wrong
doing. If the reverse were true then the minority stock-
holders would he at the mercy of the majority who would
be able to elect the directors and be able to control stock-
holders' meetings and thereby ratify the acts of the di-
rectors however wrongful and injurious they might be
to the corporation.''
Question 686: State the point here involved and the Court's
decision.
Case 687. Hun v. Cary, 82 N. Y. 65.
Facts: Suit brought by receiver of Central Savings
Bank against trustees of the bank to recover damages
caused by their alleged misconduct. The bank was or-
ganized in 1867. Up to January, 1873, its deposits had
averaged $70,000 and its expenses exceeded its income.
In May of that year, the trustees voted to purchase a
lot for $29,250, paying $10,000 in cash, and put up a
building costing $27,000, giving back a mortgage for
$30,500. The object was to increase the business of the
bank. At the time of the purchase the bank occupied
leased rooms and its liabilities exceeded its assets.
Point Involved: Whether directors are liable to the
corporation for improvidence; whether the acts in ques-
tion were mere errors of judgment or reckless acts; the
1280
CORPORATIONS
duty of care upon a director in managing the corporate
business.
Earl, J.:  This action was brought by the receiver
of the Central Savings Bank of the City of New York,
against the defendants, who were trustees of the bank,
to recover damages which, it is alleged, they caused the
bank by their misconduct as such trustees.
"The first question to be considered is the measure of
fidelity, care and diligence which such trustees owe . to
such a bank and its depositors. The relation existing
between the corporation and its trustees is mainly that
of principal and agent, and the relation between the trus-
tees and the depositors is similar to that of trustee and
cestui que trust. The trustees are bound to observe the
limits placed upon their powers in the charter, and if
they transcend such limits and cause damage they incur
liability. If they act fraudulently or do a wilful wrong,
it is not doubted that they may be held for all the dam-
age they cause to the bank or its depositors. But if they
act in good faith within the limits of powers conferred,
using proper prudence and diligence, they are not re-
sponsible for mere mistakes or errors of judgment. That
the trustees of such corporations are bound to use some
diligence in the discharge of their duties cannot be dis-
puted. All the authorities hold so. What degree of
care and diligence are they bound to exercise? Not the
highest degree, not such as a very vigilant or extremely
careful person would exercise. If such were required,
it would be difficult to find trustees who would incur the
responsibility of such trust positions. It would not be
proper to answer the question by saying the lowest de-
gree. Few persons would be willing to deposit money
in savings banks, or to take stock in corporations, with
the understanding that the trustees or directors were
bound only to exercise slight care, such as inattentive
persons would give to their own business, in the manage-
ment of the large and important interests committed to
their hands. When one deposits money in a savings
DIRECTORS
1281
bank, or takes stock in a corporation, thus divesting him-
self of the immediate control of his property, he expects,
and has the right to expect, that the trustees or directors,
who are chosen to take his place in the management and
control of his property, will exercise ordinary care and
prudence in the trusts committed to them—the same de-
gree of care and prudence that men prompted by self-
interest generally exercise in their own affairs. When
one voluntarily takes the position of trustee or director
of a corporation, good faith, exact justice, and public
policy unite in requiring of him such a degree of care and
prudence, and it is a gross breach of duty—crassa neg-
ligentia—not to bestow them.
"It is impossible to give the measure of culpable neg-
ligence for all cases, as the degree of care required de-
pends upon the subjects to which it is to be applied.
(First Nat. Bank v. Ocean Nat. Bank, 60 N. Y. 278.)
What would be slight neglect in the care of a quantity
of iron might be gross neglect in the care of a jewel.
What would be slight neglect in the care exercised in
the affairs of a turnpike corporation or even of a manu-
facturing corporation, might be gross neglect in the care
exercised in the management of a savings bank intrusted
with the savings of a multitude of poor people, depend-
ing for its life upon credit and liable to be wrecked by
the breath of suspicion. There is a classification of neg-
ligence to be found in the books, not always of practical
value and yet sometimes serviceable, into slight negli-
gence, gross negligence, and that degree of negligence in-
termediate the two, attributed to the absence of ordinary
care; and the claim on behalf of these trustees is that
they can only be held responsible in this action in con-
sequence of gross negligence, according to this classifica-
tion. If gross negligence be taken according to its ordi-
nary meaning—as something nearly approaching fraud
or bad faith—I cannot yield to this claim; and if there
are any authorities upholding the claim, I emphatically
dissent from them.
"It seems to me that it would be a monstrous proposi-
1282
CORPORATIONS
tion to hold that trustees, intrusted with the management
of the property, interests and business of other people
who divest themselves of the management and confide in
them, are bound to give only slight care to the duties of
their trust, and are liable only in case of gross inatten-
tion and negligence; and I have found no authority fully
upholding such a proposition.'' [Held that the trustees
were not guilty of a mere error of judgment, but improvi-
dence, and reckless extravagance and therefore liable to
the receiver.]
Qu-estion 687: What degree of care must a director show?
Does the nature of the business help to determine ? Suppose the
director does not act in bad faith, is that alone enough to save
him? Is a director always liable for errors of judgment?
Case 688. Dawson v. National Life Ins, Co. et al., 176
Iowa, 362,157 N. W. 929, L. R. A. 1916 E. 878.
Ladd, J.: "* * »
"Appellant (Dawson) requested the Court to instruct
the jury in the language following: 'You are instructed
that a director and managing officer of a corporation
doing business as a life insurance company stands in a
relation of a fiduciary to all the stockholders who are
not themselves engaged in the active management of the
company, and before any such director and officer of
the company who is acquainted with its condition and
affairs, can rightfully purchase the stock of such com-
pany from stockholders who are not actively engaged in
the management and operation of the corporation, such
managing officer and director must inform such stock-
holders of the true condition of the company and its
affairs and assets, and must give to such stockholders
all the information affecting the value of the stock which
such officer himself possesses; and a purchase from a
stockholder who is not acquainted with the condition and
affairs of the company, of his stock in such company, by
one of the directors and managing officers, without hav-
ing first informed such stockholder of the true condi-
tion of the company and value of its assets is a fraud
DIRECTORS
1283
* * *. This [instruction] was refused. # * *
"The debate as to whether technically a fiduciary re-
lation exists [between director and stockholder] may
and doubtless will go on, but a knowledge of the law is
not required to enable one to appreciate the moral wrong
perpetrated by a corporate officer with knowledge ac-
quired by virtue of his position in profiting on the ignor-
ance of a stockholder. * * * Stockholders, other
than directors and officers stand on an equal footing and
deal with each other at arm's length. * * * But
power akin to that of an attorney, priest, agent or co-
partner is conferred on the directors and officers by those
selecting them to manage corporate affairs. [Held, that
court erred in not putting the case to the jury on ques-
tion of constructive fraud.]
(Note: The authorities are in sharp conflict as to whether a
director in purchasing stock from a stockholder owes any duty
to make full disclosure. The weight of authority is contrary
to the above case and holds that while a director occupies a
fiduciary relationship toward the corporation he owes no such
duty toward a stockholder in the acquisition of his stock and
therefore is within the protection of the rule that mere silence
on the part of a contracting party is not fraud. See to that
effect: Shaw v. Cole Mfg. Co., 132 Tenn. 210, 177 S. W. 479
L. R. A. 1916 B 706 and collection of authorities'in note L. R. A.
1916 B. p. 708. It seems to the editor of this case book that the
view of the case above that there is a duty to disclose material
facts materially affecting value is sound, and that that view will
be more generally adopted.)
Case 689. Morgan v. Skiddy et al., 62 N. Y. 319.
Facts: Certain directors sanctioned the circulation of
a prospectus known to contain false statements of ma-
terial facts in respect to the assets and condition of the
corporation, the natural tendency of which was to induce
subscriptions. Plaintiff relying thereon bought stock.
He sues the directors for fraud.
Point Involved: Whether a director is personally
liable who sanctions false statements to induce subscrip-
tions.
1284
CORPORATIONS
Andrews, J.: "* * *
'1 The representations made in the prospectus as to the
exploration made on the land of the company were false.
But two or three shafts had been sunk upon this prop-
erty. Very little work had been done upon it, and the
presence of valuable ores in any considerable quantities
had not been discovered. * * * The false statement
in the prospectus related to an existing fact which ma-
terially affected the value of the shares; it was prepared
for the purpose of circulation and to induce investments
in the stock of the company. If the plaintiff purchased
his stock relying upon the truth of the prospectus, he
has a right of action for deceit against the persons who,
with knowledge of the fraud and with intent to deceive,
put it in circulation. The representation was made to
each person comprehended within the class of persons
who were designed to be influenced by the prospectus;
and when a prospectus of this character has been issued
no other relation or privity between the parties need be
shown, except that created by the wrongful and fraud-
ulent act of the defendants in issuing or circulating the
prospectus, and the resulting injury to the plaintiff.
(Clark v. Dixon, 6 C. B. [N. S.], 453; Central Railroad
Co. v. Kish, Law Rep. [2 Eng. and Irish App.], 100.)
Question 689: In what way were the false statements made in
this case? Did the directors know the statements were false?
Were they held liable?
(Note: Statutes extend or declare the liability of a director.
Thus a director may be made liable for knowingly making false
financial statements, allowing the debts to exceed the capital
stock, etc., allowing the corporation to proceed to business with-
out having complied with certain statutes, etc.)
C. Powers of Directors.
§ 726. (Corporations, Sec. 90.) Various powers of
directors considered.
Case 690. Cook on Corporations (5th Ed.), Vol. 2,
Sec. 512.
DIRECTORS
1285
"The board of directors have the widest powers. All
the various acts and contracts which a corporation may
enter into are entered into by and through the board
of directors. The board of directors make or authorize
the making of notes, bills, mortgages, sales, deeds, liens
and contracts generally of the corporation. They ap-
point the agents, direct the business and govern the
policy and plans of the corporation. The directors elect
the officers and in this connection it may be added that
at common law there is no limit to the number of offices
which may be held simultaneously by the same person,
provided that neither of them is incompatible with the
other. * * *
Question 690: If a corporation under its charter has'power
to do a thing, has its board of directors the power to do it ?
(Note: Generally speaking, whatever the corporation may
do the directors of that corporation may do. Statutes may
modify this, for instance, may provide that bond issues shall
not be authorized without the approval of the stockholders. And
of course, such things as charter changes must be voted by the
stockholders.)
D. Directors' Meetings
§§727-729. (Corporations, Sees. 91-93.)
Case 691. -Doernbecher v. Columbia City Lumber Co.
et &L, 21 Oregon, 573.
Facts: The facts are stated in the opinion.
Point Involved: "Whether a directors' meeting held
without notice to all the directors (and not participated
in by all the directors notwithstanding such lack of no-
tice) is void, where a majority of the directors attend
and such majority all vote in favor of the act in question.
Bean, J.:  * * *
"The company being largely indebted to William Lowe
prior to the fourteenth day of May, 1889, Lowe assigned
'his claim to plaintiff, who on that day duly commenced
an action against the company to recover the amount
due thereon, which finally resulted in a judgment in
1286
CORPORATIONS
plaintiff's favor. After the commencement of this action
and before final judgment, Directors Dunbar, Wallace,
and McDougall without any notice to the other directors,
assembled by mutual consent at the office of Emmons &
Emmons in the city of Portland, and pretended to pass a
resolution authorizing the president and secretary of the
company to assign all its property to E. W. Emmons for
the benefit of its creditors, after which a deed of assign-
ment was executed in due form. It is claimed by plain-
tiff that the proceedings of this meeting are illegal and
void, because it was convened without notice, verbal or
written, to the directors who did not attend; and in this
we think he is abundantly supported both by reason and
authority.
"It is indispensable to a legal meeting of the directors
of a corporation for the transaction of business, that all
the directors have notice, actual or constructive, of the
time and place of the meetings. Otherwise, it might hap-
pen that a bare majority of the quorum present being a
minority of the whole, would do some act contrary and
in opposition to the will of the majority. The stock-
holders and other persons interested in the corporation
are entitled to the combined wisdom of all the directors.
Where the time and place has not been fixed by some
other competent authority, such meetings must be called
by personal notice to each member of the board of di-
rectors. 'It is not only a plain dictate of reason,' says
Mr. Justice Cowan, 'but a general rule of law, that no
power or function entrusted to a body consisting of a
number of persons, can be legally exercised without no-
tice to all the members composing such body.' (People
v. Batchellor, 22 N. Y. 134.) And this is so for the trans-
action of even ordinary business.
"It is no excuse to say that the three who were present
all voted for the resolution, and had the other two been
present the result would have been the same. The right
to deliberate, and by their advice and counsel convince
their associates, if possible, is the right of the minority,
of which they cannot be deprived by the arbitrary will of
the majority. (Com. v. Cullen, 13 Pa. St. 133.)
DIRECTORS
128?
"All persons interested in the corporation are entitled
to the advice and influence as well, as the votes of all the
directors. And, says Mr. Morawetz, 'while it may not be
the duty of every director to be present at every meeting
of the board, yet it is certainly the intention of the share-
holders that every director shall have a right to be pres-
ent at every meeting, in order to acquire full information
concerning the affairs of the corporation and to give the
other directors the benefit of his judgment and advice.
If meetings could be held by a bare quorum without
notifying the other directors, the majority might vir-
tually exclude the minority from all participation in the
management of the company.' (Morawetz Corp. Sec.
532.)
"Where the meeting is a general or stated one pro-
vided for in some resolution or by-law, notice of the time
and place of the meeting is perhaps, in the absence of
a different provision in the charter or by-laws of the
company, not necessary. (State ex rel. v. Bonnell, 35
Ohio St. 10; People v. Batchellor, supra; Merritt v.
Ferris, 22 111. 303; Warner v. Mower, 11 Vt. 385.) In
such case each member is presumed to have notice of
the day fixed for the meeting. But if the meeting be a
special one, personal notice, if practicable, is necessary
to each member unless all are present and participate
in the proceedings. And such notice is essential to the
power of the board to do any act which will bind the
corporation, and without such notice or the presence of
all the directors its acts are void.
Question 691: Is a notice of a directors' special meeting
necessary? If no notice is given and a majority of the directors
attend and vote for the act in question, why is it material that
the other directors are not notified?
(Note: A majority of the directors is a quorum (in the ab-
sence of express provision otherwise) if the meeting is properly
called and noticed; and a majority of the quorum may transact
business. Thus it is possible for two out of five directors to
pass resolutions.)
CHAPTER 91
THE ADMINISTRATIVE OFFICERS OF THE
CORPORATION
Introductory.
The President.
The Vice President.
The Secretary.
The Treasurer.
In general.
Execution of contract's by officers of corporation. (See Agency.)
(Note: The President—The president of a corporation has
the duty of presiding at directors' meetings and in some states,
but not in others, he is presumed to be, in the absence of evidence
to the contrary, a general manager.
The Vice-President—The vice-president is an officer whose
powers as such are very ill defined and usually reference must be
made to the. particular facts in the case. He may as a matter of
fact, have very extensive powers, or his office may be purely
honorary.
The Treasurer—The treasurer has the charge of the books
relating to his office, and the funds of the corporation. His duty
is to receive the funds and pay them out upon proper vouchers
or directions. He has very little implied power to bind the
corporation.
The Secretary—The secretary of the corporation has charge of
its books and its seal, and his duty is to keep the usual secretarial
books, attend to the ordinary details of management, send out
notices of meetings, attend stockholders' and directors' meet-
ings, and act as secretary of those meetings.
Other Administrative Officers—Besides the officers named, any
corporation may have certain other administrative officers whose
powers and duties depend in each case upon the particular facts
involved.)
(Note: As to right of one person to hold more than one office
see Case 690.)
1288
§ 730.
§731.
8 732.
§ 733.
§ 734.
§ 735.
§ 736.
PART XV
CREDITORS OF A CORPORATION
Chapter 92. Corporate Bonds and Mortgages.
Chapter 93. Insolvent Corporations.
§§737-749. (Corporations, Sees. 101-113.)
(Note: These subjects covered in general fashion in Volume
on Corporations, Commercial Law Series, were not covered in the
first edition of this Case Book and the editor finds neither time
nor space to include cases in this edition. Nor is it believed that
they would be particularly helpful.
As to liability of stockholders of insolvent corporation, see
Chapter 85 supra.)
PART V
POWERS OF A CORPORATION
Chapter 94. General Consideration of Powers of a Cor-
poration.
Chapter 95. Certain Particular Powers Considered-
1289
CHAPTER 94
GENERAL CONSIDERATION OF POWERS OF A
CORPORATION
A corporation a creature of limited powers.
Powers inherent in corporate existence.
Express charter powers.
Implied charter powers.
Notice of powers of corporation.
Enforceability of contracts ultra vires.
§ 750. (Corporations, Sec. 114.) A corporation as a
creature of limited powers.
(Note: It is a fact, to be amplified and illustrated by the
cases in this and the following chapter, that a corporation is a
creature of limited powers. There is a view that it has power
to do things which under its charter it has no right to do, but it
seems sounder logic that it is a creature of limited powers. Its
powers are limited by its charter.)
§ 751. (Corporations, Sec. 115.) Powers inherent in
corporate existence.
(a) In General.
(Note: See Thomas v. Dakin, Case No. 631, supra.)
(b) Power to Commit Torts.
Case 692. Pennsylvania Iron Wks. Co. v. Henry
Voght Machine Co., 29 Ky. L. Rep. 861, 8 L. R. A. new
series 1023.
Facts: The defendant is a Pennsylvania corporation
and the plaintiff a Kentucky corporation, and are rivals
in the manufacture of ice machines: The Pennsylvania
company opened an office in Louisville, Ky., and placed
1290
S 750.
§ 751.
' § 752.
§ 753.
§ 754.
§ 755.
POWERS OF CORPORATIONS 1291
it in charge of William Wilson. Both companies became
bidders to put in an ice machine desired by the Northern
Lake Ice Co. of Louisville. The Kentucky corporation
was successful and when Wilson learned of this fact, he
wrote a libelous letter to the Northern Lake Ice Co.
This letter was written on the company's letter head and
signed  Pennsylvania Iron Works, Wm. Wilson, Man-
ager, Southern Office. The Kentucky company sues
the Pennsylvania company for damages on account of
libel. Defendant urges that this was a wrongful act of
an employee for whom it is not responsible.
Point Involved: The power of a corporation to com-
mit a tort; whether answerable in libel for the libelous
statements of an agent made by him as a part of his act
in representing the company.
Carroll, C.: "* * *
"A corporation is liable in damages for the publica-
tion of a libel, as it is for other torts. To establish its
liability, the publication must be shown to have been
ratified by it, or to have been made by one of its servants
or agents in the scope of his employment and in the
course of the business in which he was employed. And
a corporation may sue for libel upon it, as distinct from
the libel upon the individual members. # * * The
evidence shows very clearly that Wilson was the duly
authorized agent of appellant and in charge of the south-
era office at the time he wrote the letters. That they
were written in the course of his business for appellant,
and were within the scope of his employment, is made
plain by the fact that they were written for the purpose
of obtaining for the appellant the contract to build the
ice machine for the Northern Lake Ice Company, and to
take this business away from the appellee. This being
the sole purpose of the letters, and, Wilson being at the
time the general agent of the appellant, it cannot be
doubted that in writing it he was acting within the scope
of his employment, and therefore appellant is liable for
his acts. It may be true that appellant did not authorize
1292
CORPORATIONS
"Wilson to insert in these letters the libelous statements
they contained, and it may be conceded that they were
written without its knowledge or consent, but this will
not exonerate it from liability for the wrong perpetrated
by him in an effort to obtain business for it. If the
appellant is not responsible for this conduct of Wilson,
it would be difficult to find a case in which a corporation
could be held liable for the acts of its agents in the pub-
lication of libelous matter. Corporations transact all
their business through agents; and when the agent is
acting in the course of his business and within the scope
of his employment, the corporation will be held account-
able for his acts and doings in the same degree as an
individual will be held answerable for torts perpetrated
by him in his individual capacity. Where an action will
lie against an individual for a tort, it will lie against a
corporation, if the tort was committed by its agent or
servant in the scope of,his employment.
Question 692: (1) What was the tort of the agent for which
the corporation was sought to be held in this case ?
Case 693. Stewart v. Wright, 147 Fed. 321.
Hook, Circuit Judge : "* * *
 While a corporation has no brain to contrive, no
tongue to deceive, and no hands with which to strike, it
employs in its service the brains and tongues and hands
of others; and as it can only operate through natural
persons, there is, as there logically should be, a correla-
tive responsibility for the acts of those persons in the
course of the corporate business and of their employ-
ment, and for any malicious and evil intent with which
such acts are attended.
 A few of the multitude of authorities will be sufficient
to illustrate the wide range of the modern doctrine. Cor-
porations have been held liable in these cases by attribut-
ing to them the conduct of their officers and agents:
Assault and battery with a deadly weapon by a railroad
company (Railway v. Harris, 122 U. S. 597, 7 Sup. Ct.
POWERS OF CORPORATIONS 1293
1286, 30 L. Ed. 1146); libel by a railroad company (Rail-
road v. Quigley, 21 How. 202, 16 L. Ed. 73); fraud and
deceit, assault and battery, malicious prosecution, nui-
sance, and libel (National Bank v. Graham, 100 U. S.
699, 702, 25 L. Ed. 750); fraud by a municipal corpora-
tion in reports of distilled spirits to revenue collector
(Salt Lake City v. Hollister, 118 TJ. S. 256, 6 Sup. Ct.
1055, 30 L. Ed. 176); fraud and deceit by a manufactur-
ing company (Butler v. Watkins, 13 Wall. 457, 463, 20
L. Ed. 629); maintenance of a nuisance (Railroad v.
Baptist Church, 108 TJ. S. 317, 2 Sup. Ct. 719, 27 L. Ed.
739); assault and battery by an express company (South-
ern Ex. Co. v. Platten, 36 C. C. A. 46, 93 Fed. 936); mali-
cious prosecution by a manufacturing company (Copley
v. Sewing Machine Co., 2 Woods, 494, Fed. Cas. No.
3213); boycotting by a corporation of which the mem-
bers were mercantile firms (Hartnett v. Plumber's Sup-
ply Assn., 169 Mass. 229, 47 N. E. 1002, 38 L. R. A. 194);
malicious prosecution by a savings bank (Reed v. Home
Savings Bank, 130 Mass. 443, 39 Am. Rep. 468); false
representations as to corporate stock by a manufactur-
ing company (Dorsey Machine Co. v. McCaffrey, 139 Ind.
545, 38 N. E. 208, 47 Am. St. Rep. 290); false impris-
onment by a national bank (Wachsmuth v. Nat. Bank,
96 Mich. 426, 56 N. W. 9, 21 L. R. A. 278); conspiracy
between a bank through its president and a merchant
to defraud those of whom latter purchased goods (John-
ston Fife Hat Co. v. National Bank, 4 Old. 17, 44 Pac.
192). It is also well settled that a corporation cannot
escape liability upon a plea that the tortious acts were
ultra vires. Railroad v. Quigley, 21 How. 202, 16 L. Ed.
73; Merchants' Bank v. State Bank, 10 Wall. 604, 645,
19 L. Ed. 1008; County of Calhoun v. Emigrant Com-
pany, 93 U. S. 124, 130; 23 L. Ed. 826; National Bank
v, Graham, 100 U. S. 699, 702, 25 L. Ed. 750; Salt Lake
City v. Hollister, 118 U. S. 256, 6 Sup. Ct. 1055, 30 L.
Ed. 176; Railway v. Harris, 122 TJ. S. 597, 7 Sup. Ct.
1286, 30 L. Ed. 146; Railway Co. v. Howard, 178 TJ. S.
153,160; Alexander v. Relfe, 74 Mo. 517; Zinc Carbonate
1294
CORPORATIONS
Company v. First National Bank, 103 Wis. 125, 79 N. W.
229, 74 Am. St. Rep. 845.
Question 693: Name a number of torts for which corporations
have been held responsible.
(Note: Obviously the more usual tort for which a corporation
is held is that of negligence, as witness the vast amount of person-
al injury litigation in our courts. See the Cases in Agency for
the principles by which an employer is charged with the torts of
his employee.)
(c) Power to Commit Crimes.
Case 694. Telegram Newspaper Co. v. Com., 172 Mass.
294.
Facts: The Newspaper Company was a corporation
which published an article concerning a trial in progress,
for which the Court entered judgment for criminal con-
tempt of court. The Newspaper Company brings the
case up to the present court by writ of error.
Point Involved: Whether a corporation can be held
guilty of a crime involving evil intent.
Field, C. J.: '' It is contended that a corporation can-
not be guilty of a criminal contempt of court, although
it may be fined for what is called a 'civil contempt.' It
is said that an intent cannot be imputed to a corporation
in criminal proceedings. It has been decided in this
commonwealth that a corporation may be liable civilly
for a libel or a malicious prosecution. Fogg v. Boston
& L. R. Corp., 148 Mass. 513; Reed v. Home Sav. Bank,
130 Mass. 443, 39 Am. Rep. 468. We think that a cor-
poration may be liable criminally for certain offenses,
of which a specific intent may be a necessary element.
There is no more difficulty in imputing to a corporation
a specific intent in criminal proceedings than in civil.
A corporation cannot be arrested and imprisoned in
either civil or criminal proceedings; but its property
may be taken, either as compensation for a private
wrong or as punishment for a pul lie wrong. In most of
the states of this country corporations may be formed,
POWERS OF CORPORATIONS 1295
tinder general laws, for the purposes of doing almost any
kind of business, as easily as partnerships, and many
of the newspapers are published by corporations. Al-
though natural persons who publish or assist in pub-
lishing a libel in a newspaper owned by a corporation
may be punished criminally by fine or imprisonment,
or both, yet, if the corporation cannot be punished by a
fine, it will escape all criminal liability. The authors of
libels are often irresponsible persons, and the remedy
by private action against corporations for the publish-
ing of libelous statements is often inadequate. That a
corporation may be indicted for a misfeasance as well
as for a nonfeasance has been decided in this common-
wealth. Com. v. Proprietors of New Bedford Bridge,
2 Gray, 339. See Queen v. Great North of England By.
Co., 9 Q. B. 315, 326. A corporation may be indicted
for a libel. State v. Atchison, 3 Lea, 729, 31 Am. Bep.
663, and note; Brennan v. Tracy, 2 Mo. App. 543; Phar-
maceutical Soc. v. London & P. Supply Asso., L. B. 5
App. Cas. 857, 869, 870; 2 Bishop, New Crim. Law, Sees.
9, 35; Newell, Defamation, Slander & Libel, 2d ed. 362,
363; Odgers, Libel & Slander, 3d ed. 436; * * *
Question 694: (1) What was the crime for which the cor-
poration was sought to be held in this case ?
(2) What was the nature of the business carried on by the
defendant? If the corporation had been a manufacturing cor-
poration and one of its agents without actual authority had
made statements in contempt of court in connection with a case
in court in which it was interested, do you think the corporation
could have been fined for such contempt?
Case 695. People v. Rochester R. & L, Co., 195 N. Y.
102, 21 L. B. A., n. s. 998.
Hiscock, J., delivered the opinion of the court:
"The respondent has been indicted for the crime of
manslaughter in the second degree, because, as alleged,
it installed certain apparatus in a residence in Bochester
.in such a grossly improper, unskillful, and negligent
1296
CORPORATIONS
manner that gases escaped and caused the death of an
inmate. The demurrer to the indictment has presented
the question whether a corporation may be thus indicted
for-manslaughter under Sec. 193 of the Penal Code. Be-
fore proceeding to the interpretation of this specific pro-
vision, we shall consider very briefly the general question
discussed by the parties, whether a corporation is ca-
pable of committing in any form such a crime as that
of manslaughter.
"Of the correctness of the proposition urged in behalf
of the people, that it may do so, subject to various lim-
Rations, we entertain no doubt. Some of the earlier
writers on the common law held that a corporation could
not commit a crime. Blackstone, in his Commentaries,
chap. 18, sec. 12, stated: 'A corporation cannot commit
treason or felony or other crime in its corporate capac-
ity, though its members may, in their distinct individual
capacities.' And Lord Chief Justice Holt (Anonymous,
12 Mod. 555) it is said to have held that 'a corporation
is not indictable, although the particular members of it
are.' In modern times, however, the courts and text
writers quite universally have reached an opposite con-
elusion. A corporation may be indicted either for non-
feasance or misfeasance, the obvious and general limitar
tions upon this liability being, in the former case, that
it shall be capable of doing the act for non-performance
of which it is charged, and that, in the second case, the
act for the performance of which it is charged shall not
be one of which performance is clearly and totally beyond
its authorized powers. Bishop, New Crim. Law, Sees.
421, 422. The instances in which it has been held that
a corporation might be liable criminally simply because
it did or did not perform some act, and where no element
of intent was supposed to be involved, are so familiar
that any extended reference to them is entirely unneces-
sary.
'' The latest authority in this state upholding such lia-
bility is found in the case of People v. John H. Wood-
bury Dermatological Institute, 192* N. Y. 455, 85 N. E.
POWERS OF CORPORATIONS 1297
697, where it was held that a corporation might be pun-
ished criminally for disobeying the statute providing
that 'any person not a registered physician, who shall
advertise to practice medicine, shall be guilty of a mis-
demeanor.' There was involved no question of intent,
but simply that of disobedience of a statutory provision
against doing certain acts. At times courts have halted
somewhat at the suggestion that a corporation could
commit a crime whereof the element of intent was an
essential ingredient. But this doctrine, again with cer-
tain limitations, may now be regarded as established,
and there is nothing therein which is either unjust or
illogical. Of course, it has been fully recognized that
there are many crimes so involving personal, malicious
intent, and acts so ultra vires that a corporation mani-
festly could not commit them. Wharton, Orim. Law,
9th ed. sec. 91; Morawetz, Priv. Corp. 2d ed. sees. 732
et seq. But a corporation, generally speaking, is liable
in civil proceedings for the conduct of the agents through
whom it conducts its business so long as they act within
the scope of their authority, real or apparent ; and it
is but a step further in the same direction to hold that,
in many instances, it may be charged criminally with
the unlawful purposes and motives of such agents while
so acting in its behalf.''
(The Court holds that the corporation is not guilty
of manslaughter under the statute, because manslaughter
is defined in New York as the  killing of one human
being by the act, procurement, or omission of another
[human being]. But, the Court says, "We have no
doubt that a definition of certain forms of manslaughter
might have been formulated, which would be applicable
to a corporation, and make it criminally liable for vari-
ous acts of misfeasance and non-feasance when resulting
in death and amongst which very probably might be
included conduct in its substance similar to that here
charged against the respondent.")
Question 695: (1) Can a corporation be criminally liable
for causing the death of a human being?
1298
CORPORATIONS
(2) Murder oeing the crime of unlawfully killing a human
being with malice aforethought, do you think a corporation
could be guilty of murder? Do you think it could be guilty of
arson or burglary because its officer for its benefit committed
such crime?
(Note: It was formerly doubted whether a corporation could
be indicted for any crime. It may unquestionably be guilty of
crimes that do not involve the personal element, as receiving
rebates, violating child labor statutes, etc. And in recent cases
it has been held for the crime of involuntary manslaughter. But
it is doubtful if a corporation could be held for crimes like
murder, arson, burglary, and the like.)
Case 696. The Overland Cotton Mill Co, v. People,
32 Colo. 263.
(Set out as Case 635, supra,.)
Question 696: What crime was the corporation held for in
this case?
§ 752. (Corporations, Sec. 116.) Express charter
powers.
Case 697. Attorney General v. Belle Isle Ice Co., 26
N. W. Rep. (Mich.) 311.
Facts: Suit of quo warranto by the Attorney General
to determine whether the Belle Isle Ice Co., whose char-
ter provided that it was organized for the purpose of
putting up and packing ice and distributing and selling
the same, was organized for a purpose authorized by
the statute providing for the incorporation of companies
for "manufacturing purposes.
Point Involved: Specifically whether cutting natural
ice and selling same is "manufacturing"; generally, a
brief discussion of the express charter powers of cor-
porations.
Champlin, J.: "* * # The law requires the ar-
tides of association [the charter] to state distinctly and
definitely the purpose for which the same is formed. If
it does not state a purpose for which the statute author-
POWERS OF CORPORATIONS
1299
izes a corporation to be formed, it would not be legally
incorporated, and its articles would afford no warrant
for the exercise of corporate action. If it does state
such a purpose, and if the other requirements of the
law are complied with it is a legal corporation and au-
thorized to act as such. In either case the articles them-
selves are the sole criterion to ascertain the purpose for
which it was formed, and the intent must be gathered
alone from the written instruments and cannot be aided,
or varied or contradicted by testimony or averments
aliunde the instrument itself. The question, therefore,
is, is the purpose set forth in the articles such as the
statute authorizes the formation of corporations to carry
on? We think it is. Its expressed purpose is to manu-
facture for market Detroit river and lake ice. It was
not necessary for the articles to state the means or meth-
ods of manufacture, * * [The Court here holds
that cutting ice as naturally frozen in rivers and lakes
is engaging in ''manufacturing as authorized by the
statute, and that the company is a legal corporation.]
Question 697: Discuss generally the necessity that the char-
ter powers of a corporation be authorized by law, how such
powers should be stated, whether it is necessary that there
should be a statement of the manner or means of accomplishing
the purpose.
Case 698. People v. Chicago Gas Trust Co., 130 111.
268.
Facts: Suit by the Attorney General against the Chi-
cago Gas Trust Co., to question by what right it exer-
cises certain powers. The company was formed under
the general corporation law of Illinois by filing a state-
ment of incorporation with the Secretary of State and
his issuances of a certificate of incorporation. One of
the objects stated was the power to hold stock in other
gas companies. The general law forbade this being done.
1 Point Involved: That the powers of a corporation
formed by filing statements and certificates under the
general corporation act, are determined by the powers
1300
CORPORATIONS
and objects as stated, in such statements or certificates,
as governed by the general laws of the state, and that
powers stated in contravention of the general law are
void.
Mr. Justice Magruder: "* * *
"The power to purchase and hold stock in other com-
panies must be the subject of legislative grant, if not
in all cases, at least in cases where it cannot be implied
from the powers expressly granted. The general incor-
poration law contains no grant of such power by the
legislature. Can a corporation organized under that law
be clothed with such a power by merely naming it in the
statement filed with the Secretary of State? We think
not. The action of the Secretary of State in issuing
the license and the certificate of organization is neces-
sarily, to a large extent, merely ministerial. (Oregon
Ry. Co. v. Oregonian Ry. Co., 130 U. S. 1; 4 Am. & Eng.
Ency. of Law, Tit. Corporations, page 192, note 1.)
Whether the articles of association, consisting of the
Statement, the License, the Report of the Commissioners,
the Certificate of Organization, etc., do or do not confer
such rights and powers as are authorized by the law, is
a matter for judicial determination.
Question 698: State what the Court held in this case.
Case 699. In re Journalists Fund of Philadelphia, 8
Philadelphia Reports, 272.
Proceeding for the approval of a charter.
Paxson, J.: "This charter is radically defective for
the following reasons:
"1. The object of the association is not sufficiently
stated. After enumerating four distinct ' purposes' for
which the association is formed, the charter goes on to
say: 'For such other purposes as may be agreed upon
by the association in the future.'
"The law requires the Court to approve the 'object'
POWERS OF CORPORATIONS 1301
of the association. How can we do so when snch object
is to be declared in the future?
i i # # *) j
Question 699: What was the question in this case and how did
the Court decide it?
§753. (Corporations, Sec. 117.) Implied charter
powers.
Case 700. Curtiss and others v. Leavitt, 15 N. Y. 9.
Comstock, J. (page 64): "It is truly said that cor-
porations can only exercise such incidental powers as
are necessary to carry into effect, the express objects of
their charter. But necessity is a word of flexible mean-
ing. There may be an absolute necessity, a great neces-
sity and a small necessity; and between these degrees
there may be many others depending on the ever varying
exigencies of human affairs.
"It is plain that corporations, in executing their ex-
press powers, are not confined to means of such indis-
pensable necessity that without them there could be no
execution at all. The contrary doctrine would lead at
once to a very great absurdity; for if there are several
modes of accomplishing the end, neither one is indis-
pensable, and each would exclude all the others. And
thus, by inevitable logic, an express grant of power would
lie forever dormant, because there are more modes than
one of carrying it into execution.
"It is almost as difficult to say that the incidental
power depends for its existence on the degree of neces-
sity which connects it with the power in chief. Such a
doctrine would impose upon courts a never ending diffi-
culty, for the inquiry would always be whether the chosen
instrumentality is the very best that could be selected;
and if not the very best, however minute the difference
may be, then the inevitable decision must follow that the
choice was fatally bad, although strictly adapted to the
end in view and made in the utmost good faith.
1302
CORPORATIONS
"These demonstrations, for such they appear to me,
would seem to leave but one other conclusion which is,
that corporations, along with their specific powers, take
all the reasonable means of execution, all that are con-
venient and adapted to the end in view, although not
the very best by many degrees of comparison. And this
is a doctrine which must necessarily result in the liberty
of choice amongst those means. The choice may be wise
or unwise. If made in the exercise of an intelligent good
faith, the wisdom of the selection may be called in ques-
tion, but the power to make it cannot be.''
Question 700: What powers does a corporation have by im-
plication from its express charter powers?
Case 701. Louisville, etc. Co. v. Commonwealth of
Kentucky, 146 Ky. 827.
Facts: Suit brought by the State of Kentucky under
a law providing that in case a railroad company owns
property for more than five years, not devoted to rail-
road purposes, the same shall escheat to the state. The
defendant company's holdings are attacked because it
appeared that the defendant company was operating a
hotel and using certain lands for park purposes. The
railroad company in order toj avoid escheat claims that
under the circumstances these lands are held for proper
and legitimate purposes in the general operation of a
railroad. It appeared that the hotel was situated as a
depot hotel, that more than 80 trains passed in and out
each day, that about 300 employes were accommodated
at that point daily, and that many passengers found
hotel accommodations there while transferring from
train to train or waiting for trains. The park was a
small tract of land contiguous to the right of way and
near the depot building, which the railroad had laid out
with shrubbery, flowers, shade trees, fountains and walks.
Point Involved: "Whether a company organized for
general railroad purpose has the implied power to main-
tain a hotel and small park under the circumstances
stated.
POWERS OF CORPORATIONS 1303
Passing, J.: "The proof in this case shows that the
hotel property cost the company more than $30,000, and
that it spent annually in taxes and repairs upon the
hotel building the larger part of the rental derived there-
from, and that it cannot be said that it is running it for
profit. On the contrary, the evidence fully justifies the
allegation that it is held and maintained solely for the
benefit of the public traveling on its trains and such of
the employes of appellant as are, from the nature of
their duties, required to take their meals and sleep there
at Guthrie. Nor is this all. It appears that under the
contract of lease the toilets and waiting rooms of the
hotel are for the special use of the lady passengers stop-
ping at Guthrie; and a temporary hospital is provided
for in one of the rooms of the hotel. The building being
under control of the company, it is in a position to see
that the wants of the passengers and employes are prop-
erly supplied; and while there is some evidence that
the prices charged are high, they are not out of propor-
tion to* the accommodations furnished. Considering the
needs of the place and the character of the use to which
this hotel property is put, we are satisfied that the Court
did not err in holding that these tracts were not subject
to escheat.
"The right of the railroad to hold tract 4 as a park
presents a new question. We are furnished no authority
by counsel for either side, nor have we been able to find
any bearing upon this subject. And yet we know that
it is a custom of railroads generally, and particularly
the great transcontinental roads, to convert the small,
unoccupied tracts of land lying adjacent to and near
their depots into miniature parks, and beautify them by
planting shade trees, flowers, and shrubbery, and laying
walks through them, and frequently, as in the present
case, building pools and putting fountains therein. The
very fact that this custom has so universally obtained is
suggested that it has not been regarded as violative of
the rights of the company so to do. Unquestionably, ha
this way the company adds to the pleasure of its passen-
1304
CORPORATIONS
gers, and frequently to the comfort, both of its pas-
sengers and employes; for these parks are not only
pleasing to the eye, but they add materially to the com-
fort of passengers and employes waiting for the arrival
and departure of trains, by affording them a place for
recreation and rest. The statutes require that the com-
pany shall provide suitable and convenient waiting rooms
at all depots for the accommodation of passengers. The
object in view is the comfort of the traveling public;
and the more perfectly the wants, needs, and interests
of the traveling public are provided for, the more pop-
ular the road becomes as a common carrier. The main-
tenance of the park is no wise profitable to the company.
On the contrary, it is a source of constant expense. It
can serve no possible purpose, except to add to the at-
tractiveness of the depot and its surroundings, and to
the comfort of the employes and passengers of the com-
pany who are required to be and remain at the depot.
* * *
 Coextensive with the custom of railroads to build
and maintain parks at and near their depots is that of
building and keeping Y. M. C. A. rooms at points along
the line of their road where their employes are required
to congregate in numbers. These buildings are erected
solely for the benefit of the employes of the company.
* * * In order to justify the railroad to hold land
for park purposes, two things must concur: First, the
land so held must lie at or near the depot, so as to be
of easy access to its passengers and employes; and, see-
ond, it must be reasonable in size, taking into considera-
tion the extent of travel to and from such depot and the
number of employes whose duties require them to be
there. In other words, the park must be in keeping with
the size of the place and other accommodations and con-
veniences furnished by the railroad at that point. If
these two necessary prerequisites are complied with,
neither the letter nor the spirit of the Constitution or
statute will be violated.
Question 701: (1) What did the Court hold with reference
to the right of the railroad to operate the hotel ? What was the
POWERS OF CORPORATIONS 1305
reasoning of the Court ? D,o you infer from that reasoning that
the jcompany could have operated hotels generally ?
(2) With reference to the right to maintain the park, what
did the Court hold ? On what reasoning ?
(3) Can a railroad corporation properly devote its funds
and property to maintain a Y. M. C. A. for its employees?
(4) The W. M. R. Co. in anticipation of increased business
guaranteed the payment of the dividends on the stock and the
interest on the bonds of the B. R. Hotel Company, a summer
hotel located in a town upon its railroad. No connection with
the railroad business is shown, except that it increased the traffic
of the railroad. Is the contract within the power of the cor-
poration? (Western Maryland R. Co. v. Blue Ridge Hotel Co.,
102 Md. 307, 2 L. R. A. new series, 887.)
(5) Do you think that the mere fact that an activity of a
corporation is profitable to it, would decide whether the activity
was within the power of the corporation ?
(6) A railroad corporation made a contract with an advertis-
ing company by which it granted the advertising company the
right to advertising space on its box cars. The railroad com-
pany then refused to carry out the contract. The advertising
company sues. Defense, ultra vires. Is the defense good?
(National Car Adv. Co. v. L. & N. R. Co., 89 S. E. (Va.) 88.)
(7) A railroad company agreed to pay to the state of Illi-
nois a percentage of its receipts from its railroad business. In
a suit by the state for an accounting, of the amounts owing to
the state, the company contends that its receipts from eating
houses and dining cars should not be included because not rail-
road business. How should Court hold? (State v. I. C. R. R.
Co., 92 N. E. (111.) 848.) '
Case 702. Mutual Life Ins. Co. v. Board Motor Truck
Co. Corp., 80 Southeastern Reporter, 566.
Harrison, J.:  This action was brought by the plain-
tiff corporation to recover of the defendant life insur-
ance company the amount of a policy issued by it for
the benefit of the plaintiff upon the life of B. F. Board,
its president and general manager. There was a verdict
and judgment in favor of the plaintiff, to which this writ
of error was awarded.
"The record shows that the plaintiff was a Virginia
1306
CORPORATIONS
corporation, with B. F. Board, its principal incorporator,
as president and general manager; that, in order to
protect the corporation and its creditors from any loss
by reason of his death, he approached the agent of the
defendant insurance company and stated that he desired
to have his life insured for the benefit of the corporation;
that the insurance had been solicited by the agents of
other companies, and asked if the defendant wrote insur-
ance of that kind. He was informed by the agent that
the defendant company did issue such policies, and would
be glad to write the policy for him. Thereupon the
policy was, in due course, issued upon the life of B. F.
Board for the benefit of the plaintiff; the premium,
$234.25, being paid by it. Both the application and the
policy state that the interest of the beneficiary in the
insured was 'loss of services in the event of death.'
"It clearly appears that the insurance company with
full knowledge of all the facts, wrote and delivered the
policy sued on, and that both parties were acting in good
faith in making the contract.
"We are of opinion that the demurrer to the plain-
tiff's declaration was properly overruled. We are fur-
ther of opinion that this contract of insurance effected
by the plaintiff was not an ultra vires act on its part,
and that the 'loss of services in the event of death,' as
stated in the policy, was a sufficient interest to maintain
the policy in favor of the beneficiary. The principal
ground upon which the defendant seeks to avoid this
policy is that the plaintiff had no insurable interest in
the life of B. F. Board. The deceased was the president
and manager of the corporation, and had been since its
organization. His relation to and knowledge of the
financial and manufacturing interests of the plaintiff
was such that his death could not fail to result in serious
and substantial loss to its creditors and all others inter-
ested in its prosperity. Although it is well known that
the leading insurance companies of the country solicit
and carry the class of insurance here involved, we have
been unable to find any decision directly in point. The
POWERS OF CORPORATIONS 1307
principles, however, announced by the decisions and
stated by the text-writers we think clearly show that the
plaintiff had an insurable interest in the life of R. F.
Board, its president and general manager.
"In the case of Mechanic's National Bank v. Comins,
72 N. H. 12, 55 Atl. 191, 101 Am. St. Rep. 650, it was
held that any reasonable expectation of pecuniary bene-
fit or advantage, either directly or indirectly, from the
continued life of another creates an insurable interest in
such life, though there may be no claim upon the person
whose life is insured that can be recognized in law or in
equity. The opinion says in part: 'It is hardly neces-
sary to say that the success of a corporate enterprise
may be so interwoven with the personality of its man-
ager that its stock is taken, and money is loaned to carry
it on, as much in reliance upon that personality as upon
the intrinsic merit of the enterprise; and no good reason
appears why a. stockholder or creditor, the value of whose
investment may be reasonably said to depend upon the
life or health of the man at the helm, should not have an
insurable interest in his life, the same as one who invests
money in a partnership, relying upon the skill or expe-
rience of his copartner, has an insurable interest in the
life of the latter, or one who equips a mining expedition
•has an insurable interest in the life of him to whom its
management is committed. The creditor or stockholder,
under such circumstances, would seem to have that 'rea-
sonable expectation of pecuniary benefit or profit from
the continuance of another's life' which is held sufficient
to constitute an insurable interest. In such case "the es-
sential thing * * * that the policy should be ob-
tained in good faith, and not for. the purpose of speculat-
ing upon the hazards of life, 'would appear to be present.
In this view we are not prepared to say, as matter of law,
* * * that the plaintiffs, who were furnishing the
funds to carry on the business of the George T. Comins
Company, had no insurable interest in the life of George
T. Comins, the manager, and apparently the originating
and directing personality in the enterprise.' 
1308
CORPORATIONS
Held: That the corporation had an insurable inter-
est and the policy was not ultra vires.
Question 702: Does a corporation have implied charter power
to secure insurance in its favor upon the lives of its officers?
Does it have an insurable interest in their lives?
Case 703. Central Lumber Co. v. Kelter, 201 111. 502.
Facts: The lumber company is sued as surety on a
bond executed by a building contractor. The contractor
gave the bond to protect the owner of the building against
his default, and the lumber company became surety on
the bond. The lumber company executed the bond in
order to obtain the contract for the sale of the lumber
to be used in the building. Defense by the lumber com-
pany that it had no power to execute the bond.
Point Involved: Whether a lumber company has
power to become surety on a building contractor 's bond
as a part of its act in securing the sale of lumber to said
building contract.
Mr. Justice Wilkix: "* * * It is again con-
tended that the bond sued on was ultra vires the power
of the corporation. The company was organized for 'the
purchase and sale of lumber and all adjuncts for carry-
ing on a general lumber business.' If the bond was exe-
cuted on the part of the corporation for the purpose of
securing a sale of lumber to Rafferty, the contractor, the
making of the bond was within its implied powers.
Question 703: (1) State the facts, the question presented
and the Court's decision in the above case.
(2) The A brewery company having no express power to
loan money, loaned B, a saloonkeeper, a sum of money, to enable
him to start in the saloon "business in which the brewery com-
pany's beer would be sold. Is this act within the charter powers
of the corporation? (Kraft v. West Side Brew. Co., 219 111.
205.)
Case 704. Best Brewing Co. v. Klassen, 185 111. 37.
Facts: The Brewing Company is sued upon an appeal
bond. The bond was given by an appellant in a case to
POWERS OP CORPORATIONS 1309
which the Brewing Company was not a party, and the
Brewing Company signed said bond as surety thereon.
(An appeal bond is a bond required to be given by a
party who takes an appeal from the judgment of the court
below. It recites that the appealing party, unless he
prosecutes the appeal with success, will pay the judgment
below with costs, etc. The law requires that a surety join
in the bond.)
Point Involved: "Whether a corporation organized for
brewery purposes is within its charter power in becom-
ing surety upon an appeal bond, no direct advantage in
the prosecution of the business of the company being
thereby shown.
Mr. Justice Wilkin: ' 'We think the primary ques-
tion here is not whether appellant has reaped a benefit
from the act of becoming surety for Rounds upon the
bond, but whether the act of signing it was within the
sdtope of its corporate authority. The purpose of the
corporation, as expressed in its charter, is to manufac-
tare and sell ale, beer and porter and carry on a general
brewing business. It would seem no acts could be more
unlike than the doing of those authorized by the charter
of the company, and the signing of the appeal bonds as
surety. The instrument was executed in a suit not by
or against the corporation, but by a third person against
another to recover possession of the house. Prima facie
the signing of the company of an appeal bond in such a
suit was an act beyond the purpose for which it was or-
ganized, and consequently illegal. If it had been shown
that it was executed clearly for the purpose of promoting
or protecting its own business of brewing or selling beer,
etc.,—that is to say, if the act had been reasonably neces-
sary to accomplish the end for which the corporation was
formed—it would have been within the scope of the cor-
porate power. But it cannot be held that every act in
furtherance of the interests of a corporation is intra
vires. Many acts can be suggested which though bene-
ficial to the business of a corporation, are too remote
1310
CORPORATIONS
from its general purposes to be deemed reasonably within
its implied powers. What is and what is not too remote
must be determined according to the facts of each case.
The rule has been stated to be: In exercising powers
conferred by its charter, a corporation may 'adopt any
proper and convenient means tending directly to their
accomplishment, and not amounting to the transaction
of a separate, unauthorized business.
Question 704: (1) State the facts in this case and the
Court's decision.
(2) How does this case differ from the preceding case?
§ 754. (Corporations, Sec. 118.) Notice of powers of
corporation.
(Note: A person who deals with a corporation is bound as
a matter of law to know its powers. He cannot claim ignorance
thereof. The charter is on record and he knows that there are
limitations and must govern himself accordingly.)
§ 755. (Corporations, Sec. 119.) Enforcibility of con-
tracts ultra vires.
(A) Right to Raise Defense of Ultra Vires; Act
Executory on Both Sides
Case 705. Nassau Bank v. Jones et al., 95 N. Y. 115
 While executed contracts, made by corporations ii5
excess of their legal powers, have, in some cases, heel;
upheld by the courts, and parties have been preclude!
from setting up, as a defense to actions brought by col
porations, their want of power to enter into such colj
tracts * * * this doctrine has never been applied tji
a mere executory contract which is sought to be ma*31(
the foundation of an action, either by or against
corporations. It was said by Judge Selden, in Tracy'(
Talmage (14 N. Y. 179), 'That a contract by a corpo%
tion, which it has no legal capacity to make, is void a%
cannot be enforced, it would seem difficult to deny.' in
White v. Buss (3 Cushing, 448), Chief Justice
POWERS OF CORPORATIONS 1311
lays down the rule as follows: 'It is well settled by the
authorities that any promise, contract or undertaking,
the performance of which would tend to promote, ad-
vance or carry into effect an object or purpose which
is unlawful, is ill itself void and will not maintain an
action.' 
Question 705: If a contract beyond the power of a corpora-
tion and is still executory on both sides, can either party refuse
to carry it out ?
(Note: In Harris v. Independence Gas Co., 76 Kan. 750, the
Court says: "The Court is convinced of the soundness of the
view, that in the absence of special circumstances affecting the
matter, neither party to even an executory contract should be
allowed to defeat its enforcement by the plea of ultra vires.
But this case is opposed to the weight of authority, and in fact
seems to stand alone.)
(B) View That Corporation May Successfully Plead
Ultra Vires, Notwithstanding' Receipt of Benefits.
Case 706. National Home Building Association v.
Bank, 181 111. 35.
Me. Chief Justice Cartwright: "It is also argued
that the building and loan association, is estopped to
raise the question whether the contract was ultra vires
because it has received the benefit of the contract by the
conveyance of property to it. That depends, as we think,
upon the sense in which the term ultra vires is used. It
has been applied indiscriminately to different states of
fact in such a way as to cause considerable confusion.
; When used as applicable to some conditions, it has been
i frequently said that a corporation is estopped to make
'i such, a defense where it has received the benefit of the
it contract. For example, the term has been applied to
lets of directors or officers which are outside and be-
fond the scope of their authority, and therefore are in-
Wons of the rights of stockholders, but which are
Fthin the powers of the corporation. In such a case^ the
Ft may become binding by ratification, consent and
1312
CORPORATIONS
acquiescence, or by the corporation receiving the benefit
of the contract. Again, it has been applied to cases where
an act was within the authority of the corporation for
some purposes or under some circumstances, and where
one dealing in good faith with the corporation, had a
right to assume the existence of the conditions which
would authorize the act. Where an act is not ultra vires
for want of power in the corporation but for want of
power in the agent or officer, or because of the disregard
of formalities which the law requires to be observed,
or is an improper use of one of the enumerated powers,
it may be valid as to third persons. In the more proper
and legitimate use of the term, it applies only to acts
which are beyond the purpose of the corporation, which
could not be sanctioned by the stockholders. There
would, of course, be no power to confirm or ratify a con-
tract of that kind,' because the power to enter into it is
absolutely wanting. If there is no power to make the
contract there can be no power to ratify it, and it would
seem clear that the opposite party could not take away
the incapacity and give the contract vitality by doing
something under it. It would be contradictory to say
that a contract is void for an absolute want of power to
make it, and yet it may become legal and valid as a con-
tract, by way of estoppel, through some other act of the
party under such incapacity, or some act of the other
party chargeable by law with notice of the want of
power.
"The powers delegated by the state to the corporation
are matters of public law, of which no one can plead
ignorance. A party dealing with a corporation having
limited and delegated powers conferred by law is charge-
able with notice of them and their limitations, and can
not plead ignorance in avoidance of the defense.''
Question 706: What is the doctrine of this case? Give the
reasons supporting it.
(Note: In De La Vergne Co. v. German Sav. Inst., 175 U. S.
40, at page 59, the Court says: "The doctrine that no recovery
POWERS OF CORPORATIONS 1313
can be had upon the contract is based upon the theory that it
is for the interest of the public that corporations should not
transcend the limits of their charters; that the property of
stockholders should not be put to the risk of engagements which
they did not undertake; that if the contract be prohibited by
statute every one dealing with the corporation is bound to
take notice of the restrictions in its charter, whether such char-
ter be a private act or a general law under which corporations
of this class are organized.")
(Note: The courts that take this view give the plaintiff the
right to recover the value of the benefits conferred. Thus- if
an insurance policy is not enforceable because ultra vires, the
premiums paid can be recovered.)
(C) View That Corporation Is Estopped to Plead Ultra
Vires by Enjoyment of Benefits.
Case 707. Denver Fire Ins. Co. v. McClelland, 9 Colo.
11,
Facts: The Denver Fire Ins. Co. is sued on a policy
of insurance by which it purported to insure McClelland
against loss of certain crops by hail. McClelland paid
$3 and gave his promissory note for $58.03 as the pre-
mium. A loss by hail occurred, and defendant is sued
and states that it has no power to issue the kind of insur-
ance in question, and that therefore the policy is void,
and for that reason it is not responsible for the loss;
and offers to return the premium paid to it by plaintiff.
Point Involved: Whether the corporation i^ estopped
by the receipt of benefits to plead ultra vires when sued
on a contract it has no charter power to make.
Beck, C. J., and Helm, J.: "Private corporations are
creatures of statute, and derive their powers solely there-
from. Upon weighty considerations of public policy, and
of private equity as well, the principle has been uni-
versally recognized that the charters or general laws
through which these corporations derive their existence
absolutely control their action; that a contract made or
an act done by them which is not in any manner author-
1314
CORPORATIONS
ized by some express provision of the charter or law of
incorporation, or which may not be clearly implied there-
from is ultra vires; and that such usurpation of power
may be relied upon as a complete defense to a suit grow-
ing out of the unauthorized act or contract.
"But for the purpose of avoiding the infliction of
manifest injustice in given cases, many courts of the
highest respectability have seen fit to recognize, an excep-
tion to the foregoing doctrine. This exception when
admitted, is always based upon principles largely anal-
ogous to those supporting equitable estoppels. The de-
cisions recognizing it hold that where a corporation
receives and retains the full benefit of a contract, and a
failure to perform on its side would result in palpable
injustice to the other contracting party, it is estopped
from escaping liability thereunder through a plea of
ultra vires.
"We are inclined to the opinion that cases sometimes
arise wherein this exception, properly understood and
limited, should be held applicable. If a private corpora-
tion has accepted and retained the full benefits of a con-
tract which it had no power to make, the same having
been performed by the other party thereto; and if the
transaction is of such a nature that the party thus per-
forming will suffer manifest injustice and hardship un-
less permitted to maintain his action directly upon the
contract, no other adequate relief being at his com-
mand, we think the defense of ultra vires may be disal-
lowed. This, however, does not do away with the -ob-
jectionable character of the unauthorized contract. It
admits the legal wrong committed by the usurpation of
power, but denies the equitable right of the corporation
to profit through such wrong at the expense of parties
contracting with it; the corporation having received and
retained the benefit of the contract, is denied the privi-
lege of invoking the illegality of its act, and thus avoid-
ing consequences naturally flowing therefrom.
"The circumstances attending and surrounding the
transaction now before us, in our judgment, render this
POWERS OF CORPORATIONS 1315
an appropriate case for the application of the foregoing
equitable doctrine. For this reason we concur in the con-
elusion arrived at by Mr. Justice Stone, who writes the
principle opinion.
Question 707: State the doctrine of this case.
CHAPTER 95
CERTAIN PARTICULAR POWERS CONSIDERED
§ 756. Power of corporation to acquire and hold real estate.
§ 757. Power of corporation to borrow money, mortgage its property, etc.
§ 758. Power of corporation to loan money.
§ 759. Power of corporation to acquire shares in other corporations.
§ 760. Power of corporation to acquire its own shares.
§ 756. (Corporations, Sec. 120.) Power of corporation
to acquire and hold real estate.
Sec. 472. Implied power to acquire, hold and grant
real estate.
(See the cases of Louisville, etc. Co. v. Com. of Ken-
tucky, supra.)
Case 708. Barnes v. Suddard, 117 111. 237.
Facts: Suit in ejectment brought by plaintiff to oust
the defendant from certain real estate. Both parties
claim title from Charles I). Fairbanks as a common
source. Charles D. Fairbanks conveyed to A. P. Fair-
banks, who conveyed to plaintiff. Before this convey-
ance by Charles D. Fairbanks, through which plaintiff
traces his title, Charles D. Fairbanks had conveyed the
property to the United States Steam Feed Co., a cor-
poration organized under the laws of Connecticut, and
through that deed defendant traces his line of title.
Plaintiff contends that the deed to such corporation was
void and therefore no title had passed out of Fairbanks1
prior to the time he conveyed to plaintiff's grantor. The
corporation was chartered by the state of Connecticut
"to make and sell feed for horses and cattle, * * *,
and to buy and sell and deal generally in such real and
personal estate as may be necessary and convenient in
the prosecution of said business. The statutes of Con-
1316
POWERS OF CORPORATIONS 1317
necticut provided that any corporation may hold prop-
erty necessary for its purposes and such as shall be taken
in payment of or as security for debts due to it. The
statutes of Illinois (where the land in question is sit-
uated) provided that corporations may own, possess and
enjoy so much real and personal estate as shall be neces-
sary for the transaction of their business, and also that
foreign corporations doing business in the state shall be
subject to like limitations as the home corporations and
shall have no other or greater powers. The land in ques-
tion was acquired by the corporation in exchange for the
right granted by it to make, use and sell feed for horses
and cattle in the state of Colorado under the letters
patent held by the corporation. This was the only busi-
ness ever transacted in Illinois and the land was never
used for corporate purposes and evidently was not pur-
chased for any corporate purpose.
Point Involved: The power of a corporation to ac-
quire, hold and grant real estate; whether anyone except
the state may question such power; whether the title to
real estate acquired from a corporation is put in ques-
tion by reason of the fact that the corporation may not
have acquired or used it for proper corporate purposes.
Mr. Justice Craig: "* * *
"If we are correct in this position, that the Connecticut
corporation had the power to acquire real estate in this
state necessary for the transaction of its business, or
such as may be taken in payment or as security for debts,
as we think it is clear it had, the remaining question to
he determined is, whether the deed is void for the reason
and upon the ground that the property purchased was
not necessary for the transaction of the business of the
corporation. It will be remembered that this question
arises collaterally, and not in a direct proceeding [i. e. by
the state] against the corporation to determine its pow-
ers, rights or privileges. Dillon, in his work on Municipal
Corporations, Sec. 444, in the discussion of the question
says: 'Whether a municipal corporation with power to
1318
CORPORATIONS
purchase and hold real estate for certain purposes, has
acquired and is holding such property for other purposes,
is a question which can only be determined in a proceed-
ing instituted at the instance of the state. If there is a
capacity to purchase, the deed to the corppration divests
the estate of the grantor, and there is a complete sale;
and whether the corporation, in purchasing, exceeds its
powers, is a question between it and the state, and does
not concern the vendor or others.' The rule announced
by Dillon has been indorsed by two well considered cases
in Indiana—Hay ward v. Davidson, 41 Ind. 214, and
Baker v. Neff, 73 id. 68. Other states where the ques-
tion has been presented, adopted the same rule, and the
Supreme Court of the United States, in National Bank
v. Matthews, 98 U. S. 628, hold to the same doctrine.
* * jja(] phe corporation been clothed with no
power to acquire real estate in this state, or if the pur-
chase had been prohibited by statute or contrary to the
manifest policy of our laws, a different question would
be presented, and the cases of Carroll v. East St. Louis,
67 111. 568, and Starkweather v. American Bible Society,
72 id. 50, might properly be invoked as authority; but
such is not "(he case.
(Held, that the title acquired by the conveyances to
and by the corporation was not open to question. Any
other view would bo disastrous to the security of real es-
tate titles, for every time a corporation bought and sold
real estate, the question would be raised whether it had
done so properly cr not.)
Question 708: (1) What express power by charter law
did the corporation in question have to hold real estate ?
(2) What did the Court hold about the right to raise in
this case the question of the power to hold real estate ? Why ?
(3) Who could raise the question?
(4) Suppose this corporation had no power to hold real
estate for any purpose, what did the Court suggest would then
have been the result ?
(Note: A private corporation has power to lease and sell any
or all of its property. Public service corporations have no such
right except pursuant to statute or their charter.)
POWERS OP CORPORATIONS
1319
§ 757. (Corporations, Sec. 121.) Power to borrow
money, to mortgage, etc.
Case 709. Alton Mfg. Co. v. Garrett Biblical Institute,
243 111. 298.
Facts: The Alton Mfg. Co. sued the Garrett Biblical
Institute on three promissory notes. They were signed
 Garrett Biblical Institute, by Robert D. Shepherd,
treasurer. They were payable to the order of Everett
0. Fisk, and were endorsed by Fisk to the Alton Mfg.
Co. The institute denied that the notes were its notes
and relied on its lack of charter power to make the notes,
and also on the authority of the treasurer to bind it on
the notes. The evidence was that the treasurer was also
a trustee, and that he was given by the board an extensive
fiscal authority, including the power to borrow money for
some purposes. The Court peremptorily directed a ver-
diet for the defendant, and the plaintiff appeals to the
present Court.
Me. Chief Justice Faemee delivered the opinion of the
Court:
"The first question necessary to be determined is
whether the Garrett Biblical Institute, under its charter,
was authorized to borrow money for its corporate pur-
poses. The answer to this question must depend upon
the provisions of the charter under which the corpora-
tion is operating, for the powers which any corporation
is permitted to exercise are those, only, which its charter
confers upon it, either by express grant or by implica-
tion, and the implied powers are recognized and given
effect for the purpose of enabling such bodies to exercise
the express powers granted. An incidental power is one
that is directly and immediately appropriate to the exe-
cution of the specific power granted, and not one that has
a slight or remote relation to it. * * *
"The Garrett Biblical Institute is a charitable corpora-
tion, created primarily for educational purposes. It is
expressly empowered to establish and maintain within
the bounds of Cook county a biblical institute under the
1320
CORPORATIONS
patronage and control of the Methodist Episcopal
Church. The conduct and control of the corporation are
placed in a board of trustees. * * * It is expressly
declared that appellee ' shall he capable, in law, of taking
and holding, by gift, grant, devise or otherwise, and of
purchasing, holding and conveying, both in law and
equity, any estate or interest therein, real, personal or
mixed, and shall have power to execute and fulfill all
such trusts as may be confided to said corporation, and
to take, hold, use, manage, lease and dispose of all such
trust property as may in any manner come to said cor-
poration charged with any trust or trusts in conformity
therewith.'
"It will be observed that the power to borrow money
and issue notes therefor is not expressly granted to ap-
pellee by the terms of its charter. But the almost uni-
versal rule of law is, that corporations possess the im-
plied power to borrow money when necessary to carry
out the purposes of their organization, and when such
power is possessed and debts contracted thereunder a
corporation may execute its notes or other customary
evidences of indebtedness therefor. * * *
"The charter of appellee does, however, grant to it the
express power of purchasing, holding and conveying, in
law and equity, any estate or interest therein, real, per-
sonal or mixed, and the power to hold, use and manage
the same. Under this power it cannot be questioned that
appellee may expend money for the purchase of real
estate for the use of the institute and to maintain and
keep it in repair, and it is equally clear that if it did not
possess the ready funds at a time when it might be neces-
sary to the purposes of the corporation to make a pur-
chase of real estate or necessary to make expenditures
for needed repairs and maintenance of property which it
owned, under its charter it possessed the implied power
to borrow money for such purposes and give its notes
therefor. The trustees having power to borrow money
for proper corporate purposes and execute notes there-
for, might exercise this authority in a number of ways:
(1) They might appoint one of their number as agent
POWERS OF CORPORATIONS 1321
of the corporation for that purpose and expressly or im-
pliedly clothe him with authority to borrow money and
give notes; (2) where no actual authority has been con-
ferred upon the agent of the corporation to borrow money
and give, notes but where the agent has done so, and with
full knowledge of all the facts the corporation has ap-
proved and ratified the acts of the agent, it will be liable
to the same extent as if actual authority had been given
to perform the acts; (3) where no authority had been
given or existed in the agent to borrow money but where
the corporation received the use and benefit of the money
it will b© liable; (4) by holding an agent out to the pub-
lie as possessing authority to exercise the powers as-
sumed by the agent and to do the acts performed by him,
in which case the corporation would be bound to the
extent of the agent's apparent authority.
"Our first inquiry, then, relates to the correctness of
the ruling of the trial court in holding that there was no
evidence tending to show that Dr. Shepherd, treasurer
and 'business agent' or 'business manager' of the cor-
p,oration, had ever been given any authority by the trus-
tees to borrow money and execute the notes of the cor-
poration therefor. This necessitates an examination
of the testimony to some extent. [Here the court re-
yiews tfie evidence. The court then concludes that the
evidence produced by the plaintiff was sufficient to go
to the jury, and concludes as follows] :
"The evidence, we think, was sufficient to justify sub-
mitting to the jury the liability of appellee on three
grounds: First, whether the money was borrowed by
authority, express or implied, of the corporation; sec-
ond, if not borrowed in pursuance of authority pre-
viously given, did the corporation, after knowledge of
the fact of its being borrowed, approve or ratify it?
Third, if it was borrowed without previous authority,
and was not afterwards, with knowledge, ratified by the
corporation, did it receive the use and benefit of the
money? It will, of course, be understood that we do not
intend, by what is said herein, to express any opin-
ion as to the weight of the evidence. What we have
1322
CORPORATIONS
held is, that upon certain grounds mentioned, the evi-
dence was sufficient to require the case to be submitted
to the jury.
"The judgments of the Appellate and Municipal courts
are reversed and the cause remanded."—Reversed and
remanded [for new trial].
Question 709: (1) How does the Court define an "im-
plied or "incidental power"? "What do such powers, generally
speaking, include?
(2) Did this corporation have express power to borrow
money? Did it have implied power?
(3) Did the treasurer, by virtue of his office, have power
to borrow money ? Could he be given that power ?
(4) What three questions were put by the Court, as ques-
tions which the plaintiff was entitled on the evidence to have a
jury answer?
§ 758. (Corporations, Sec. 123.) Power to loan money.
Case 710. Canning- Co. v. Stanley, 133 Iowa 57.
McClain, J.: "* * * While it is true as a gen-
eral proposition, that a corporation authorized by its
articles only to carry on a mercantile or manufacturing
business has no authority to engage in the business of
loaning money, it does not follow that it has not the
power in the management of its funds to loan iJhem out
temporarily at interest when not needed in the prosecu-
tion of its business. The loaning of money not being
expressly prohibited to the corporation it may as we
think without any question make such temporary dis-
position of the funds which it has on hand from time to
time as to secure a profit, the very object of its organiza-
tion being to earn money for its stockholders in the
prosecution of its business. Such a temporary and inci-
dental loaning of money is not the engaging in the busi-
ness of making loans which is outside the scope of the
authority of manufacturing corporations.
Question 710: Has a manufacturing or commercial corpora?-
tion the power to loan money?
POWERS OF CORPORATIONS 1323
(Note: Loaning money is ordinarily beyond the power of a
corporation not organized for banking purposes. But it has a
limited power to loan as stated in this case.)
§759. (Corporations, Sec. 124.) Power of corporation
to sell its property.
(The corporation may legally sell any or all of its property.)
§ 760. (Corporations, Sec. 125.) Power of corporation
to acquire shares in other corporations.
Sec. 476. Power to acquire shares in other corporations.
Case 711. Converse v. Emerson & Co., 242 111. 619.
Facts: Converse, as receiver of Minnesota Thresher
Mfg. Co., brings suit against Emerson, Talcott & Co. to
recover assessments levied by the Minnesota courts on
the stock of the Minnesota Company, and in which the
Emerson Company appears as ah original subscriber.
The Emerson Company had been a creditor of the N. W.
Mfg. and Car Co. Such company having become in-
solvent, its creditors, including the Emerson Company,
organized a new company, the present Minnesota
Thresher Mfg. Co., whose charter stated that its object
was to take over the capital stock and assets of the
former company and to engage in a manufacturing busi-
ness. The Minnesota statute provides for a double lia-
bility on shareholders in the event of insolvency and an
assessment is now made according to such law. Suit is
brought in the Illinois courts to enforce such liability.
Point Involved: "Whether a corporation can be a sub-
scriber to the shares or a stockholder in another cor-
poration.
Mr. Justice Cooke : "* * *
"A corporation is but the creature of the statute, and
it can exercise no greater powers than those which are
expressly conferred upon it by its charter or which must
be necessarily implied from its charter. The charter of
1324 CORPORATIONS
the appellee company empowered it only to engage m
the business of manufacturing and selling certain arti-
cles. It had no authority, either express or implied, to
participate in the organization of other corporations,
either for speculative or for manufacturing purposes.
It is earnestly contended on the part of the appellant
that the stock in question was taken by the appellee com-
pany simply to secure an indebtedness, and that it was
clearly within the powers of appellee to take and hold
the stock for this purpose, and that by so taking and
holding it the appellee company assumed all the liabili-
ties of a legitimate holder of the stock. Without passing
upon the question whether, in any event, the appellee
would have the right to take the stock of another corpora-
tion to secure the payment of an existing indebtedness,
we do not agree with the view of appellant. Under the
facts as agreed upon in this case it is clear that the
appellee company did not receive this stock in payment
of a debt. The thresher company was not indebted to
appellee. The debt referred to was owing to appellee
by a different corporation. The appellee became one of
the organizers of the thresher company for the purposes
for which that company was incorporated and was one
of the original subscribers for its stock. Its act in so
doing was ultra vires its charter and void, and this suit
cannot be maintained thereon. People v. Pullman Car
Co., 175 111. 125; People v. Chicago Gas Trust Co., 130
id. 268; National Home Building Assn. v. Home Savings
Bank, 181 id. 35.
11 Appellant further contends that appellee is now
estopped from setting up the doctrine of ultra vires for
the reason that for a period of twenty-three years it
held the stock and participated in the management' of
the thresher company and received all the benefits aceru-
ing to a stockholder. It appears that no dividends have
ever been declared on this stock. If any material benefit
has been received by appellee on account of its supposed
ownership of this stock the appellant herein has an ade-
quate remedy. In the case of National Home Building
POWERS OF CORPORATIONS 1325
Assn. v. Home Savings Bank, supra, it is held that a con-
tract beyond the power of a corporation to make is void,
and the fact that the corporation has received the bene-
fits thereof or the other parties have acted thereunder
does not estop the corporation from raising the defense
of ultra vires.
Question 711: Can a corporation acquire shares in another
corporation? For what purposes would its acquisition of stock
be, upheld ?
(Note: This is the general rule, unless the governing law
gives the corporation the power. It is generally held that for
the purpose of protecting its own credits, it may acquire shares,
holding such shares as property, rather than as a shareholder
and disposing of them as soon as possible without sacrifice. In
Illinois, since this case was decided, the statute gives the cor-
poration the power to own stock in other corporations; but this
case is retained for its statement of the law where there is no
'such statute.)
§761. (Corporations, Sec. 125.) Power to acquire its
own shares.
(Note: A corporation may acquire its own shares, when no
fraud on the law, on other stockholders or creditors is thereby
attempted.)
PART VI
SUNDRY TOPICS
Chapter
96.
Foreign Corporations.
Chapter
97.
Trusts and Monopolies.
Chapter
98.
Dissolution and "Winding Up of Corpora-
tions.
Chapter
99.
Public Service Corporations.
Chapter
100.
Business Trusts.
Chapter
101.
Non-stock Corporations.
Chapter
102.
Blue Sky Laws.
CHAPTER 96
FOREIGN CORPORATIONS
Definition and general statement.
Common provisions in respect to corporations.
What constitutes doing business in another state.
When foreign corporation has right to enter other state.
Suit against foreign corporations.
Jurisdiction of state court over internal affairs of foreign corpora-
tion.
§ 762. (Corporations, Sec. 126.) Definition and general
statement.
(Note: A foreign corporation is a corporation created by
another legislative jurisdiction than the one in which its right
to come to do corporate acts, to carry on business, to own prop-
erty, is being considered. Thus an Illinois corporation is a for-
eign corporation in Indiana.)
Case 712. Empire Mills v. Alston Groc. Co., — Tex.
Ap. 12 L. R. A. 366.
1326
§ 762.
§ 763.
8 764.
§ 765.
§ 766.
§ 767.
FOREIGN CORPORATIONS
1327
Davidson, J.: "Again, it may be said in this connec-
tion that 'it is a fundamental principle that the laws of a
state can have no binding force, proprio vigore, outside
of the territorial limits and jurisdiction of the state en-
acting them.' * * * 'Hence it follows that a state can-
not grant to any person the right to exercise a franchise
in a foreign state or country; for a franchise is the re-
suit of a law authorizing particular individuals to do
acts or enjoy immunities which are not allowed to the
community at large.' Morawetz, Priv. Corp. 1st ed. 500,
535.
"A grant of corporate existence is a grant of special
privileges to the corporators, enabling them to act for
certain designated purposes as a single individual, and
exempting them (unless otherwise provided) from in-
dividual liability. The corporation, being the mere crea-
tion of local law, can have no legal existence beyond the
limits of the sovereignty where created. It must dwell
in the place of its creation, and cannot migrate to another
sovereignty. The recognition of its existence even by
other states and the enforcement of its contracts made
therein depend purely upon the comity of those states.'
Morawetz Priv. Corp. 1st ed. Sec. 500. * * *
"The rule of comity is entirely in subjection to the
sovereign will of the state, and can only exist by per-
mission of the state in which it is sought to employ it.
* # * >)
Question 712: Has a corporation a right to enter other states?
By virtue of what does it enter ?
Case 713. Paul v. Virginia, 8 Wall. (U. S.) 168.
Me. Justice Field : * *
"Now a grant of corporate existence is a grant of
special privileges to the corporators, enabling them to
act for certain designated purposes as a single Individ-
ual, and exempting them (unless otherwise specially pro-
vided) from individual liability. The corporation, being
the mere creation of local law, can have no legal existence
1328
CORPORATIONS
beyond the limits of the sovereignty where created. As
said by this Court in Bank of Augusta v. Earle, 13 Pet.
519, 10 L. Ed. 274: 'It must dwell in the place of its
creation, and cannot migrate to another sovereignty.'
The recognition of its existence even by other states,
and the enforcement of its contracts made therein, de-
pend purely upon the comity of those states—a comity
which is never extended where the existence of the cor-
poration or the exercise of its powers is prejudicial to
their interests or repugnant to their policy. Having no
absolute right of recognition in other states, but depend-
ing for such recognition and the enforcement of its con-
tracts upon their assent, it follows, as a matter of course*
that such assent may be granted upon such terms and
conditions as those states may think proper to impose.
They may exclude the foreign corporation entirely, they
may restrict its business to particular localities, or they
may exact such security for the performance of its con-
tracts with their citizens as in their judgment will best
promote the public interest. The whole matter rests in
their discretion.
Question 713: What does this case hold?
(Note: This case also held that the issuance of an insurance
policy by a citizen of one state to a citizen of another, is not
interstate commerce.)
§ 763. (Corporations, Sec. 127.) Common provisions
in respect to foreign corporations.
(Note: The provisions in respect to foreign corporations are
as follows:
(1) Copies of charter to be filed.
(2) Certain information respecting amount of business, loca-
tion of property, etc.
(3) Statement of location of principal office in the state, with
name of official or agent on whom papers may be filed.
(4) Fees to be paid.
(5) Penalty for non-compliance in shape of a fine, and a pro-
vision that contracts entered into-in the state during;
such compliance are void, or cannot be enforced in the
courts of the state.)
FOREIGN CORPORATIONS
1329
Case 714. Fruin-Colnon Contracting Co. v. Chatter-
son, 146 Ky. 540.
Carroll, J.:  She set up that the appellant [a foreign
corporation] had failed to comply with this statute [the
foreign corporation law] and hence could not recover
against her on the contract made with the hoard of public
works for the street improvement. In a reply, appellant
admitted that when the contract was awarded and the
work completed it had not complied with the statute, hut
averred that it did so afterwards, and in November, 1909.
Chancellor Miller, now a judge of this court, ruled that,
under the facts admitted in the pleadings, the plaintiff
could not recover and entered a judgment dismissing the
petition. On this appeal, the only question presented is,
Did the failure of the appellant to comply with the stat-
ute before making the contract and completing the work
under it deny it the right to recover the cost of the
improvement 1 * * *
"With the question of estoppel out of the way, the
exact matter for decision is, Will a foreign corporation
be assisted by the courts of this state to enforce a con-
tract that was entered into and completed at a time when
it was unlawful for the corporation to carry on in this
state the business it was engaged in, and out of which
the contract arose? The statute does not provide that
contracts entered into before it has been complied with
shall be void or nonenforceable, nor does it use any
language in reference to the contract; but, when a statute
makes it unlawful to do business under certain condi-
tions, it seems to necessarily and logically follow that the
doing of the business under the prohibited conditions is
in itself unlawful. When the doing of the act is made
unlawful, there is no reason why the statute should also
declare that contracts made in violation of it should also
be unlawful. When the law prohibits a thing, it is un-
lawful to do it, and the courts should not lend their aid
to the enforcement of prohibited contracts. Courts are
established to afford remedies to litigants who seek relief
growing out of lawful transactions, and not to aid those
1330
CORPORATIONS
who would invoke their assistance to enforce contracts
made in violation of law. Their chief purpose is to se-
cure the observation of laws enacted for the safety and
protection of life and property and the general well-being
of the people, and it would be a startling departure from
this purpose if they should also give relief to parties
who are seeking to enforce contracts made in violation
of law. Such a course of procedure would be a perver-
sion of justice, and convert the courts into instruments
to aid lawbreakers, in place of punishing them. It is also
argued that it-would be a hardship on this corporation
to lose the value of its work, but this furnishes no ex-
cuse why it should obtain relief, as there is scarcely a
penal statute the enforcement of which does not impose
severe burdens; and if the severity of the punishment
should be treated as a reason for disregarding the stat-
ute, many beneficial laws would be unenforced.
"Our attention has been called by counsel for appellant
to authorities from other states, holding that the courts
will not deny relief in cases of this character, but will
leave the offending corporations to be punished under
that penalty feature of the statute. That there is much
diversity of opinion on the subject under consideration to
be found in the decisions of the courts of other states
cannot be doubted by any person who has examined the
cases, but we think the weight of authority supports the
principle that when a statute expressly declares that it
shall be unlawful to do business until its requirements
shall have been complied with, a contract made in con-
travention of the statute will not be enforced by the
courts. * * *
Question 714: What was the defense made in this case ? How
was this defense met ? Did the defense prevail ? Are all the
states in accord on this question ?
(Note: In some states, the penalty for non-compliance with
foreign corporation laws is (as in the above case) loss of right
to sue on contracts entered into before compliance with the
law and compliance with the law afterwards and before suit
FOREIGN CORPORATIONS
1331
started will not help. In other states, the penalty is not so
severe, and suits may be maintained if there is future com-
plianee. Some federal decisions hold that suit may be brought
ill the federal court even if suit cannot be maintained in the
state court, unless the state law instead of merely forbidding
suits in the courts of the state, makes the contract unlawful.)
§764. (Corporations, Sec. 128.) What constitutes do-
frig business in the state within the meaning of foreign
corporation laws.
Case 715. Kirven v. Virginia, Etc., Co., 145 Fed. 288.
Dayton, D.J.: "* * *
"It has further been held that sales of goods by a
foreign corporation to a resident of a state, although
made by a salesman or agent sent into the state, to be
shipped to him in the state from another state, belong to
the operations of the interstate commerce and are not
subject to these restrictive laws of the states. Also even
though the business is done by the foreign corporation
through an agent or firm resident in the state, and notes
are given in settlement in the state payable in the state.
It has, however, been held that this interstate commerce
clause does not apply to foreign corporations maintain-
ing continuously an agency in a state from which orders
are solicited and the goods are delivered to purchasers.
"In construing the effect of these statutes in given
cases, it has become frequently necessary for the courts
to define what constitutes a ' doing, transacting or carry-
ing on a business,' and, while there is some conflict, the
greater weight of authority is to the effect that isolated
transactions, especially commercial, between foreign cor-
porations and a citizen of the state, do not constitute a
'doing, transacting or carrying on a business,' within
the meaning of such statutes using these terms. It has
so been held by the courts of Alabama, Arkansas, Colo-
rado, Illinois, Iowa, Kansas, Missouri, New Jersey, New
York, Oregon, Pennsylvania, Tennessee, Texas, Wash-
ington, Wisconsin, and by the federal courts in such cases
1332
CORPORATIONS
as Cooper MfgC Co. v. Ferguson, 113 U. S. 727; Frawley
v. Penna Casualty Co., 124 Fed. 259 ; Oakland Sugar Co.
v. Wolf, 118 Fed. 239. Among such instances of single
transactions not constituting a 'doing of business within
the meaning of the statutes' are the making of a single
sale or contract of goods to a citizen and the taking of
a mortgage in the state to secure payment therefor.
* * * And the taking of notes in the state for goods
sold or a debt contracted in another state, and the suing
thereon in the state, does not constitute such 'doing of
business.' * * * And these statutes cannot affect
contracts made by a citizen outside of his state with a
foreign corporation, as for instance, where an order is
sent by the citizen for goods to the foreign corporation,
or where such order is taken by a local agent, subject to
the approval of the corporation, and is approved by the
corporation outside the state, and the goods are shipped
from outside the state by it to the purchaser in the state.
*s£ -X- J J
Question 715: The A corporation, organized under the laws
of New Jersey, has its general office and factory in New York,
and opens up a branch office in Illinois, from which contracts are
closed and goods are delivered to purchasers. It also has a trav-
eling salesman in Massachusetts who solicits orders and sends
them in to be approved and filled. It also purchases land in
Ohio, and then, deciding not to open on office there, resells the
same and takes hack a mortgage. In which of these states must
it comply with the foreign corporation law ?
Case 716. Penn Collieries Co. v. McKeever, 75 North-
eastern Reporter, 935-937.
Facts: The plaintiff, a foreign corporation organized
under the laws of West Virginia, sued for the price of
a cargo of coal, which it had sold and delivered to the
defendant, in the city of New York. The defense to the
suit was that, as the plaintiff was doing business in this
state, without having procured from the Secretary of
State the certificate required by section 16 of the general
corporation law (Laws 1892, p. 1805, c. 687) it could not
FOREIGN CORPORATIONS 1333
maintain any action upon its contracts. The evidence
showed that the coal had been sold by an agent of the
company in the city of New York, where he had an office
and which he made his headquarters, as the company's
sales agent for the middle New England district and New
Jersey, an agency which included that city within its
territory. The cargo of coal sold to the defendant ap-
pears to have been the only sale of coal ever made by
the plaintiff within this state. The coal was mined in
Pennsylvania. It was, originally, sold in New Jersey.
It had been rejected by the purchaser in New York, and,
while there and in the canal boat, had been resold,
through a broker, to the defendant. Usually orders for
coal were forwarded to the Pennsylvania office and were
filled from there directly. No books of account, nor bank
account, were kept in the city of New York, and no coal,
or other goods, of the company, were kept in this state;
the office there being solely for the agent's convenience.
Upon the evidence the trial judge made these findings
of fact, a jury having been waived; that the plaintiff had
not procured the statutory certificate ; the sale and de-
livery to the defendant; his promise to pay therefor and
his refusal to make payment; and that the plaintiff was
pot doing business in the state within the meaning of
the statute. The judgment recovered by the plaintiff
has been affirmed by the Appellate Division in the First
Department by a divided; court. The defendant further
appeals to this court, and insists that the plaintiff was
doing business within this state, under the facts disclosed
by the evidence, within the purview of the provisions
of the general corporation law.
Gray, J. (after stating the facts): "I think that the
determination below was correct. Section 15 of the
general corporation law (Laws 1892, p. 1805, p. 687)
prescribes that 'no foreign corporation, other than a
moneyed corporation, shall do business in this state with-
put having first procured from the Secretary of State
a, certificate that it has complied with all the require-
1334
CORPORATIONS
merits of law to authorize it to do business in this state,
and that the business of the corporation to be carried
on in this state is such as may he lawfully carried on
by a corporation incorporated under the laws of this
state for such or similar business,' etc. Further it pro-
vides that 'no foreign stock corporation doing business
in this state shall maintain any action in this state upon
any contract made by it in this state unless prior to
the making of such contract it shall have procured such
certificate.' I am, clearly, of the opinion that the statu-
tory provisions were not intended for any such case as
this. I think that they should be construed, both upon
the fair import of their language, as well as upon a just
consideration of the public policy and of the state inter-
ests to be promoted, as simply preventing foreign cor-
porations from entering the state by agencies and there
engaging in the general prosecution of their ordinary
business without first complying with certain require-
ments of a reasonable nature and evidence their compli-
ance by obtaining a certificate to the effect.
"The policy of our state, as manifested in its laws,
is not to impose any unconscionable restrictions upon
the transactions of foreign corporations here. Their
right to transact business here has always been conceded.
Indeed, the effect of the legislation of recent years has
been to remove all barriers in their way and to enable
them to come here freely, provided they subjected them-
selves to our laws and exercised no powers not conferred
by their charters; that is to say, a foreign corporation
may enter our boundaries as freely as may natural per-
sons and it may transact any lawful business here, pro-
vided that it takes those preliminary steps, prescribed
by our statutes, which evidence its corporate nature and
purposes and which secure to the state government an
effective supervision and control of the business to be
carried on. The statute of 1892 only declared the policy
of this state that a foreign stock corporation should not
carry on any business therein which a domestic corpora-
tion of similar nature could not lawfully conduct. It
FOREIGN CORPORATIONS
1335
was intended to place them upon a similar footing. See
Lancaster v. Amsterdam Imp. Co., 140 N. Y. 576, 35 N.
E. 964, 24 L. R. A. 322; Neuchatel Asphalte Co. v. Mayor,
etc., of N. Y., 155 N. Y. 373, 49 N. E. 1043. The rule was
early declared that, unless interdicted by the state, a
foreign corporation could perform within its boundaries
single corporate acts, or conduct its corporate business,
when not prohibited by our laws, or when not violative
of public policy (Bard v. Poole, 12 N. Y. 495; Hollis v.
Drew Theological Seminary, 95 N. Y. 166); and the en-
actment of the present general corporation law was in-
tended to regulate its existence, if proposing to conduct
a business, by the imposition of reasonable conditions.
But no such narrow policy was intended to be declared
by the statute as the prohibition of all corporate trans-
actions by foreign corporations, irrespective of their
nature, or of the condition under which they occurred;
nor does the language indicate it. To bring into opera-
tion the statutory provision, the facts should show more
than a solitary, if not accidental, transaction as was
the one before us. They should establish that the cor-
poration was conducting a continuous business.
' "To be 'doingbusiness in this state' implies corporate
continuity of conduct in that respect, such as might be
evidenced by the investment of capital here, with the
maintenance of an office for the transaction of its busi-
ness, and those incidental circumstances which attest the
corporate intent to avail itself of the privilege to carry
on a business. In short, it should appear, as it was
intimated in the opinion in People ex rel. Armstrong
Cork Co. v. Barker, 157 N. Y. 159,165, 51 N. E. 1043, that
the corporation and its officers intended 'to establish a
continuous business in the city of New York, and not
one of a temporary character.' In this case there was
no circumstance to evidence in any degree anything of
the kind. In a very recent case it appeared that a foreign
corporation having a manufacturing plant without the
state maintained a salesroom in the city of New York
to which some of its manufactures were consigned for
1336
CORPORATIONS
distribution elsewhere, upon sales made at the home
office, or for sales in that city, and it was sought to
assess it, upon capital employed, here, for a business
franchise tax. It did not appear that anything was done
here by the corporation beyond the mere maintenance
of an office for such a, purpose, and the determination
turned upon whether the two essential conditions con-
curred of 'doing business in this state' and of some por-
tion of its capital being employed here. We affirmed
a determination made below that the corporation was
not assessable, and necessarily that determination rested
upon the insufficiency of the facts to establish that it
was 'doing business' here. People ex rel. A. J. Tower
Co. v. Wells, 182 N. Y. 553, 75 N. E. 1132, affirming 98
App. Div. 82, 90 N. Y. Supp. 313.
"I advise the affirmance of the judgment, with costs.
§765. (Corporations, Sec. 129.) Rights under the
Federal Constitution.
Case 717. Butler Bros, Shoe Co. v. U. S. Rubber Co.,
156 Fed. 1.
Sanborx, J.: "* * *
'' The review of the decisions of the Supreme Court re-
lating to the power of a state to trammel or destroy the
right of a corporation of another state to do business
within its borders in which we have indulged may have
been tedious; but it may be profitable, if it serve to cor-
rect the erroneous view that such a corporation has no
such right, and that all its powers and privileges without
the limits of the state of its creation are at the mercy'of
any state in which it attempts to do business. It is not
now, and it never has been, the law that no corporation of
one state has any absolute right of recognition in other
states, or that other states may exclude all the corpora-
tions of any state from doing any business within them,
or that they may condition their transaction of such busi-
ness by such terms as they may think proper to impose.
FOREIGN CORPORATIONS 1337
"The Constitution of the United States and the acts
of Congress in pursuance thereof are the supreme law
of the land. Under that Constitution and those laws a
corporation of one state has at least three absolute rights
which it may freely exercise in every other state in the
Union, without let or hindrance from its legislation, or
action:
"Every corporation empowered to engage in inter-
state commerce by the state in which it is created, may
carry on interstate commerce in every state in the Union,
free of every prohibition and condition imposed by the
latter. * * *
"Every corporation of any state in the employ of the
United States has the right to exercise the necessary
corporate powers and to transact the business requisite
to discharge the duties of that employment in every other
state in the Union without permission granted, or con-
ditions imposed by the latter. # # *
"Every corporation of each state has the absolute right
to institute and maintain in the federal courts, and to
remove to those courts for trial and decision, its suits
in every other state, in the cases and on the terms pre-
scribed by the acts of Congress. * * *
"Every law of a state which attempts to destroy these
rights or to burden their exercise is violative of the Con-
stitution of the United States and void.
Question 717: To what extent is the power of a state over
foreign corporations limited by the United States Constitution?
Case 718. International Text Book Co. v. Pigg, 217
U. S. 91.
Facts: Suit brought by International Text-book Co.
to recover of Pigg a sum of money due for instruction
in commercial law. Defense, that the plaintiff had not
complied with the Kansas Foreign Corporation Law, and
therefore in accordance with that law could not sue in
the Kansas courts.
Point Involved: Whether the contract sued on in-
volved interstate commerce, which the Kansas statute
1338
CORPORATIONS
could not burden. What in general constitutes interstate
commerce ?
Me. Justice Hablan : "* * *
'' It is true that the business in which the International
Text-book Company is engaged is of a somewhat excep-
tional character, but, in our judgment, it was, in its es-
sential characteristics, commerce among the states within
the meaning of the Constitution of the United States. It
involved, as already suggested, regular and, practically,
continuous intercourse between the Text-book Company,
located in Pennsylvania, and its scholars and agents in
Kansas and other states. That intercourse was con-
ducted by means of correspondence through the mails
with such agents and scholars. While this mode of im-
parting and acquiring an education may not be such as is
commonly adopted in this country, it is a lawful mode to
accomplish the valuable purpose the parties have in view.
More than that; this mode—looking at the contracts be-
tween the Text-book Company and its scholars—involved
the transportation from the state where the school is
located to the state in which the scholar resides, of books,
apparatus and papers, useful or necessary in the partic-
ular course of study the scholar is pursuing and in re-
spect of which he is entitled, from time to time, by virtue
of his contract, to information and direction. Intercourse
of that kind, between parties in different states—partic-
ularly when it is in execution of a valid contract between
them—is as much intercourse, in the constitutional sense,
as intercourse by means of the telegraph—' a new species
of commerce,' to use the words of this Court in Pensa-
cola Telegraph Co. v. Western Union Telegraph Co., 96
U. S. 1, 9. In the great case of Gibbons v. Ogden, 9
Wheat. 1, 189, this Court, speaking by Chief Justice
Marshall, said, ' Commerce, undoubtedly, is traffic, but it
is something more; it is intercourse.' Referring to the
constitutional power of Congress to regulate commerce
among the states and with foreign countries, this Court
said in the Pensacola case, just cited, that 'it is not only
the right but the duty of Congress to see to it that inter-
FOREIGN CORPORATIONS
1339
course among the states and the transmission of intelli-
gence are not obstructed or unnecessarily encumbered by
state legislation.' This principle has never been modified
by any subsequent decision of this Court.
"The same thought was expressed in Western Union
Tel. Co. v. Pendleton, 122 U. S. 347, 356, where the Court
said: ' Other commerce deals only with persons, or with
visible and tangible things. But the telegraph transports
nothing visible and tangible; it carries only ideas, wishes,
orders and intelligence.' It was said in the Circuit Court
of Appeals for the Eighth Circuit, speaking by Judge
Sanborn, in Butler Bros. Shoe Co. v. United States Bub-
ber Co., 156 Fed. Bep. 1,17, that' all interstate commerce
is not sales of goods. Importation into one state from
another is the indispensable element, the tests, of inter-
state commerce; and every negotiation, contract, trade,
and dealing between citizens of different states, which
contemplates and causes such importation, whether it be
of goods, persons, or information, is a transaction of
interstate commerce.' If intercourse between persons in
different states by means of telegraphic messages con-
veying intelligence or information is commerce among
the states, which no state may directly burden or un-
necessarily encumber, we cannot doubt that intercourse
or communication between persons in different states, by
means of correspondence through the mails, is commerce
among the states within the meaning of the Constitution,
especially where, as here, such intercourse and commu-
nication really relates to matters of regular, continuous
business and to the making of contracts and the trans-
portation of books, papers, etc., appertaining to such
business. In our further consideration of this case we
shall therefore assume that the business of the Text-
book Company, by means of correspondence through the
mails and otherwise between Kansas and Pennsylvania,
was interstate in its nature.
Question 718: (1) Define interstate commerce; what does
it include ?
(2) Can a state restrict interstate commerce? Why?
1340
CORPORATIONS
§766. (Corporations, Sec. 130.) Suit against foreign
corporations.
Case 719. Goldy v. Morning News, 156 United States
Reports, 518.
Facts: Suit by Catherine Goldy against the Morning
News claiming damages for libel in the sum of $100,000
brought in New York, the Morning News being a Con-
necticut corporation, carrying on business in Connecticut
only, and having no place of business, officer, agent or
property in the State of New York. The suit was started
by personal service of a summons in New York City
upon the President of the corporation, temporarily in
New York. The defendant filed a special appearance
and contested the legal sufficiency of the service.
Point Involved: See opinion.
Me. Justice Geay: "This writ of error presents the
question whether, in a personal action against a corpo-
ration which neither is incorporated nor does business
within the state, nor has any agent or property therein,
service of the summons upon its president temporarily
within the jurisdiction, is sufficient service upon the cor-
poration.
u* * *
"Upon the question of the validity of such a service
as was made in this case, there has been a difference of
opinion between the courts of the State of New York
and the Circuit Courts of the United States. Such .a
service has been held valid by the Court of Appeals of
New York (citing cases). It has been held invalid by
the Circuit Courts of the United States held within the
State of New York (citing cases); as well as in other
circuits (citing cases). It becomes necessary therefore
to consider the question upon principle and in the light
of the previous decisions of this court.
"It is an elementary principle of jurisprudence that
a court of justice cannot acquire jurisdiction over the
person of one who has no residence within its territorial
foreign Corporations
1341
jurisdiction, except by actual service of notice within
the jurisdiction [in which the suit is pending] upon
him or upon some one authorized to accept service in
his behalf, or by his waiver, by general appearance or
otherwise, of the want of due service. Whatever effect
a constructive service may be allowed in the courts of
the same government, it cannot be recognized as valid
by the courts of any other government (citing cases).
11 * * # > >
[Held: Service insufficient.]
(Note : If a person or corporation has property in a state
but is not otherwise present in that state such property may be
seized and subjected to the payment of the claim, but a personal
judgment against the defendant cannot be based thereon. (Pen-
noyer v. Neff, 95 U. S. 714).
: A corporation may be present to make itself available to per-
sonal service, if it is transacting business in the state, for then it
is present in the state. It is not present in the state merely be-
cause its officers or agents are in the state, if they are not there
pi the corporation's business, and mere isolated transactions are
not; regarded as a transaction of, business. "The right of ex-
emption of a foreign corporation from suit in a jurisdiction
foreign to the state of its organization is one of substantial value
and is not to be taken away by refinements based upon mere
casual transactions which do not bring it in some definite sub-
stantial way within the ordinary meaning of the language of
the statute. Walton N. Moore Dry Goods Co. v. Commercial
Industrial Co., 276 Federal Reporter, 590.
- It has been held, however, that if the agent of the corporation
is within the state of service of process, upon the subject matter
of thn suit itself, service upon him is good service upon the
corporation^ provided he was not lured into the state for the
purpose of service. Premo Specialty Mfg. Co. v. Jersey Creme
Co., 200 Fed. 352 (Cir. Ct. of Appeals, 9th Cir.) 43 L. R. A.
new series, 1015, and note.)
§767. (Corporations, Sec. 131.) Jurisdiction of court
over internal affairs of foreign corporation.
Case 720. Babcock v. Farwell, 245 111. 14.
... Facts: Suit in tbe Illinois courts, by a stockholder of
a corporation organized under laws of Great Britain to
1342
CORPORATIONS
set aside certain contracts made between the corporation
and Farwell declared void and to compel an accounting.
Defense, that the Illinois Court has no jurisdiction over
internal controversies in the corporation.
Mr. Justice Dunn: "The general rule has been de-
clared by the decisions of many courts and has been
stated by text writers to be, that the courts of one state
will not exercise the power of deciding controversies
relating merely to the internal management of the affairs
of a corporation organized under the laws of another
state or of determining rights dependent upon such man-
agement. * * *
"As stated in Thompson on Corporations, supra, this
doctrine obviously has its limitations. Except in cases
involving the exercise of visitorial powers, the question
is not strictly one of jurisdiction but rather of discretion
in the exercise of jurisdiction. The reasons which in-
fluence courts of chancery to refuse to interfere in the
management of the internal affairs of a foreign corpora-
tion are, that the rights arising between a corporation
and its members out of such management depend upon
the laws under which the corporation is organized; that
the courts of that state afford the most appropriate
forum for adjudication upon the relation between the
stockholders and the corporation, and that frequently
such courts alone possess power adequate to the enforce-
ment of all decrees that justice may require. It is the
inability of the Court to do complete justice by its decree,
and not its incompetency to decide the question involved,
that determines the exercise of its power. The general
statement that courts will not interfere with the manage-
ment of the internal affairs of foreign corporations must
be construed in connection with the particular facts. The
rule rests more on grounds of policy and expediency than
on jurisdictional grounds; more on want of power to
enforce a decree than on jurisdiction to make it. Where
the wrongs complained of are merely against the sover-
eignty by which the corporation was created or the law
FOREIGN CORPORATIONS
1343
of its existence, or are such as require for their redress
the exercise of the visitorial powers of the sovereign, or
where full jurisdiction of the corporation and of its
stockholders is necessary to such redress, the courts will
decline jurisdiction. Examples of such cases are suits
to dissolve a corporation; to appoint a receiver; to deter-
mine the validity of its organization or which of two
rival organizations is legal; to restrain it from declaring
a dividend or compel it to make one; to restrain an issue
of stock or of bonds; to compel a division of its assets;
to restore a stockholder to his right to vote at stock-
holders' meetings from which he has been excluded, or
to compel the recognition of one claiming to have been
elected a director. * * *
"Where, however, the relief sought is within the gen-
eral jurisdiction of a court of chancery, where all the
parties necessary to the full and proper adjustment of
the rights involved are before the Court and where the
relief sought does not require the exercise of the visi-
torial power of • the government, we think the Court
should exercise the power of determining controversies
brought before it instead of remitting suitors to a foreign
jurisdiction.
(Held: That the court would take jurisdiction and
grant relief in the present case.)
Question 720: Will a Court take jurisdiction to decide con-
troversies in internal management of foreign corporations'?
When does the Court not have jurisdiction ? Name eight matters
that a Court Will not decide in reference to a foreign corporation.
CHAPTER 97
TRUSTS AND MONOPOLIES
§§768, 769, 770. (Corporations, Sees. 132, 133, 134.)
(See State ex rel. Watson v. Standard Oil Co., Case
637, supra; and
CHAPTER 98
DISSOLUTION AND WINDING UP OF
CORPORATIONS
§§-771, 772. (Corporations, Sees. 135, 136.)
{No cases.)
CHAPTER 99
PUBLIC SERVICE CORPORATIONS
§§773-786. (Corporations, Sees. 137-150.)
(No cases.)
1344
CHAPTER 100
BUSINESS TRUSTS
§§ 786-787. (Corporations, Sees. 151-160.)
(1) What is a business trust.
(2) Advantages of organization as business trust.
(3) Disadvantages of organization as business trust.
(1) What is a Business Trust.
Case 721. Home Lumber Company v. Hopkins, 107
Kansas, 153, 190 Pac. 601.
Johnson, Ch. J., delivered the opinion of the court:
"This proceeding was brought by the plaintiff to com-
pel the state charter board to consider its application
for permission to sell its stock and securities within the
state, and to find and determine whether the plaintiff
had complied with the statutes of the state and is entitled
to dispose of securities and stock in Kansas. The plain-
tiff, an unincorporated association, submitted its agree-
ment or declaration of trust under which it was organ-
ized, and its plan of operations, to the charter board,
with a request that it be permitted to sell its stock and
securities within the state. That tribunal concluded that
the agreement created a partnership, and was not such
an organization as was entitled to sell securities and
stock in Kansas, because the agreement created partner-
ship liabilities and the plan of business was inequitable
and unfair. The board therefore declined to investigate
or consider the solvency of the company, whether its
plan of business was otherwise honest and fair to in-
vestors its advertising matter free from deception, and
whether or not the reasonable value had been placed
1345
1346
CORPORATIONS
upon the assets of the company which was offered in
exchange for property and secnrities. Having deter-
mined that each shareholder became liable as a co-
partner, and that the business of the sale of its securi-
ties and stock was to be conducted upon a plan regarded
to be unfair and inequitable, the board deemed it un-
necessary to proceed further with the investigation.
"The first and principal question presented for deter-
mination is whether the company, as orgnaized, con-
stitutes a partnership. If the shareholders are not part-
ners liable for the debts of the company, and the business
contemplated is not contrary to law or public policy, it
was the duty of the charter board to investigate and
determine the merits of the plaintiff's application. The
agreement is a declaration of trust in which parties trans-
fer to trustees certain property interests, and for the
purpose of defining the interest of each subscriber in
the estate and trustees were to issue negotiable certifi-
cates of shares to the extent of 150,000, each of the value
of $1, and which they might, if they deemed it expedient,
increase to 1,000,000 shares. They engaged to use the
property and proceeds of the shares sold in a general
manufacturing, mercantile, or commercial business, in
any and all of its branches, to buy, sell, hypothecate, or
otherwise deal in bonds and stocks, debentures, notes,
and all forms of obligations of corporations, countries,
states, counties, and municipalities or persons. In fact,
they were authorized to buy, sell, and deal in all kinds
of property, and to carry on all kinds of business not
inconsistent with law. It was stipulated that the trustees
should not be less than three nor more than five in num-
ber, to be elected annually by the shareholders at their
meetings, and vacancies in the number of trustees are
to be filled by the remaining trustees.
"In respect to the functions, obligations, and liabilities
of the trustees, it is provided:
 'The trustees shall hold the legal title to all prop-
erty at any time belonging to the trust, and shall have
and exercise the exclusive management and control of
BUSINESS TRUSTS
1347
the same; they shall assume all contracts for, and obli-
gations and liabilities in connection with or growing out
of, the property assigned to them by the subscriber and
mentioned in the schedule filed with the trustees, also
in the management of the same; and to the extent of
the value of such property and business, but not -per-
sonally, shall agree to hold the subscriber and any
persons associated with and acting with him harmless
and indemnified from and against any loss, cost, expense,
or liability upon, or by reason of, or in connection with
any contract, obligation, or liability; they may adopt and
use a common seal with such designs as they, in their
discretion, may deem best suited to disclose the purposes
of the company; they may collect, sue for, receive, and
receipt for all moneys at any time due to said trust;
they may employ counsel to begin, prosecute, defend, or
settle suits at law, in equity, or otherwise, with the con-
sent of all the trustees given at a meeting called for
that purpose, but not otherwise, unless the general power
shall at any time be delegated by a full board meeting
to any one particular individual member or members,
in writing; they may borrow money for the purposes
incidental to the proper management in like manner as
they may deem best to secure said loans; and they shall
incur no debt or loan liability except such as may be
incidental to the proper management of the property
held by them, and the other proper carrying out of the
purposes of their trust.
 'In addition to the shares to be originally issued to
the subscriber as hereinbefore provided, the trustees
shall issue and sell at public or private sale, upon such
terms and for such prices as they may deem expedient,
such additional shares as may be necessary to provide
funds to carry on and accomplish the purposes herein-
before mentioned and set forth. The total amount to
be issued by said trustees shall not in any event exceed
one million (1,000,000) shares. The trustees may accept
property or services in lieu of cash for the shares issued
by them, and they shall be the sole judges of the value
of said services or property.
1348
CORPORATIONS
 'So far as strangers to this trust are concerned, a
resolution of the trustees authorizing a particular act
to be done shall be conclusive evidence in favor of such
strangers that such act is within the powers of the trus-
tees, and no purchaser from the trustees or one loaning
money to the trustees shall be bound to see the applica-
tion of the purchase money or other consideration paid
or delivered by or from said purchaser or loaner to or
for said trustee.'
' ' Other provisions in the agreement are to the effect
that the trustees may make, amend, and repeal by-laws,
may elect officers and appoint agents and fix their com-
pensation, may pay themselves such compensation as
they deem to be reasonable, and they shall not be liable
for errors of judgment, and shall pay only such dividends
as they deem advisable, the amount of such dividends
to be left wholly to their discretion. The trust is to
continue not longer than twenty years, and when ended
the trustees are to wind up its affairs, liquidate its assets,
and distribute the same among the holders of the shares,
according to the number of shares held by each. It was
also provided that the death of the shareholder should
not determine the trust, nor entitle the legal represent-
atives of such shareholder to an accounting or to take
any action in any court or elsewhere against the trustees,
but that the regular representatives of the deceased
shareholder should succeed to the rights of the decedent.
There were further provisions that 'the ownership of
shares hereunder shall not entitle the shareholders to
any title in or to the trust property whatsoever, or right
to call for a partition or division of same, or for an
accounting, or for any voice or control whatsoever of
the trust property or of the management of said prop-
erty or business connected therewith by the trustees.
The trustees shall have no power to bind the shareholders
personally, and the subscriber and his assigns and all
persons and corporations extending credit to, contract-
ing with, or having any claim against the trustees shall
look only to the funds and property of the trust for
BUSINESS TRUSTS
1349
payment under such contract or claim, or for the pay-
ment of any debt, damage, judgment, or decree, or of
any money that may otherwise become due or payable
to him from the trustees, so that neither the trustees
nor the shareholders, present or future, shall be per-
sOnally liable therefor. In every written order, contract,
or obligation which the trustees shall give or enter into,
it shall be the duty of the trustees to stipulate that
neither the trustees nor the shareholders shall be held
for any personal liability, under or by reason of such
contract, order, or obligation.'
 As will be observed, the title as well as the exclusive
management and control of the property of the trust are
absolutely vested in the trustees. The shareholders have
no voice or control in the property or its management,
and no right even to call for an accounting by the trus-
tees. They can exercise no authority as individuals, nor
in association, except to elect the trustees, and when new
trustees are elected they have the same absolute author-
ity and control that are specified in the declaration of
trust. It is expressly stated that no personal liability
of a shareholder can arise by reason of any contract
the trustees may make, any obligation they may assume,
or any judgment rendered against them, and to put the
matter of personal liability beyond cavil, it is provided
that in every written order, contract, or obligation, given
or entered into by the trustees, they are required to write
into it the provision that the shareholders, as well as
the trustees, shall be free from any personal liability.
Under the declaration, all persons extending credit to
the trustees or entering into contracts with them must
look alone to the funds and property of the trust estate
for payment.
"Whether an agreement committing the possession
and control of property to trustees for the benefit of
shareholders creates a trust or partnership depends upon
the interest transferred and the extent of the control
given to the trustees. If the title is transferred to them,
and they are given the exclusive power to act as prin-
1350
CORPORATIONS
cipals in the management of the trust property, a true
trust is created; but, if the shareholders are copro-
prietors, and the trustees are subject to the control of
the shareholders in the management of the trust, it is
deemed to be a partnership. Such a test has been ap-
plied in Massachusetts, where a large volume of busi-
ness is done under trust agreements. The cases of Hoad-
ley v. Essex County, 105 Mass. 519; Whitman v. Porter,
107 Mass. 522; Phillips v. Blatchford, 137 Mass. 510;
Ricker v. American Loan & T. Co., 140 Mass. 346, 5
N. E. 284; Williams v. Boston, 208 Mass. 497, 94 N. E.
808; Frost v. Thompson, 219 Mass. 360, 106 N. E. 1009;
Priestley v. Treasurer, 230 Mass. 452, 120 N. E. 100,
are examples of those which fall on the partnership
side of the line. On the other hand, Mayo v. Moritz,
151 Mass. 481, 24 N. E. 1083, and Williams v. Milton,
215 Mass. 1, 102 N. E. 355, illustrate the type of agree-
ments which are held to create a pure trust. In the
Williams v. Milton Case there is a full discussion of the
elements entering into the two classes of agreements,
and the line dividing them is clearly pointed out. It
was said: 'The difference between Hoadley v. Essex
County, supra (involving the same indenture as that in
Gleason v. McKay, 134 Mass. 419); Whitman v. Porter,
107 Mass. 522; Phillips v. Blatchford, 137 Mass. 510;
Ricker v. American Loan & T. Co., 140 Mass. 346, 5 N.
E. 284; and Williams v. Boston, 208 Mass. 497, 94 N. E,
808, on the one hand, and Mayo v. Moritz, supra, on the
other hand, lies in the fact that in the former cases the
certificate holders are associated together by the terms
of the "trust, and are the principals whose instructions
are to be obeyed by their agent, who, for their conven-
ience, holds the legal title to their property. The prop-
erty is their property. They are the masters. While
in Mayo v. Moritz, on the other hand, there is no associa-
tion between the certificate holders. The property is
the property of the trustees, and the trustees are the
masters. All that the certificate holders in Mayo v.
Moritz had was a right to have the property managed
BUSINESS TRUSTS
1351
by the trustees for their benefit. They had no right to
manage it themselves, nor to instruct the trustees how
to manage it for them. As was said by C. Allen, J., in
Mayo v. Moritz, 151 Mass. 481, 484, 24 N. E. 1083: "The
scrip holders are cestuis que trust, and are entitled to
their share of the avails of the property when the same
is sold, and that is all to which they were entitled.
In Mayo v. Moritz the scrip holders had a common in-
terest in the trust fund, in the same sense that the mem-
bers of a class of life tenants and the members of a class
of remaindermen (among whom the income of a trust
fund and the corpus are to be distributed respectively)
have a common interest. But in Mayo v. Moritz there
was no association among the certificate holders, just as
there is no association, although a common interest,
among the life tenants or the 'remaindermen, in an ordi-
nary trust. For a decision in this commonwealth some-
what like Mayo v. Moritz, ubi supra, see Hussey v. Ar-
nold, 185 Mass. 202, 70 N. E. 87. See also, in this con-
nection, Makin v. Savings Inst., 23 Me. 350, 41 Am. Dec.
349; Burt v. Lathrop, 52 Mich. 106, 17 N. W. 716.' 215
Mass. 8, 9.
< t * * m
"See also Hussey v. Arnold, 185 Mass. 202, 70 N. E.
87; Re Associated Trust (D. C.) 222 Fed. 1012; Crocker
v. Malley, 249 U. S. 223, 63 L. ed. 573, 2 A. L. R. 1601,
39 Sup. Ct. Rep. 270; Cox v. Hickman, 8 H. L. C'as. 268,
11 Eng. Reprint, 431, 9 C. B. N. S. 47, 142 Eng. Reprint,
19, 30 L. J. C. P. N. S. 125, 7 Jur, N. S. 165, 8 Week.
Rep. 754, 19 Eng. Rul. Cas. 323; Smith v. Anderson,
L. R. 15 Ch. Div. 247, 50 L. J. Ch. N. S. 39, 43 L. T.
N. S. 329, 29 Week. Rep. 21; Crowther v. Thorley, 50
L. T. N. S. 43, 32 Week. Rep. 330, 48 J. P. 292; Re Sid-
dall, L. R. 29 Ch. Div. 1, 54 L. J. Ch. N. S. 682, 52 L. T.
N. S. 114, 33 Week. Rep. 509; Re Thomas, L. R. 14 Q.
B. Div. 379, 54 L. J. Q. B. N. S. 336, 51 L. T. N. S. 602,
33 Week. Rep. 583; Re Faure Electric Accumulator Co.,
L. R. 40 Ch. Div. 141, 58 L. J. Ch. N. S. 48, 59 L. T. N. S.
918, 37 Week. Rep. 116, 1 Megone, 99; Wrightington,
1352
CORPORATIONS
Unincorporated Asso. p. 49; Chandler, Express Trusts
nnder Common Law, p. 19.
11 Following the rule of the authorities, it is clear that
the shareholders herein cannot be regarded as partners.
They had surrendered proprietorship in the property to
the trustees, and have no control over it or of the busi-
ness done by the company, and neither can they be held
liable upon any contract or obligation of the trustees.
The latter act as proprietors and principals, and con-
duct the business, free from the control of the share-
holders, and may make and change investments when-
ever they deem best, and make or withhold dividends in
their discretion. They do not take orders or directions
from shareholders and are in no sense the agents of the
shareholders. While stock is issued to shareholders, the
shares give no right except to furnish a basis for the
division of profits, and for a distribution of the prop-
erty and funds when the trust is concluded. The stock
measures the voting strength of shareholders when trus-
tees are elected, but the fact that they choose trustees
with the powers conferred by the declaration of trust
is not such control as to make the trustees their agents,
or give the shareholders the character of partners. It
follows that the state charter board was not warranted
in denying the application of the plaintiff upon the
ground that it was a partnership.
"It does not follow, however, that the plaintiff as
organized is entitled to a permit to sell its stock and
securities, even if it is found to be solvent, its assets
substantial and sufficient, and its plan of business such
as would be fair and equitable towards investors. To
meet the requirements of our law the company must
bring itself within the rules applicable to corporations
and conform to the regulations imposed by statute on
corporations. The Constitution expressly provides that
'the term corporations, as used in this article, shall in-
elude all associations and joint stock companies having
powers and privileges not possessed by individuals or
BUSINESS TRUSTS
1353
partnerships; and all corporations may sne and be sued
in their corporate names.' Const, art. 12, 6.
(Held: That the form of organization was not that
of a partnership, but a trust, that persons buying the
shares would not become individually liable as partners
and the State Charter Board should inquire into the
solvency of the plaintiff, the sufficiency of its assets, etc.,
and if found to measure up to the requirements of the
statute in that regard, a (blue sky) permit should be
issued by the board permitting plaintiff to sell its shares
and securities.)
) (Note: The law as developed from early times by courts of
equity permits the legal title of property to be in one person or
group of persons for the benefit of, or in trust for, another or
others. The practice is1 familiar and common. The court of
equity enforces the trust.
Owing to restrictions upon activities of corporations, and
greater tax burdens to be carried by corporations, the organiza-
tion of business companies as 1 'trusts rather than as corpora-
tions has been of recent years greatly advocated. A considerable
number of companies have been so formed and numerous cases
have come into the courts on a variety of questions. The greatest
danger to be avoided is to prevent partnership liability among
the beneficiaries or shareholders. It is held that if the bene-
ficiaries retain control of the business, with right to direct its
activities, depose the trustees, etc., the concern is a partnership,
but if the legal title and control is passed over to the trustees,
then there is a '' pure trust'' and the beneficiaries are not liable
as partners. This is the test applied in the above case.
Needless to say, the law is not entirely settled on this point.
In the following paragraphs the nature of the Massachusetts
Trust is further developed.)
(2) Advantages Over Corporate Form of Organization
as a Business Trust.
a. No charter fdes due state. As the trust is not a corpora-
tion, it exists without a charter, and by virtue of the trust in-
strument. Hence the fees required in the corporation act are not
applicable.
1354
CORPORATIONS
b. No franchise tax, capital stock tax, etc. For the same
reasons these do not apply.
c. Corporation income tax law not applicable. If the Mas-
sachusetts Trust is a true trust the income tax payable by cor-
porations or associations does not apply.
d. The foreign corporation laws do not apply. A trustee be-
ing a citizen may under the Federal Constitution go freely from
state to state enjoying the immunities of the citizens of the sev-
eral states. Not only do the foreign corporation acts not apply,
but there are constitutional objections to extending them to ap-
ply to trustees.
e. No charter restrictions. The question of limitation of
power by the charter cannot arise.
f. No annual franchise fees, reports due state, etc.
(3) Disadvantages of Organization as Business Trust.
(Note: If there were no hampering restrictions and unjust
incidence of tax and fees upon corporations, it seems that those
who do not wish to transact business as sole proprietors or as
partners would do so as incorporators. The corporation, being
a business unit, legally disassociated from its members, furnishes
the ideal organization.
Disadvantages of putting the business in the hands of trustees
are suggested as follows:
(a) Danger of partnership liability by reason of improper
drafting of trust agreement. This disadvantage is of course
surmountable, but the feeling that it has not been surmounted
may exist.
(b) Liability of trustees. The trustees are personally liable
to an unlimited extent unless in their contracts they stipulate
for limitation of liability to the extent of the trust estate. This
may be accomplished by use of a stereotyped provision in con-
nection with the execution of the contract. Tort liability may
be covered by insurance.
(c) Less simplicity in organization, less control over the
trustees, novelty of idea, and questions of technical character,
are suggested as disadvantages.)
CHAPTER 101
NON STOCK CORPORATIONS
§§ 787 to 790. (Corporations, Sees. 161-164.)
(No cases.)
CHAPTER 102
"BLUE SKY LEGISLATION
(Note: So called "blue sky laws or laws regulating the sale
of securities are of recent origin, and far from uniform in their
detail. They are for the purpose of lessening fraud in the sale
of securities. They provide for a public machinery to inquire
into the details of a proposed flotation, and require a permit or
license as a condition precedent to the sale of the securities in-
volved.
These laws have been held constitutional by the United States
Supreme Court. In Merrick v. N. W. Halsey & Co., 242 U. S.
568, 61 L. Ed. 498, the Court said:
"We think the statute under review is within the power of
the state. It burdens honest business, it is true, but burdens it
only that, under its forms, dishonest business may not be done.
This manifestly cannot be accomplished by mere declaration;
there must be conditions imposed and provision made for their
performance. Expense may thereby be caused and incon-
venience, but to arrest the power of the state by such considera-
tions would make it impotent to discharge its functions. In
this decision the Court upheld the Michigan Act.
In the main, these acts are aimed at requiring some proof of
the merits of speculative or not established securities. Thus se-
curities that have been duly listed on established exchanges may
be exempted from the operation of the act; for there is little
1355
1356
CORPORATIONS
danger of wholesale fraud in such cases. So an owner of a se-
curity who sells it, not in the way of repeated transactions of
that character, does not ordinarily come within the meaning of
these acts.
Blue sky laws provide criminal penalties for their infraction
and also civil liability on the part of sellers, their officers and
agents, to those who have purchased.
Any person whose business is to sell securities obviously
should acquaint himself with the blue sky law of his jurisdic-
tion.)
APPENDIX A.
UNIFORM STOCK TRANSFER ACT.
(In force in the following states: Alaska, Connecticut, Illinois, Louis-
iana, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, South Dakota, Tennessee and Wisconsin.)
Section 1. Title to a certificate and to the shares represented thereby
can be transferred only,
(a) By delivery of the certificate indorsed either in blank or to a
specified person by the person appearing by the certificate to be the owner
of the shares represented thereby, or
(b) By delivery of the certificate and a separate document containing
a written assignment of the certificate or a power of attorney to sell,
assign, or transfer the same or the shares represented thereby, signed by
the person appearing by the certificate to be the owner of the shares repre-
sented thereby. Such assignment or power of attorney may be either in
blank or to a specified person.
The provisions of this section shall be applicable although the charter
or articles of incorporation or code of regulations or by-laws of the corpora-
tion issuing the certificate and the certificate itself, provide that the shares
represented thereby shall be transferable only on the books of the corpora-
tion or shall be registered by a registrar or transferred by a transfer
agent.
Section 2. Nothing in this Act shall be construed as enlarging the
powers of an infant or other person lacking full legal capacity, or of a
trustee, executor or administrator, or other fiduciary, to make a valid in-
dorsement, assignment or power of attorney.
Section 3. Nothing in this Act shall be construed as forbidding a cor-
poration,
(a) To recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, or
(b) To hold liable for calls and assessments a person registered on its
books as the owner of shares.
Section 4. The title of a transferee of a certificate under a power of
attorney or assignment not written upon the certificate, and the title of
any person claiming under such transferee, shall cease and determine if,
at any time prior to the surrender of the certificate to the corporation is-
suing it, another person, for value in good faith, and without notice of
the prior transfer, shall purchase and obtain delivery of such certificate
1357
1358
CORPORATIONS
with the indorsement of the person appearing by the certificate to be the
owner thereof, or shall purchase and obtain delivery of such certificate
and the written assignment or power of attorney of such person, though
contained in a separate document.
Section 5. The delivery of a certificate to transfer title in accordance
with the provisions of Section 1, is effectual, except as provided in Sec-
tion 7, though made by one having no right of possession and having no
authority from the owner of the certificate or from the person purporting
to transfer the title.
Section 6. The indorsement of a certificate by the person appearing by
the certificate to be the owner of the shares represented thereby is effectual,
except as provided in Section 7, though the indorser or transferor,
(a) Was induced by fraud, duress or mistake, to make the indorsement
or delivery, or
(b) Has revoked the delivery of the certificate, or the indorsement,
whether before or after the delivery of the certificate, or
(c) Has died or become legally incapacitated after the authority given
by the indorsement or delivery of the certificate, or
(d) Has received no consideration.
Section 7. If the indorsement or delivery of a certificate,
(a) Was procured by fraud or duress, or
(b) Was made under such mistake as to make the indorsement or de-
livery inequitable, or
If the delivery of a certificate was made
(c) Without authority from the owner, or
(d) After the owner's death or legal incapacity, the possession of the
certificate may be reclaimed and the transfer thereof rescinded, unless: .
(1) The certificate has been transferred to a purchaser for value in
good faith without notice of any facts making the transfer wrongful, or
(2) The injured person has elected to waive the injury, or has been
guilty of laches in endeavoring to enforce his rights.
Any court of appropriate jurisdiction may enforce specifically such
right to reclaim the possession of the certificate or to rescind the transfer
thereof and, pending litigation, may enjoin the further transfer of the
certificate or impound it.
Section 8. Although the transfer of a certificate or of shares represented
thereby has been rescinded or set aside, nevertheless, if the transferee has
possession of the certificate or of a new certificate representing part .or the
whole of the same shares of stock, a subsequent transfer of such certificate
by the transferee, mediately or immediately, to a purchaser for value in
good faith, without notice of any facts making the transfer wrongful, shall
give such purchaser an indefeasible right to the certificate and the shares
represented thereby.
Section 9. The delivery of a certificate by a person appearing by the
certificate to be the owner thereof, without the indorsement requisite for
the transfer of the certificate and the shares represented thereby, but with
intent to transfer such certificate or shares shall impose an obligation, in
the absence of an agreement to the contrary, upon the person so delivering,
to complete the transfer by making the necessary indorsement. The transfer
shall take effect as of the time when the indorsement is actually made.
This obligation may be specifically enforced,
STOCK TRANSFER ACT
1359
Section 10. Ali attempted transfer of title to a certificate or to the
Shares represented thereby without delivery of the certificate shall have the
effect of a promise to transfer and the obligation, if any, imposed by such
promise shall be determined by the law governing the formation and per-
iormance of contracts.
Section 11. A person who for value transfers a certificate, including one
Who assigns for value a claim secured by a certificate, unless a contrary
intention appears, warrants—
(a) That the certificate is genuine,
(b) That he has a legal right to transfer it, and
(e) That he has no knowledge of any fact which would impair the
validity of the certificate.
In the case of an assignment of a claim secured by a certificate, the
liability of the assignor upon such warranty shall not exceed the amount
of the claim. *
Section 12. A mortgagee, pledgee, or other holder for security of a
certificate who in good faith demands or receives payment of the debt for
which such certificate is security, whether from a, party to a draft drawn
for such debt, or from any other person, shall not by so doing be deemed
to represent or to warrant the genuineness of such certificate, or the value
of the shares represented thereby.
Section 13. No attachment or levy upon shares of stock for which a
certificate is outstanding shall be valid until such certificate be actually
seized by the officer making the attachment or levy, or be surrendered to
the corporation which issued it, or its transfer by the holder be enjoined.
Except where a certificate is lost or destroyed, such corporation shall not
be compelled to issue a new certificate for the stock until the old certificate
is surrendered to it.
• Section 14. A creditor whose debtor is the owner of a certificate shall
be entitled to such aid from the courts of appropriate jurisdiction, by in-
junction and otherwise, in attaching such certificate or in satisfying the
claim' by means thereof as is allowed at law or in equity, in regard to
property which can not readily be attached or levied upon by ordinary legal
process.
Seetion 15. There shall be no lien in favor of a corporation upon the
shares represented by a certificate issued by such corporation and there shall
be no restriction upon the transfer of shares so represented by virtue of any
by-law of such corporation, or otherwise, unless the right of the corporation
to such lien or' the restriction is stated upon the certificate.
Section 16. The alteration of a certificate, whether fraudulent or not
and by whomsoever made, shall not deprive the owner of his title to the
certificate and the shares originally represented thereby, and the transfer
of such a certificate shall convey to the transferee a good title to such a
certificate and to the shares originally represented thereby.
Section 17. Where a certificate has been lost or destroyed, a court of
•Competent jurisdiction may order the issue of a new certificate therefor on
(Service of process upon the corporation and on reasonable notice by publica-
ttion, and in any other way which the court may direct, to all persons inter-
tested, and upon satisfactory proof of such loss or destruction and upon the
.giving of a bond with sufficient surety to be approved by the court to
protect the corporation or any person injured by the issue of the new
1360
CORPORATIONS
certificate from any liability or expense, which it or they may incur by
reason of the original certificate remaining outstanding. The court may
also in its discretion order the payment of the corporation's reasonable costs
and counsel fees.
The issue of a new certificate under an order of the court as provided in
this section, shall not relieve the corporation from liability in damages to
a person to whom the original certificate has been or shall be transferred
for value without notice of the proceedings or of the issuance of the new
certificate.
Section 18. In any case not provided for by this Act, the rules of law
and equity, including the law merchant, and in particular the rules relating
to the law of principal, agent, executors, administrators and trustees, and to
the effect of fraud, misrepresentation, duress or coercion, mistake, bank-
ruptcy, or other invalidating cause, shall govern.
Section 19. This Act shall be so interpreted and construed as to effectu-
ate its general purpose to make uniform the law of those states which
enact it.
Section 20. A certificate is indorsed when an assignment or a power of
attorney to sell, assign, or transfer the certificate or the shares represented
thereby is written on the certificate and signed by the person appearing
by the certificate to be the owner of the shares represented thereby, or
when the signature of such person is written without more upon the back
of the certificate. In any such cases a certificate is indorsed though it has
not been delivered.
Section 21. The person to whom a certificate was originally issued is
the person appearing by the certificate to be the owner thereof, and of the
shares represented thereby, until and unless he endorses the certificate to
another specified person, and thereupon such other specified person is the
person appearing by the certificate to be the owner thereof until and
unless he also indorses the certificate to another specified person. Sub-
sequent special indorsements may be made with like effect.
Section 22. (1) In this Act, unless the context or subject matter other-
wise requires—
"Certificate means a certificate of stock in a corporation organized
under the laws of this state or of another state whose laws are consistent
with this Act.
"Delivery means voluntary transfer of possession from one person to
another.
"Person includes a corporation or partnership or two or more persons
having a joint or common interest.
To "purchase includes to take as mortgagee or as pledgee.
"Purchaser includes mortgagee and pledgee.
"Shares means a share or shares of stock in a corporation organized un-
der the laws of this state or of another state whose laws are consistent
with this Act.
'' State'' includes state, territory, district and insular possession of the
United States.
"Transfer means transfer of legal title.
'' Title'' means legal title and does not include a merely equitable or
beneficial ownership or interest.
STOCK TRANSFER ACT
1361
"Value is any consideration sufficient to support a simple contract. An
antecedent or pre-existing obligation, whether for money or not, constitutes
value where a certificate is taken either in satisfaction thereof or as se-
curity therefor.
(2) A thing is done "in good faith within the meaning of this Act,
when it is in fact done honestly, whether it be done negligently or not.
Section 23. The provisions of this Act apply only to certificates issued
after the taking effect of this Act.
Section 24. All Acts or parts of Acts inconsistent with this Act are
hereby repealed.
Section 25. This Act shall take effect on the day of
, one thousand nine hundred and
Section 26. This Act may be cited as the Uniform Stock Transfer Act.
DIVISION H
BANKRUPTCY
DIVISION H
BANKRUPTCY
The History and Purposes of Bankruptcy
Legislation.
The Courts and Officers in Bankruptcy.
Who May Be a Bankrupt.
Acts of Bankruptcy.
The Petition and Proceedings Thereon.
The Trustee's Title.
Claims Against Estate.
Duties and Rights of Bankrupt.
Discharge.
CHAPTER 103
THE HISTORY AND PURPOSES OF BANKRUPTCY
LEGISLATION
§ 791. Definition of bankruptcy.
§ 792. History of bankruptcy.
§ 793. Legislative jurisdiction of the subject of bankruptcy in the United
States.
§ 794. The extent of the Federal power ; constitutionality of present act.
§ 795. History of bankruptcy laws in the United States.
§ 796. Function of bankruptcy act to benefit creditors.
§797. Function of bankruptcy act to benefit the debtor.
§ 798. Kind of obligations discharged.
§ 799. Brief view of proceedings under present law.
§ 791. (Bankruptcy, Sec. 1.) Definition of bankruptcy.
Case 772. Remington on Bankruptcy, 3rd Ed. Ex-
cerpts, pages 1, 2,18,19.
"To gain a proper conception of bankruptcy law and
of its place in jurisprudence, it is well first to exclude
Chapter 103.
Chapter 104.
Chapter 105.
Chapter 106.
Chapter 107.
Chapter 108.
Chapter 109.
Chapter 110.
Chapter 111.
1365
1366 BANKRUPTCY
from the idea, certain popular misconceptions of its
origin, scope and function.
"Bankruptcy law is popularly conceived to be a law
devised mainly for releasing debtors from the bondage
of hopeless indebtedness. This is undoubtedly the first
idea that springs to mind when bankruptcy law is men-
tioned. But it is a wholly inadequate idea. Release
from debts is not necessarily a part of bankruptcy law
at all, and from the standpoint of history is a mere in-
cident to its original object. To be sure, one of the
most beneficent features of bankruptcy laws of the pres-
ent times and one of the most potent arguments in their
favor is the privilege granted in them to bankrupts who
have given up all their property towards satisfying their
debts and have truthfully revealed all information in
relation to their affairs, of obtaining a release from the
unpaid remainder of their debts. But this release from
debt is, as above noted, merely an incident of the later
development of bankruptcy law, not its original object.
(From pages 1 and 2.)
"As bankruptcy jurisprudence now stands in the
United States, then, it may be said to be a system of
laws for the taking possession of the assets of an in-
solvent, either upon his own initiative or, in case he has
done certain acts called acts of bankruptcy, considered
to demonstrate his unworthiness or incapacity properly
to continue his business, upon the initiative of his cred-
itors; for recovering such of his assets as have been
transferred fraudulently to third parties or unfairly to
particular preferred creditors or have been seized by
creditors while the debtor was insolvent; for selling the
assets and distributing the proceeds equitably amongst
his creditors; and finally for granting to him, in case
he has surrendered all his assets and disclosed to his
creditors in bankruptcy the truth about his business, a
discharge from the unpaid deficit of his debts.
(From pages 18, 19.)
Question 772: Was the original idea in bankruptcy law to
help the creditors or the debtor? Do modern bankruptcy laws
HISTORY AND PURPOSES
1367
operate in favor of the debtor ? How ? What is required of the
bankrupt as a condition to obtaining a discharge in bankruptcy %
(Note: The author's statement that "release from debt is
not necessarily a part of bankruptcy law at all and that it is
a mere incident in its later development is not sustained by some
of the authorities as to present laws of bankruptcy although it
is undoubtedly true from a historical standpoint. See Hardie'
v. Dry Goods Co., 165 Fed. 588, to which the author refers as
dissenting from his view. See also Stellwegen v. Cluni, 245 U. S.
at page 617, in which the Court says: "'The federal system of
bankruptcy is designed not only to distribute the property of
the debtor, not by law exempted, fairly and equally among his
creditors, but as a main (italics ours) purpose of the act, intends
to aid the unfortunate debtor by giving him a fresh start in
life, free from debts, etc.
The point is perhaps after all merely academic from the stand-
point of modern laws except, perhaps, in its bearing upon the
question whether the right of the bankrupt to his discharge
should be liberally or strictly construed.)
§ 792. History of bankruptcy in other countries.
Case 773. Blackstone's Commentaries (1778), Book
11, pages 471, 472, 473.
"He [a bankrupt] was formerly considered in the
light of a criminal or offender; * * # but at present
the laws of bankruptcy are considered as laws calculated
for the benefit of trade and founded on the principles
of humanity as well as justice; and to that end they
confer some privileges, not only on the creditors but also
on the bankrupt or debtor himself. On the creditors: by
compelling the bankrupt to give up all his effects to their
use without any fraudulent concealment; on the debtor
by exempting him from the rigor of the general law
whereby his person might be confined at the discretion
of his debtor, though in reality he has nothing to satisfy
his debt: whereas the law of bankrupts: taking into con-
sideration the sudden and unavoidable accidents to which
men in trade are liable, has given them the liberty of
their persons, and some pecuniary emoluments upon con-
dition they surrender up their whole estate to be divided
among creditors.
1368
BANKRUPTCY
"In this respect our legislature' seems to have attended
to the example of the Roman law. I mean not the ter-
rible law of the twelve tables; whereby the creditors
might cut the debtor's body into pieces, and each of
them take his proportionable share; if indeed that law
* * * is to be understood in so very butcherly a light;
which many learned men have with reason doubted. Nor
do I mean those less inhuman laws (if they may be called
so, as their meaning is indisputably certain) of imprison-
ing the debtor's person in chains; subjecting him to
stripes and hard labor, at the mercy of his rigid cred-
itor; and sometimes selling him, his wife and children
to perpetual foreign slavery trans Tiberim * * *.
But I mean the law of cession, introduced by the Chris-
tian emperors; whereby if a debtor ceded or yielded up
all his fortune to his creditors he was secured from
being dragged to a gaol ***.»>■
(Note: From the above quotation from Blackstone whose
famous Commentaries were published in the 1770's we see that
early bankruptcy laws treated insolvent debtors as offenders,
making no distinction between the honest and the dishonest
debtor, that even in the Roman times, a different conception
began to be entertained though not to the extent of relieving the
debtor from his debts. The earlier English laws did not dis-
charge the debtor. But in Blackstone's time the modern idea
had been conceived of giving the honest insolvent debtor freedom
from his debts in consideration that he would surrender his
assets for division among his creditors.
Earlier bankruptcy laws applied only to traders, and if the
above quotation from Blackstone were extended, his commentary
on that idea would appear. He argues the reason of the law
to be that traders must incur indebtedness, but those out of trade
should not be encouraged to enter into indebtedness they can-
not pay. So, the earliest act in this country applied to traders
only. See § 795 post.)
§793. (Bankruptcy, Sec. 3.) Legislative jurisdiction
of the subject of bankruptcy in the United States.
Case 774. United States Constitution, Article I, Sec.
8.
HISTORY AND UuRpC>SES 1369
"Congress shall have power "to establish uniform
laws on the subject of bankruptcies throughout the United
States.''
Question 774: Does the federal congress have power to pass
bankruptcy laws? Why?
Case 775. Stellwegen v. Clum, 245 U. S. 605.
Mb. Justice Day: "* * *
i'The Federal Constitution, Article I, § 8, gives Con-
gress the power to establish uniform laws on the subject
of bankruptcy throughout the United States. In view
of this grant of authority to the Congress it has been
settled from an early date that state laws to the extent
that they conflict with the laws of Congress, enacted
under its constitutional authority oil the subject of bank-
ruptcies, are suspended. While this is true, state laws
are thus suspended only to the extent of actual conflict
with the system provided by the Bankruptcy Act of Con-
gress. Sturgis v. Crowinshield, 4 Wheat. 122; Ogden v.
Saunders, 12 Wheat. 213.
Question 775: Do the states have power to enact bankruptcy
laws ? What is the effect of the enactment of a national act upon
the laws of the states upon bankruptcy ?
(Note: See also next section for constitutionality of present
federal bankruptcy law, wherein is brought out what is meant
by the requirement that the law be uniform throughout the
United States.
The states may have in force insolvency or bankruptcy laws
when no federal law is in force that conflicts therewith. Such
state bankruptcy laws cannot discharge the indebtedness of the
debtor as to citizens of other states unless they submit
to the jurisdiction of the state court; and cannot discharge debts
incurred prior to the enactment of the state law, by reason of
the inhibition in the federal constitution against a state passing
any law impairing the obligation of contracts. Such state laws
in so far as they are inconsistent with the federal act are sus-
pended (not repealed) during its operation.)
1370
BANKRUPTCY
§ 794. Extent of the Federal power; constitutionality of
the present act.
Case 776. Hanover Bank v. Moyses, 186 United States
Reports, 181.
Facts: Suit by Hanover National Bank against
Moyses upon a debt. The debtor had filed a petition in
bankruptcy under the bankruptcy act of 1898 (the pres-
ent law) and been granted his discharge. The Hanover
National Bank claims that this discharge is ineffectual
upon the reasoning that the bankruptcy act is uncon-.
stitutional, among other grounds, (1) that it is not uni-
form in its operation throughout the United States, and
(2) that others than traders may thereby be adjudged
bankrupts.
Me. Chief Justice Fuller delivered the opinion of the
Court.
"By the fourth clause of section eight of Article I of
the Constitution the power is vested in Congress 'to
establish * - * * uniform laws on the subject of bank-
ruptcies throughout the United States.' This power was
first exercised in 1800. 2 St. 19, c. 19. In 1803, the law
was repealed. 2 Stat. 248, c. 6. In 1841 it was again
exercised by an act that was repealed in 1843. 5 Stat.
440, c. 9; 5 Stat. 614, c. 842. It was again exercised in
1867 by an act which, after being several times amended,
was finally repealed in 1878. 14 Stat. 517, c. 176; 20
Stat. 99, c. 160. And on July 1,1898, the present act was
approved.
"The act of 1800 applied to 'any merchant, or other
person, residing within the United States, actually using
the trade of merchandise, by buying or selling in gross,
or by retail, or dealing in exchange, or as a banker,
broker, factor, underwriter, or marine insurer' and to
involuntary bankruptcy.
"In Adams v. Storey, 1 Paine, 79, Mr. Justice Liv-
ingstone said on circuit: 'So exclusively have bank-
ruptcy laws operated on traders, that it may well be
HISTORY AND PURPOSES
1371
doubted, whether an act of Congress subjecting to such
a law every description of persons within the United
States, would comport with the spirit of the powers
vested in them in relation to this subject.' But this
doubt was resolved otherwise, and the acts of 1841 and
1867 extended to persons other than merchants or trad-
ers, and provided for voluntary proceedings on the part
of the debtor, as does the act of 1898.
* *
"The laws passed on the subject must, however, be
uniform throughout the United States, but that uniform-
ity is geographical and not personal, and we do not
think that the provision of the Act of 1898 as to exemp-
tions is incompatible with the rule.
"Sec. 6 reads: 'This act shall not affect the allow-
ance to bankrupts of their exemptions which are pre-
scribed by the state laws in force at the time of the filing
of the petition in the state wherein they have had their
domicile for the six months or the greater portion thereof
immediately preceding the filing of the petition.'
11 # * *
"We * *. * hold that the system is, in the con-
stitutional sense, uniform throughout the United States
when the trustee takes in each state whatever would
have been available to the creditors if the bankrupt law
had not been passed. The general operation -of the law
is uniform although it may result in certain particulars
differently in different states.
"Nor can we perceive in the recognition of the local
law in the matter of exemptions, dower, priority of pay-
ments, and the like, any attempt by Congress to unlaw-
fully delegate its legislative power. In re Rahrer,
Petitioner, 140 U. S. 545, 560. * * *
{Held: Constitutional.)
Question 776: (!) How many bankruptcy laws have been
enacted by the federal Congress? For what years were they in
force? What is the date of the present act?
(2) Does the constitutional power permit Congress to pass
1372
BANKRUPTCY
a bankruptcy law applying to others besides traders ? Does the
present act confine itself to traders?
(3) Does the fact that the federal law recognizes the exemp-
tions of the debtor allowed him by the law of his state prevent
it from being uniform in the constitutional sense?
§ 795. (Bankruptcy, Sec. 5.) History of bankruptcy
laws in tho United States.
(See Hanover Bank v. Moyses, Case 776, supra.)
§§796, 797. (Bankruptcy, Sees. 6, 7.) Function of
Bankruptcy Act to benefit creditors, and to benefit
debtor.
(See Sec. 791.)
§ 798. (Bankruptcy, Sec. 8.) Kinds of obligations
discharged.
(Note: Debts mature and immature are discharged. See,
hereafter, subject Discharge. See also § 859 (Unliquidated
claims).)
§799. (Bankruptcy, Sec. 9.) Brief view of proceed-
ings in bankruptcy under present law.
1. Petition filed; either by bankrupt (called volun-
tary bankruptcy); or by creditors (called involuntary
bankruptcy).
2. Appointment of receiver by court of bankruptcy
pending election of trustee, where necessary for preser-
vation of estate.
3. Reference to referee in bankruptcy.
4. Adjudication, that is, the entry of an order declar-
ing the debtor a bankrupt. He may, in involuntary pro-
ceedings contest the case on some ground and if he pre-
vails in his defense adjudication does not follow. He
may contest on the ground
(1) He is not subject to involuntary proceedings be-
cause of the nature of Ris occupation or business;
(2) He is not insolvent;
HISTORY AND PURPOSES
1373
(3) He did not commit an act of bankruptcy;
(4) Other jurisdictional requirements not fulfilled.
5. Filing of schedules; in voluntary proceedings; filed
with the petition; in involuntary proceedings, filed after
adjudication.
c 6.: First meeting of creditors to elect a trustee and
examine the bankrupt.
7. Collection of assets by trustee, bringing suit where
necessary.
8. Proof of debts by creditors.
9. Declaration of dividends.
10. Application by bankrupt for his discharge.
11. Objections to discharge and hearings thereon.
12. Discharge.
CHAPTER 104
THE COURTS AND OFFICERS IN BANKRUPTCY
§ 800. The courts of bankruptcy jurisdiction.
§ 801. The territorial limits of the court's jurisdiction.
§ 802. Jurisdiction as determined by the location of the bankruptcy cause
within the jurisdiction.
§ 803. Ancillary jurisdiction.
§ 804. Extent of jurisdiction over subject matter.
§ 805. Jurisdiction of bankruptcy court to recover assets.
§ 806. Jurisdiction of state courts.
§ 807. Summary proceedings in district court to recover property.
§ 808. Appellate jurisdiction.
§ 809. The referee in bankruptcy.
(Note : This chapter concerns itself with general questions of
jurisdiction and procedure. Clearly to the business student, the
subject matter is not of that primary importance which other
subjects are, and hence no cases are given, and the comment is
of general character.)
§800. (Bankruptcy, Sec. 10.) The courts of bank-
ruptcy jurisdiction.
Case 777. Bankruptcy Act, Sec. 1 (8).
'i Courts of bankruptcy shall include the district courts
of the United States and of the Territories, the Supreme
Court of the District of Columbia, and the United States
Court of the Indian Territory, and of Alaska.''
Question 777: What are the courts in which bankruptcy cases
are begun under the present bankruptcy act?
§ 801. The territorial limits of the court's jurisdiction.
(Note: The United States is divided into Judicial Districts
being either territorially coterminous with the territory of the
state, or a portion thereof, as the Maine Judicial District, or
the Northern District of Illinois. In each of these judicial dis-
1374
COURTS AND OFFICERS
1375
tricts is a United States District Court, and these are the courts
vested with jurisdiction in bankruptcy cases. Such district
courts are the federal courts of original jurisdiction.)
§802. (Bankruptcy, Sec. 12.) Jurisdiction as deter-
mined by the location of the bankruptcy cause
within the jurisdiction.
Case 778. Bankruptcy Act, Sec. 2 (1).
 [That the courts of bankruptcy as hereinbefore de-
fined] are hereby invested within their respective ter-
ritorial limits as now established, or as they may be
hereafter changed, with such jurisdiction in law and in
equity as will enable them to exercise original jurisdic-
tion in bankruptcy proceedings, in vacation in chambers
and during their respective terms, as they are now or
may be hereafter held to
 (1) Adjudge persons bankrupt who have had their
principal place of business, resided, or had their domicile
within their respective territorial jurisdictions for the
preceding six months or the greater portion thereof, or
who do not have their principal place of business, reside
or have their domicile within the United States, but have
property within their jurisdictions, or who have been ad-
judged bankrupts by courts of competent jurisdiction
without the United States and have property within
their jurisdiction.
(Note: Residence and domicile defined. A person may be-
come or be made a bankrupt in the district in which he has
resided or had his domicile for the greater portion of the last
six months just prior to the filing of the petition. ''There is of
course-a legal distinction between 'domicile' and 'residence'
although the terms are generally used as synonymous the dis-
tinction depending upon the connection in which and the pur-
pose for which the terms are used. 'Domicile' is the place
where one has his true, fixed, permanent home and principal
establishment, and to which, whenever he is absent, he has the
intention of returning and where he exercises his political
rights. * * * 'Residence' indicates permanency of occupa-
tion as distinguished from temporary occupation, but does not
1376
BANKRUPTCY
include so much as 'domicile' which requires an intention con-
tinued with residence. * * * In re Garneau, 127 Fed.
677. It was held in this case that if it appeared that a debtor
removed from one district to another for the sole purpose of
being able to go through bankruptcy in the latter, he neither
resided nor "had his domicile in the latter. It appeared in that
case that the debtor who lived in St. Louis moved to East St.
Louis for the purpose of filing a petition in the latter city. The
Court said that to permit a residence to be acquired for bank-
ruptcy purposes alone would be to open the door to grave frauds
on creditors. "He was a sojourner merely, and not a resident of
East St. Louis.
Principal place of business. The debtor may become a bank-
rupt in the district in which he has had his principal place
of business for the greater portion of the last six months. The
question where the principal place of business is may be in-
volved in difficulty especially where extensive operations are
carried on in different districts. Generally it would be where
the business has its head, its principal office. It is a question of
fact. In the case of a corporation it is presumably in the
state from which it gets its charter, but though that state is
the state of its residence, it may be shown that its principal
place of business is elsewhere. In the case of Continental Coal
Corp. v. Rozelle Bros, the corporation had its charter from the
state of Wyoming, carried on extensive mining operations in
Kentucky, employing about 1,000 men there, maintaining four
commissaries, and selling to the public, but kept its books in
Chattanooga, Tennessee, where its officers resided and the gen-
eral supervision of its business conducted though it had very
little property there. Held, that its principal place of business
was in Kentucky.
Concurrent jurisdiction. If the residence is in one district,
the domicile in another and the place of business in another, any
one of these districts worn 1 be a proper one for the filing of the
petition. In that case a R ontest may arise as to which court
shall take over the administration, and this is finally deter-
mined by making inquiry as to the greater convenience of the
parties in interest.)
§803. (Bankruptcy, Sec. 13.) Ancillary jurisdiction.
(Note: The main jurisdiction being in one district, ancillary
proceedings may be had in other districts if the existence of
assets there requires such ancillary proceedings.)
COURTS AND OFFICERS
1377
§ 804. (Bankruptcy, Sec. 14.) Extent of jurisdiction
over subject matter.
(Note: The text of section 2 of the Bankruptcy Act is as
follows:
Section 2. That the courts of bankruptcy as hereinbefore
defined, viz.,
The district courts of the United States in the several states,
The supreme court of the District of Columbia,
The district courts of the several Territories, and
The United States courts in the Indian Territory and the
District of Alaska, are hereby made courts of bankruptcy, and
are hereby invested, within their respective territorial limits as
now established, or as they may be hereafter changed, with such
jurisdiction at law and in equity as will enable them to ex-
ercise original jurisdiction, in bankruptcy proceedings, in vaca-
tion in chambers and during their respective terms, as they are
now or may be hereafter held, to
(1) Adjudge persons bankrupt who have had their principal
place of business, resided, or had their domicile within their
respective territorial jurisdictions for the preceding six months
pr the greater portion thereof, or who do not have their prin-
cipal place of business, reside, or have their domicile within
the United States, but have property within their jurisdictions,
or who have been adjudged bankrupts by courts of competent
jurisdiction without the United States and have property within
their jurisdictions;
(2) Allow claims, disallow claims, reconsider allowed or dis-
allowed claims, and allow or disallow them against bankrupt
estates;
(3) Appoint receivers or the marshals,, upon application of
parties in interest, in case the courts shall find it absolutely
necessary for the preservation of estates, to take charge of the
property of bankrupts after the filing of the petition and until
it is dismissed or the trustee is qualified;
(4) Arraign, try, and punish bankrupts, officers, and other
persons, and the agents, officers, members of the board of di-
rectors or trustees, or other similar controlling bodies, of cor-
porations for violations of this Act, in accordance with the laws
of procedure of the United States now in force, or such as may
be hereafter enacted, regulating trials for the alleged violation
of laws of the United States;
(5) Authorize the business of bankrupts to be conducted for
BANKRUPTCY
limited periods by receivers, the marshals, or trustees, if neces-
sary in the best interests of the estates, and allow such officers
additional compensation for such services, as provided by sec-
tion 48 of this Act;
(6) Bring in and substitute additional persons or parties in
proceedings in bankruptcy when necessary for the complete
determination of a matter in controversy;
(7) Cause the estates of bankrupts to be collected, reduced
to money and distributed, and determine controversies in rela-
tion thereto, except as herein otherwise provided;
(8) Close estates whenever it appears that they have been
fully administered, by approving the final accounts and dis-
charging the trustees, and reopen them whenever it appears
they were closed before being fully administered;
(9) Confirm or reject compositions between debtors and
their creditors, and set aside compositions and reinstate the
cases;
(10) Consider and confirm, modify or overrule, or return,
with instructions for further proceedings, records and findings
certified to them by referees;
(11) Determine all claims of bankrupts to their exemptions;
(12) Discharge or refuse to discharge bankrupts and set
aside discharges and reinstate the cases;
(13) Enforce obedience by bankrupts, officers, and other
persons to all lawful orders, by fine or imprisonment or fine
and imprisonment;
(14) Extradite bankrupts from their respective districts to
other districts;
(15) Make such orders, issue such process, and enter such
judgments in addition to those specifically provided for as may
be necessary for the• enforcement of the provisions of this Act;
(16) Punish persons for contempts committed before referees;
(17) Pursuant to the recommendation of creditors, or when
they neglect to recommend the appointment of trustees, appoint
trustees and upon complaints of creditors, remove trustees for
cause upon hearings and after notices to them;
(18) Tax costs, whenever they are allowed by law, and ren-
der judgments therefor against the unsuccessful party, or the
successful party for cause, or in part against each of the parties,
and against estates, in proceedings in bankruptcy;
(19) Transfer cases to other courts of bankruptcy; and
(20) Exercise ancillary jurisdiction over persons or property
COURTS AND OFFICERS
1379
within their respective territorial limits in aid of a receiver or
trustee appointed in any bankruptcy proceedings pending in
any other court of bankruptcy.
Nothing in this section contained shall be construed to deprive
a court of bankruptcy of any power it would possess were certain
specific powers not herein enumerated.)
§805. (Bankruptcy, Sec. 15.) Jurisdiction of bank-
ruptcy court to recover assets.
(Note: The trustee may sue in the United States District
Courts to set aside voidable preferential transfers; to enforce
liens; and to set aside fraudulent conveyances. Otherwise,
"Suits by the trustee shall only be brought or prosecuted in the
courts where the bankrupt whose estate is being administered
by such trustee might have brought or prosecuted them if pro-
ceedings in bankruptcy had not been instituted unless by con-
sent of the proposed defendant.")
§806. (Bankruptcy, Sec. 16.) Jurisdiction of state
courts.
(See note in last section.)
§807. (Bankruptcy, Sec. 17.) Summary proceedings
in district court to recover property.
(Note: If property is held adversely by other persons, that
is to say, is in their possession before bankruptcy, the trustee to
obtain possession must maintain a plenary suit, that is, a regular
judicial proceeding such as any person must institute to recover
property belonging to him and adversely held by others. But
if the property is in the bankrupt's possession when the bank-
ruptcy proceedings are begun and after that time taken posses-
sion of by others, a proceeding of a summary character may be
maintained in the bankruptcy court, which upon proper proofs
made enters an order that the property be turned over.)
§808. (Bankruptcy, Sec. 18.) Appellate jurisdiction.
(Note: The text of section 24 of the Act is here given:
Sec. 24. Jurisdiction of Appellate Courts.—a. The Supreme
Court of the United States, the circuit court of appeals of the
1380
BANKRUPTCY
United States, and the supreme courts of the Territories, in vaca-
tion in chambers and during their respective terms, as now or as
they may be hereafter held, are hereby invested with appellate
jurisdiction of controversies arising in bankruptcy proceedings
from the courts of bankruptcy from which they have appellate
jurisdiction in other cases. The Supreme Court of the Unitfed
States shall exercise a like jurisdiction from courts of bank-
ruptcy not within any organized circuit of the United States and
from the supreme court of the District of Columbia.
b. The several circuit courts of appeal' shall have jurisdic-
tion in equity, either interlocutory or final, to superintend and
revise in matter of law the proceedings of the several inferior
courts of bankruptcy within their jurisdiction. Such power shall
be exercised on due notice and petition by any party aggrieved.
Sec. 25. Appeals and "Writs of Error.—a. That appeals, as
in equity cases, may be taken in bankruptcy proceedings from
the courts of bankruptcy to the circuit court of appeals of the
United States, and to the supreme court of the Territories, in the
following cases, to wit,
(1) From a judgment adjudging or refusing to adjudge the
defendant a bankrupt;
(2) From a judgment granting or denying a discharge; and
(3) From a judgment allowing or rejecting a debt or claim
of five hundred dollars or over.
Such appeal shall be taken within ten days after the judg-
ment appealed from has been rendered, and may be heard and
determined by the appellate court in term or vacation, as the
case may be.
b. From any final decision of a court of appeals, allowing or
rejecting a claim under this Act, an appeal may be had under
such rules and within such time as may be prescribed by the
Supreme Court of the United States, in the following cases and
no other:
1. Where the amount in controversy exceeds the sum of two
thousand dollars, and the question involved is one which might
have been taken on appeal or writ of error from the highest
court of a State to the Supreme Court of the United States; or
2. Where some Justice of the Supreme Court of the United
States shall certify that in his opinion the determination of the
question or questions involved in the allowance or rejection of
such claim is essential to a uniform construction of this Act
throughout the United States.
COURTS AND OFFICERS
1381
c. Trustees shall not be required to give bond when they
take appeals or sue out writs of error.
d. Controversies may be certified to the Supreme Court of the
United States from other courts of the United States, and the
former court may exercise jurisdiction thereof and issue writs
of certiorari pursuant to the provisions of the United States laws
now in force or such as may be hereafter enacted.
§809. (Bankruptcy, Sec. 19.) The referee in hank-
ruptcy.
(Note: The referee is a judicial officer in bankruptcy to
whom the cases are referred for details of administration. He
has no jurisdiction except by order of reference, and his judicial
duties are subject to review by the judge in bankruptcy. He
has power, upon reference, to enter orders of adjudication, dis-
miss petitions, conduct examinations, allow claims, declare divi-
dends, give notices to creditors, and generally to attend to details
of administration.)
CHAPTER 105
WHO MAY BE BANKRUPT
A. In Respect to Business or Calling'.
B. In Respect to Legal Status.
C. In Respect to Amount of Indebtedness.
§810. (Bankruptcy, Sec. 20.) Introductory.
Case 779. Bankruptcy Act, Sec. 4.
"a. Any person, except a municipal, railroad, insur-
ance, or banking corporation shall be entitled to the bene,
fits of this Act as a voluntary bankrupt.
"b. Any natural person except a wage-earner or a
person engaged chiefly in farming or the tillage of the
soil, any unincorporated company, and any moneyed,
business or commercial corporation, except a municipal,
railroad, insurance, or banking corporation, owing debts
to the amount of one thousand dollars or over, may be
adjudged an involuntary bankrupt upon default or an
impartial trial, and shall be subject to the provisions and
entitled to the benefit of this Act.
Question 779: (1) What exceptions are made to the classes
of debtors who can file petitions in voluntary bankruptcy?
(2) Against (a) what natural persons; (b) what corpora-
tions; can a petition in involuntary bankruptcy not he filed ?
A. In Respect to Business or Calling
(a) of Natural Persons.
§ 811. In general.
§ 812. Wage earners.
§ 813. Persons engaged chiefly in farming or tilling the soil.
§ 814. Occupations considered as of what date.
1382
WHO MAY BE BANKRUPT
1383
§ 811. (Bankruptcy, Sec. 21.) In general.
(Note: All natural persons (but see as to Minors, Insane
Persons, Estates, and Aliens, post) may file voluntary proceed-
ings, and all natural persons may be made involuntary bank-
rupts except (1) wage earners and (2) persons engaged chiefly
in farming and tillage of the soil.)
§812. (Bankruptcy, Sec. 22.) Wage earners.
Case 780. First National Bank v. Barnum, 160 Fed.
(Dist. Ct., Pa.) 245.
Archbald, District Judge: "There are involuntary
proceedings and are resisted by the respondent upon the
grounds: (1) that he is a wage earner; (2) that the peti-
tioners are not creditors. It appears as to the first that
respondent is a music teacher, giving lessons on the
piano, organ, violin and mandolin at 50 cents an hour,
earning from $35 to $40 a month, or a little less than
$500 a year, some pupils coming to his house for in-
struction, and others being taught at their homes. This
constitutes his livelihood, in addition to which, however,
he has a summer cottage at Harvey's lake which he rents
for $175 a season, and another property from which he
gets $150, besides which he has divided up certain land
which he owns, and is selling it off in lots. The question
is whether under these circumstances he is a wage
earner within the meaning of the law so as not to be sub-
ject to involuntary bankruptcy.
"A wage earner is defined by the Bankruptcy Act as
one 'who works for wages, salary or hire, at a rate of com-
pensation not exceeding five hundred dollars per year.'
By this it is evidently intended to relieve from adverse
proceedings those who, not being engaged in business or
trade, depend for a living upon the result of individual
labor or effort without the aid of property or capital.
But not all of this class are exempt as shown by the limit
of $1,500. And the work done must be such as is com-
pensated by wages, salary or hire, other earnings not
being put in the same category. These terms mean much
1384
BANKRUPTCY
the same thing, and are no donbt collectively used m
order to cover the different possible kinds of employ-
ment comprehended within the general idea. Wages
as distinguished from salary are commonly understood
to apply to the compensation for manual labor, skilled or
unskilled, paid at stated times, and measured by the day,
week, month or season * * * and also by the piece.
* * * But not by the job. * * * Nor including
profits on the services of others. * * * Salary on
the other hand has reference to a superior grade of serv-
ices. * * *
The cases directly decided under the bankruptcy act
confirm these views. Thus it is held that a person doing
hauling with his team by the day—which affords a good
example of what may in strictness be termed a hiring—
is a wage earner. In re Yoder (D. C.), 11 Amer. Bankr.
Rep. 445, 127 Fed. 894. * * * So money due for
piece work, paid weekly, is held to be wages. In re
Gurewitz, 10 Am. Bankr. Rep. 350, 121 Fed. 982, 58 C.
C. A. 320. And a bookkeeper, in the employ of others,
receiving a salary of $65 or $70 a month, is a wage-earner
within the meaning of the law. In re Pilger (D. C.), 9
Am. Bankr. Rep. 244, 118 Fed. 206. And so, as we may
assume—applying the same principle—would be the
chorister of a church, paid a specified yearly sum for his
services. Catlin v. Ensign, 29 Pa. 264. Or a traveling
salesman receiving a percentage commission on the
amount of his sales. Hamberger v. Marcus, 157 Pa.
133, 27 Atl. 681, 37 Am. St. Rep. 719. But not a factor or
broker, engaged in the business of selling goods on com-
mission. Id. Nor a millowner, who saws lumber for
others at so much a thousand. Campfield v. Lang (C.
C.), 25 Fed. 128. Nor one who builds a house or other
structure, by contract, even though he does a part of
the work himself. Berkson v. Cox, 73 Miss. 339, 18 South.
934, 55 Am. St. Rep. 539; Henry V. Fisher, 2 Pa. Dist.
R. 7; Morse v. Robertson, 9 Hawaii, 195. Nor one who
tows a canal boat. Ryan v. Hook, 34 Hun. 191. Or
threshes out grain by the job. Johnston v. Barrills, 27
WHO MAY BE BANKRUPT
1385
Or. 251, 41 Pac. 656, 50 Am. St. Eep. 717. Nor are the
fees of lawyers, physicians, and the like to be classed as
wages. Vane v. Newcombe, 132 U. S. 220, 10 Sup. Ct.
60, 33 L. Ed. 310; People v. Myers (Sup.) 11 N. Y. Supp.
217. Nor the debts due to a blacksmith from his cus-
tomers for his services. T a turn v. Zachry, 86 Ga. 573,
12 S. E. 940. Nor is a school teacher a laborer or serv-
ant; however, we may speak of one, at times, as being
hired. School District v. Gautier, 13 Okl. 194, 73 Pac.
954.
"From these considerations, as it seems to me, but
one conclusion can be drawn. A person, like the respond-
ent, giving music lessons at so much an hour, is not a
wage-earner within the meaning of the act. Teaching
is a profession, denoting a nicer relation and involving
a finer character of work, and entitled, like that of the
lawyer, doctor, the engineer, the architect, or the minis-
ter, to be regarded as upon a higher plane. His work is
mental, not physical. He labors with his head, not his
hands. And while that may not be distinctly conclusive,
it has its weight. He is the tutor, or instructor, of his
pupil, not his servant; his, of the two, being the master
mind. This is not to say the one who works for a salary,
like the teachers in our public schools, may not be wage-
earners, within the meaning of the bankruptcy law. The
fact of being under a salary makes a difference and
brings the case squarely within the act, although it may
be noticed in passing that, in the school laws of the
state, teachers are said to be appointed, not employed or
hired. But the compensation received by the respondent,
in the present instance, is certainly not a salary. Neither
is it wages. And notwithstanding the misuse of the
term, alluded to above, neither can he be said to work
for hire. He is simply paid a stipulated sum or stipend
in return for the instruction which he gives, which he
holds himself out as competent to impart, being engaged
so to do by his pupils or their parents, but not hired, any
more than the lawyer, doctor, or others in professional
life. The returns from his teachings may be earnings,
1386
BANKRUPTCY
which as we have seen is a comprehensive term, hut not
wage-earnings, and so not effective to exempt him from
liability here. * * *
Question 780: (1) Under the Bankruptcy Law, is a wage-
earner entitled to file a petition in bankruptcy? Is he subject
to involuntary proceedings? How is a wage-earner defined by
the law ? If he makes $2,000 a year as a carpenter, is he a wage-
earner within the meaning of the bankruptcy act? "Why?
(2) A lawyer works as clerk for a law firm at a salary of
$1,200 a year. Can he be made an involuntary bankrupt ?
(3) A teamster owning his own outfit does a drayage busi-
ness for all who will employ him. Is he subject to involuntary
proceedings ?
§ 813. (Bankruptcy, Sec. 23.) Persons engaged chiefly
in farming or tilling the soil.
Case 781. Matter of Brown, 284 Fed. (D. C. Mo.) 899.
Faris, District Judge: "* * * the sole question
presented and now remaining in the case is whether the
acts, dealings, occupation and business of Brown render
him exempt, under the statute from adjudication in this
sort of a proceeding.
11 * * *
"This statute is fairly plain. The facts alone are
troublesome always and in the case at bar peculiarly so,
because of their involution and the many and diverse
activities, dealings and interests of the alleged bankrupt.
"Whatever other courts have said and whatever the
language of the statute and the logic of the situation
may seem to infer, it has been held in this jurisdiction
that the word 'farmer' and 'tillage of the soil' are synon-
ymous, * * *; also it seems to be fairly well settled
that the status of the alleged bankrupt is to be deter-
mined as of the date at which the act or acts of bank-
ruptcy were committed.
< i * * * jj
Question 781: (1) A owns a farm and rents it to a tenant.
Is A a farmer or tiller of the soil within the meaning of the
bankruptcy law ?
WHO MAY BE BANKRUPT
1387
(2) A having amassed some money in the farming business,
sells his farm and moves to town, living as a retired farmer. Is
he subject to involuntary bankruptcy proceedings?
(3) A being in mercantile business becomes insolvent and
commits an act of bankruptcy on August 15th. On August 18th,
he sells his store and buys a farm and starts farming. On
September 1st, a petition in bankruptcy is filed against him. He
defends that he is a farmer and moves that the petition be dis-
missed. Should the motion be allowed?
Case 782. Rice v. Bordner, 140 Federal Reports, page
566.
Archbald, District Judge: "The depositions which
have been taken are directed to whether or not the alleged
bankrupt was a farmer, but it is a question whether that
issue is properly raised by the pleadings. It is not stated
in the petition what was his occupation, nor is it nega-
tived that he was principally engaged in farming, one
or the other of which was called for. In re Taylor, 4
Am. Bankr. Rep. 515, 102 Fed. 728, 42 C. C. A. 1; In re
Bellah, 8 Am. Bankr. Rep. 310, 116 Fed. 69; In re Mero,
12 Am. Bankr. Rep. 171, 128 Fed. 630; In re Callison,
12 Am. Bankr. Rep. 344, 130 Fed. 987; In re Brett, 12
Am. Bankr. Rep. 492, 130 Fed. 981; In re Levingston,
13 Am. Bankr. Rep. 357. And the answer, on the other
hand, expressly avers that he was a farmer, to which
there is no replication. Under the ordinary rules of
equity pleading this made the answer conclusive upon
the subject, and, if the case had been set down for a
hearing on petition and answer, it would have had to be
dismissed. In re Taylor, 4 Am. Bankr. Rep. 515, 102
Fed. 728, 42 C. C. A. 1.
"But, passing that by, the proofs that have been sub-
mitted lead to the same result. They show that in a
small way the respondent may be said to have had sev-
eral occupations. He had a store; he was agent for the
sale of fertilizers; and he ram a farm. The question is
in which business was he chiefly engaged. This is to be
determined by which was of paramount importance to
him, or on which he depended for a living (In re Mackey,
1388
BANKRUPTCY
6 Am. Bankr. Rep. 577, 110 Fed. 355; In re Drake, 8
Am. Bankr. Rep. 137, 114 Fed. 229), about which there
can be no serious question. No doubt at one time he
had a store of considerable local importance; the election
district being named after it. But that was many years
ago, and the business had been so eaten into by other
stores which have started up about him at no great dis-
tance that what he was doing in that line, at the time
these proceedings were instituted, was insignificant. It
is true that he had a fair mercantile rating in Dun's
and Bradstreet's Agencies, and that for the purpose of
mercantile appraisement he made oath that his business
for the previous year had amounted to $1,000, and the
year before that to $1,200. But it is shown by his bills
that this was an over-estimate; his purchases of goods
for the two years mentioned amounting to only a little
over $700. From this, as he swears, his income was about
$60 or $70 a year; and it is difficult to see how it could
be more. In addition he sold $200 or $300 worth of
fertilizers as agent for a phosphate company, which is
included in the figures given to the mercantile appraisers;
and the value of the stock in the store at the time the
petition was filed would not exceed $200.
"In contrast to this it is shown that the respondent had
two farms, aggregating 240 acres, which he managed
himself, employing but one man regularly besides his
son; others being called in as occasion required. From
this land he raised wheat, oats, corn, and hay, besides
having a number of cows and selling milk; the total
farm products being valued at from $1,000 to $1,200, out
of which he realized about $600, and the sales of milk
alone amounting to some $200 to $250. That it was upon
the farm that he depended for a livelihood is evident;
what is called his store being the merest excuse for one,
and yielding him but a pittance. This, moreover, he
gave over to the care of his wife during the seasons of
the year when the farm demanded attention; and to the
latter he devoted his time, participating directly in the
farmwork, notwithstanding his 70 odd years. Under the
WHO MAY BE BANKRUPT
1389
circumstances, there can be no question, as already
stated, that this was his paramount, as it was his prin-
cipal, occupation, both as regards the time given to it
and its importance to himself and his family. He was
thus, within the meaning of the act, chiefly engaged in
farming and the tillage of the soil, and so not liable to
be put into bankruptcy.
"The petition is therefore dismissed, at the cost of
the petitioning creditor.
Question 782: A owns a farm and also operates a small
country general store. Creditors file a petition in bankruptcy
against him. What determines whether or not he is a farmer?
§814. (Bankruptcy, Sec. 24.) Occupation considered
as of what date.
(Note: The occupation of wage-earner or farmer which
exempts one from involuntary proceedings is determined as of
the time when the act of bankruptcy is committed, not as of
the time the petition is filed. Otherwise a merchant becoming
insolvent and committing an act of bankruptcy could defeat the
proceedings by changing his occupation.)
(b) Of Corporations.
§ 815. (Bankruptcy, Sec. 25.) In general.
(1) History of this section.
(2) Corporations which can file voluntary petitions.
(3) Corporations which are subject to involuntary
bankruptcy.
(1) History of this Section.
(Note: The act of 1898, as originally drawn did not permit
voluntary proceedings by corporations, and involuntary petitions
could be filed against corporations engaged principally in rnanu-
facturing, trading, printing, publishing, or mercantile pursuits.
By amendment of 1903, mining corporations were added. There
were many differences of opinion as to whether certain kinds of
corporations came within the meaning of these words, and many
corporations were excluded, being non-trading corporations. By
1390
BANKRUPTCY
amendment of 1910, all corporations were included, ■except
certain ones, and voluntary bankruptcy was permitted.)
(2) Corporations which can File Voluntary Petitions.
(Note: Any corporation, commercial or non-commercial, for
profit or not for profit, may file a voluntary proceeding, unless
it is a municipal, railroad, insurance or banking corporation.)
(3) Corporations which are Subject to Involuntary
Petitions.
(Note: To be involuntary bankrupts, corporations must be
moneyed, business or commercial, and must not be municipal,
railroad, insurance or banking corporations.)
Case 783. Vallely v. Northern Fire Ins. Co., 254 U. S.
348.
Facts: The Northern Fire and Marine Insurance
Company was adjudged an involuntary bankrupt May
3, 1917, upon petition of its creditors. The petition set
forth that the company was a North Dakota corpora-
tion, and that it had been in the business of insuring
property against loss by fire, hail, etc. The company
filed no contest and was duly adjudicated a bankrupt
in the bankruptcy court. No appeal was then taken.
The estate of the bankrupt was then put in process of
administration, a trustee being elected, claims presented,
assets collected, expenses incurred, etc. Afterwards and
on December 18, 1917, the insurance company filed a mo-
tion in the bankruptcy court to vacate the adjudication
as null and void, and dismiss the proceedings upon the
ground that it appeared that the company was an insur-
ance corporation and therefore could not be adjudged
a bankrupt. The motion was sustained. The trustee
filed a certificate to the Circuit Court of Appeals to re-
vise this order and the Circuit Court of Appeals certifies
to the United States Supreme Court certain questions
the third of which reads as follows:
 Where an insurance corporation adjudged bankrupt
in an involuntary proceeding after Urn passage of the
WHO MAY BE BANKRUPT
1391
amendatory act of June 25, 1910, upon due service of
process and default, does not appeal from the ad'judica-
tion hut acquiesces therein and aids the trustee in the
performance of his duties in administering the estate,
may it be estopped from thereafter questioning the valid-
ity of the adjudication and the power of the court and
the trustee to proceed?
Mr. Justice McKenxa delivered the opinion of the
Court: "* * * The Act of June 25, 1910, which
covers the present proceeding is peremptory in its pro-
hibition. It excludes by § 4-a, insurance companies from
the benefits of voluntary bankruptcy, and by subdivision
b prohibits them from being adjudged involuntary bank-
rupts. The effect of these provisions is that there is
no statute of bankruptcy as to the excepted corporations
and necessarily there is no power in the district court
to include them. In other words, the policy of the law
is to leave the relation and remedies of 'municipal, rail-
road, insurance and banking' corporations to their cred-
itors and their creditors to them, to other provisions of
the law.''
[The question is answered in the negative.]
Question 783: May an insurance company waive its right not
to be put in bankruptcy? Why does the law exempt insurance,
banking, municipal and railroad corporations from the operation
of the act?
(Note: Is the above case authority for the proposition that
a farmer or a wage-earner cannot be adjudged a bankrupt even
if he does not raise the issue? Clearly not. A petition in in-
voluntary bankruptcy against an individual should allege that
the debtor is not a farmer or a wage earner. The debtor may at
that time contend that he is a farmer or wage-earner. That
issue is tried. It is a question of fact. If decided against him
he may appeal; and if he does not contest the petition the fact
that he is not a wage-earner or farmer is taken as a fact by his
own default in answering. It once having been duly established
as a fact by trial or default that he is not a wage-earner or
farmer, his day in court on that point has been had.)
1392
BANKRUPTCY
B. In Respect to Legal Status.
§ 816. Corporations.
§ 817. Unincorporated companies.
§ 818. Partners and partnerships.
§ 819. Minors.
§ 820. Insane persons.
§ 821. Estates of deceased persons.
§ 822. Aliens.
§ 816. (Bankruptcy, Sec. 26.) Corporations.
(See Sec. 815 supra.)
§ 817. (Bankruptcy, Sec. 27.) Unincorporated
companies.
(Note: Unincorporated companies may be adjudged bank-
rupts, either upon voluntary or involuntary petition. "By un-
incorporated company is meant a concern which is neither a
corporation or a partnership for they are expressly provided for.
Is a "business trust subject to bankruptcy proceedings?
Judge Evan A. Evans held in the affirmative in In re Parker,
275 Fed. 868, and said "one is impressed, at the outset, that if
such a commercial enterprise is not subject to the bankruptcy
act, it was an oversight on the part of Congress. This case
was reversed by the Circuit Court of Appeals (283 Fed. 404)
but without passing on that exact point, the court holding that
the petition did not set forth allegations with sufficient certain,
clarity and consistency to give the court jurisdiction and ordered
the case dismissed with leave to file an amended complaint.)
§ 818. (Bankruptcy, Sec. 28.) Partners and
partnerships.
Case 784. Bankruptcy Act, Sec. 5, a, b, c.
"a. A partnership, during the continuance of the
partnership business, or after its dissolution, and before
final settlement thereof, may be adjudged a bankrupt.
"b. The creditors of the partnership shall appoint the
trustee; in other respects so far as possible the estate
shall be administered as herein provided for other
estates.
WHO MAY BE BANKRUPT
1393
"c. The court of bankruptcy which has jurisdiction
of one of the partners may have jurisdiction of all of
the partners and of the administration of the partner-
ship and individual property.
Question 784: May a partnership be adjudged a bankrupt?
May a person be adjudged a bankrupt in reference to his mem-
bership in the partnership and not in reference to his other busi-
ness or personal affairs ?
Case 785. Francis v. McNeal, 228 United States Re-
ports, 695.
Me. Justice Holmes delivered the opinion of the Court:
1 'This is a proceeding to review an order of the Bank-
ruptcy Court to the effect that the separate estate of
Stanley Francis, should be turned over for administra-
tion to the respondent, McNeal, trustee in bankruptcy of
a firm of which Francis was a member. The order was
made on the petition of the trustee, and was affirmed
upon a petition for revision by the Circuit Court of Ap-
peals. 186 Fed. Rep. 481; 108 C. C. A. 459.
"The facts are short. Creditors filed a petition against
Latimer, Francis and Marrin, alleging that they were
partners trading as the Provident Investment Bureau,
and that they were bankrupt individually and as a firm.
McNeal was appointed receiver of the partnership and
individual estates, but Francis denied that he was a
partner and sought to have the receiver discharged.
Thereupon, on March 13, 1906, it was agreed between
the counsel for the receiver and for Francis that McNeal
should be discharged as receiver of the individual estate
of Francis; that the question whether Francis was a
partner should be referred to one of the regular referees;
that until the determination of that question, his counsel,
Scott, should collect the rents and retain possession of
his estate; and that thereafter Scott should account and
turn over the funds to such person as the court might
direct. On April 17 an order was made embodying the
agreement and naming a, referee. The referee found
1394
BANKRUPTCY
that Francis was a partner, and that now stands ad-
mitted for the purposes of the present decision. The
firm was adjudicated bankrupt in June, 1909. McNeal
was appointed trustee in July and forthwith filed the
petition upon which the order in question was made.
The order declared that the separate estate of Francis
was subject to administration in bankruptcy and ordered
the real estate turned over to McNeal, with leave to sell.
The firm, even with the separate estates of the partners,
will not be able to pay its debts in full.
 Since Cory on Accounts was made famous by
Lindley on Partnership the notion that the firm is an
entity distinct from its members has grown in popu-
larity and the notion has been confirmed by recent specu-
lations as to the nature of corporations and the oneness
of any somewhat permanently combined group without
the aid of law. But the fact remains as true as ever
that partnership debts are debts of the members of the
firm, and that the individual liability of the members is
not collateral like that of a surety, but primary and
direct, whatever priorities there may be in the marshal-
ing of assets. The nature of the liability is determined
by the common law, not by the possible intervention of
the Bankruptcy Act. Therefore ordinarily it would be
impossible that a firm should be insolvent while the mem-
bers of it remained able to pay its debts with money
available for that end. A judgment could be got and
the partnership debt satisfied on execution out of the
individual estates.
"The question is whether the Bankruptcy Act has es-
tablished principles inconsistent with these fundamental
rules, although the business of such an act is so far as
may be to preserve, not to upset, existing relations. It
is true that by Sec. 1, the word 'person' as used in
the act includes partnerships; that by the same section,
a person shall be deemed insolvent when his property,
exclusive, etc., shall not be sufficient to pay his debts;
that by Sec. 5-A, a partnership may be adjudged a
bankrupt, and that by Sec. 14-A, any person may file
WHO MAY BE BANKRUPT
1395
an application for discharge. No donbt these clauses
taken together recognize the firm as an entity for certain
purposes, the most important of which, after all, is the
old rule as to the prior claim of partnership debts on
partnership assets and that of individual debts upon the
individual estate. Section 5-G. But we see no reason
for supposing that it was intended to erect a commercial
device for expressing special relations into an absolute
and universal formula;—a guillotine for cutting off all
the consequences admitted to attach to partnerships else-
where than in the bankruptcy courts. On the contrary
we should infer from Sec. 5, clauses C through Gr, that
the assumption of the Bankruptcy Act was that the part-
nership and individual estates both were to be admin-
istered, and that the only exception was that in H, 'in
the event of one or more, but not all of the members of
a partnership being adjudged bankrupt.'
"In that case naturally the partnership property may
be administered by the partners not adjudged bankrupt
and does not come into bankruptcy at all except by con-
sent. But we do not perceive that the clause imports
that the partnership could be in bankruptcy, and the
partners not. The hypothesis is that some of the part-
ners are in, but that the firm has remained out, and pro-
vision is made for its continuing out. The necessary
and natural meaning goes no farther than that.
"On the other hand it would be an anomaly to allow
proceedings in bankruptcy against joint debtors from
some of whom, at any time before, pending, or after
the proceeding, the debt could be collected in full. If
such proceedings were allowed it would be a further
anomaly not to distribute all the partnership assets. Yet
the individual estate after paying private debts is part
of those assets so far as needed. Section 5-F. Finally,
it would be a third incongruity to grant a discharge in
such a case from the debt considered as joint but to
leave the same persons liable for it considered as several.
We say the same persons, for however much the differ-
ence between firm and member under the statute be dwelt
1396
BANKRUPTCY
"upon, the firm remains at common law a group of men
and will be dealt with as such in the ordinary courts
for use in which the discharge is granted. If, as in the
present case, the partnership and individual estates to-
gether are not enough to pay the partnership debts, the
rational thing to do, and one certainly not forbidden
by the act, is to administer both in bankruptcy. If such
a case is within Sec. 5-H, it is enough that Francis
never has objected to the firm property being adminis-
tered by the trustee.
"If it be said that the logical result of our opinion is
that the partners ought to be put into bankruptcy when-
ever the firm is, as held by the late Judge Lowell, in an
able opinion, In re Forbes, 128 Fed. Rep. 137, it is a
sufficient answer that no such objection has been taken,
but on the contrary, Francis has consented and agreed
to hand over his property according to the order of the
court. So far as Vaccaro v. Security Bank of Memphis,
103 Fed. Rep. 436, 442, is inconsistent with the opinion
of the majority in In re Bertenshaw, 157 Fed. Rep. 363,
we regard it as sustained by the stronger reasons and
as correct.
Question 785: May a partnership be adjudicated a bank-
rupt while any of its members are solvent? Why? May a mem-
ber be adjudicated a bankrupt when the other members of the
firm are solvent ? Why ?
§819. (Partnerships, Sec. 29.) Minors,
Case 7,86. In re Walrath, 24 American Bankr. Re-
ports, 541.
Ray, District Judge: "The above-named bankrupt is
an infant under the age of 21 years, and it is alleged
that for such reason this court has no jurisdiction to
grant a discharge in this proceeding. Henry L. Walrath
filed his voluntary petition in bankruptcy on or about
May 26,1909. An adjudication was made, and the matter
referred to C. L. Stone, Esq., one of the referees in bank-
ruptcy. The first meeting of creditors was held July
WHO MAY BE BANKRUPT
1397
19, 1909, and Frank E. Parsnow, a creditor, appeared
and filed his claim in the sum of $939.40, and same was
duly proved and allowed. A. H. Sheldon was appointed
trustee of the estate of said bankrupt, and Parsnow par-
ticipated in such appointment. The trustee duly quali-
fied and acted. Parsnow demanded an examination of
such bankrupt, and such examination was had. It ap-
pears there were no assets. No other creditor proved a
claim. September 15, 1909, the bankrupt filed his peti-
tion in due form, asking a discharge under the Bank-
ruptcy Law. The referee has filed his certificate of con-
formity and recommends a discharge. On the return
of the order to show cause on such petition for a dis-
charge, said Frank E. Parsnow, who had proved such
claim, filed specifications of objection to the discharge
of the bankrupt on the ground that, he being an infant,
the court, has no jurisdiction to grant such order.
"The claim of Parsnow proved and allowed, and which
gives him standing in court is the amount of a judgment
in his favor against Walrath, in an action for negligence,
from which no appeal has been taken. The said object-
ing creditor has not at any stage moved to open the
adjudication or dismiss the petition instituting the bank-
ruptcy proceedings. Infants are liable for some debts,
and they and their property may be bound in judgment
therefor. This claim of Parsnow is one of that class.
It has been so adjudicated by a court of competent juris-
diction. Walrath, the bankrupt, owes the debt. He owed
the debt when the proceeding in bankruptcy was insti-
tuted. The law has so adjudged. The Bankruptcy Act,
'An act to establish a uniform system of bankruptcy
throughout the United States,' approved July 1, 1898
(Act July 1, 1898, c. 541, 30 Stat. 545 (U. S. Comp. St.
1901, p. 3418 , as amended February 5, 1903 (32 Stat.
797, c. 487), and June 15, 1906 (34 Stat. 267, c. 3333),
provides in section 1- that "debt shall include any debt,
demand or claim provable in bankruptcy,' and in section
2 that the courts of bankruptcy shall have power to
'adjudge persons bankrupt who,' etc., and in section 4
1398
BANKRUPTCY
that 'any person who owes debts, except a corporation,
shall be entitled to the benefits of this act as a voluntary
bankrupt,' and in section 63 that 'debts of the bankrupt
may be proved and allowed against his estate which are
(1) a fixed liability as evidenced by a judgment or an
instrument in writing, absolutely owing at the time of
the filing of the petition against him,' etc.
"This was a provable debt, and was proved by this
objecting creditor, and duly allowed. The act nowhere
excepts infants from its provisions or benefits. The lan-
guage is as broad as it could have been made in general
terms to include infants, and there is nothing elsewhere
in the act indicating that they are not included in the
language quoted. There is no ground of public policy
for excluding them, or so construing the act as to exclude
them, where they owe debts. This court therefore holds
that Henry L. Walrath was, although an infant, entitled
to the benefits of the act, and that he was properly ad-
judicated a bankrupt. The proceedings had are neither
void nor voidable. In re Carl S. Brice (D. C., Iowa), 2
Am. B. R. 197, 93 Fed. 942; Collier on Bankruptcy (7th
Ed.), 96, 97, where it is said:
 'An infant, either petitioning or petitioned against,
must appear to have capacity to owe. It is yet a mooted
question, however, whether an infant who has either held
himself out and traded as an adult, or who alleges only
debts for necessaries, cannot be adjudged bankrupt on his
own petition. The better opinion seems to be that he can.'
"This infant in respect to this debt was under no
disability. He owed the debt, and his property was
liable for its payment. Suppose he had owed ten debts
of the same class and grade, with only property suffi-
cient to pay 50 cents on the dollar; is there any good
reason why he should not have been adjudged a bank-
rupt, and his property applied in payment of all pro
rata? Or, should the first one to obtain judgment and
execution be allowed to sweep the deck, in the very face
of the act and its declared purpose? Under the act of
1841 (Act Aug. 19,1841, c, 9, 5 Stat. 440), where, as here,
WHO MAY BE BANKRUPT
1399
infants were not exempted from its operation, it was
held they were entitled to its benefits. In re Book, 3
McLean, 317, Fed. Cas. No. 1,637. It is unquestionably
true that an infant cannot be adjudicated a bankrupt,
unless it appears that he 'owes' debts. The word 'owe'
means something: That he is now legally liable for its
payment, and that it may be enforced. This being so,
he is entitled to his discharge in this proceeding insti-
tuted for that purpose; no other ground of objection
appearing. 'Any person who owes debts' is entitled
to the benefits of the act, and it cannot be successfully
contended that an infant is not a person.
"But the validity of these proceedings cannot be chal-
lenged here collaterally. The petitioner has been ad-
judicated, and jurisdiction established. That judgment
stands unimpeached. This is an independent proceed-
ing. In re Clisdell (D. C., N. Y.), 4 Am. B. R. 95, 101
Fed. 246; In re Mason (D. C., N. C.), 3 Am. B. R. 599,
99 Fed. 256. Sections 14 and 29 state the objections
which may be interposed and litigated here. Jurisdiction
and the validity of the prior proceedings are not in-
eluded. The confusion in the cases has arisen over the
attempt to show that an infant who actually 'owes' a
debt for which he and his property are liable, and which
may be enforced against both, is not entitled to the bene-
fits of the act, for the reason that infants who have made
contracts not binding, and which may not ever become
binding, which the infant may ratify on becoming of
age and then owe the debt incurred by such ratification,
but which they do not owe or cannot owe during infancy,
are not entitled to the benefits of the act; in other words,
that infants who do 'owe' debts are not entitled to the
benefits of the act, for the reason infants who do not
owe debts are not.
"Infants with no liabilities except of the latter de-
scription are not entitled to the benefits of the act, for
the reason they do not 'owe' debts, not for the reason
they are infants. An adult is not entitled to the benefits
of the act unless he owes debts. The disability of the
1400
BANKRUPTCY
infant goes to his power to incur a debt, so that he
cannot be said to owe it, not to his power to pay or avoid
a debt he actually owes, or take the benefit of a law
which releases him, or which may release him, from one
he actually 'owes.' * * *
Question 786: (1) M, a minor, buys an automobile on
credit for $2,000. Not paying for the car, the creditor files a
petition against him in bankruptcy. He contests the validity
of the proceedings upon the ground he is a minor. Should the
petition be dismissed?
(2) A minor owes $1,000 to X for food, lodging and clothing.
He files a petition in bankruptcy, scheduling this claim and
asking that, it be discharged. X claims that the minor is not
entitled to the benefit of the bankruptcy act. How should the
court hold ?
(3) M, a minor, negligently operates his automobile and
seriously injuries X. X gets judgment for $5,000 damages. M
files his petition in bankruptcy and schedules this claim for
discharge. Should the court take jurisdiction?
(Note: On the question whether liabilities for malicious in-
juries are discharged, see Discharge, post.)
§§ 820, 821. (Partnerships, Sees. 30, 31.) Insane per-
sons; estates of deceased persons.
Case 787. Bankruptcy Act, Sec. 8.
"Death or Insanity of Bankrupt. The death or in-
sanity of a bankrupt shall not abate the proceedings,
but the same shall be conducted and concluded in the
same manner, so far as possible, as though he had not
died or become insane: Provided, that in case of death
the widow and children shall be entitled to all rights of
dower and allowance fixed by the laws of the state of
the bankrupt's residence.
Question 787: If an estate of a deceased person is found to
be insolvent, can it be put into bankruptcy? If a petition is
filed by or against a person, who dies while the bankruptcy pro-
ceedings are pending, does his death abate the proceedings?
(Note: A person insane before petition filed is not subject
to bankruptcy proceedings. So an estate of a deceased person
WHO MAY BE BANKRUPT 1401
is not to be put in bankruptcy. The court of probate is the
proper tribunal to administer an insolvent deceased estate.)
§ 822. (Bankruptcy, Sec. 32.) Aliens.
(Note: See § 802.)
C. In Respect to Amount of Indebtedness.
§ 823. Voluntary bankruptcy.
§ 824. Involuntary bankruptcy.
§§ 823, 824. (Bankruptcy, Sees. 33, 34.)
(Note: No amount of indebtedness is prescribed as requisite
in case of voluntary bankrupts. The involuntary bankrupt must
be one  owing debts to the amount of one thousand dollars
or over.")
CHAPTER 106
ACTS OF BANKRUPTCY
A. Introductory.
B. The particular acts of bankruptcy.
A. Introductory.
§ 825. In general.
§ 826. Insolvency defined.
§ 827. Within what time act of bankruptcy must be committed.
§ 825. (Bajikruptcy, Sec. 35.) In general.
(Note: In involuntary bankruptcy proceedings, it is neces-
sary to allege in the petition, and to prove if that point is con-
tested, that the debtor proceeded against is insolvent, and
committed an act of bankruptcy within the four months just
preceding the filing of the petition. The acts of bankruptcy are
considered severally in the following sections.)
§826. (Bankruptcy, Sec. 36.) Insolvency defined.
Case 788. Bankruptcy Law, Sec. 1, par. 15.
 A person shall he deemed insolvent within the pro-
visions of this act whenever the aggregate of his prop-
erty exclusive of any property which he may have con-
veyed, transferred, concealed or removed, with intent
to defraud, hinder or delay his creditors, shall not at a
fair valution, be sufficient in amount to pay his debts.
(Note: Generally speaking insolvency in involuntary bank-
ruptcy is an essential element either as an element in the act of
bankruptcy or as a necessary condition at the time of filing the
petition. The exact place that insolvency plays in bankruptcy
proceedings will be indicated in the study of each act of bank-
ruptcy. Clearly bankruptcy proceedings are for insolvent per-
sons.)
1402
ACTS OF BANKRUPTCY
1403
Case 789. In re Crenshaw, 19 American Bankruptcy
Reports, 503.
Toulmin, District Judge: "* * *
"As suggested by counsel, the vital question in this
case is solvency or insolvency. * * * In determining
the issue as to solvency or insolvency of the respondent,
all the property which he owns is to be reckoned in coin-
puting the amount of his assets, except such as he may
have transferred or concealed in fraud of his creditors,
but not excluding property which is exempt from execu-
tion by the laws of the state. * * * 
Question 789: (1) Debtor owes $1,350. He has assets at
a fair valuation worth $1,400. Under the laws of his state he
is entitled to a $400 exemption which he can claim under the
bankruptcy law. Is he insolvent?
(2) A debtor owns assets of fair valuation of $25,000. He
owes debts aggregating $15,000. He conveys to his sister prop-
erty worth $15,000, as a voluntary conveyance, it being under-
stood that she will re-convey "when the trouble blows over. Is
the debtor insolvent ?
Case 790. In re Sedalia Farmers Co. of Packing- &
Produce Co., 268 Federal Reports, 898 (D. C. Mo.).
Vax Valkenburgh, District Judge: "* * * Was
the alleged bankrupt insolvent * * * when the peti-
tion in bankruptcy was filed? * * *
"Upon the showing disclosed by the record, I have
no hesitation in finding that the corporation was in-
solvent [when the petition was filed]. The referee has
so found and the evidence fully sustains him. The aggre-
gate of its property was not, at a fair valuation, suffi-
cient in amount to pay its debts.
 'Fair valuation means a fair market value—that is
at a value which the corporation might have realized
on them for itself.' In re Marine Iron Works (D. C.
N. Y.), 20 Am. B. R. 390, 159 Fed. 753.
"And as announced by Judge Amidon in Stern v.
1404
BANKRUPTCY
Paper (D. C. N. P.), 25 Am. B. R. 451, 453, 183 Fed.
228, 230:
 'Fair valuation' within the meaning of subdivision
15 of section 1 of the Bankruptcy Act * * * means
a value that can be made promptly effective by the owner
of property 'to pay debts' * * * 'Fair valuation'
means such a price as a capable and diligent business
man could presently obtain for the property after con-
ferring with those accustomed to any such property.
Question 790: How is 'fair valuation' determined?
(Note: In J. W. Butler Paper Co., v. Goembel, 143 Fed.
295, the court said: "The valuation for the test of solvency or
insolvency under the issue must relate to the conditions, as a
going concern, * * * and not to the mere dead matter of
the plant after bankruptcy intervened.")
§ 827. (Bankruptcy, Sec. 37.) Within what time act of
bankruptcy must be committed.
Case 791. In re Triangle S. S. Co., Inc., 267 Federal
Reports (D. C. N. Y.), 303.
Mayer, District Judge: "Judge Learned Hand's
opinion and order (267 Fed. 300) left the case in the
position that the amended petition is to be considered
on its merits. The question involved may be briefly
stated:
"The original petition was held demurrable because
the petition failed to set forth acts of bankruptcy. The
present petition sets forth allegations as to acts of bank-
ruptcy within the four-months period referred to in sec-
tion 3b of the Bankruptcy Act (Comp. St. Sec. 9587). It
will be assumed, although not decided, that the petition
sufficiently alleges the acts complained of. The amended
petition recites that 'within four months next preceding
the date of this petition, and while insolvent,' the al-
leged bankrupt 'committed acts of bankruptcy as fol-
lows.' It thereupon sets out the exact language con-
ACTS OF BANKRUPTCY
1405
tained in the original petition as defining the acts of
bankruptcy, numbering them 1 and 11. It then recites:
 'That the particulars of the transfers set forth in
paragraphs 1 and 11 are more particularly alleged and
specified as follows.'
"The transactions then set forth are the only ones
specifically stated to have occurred more than four
months prior to the filing of the amended petition, but
apparently within four months prior to the filing of the
original petition. The question, then is whether, for the
purpose of calculating the four months, the date is that
of the original or of the amended petition.
"It is settled by authority. In the case of In re Con-
don, 209 Fed. 801,126 C. C. A. 524, Judge Lacombe said:
 'The original petition, filed April 12, 1911, merely
alleged, in the language of the statute, that Condon has
made transfers to hinder, delay, or defraud creditors.
* * * There was no specification of any of these, nor
were any facts in relation thereto set forth. This was
insufficient under decisions of this court. In re Rosen-
blatt, 193 Fed. 638, 111 C. C. A. 506 (January 29, 1912);
and In re Brocton Ideal Shoe Co., 202 Fed. 199, 120 C. C.
A. 447 (January 13,1913). Thereafter, on May 25, 1911,
the petition was amended by setting forth the details of
12 separate transactions of the kind charged in the or-
iginal petition. Since the petition became a sufficient one
only when it was fortified with this amendment, the date
of the amendment must be taken as the date from which
the four-months period of section 3b is to be calculated.
This eliminates all of said alleged transactions except
the last 4. Since a single act of bankruptcy, if proved,
will sustain an adjudication, it will be sufficient to con-
sider only the twelfth of these alleged transfers.'
"Judge Hough covered the same point by his observa-
tions in In re Havens, 225 Fed. at page 481, 166 C. C.
A. at page 557 :
 'It was assumed below that this was an act of bank-
ruptcy not set forth in the original petition and only
1406
BANKRUPTCY
charged in and by an amendment made more than four
months after its commission. Whether such an act, oc-
curring more than four months before amendment, could
be introduced into a pending proceeding, was thought an
"interesting question by Lacombe, J., in the Biggs
Case, swpra. This court answered it in the negative (In
re Haff, 136 Fed. 80, 68 C. C. A. 646), the matter not
having been covered by In re Sears, 117, 294, 54 C. C. A.
532, which was correctly explained and limited in ap-
plication by Gleason v. Smith, 145 Fed. 897, 76 C. C. A.
427. The general rule as stated in the Haff Case has been
approved, especially in the Ninth Circuit (Walker v.
Woodside, 164 Fed. 685, 90 C. C. A. 644), and in the
Seventh (In re Brown Commercial Car Co., 227 Fed. 390,
142 C. C. A. 83). Our own decision (In re Condon, 209
Fed. 801, 126 C. C. A. 524) is (in this respect) but a
reassertion of the Haff Case. This rule rests in theory
upon the reasoning of Justice Nelson in Be Craft, 6
Blatchf. 177, Fed. Cas. No. 3,317, where it was pointed
out that "to allow a substantial amendment—that is, one
going to the whole foundation of the proceeding nunc
pro tunc—would be a direct violation of a limitation
"obviously for the benefit of the debtor namely, the
requirement that proceedings must be brought within
a limited time after the act of bankruptcy is committed;
i. e., under the present statute, four months. If, there-
fore, the creditors' allegations in respect of the proceeds
of the $30,000 mortgage are to be regarded as stating
an act of bankruptcy committed, and complete more than
four months before amended petition filed, the order
complained of was right.'
"To the same effect is In re Louisell Lumber Co., 209
Fed. 784, 126 C. C. A. 508. These cases, with others
therein cited, are decisive of this case.
"The demurrer is sustained, and the petition will be
dismissed.
Question 791: Within what time prior to the filing of the
petition must the act of bankruptcy be committed ? Is an allega-
ACTS OF BANKRUPTCY
1407
tion of an act of bankruptcy a necessary element of a petition
in bankruptcy? If the petition does not allege such act of
bankruptcy and is amended to allege such an act is it sufficient
if it alleges an act that was within four months of the defective
petition but more than four months prior to the amended
petition ?
B. The Particular Acts of Bankruptcy.
§ 828. Fraudulent transfers.
§ 829. Preferential payments or transfers.
§ 830. Preferences secured through legal proceedings.
§ 831. General assignment for benefit of creditors.
§ 832. Admission of insolvency and consent to bankruptcy.
§ 828. (Bankruptcy, Sec. 38.) Fraudulent transfers.
(1) Definition.
Case 792. Bankruptcy Law, Sec. 3, a, (1).
 [Acts of bankruptcy by a person shall consist of his
having]
(1) Conveyed, transferred, or removed, or permitted
to be concealed or removed, any part of his property with
intent to hinder, delay or defraud his creditors, or any
of them.,,
Question 792: Define the first recited act of bankruptcy.
(Note: Fraudulent transfers and concealments by bank-
rupts have a bearing in bankruptcy proceedings from three
viewpoints.
(1) As acts of bankruptcy (now considered).
(2) As transactions that may be set aside by the trustee
(see Chapter 106.)
(3) As bar to discharge (See Chapter 109).)
Case 793. Githens v. Shiffler, 112 Federal Reporter,
505.
Akchbald, District Judge: "The act of bankruptcy
charged in this case is the transfer of property with in-
tent to hinder, delay, and defraud creditors. The de-
1408
BANKRUPTCY
fendants, 0. W. Shiffler & Bro., were engaged last spring
in the grocery business at Lebanon, Pa,, and on April
30th, after some preceding negotiations, sold out their
stock of merchandise to Light Bros, for $1,166.42. They
were indebted at the time to sundry parties, and among
others to the plaintiffs, Githens, Rexsamer & Co., on cur-
rent bills to the amount of $581, and were insolvent.
While negotiations for the sale were in progress, Col.
Seltzer, the plaintiffs' attorney, called upon J. H. Shiffler,
one of the firm, and demanded payment, and was assured
that if he would not make them any trouble by suit, which
might interfere with the sale, they would pay him out of
the proceeds. After the sale was consummated, however,
the defendants not having kept their promise, he called
upon them again, complained of his treatment, and asked
why they had not done as they agreed, to which they
replied that they had paid others who had done them
greater favors. The fact was that out of the money
realized from the sale they paid $650,. the balance due on
a note for borrowed money, on which the estate of their
father, Levi Shiffler, was surety, and $150 back rent on
the store. They also set aside $100 for the support of
their aged mother, and kept the rest—some $266—for
their own support until they could get other work to do.
The sale to Light Bros, was an open and apparently fair
one, and was made at the solicitation of that firm, and not
of the defendants. The price was fixed by an appraise-
ment, which was closely watched by both parties, and the
amount received—$1,166.42—was all the stock was worth,
and was paid in cash at the time possession was deliv-
ered. The defendants deny that there was any purpose
to hinder, delay, or defraud creditors, and, on the con-
trary, declare that they sold simply because they could
not keep up the stock in such shape as to hold customers,
The jury have found to the contrary of this—that the
sale was fraudulent—and the question is whether the
verdict is warranted by the evidence.
'' The transfer of property with intent to hinder, delay,
and defraud creditors, which is made an act of bank-
ACTS OF BANKRUPTCY
1409
ruptcy by the statute, is none other than the like fraudu-
lent transfer made void by St. 13 Eliz., which is itself
simply declaratory of the common law. That which,
therefore, according to the established course of author-
ity, constituted a fraudulent transfer at the time of the
passage of the bankruptcy act, may be regarded as in-
tended to be covered by that act, and nothing more. As
long ago as Copis v. Middleton, 2 Madd. 410-430, it was
said, 'The statute (13 Eliz.) does not deprive a man of
the power of selling his estate, or doing what he pleases
with the purchase money;' and in Darvill v. Terry, 6
Hurl. & N. 807, relying on Wood v. Dixie, 7 Q. B. 892,
it was decided that a bill of sale by way of mortgage of
personal chattels, if executed as security for money actu-
ally lent, is not fraudulent and void within St. 13 Eliz.,
though its object is to defeat the expected execution of a
judgment creditor. It was further held in Ex parte Stub-
bins, 17 Ch. Div. 58—quite in line with the case in hand—
that a sale of goods for cash, the seller intending to use
the purchase money in making a voluntary payment, was
not a fraudulent transfer within the meaning of the Eng-
lish bankruptcy act. 'But it was pressed upon us,' says
James, L. J., 'that the transfer of goods to a purchaser
for value with the view of using the purchase money for
a voluntary preference, the purchaser knowing this in-
tention, was a fraudulent conveying away or transfer
within the meaning of the sixth section of the (bank-
ruptcy) act (32 & 33 Vict. c. 71). It appears to me that
that view cannot be sustained. In truth, a mere volun-
tary transfer, impeachable only on the ground that it is a
preference to a particular creditor, has never been held
to be in itself a fraud, or an act of bankruptcy. It may
be impeached on the ground that it is voluntary, but it is
impossible, as it appears to me, to hold that a mere volun-
tary transfer is of itself an act of fraud; and, if this is
not fraudulent within any principle of law, it would be
equally impossible to say that a sale becomes fraudulent
because there is an intention in the mind of the vendor
to use the purchase money for the purpose of making a
1410
BANKRUPTCY
voluntary preference, and the purchaser knows that that
is the motive of the sale and the intention of the vendor
with reference to the proceeds of the sale. It appears
to me that it would be an extravagant extension of the
doctrine of fraud on the bankrupt law to hold that such
a sale, under such circumstances, is of itself a fraudu-
lent act, or an act of bankruptcy.' Taking this to be the
law, the present verdict cannot be sustained. It is no
doubt true that, even though the sale of their property
by the defendants was for a full consideration, if really
made for the purpose of putting it out of the reach of
creditors it was fraudulent (Ferris v. Irons, 83 Pa. 179);
and we may take into consideration as well that which
occurred after as that which preceded the transaction in
passing upon it. Yet, even so, there is nothing in the
case to give it any such fraudulent character. The most
that can be said against it is that the defendants used
the proceeds of the sale to prefer certain of their cred-
itors, and to meet their own personal needs, instead of
distributing it pro rata among all whom they owed. But,
so far as they paid some debts to the exclusion of others,
they were strictly within the authority given them by the
common law, however it may be to the contrary in bank-
ruptcy; and, while the payment of the back rent, or of
the debt for which their father's estate was surety, was
undoubtedly a preference which the bankrupt law would
avoid, it cannot be said to establish an intent through
the medium of the sale to hinder, delay, or defraud their
other creditors, even though they had such a preference
in mind from the beginning (Ex parte Stubbins, 17 Ch.
Div. 58); or, in other words, an intent to prefer is not
to be confounded with an intent to defraud, nor a prefer-
ential transfer with a fraudulent one. Nor can a fraudu-
lent intent be made out of the setting aside of $100 for
the support of their mother, or the retention of two hun-
dred and sixty-odd dollars to meet their own personal
needs. The one was not only a filial, but a legal, obliga-
tion, if, as we assume, their mother had need of it. Nor
were they bound to strip themselves of their last dollar,
ACTS OF BANKRUPTCY
1411
and go upon the town, under penalty of being charged
with a dishonest or covinous purpose. Even, therefore, if
we had a right to infer that from the beginning they con-
templated all that was subsequently done—which is quite
a stretch of inference—it cannot be regarded as a fraud:
ulent withdrawal of their property out of the reach of
creditors to sell with that in view; otherwise any disposi-
tion by an insolvent debtor would be open to that charge
if every dollar derived from it was not turned over im-
partially to his creditors. This is not the standard of
the law, however it may be of morals or ideal honesty;
and, while a man may not connive with others to get his
property out of the way by sale or otherwise, yet a fair
and open disposition of it on a full consideration cannot
be given any such character although it may incidentally
have the effect of leaving nothing which creditors can
get hold of, and even though the debtor do this to meet
some of his obligations rather than others.
"The only thing that remains is the fact that the de-
fendants did not carry out their promise to pay the
plaintiffs out of the proceeds of the sale. This, of course,
would have been as much of a preference, and as objec-
tionable to the bankrupt law, which the plaintiffs seek
to invoke, as the payment of the rent or of the debt for
which their father was surety. But, passing by this fea-
ture of it, there is nothing in the mere failure to keep
their promise that can be laid hold of to make out a fraud-
ulent motive in the transaction. The negotiations for the
sale were then in progress, and could not, therefore, have
been gotten up by the defendants, nor carried through
by them, to get their property out of the way under pres-
sure of this particular claim.
"All this is said, of course, with reference to the act of
bankruptcy alleged in the petition. Had a transfer of
property with intent to prefer been charged, we should
have had a very different question to deal with; but, as
the case stands, there is nothing to warrant the conclu-
sion that the sale was not an honest one. The money
which the defendants received from it was their own in
1412
BANKRUPTCY
law, and the fact that they exercised their proprietary
rights in disposing of it afforded no evidence of a fraud-
ulent purpose.
"The rule is made absolute, and a new trial awarded.
Question 793: (1) D, being insolvent (but not bankrupt)
sells his property to X. Is the sale fraudulent, or in any
manner forbidden by the bankruptcy law?
(2) D, being insolvent (but not yet bankrupt) owes X, Y
and Z. He pays X his entire claim. Did the common law
forbid this? Does the bankruptcy law? Is the payment a
fraudulent conveyance?
(Note: The bankruptcy act makes a transfer, concealment or
removal "with intent to hinder, delay or defraud his creditors,
or any part of them, an act of bankruptcy. This provision
incorporates into the bankruptcy law the law of fraudulent
conveyances built up by the common law. That is to say, the
bankruptcy act attempts no definition of its own, but adopts
the definition already existing. Fraudulent conveyances are
fruitful sources of litigation by creditors. The law will not
permit a debtor to transfer his property in fraud of creditors
and if the transferee is a party to the fraud or chargeable with
knowledge or notice of it, it may be set aside. However, in in-
quiring whether such a transfer is fraudulent from the view-
point of the commission of an act of bankruptcy the question
whether it can be taken away from the transferee is immaterial.
That point comes up later in the proceedings. Now it is alleged
as an act of bankruptcy whereby to get the debtor into the
bankruptcy court.
It is well established that a sale by an insolvent even for
an insufficient price is not in itself a fraudulent transfer al-
though great inadequacy of price may be an element in the
proof. So, a mortgage or pledge by an insolvent is not a
fraudulent transfer. The idea in fraudulent transfers is that
of getting the property out of the way of the reach of creditors
by making a disposition for no value, or for value upon a secret
trust to reconvey to the debtor when the trouble is over, or to
get assets in fluid form with actual intent to defeat or hinder
creditors.
It was seen in the law of sales that certain transactions are
made fraudulent by statute, as non-observance of bulk-sales acts,
retention of possession by vendor, etc.)
ACTS OF BANKRUPTCY
1413
(2) Insolvency as Element in This Act of Bankruptcy.
(Note: Insolvency is not an element in this act of bank-
ruptcy, although solvency at the time of filing the petition is
a defense against the proceedings. But in determining the
solvency of the debtor, the property which he has fraudulently
transferred, concealed or removed is not to be considered as
has been seen. Therefore a debtor in this way might be in-
solvent and yet the estate by recovery of fraudulent conveyances
might become solvent, that is, pay out in full.)
§829. (Bankruptcy, Sec. 39.) Preferential payments
or transfers.
Case 794. Bankruptcy Law, Sec. 3, a, (2).
 [Acts of bankruptcy by a person shall consist of Ms
having]
 (2) Transferred, while insolvent, any portion of his
property, to one or more of his creditors with intent to
prefer such creditors over his other creditors.
Question 794: What is the act of bankruptcy secondly
recited ?
(Note: Preferring a creditor has a twofold aspect in bank-
ruptcy. It is (1) an act of bankruptcy if preference was in-
tended and (2) a transaction that may be set aside if the creditor
preferred knew or had reasonable cause to know that a pref-
erence was intended. The second aspect we consider in Chapter
108.
Having preferred a creditor is no bar to discharge. There is
nothing morally wrong, and outside of the bankruptcy act,
nothing legally wrong in preferring one creditor over another.
As a matter of fact an insolvent person can hardly escape pre-
ferring creditors. Preferences are made acts of bankruptcy
and can be set aside by the trustee in bankruptcy for the reason
that it is the purpose of the bankruptcy act to accomplish an
equal distribution among the general creditors of an insolvent
person. To permit preferences would defeat this prime object.
To be an act of bankruptcy the following elements are essen-
tial in alleged preferences:
(1) The debtor must be insolvent when the preference is
made.
1414
BANKRUPTCY
(2) There must be an existing debt. One cannot prefer a
creditor unless there is a credit existing. Therefore cash trans-
actions are not preferences;
(3) The debtor must intend to prefer. If he knows he is
insolvent, his payment of a substantial debt is a preference for
he must be presumed to know the natural and probable conse-
quences of his act. Yet if he can show that he did not know
he was insolvent he has rebutted the intention.
See further as to preferences, Chapter 106.
§ 830. (Bankruptcy, See. 40.) Preferences secured
through legal proceedings as acts of bankruptcy.
Case 795. Bankruptcy Law, Sec. 3 a (3).
'' [Acts of bankruptcy by a person shall consist of his
having]
 (3) Suffered or permitted, while insolvent, any cred-
itor to obtain a preference through legal proceedings,
and not having at least five days before a sale or final
disposition of any property affected by such preference
vacated or discharged such preference.
Question 795: What is the act of bankruptcy, thirdly re-
cited?
(Note: This act of bankruptcy is for the purpose of pre-
venting a creditor getting a preference within four months
prior to the filing of the petition through legal proceedings.
The entry of a judgment against an insolvent debtor is not an
act of bankruptcy. But if the judgment creditor through his
legal proceedings, as by levy of execution and sale proceeds to
obtain a preference, the "suffering or permitting of such pref-
erence by the bankrupt is an act of bankruptcy which other
creditors may take advantage of. If the debtor does not prevent
the '' sale or final disposition'' at least five days before the same,
he thereby "suffers or permits it within the meaning of the
bankruptcy law. This was decided early in the history of the
act of 1898 in Wilson v. Nelson, 183 United States, 191 (1901).
In that case Nelson, the debtor in 1885 gave his promissory
note containing an irrevocable power of attorney to confess
judgment against him thereon. On November 21, 1898, the
holder caused a judgment to be confessed. Execution was im-
ACTS OF BANKRUPTCY
1415
mediately issued to the sheriff who levied upon Nelson's goods
and sold the same, leaving Nelson with no assets to pay his
debts. This judgment was entered and levy made without
Nelson's knowledge or consent. Against him it was a valid
proceeding and not subject to be set aside, or vacated by him.
On December 10, 1898, other creditors of Nelson filed a petition
in bankruptcy against him alleging the above facts as the act
of bankruptcy. Issue was joined on this question and went to
the United States Supreme Court on certificate. The court
held that the failure to vacate or discharge this preference was
an act of bankruptcy.)
§ 831. (Bankruptcy, Sec. 41.) General assignments for
benefit of creditors and receiverships as acts of bank-
ruptcy.
Case 796. Bankruptcy Law, Sec. 3 a (4).
'1 [Acts of bankruptcy by a person shall consist of his
having]
 (4) Made a general assignment for the benefit of his
creditors, or, being insolvent, applied for a receiver or
trustee for his property or because of insolvency a re-
ceiver or trustee has been put in charge of his property
under the laws of a State, of a Territory, or of the United
States.''
Question 796: What is the act of bankruptcy partly recited?
§832. (Bankruptcy, Sec. 42.) Admission of insolvency
and consent to bankruptcy.
Case 797. Bankruptcy Law, Sec. 3 (a) 5.
■  [Acts of bankruptcy by a person shall consist of his
having]
 (5) Admitted in writing his inability to pay his debts
and his willingness to be adjudged a bankrupt on that
ground.''
Question 797: What is the last recited act of bankruptcy?
CHAPTER 107
THE PETITION AND PROCEEDINGS THEREON
§ 833. Voluntary petitions.
§ 834. Involuntary petitions.
§ 835. The adjudication; first meeting of creditors and election of trustee.
§ 836. Duties of trustee.
§833. (Bankruptcy, Sec. 43.) Voluntary petitions.
(Note: Voluntary petitions in bankruptcy are filed on
official Form, No. 1, with Schedule A, itemizing the debts, se-
cured and unsecured and Schedule B, itemizing the assets and
claiming the exemptions of the bankrupt.)
§834. (Bankruptcy, Sec. 44.) Involuntary petitions.
(1) Who May File Petition.
Case 798. Bankruptcy Law, Sec. 59b.
"Three or more creditors who have provable claims
against any person which amount in the aggregate, in ex-
cess of the value of securities held by them, if any, to five
hundred dollars or over; or if all the creditors of such
person are less than twelve in number, then one of such
creditors whose claim equals such amount may file a peti-
tion to have him adjudged a bankrupt.
Question 798: (1) How many creditors must join in the
petition"?
(2) What must be the aggregate amount of their claims?
(3) How much must the debtor owe? (See Section 824).
Case 799. Stevens et al v. Nave-McCord Mercantile
Co., 150 Fed. 71 (C. C. A. 8th Cir.)
Sanborn, Circuit Judge. <<* * *
"The debtor, Stevens, was insolvent and had 48 cred-
itors. He conveyed all his property to a trustee for the
1416
THE PETITION
1417
use of 47 of these creditors with the intent that they
should receive therefrom a payment of part of their
claims, and that the 48th creditor, his wife, should re-
ceive nothing. The 47 creditors and their trustee, with
knowledge that this preference was intended, accepted
the transfer and received therefrom payments of 50 per
cent, of their claims. Within four months after the as-
signment the 48th creditor filed her petition for an ad-
judication of Stevens a bankrupt and set forth the fore-
going facts. If the 47 creditors who had received the
preference ought not to be counted against the petitioner,
there was less than 12 other creditors, her petition stated
.facts sufficient to warrant the adjudication she sought,
and, whether Fowler and Deardorff should have been
permitted to join her in her petition or not, its dismissal
was error. Since a decision of this question in favor of
the appellants will dispose of this case^and render all
other issues immaterial, it will be first considered.
"The argument, in support of the contention that cred-
itors who have secured a voidable preference must be
counted in computing the number of creditors that must
join in the petition, is that such parties have provable
claims, and that every one who has a provable claim, and
who is not excluded by section 59e (30 Stat. 562, 3 TJ. S.
C'omp. St. 1901, p. 3445), is a countable creditor under
the bankruptcy law of 1898. It is said that section 59b
provides that 'three or more creditors who have provable
claims against any person * * * or if all of the cred-
itors of such person are less than twelve in number, then
one of such creditors * * * may file a petition to
have him adjudged a bankrupt;' that section 1, subd.
9 (30 Stat. 544 (U. S. Comp. St. 1901, p, 3419)), de-
clares that ' "creditor shall include any one who owns
a demand or claim provable in bankruptcy;' that section
59f authorizes 'creditors other than original petitioners'
to 'be heard in opposition to the prayer of the petition;'
that section 18b (30 Stat. 551 (U. S. Comp. St. 1901, p.
3429)), allows 'the bankrupt or any creditor' to appear
and plead to the petition; that section 57d (30 Stat. 560
1418 BANKRUPTCY
(IT. S. Comp. St. 1901, p. 3443)), provides that 'claims
which have been duly proved shall be allowed *
unless objection to their allowance shall be made by par-
ties in interest * * that section 57g provides
that 'the claims of creditors who have received prefer-
ences shall not be allowed unless such creditors shall
surrender their preferences;' and that section 59e pro-
vides that, 'in computing the number of creditors of a
bankrupt for the purpose of determining how many cred-
itors must join in the petition, such creditors as were
employed by him at the time of the filing of the petition
or are related to him by consanguinity or affinity within
the third degree, as determined by the common law, and
have not joined in the petition, shall not be counted.'
Counsel reason with much force and cogency that these
provisions of the bankruptcy law clearly show that a
preferred creditor has a claim which may always be
proved and filed, and which may thereafter be allowed
upon his surrender of his preference, and that the ex-
press specification in 59e of the creditors who may not
be^ counted in determining how many creditors must join
in the petition excludes preferred creditors who are not
thus mentioned from the latter category under the famil-
iar rule, 'Expressio unius est exclusio alterius,' and thus
unavoidably includes them in those that must be counted.
The argument is very persuasive, but it is met by other
considerations which must not be disregarded. A cred-
itor who has a voidable preference may make and file
his formal proof of claim without surrendering his pref-
erence, and in that sense his claim is provable. In other
words, it is susceptible of a formal statement in writing
under oath which may be filed in court, under sections
57a and 57c. But the claimant may not secure an allow-
ance of his claim, he may not vote upon it at a meeting
of creditors, he may not obtain any advantage by means
of it in the bankruptcy proceedings, until he first sur-
renders his preference. Sections 57g, 56a (30 Stat. 560
(U. S. Comp. St. 1901, pp. 3442, 3443)); Keppel v. Tif-
fin Savings Bank, 197 U. S. 357, 361, 367, 25 Sup. Ct.
THE PETITION
1419
443, 49 L. Ed. 790. Cardinal rules for the construction
of a statute are that the intention of the legislative body
which enacted it should be ascertained and given effect,
if possible, regardless of technical rules of construction
and the dry words of the enactment ; that that intention
must be deduced not from a part but from the entire
law; that the object which the enacting body sought to
attain and the evil which it was endeavoring to remedy
may always be considered for the purpose of ascertain-
ing its intention; that the statute must be given a ra-
tional, sensible construction; and that, if this be con-
sonant with its terms, it must have an interpretation
which will advance the remedy and repress the wrong.
U. S. v. Ninety-Nine Diamonds (C. C. A. 8th Cir.), 139
Fed. 961, 965, 72 C. C. A. 9, 2 L. R. A. (N. S.) 185.
"The discharge of the bankrupt from his debts and
the equal distribution of his unexempt property among
his creditors of the same class were the chief objects
which Congress sought to attain by the enactment of
this statute. The preference of one or more creditors
over others of the same class was one of the principal
evils at which the statute was leveled. Witness the pro-
hibition of the allowance of the claim of a preferred
creditor and of his participation in the meetings of cred-
itors until he surrenders his preference and the right
granted to the trustee to recover from him the property
he has obtained thereby or its value. Sections 56a, 57g,
60a, 60b (30 Stat. 560, 562 (U. S. Comp. St. 1901, pp.
3442, 3443, 3445)); Pirie v. Chicago Title & Trust Co.,
182 U. S. 438, 449, 21 Sup. Ct. 906,45 L. Ed. 1171; Kippel
v. Tiffin Savings Bank, 197 U. S. 356, 361, 25 Sup. Ct.
443, 49 L. Ed. 790. The bankruptcy law contains no
express provision that a creditor who holds a voidable
preference may so use his claim as to obtain any ad-
vantage from it before he surrenders his preference.
Should a provision be ingrafted upon this statute by
construction by means of which he may avail himself of
the act itself to defeat one of its main purposes, a con-
struction by means of which he may use the statute to
1420
BANKRUPTCY
retain a preference which it was one of the chief objects
of the act to avoid1? For, if this statnte be interpreted
to mean that a debtor may confer voidable preferences
upon all his creditors but two, and may thereby enable
them to hold their preferences and be counted against
an adjudication, the evil which Congress sought to re-
move is promoted, and the remedy it provided is im-
paired. Such an interpretation does not accord with
the spirit of the law. It would not be a reasonable,
sensible construction of it, and it seems to be contrary
to the intention evidenced by the body of the statute.
The most persuasive argument against this conclusion
is that creditors holding voidable preferences are not
mentioned in section 59e in the list of those who may
not be counted, and the rule that the specification of
some is the exclusion of others. But, after a, thoughtful
consideration of this and the other contentions of coun-
sel, the evil of preferences which the bankrupt law was
enacted to remove, the remedy of an equal distribution
of the property of the bankrupt which it was passed to
provide, the prohibition of the use of their claims by
preferred creditors until they surrender them which the
act contains,, the general scope of the law and all its
provisions read and considered together, and the duty
to give to it a rational and sensible interpretation, have
forced our minds to the conclusion that it was the in-
tention of Congress that creditors who hold voidable
preference should not be counted either for or against
the petition for an adjudication in bankruptcy until they
surrender their preferences. This intention, thus de-
duced, must therefore prevail over the technical rules
of construction which counsel for the appellees invoke.
The result is: A creditor who holds a voidable prefer-
ence has a provable claim in the sense that he may make
and file the formal proof thereof specified by the bank-
ruptcy law; but he may not procure an allowance of his
claim, he may not vote at a creditors' meeting, and he
may not obtain any advantage from his claim in the
THE PETITION
1421
bankruptcy proceeding before he surrenders his prefer-
ence.
 Such a preferred creditor may present or may join
in a petition for an adjudication of bankruptcy. But
he may not be counted for the petition unless he sur-
renders his preference before the adjudication. In re
Hornstein, 122 Fed. 266, 273, 277; In re Gillette (D. C.)
104 Fed. 769.
1' Such a creditor may not be counted against the peti-
tion, nor in computing the number of creditors that must
join in the petition, unless he first surrenders his pref-
erence. But, if he surrenders his preference before the
adjudication, he may bo counted after the surrender.
In re Miner (D. C.), 104 Fed. 520; Collier on Bankruptcy
(5th Ed.), 440, 481; In rc Blount (D. C.), 142 Fed. 263,
266; Leighton v. Kennedy, 64 C. C. A. 265, 267, 129 Fed.
737, 739; In re Israel, Fed. Cas. No. 7, 111; Clinton v.
Mayo, Fed. Cas. No. 2, 899; In re Currier, Fed. Cas. No.
3,492.
4'The decisions upon some of the questions which have
been considered have not been uniform, and these con-
elusions have not been reached without a perusal of the
opinions in the cases of In re Herzikopf (D. C.), 118
Fed. 101; In re Burlington Malting Co. (D. C.), 109 Fed.
777, 779; In re Romanow (D. C.), 92 Fed. 510; In .re
Rogers' Milling Co. (D. C.), 102 Fed. 687; In re Schen-
kein (D. C'.), 113 Fed. 421, 427; In re Fishblate Clothing
Co. (D. C.), 125 Fed. 986; Brandenburg on Bankruptcy
(3rd Ed.), 922, 923.
"In the case under consideration, all the creditors ex-
cept three had received voidable preferences which they
had not offered to surrender. They were not entitled
to be counted, therefore, in computing the number of
creditors for the purpose of determining how many must
join in the petition. ' The petition of Martha Stevens
disclosed the fact that there were less than 12 creditors
who could be lawfully reckoned for this purpose, and
it stated facts sufficient to entitle her to the adjudica-
1422
BANKRUPTCY
tion she sought. The court therefore fell into a fatal
error when it sustained the demurrer to her petition and
dismissed it. This conclusion disposes of the case and
renders the questions relative to the rights of Fowler
and Deardorff to join in her petition academic. Some
of those questions were considered by this court in
Swarts v. Fourth Nat. Bank, 117 Fed. 1, 8,13, 54 C. C. A.
387, 394, 398, and Swarts v. Siegel, 117 Fed. 13, 15, 20,
54 C. C. A. 399, 401, 406; but, as they have all become
immaterial, it would be an idle task to discuss or decide
them here, and they are therefore dismissed. The ques-
tions which involve the right of Fowler and Deardorff
to join with Martha Stevens in a petition for an adjudica-
tion are not decided, but are expressly reserved.
'' The order of dismissal and the order which sustained
the demurrer to her petition must be reversed, and the
case must be remanded to the court below, with direc-
tions to permit the appellees to answer the petition and
to allow the appellants Fowler and Deardorff to present
petitions herein, if they are so advised, and it is so
ordered.''
Question 799: How many creditors must join in the petition?
How much must be the amount of the claims or claim of the
petitioning creditors? Were the 47 creditors in the above case
to be counted? Why?
(2) What Petition Must Allege.
(See Vallely v. Northern Fire Ins. Co. 245 U. S. 347, set out
as Case No. 783, supra.
See in re Triangle S. S. Co. Inc. 267 Fed. 303. Set out herein
as Case No. 971, supra.)
§ 835. (Bankruptcy, Sec. 45.) The adjudication. First
meeting of creditors and election of trustee.
Case 800. Bankruptcy Law, Sees. 18, 19a.
Sec. 18. Process, Pleadings, and Adjudications.—a.
Upon the filing of a petition for involuntary bankruptcy,
service thereof, with a writ of subpoena, shall be made
THE PETITION
1423
upon the person therein named as defendant in the same
manner that service of such process is now had upon
the commencement of a suit in equity in the courts of
the United States, except that it shall be returnable with-
in fifteen days, unless the judge shall for cause fix a
longer time; but in case personal service cannot be made,
then notice shall be given by publication in the same
manner and for the same time as provided by law for
notice by publication in suits to enforce a legal or equi-
table lien in courts of the United States, except that,
unless the judge shall otherwise direct, the order shall
be published not more than once a week for two con-
secutive weeks, and the return day shall be ten days
after the last publication unless the judge shall for cause
fix a longer time.
b. The bankrupt, or any creditor, may appear and
plead to the petition within five days after the return
day, or within such further time as the court may allow.
c. All pleadings setting up matters of fact shall be
verified under oath.
d. If the bankrupt, or any of his creditors, shall ap-
pear, within the time limited, and controvert the facts
alleged in the petition, the judge shall determine, as soon
as may be, the issues presented by the. pleadings, with-
out the intervention of a jury, except in cases where a
jury trial is given by this Act, and make the adjudica-
tion or dismiss the petition.
e. If on the last day within which pleadings may be
filed none are filed by the bankrupt or any of his cred-
itors, the judge shall on the next day, if present, or as
soon thereafter as practicable, make the adjudication
or dismiss the petition.
f. If the judge is absent from the district, or the divi-
sion of the district in which the petition is pending, on
the next day after the last day on which pleadings may
be filed, and none have been filed by the bankrupt or
any of his creditors, the clerk shall forthwith refer the
case to the referee.
g. Upon the filing of a voluntary petition the judge
1424
BANKRUPTCY
shall hear the petition and make the adjudication or dis-
miss the petition. If the judge is absent from the dis-
trict, or the division of the district in which the petition
is filed, at the time of the filing, the clerk shall forthwith
refer the case to the referee.
Sec. 19. Jury Trials.—a. A person against whom an
involuntary petition has been filed shall be entitled to
have a trial by jury, in respect to the question of his
insolvency, except as herein otherwise provided, and any
act of bankruptcy alleged in such petition to have been
committed, upon filing a written application therefor at
or before the time within which an answer may be filed.
If such application is not filed within such time, a trial
by jury shall be deemed to have been waived.
Question' 800: Is a person against whom a petition in bank-
ruptcy is filed entitled to a jury trial on any issue? How does
he waive such right? If he does not contest the proceedings, is
a trial had to determine the truth of the petition?
Case 801. Bankruptcy Law, Sees. 55, 56.
"Sec. 55. Meetings of Creditors.—a. The court
shall cause the first meeting of the creditors "of a bank-
rupt to be held, not less than ten nor more than thirty
days after the adjudication, at the county seat of the
county in which the bankrupt has had his principal place
of business, resided, or had his domicile; or if that place
would be manifestly inconvenient as a place of meeting
for the parties in interest, or if the bankrupt is one who
does not do business, reside, or have his domicile within
the United States, the court shall fix a place for the
meeting which is the most convenient for parties in in-
terest. If such meeting should by any mischance not be
held within such time, the court shall fix the date, as soon
as may be thereafter, when it shall be held.
"b. At the first meeting of creditors the judge or
referee shall preside, and, before proceeding with the
other business, may allow or disallow the claims of cred-
itors there presented, and may publicly examine the
bankrupt or cause him to be examined at the instance
of any creditor.
THE PETITION
1425
"c. The creditors shall at each meeting take such
steps as may be pertinent and necessary for the pro-
motion of the best interests of the estate and the enforce-
ment of this Act.
"d. A meeting of creditors, subsequent to the first
one, may be held at any time and place when all of the
creditors who have secured the allowance of their claims
sign a written consent to hold a meeting at such time
and place.
'1 e. The court shall call a meeting of creditors when-
ever one-fourth or more in number of those who have
proven their claims shall file a written request to that
effect; if such request is signed by a majority of claims,
and contains a request for such meeting to be held at a
designated place, the court shall call such meeting at
such place within thirty days after the date of the filing
of the request.
"f. Whenever the affairs of the estate are ready to
be closed a final meeting of creditors shall be ordered.
"Sec. 56. Voters at Meetings of Creditors.—a. Cred-
itors shall pass upon matters submitted to them at their
meetings by a majority vote in number and amount of
claims of all creditors whose claims have been allowed
and are present, except as herein otherwise provided.
"b. Creditors holding claims which are secured or
have priority shall not, in respect to such claims, be
entitled to vote at creditor's meetings, nor shall such
claims be counted in computing either the number of
creditors or the amount of their claims, unless the
amounts of such claims exceed the values of such securi-
ties or priorities, and then only for such excess.''
Question 801: What is the purpose of the first meeting of
creditors ? When is it held ? What determines the voting power
of creditors?
Case 802. Bankruptcy Law, Sees. 44, 45.
"Sec. 44. Appointment of Trustees.—a. The credi-
tors of a bankrupt estate shall, at their first meeting
after the adjudication or after a vacancy has occurred
in the office of trustee, or after an estate has been re-
1426
BANKRUPTCY
opened, or after a composition has been set aside or a
discharge revoked, or if there is a vacancy in the office
of trustee, appoint one trustee or three trustees of such
estate. If the creditors do not appoint a trustee or trus-
tees as herein provided, the court shall do so.
"Sec. 45. Qualifications of Trustees.—a. Trustees
may be (1) individuals who are respectively competent
to perform the duties of that office, and reside or have
an office in the judicial district within which they are
appointed, or (2) corporations authorized by their char-
ters or by law to act in such capacity and having an
office in the judicial district within which they are ap-
pointed.
Question 802: Who elects or appoints the trustee in bank-
ruptcy? Who is qualified to act as trustee?
§ 836. (Bankruptcy, Sec. 46.) Duties of trustees.
Case 803. Bankruptcy Law, Sec. 47.
Sec. 47. Duties of Trustees.—a. Trustees shall re-
spectively:
(1) Account for and pay over to the estate under their
control all interest received by them upon property of
such estates;
(2) Collect and reduce to money the property of the
estates for which they are trustees, under the direction
of the court, and close up the estate as expeditiously
as is compatible with the best interests of the parties
in interest ; and such trustees, as to all property in the
custody or coming into the custody of the bankruptcy
court, shall be deemed vested with all the rights, reme-
dies, and powers of a creditor holding a lien by legal or
equitable proceedings thereof; and also, as to all prop-
erty not in the custody of the bankruptcy court, shall
be deemed vested with all the rights, remedies, and
powers of a judgment creditor holding an execution duly
returned unsatisfied.
(3) Deposit all money received by them in one of the
designated depositories;
THE PETITION
1427
(4) Disburse money only by clieck or draft on the de-
positories in which it has been deposited;
(5) Furnish such information concerning the estates
of which they are trustees and their administration as
may be requested by parties in interest;
(6) Keep regular accounts showing all amounts re-
ceived and from what sources and all amounts expended
and on what accounts;
(7) Lay before the final meeting of the creditors de-
tailed statements of the administration of the estates;
(8) Make final reports and file final accounts with the
courts fifteen days before the days fixed for the final
meetings of the creditors;
(9) Pay dividends within ten days after they are de-
clared by the referees;
(10) Report to the courts, in writing, the condition
of the estates and the amounts of money on hand, and
such other details as may be required by the courts,
within the first month after their appointment and every
two months thereafter, unless otherwise ordered by the
courts; and
(11) Set apart the bankrupt's exemptions and report
the items and estimated value thereof to the court as
soon as practicable after their appointment.
b. Whenever three trustees have been appointed for
an estate, the concurrence of at least two of them shall
be necessary to the validity of their every act concern-
ing the administration of the estate.
c. The trustee shall, within thirty days after the ad-
judication, file a certified copy of the decree of adjudica-
tion in the office where conveyances of real estate are
recorded in every county where the bankrupt owns real
estate not exempt from execution, and pay the fee for
such filing, and he shall receive a compensation of fifty
cents for each copy so filed, which together with the
filing fee, shall be paid out of the estate of the bank-
rupt as a part of the costs and disbursements of the
proceeding.
CHAPTER 108
THE TRUSTEE'S TITLE
§ 837. As to what date in respect to bankrupt's ownership.
§ 838. Trustee as representative of creditors.
§ 839. As to nature of property.
§ 840. Same subject: personal privileges.
§ 841. Interests in patents, patent rights, copyrights and trademarks
§ 842. Insurance policies.
§ 843. Property held by bankrupt in trust.
§ 844. Property transferred or money paid as a preference.
§ 845. Fraudulent conveyances.
§ 846. Property held by bankrupt claimed by third persons.
§ 847. Property held by third person belonging to bankrupt.
§ 848. Eights of suit.
§ 849. Burdensome property.
§ 850. To what liens trustee's title is subject.
§ 837. (Bankruptcy, Sec. 47.) As of what date in re-
spect to bankrupt's ownership.
Case 804. Bank of Elberton v. Swift, 268 Federal Re-
ports, 305 (C. C. A. 5th Cir.).
Bryan, Circuit Judge: "November 8, 1917, John K.
Swift was adjudged a bankrupt on his voluntary peti-
tion. June 6, 1918, the Bank of Elberton filed a petition
to set aside the adjudication, on the ground of fraud.
The fraud charged was that the bankrupt was using the
Bankruptcy Act. to defeat the collection of his note for
$4,300, which the bank held against him. The bank's
petition alleged that the note was dated April 16, 1917,
and due December 1, 1917; that at the time the bankrupt
filed his petition his mother was 98 years old and at the
point of death, and that she actually died shortly there-
after; that the bankrupt knew at the time of filing his
petition in bankruptcy that by his mother's will be would
be left a legacy of about $20,000; that he knew the will
1428
TRUSTEE'S TITLE 1429
could never be changed, because after his mother had
made it, a guardian of her property had been appointed
by the ordinary's court, on the ground of her imbecility
from old age; that the bankrupt's debts, other than to
the bank, were insignificant; and that according to his
schedule of assets the only property he had was a watch
and wearing apparel worth less than $100.
"The District Court dismissed the bank's petition, and
it has appealed and filed petition to superintend and
revise.
"After the most careful consideration we concur in
the conclusion reached by the venerable and lamented
District Judge. Section 59a of the Bankruptcy Act pro-
vides that 'any qualified person may file a petition to
be adjudged a voluntary bankrupt.' Comp. St. 9643.
Section 70a.vests the trustee 'with the title of the bank-
rupt * * * to all * * * property which, prior
to the filing of the petition, he could by any means have
transferred or which might have been levied upon and
sold under judicial process against him.' Comp. St.
9654. The amendment of 1910 (Comp. St. 9631) further
vests the trustee 'with all the rights, remedies and pow-
ers of a creditor holding a legal or equitable lien upon
property within the custody of the bankruptcy court,
and of a judgment creditor holding an unsatisfied execu-
tion as to property not within such custody. The bank-
rupt is entitled to be discharged, except for acts specif-
ically set forth in Section 14 and now material to this
case, and the discharge operates to release him from his
debts as of the date of the filing of his petition.
"The act necessarily contemplates: (1) That a vol-
untary petitioner will be discharged from the burden
of his debts; and (2) that all the property owned by
him at the time he filed his petition will be distributed
among his creditors. The discharge of the bankrupt
does not affect the rights of the creditors to property
which passes into the hands of the trustee. To insure
distribution of all the bankrupt's property the trustee
is given the power to assert, not only any right which
1430
BANKRUPTCY
the debtor could have asserted, but also any right, rem-
edy, or power of a creditor holding a lien or unsatisfied
execution. The statute, as already pointed out, specif-
ically sets forth the grounds of objection to a discharge.
But nowhere is it declared to be a ground of objection
that after-acquired property would be unaffected by the
claims of creditors. . On the contrary, one of the main
purposes of the act is to relieve after-acquired property
from such claims.
"In Hanover National Bank v. Moyses, 186 U. S. 181,
text 191, 22 Sup. Ct. 857, 861 (46 L. Ed. 1113) Chief
Justice Fuller quoted with approval the following lan-
guage from In re Fowler, 1 Lowell, 161, Fed. Case. No.
4,997:
 'He (the bankrupt) may be, in fact, fraudulent, and
able and unwilling to pay his debts; but the law takes
him at his word, and makes effectual provision, not only
by civil but even by criminal process to effectuate his
alleged intent of giving up all his property,' and then
added:
 'Adjudication follows as matter of course, and
brings the bankrupt's property into the custody of the
court for distribution among all his creditors.'
"Only vested interests are considered property within
the meaning of the act. In re Elite (D. C.), 109 Fed.
625; In re Gardner (D. C.), 106 Fed. 670. Clearly, if
property which the bankrupt actually acquires after the
filing of his petition is not subject to his debts, property
which he only hopes or expects to acquire cannot be
reached by creditors.
"The only cases relied upon by appellant are Zeit-
inger et al. v. Hargadine-McKittrick Dry-Goods Co., 244
Fed. 719,157 C. C. A. 167; and In re Weidenfeld (D. C.),
257 Fed. 872. In the first-named case it appears that
the board of directors of the defendant company were
being sued by the stockholders in the state court, and
that, after that court had announced that it would grant
an accounting and appoint a receiver, the directors sud-
denly filed a voluntary petition to have the corporation
TRUSTEE'S TITLE
1431
adjudged a bankrupt. This petition ^as finally denied
in the Circuit Court of Appeals. The contest there was
between the stockholders and the directors, and not be-
tween debtor and creditors. Moreover, the debts claimed
by the petition in bankruptcy to exist had theretofore
been held by the state court not to be valid claims against
the company. The whole purpose of that bankruptcy
proceeding was to oust the jurisdiction of the state court.
"In the Weidenfeld Case an involuntary petition had
been resisted by the bankrupt until his wife died leaving
him some property. He asked leave to withdraw his
objection and to consent to be adjudged a bankrupt, in
which event, of course, the property acquired from his
wife would be relieved of his debts. But the petition-
ing creditors had therefore asked leave to dismiss their
petition against Weidenfeld and had given the required
notice to the other creditors. There was no objection
by the other creditors, and of course the court allowed
the petitioning creditors to withdraw their petition,
which was sufficient to end the case, although it denied
the petition of the bankrupt suddenly to change his at-
titude.
"It was practically admitted in the oral argument that
there was no remedy within the letter of the act, but it
was earnestly insisted that appellant's petition showed
an attempt to violate its spirit and to use the process
of the court to perpetrate a, fraud. It was not denied
that a party might take advantage of a voluntary pro-
ceeding in bankruptcy for the very purpose of having
any property he might accumulate thereafter relieved
from his debts, but it was said that there must be a line
drawn between a general purpose of that kind and a
specific intent such as is alleged to exist here, where the
acquisition of the property by appellee followed so close-
ly in time upon the filing of his petition. To that argu-
ment it need only be replied that the law authorizes the
petition to be filed and adjudication made, and a dis-
charge granted. The act fixes the rights of the parties.
It has carefully enumerated the things that can be done
1432
bankruptcy
and the things that cannot be done, and it is not for
the courts to add to the one or to the other. Congress
enacted the bankruptcy statute in the exercise of a pub-
lie policy, for the benefit, not of debtors and creditors,
but of society at large. It realized, of course, that un-
scrupulous and dishonest men would take advantage
wherever they could of its provisions. Equally of course,
it was not intended to enable a debtor to rush into bank-
ruptcy just in time to prevent his creditors from satis-
fying their claims out of property he was about to come
into possession of. But the difficulty in any law upon so
complicated a subject as business relations is to make
it cover every particular case that may possibly arise.
It does not seem to us that the act takes into account
the motives of creditors in involuntary proceedings, or
of debtors in voluntary proceedings; but instead of that,
in view of the fact that such a practical subject as busi-
ness relations between debtor and creditor is being dealt
with, it concerns itself rather with conditions as they
exist, and undertakes to fix definitely the obligations of
the debtor and the rights and remedies of the creditor.
In our judgment, it was thought best by Congress to
prescribe general rules, which would usually promote
satisfactory results, notwithstanding the fact that in
isolated instances it would be difficult, if not impossible,
to attain to the high standards of exact justice.
"The order of the District Court is not one that can
be reviewed on appeal, under the provisions of section
25z of the Bankruptcy Act, and the appeal is therefore
dismissed.
"The petition to superintend and revise is denied.''
Question 804: (1) Did the bankrupt in the above case own
the $20,000 legacy at the time the petition in bankruptcy was
filed? Why did not the fact that the mother could not change
her will make him the owner of the legacy ? If the mother had
died prior to the filing of the petition and the bankrupt had not
yet received the legacy would it have passed to the trustee in
bankruptcy ?
TRUSTEE'S TITLE
1433
(2) D dies leaving a will in which he provides that his real
estate shall pass to A for life and after A's death to B in fee.
B goes into bankruptcy after D's death and during A's life time.
Has B any interest in the real estate which passes to the trustee
in bankruptcy ?
(3) A fund was placed in trust, the income to be paid to the
bankrupt's mother during her life, and if any deficiency in the
income made it necessary to make use of the principal, in order
to give the mother a comfortable living it could be resorted to
for that purpose. On the mother's death the remaining princi-
pal, if any, was to pass to the bankrupt, her son. While the
mother was still living and the fund was intact, the son went
into bankruptcy. Did he have any interest in the fund that
passed to the trustee. (Pollack v. Meyer Brothers Drug Co.
233 Federal, 861.)
Case 805. Everett v. Judson, 228 United States, 474.
(Set out as Case 811 post.)
Case 806. Matter of William F. Wright, 157 Federal,
544 (C. C. A. 2nd Cir.).
Noyes, Circuit Judge: "The bankrupt is a party to a
contract with a life insurance company under which he
is appointed its managing agent and in addition to com-
missions for writing new policies, receives commissions
upon renewal premiums. The contract has several years
to run and the bankrupt's interest in renewals upon
policies in force at the time of the bankruptcy amounts
to about $5,000 a year. The contract is terminable by
the company in case the agent fails to comply with its
conditions or the business is unsatisfactory. Upon such
termination the interest of the agent ceases. The com-
pany agrees to maintain an office and provide a cashier
for the purpose of collecting premiums. In case the
agent dies the company pays to his widow if living, other-
wise to his estate, the renewal interest for five years
less a collection charge. In case of withdrawal from
the territory the agent is entitled to his renewal interest
during the term of the contract provided he continue in
the company's service.
1434
BANKRUPTCY
"A creditor applies to the referee in bankruptcy for
an order directing the bankrupt to assign this contract
to the trustee. The referee declined to make the order
but certified the following question to the District Court:
'Whether the interest of the bankrupt in the commis-
sions on renewal premiums accrued since the bankruptcy,
pursuant to the terms of the contract between him and
such life insurance company, was property which, at
the time of such bankruptcy he could by any means have
transferred without the consent of the company, or which
might have been levied upon and sold under judical
process.'
"The question briefly stated is, therefore, whether the
bankrupt's interest in the renewal premiums under the
contract was property which he could by any means have
transferred.
"At the outset it is apparent that these interests are
substantial value,
 (1) To the bankrupt. He will receive $5,000 a year
from them and according to his own testimony more
than three-quarters of the renewal premiums are paid
upon mere notice.
"(2) To the bankrupt's widow or his estate. They
will receive the renewal commissions in case of the bank-
rupt's death less a small collection charge.
 (3) To the Insurance Company. Manifestly the com-
pany could afford to pay well for a release from the
renewal provisions of the contract.
"So we have interests accruing under a contract which
are of value to the insurance company and to the bank-
rupt and his estate. The only question is whether they
are available for the payment of the bankrupt's debts.
"Now it is of little importance whether the bankrupt
and the insurance company, jointly or separately, might
interfere with the trustee in realizing upon these inter-
ests.
"If they are property which can by any means be
transferred the creditors of the bankrupt are entitled
to the benefit of them however little they may bring.
TRUSTEE'S TITLE
1435
Marketability and assignability are quite distinct. Upon
the face of the papers it would seem that the bankrupt
had an interest in this contract which should be made
available for the payment of his debts. Courts should
not be swift to find reasons why creditors should not
receive the benefit of all a bankrupt's assets.
"But these reasons are urged why the bankrupt's in-
terest in renewal premiums is not 'property which can
by any means be transferred' within the meaning of the
Act:
"(1) The contract is based upon personal trust and
confidence and cannot be assigned without the consent
of the insurance company.
"(2) The collection of renewal premiums require the
- continued and future services of the bankrupt which can-
not be appropriated.
"It may be conceded that this contract, as a whole,
is based upon personal trust and confidence and is not
assignable. Arkansas Valley Smelting Co. v. Belden
Mining Co. (127 U. S. 379). But there is a difference
between an absolute assignment of a contract and an
assignment of rights under a contract. The personal
confidence which precludes the transfer of rights arising
out of a contract must be involved in the nature of the
rights themselves. Hearst v. Roehm (84 Fed. 569). It
is not ordinarily involved in the right to receive moneys
due or to grow due under a contract and this right is
generally assignable without the consent of the other
party. Fortunato v. Patten (147 N. Y. 277); Knevals
v. Blauvelt (82 Me. 458).
"The right to receive the renewal commissions under
the present contract which is the right involved in the
question certified, seems not to involve personal con-
fidence. The contracts oT insurance have already been
obtained. The collection of renewal premiums is large-
ly a ministerial act. The contract provides that the in
surance company shall appoint a cashier to receive such
moneys. Even the bankrupt testified that seventy-five
per cent of the renewal premiums are paid upon mere
1436
BANKRUPTCY
notice. The collection charge made by the company
against an agent's estate is only two and one-half per
cent.
"It is possible that if the interests under the contract
are transferred to the trustee the insurance company
may defeat the object of the transfer by withholding its
consent. It does not appear that it has refused its con-
sent and there is no presumption that it will do so. But
the fact that the interest is defeasible does not prevent
its transfer. Defeasible and contingent interests of this
nature are assignable. In re Becker, 3 Am. B. R. 412,
98 Fed. 407; Fortunate v. Patten, supra.
"It is urged in the second place that the collection
of renewal premiums requires continued service on the
part of the bankrupt and that his creditors are not en-
titled to his future services. This contention may be
agreed to without affecting the question whether the
renewal interests are assignable. It is true that in case
they are transferred, the bankrupt cannot be compelled
to render any future services. Collection by means of
the cashier alone might or might not prove effective.
Some arrangement for procuring the bankrupt's services
might be desirable. If no arrangement could be made
the insurance company might refuse its consent to the
transfer. So it is possible that the bankrupt might cause
the forfeiture of the renewal interests by leaving the
employment of the company. These contingencies might
render the interest to be transferred to the trustee of
little value. But they would not render such interest
unassignable.
"Therefore, without examining further the objections
to the transfer we may, say that all of them relate to
the marketability of the interests in question, rather
than their transferability and* have no direct bearing
upon the question certified. We accordingly answer that
question in the affirmative. In thus approving the trans-
fer of the renewal interests to the trustee we are not
unmindful of the probability, already pointed out, that
some portion of the premiums could in the future be
TRUSTEE'S TITLE
1437
most advantageously collected by the bankrupt to whose
services the trustee is not entitled. But the method of
collection we regard as a matter of administration which
may safely be left to the discretion of the bankruptcy
court. If the bankrupt is willing to render services in
the collection of renewal premiums the referee has au-
thority to fix a fair basis of compensation.
''The decision of the District Court is affirmed with
costs.''
Question 806: (1) What were the assets here in question?
What reasons were urged that they were not assets passing to
the trustee and how did the court meet these reasons? (2) A as-
signs a patent owned by him to X, upon a royalty basis, royalties
to be paid annually on the basis of sales throughout the life of
the patent. A goes into bankruptcy. Is the trustee entitled
to the interest of A to the future royalties?
Case 807. Johnson v. Collier, 222 United States Re-
ports, 538.
Facts: Collier on August 8, 1906, after he was ad-
judicated a bankrupt and before a trustee has elected,
brought suit against Johnson for damages for interfer-
ing with property which Johnson had scheduled in the
bankruptcy proceedings. Defendant pleaded as a de-
fense that Collier had no title in the cause of action.
Trial court found in Collier's favor. The Supreme Court'
of Alabama affirmed the judgment and Johnson sued out
writ of error to the United States Supreme Court.
Mr. Justice Lamar : '' The trustee, with the approval
of the court, may prosecute any suit commenced by the
bankrupt prior to the adjudication. (Sect. 11c.) But
the statute is otherwise silent as to the right of the bank-
rupt himself to begin a suit in the time which intervenes
between the filing of the petition and the election of the
trustee. There is a conflict in the conclusions reached
in the few cases dealing with this question. Rand v.
Sage, 94 Minn. 344, 102 N. W. 864; Rand v. Iowa C. R.
Co., 186 N. Y. 58, 116 Am. St. Rep. 530, 78 N. E. 574,
1438
BANKRUPTCY
9 A. & E. Ann. C'as. 542; Gordon v. Mechanics & T. Ins.
Co., 120 La. 444, 15 L. R. A. (N. S.) 827, 124 Am St.
Rep. 434, 45 So. 385, 14 A. & E. Ann. Cas. 886.
''While for many purposes the filing of the petition
operates in the nature of an attachment upon choses in
action and other property of the bankrupt, yet his title
is not thereby divested. He is still the owner, though
holding in trust until the appointment and qualification
of the trustee, who thereupon becomes 'vested by operar
tion of law with the title of the bankrupt' as of the date
of adjudication. (Sect. 70.)
"Until such election the bankrupt has title,—defea-
sible, but sufficient to authorize the institution and main-
tenance of a suit on any cause of action otherwise pos-
sessed by him. It is to the interest of all concerned
that this should be so. There must always some time
elapse between the filing of the petition and the meeting
of the creditors. During that period it may frequently
be important that action should be commenced, attach-
ments and garnishments issued, and proceedings taken
to recover what would be lost if it were necessary to
wait until the trustee was elected. The institution of
such suit will result in no harm to the estate. For if
the trustee prefers to begin a new action in the same
or another court, in his own name, the one previously
brought can be abated. If, however, he is of opinion
that it would be to the benefit of the creditors, he may
intervene in the suit commenced by the bankrupt, and
avail himself of rights and priorities, thereby acquired.
Thatcher v. Rockwell, 105 U. S. 469, 26 L. ed. 950.
"If, because of the disproportionate expense, or un-
certainty as to the result, the trustee neither sues nor
intervenes, there is no reason why the bankrupt himself
should not continue the litigation. He has an interest
in making the dividend for creditors as large as pos-
sible, and in some states the more direct interest of
creating a fund which may be set apart to him as an
exemption. If the trustee will not sue and the bankrupt
cannot sue, it might result in the bankrupt's debtor being
TRUSTEE'S TITLE
1439
discharged of an actual liability. The statute indicates
no such purpose, and if money or property is finally
recovered, it will be for the benefit of the estate. Nor
is there any merit in the suggestion that this might
involve a liability to pay both the bankrupt and the trus-
tee. The defendant in any such suit can, by order of
the bankrupt court, be amply protected against any dan-
ger of being made to pay twice. Rand v. Iowa C. R.
Co., 186 N. Y. 58, 116 Am. St. Rep. 530, 78 N. E. 574,
9 A. & E. Ann. Cas. 542; Southern Exp. Co. v. Connor,
49 Ga. 415.
 There was no error in holding that the bankrupt
had title to the cause of action and could institute and
maintain suit thereon.
Question 807: Who has title to the property owned by the
bankrupt when the petition is filed after the petition is filed and
before the trustee is elected? Could the bankrupt dispose of it
during that period? May he start suits in respect to it?
(Note: The trustee gets title to all of the property of the
bankrupt (more specifically described throughout this chapter)
which the bankrupt had when the petition was filed. The
statute says that the trustee takes title as of the date of the
adjudication. But it is to the property that the bankrupt had
when the petition was filed that he takes title to. Property
acquired afer the day the petition is filed belongs to the bank-
rupt. The day the petition is filed is the "day of cleavage.")
§838. (Bankruptcy, Sec. 48.) Trustee as represent-
ative of creditors.
Case 808. Bailey v. Baker Ice Machine Co., 239
United States Reports, 268.
Facts: October 14,1911, Baker Ice Machine Company
sold to Grant Brothers a refrigerating machine for $5,940
under conditional sale, title remaining in the sellers,
but possession being delivered to the purchasers. The
machine was installed in February, 1912. On May 15,
1912, the contract of conditional sale was recorded in
the county register's office. At that time Grant Brothers
1440
BANKRUPTCY
were insolvent. On July 11, 1912, Grant Brothers filed
a voluntary petition in bankruptcy and on the following
day were adjudged bankrupts and the trustee took pos-
session of the machine. The trustee maintained, first,
that the transaction was a sale to Grant Brothers with
a chattel mortgage back to the purchasers which not
being recorded at the time, but within the four months
prior to the filing of the petition operated as a prefer-
ence, but the court held it was not a chattel mortgage
and the taking of the possession was not payment to
a creditor and was therefore not a preference. Second,
the trustee contended that the recording was void as to
him because of his character as a representative of cred-
itors having the rights, remedies and powers of a creditor
holding a lien.
Me. Justice Vax Devanteb, delivered the opinion of
the court:
"* * * Under the recording law of Kansas a con-
tract of conditional sale is valid between the parties,
whether filed for record or not, but is void as against
a creditor of the vendee who fastens a lien upon the
property by execution, attachment or like legal process
before the contract is filed for record. Gen. Stat. 1909,
Sect. 5237; McVay v. English, 30 Kansas, 368, 371; Lead
Pencil Co. v. Champion, 57 Kansas, 352, 257; Young-
berg v. Walsh, 72 Kansas, 220, 227; Geiser Mfg. Co. v.
Murray, 84 Kansas, 450; Paul v. Lingenfelter, 89 Kansas,
871; Geppelt v. Middle West Stone Co., 90 Kansas, 539,
544; Dison v. Tyree, 92 Kansas, 137, 139; Big Pour Im-
plement Co. v. Wright, supra. Here the contract was
made October 14,1911, and filed for record May 15,1912.
In the meantime no creditor fastened a lien upon the
property by execution, attachment or other legal process.
But it is contended that Sect. 47-A, clause 2, of*the Bank-
ruptcy Act, as amended in 1910, o. 412, 36 Stat. 838, 840,
gave the trustee the status of a creditor having such a
lien. That section provides that a trustee in bankruptcy,
'as to all property in the custody or coming into the
TRUSTEE'S TITLE
1441
custody of the bankruptcy court, shall be deemed vested
with all the rights, remedies, and powers of a creditor
holding a lien by„legal or equitable proceedings.' Al-
though otherwise explicit, this provision does not desig-
nate the time as of which the trustee is to be regarded
as having acquired the status indicated, and yet some
point of time must be intended. Is it the date of
the trustee's appointment, the filing of the petition in
bankruptcy, or some time anterior to both? "When not
otherwise specially provided, the rights, remedies and
powers of the trustee are determined with reference to
the conditions existing when the petition is filed. It is
then that the bankruptcy proceeding is initiated, that
the hands of the bankrupt and of his creditors are stayed
and that his estate passes actually or potentially into
the control of the bankruptcy court. We have said:
'The filing of the petition is an assertion of jurisdiction
with a view to the determination of the status of the
bankrupt and a settlement and disposition of his estate.
The exclusive jurisdiction of the bankruptcy court is
so far in rem that the estate is regarded as in custodia
legis from the fifing of the petition.' Acme Harvester
Co. v. Beekman Lumber Co., 222 U. S. 300, 307. And
again: 'We think that the purpose of the law was to fix
the fine of cleavage with reference to the condition of
the bankrupt estate as of the time at which the petition
was filed and that the property which vests in the trustee
at the time of adjudication is that which the bankrupt
owned at the time of the fifing of the petition.'
"Everett v. Judson, 228 IJ. S. 474, 479. And see
Zavelo v. Reeves, 227 IJ. S. 625, 631. Had it been in-
tended that the trustee should take the status of a cred-
iter holding a lien by legal or equitable process as of
a time anterior to the initiation of the bankruptcy pro-
ceecling, it seems reasonable to believe that some expres-
sion of that intention would have been embodied in Sect.
47-A as amended. As this was not done, we think the
better view, and one which accords with other provisions
of the act, is that the trustee takes the status of such
1442
BANKRUPTCY
a creditor as of the time when the petition, in bankruptcy
is filed. Here the petition was filed almost two months
after the contract was filed for record, and therefore
the trustee was not entitled to assail it under the record-
ing law of the State.
"The record shows that between the date of the con-
tract and the time it was filed for record the bankrupts
mortgaged the machine to the First National Bank of
Horton and that the bank, although apparently assert-
ing some right under the mortgage, was not brought into
the present proceeding. In this situation, our decision
and that of the Circuit Court of Appeals must be under-
stood to be without prejudice to further proceedings re-
specting the rights, if any, existing under that mort-
gage.''
Question 808: If the conditional sale had been recorded be-
fore bankruptcy but after a creditor had obtained a judgment,
•would the title of the conditional seller have been good against
the trustee ? If the petition had been filed prior to the record-
ing of the conditional sale and there had then been no creditors
who had any lien by legal or equitable proceedings, would the
trustee's right be superior to that of the conditional vendors?
(Note: Prior to amendment of 1910, the Bankruptcy Act
as construed by the judicial decisions gave the trustee no greater
rights than the creditors had at the time of the filing of the
petition. That is to say, for example, if there was an unrecorded
conditional sale made to the bankrupt under which he took
possession, and the statute provided that the rights of the seller
should be void as against judgment or attaching creditors, the
result would be that a general creditor would have no rights
superior to the conditional vendor unless he got his judgment
or attachment lien prior to the recording of the conditional
sale or prior to the taking possession by the vendor for default.
Therefore if at the time the petition in bankruptcy was filed,
there were no judgment or attachment creditors, the trustee
would merely represent them as general creditors and the rights
of the conditional vendor would be superior to his notwithstand-
ing such conditional vendor had not recorded the conditional
sale, or taken possession, and notwithstanding the conditional
sale was unknown to any of the creditors. This was manifestly
TEUSTEE'S TITLE
1443
unjust and one might almost say, absurd, because the filing of
the petition in bankruptcy took away from the creditors, rights
that on that same day they might have procured by obtaining
judgment or by attaching the property. Under amendment
of 1910, the trustee became vested with all the rights, remedies
and powers of a creditor holding a lien by legal or equitable
proceedings, and which might have been exercised by them had
such bankruptcy petition not been filed. This refers, as shown
in the Bailey case to the time when the petition is filed. If a
record is made or possession taken under any chattel mortgage
or conditional sale prior to the filing of the petition, which at
that time is good against creditors, then it is also good against
the trustee.)
Had there been creditors having a lien by legal or equitable
proceedings (i. e. by judgment, attachment or otherwise), and
such liens had accrued prior to the filing of the conditional
sale, then by the state law as to conditional sales, the creditors
would have had the superior advantage and the trustee would
have had the same advantage. So if the petition had been filed
prior to the recording of the conditional sale the trustee would
not take subject to the interest of the conditional vendors, even
though no creditor had any such lien (being all general credi-
tors) for the trustee is given the status of a creditor having a
lien by legal or equitable proceedings.
If any creditors secured judgments within four months prior
to the filing of the petition, their liens would be dissolved so far
as they thereby could secure any advantage over other creditors,
but the fact that there were such judgment creditors would give
the trustee the character of a judgment creditor even if the
conditional sale was recorded before bankruptcy for the lien of
the judgment though dissolved by the bankruptcy proceedings
would be preserved for the benefit of the estate.)
§839. (Bankruptcy, Sec. 49.) As to nature of
property.
Case 809. Bankruptcy Act, Sec. 70.
"The trustee of the estate of a bankrupt upon his
appointment and qualification, and his successor or sue-
cessors, if he shall have one or more, upon his or their
appointment or qualification shall in turn he vested with
operation of law with the title of the bankrupt, as of
1444
BANKRUPTCY
the date he was adjudged a bankrupt, except in so far
as it is to property which is exempt, to all
"(1) Documents relating to his property;
"(2) Interests in patents, patent rights, copyrights
and trademarks;
 (3) Powers which might have been exercised for his
own benefit, but not those which he might have exercised
for some other person;
"(4) Property transferred by him in fraud of his
creditors;
"(5) Property which prior to the filing of the peti-
tion he could by any means have transferred or which
might have been levied upon and sold under judicial
process against him;
"Provided, That when any bankrupt shall have any
insurance policy which has a cash surrender value pay-
able to himself, his estate, or personal representatives,
he may, within thirty days after the cash surrender
value has been ascertained and stated to the trustee by
the company issuing the same, pay or secure to the trus-
tee the sum ascertained and stated, and continue to hold,
own, and carry such policy free from the claims of the
creditors participating in the distribution of his estate
under the bankruptcy proceedings, otherwise the policy
shall pass to the trustee as assets; and
"(6) Rights of action arising upon contracts or from
the unlawful taking or detention of, or injury to, his
property.
"b. All real and personal property belonging to bank-
rupt estates shall be appraised by three disinterested
appraisers; they shall be appointed by, and report to,
the court. Real and personal property shall, when prac-
ticable, be sold subject to the approval of the court; it
shall not be sold otherwise than subject to the approval
of the court for less than seventy-five per centum of
its appraised value.
c. The title to property of a bankrupt estate which
has been sold, as herein provided, shall be conveyed to
the purchaser by the trustee.
TRUSTEE'S TITLE
1445
d. Whenever a composition shall be set aside, or dis-
charge revoked, the trustee shall, upon his appointment
and qualification, be vested as herein provided with the
title to all of the property of the bankrupt as of the
date of the final decree setting aside the composition or
revoking the discharge.
e. The trustee may avoid any transfer by the bank-
rupt of his property which any creditor of such bankrupt
might have avoided, and may recover the property so
transferred, or its value, from the person to whom it was
transferred, unless he was a bona fide holder for value
prior to the date of the adjudication. Such property
may be recovered or its value collected from whoever
may have received it, except a bona fide holder for value.
For the purpose of such recovery any court 'of bank-
ruptcy as hereinbefore defined, and any State court which
would have had jurisdiction if bankruptcy had not inter-
vened, shall have concurrent jurisdiction.
f. Upon the confirmation of a composition offered
by a .bankrupt, the title to his property shall thereupon
revest in him.
§ 840. (Bankruptcy, Sec. 50.) Personal privileges.
(Note: Privileges or rights purely personal, that the bank-
rupt himself could not have transferred or which could not be
reached under legal process, as for instance a personal license,
do not pass to the trustee; but if of transferable value, even
though there might be objections successfully urged to its trans-
fer by others, as for instance by members of' a stock exchange
to the transfer of a membership it passes to the trustee, although
his realization of value thereby might be defeated:)
§ 841. (Bankruptcy, Sec. 51.) Interests in patents,
patent right, copyrights and trademarks.
(Note: Specifically given by Sec. 70 of the law quoted above
in § 839.)
§ 842. (Bankruptcy, Sec. 52.) Insurance policies.
(Note: See Sec. 70, quoted above in § 839.)
1446
BANKRUPTCY
Case 810. Burlingham v. Crouse, 228 United States
Reports, 459.
Mr. Justice Day delivered the opinion of the Court:
< i # # #
''It appeared that the policies had a cash surrender
value which at the time when the trustees qualified was
$15,370.00 or the amount of the loan of the Equitable
Society upon the policies. It is therefore apparent that
on the day when the petition was filed as well as the
day of the adjudication in bankruptcy, the cash sur-
render value would not have exceeded the loan and lien
of the society upon the policies. The Circuit Court of
Appeals for the Second Circuit held that under the cir-
cumstances the policies did not pass to the trustee as
assets. * * *
"* * * Congress undoubtedly had the nature of
insurance contracts in mind in passing § 70-a with its
proviso. * * * In passing this statute, Congress in-
tended, while exacting this much, that when that sum
[the cash or surrender value] was realized to the estate
the bankrupt should be permitted to retain the insur-
ance which, because of advancing years or declining
health, it might be impossible for him to replace. It is
the two-fold purpose of the Bankruptcy Act to convert
the estate of the bankrupt into cash and distribute it
among creditors and then to give the bankrupt a fresb
start with such exemptions and rights as the statute left
untouched. In the light of this policy the act must be
construed. We think it was the purpose of Congress to
pass to the trustee that sum which was available to the
bankrupt at the time of bankruptcy as a cash asset, other-
wise to leave to the insured the benefit of his life insur-
ance. * # *
[The Court affirms the judgment of the Circuit Court.
This case holds (1) that if the insurance has no sur-
render value (in this case because the surrender value
had been fully advanced prior to bankruptcy) the policies
do not pass to the trustee; (2) that the assignee of a
TRUSTEE'S TITLE
1447
policy lias the right to retain the policy on the same
terms that the bankrupt might have retained it.]
Question 810: In what case does an insurance policy pass to
the trustee ? How can the bankrupt prevent it from passing to
the trustee? Why in the above case did or did not the policy
pass to the trustee ?
Case 811. Everett v. Judson, 228 United States Re-
ports, 474.
Facts: Judson and Judson, partners, went into in-
voluntary bankruptcy December 17, 1910; on January
9, 1911, the firm and its members were adjudged bank-
rupts. On February 9, 1911, Everett qualified as trus-
tee. Alfred N. Judson, one of the members owned cer-
tain life insurance policies at the time the petition in
bankruptcy was filed, which were payable to his execu-
tors, administrators or assigns. At the time of the filing
of the petition in bankruptcy the value of these policies
after deducting loans that had been made upon them was
$63.80. Their principal amount payable in the event of
death was $16,000 less outstanding advances against
them. After the petition in bankruptcy was filed and be-
fore the adjudication in bankruptcy Alfred N. Judson
committed suicide and the policies thereby became pay-
able. This contest is between the executor of Judson's
estate and the trustee in bankruptcy to settle the right to
funds amounting to $8,675.14, the sum due on the policies,
less $63.80 their cash surrender value, or $8,611.34. The
District Court held that the proceeds of the policies over
and above the cash surrender value as of the date of the
filing of the petition passed to the executor. The Circuit
Court of Appeals affirmed the order of the District Court.
Mr. Justice Day delivered the opinion of the Court:
"The present case was argued at the same time as the
case of Burlingham v. Crouse, ante, p. 459, and in so far
as it is like that case the principles therein laid down are
controlling. The present case has, however, a feature not
directly involved in the case of Burlingham v. Crouse,
because Judson, the insured, committed suicide before
1448
BANKRUPTCY
the adjudication in bankruptcy, although after the filing
of the petition, and it is the contention of the petitioner
that the Bankruptcy Act vested the title to the property
in the trustee as of the time of the adjudication and that
the death of the bankrupt between the filing of the
petition and the date of the adjudication made the pro-
ceeds of the policies assets in the hands of the trustee.
 While it is true that Sec. 70a provides that the trus-
tee, upon his appointment and qualification, becomes
vested by operation of law with the title of the bankrupt
as of the date he was adjudged a bankrupt, there are
other provisions of the statute which, we think, evidence
the intention to vest in the trustee the title to such prop-
erty as it was at the time of the filing of the petition.
This subject was considered in Acme Harvester Co. v.
Beekman Lumber Co., 222 TJ. S. 300, wherein it was held
that, pending the bankrupt proceedings and after the
filing of the petition, no creditor could obtain by attach-
ment a lien upon the property which would defeat the
general purpose of the law to dedicate the property to
all creditors alike. Section 70a vests all the property in
the trustee, which, prior to the filing of the petition, the
bankrupt could by any means have transferred or which
might have been levied upon and sold under judicial
process against him. The bankrupt's discharge is from
all provable debts and claims which existed on the day on
which the petition for adjudication was filed. Zavelo v.
Reeves, 227 IJ. S. 625, 630-1. The schedule that the bank-
rupt is required to file, showing the location and value
of his property, must be filed with his petition.
"We think that the purpose of the law was to fix the
line of cleavage with reference to the condition of the
bankrupt estate as of the time at which the petition was
filed and that the property which vests in the trustee at
the time of adjudication is that which the bankrupt
owned at the time of the filing of the petition. And it
is as of that date that the surrender value of the insur-
ance policies mentioned in Sec. 70a should be ascertained.
The subsequent suicide of the bankrupt before the ad-
TRUSTEE'S TITLE
1449
judication was an unlooked-for circumstance which does
not change the result in the light of the construction
which we give the statute.
"It follows that the judgment should be
"Affirmed.
Question 811: A goes into bankruptcy having insurance in
the amount of $10,000 upon his life that has a cash surrender
value of $100. This is his only asset. After the petition is filed
and before the adjudication in bankruptcy A dies. The policy is
payable to his estate of which X, Y, and Z are beneficiaries.
The creditors claim the $10,000 (their claims aggregating more
than that sum). Are they entitled to it?
Case 812. Cohen, Trustee in Bankruptcy, v. Samuels,
245 United States Beports, 50.
Facts: On May 13,1915, Elias W. Samuels filed a volun-
tary petition in bankruptcy and was adjudicated a bank-
rupt. Cohen was appointed his trustee. Samuels held five
insurance policies in various companies. They were pay-
able to certain relatives of Samuels as beneficiaries,
Samuels reserving the right to change the beneficiaries.
These policies had a cash surrender value when the pe-
tition was filed. Cohen made a motion to compel Sam-
uels to deliver'to him the policies or pay their cash sur-
render value. The motion was denied by the District
Court, and again denied by the Circuit Court of Appeals.
The case comes before the Supreme Court upon this
question.
Me. Justice McKexxa delivered the opinion of the
Court:  * * * The declaration of subdivision 3 is
that 'powers which he might have exercised for his own
benefit' 'shall in turn be vested' in the trustee, and there
is vested in him as well all property that the bankrupt
could transfer or which by judicial process could be sub-
ject to his debts, and especially as to insurance policies
which have a cash surrender value payable to himself, his
estate or personal representative. It is true that the poli-
cies here are not so payable, but they can be, or could have
been, so payable at his own will and by simple declara-
1450
BANKRUPTCY
tion. Under such conditions to hold that there was noth-
ing of property to vest in the trustee would be to make
an insurance policy a shelter for valuable assets, and it
might be, a refuge for fraud. * * * Judgment of
the Circuit Court of Appeals affirming the order of the
District Court is reversed and the case remanded to the
District Court for further proceedings in accordance
with his opinion.
Question 812: What does this case hold?
§ 843. (Bankruptcy, Sec. 53.) Property held by bank-
rupt in trust or nature of a trust.
(Note: If the bankrupt holds a legal title to property in
trust for another, this property is no part of his estate and
does not pass to the trustee in bankruptcy.. Thus if he holds
under an express trust, the property so held is not assets. A
man worth $5,000 might be made trustee of a $100,000 estate.
The same is true of property held under an implied trust.
The property is not his, although he holds legal title to the same.
In order to claim trust property or funds, the property or
funds must be identified. But if the funds are traced into a
general fund and payments made out of that fund, and the
amount of the general fund does not fall below the amount of
the trust fund, the presumption will be that the trustee did not
wrongfully use the trust funds in his drafts upon the fund, and
the trust fund will be deemed to be a part of such larger fund
and reclaimable by the beneficiary, "because the legal presump-
tion is that he regarded the law and neither paid out nor in-
vested in other property the trust fund but kept it sacred."—
Empire State Surety Co. v. Carroll County, 194 Federal Re-
porter, 593, at 605.)
§ 844. (Bankruptcy, Sec. 54.) Property transferred or
money paid as a preference.
Case 813. Coder v. Arts, 152 Federal Reports, 943
(affirmed in 213 U. S. 223.).
Sanborn, Circuit Judge : '' The court below sustained
a mortgage to William Arts to secure a pre-existing debt
TRUSTEE'S TITLE
1451
of $98,503.32, which Alexander Armstrong, the mort-
gagor, owed him. This mortgage was dated May 2,1904,
recorded May 3, 1904, described 2,360 acres of land in
Carroll county, Iowa, owned by Armstrong, who subse-
quently, and on July 27, 1904, filed his voluntary petition
in bankruptcy, which was afterwards granted. The trus-
tee assails the conclusion of the court below that this
mortgage is valid by an appeal, and also by a petition
to revise upon the grounds (1) that Arts had reasonable
cause to believe that by this mortgage it was intended to
give him a preference (section 60b, 30 Stat. c. 541, pp.
562, 560 (U. S. Comp. St. 1901, p. 3445), 32 Stat. c. 487,
Sec. 13, p. 799 (U. S. Comp. St. Supp. 1905, p. 689) ); (2)
that Armstrong gave the mortgage with the intent on his
part to hinder, delay, and defraud his creditors (section
67e); and (3) that it was made within four months prior
to the filing of the petition, and is void, although the
mortgagee had no reasonable cause to believe that it was
intended to give a preference by it, and the mortgagor
did not make it with the intent to hinder, delay, or de-
fraud other creditors. As the consideration of some of
these contentions involves the investigation of the facts
and circumstances under which the mortgage was given,
the case will be considered upon the appeal and the peti-
tion to revise will be dismissed.
"1. There was much conflict in the evidence, but these
facts were established: Armstrong was engaged prin-
cipally in farming; Arts in banking. The latter had been
sole owner of a state bank in Carroll in the state of Iowa
for six years, and his son, W. A. Arts, had been his
cashier. As early as 1900 Arts had loaned $28,000 to
Armstrong, and from that time until the mortgage was
made he continued to loan him money in amounts vary-
ing from $20,000 to a few thousand dollars at a time, and
to renew old loans until, on May 2, 1904, Armstrong owed
him upon his promissory notes $98,503.32, and was over-
drawn about $2,000 in his bank. The debtor had the
reputation of being one of the wealthiest men in Carroll
county. He held the title to 2,440 acres of land in that
1452
BANKRUPTCY
county, to 616y2 acres in Monona county, to a residence
in the town of Glidden, for which he paid about $12,000,
to 200 or 300 cattle, some 30 horses, a large number of
hogs, and some farm machinery. There were mortgages
upon some of these lands, but they amounted to but a
small proportion of the value of the real estate. In July,
1903, Armstrong had made a statement to Arts in which
he estimated the value of his property at $220,000 and
mentioned one mortgage for $5,900. The capital of Arts'
bank was $50,000 and he had loaned to Armstrong this
$98,503.32 without any security. In March and April,
1904, Arts became very seriously ill, and F. H. Arts, one
of his sons, who was in business in Nebraska, was called
home to attend him in his illness. "While he was at C'ar-
roll, he and W. A. Arts, the cashier, examined the loans
made by their father, and he suggested that as the loan
to Armstrong was very large, and the facts regarding
it might soon be discovered, the interests of the bank de-
manded that this loan should be secured. One of the sons
then telephoned to Armstrong who lived several miles
distant, and asked him to come to the bank. He came the
next morning, and they expressed their wish to him and
the reason for it. He returned to his home, sent them his
tax receipts, they caused' the mortgage to be drawn, and
four or five days later, on May 2, 1904, he and his wife
came in and executed it. On the next day Arts recorded
it. At the time it was recorded Arts requested the re-
corder not to enter the mortgage upon a book which he
kept for the convenience of news-mongers, but which was
not one of the legal records of the county, and the re-
corder complied with his request. At the time this mort-
gage was made Armstrong was overdrawn in the bank
about $2,000, and no security was taken for this over-
draft, nor was it paid. Armstrong continued to draw
checks upon the bank, and, during the month of May and
a part of June, Arts paid out for him without farther
security $3,000 more. Arts and his sons testified that
they did not know that Armstrong was insolvent, and
that they had no cause to believe that there was any in-
TRUSTEE'S TITLE
1453
tention to give Aits a preference by the execution of the
mortgage. The truth was that Armstrong was insolvent.
He owed about $295,000 and his property was worth
about $182,000. He testified that he knew he was insolv-
ent when he gave the mortgage. He did not inform Arts
or his sons of this fact, and he made a statement in De-
cember, 1903, that he owed $36,000, and that the value of
his property was $210,750, and another on June 13, 1904,
more than a month after the mortgage was recorded, in
which he disclosed property worth, at his estimate, $59,-
340 more than his debts. The mortgage to Arts covered
2,360 acres of land in Carroll county; but Armstrong held
the title to 616y2 acres of land in Monona county which
he estimated worth $40,040, subject to a mortgage of
$20,000, 80 acres near Glidden which he estimated worth
$6,400, and personal property, which he estimated worth
$28,600, which were not included in this mortgage, and
which, according to these estimates made in June, 1904,
were'worth more than $45,000 above the incumbrances he
then reported upon them. Armstrong and his wife testi-
fied, and Arts and his sons denied, that the sons agreed
with Armstrong and his wife that the mortgage should
be kept from the record for six months, and that when
they told Arts of this contract he replied: "I guess not,
too much inquiry. It will go on record.'' The mortgage
was recorded the day after it was made. One Sterling
testified, and W. A. Arts denied, that in March or April,
1904, the latter told Sterling that Henry Armstrong was
no good, and the old man was no better. One Hess tes-
tified that in 1900 Armstrong owed and paid his bank
$28,000, and that he then learned that he was in debt to
the amount of $75,000. One Carter testified, and Arts de-
nied, that the former, in February, 1904, tried to sell to
the latter two promissory notes signed by Armstrong,
and that Arts declined to buy them, and said that he was
carrying the Armstrongs for all that he cared to, and
that they would have to pay up before he would let them
have any more money.
"In this state of the evidence the court below was of
1454
BANKRUPTCY
the opinion that Arts did not have reasonable cause to
believe that there was any intention to give him a prefer-
ence by the making of this mortgage. When the court
has considered conflicting evidence and made a finding or
decree it is presumptively correct and unless some obvi-
ous error of law has intervened or some serious mistake
of fact has been made, the finding or decree must be per-
mitted to stand. * * *
"Armstrong was engaged principally in farming, and
he was not subject to adjudication in bankruptcy upon
an involuntary petition. The preference voidable under
the bankruptcy law, therefore, could not arise, unless he
voluntarily invited an adjudication in bankruptcy against
himself. In the absence of such an adjudication of a bona
fide mortgage whereby a creditor obtains a larger per-
centage of his preexisting debt than other creditors of
the same class is valid. Armstrong was reputed to be one
of the wealthiest citizens of Carroll county. He made a
financial statement to Arts less than a year before this
mortgage was made, which disclosed property owned by
him which was worth at least $100,000 above the debt
to Arts, and the other debts he then mentioned. Arts had
been loaning money to him without security for many
years. All the testimony, which tended to show any rea-
sonable cause for Arts to believe that there was any in-
tention to give him a preference by the execution of this
mortgage, was denied under oath. The mortgage was
not taken hastily. It did not include all the debtor's
property, but left personal and real estate worth many
tens of thousands of dollars uncovered by it, and Arts
still extended credit to Armstrong for the $2,000 over-
draft, and within the next 50 days after the mortgage
was made paid out for him $3,000 more without taking
any security until after it had been expended. These
facts support the finding below. To our minds the record
discloses no mistake in the consideration of the evidence,
and no error in the application of the law in the investi-
gation of this question by the court below. Our conclu-
sion is that Arts did not have reasonable cause to believe
TRUSTEE'S TITLE
1455
that there was any intention to give him a preference
over other creditors by the execution of the mortgage of
May 2, 1904.
1 '2. Upon the record which has been recited the court
also found that Armstrong did not make this mortgage
with the intent or purpose on his part to hinder, delay, or
defraud his creditors, or any of them, and no error of law
or mistake of fact has been discovered in its consider-
ation of the evidence relative to this question which
would warrant a disturbance of this conclusion. The
contention that the intent to hinder, delay, and defraud
other creditors must be inferred from the fact that the
inevitable effect of the mortgage was to deprive them
of the opportunity to collect their claims in full, and from
the rule of law that every one is presumed to intend the
natural and probable effect of his acts, is not tenable
here. It is every intent to hinder, delay, or defraud cred-
itors unlawfully only, not every intent to hinder, or delay
them, that avails to avoid a transfer made for a pre-exist-
ing debt under section 67e. An insolvent debtor until the
commencement of proceedings in bankruptcy still has the
jits disponendi of his property. He has the right to
secure and pay his debts with it, and he has the right to
secure and pay one creditor in preference to others, pro-
vided always the security or the payment is not violative
of any of the acts of Congress or of any of the statutes of
the state. A preference of one creditor over others by
such a payment or by such security, which is free from
actual and intended fraud, and from any purpose to
affect other creditors injuriously, beyond the necessary
effect of the security or the payment, is valid and lawful,
and it cannot evidence such an intent to hinder, delay and
defraud as will make it void or voidable under section
67e. 'Every mortgage necessarily tends to hinder or
delay creditors other than the mortgagee, but a delay
necessarily resulting from a fair and honest exercise of
the right to dominion over one's property, and to pledge
or otherwise dispose of it, is neither an unjust nor law-
ful interference with the rights of others and is not
1456
BANKRUPTCY
within the terms of the statute making void conveyances
intended to hinder or delay creditors.' Sabin v. Colum-
bia River Lumber & Fuel Co., 34-Pac. 692, 695, 25 Or. 15,
42 Am. St. Rep. 756; Lampson v. Arnold, 19 Iowa, 479,
484, 485; Stewart v. Dunham, 115 U. S. 61, 66, 5 Sup. Ct.
1163, 29 L. Ed. 329. A transfer made in good faith
to pay or to secure an honest antecedent debt by an
insolvent within four months of the filing of a peti-
tion in bankruptcy by or against him constitutes no
evidence of an intent on his part to hinder, delay, or
defraud other creditors, within the meaning of sec-
tion 67e of the bankruptcy law, notwithstanding the
fact that its necessary effect is to hinder and delay them,
and to deprive them of the opportunity they might other-
wise have had to collect their claims in full.
 There is no other substantial evidence in this case
of any purpose on the part of Armstrong to hinder, delay,
or defraud any of his creditors. He honestly owed the
entire debt he secured. He owed a banker, who for years
had loaned him money whenever he desired it, without
security. A part of his debt was due, and a portion had
not yet matured. His creditor was ill, and his sons
feared for his life. He owed him more than the entire
capital of his bank, and the cashier feared that if this
fact were known it might cause a run upon the institution
He was requested to protect and secure an obligation he
could not immediately pay. He did so with no apparent
purpose or intention except to honestly secure the pay-
ment of that which he undoubtedly would have paid as he
had promised if the money to do so had been at his dis-
posal. His act was free from fraud or unlawful intent,
and the finding of the court upon this question must be
affirmed.
"3. Was the mortgage voidable by the trustee
although the mortgagee did not have reasonable cause to
believe that there was an intention to give a, preference
thereby under section 60b and although the mortgagor
had no intent or purpose on his part to hinder, delay, or
defraud his creditors, or any of them, under section 67e,
TRUSTEE'S TITLE
1457
because the mortgage was given to secure a pre-existing
debt within four months of the filing of a petition in
bankruptcy? Counsel for the trustee argue that an af-
firmative answer should be given to this question because
sections 60a and 60b have no application to liens volun-
tarily created, and section 67e avoids mortgages for a
pre-existing debt although the mortgagor had no intent
to hinder, delay, or defraud his creditors. The portions
of these sections pertinent to their argument are:
 'Sec. 60. Preferred Creditors.—a. A person shall be
deemed to have given a preference if, being insolvent,
he has procured, or suffered a judgment to be entered
against himself in favor of any person, or made a trans-
fer of any of his property, and the effect of the enforce-
ment of such judgment or transfer will be to enable any
one of his creditors to obtain a greater percentage of his
debt than any other of such creditors of the same class.
 'b. If a bankrupt shall have given a preference
within four months before the filing of a petition, or
after the filing of the petition and before the adjudica-
tion, and the person receiving it or to be benefited
thereby, or his agent acting therein, shall have had rea-
sonable cause to believe that it was intended thereby to
give a preference, it shall be voidable by the trustee and
he may recover the property or its value from such
person.''
 'Sec. 67. Liens.—d. Liens given or accepted in
good faith and not in contemplation of, or in fraud upon
this act and for a present consideration, which have been
recorded according to law, if record thereof was neces-
sary in order to impart notice, shall not be affected by
this act.
 'e. That all conveyances, transfers, assignments or
incumbrances of his property, or any part thereof, made
or given by a person adjudged a bankrupt under the pro-
visions of this act subsequent to the passage of this act,
and within four months of the filing of the petition, with
the intent and purpose on his part to hinder, delay, or
defraud his creditors, or any of them, shall be null and
void as against the creditors of such debtor.'
1458
BANKRUPTCY
"The following, and many other authorities cited by
counsel to sustain their contention, have been examined
by the court: City National Bank v. Bruce, 109 Fed.
69, 48 C. C. A. 236; In re Sanderlin (D. C.), 109 Fed. 857;
In re Jones (D. C.), 118 Fed. 673; In re Belding (D. C.),
116 Fed. 1016; In re Wolf (D. C.), 98 Fed. 84; In re Pease
(D. C.), 129 Fed. 447, 448; In re Gutwillig, 92 Fed. 337,
34 C. C. A. 337; Keppel v. Tiffin Savings Bank, 197 U. S.
356, 25 Sup. Ct. 443, 49 L. Ed. 790; Pollock v. Jones, 124
Fed. 163, 61 C. C. A. 557. But the word 'transfer' in
section 60a. both by the express terms of the bankruptcy
law and by the authoritative decision includes 'the sale
and every other and different mode of disposing of, or
parting with property, or the possession of property, ab-
solutely or conditionally, as a payment, pledge, mortgage,
gift or security.' Section 1, par. 25; Pirie v. Chicago
Title & Trust Co., 182 U. S. 438, 444, 21 Sup. Ct. 906, 45
L. Ed. 1171; In re Ed. W. Wright Lumber Co. (D. C.),
114 Fed. 1011, 1013. A mortgage is a security and a
transfer, and subject to the provisions of section 60a and
section 60b. Such a mortgage or transfer as constitutes
a preference under section 60a is not voidable under sec-
tion 60b by the plain words of that section, and by its
adjudicated construction unless the creditor who receives
it, or is benefited by it, or his agent, has reasonable cause
to believe that it was intended thereby to give a prefer-
ence. Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 21
Sup. Ct. 906, 45 L. Ed. 1171; McNair v. Mclntyre, 113
Fed. 113, 114, 51 C. C. A. 89, 90; Hussey v. Richardson-
Roberts Dry Goods Co. (C. C. A.), 148 Fed. 598, 599;
Pittsburg Plate Glass Co. v. Edwards (C. C. A.), 148 Fed.
377.
"And finally, mortgages or transfers, to secure pre-
existing debts made within four months of the filing of a
petition in, bankruptcy, are legal and valid, unless void-
able by reason of some provision of the bankruptcy law,
or of some state law, notwithstanding the fact that
they create preferences. They are valid unless avoided;
not void unless validated. The provision of section 67d,
TRUSTEE'S TITLE
145
that liens for present considerations given and accepte
in good faith shall not be affected by the bankruptcy la\
does not strike down or render voidable those given an
accepted for past considerations, and section 67e, whic
declares that all transfers made or given by a perso
adjudged a bankrupt within four months before the filin
of the petition 'with the intent and purpose on his pai
to hinder, delay, or defraud his creditors, or any of then
shall be null and void,' is necessarily limited by tb
force of its terms to those transfers which are given wit
that intent only, and it leaves those given and accepte
without such an intent unaffected by it and valid. .
transfer or mortgage made by a person adjudged a banl
rupt to secure a pre-existing debt within four months c
the filing of the petition is not voidable under section 67*
unless it was either made with the intent on his part i
hinder, delay or defraud his creditors, or some of then
or is held void as against his creditors by the laws of tb
state, territory, or district in which the property is siti
ated. The result is that the mortgage to Arts was pro|
erly sustained by the court below.
Question 813: (1) What is a preference? Within whj
time must it be made in order to be voidable by the trustee
What must be true of the creditor to whom a preferential tran:
fer is made in order to make him subject to an order to surrende
the preference?
 (2) Is a preference of one creditor over another in itself
fraudulent conveyance?
(3) If a lien is given to secure an indebtedness entered ini
at the time the lien is given voidable under the bankruptcy la
if given within four months prior to the filing of the petition i
bankruptcy and if the creditor knows the debtor is insolvent ?
(4) Answer the same question in case of a lien given t
secure a past indebtedness.
(5) When will a lien given to secure a past indebtednes
when the lien is taken within the four months be not voidable
(Note: It is the idea of a voidable preference that ther
be an existing indebtedness that is then paid, so that the paii
creditor knowing or having reasonable cause to know that
1460
BANKRUPTCY
preference is intended, gets a greater percentage of his claim
than other creditors would get if the estate were then divided
among them. A preference must deplete the estate. Hence, a
payment to a creditor having full security is not a preference;
hence, also, transactions in which value for value is given can-
not be preferences, as payments by an insolvent for considera-
tions received, or sales by him,, even though in his exigency he
sells for a low price.)
§ 845. (Bankruptcy, Sec. 55.) Fraudulent conveyances.
(Note: See Coder v. Arts, supra, and Githens v. Shiffler,
supra.)
(Note: A fraudulent conveyance which is fraudulent in fact
or fraudulent in law is voidable by the trustee in bankruptcy if
the creditors could have avoided it under the laws of the state,
no matter whether made within or before the four months period.
In other words, the bankruptcy proceeding will not deprive the
creditors of rights which they would have had had bankruptcy
proceedings not intervened. Stellwegen v. Crum, 245 United
States, 605.
It is essential, of course, to the voidability of the transfer that
the person to whom it is made be chargeable with knowledge or
notice of the fraud intended, for if he is a purchaser for value
and without notice he acquires a good title. In this connection
it is to be remembered that a conveyance may be constructively
or legally fraudulent though in fact it is not fraudulent as, for
instance, where a bulk sales law is not observed, or there is
retention of possession after sale.)
§ 846. (Bankruptcy, Sec. 56.) Property held by bank-
rupt claimed by third persons.
(See In re Columbus Buggy Co., Case No. 267, supra.)
§ 847. (Bankruptcy, Sec. 57.) Property held by third
person belonging- to bankrupt.
(Note: The trustee can recover any property belonging to
the bankrupt which any other person has in his possession not
held under a valid right or lien good against the creditors. In-
asmuch as possession is usually equivalent to recording, any
third person having possession by way of pledge or to maintain
TRUSTEE'S TITLE
1461
any lien would have a right which he could enforce in the
bankruptcy proceedings. Subject to valid liens, if any, property
in the hands of others belonging to the bankrupt passes to the
trustee and he may recover it.)
§848. (Bankruptcy, Sec. 58.) Rights to sue.
(See Johnson v. Collier, 228 United States Reports, 538, set
out under § 837, supra.)
Case 814. Matter of W. 0. Nabors, bankrupt, 48
American Bankruptcy Reports, 619.
Clayton, District Judge : "Nabors, the bankrupt here,
was injured by a government motorcycle being driven by
an enlisted soldier of the United States Army on March
9,1918. He has pending in Congress a claim in the form
of a bill to pay him $10,000 damages on account of his
injury, and the Court is informed that this bill has re-
ceived the sanction of the senate of the United States,
but it has not passed the house of representatives.
"The petitioners, McAbee & Jenkins, show that they
are creditors of the bankrupt, and that he is indebted to
them in the sum of $348.95 by provable claim, which has
heretofore been duly filed and allowed in this cause. The
petitioners further show that on June 15, 1921, the bank-
rupt filed his voluntary petition, with a schedule of assets
and liabilities; that in the conduct of said matter no
dividend was paid to the creditors, and that on January
25, 1922, the bankrupt was discharged; and the petition-
ers show that at the time of the filing of his petition and
his discharge the bankrupt failed to schedule as part of
the assets of his estate his right of action or claim for
damages accruing to him for injuries sustained by him
in collision with the motorcycle hereinbefore mentioned.
"The petitioners pray for an order setting aside the
discharge and reopening the case for further appropriate
proceedings in the matter, to the end that the aforesaid
.right of action or claim of the bankrupt may be admin-
istered as a part of his estate. The above claim for in-
1462
BANKRUPTCY
juries sustained in the manner above described by the
bankrupt, because of the negligent act of a soldier of the
United States, is not a legal liability against the govern-
ment. If such a claim be paid at all, it will be paid be-
cause of the sense of justice or generosity of the Con-
gress. It is manifest that this claim of the bankrupt
against the United States government does not pass to
the trustee or creditors in bankruptcy as a part of his
estate.
 'A claim for unliquidated damages resulting in per-
sonal injuries on account of negligence is not a provable
debt. Imbriani v. Anderson, 76 N. H. 491, 84 Atl. 974;
In re New York Tunnel Co. (C. C. A. 2d Cir.) 20 Am.
B. R. 25, 159 Fed. 688, 86 C. C. A. 556; Brown & Adams
v. United Button Co. (C. C. A. 3d Cir.), 17 Am. B. R.
565, 149, Fed. 48, 79, C. C. A. 70, 8 L. R. A. (N. S.) 961,
9 Ann. Cas. 565; Weisfield v. Beale, 231 Pa. 39, 79 Atl.
878. Kellogg v. Schuyler, 2 Denio (N. Y.) 73. In re
Schuchardt, 8 Ben. 585, Fed. Cas. No. 12483; Beers v.
Hanlin (D. C., Ore.), 3 Am. B. R. 745, 99 Fed. 695. The
principle underlying this case differentiates it from a
claim for the conversion of personal property, for the
latter is a provable debt, because it does not arise out of
injury to the person. Pitcairn v. Scully (Pa. C. P.), 33
Am. B. R. 870, 252 Pa. 82, 97 Atl. 120; Cole v. Roach, 37
Tex. 413; Fingold v. Schacter (Mass. Sup. Ct.) 36 Am.
B. R. 596, 223 Mass. 274, 111 N. E. 903.
"The principle controlling in this case is stated in
German Bank, etc., v. U. S. (U. S. Sup. Ct.), 148 U. S.
573, 13 Sup. Ct. 702, 37 L. Ed. 564, to be that:
 'It is a well-settled rule of law that the government
is not liable for the nonfeasances or misfeasances or heg-
ligence of its officers, and that the only remedy to the in-
jured party in such cases is by appeal to Congress.'
'' And that:
 ' If this be treated as a case of tort, then it is clear
that the government is not liable, not only on the ground
above stated, but because, under the act of Congress con-
ferring jurisdiction upon the Court of Claims (24 Stat.
TRUSTEE'S TITLE
1463
505, c. 359), there is an express exception of cases sound-
ing in tort.'
"It is established beyond dispute that the alleged claim
is based entirely on the tort committed by one of the gov-
ernment soldiers and the matter here must be governed
by the rule declared in the above adjudicated case. It
follows that the cause of action for the personal injury
does not pass to the trustee in bankruptcy or the crecL-
itors, and that the bankrupt's claim for personal injuries
cannot be administered as a part of the bankrupt estate.
North Chicago Street Ry. Co. v. Ackley 171 111. 100, 49
N. F. 222, 44 L. R. A. 177; Jones v. Clifton, 101 IT. S. 225,
25 L. Ed. 908; Brandies v. Cochran, 112 U. S. 344, 5 Sup.
Ct. 194, 28 L. Ed. 760.
"The title to property which is vested in the trustee
of the bankrupt estate is governed by section 70 of the
Bankruptcy Act (Comp. St. 9654). The position of the pe-
titioners, that the title to the claim against the govern-
ment for damages became vested in the trustee under
subdivision 3 or under subdivision 5 of said section, is not
tenable. The first-named subdivision deals with tech-
nical powers under the common law, and does not apply
to the right of action for personal injury. The other sub-
division passes to the trustee :
 ' Property which prior to the filing of the petition he
could by any means have transferred, or which might
have been levied upon and sold under judicial process
against him.'
"The claim here, for damages growing out of a tort
alleged to have been committed against the person of the
bankrupt, manifestly could not have been levied upon
and sold under judicial process. Moreover, the alleged
claim being only of a personal nature, the bankrupt could
not be compelled to prosecute it. Rights of action aris-
ing upon contract, or from the unlawful taking or deten-
tion of or injury to the bankrupt's property, pass to the
trustee as assets; but this does not include an action for
tort resulting in personal injury. The authorities above
cited sustain this proposition.
1464
BANKRUPTCY
1 'Accordingly decree and order will be entered sustain-
ing the demurrer to the petition, and denying the relief
prayed for by the petitioners.
Question 814: What rights of suit pass to a trustee in bank-
ruptcy? If the bankrupt has a claim for personal injury, does
it pass to the trustee in bankruptcy? Suppose he had secured
judgment for the injury before the petition was filed and the
judgment was yet unpaid would the right to collect it pass to
the trustee?
§849. (Bankruptcy, Sec. 59.) Burdensome property;
trustee may reject.
(Note: The trustee in bankruptcy may reject burdensome
property and thrust it back upon the bankrupt.)
§ 850. (Bankruptcy, Sec. 60.) To what liens trustee's
title is subject.
(1) Liens secured through judicial proceedings (a)
within four months, (b) more than four months prior to
filing petition.
Case 815. Bankruptcy Law, Sec. 67f.
(See the law quoted in Coder v. Arts, supra.)
Case 816. Wagner v. Mt. Carmel Iron Works, 270
Federal Reports, 80 (C. C. A. 3rd Cir.).
Facts: Wagner got a judgment on January 9, 1920,
against the Mt. Carmel Iron Works for infringement of
patent. The Company went into bankruptcy, March 15,
1920. Wagner claims that the lien of his judgment was
not dissolved though obtained within the four months
period because his claim based on such judgment is not
dischargeable because it arose out of a ' deliberate, wan-
ton and continuous' tort.
Held: That the lien was dissolved regardless of the
question whether the debt was dischargeable or not.
Otherwise, the power would rest in any creditor having
a non-dischargeable claim, to defeat the bankruptcy pro-
TRUSTEE'S TITLE
1465
ceedings by fastening the lien of his judgment upon such
property.
Question 816: Are liens obtained by judgments dissolved
by bankruptcy proceedings? In what cases? Does it make
any difference that the judgment is one that the bankruptcy
proceedings will not discharge?
(2) Liens arising out of contract.
See Coder v. Arts, supra.
(Note: A lien given to secure a present indebtedness is
valid and is not dissolved by bankruptcy proceedings. Nor is a
valid lien given to secure a past indebtedness invalid (1) if
given prior to the four months period, or (2) if given within
the four months period where it does not amount to a voidable
preference.—Coder v. Arts, supra.)
(3) Liens given by law not arising out of contract or
judicial proceedings.
Case 817. Henderson v. Mayer, 225 United States Re-
• ports, 631.
Facts: Samuel Mayer owned a plantation in Georgia
which he rented to Joseph Burns for one year. The rent
not being paid Mayer on November 30, 1908, made an
affidavit according to the local statute and the Justice of
the Peace thereupon levied a distress warrant on the cot-
ton, corn and other property on the place. The statute
of Georgia provided: "Landlords shall have a special
lien for rent on crops made on land rented from them
superior to all other liens except liens for taxes * * *
and shall also have a general lien on the property of the
debtor, liable to levy and sale, and such general lien shall
date from the time of the levy of a distress warrant to
enforce the same.
Three days after the distress warrant was levied gen-
eral creditors filed a petition in bankruptcy against
Burns, and the trustee contests Mayer's lien.
Mr. Justice Lamar, after making a statement of facts,
delivered the opinion of the court:
1466
BANKRUPTCY
'' The provisions of the Bankruptcy Act, preventing an
insolvent from giving or the creditor from securing pref-
erences for pre-existing debts, apply not only to mort-
gages and transfers voluntarily made by the debtor, but
also to those preferences which are obtained through
legal proceedings, whether the lien dates from the entry
of the judgment, from the attachment before judgment,
or, as in some States, from the levy of execution after
judgment. But the statute was not intended to lessen
rights which already existed, nor to defeat those inchoate
liens given by statute, of which all creditors were bound
to take notice and subject to which they are presumed to
have contracted when they dealt with the insolvent.
 Liens in favor of laborers, mechanics and contrac-
tors are of this character; and although they may be
perfected by record or foreclosure within four months of
the bankruptcy, they are not created by judgments, nor
are they treated as having been ' obtained through legal
proceedings,' even when it is necessary to enforce them
by some form of legal proceeding. The statutes of the*
various states differ as to the time when such liens at-
tach, and also as to the property they cover. They may
bind only what the plaintiff has improved or constructed;
or they may extend to all the chattels of the debtor, or
"all the property involved in the business. In re Ben-
nett, 153 Fed. Rep. 673.
"In some cases the lien dates from commencement of
the work, or from the completion of the contract. In
others, prior to levy they are referred to as being dorm-
ant or inchoate liens, or as 'a right to a lien.' In re Ben-
nett, 153 Fed. Rep. 677; In re Laird, 109 Fed. Rep. 550.
But the courts, dealing specially with bankruptcy mat-
ters, have almost uniformly held that these statutory
preferences are not obtained through legal proeedings,
and, therefore, are not defeated by Sec. 67f, even where
the registration, foreclosure or levy necessary to their
completion or enforcement was within four months of
the filing of the petition in bankruptcy.
"Similar rulings have been made where the landlord
TRUSTEE'S TITLE
1467
has only a common law right of distress. In re "West
Side Paper Co., 162 Fed. Rep. 110. This is often referred
to as a lien, but it is "only in the nature of security. 3
Black. Com. 18. The pledge, or quasi-pledge, which the
landlord is said to have is, at most, only a power to seize
chattels found on the rented premises. These he could
take into possession and hold until the rent was paid.
Doe ex dem Gladney v. Deavors, 11 Georgia, 79, 84. But
before the distraint the landlord at common law has 'no
lien on any particular portion of the goods and is only
an ordinary creditor except that he has the right of dis-
tress by reason of which he may place himself in a better
position.' Sutton v. Reese, 9 Jur. (N. C.) 456. A right
fully as great is created by the Georgia statute here in
question. For while giving the owners of agricultural
lands a special lien on the crops, there was no intention
to deprive the proprietor of urban and other real estate
of the lien for rent which there, as in other states, is
treated as an incident growing out of the relation of land-
lord and tenant.
"The Code (Sec. 2787) expressly 'establishes liens in
favor of landlords.' It (Sec. 3124) gives them 'power to
distrain for rent as soon as the same is due.' It declares
(Sec. 2795) that landlords 'shall have a general lien on
the property of the tenant liable to levy and sale
* * * which dates from the levy of the distress war-
rant to enforce the same.' It is true that prior to levy
it covers no specific property, and attaches only to what
is seized under the distress warrant issued to enforce the
lien given by statute. But in this respect it is the full
equivalent of a common law distress—the lien of which
is held not to be discharged by Sec. 67f. In re West Side
Paper Co., 162 Fed. Rep. 110; Austin v. O'Reilly, 2
Wood, 670.
'' The fact that the warrant could be levied upon prop-
erty which had never been on the rented premises does
not change the nature of the landlord's right, though it
may increase the extent of his security. The statutory
restrictions as to date, rank and priority may be im-
1468
BANKRUPTCY
portant in a controversy with other lienholders, but was
wholly immaterial in this contest between the landlord
and trustee, where the latter was only representing gen-
eral creditors. As against them the landlord had from
the beginning of the tenancy the right to a statutory lien,
which had completely ripened and attached before the
filing of the petition in bankruptcy. The priority arising
from the levy of the distress warrant was not secured
because Mayer had been first in a race of diligence, but
was given by law because of the nature of the claim and
the relation between himself as landlord and Burns as
tenant. In issuing the distress warrant the justice acted
ministerially. Savage v. Oliver, 110 Georgia, 636. The
sheriff was not required to return it to any court, and no
judicial hearing or action was necessary to authorize him
to sell for the purpose of realizing funds with which to
pay the rent. Such a lien was not created by a judgment
nor 'obtained through legal proceedings.'
"Decisions to the same effect were made under the
Bankruptcy Act of 1867 (14 Stat. 517, 522, Sec. 14), which
dissolved attachments or mesne process within four
months prior to the filing of the petition. In Austin v.
O'Reilly, 2 Wood, 670, decided in 1875, it appeared that
in Mississippi the landlord had no lien, but as in
Georgia was authorized to seize (but by attachment) the
tenant's goods wherever found. Justice Bradley, pre-
siding at Circuit, said that the landlord's right to a dis-
tress at common law was not a strict lien, 'but being com-
monly called a lien, and being a peculiar right in the
nature of a lien, * * * the Supreme Court of the
United States, and most of the District and Circuit
Courts have regarded it as fairly to be classed as a lien,
within the true intent and meaning of the Bankrupt Act,'
and that the statutory attachment being in the nature of
a common law distress was not nullified or discharged
by the bankruptcy proceedings.
"There is nothing in the act of 1898 opposed to' this
conclusion. On the contrary, its general provisions in-
dicate a purpose to continue the same policy and an in-
TRUSTEE'S TITLE
1469
tent, as against general creditors, to preserve rights like
those given by the Georgia statute to landlords, even
though the lien was enforced and attached by levy of a
distress warrant within four months of the filing of the
petition in bankruptcy.
"Affirmed.
(Note: The lien secured through judicial proceedings, as by
attachment, judgment, execution or levy, (which are dissolved
by the bankruptcy proceedings if arising within four months
prior to the bankruptcy petition) must be carefully dis-
tinguished under the bankruptcy act from liens given by general
law, as liens of landlords, mechanic's liens, labor liens, and the
like, which exist independent of judicial proceeding, (which
are not dissolved by the bankruptcy proceedings) although,
as for instance in case of a mechanic's lien a judicial proceed-
ing may be necessary to enforce the lien. Thus under Illinois
law a mechanic's lien is given to contractors and sub-contractors
upon the real estate of a debtor for material supplied or labor
furnished for the improvement of the real estate. This lien
exists for a period of time after material furnished or labor
done, without any record, and thereafter a record must be made.
Such a lien if such time has not expired is not dissolved by
bankruptcy proceedings. It is not a lien obtained by judicial
proceedings, although to enforce it, judicial proceedings are
necessary.
Generally a landlord has no lien until he levies a distress
warrant. Creditors obtaining liens by judgment have priority
over the landlord, although their judgment liens would be
dissolved by bankruptcy proceedings if less than four months
old when the bankruptcy proceedings are begun. Held, in
Watkins v. Alexander, 283 Fed. 968 (C. C. A. 5th Cir. 1922),
that under the Georgia statute, a lien, of a landlord is not good
in bankruptcy if he has not levied a distress warrant prior to
the bankruptcy proceedings.)
CHAPTER 109
CLAIMS AGAINST BANKRUPT ESTATE
A. What claims provable in bankruptcy.
B. Proof and allowance of claims.
C. Secured and lien claims.
D. Claims having priority.
E. Claims of preferred creditors.
F. Dividends on claims.
Gr. Compositions with creditors
H. Setoffs.
§ 851. (Bankruptcy, Sec. 61.) In general.
Case 818. Bankruptcy Law, Sec. 63.
Debts of the bankrupt may be proved and allowed
against his estate which are
(1) A fixed liability, as evidenced by a judgment or
an instrument in writing, absolutely owing at the time
of the filing of the petition against him, whether then
payable or not, with any interest thereon which would
have been recoverable at that date or with a rebate of
interest upon such as were not then payable and did not
bear interest;
(2) Due as costs taxable against an involuntary bank-
rupt who was at the time of the filing of the petition
against him plaintiff in a cause of action which would
pass to the trustee and which the trustee declines to
prosecute after notice;
(3) Founded upon a claim for taxable costs incurred
in good faith by a creditor before the filing of the peti-
tion in an action to recover a provable debt;
(4) Founded upon an open account, or upon a con-
tract express or implied; and
(5) Founded upon provable debts reduced to judg-
CLAIMS
1471
raents after the filing of the petition and before the con-
sideration of the bankrupt's application for a discharge,
less costs incurred and interests accrued after the filing
of the petition and up to the time of the entry of such
judgments.
b. Unliquidated claims against the bankrupt may,
pursuant to application to the court, be liquidated in
such manner as it shall direct, and may thereafter be
proved and allowed against his estate.
A. What Claims Provable in Bankruptcy.
§ 852. In respect to whether due or not.
§ 853. In respect to whether owing before or after petition filed.
§ 854. Claims based upon judgments.
§ 855. Fixed liabilities as evidenced by written instruments.
§ 856. Rents to accrue.
§ 857. Claims founded on open accounts.
§ 858. Claims arising on any contract express or implied for payment of
money.
§ 859. Unliquidated claims (1) When provable.
§ 860. Unliquidated claims (2) When not provable.
§ 861. Fines.
§ 852. (Bankruptcy, See. 62.) In respect to whether
claim is due or not.
(Note: A debt is provable whether due or not at the time
of bankruptcy. Being provable, it must be proved; otherwise
it is dischargeable as though it had been proved.)
§ 853. (Bankruptcy, Sec. 63.) In respect to whether
owing before or after the petition is filed.
(Note: A debt to be provable or in any manner affected by
the bankruptcy proceedings need not be due, but must be
"owing. The day of bankruptcy is here, as in case of assets,
the day of cleavage. Debts arising after the petition is filed are
not provable. But see § 858 herein as to the operation of the
petition as a breach of executory contracts.)
§854. (Bankruptcy, Sec. 64.) Claims based upon
judgments.
(Note: Judgments secured prior to bankruptcy proceedings
are provable; although the lien thereof is discharged if obtained
1472
BANKRUPTCY
within the four months period. See § 860 post, to the effect
that judgments are provable (and therefore must be proved)
even if obtained upon unliquidated claims that would not have
been provable if no judgment had been obtained prior to the
proceedings.)
§ 855. (Bankruptcy, Sec. 65.) Fixed liabilities as evi-
denced by written instruments.
(Note: This refers to forms of indebtedness as set forth in
notes, leases, or any other written instrument setting forth a
fixed liability.)
§856. (Bankruptcy, Sec. 66.) Rents.
(Note: Rents to accrue are not provable. Even under the
doctrine that a petition in bankruptcy is a breach of an executory
contract, rents to accrue are not provable. However, it has
been held that where the lease was broken prior to bankruptcy
proceedings and the landlord re-let at reduced rental, he had a
provable claim for the difference. In re Mullins Clothing Co.
238 Fed. 58 (C. C. A. 2nd Cir.). The landlord would have had
a right to sue for damages, and these damages he could prove
in bankruptcy. The court said "we do not overlook the doctrine
that a covenant to pay rent creates no debt until the time
stipulated for the payment arrives and therefore that rent accru-
ing under a lease after the filing of the petition in bankruptcy
against the lessee is not provable against his estate as a fixed
liability absolutely owing at the time of the filing of the
petition. .
The trustee may claim the lease as an asset, or reject it if he
chooses. He may take possession for a reasonable time without
thereby electing to accept the lease. If he accepts he may assign
it, with the consent of the court, notwithstanding a provision in
the lease against assignment or subletting.)
§ 857. (Bankruptcy, Sec. 67.) Claims founded on open
accounts.
(Note: These are perhaps the most common sorts of claims
provable against bankrupt mercantile concerns. There is very
little need for discussion. Payments made by the debtor on
open account are not preferential payments where the net re-
suit is not to diminish the estate.)
CLAIMS
1473
§ 858. (Bankruptcy, Sec. 68.) Claims arising upon any
contract express or implied for the payment of money.
Case 819. Central Trust Company v. Chicago Audi-
torium, 240 United States, 581.
Me. Justice Pitney delivered the opinion of the court:
'' On July 22, 1911, a creditors' petition in bankruptcy
was filed against the Frank E. Scott Transfer Company,
an Illinois corporation, and it was adjudged a bankrupt
on August 7. The act of bankruptcy charged and adju-
dicated does not appear. When the proceedings were
commenced, the bankrupt held contract relations with
the Chicago Auditorium Association under a written
agreement made between them February 1, 1911, which
had been partially performed. By its terms the Asso-
ciation granted to the Transfer Company, for a term of
five years from the date of the contract, the baggage
and livery privilege of the Auditorium Hotel, in the City
of Chicago, that is to 'say, the sole and exclusive right,
so far as it was within the legal capacity of the Associa-
tion to grant the same, to transfer baggage and carry
passengers to and from the hotel and to furnish livery
to its guests and patrons. For the baggage privilege
the Transfer Company agreed to pay to the Association
the sum of $6,000, in monthly instalments of $100 each,
and for the livery privilege the sum of $15,000 in month-
ly instalments of $250 each, and also agreed to furnish
to the hotel and its guests and patrons prompt and effi-
cient baggage and livery service at reasonable rates at
all times during the continuance of the privileges. It
was further agreed as follows:
 'The party of the first part (Chicago Auditorium
Association), however, reserves the right, which is an
express condition of the foregoing grants, to cancel and
revoke either or both of said privileges, by giving six
months' notice in writing of its election so to do, when-
ever the service is not, in the opinion of the party of
the first part, satisfactory, or in the event of any change
1474
BANKRUPTCY
in management of said hotel; and in case of the termi-
nation of either or both of said privileges by exercise
of the right and option reserved by this paragraph, such
privilege or privileges shall cease and determine at the
expiration of the six months' notice aforesaid, and both
parties hereto shall in that case be released from further
liability respecting the concession so cancelled and re-
voked.
 'Said rights and concessions shall not be assignable
without the express written consent of the party of the
first part, nor shall the assignment of the same, with
such written consent, relieve the party of the second part
(Scott Transfer Company) from liability on the cov-
enants and agreements of this instrument.'
11 The contract authorized the Association, in the event
of default by the Transfer Company in the payment of
any installment of money due, or in the performance of
any other covenant, if continued for thirty days, to termi-
nate the privileges at its option, without releasing the
Transfer Company from liability upon its covenants.
Should either or both of the privileges be thus terminated
before January 31, 1916, the Association was to be at
liberty to sell the privileges, or make a new or different
contract for the remainder of the term, but was not to
be obliged to do this, and the Transfer Company, unless
released in writing, was to remain liable for the entire
amount agreed to be paid by it.
"Up to the time of the bankruptcy this contract re-
mained in force, and neither party had violated any of
its covenants. The trustee in bankruptcy did not elect
to assume its performance, and the Association entered
into a contract with other parties for the performance
of the baggage and livery service and obtained there-
from the sum of $234.69 monthly as compensation for
those privileges. On February 28, 1912, it exhibited its
proof against the bankrupt estate, claiming an indebted-
ness of .$6,537.94, of which $311.20 had accrued prior
to the bankruptcy proceedings, and the remainder was
claimed as unliquidated damages arising under the con-
CLAIMS
1475
tract for alleged breach thereof on the part of the bank-
rupt through the bankruptcy proceedings. Of this
amount $691.86 represented the loss incurred during the
first six months of bankruptcy. Objections filed by the
trustee were sustained by the referee, except as to that
portion of the claim which had accrued prior to the bank-
ruptcy proceedings. On review, the District Court sus-
tained this decision. On appeal to the Circuit Court of
Appeals, the order of the District Court was reversed,
and the cause remanded with direction to allow $691.86
upon the claim, and to disallow the remaining portion.
216 Fed. Rep. 308.
"An appeal to this court by the trustee in bankruptcy
was allowed, under 25b-2 of the Bankruptcy Act (of July
1, 1898, c. 541; 30 Stat. 544, 553), upon a certificate by
a Justice of this court that the determination of the ques-
tions involved was essential to a uniform construction
of the Act throughout the United States. * * *
#
"Coming to the merits: It is no longer open to ques-
tion in this court that, as a rule, where a party bound
by an executory contract repudiates his obligations or
disables himself from performing them before the time
for performance, the promisee has the option to treat
the contract as ended, so far as further performance is
concerned, and maintain an action at once for the dam-
ages occasioned by such anticipatory breach. The rule
has its exceptions, but none that now concerns us. Roehm
v. Horst, 178 U. S. 1,18,19. And see O'Neill v. Supreme
Council, 70 N. J. L. 410, 412. There is no doubt that
the same rule must be applied where a similar repudia-
tion or disablement occurs during performance. Whether
the intervention of bankruptcy constitutes such a breach
and gives rise to a claim provable in the bankruptcy
proceedings is a question not covered by any previous
decision of this court, and upon which the other Federal
courts are in conflict. It was, however, held in Lovell
v. St. Louis Life Ins. Co., Ill U. S. 264, 274, where a
life insurance company became insolvent and transferred
1476
BANKRUPTCY
its assets to another company, that a policy-holder was
entitled to regard his contract as terminated and demand
whatever damages he had sustained thereby. And see
Carr v. Hamilton, 129 U. S. 252, 256. In support of
the provability of the claim in controversy, Ex parte
Pollard, 2 Low, 411; Fed. Cas. No. 11,252; In re Swift
(C. C. A. 1st), 112 Fed. Rep. 315, 319, 321; In re Stern
(C. C. A. 2d.), 116 Fed. Rep. 604; In re Pettingil & Co.
(D. C., Mass.), 137 Fed. Rep. 143, 146, 147; In re Neff
(C. C. A. 6th), 157 Fed. Rep. 57, 61, are referred to; and
see Pennsylvania Steel Co. v. New York City Ry. Co.
(C. C'. A. 2d), 198 Fed. Rep. 721, 736, 744. To the con-
trary, In re Imperial Brewing Co. (D. C., Mo.), 143 Fed.
Rep. 579; In re Inman & Co. (D. C., Ga.), 171 Fed. Rep.
185; S. C. 175 Fed. Rep* 312; besides which a number
of cases arising out of the relation of landlord and .tenant
are cited: In re Ells, 98 Fed. Rep. 967; In re Pennewell,
119 Fed. Rep. 139; Watson v. Merrill, 136 Fed. Rep.
359; In re Roth & Appel, 181 Fed. Rep. 667; Colman Co.
v. Withoft, 195 Fed. Rep. 250. Cases of the latter class
are distinguishable, because of the 'diversity between
duties which touch the realty, and the mere personalty.'
Co. Litt., 292, b, 513.
"The contract with which we have to deal was not a
contract of personal service simply, but was of such a
nature as evidently to require a considerable amount of
capital, in the shape of equipment, etc., for its proper
performance by the Transfer Company. The immediate
effect of bankruptcy was to strip the company of its
assets, and thus disable it from performing. It may be
conceded that the contract was assignable, and passed
to the trustee under 70a (30 Stat. 565), to the extent
that it had an option to perform it in the place of the
bankrupt (see Sparhawk v. Yerkes, 142 II. S. 1, 13; Sun-
flower Oil Company v. Wilson, 142 U. S. 313, 322); for
although there was a stipulation against assignment
without consent of the Auditorium Association, it may
be assumed that this did not prevent an assignment by
operation of law. Still, the trustee in bankruptcy did
CLAIMS
1477
not elect to assume performance, and so the matter is
left as if the law had conferred no such election.
"It is argued that there can be no anticipatory breach
of a contract except it result from the voluntary act of
one of the parties, and that the filing of an involuntary
petition in bankruptcy, with adjudication thereon, is but
the act of the law resulting from an adverse proceeding
instituted by creditors. This view was taken, with re-
spect to the effect of a state proceeding restraining a
corporation from the further prosecution of its busi-
ness or the exercise of its corporate franchises, appoint-
ing a receiver, and dissolving the corporation, in People
v. Globe Ins. Co., 91 N. Y. 174, cited with approval in
some of the Federal Court decisions above referred to.
In that case, it did not appear that the company was the
responsible cause of the action of the State, so as to
make the dissolution its own act; but, irrespective of
this, we cannot accept the reasoning. As was said in
Roehm v. Horst, 178 U. S. 1, 19:
'' 1 The parties to a contract which is wholly executory
have a right to the maintenance of the contractual rela-
tions up to the time for performance, as well as to a
performance of the contract when due.' Commercial
credits are, to a large extent, based upon the reasonable
expectation that pending contracts of acknowledged
validity will be performed in due course; and the same
principle that entitles the promisee to continued willing-
ness entitles him to continued ability on the part of the
promisor. In short it must be deemed an implied term
of every contract that the promisor will not permit him-
self, through insolvency or acts of bankruptcy, to be
disabled from making performance; and, in this view,
bankruptcy proceedings are but the natural and legal
consequence of something done or omitted to be done
by the bankrupt, in violation of his engagement. It is
the purpose of the Bankruptcy Act, generally speaking,
to permit all creditors to share in the distribution of
the bankrupt, and to leave the honest debtor thereafter
free from liability upon previous obligations. Williams
1478
BANKRUPTCY
v, U. S. Fidelity Co., 236 U. S. 549, 554. Executory
agreements play so important a part in the commercial
world that it would lead to most unfortunate results if,
by interpreting the Act in a narrow sense, persons en-
titled to performance of such agreements on the part
of the bankrupts were excluded from participation in
bankrupt estates, while the bankrupts themselves, as a
necessary corollary, were left still subject to action for
non-performance in the future, although without the
property or credit often necessary to enable them to
perform. We conclude that proceedings, whether volun-
tary or involuntary, resulting in an adjudication of hank-
ruptcy, are the equivalent of an anticipatory breach of
an executory agreement, within the doctrine of Roehm
v. Horst, supra.
"The claim for damages by reason of such a breach
is 'founded upon a contract, express or implied' within
the meaning of 63a-4, and the damages may be liquidated
under 63b. Grant Shoe Co. v. Laird, 212 U. S. 445, 448.
It is true that in Zavelo v. Reeves, 227 U. S. 625, 631, we
held that the debts provable under 63a-4 include only
such as existed at the time of the filing of the petition.
But we agree with what was said in Ex parte Pollard,
2 Low, 411, Fed. Cas. No. 11,252, that it would be 'an
unnecessary and false nicety' to hold that because it was
the act of filing the petition that wrought the breach,
therefore, there was no breach at the time of the petition.
And as was also declared in In re Pettingill, 137 Fed.
Rep. 143: ' The test of provability under the Act of 1898
may be stated thus: If the bankrupt, at the time of
bankruptcy, by disenabling himself from performing the
contract in question, and by repudiating its obligation,
could give the proving creditor the right to maintain
at once a suit in which damages could be assessed at
law or in equity, then the creditor can prove in bank-
ruptcy on the ground that bankruptcy is the equivalent
of disenablement and repudiation. For the assessment
of damages proceedings may be directed by the court
under 63b (30 Stat. 562).' It was in effect so ruled by
CLAIMS
1479
this court in Lesser v. Gray, 236 U. S. 70, 75, where it
was said: 'If, as both the bankruptcy and state courts
concluded, the contract was terminated by the involun-
tary bankruptcy proceeding, no legal injury resulted. If,
on the other hand, that view of the law was erroneous,
then there was a breach and defendant Gray became
liable for any resulting damage; but he was released
therefrom by his discharge.' Of course, he could not be
released unless the debt was provable.
"We therefore, conclude that the Circuit Court of
Appeals was correct in holding that the intervention of
bankruptcy constituted such a breach of the contract in
question as entitled the Auditorium Association to prove
its claim.
"The denial of all damages except such as accrued
within six months after the filing of the petition was
based upon the ground that the contract reserved to the
Association an option to revoke the privileges by giving
six months' notice in writing of its election so to do, in
which case both parties were to be released from further
liability at the expiration of the six months. * * *
Here the obligation of the bankrupt was clear and un-
conditional. The right reserved to the Auditorium As-
sociation to cancel and revoke the privileges was reserved
for its benefit, not that of the grantee of those privileges.
It does not lie in the mouth of the latter, or of its trustee,
to say that its service would not be satisfactory, and
there is no presumption that otherwise it would have
been advantageous to the Association to exercise the op-
tion. It results that the decree, in so far as it limits the
provable claim to a period of six months after the bank-
ruptcy, must be reversed, and the cause remanded for
further proceedings in conformity with this opinion.
Question 819: What is anticipatory breach of contract? If
a party to a contract is put into bankruptcy so that he is thereby
disabled from performing such contract, is the other party to
the contract entitled to file in the bankruptcy proceedings his
claim for damages caused by the breach? Illustrate by the
facts in this case.
1480
BANKRUPTCY
§ 859. (Bankruptcy, Sec. 69.) Unliquidated claims,
(1) When provable.
(Note: After enumeration of the claims in Bankruptcy,
the act provides: "Unliquidated claims against the bankrupt
may, pursuant to application to the court be liquidated in such
a manner as it shall direct, and may thereafter be proved and
allowed against his estate. This has always been held not to
extend the class of claims provable but merely to provide for
the liquidation of those that come within the enumerated classes.
For instance, if arising upon contracts, express or implied, they
may be liquidated by the court. See next section for unliqui-
dated claims that are not provable.)
860. (Bankruptcy, Sec. 70.) Unliquidated claims.
(2) When not provable.
Case 820. Schall v. Camorrs, 251 United States, 239.
Facts: Claim filed by Muller, Schall & Company
against LeMore and Carriere, partners, bankrupts, based
upon commission of a tort (fraud) not reduced to judg-
ment,
Mk. Justice Pitxey: "* * * The first and funda-
mental question is whether a claim for unliquidated dam-
ages, arising out of a pure tort which neither constitutes
a breach of an express contract nor results in any unjust
enrichment of the tort-feasor that may form the basis of
an implied contract, is provable in bankruptcy. * * *
"That clause b [Sec. 63] provides the procedure for
liquidating claims provable under clause a, if not already
liquidated, especially those founded upon an open ac-
count, or a contract express or implied, is entirely clear,
and has been recognized repeatedly in our decisions.
Grant Shoe Co. v. Laird Co., 212 U. S. 445, 447-448; Cen-
tral Trust Co. v. Chicago Auditorium Assn., 240 U. S.
581, 592. Has it the further effect of admitting all un-
liquidated claims including those of tortious origin?
"* * * Since claims founded upon an open account
or upon a contract express or implied often require to
be liquidated some provision for procedure evidently
CLAIMS
1481
.was called for; clause b fulfills this function and would
have to receive a strained interpretation in order that
it should include claims arising purely ex delicto. Such
claims might easily have been mentioned if intended to
be included. Upon every consideration we are clear that
claims based upon a mere tort are not provable. Where
the tortious act constitutes at the same time a breach
of contract a different question may be raised, with
which we have no present concern; and where, by means
of the tort, the tort feasor obtains something of value,
for which an equivalent price ought to be paid, even if
the tort as such, be forgiven, there may be a claim prov-
able quasi ex contractu. * * *
(Note: Torts reduced to judgment prior to bankruptcy are
provable; and also dischargeable unless the injury was wilful
or malicious.)
§861. (Bankruptcy, Sec. 71.) Fines.
(Fines are not provable.)
B. Proof and Allowance of Claims.
§ 862. How claims proved.
§ 863. Allowance of claims.
§ 862. (Bankruptcy, Sec. 52.) How claims proved.
(Note: Claims in bankruptcy are proved by filing a sworn
statement of the claim upon forms established by the bank-
ruptcy rules. The matter in practice is of rather informal
character.- Such claim may be objected to by any party in
interest, and then a trial is had upon the merits.)
§ 863. (Bankruptcy, Sec. 73.) Allowance of claims.
(Note: The allowance of a claim is an order entered judicially
recognizing the claim, after proof, by which it becomes entitled
to dividends.)
C. Secured and Lien Claims.
§ 864. In general.
§ 865. The standing of a secured creditor.
§ 866. Other lien claims.
1482
BANKRUPTCY
§§ 864, 865. (Bankruptcy, Sees. 74, 75.) In general—
secured creditors.
(Note: It has been seen in another connection that bank-
ruptcy proceedings do not deprive a creditor of the advantage
of his security, unless received by way of preference within
the four months period. Security is taken by creditors to pro-
vide against possible bankruptcy. So a creditor who has a
lien given by the general law which elevates him above the plane
of a general creditor is not deprived thereof unless it is a lien
secured through judicial proceedings within the four months
prior to bankruptcy, for to allow it in the latter case would be
to permit a general creditor to get an advantage merely by tak-
ing judgment, and thereby overcome that equality of standing
among general creditors which the bankruptcy law contem-
plates.
A secured creditor may surrender his security and come in
as a general creditor. Obviously this would be unusual. A
secured creditor is a general creditor and to be treated as such
to the extent that his claim exceeds his security.
The act provides : (Sec. 57 e) "claims of secured creditors and
those who have priority may be allowed to enable such creditors
to participate in the proceedings at creditors' meetings held
prior to the determination of the value of their securities or
priorities, but shall be allowed for such sums only as to the
court seem to be owing1 over and above the value of their securi-
ties and priorities.
(Sec. 57 h) "The value of securities held by secured creditors
shall be determined by converting the same into money accord-
ing to the terms of the agreement pursuant to which such
securities were delivered to such creditors or by such, creditors
and the trustee by agreement, arbitration, compromise or liti-
gation, as the court may direct, and the amount of such value
shall be credited upon such claims and a dividend shall be paid
only on the unpaid balance.")
§ 866. (Bankruptcy, Sec. 76.) Other lien claims.
(Note: The law may allow certain classes of creditors liens
upon the debtor's property which places them at an advantage
over other general creditors. Liens allowed by law and not
arising out of judicial proceedings are not dissolved and liens
CLAIMS
1483
arising out of judicial proceedings are not dissolved if the lien
is older than four months when the petition is filed.)
D. Claims Having Priority.
§ 867. How a claim having priority differs from a secured claim.
§ 868. What claims have priority.
§ 867. (Bankruptcy, Sec. 77.) How a claim having
priority differs from a secured claim.
(Note: What is the difference between
(1) A creditor having security;
(2) A creditor having a lien allowed by law;
(3) A creditor who has been preferred;
(4) A creditor having priority?
We may answer by an illustration:
Debtor X goes into bankruptcy on July 15. Creditor No. 1
has sold him goods on open account and received no payment.
He is a general creditor without security, without preference
and without priority.
Creditor No. 2 has sold X a cash register prior to bankruptcy
and taken back a chattel mortgage which he duly records; He is
a creditor having security of whose advantage the bankruptcy
proceedings will not deprive him.
^Creditor No. 3 has prior to bankruptcy sold and delivered to
X material for a building on X's real estate. The law of the
state gives Creditor No. 3, a mechanic's lien upon the real estate
benefitted. The practical result is much the same as if the
creditor had a mortgage upon such real estate, and the bank-
ruptcy proceedings do not deprive him of the advantage thereof.
Creditor No. 4 has prior to bankruptcy sold X goods on credit
and within four months prior to the filing of the bankruptcy
petition X pays Creditor No. 4 his claim, the creditor knowing
or having reason to know that a preference was intended. In
order to preserve equality of distribution among creditors of
the same class, the law provides that this creditor must surrender
his preference.
Creditor No. 5 is a workman to whom X when he goes into
bankruptcy owes $200; this creditor has no lien on any assets,
and is a general creditor; but before other general creditors
are entitled to any dividend X is entitled to payment in full of
1484
BANKRUPTCY
his claim. However, if there are only enough assets to pay
costs of administration, they are to be paid in full before
Creditor No. 5 is entitled to anything for they are first in order
of priority.)
§ 868. (Bankruptcy, Sec. 78.) What claims have
priority.
Case 821. Bankruptcy Law, Sec. 64.
Sec. 64. Debts Which Have Priority.—a. The court
shall order the trustee to pay all taxes legally due and
owing by the bankrupt to the United States, state, county,
district, or municipality in advance of the payment of
dividends to creditors, and upon filing the receipts of
the proper public officers for such payment he shall be
credited with the amount thereof, and in case any ques-
tion arises as to the amount or legality of any such tax
the same shall be heard and determined by the court.
b. The debts to have priority, except as herein pro-
vided, and to be paid in full out of bankrupt estates,
and the order of payment shall be
(1) The actual and necessary cost of preserving the
estate subsequent to filing the petition;
(2) The filing fees paid by creditors in involuntary
cases, and, where property of the bankrupt, transferred
or concealed by him either before or after the filing of
the petition, shall have been recovered for the benefit of
the estate of the bankrupt by the efforts and at the ex-
pense of one or more creditors, the reasonable expenses
of such recovery.
(3) The cost of administration, including the fees and
mileage payable to witnesses as now or hereafter pro-
vided by the laws of the United States, and one reason-
able attorney's fee, for the professional services actually
rendered, irrespective of the number of attorneys em-
ployed, to the petitioning creditors in involuntary cases,
to the bankrupt in involuntary cases while performing
the duties herein prescribed, and to the bankrupt in
voluntary cases, as the court may allow;
(4) Wages due to workmen, clerks, traveling or city
CLAIMS
1485
salesmen, or servants which have been earned within
three months before the date of commencement of pro-
ceedings, not to exceed three hundred dollars to each
claimant.
(5) Debts'owing to any person who by the laws of the
States or the United States is entitled to priority.
c. In the event of the confirmation of a composition
being set aside, or a discharge revoked, the property
acquired by the bankrupt in addition to his estate at the
time the composition was confirmed or the adjudication
was made shall he applied to the payment in full of the
claims of creditors for property sold to him on credit,
in good faith, while such composition or discharge was
in force, and the residue, if any, shall be applied to the
payment of the debts which were owing at the time of
the adjudication.
Case 822. In re Bonk, In re Shank, 270 Federal Re-
porter, 657 (D. C., Mich.).
Facts: This appeal is to review an order denying
priority to a claim alleged to have been earned as wages
during the three months just prior to filing the petition.
Tuttle, D. J.: 11 * * * From the testimony on the
hearing before the referee * * * it appeared that
the claimant, pursuant to his contract with the bankrupt,
just quoted, took charge of the drug store and managed
it for the bankrupt, purchasing the merchandise for the
store and paying the rent and the other expenses in con-
nection with the operation of such store, including the
salary of a pharmacist who was employed there while
claimant was in charge, and who in addition to his other
duties had charge of the cash register and kept all the
records showing the receipts and expenditures of the
business. It does not appear that claimant rendered
services in any other capacity than as manager of the
store, operating the same for the owner, but exercising
his own discretion in the performance of his duties. His
claim for wages is based, not on a quantum meruit for
work and labor performed but on the contract under
1486
BANKRUPTCY
which he had agreed Ho manage and operate' the store
on the terms and conditions specified in the contract.
Under snch circumstances it is clear that the claimant
is not included in the class of 'workmen, clerks, traveling
or city salesman, or servants' within the meaning of
Section 64b, subd. 4 of the Bankruptcy Act; the language
there used not being intended to apply to the manager
of a business. * * *>>
Question 822: (1) Under what class of creditors did
claimant in this case seek to qualify? Why? What was the
nature of his work? What did the court hold in reference to
his claim?
(2) To what sum have workmen, clerks, travelling or city
salesmen, or servants, priority? Within what time must such
sum be earned?
E. Claims of Preferred Creditors.
§ 869. (Bankruptcy, Sec. 79.) Preferred creditor must
surrender preference.
Case 823. Keppel v. Bank, 197 U. S. 356.
Facts: Charles A. Goetz became a bankrupt on Oc-
tober 12, 1900. Geo. B. Keppel, the trustee, sued the
Tiffin Savings Bank in the Ohio Court to cancel two real
estate mortgages executed by Goetz, one to secure a note
for four, and the other a note for two thousand dollars.
The mortgage to secure the four thousand dollar note
was made more than four months before the bankruptcy,
the mortgage securing the two thousand dollar note was
executed a few days before the bankruptcy, the mort-
gagor being at the time insolvent and intending to prefer
the bank by giving it security for an existing indebted-
ness. The bank defended the suit, averring its good
faith and asserting the validity of both mortgages. In
a cross petition it asked for the enforcement of both
mortgages. The court held the mortgage securing the
four thousand dollar note to be valid, and the mortgage
securing the two thousand dollar note to be void. The
trustee appealed to a Circuit Court, where a trial de novo
CLAIMS
1487
was had. A judgment was entered sustaining the secur-
ity for the four thousand dollar note, and avoiding that
as to the two thousand dollar note. The hank subse-
quently sought to prove that it was a creditor of the
estate upon the note for two thousand dollars, and upon
two other unsecured notes aggregating $835.00. The
referee refused to allow the proof upon the ground that,
as the hank had compelled the trustee to sue to cancel
the security and a judgment nullifying it had been ob-
tained, the bank had lost the right to prove any claim
against the estate. The District Judge, upon review,
reversed this ruling. The Circuit Court of Appeals, to
which the issue was taken, certified the case to the present
Court.
Me. Justice White delivered the opinion of the Court:
"The following are the questions asked by the Court of
Appeals:
 'First: Can a creditor of a bankrupt, who has re-
ceived a merely voidable preference, and who has in good
faith retained such preference until deprived thereof by
the judgment of a court upon a suit by the trustee, there-
after prove the debt so voidably preferred?
11 t * * *
a <T}fi.rcl: If the failure to "voluntarily surrender
the mortgage given to secure the $2,000 note operates
to prevent the allowance of that note, does the penalty
extend to and require the disallowance of both the other
claims 1'
"Before we develop the legal principles essential to a
solution of the first question it is to be observed that
the facts stated in the certificate and implied by the
question show that the bank acted in good faith when it
accepted the mortgage and when it subsequently insisted
that the trustee should prove the existence of the facts
which, it was charged, vitiated the security. * * *
"On,the one hand it is insisted that a creditor who
has not surrendered a preference until compelled to do
so by a decree of a court cannot be allowed to prove any
1488
BANKRUPTCY
claim against the estate. On the other hand, it is urge
that no such penalty is imposed by the bankruptcy ac ,
and hence, the creditor, on an extinguishment of a pre -
erence, by whatever means, may prove his claims.^ These
contentions must be determined by the text, originally
considered, of section 57g of the bankrupt act, providing
that 'the claims of creditors who have received prefer-
ences shall not be allowed unless such creditors shall
surrender their preferences.' * * *
"The text is, that preferred creditors shall not prove
their claims until they have surrendered their prefer-
ences. * * *
"We think it clear that the fundamental purpose of
the provision in question was to secure an equality of
distribution of the assets of a bankrupt estate. This
must be the case, since, if a creditor, having a prefer-
ence, retained the preference, and at the same time proved
his debt and participated in the distribution of the estate,
an advantage would be secured not contemplated by the
law. Equality of distribution being the purpose intended
to be effected by the provision, to interpret it as for-
bidding a creditor from proving his claim after a sur-
render of his preference, because such surrender was
not voluntary, would frustrate the object of the provi-
sion, since it would give the bankrupt estate the benefit
of the surrender or cancellation of the preference, and
yet deprive the creditor of any right to participate, thus
creating an inequality. But, it is said, although this is
true, as the statute is plain, its terms cannot be dis-
regarded by allowing that to be done which it expressly
forbids. This rests upon the assumption that the word
'surrender' necessarily implies only voluntary actions,
and hence excludes the right to prove where the sur-
render is the result of a recovery compelled by judgment
or decree.
'' The word ' surrender,' however, does not exclude com-
pelled action, but to the contrary generally implies such
action. That this is the primary and commonly accepted
meaning of the word is shown by the dictionaries. Thus,
the Standard Dictionary defines its meaning as follows:
CLAIMS
1489
1. To yield possession of to another upon compulsion or
demand, or under pressure of a superior force; as to
surrender an army or fort. * * *
[The court by this course of reasoning decides that a
claimant who in good faith retains a preference until
compelled to yield it up, has "surrendered the prefer-
ence within the meaning of the bankruptcy act that a
preferred creditor cannot prove his claim until he has
surrendered his preference, and then, by implication he
may prove it. The opinion is very long and cannot he
given in full. Four justices dissented.
The first question being so answered, the other ques-
tion above stated required no response.]
Case 824. Pirie v. C. T. & T. Co., 182 United States
Reports, 438.
Facts: In bankruptcy proceedings in matter of Frank
Brothers, Carson, Pirie, Scott & Company filed a claim
for goods sold and delivered to the bankrupt firm for
the sum of $3,093.98. The claim was allowed and sub-
sequently a claim' of 15% was paid thereon.
The Chicago Title and Trust Company, trustee, sub-
sequently filed a petition to reconsider and disallow the
claim upon the ground that the debtor within four months
prior to the bankruptcy had paid Carson, Pirie, Scott &
Company large sums of money as preferences, which
preferences had not been surrendered.
Carson, P., S. .& Co. filed an answer to this admitting
the receipt of $1,336.79 but setting forth that they did
not know or have reason to believe that a preference
was intended.
The referee decided that the claim should be recon-
sidered and disallowed. On review, the District Court
entered an order to the same effect.
C. P. S. & Co. took an appeal to the Circuit Court of
Appeals, which affirmed the order of the District Court.
The case was then brought to this court.
Mr. Justice McKeistna delivered the opinion of the
Court:
"The question presented by this record is whether
1490
BANKRUPTCY
payments in money made by an insolvent debtor to a
creditor, the debtor not intending to give a preference,
and the creditor not having reasonable cause to believe
that a preference was intended, did nevertheless con-
stitute a preference within the meaning of the bankrupt
act of 1898, and were required to be surrendered as a
condition of proving the balance of the debt or other
claims of the creditor.
[The court quotes Sec. 60a, Bankruptcy Act, and de-
cides that a payment in money may be a preference as
well as a transfer of property. This part of the answer
being disposed of the court then decides that while
it is necessary in a preference as an an act of bank-
ruptcy that an intent to prefer be present, and while it
is necessary in a preference which a trustee may forcibly
set aside, that the creditor have reason to believe that a
preference was intended, a creditor who has received a
preference that he cannot be compelled to surrender, can-
not prove the balance of his claim unless he does suT-
render it.]
"As we have already said, if the preference exceed
the share of the bankrupt's estate which the creditor
would be entitled to, he may keep the preference. If it
be less he may surrender it and share equally with the
other creditors. If the purposes of the statute are to be
considered, this is certainly not punishment, but benefit.
If it is discrimination at all, it is discrimination against
the other creditors.
Judgment of the Circuit Court of Appeals affirmed.
The Chief Justice, Mr. Justice Shiras, Mr. Justice
White, and Mr. Justice Peckham dissented.]
F. Dividends on Claims.
§ 870. (Bankruptcy, Sec. 80.) How payable.
Case 825. Bankruptcy Act, Sec. 65.
"Sec. 65. Declaration and Payment of Dividends.—
a. Dividends of an equal per centum shall be declared
CLAIMS
1491
and paid on all allowed claims, except such as have prior-
ity or are secured.
"b. The first dividend shall be declared within thirty
days after the adjudication, if the money of the estate
in excess of the amount necessary to pay the debts which
have priority and such claims as have not been, but prob-
ably will be, allowed equals five per centum or more of
such allowed claims. Dividends subsequent to the first
shall be declared upon like terms as the first and as often
as the amount shall equal ten per centum or more and
upon closing the estate. Dividends may be declared
oftener and in smaller proportions if the judge shall so
order: Provided, That the first dividend shall not in-
elude more than fifty per centum of the money of the
estate in excess of the amount necessary to pay the debts
which have priority and such claims as probably will be
allowed: And provided further, That the final dividend
shall not be declared within three months after the first
dividend shall be declared.
"c. The rights of creditors who have received divi-
dends, or in whose favor final dividends have been de-
clared, shall not be affected by the proof and allowance
of claims subsequent to the date of such payment or
declarations of dividends; but the creditors proving and
securing the allowance of such claims shall be paid divi-
dends equal in amount to those already received by the
other creditors if the estate equals so much before such
other creditors are paid any further dividends.
d; "Wdienever a person shall have been adjudged a
bankrupt by a court without the United States and also
by a court of bankruptcy, creditors residing within the
United States shall first be paid a dividend equal to that
received in the court without the United States by other
creditors before creditors who have received a dividend
in such courts shall be paid any amount.
"e. A claimant shall not be entitled to collect from
a bankrupt estate any greater amount than shall accrue
pursuant to the provisions of this act.
1492
BANKRUPTCY
G. Compositions with Creditors.
§ 871. Composition may "be offered by bankrupt.
§ 872. Conditions of the composition.
§ 873. When compositions set aside.
§§ 871, 872, 873. (Bankruptcy, Sees. 81, 82, 83.)
Compositions.
Case 826. Bankruptcy Act, Sees. 12, 13.
"Sec. 12. Compositions, When Confirmed.—a. A
bankrupt may offer, either before or after adjudication,
terms of composition to his creditors after, but not be-
fore, he has been examined in open court or at a meet-
ing of his creditors, and has filed in court the schedule
of his property and the list of his creditors required to
be filed by bankrupts. In compositions before adjudica-
tion the bankrupt shall file the required schedules, and
thereupon the court shall call a meeting of creditors for
the allowance of claims, examination of the bankrupt,
and preservation or conduct of estates, at which meeting
the judge or referee shall preside; and action upon the
petition for adjudication shall be delayed until it shall
be determined whether such composition shall be con-
firmed.
"b. An application for the confirmation of a com-
position may be filed in the court of bankruptcy after,
but not before, it has been accepted in writing by a ma-
jority in number of all creditors whose claims have been
allowed, which number must represent a majority in
amount of such claims, and the consideration to be paid
by the bankrupt to his creditors, and the money neces-
sary to pay all debts which have priority and the cost of
the proceedings, have been deposited in such place as
shall be designated by and subject to the order of the
judge.
"c. A date and place, with reference to the conven-
ience of the parties in interest, shall be fixed for the
hearing upon each application for the confirmation of a
composition, and such objection as may be made to its
confirmation.
CLAIMS
1493
"d. The judge shall confirm a composition if satis-
fied that (1) it is for the best interests of the creditors:
(2) the bankrupt has not been guilty of any of the acts
or failed to perform any of the duties which would be
a bar to his discharge; and (3) the offer and its accept-
ance are in good faith and have not been made or pro-
cured except as herein provided, or by any means, prom-
ises, or acts herein forbidden.
* * e. Upon the confirmation of a composition, the con-
sideration shall be distributed as the judge shall direct,
and the case dismissed. Whenever a composition is not
confirmed, the estate shall be administered in bankruptcy
as herein provided.
"Sec. 13. Compositions, When Set Aside.—a. The
judge may, upon the application of parties in interest
filed at any time within six months after a composition
has been confirmed, set the same aside and reinstate the
case if it shall be made to appear upon a trial that fraud
was practiced in the procuring of such compensation,
and that the knowledge thereof has come to the petition-
ers since the confirmation of such composition.
H. Sut-Offs,
§874. (Bankruptcy, Sec. 84.) Right to set-off.
Case 827. Bankruptcy Law, Sec. 68.
"Sec. 68. Set-Offs and Counter-Claims.—a. In all
cases of mutual debts or credits between the estate of
a bankrupt and a creditor the account shall be stated
and one debt be set off against the other, and the balance
only shall be allowed or paid.
"b. A set-off or counter-claim shall not be allowed
in favor of any debtor of the bankrupt which (1) is not
provable against the estate; or (2) was purchased by
or transferred to him after the filing of the petition, or
within four months before such filing, with a view to such
use and with knowledge or notice that such bankrupt
was insolvent or had committed an act of bankruptcy.
1494
BANKRUPTCY
Case 828. In re Potter & Slymus Co., 262 Federal Re-
ports, 955 (C. C. A. 2nd Cir.).
Hough, C. J.: "* * * It is quite true that set-off
does work a preference; but while the Bankrupt Act
itself creates preferences, it does not create, hut recog-
nizes set-offs (Studley v. Boylston Bank, 229 TJ. S. at 528,
33 Sup. Ct. 806, 57 L. Ed. 1313); indeed, a set-off may be
described as a sort of lawful preference.
Case 829. New York County National Bank v. Mas-
sey.
Facts: Stege & Brother owed the N. Y. County Na-
tional Bank $40,000 for money borrowed, and had at
the time of bankruptcy $6,209.25 upon deposit. The
bank proved its claim for the difference, being $33,750.25
(with adjustments for interest). The trustee moved to
disallow and expunge from his list of claims the claim
the bank unless it surrendered the amount of the
deposit. The referee denied the motion. Upon that
point it comes to this court.
Held: A bank being a debtor to a depositor, and being
also his creditor for moneys loaned, there is a case of
"mutual debts or mutual credits, within the meaning
of Sec. 68 B. A. And in the absence of fraud or collu-
sion between the bank and the bankrupt, there is a right
of set-off with right to prove the balance of the claim
and receive dividends thereon; distinguishing this case
from Pirie v. Chicago Title & Trust Co., 182 U. S. 438,
which was a case of a payment by the bankrupt to a
creditor, while this was a deposit, that is to say, a lend-
ing of money by the depositor to the bank, that being
the nature of a bank deposit.
CHAPTER 110
DUTIES AND RIGHTS OF BANKRUPT
§ 875. Duties enumerated by act.
§ 876. Duty to submit to examinations.
§ 877. Protection of bankrupt from arrest in civil cases.
§ 878. Detention of bankrupt.
§ 879. Offenses of bankrupt created by bankruptcy law.
§ 880. The bankrupt's exemptions.
§ 875. (Bankruptcy, Sec. 85.) Puties of bankrupts
enumerated by the act.
Case 830. Bankruptcy Law, Sec. 7.
"Sec. 7. Duties of Bankrupts.—a. The bankrupt
shall
"(1) Attend the first meeting of his creditors if di-
rected by the court or a judge thereof to do so, and the
hearing upon his application for a discharge, if filed;
 (2) Comply with all lawful orders of the court;
• "(3) Examine the correctness of all proofs of claims
filed against his estate;
"(4) Execute and deliver such papers as shall be or-
dered by the court;
"(5) Execute to his trustee transfers of all his prop-
erty in foreign countries;
"(6) Immediately inform his trustee of any attempt,
by his creditors or other persons, to evade the provisions
of this Act, coming to his knowledge;
"(7) In case of any person having to his knowledge
proved a false claim against his estate, disclose that fact
immediately to his trustee;
"(8) Prepare, make oath to, and file in court within
ten days, unless further time is granted, after the adju-
dication, if an involuntary bankrupt, and with the peti-
tion if a voluntary bankrupt, a schedule of his property,
1495
1496
BANKRUPTCY
showing the amount and kind of property, the location
thereof, its money value in detail, and a list of his cred-
itors, showing their residences, if known; if unknown,
that fact to be stated; the amounts due each of them,
the consideration thereof, the security held by them, if
any, and a claim for such exemptions as he may be en-
titled to, all in triplicate, one copy of each for the clerk,
one for the referee, and one for the trustee; and
"(9) When present at the first meeting of his cred-
itors, and at such other time as the court shall order,
submit to an examination concerning the conducting of
his business, the cause of his bankruptcy, his dealings
with his creditors and other persons, the amount, kind,
and whereabouts of his property, and, in addition, all
matters which may affect the administration and settle-
ment of his estate; but no testimony given by him shall
be offered in evidence against him in any criminal pro-
ceeding.
"Provided, Jioivever, That he shall not be required to
attend a meeting of his creditors, or at or for an exami-
nation at a place more than one hundred and fifty miles
distant from his home or principal place of business, or
to examine claims except when presented to him, unless
ordered by the court, or a judge thereof, for cause shown,
and the bankrupt shall be paid his actual expenses from
the estate when examined or required to attend at any
place other than the city, town, or village of his residence.
§ 876. (Bankruptcy, Sec. 86.) Duty to submit to
examinations^
(Note: A bankrupt must submit to examination by the
creditors as set forth in section 7 of the act quoted above. The
right of examination is to be liberally construed. Other wit-
nesses may be called and must answer material questions. A.
bankrupt or any witness need not answer questions whose an-
swers might tend to incriminate him, notwithstanding the pro-
vision of the law that the testimony shall not be offered against
him in any criminal proceeding. To take away from him the
protection of the federal provision against self-incriminating evh
BANKRUPT'S DUTIES, ETC.
1497
dence there would have to be complete statutory immunity.
But a bankrupt who relies upon the statutory privilege and does
not answer can be refused his discharge.)
§§ 877, 878. (Bankruptcy, Sees. 87, 88.) Protection of
bankrupt from arrest in civil cases detention of the
bankrupt.
(Note: By sections 9 and 10 of the bankruptcy act the bank-
rupt is protected from arrest in civil cases, and his detention
for bankruptcy purposes is provided for. It is provided that
a bankrupt is exempt from arrest upon civil process, except (1)
When issued from a court of bankruptcy for contempt or dis-
obedience of its lawful orders; (2) When issued from a state
court upon a non-dischargeable debt or claim, and even in such
cases he is exempt from arrest while in attendance upon the
bankruptcy court or engaged in the performance of a duty im-
posed by the act. It is also provided that a bankrupt may be
detained within the jurisdiction if it appears that he is about to
leave to avoid examination. If necessary to extradite him, sec-
tion 9 provides for extradition proceedings.)
§879. (Bankruptcy, Sec. 89.) Offenses of bankrupt
created by Bankruptcy Act.
(Note: By section 29 of the bankruptcy law the following
offenses that may be committed by a bankrupt are defined:
(1) Concealing while a bankrupt, or after his discharge,
from the trustee, any property belonging to the estate in bank-
ruptcy;
(2) Making a false oath or account in bankruptcy.
Other offenses are provided for that are applicable to trustees,
claimants, and others.
A bankrupt may be also guilty of contempt of court for
refusal to obey its lawful orders.)
§880. (Bankruptcy, Sec. 90.) The bankrupts
exemptions.
(Note: Bankrupt's Exemptions;
(1) What they are: The debtor is allowed those exemptions
which are permitted by the law of the state. Thus one bank-
rupt may have more liberal exemptions than another.
1498
BANKRUPTCY
(2) Bankrupt must claim exemptions. The bankrupt must
schedule assets which are exempt, and then claim his exemptions
in his schedules. Otherwise he waives them.
(3) Trustee has no title to the exemptions, his duty being
to set them off to the bankrupt. The trustee takes no title to
the exemptions when'they are duly claimed. They belong1 to
the bankrupt.
(4) Conversion of non-exempt into exempt assets prior to
bankruptcy. A debtor may lawfully change non-exempt assets
into exempt assets, even if insolvent, and thus put them out of
the reach of creditors; as where he invests in a homestead
allowed as an exemption by the local law; but such transfers
may be in fact fraudulent as where a debtor preceding bank-
ruptcy received payments in the course of business and instead
of depositing them from day to day as had been his wont, re-
tained them upon his person or in a vault and purchased a valu-
able homestead which he moved his family in one month before
bankruptcy. Held: fraudulent and not allowed. Kangas v.
Robie, (C. C. A. 8th Cir.) 264 Fed. 92.)
CHAPTER 111
DISCHARGE
A. The Discharge of the Bankrupt.
§ 881. Importance of discharge.
§ 882. Within what time discharge must be applied for.
§ 883. The petition for discharge.
§ 884. Filing objections for discharge.
§ 885. Grounds for refusing discharge.
§ 881. (Bankruptcy, Sec. 91.) Importance of discharge.
(Note: It is probably believed by many persons that filing
a petition in bankruptcy discharges one of his indebtedness.
It will be seen in this chapter that an affirmative move to obtain
a discharge is necessary and that upon such motion the discharge
may be for various reasons refused. In case of which refusal
the bankrupt continues liable for his debts, less any dividends
that may have been paid upon them.)
§882. (Bankruptcy, Sec. 92.) Within what time dis-
charge must be applied for.
(Note: Discharge must be applied for after the expiration
of one month and within the next twelve months subsequent to
the adjudication^ if unavoidably prevented from filing his
application within such time, and it so appears to the judge,
the application for discharge may be filed within, but not after,
the next six months. B. A. Sec. 14a.)
§888. (Bankruptcy, Sec. 93.) The petition for a
discharge.
(Discharges are applied for upon Official Form, 57. The
creditors are entitled to 30 days notice. B. A. Sec. 58.)
§ 884. (Bankruptcy, Sec. 94.) Filing objections to
discharge.
(Note: The trustee or other parties in interest may file ob-
jections to discharge. These objections must be based upon the
1499
1500
BANKRUPTCY
grounds for refusing discharge considered in the following sec-
tion. The trustee cannot himself file the objections unless "he
shall be authorized so to do at a meeting of creditors called for
that purpose. Sec. 14b.)
§ 885. (Bankruptcy Act, Sec. 95.) Grounds for refus-
ing discharge.
The judge shall discharge the applicant unless he has
(1) "committed an offense punishable by imprisonment
as herein provided. (See Sec. 879, supra.)
(2) or unless he has "with intent to conceal his
financial condition, destroyed, concealed or failed to keep
books of account or records from which such condition
might be ascertained.
(3) or, unless he has ''obtained money or property on
credit from any person upon a materially false statement
in writing made by him to such person or his representa-
tive for the purpose of obtaining credit from such
person;
(4) or, unless he has "at any time subsequent to the
first day of the four months immediately preceding the
filing of the petition transferred, removed, destroyed or
concealed, or permitted to be removed or destroyed or
concealed any of his property with intent to hinder,
delay or defraud his creditors;
(5) or unless he has "in voluntary proceedings been
granted a discharge in brankruptcy within six years;
(6) or unless he has ''in the course of the proceedings
in bankruptcy refused to obey any lawful order of or to
answer any material question approved by the Court.
B. Debts not Dischargeable.
§ 886. In general.
§ 887. General rule.
§ 888. Debts not affected by a discharge.
§ 889. New promise to pay.
§ § 886, 887. (Bankruptcy, Sees. 96, 97.)
(Note: If the bankrupt obtains his discharge, then the ques-
tion is: What debts does his discharge affect? We have seen
DISCHARGE
1501
that some debts are not provable, hence they would not be dis-
chargeable. As a general rule the provable debts, if proved,
are discharged, and debts not provable are not discharged. But
this does not dispose entirely of the matter, as shown by the
following sections:)
§ 888. (Bankruptcy, Sec. 98.) Debts not affected by a
discharge.
(1) Debts Not Provable.
(Note: A claim for a tort, not reduced to judgment prior
to petition filed, is not dischargeable. If reduced to judgment,
it is dischargeable, unless a wilful or malicious injury.
There are torts of such a nature that the injured person may
waive the tort and sue in contract. Such, chiefly, are injuries
to property by a bailee, in which the bailor can sue for injury
to his property or waiving the tort, may sue on the contract of
bailment. So, he may waive the tort and claim in bankruptcy.
If he does so, the debt is discharged.)
(2) Taxes.
(The trustee is ordered to pay taxes. But taxes not
paid are still owing. The discharge in bankruptcy does
not wipe them out.)
(3) Debts Consisting in "Liabilities for Obtaining Prop-
erty by False Pretenses or False Representations.
(Note: These are not dischargeable. This phrase refers to
actual fraud, not fraud imputed by a general rule of law. The
reduction of the claim to judgment does not change its status as
a liability for fraud. (In re Haskel, 228 Fed. 819).)
"Liabilities for Wilful and Malicious Injuries to
Person or Property of Another.
(Note: If the injury is so caused it is not dischargeable. To
be "wilful and malicious there must be more than mere negli-
gence. Hence, judgments recovered for acts of negligence if
recovered prior to bankruptcy are dischargeable, as damage by
negligently driving an automobile. Ex parte Harrison, 272
1502
BANKRUPTCY
Federal Reports, 543. See also McClellan v. Schmidt, 253
Federal Reports, 986. In Mclntyre v. Kavanaugh, 242 U. S. 138,
the bankrupts had been stockbrokers. They received certain
stock certificates from Kavanaugh, to hold as security. With-
out authority they sold the stock and appropriated the proceeds.
The proceeds were in excess of the amount of the debt for
which the stocks were held as security. The court held that the
liability for the tort of converting the stock was one arising out
of wilful and malicious injury to property of another and not
dischargeable in bankruptcy.)
(5) Liabilities for Alimony Due or to Become Due, or
for Maintenance or Support of Wife or Child, or for
Seduction or Criminal Conversation.
(Note : Such liabilities are not dischargeable in bankruptcy.)
(6) Debts Not Duly Scheduled.
(Note: The law provides that debts are not dischargeable
which "have not been duly scheduled in time for proof and
allowance, with the name of the creditor if known to the bank-
rupt, unless such creditor had notice or actual knowledge of
the proceedings in bankruptcy.")
(7) Debts Not Dischargeable if "They Were Created by
His Fraud, Embezzlement, Misappropriation or De-
falcation While Acting as an Officer or in Any Fiduci-
ary Capacity.
(Note: It was held in Crawford v. Burke, 195 U. S. 176, de-
cided under the act of 1867, construing similar language, that
this referred to those who were acting as technical trustees, and
not to cases of implied trusts. In that ease a broker who had sold
stock and had not paid over the proceeds was held discharged in
bankruptcy from such liability. But in Mclntyre v. Kavanaugh,
242 U. S. 138, decided under the present law, the court held that
a broker who: without authority sold stock and appropriated the
proceeds was not discharged by reason of the provision as to
wilful and malicious injury to property and suggested that the
latter provision was put in to overcome Crawford v. Burke.)
§ 889. (Bankruptcy, Sec. 99.) New promise to pay.
(Note: It is the general law, independent of the bank-
ruptcy act, that a new promise to pay a debt discharged in
bankruptcy revives the debt. The promise to so operate,
must be a definite promise, showing an intent to waive the
privilege of the discharge, and under the statutes of some states
must be in writing.)
TABLE OF CASES
[references are
A
Adams v. Beall 576
Advance Amusement Co. v.
Franks 158
Albright v. Stegeman 53
Alexander v. Hazelrigg 511
Alton Mfg. Co. v. Garrett. Bib.
Inst 709
American Cotton Oil v. Kirk. . 87
American Nat'l Bank v. Nat.
Fertilizer Co 543
Anderson v. Elem 487
Anderson v. Wisconsin Rwy.. . . 332
Anderson v. Robertson./..... 495
Andrews v. Stinson 626
Ankeny v. McMahon 123
Arbuckle Bros. v. Kirkpatrick. 268
Arnold v. Delano 357
Ash v. Guie. . 569
Austin v. Holland 610
Austin v. Kuehn 136
Austin v. Seligman 266
Auten v. Gruner 510
Avondale Land Co. v. Shook... 641
B
BabcoQk v. Farwell 661, 720
Bagley v. Findlay 360
Bailey v. Baker Ice Machine Co. 808
Bailey v. Partridge 213
Bain v. Whitney • 292
Baird v. Shipman 257
Baldy v. Parker 281
Ballen v-. Friedman...» 452
Bank of Elberton v. Smith.. . . 804
Bank v. By nam 169
Barker, In re 667
Barlow v. Cong-Soc 255
) case numbers]
Barnes v. Suddard 708
Barnes v. Vaughn 528
Bartholomew v. Jackson 37
Bartlett v. First Nat. Bk 437
Beach v. M. E. Church 47
Bedford R. R. Co. v. Bowser.. 655
Bell v. Baxter 98
Bellows v. Sowles 130
Belz & Co. v. McMorrow 325
Benton v. Y. M. C. A 39
Bernard v. Taylor 107
Bessenger v. Wentzel 536
Best Brewing Co. v. Klassen.. 704
Bierne v. Dord 301
Brewer v. Mueller 68
Biggs v. Evans 340
Bird v. Monroe 128
Bixly v. Moore 121
Blank- v. Aronson 220
Blinns v. Waddell 602
Bliss v. N. Y. C. & H. R 58
Bond v. Gibson 598
Bonk, In re 822
Booth v. Spuyten-Duyvil Rolling
Mill 185
Bowes v. Shand 173
Bowman v. Neely 106
Bowser v. Marks 278
Bradwell v. Prior 479
Brady v. Cole 69
Brinkerhoff Trust & Sav. Co.. 673
Brisbane v. D. L. & W. R. Co. . 672
Broadnax v. Ledbetter 38
Broad Street Bank v. Nat'l
Bank 509
Brown, Matter of 781
Brown V. Foster. 175
Brown v. Leach 622
Bryans v. Nix 324
Buckley v. Humason 112
1504
TABLE OF CASES
[REFERENCES ARE
Bull v. Griswold 140
Bullard v. Kennedy 594
Burlingham v. Crouse 810
Burnley v. Tufts 335
Burwash v. Ballou 81, 680
Butler v. Moses 64
Butler Bros. Shoe Co. v. U. S.
Rubber Co 717
C
Canning Co. v. Stanley 710
Calajs Steamboat Co. v. Scudder 342
Carlisle v. Bragg 60
Carson, P. S. & Co. v. C. T. &
T. Co 824
Carthage v. Duvall 327
Cass Nat. Bk. v. Clarke 254
Case v. Beauregard 614
Central Lumber Co. v. Kelter. . 703
Central Trust Co. v. Bridges. . 202
Central Trust Co. v. Chicago
Auditorium 819
Challis v. McCrum 521
Chambers v. Seay 259
Chapman v. Haley 117
Chase v. Hinkley 141
Checkley v. I. C. R. Co 404
Chester Glass Co. v. Dewey... 650
Chicago Edison Co. v. Pay 675
Clafin v. Lenheim 261
Clandeboye, The 73
Clason v. Bailey 145
Cleveland Rolling Mill v.
Rhodes 155
Coder v. Arts 813
Cohen v. Samuels 812
Cole Mclntyre Co. v. Holloway 57
Columbus Buggy Co., In re... 267
Combs v. Scott 206
Commonwealth Title Co. v.
Gregson 326
Consol. Nat. Bk. v. P. C. S. S.
Co 229
Converse v. Emerson Co 711
Cook v. Colehan 424
Co-operative Law Co., In re. . . . 639
Copper Process Co v. Chicago
Bond Co 563
' CASE NUMBERS]
Corbin v. Tracy
Coursole v. Weyerhauser 21
Crawford v. Collins 578
Cream City Glass Co. v. Eried-
lander 356
Crenshaw, In re 789
Cromwell v. County of Sac.... 497
Cud v. Rutter 192
Cunningham v. Castle. 248
Curtiss Land & Loan Co. v. Int.
Land Co 51
Curtiss v. Leavitt 700
Cushion Shoe Heel Co. v. Hartt 643
D
Dale v. Gear 522
Dale v. Hamilton 577
Daniel v. Atlantic Coast Line. . 245
Darrow v. Calkins 628
Dartmouth Coll. v. Woodward. 640
Davis v. Hamlin 221
Dawson v. National Life Ins.
Co 688
Demarest v. Dunton 165
Dempsey v. Chambers 211
Dentzel v. Island Park Ass'n. . 328
Denver Fire Ins. Co. v. McClel-
land 707
Derocher v. Continental Mills. . 30
Distilling & Cattle Feed. Co. v.
People 103
Doernbecher v. Columbia City
Lumber Co 691
Doherty v. Shipper 216
Dorris v. Kings 139
Dowling v. Exchange Bank.... 504
Duplex Boiler Co. v. Garden. . . 176
Dupont Powder Co. v. Jones
Bros 567
Duvall v. Wellman 118
E
Eberts v. Selover 211
Echols v. State 196
Edwards v. Dillon 600
Edwards v. Schillinger 656
Ehler v. Braun 507
TABLE OF CASES
1505
[references
Ehrmantraut v. Robinson
Eichelroth v. Long
Eisner v. Macomber
Eldridge v. Finniger
Eldridge v. Holway
Elias v. Whitney
' Elliott v. Caldwell
Empire Mills v. Alston Groc.
Co
Ernst v. Elmira M. I. Co
Ettlinger v. Nat'l Surety Co.. .
Everett v. Judson
F
Farrell v. R. & D. R. R. Co
Farmer's Nat. Bk. v. Ridge
Ave. Bank
Fawcett v. Osborne '. ..
First National Bank v. Bynum
First National Bank v. Barnum
First National Bank v. Buttery
First National Bank v. Farson.
First National Bank v. Gustin.
First National Bank v. Lightner
First National Bank v. Miller.
First National Bank v. McCul-
lough
First'National Bank v. Skeen.
First National Bank v. Sprague
Fisher v. Leland
Fitts v. Hall
Foley v. Felrath
Forsythe Mfg. Co. v. Castlen..
Four Oil Co. v. United Oil
Producers
Fox v. Ryan
Francis v. MeNeal
French v. Harding
Fruin-Colnon Cont. Co. v. Chat-
terson
G
Galusha v. Sherman
Gann v- Zettler
Geary v. Psychic
George, In re
TO case numbers]
German American Bk. v. Milli-
man 529
German Fire Ins. Co. v. Queck. 152
Gillette v. Hodge 490
Gillet v. C. T. & T. Co 658
Gitliens v. Shiffler 793
Glidden v. Henry 426
Goddard v. Binney . 287
Goldy v. Morning News 719
Goodell v. Bates 564
Goodrich v. Tenney 116
Goodwin v. Hardy 682
Goodyear Co. v. Selz Schwab &
Co 159
Gorham v. Meacl^am 19
Goshen Bank v. Bingham.... 492
Gove v. Yining 547
Grahan v. U. S Sav. Inst 231
Grand Ave. Hotel Co. v. Whar-
ton 303
Graves v. Johnson 113
Gray v. Merriam 271
Greenhood v. Keaton... 232
Gregory v. Lee 27
Gress v. Knight 652
Griggsby v. Stapleton 72
Grommes v. St. Paul 168
Grooms v. Olliffe 501
Guaranty Co. v. Liebold 71
H
. Hadley v. Baxendale 188
Haener v. McKenzie 67
Hahn v. Fredericks 310
Hall v. Tobey 421
Hall Mfg. Co. v. W. S. & L. Wks. 102
Hamilton v. Gordon 316
Hamer v. Sidway 85
Hammerschlag Mfg. Co. v. Im-
porters Bk 561
Hanauer v. Doane 114
Hanford v. McNair 203
Hanover Bank v. Moyses.... 776
Hanson v. Busse 300
Harper v. Graham 96
Harris v. Theus 100
Harsh v. Nebraska Seed Co.. . . 41
Harris v. Davis 574
are
207
364
681
242
225
474
178
712
671
562
811
358
618
338
429
780
427
601
659
407
544
468
500
226
483
34
318
149
50
215
785
679
714
. 75
218
398
560
1506
TABLE OF CASES
[references are to
Hauser v. Marmon Co 29
Hawes v. Oakland 660
Hawkins v. McGroarty 208
Henderson v. Mayer 817
Henderson v. Wing 580
Henry v. Carutliers 529
Hereth v. Meyer 402
Herman v. Schlessinger 93
Hertzog v. Hertzog 154
Hess v. Lowrey 605
Higgins v. Senior 265
Hill v. Balkcom 180
Hobart v. Young 291
Ilobbs v. Massasoit Whip Co.. . 56
Hoclister v. De La Tour 181
Hodges v. Schuler 417
Ilogan v. Stophlet 89
Hogue v. Williamson.. 419
Home Lumber Co. v. Hopkins. . 721
Hosier v. Beard 506
Howell v. Harvey 621
Iluber Mfg. Co. v. Watson. . . . 214
Huffman v. Paige-Detroit Co.. . 260
Hun v. Cary. 687
Hunt v. Thompson 204
Hyman v. Doyle 525
I
Imperial Building Co. v. Bd. of
Trade 642
Indiana Fuel Supply v. Ind.
Basket Co 63
Insurance Co. v. Davis 262
International Harvester Co. v.
Yoboril 76
International Text Book Co. v.
Pigg 718
Interstate Trust Co. v. IJ. S.
Nat'l Bank 471
J
Jarvis v. Manhattan Beach. .. . 674
Jefferson Bank v. C. W. L. Co. 498
Jenkins v. Benfrow 237
Jennings v. Stannus 575
Joel v. Morrison 247
Johns v. Jaycox 235
Johnson v. Collier 807
case numbers]
Johnson v. N. Y. C. Transp. Co. 222
Johnson v. Russell H9
Johnson v. Seller 90
Jones v. Cooper 131
Jones v. Home Furn. Co 399
Jones v. Dexter 590
Jones v. Gordon 482
Jones v. Just 296
Jorden v. Patterson 189
Journalistic Fund of Phila., In
re 699
Judge v. Braswell 596
Justice v. Stonecipher 491
K
Kadish v. Young 182
Karraker v. Eddleman 608
Kayton v. Barnett 238
Kansas City Paper House v.
Foley 110
Keighler v. Savage 217
Keigliley v. Durant 205
Kelly v. Hemingway 425
Kelly v. Riley ' 187
Kelley , v. Tliuey 243
Kelley v. Whitney 488
Kemper v. Kohn 43
Kennedy v. Portman 272
Keppel v. Bank 823
Kimberly v. Patchin 311
Kingan v. Silver. . . 198
Kinnan v. Sullivan Co. Club. . 670
Kingsley v. Siebrecht 241
Kingston v. Preston 179
Kirkeby v. Erickson 138
Kirvin v. Virginia Co 715
Kitchen v. Herring 191
Klem v. Independent Brew.
Ass'n .686
Klots Thowing Co. v. M'f'rs
Com '1 Co 405
Kohn v. Milcher 405
Komorowski v. Krumdick 234
Kronmeyer v. Buck 78
L
Laing v. Butler 239
Lathrop v. Adams 606
TABLE OF CASES
1507
[references
Law v. Stokes
Lawrence v. Fox
Leavitt v. Putnam
Lebordais v. Vitrified Wheel
Co
Lewis v. Bloede
Lewis v. Johnson
Lindsay v. Stranahan
Linz v. Schuck
Lloyd v. George
Lomita L. & W. Co. v. Eobin-
son
Lowman v. Sheets
London Guarantee Co. v. Horn.
Louisville A. V. Co. v. Lorick. .
Louisville R. Co. v. Com
Love v. Harris
Lucas v. W. U. T. Co.........
Lusk v. Thro op
Lyon v. Kent 199,
M
Mack v. Prang
Maclay v. Harvey
Mafe v. Ginnochio
Mallin v. Wenham
Manufacturers & Mechanics
Insp. Bureau v. Everwear.. .
Marbury Lumber Co. v. Stearns
Mfg. Co
Market Street R. Co. v. Hell-
man
Markey v. Corey
Markle v. Wilbur
Marr v. B. C. R. & N
Martin Emerich v. Siegel
Martin v. Chauntry
Mason v. Eldred
Massachusetts Nat'l Bk. v.
Snow
Mathieson Mfg. Co., In re... .
Matthews v. Houghton
Mattison v. Marks
Maxfield v. Schwartz
McCormick v. Kelley
McCormick v. Dunville
McFerren, Ex parte
McKinley v. Goodman
to case numbers]
McKinley v. Watkins 98
McMann v. Walker .. 513
McNamara v. Jose 480
•Meany v. Pool & McCord 408
Meehan v. Valentine 568
Merritt v. Boyden 508
Melroy v. Kemmerer 94
Melton v. Pensacola Bank.... 446
Merchants National Bank v.
Nichols 230
Metcalf v. Bradshaw 592
Mills v. Mills 109
Mills v. Wyman 88
Minneapolis Threshing Mach.
Co. v. Davis 653
Minnesota Linseed Oil Co. v.
Collier 44
Missouri Pac. R. Co. v. Lar-
rabee Mills 273
Mitchell v. Pinckney 294
Mitchell v. Cachings 485
Mitchell v. Reed 591
Moe Co. v. Logue Co 339
Montgomery v. Johnson 40
Moore & Handley v. Towers
Hardware Co 638
Moore v. Love 286
Moore v. U. S 349
Morgan v. Skiddy 689
Morrill v. Little Falls Mfg. Co.. 664
Mors v. Peterson 79
Mott v. Havana Nat. Bk 404
Mucklow v. Mangles 322
Mueller v. N. U.. 163
Muthal v. Quin 166
Mutual Life Ins. Co. v. Board
Co 702
N
Nabors, In re 814
Nash v. Inman 22
Nassau Bank v. Jones 705
National Savings Bank v. Cable 409
National Bank v. Bank 517
National . Cash Register v.
Townsend 131
National City Bank of Chicago
v. National Bank 518
are
227
162
465
308
172
46
595
91
244
645
599
171
143
701
146
54
133
200
502
45
336
167
153
302
668
464
589
132
186
415
611
445
665
416
423
59
293
365
20
190
1508
TABLE OF CASES
[references
National Home Building Ass'n
v. Bank
Naugle v. Yerkes
Nelson v. Brassington
New York Co. Nat. Bk. v.
Massey
New v. Wright
Newhal v. Buckingham
Nickell v. Bradshaw
Nixa Canning Co. v. Lehman
Grocer Co
Nolan v. Whitney
North v. Moore
North Alaska Salmon Co. v.
Hobbs
N. T. W. Co. v. Gilfillan
O
Oakley v. Carr
0 'Connor v. Clarke
Osgood's Adm'r v. Artt
Otis v. Gardner
Overland Cotton Mill Co. v.
People
P
Pahlman v. Graves
Paine v. Central Vermont R.
Co
Parker v. Bethel Hotel Co
Paterson, In re
Paul v. Virginia
Pennock's Appeal
Pennsylvania Iron Wks v.
Voght Machine Co
Pennsylvania Steel Co. v. N. Y.
C. R. Co
Pence v. Carney
Penn Collieries v. McKeever. .
Peoples Pleasure Park Co. v.
Rohlader
People v. Chicago Gas Trust..
People v. Rochester R. C. L.
Co
People v. Rose
Peoria, etc. Co. v. Turney
Perry v. Bigelow
to case numbers]
Percefull v. Plat
Phifer v. Erwin ^77
Philpots Estate, In re 473
Pinnell's Case 92
Planter's Nat'l Bk. v. Wysong 105
Pope v. Hanke 108
Powder Co. v. Burkhardt 264
Preston v. Fitch 627
Price v. Neal 516
R
Raffles v. Wichelhaus 62
Rail v. Little Falls Lumber Co. 314
Rann v. Hughes 83, 124, 129
Reynolds v. General Electric.. 299
Rice v. Bordner 782
Rice v. Winslow 120
Rice v. Wood 219
Richmond v. Moore Ill
Riegel v. Amer. Life Ins. Co... 61
Roberts v. Smith 414
Robinson v. Noble 350
Robinson Bank v. Miller 584
Rock v. Collins 603
Rockfield v. First Nat'l Bank.. 523
Rohder v. Thwaite 323
Rogers v. Hanson 363
Rosenkranz v. Barker 607
Rubin v. Strandberg 33
Rucker v. Sanders 52
Russell v. Palatine Ins. Co 249
Russell v. Temple 634
Ryan v. Smith 25
Rodgers v. Meranda 616
S
Sanford v. Brown Bros. Co.... 366
Sanger v. Hibbard 32
Sarin v. Wilson 676
Schall v. Camorrs 820
Schubert Thea Co. v. Rath.... 55
Scott v. Buchanan 31
Sedalia Farmer's Co., In re... 790
Seitz v. Brewer's R. Co 147
Shea v. Donohue 625
Sherman v. Kitsmiller 32
Shindler v. Houston 284
are
706
80
86
829
630
613
430
306
174
579
362
657
545
341
493
678
635
617
486
632
359
713
333
692
161
319
716
633
698
695
573
304
439
TABLE OF CASES
1509
[references are
Siegel v. Bank 403
Silver v. Perkins 253
Sillitoe, Ex parte 620
Singer v. Rahn 197
Skobis v. Ferge 170
Sloan v. Williams 164
Smith v. Aiker 177
Smith v. Brown 156
Smith v. Hale 295
Smith v. Nightengale 411
Smith Co. v. Moseahledes 329
Snell v. Snell 36
Snow v. Greisheimer 97
Spadore v. Thompson 135
Spaids v. Barrett 77
Spear v. Rockland-Rockport
Lime Co 648
Speed, Estate of 636
Staples v. Schmidt 246
State v. Morristown Fire Ass'n 646
State v. Standard Oil Co 637
Stellwegen v. Clum 775
Stevens v. Nave MeCord Mer-
cantile Co 799
Stewart v. Wright 693
Stitzel v. Miller 428
Storrow v. Texas Consol. C. &
M. A 647
Stout v. Baker 612
Strong v. Foote 24
T
Tarkington v. Purvis 82
Taylor v. Connor 209
Telegram Newspaper Co. v.
Com 694
Thilmany v. Paper Bag Co 251
Thomas v. Dakin 631
Thompson v. First National
Bank 572
Thompson v. Williams 542
Thorpe v. Windeman 412
Tichnor v. McClelland 345
Tillinghast v. Boothby 101
Towne v. Wiley 35
Triangle S. S. Co., In re 791
Turner v. Crompton 258
) case numbers]
Tutt v. Brown 240
Twin Lick Oil Co. v. Marbury 685
Twyne's Case 343
U
Underwood v. Wolf 361
Union Trust Co. v. Preston Na-
tional Bank 503
United Hardware Co. v. Blue.. 285
Y
Vallelyv. Northern Fire Ins. Co. 783
Yarney v. Connery 95
Venner v. C. C. Rwy. Co. 662, 666
Yinton v. King 489
Vowles v. Yakish '.. 250
W
Wagner v. Mt, Carmel Iron
Wks 816
Walker v. Nussey 282
Walker v. Tucker 183
Walker v. Walker 125
Wallace Iron Wks. v. Barley.. 157
Walls v. Bailey 150
Walrath, In re 787
Ward v. Great Atl. & Pae. Tea
Co 307
Ward v. Williams 210
Warman v. First Nat'l Bank. . 476
Warner v. Mower 663
Warren v. Lynch 122
Warren v. Smith 134
Warner v. T. & P. R. Co 142
Washington v. Norwood 565
Webb v. Fordyce 593
Weikel v. Stearns 70
Wentworth v. Riggs 263
Wentworth Co. v. French 669
Western Metals Co. v. Hartman
Co 144
Wettlaufer v. Baxter 432
Wharton v. McKenzie 26
Wheeler v. Reed 252
White v. Cushing 400
White v. Miller 256
1510
TABLE OF CASES
[references
Whitney v. Martin
Wiederman v. Keller
Wier v. Hudnut
Wilcox v. Aultman
Wilhelm v. Eaves
Wilkins v. Usher
Willetts v. Phoenix Bank
Wilson v. Finney
Wilson v. Walrath
Wilson v. Wilson
Wisconsin Yearly Meeting v.
Babler
Withers v. Richardson
Wolf v. Mills
Wood v. Boynton
Wood v. Dummer
Wood v. McCain
to case numbers]
Woodworth v. Huntson 494
Worden v. Dodge 410
Wright, In re 80(3
Wuller v. Chuso Groc. Co 28
Y
Yeiser v. U. S. Board & Paper-
Co 644
Yerrington v. Greene 184
7.
Zander v. N. Y. Security Trust
Co 434
Ziff Mfg. Co. v. Pastorino. ... 354
Zimmerman v. Anderson 441
are
224
305
282
499
160
484
436
265
344
223
440
137
604
65
654
228
INDEX
[references are to sections]
A
ACCEPTANCE—
of defective performance, 165.
of goods in sales,
what constitutes, 368, 369.
as barring action for damages, 369.
ACCEPTANCE OP BILLS OP EXCHANGE—
defined, 439-440.
how made, 441, 442.
general or qualified, 443.
presentment for,
required, 502.
within what time, 503.
requirements of, 503.
delay in, 504.
dishonor by refusing, 503, 505.
ACCEPTANCE OP CHECK, see "Acceptance of Bills of Exchange.
ACCEPTANCE OP OFFER—
completes contract, 61.
must be in terms erf offer, 61.
may be by conduct, 62.
when complete, 63.
silence as, 64.
as affected by "Fraud, "Mistake, "Duress, "Undue Influence,
see those subjects.
ACCEPTANCE FOR HONOR, 497.
ACCOMMODATION PARTY—
defined, 446-447.
consideration, 433.
ACCORD AND SATISFACTION—
see '' Compromise of Claim.''
ADEQUACY OF CONSIDERATION, 82.
1511
1512
INDEX
[references are to sections]
ADMINISTRATORS—
promises by, 117.
ADMISSIONS BY AGENT—
binding on principal when, 241.
AGENT—
defined, 185-188.
kinds of, 188.
capacity to be, 193.
authority of, see "Authority of Agent, "Ratification of Agency.
rights of, see '' Duty of Principal.''
obligation of, see "Duty of Agent, "Rights of Third Persons.
see also "Principal, "Revocation of Agency, "Notice to Agent.
AGREEMENT—
see "Offer"; "Acceptance of Offer"j "Discharge of Contracts.
ALTERATION—
discharges contract, 171.
of negotiable paper, 485, 519.
ANTEDATING PAPER, 424-426.
ASSIGNMENT OF CONTRACT^
meaning of, 148.
of rights thereunder, 149.
of obligations, 150.
to be performed in future, 152.
effect of, 153-156.
what constitutes, 156.
AUCTION SALES—
transfer of title in, 349.
fraudulent bids in, 349.
AUTHORITY OF AGENT—
how derived, 197-199.
general rules, 228-232.
to receive payment, 237.
to borrow money, 233.
to make or endorse paper, 234.
to sell personal property, 235, 236.
to extend credit, 238.
to warrant, 240.
to make admissions, 241.
to receive notice, 242.
INDEX
[references are to sections]
AUTHORITY OF PARTNER TO BIND FIRM—
introductory, 592.
under Uniform Act, 593.
to purchase and sell generally, 594, 595, 596, 597.
to warrant, 598.
to borrow money, 800.
to bind firm on notes, etc., 599.
to settle, release, etc., 602.
to mortgage and pledge, 602.
to use assets to pay personal debts, 603.
B
BAILMENTS—
defined and distinguished from sales, 288-291.
duty of care in, 292, 293.
lien, 294.
BANKRUPTCY—
history of, 791.
purposes of, 791.
in other countries, 792.
power of congress, 793, 974.
courts in, 800-808.
who subject to, 810-814.
corporations subject to, 815.
partners subject to, 818.
of minors, 819.
of insane persons, 820.
of deceased estates, 821.
acts of, 825-832.
trustee in, 837-850.
claims in, 851-874.
duties in, 875-880.
discharge in, 881-885.
BENEFICIARIES—
when may sue on contract, 145-147.
BILL OF LADING—
title reserved in, 347, 348.
defined and described, 303-312.
BILLS OF EXCHANGE—
defined, 394.
inland and foreign, 394.
acceptance of,
see "Acceptance of Bills of Exchange.
1514
INDEX
[references are to sections]
BILLS OP EXCHANGE—Continued
protest of,
see "Protest.
see also "Presentment for Payment, "Notice of Dishonor.''
BLANK—
execution of paper in, 431.
failure to cancel, 431, 485, 579.
authority to fill in, 431.
BLUE SKY LAWS, see chapter 102.
BREACH—
as affected by dependence of covenants, 166.
injunction against, 184.
see also "Performance of Contracts.
BROKER—
marriage procured by, 105.
acting without license, 100.
defined, 263.
BULK SALES LAW—
provisions of, 530.
BUSINESS TRUSTS—
defined, 786-787.
o
CAPACITY—
see "Minors"; "Married Women"; "Insane Persons"; "Agent";
'' Principal.''
CAPITAL STOCK—
see '' Stock.''
CARRIER—
defined, 296, 298.
duties and rights of, 296-302.
CAVEAT EMPTORr—
as applied to contracts generally, see "Fraud in Consideration.
in sales, 331.
CERTIFICATES OF STOCK—
whether essential, 668.
see also "Stock"; "Stockholders.
CERTIFICATION OF CHECK—
see '' Acceptance of Bills .of Exchange.''
INDEX
1515
[references are to sections]
CHARTER—
see also "Power of Corporation.
generally of, 650-657.
a contract, 651, 652.
when defective, 656.
CHECKS—
see also '' Bills of Exchange.''
defined, 394.
when to be presented, 500, 466.
as assignment, 156.
C. I. F. SALES—
when title passes in, 347.
C. O. D. SALES
when title passes in, 347.
COMMERCIAL PAPER—
see "Negotiable Paper.
COMMON LAW
defined, 17.
COMPENSATION OF AGENT—
right to, 212-216.
when agent wrongfully discharged, 214.
when agent rightfully discharged, 165, 215.
COMPOSITION WITH CREDITORS—
defined, and validity of, 87.
COMPROMISE OF CLAIM—
validity of, 87, 88.
CONCEALMENT—
as fraud, 71.
CONDITIONAL SALES—
rights of seller and buyer, 391.
rights of third persons, 391.
CONFESSION OF JUDGMENT—
authorized in note, 422.
CONSIDERATION—
defined, 81.
adequacy of, 82.
promises as, 83.
1516
INDEX
[references are to sections]
CONSIDERATION—Continued
past act as, 84.
moral obligation as, 84.
legal obligation as, 85.
contract obligation as, 86.
part payment of debt as, 87.
composition as, 87.
compromise as, 87.
forbearance as, 88.
in subscriptions, 89.
in sales, 314.
in negotiable paper, 433-438; 412.
CONSTITUTION—
defined, 5, 6, 7.
power of federal government under, 6.
laws contrary to, 6.
CONSTRUCTION
rules of,
in contracts, 135-143
in negotiable paper, 427.
CONTRACTS—
see also the specific heads,
definition of, 33, 34.
hinds of, 35.
CORPORATION—
defined, 637.
theory of, 637-641.
as entity, 638.
as a person", 639, 640.
distinguished from partnership, 641.
kinds of, 643.
purposes for which formed, 642, 644.
generally of the charter of,
see "Charter.
de facto, 656.
promoters of, 661-663.
capacity and powers of,
see "Powers of Corporations, "Ultra Vires.'•
stock and stockholders,
see '' Stock,  Stockholders.''
directors, see "Directors of Corporations.
COURTS—
of law and equity, 22.
of trial and review, 23.
INDEX
1517
[references are to sections]
CRIME—
defined, 9.
power of corporation to commit, 751.
D
DAMAGES—
liquidated in contract, 139-143.
rule of, 177-179.
DATE—
in negotiable paper, 424-426.
DEATH—
as affecting offer, 58.
as discharging contract, 170.
as dissolving partnership, 626-629.
DEFENSES—
see "Holder in Due Course.
DEL CREDERE AGENCIES—
defined, 188.
DELEGATION OF AUTHORITY BY AGENT—
right of, 223-225.
DELIVERY OF GOODS—
duty of seller to make, 363.
concurrent with payment, 363.
place, time and manner of, 364-366.
in wrong quantity, 366.
in installments, 366.
to carrier, 347, 367.
acceptance of, see '' Acceptance.''
DELIVERY OF NEGOTIABLE PAPER, 438-422.
DEMAND PAPER—
is negotiable, 413.
when overdue, 500, 466.
DEMURRER—
defined, 24.
DESTRUCTION OF SUBJECT MATTER—
as affecting contract, 170.
DIRECTORS OF CORPORATIONS, 719-722.
1518
INDEX
[references are to sections]
DISAFFIRMANCE—
see "Fraud, "Duress, "Minors, and other specific heads.
DISCHARGE OF CONTRACTS—
meaning of, 161.
by performance, 162, 163, 165, 166.
by breach, 164, 166, 167, 169.
by impossibility, 170.
by agreement, 174.
by novation 172.
by alteration, 171.
by bankruptcy, 175.
by death, 170.
of negotiable paper, 515-520.
DISCHARGE OF EMPLOYEE—
causing, 158.
damages io, 179, 214-216.
DISHONOR—
see "Notice of Dishonor, "Protest, "Presentment.
DISSOLUTION OF PARTNERSHIP—
how dissolved, 620-634.
in death, 626.
DIVIDENDS, 714-718.
DOCUMENTS OF TITLE—
see "Bills of Lading, "Warehouse Receipts.
DUE COURSE—
See "Holder in Due Course.
DURESS—
defined, 77.
in negotiable paper, 477.
DUTY OF AGENT—
to exercise good faith,
general rule, 217.
in not acting for both parties, 218.
in not dealing with himself, 219.
in not competing with principal, 220.
to obey instructions, 221.
to use prudence and skill, 222.
not to delegate authority, 223, 224, 225.
INDEX
1519
[references are to sections]
DUTY OF PRINCIPAL—
to compensate agent, 212-216.
E
EVIDENCE—
see "Parol Evidence Rule.
EXAMINATION OF GOODS—
right to, by buyer, 368.
see also "Acceptance.
EXECUTORS—
promises by, 117.
F
F. O. B. SALES—
when title passes in, 347.
FOOD—
warranties in sale of, 481.
FORBEARANCE OF SUIT—
as consideration, 89.
FOREIGN CORPORATION—
defined, 762.
rights of, 763-765.
what is doing business by, 764.
penalties against, for non-compliance, 763.
suit against, 766.
jurisdiction of court over, 767.
FORFEITURE—
see '' Liquidated Damages.''
FORGERY, DEFENSE OF—
in negotiable paper, 484.
FORM OF CONTRACT—
see '' Formal Contract";  Implied Contract";  Parol Evidence
Rule"; "Frauds, Statute of"; "Written Contracts"; "Oral Con-
tracts"; etc.
FORMAL CONTRACT—
defined, 109-112
FRAUD IN CONSIDERATION—
elements in, 68, 69, 70.
silence as, 72-75.
1520
INDEX
[references are to sections]
FRAUD IN CONSIDERATION—Continued
concealment as, 71.
disaffirmance of contracts procured by, 79, 80.
in auction sales, 349.
FRAUD IN EXECUTION—
defined, 66.
FRAUDS, STATUTE OF—
in general, 114.
text of, 115.
history of, 114.
object of, 116.
cases within, 141,
promises of executors, 117.
promises of guaranty, etc., 118.
promises in consideration of marriage, 119.
contracts concerning land, 120.
contracts for more than year, 121.
contracts of sale of goods, 122; 125-127; 317-323.
what is compliance with, 123-127.
G
GAMBLING AGREEMENTS—
illegal, 96.
GIFTS—
distinguished from sales, 316.
GUARANTIES—
must be in writing, 118.
see Chapter 66.
H
HOLDER IN DUE COURSE—
importance of inquiring who is, 461.
who is, 462.
indorsement necessary, 467.
paper must be regular to constitute, 463.
must purchase in good faith, 465.
must purchase paper before overdue, 681, 466.
must give value, 464.
one is, who purchases from holder in due course, 468.
burden of proof as to, 469.
amount recoverable, by, 470.
INDEX
1521
[references are to sections]
HOLDER IN DUE COURSE—Continued
defenses not available against,
payment before maturity, 472.
set off, 473.
want or failure of consideration, 474, 475.
fraud in consideration, 476.
duress, 477.
illegality, 478.
lack of authority, 481.
defenses available,
in general, 482.
personal incapacity, 483.
forgery, 484.
material alteration, 485.
fraud in execution, 486.
illegality, 487.
HONOR—
acceptance for, 447.
payment for, 448.
see also "Presentment for Payment, "Presentment for Acceptance,
"Notice of Dishonor, "Protest.
I
ILLEGAL CONTRACTS—
see "Legality of Contract.
ILLEGALITY—
defense of, in negotiable paper, 478, 487.
IMPLIED CONTRACTS—
defined, 133.
IMPOSSIBILITY OF PERFORMANCE—
when excuses, 170.
INCOMING PARTNER—
liability of, for past debts, 610-612.
INDORSEMENT—
manner of, 451.
partial, 452.
kinds of, 456-460.
where several payees, 455.
rules and presumptions concerning, 455.
or of liability under, 496.
see also "Holder in Due Course"; "Liability of Parties.
1522
INDEX
[references are to sections]
INFANTS—
see "Minors.
INFLUENCE—
see "Undue Influence.
INJUNCTION—
against breach of contract, 184.
INNKEEPERS—
defined, 297.
INSANE PERSONS—
contracts of, 45.
as agents, 193.
as bankrupts, 819.
INSANITY—
as affecting offer, 58.
installment sales, 366.
INTERFERENCE WITH CONTRACT—
damages for, 158-160.
INTERNATIONAL LAW—
defined, 1, 2.
INTERPRETATION OF CONTRACTS, 135-143.
J
JUDGMENT NOTE—
validity of, 422.
K
KINDS OF CONTRACTS, 35.
L
LADING, BILL OF—
see '' Bill of Lading.''
LAND—
contracts relating to, to be in writing, 120.
LAW—
defined, 1.
international, 1, 2.
INDEX
1523
[references are to sections]
LAW—Continued
municipal, 1, 2, 3.
branches of, 4, 5-12.
LEGALITY OF CONTRACT—
an essential element, 91.
in restraint of trade, 92.
of monopolistic tendency, 93.
limiting liability, 94.
in restraint of marriage, 97.
in corruption of public service, 96.
against public policy in general, 96.
of a wagering nature, 96.
of usurious nature, 95.
made on Sunday, 99.
made without license, 100.
where contemplated by one party only, 101.
lack of, prevents enforcement, 102.
lack of, prevents rescission, 103.
except in certain cases, 104-106.
LEGAL OBLIGATION—
as consideration, 85.
LIABILITY OF PARTNER—
for torts of copartner, 868.
see also "Remedies of Creditors of Partner.
LIABILITY OF PARTY TO NEGOTIABLE PAPER—
of maker, 488.
of drawer, 489.
of drawee, 490.
of acceptor, 491.
of unqualified indorser, 492.
of transferror by delivery, 493.
of qualified indorser, 494.
of irregular indorser, 495.
procedure to charge,
see '' Presentment for Payment,''  Presentment for Acceptance.''
"Notice of Dishonor, "Protest.
LICENSE—
effect of lack of, on contract, 117.
LIQUIDATED DAMAGES, 139-143.
LIQUIDATION—
between partners, 909.
1524
INDEX
[references are to sections]
LIMITATION OF LIABILITY, 94; see also "Liquidated Damages.
LIMITATIONS, STATUTE OF, 176.1
LIQUIDATED DAMAGES, 139-143.
LIMITED PARTNERSHIPS—
defined, 635, 636.
M
MAIL—
contracts made by, 63.
MARRIAGE—
contracts in restraint of, 97.
procured by broker illegal, 805.
contracts in consideration of, 19.
MARRIED WOMEN—
contracts of, 44.
MEETINGS—
of stockholders, 687-706.
of directors, 719-722.
MINORS—
who are, 38.
contracts of, voidable, 39-42.
ratification of, 39, 42.
disaffirmance of, 39, 42.
necessaries supplied to,
liable for, 40.
torts of, 43.
as agents, 193.
as principals, 191.
as bankrupts, 819.
MISTAKE—
as affecting contract, 67.
MONEY—
negotiable paper must be payable in, 412.
MONOPOLIES, 94.
MORAL OBLIGATION—
as consideration, 84.
N
NAME—
of partnership, 578-580.
INDEX
1525
[references are to sections]
NECESSARIES, CONTRACTS FOR—
see '' Minors.''
NEGOTIABLE PAPEIL-
defined, 392-405.
formal requisites,
enumerated, 408.
writing and signature, 409.
unconditional promise or order, 410.
certainty of sum, 411.
payment in money, 412.
time of payment, 414.
payment on demand, 412.
fixed or determinable time, 414.
words of negotiability, 415-417.
provisions not invalidating,
in general, 419.
provision for sale of collateral, 420, 421.
confession of judgment clause, 422.
waiver of exemption laws, 423. .
seal, date, etc., 424-426.
rules of construction, 427.
execution, delivery and consideration, 428-432.
negotiation of, 449-460.
see also  Indorsement.
holder in due course, see '' Holder in Due Course.''
liability of parties, see "Liability of Parties, "Notice of Dishonor,
'' Presentment for Payment,  Protest.''
discharge of, 515-520.
bills of exchange, see "Bills of Exchange.
NEGOTIATION—
see '' Indorsement.''
NOTICE TO AGENT—
is, to principal, 242.
NOTICE BY OUTGOING PARTNER—^
what to be given, 612.
NOTICE OF DISHONOR—
provisions of act, 506, 507.
waiver of, 510,
not required when, 508, 509.
NOTICE IN NEGOTIABLE PAPER—
what constitutes, 612.
1526
INDEX
[references are to sections]
o
OBLIGATION—
of principal to agent, see, '' Duties of Principal.''
of agent to principal, see '' Duties of Agent.''
of principal to third person, see '' Rights of Third Persons Against
Principal. .
of parties in negotiable paper, see '' Liability of Parties.''
OFFER—
propositions not constituting, 50-54.
duration of, 55-60.
withdrawal of, 59.
rejection of, 56.
termination of, 55-60.
acceptance of, see '' Acceptance.''
as affected by "Fraud, "Mistake, "Duress, "Undue Influence,
see those subjects.
OFFER AND ACCEPTANCE—
see "Offer, "Acceptance.
necessary to contract, 49.
OPERATION OF CONTRACTS—
general rule, 144.
as to undisclosed principals (see "Undisclosed Principals"),
as to beneficiaries, 145-147.
as to assignees, 148-157.
as to strangers, 158-160.
OPINION—
not basis for fraud, 68-69.
not basis for breach of warranty, 329.
ORAL CONTRACTS—
validity of, 132.
ORDER—
in bill of exchange, 410.
OUTGOING PARTNER—
liability of, 612.
OVERDUE PAPER—
is negotiable, see "Holder in Due Course.
OWNERSHIP—
see '' Transfer of Title.';
INDEX
1527
[references are to sections]
p
PAROL EVIDENCE RULE—
stated, 129.
when writing incomplete, 130.
customs and usages, 130.
void and voidable contracts under, 131.
in respect to warranties, 330.
PARTIES—
who are, 36.
capacity of, to contract, 37, 324.
see also "Minors, "Married Women, "Insane Persons, "Agent,
etc.
PARTNERS—
who may be, 575.
kinds of, 570.
mutual rights and duties of, 585-591.
in bankruptcy, 818.
PARTNERSHIP—
defined, 560.
an association, 561.
an association in co-ownership, 562.
an association for profit, 563.
test of, 564.
cases not of, 565.
how differs from corporation, 568.
by estoppel, 565.
kinds of, 569.
trading and non-trading, 569.
limited and. unlimited, 569.
 who may form, 575.
purpose of, 577.
name of, 578-580.
property of,
how to be held, 580, 583.
what constitutes, 836, 582.
rights and obligations of members of,
toward each other, 585-591.
toward others,
see "Authority of Partner, "Torts of Partner, "Rem-
edies of Creditors of Partners.''
duration of, 610-612.
remedies of creditors of, 880-895.
dissolution of,
by lapse of time, 621.
by mutual agreement, 622.
1528
INDEX
[references are to sections]
PARTNERSHIP—Continued
dissolution of—continued
by transfer of partner's interest, 623.
by death of partner, 626-629.
by bankruptcy and court decree, 630-634.
notice upon dissolution, 611.
accounting upon dissolution, 625.
title of surviving member of, 901.
devolution of realty of, 903.
in bankruptcy, 818, 630-634.
PAST ACT—
not consideration, 84.
PENALTY—
not enforceable, 139-143.
PERFORMANCE OF CONTRACT—
must be in accord with terms, 162.
substantial, sufficient, 162.
defective, acceptance of, 165.
when to be to other's satisfaction, 163.
of contract of sale, see "Delivery, "Acceptance.
PERSONAL DEFENSES—
in negotiable paper, 472-478.
PERSONAL PROPERTY—
sales of, see '' Sales,''
PLEDGE—
defined, 295.
POST-DATING PAPER, 424-426.
POTENTIAL EXISTENCE—
sales of goods having, 325.
POWERS OF CORPORATION—
inherent, 750-751.
to commit torts, 751.
to commit crimes, 751.
express, 752.
implied,
■in general, 753.
to acquire, hold and grant real estate, 756.
to lease and sell, 757.
to borrow money, 757.
to loan money, 758.
to acquire shares, 759, 760.
see also "Ultra Vires.
INDEX
1529
[references are to sections]
PRESENTMENT FOR ACCEPTANCE—
necessary when, 502.
sufficient when, 503.
excused when, 504.
rights upon non-acceptance, 505.
PRESENTMENT FOR PAYMENT—
in general, 497.
not necessary to charge maker or acceptor, 498.
necessary to charge drawer and indorser, 499.
must be at proper place, 500.
must consist in exhibition of instrument, 500.
must be at proper hour, 500.
must be to proper person, 500.
not required and excused when, 501.
PRESIDENT—
duty and power of, 731.
PRICE—
defined, 316.
how determined, 316.
PRINCIPAL—
capacity to act as, 190-192.
authority conferred by, see "Authority of Agent, "Ratification of
Agency.''
rights against agent, see "Duty of Agent.
liability to third persons, see "Rights of Third Persons"; "Authority
of Agent";  Undisclosed Principal.''
liability to agent, see "Duty of Principal.
see also '' Agent.''
PROMISES-^
indefinite not enforceable, 83.
in promissory notes, 410.
PROMISSORY NOTES—
defined, 394-405.
see, generally, "Negotiable Paper.
PROMOTERS—
rights and duties of, 661-663.
PROPERTY OF PARTNERSHIP, 580-583.
PROTEST—
necessary when, 511.
requirements as to, 513.
1530
INDEX
[references are to sections]
PROTEST—Continued
by whom to be made, 512.
when and where to be made, 513.
for better security,
dispensed with when, 514.
PUBLIC SERVICE CORPORATIONS—
defined, 296-302.
Q
QUALIFIED ENDORSER—
defined, 458.
liability of, 494.
QUASI CONTRACTS, 133.
R
RAILROADS, see "Carrier.
RATIFICATION—
of minor's contract, see '' Minors.''
RATIFICATION OF AGENCY BY PRINCIPAL—
meaning of, 204.
essentials to, 205.
by express statement, 206.
silence as, 207.
receipt of benefits as, 208.
suit as, 209.
RATIFICATION OF VOIDABLE CONTRACTS, 81.
REAL DEFENSES—
in negotiable paper, 482-487.
REMEDIES OF BUYER—
for failure to deliver, 386-391.
for breach of warranty, 386-391.
REMEDIES OF CREDITORS OF PARTNERS—
against jJartn'ers jointly, 613.
against each in s'olido, 614.
against firm assets at law, 615-618.
against individual assets of partner, 616.
against firm assets for individual debt, 618.
against assets in equity, 619.
INDEX
1531
[references are to sections]
REMEDIES OF SELLER—
damages, 370-384.
specific performance, 180-183; 370-384.
lien, 370-384.
right of stoppage, 370-384.
resale and rescission, 370-384.
REMEDY—
for breach of contract,
damages, 177-179.
specific performance, 180-183.
injunction against, 184.
by party guilty of breach, 165.
in sales, 370-391.
RESERVATION OF TITLE, 398.
RESCISSION—
see "Mistake, "Fraud, "Undue Influence, "Duress, "Minors,
'' Legality.''
RESTRAINT OF TRADE—
contracts in, 92.
REVOCATION OF AGENCY—
power of, 278-279.
no power of, when, 278.
means of, 275-277, 280.
notice of, 281, 282.
REWARDS—
acceptance of, 50.
recovery of, by officer, 85.
RIGHTS OF AGENT—
see '' Duty of Principal.''
RIGHTS OF THIRD PERSONS—
against principal,
see '' Authority of Agent.''
against agent,
when lacks authority, 255.
when principal undisclosed, 257.
by form of contract, 258-260.
in tort, 262.
S
SALES OF PERSONAL PROPERTY—
to be in writing when, 122; 125-127; 327-323.
distinguished from contracts to sell, 313.
1532
INDEX
[references are to sections]
SALES OF PERSONAL PROPERTY—Continued
distinguished from gifts, 316.
distinguished from bailments, 288-291.
when not in existence, 325.
as affected by destruction of goods, 326-327.
price in, 316.
warranties in, see "Warranties.
transfer of title in, see '' Transfer of Title.''
performance, see "Delivery, "Acceptance of Goods.
remedies, see "Remedies of Seller, "Remedies of Buyer.
SAMPLES—
power of agent to sell, 235-236.
warranties in sale by, 336.
SEAL—
defined, 109.
form of, 109-110.
abolition of, 112.
effect of, 109-112.
on negotiable paper, 424.
SECRETARY—
office of, 733.
SERVANT—
see '' Agent.''
SETTLEMENT—
see "Compromise of Claim, "Composition, "Consideration.
SHARES—
see '' Stock.''
SIGNATURE—
under statute of frauds, 123.
form of, by agent, 258-260.
under negotiable instruments law, 409.
SILENCE—
as acceptance, 64.
SPECIFIC PERFORMANCE—
decree for, when allowed, 180-183.
STARE DECISIS—
doctrine of, 19.
STATUTORY LAW—
see "Written Law.
INDEX
1533
[references are to sections]
STATUTE OF FRAUDS—
see "Frauds, Statute of.
STOCK—
defined, 664.
division into shares, 664.
kinds of, 665-667.
certificates of, 668.
subscription to,
upon condition, 672,
fraud in securing, 671.
liability upon, 673.
payment of, 674-679.
transfer of, 707-713.
lost, stolen and forged certificates of, 707-713.
STOCKHOLDERS—
see also '' Stock.''
meetings of, 687-706.
vote of, 687-706.
right to prevent illegal acts, 682.
right to inspect books, 684.
right to dividend, 681, 714-718.
SUBSCRIPTIONS—
contractual nature of, 58, 90.
SUM IN NEGOTIABLE PAPER—
must be certain, 411.
SUNDAY CONTRACTS—
illegality of, 96.
SURETYSHIP—
see Chapter 67.
T
TELEGRAPH—
contracts made by, 63.
TERMINATION OF AGENCY—
see "Revocation of Agency.
THREATS—
effect of, on contract, 77, 477.
TIME—
is of essence of contract, 137-138.
in negotiable paper, 412-414.
1534
INDEX
[references are to sections]
TITLE, TRANSFER OF—
see "Transfer of Title.
TORTS—
. defined, 9, 10.
TORTS OF AGENT—
principal liable for, 253.
agent liable for, 262.
TORTS OF CORPORATIONS—
power to commit, 751.
TORTS OF PARTNER—
general rule, 606-609.
examples, 606-609.
TRANSACTION—
recital of, in negotiable paper, 412.
TRANSFER OF TITLE—
as between buyer and seller,
rules governing,
where goods unascertained, 341.
to ascertain intention, 842.
presumption of immediate transfer, 343, 344.
in sales on approval, 345.
upon appropriation, 344, 345, 347.
upon delivery to carrier, 347.
in C. O. D. sales, 347.
in F. O. B. sales, 347.
in C. I. F. sales, 347.
reservation of, 348.
in auction sales, 349.
as affecting third persons,
true owner estopped when,
not by mere possession, 350-352.
by allowing appearance, 354.
by giving documentary evidence, 356.
in case of recording acts, 359-362.
in case of factors acts, 361.
in case of bulk sales law, 360.
when seller retains possession, 358.
TREASURER—
office of, 734.
TRIAL—
order of, 24.
INDEX
1535
[references are to sections]
TRUSTS—
legality of, 93.
business, 786-787.
TRUSTEE IN BANKRUPTCY, 832-850.
/ u
ULTRA YIRES—
see also "Powers of Corporations.
meaning of, 755.
right to raise defense, 755.
UNCONSTITUTIONAL LAWS, 6.
UNDISCLOSED PRINCIPAL—
may be held by third party, 243-248.
may hold third party, 249.
UNDUE INFLUENCE—
defined, 78,
presumed when, 78.
disaffirmance of contracts procured, 78.
USURY—
defined, 95.
Y
VALUE, IN NEGOTIABLE PAPER—
must be given to constitute holder in due course, 464.
VICE PRESIDENT—
office of, 732.
W
WAGER AGREEMENTS—
illegal, 96.
WAREHOUSE RECEIPTS—
defined and described, 303-312.
WARRANTY—
expfesSj
power of agent to make, 240.
defined, 328.
the affirmation of fact therein,
what is, 328, 329.
1536
INDEX
[references are to sections]
WARRANTY—Continued
express—continued
the affirmation of fact therein—continued
as distinguished from opinion, 329.
as relied on by the buyer, 329.
implied,
none when, 331.
generally of, 332, 333.
of title, 334.
in sale by description, 335.
of merchantability, 335.
of fitness for purposes, 337.
in sale by sample, 336.
none to subpurchasers, 338, 339.
remedy for breach of, 386-391.
WORDS OP NEGOTIABILITY—
what are, 415-417.
WRITTEN CONTRACTS—
what, must be in form of, 113.
under statute of frauds (see "Frauds, Statute of"),
parol evidence rule concerning, 128-131.
negotiable paper must be in form of,
WRITTEN LAW—
defined, 14.
forms of, 15, 16.