MRPP*
ELEMENTS
BUSINESS
HUFFCUT
. .,' ***'■
9<"
THE ELEMENTS OF
BUSINESS LAW
WITH ILLUSTRATIVE
EXAMPLES AND PROBLEMS
BY
ERNEST W. HUFFCUT
REVISED BY
GEORGE GLEASON BOGERT
PROFESSOR OF LAW IN THE CORNELL UNIVERSITY COLLEGE OF LAW
GINN AND COMPANY
BOSTON • NEW YORK • CHK \<;<> • LONDON
ATLANTA ■ DALLAS • COL1 MB1 FRAN< ISCO
T
1917
COPYRIGHT, 1905, BY
KRNEST W. HUFFCUT
COPYRIGHT, 1917, ISY
LILLIAN HUFFCUT
ALL RIGHTS RESERVED
519.11
gbt Sthtnsum $regg
I. INN AND COMPANY- 1'KO
PK1UTOKS • UUSION • U.S.A.
N
6 PREFATORY NOTE
An effort has been made in this book to state as concisely
and clearly as possible the leading and fundamental principles
of business law, and in place of extended abstract explanations
of them to substitute simple concrete examples showing them
in their actual application to business transactions. In order
that the conclusions drawn in these examples may be verified
and not rest upon mere conjecture, the examples have for the
most part been taken from cases decided in the courts. At the
end of each chapter are given a number of concrete problems
without the conclusions, intended to afford an exercise in the
application of the principles drawn from the text and the exam-
ples. These also have been taken mainly from the decided
cases. The drill in the examples and problems should be con-
stant and thorough, and will be found far more interesting and
instructive and far better calculated to develop intelligent think-
ing and reasoning than the memorizing and repeating of abstract
dogmatic statements.
The arrangement of the book has kept in view a logical anal-
ysis and unfolding of the subject. But if for any reason it
should be thought desirable to deal with negotiable instruments
earlier in the course, it would do equally well to interchange
Parts II and III, giving the latter first.
Should the book prove too extended for the time allotted,
Parts V and VI may be omitted, although it would be well to
cover, if possible, the chapter on partnership. The last three
chapters do not fall clearly within the scope of business law, and
for this reason, and because it lias been the object not unduly
to extend them, the examples and problems have been for t In-
most part omitted and numerous facsimiles of formal documents
substituted. While these chapters deal with somewhat technical
matters, the subjects involved arc of great importance to all who
have property interests.
iii
IV
PREFATORY NOTE
The glossary of legal terms should be constantly referred to,
in order that the nomenclature of the law may be correctly
understood. While the glossary has been made as complete as
practicable, it would be well to supplement it by a good law
dictionary, in which more extended definitions and explanations
may be found.
The work is based necessarily upon the common law. While
the nature of statutory changes has been indicated, the precise
provisions of statutes are rarely given, because these vary so
widely in the different states that such a course would prove
misleading. The difficulties of an accurate statement of the
statutory law in a book of this size are in fact insurmount-
able. Should the teacher be fortunate enough to secure the
cooperation of a local attorney, some progress in this direction
might be made.
It will be found in setting examinations that concrete prob-
lems are better calculated to disclose the practical value of the
student's work than questions calling mainly for definitions,
rules, or abstract statements. E W H
Cornell University College of Law
July 3, 1905
PREFACE TO SECOND EDITION
During the eleven years which have elapsed since the first
edition of this book was published there have occurred many
changes in American law which render desirable a revision.
Numerous alterations in the seventeenth section of the Statute
of Frauds; the increasing importance of the antitrust legislation;
several amendments to the federal bankruptcy law ; the adoption
by many states of the various uniform laws, notably the Uniform
Sales Act, Uniform Warehouse Receipts Law, Uniform Bills
of Lading Act, and Uniform Stock Transfer Act ; the recent
amendments to the Interstate Commerce Act regarding carriers ;
the approval by the Interstate Commerce Commission of a new
form of bill of lading ; the passage of the Federal Reserve Act ;
changes in the rates of interest, especially in the Western states ;
the almost complete abolition of days of grace ; the rapid spread
of the Negotiable Instruments Law ; the revolution in the law of
master and servant caused by the Employers' Liability and Work-
men's Compensation acts ; and the increase in the popularity of
the Torrens system of land registration — all have necessitated
changes in the text. Many other minor alterations in the interest
of accuracy and completeness have been occasioned by the growth
of the law.
It would be difficult to improve upon the admirable lucidity
and compactness of Dean Huffcut's style. Hence the new mat-
ter introduced relates largely to substance and not to diction.
I desire to add that it is a particular satisfaction to be
accorded the privilege, by this revision of the work of the
late Dean Iluffcut, of paying a meed of gratitude to a teacher
for whom I entertained a warm personal regard, and whose
legal exposition, in classroom or in printed text, was distin-
guished by remarkable analytical power and by singular clarity
and accuracy <>{ expression.
GEORGE G. BOGERT
Cokni n. ' 1 1 v Colli gb oi Law
I m \< \, New York
CONTENTS
CHAPTER I. PRELIMINARY TOPICS
Business Law and Cognate Subjects
SECTION PAGE
1. Business l
2. Law '
3. Business law 2
4. Divisions of the law 3
5. Property 4
6. Legal obligations 4
7. Courts "
8. Procedure °
9. Scope of this work 9
PART I. THE PRINCIPLES OF CONTRACT
CHAPTER II. FORMATION OF CONTRACTS
10. Definition of contract IT
11. Essentials of enforceable contract i 2
I. Agreement
1 2. Contracts begin in agreement ! -
13. Classes of agreements r 3
14. Agreements originate in some form of offer and acceptance ... 13
II. Competent Parties
15. Infants l 7
|6. Insane persons I"
17. Married women '9
in. Consideration
18. Necessity of consideration '9
19. The consideration need not equal the promise in value 20
20. A past consideration will not support a promise 21
21. The consideration must be legal 22
vii
viii CONTENTS
IV. Form : Writing ; Seal
riOH PAGE
22. Statute of Frauds 23
Contracts under seal 25
V. Legality of Object
24. Contracts made illegal by statute 27
25. Wagering contracts 28
26. Contracts illegal at common law 30
27. Effect of illegality upon contracts in which it exists 32
VI. Reality of Consent
28. Mistake 33
29. Fraud and misrepresentation 35
30. Duress 36
31. Undue influence 37
CHAPTER III. OPERATION AND DISCHARGE OF CONTRACTS
I. Liabilities and Rights of Third Parties
32. Liability of third parties 45
33. Rights of third parties 46
II. Assignment of Contracts
34. Assignment by act of the parties 46
35. Negotiability of certain contracts 47
36. Assignment by operation of law 48
III. Discharge of Contracts
37. Discharge by agreement, including performance 49
38. Discharge by impossibility of performance 5 1
39. Discharge by breach 53
40. Remedies for breach of contract 54
IV. Discharge in Bankruptcy
41. Insolvency laws not discharging debtor 56
42. Bankruptcy laws discharging debtor 56
43. The state insolvency laws 57
44. National Bankruptcy Law of 1898 57
CONTENTS ix
PART II. PARTICULAR CONTRACTS CONCERNING
GOODS
CHAPTER IV. SALES OF GOODS
I. The Contract
SECTION PAGE
45. Definition and analysis 61
46. Statute of Frauds 66
II. The Title
47. When does title pass ? 69
4S. Specific or ascertained goods 7°
49. Unascertained goods 7 2
50. Who has the risk? 74
III. Performance
51. Duties of the seller 75
52. Duties of the buyer 75
1Y. Warranties
53. Definition and classification 76
54. Express warranties 76
55. Implied warranties 77
56. The rule of caveat emptor 79
57. Remedies for breach of warranty 80
V. Remedies
58. Rights of unpaid seller against the goods 81
59. Rights of unpaid seller by way of action for breach of contract . . 83
60. Remedies of the buyer ... 84
CHAPTER V. BAILMENT OF GOODS
61. Definition and distinctions 90
Classification of bailments 91
I. BaILMENI SOLELY i"r Ill NEFIT OF < >NE PARTY
63. Bailments for sole benefit of bailor 93
64. Bailment ■ for bailee's sole benefit 95
x CONTENTS
II. Mutual-Benefit Bailments
PAGE
65. Pledge <t pawn 97
66. Bailee hires an article of bailor 99
(■~. Bailor engages bailee to keep, repair, or transport an article . . . 101
III. Special Cases of Bailment kor Keeping or Transportation
68. Innkeepers 104
69. Common carriers of goods 107
IV. Cases not Strictly of Bailment
70. Public carriers .if passengers and baggage 116
71. Telegraph and telephone companies 118
CHAPTER VI. INSURANCE CONTRACTS
72. Nature and kinds of insurance 122
73. Kinds of policies 123
74. Definitions 123
75. Characteristics 125
76. The insured must have an insurable interest 127
77. The contract of insurance is one requiring the highest good faith . 128
78. Warranties 129
79. Statutory or standard policies 131
80. Marine insurance 132
PART III. PARTICULAR CONTRACTS CONCERNING
CREDITS
CHAPTER VII. CREDITS AND LOANS
81. Capital and credit ; money and exchange ; payment 135
82. Interest and usury 140
S3. Banks 142
84. Bank deposits 144
85. Loans and discount; security 145
CHAPTER VIII. THE CONTRACT OF GUARANTY
86. Guaranty defined 149
87. A guaranty must be in writing 150
88. Consideration 150
89. Notice of acceptance by guarantee 151
CONTENTS XI
SECTION PAGE
90. Notice to guarantor of the default of the principal 151
91. What will discharge the guarantor 152
92. Guarantor's liability 155
93. Guarantor's remedies l 55
CHAPTER IX. NEGOTIABLE INSTRUMENTS
I. Nature and Characteristics
94. Kinds of negotiable instruments 1 5*9
95. Characteristics of negotiable instruments 161
96. Definitions 163
97. Negotiable Instruments Law ... 1 70
II. Form
98. What a negotiable instrument must contain 1 70
99. What a negotiable instrument must not contain 172
100. Nonessentials 1 73
101. Effect of blanks 1 74
102. Delivery 1/4
III. Negotiation
103. Negotiation; indorsement; delivery 175
104. Holder in due course 1 77
105. Rights of holder in due course 1 79
IV. Maker's and Acceptor's Contract
106. Maker's contract on a promissory note 181
107. Acceptor's contract on a bill of exchange 181
108. Presentment of bill of exchange for acceptance 185
109
1 10
I 1 1
I I 2
"3
114
l«5
V. Drawer's and Endorser's Contract
Drawer's contract on a bill of exchange 186
Endorser's contract on a bill or note 186
Presentment for payment l88
Notice of dishonor '9'
Protest M| l
Checl '9 8
Position of indorser after liability is fixed 199
xii CONTENTS
PART IV. AGENCY: THE CONDUCT OF BUSINESS
THROUGH REPRESENTATIVES
CHAPTER X. PRINCIPAL AND AGENT
ion PAGE
tl6. Agency: its divisions and problems 205
I. Appoin i mk\ i' of Agents
117. Who may appoint agents 207
1 1 S. Who may be an agent 208
119. Form of appointment 210
120. Ratification 210
121. Agency by necessity 212
[22. Termination of agency 212
123. Irrevocable agencies 213
II. Obligations of Principal and Agent to Each Other
124. Obligations of principal to agent 213
125. Obligations of agent to principal 214
III. Liability of Principal to Third Parties
126. General Rules 217
127. Agent's apparent authority 217
128. Agents following customary calling 219
1 29. Undisclosed principal 220
130. Frauds by agent 222
IV. Liability of Agent to Third Parties
131. Where agent alone is liable 222
132. Where both principal and agent are bound 223
CHAPTER XI. MASTER AND SERVANT
I. Injuries to Third Persons
133. Negligent torts by servants 227
134. Willful torts by servants 227
II. Injuries to Servants
135. Injury to one servant by another 228
136. The master's nonassignable duties 229
137. Employers' liability acts 229
138. Workmen's compensation and insurance acts 230
CONTENTS xiii
PART V. BUSINESS ASSOCIATIONS
CHAPTER XII. PARTNERSHIPS AND JOINT-STOCK
COMPANIES
SECTION PAGE
139. Forms of conducting business 235
I. Partnerships
140. What constitutes a partnership 236
141. Rights and duties of partners as to each other 238
142. Powers of partners 239
143. Liabilities of partners 240
144. Rights and remedies of creditors 241
145. Dissolution 242
II. Joint-Stock Companies
146. How distinguished from ordinary partnerships 243
147. How like ordinary partnerships 244
CHAPTER XIII. CORPORATIONS
48. Definition and classification 24S
49. How a corporation is formed 24S
50. Members 250
51. Directors 252
52. Officers and agents 253
53. Powers of a corporation 254
54. Stockholders' rights 255
55. Liability of stockholders 257
56. Reports of corporations .2",
57. Receivers of corporations -5;-;
5-S. Dissolution of corporations 258
PART VI. PROPERTY IN LAND AND MOVABLES
CHAPTER XIV. RIAL PROPERTY
I. Estates i\ Real Pr< >pi r i \
ISO- Meaning of the term " property " 261
16 1 itates in land ; duration 564
161. Future inland: reversions and remainders 267
t?>2. Estates held jointly <>r in common 268
163. Equitable estates : trusts 269
xiv C< '\ II N I S
II. Land: rrs Constituents, Growths, and Fixtures
[ON PAGB
164. Extent of ownership : soil, air, minerals, waters 270
[65. Vegetable products 270
100. Fixtures 271
III. Relative Rights of Adjoining Owners
i"-. Fences: cattle trespass 273
[68. Air ami waters ; support of land 273
[69. Easements 274
IV. Transfer of Interests in Lands
170. Contract of sale 274
171. Conveyances 276
172. Wills 277
173. Descent to heirs 280
1 74. Adverse possession 282
V. Mortgages and Liens
175. Mortgages of real property 282
1 76. Liens on real property 283
VI. Landlord and Tenant
177. The lease and its covenants 288
1 78. Defects, repairs, and waste 290
179. Assignment and subletting 291
180. Rent and remedies for nonpayment 291
181. Termination of lease 292
CHAPTER XV. PERSONAL PROPERTY
I. Classification : Kinds and Estates
182. Classification 294
183. Property in animals 294
[84. Trademarks; goodwill; names 295
185. Estates in personal property 296
II. Acquisition and Transfer
186. Acquisition by occupancy and by finding lost property .... 297
187. Accession and confusion 298
188. Transfer by gift 300
[89. Other modes of transfer 302
GLOSSARY 3°5
INDEX 3 T 3
THE ELEMENTS OF
BUSINESS LAW
CHAPTER I
PRELIMINARY TOPICS
Business Law and Cognate Subjects
1. Business. Business concerns itself with property, credit,
and services, and with contracts pertaining to these things.
The term " business " embraces every kind of industrial activity
by which men acquire, manufacture, or otherwise produce prop-
erty ; by which they sell or transfer it; by which they store,
transport, or insure it; by which they borrow or lend money
and give or secure credit ; by which they combine with others
to these ends ; and by which they furnish or obtain services in
these and similar enterprises. This is by no means an exhaus-
tive list of commercial operations, but it indicates the variety
and extent of those human activities that pass under the name
of business.
2. Law. The term "law" includes all those rules by which
courts are controlled in the administration of justice. The same
rules must also govern men in their relations to each other,
because if they be violated, the courts will either give repara-
tion to the injured party or refuse to aid the one who has
violated them.
Rules of law arc of two kinds : first, those that have been
worked out by the courts themselves in deciding actual eases
brought before them by litigants; and, second, those enacted
by the legislatures. The first are known as the common law,
and the second as statute law. The common law is sometimes
called the unwritten law, and statute law is sometimes called the
written law.
2 PRELIMINARY TOPICS [Ch. I
i. Common law. The common law is therefore the law declared
by judges in the decision of cases. It rests primarily upon custom,
because in deciding cases the judges seek to give effect to the
prevailing customs of the people in their relations and dealings
with each other. But when a point of law is once decided, sub-
sequent judges in the same jurisdiction follow it as a precedent,
and the point is said to be decisively settled. This is known as
the doctrine of stare decisis, — the doctrine that courts must
stand by decided cases, uphold precedents, and maintain former
adjudications. With the lapse of time, therefore, the greater
number of the ordinary questions that may arise have been thus
settled and the common law established. The rules must be
sought in the printed reports of the decisions of the courts.
2. Statute law. Statute law consists of the enactments of
legislatures. These may be for the purpose of changing some
rule established by the courts when, for example, the develop-
ment of society makes the continuance of the old rule inexpe-
dient, or for the purpose of codifying into a brief statute the
rules scattered through hundreds or even thousands of volumes
of reported cases. The whole law of negotiable instruments has
been thus codified in England and in many of our American
states (see sect. 97 post).
For the law of any state, therefore, one must consult the statutes of that
state and the reports of its courts. In some states the reports are very numer-
ous. For example, there are in New York upwards of one thousand volumes,
in Massachusetts more than two hundred volumes, and in all the states
combined, over ten thousand volumes. A statute or decision is not binding
except in the state where enacted or rendered. Hence it follows that the law
may be one way in Massachusetts and just the opposite in New York. As we
have the federal Congress and courts, and forty-eight state legislatures and
courts, not to mention territories and dependencies, it will be seen that the
American law may present many diverse enactments or decisions upon the
same question. This is what makes it very difficult in this country to present
a statement of the law which is correct for every jurisdiction.
3. Business law. Business law is that portion of the general
law which governs business transactions. While the term is fre-
quently used as if it denoted a distinct body of law susceptible
of accurate definition, it is in reality a term of vague meaning.
One engaged in business transactions may be confronted with
§4] DIVISIONS OF THE LAW 3
legal questions involving almost any topic of the law, and hence
might need advice from an expert or might in simple cases be
able to solve the difficulty for himself. The most that any law
book for business men can well undertake to do is to present
the elementary principles governing the ordinary business trans-
actions, leaving for lawyers the more intricate or technical prob-
lems. The chief aim of such a book should be to inform the
business man how to keep out of difficulties, rather than to enable
him to extricate himself after he is once involved.
Business law is, therefore, merely such a selection from the
general body of the law, and especially the law of contract, as
a particular author may think it profitable for a business man
to know.
4. Divisions of the law. The law may be divided into two
great branches, public law and private law.
1. Public /aw. Public law includes those topics with which
the state, that is, the public as a whole, is especially concerned :
namely, (a) international law, or the law governing the relations
of one nation to other nations ; (&) constitutional law, or the
fundamental law governing a nation or state in its relations to
its citizens ; (c) criminal law, or the law by which the public
protects itself against crimes and offenses prejudicial to its
well-being ; and (d) administrative law, or the law under which
governmental affairs are carried on, as tax laws, highway laws,
and the like.
2. Private law. Private law includes those topics with which
individuals are particularly concerned in their private relations.
These are very numerous but may be roughly grouped under
three main heads: namely, (a) the law of property, including
[uisition, ownership, possession, security, alienation, descent,
and the like; (b) the law of obligation, including contracts, torts,
trusts, and the like ; and (c) the law of procedure, or the law
by which cases are brought into courts and conducted to trial
and judgment.
The topics treated under the head of business law arc those in-
volving either tin- law ol property or the law of obligation. The
acquisition and disposition of property, the making and perform-
ing of contracts, constitute the major part of a business enterprise.
4 PRELIMINARY TOPICS [Ch.1
5. Property. Property consists in the ownership of material
objects, or the ownership of some right in or to a material object,
or the ownership of souk- right against a person, or the owner-
ship of some immaterial right to be exercised to the exclusion of
others. Material objects are either immovable, like land, or mov-
able, like coin, cattle, or merchandise. One may own and pos-
sess these things, or he may own a right in them, as when he
lias a right to cross another's lands or a right to sell another's
goods pledged to him lor a debt. Immaterial property may con-
sist in a right granted by statute or usage to the exclusion of
others, as a right to a patent or to a trade-mark ; or it may
consist of a right against a person, as a right to compel him
to pay a promissory note or to pay damages for a trespass to
property.
The law regards property as either real property or personal
property.
i. Real property. Real property consists of any estate or inter-
est in lands, except a leasehold estate for years or a mortgage or
lien. There are two such estates : an estate of inheritance, or, as
it is often called, an estate in fee, which is an estate that descends
to the owner's heirs ; and an estate for life which terminates at
the death of the owner or of some other designated person (see
sect. 160 post).
2. Personal property. All other property is personal property.
This includes (i) chattels real, that is, leasehold interests in
lands ; (2) chattels personal, that is, all other kinds of property,
consisting of the following classes : (a) corporeal movable objects;
(b) incorporeal rights or privileges, like patents, copyrights, trade-
marks, and good will in a business ; (e) rights of action against
persons, called choses in action {choses is the French for " things ").
The kinds of property with which business is chiefly con-
cerned are corporeal movable objects and choses in action.
The former are goods, wares, and merchandise ; the latter are
negotiable instruments, stocks and bonds, mortgages and liens,
and debts in general.
6. Legal obligations. Legal obligations are those which the
law enforces. They arise either by agreement or by the policy
of the law, independent of an agreement.
§6] LEGAL OBLIGATIONS 5
1. Contract. An agreement enforceable at law we call a con-
tract, and the failure or refusal to carry out the agreement we
call a breach of contract.
Example 1 . A agrees with B that A shall sell and B shall buy A's bicycle
for S30. This is a contract. If either party refuses to carry out his part of it,
the other has a case at law for damages.
Contracts have to do with a great variety of interests, and
many special kinds of contracts may be enumerated, such as
contracts of sale, contracts of bailment, contracts of carriage,
contracts of insurance, contracts of partnership, contracts of
guaranty, contracts for the loan of money, and the like.
2. Tort. The obligations fixed by private law independent
of agreement have no specific names, but the breach of any
of these obligations is called a tort, which is simply the French
word for " wrong." Many of these torts have specific names.
Examples: 2. A strikes B in anger. A has committed the tort called
assault and battery.
3. C goes without permission on D's land. C has committed the tort
called trespass.
4. E speaks false and malicious words derogatory to F's character. E has
committed the tort called slander. If E writes the words, the tort is called libel.
5. G drives so carelessly in the street as to run into and injure H's carriage.
G has committed the tort known as negligence.
In each of the above cases the wrongdoer was under an
obligation fixed by the law not to infringe the personal security
or property rights of another to his damage, and to use due
care for the safety of others and their property. The violation
of this obligation constitutes the tort.
Where, in the formation of a contract, one party knowingly
makes a false representation to the other, a tort is committed.
Where, after a contract is made, a stranger to it induces one
of the parties to break it, a tort is also committed.
nnplcs : 6. A wishes to sell sheep to B. He tells B that they are sound
and healthy. Me knows they are diseas< id. I; buys the sheep and afterwards
discovers that they arc diseased, (a) There is a contract between A and B.
{b) There is a tort, known as deceit, committed by A.
7. A agrees to work for. I',. X, knowing this, induces A to break the contract.
X has committed a tori whi< l> hafl no very Specific name. Il is called " indu< ing
• ntract," or, in this form of contract, "enticing away a servant."
6 PRELIMIN \KY TOPICS [Ch. I
3. Quasi-contracts. In certain cases where there is no true
contractual agreement, the law, by reason of some act or situa-
tion of a party, imposes an obligation upon him and gives a
remedy against him, as if, in fact, his obligation did arise from
agreement. In order to prevent unjust enrichment and to give
an efficient remedy, the law indulges in such cases the fiction
that a promise was made, and permits an action in the form of
an action on contract. These cases are called quasi-contracts,
because the form of remedy is like that in the case of a true
contract
Examples: 8. A steals B's money. B may recover the money in a con-
tract action, there being by fiction of law an implied promise to repay it.
9. C by mistake pays D more than he owes. C may recover the excess in
a contract action. The law implies a promise by D to return the overpayment.
10. E is a lunatic, known to be one, and incapable of making a contract.
F furnishes E with necessary food. F may recover the reasonable value of
the food in a contract action. The law creates the promise of the lunatic to
pay for necessaries.
4. Trusts. A trust is an obligation of one who has the legal
title to property to account for it to one who has the beneficial
or equitable interest. Trusts are not recognized or enforced by
the courts known as the law courts, but by the courts known
as the equity or chancery courts. These courts are explained
in the next section. Law courts recognize only legal titles and
interests, but equity courts recognize equitable titles and interests.
Example II. B' conveys or wills his farm in trust to C to receive the rents
and income and pay the same over to D. This is a trust. D's rights are not
recognized by the law courts, but the equity courts recognize and enforce D's
rights and compel C to account to D for the rents and income.
The so-called " trusts " referred to in current economic discussions are not
now trusts in the above sense, but are simply monopolistic combinations.
Originally stockholders in various corporations placed their shares in trust
with a committee, and the total profits of all the corporations were divided
among the various stockholders pro rata, thus constituting a real trust. But
it is now the custom to unite all the corporations into one corporation, in
order to eliminate competition. This does not create a true trust, but the old
name continues to be used to describe the new monopolistic device.
7. Courts. The courts of a particular state /^hay consist of
law courts and equity courts, although in modern times these
8.7] COURTS 7
are often combined. The United States has also an admiralty
court, or rather a court with admiralty jurisdiction.
1. Laze courts. Law courts are organized tribunals for the
trial of cases and the hearing of appeals. Each state has trial
courts and at least one court to which appeals may be taken.
Trial courts consist of a judge and a jury, with attendant officers.
Appellate courts consist of a bench of judges without a jury.
The trial courts are generally the following :
a. A court of general jurisdiction is one before which most
cases may be brought. This is usually called a circuit court,
because the judges go on circuit from place to place to hold
trials.
b. Courts of limited, or local, jurisdiction are for the trial of
smaller cases ; such are county courts, city courts, and courts
held by justices of the peace.
c. Courts for the administration of the estates of deceased
persons are called the surrogate's court, probate court, orphans'
court, etc.
The appellate courts are those to which appeals are taken
from the trial courts. Most states call the appellate courts the
Supreme Court. In New York, however, the highest appellate
court is called the Court of Appeals, and the trial court of
general jurisdiction is called the Supreme Court. Owing to the
large amount of appellate work, some states have an intermedi-
ate appellate court. In New York this is called the Appellate
Division of the Supreme Court.
In the federal jurisdiction the trial court is the District Court;
the intermediate appellate court is the Circuit Court of Appeals,
and the highest appellate court is the Supreme Court.
2. Equity courts. Side by side with the common-law . courts
there grew up in England a separate court known as the equity
court or the chancery court. This court consisted of a judge
without a jury, and was intended to give relief in hard cast's
when-, by the somewhat rigid rules of the common-law courts,
none could be had. A body of rules or doctrines evolved by
this court is known as equity. Equity consists, therefore, of
the rules and doctrines by which equity courts are controlled
in the administration of justi- .
S PRELIMIN \K\' TOPICS [Ch. i
In a few of our states such separate equity courts still exist,
but generally the powers of a common-law court and of an
equity court have been combined in one court which administers
both law and equity. In such case the court of general jurisdic-
tion is both a common-law and an equity court. If one wished
to sue for breach of contract or for an accounting for a trust, he
would go before the same court: in the contract case the judge
with a jury would administer law rules ; in the trust case the judge
without a jury would administer equity rules.
3. Admiralty courts. Admiralty courts administer still a dif-
ferent law, known as the admiralty law or law of the sea. They
have to do with vessels and their cargoes and crews upon public
navigable waters. There is no separate court of admiralty in the
United States ; the District Courts of the United States have
admiralty jurisdiction and administer admiralty law. State courts
have no admiralty jurisdiction. An admiralty court consists of a
judge without a jury. The judge is the trier of the facts as well
as the administrator of the law.
8. Procedure. A case is brought before a court by pleadings.
The plaintiff makes a complaint or declaration, setting out his cause
of action, and a summons to appear and answer this is served
upon the defendant. The latter makes an answer to the complaint.
Upon these documents, or others which may be allowed, the issue
is framed, that is, the question in dispute is made clear.
At a time appointed the parties go before the court with their
attorneys and witnesses and give evidence to sustain their con-
tentions. The jury is instructed by the judge as to the law of
the case, and renders its verdict upon the facts proved and the
instructions received. The court enters a judgment in accordance
with this verdict.
The defeated party may appeal from this judgment. His at-
torney prepares a transcript of the evidence, and with this, upon
notice to his adversary, goes before an appellate court of judges
and asks to have the judgment reversed.- Argument by both
parties is heard by the appellate court. If the court finds a sub-
stantial error in the rulings or instructions of the trial judge, or
finds the verdict unsupported by the evidence, it may reverse the
judgment and order a new trial. Otherwise it affirms the judgment.
§9] SCOPE OF THIS WORK 9
If a new trial is ordered, the same procedure is repeated, except
that no new pleadings are necessary.
When a final judgment is entered, the successful party is en-
titled, besides any judgment for a fixed sum, to such costs as may
be allowed by law. If the judgment is not paid, he may issue an
execution against the property of his adversary, and the sheriff
may levy on the property and sell it to satisfy the judgment. In
every state a certain amount of property is exempt from levy and
sale upon judgments. These exemption laws are intended to secure
to debtors certain household necessities, tools of a trade, and often
a homestead.
9. Scope of this work. A business man has to deal mainly with
property and contracts. He can hardly carry on business without
dealing directly or indirectly with some species of property, and very
often the purchase and sale of property is the chief part of his
business. He cannot carry on business at all without making con-
tracts, — often scores or hundreds of contracts in a single day.
Accordingly these two topics of the law are those with which the
business man should be especially familiar. He needs to know
what constitutes a binding contract, what obligations arise upon
its completion, and what steps are necessary to its legal perform-
ance. While he can hardly hope to know technically about torts,
he ought, if an employer of workmen, to know what obligations
he undertakes as concerns their safety, and what liabilities he
incurs by failing to use due care to have the instrumentalities of
his business in a safe condition. It will be the object of this work
to state some of the more important legal rules connected with
these subjects.
We shall first consider the formation of contracts, that is, what
constitutes a binding and enforceable agreement. This will be
followed by a'discussion of the operation of contracts (that is, the
rights arising from them) and the discharge of contracts (that is,
how they arc ended and the rights under them terminated).
These general principles will be followed by a discussion of the
particular contracts concerning personal property (namely, the sale,
bailment, carriage, and insurance of goods) and the particular con-
tracts concerning credil (thai is, contracts creating debts, contracts
guaranty, and contracts contained in commercial paper).
io PRKUMINARY TOPICS [Ch. I
Agencv. the moans by which one makes contracts through an
employee, follows the discussion of contracts and their special
tonus. Here also is an excursus upon the subject of master
and servant.
Business associations, such as partnerships and corporations,
are next discussed.
Finally, there is a concise treatment of the subject of property,
real and personal, in order to bring together some topics not
treated under the head of contract.
REVIEW QUESTIONS
SECTION 1. With what is business concerned? What is included in the
term " business " ? Enumerate all the different kinds of business conducted on
a specified block of a business street in your city or village.
2. Define law; common law; statute law. Who declares the common law?
Where is it found ? What is it based upon ? What is the force of precedents ?
What are the two objects of statute law? Why is the law more difficult to
state in America than in England?
3. Explain " business law." From what branch of the law is it mainly
taken ?
4. Name two main divisions of the law. What does public law include?
What does private law include?
5. What is property? What objects and rights constitute property? What
is real property? Is an estate for years real property? Is a mortgage? What
two kinds of personal property? What three kinds of personal chattels?
With what two kinds of property is business chiefly concerned ?
6. What are legal obligations? How do they arise? Distinguish between
contract obligation and tort obligation. Illustrate. Name and illustrate some
torts. Explain and illustrate quasi-contracts. Explain and illustrate trusts.
Explain the meaning of the term " trust " in economic discussions.
7. What is a court? a trial court? an appellate court? Describe three
kinds of trial courts. Name the federal courts. What are equity courts? Do
they have a jury? What is equity? What are admiralty courts? What cases
do they hear? What is the United States admiralty court?
8. Describe the steps in bringing a case before a court and to trial and
judgment. Explain the process of an appeal. How is a judgment enforced?
What are exemptions?
PART I. THE PRINCIPLES OF
CONTRACT
CHAPTER II
FORMATION OF CONTRACTS
10. Definition of contract. A contract is an agreement between
two or more persons for the breach of which a court of law will
give damages. There are many agreements for the breaking of
which no damages can be had, either because the agreement con-
templates no legal relations or because it ends in a legal relation
that is enforceable only in a court of equity.
Examples: i. B agrees to sell a watch to C for $25, and C agrees to pay
l; $25 for the watch. This is a contract. If B refuses to deliver the watch
C has an action at law against B for damages. If C refuses to take the watch
and pay the $25, B has an action at law against C for damages.
2. D and E mutually agree that they will meet each other at a designated
place and go to a football game together. This is not a contract. It contem-
plates social, not legal, relations.
3. F agrees with G to take G's 'property and invest it, receive the income,
pay the income to G during his life, and divide the principal among G's chil-
dren after G's death. This creates a trust. If F failed to pay over the income,
G's remedy would be by suit in equity for an accounting, not at law for
damages. Since the agreement is not enforceable at law, it is not a contract.
The agreement may give one party the right to demand that
the other do something (affirmative contract), or it may give one
party the right to demand that the other forbear from doing
something (negative contract), or the same agreement may give
both rights.
/ ,i»if<lr 4. B sells his dry-goods business to C for $5000, and agrees not
to, in that busini in in the same city. C acquires two rights: first,
the right to have I; transfer to him the business; and, second, the right t<> have
I', forbear to enter into competition with him. I "i the breach <>t cither of
II
12 FORMATION OF CONTRACTS [Ch. II
these terms C has an action at law for damages. (For the breach of the sec-
ond he might also secure .m injunction in equity, because the damages he
would suiter from B's competition are so uncertain thai the Legal remedy is
deemed inadequate; bul since he may have damages at law, the agreement is
a contract. Equity courts sometimes specifically enforce contracts.)
The persons making the agreement may be two or more, but
they are so divided as to "constitute two groups of persons.
Example 5. B sells his horse to C and D. C and D resell the horse to
E, F, and G. In the first contract B is on one side and C and D jointly on
the other. In the second contract C and D are on one side and E, F, and (i
on the other.
In some cases three parties make among them three contracts,
which constitute what is called a novation.
Example 6. A owes B ,5 100. B owes C $100. The three meet and agree
that A shall pay C. B's claim on A is extinguished. B's obligation to C is
extinguished. A new obligation from A to C is created. Thus there are, in
effect, three contracts.
11. Essentials of enforceable contract. In order that a con-
tract shall be enforceable, that is, one for the nonperformance of
which the law will give damages, the following elements must be
present: (1) an agreement, (2) by competent parties, (3) upon
sufficient consideration, (4) in some cases evidenced in a particu-
lar form, (5) for a legal object, and (6) made without mistake,
fraud, undue influence, or duress.
I. Agreement
12. Contracts begin in agreement. All true contracts begin
with an agreement. By agreement is meant the meeting of the
minds of the contracting parties in a common assent to the same
definite conclusion. But the state of the mind of a party must
be judged by what he says and does. He cannot definitely agree
to a thing and afterwards escape upon the plea that he misspoke
himself or did an act manifesting agreement which he did not
intend to do.
Examples : 1 . B leads out a colt and says to C, " I will sell you this colt
for $40." C answers. " I will take him at that price." B discovers he has led
out a colt he did not intend to sell. B is bound.
§§13, 14] AGREEMENT 13
2. B writes, " I will sell you 10,000 bushels of wheat at 80 cents a bushel."'
C, in honest reliance upon the offer, replies, " I will accept your offer." B
asserts he intended to write, and thought he had written. " 1.000 bushels."
B is bound to deliver 10,000 bushels or pay damages for nondelivery.
Agreements must be definite enough to enable a court to ascer-
tain and enforce the terms. Indefinite and uncertain agreements
are unenforceable, because the court will not make or complete
contracts for parties,
Excunples : 3. "I will sell you one hundred acres of land for Siooo."'
" I accept." This is too uncertain, because no definite one hundred acres
are indicated.
4. " I will sell you one hundred bushels of potatoes for >6o." " I accept."
This is definite enough, because no particular one hundred bushels need be
specified.
5. " I will give as much for your horse as A says he is worth." " I
accept." This is definite enough, because a way of ascertaining the price
has been agreed upon.
6. " Send me one hundred bushels of potatoes." The potatoes are delivered.
This is enough. The market price is understood.
13. Classes of agreements. Agreements leading to legal obliga-
tions serve three purposes ; namely, to create rights, to transfer
rights, and to extinguish rights. An agreement which creates a
right is called a contract. An agreement which transfers a right
is called an assignment. An agreement which extinguishes a
right is called a release or discharge. All are in fact contracts.
Examples : 1 . A and B agree that A shall sell and deliver his horse to
B for Si 00, which B agrees to pay sixty days after such delivery. This is a
contract. When A delivers the horse, he has performed his part and has a
right against B to demand the Si 00 in sixty days.
2. A agrees with C to transfer to C this right against B in exchange for
a cow. When done this is an assignment by A to C of A's right against I'.
to the $ioo.
3. C, who now owns the right against B, agrees with B to accept and does
accept a buggy as the equivalent of the Si 00. C thereby discharges the righl
against B,
14. Agreements originate in some form of offer and acceptance.
An offer is an expression by one person of his willingness to
become a party to an agreement in accordance with terms ex-
pre ied or indicated. Acceptance is the expression by the person
to whom the offer was made "t his willingness to do or fori"
from doing what the offeror requires.
i 4 FORMATION OF CONTRACTS [Ch. II
The offer may be of a promise or of an act. The acceptance
may be the giving of a promise or the doing of an act. No
words need be used. We may have a contract in which there
is a promise for a promise, that is, an outstanding promise on
each side ; this is called a bilateral executory contract. Or we
may have a contract in which there is a promise outstanding
on one side and the act performed on the other ; this is called
a unilateral executory contract. When both parties have fully
performed the contract, it is said to be an executed contract.
When a promise is put into words, it is said to be an express
promise ; when it is inferred from acts or conduct, it is called
an implied promise.
Examples : i . Promise for promise : " I will work for you for one month
for $30/' " Agreed." There is an outstanding promise on each side before
any act is done.
2. Promise for act: " I will pay you $10 if you find and return my lost
watch." The offeree finds and returns the watch. The contract is then com-
plete. There is an outstanding promise on one side.
3. Act for promise : A newspaper is sent regularly to a person who takes
and reads it as often as it reaches him. The offer is in the sending of the
paper. The promise to pay for it is implied from the receiving and using it.
There are certain rules governing offer and acceptance that
are often applied in order to determine whether an agreement
has been reached. These will be briefly enumerated.
1. The offer must be communicated to the offeree. This, as we
have seen, may be by oral or written words or by acts and con-
duct. However expressed, the offer must actually reach the offeree
or there can be no acceptance by him. The offer may be made
to all the world but must be accepted by some definite person.
Example 4. B publishes in a newspaper an offer of $10 reward for the
return of his lost watch. C returns the watch, not knowing that such a reward
has been offered. Afterwards C learns of the offer and claims the reward. He
cannot compel B to pay it, because the act was not done relying upon the offer
or with knowledge of it. (But some states allow a recovery upon no very well-
defined principle.)
2. The acceptance must be either communicated or else actively
manifested in a manner contemplated by the terms of the offer.
Mental determination to accept is not enough ; the mental intent
must be unequivocally indicated. If the offeror has stated how it
§14] AGREEMENT 15
shall be indicated, the offeree may do what is required without
actually communicating with the offeror ; but stipulating that
silence shall be deemed an acceptance will not make it so, since
the offeror cannot impose on the offeree the obligation to speak.
Speech or action is necessary. When an offer is sent by mail,
it is implied that the offeree may indicate assent by mailing an
acceptance ; and the contract is complete ' when the letter is
mailed, although it may never be received.
Examples: 5. B writes C: "I will give you $100 for your horse. If
within ten days I do not hear from you to the contrary, I shall consider that
you accept." No answer is returned to B. There is no contract, even though
C has mentally determined to accept. Mere silence does not give consent. If
B had specified some act that C was to do to indicate assent, the doing of the
act with the intent to accept would be enough.
6. D advertises that if anyone buys and uses his medical remedy as
directed and afterwards contracts any disease caused by taking cold, he will
pay to such person $100. E buys and uses the medicine as directed and after-
wards contracts a cold and disease caused by the cold. D is held liable to pay
E the ?ioo. E's acceptance of D's offer is manifested by buying and using
the medicine as directed, with knowledge of the offer. It is not necessary for
E to communicate his acceptance to D.
7. F posts a letter to G, offering to sell his horse to G for $1 50. G receives
the letter on Monday, and on Tuesday posts a letter directed to F, accepting
the offer. The letter is lost in the mails and never reaches F, who on Friday
sells his horse to H. F is liable to G in damages for breach of contract, for
the contract was completed by acceptance as soon as G posted his reply. If F
wishes to guard against this, he should say in his letter, " Upon receiving your
acceptance the sale will be closed," or use some similar phrase especially
requiring that the acceptance should be actually received. By using the mails
the offeror impliedly invites the offeree to use the mails, with the result indi-
cated. If F*s offer were personal, there would ordinarily be no implied invita-
tion to use the mails for an acceptance ; but there might be an invitation either
expressed or gathered from circumstances, as, if G lives at a distance and is
told by F to go home, think it over, and let him know, G may use the mails,
and his acceptance is complete when the letter containing it is duly posted.
3. The acceptance must be absolute and accord with the terms
of the offer. If the offeree qualifies his acceptance in any way, it
is not an acceptance but merely a counter offer to be accepted or
rejected by the original offeror. A qualified acceptance amounts
to a rejection of the offer, which cannot thereafter be accepted
so as to bind the offeror.
16 FORMATION OF CONTRACTS [Cm. II
Example 8. B otters his horse to C for 5150. C replies, " I will take the
horse al %\ 25." B refuses. C then says, " I will take him at #150." 11 refuses
this. C sues B foi breach of contract. C will fail. C"s acceptance at $125 was
.1 rejection ol the offer at $1 50, and the offer was at an end.
4. An offer may be varied or revoked before acceptance. An
unaccepted offer creates rfo legal rights. The offeror may vary
or revoke it at any time before the offeree accepts it. If, how-
ever, the offeree has paid a consideration for the option to accept
or reject, or if, in some states, the offer is under seal, the offer
is in the form of a contract and cannot be varied or revoked.
An acceptance of the offer concludes the contract and it is then
irrevocable. But there must in fact be an offer. Merely sending
out a circular of prices, or advertising prices in a newspaper, is
not an offer, but merely an invitation to deal with the advertiser.
Examples : 9. B offers C his horse for $ 1 50 and gives C twenty-four
hours in which to accept. In an hour B withdraws his offer; but C, an hour
later, accepts. There is no contract. There was nt> consideration for B's
promise to give C twenty^our hours to accept, and B may revoke his offer
before C actually accepts.
10. D gives E an option to take 1000 bushels of wheat on September 1,
at 90 cents a bushel, for which option E pays D $40. D withdraws the option
before September 1 , but on that day E accepts and demands the wheat. D is
liable to E for refusal to deliver. The offer is irrevocable.
5. The offeree must have notice of the revocation. An offeree
may accept within the time fixed, or, if none be fixed, within a
reasonable time, unless he has notice before his acceptance that
the offer is revoked. It seems that the notice need not neces-
sarily come from the offeror, it being sufficient that the offeree
actually learns from any source that the offer is revoked.
Examples: 11. B writes C, "I will sell you my horse for $150." The
next day B writes C, " I withdraw the offer." The following day, and before
receiving the letter containing the withdrawal, C posts an acceptance. The
contract is complete, since C had no notice of the withdrawal before acceptance,
and acceptance is complete when the letter is mailed. Revocation is not
complete until received.
12. D offers E his horse at $150 and gives E two days to accept. The
next day D sells the horse to X, who tells E the horse is his (X's). E then
accepts. There is no contract. E knew when he accepted that the offer had
been revoked by a sale to X.
§15] PARTIES 17
6. An offer may lapse without express revocation. If a time is
fixed, the expiration of the time revokes the offer. If no time
is fixed, the offer lapses after the expiration of a reasonable time ;
what is a reasonable time must depend upon the circumstances of
the case. An offer lapses by the death of either party.
Examples : 13. On June 1 B offers C $50 for a cow. C accepts the offer
on August 1. This is not a reasonable time where the parties live near each
other. Even a week might be too long.
14. D writes E, " I will sell you my farm for $3000." Before E posts his
acceptance D dies. The offer is revoked by D's death. But if E posts his
acceptance before D's death the contract is binding upon D's estate.
II. Competent Parties
15. Infants. An infant is a person under the age of twenty-
one. In many states women become of age at eighteen, and in
some they are of age at eighteen, or even younger, if married.
A person attains his majority on the dgy preceding his twenty-
first birthday, that is, on the last day of his twenty-first year.
If the twenty-first anniversary of one's birthday is November 8,
he can vote or make binding contracts on November 7.
Contracts made during infancy are voidable l at the infant's
option, exercised either during his infancy or after he attains his
majority, subject to these exceptions : (a) contracts for necessaries
are binding ; (b) contracts made during infancy but ratified after
attaining majority are binding. But an infant's contracts are bind-
ing upon the adult with whom they are made ; the infant alone
can repudiate them at his election.
(a) Necessaries include not merely the things necessary to sus-
tain life, but also such additional articles as are suitable to the infant's
station in life and to his circumstances when they are purchased.
In addition to food, lodging, clothing, medical attendance, and
schooling, such articles as horses, watches, and jewelry have been
held to be necessaries under particular circumstances ; but the
courts arc not disposed to go beyond the normal list of necessaries.
Even as to those the person who furnishes them cannot recover
1 '• 1 said that an infant's appointment of an agent is void, — thai is.
absolutely of no effect, — but this is so doubtful that the statement is not made
in the text (see seel. 1 17 post),
iS 1 ORMATION OF CON TRACTS [Ch. [1
if the infant was already adequately supplied. If one can recover
against an infant for necessaries, he can recover only the reason-
able value, not what the infant may have agreed to pay.
(fi) Ratification takes place when, upon attaining his majority,
the infant promises to pay or does an act which is a clear recog-
nition o^i his liability. Some states require a ratification to be in
writing, but this is not generally so.
Examples: i. B, an infant, agrees to work for C for a year at #12 a
month. He works a month and then quits. C has no action against B for
breach of contract. B may recover against C for the labor performed.
2. Same contract. At the end of a month C discharges B without cause.
B has an action against C for breach of contract. The adult is hound but the
infant is not.
3. D, an infant, purchases jewelry of E. E cannot recover the price from
D, although if D pleads his infancy as a defense to the action, the title to the
jewelry will revest in E. It is immaterial that E thought D was an adult. It
is immaterial that D represented that he was of age, although D might in such
a case be liable in tort for deceit.
4. D purchases clothing for himself of E. D is liable, provided E can
show that D was not adequately supplied according to his station in life. But
although D promised to pay $50 for the clothing, E can recover only its actual
value up to $50.
5. E, an infant, purchases jewelry, not necessaries, of F. After attaining
his majority E promises to pay for the jewelry. E is now liable upon the
theory of ratification.
6. G, an infant, purchases a horse of H and pays for it. G may return the
horse during infancy or within a reasonable time after attaining his majority
and recover the money. This is disaffirmance, the opposite of ratification.
7. Same purchase. The horse dies. G may recover his money from H.
When an infant disaffirms, the adult may recover what he parted with, if the
infant still has it ; but if it is lost or destroyed, the adult is nevertheless bound
to return to the infant whatever he received from him.
16. Insane persons. If one contracts with an insane person,
knowing him to be insane, the contract is voidable by the lunatic.
If one contracts with a person who is insane and who has been
judicially declared to be so by some competent judge or other
officer, 1 the contract is probably voidable by the lunatic. If one
1 Statutes provide methods by which persons suspected of insanity may be
brought before a court and the matter judicially determined. A judgment of
insanity is constructive notice to all the world of the fact of insanity. The insane
person's property is then under the control of a guardian or committee appointed
by the court.
§§17. IS] CONSIDERATION 19
contracts in good faith with a person not known to be insane
but who is so in fact, the contract may be upheld if it is so far
executed that to avoid it would damage the innocent party ; if,
however, it can be avoided and the innocent party be put in statu
quo, the lunatic may avoid it even in this case.
An insane person is, like an infant, liable for necessaries. If
he afterwards recovers his reason, he may ratify contracts made
while insane.
Idiots' contracts stand substantially upon the same footing as
the contracts of insane persons.
An intoxicated person, if so much intoxicated as to be unable
to understand and appreciate the nature of his acts, may avoid a
contract made while in such a condition.
17. Married women. At common law married women were
incapable of making any binding contracts. Neither the married
woman nor the other party to the contract was bound ; the con-
tract was absolutely void. She could bind her husband, not herself,
upon a contract for necessaries.
This common-law disability has been largely removed by stat-
utes. These vary in the different states, but in general a married
woman may now contract as fully as an unmarried woman, except
that a married woman cannot, in some states, contract with her
husband or as surety for her husband. These statutes are too
numerous to be considered further.
III. CONSIDERATION
•
18. Necessity of consideration. Saw in the case of sealed
contrails (and now in many states even as to these), every
promise contained in a contraet must rest upon a consideration
in order to be enforceable. A contract not under seal is called
a simple contract. A sealed contract is sometimes called a
deed or a specialty; if for the payment of money, it is often
called a bond.
Consideration consists in some legal detriment suffered by the
promisee's reiving upon the promise, and there is usually some
corresponding benefil to the promisor. Unless such consideration
can he shown by the promisee, he cannot enforce the promise
FORMA I ION OF CON TRACTS [Ch. h
against the promisor. Heme gratuitous promises are unenforce-
able. A mere moral obligation to do a tbiug is not a consideration
for a promise to do it.
In negotiable instruments the law presumes consideration, but
the promisor may show that none in fact exists.
At common law sealed instruments require no consideration.
Many states by statute now provide that in sealed instruments
there must be a consideration, but make the seal presumptive
evidence that there is one, leaving the promisor to show, if he
can, that there was none. In other states the distinction between
sealed and unsealed instruments has been abolished.
Examples : i . A father makes and presents to his son a negotiable promis-
sory note as a gift. The son cannot enforce it if the father sets up want of
consideration as a defense.
2. The son negotiates the note before maturity to X, who pays the son for
it in good faith. X may enforce it against the father because X has suffered
a legal detriment in parting with his money, relying upon the father's promise
(see sect. 104 jztosy').
3. A father says to his son, " I will give you $500 if you refrain from smok-
ing until you are twenty-one." The son refrains. He may enforce the promise.
He has suffered a legal detriment in doing what he was not legally bound to do.
4. B promises C that he will repair C's watch free of charge. He after-
wards refuses to do so. C has no remedy. There is no consideration for
B's promise.
5. Same, promise. B undertakes the repairs and does them so badly as
to ruin the watch. B is liable to C for gross negligence. C suffers a legal
detriment in parting with his watch.
19. The consideration need not equal the promise in value.
The law allows persons to affix their own value to acts or for-
bearances. If the promisee does or forbears anything he is not
bound to do or forbear, there is sufficient consideration. But if
the promisee does or forbears something he is already bound to
do or forbear, there is no consideration. The problem in many
cases is whether the promisee has done or forborne what he was
not under a legal obligation to do or forbear. Such cases will be
considered in concrete examples.
Examples : 1 . John Doe promises Richard Roe that if Roe will name
his child after John Doe, the latter will pay Roe (or the child) $1000. Roe
names the child after Doe. He may recover the $1000. He has done what
he was not legally bound to do.
§20] CONSIDERATION 21
2. B agrees to pay C S200 for a buggy worth but $50. C agrees to deliver
the buggy to B for 5200. C may recover the $200. C makes a promise which
he is not bound to make, and which B may enforce against him, and this is a
consideration for B's promise.
3. F has a horse belonging to E which he wrongfully refuses to deliver
up. E promises F $50 if he will deliver it, and F does deliver it. F cannot
recover the $50. He has merely done what he was legally bound to do.
4 (Successive promises). G contracts to dig a well for H for $60. When
down a few feet, G strikes rock and refuses to go on. H promises G an
extra ^25 if he will finish the well, (a) Some courts say G cannot recover
the extra 525 because he merely did what he was already bound to do.
(b) Some courts say G was not bound to go on because he had an option to
stop and pay damage? for the breach of contract, and that G therefore
did what he could not be legallv compelled to do. (c) Some courts say that
the old contract was by agreement rescinded and a new one for $85 was
made. This case illustrates how conflicts of judicial decisions grow up where,
as in our country, we have so many courts independent of each other.
5 (Payment of smaller sum). K owes L 5 100. L says, " If you will pay
me ?6o, I will release the other $40." K pays the $60. L may also recover
the other $40. The payment of a smaller sum in satisfaction of a larger is
not a sufficient consideration to support a promise to release the balance,
because K is already legally bound to pay the $60. But if, by agreement, K
also gives L a jackknife, he has done what he was not legally bound to do,
and the 540 claim is discharged.
6 (Composition with creditors). M owes various creditors, A, B, C, and
others. , M agrees to pay each 60 per cent of his claim, provided he and all
others will release M from the balance ; they all agree to do this. M pays each
60 per cent. A afterwards sues M for the remaining 40 per cent of his claim.
A cannot recover. This is called a composition with creditors. The reasons
given for upholding it are not consistent, but it is often said to be an exception
based upon the policy of encouraging such compositions and upon the policy
of forbidding one creditor to recover more when by a kind of mutual arrange-
ment all have consented to take the same percentage.
7 {Mutual subscriptions). The X church is laising money for a new bell.
A, B, and C subscribe each the sum set opposite his name. May these
promises be enforced? Is there any consideration for them ? [a) Some courts
say there is none unless the X church has acted upon the promises by pur-
chasing a bell or contracting for one. (In Other courts think the promises
mutually support each other, and that B subscribes in consideration of A's
subscription, etc, (c) Other courts think the X church, by accepting the
promises, aj e plan, and thai this promise is the considers
tion for thr- promises of the subscribers. Ho n, we have a conflict oi
authority upon a difficult question of law.
20. A past consideration will not support a promise. A prist
consideration is one performed or finished by H without request
22 FORMATION OF CONTRACTS [Ch. II
and before any promise is given by C. If C should afterwards
promise something to B by way of compensation or reward for
the benefit conferred by B's act, this promise would rest upon a
past consideration and would be unenforceable.
Examples: i. B without C's knowledge or request moves a stack of hay
standing on C's farm, in order to save it from a spreading fire. When C
learns of this, he promises to pay I'> for his time and trouble. This promise
is unenforceable because it rests upon a past consideration.
i. I) finds a lost article and returns it to C, the owner. C promises to pay
D a certain sum by way of reward. D cannot recover upon this promise ; it
rests upon a past consideration.
To this rule there are certain apparent exceptions.
a. If there is a request by C that B move the stack or that D
search for the lost article, the law implies a promise to pay for
the service ; and when C expressly promises to pay, he is merely
confirming the implied promise, and his expressed promise is
substituted for the implied one and is enforceable.
b. If there is some legal bar to enforcing a contract against C,
which he may set up or not, he may under certain circumstances,
by a subsequent promise, render himself liable on such a contract
notwithstanding the bar. Such legal bars are infancy, the Statute
of Limitations, discharge in bankruptcy, and the like.
Examples : 3. B, an infant, purchases jewels of C. When B arrives at
his majority he promises to pay for them. B is liable to C. Some say B's
promise rests upon the past consideration, that is, the delivery of the jewels,
and that C suffers no detriment from relying upon the new promise. Others
treat B's promise merely as a waiver of his plea of infancy, and thus escape
the difficulties of consideration.
4. D owes E a debt which is barred by the Statute of Limitations, that is,
a statute providing that an action for debt or breach of contract must be
begun within a certain time (usually six years). If E sues D, the latter may
plead the statute and escape. But after the debt is barred, D promises to pay
it. D is now liable. The case is practically the same as that of the infant.
5. F owes G a sum of money. Without anv new consideration, F gives G
a chattel mortage or other security. The chattel mortgage is enforceable. The
antecedent debt, although a past consideration, is sufficient to support it.
21. The consideration must be legal. Illegal contracts will be
dealt with later. It is enough to say here that if A's promise
rests upon a counter promise or an act of B's which is illegal,
then A's promise cannot be enforced. Thus, A promises to pay B
§22] FORM 23
a sum of money if B will purloin a document from C. B purloins
the document. He cannot recover the sum promised, because his
act constituting the consideration is illegal. So also promises to
pay money lost in gambling are unenforceable because all gambling
or wagering contracts are illegal.
IV. Form: Writing; Seal
22. Statute of Frauds. The Statute of Frauds (so called be-
cause it was intended to prevent fraud and perjury in the proving
of contracts before the courts) was enacted by the English Parlia-
ment in 1676 and has been substantially reenacted, in whole or in
part, by most of the American states. Two sections of this statute,
the fourth and the seventeenth, are those that deal particularly
with contracts.
1. Fourth section. The fourth section provides in substance
that in order to be enforceable the following contracts, or some
note or memorandum of them, shall be in writing and signed by
the party to be charged (that is, the one against whom it is sought
to enforce the contract) or by his authorized agent :
a. the promise of an executor or administrator to pay out
of his own estate that which is due from the estate he is
administering ;
b. the promise to answer for the debt, default, or miscarriage
of another — that is, to be surety that another will pay his debts
or discharge any of his legal obligations (see Chapter VIII) ;
c. the promise to do anything, as transfer property, in con-
sideration of marriage, that is, where the marriage is the con-
sideration for such promise ;
(I. any contract or sale of lands, or any interest in or concern-
ing lands (though in the United States generally leases for less
than one year are excepted) ;
e. any contract which by its terms is not to be performed
within the space of one year from the time of the making thereof ;
but if it may be fully performed within one year, it does not
require a writing.
It must be observed that this requirement is in addition to
all other requirements. All contracts require a true agreement,
24 FORMATION OF CONTRACTS [Ch. II
competent parties, and consideration. These contracts require all
those things and also a writing duly signed. Most contracts
maybe proved by parol evidence; these contracts may be proved
only by a writing. The writing may be a mere memorandum
suiting the chief points in the agreement, or it may even con-
sist of a series of letters so connected as to make together a
complete memorandum. Careful persons will make a full memo-
randum, being particular to name the parties, the subject matter,
the consideration, the terms and conditions, and to have this
memorandum signed by both parties to the contract. If the
writing fails to state any essential term, it is unenforceable, for
that term would have to be proved by parol evidence, and the
statute forbids this.
In many states additional contracts requiring a writing are
enumerated, as, for example, a promise to pay a debt discharged
in bankruptcy, a promise to pay a debt barred by the Statute of
Limitations, a promise after arriving at majority to pay a debt
contracted during infancy, the acceptance of a bill of exchange,
a fire-insurance policy, a limited partnership, a common-law mar-
riage, and many others. Whether a particular contract must be in
writing in a given state can be ascertained only after a careful
examination of the statutes of that state.
2. Seventeenth section. The seventeenth section of the Statute
of Frauds provides that a contract for the sale of goods, wares, and
merchandise (that is, any personal property) of the value of ten
pounds or upwards shall be unenforceable unless the buyer accepts
part of the goods so sold and actually receives the same, or gives
something in earnest to bind the bargain or in part payment, or
there be a note or memorandum in writing signed by the party
to be charged or by his authorized agent.
It will be observed that a contract to sell land can be evidenced
in only one way, namely, r by a writing, while a contract to sell
goods of the value of $r%& or more may be evidenced in any one
of three ways : namely, by the acceptance and receipt of the
goods or a part of them, by a part payment of the price or pay-
ment of earnest money, and by a writing. States differ as to
the value below which no special form is required. Some fix it as
low as $30, and one as high as $2500. Several states do not
§23] FORM 25
have this portion of the statute at all. 1 In these states a contract
to sell goods, no matter of what value, may be proved by parol
although there has been neither delivery nor payment. It is gen-
erally thought that the statute as to the sale of goods has out-
lived its usefulness and should be everywhere repealed as an
unnecessary restraint upon commerce.
It is difficult at times to say whether a sale is of real property
or of personalty. The sale of standing trees to be cut by the
buyer is generally held to be a sale of realty ; but if the seller is
to cut them, the contract contemplates that they shall be personal
property when delivered to the buyer. Growing annual crops,
known as emblements, are considered personalty, while fruits,
grass, and other perennials are held to be in the same class as
trees. By the Uniform Sales Act (see sect. 45 post) a contract for
the sale of articles attached to or forming a part of land, by which
such articles are to be severed from the land at any time, is con-
sidered a contract for the sale of personal property.
23. Contracts under seal. Any contract may be made in writ-
ing, under seal. Conveyances of land must be by deed, that is,
under seal ; but in New York, although the question is in dispute,
a seal seems no longer necessary. Statutes may require other con-
tracts or conveyances to be sealed, but the modern tendency is
to decrease rather than to magnify the importance of the seal.
An unsealed contract is called a simple contract.
A seal at common law was an impression on wax or other
adhesive substance, affixed to the document to be sealed. In the
1 It is not found in Alabama, Delaware, Kansas, Kentucky, Louisiana, New
Mexico, North Carolina, Tennessee, Texas, Virginia, and West Virginia.
In the following states the sum is fixed at $30 : Arkansas, Maine, and Missouri.
In New Hampshire it is fixed at $33 i in Vermont, at $40.
In the following states it is fixed at $50: Colorado, District of Columbia,
Georgia, Indiana, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New
York, Oklahoma, Oregon, South Carolina, South Dakota, Washington, Wisconsin,
and Wyoming.
In Connecticut, Hawaii, and Michigan it is fixed at S100.
In California, Montana, Nevada, and 1 tab the amount is $200.
In Alaska, Arizona, Idaho, [llinoi , Ml a< hu etts, New Jersey, North Dakota,
osylvania, and Rhode Island the Bum is $500.
In Ohio the sum is fixed .it $2500.
In the following contract foi the sale oi goods <>t any value, howevei
•mall, must conform to the Statute of Frauds: Florida Iowa
26 FORMATION OF CONTRACTS [Ch. II
Middle Ages, when few persons could write, cadi important per-
son had his own seal, or signet, which took the place of his signa-
ture. In modern times a mere scroll with the pen is declared by
statute, in most states, to be a sufficient seal. The commonest
form is to write the word " seal " after the name and make a
rough circular scroll around it with the pen.
While very few contracts must bear a seal, any contract may
bear one. If a contract is sealed, it has certain characteristics
which it would not have if it were unsealed. Chief among these
are the following :
i. At common law the contract under seal does not require
any consideration. For example, a father promises under seal to
pay his son one thousand dollars, this being merely a gift with-
out consideration. Such an instrument is called a bond and is
enforceable. Were such promise made in an unsealed instru-
ment, the son could not enforce it for want of consideration.
Were it made in a negotiable promissory note, the son could not
enforce it ; but if he negotiated it. to another person who paid
value and had no notice of the absence of consideration, the
transferee could enforce it.
By statute in many states the common-law rule upon this point has been
changed and the seal is made merely presumptive evidence of consideration ;
that is, it dispenses with the necessity of the proving of consideration by the
one who seeks to recover upon the instrument, but it leaves the defendant
free to prove that there was no consideration and thus to defeat the instru-
ment. Even this statutory provision has not, however, succeeded everywhere
in depriving the seal of its importance as a substitute for consideration. Some
courts have held that if the seal is used expressly to give validity to a gratui-
tous promise, it will be effective for that purpose notwithstanding the statute ;
but if it is used in a contract where a consideration was intended but has
failed, the defendant, notwithstanding the seal, may prove that there is no con-
sideration, and thus defeat the contract. Under this holding, a bond to give
money without consideration would be good, while a bond to pay money for
services to be rendered would not be enforceable in case the consideration
failed, that is, if the services were not rendered.
In some states a sealed contract is by statute put upon precisely the same
basis as an unsealed contract ; that is, seals are practically abolished.
2. Only the parties to a sealed instrument may sue or be sued
upon it. In an action upon an unsealed contract it may be shown
§ 24] LEGALITY 27
that a party named is in fact an agent for a party unnamed, and
the latter may sue or be sued upon such unsealed contract.
3. A right of action upon a sealed contract is not usually
barred by the Statute of Limitations as soon as an action upon
a simple contract. The period allowed upon a sealed contract
varies in the different states from ten to twenty years, while the
period allowed upon a simple contract is usually not more than
six years.
Examples : 1 . "I promise to pay John H. Blackheath one thousand
dollars on February 10, 1906. William Blackheath." This is a simple
contract to pay money ; if made as a gift, no one can enforce it.
2. " I promise to pay to John H. Blackheath, or order, one thousand
dollars on February 10, 1906. William Blackheath." This is a negoti-
able promissory note. If made as a gift, John cannot enforce it; but he could
negotiate it to another person who might enforce it.
3. " Know all men by these presents : That I, William Blackheath, am
held and firmly bound unto John H. Blackheath in the sum of one thousand
dollars to be paid to the said John H. Blackheath, his executors, administra-
tors, or assigns, on February 1 o, 1 906 ; to which payment I bind myself, my
executors and administrators by these presents.
" Witness my hand and seal this tenth day of February, one thousand nine
hundred and five.
William Blackheath. [Seal]"
This is a bond. Although made as a gift, John may enforce it at common
law.
V. Legality of Object
24. Contracts made illegal by statute. The statutes may
declare a contract to be illegal, may prohibit it, or may simply
penalize it. It is a question of construction whether prohibited
and penalized contracts are illegal.
1. Certain contracts are declared by statute to be illegal. Such
are contracts for gambling or wagering, contracts for usury, in
some states contracts for work, labor, or any unnecessary act
t<. be performed on Sunday, and in some states any contract
made on Sunday, even though performance is to be made on
a secular day.
2. Certain acts are prohibited by statute. A contract to
perform a prohibited act, or involving such an act, would be
an illegal contract.
_\S FORM \ in >\ T OF CONTRACTS [Ch. II
Example i. The statute prohibits prize fighting, A contract to engage
in a prize fight is illegal. Again, the statute prohibits any person from
engaging in tin- practice of medicine without first obtaining a license. An
unlicensed physician cannot recover eompensation for professional services.
A teacher cannot recover for his services in a public school unless he is
duly licensed.
3. Certain acts are penalized by statute but are not in terms
prohibited. In such cases it is a question of construction whether
a contract to do the act is illegal.
Examples : 2. The statute provides that anyone who sells a lot in a plat
in any city without first recording the plat in the appropriate public office
shall pay a penalty of $50 for each offense. A sells B a lot in an unrecorded
plat. B afterwards refuses to take the lot and pay the purchase price. Is the
contract of sale of this lot an illegal contract? It has been held not, because
the court thought it was not the object of the statute to prohibit such sales,
but merely to make it so expensive to deal in lots in unrecorded plats that
landowners would be induced to record the plats.
3. The statute fixes a penalty for the sale of adulterated foods. B sells to
C a quantity of adulterated foods. C is not bound. He may refuse to take
the goods and pay the price, on the ground that B's contract is illegal. The
intent of the statute is to prevent the sale of adulterated goods.
25. Wagering contracts. A wagering contract is an agreement
to give money or property upon the determination or ascertain-
ment of an uncertain event. The consideration for such promise
may be either a like promise or something given outright.
Examples : 1 . A and B contract that if A's horse wins a race with B's
horse, B shall pay A $100; but if B's horse wins, A shall pay B $100.
2. A promises to pay B $100 in case B's horse wins, provided B pay A
in hand $20. If B's horse wins, A would pay B $100 and would be #80 out
of pocket; if B's horse loses, A has his $20 and B is that much out of
pocket.
3. A, B, and C each pay an entrance fee as a condition of competing
for a purse or prize at a horse-racing contest. This is not a wager unless the
competitors are the sole contributors to the purse and thus practically bet each
against the others, or unless this form is adopted as a subterfuge to conceal
a wager.
It seems that by the common law of England wagering con-
tracts were not illegal. Judges later regretted that the law was
not otherwise, and became very astute in finding reasons for hold-
ing particular wagers 'ilegal, as, for example, that a wager on the
§ 25 J LEGALITY 29
life of Napoleon was illegal because it gave one wagerer>an inter-
est in keeping the king's enemy alive and the other an interest in
compassing his death by means other than lawful warfare. But
even with such refinements as these the courts felt bound to en-
force many wagers. In New York wagers were held to be legal.
In Massachusetts, however, the courts refused to follow the Eng-
lish rule and held them to be illegal. Now, by statute, they are
generally declared to be illegal in all jurisdictions.
Wagers on the rise and fall of prices. The form of this wager
is that one party sells another grain or stock for future delivery
at a specified price ; but in fact neither party intends an actual
delivery, and both intend to settle on the delivery day the differ-
ence between the contract price and the market price in money.
It is equivalent to betting that the market price on a certain day
will be so much. Often these take the form of " options " as well
as " futures " ; that is, A sells B the option to call for wheat on a
certain day at a certain price, or A sells B the option to deliver
wheat on that day at a certain price, or A may sell B the option
to call at one price or deliver at another ; the first is termed a
"call," the second a "put," and the third a "spread" or a
" straddle." Whenever the intent is merely to settle the gain or
loss in money, and there is no intent to deliver or receive the
article itself, the transaction is a gambling contract and illegal.
Examples: 4. " I have sold John Doe 100 shares of stock in the XY
Co. at 85 per cent, payable and deliverable at seller's option in 30 days.
RICHARD ROE." This may be a valid contract giving the seller the right to
deliver the stock at any time within 30 days at $85 a share (par value $100);
or it may be intended that on any day when that stock is worth say $80 a share,
the transaction shall be closed by the buyer paying the seller $500. The trans-
action must be closed at the end of 30 days if not closed earlier.
5. " For value received the bearer may call on me for 10,000 bushels of
wheat at 70 cents a bushel on Sept I, 1905. RICHARD ROE." This is a
"call." The buyer on September 1 will "call" for the wheat if it is more
than 70 cents a bushel, but not if it is less. If it is more, he makes the excess,
less what he paid for the option; if it is less, he loses what he paid for the
option. When the differences arc intended to lie settled in money this is a
gambling contract, but it is perfectly valid if actual delivery is intended.
6, " For value received the bearer may deliver to me 10,000 bushels of
wheat at 70 cents a bushel on Sept. 1. 1905. Rl< HARD ROE." This is a
"put." 11 wheat is 60 cents a bushel on September 1, the sella will " put"
3 o FORMATION OF CONTRACTS [Ch. II
it on Roe. who must pay 10 cents a bushel to the seller. The latter thereby
makes Siooo, less what he paid for the option. If it is more- than 70 cents .1
bushel, the seller will not " put " it, and he loses what he paid for the option.
But this contract is valid if actual delivery is intended.
7. " For value received the bearer may call on me for 10,000 bushels of
wheat at So cents a bushel any time in 60 days from date ; or the bearer may
at his option deliver the same to me at 75 cents a bushel. RICHARD ROE."
This is a " spread." If the call and put prices were the same, it would be a
"straddle." If actual delivery is intended (as it rarely is), this would be a
valid contract; but if it is intended to settle gains or losses in money, it is
a gambling contract.
Insurance. Insurance was at one time a favorite wagering con-
tract. Thus, persons not at all interested in a ship or its cargo
would take out insurance upon it, in order that if it was lost they
might recover the amount named in their policies. Very often
insurance was taken upon lives in which the policyholder had no
interest. This is in general made illegal by statute. In order that
an insurance policy may be legal, the one insured must have some
insurable interest in the property or the life covered by the policy.
Even in such cases the insurance contract is a kind of wagering
contract, but it is one permitted by the policy of the law.
26. Contracts illegal at common law. The common law has
indicated a very considerable number of instances in which it will
regard contracts as illegal because contrary to public policy. Only
a few of them can be enumerated.
1. Contracts to commit crimes or civil wrongs (torts) are illegal.
Thus, a contract to commit an assault would be illegal for both
reasons, since an assault is both a crime and a tort.
2. Contracts to do acts which injure the public service or inter-
fere with the administration of justice are illegal. A contract to
obtain a public office or vote for another for office, to influence
legislative action by lobbying, to quiet competition for public con-
tracts, to stifle the prosecution for a public offense, to carry on
a suit as an attorney at the expense of the attorney and share
the proceeds (champerty), to suborn witnesses, and the like, are
all illegal.
3. Contracts which affect the freedom or security of marriage
are illegal. Such is a contract to procure a collusive divorce ; and
such is a marriage-brokerage contract, that is, a contract by A to
§26] LEGALITY 31
procure or bring about a marriage between B and C for a con-
sideration paid or to be paid by either B or C to A.
4. Contracts in restraint of trade may be legal or illegal, accord-
ing as the restraint is reasonable or unreasonable. Such a contract
is reasonable when it is reasonably necessary to protect the prom-
isee and not injurious to the interests of the public. Beyond this
point it is unreasonable and illegal.
The great increase in trusts and monopolies within recent years
has caused the federal legislature and many state legislatures to
enact laws on the subject of restraint of trade. Congress in 1887
passed the Interstate Commerce Act to provide for the regulation
of interstate transportation ; in 1890 it passed the Sherman Anti-
Trust Act to regulate interstate commerce, aside from transportation
and banking, and by that act made contracts in restraint of inter-
state trade illegal and persons creating a monopoly in interstate
trade guilty of a misdemeanor; in 1914 it passed the Clayton
Act, which specifies certain acts which shall be deemed to be un-
reasonably in restraint of trade and illegal, and it also passed the
Federal Trade Commission Act, which constitutes the Federal
Trade Commission the regulator of interstate commerce, with
power to inquire into acts in restraint of trade and to issue orders
which are subject to review by the courts. Various state acts also
provide against contracts which tend to monopoly or restraint of
trade within the several states.
Examples: 1. A buys B's retail shoe store in the city of Ithaca, and B
agrees not to engage again in the shoe trade in Ithaca. This is reasonably nec-
essary to protect A against B's competition, and is held to be not so injurious
to the public as to render it against public policy. If B agrees not to engage
in the retail shoe trade in the state of New York, this would be obviously a
greater restraint than is reasonably necessary and would be illegal. If he agrees
not to engage in the retail shoe trade in the county in which Ithaca is situated,
this might be reasonable or unreasonable, according to circumstances. Some
states hold any restraint which includes the whole of the state to be unreason-
able, but this is contrary to modern tendencies.
2. The maker of guns and heavy ordnance of which governments were the
chief purchasers sold his business and agreed that for twenty-five years ho
would not engage in a like business anywhere in the world. It was held by
the English court that this restraint was reasonably necessary to protect the
purchaser, since a manufactory of such guns anywhere in the world would be
a competitor.
32 FORMATION OF CONTRACTS [Ch. II
3. If the business is one carried on under a public franchise (as a franchise
to lay gas pipes in public streets), or if it is impressed with a public trustor in-
terest (as the business of a common carrier who must serve all members of the
public on equal terms), the courts may hold even a local restraint unreasonable,
not as to the promisee but as to the public whom the parties are bound to serve.
4. Agreements to combine for the purpose of lessening competition, limit-
ing the output, regulating prices, dividing the territory in which business shall
be done, and the like, are illegal because detrimental to the public welfare.
27. Effect of illegality upon contracts in which it exists. In
determining the effect of illegality upon a contract in which it ex-
ists, it is necessary to determine whether the contract is divisible
or indivisible, and if divisible, whether the legal may be separated
from the illegal portion.
1. If a contract is indivisible, that is, if it has one indivisible
promise or act on one side and one on the other, the whole con-
tract must fail if one of these is illegal.
llxiunple 1. A agreed to work for B for a specified sum per month, and to
take charge of B's barroom and bar. It was illegal to maintain a bar for the
sale of intoxicating liquors. A performed various services including the sale of
liquors at the bar. A cannot recover the agreed price for his services because
A's promise to perform the services is an indivisible one and is tainted with
illegality. He cannot recover for the legal services, that is, those not connected
with the sale of liquors, because the promise of B is not apportioned but en-
tire, and the promises and acts of A are also entire. The whole contract must
therefore be regarded as illegal and unenforceable.
2. If the contract is divisible, that is, if there are two or more
promises on one side and a separate consideration for each on the
other side, and if the legal may be separated from the illegal, the
legal portion may be enforced unless the illegal part is so immoral
or criminal that the court thinks it best to give the parties no relief.
Example 2. A sells his retail business to B for $10,000, and in considera-
tion of $1000 more A agrees not to engage in a similar business again any-
where in the state. The second agreement is illegal as an unnecessary restraint
of trade, but it rests upon a separate consideration and can therefore be sepa-
rated from the legal part, and the latter may be enforced.
3. Ordinarily the law gives no relief to either party to an illegal
contract, either by enforcing the contract or by allowing a party to
it to recover anything paid or advanced under it. But it may aid
a party to get back what he has paid, provided he is, as compared
§28j REALITY OF CONSENT 33
with the other party, innocent of an illegal intent, or provided his
recovery of the money would prevent the illegal transaction from
being carried out. Statutes often provide that money paid on a
gambling contract may be recovered.
Examples: 3. A marriage broker induces an ignorant immigrant to pay
him money to secure her a husband. The court thinks the parties are not in
equal guilt, since the woman is ignorant and is played upon by the superior
ability of the broker, and permits her to recover the money.
4. A pays B a sum of money to commit an assault on C. To allow A to
recover this before the assault is committed would remove the inducement for
B to commit the assault. Such recovery is not out of consideration for A but
out of "consideration for C and the public peace.
VI. Reality of Consent
Agreement consists in the meeting of the minds of the parties.
But if one mind or both give consent by mistake, or if one is
misled by misrepresentation or fraud, or if one is compelled by
duress or undue influence, there may be no true agreement. In
such cases the contract may be avoided by the party misled. We
have then to consider the effect of mistake, fraud, duress, and
undue influence.
28. Mistake. Mistake about some material fact connected with
the contract may be mutual, that is, common to both parties, or
unilateral, that is, made by one party alone. (1) The fact about
which a mutual mistake occurs may be as to the subject matter
of the contract, namely, (a) its existence, {b) its identity, or (c) its
quality. (2) Unilateral mistake may be (a) unknown to the other
party, (/>) known to the other party, (c) as to the identity of a
party, or (d) as to the nature of the transaction itself. "
(1) (a) Mutual mistake as to the existence of the subject matter
of the contract really prevents a contract from being formed at all.
Examples: 1. A sells B a horse. Unknown to either party the horse
died before tin- contract was made. There is no contract, because there is
no subject matter upon which the minds "I the parties could meet.
2. A on-., is at sea. The owner sells it subject to the risk of its being
already lo t. The buyer is hound although the cargo was lost when the (on
tract was made. i„ , ,., e the i,,: the risk. There is n<> mistake, be-
can risk 1. .1 pari of the subjeel matter ol the contract, it tin- owner
knew it was lost, the contract can he avoided for fraudulent concealment
34 FORMA riOM OF CONTRACTS [Ch. h
(/>) Mutual mistake as to the identity of the subject matter
enables either party to avoid the contract.
Example 3. A says, " I luive purchased X's horse, Billy, and will sell him
to you for $250." 15 replies, " 1 will take him at that price." X had two
horses named Billy. A knew only the one he bought and 15 knew only of
the other. There is no binding contract. The minds have not met upon the
same subject matter.
(<•) .Mutual mistake as to the quality of an article will not ordi-
narily affect the validity of a contract.
Example 4. A finds a stone which appears to be a jewel of some kind, and
thinks it is a topaz. B, equally uncertain as to its quality or value, buys it for
a small sum. It turns out to be an uncut diamond of great value. The contract
is binding. Neither party knew the true nature of the stone, and each had an
equal opportunity to ascertain.
(2) (a) Unilateral mistake unknown to the other party is not
ordinarily a ground for avoiding a contract.
Exatnpie 5. A sells the stone (as above), believing it to be a topaz.
B knows it is a diamond but is ignorant of A's belief. The contract is
binding. A alone is mistaken and B has neither induced A's mistake nor
taken fraudulent advantage of it.
(b) Unilateral mistake known to the other party and taken
advantage of by him may enable the mistaken party to avoid
the contract. But this doctrine has rather narrow limits. If the
opportunity of knowledge is equally open to both parties, one
is not bound to reveal to the other what he has by superior
diligence discovered.
*& v
Examples : 6. A buys of B the negotiable paper of X. A believes X to
be solvent. B has just learned of X's insolvency and knows that A has not
yet learned of it or had a reasonable opportunity to learn of it. A may avoid
the contract. B's fraudulent concealment is fatal.
7. A sells his land to B. There is a valuable mine in it. A does not know
this. B does know it and knows that A is ignorant of it. The contract is
binding. B is not bound to disclose what A has had an equal opportunity to
discover, but B must not by any word or artifice mislead A.
8. A sells cotton to B, the price being dependent upon whether the war
between the United States and Great Britain is ended. A asks B whether there
is any news of peace. B, knowing that peace has been declared, says there is
no news. He thereby confirms A's mistake and A may avoid the contract.
§29] REALITY OF CONSENT 35
(c) Unilateral mistake as to the identity of the other party
will avoid a contract.
Exatnple 9. A, has been accustomed to deal with B. Unknown to A,
B has sold his business to C. A sends an order for goods to B. C gets the
order and ships the goods. A is not bound. He has a right to select whom
he will deal with, and is not obliged to have another person than B introduced
into the contract.
(d) Unilateral mistake as to the nature of the contract may
avoid it.
Examples: 10. A is induced by a trick of B to sign a negotiable note,
thinking he is signing a contract to sell goods for B. A is not bound.
11. As above. B indorses the note to C, who pays value for it in igno-
rance of B's fraud. A is not liable to C unless C shows that A's negligence
in signing the note is so great as to make it just that he should suffer rather
than C. When the rights of an innocent third party are in question, A may
be estopped to set up the mistake and the fraud. Whether A's negligence
is so great as to work such an estoppel is a question of fact.
29. Fraud and misrepresentation. Fraud consists in a false
representation of fact, made with knowledge of its falsity (or
with reckless disregard of its truth or falsity), with the inten-
tion that it should be acted upon by another, and actually
inducing that other to act upon it to his damage. Fraud by
one party enables the other party to a contract to rescind it.
Fraud is also a tort, and is called deceit in the law of torts.
Example 1. A seller of a horse represents him to be sound and healthy
when, known to the seller and unknown to the buyer, he has the glanders.
The buyer acts upon the representation, buys the horse, and afterwards dis-
covers that it is diseased. The buyer may either (a) rescind the contract, that
is, return the horse and recover the purchase money, or (6) keep the horse
and recover damages in an action in tort for deceit.
If in the above case the seller actually believes the horse to
be sound when he makes the statement, there is no fraud but
merely innocent misrepresentation. In such ease there can be
no action for deceit, since in order to base an action for deceit
it is necessary cither to show that the seller knew that what he
said was false or t'> show that he knew that he did not know
whether it was true or false, that is, made the statement without
any belief and in reckless disregard of its truth or falsity. At
36 FORMATION OF CONTRACTS [Ch. II
common law a contract would not be set aside for innocent mis-
representation, and this is probably the generally accepted rule,
although the equity courts often set contracts aside upon this
ground
Misrepresentations- of fact may take the form of warranties,
in which case they become collateral contract promises, and
an action lies for the breach of them (see sect. 53 post).
Representations may become a part of the main contract, and
then if they are false the contract is broken and an action lies
for its breach. Whether a representation merely induces one
to make a contract, or becomes a warranty, or becomes a term
of the contract itself, is a matter of construction too difficult
to be treated here.
Example 2. The seller of a horse says, " I warrant him to be sound and
healthy." Unknown to either party, the horse has the glanders. The buyer
has an action in contract against the seller for a breach of warranty. If the
seller knew the horse had the glanders, the buyer could, at his election, sue
for breach of warranty, or sue in tort for deceit, or rescind the contract and
recover the purchase money.
If the misrepresentation is as to a matter of opinion rather
than of fact, there is no actionable fraud, because the injured
party has no right to rely upon it.
Example 3. The seller of a horse says, " This horse is the fastest animal
in the county." No sensible buyer would attach any importance to such a
" puff " by a seller.
In some cases where the defect is not discoverable upon
examination, and is a fatal one, the seller may be under a duty
to disclose it to the buyer. The general rule, however, is caveat
emptor, "let the buyer beware." But in no case must the seller
resort to " artful concealment " to cover up a defect.
Example 4. B sells C a mahogany log too large to be easily rolled over,
and conceals a defect by rolling the defective part next the ground. This is
artful concealment for which the buyer may rescind.
30. Duress. Duress consists in actual or threatened violence
or imprisonment whereby the will of a contracting party is
coerced. Such threatened violence or imprisonment may be
directed against oneself or against a member of one's family.
§31] PRACTICAL SUGGESTIONS 37
Whatever threat overcomes the will of the contracting party
and compels him to do what he otherwise would not do may
in general be regarded as duress.
Example. A's son has been in B's employment and is charged with
embezzlement. B threatens to have the son arrested and prosecuted unless
A pays or secures to B the sum alleged to have been taken. A gives B his
note for the amount. This note may be avoided upon the ground that it
was given under duress, that is, under the fear occasioned by B's threat to
imprison A's son.
31. Undue influence. Undue influence consists in an uncon-
scientious use of power over the will of another, whereby that
other is induced to make contracts or gifts which he otherwise
would not make. It is a subtle form of duress whereby a per-
son of superior intellect and will dominates one of inferior
capacity or experience.
Example. A stepfather manages the property of his infant stepchildren.
As each one becomes of age the stepfather buys the property or interest, takes
a conveyance, and pays an inadequate consideration. The conveyances so
obtained may be set aside, since the influence of the parent or guardian is
presumed to continue for some time after the child or ward reaches his majority,
and the contract is made under such undue influence as is unfair.
In some cases, as parent and child, or attorney and client,
the law presumes that the parent or attorney exercised undue
influence. In other cases the burden is upon one who seeks
to set aside a transaction to show that undue influence was in
fact exerted.
HOW TO MAKE A CONTRACT
The object in drawing up a contract should be to embody the exact
agreement of the parties in such a manner that no future misunderstandings
as to its terms shall arise. There is a rule of law that when a contract is reduced
to writing, the terms of the written instrument cannot be contradicted or varied
by parol evidence. While there are some exceptions to this rule, not necessary
to be mentioned lure, the rule is very general in its application and should be
borne in mind when the contract is written and executed. A very good way
is for each party to put in one-two-three order the promises he is ready to make,
and for the Other party to sec whether these are the promises he is willing to
accept. Whi ral promises are embodied in the written instrument,
the whole should be carefully considered again in order to make sure that each
party has given and '1 just whal he intends. It is very unwise to leave
anything to an outside parol agreement.
38 FORM A IK 'NT OF CONTRACTS [Cn. II
A general form of a contract is here given. The particulars may be varied
according to the actual agreement
" This A.GRJ BMEN r. nuulc in duplicate this fifth day of April, one thousand
nine hundred and five, by and between Alfred lSlack, of the city of Ithaca,
in the state of New York, of the first part, and William Coles, of the same
city and state, of the second part,
"WITNESSETH, that the said party of the first part, for and in considera-
tion of the agreement hereinafter contained, to be performed by the party of
the second part, agrees to and with said party to construct and finish in a good,
substantial, and workmanlike manner on the lot belonging to the party of the
second part, and known as No. I 5 in Prospect Street in the city of Ithaca, N. Y.,
one frame building in accordance with the plans and specifications hereto an-
nexed, of good, substantial materials, on or before the fifteenth day of November
next. And the party of the second part, in consideration thereof, agrees to pay to
the said party of the first part for the same the sum of five thousand dollars,
lawful money of the United States, as follows : the sum of one thousand dollars
when the foundations are completed ; the sum of one thousand dollars when
the frame or superstructure is inclosed ; the sum of one thousand dollars when
the structure is plastered ; and the balance of two thousand dollars when the
building is fully completed according to the plans and specifications.
" And the party of the first part further agrees that in case of his failure
to complete the work by the date fixed he will pay to the party of the second
part as liquidated damages, and not as a penalty, ten dollars for each and
every day the full completion of his contract is delayed beyond that date.
" In Witness Whereof, the parties to these presents have hereunto
set their hands the day and year first above mentioned.
Alfred Black
William Coles "
If the signatures are to be witnessed, add at the left " Signed in the
presence of," and have the witness write his name beneath this phrase. If
there is a witness, he must be produced in court in order to prove the sig-
natures, or his absence must be satisfactorily accounted for. If there is no
witness, then other evidence, as the testimony of the other party, the proof
of handwriting, etc., may be resorted to in order to prove the signature in
question. If a seal is used, the final clause should read, " In witness whereof,
the parties to these presents have hereunto set their hands and seals the day
and year first above written " (see sect. 23 ante as to the effect of a seal).
If the signature of a party is to be affixed by his agent, the form should
be "John Doe, by Andrew Bright, his agent." The use of the word "by"
is very important. The signature "John Doe, Andrew Bright, Agent," might
make Bright a party (see sect. 131 post).
If someone (A. B.) is to guaranty the performance by the party of the first
part above, and if the guaranty is given at the time the contract is made,
there may be written below the signatures the following:
§31] REVIEW QUESTIONS AND PROBLEMS 39
" In consideration of the agreement above made by the party of the second
part, I do hereby guaranty to the said party that the above-named Alfred
Black will well and faithfully perform everything by the foregoing agreement
on his part to be performed, at the times and in the manner above provided.
A. B."
If the guaranty is made subsequent to the contract to be guarantied, it
will require a new consideration, and this should be expressed in the written
guaranty — for example, "In consideration of one dollar to me paid by William
Coles, the receipt whereof is hereby acknowledged, I do hereby guaranty, etc."
(see sect. 88 post).
A simpler form of contract would be as follows :
" A. B. and C. D. do hereby mutually agree as follows : A. B. to [state
what A. B. promises}; C. D. to [state what C. D. promises}. . g
Ithaca, N.Y., Jan. 5, 1905. C. D."
But the more formal phraseology is safer to use in order to make clear
that the promises are mutually dependent and indivisible (see sect. 39 post).
A contract may be assigned in the following form :
" For value received, I hereby assign to E. F. the within contract.
Ithaca, N.Y., June 7, 1905. A. B."
REVIEW QUESTIONS AND PROBLEMS
Section 10. Define contract. Distinguish agreement from contract.
Illustrate. Distinguish affirmative and negative contracts. How many parties
to a contract? What is a novation ? Illustrate.
Problem 1 . B in a spirit of frolic and banter offers C $300 for a watch
worth 515. C in the same spirit accepts, takes B's check for $300 on a bank
in which he has no deposit, and delivers the watch to B. C presents the
check, and, when it is dishonored, brings an action against B for the $300.
B sets up the above facts and offers to return the watch. Should C recover
the S300 against B ?
11. Name the essentials of an enforceable contract.
12. What is the meaning of agreement? How is it determined when an
agreement has been reached.'' Why must its terms he definite?
Problem 2. II offers t" sell his horse to C for % [65. (' understands I'. in say
$05. and replies, " I '11 give fifty-five.'' I', understands that C means " one fifty-
five," having dropped the "one," ax is nol unusual among traders. B replies,
"Sixty-five is the price." C then Bays, " I '11 take him." Is there a contract?
Problem j, I', agrees to give his niece C 100 acres of land if she will live
with him until her marriage and a. 1 as his housekeeper. G accepts and performs
her part of the agreement B refua - i" convey to her any land. C sues for
breach of the contract. Is there an enfon eable contract ? I las C any remedy?
4 o FORMATION OF CONTRACTS [Ch. II
Problem 4. B hires C and agrees to pay him "good wages," but after-
wards refuses to give him any work. C sues for damages for breath oi
contract Result?
13. Name three classes of agreements. Illustrate. Point out the different
classes in sect. io. Ex. 6.
14. How do agreements originate? Define offer. Define acceptance. What
forms do offer and acceptance take: Explain bilateral executory contract;
unilateral executory contract; executed contract. Define express promise;
implied promise.
1. Must the offer be communicated? To whom? When is the offer of a
reward published in a newspaper communicated? When one purchases a
railway ticket, who makes the offer?
Problem 5. C is on a train and B's agent comes through to take orders
for the delivery of baggage. C gives the agent a check for his trunk and
receives a receipt containing a notice that B will not be liable in case of loss
to an amount exceeding $100. C does not read the receipt or know of its
contents. The baggage is lost. Is C limited to a recovery of $ 100?
2. How may the acceptance be communicated? Are words necessary?
Must it actually reach the offeror? Is mental acceptance sufficient? When
an offer is made by mail, when is the acceptance complete ?
Problem 6. B asked C for an estimate of the cost of fitting up an office.
C made the estimate (not an offer). B then wrote C saying that if C would
do the work within two weeks, he might begin at once. No answer was
received. The next day B countermanded the order. Meanwhile C purchased
material and began to work upon it at his shop. C now sues B for breach
of contract. Was there a completed contract?
Problem 7. C has supplied B with eelskins used in his business. He has
sent them without a specific order, and B has kept them and paid for them.
C sends B a quantity on April 2. B keeps them for some months unpacked.
They are then destroyed by fire. Is B liable to C for the price?
3. What is the effect of a qualified acceptance? Illustrate.
Problem 8. B offers C 2000 tons of iron rails at so much per ton. C tele-
graphs, " Send me 1 200 tons iron rails as per offer." B telegraphs a refusal to
fill the order. C then telegraphs, " Send me 2000 tons iron rails as per offer."
B again refuses to fill the order. C then sues B for breach of contract. Result?
4. What control has the offeror over the offer before acceptance ? Same
question (a) when offer is made under seal and (b) when offeree pays to have
time to accept?
Problem g. C is offering goods at auction. B bids $100 for the lot, but
retracts the bid before the hammer falls. C refuses to accept the recall of the
bid and knocks down the goods to B, who refuses to take them. C sues B.
Is there a contract?
REVIEW QUESTIONS AND PROBLEMS 41
Problem 10. B sent a letter to C saying : " We are able to offer salt at
85 cents a barrel. Shall be pleased to receive orders." C at once ordered
2000 barrels at that price. B refused to fill the order, as salt had gone up
in price. C sues B for breach of contract. Result?
5. Suppose the offeree accepts after the offeror has revoked but before
the offeree knows of the revocation ?
6. How does an offer lapse ? What is the effect, upon an unaccepted offer,
of the death of the offeror or of the offeree ?
15. Who is an infant? When is he of age? Which of his contracts are
binding during infancy ? Which are binding after he is of age ? What are
necessaries? What is ratification?
Problem 11. On August 10, at 8 a.m., B bought of C a bicycle for $50.
B*s twenty-first birthday was on August n, and it was proved that he was
born at 10 p.m. of that day. C sues B for the agreed price. B seeks to
disaffirm the contract and pleads that it was made during infancy. Result?
Problem 12. B, a student of eighteen years, engaged a room of C for
forty weeks, at 52 a week, payable weekly. At the end of ten weeks he
left the room, and C was unable to secure another lodger. C sues B for $80.
B pleads infancy. How much may C recover?
Problem 13. B, while an infant, bought jewelry (not necessary) of C. After
B became of age he acknowledged the debt and said he would pay it as soon
as he had the means. Is B liable to C ?
Problem 14. B, an infant, buys a horse of C. After B is twenty-one he
sells the horse to X. C sues B for the price of the horse. Can B succeed?
Problem ij. C, an infant, sells B a horse. Before C is twenty-one he
brings an action to recover the horse from B. Will such an action lie during
C's minority ?
16. What contracts of an insane person are voidable ? What are binding?
Same questions as to idiots ; intoxicated persons.
17. What was the common-law rule as to married women's contracts?
What is a void contract? (Are an infant's contracts void?) How do statutes
change the common law as to married women's contracts?
18. What contracts require a consideration? What instruments have
>umptive consideration ? What is the effect of a seal at common law ?
Problem 16. C voluntarily supplied necessary articles to B's father, who
was old and poor. B afterwards promised C to pay for them. C now sues B
on that promise. Is B liable?
19. Must the consideration equal the promise in value? What is a
valuable consideration.' What is not?
I'n<l>tr»i /,-. B says to ( '. " If you will take a trip abroad, 1 will pay your
( takes the trip, and now sues B for the expense incurred.
I liable?
4 2 FORMATION OF CONTRACTS [Ch. II
Problem iS. B writes to C, " If you will extend the time which A has to
pay you his debt, 1 will become surety for A's payment." C extends the time
and takes from A a new note on three months' time. A does not pay. C sues
B. Should C succeed ?
Problem IQ. B and C were in dispute about a claim made by C upon B
for an injury to goods which B was carrying for C. B finally agreed to give
and C to take one half the amount C first claimed. C sues on B's promise.
1 1 answers that there was no consideration for his promise because he (B) was
not liable at all to C for the injury to the goods.
Problem 30. C was a constable in A. B offered a reward of $ioo for the
arrest of X for a specified crime. C, knowing of the reward, arrested X in A,
and now brings an action for the reward. What objection ?
20. What is meant by a past consideration ? Distinguish from an executed
consideration. Illustrate. Effect of previous request? What is meant by
waiving a legal bar to an action on a contract?
Problem 31. B says to C, " If you will look up certain of my debtors, I
will pay you what is right." C does so. B then promises to pay C $ioo.
How much may C recover?
21. What is meant by an illegal consideration ? Illustrate.
22. What is the Statute of Frauds? Object? When first enacted? What
sections deal with contracts? State the provisions of the fourth section. Of
what may the memorandum consist? What must it contain? State the pro-
visions of the seventeenth section. In what three ways may this section be
satisfied? Is the seventeenth section in force in your state? If so, what
contracts for personalty are within the statute?
Problem 22. A memorandum of sale made by an auctioneer read as
follows :
"Oct. 9, 1866. This day sold B's house and land on Bartlett Street in
Lewiston; was struck down to C for $1200, one third down.
D. E., Auctioneer "
C sues B, alleging that he (C) was to pay one third down, one third in one
year, and one third in two years, and that B refused to carry out the contract.
B pleads the Statute of Frauds. Is this a good defense?
Problem 23. B sells C by parol two standing trees for $10. Afterwards B
refuses to allow C to cut the trees. C sues B for breach of contract. B pleads
the Statute of Frauds. Result?
Problem 24. B. Ry. and C agree orally that if C will grade and lay a side-
track, or switch, the Ry. will maintain the switch for C's benefit for shipping
purposes as long as C may need it. C does his part. The B. Ry. refuses to
perform its part. C brings an action for damages. The Ry. pleads the
Statute of Frauds. Which provision? Result?
REVIEW QUESTIONS AND PROBLEMS 43
23. What is a seal? What is a sealed contract? What is the effect of a
seal ? What statutory changes in the effect of a seal ?
24. What contracts are usually declared by statute to be illegal ? What is
the effect of prohibiting an act ? What is the effect of affixing a penalty to the
doing of an act ?
Problem 2j. A statute prohibits any work, labor, or business on Sunday.
C agrees with B to procure advertisements to be published in B's Sunday
newspaper. Is this contract illegal?
Problem 26. Under a similar statute B makes and delivers a promissory
note to C on Sunday. May C enforce the note?
25. Define wagering contracts. Were they illegal at common law? Explain
wagers on the rise and fall of the market. In what sense are insurance contracts
wagering contracts ?
Problem 2j. C, a broker, sues B, a customer, for moneys paid and
expended by C in certain stock transactions. It was understood between C
and B that the purchases and sales made by C for B should not result in an
actual transfer of stocks, but that in each case the contract should be adjusted
by the payment of money by B in case the transaction proved to be a losing
one, or to B in case it was a winning one. C paid out for B more than he
took in for him. Can C recover this amount?
26. Enumerate and illustrate contracts illegal at common law. What is a
contract in restraint of trade? Are all such contracts illegal? What is the test?
Problem 28. B had a claim against the United States. C agreed with B
to secure an act of Congress appropriating money for the payment of the
claim, and B agreed to pay C 25% of whatever sum Congress might appro-
priate. C secured an appropriation in favor of B for $12,000. B refuses to
pay C, who then brings an action against him for $3000. Result?
Problem 2Q. C charges B with embezzlement. Upon C's agreeing not to
prosecute B criminally, the latter gives C a promissory note for the amount.
Is B liable upon the note?
27. What is an indivisible contract? What is the effect if any portion of it
is illegal? What is a divisible contract? What is the effect if one part is
illegal? If a party pays money upon an illegal contract, can he recover it?
/'roblem jo. C deposited S500 with B as a wager on a foot race, knowing
it was to be a "bogus" race, and intending to cheat someone. Before the
race was run, C became suspicious that he would be cheated and demanded
k his money. 15 refused to give it link, and finally paid it to A, the
pretended winner of the race. C sues I! for tin- amount Result?
28. What is meant by reality <>f consent? What will prevent reality of
consent? Distinguish between mutual and unilateral mistake. Name the
classes of mutual mistake. Explain and illustrate each. Which will avoid a
contract? When will unilateral mistakes avoid a contract?
44
FORMA HON (>l I'ON TRACTS [Ch. II
Problem 31. Contract of sale of a lot of land on Prospect Street in
Waltham. In an action against the buyer for the price, he sets up that the
land now tendered him is on another Prospect Street than the one he had in
mind, and understood that the seller had in mind, when the contract was
made. Is this a good defense?
Problem ,v. C. Kv. prepares a rate sheet and by mistake prints the fare
from A to I) as jtel.25 when it should be #36.70. B discovers the mistake
and takes advantage of it by at once purchasing of a local agent a large
number of tickets at the printed price. C. Ry. seeks to enjoin B from dis-
posing of these tickets and to compel him to return them and receive back
his money. Result?
29. Define fraud and its effect upon the contract. Distinguish innocent
misrepresentation. Is this a tort? Will it avoid a contract? When does a
representation become a warranty ? What is the effect of a representation of
opinion ? What is fraudulent concealment?
Problem 33. B had engaged S to teach school in District A in case she
secured a certificate by a certain time. C applied for the same school, and on
being informed of the contract with S, stated to B that there would be no
examination for teachers in time for the opening of school. B then engaged
C. Later S appeared with the necessary certificate, and B refused to allow C
to teach. C sues B for breach of contract. (1) In case C knew there would
be an examination, can he recover? (2) In case C believed there would not be
an examination, can he recover ?
Problem 34. C sold B cattle, knowing and concealing the fact that they
had Texas fever, a disease not discoverable by examination. The cattle died,
and C sues for the price. Should he win the suit ?
30. Define duress. Need it be against the contracting party?
31. What is undue influence? Distinguish from duress. When is it
presumed ?
Draw a contract by which you agree to work for John Doe as clerk in
his store for one year, with a vacation of two weeks, for $10 a week payable
weekly during the entire year, and are to have at cost price such goods, not
exceeding 5 100 in the aggregate, as you may choose to select from his stock.
Draw a contract by which Richard Roe guaranties the faithful performance
of your part of the above contract.
Draw an assignment of your right to the goods.
CHAPTER III
OPERATION AND DISCHARGE OF CONTRACTS
I. Liabilities and Rights of Third Parties
32. Liability of third parties. The problem here is twofold :
first, whether anyone can be made liable upon a contract who
is not a party to it ; and, second, whether one may be liable for
interfering with the formation or performance of contracts.
i. Contracts bind only the parties to them. A person cannot
be made liable upon a contract to which he was not a party, for
agreement lies at the basis of all true contracts. But an undis-
closed principal may be liable on a contract made by his agent,
although by its terms it is a contract between the agent and the
other party ; this is an exception to the general rule, and is
treated later (see sect. 129).
Examples : 1. A contracts with B. In fact, A is acting for an undisclosed
principal P. When B learns this, he may hold P liable on the contract.
2. But if A, as above, exceeds the authority P gave him, B cannot hold P.
It is really P's consent that A may make the contract that renders P liable.
2. Third persons may render themselves liable in tort by
interfering with contracts, by inducing one party to a contract to
commit a breach of it, or by using unlawful means to prevent a
person from making a contract. A boycott is brought about by
inducing persons not to deal with the one boycotted. If force or
fraud is used, the boycott becomes unlawful.
Example* : 3. A engages B to sing at his theater for the season. X
induces I; to break this contract and sing at X's theater. X is liable to A for
the damages caused by B's breach of contract.
4. A is negotiating with B to sing at his theater. X falsely tells B thai \
is insolvent and cannot pay the salary. B refuses to contract. X is liable in
tori to A for inducing B, by false representations, not to 1 titer into a contract
with A.
5. Strikers threaten to assault workmen who are seeking their places, and
thus prevent the employer from getting new workmen. The strikers are liable
45
46 OPK RATION OF CONTRACTS [Ch. Ill
to the employer for preventing him by unlawful means (threats of violence)
from making contracts with those who otherwise would apply. The strikers
may also be enjoined from using unlawful means for this purpose. If the
strikers also keep customers away by such means, there is an unlawful boy-
cott of the employer's business.
33. Rights of third parties. In most of the United States,
but not in England, if a contract is made by A with B for the
direct benefit of C, the latter may recover upon it, although A
furnished the consideration and the promise of B was made to
A. This is especially so whenever A owes C some duty which
he is seeking to discharge by giving C the benefit of B's promise.
So also an undisclosed principal may sue upon a contract made
by his agent in his behalf.
Examples : i . A lends B money and B promises A to repay it to C, to
whom A owes money. C may maintain an action against B upon the promise
made for his benefit. ■
2. An incoming partner promises an outgoing partner to assume and pay
the latter's obligations to the partnership creditors. The creditors may sue the
incoming partner upon the promise made for their benefit.
3. A father agrees to name his child after B, in consideration of B's promise
to pay the child $1000 when he is twenty-one. The father names the child
after B. When the child is twenty-one he may compel B to pay him the
money so promised.
4. A contracts with B, but is secretly acting for P, an undisclosed principal.
P may hold B upon the contract.
II. Assignment of Contracts
34. Assignment by act of the parties. A bilateral contract
creates both liabilities and rights. The problem is whether either
the liabilities or the rights may be assigned by a party to the
contract to some other person.
1 . Assignment of liabilities. A party to a contract cannot as-
sign or transfer his liabilities under it. The other party has a right
to look to the person with whom he has contracted. If the duties
are not for purely personal service or do not involve personal confi-
dence, one can assign his rights and delegate the performance of his
duties, but will remain liable if they are not properly performed.
Example 1. A let a carriage to B at a yearly rental for five years, and
agreed to keep it in repair and to paint it every year. A sold his business to C
§35] ASSIGNMENT 47
and notified B that C would be answerable for future repairs. B refused to
accept C and returned the carriage. B is right. He is not bound to look to
anybody except A for the repairs. But nevertheless A could delegate to C the
doing of the necessary work, remaining himself personally liable for any negli-
gence or nonperformance. If the work is artistic work, the performance of it
cannot be delegated : the other party has a right to the artistic skill of the
person with whom he contracted.
2. Assignment of rigJits. The rights one acquires under a
contract may be assigned if they relate to money or property,
but one cannot assign a right to some personal service. At com-
mon law the assignee must sue in the name of the assignor, but
statutes now generally give the assignee the right to sue in his
own name. The assignee is subject to whatever defenses might
have been set up against his assignor ; he gets the assignor's
rights, and no more.
Examples : 2. A contracts to give B $100 for B's horse. A assigns the
contract to C. Upon tender of the 5 1 00 C is entitled to the horse. So also B
could assign the right to receive the money.
3. A contracts to give B his note for fioo for B's horse. A assigns the
contract to C. B is not bound to take C's note, nor is he bound to deliver the
horse to C unless the latter tenders A's note.
4. C agrees to work for D in D's store for S30 a month. D sells the store
to E and assigns to him the contract with C for services. C is not obliged to
work for E under the contract.
5. F assigns to H a contract with G by which G agreed to deliver 100
bushels of oats in exchange for F's horse. H sues G for breach in refusing
to deliver the oats after receiving the horse. G sets up that F fraudulently
represented the horse to be sound and claims an offset in damages. H is
subject to this defense precisely as F would have been.
35. Negotiability of certain contracts. Contracts contained in
written instruments that are negotiable, such as bills of exchange,
promissory notes, and checks, may be transferred by negotiation
from hand to hand so that each new holder may recover upon
them. Moreover, the transferee, if a holder for value and without
notice, is not subject to the personal defenses which might have
been set up against the transferor. This incident of negotiability
is a peculiar attribute of these instruments and will be more fully
discussed under the head of Negotiable Paper.
The distinction between assignability and negotiability may be
thus illustrated.
48 OPERATION OF CONTRACTS [Ch.hi
1. " On demand I promise to deliver to John Doe ioo bushels of wheat at
eighty cents a bushel. Richard Roe."
Indorsed: " For value received, I hereby assign this contract to J. S.
Dale. John Doe."
2. " On demand 1 promise to pay to the order of John Doe one hundred
dollars, value received. RICH \ki> ROE."
Indorsed: n Pay to J. S. Dale. JOHN DOE.'!
The first instrument is a common-law contract. It is assigned
by the promisee, John Doe, to J. S. Dale. The assignee, Dale,
may maintain an action against the promisor, Richard Roe, in
case the latter refuses to deliver the wheat upon tender of the
price. At common law Dale would have to sue in the name of
the assignor, Doe, and he would be subject to whatever defenses
might have been set up had Doe brought the action himself, as,
for example, that there was mistake or fraud in the contract.
He may now generally, under statutory provisions, sue in his own
name, but he is still subject to the same defenses.
The second instrument is a negotiable promissory note. It is
indorsed by the promisee, John Doe, to J. S. Dale. The indorsee,
Dale, may maintain an action in his own name against the maker,
Richard Roe, in case the latter fails to pay at maturity; and if
he gave value and had no notice of any defense, like mistake or
fraud, he will not be subject to such defense even though Doe
would have been subject to it if he had retained the note and
brought the action.
The rules of negotiability came into the law from the custom
of merchants, and are peculiar to a class of instruments known
as negotiable paper.
36. Assignment by operation of law. Where a contracting
party dies, most contracts which he might have assigned during
his life pass to his executor or administrator, who may sue or
be sued upon them. Contracts for personal services do not survive
the death of either party, and contracts requiring long-continued
operations or conduct of business by an administrator will not be
deemed to survive.
So where a person becomes a bankrupt, his right to enforce
contract obligations passes to his trustee in bankruptcy ; but the
trustee would not be bound to enter upon performance inconsistent
with the purpose of winding up the bankrupt's affairs.
§37] BY AGREEMENT 49
At common law a husband, upon marrying, became entitled to
all his wife's personal property and could enforce her claims
growing out of contract. Conversely, he became liable for her
antenuptial debts. But these common-law rules have been al-
most everywhere swept away by statutes giving married women
the control of their own property and making them liable for
their own contracts.
III. Discharge of Contracts
37. Discharge by agreement, including performance. An agree-
ment to discharge a contract may be made by the parties to it
after it is created, or the agreement as to a method of discharge
may be contained in the contract itself.
1. Waiver or rescission. When a bilateral contract has been
concluded and is a binding agreement, the parties to it, by a new
agreement, may contract to discharge it. The consideration is
the mutual release of A by B and of B by A from any further
liability under it. If the contract has been performed by A but
not by B, A may release B, but there must be some consideration
for the release or it must be under seal ; but in those states
where the seal has no legal effect there must be consideration
for the release.
Examples : 1. A agrees to sell and B to buy A's book for $1. A and B
then mutually agree to release each other. A's promise to release B is the
consideration for B's promise to release A, and vice versa.
2. A has delivered the book to B, and B now owes A $1. A promises B
not to claim the dollar, that is, releases B from liability. The promise is not
enforceable ; there is no consideration for it. B gives A fifty cents and A
releases 15 from the balance. Still there is no consideration; a smaller sum is
not consideration for a larger. B gives A a ten-cent pencil in consideration
\'s promise to rel< 1 • him ; the promise is enforceable and B is no Ion
liable to A. A gives Ba release under seal; it is enforceable and B is released.
A release under seal might be as follows: " For value received, I hereby release
and discharge B.B. from all claims tor the unpaid portion of the purchase
price ol X book. Witness my hand and seal this seventh day ol February,
1905. A. A. [seal]."
2. Substituted contract. The parties may by agreemenl sub-
stitute a new contract for an existing one
5 o DISCHARGE OF CONTRACTS [Ch. Ill
Example 3. A agrees to dig a well for 15 for #50. A complains that he
will lose money, owing to the presence of rock which had not been contem-
plated. It is agreed that A shall dig the well and that B shall pay him #75.
This may he treated as a substituted contract and thus escape the difficulties
mentioned in sect 10. Ex. 4, ante. _
3. Provisions for discharge. The contract itself may contain
certain provisions looking to a discharge under specified contin-
gencies, as, for example, an agreement that either party may ter-
minate it upon thirty days' notice. Insurance contracts or policies
provide for a discharge in case of increase of risk, as in case the
property remains vacant and unoccupied for more than ten days,
and the like.
4. Discharge by performance. If in accordance with the terms
of the contract either party performs what he has promised to
perform, he is discharged. If both perform, the contract is dis-
charged, or executed. Tender is an attempted performance ; if it
is accepted, it discharges the one making it ; if it is refused, it
discharges him unless his contract is for the payment of money,
in which case he is still liable on his debt but may plead the
tender against a claim for interest or the costs of an action. A
tender of money, to be technically good, must be of the exact
amount due and in legal-tender money.
Legal-tender money in payment of private debts consists of any gold coin,
silver dollars, United States notes (greenbacks), and United States Treasury
notes, to any amount; fractional silver coins to the amount of ten dollars;
nickel and copper coins to the amount of twenty-five cents. Gold and silver
certificates and national bank notes are not legal-tender money, but are ordi-
narily received in payment of debts without objection.
A tender of a check or note of a debtor need not be accepted in place of
money. If it is accepted, it is (in most states) regarded as merely a conditional
payment unless otherwise expressly stipulated. If the check or note is not
paid, the creditor can either sue upon it or, by returning it, sue upon the
original claim for which it was given. But if the creditor takes the note of
some third person, which is the property of the debtor, it is regarded pre-
sumptively as payment, just as if he had taken a horse or other corporeal
chattel owned by the debtor.
Before a party to a contract can be said to have performed, he
must have fully and exactly done what he promised. But in con-
tracts for building or executing work with many specifications and
§38] BY IMPOSSIBILITY 51
details a deviation that is slight and not willful may be overlooked
on the doctrine of substantial performance. The contractor, while
he may recover upon such substantial performance, must deduct
from his recovery the amount the other party is damaged by the
deviation. A deviation which is more than slight or trivial, or
which is willful, will defeat a recovery because it is not regarded
as performance, and the contractor is not therefore discharged
from his obligation.
Example 4. A agrees to build a house for B for $11,700. He has fully
completed it according to specifications, except that there are some slight
defects in the plastering. This is substantial performance, and A may recover
the contract price less an offset for the defect, which was in this case held to
be $200. But if the deviation was willful or excessive, A could not recover.
One court says : " It may be harsh doctrine to hold that a man who has built
a house shall have no pay for it, but the fault is with the one who voluntarily
violates his contract."
If one agrees to perform to the satisfaction of another, and the
matter is one of personal taste, he cannot recover until the other
is satisfied. But if it is a matter which is not one of mere personal
taste, and the work would be lost if it were not accepted, the
other must be satisfied when he ought reasonably to be satisfied.
Examples : 5. A agrees to paint the picture of B's wife to B's satisfaction.
B is not pleased with it. He is not obliged to take it. A has not performed
his contract.
6. A agrees to put in boilers in B's factory to B's satisfaction. A puts in
the boilers. B is not satisfied. But if a reasonable man would say B should
be satisfied, A has fulfilled his contract and B is liable.
38. Discharge by impossibility of performance. A contract is
not created if an impossibility exists at the time it is made. In
only the excepted cases will subsequent impossibility discharge
a contract.
1. Prior impossibility, [fa physical or legal impossibility exists
when the contract is supposed to be made, there is no contract,
because the promise to clo an impossible act is imt a real con-
sideration for the counter promise or act ; lor example, if the
subject matter does not exisl when the contracl is supposed to be
made, the contract is ineffective, because there is no subject matter
upon which it 1 an operate.
52 DISCHARGE OF CONTRACTS [Ch. Ill
2. Subsequent impossibility. If an unforeseen difficulty arises
subsequent to the formation of the contract, it will not, save in
the cases enumerated, discharge the contract.
Example i. A agrees to sell and deliver to B a quantity of beans to be
raised by A. A's crop is destroyed by frost. A is liable for a breach of con-
tract, since, although he cannot deliver beans from his own land, he can procure
them elsewhere, and there is not, therefore, a real impossibility.- If, however,
it had been specified that A was to deliver the beans grown in a particular
field, and the crop in that field had been destroyed, there would have been an
impossibility due to the destruction of the subject matter.
The following cases of impossibility arising subsequent to the
formation of the contract will discharge the contract.
a. Legal impossibility. If the impossibility is created by
a change in the laws, or by an act of law, the . promisor is
discharged.
Examples : 2. A leases a wooden building to B and agrees, in case it
burns, to rebuild it. It burns and B demands that it be rebuilt. A defends
upon the ground that, since the contract was made, the city by ordinance has
forbidden the erection of wooden buildings. The defense is good. A is not
obliged to build except in wood, and the law p r events him from building in
that material.
3. A agrees to work for B for three months. At the end of a month A is
arrested and imprisoned. His contract is discharged, since the law by restrain-
ing him has made it impossible for him to perform.
/;. Destruction of the subject matter of the contract. Where
the existence of a specific thing is essential to performance, the
contract is discharged if the thing is destroyed through no fault
of the parties.
Examples : 4. A agrees to let B occupy a hall for public entertainments.
Before the time for occupation arrives, the hall is destroyed by fire. The con-
• tract is discharged.
5. A sells B a buggy and agrees to repaint it and deliver it in thirty days.
Before the work is finished, the buggy is destroyed by fire. The contract is
discharged. Neither party has any action against the other. (If the buggy
had been in a deliverable condition, the title would have passed to B at once,
and he would have been obliged to pay the agreed price, although he had left
the buggy in A's hands. This is more fully explained under the head of Sales.)
6. When work is to be done by A upon an article belonging to B, the
destruction of the article discharges the contract, but A may recover for the
work performed upon it before its destruction.
§39] BY BREACH 53
7. One may contract against loss or destruction. For example, A hires a
boat and contracts that in case of loss he shall pay a specified sum. The boat
is lost in a storm without A*s fault. A is bound to pay as agreed.
c. Death or disability in the case of contract for personal serv-
ices. If the contract is for personal services, the death or in-
capacity of the one who is to perform such services will discharge
the contract.
Examples : 8. A musician contracts to play at a theater. Owing to illness
he is unable to do so. The theater manager sues for damages for breach.
He cannot recover. The illness and consequent incapacity of the musician
discharge the contract.
9. An unforeseen peril, as the prevalence of a dangerous contagious
disease, may operate to discharge a contract for personal services within the
infected district.
10. The death of a master or of a servant discharges the contract as
between the survivor and the executor or administrator of the deceased
person.
39. Discharge by breach. A contract may be indivisible or
divisible, and the promises may be mutually dependent or may
be independent.
1. Where the promises on each side are mutually dependent
and the contract is an indivisible one, a breach of performance
by one party will discharge the other from performance and will
give that other an action for damages against the one in default.
A positive assertion by one party, prior to the time fixed for per-
formance, that he will not perform, is an anticipatory breach and
in some states gives the other party an immediate right of action.
If one party tells the other to stop performance, the latter cannot
by going on add to the damages for the breach.
Exatnple 1. A agrees to sell a horse to B for ?ioo. A refuses to deliver
the horse and receive the purchase price. B is discharged from any further
obligation ; he is not bound to receive the horse in case A should afterwards
tender it, or to pay anything to A ; and he may maintain an action for
damages against A for the refusal to deliver when performance was due.
2. If, however, the contract is a divisible one, or the transac-
tion is made up really of a series of contracts, then the breach of
one part will not discharge the other parts. The difficulty in these
cases is in determining whether a contract is divisible or indivisible.
54 DISCHARGK BY BRKACH [Ch. Ill
Example 2. A contracts to sell H 1200 tons of coal in twelve monthly
installments of 100 tons. The English court held this to be a divisible con-
tract, and that a breach in performance as to one installment would not dis-
charge the contract as to the remaining installments. The Supreme Court of
the United Stairs held such a contract to be an indivisible one for the full
amount specified, and thai a breach as to any installment would discharge the
entire contract. Generally in the United States such contracts are regarded
as indivisible.
3. Sometimes promises are not mutually dependent, and in
such a case a failure of performance on one side may not dis-
charge a promise on the other.
Example 3. A agrees to pay a certain rent for B's house, and B agrees to
allow A to occupy the house for one year and to give A the option to renew the
lease for a second year. A falls in arrears upon his rent and B refuses to renew
the lease. It is held that the covenant to renew is independent of the promise
to pay the rent, and therefore B is not discharged from the promise to renew
because of A's breach of the promise to pay. These cases are not very com-
mon, and the construction is so technical as to be chiefly the business of lawyers.
4. A warranty is a subsidiary promise attached commonly to a
contract of sale. The breach of the warranty gives the buyer, under
the Sales Act, the option of bringing an action for damages or
of rescinding the contract.
Example 4. A sells B a horse and innocently warrants it to be sound.
After B has taken the horse, he discovers that it is unsound, and attempts to
compel A to take it back and repay the purchase money. Some courts hold
that this cannot be done and that B's only remedy is an action for damages
for the breach of the warranty ; but in the Sales Act states and some other
states B is allowed to rescind (see sect. 57 post).
40. Remedies for breach of contract. A breach of contract may
be of a vital or a nonvital term. Whether a given term is vital or
nonvital is a question of fact for the construction of the court.
A vital term is one of such importance that it goes to the life of
the contract. In case a vital term in a contract is broken by one
party to it, these results follow :
1. The other party is exonerated from further performance on
his part ;
2. He has an action for breach of the contract, in which he
may recover as damages the contract price of whatever he has
delivered or done, and also for any loss sustained by being pre-
vented from completing the contract ; or,
§40] REMEDIES FOR BREACH 55
3. By treating the contract as entirely abandoned, he may,
if he chooses, recover the value of whatever he may have him-
self already performed ; that is, he may proceed upon an implied
promise to pay a reasonable price or compensation.
Examples : 1. A sells 10,000 feet of lumber to B at $20 a thousand feet.
A delivers 4000 feet, when B refuses to receive the remainder. A is not
bound to deliver or tender any more. A may sue for breach of contract and
recover $So (the contract price of that delivered) ////.*• the profit he would have
made upon the remaining 6000 feet, which, assuming that the lumber cost A $ 1 5
a thousand and is now worth in the market only 515a thousand, would be $30.
2. Or, if A chooses to disregard the express contract, he may sue as upon
an implied contract and recover the market value of the lumber actually deliv-
ered. Assuming that this is 525 a thousand, A could recover $ 100 ; but he could
not recover for any loss of profits upon the portion undelivered. In case A
has contracted to sell this lumber to B at too low a price, this alternative
would be preferable.
3. A buys a quantity of turnip seed of B, who represents the seed to be
from a particular variety of turnips suitable for early market. A plants the
seed, and the turnips raised from them are of a late variety, fit only for cattle.
A may recover as damages the difference between the market value of the
crop he raised and that of the crop he might have raised had the seed been
as represented.
If the breach is of a nonvital term, the other party is not
exonerated, but merely has a right of action for such damages
as he has sustained by reason of the breach of the particular
nonvital term.
In certain classes of cases, where damages would be an inade-
quate remedy, the injured party may obtain from an equity court
an order that the other party specifically perform his promise.
< < >ntracts for the conveyance of land are thus specifically enforced,
and contracts for the transfer of chattels may be specifically en-
forced if the chattel is one, like a patented article, which cannot
be procured elsewhere than of the vendor.
Actions for the breach of contracts must be brought within the
time fixed by the Statute of Limitations. In case of simple con-
tracts this is usually from three to six years, and in the case of
Bealed contracts, from ten to twenty years. The statutes differ
somewhat in the different states. When more than the prescribed
time has elapsed since the breach, the contract or right of action
upon it is said to be "outlawed," that is, barred by the statute.
5 6 DISCHARGE OF CONTRACTS [Ch. Ill
But a debt may be revived by a new promise to pay it after it is
barred by the Statute of Limitations, although nearly all the states
now require such a promise to be in writing. A part payment
after the debt is barred will also revive the whole claim.
IV. Discharge in Bankruptcy
41. Insolvency laws not discharging debtor. At common law
debtors could be imprisoned for debt, and such imprisonment
might be of indefinite duration. It was not until 1759 that Parlia-
ment passed a general and comprehensive act for their relief.
This act provided that prisoners in custody for debts under ^100
(afterwards extended to ^200) might secure their release by mak-
ing an assignment of all their property, with some trifling excep-
tions, for the benefit of their creditors ; the debtor, however, was
not discharged from civil liability for the unpaid portion of his
debts. This was the origin of insolvency laws under which, after
the abolition of imprisonment for debt, insolvent debtors continued
to make assignments for the benefit of creditors in order that all
might share pro rata in the available assets. These laws were
extended in England and in some of our states so as to enable
creditors to compel an insolvent to make an assignment of his
property for their benefit and to give the debtor a discharge
from further liability. When they reach this point, they are
indistinguishable from bankruptcy laws.
42. Bankruptcy laws discharging debtor. Bankruptcy laws are
older than insolvency laws, but were originally applied only to
traders or persons in mercantile pursuits. They were framed to
enable creditors to compel a bankrupt trader to turn over his
property for their benefit. They were extended for the benefit of
the trader, so that, upon turning over all his property for the pay-
ment of his debts, the bankrupt became discharged from further
liability and could begin business again free from the burden of
former debts. They were further extended so as to apply to all
persons, whether traders or not, and to enable a debtor to go into
voluntary bankruptcy and secure a discharge.
Thus, by an extension of insolvency laws so as to discharge a
debtor from his debts as well as from imprisonment, and by an
§§43,44] BY BANKRUPTCY 57
extension of the bankruptcy laws to include all debtors, the two
classes of laws became practically alike.
43. The state insolvency laws. Our American states have
passed laws which sometimes resemble insolvency laws and some-
times resemble bankruptcy laws. The main distinction to be
observed is whether, upon assigning all his property for the bene-
fit of his creditors, the debtor is discharged from further liability
for his debts then existing. If so, the law, whatever it may be
called, is practically a bankruptcy law ; if not, it is practically an
insolvency law.
Any state law which is in effect a bankruptcy law is now sus-
pended by the National Bankruptcy Law, which went into effect
July i, 1898 (see next section).
Any state law which merely governs the voluntary assignment
of property for the benefit of creditors, and is to that extent an
insolvency law, is not suspended ; but a voluntary assignment for
the benefit of creditors is an act of bankruptcy, and the creditors
may bring the assigning debtor under the National Bankruptcy
Law if they choose.
44. National Bankruptcy Law of 1898. The Constitution of
the United States confers upon Congress the power "to establish
uniform laws on the subject of bankruptcies throughout the United
States." If Congress does not pass such laws, the states are free
to do so. But if Congress does pass such laws, the state bank-
ruptcy laws cease to operate while such national statutes are in
force. National bankruptcy laws have been in operation from
1800 to 1803, from 1 84 1 to 1843, from 1867 to 1878, and since
July 1, 1898. The state laws are therefore now suspended, but
would revive if the federal statute were repealed. If a person is
discharged in bankruptcy from his debts, he may revive any of
them by an express promise to pay them. Such promise requires
no new consideration ; it simply waives the bar raised by the
discharge in bankruptcy.
The ( rnited States Bankruptcy Law provides that "acts of bankruptcy by
a person shall consist of his having (I) conveyed, transferred, concealed, 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: or (2)
transferred, while insolvent, any portion of his property to one or more -I
5 8 IMSfllAROK OK CONTRACTS [Ch. Ill
his creditors with intent to prefer such creditors over his other creditors; or
(3) suffered or permitted, while insolvent, any creditor 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 dis-
charged such preference; or (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 receiver or trustee has been put in charge
of his property under the law of a state, of a territory, or of the United States ;
or (5) admitted in writing his inability to pay his debts and his willingness to
be adjudged a bankrupt on that ground."
It further provides that "a person shall be deemed insolvent . . . whenever
the aggregate of his property, exclusive of any property which he may have
conveyed, transferred, concealed, or removed, or permitted to be concealed
or removed, with intent to defraud, hinder, or delay his creditors, shall not, at
a fair valuation, be sufficient in amount to pay his debts."
. It further provides that (a) any person, except a municipal, railroad, insur-
ance, or banking corporation, shall be entitled to the benefits of this act as a
voluntary bankrupt; (b) any natural person, except a wage earner (earning not
more than $1500 a year) or a person engaged chiefly in farming or the tillage
of the soil, any unincorporated company, and any moneyed, business, or com-
mercial corporation, except a municipal, railroad, insurance or banking cor-
poration, owing debts to the amount of $1000 or over, may be adjudged an
involuntary bankrupt; (c) a partnership, during the continuation of the partner-
ship business, or after its dissolution, and before a final settlement thereof,
may be adjudged a bankrupt.
It further provides for the discharge of the bankrupt unless he has been
guilty of fraud or concealment. The discharge releases him from all debts,
except taxes, liabilities for obtaining property by false pretenses or false repre-
sentations, willful and malicious injuries, alimony, support of wife or child,
seduction, criminal conversation, debts not scheduled in time for proof and
allowance, or debts created by fraud, embezzlement, misappropriation, or
defalcation while acting as an officer or in any fiduciary capacity.
The claims provable against a bankrupt include judgments, open accounts
and contracts, and instruments in writing, whether yet payable or not, such
as promissory notes. Claims that must be enforced in tort actions are not
provable unless already reduced to judgment, in which case the judgment is
provable.
REVIEW QUESTIONS AND PROBLEMS
Section 32. Who are liable on contracts? What exception to this rule
is there? How may a third person render himself liable by interfering with a
contract ? What is a boycott ?
33. May a third person (X) sue upon a contract made by A and B ? Under
what circumstances ? May a person not named in the contract between A and
B sue upon it ? When ?
REVIEW QUESTIONS AND PROBLEMS 59
Problem i. B engages A to make an abstract of B's title to real property.
A negligently fails to note on the abstract a recorded mortgage which is a lien
on the lands. B wishes to borrow money of X upon mortgage, and gives him
the abstract which shows the land clear of encumbrances. X loans the money
and takes a mortgage. He then discovers the prior mortgage. The land is
insufficient in value to pay both mortgages, and X suffers loss. He sues A for
damages. Can he recover?
34. Why can a person not assign his liabilities ? What rights under a
contract can one assign? What rights can he not assign? What does the
assignee get?
Problem 2. B contracted to sell to X 1 0,000 tons of ore at the rate of
50 tons a day, to become the property of X when delivered. After delivery
the ore was to be sampled and assayed and the price fixed by the daily market
quotation. X assigned the contract to C. B refused to deliver to C, who sues
B for damages. Is B liable?
Problem j. B contracted to make certain articles for X, to be used by him
in his business and to be paid for when delivered. X sold his business to C
and assigned this contract to C. B refused to supply the articles to C, who
sues B for damages. Is B liable ?
Problem 4. B contracts to sing at X's theater. X sells the theater to C
and assigns B's contract to C. B refuses to sing, and C sues B for breach
of contract. Is B liable?
35. Distinguish assignability from negotiability. To what contracts does
the latter apply ?
36. What effect does the death of a party have upon a contract? What
contract obligations do not survive death? What is the effect of the bank-
ruptcy of a party to a contract? At common law what was the effect of
marriage upon a woman's contracts? How is this changed by statutes?
37. I low may parties discharge their contracts by agreement ? Does a bilat-
eral contract need a new consideration for mutual discharge ? Does a unilateral
contract? Give an example of substituted contract and of a contract containing
provisions for a discharge. What is discharge by performance ? What is the
effect of tender of performance ? What is legal-tender money ? What is the effect
of taking a debtor's check? What is the doctrine of substantial performance?
What is the effect of promising to perform to the satisfaction of another?
Problem 5. C sold B a horse on condition that B might use it and, if he
did not like it, might return it. B used the horse so badly that it was injured.
l; then offend to return it, but C refused to receive it and sued for the price.
Can he recover ?
38. Effect of impossibility existing when contract is made? existing and
not known? arising subsequently? What three exceptions to the general rule
are then .lain and illustrate each.
6o DISCHARGE OF CONTRACTS Lch.iii
Problem 6. B agreed to sell and deliver to C 607 particular bales of cotton
marked and identified. B delivered 4<>o bales, when the remaining 147 bales
were destroyed by fire without fault of either party. C sues B for breach of
contract in not delivering the 147 bales. Is B liable?
Problem ~. I'> engages C as a farm servant. 13 dies. B's executor refuses
to retain C on the farm. C sues the executor for breach of B'b contract. May
he recover ?
39. When will breach by one party discharge the other? What is an
anticipatory breach, and what is its effect? When will breach by one not
discharge the other? What are divisible contracts? What are independent
promises? Effect of breach of warranty?
Problem S. B bought a quantity of iron of C in January, 1880, to be de-
livered and paid for on July 15, 1880. On June 12, 1880, B notified C that
he would not receive or pay for the iron. C sold the iron elsewhere and sued
B at once for damages without waiting until July 1 5. May he recover?
Problem g. B engaged C to clean and repair certain pictures at a specified
price for each. After C had begun work, B countermanded the order, but C per-
sisted in finishing the work and sued B for the full contract price. Can he recover?
Problem 10. B buys C's farm for #3000 on these terms : $500 down ;
51000 in three months; #1500 in six months; the deed to be delivered to
C at the end of six months, (a) C sues for the #1000 at the end of three
months, (b) C sues for the $1500 at the end of six months. In each case
B defends on the ground that C has not delivered the deed. Result?
40. If A breaks his contract with B, state B's rights and remedies. What
is specific performance and by what court granted? What is the Statute of
Limitations? How may a debt barred by that statute be revived?
Problem 11. B sells C 10,000 bushels of potatoes at 50 cents a bushel,
to be delivered in quantities of 500 bushels. B delivers 2000 bushels, when
C refuses to receive any more. Assume potatoes to be worth at the time of
breach 60 cents a bushel ; how much may B recover of C in case he sues C
for breach of the contract? How much may he recover if he disregards the
express contract and sues for the value of the potatoes actually delivered?
Problem 12. If in the above problem the market price of potatoes at the
time C commits the breach is 40 cents a bushel, what will be the most advan-
tageous remedy for B to pursue?
41. What was the object of the first insolvency laws? How extended?
42. What were bankruptcy laws and for whose benefit were they enacted?
How extended ?
43. What is now the distinction between insolvency laws and bankruptcy
laws? Are bankruptcy laws in force by state legislation? Are insolvency laws?
44. When have national bankruptcy laws been in force? How long has the
present one been in force? Give some of its provisions.
PART II. PARTICULAR CONTRACTS
CONCERNING GOODS
1 CHAPTER IV
SALES OF GOODS
I. The Contract
45. Definition and analysis. The sale of goods is now regulated
in many states l by the Uniform Sales Act. This statute was pre-
pared by the Conference of Commissioners on Uniform State
Laws. It sets forth the rights and duties of seller and buyer in
contracts relating to the sale of goods, and, while changing the
law in some states in some respects, it in the main embodies the
previously existing common-law views. A contract of sale is a con-
tract whereby the seller transfers or agrees to transfer the property
in goods to the buyer for a money consideration called the price.
Where the result of the contract is to transfer the title to the goods
to the buyer, there is strictly a sale ; but where the title is to be trans-
ferred at some later time, there is only an agreement to sell. The
agreement to sell becomes a sale when the title is in fact transferred.
Examples: i. " I will sell you my horse for $100." " 1 accept." This is
a sale. The title passes at once. If the horse dies, the loss falls on the buyer,
even though the horse had not yet been delivered.
2. " I will sell you my coll for Sioo when he is a year old." " I accept."
This is an agreement to sell. The title remains with the seller until the colt is a
year old. It then passes to the buyer and the agreement to sell becomes a sale.
3. The colt dies before he is a year old, without fault of either party. The
contract is discharged.
i. // is a contract. This implies all the elements heretofore
discussed, namely, agreement, competent parties, sufficient con-
sideration, in some cases a particular form, legality, and real
assent. These need not be again discussed at this point, but
1 Alaska, Arizona, Connecticut, Idaho, Illinois. Iowa, Maryland, Massai hu
Mil big in.Minnetota, Mi ouri, Nevada, Newjei ley, New York, North Dakota, i >hio,
' tregon, Pennsylvania, Rhode [aland, Tenne isee, Utah, Wisconsin, and Wyoming.
61
62 SALES OF GOODS [Ck. IV
the nature of the consideration (money) and the form (Statute
of Frauds) will call for notice under another head. It is also
important to note that where necessaries are sold to an infant,
or minor, or to a person under mental incapacity, as a lunatic,
he must pay a reasonable price therefor. What are necessaries
depends upon the social and financial condition of the infant or
lunatic, and upon his actual needs at the time of the sale (see
sects. 15 and 16 atite).
2. Whereby the seller transfers or agrees to transfer. 11 the
seller transfers the property in the goods, the sale is said to
be executed ; the seller's title is divested ; the buyer's title is
vested. If the seller merely agrees to transfer the property
in the goods, the sale is said to be executory ; the seller's title
is not disturbed ; the buyer has only a right of action under
the contract, and he has not any title in the goods. It is one
of the important questions - in the law of sales as to when the
title passes, that is, whether the sale is executed or executory.
This will be discussed hereafter. It should be observed that
the contract may be executory while the sale is executed ; that
is, the agreement to pass title is executed while the rest of the
agreements are executory.
Examples : 4. " I will sell you my horse for $100 and deliver him to you
to-morrow at your farm, you to pay the money at that time." " I accept."
This is an executed sale, that is, the title passes at once to the buyer; but
it is still an executory contract, that is, each party has still something to do
in the way of performance.
5. If the seller and the buyer agree as above, but the seller also agrees
to shoe the horse before delivery, the title does not pass until the horse is
shod. This is an executory sale and an executory contract.
3. Property in the goods. By the term " goods " is meant, gen-
erally, every kind of personal property, except money and choses
in action. Examples of goods are corporeal movable property,
like a horse or a bushel of wheat ; incorporeal property, like a
patent right or a trade-mark. By property is meant the owner-
ship of the goods or the general title to the goods. In order to
pass this property to the buyer, it is necessary that the seller
should have it, for the general rule in sales is that "a buyer
acquires no better title to goods than the seller had." Three
important exceptions to this rule may be noted.
§45] THE CONTRACT 63
a. In the negotiation of negotiable instruments the transferor may
give a better title than he has himself. This is not technically a sale.
b. By the Factors Acts it is provided that a factor or com-
mission merchant who is intrusted by the owner with goods or
documents of title representing goods, under conditions indicating
apparent authority to sell, may sell or otherwise dispose of them
and give good title as if he were the true owner of the goods
or documents or had authority from the true owner.
c. If the buyer leaves the seller in possession of the goods,
or of the documents of title to the goods, and the seller resells
and delivers them to another innocent purchaser, many courts
hold that the latter may retain them as against the first buyer,
since the first buyer has made it possible for the seller to com-
mit the fraud. So, if the true owner invests another person
with the indicia of ownership, and the latter sells to an inno-
cent purchaser for value, the true owner will be estopped to
set up his title against the innocent purchaser.
But if one sells and delivers goods to another, retaining title
in himself as security for the purchase money, and the buyer
resells them to an innocent purchaser for value, the latter gets
at common law no title against the first seller, who retained the
title. This has led to such hardship upon innocent purchasers
that statutes now generally provide that such conditional sales
shall be void as against innocent purchasers from the vendee,
unless they are in writing and recorded in some public office.
The retention of title is merely a form of security, like a chattel
mortgage, and chattel mortgages are not valid against innocent
purchasers of the mortgaged chattels unless duly recorded.
When the seller has been induced by fraud of the buyer to
sell his goods and part with the possession, he may rescind the
contract and recover the goods. But if, before he does so, the
buyer resells them to an innocent purchaser for value, the latter
gets a title good against the first seller.
Who is " a purchaser in good faith and for value " ? First, one
who purchases without notice of his vendor's defective title, or of
facts which should put him upon inquiry concerning the title ; and,
second, one who also pays a valuable consideration. A promise
to pay is not sufficient, since, if the true owner recovers the
64 SALES OF GOODS [Ch. IV
goods, this purchaser will never be obliged to pay his vendor.
On the question of whether taking the goods in payment of an
antecedent debt owing him from his vendor makes the buyer a
purchaser tor value, the courts differ. Some hold it does not,
because if the buyer has to give up the goods the debt is restored
ami he is in no worse position than he was before ; others hold
that it does, because the buyer has been " lulled into security " and
may thereby lose the debt which he otherwise would have col-
lected. There is the same difference of opinion where the buyer
takes the goods from his vendor as collateral security (pledge) for
a preexisting debt. It is generally held that an attaching creditor
or an assignee in bankruptcy is not a purchaser for value.
Examples : 6. B sells his horse to C, and C allows B to retain possession.
B then sells and delivers the horse to D, who does not know of the previous
sale. D may retain the horse as against C, for the latter by leaving B in
possession made it possible to commit the fraud, and C must suffer the loss
rather than D.
7. B owns a wagon. He rents it to C, who paints on it, " C, Piano Mover,"
and uses it in his business. C sells the wagon to D, who believes C to be the
owner. B cannot reclaim it from D. He has invested C with the indicia of
ownership. But if B had merely rented the wagon without authorizing C to
put his name on it, the purchaser would have obtained no title as against B.
8. B sells and delivers a piano to C, but by the contract retains title until
it is fully paid for. C sells it to D for value, D supposing C to be the owner.
B brings an action to recover it from D. B will recover unless some statute
changes the rule of the common law (in a very few states the holding is for
D without the aid of statute); but D gets whatever rights C had, and, by
paying what the latter still owes, may acquire title, unless C has already by
default forfeited his rights.
9. B sells and delivers buggies to C, a retail dealer in buggies, but
retains title in the buggies and provides that the proceeds of sales by C
shall belong to B so far as necessary to pay B. C sells his whole business
and stock to D, including these buggies, and B brings an action against
D to recover them. It is held that B cannot recover, because he has
authorized C to sell. There are two inconsistent provisions, — that B shall
have title, and that C shall sell and give good title. The latter must prevail
as to an innocent purchaser from C.
10. B sells goods to C, who gives B in payment a bill of exchange accepted
by X. It turns out that the bill is fictitious, no such person as X being in
existence. C resells and delivers the goods to D, and B then seeks to recover
the goods from D. He cannot do so. B has a right to rescind the contract
with C for fraud and recover the goods while in C's hands ; but he cannot
recover them from D, who has purchased in good faith from C.
Bill of Sale
linoto all jHcn ftp tijcse presents;,
That..?.!..?^^^? 1 .^..^??. 1 .?.?.-...?^.*???..?.?.^. .?.?. Lockport, Niagara County, New York,
m . of the first part, for and in consideration of the sum
of.?.?. 1 ? Dollars (#?.:.9.9.— .), lawful money of the United States,
to i° e . in hand paid, at or before the ensealing and delivery of these
presents, by..^.?. sepll ... I ? udley ' of the s a| ne place,
of the second part, the receipt whereof is hereby acknowledged, have bar-
gained and sold, and by these presents do grant and convey unto the said
party of the second part, ft A 3 . executors, administrators and assigns,
the twelfth edition 1...9.C ...?.?J}*.'.? .."Commentaries on American Law," edited by
0. W. Holmes, Jr.
Co Ipal)C anB tO jpOlU the same unto the said party of the second part,
ftA 8 executors, administrators and assigns forever. And J.
do covenant to and with the said party of the second part that.-:— vL^.rrr the
owner and ha ve the right to sell and transfer the said property, and will defend
the same against any person or persons whomsoever claiming the same.
3fn WittlC$$ 2#f)CrC0f,— I—/,* ve hereunto set— ..«»*— .
hand and seal the 88 . c .? n . d day of M ay in the year One thou-
sand nine hundred and 8 .A?.* e . e . r ?
Jn presence of /fa^ ((U { (j' ( ( j / g , f=\
/fenvy LaXAvofo \—ff
.[L.S.]
&>tate of Jfirto Rorfc,
County c£.....?**R»™
City f Lockport
>ss.
On this 8 . 8 . c P.P. d . day of May in the year One thousand nine
hundred and .. a \ * t. e . en before me, the subscriber, personally appeared
. : ?A . c ft ard . .h\Y.y " a to me personally known to be the same
person di ■-' rili<;d in and who executed the foregoing instrument, and he :
acknowledged to me that he executed the same.
r notary • s "> j> - \ oe
I SEAL J Notary Public for Niagara County, New York.
"5
66 SALES OF GOODS [Ch. IV
11. B is induced by fraud to sell goods to C, who then transfers them to
D in payment of a prior debt owing by C to 1 >. 1> rescinds the contract with
t and seeks to recover the goods from 1). In New York H may recover, as
it is held that I) is not a purchaser for value. In Kngland and under the Uni-
form Saks Act generally D is held to be a purchaser for value and B cannot
recover the goods.
4. For a money consideration called the price. A sale differs
from a baiter in that in a sale the consideration must be in money,
while in a barter it may be other goods, labor, or the like. It is'
not necessary that the price should be fixed by the contract. It is
enough if it is ascertainable, and it may be ascertained by the ordi-
nary market price or left to some third person to fix or determine.
5. Bill of sale. A bill of sale is a formal document, corre-
sponding to a deed of real property, whereby the seller transfers
to the buyer the title to specified goods and (usually) warrants
the title. It is used in sales of any considerable amount, but may
be used in any sale.
46. Statute of Frauds. The seventeenth section of the Statute
of Frauds provides that contracts for the sale of goods of the value
of ^10 ($50) or more must be evidenced either (1) by the ac-
ceptance and receipt of the goods or part of them, or (2) by the
payment of some part of the purchase price, or (3) by some note
or memorandum in writing signed by the party to be charged or
by his lawful agent (see sect. 22 ante).
1 . What are goods ? The English statute uses the phrase
" goods, wares, or merchandise." Under this it was held that the
sale of choses in action (that is, shares of stock, contract claims,
etc.) need not comply with the statute, since they were not "goods,
wares, or merchandise." The holding in the United States has
been generally to the contrary. In many states the statute now
expressly names "choses in action," and in many the term "per-
sonal property " is substituted.
2. Distinction between contract of sale and contract for work
and labor. It is sometimes difficult to tell whether a contract is
one of sale or one for work and labor. If the former, it must
satisfy the statute ; if the latter, it is not within the statute at all.
Example 1. A goes to B's carriage factory and orders B to make a car-
riage according to a certain description, for which A agrees to pay $250.
When it is finished, A refuses to take it, and pleads the Statute of Frauds. Is
§46] THE CONTRACT 6?
this a contract of sale? If so, B cannot recover against A, because • there has
been no receipt of goods, no part payment, and no note or memorandum in
writing. Or is it a contract for work and labor? If so, B may recover against
A because such a contract is not mentioned in the Statute of Frauds, and is
therefore good however made or evidenced. There are two different rules that
have been applied to solve this problem, (a) The English rule is that if the
contract results in the transfer of title to a chattel, it is a sale. Under this rule
the contract specified is a sale and the statute is a good defense, (b) The
general American rule and the rule under the Uniform Sales Act is that if
the article is such as the vendor, in the ordinary course of his business, manu-
factures for the general market, the contract is one of sale •, but if it is made
to a special order for a special purchaser, and not for the general market, the
contract is for work and labor. Under this rule the contract specified would
be for work and labor, and the statute would not be a defense.
The English rule looks to the time of performance. The Massachusetts, or
American, rule looks to the nature of the contract itself.
3. Distinctio7i between personalty and realty. It is also some-
times difficult to tell whether articles attached to lands or build-
ings are personal property or real property ; for example, crops,
trees, ice, fixtures, etc. In general, crops raised annually by labor
are treated as personalty, while trees, perennial crops, and the
like are treated as interests in land. Mineral products generally
are realty, but ice has been held to be personalty. Under the
Uniform Sales Act a sale of anything attached to or forming a
part of land, which is to be severed from the land at any time,
is a sale of goods. If the article sold is treated as realty, then,
whatever its value there must be a writing. If it is treated as
personalty, there need be no formality unless it is of the value of
$50, and then a writing may be dispensed with if there is part
acceptance and receipt or part payment (see sects. 165, 166 post).
Examples: 2. B sold C by parol a growing crop of five acres of turnips
for . ; 25, no present payment. B gathered the turnips when ripe and C
claimed them. B pleads the Statute of Frauds. The statute does not apply.
The turnips while growing, as well as when red, are personalty, and not
an interest in lands. They arc an annual crop, known to the law as fructus
industriales.
3. ii sold a growing crop Ol ha) to I I ■■■ | -y>o. with no payment
down. B gathered the hay. C claims it. B pleads the Statute of Frauds.
Uniform Sales Act the contract is one for the sale of goods, since
the hay is to 1 red under the contract, and. as there is no part payment,
acceptance and receipt, or memorandum, the Statute of Frauds is a defense.
6S SAl.KS OK GOODS [CK. IV
4. Acceptance and receipt. One way of satisfying the Statute
of Frauds is by an acceptance and receipt of the goods or a part
of them. Both acceptance and receipt are necessary to satisfy
the statute, although not necessary to pass title. 1 Acceptance is
signifying that the goods are in conformity with the contract.
Receipt is taking the goods actually or constructively into the
custody of the buyer.
Examples: 4. B buys a quantity of wheat of C, who takes a load to B's
warehouse, where it is inspected by B and accepted. B afterwards refuses to
take the rest, and when sued, pleads the statute. His acceptance and receipt
of one load satisfies the statute, and C may prove the contract for the whole.
5. Acceptance may take place without receipt. Thus, B inspects the wheat
in C's granary and expresses his assent to becoming the owner. If this wheat
be then delivered to a common carrier, as a railway company, for transporta-
tion to B by his direction, there is both acceptance and receipt, because the
carrier is regarded as agent of the buyer to receive, although not to accept.
5. Part payment. If one, instead of accepting and receiving
the goods, pays any part of the purchase money, this also satisfies
the statute, and he is bound by the contract. Generally payment
at any time is sufficient.
6. The note or memorandum. There need not be a full and
detailed written contract. It is enough if it contain the names of
the parties, the subject matter of the sale, and the agreed price.
It may be printed or written, and may be in pencil. It is best
that both parties should sign it, for it is uncertain which may
seek to avoid the performance. But it is enough that the one
who is sought to be charged has signed.
Example 6. B buys of C 20,000 feet of lumber at $10 a thousand feet.
B signs the memorandum, but C does not. C may maintain an action against
B in case he refuses to take the lumber, but B could not maintain an action
against C in case he refused to deliver it. If both had signed, then each could
have enforced the contract against the other.
An authorized agent may sign for either party. An auctioneer
is the agent of both buyer and seller for the purpose of making
the memorandum. The note or memorandum may be contained
in two or more papers or letters constituting a connected series,
ft may be made at any time, and need not be made at the time
the contract is formed.
1 Upon the requirements for passing title, see sects. 47-49.
§47] THE TITLE 69
Form of Contract of Sale
This Agreement, made this fifth day of September, 191 6, between
John Doe, of Ithaca, N.Y., and Richard Roe, of the same place,
WITNESSETH, that the said John Doe, in consideration of the agreement
hereinafter contained, to be performed by the said Richard Roe, agrees to sell
and deliver to the said Richard Roe, at the farm of the said John Doe, five
hundred bushels of potatoes of good marketable quality, on the twentieth day
of October. 191 6. And the said Richard Roe, in consideration thereof, agrees
to pay to the said John Doe the sum of sixty cents a bushel for the said
potatoes, immediately upon the completion of the delivery thereof.
In WITNESS Whereof, the said parties have affixed hereto their respective
signatures the day and year first above written.
John Doe
Richard Roe
A much simpler form would satisfy the Statute of Frauds, which requires
only a note or memorandum. For example :
John Doe has sold to Richard Roe five hundred bushels of potatoes at
sixty cents a bushel, to be delivered Oct. 20, 191 6.
John Doe
Ithaca, N.Y., Sept. 5, 1916. Richard Roe
If only Doe signed, he would be bound but Roe would not, and vice versa.
II. The Title
47. When does title pass? It is important to ascertain the
time when title passes from the seller to the buyer. From that
moment the risk of loss is on the buyer ; he is also entitled to
any gain or increase. In case of his death his executor or admin-
istrator is entitled to the goods ; during his life his creditors may
attach the goods. He alone has the full power to sell them and
give a good title to the buyer ; he may maintain actions of re-
plevin or trover in case of conversion or unlawful detainer by the
seller or any other person. On the other hand, the seller, in case
title passes to the buyer, may maintain an action for the price of
the goods ; whereas, if title has not passed, the seller's action
would be for damages for breach of the contract to receive and
pay for the goods.
In determining the question as to when title passes, it is nec-
essary to classify goods into (1) specific or ascertained goods,
that is, goods upon which the minds of the parties meet, and
jo SALES OF GOODS [Ch. IV
(2) nonspecific or unascertained goods, that is, goods described but
not actually chosen or specifically indicated.
Example. y\ < 1> purchases all the wheat in C's granary; these goods are
specific. (-) 1> purchases of C one thousand bushels of wheat (no particular
wheat indicated); these goods are unascertained. Title to the wheat in the
granary would ordinarily pass to 13 as soon as the contract is made, because de-
livery is not necessary to pass title, while title to the one thousand bushels would
not pass until the goods are ascertained and appropriated by mutual consent
48. Specific or ascertained goods. The general and particular
rules for determining when title passes in the sale of specific
goods are as follows :
1. General rule. Where there is a contract for the sale of
specific or ascertained goods, the property in the goods is trans-
ferred to the buyer at such time as the parties to the contract in-
tend it to be transferred. It thus appears that the intention of
the parties is the controlling test. If this is expressed, there can
be no doubt ; but it is not ordinarily expressed, and the law has
therefore certain rules for ascertaining it. In fixing these rules
the law looks to the terms of the contract, the conduct of the
parties, and all the circumstances of the case.
2. Particular rules. Unless a different intent appears, the fol-
lowing rules are applied for the purpose of determining the time
at which the title to the goods passes to the buyer.
Rule i. Where there is an unconditional contract for the
sale of specific goods in a deliverable state, the title to the goods
passes to the buyer when the contract is made, even though pay-
ment or delivery, or both, may be postponed to a future time.
Example 1. B purchases C's carriage for $100, and it is agreed that the
carriage shall be delivered and the price paid one week later. The next day
the carriage burns up. B must pay the price, because the carriage is his under
this rule, as much so as if it had actually been delivered to him and he had
paid for it. (A very few states hold that a sale for cash is conditional, and
that the title does not pass until the price is paid or payment waived. But the
better holding is that the title passes and the seller may retain possession
until the price is paid.)
Rule 2. Where there is a contract for the sale of 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.
§4S] THE TITLE J\
Example 2. B purchases C's carriage, and C agrees to have the carriage
painted and to deliver it one week later. The next day, and before the carriage
is painted, it burns up. B is not bound to pay the price. The loss falls upon
C, because the title does not pass from him to B until the carriage is painted.
The loss falls upon him who has the title. After the carriage is painted, the
title passes to B even before delivery. In England he must have notice that
it is completed, but not in the United States.
Rule 3. Where there is a contract for the sale of goods in a
deliverable state, but the seller is bound to weigh, measure, test,
or do some other act or thing with reference to the goods for the
purpose of ascertaining the price, under the prevailing rule the
title passes, notwithstanding that such act or thing is not done.
Example 3. B purchases all the wheat in C's granary at 80 cents a bushel,
and C agrees to measure the wheat in order to ascertain the sum B is to pay.
The title passes to B on the making of the contract, notwithstanding that C
has not measured the wheat. Should it be destroyed in the meantime, the
loss would be B's and not C's.
Rule 4. Where goods are sold and delivered to the buyer
with an option to return them, the title passes to the buyer subject
to be revested in the seller by a return within the time specified,
or, if no time be specified, within a reasonable time. This is a
case of a sale upon condition subsequent, that is, a right to return
or resell to the original seller. It differs from the next case in
that the condition there is a condition precedent.
Example 4. B purchases C's mowing machine, with the agreement that
if it docs not suit him, C will take it back at the price B paid or agreed to pay.
This is a purchase by B and a contract to give B an option to resell to C.
The title is in B until he exercises this option.
Rule 5. Where goods are delivered to the buyer "on ap-
proval," the title remains in the seller until the buyer signifies his
approval. Such approval may be signified expressly or impliedly.
If the buyer retains the goods beyond the time fixed, or, if no
time be fixed, beyond a reasonable time-, he will be regarded as
having signified his approval, and title will then vest in him. The
sale of the goods by him would be an approval. It is a matter of
construction having regard to all the terms of the contract whether
the transaction is "on sale or return" or "on approval."
imple ;, B takes C's mowing machine "on three days' trial and
approval." The title is in C until the three days have elap
SALES OF GOODS [Ch. IV
R.ULE 6. Where there is a sale of goods in a deliverable con-
dition, the seller may by the terms of the contract reserve the
title in himself until the price is paid. This right maybe reserved
notwithstanding actual delivery to the buyer.
Examples : 6. B sells C household goods, retaining title until the goods are
paid for. Title, as security at least, is still in B. It is generally held that after
C has possession the risk as to loss falls upon him, since B's title is in the
nature of a security for payment only. It is also the law in many states that
in order to protect himself against an innocent purchaser of the same goods
from C, the seller must file the written contract in some public office.
7. D sells goods to C to be shipped. D, in shipping the goods, takes the
bill of lading (freight receipt) in his own name or deliverable to his own order.
Title, as security at least, is still in D. It is often held that title for all other
purposes passes to C, and that D merely retains possession or control as
security for payment. Such would be the case if title passed to C at the time
of the sale. But if the sale was executory, then D's conduct showed an intent
that title should not pass until some future time.
8. F sells goods to G, takes the bill of lading in G's name, attaches it to a
bill of exchange (draft) drawn upon G for the price, and forwards the draft
and bill of lading. G is bound to accept or pay the draft, or return the bill of
lading. If he retains the bill of lading without accepting the draft, he acquires
no added right in the goods thereby ; but since he is intrusted by F with the
bill of lading, he could, by a sale to an innocent purchaser, confer a good title
as against F. The safe course is to forward the bill of lading and draft to a
third party, as a bank, with instructions to deliver the bill of lading to G only
in case he accepts or pays the draft.
49. Unascertained goods. The following rules govern the courts
in determining at what time the title in unascertained goods passes
to the buyer under a contract of sale.
Rule i. Where there is a contract for the sale of described
but unascertained goods, no property in the goods is transferred
to the buyer until the described goods are ascertained and appro-
priated to the contract with the consent of both parties.
Exceptions : (a) There may be a contract of sale of an undivided share of
specific goods, in which case the buyer becomes a tenant in common with the
seller or owner of the remaining undivided portion. For example, B purchases
one half the wheat in C's granary. Title to an undivided half of the wheat
passes at once to B. (&) There may be a sale of a definite measure to be taken
out of a definite mass of indefinite measure. This case differs from the first
in that the sale is not of an aliquot portion, as one half, but of a definite
weight or measure out of a specific mass of unknown weight or measure, as
§49] THE TITLE 73
6000 bushels of wheat out of all the wheat in a bin, the total in the bin being
unknown. The buyer becomes owner of that undivided portion represented by
the ratio of 6000 to the total ; if the total be 9000, then the buyer may take
title to an undivided two thirds from the time of the making of the contract.
Two remarks are to be made upon this exception. First, it applies only to
what are called fungible goods, that is, goods like wheat, coal, and the like,
which do not have to be dealt with in specie but by weight or measure, and
not to goods having individual characteristics, like horses. Second, even as to
fungible goods the exception has not been everywhere accepted, many juris-
dictions insisting that title cannot pass in such cases until the 6000 bushels
have been separated from the mass.
Rule 2. Where there is a contract for the sale of unascer-
tained goods 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 passes to
the buyer at the time of such appropriation. Such assent may be
expressed or implied and may be given either before or after the
appropriation is made. The appropriation must be final and un-
conditional. If the seller may substitute other goods, it is not final.
Examples : 1 . B orders of C 6000 bushels of wheat of a specific descrip-
tion, the same to be measured into a freight car on the siding at C's warehouse.
C measures 6000 bushels of the specified description into the car. The title
passes to B as soon as the appropriation is thus completed.
2. B buys goods of C from sample. C sets aside in his store goods cor-
responding with the sample, and marks them with B's name. The goods are
burned and C sues B for the price. If the appropriation was made by C with
B's consent, the title passed and B is liable. But if the appropriation was not
final, — if B had not consented to this form of appropriation, — the title was
still in C, and B is not liable. This involves questions of fact to be determined
in each case.
RULE 3. An unconditional delivery of the goods to a carrier,
as directed by the buyer, or as warranted by custom and usage,
is always depmed a sufficient appropriation to transfer the title
to the buyer ; but a delivery by which a bill of lading is made to
the order of the seller, or is retained by the seller, or is attached
to a bill of exchange drawn upon the buyer, may not pass title.
This is explained in Rule 6, sect. 4H.
Example 3. I', orders of C 6000 bushels <>f wheat of a specified des< liption.
C delivers to a railway carrier 6000 bushels "I wheat of this des< ription billed
74 SALES OF GOODS [Ch. IV
to B, and sends B the bill of lading. The title passes to 15 as soon as the
delivery to the carrier is complete. Bui if the bill of lading reads "deliverable
to the order ol C," the title will not pass, because C has thus reserved it in
himself. Moreover, if the contract requires the seller to deliver the goods
to the buyer al a particular place, the property will not pass until the goods
have reached the place agreed upon. Thus, B orders of C the wheat as above,
" to be delivered free of charge at my warehouse in the city of X." The title
does not pass until the wheat is in the specified warehouse.
Rule 4. If goods are shipped to the buyer C.O.D. (cash on
delivery), under the Uniform Sales Act and prevailing American
rule title passes to the buyer at the time of delivery to the carrier.
The seller is deemed to reserve by the C.O.D. clause only the
right to possession until payment.
50. Who has the risk? Unless otherwise agreed, the goods
remain at the seller's risk until the title passes to the buyer. As
soon as the title passes to the buyer the goods are at the buyer's
risk, whether he actually has possession or not. Risk follows
title is the rule that prevails unless the parties stipulate to the
contrary. In determining who has the title the rules given above
are to be applied in the absence of an express stipulation.
Except ion. If the seller delivers the goods to the buyer, but by the terms
of the sale retains title as security for the purchase price, the goods are at the
risk of the buyer. For example, B purchases household goods of C upon in-
stallment payments, and it is agreed, that the title to the goods shall remain in
C until they are actually paid for. B has the goods in his house, where they
are accidentally destroyed by fire. B must pay for the goods ; the risk is with
him, although for security the title is with C. It is the same as if title had
passed to B and he had then given C a chattel mortgage on the goods as
security.
He who has title also has the right to any gain or increase
derived from the article. He who bears the risk and burden is
also entitled to the benefits.
Example. C purchases B's flock of sheep and leaves them in B's posses-
sion, delivery and payment to be later. B shears the wool. C sues B for its
value. C may recover. The title passed to him and the wool is his. So if
lambs are born of these sheep, they belong to C. On the other hand, if any of
the sheep die, the loss falls on C.
§§51,52] PERFORMANCE 75
III. Performance
51. Duties of the seller. The duties of the seller in perform-
ance of his contract may be briefly enumerated as follows :
i. It is the duty of the seller to deliver the goods in accord-
ance with the terms of the contract. Whether he is to send them
or the buyer is to call for them will depend upon the contract.
If nothing appears in this respect, the place of delivery is ordi-
narily the seller's place of business or residence or the place
where the goods are at the time of the sale. If no time is fixed,
a reasonable time is understood.
2. It is the duty of the seller to deliver the quantity specified.
If he delivers less, the buyer may reject them ; if he delivers
more, the buyer may take what he contracted for and reject the
rest, or he may reject the whole. The buyer is not bound to accept
delivery in installments, unless he has agreed to do so.
3. It is the duty of the seller to deliver the quality specified.
The buyer must be allowed a reasonable opportunity to inspect
the goods, if he did not inspect them when he purchased them ;
and he is not deemed to have accepted them until he has had
such opportunity of examining them in order to see if they con-
form to the contract. He is deemed to have accepted them when
he intimates that fact to the seller, or exercises ownership over
them, or retains them without dissent after the lapse of a reasonable
time. If the buyer rightfully rejects the goods, he is not bound to
return them to the seller, but must permit the seller to take them.
4. It is the duty of the seller to confer upon the buyer a good
title to the goods.
5. It is the duty of the seller to make good all representations
and warranties expressed or implied in the contract of sale. This
is more fully explained under Warranties post.
52. Duties of the buyer. The duties of the buyer, after a
contract of sale and purchase is made, are as follows:
1. It is the dutv of the buyer to accept the goods. If he
refuses tO do so, the seller may sue for the price \\ title has
passed to the buyer, or if, although the title has nol passed, the
goorls are nol readily resaleable; <>r the seller may sue for
damages for failure to accept.
6 SALES OF GOODS h'u. IV
2. It is the duty (if the buyer to pay for the goods. Unless
otherwise agreed, delivery of the goods and payment of the price
are concurrent conditions. If the price is agreed upon, that must
be paid. If no price is agreed upon, a reasonable price, namely,
the market price, is understood.
IV. Warranties
53. Definition and classification. A warranty is a contract of
indemnity made by a seller of goods in favor of the buyer, to
protect the latter against the failure of one or more terms of the
contract of sale.
A warranty may be either express or implied.
An express warranty is a promise or affirmation by the seller
of a material fact concerning the goods which has a natural
tendency to induce the buyer to purchase them.
An implied warranty is one which arises from the acts and
conduct of the parties, or from custom or usage, or by operation
of law.
Examples : i . B buys goods of C, who assures B (that is, warrants) that
they have fast colors. This is an express warranty. It is not necessary to use
the word "warrant" or "warranty." If the colors run, there is a breach
of the warranty.
2. It turns out that C did not own the goods. There is a breach of the
implied warranty of title which accompanies every sale of personal property.
3. D orders of E a quantity of goods by sample. There is an implied
warranty that the goods when received shall correspond' with the sample.
54. Express warranties. The express warranty is gathered
from the terms of the contract. If the contract be in writing
and unambiguous, the construction is for the court. If the con-
tract be by parol, the construction, unless too clear for any dif-
ference of opinion, is for the jury. If the contract is in writing,
an oral express warranty cannot, save in very exceptional cases,
be added to it. If the seller first makes statements amounting
to warranties, and then declares he will not warrant, there is no
warranty. But his unexpressed intention not to warrant will not
avail him if he uses apt words. It is not his intention, but the
impression reasonably produced upon the mind of the buyer by
his words or conduct, that is the test.
§55] WARRANTIES 77
The presence of an express warranty will not exclude an implied
warranty unless the express warranty be inconsistent with it.
General warranties of " soundness " and the like will not ordi-
narily cover specific defects obvious to the buyer, but they will
cover defects about which a buyer expresses doubt after an ex-
amination. A particular warranty will cover a particular defect if
intended to do so, although the defect may be patent.
Expressions of opinion or " puffs " do not amount to warranties.
Examples : 1. B in selling a horse says, " This horse is sound." There is
visible a large bunch upon the horse's leg. The warranty does not cover this
defect, although it does cover other defects not obvious.
2. A buyer in looking at sheep thinks he has discovered foot rot. The
seller assures him that he is mistaken and warrants the sheep to be sound.
The general warranty covers foot rot.
3. " These sheep will sheer from six to ten pounds of wool a head, and
you can pay for the sheep from the wool in two years " is a mere statement
of opinion, or " puff," and the buyer should not rely upon it. So also the
statement " This is an A No. 1 bond."
55. Implied warranties. The following are the principal implied
warranties that are attached to a contract of sale.
1. Warranty of title. There is an implied warranty by the
seller that he has a right to sell the goods, that the buyer shall
have and enjoy quiet possession of them, and that they shall be
free from any charge or encumbrance in favor of any third
person — or, in other words, a warranty of title. If this warranty
is broken and the buyer deprived of the goods, he may recover
the purchase price paid, with interest.
Exceptions. This does not attach, however, to a sale made by a sheriff or
other person who sells under authority of law, nor, in general, to a sale in
which the seller undertakes to transfer only such property as he or the person
he represents may have in the goods; as, for example, a sale by an assignee
in bankruptcy, an administrator or executor, a trustee-, or a mortgagee under a
po lie. Hut it does attach to the ordinary sales in the business world.
2. Sale by description, (a) In the sale of ;:/«<>ds by description
there is an implied warranty that tin ods shall correspond
with tin- description. (b) II the goods are bought by description
from a seller who deals in goods of that description, there is an
implied warranty that tin- shall be of merchantable quality.
;S SALES OF GOODS [Cft. IV
Examples: i. B orders of C "early strap-leaf red-top turnip seed" for
raisin;; turnips for market. C furnishes seed, which B plants. The crop is
late and lit only for cattle. No inspection of the seed by 13 could reveal that
they did not correspond with the description. B has an action against C
for breach of the implied warranty that the seed should correspond with the
description. It is immaterial that C believed that the seed were of the kind
ordered. B may recover as damages the difference between the market value
of the crop raised and the market value of the one he would have raised had
the seed he ordered been furnished.
2. 15 orders ice of C, to be shipped from Maine to Boston. There is an
implied warranty that the ice shall be of merchantable quality ; but if B has
examined the ice before shipment, there is no implied warranty as to any
defect which such examination ought to have revealed.
3. Sale by sample. In a sale by sample there is an implied
warranty (a) that the bulk shall correspond with the sample in
quality, and (b) that the goods shall be free from any defect ren-
dering them unmerchantable which would not be apparent on
reasonable examination of the sample.
Example 3. B ordered of C certain "corkscrew worsted coatings," to
correspond in weight and quality with samples supplied B. The cloth when
made up into coats gave way at the seams, owing to some defect in the manu-
facture. The bulk corresponded with the sample, so there was no breach of
that warranty ; but it was unfit for the purpose to which such material is ordi-
narily put, and this was a breach of the warranty of merchantability. B could
not reasonably discover this defect from the sample, nor indeed from the bulk,
until the cloth was actually made up into garments.
The buyer must be given a reasonable opportunity to compare
the bulk with the sample, and in sales by description he must
have reasonable opportunity for inspection.
There may be in the same sale an implied warranty as to
description and also as to sample. Such was the case in the
example last given. The goods were to be " corkscrew worsted
coatings " and were also to correspond with the sample.
4. Fitness for particular purpose. Where the buyer makes
known to the seller the particular purpose for which such goods
are required, relying upon the seller's skill or judgment, there
is an implied warranty that the goods shall be reasonably fit for
such purpose.
Examples: 4. B orders of C, a carriage maker and repairer, a new pole
for his carriage. The pole breaks, owing to a defect, and the carriage is
§ 56] WARRANTIES 79
damaged. C is liable to B for the damages. There is a breach of the implied
warranty that the pole shall be reasonably fit for the purpose.
5. B orders of C, a manufacturer of cloths, a quantity of " indigo blue
cloth." B is a woolen merchant, but is not known to C to be a tailor. B
makes the cloth up into liveries, and the cloth soon shows defects. There was
no implied warranty that the cloth was fit for that purpose, because the pur-
pose was unknown to the seller. There might be a breach of the implied
warranty of merchantability, but this would depend upon other circumstances.
Had the order been " indigo blue cloth suitable for liveries," there would have
been an implied warranty of fitness.
6 (Exception). A sale of a specified article under its patent or other trade
name does not carry an implied warranty for any particular purpose. An order
for "your Challenge auger outfit for boring wells " is fully complied with when
the " Challenge auger outfit " is furnished. The contract assumes that the
buyer knows what are the character and capacities of this article.
5. Sale of provisions. The above rules apply to the sale of
provisions under the Uniform Sales Act ; but in some jurisdic-
tions there is a special implied warranty in the sale of provisions
for human consumption, namely, that they are wholesome and fit
for food. This is put on the ground of the preservation of health
and life, and is applied even where the buyer sees and inspects
the article before purchasing. Most courts recognizing this war-
ranty at all limit it to the case where the buyer intends to consume
the article and the seller knows this fact ; but some extend it
even to the case of a sale by a wholesaler to a retailer who intends
to resell the article. In no case is the doctrine applied to the
sale of food for animals.
Example 7. A sells meat to B, a retailer, who resells it to C for domestic
use. Under the Uniform Sales Act both A and B would be liable on an
implied warranty of fitness for use as food. Some courts hold that there is an
implied warranty of wholesomeness by B but not by A. If either A or B
Lnrw the meat was unwholesome, he would be liable in deceit for fraudulent
concealment.
56. The rule of caveat emptor. The general rule in the law
of sales is that of caveat emptor^ "let the buyer beware." This
is supposed to have the effect of making men self-reliant and
Cautious, and of decreasing litigation.
The exceptions to the rule are those enumerated under the
head Of implied warranties. In those cases the seller assumes
the risk instead of the buyer, and without any express stipulation.
So SALES OF GOODS [Ch. IV
In all other cases, if the buyer does not wish to assume the
risk, he should exact an express warranty. In the sale of specific
chattels examined by the buyer there is usually no implied war-
ranty except as to title ; but if the character of the article cannot
be ascertained by examination (as in the case of seeds), there is
an implied warranty that the article shall possess the necessary
characteristics of such articles.
57. Remedies for breach of warranty. In discussing the reme-
dies for breach of warranty it is necessary to distinguish between
express warranties and implied warranties.
i. Express warranties. In some American states a buyer to
whom title has passed cannot rescind the sale for breach of an
express warranty. He is confined to an action for damages for
the breach. Under the Uniform Sales Act and in some other
states he may either rescind the sale, that is, return the goods
and recover the price, or he may keep the goods and sue for the
breach of the warranty. The reason given for denying the right
is that the contract of warranty is collateral to the main contract
of sale, and its breach should not affect that contract. If, however,
the warranty is fraudulent, that is, if the seller knew it was false,
the contract may be afterwards rescinded for the fraud.
If the title has not passed to the buyer, he may refuse to
receive the goods upon discovering a breach of the express
warranty.
Examples : I. B sells and delivers timber to C and innocently warrants it
to be sound. C discovers that the timber is unsound, offers to return it, and
demands back the purchase money. He then sues for the purchase money. In
some states he will fail ; he can recover only the difference in value between the
timber as warranted and as it was in fact. Under the Uniform Sales Act he will
succeed, upon returning the timber, in recovering the whole purchase money.
2. B makes the warranty, knowing that the timber is unsound. This is
fraud, and C may rescind and recover the whole purchase price.
3. E sells F a buggy which he innocently warrants to be new and sound,
and agrees to repaint the wheels. F discovers the buggy to be an old one
and unsound. F may refuse to receive it, because the title has not yet passed
to him.
2. Implied Warranties. Under the Uniform Sales Act the
remedies for breach of an implied warranty are the same as those
for breach of an express warranty. In England and a few
§5SJ REMEDIES 8 1
American states the term " condition " is used to indicate an
obligation regarding the goods which is not collateral to the con-
tract of sale but is a vital part of the contract. This obligation
is also sometimes called an implied warranty in these jurisdictions.
For breach of a condition in England and these few American
states the buyer may at his election either (a) rescind the sale
and recover the price or (b) receive and keep the goods and sue
for damages for the breach or, in case the price is unpaid, set up
these damages to diminish the price. In order to rescind, the
buyer must act promptly or within a reasonable time. If the seller
refuses to receive the goods upon a rescission, the buyer may
hold them as bailee for the seller.
Examples : 4. B orders goods of C by description. When the goods
arrive, B discovers that they do not answer the description. He may reject
them or he may take them and sue for damages if he has paid the price, or
deduct the damages from the price if it is yet unpaid.
5. (a) B orders of C a machine for a particular purpose. B sets it up and
finds it unfit for the purpose. B may reject it if he acts with promptness after
such test, or he may keep it and sue for damages for breach of the implied
warranty, (b) So if B orders a chemical, he may use enough of it to determine
whether it answers the description ; and if it does not, he may reject the
remainder without being required to pay for what he has reasonably used in
the test, (c) But if he can determine the quality without using any, he
waives his right to reject the bulk by consuming any portion of it.
6. The damages recoverable upon a breach are all the losses directly and
naturally resulting from it. B orders from the maker, C, a refrigerator suit-
able for keeping dressed poultry. The refrigerator furnished by C is not suit-
able for the purpose, and the poultry spoil. B's damages include the difference
between the value of the refrigerator ordered and the one delivered, and also
the loss incurred by the spoiling of the contents. See also the case of the sale
of the turnip seed, p. 83 ante.
V. ki. mi I'll -
58. Rights of unpaid seller against the goods. Although the
title to the goods may have passed to the buyer, the unpaid seller
is entitled to the following rights :
I. If the seller is still in possession of the goods, he has a
lien on them, or a righl to retain them until the price is paid,
unless he has sold OH unlit and the term of eiedit has nol
expired.
82 SALES OF GOODS [Ch. IV
2. If the seller has shipped the goods and he afterwards
learns of the insolvency of the buyer, he has the right to stop
the goods /;/ transitu before they reach the buyer, and thus
regain possession of them.
3. If the seller has a lien or has stopped the goods in tran-
situ, as above, (a) he may resell the goods in case the buyer
delays an unreasonable time to pay for them, or at once if the
goods are perishable, and if they sell for less than the buyer
agreed to pay may recover from him as damages the difference ;
or (/>) he may rescind the sale and transfer of title, and may
resume the title himself in case the buyer delays an unreasonable
time to pay the price, and may also recover from the buyer as
damages any loss occasioned by the buyer's default.
Seller s lien. The seller's lien exists when he has sold for
cash down ; or when, having sold on credit, the term of credit
has expired before delivery ; or when, having sold on credit, the
buyer becomes insolvent before delivery. He loses his lien by
delivery to the buyer or his agent, or by delivery to a carrier with-
out reserving in the bill of lading the right to possession, or by a
waiver of the lien. He cannot hold the goods for any claim except
the purchase price, nor after valid tender of the purchase price.
Stoppage in transitu. Goods are in transit after delivery to a
carrier and before delivery to the buyer, and may be stopped by
the unpaid seller in case the buyer becomes insolvent. The transit
ends, however, if the carrier consents, after the arrival of the
goods at their destination, to hold them for the buyer, or if the
carrier wrongfully refuses to deliver them to the buyer upon
demand. The unpaid seller exercises his right of stoppage in
transitu by giving reasonable notice to the carrier. 1 It is then
the duty of the carrier to redeliver the goods to the seller, and the
duty of the seller to pay the transportation charges. But if the
carrier has issued a negotiable bill of lading, this must be sur-
rendered or a sufficient bond be given to protect the carrier from
1 To the X.Y. Railroad Co : Circumstances having arisen which give to me
the right of stoppage in transitu, I hereby direct you to hold, subject to my
orders, the goods delivered to you on Dec. 31, 1916, at Ithaca, N.Y., and con-
signed to John Doe, Buffalo, N.Y., and not to deliver the same to the consignee.
Ithaca, N.Y., Jan. 5, 191 -. Richard Roe
§59] REMEDIES 83
any claim arising under it. If, however, such negotiable docu-
ment of title has actually been transferred by way of sale to an
innocent purchaser for value while the goods are in the hands
of the carrier, and before the seller's right has been exercised,
his right of stoppage in transitu is ended. But a sale of the
goods by the buyer, where there is no such documentary title,
will not defeat the seller's right.
Resale. The seller's right of resale is exercised as agent by
operation of law for the buyer. The purchaser at the resale gets
a title good against the original buyer. Notice of the intention
to resell need not necessarily be given to the buyer, but it is
always safer to give it. Notice of the actual time and place of
the resale need never be given.
Rescission. Notice of rescission of the contract and retransfer
of title to the seller, or some overt act showing an intention to
rescind (as, for example, the consumption of the goods by the
seller) is essential.
Examples : 1 . B sold lumber to C and took C's note for thirty days. The
lumber remained in B*s possession. C sold the lumber to D. When D came
for it, B refused to deliver it, because C had become insolvent. B bas asserted
a valid right. Although a sale on credit waives a lien, the lien revives if the
buyer becomes insolvent. D got no better right than his vendor C had.
2. B sold tobacco to C, who, unknown to B, was then insolvent. B con-
signed the tobacco to C and sent C a bill of lading. C failed and transferred
the bill of lading to D, his assignee in bankruptcy. B then stopped the goods
in the carrier's hands. D claims them. In this case B will get the goods. An
assignee in bankruptcy is not a purchaser for value, as he parts with nothing.
But if C or D had sold and delivered the bill of lading to E before B stopped
the goods, B's right would have been gone.
3. B sold C a diamond for cash. C would not pay cash on delivery and
l; retained the diamond. Afterwards B sold it to I) for >40 less than C had
agreed to give. B may recover this S40 of C, provided he sold in good faith
according to usage and for the highest price obtainable.
4. In the above ease B sold the diamond for 530 more than C had agreed
ive. C claims this 530. (a) If B sold a of C, he should account to
C for the profits. (6) If 11 res< inded the contrai 1. the diamond bei ame his and
he is entitled to the enhanced price; but of COUTSe he has now suffered no
damage for which he can sui
59. Rights of unpaid seller by way of action for breach of con-
tract. The unpaid seller has the following remedies against the
delinquent buyer:
84 SALES OF GOODS [Ch. IV
i. Action for the price. If the property in the goods has passed
to the buyer, the seller may maintain an action for the price; so
also if by the terms of the contract the price is to be paid before
the property in the goods passes to the buyer. If the goods are
not readily resalable at a reasonable price, the seller, upon tender
of them and refusal of the buyer to accept them, may hold them
as bailee of the buyer and may maintain an action for the price.
2. Action for damages for nonacceptance . If the buyer unrea-
sonably refuses to accept the goods, the seller may maintain an
action against him for damages for nonacceptance. The measure
of damages is the loss to the seller. If there is an available
market, the loss is the difference between the contract price and
the market price.
Examples : i. C sells B a wagon for $50, delivery and payment to be one
week later. Title passes to B. If he refuses to take the wagon, C may sue
and recover the price. Moreover, if B refuses to take the wagon, C may,
according to some- authorities, charge him for the storage and care of it.
2. C agrees to build a wagon for B according to a certain plan and descrip-
tion. When it is completed according to the contract, C tenders it to B and
the latter refuses it. (a) According to a few authorities C's only remedy is
damages for breach of contract, since no title has passed to B and the wagon
is still C's. (b) But under the Uniform Sales Act C may tender the wagon to
B ; title will then pass, and C may sue for the price.
60. Remedies of the buyer. The buyer may be the owner of
the goods or the title may not have passed. His remedies will
be more numerous in the former case than in the latter.
1. Remedies as owner. If the property in the goods has passed
to the buyer, and the seller wrongfully refuses to deliver the goods,
the buyer may treat the seller as having converted them. This
allows the buyer to replevin the goods, thus actually getting pos-
session of them, or to sue in tort for conversion, thus getting
their value in money.
2. Action for damages for breach of contract. If the property
in the goods has not passed to the buyer, and the seller wrong-
fully refuses to deliver the goods, the buyer may maintain an
action for damages for nondelivery. The measure of damages is
the loss resulting naturally to the buyer. If there is a market,
the measure is ordinarily the difference between the contract price
and the market price at the time delivery was due ; these are
§60] REVIEW QUESTIONS AND PROBLEMS 85
called general damages. Damages may be increased by knowledge
communicated to the seller, at the time the contract is made, of
the use to which the buyer intends to put the goods ; these are
called special damages.
Examples : 1. B purchases of C 1000 bushels of wheat at 80 cents a
bushel, to be delivered September 1 . C refuses to deliver on that date, and
wheat is then 90 cents a bushel in the same market. B's damages are 10 cents
per bushel, or Si 00.
2. B orders of C a shaft to replace a broken one in his mill, and notifies
C that the mill must be idle until the shaft is delivered. C agrees to deliver
it by a certain date, and fails to do so. B may recover as special damages the
loss resulting from the idleness of the mill while he is with due diligence pro-
curing another shaft after C's failure to deliver at the appointed time. Without
such notice to the seller, B's damages would be merely the difference between
the price he agreed to pay C for the shaft and the price he is obliged reason-
ably to pay for one elsewhere.
3. B bought goods of C, to be delivered January 15, informing C that he
wished to put his salesmen on the road on that date with the goods. C delayed
delivery and in consequence B's salesmen were idle for two weeks. B may
recover the loss of profits on resales due to the delay of C. So if B, to C's
knowledge, had resold the goods to D, to be delivered January 20, and had to
pay damages to D for nondelivery, he could recoup these damages from C.
But these results ensue only when C has express notice of the use to which B
intends to put the goods and the contract is made in contemplation of that.
3* Action for breach of warranty. This has already been dis-
cussed (see sect. 57 ante).
REVIEW QUESTIONS AND PROBLEMS
Section 45. Define contract of sale ; executed sale ; executory sale. What
are goods? In what cases may a buyer get better title than the seller had?
When not? Who is a purchaser in good faith and for value? Is an ante-
cedent debt value? Distinguish sale and barter. How may the price be fixed?
What is a bill of sale ? Draw a bill of sale of a pair of horses, buggy, harness,
whip, lap robe, for $350.
Problem /. 15, in the name of C, orders goods of D, who supplies them
supposing he is dealing with C. After B gets the goods he sells them to E,
who has no knowledge of B's trick. D then brings an action to recover the
goods from E. Result?
Problem 2. B is induced by fraud to Bell and transfer ^'oorls to C. whose
ditora then seize the goods. I eekfl to recover the goods from the
creditors. Can he do so?
86 SALES OF I'.oODS [Ch. iv
Problem J, In the above case C pledges the goods to a creditor as
security for a preexisting debt. Can B recover them?
46. What is the seventeenth section of the Statute of Frauds? What
are "goods, wares, and merchandise"? Are choses in action goods? How
can you tell whether a contract is for the sale of goods or for work and
labor? Stale the different tests. Is grass realty or personalty? What differ-
ence does it make? What constitutes acceptance and receipt? What is part
payment? What should the note or memorandum contain? When may it
be made? Write a contract of sale.
Problem ./. C agreed orally to make for B a set of artificial teeth for
$75, and B agreed to pay C that sum. When the teeth were finished, 15
refused to take them. C sues for the price. B pleads the Statute of Frauds.
Result ?
Problem j '. B orally agrees to cut and deliver to C, for the price of $15,
certain trees standing on B's land. B refuses to perform, and when sued sets
up the Statute of Frauds. Is B in the right?
Problem. 6. B examined barrel hoops at C's factory and agreed orally
to purchase a quantity for $200. B told C to deliver them at the steamer
Curlew for transportation. C delivered them at the steamer. The Curlew
was lost at sea with her cargo. C sues B for the price. B sets up the
Statute of Frauds. Were the goods " accepted and received " by B ?
Problem 7. B bought a carriage of C for $350, but it remained in C's
possession and there was no payment and no memorandum. Some changes
were ordered, after which B inspected the carriage and approved it. Later
B hired a team of horses and drove out in the carriage, but returned it to
C's warehouse. He then refused to take and pay for it. C sues B, who
pleads the Statute of Frauds. Result?
Problem 8. B goes into a store and buys on credit dress goods and
trimmings amounting to $124. Among the purchases is a spool of thread at
five cents. B takes the spool of thread home. Later she refuses to take the
goods and pleads the Statute of Frauds. Result?
Problem g. B and C made an oral contract for the sale and purchase of
goods of the value of $2500, and each deposited $200 in the hands of X,
to be forfeited by the party who should refuse to perform the contract.
B refused to perform. C sues B for breach, and B pleads the Statute of
Frauds. C replies that there was part payment.- Result?
47. Why is it important to determine when title passes? What are specific
goods? What are unascertained goods? Illustrate.
48. State the general rule as to when title passes in the sale of specific
goods. State the six particular rules. Illustrate each.
Problem 10. C sold to B lumber which the parties culled out and agreed
upon. C agreed to deliver it at the cars. There was a written memorandum.
REVIEW QUESTIONS AND PROBLEMS 87
While still in C*s yard the lumber burned. C sues B for the price. Did the
title pass to B so as no make the loss his ?
Problem 11. Sale of 119 specific bales of cotton at 31^- cents a pound,
payable cash on delivery, the cotton to be weighed and sampled before
delivery. Seventy bales are weighed and sampled, but not delivered, when
the whole 119 bales are destroyed by fire. Is the buyer liable for the
119 bales? Is he liable for the 70 bales?
Problem 12. X sells B 238 bags of coffee, marked and designated, but
X agrees to weigh the bags in order to ascertain the total price, the sale
being by the pound. Has title passed to B?
49. State the rules to determine when title passes in the sale of unascer-
tained goods. What are fungible goods? When is an appropriation final?
Problem ij. B purchased of C 200 bushels of corn out of a lot of 400
to 500 bushels in Cs crib. It was to be left until it hardened, and then
C was to measure and deliver it. C's creditors levied on the whole lot.
C then delivered 200 bushels to B, and the creditors seek to recover the corn
from B. Result?
Problem 14. In the above case the crib burns and all the corn is
destroyed. Must C pay B for the 200 bushels?
Problem ij. Assume, in Problems 1 3 and 1 4. that C has agreed to deliver
the corn and that B sues for breach of this promise. May he recover?
Problem 16. C orders by mail a barrel of shellac of B, who selects a
barrel answering the description and ships it to C by the X. Ry. as directed.
It is lost in transit. May B maintain an action against the X. Ry. for its loss?
Problem ij. In the above case B took the bill of lading in his own name
and retained it. Can B sue the X. Ry. for the Joss?
50. Where is the risk of loss after a contract of sale? Where is the
ri^ht to gain or increase? Do these rules apply to a sale and delivery when
the seller retains title as security for payment?
51. State the duties of the seller. Where is delivery to be made? If the
buyer orders 50 barrels of apples and the seller delivers 48 barrels, must the
buyer take them? How is it if the seller delivers 55 barrels? If the seller
delivers 50 barrels, whal right has the buyer?
52. State the duties of the buyer.
53. Define warranty ; express warranty : implied warranty.
54. Hoes an express warranty arise without words? Who determines
whether th. 1 express warranty i What is the test? What is a " puff " ?
Problem /.'■■'. B sold a horse '" C. During tin- negotiations B represented
the horse to !><• Bound. It was unsound. C sues B for breach "t warranty.
B objects that he did not "warrant" the horse. Rest
55. Suite the implied warranties anil when they occur. When is a
warranty of title not implied? When is there a warranty thai goods arc
88 SALKS OK COODS [Ch. IV
merchantable? Is there a warranty of fitness for the purpose in a sale In a
retailer? Is there any special implied warranty in the sale of provisions?
Problem 10. B stole a horse and had him sold at auction. C bought
at the auction and then resold the horse to D. 'The true owner traced it
and recovered it from D, who now sues C for breach of warranty of title.
Result?
Problem ZO. B sold C [84 bales of hemp, and C at the time of the
sale inspected it before purchasing by opening several bales. Most of it
later turned out to be bad. C sues B for breach of implied warranty.
Result ?
Problem 21. C ordered of 15 " Calcutta linseed." It came mixed with rape
and mustard seed. All linseed has some such seeds mixed with it ; this had
more than the usual quantity. C contends that the contract is not satisfied
by offering this article, — that it does not answer the description. How
would you hold?
Problem 22. B bought of C a carload of cedar posts, to be shipped by C
to B. When they arrived, B's servants unloaded a part of them, and, dis-
covering they were not of good quality, so informed B. The latter then
inspected them and, because they were not of good quality, replaced
them in the car, and refused the w^hole lot. C sues B for the price. Is
B liable?
Problem 23. C bought of B by sample " 102 bales second quality Ceard
scrap rubber as per sample." When the bales arrived, they were found not
to be second quality, but inferior, though they were like the sample. Is C
bound to keep the rubber and pay for it without offsetting the damages for
breach of warranty ?
Problem 24. a. A manufacturer sells B powder for blasting. It is of
poor quality and unfit for the purpose. Is there a breach of warranty?
b. A dealer who purchased of the manufacturer sold C some of the
same powder for the same purpose. Is the dealer liable to C for breach of
warranty ?
56. What is meant by the rule of caveat emptor? What are the excep-
tions to the rule? If A sells B a horse without express warranty, is there
any implied warranty? If A sells B seeds?
57. Can the buyer rescind the contract for a breach of an express war-
ranty if title has passed? for breach of an implied warranty? If goods are
ordered by description and they do not answer the description, may the
buyer take them and sue for breach of implied warranty?
58. State all the rights of an unpaid seller against the goods. What is
the seller's lien? How is it lost? What is the right of stoppage in transitu?
When may it be exercised? How is it lost? Explain the exercise of the
right of resale ; of rescission.
REVIEW QUESTIONS AND PROBLEMS 89
Problem 25. B sells C a horse, payment and delivery to be one week
later. At the time fixed C does not take or pay for the horse. Explain all
the remedies to which B may resort against the property itself.
Problem 26. B sells C a horse on credit, delivery to be one week later
and payment one month later. What are B's rights against the property?
59. State the seller's rights against the buyer. How does he measure
his damages for a breach?
60. State the remedies of the buyer (a) where the title has passed and
(b) where it has not passed. What are general and what special damages?
When may special damages be recovered?
CHAPTER V
BAILMENT OF GOODS
61. Definition and distinctions. A bailment 1 of goods is a
transfer of the possession without a transfer of the general
ownership, upon a contract, expressed or implied, that after
the purpose of the transfer shall have been accomplished the
property shall be redelivered to the bailor or to some person
designated by him.
The person making the delivery is called the bailor. The
person to whom it is made is called the bailee.
Such a transfer of possession usually occurs by delivery from
the bailor to the bailee. It may take place, however, without
such delivery.
Examples. If one finds an article and takes it into his custody, he is a
bailee for the unknown owner, although there has been no delivery, and is
under an obligation created by the law to return it to the true owner upon
demand. So if one steals or converts property belonging to another, he is
a bailee, and the law creates for him a promise to return it to the owner. So
also an officer who seizes goods under a legal process is a bailee of the goods.
In all these cases there is a transfer of possession without delivery, but in all
of them the bailee is bound to deliver up the property either upon demand or
when the purpose for which he has taken it is accomplished.
The duty of the bailee is usually fixed by his own promise, and is therefore
the result of contract. But in the cases last given there is no promise and no
real contract. The law treats these cases upon the fiction that there is a promise ;
that is, the law creates the promise and requires the bailee to return the goods
or pay damages for withholding them.
The consideration for the bailee's promise is the detriment
suffered by the bailor in parting with his property. Sometimes
the bailor furnishes some other consideration, as when he pays
or promises to pay the bailee for caring for the property or
doing work upon it. But in the case of a gratuitous bailee
(one who cares for the property without compensation) the
1 " Bailment " is from the French bailler, " to deliver."
90
§62] CLASSIFICATION 91
only consideration is the parting with the property by the
bailor. This is an act which the owner is not legally bound to
do, and is therefore a sufficient consideration.
Bailment applies only to personal property. This may be
corporeal, as a horse, or incorporeal, as a document of title.
The bailor need not be the true owner of the property. One
may hire a horse and put him in a livery stable ; in such a
case there are two bailments, — by the owner to the hirer, and
by the hirer to the livery-stable keeper. One who finds a jewel
may deliver it to a jeweler to be tested ; in such a case the
finder is bailor and the jeweler is bailee, and the finder may
recover the jewel, or its value, if the jeweler refuses to sur-
render it. The bailee cannot dispute his bailor's title.
Distinctions. A bailment must be distinguished from a sale or barter.
A bailment differs from a sale in this : in a sale there is a transfer of the
general ownership or title, while in a bailment there is the transfer of posses-
sion for a particular purpose, the general ownership or title remaining in
the bailor.
A bailment differs from a barter for the same reason. Further, in a bail-
ment the identical thing is to be returned, though sometimes in an altered
form, while in a barter some other thing is to be returned. If one delivers
grain to be ground into meal and the meal returned, this is a bailment ; but
if one takes his grain to a mill and receives therefor meal already ground,
this is a barter, or sale. If one " lends *' his neighbor a bag of oats to feed
the neighbor's horse, this is a barter, because the same oats are not to be
returned, but a like quantity of oats; this is technically called a mutuum.
Sometimes there is a bailment with an option to purchase, as where there
is a "sale on approval "(see page y6ante). In such case the transaction becomes
a sale wheh the bailee signifies his approval.
Sometimes there is a bailment with permission to mix the goods with
others of a like kind, as where grain is placed in an elevator with the grain
belonging to other bailors. The owners become owners in common of the
mass, according to their respective shares. If there is no such permission,
ress or implied, the bailee must keep the bailor's goods separate from
his own or oth>
62. Classification of bailments. Bailments fall into two classes,
and each has subdivisions. The two classes arc (A) bailments
solely for the benefit of on,- party, and (/•') bailments for the
mutual benefit of both parties.
A. Bailments solely for tin- benefil of one party, or gratuitous
bailments, are divided into two classi
92
BAILMENT [Ch. v
1. Bailments for the sole benefit of the bailor are called either
a deposit (or, in the Roman law, depositum) or a mandate (or,
in the Roman law, mandatum). These are bailments in which
the bailee without compensation is to keep the property of the
bailor for him (deposit), or to do something to or about the
property for the bailor's benefit (mandate).
Examples. C undertakes without reward to keep D's jewels. C without
reward undertakes to repair D's watch. C without reward undertakes to
carry D's grist to mill. The first case is a deposit. The others are mandates.
2. A bailment for the sole benefit of the bailee is called a
commodatum, that is, a gratuitous loan. This is a bailment in
which the bailor without compensation allows the bailee to use
his property.
Examples. D loans C a jewel to wear, or D loans C his horse to drive,
without compensation.
B. Mutual-benefit bailments may be divided into three classes,
with two additional special instances.
i. The delivery of a chattel as security for a debt. This is
called a pawn or pledge, or giving of collateral security (in the
Roman law, pignus).
Examples. D borrows money of C and delivers his watch to C as security.
D borrows money of a bank and delivers bonds or shares of stock as collateral
security.
2. The delivery of a chattel to the bailee to be used by him
and such use paid for. This is like the second case given above,
except that the bailee is to compensate the bailor. It is called
a hiring, or, in the Roman nomenclature, locatio rei (the hired
use of a thing).
Examples. D loans a jewel to C to wear, or D loans his horse to C to
drive, in each case for a stipulated price.
3. The delivery of a chattel to the bailee to keep safely, or
to do work upon, for a compensation. This is like the first case
given above, except that the bailee is to be paid instead of act-
ing gratuitously. This is called a hiring (of services) or, in the
Roman nomenclature, locatio operis (hired services about a thing).
There are three special instances of this : (a) hired custody of
§63] FOR BENEFIT OF ONE PARTY 93
a thing {locatio custodiae) ; (b) hired services upon a thing
{locatio opcris faciendi) ; (r) hired carrying of a thing (locatio
operis mercium vehendarunt).
Examples. C undertakes for a price to keep D's jewels safely. C for a
price undertakes to repair D's watch. C for a price undertakes to carry D's
grain to mill.
The following special cases of delivery for safe-keeping or for
transportation fall under mutual-benefit bailments but call for
separate treatment.
i. Innkeepers. The intrusting of goods to the protection of an
innkeeper by a guest at the inn gives rise to peculiar liabilities.
2. Common carriers. The delivery of goods by a shipper to a
common carrier for transportation gives rise to peculiar liabilities.
The following special cases do not fall strictly under bailment
but may be treated here for convenience.
i. Public carriers of passengers and baggage.
2. Telegraph and telephone companies.
The classification of bailments may be summarized as follows :
Classification- of Bailments
A. Gratuitous. B. Mutual -benefit.
i. Gratuitous services. I. Pledge, or pawn.
a. Deposit. 2. Hind use of a thing.
b. Mandate. 3- Hired services about a thing.
2. Gratuitous loans. a. Custody of a thing (with special
case of innkeepers).
b. Work upon a thing.
c. Transportation of a thing (with
special case of common carriers).
I. Bailments solely for Benefit of One Party
•
63. Bailments for sole benefit of bailor. These bailments lay on
the bailee the lightest duties, since he derives no benefit from them.
i. //,.. i ited. Thisbailmenl maj be created by contract, as
where, upon the bailee's promise to care forthe article gratuitously,
the bailor delivers it to the bailee. Some writers do not regard
this strictly as contract, because the only consideration for the
94 i:\ll. MKNT [Ch.V
promise is the parting with possession by the promisee, li is,
however, convenient to treat the relation as the result of contract.
This bailment may also be created by a voluntary undertaking
of the bailee without any action on the part of the bailor, as,
for example, where one finds lost property and takes it into his
possession.
It may also be created without a voluntary undertaking of the
bailee, as where goods are cast by a flood or other force of nature
upon the lands of the bailee.
2. Bailors obligations. As these are gratuitous bailments, the
bailor is not bound to compensate the bailee for his services in
the care of the property or for any work done upon it ; but if
the bailee has not by agreement undertaken to bear unusual ex-
penses, the bailor must indemnify him for such actual disburse-
ments. The voluntary bailor is also bound to warn the bailee
of any danger of which the former is aware, if such danger in-
creases the ordinary risk of the bailment and is not apparent to
the bailee. •
Examples : i. C undertakes without compensation to keep and feed D's
dog. C is obliged to pay a dog tax. U must reimburse C.
2. C undertakes without compensation to take and care for D's dog.
Known to D but unknown to C the dog is vicious. C is bitten by the dog.
D is liable to C for the injury. But D would not be liable if he did not know
of the vicious propensities of his dog or if he warned C of them.
3. Duties of bailee. The bailee is not bound to undertake the
bailment even after he has promised to do so. This is because
there is no consideration for his promise, since the bailor has
promised him nothing in return. But if the bailee does undertake
the bailment by receiving the goods, he then comes under certain
obligations to the bailor.
a. The bailee must not by gross negligence injure, destroy,
or lose the goods. It is said that since the bailee is acting gra-
tuitously, he is bound to use only slight care toward the subject
of the bailment and is liable only for gross negligence. What-
ever this may mean, — and it is a matter difficult to define accu-
rately, — it is clear that less care is exacted of the gratuitous
bailee than of any other. The amount of care must, however,
vary in proportion to the risk.
§6+] FOR BENEFIT OF ONE PARTY 95
Example 3. More care would be required in the keeping of a diamond
than in the keeping of a plow ; more skill and care would be required in the
repairing of a watch than in the repairing of an umbrella. The court instructs
the jury that the gratuitous bailee is required to use only slight care and is
liable only for gross negligence, that this is the care that persons of less than
ordinary prudence, but still of prudence, exercise under like circumstances,
and that whether the bailee exercised this care in the case in litigation is a
question of fact for the jury to determine.
b. The bailee must not use the article except so far as its use
is reasonable or necessary for its proper care. The bailee might
drive a horse to keep it in health, or milk a cow ; but he could
not use the horse for plowing his own field, or wear a diamond
intrusted to him.
c. The bailee must redeliver the article at the termination of
the bailment, together with any increase or profit derived from it.
If it has been lost, the bailee is liable only if the loss was due
to his gross negligence.
Examples : 4. B undertakes gratuitously to keep C's furs. He keeps them
so negligently that the moths injure them. B is not liable unless this is found
to be gross negligence.
5. B wears the furs and loses them. B is liable. He had no right to use
the furs, and in doing so assumed the entire risk of their safety.
6. B undertakes gratuitously to keep C's jewels. B locks them up in his
desk. Burglars break open the desk and steal the jewels. B is not liable unless
he was grossly negligent, which could hardly be the case under these facts.
7. B leaves the jewels in an unlocked drawer and they are stolen. This
might be gross negligence.
4. Termination of bailment. The bailment is terminated when-
ever either party elects to terminate it. This is perhaps subject
to the qualification that if the bailee has entered upon some
work to be done upon the article, he is bound to finish it. The
death of either party terminates the bailment. So also does the
insanity of either.
64. Bailments for bailee's sole benefit. These bailments lay
on the bailee the heaviest duties, since he alone benefits from
them.
1. How create,!. This form of bailment arises only by con-
trnct, because it requires the assenl of the bailor to lend and the
assent of the bailee to borrow. A promise t<> lend is not binding,
9(3 BA1I.MKNT [CH.V
because there is no consideration for it; but after the loan is
made, the contract is complete. The absence of compensation to
the bailor characterizes this class of bailments.
2. Obligations of bailor. The sole obligation of the bailor is
to warn the borrower of any defect, known to him and not known
or obvious to the bailee, which renders the article dangerous. If
he docs not, and the bailee is injured in consequence of such
defect, the bailor is liable to him for the injury.
Example i. B lends his horse to C to drive. Known to B but unknown
to C, the horse is a runaway. If B does not warn C of this, and the horse
runs away and injures C, B is liable.
3. Duties of the bailee. The obligations of the bailee may be
fixed by the contract itself. Where they are not specified, the
following will be implied.
a. The bailee must exercise great care in keeping or using
the article, and is liable for slight negligence. The bailment
being for the bailee's sole benefit, the law exacts of him greater
care than in the case of any other bailee. He is not liable for
inevitable accident but only for such injuries as by the exercise
of great diligence he could have prevented. In the presence
of any danger he ought to prefer the safety of the borrowed
article to the safety of his own property. In this respect this
bailment is at the opposite extreme from the one for the bailor's
sole benefit.
Example 2. C loans B his watch. B loses it. If this was due to a want
of great care (more than one ordinarily takes of his own property), B is liable
to C. This is a question for the jury under proper instructions.
b. The bailee may, of course, use the article, but he must not
lend it to others unless it is understood that he may do so, and
must use it in accordance with the contract or understanding.
Any material deviation may cast upon him the liability of insuring
the safety of the article or may render him liable in tort for its
conversion.
Examples : 3. C borrows D's horse to drive, to A, and drives instead to B
in another direction. The horse dies without C's fault. C must pay for the
horse. He has technically converted it and is absolutely liable. If the horse
had died without Cs fault while he was driving to A, he would not have been
liable.
§65] FOR MUTUAL BENEFIT 97
4. C borrows D's horse to drive and permits E to drive it. C is absolutely
liable for any injury to the horse while in E's hands. But it may be implied
that another is to use the article. If C takes D's horse in order to try him
before buying, C may permit a competent horseman to make the test.
c. The bailee must redeliver the article with its increase or
profits. He cannot deny his bailor's title ; that is, he cannot hold
the article under a claim that it is his or another person's, but
must return it and resort to an action to establish his claim.
Examples : 5. C borrows D"s bonds to pledge in order to raise money.
C must return the bonds and also any income accruing during the loan.
6. C borrows D"s team and refuses to return it, alleging that it belongs to
his wife, a sister of D. This is not a good defense. C must return the team,
and the wife can then bring an action to recover it. C cannot thus dispute his
bailor's title.
4. Termination of bailment. A bailment in the nature of a
loan may be terminated at the will of the borrower. Whether, if
it be for a definite time, the lender may recall it before the time
has elapsed is a doubtful question. Any violation of the borrower's
duty toward the article justifies the lender in recalling it. The
death of the borrower, or his insanity, terminates the bailment.
The death or insanity of the lender may not, possibly, terminate
a loan for a definite period if that period has not yet elapsed.
II. Mutual-Benefit Bailments
65. Pledge or pawn. This is a mutual-benefit bailment intended
as a species of security; and when it is a bank transaction with
stocks, bonds, or other like instruments pledged, it is called
collateral security.
1. How created. A pledge or pawn is a bailment of a chattel
as security for a debtor other legal obligation, and is usually ac-
companied by a power in the bailee to sell the article in case of
default. When a transaction is on a larger scale, the bailment is
often (ailed the giving of collateral security, as where one borrows
money at a bank and deposits bonds as security for the loan.
These transactions by way of pledge can arise only by contract.
The statutes generally regulate somewhat strictly the business of
pawnbrokers, and prescribe the rate of interest they may lawfully
9 S BAILMENT [di. V
charge for loans secured by pledge. Delivery to the pledgee is
essential to the creation of a pledge. The delivery of documents
of title, like warehouse receipts or bills of lading, constitutes a
pledge of the property they represent. Stock certificates should
be accompanied by a power to transfer the title upon the books
of the corporation that issued them.
' 2. Rights and obligations of pit ■< Igor. A pledgor of property
impliedly warrants that he has good title to it and is liable to the
pledgee for a breach of this warranty if the pledgee is damaged
thereby. He has a right to assign to another his interest in the
pledged article, that is, the difference between its value and the
sum for which it is pledged. Me has a right to redeem the pledge
by payment of the debt which it secures. No agreement of the
parties can make the pledge irredeemable, because this is regarded
by the law as oppressive to the debtor, who usually gives a pledge
under the stress of necessity.
3. Rights and duties of pledgee. The pledgee has a right to
assign his interest in the pledge. He has no right to use the
pledged article except so far as its use is necessary to its proper
care. Any profits derived from it the pledgee holds to apply toward
the debt ; but if that is otherwise paid, he must account for them
to the pledgor. He is to be reimbursed for any expenses neces-
sarily incurred in caring for the article pledged. He must use
ordinary care in keeping and preserving the property, and is liable
for ordinary negligence. This case lies midway in this respect
between the bailment for the bailor's sole benefit and that for the
bailee's sole benefit. He must redeliver the property when the
pledge is redeemed by the pledgor.
After the debt is due and unpaid, the pledgee may sell the
property to pay the debt, and must pay to the pledgor any sur-
plus above the debt, interest, and expenses of sale. If there is no
provision in the contract permitting a private sale, the sale must
be at public auction after due notice to the pledgor ; but it is often
held that stocks and bonds may, after due notice, be sold on the
floor of the stock exchange. The pledgee cannot purchase at his
own sale. In the absence of an express provision in the contract
prescribing the mode of sale, and especially where notice cannot
be given to the pledgor, or where there are conflicting claims, it
§66] FOR MUTUAL BENEFIT 99
is safer for the pledgee to secure a judicial sale under a decree
of a court of equity. In some states the statute provides for the
manner of sale of pledged property.
4. Termination of pledge. A pledge is terminated when the
property is redelivered to the pledgor, or when by tender or pay-
ment of the debt the pledgor is entitled to have it redelivered.
A refusal to redeliver the property when the pledgor is entitled
to it renders the pledgee liable in tort for conversion.
Examples : 1 . A pledges a jewel to B as security for a loan. B leaves the
jewel at night in a show case. Burglars enter and take it. B is liable to A
for the loss if it is found that B did not use due or ordinary care for the safe-
keeping of the jewel. Due care might require B to put the jewel in a safe.
2. B wears the jewel and it is lost. B is liable to A, for he assumed the
risk in wearing the jewel.
3. A pledged securities to a bank for the payment of a particular loan.
A paid the loan and demanded the securities. The bank refused to deliver
them and claimed to hold them for another unsecured loan. A brought an
action against the bank for conversion of the securities and recovered. The
bank could hold the securities for the particular loan, but for no other.
4. The bank received dividends on the securities. These belong to A after
he pays the loan, or they may be deducted from the loan and payment made
of the balance.
5. A received dividends on the securities. He holds them in trust for the
bank until the loan is paid.
6. A pledgee upon default sold the pledge under authority given by
the pledgor and purchased at his own sale. The sale may be avoided at the
election of the pledgor.
Pawnbrokers. In New York pawnbrokers may take 3 per cent a month
for the first six months and 2 per cent a month thereafter upon loans not ex-
ceeding >ioo, and 2 per cent a month for the first six months and 1 per cent
a month thereafter upon loans exceeding -100. They cannot sell pawns until
one year after possession thereof, and the sale must be at public auction and
conducted by a licensed auctioneer. Notice of tin- sale must he published for
at least six days in two daily newspapers. Any surplus on the sale shall be
turned over to the pledgor. In Massachusetts the mayor ami aldermen or
other licensing hoard of a city may fix the rate of interest, and articles may be
sold at public auction after four months.
66. Bailee hires an article of bailor. This is also a mutual-
benefit bailment, since both parties derive a benefil from it.
I. II,' xted. This bailment arises only by contract. The
bailor agrees to deliver to the bailee an article t<> be used by the
latter, who in turn to pay the bailor a compensation 1 < «r
ioo BAILMENT [Ch.V
such use. If the bailor refuses to deliver or the bailee to receive,
there is a breach of contract for which damages may be recovered.
When a delivery is actually made and accepted, the bailment begins.
2. Rights and liabilities of bailor. The bailor warrants his title
and warrants that the bailee shall not be disturbed in his posses-
sion by one maintaining a superior title. 1 te must warn the bailee
of any defects, known to him and not observable by the bailee,
which render the article dangerous for the purpose for which it
is hired. So also the bailor must use due care to discover and
remedy defects.
Example i . B lets to C a horse and carriage, and the carriage breaks down
and injures C from a defect which, by the use of due care, B might have
discovered. B is liable to C.
3. Rights and duties of bailee. The rights and duties of the
bailee may be fixed in part by the contract. In the absence of
contract provisions the following general rules would govern.
a. The bailee must exercise ordinary care in the keeping and
use of the article, and is liable for ordinary negligence. Ordinary
care is that which the average prudent man exercises under like
circumstances in the conduct of his own affairs. The bailee is
not liable for inevitable accident nor for any willful act of a third
person. He is liable only for negligence ; that is, the want of
that ordinary care on his part which naturally and probably results
in injuring the article.
b. The bailee acquires the right to the exclusive use of the
article during the time specified. He may maintain an action for
any disturbance of his lawful possession and is said to have a
special property in the goods. He must use the article with due
care and only for the purpose or in the manner agreed upon. If
he hires a horse to drive to A, he must not drive elsewhere or
beyond A. An intentional material variation from the terms of
the contract may amount to a conversion and render the bailee
absolutely liable for the safe return of the chattel.
Examples : 2. A hires B's horse to drive to X. He does drive to X, but
by a very circuitous and unusual route. This may be a technical conversion
and render A liable for any injury to the horse while so converted.
3. A overdrives the horse and injures it. He is liable to B for want of care
in using the horse.
§67] FOR MUTUAL BENEFIT ioi
c. The bailee is liable to third persons for injuries resulting
to them from his use of the article, in the same way as if it were
his own. The bailor is not liable unless perhaps for some in-
herent vice in the article, of which he did not warn the bailee.
Third persons injuring the article are liable to either the bailor
or the bailee, as their damage may appear.
Examples : 4. A hires B's horse. A drives so negligently that he injures
C. A is liable to C. B is not liable to C.
5. X drives into the horse and injures it. X is liable to A to the extent that
the injury renders the horse less valuable to A, and to B for any permanent
injuiy to the horse.
d. The bailee is bound to compensate the bailor. If the price
is not fixed by agreement, a reasonable price is understood. If
the chattel is destroyed without fault of either party before the
term of the bailment is completed, the contract is discharged,
but the bailor may recover the reasonable value of such use as
the bailee has had up to that time.
e. The bailee must redeliver the chattel at the termination of
the bailment, and must pay any damages done to it by his negli-
gence. If the bailee converts the chattel and the bailor recovers
its full value, the absolute title vests in the bailee upon such
payment to the bailor.
Example 6. A hires B's wagon for two days. At the end of two days B
demands it and A refuses to return it. (a) B may replevin it ; that is, get it by
legal process, (b) B may sue in tort for conversion and get a judgment for
the full value of the wagon. When A pays this judgment (not before), the title
to the wagon vests in A.
67. Bailor engages bailee to keep, repair, or transport an
article. In these bailments there is always a contract under
which the bailee is to perform some services upon the chattel
for a compensation.
1 . Different bailments under this head. These bailments are
of various kinds and for various purposes. There are three dis-
tinct types : (a) where the bailee for compensation is to take care
of the goods for th<- bailor, as a warehouseman stores and cares
for the goods of his customer, or an innkeeper those of his guest ;
{!>) where the bailee for compensation is to do some work upon
the article, as a jeweler repairs a watch or .1 miller grinds grain ;
[02 BAILMENT [Ch. v
(c) where the bailee is to carry or transport goods for the bailor
for a compensation, as railways carry freight or postal authorities
carry letters.
The cases of innkeepers and common carriers present peculiar
features and will be treated separately.
2. Liabilities of bailor. In addition to the liabilities of bailors
in other relations, the bailor in this class is under a duty to com-
pensate the bailee. That the bailee receives a compensation is
the distinctive characteristic of these bailments. The compensa-
tion may be slight, but if there is any it serves to take the case
out of the class of gratuitous bailments. Thus, if H agrees to
tike and care for C's horse upon consideration that he may use
it, B is a bailee for hire and is not a mere depositary ; he receives
the use of the horse as compensation.
Usually the compensation is fixed by the contract or it is
understood that it shall be the reasonable value of the bailee's
services. When the bailee has fully performed, he is entitled to his
compensation, even though, before the article is returned to the
bailor, it should be destroyed, provided the destruction is due to
no fault of the bailee. If the article is destroyed without his fault
after he has partly performed but before his contract is completed,
he is entitled to compensation for labor or material furnished up to
the time of the destruction of the article. If the bailee abandons
the work without justification, many courts forbid him to recover
any compensation, but some permit a recovery for the services
less the damages to the bailor arising from the breach. So, if
the bailee does the work unskillfully, but it is of some value, he
may recover its value less the damages to the bailor.
Examples : i. B runs a store. He permits packages to be left there to be
taken by a local expressman. A package for C is left there to be taken by the
expressman, and when called for cannot be found. C sues B, who contends
he was a gratuitous bailee and liable only for gross negligence. The judge
tells the jury that B is not a bailee for hire unless he is to receive some certain
benefit, — that an uncertain, contingent benefit in drawing custom to his store
is not enough. On appeal the court held this was error. The nature and
amount of compensation arc immaterial. The law will not inquire whether it
is adequate, nor in such a case whether it is certain. It is enough that B de-
rives some compensation. (But note that in this case C is under no obligation
to pay 15 anything.)
§67] FOR MUTUAL BENEFIT 103
2. C agrees to work as bailee on B's chattel. After beginning the work,
but before completing it, he stops and refuses to go on. Can he recover any-
thing ? Many courts say he cannot, because he has committed a breach. Some
allow him to recover the reasonable value of his services, less the damages to
the bailor from delay in the completion of the work.
3. Rights and liabilities of bailee. These are often regulated,
at least in part, by contract. Where the contract is silent, the
following rules apply.
a. The bailee is bound to exercise ordinaiy care and diligence
and is liable for ordinary negligence, but the standard of liability
is different in the case of innkeepers and common carriers. If
the bailee undertakes to perform work requiring skill, as in the
case of a watch repairer, he is bound to possess and exercise
the skill ordinarily possessed by those engaged in the occupation.
b. The bailee has a temporary, special property in the chattel,
and may protect this by insurance and by appropriate action
against third persons who interfere with his possession.
c. The bailee has a lien upon the chattel for his reasonable
charges for storage or for services. The only bailees in this
class who were excepted at common law were agistors who pastured
cattle, and livery-stable keepers who cared for them, but statutes
have generally extended the lien in favor of these bailees, as well
as in favor of garage keepers. At common law the lien was
merely possessory and was accompanied by no power to sell, but
the power of sale to enforce the lien is now quite generally con-
ferred by statute.
Warehousemen. A warehouseman is one who receives and stores goods
for compensation. The warehouseman usually gives a "warehouse receipt"
for goods received by him. These receipts may be transferred by indorsement
so as to give the indorsee a right, upon presenting the receipt, to claim the
goods. Grain stored in warehouses is transferred by merely indorsing and
transferring the warehouse receipts. Usually such grain is mixed with like
grain of other bailors, and the receipt entitles the owner to the specified num-
ber of bushels from the common mass. In the absence of contract or custom
the bailee has no right to 1 the bailor's goods with those of others, and
if he do<-s so and loss ensues, he musl make good the loss. If he confusi
bailor's goods with his own, he will suffer whatever loss <>r inconveniei
arises, even to the extent of losing his own goods altogether. If the goods .in-
injured or lost, it is incumbeni upon the warehouseman to account foi the in-
jury. If he pleads a fire or theft or the like, the bailor must then show that
104 BAILMENT [Ch. V
the fire or theft was due to the negligence <>f the warehouseman. The rights
and duties of warehousemen and the transfei oi warehouse receipts are now
regulated by the Uniform Warehouse Receipts Act in forty-three jurisdictions :
Alabama. Arkansas, California, Colorado, Connecticut, Delaware, Florida,
Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Jersey, New
Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsyl-
vania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia,
Washington, West Virginia, Wisconsin, Wyoming, Alaska, District of Colum-
bia, and the Philippine Islands. This act is in the main a statement of the gener-
allv prevailing common law. United States bonded warehouses are regulated
by statute (United States Compiled Statutes of 191 3, §§ 5 6 3 8 -5 6 94)- They
are for the convenience of importers or others required to pay duties or excise
taxes, and goods are kept in them in bond until such taxes are paid.
Wharfingers. Wharfingers are warehousemen who maintain wharves for
the purpose of receiving goods and keeping them for compensation.
Safe-deposit companies. If one rents a safe-deposit box in a bank or in
the vaults of a safe-deposit company, is the bank, or the company, a bailee of
the articles stored in the box? Probably not, in the ordinary sense of that
term. The company never has possession of the contents of the box. The
one who hires the box puts the articles in it, locks it, and keeps the key.
The company, for added security, has another key, without the use of which
the box cannot again be opened. Neither key alone will open the box ; both
must be used. The situation is like bailment, but does not fully correspond to it.
The company is liable for breach of contract in permitting any unauthorized
person to open the box, and is bound to use due diligence to guard the box
and its contents. While the courts sometimes speak of these transactions as
bailments, there is a material difference between them and ordinary bailments
in that there is no actual delivery of the goods to the company.
Banks. When money is deposited in a bank, the relation is that of debtor
and creditor, not that of bailor and bailee. One may, however, make a
deposit as bailor. Such would be the case where one deposits a bag of gold,
the same identical money to be returned to him.
III. Special Cases oe Bailment eor Keeping or
Transportation
68. Innkeepers. The relation of an innkeeper to his guests,
and particularly toward the goods of his guests, is peculiar and
is the result of a state of society now largely outgrown.
1. Who are innkeepers. An innkeeper or hotel keeper is one
who holds himself out to the public as ready to entertain trav-
elers or transients as guests for a compensation, furnishing food
§6SJ INNKEEPERS 1 05
and lodging or lodging alone. A restaurant is not an inn, be-
cause it furnishes only food. A lodging house is not an inn,
because the keeper is not bound to entertain any who apply, and
makes a special contract with each. An innkeeper, as to some
of his permanent guests, may be rather a lodging-house keeper
or a boarding-house keeper than strictly an innkeeper. A steamer
providing lodging and food for passengers has been treated as to
those so entertained as a floating inn, but there is strong authority
to the contrary. A sleeping car, on the other hand, is held not
to be an inn. These distinctions are very nice and not always
satisfactory.
2. Who arc guests. A guest at an inn or hotel is a transient
who receives accommodations therein under a contract, express or
implied, with the proprietor. One who lives regularly or perma-
nently at a hotel is not a guest in the legal sense of the term ;
but one may engage accommodations for a definite period, longer
or shorter, without ceasing to be a guest, provided he is still a
wayfarer or transient and not a resident. The transient may be
a traveler or one who resides in the place where the inn is
located. The taking of lodgings is not necessary to make the
patron a guest. A traveler who resorts to an inn for food or
drink may be a guest. He may even become a guest of the inn-
keeper at the railway station and there put his baggage in charge
of the hotel porter.
Examples: 1. B*s family reside in X. but B lives in V and visits \
only occasionally. The family engage permanent accommodations at a hotel.
I) visits them there and remains at the hotel for a month. B's watch and
his wife's jewels are stolen. 15 is a guest and the innkeeper is liable to him
for the loss of the wateh. His wife is not a guest and cannot recover for
her jewelry.
2. 15 goes to a hotel and registers, but does not take a room. He j
to the dining room, leaving his hand bag in the custody of a porter. It is
stolen. The innkeeper is liable. The taking of a room, however, is a quite
decisive test.
3. Rig/its tint/ liabilities of <ni innkeeper. These differ in
several particulars from those "I other bailees.
a. An innkeeper is bound t<> receive .ill lit and orderly guests
if h<- has accommodations for them. His refusal t<> do so may
render him liable to an action for damages, or to ;i criminal
106 r, \II.M1.\T [Ch. V
prosecution, or both. Ordinary bailees may choose with whom
they will ileal, but an innkeeper is following a public calling and
must serve all members of the public alike. The innkeeper must
receive the baggage of the traveler also.
b. At common law an innkeeper is absolutely liable for the
loss of his guest's goods in the inn, unless such loss was due to
an act of God, to an act of the public enemy, or to the fault of
the guest. He is thus practically an insurer of the safety of the
goods, --and especially against theft, --a liability which does not
attach to bailees generally. This rule originated in early times
when robbers infested the routes of travel, and was intended to
protect the guest from collusion between them and the inn-
keepers. Modern statutes have to some extent relieved the inn-
keeper from this high degree of liability by providing that if he
posts notices that he has a safe in which valuables may be de-
posited, he shall not be liable for those retained by the guest.
Whether " valuables " includes reasonable pocket money has been
differently decided, but in New York it is held that all money
is included, and that if a guest retains any money he does so at
his own risk. On the other hand, in New York it is held that
a watch is not an ornament and that the innkeeper is an insurer
of its safety, even though it is not deposited in the safe.
While the common-law rule of liability stated above is the one quite gener-
ally adopted, it has not gone without dispute. Indeed, three different rules
have been applied: (i) the strict rule given above, that the innkeeper is an
insurer, with the exceptions noted ; (2) that the innkeeper may excuse himself
by showing inevitable accident or irresistible force, though not amounting to
an act of God or the public enemy, as fire or robbery ; (3) that the innkeeper
may excuse himself by showing that he was free from negligence. Many
statutes have expressly relieved the innkeeper of liability for loss not due to
his negligence. (For the meaning of " act of God " see sect. 69, p. 108, post.)
The innkeeper is also bound to use due care to protect guests from assaults
or insults, and especially those proceeding from the servants of the inn.
c. The innkeeper has a lien upon the baggage of his guest
for the amount of the guest's bill. At common law he had no
power to sell the goods in order to enforce the lien, but such
power is now generally conferred by statute.
4. Innkeeper as ordinary bailee. An innkeeper is an ordinary
bailee of goods brought to the inn by a guest for show or sale,
§69] COMMON CARRIERS OF GOODS 107
of the goods of boarders, and of goods held by him under a lien.
He may be a gratuitous bailee of goods left by one not a guest,
or left for an unreasonable time by one who has ceased to be
a guest.
69. Common carriers of goods. No other bailee for mutual
benefit undertakes so high a degree of liability as a common
carrier of goods, although by special contract the carrier now
usually avoids the extreme liability fixed by the common law.
1. Who are common carriers. A common carrier is one who,
in the exercise of a public calling, undertakes to transport for a
compensation the property of any person who may apply. A
private carrier is one who so transports goods under special con-
tract, without being engaged in the business as a public employ-
ment. A common carrier holds himself out as ready to serve all
persons indifferently to the extent of his ability. In this respect
he is like the innkeeper. Railways, steamboats, canal boats,
express companies, stages, and the like, so far as they carry
goods, are common carriers.
2. Liabilities. Two things distinguish the liabilities of com-
mon carriers from those of private carriers and most other
bailees : first, they are liable for wrongfully refusing to receive
and transport goods ; second, they are insurers of goods against
all loss or damage, except such as may be occasioned by the act
of God, or of the public enemy, or of public authority, or of the
shipper himself, or which may be due to the inherent nature or
infirmity of the goods.
First. The duty to carry for all indifferently arises from the
public or quasi-public nature of "the calling. A refusal to carry
up to the limit of his facilities may render a common carrier
liable in damages, or he may be compelled by the courts to per-
form the duty specifically. Dangerous goods, Ol goods other than
those which the carrier professes to (any, may be lawfully re-
fused. Carriers, like railways, which enjoy special franchises (as
rights of way or the power to condemn lands for a righl of way)
may be compelled to supply reasonably sufficient facilities and
to carry the goods which the community requires to have carried,
but carriers not enjoying such special privileges cannot fie com-
pelled to supply greater facilities than they choose. The duty to
[08 BAILMENT [Cii. V
carry for all indifferently implies the duty not to discriminate
bet worn customers by giving any preference to the goods of one
over those of another, or by charging one shipper more than a
reasonable rate while carrying for another at a reasonable rate.
Aside from statute there is diversity of opinion as to whether a
carrier may carry for one at less than a reasonable rate, provided
he carried for others at a reasonable rate. There exist in most
states statutes governing the rates to be charged by common
carriers for transportation beginning and ending within a state,
and the Federal Congress has enacted a similar statute, known
as the Interstate Commerce Act, providing a method for regu-
lating the rates to be charged for transportation from one state
to another.
Second. The liability for loss or damage is very great. In the
absence of contract to the contrary, or of statutory modification,
a common carrier is liable absolutely for all loss or damage to the
goods in his hands as common carrier, except as follows :
a. The carrier is not liable for loss occasioned by an act of
God ; that is, by some force of nature beyond the control of man
and unconnected with any culpable human agency. Lightning,
extraordinary floods, cyclones, and the like are regarded as acts
of God. Fire, unless occasioned by lightning, is not. Accident is
not, unless it be what is termed inevitable accident. Fven if the
loss is due to an act of God, the carrier may be liable if the loss
is related approximately to some negligence of his.
Examples: i. The carrier negligently delays goods at X, where there
is known to be danger of a flood. Even if the goods are destroyed by an
extraordinary flood, the negligence in delaying them there may render the
carrier liable.
2. A steam boiler explodes without any known cause and injures a
shipper's goods. The carrier is liable.
3. Lightning sets fire to a freight car and destroys its contents. The carrier
is not liable.
4. A fire breaks out from causes unknown and destroys freight. The
carrier is liable.
b. The carrier is not liable for loss or damage occasioned by
the public enemy ; that is, by an organized military force making
war upon the country of the carrier or by pirates on the high
seas. Mobs, rioters, strikers, and the like are not regarded as
§69] COMMON CARRIERS OF GOODS 109
public enemies within this exception. The carrier is liable for
loss by theft. If he negligently exposes the goods to the risk of
destruction by the public enemy, when he could take a safer
route, he will be liable for the loss.
c. The carrier is not liable for losses due to the fault of the
shipper.
Examples : 1 . The shipper improperly packs breakable goods, as china,
and they are injured in transit. The carrier is not liable.
2. The shipper conceals money in a box of ordinary freight and it is lost.
The carrier is not liable for the loss of the money, because he is entitled to
be advised of the value of the goods in order that he may take necessary
precautions.
d. The carrier is not liable for any loss or damage due to the
intervention of some lawful public authority, as where goods are
taken from him by health officers or by seizure under legal process.
e. The carrier is not liable for loss or damage due to the
inherent nature or infirmity of the goods.
Example. The carrier is not liable for the decay of fruit unless he has
negligently delayed it in transit. He is not liable for the death of stock due
to disease or fright, unless such death can be proximately traced to some
negligence of his.
In any case the carrier is liable for his own negligence to the
same extent as any bailee for hire. He is liable for deviations or
delays resulting in loss if due to his negligence.
•3. Modifications of liability by contract or statute. A com-
mon carrier may, unless forbidden by statute to do so, contract
with the shipper to limit his liability to that of an ordinary bailee ;
that is, he may contract against liability as an insurer. The rule
that he should insure the safety of the goods was intended to
protect the shipper against collusion between the carrier and
highwaymen or other robbers. The reason for the rule has prac-
tically disappeared, and therefore the courts uphold contracts
which abrogate the rule so far as tiny are reasonable not
contrary to public policy.
Carriers have also soughl to contrad againsl their own negli-
gence or thai of their employees ; that is, againsl tin- liability fixed
for an ordinary bailee. This mosl courts have refused to permit
them to do, upon the -round that it is contrary to public policy.
no BAILMENT [Ch. V
*
Kngland and Now York permit it, although even there the shipper
is entitled, upon the payment of a higher rate, to have his goods
carried without such a Limited-liability contract.
In some jurisdictions statutes modify the common-law liability
of carriers in some particulars; for example, by exempting the
carrier from loss or damage by fire not due to the negligence
of the carrier.
By seet. jo of the Interstate Commerce Act a carrier engaged
in interstate commerce is liable to the shipper for the full dam-
age done to the goods, notwithstanding any limitation of liability or
limitation of the amount of recovery or representation or agreement
as to value in the receipt or bill of lading.
Contracts sometimes limit the amount of liability to a sum fixed by the
shipper as the value of his goods. These are generally upheld on the ground
that if the value is greater than that fixed, the carrier is entitled to greater
compensation for the added risk.
Contracts also often require claims for loss or damage to be presented within
a stated time ; and if the time allowed is reasonable, these are also upheld.
The consideration of these contracts is usually that the carrier will transport
the goods at a lower rate than that charged where his liability is that fixed by
the common law. (For the contract usually made see the uniform bill of lading
conditions, post.)
A mere notice not brought to the attention of the shipper cannot operate
to limit the carrier's liability. But a notice in a bill of lading, express receipt,
and the like is presumed to be assented to by the shipper who receives it, if it
is delivered to him before the goods are beyond recall. This rule does not
apply to a local baggage carrier who gives a receipt for baggage, because cus-
tom has not made such receipts evidence of a contract. In the case of the
ordinary railway ticket it must be shown that the person receiving the token
or ticket actually saw or knew of the notice when he took the receipt or pur-
chased the ticket, or had notice that there was some limitation in the ticket or
accepted the ticket with notice that it was a special contract.
4. When liability ends. Liability as carrier ends when the
goods are delivered to the consignee, or when after notice the
consignee leaves the goods an unreasonable time in the hands of
the carrier. In the latter case the carrier ceases to be liable as
carrier and becomes liable as warehouseman. In many states a
railway carrier becomes merely a warehouseman, without notice to
the consignee, when the goods arrive at their destination and are
unloaded into the railway freight house ; in other states the change
§69] COMMON CARRIERS OF GOODS in
of position occurs after the goods have been in the freight house
a reasonable time ; and in still other states, including New York,
it is further required that notice of arrival shall have been given
to the consignee or a reasonable effort made to give such notice.
Liability also ends when a carrier, having received goods to
be transported over its own and connecting lines, has delivered
the goods to a connecting carrier, unless the first carrier has
contracted to transport the goods to their final destination.
By sect. 20 of the Interstate Commerce Act, 1 where several car-
riers are engaged in transporting goods from one state to another
or from the United States to a foreign country, the initial carrier
is liable for all loss or damage on through shipments, even though
such loss or damage may have been caused by acts of the second
or later carriers. The initial carrier may, of course, recover from
the carrier actually responsible for the loss or damage any sums
which the initial carrier has been obliged to pay under this statute.
By merely accepting goods billed to a point beyond its own line, a carrier
does not, in the absence of statute, contract to be liable after the goods leave
its hands ; there must be something in the contract to that effect. This is the
general American doctrine, but in England and a few of our states it is held
that a railway accepting goods billed beyond its line impliedly undertakes to
deliver them at their final destination and is therefore liable for loss occurring
upon a connecting line. If the first carrier takes prepayment for the whole
transit, or in the bill of lading agrees "to forward," or uses like expressions
indicative of an agreement to deliver at the final destination, a contract for the
whole transportation may be implied. If the first carrier is not made liable by
its contract, the shipper must recover against the carrier that causes the loss
or damage; but goods found damaged in the hands of a railway company are
presumed to have been damaged by that company.
5. Delivery. The carrier must deliver the goods to the con-
signee or a connecting carrier or pay damages for nondelivery,
unless (a) they are claimed by one whose title is superior, as by
a true owner whose goods have been converted, or (b) the eon
signor has exercised the right of stoppage in transitu (sec p. 82
ante), or (c) they have been lost from a cause for which the car
tier is not liable If the carrier delivers to the wrong person, he
is liable for conversion. The carrier must use due diligence to
notify the consignee of the arrival of the goods.
1 Sec sect. 2(1 ,t)il<-.
[12 BAILMENT [Ch. v
6. Bills of lading, etc. A bill of lading is the written reeeipt,
bv a carrier, for goods delivered to the carrier for transportation,
and an agreement to transport and deliver them to a person named
therein or to his order. It is signed by an agent of the owner
oi the vessel, railroad, or other transportation agency.
The rules regarding the issuance and transfer of bills of lading,
and the rights and duties of carriers and shippers thereunder, are
now set forth in twenty-three jurisdictions 1 in the Uniform Bills of
Lading Act. By Act of Aug. 29, 19 16, Congress passed a Bills of
1 .ading Act practically identical with the Uniform Bills of Lading
Act. The federal statute, of course, governs only bills of lading
used in interstate commerce and commerce between the United
States and a foreign nation or the dependencies of the United States.
A charter party is a contract of affreightment in writing, by
which the owner of a vessel lets the whole or a part of her to a
person for the transportation of goods for a particular voyage, in
consideration of the payment of freight charges. A charter party
may leave the possession and control of the vessel with the owner,
or may transfer the possession and control to the freighter.
With the growth of commerce and the increase of carriers it
has been found advantageous to have a uniform bill of lading.
The Interstate Commerce Commission has approved a standard
form of a bill of lading which is now in general use. 2 Shippers,
when once familiar with it, need not scrutinize each one in order
to ascertain whether it contains some new term. Like the stand-
ard fire-insurance policy, it brings uniformity into an everyday
transaction and contract.
A shipping order is also used as a part of the uniform bill-of-
lading forms. This is an order signed by the shipper and ad-
dressed to the carrier, directing him to receive and carry the
goods. It contains the same conditions as the bill of lading.
There are also in use a uniform export bill of lading and a
uniform live-stock bill of lading.
1 These jurisdictions are California, Connecticut, Idaho, Illinois, Iowa, Louisiana,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hamp-
shire. New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont,
Washington, Wisconsin, Alaska, and the Philippine Islands.
2 The Interstate Commerce Commission now has under consideration the
approval of a revised standard form of bill of lading.
Ir.'.'ar- Bill ot Lading— Standard Farm of Straight Bill tl Ladlin, spproicd by the lalarstale Commtrct Coounlssloa bj Order No. 787 el June 27, 190&
The Delaware, Lackawanna & Western Railroad Company
Shipper's H a, ^ ^ r
Agent's No. O/V-i
STRAIGHT BILL OF LADING-ORIGINAL-NOT NEGOTIABLE
RECEIVED, subject to the classification* and unfli in efiect oo the date pi tasuc ol liua Original bill of Lading,
at.
tf.-H-.
py^<-<^
l'Jl£
the property described below, in apparent good order, except as noted
(contents and condition 6t contents of packages unknown), marked, consigned and destined as indicated below, which said Company
agrees to carry to its usual place of delivery at said destination, if on its road, otherwise to deliver to another earner on the route to
said destination. It is mutually agreed, as to each carrier of all or any of aaid property over all or any portion of said route to
destination, and as to*ach party at any time interested in all or any of said property, that every service to be performed hereunder
shall be subject to all the conditions, whether printed or written, herein contained (including conditions on back hereof), and which
are agreed to by the shipper, and accepted for himself and his assigns.
The Rate of Freight from.
in-
Oi^j-t-
IimiUI IF UlCitu IF 2d CUt*
%
10
Js in cents per 100 Lbs.
IF 4th cu»» IF 5th Class iFGwcin, /w
Consigned to_
Destination, _
J/rL^ £ ftn*^
Qlsil AUarcM — No* lot pujpos«»oi Delivery)
Route,
Dl*J-t4
_ State of _
A-
&
Car Initial,
_ County of_
_Car No._
v/sv'^
e^
•1C LACES
DESCRIPTION OF ARTICLES AMD SPECIAL MARKS
WEIGHT
rSubiect t* CoTwctMn '
cuss
01 IUIE
CHECK
COLUMI
If charges are to bo
prepaid, write or stamp
here, "To be Prepaid."
V
ftjL-4/3 )\s#^L^C*
/jTa
Received $
to apply in prepayment
of the charges on the
property described
hereon.
A.-: : of i *.h,«T
Per
(The •Um»tor» (Mr* »<rknowUdc*»
Onlf UMUDOUQt pr*p*kd )
Charges advanced :
*
AAfr , ^
TV^C --.
^Shipper
li^A. ^^^
_An<:nt
Per,
Per.
(ThMb UU MHUttbtrcMd t7 Sh.aKivlMS'MdBsrMl^ U~ *-J I ^ t— r'T »
The words " not negotiable " arc printed on the face of each uniform hill of lading
for the protection of carriers under certain state laws. They are sometimes
omitted where they interfere with the obtaining by the Bhippei oi advances
upon the bill of lading.
ii J
ii 4
I'.AII.MKNT
[Cn.V
Conditions
Sec. 1. The carrier or party in pos-
session of any of the property herein
described shall be liable for any loss
thereof or damage thereto, except as
hereinafter provided.
No carrier or party in possession of
any of the property herein described
shall be liable for any loss thereof or
damage thereto or delay caused by the
act of God, the public enemy, quaran-
tine, the authority of law, or the act or
default of the shipper or owner, or for
differences in the weights of grain, seed,
or other commodities caused by natural
shrinkage or discrepancies in elevator
weights. For loss, damage, or delay
caused by fire occurring after forty-
eight hours (exclusive of legal holidays)
after notice of the arrival of the prop-
erty at destination or at port of export
(if intended for export) has been duly
sent or given, the carrier's liability shall
be that of warehouseman only. Except
in case of negligence of the carrier or
party in possession (and the burden to
prove freedom from such negligence
shall be on the carrier or party in pos-
session), the carrier or party in posses-
sion shall not be liable for loss, damage,
or delay occurring while the property
is stopped and held in transit upon re-
quest of the shipper, owner, or party
entitled to make such request ; or re-
sulting from a defect or vice in the
property or from riots or strikes. When
in accordance with general custom, on
account of the nature of the property,
or when at the request of the shipper
the property is transported in open cars,
the carrier or party in possession (ex-
cept in case of loss or damage by fire,
in which case the liability shall be the
same as though the property had been
carried in closed cars) shall be liable
onlj tor negligence, and the burden to
prove freedom from such negligence
shall be on the carrier or party in pos-
session.
Sec. 2. In issuing this bill of lading
this company agrees to transport only
over its own line, and except as other-
wise provided by law acts only as agent
with respect to the portion of the route
beyond its own line.
No carrier shall be liable for loss,
damage, or injury not occurring on its
own road or its portion of the through
route, nor after said property has been
delivered to the next carrier, except as
such liability is or may be imposed by
law, but nothing contained in this bill
of lading shall be deemed to exempt
the initial carrier from any such liability
so imposed.
Sec. 3. No carrier is bound to trans-
port said property by any particular train
or vessel or in time for any particular
market or otherwise than with reason-
able dispatch, unless by specific agree-
ment indorsed hereon. Every carrier
shall have the right in case of physical
necessity to forward said property by
any railroad or route between the point
of shipment and the point of destina-
tion ; but if such diversion shall be from
a rail to a water route the liability of the
carrier shall be the same as though the
entire carriage were by rail.
The amount of any loss or damage
for which any carrier is liable shall be
computed on the basis of the value of
the property (being the bona fide in-
voice price, if any, to the consignee,
including the freight charges, if pre-
paid) at the place and time of shipment
under this bill of lading, unless a lower
value has been represented in writing
by the shipper or has been agreed upon
§69]
COMMON CARRIERS OF GOODS
"5
or is determined by the classification or
tariffs upon which the rate is based, in
any of which events such lower value
shall be the maximum amount to govern
such computation, whether or not such
loss or damage occurs from negligence.
Claims for loss, damage, or delay must
be made in writing to the carrier at the
point of deliveiy or at the point of origin
within four months after delivery of the
property, or in case of failure to make
delivery, then within four months after a
reasonable time for delivery has elapsed.
Unless claims are so made the carrier
shall not be liable.
Any carrier or party liable on account
of loss of or damage to any of said
property shall have the full benefit of
any insurance that may have been
effected upon or on account of said
property, so far as this shall not avoid
the policies or contracts of insurance.
Sec. 4. All property shall be subject
to necessary cooperage and baling at
owner's cost. Each carrier over whose
route cotton is to be transported here-
under shall have the privilege, at its
own cost and risk, of compressing the
same for greater convenience in hand-
ling or forwarding, and shall not be held
responsible for deviation or unavoidable
delays in procuring such compression.
Grain in bulk consigned toa pointwhere
there is a railroad public, or licensed
elevator, may (unless otherwise ex-
pressly noted herein, and then if it is
promptly unloaded) be there de-
livered and placed with other grain of
the same kind and grade without re
spect to ownership, and if so deli
shall be sulijcct to a lien for elc
charges in addition to all other di
under.
Sec. 5. Property not removed by the
party entitled to receive i( within I
eight hours (exclusive of legal holid
after notice of its arrival has been duly
sent or given may be kept in car, depot,
or place of delivery of the carrier,
or warehouse, subject to a reasonable
charge for storage and to carrier's re-
sponsibility as warehouseman only, or
may be, at the option of the carrier,
removed to and stored in a public or
licensed warehouse at the cost of the
owner and there held at the owner's
risk and without liability on the part
of the carrier, and subject to a lien
for all freight and other lawful charges,
including a reasonable charge for
storage.
The carrier may make a reasonable
charge for the detention of any vessel
or car, or for the use of tracks after the
car has been held forty-eight hours (ex-
clusive of legal holidays), for loading or
unloading, and may add such charge to
all other charges hereunder and hold
such property subject to a lien therefor.
Nothing in this section shall be con-
strued as lessening the time allowed
by law or as setting aside any local
rule affecting car service or storage.
Property destined to or taken from
a station, wharf, or landing at which
there is no regularly appointed agent
shall be entirely at risk of owner after
unloaded from cars or vessels or until
loaded into cars or vessels, and when
received from or delivered on private
or other sidings, wharves, or landings
shall be at owner's risk until the cars
are attached to and after they are de-
ta< lied fit .ni trains.
Sec. 6. No carrier will carry or be
liable in any way for any documents,
s|>ei ie, or for any articles ol <• M.iordi-
narj value not specifically rated in the
published classify ation i ir tai iffs, un
[i i pec id agreement to <lo so and
a stipulated value i>f the aiticlcs are
indorsed hereon.
1 1'
BAILMENT
[Ch. v
Sec. 7. Every party, whether prin-
cipal "i agent, shipping explosive 01
dangerous goods, without previous lull
written disclosure to the cai rier ol theii
nature, shall be liable for all loss or
damage caused thereby, and such goods
may be warehoused at owner's risk and
expense or destroyed without compen-
sation.
Sec. 8. The owner or consignee shall
paj the height, and all other lawful
charges accruing on said property, and,
if required, shall pay the same before
delivery. If upon inspection it is ascer-
tained that the articles shipped are not
those described in this bill of lading,
the freight charges must be paid upon
the articles actually shipped.
Sec. 9. Except in case of diversion
from rail to water route, which is pro-
vided for in section 3 hereof, if all or
any part of said property is carried by
water over any part of said route, such
water carriage shall be performed sub-
ject to the liabilities, limitations, and
exemptions provided by statute and to
the conditions contained in this bill of
lading not inconsistent with such stat-
utes or this section, and subject also to
the condition that no carrier or party in
possession shall be liable for any loss
or damage resulting from the perils of
the lakes, sea or other waters ; or from
explosion, bursting of boilers, breakage
of shafts or any latent defect in hull,
machinery, or appurtenances ; or from
collision, stranding, 01 other accidents
ol navigation, or from prolongation ol
the voyage. And any vessel carrying
any or all of the property herein de-
scribed shall have the liberty to call
at intermediate ports, to tow and be
towed and assist vessels in distress, and
to deviate for the purpose of saving life
or property.
The term "water carriage" in this
section shall not be construed as
including lighterage across rivers or
in lake or other harbors, and the
liability for such lighterage shall be
governed by the other sections of this
instrument.
If the property is being carried under
a tariff which provides that any carrier
or carriers party thereto shall be liable
for loss from perils of the sea, then as
to such carrier or carriers the provi-
sions of this section shall be modified
in accordance with the provisions of
the tariff, which shall be treated as in-
corporated into the conditions of this
bill of lading.
Sec. 10. Any alteration, addition or
erasure in this bill of lading which shall
be made without an indorsement thereof
hereon, signed by the agent of the car-
rier issuing this bill of lading, shall be
without effect, and this bill of lading
shall be enforceable according to its
original tenor.
IV. Cases not strictly of Bailment
70. Public carriers of passengers and baggage. Public carriers
of passengers are those who in the exercise of a public calling
hold themselves out as ready to carry all passengers who apply.
They are not, of course, bailees of the persons whom they carry, al-
though they are bailees of a passenger's baggage delivered into their
custody. Proprietors of railways, street railways, stagecoaches,
steamers, ferries, omnibuses, and the like are public carriers.
§ 70] CARRIERS OF PASSENGERS i 1 7
1. Passengers. Passengers are those persons carried by a pub-
lic carrier with his consent, except persons in his service. Persons
carried gratuitously, as well as persons who pay their fare, are
included. It is the duty of a public carrier, up to the limit of
reasonable accommodations, to carry all who are orderly and
who pay the reasonable charge.
2. Liability of public carrier of passengers. A public carrier
does not insure the safety of passengers as he does the safety of
goods, but he is bound to use the utmost skill, diligence, and
caution, so far as human foresight may go, and is liable for slight
negligence in this regard. He is liable also for any willful injury
inflicted by one of his servants, and is bound to use reasonable
care to protect the passenger from violence at the hands of other
passengers. He may eject a passenger for refusal to pay fare or
for disorderly conduct, using only as much force as is necessary
for that purpose.
Whether a carrier may limit his liability to a passenger by con-
tract, and especially the liability for the negligence of servants,
is a disputed question. He may in England and in New York
and some other states, but the United States Supreme Court and
the courts of most states regard such contracts as against public
policy, although the United States Supreme Court permits a
carrier to limit its liability to a passenger carried gratuitously.
3. Baggage. A carrier is bound to transport a reasonable
amount of baggage for each passenger. Baggage includes such
articles of necessity or convenience as a passenger may carry for
his personal use, but not articles carried as merchandise. For all
baggage that is delivered into the custody of the carrier he is
liable as insurer, unless the liability is limited by lawful contract.
In this respect the liability is the same as that of the carrier of
goods. There are therefore usually but three questions that arise
in the case of the loss of baggage: (1) Were the articles lost
really the baggage of the passenger ? (2) Was the baggage actu-
ally delivered into the custody of the carrier or did the passenger
retain custody of it? (3) Was there any lawful contract limiting
the liability of the carrier?
imples : 1. A traveler goin^ to the woods for recreation carried in
his trunk ^uns and fishing tackle and tennis rackets. The trunk was lost by
us BAILMENT [Ck.V
the carrier. Under the circumstances these articles were held to be properly
baggage.
2. A commercial traveler carried in a trunk samples of the goods he was
selling. These were held not to be baggage.
3. A traveler carried in his trunk presents for friends. These were held
not to be baggage.
4. A traveler carried a hand bag into the car and left it in his seat while
he went to the smoking car, and it was stolen. The baggage was not in the
custody of the carrier, and the latter was not liable for the loss.
71. Telegraph and telephone companies. These are not com-
mon carriers. A few jurisdictions have held them to be common
carriers, but the greater number treat them as companies render-
ing a public service and bound to serve all persons alike and for
uniform reasonable compensation. They do not insure the safety
and accuracy of messages, but are bound to use reasonable care
and are liable for ordinary negligence. They may become insurers
by contract for added compensation.
Whether they may by contract stipulate against their own negli-
gence is a disputed question. It is generally held that they may,
but some courts regard such contracts as against public policy.
Where such contracts are upheld, the telegraph companies
refuse to become liable for errors in transmission unless the
sender has the message repeated and pays an added compen-
sation therefor.
Either the sender or the addressee of the message may sue in
tort for damages arising from the negligence of the company, but
only the sender can sue for breach of contract, because he alone
has made a contract — unless, indeed, the sender was actually the
agent of the addressee and made the contract in his behalf.
It is generally made a penal offense for telegraph companies
or any of their employees to divulge the contents of telegrams to
anyone except the addressee.
REVIEW QUESTIONS AND PROBLEMS
Section 61. Define bailment ; bailor; bailee. Is a finder of lost property
a bailee? How is his duty fixed? What is the consideration for a bailee's
promise ? Can one who does not own property bail it to another ? Distinguish
bailment from sale ; from barter ; from a mutuum. May a bailee mix the
goods with other like goods?
REVIEW QUESTIONS AND PROBLEMS 119
62. State the two classes of bailments. State the subclasses of each. What
is a deposit ? What is a mandate ? What is a commodatum ? What is a pawn ?
What is a hiring? State three general and two special cases of hired services
about a thing. State two cases not strictly bailment but treated thereunder.
63. How is a bailment for bailor's sole benefit created? Is it a contract?
Must the bailor know of it? Must the bailee consent to it? What are the
bailor's obligations? What are the bailee's duties? How much care must he
use? Can he use the article? Is he liable if the article is lost? When is this
bailment terminated?
Problem 1. A bank undertook gratuitously to keep in its vaults a locked
chest of C's containing 550,000 in gold. The bank cashier stole it, together
with money belonging to the bank, and absconded. Is the bank liable to C ?
Problem 2. In the above case the directors learned that the cashier was
engaged in heavy stock speculations, but took no steps to investigate his
conduct. Result?
64. How is a bailment for the bailee's sole benefit created? Is a promise
to lend enforceable, and why? What is the bailor's duty? What are the
duties of the bailee? How much care must he use? May he lend the article
to others ? May he use it for a purpose not agreed upon ? May the bailee
deliver the article to a claimant other than the bailor? How is this bailment
terminated ?
65. Define a pledge. How is it created? What is essential? What war-
ranty does the pledgor make? Can he sell the pledged article? Can the
pledge be made irredeemable? What are the duties of the pledgee? What
care must he use? What are the pledgee's rights? How may he sell the
pledge? Can he purchase? When is the pledge terminated? What claim
does the pledge secure ? Who are pawnbrokers ? May they charge more than
the usual rate of interest?
Problem j. 15 owed a bank $5000. He then borrowed of the bank 510,000
and pledged 300 shares of stock as security for the loan. B then became in-
solvent and all his property was transferred to a trustee for the benefit of his
creditors. The bank sold the stock for > 13.500. paid the loan of 510.000,
and applied the surplus 53500 on the prior indebtedness. The trustee sues
the bank for this S3500. Which is entitled to it ?
66. How is a bailment by hiring a thing created? Is a promise by the
bailor to hire it to the bailee enforceable? Whal docs the bailor warrant?
What is his duly as to defects? What are the rights Oi the bailee.-' What
are his duties? Mow much care musl he use.- 11 a thud person injures the
le, 1 the bailee liabli ? Is he liable to third persons, and when:'' Are
they liable to him? Are they liable to the bailor? Wh<> is liable in case the
article is accidentally destroyed ? It the bailee uses the am. le otherwise than
he agreed, ■■'• hal 1 ■ the result :
[20 1! AILMENT [<'u. V
Problem 4. C hires a horse and carriage of X. B negligently runs into
and injures the carriage to the extern oi &20. C sues 15 for this damage.
May he recover?
Problem 5. As above. The horse falls sick while C is on a journey.
C leaves him with L) for care and treatment. 1) sues X for the expense.
Result?
67. What are the classes of bailments of the hiring of services about a
thing? What are the duties of the bailor ? How is compensation fixed? May
the bailee recover if he abandons the work midway? May he recover if, after
he has finished the work, the article is destroyed? What are the duties of the
bailee? How much care must he exercise ? What is the bailee's lien? Who
is a warehouseman? May he mix goods? Who are wharfingers? Is a safe
deposit a warehouse? Does money deposited in a bank create a bailment?
Problem 6. C deposited his goods in B's warehouse. They were stolen.
C sues B. C contends it is for B to show that he used due care. B contends
it is for C to show that B was negligent. Which is right ?
68. Who are innkeepers? Is a steamship an inn? Is a sleeping car?
Who are guests? Must an innkeeper receive all guests who apply? What
are his liabilities as to a guest's goods? State three holdings on this. What
do statutes provide? What is the innkeeper's lien? When is an innkeeper
an ordinary bailee ?
Problem 7. C drove to an inn and had his horse placed in the stable con-
nected with it. The horse was kicked by the horse of another traveler and its
leg broken. C sues the landlord of the inn. The landlord offers to prove he
was not negligent. Would such proof release him from liability?
Problem 8. An inn is accidentally burned and a guest's clothes, jewelry,
etc. are destroyed. Is the innkeeper liable?
Problem g. While C was in a sleeping-car berth, and while asleep, he was
robbed of his money and watch. Is the sleeping-car company liable to him
for this loss ?
69. Who are common carriers? What two things distinguish a common
carrier from a private carrier? What goods must a common carrier accept?
May he give special rates? What statutes govern rates ? How can a common
carrier escape liability for loss of goods ? What is an act of God ? Who is a
public enemy ? When is the shipper at fault ? What are inherent infirmities
in the goods? May a shipper contract against loss by above causes? May he
contract against loss due to his own negligence or that of his servants? When
does his liability as common carrier end? What is the liability of a railway
when goods reach their destination and arc placed in the freight house?
When goods go over several railways, which is liable for damage to them?
When is a common carrier excused for nondelivery? What is a bill of lading?
What is a charter party ?
REVIEW QUESTIONS AND PROBLEMS 121
Problem 10. B owned a sloop which he used for his own business. On
two occasions he carried goods for C. On the second occasion the sloop was
driven ashore (not by an act of God or by the negligence of 13) and the goods
were injured. Is B liable to C?
Problem n. B owns a vessel running regularly between two ports and
carrying passengers and freight. C ships goods on the vessel. It is destroyed
by fire while at sea. Is B liable to C for the loss of the goods?
Problem 1 2. In the above case the vessel is captured by a war vessel of
another nation with which B's nation is at war, and the goods are confiscated.
Is B liable to C ?
Problem /j. C shipped plate glass from New York City to Marion, N.C.
The glass went over four different railroads. At Marion it was found to be
broken. C sues the B. Railway, which delivered the glass at Marion. The
bill of lading provided that " no carrier shall be liable for loss or damage not
occurring on its own road," and only for loss by negligence. When the B.
Railway received the box, there was no sign of breakage, nor was there any
when it reached Marion, until the box was opened. The B. Railway contends
that it is not liable unless C shows that the breakage occurred on its road.
C contends that the B. Railway must show that it was not negligent. Which
is right?
70. Who are public carriers? Who are passengers? What is the liability
of a public carrier for safety of passengers, and what for safety of baggage?
What is baggage? May the carrier limit liability for its loss?
Problem 14. C, a passenger, brought action against the B. Railway for
loss of baggage. The trunk contained very valuable dress laces worth $10,000.
C was a wealthy foreigner traveling in this country, and the laces were a part
of her wearing apparel. Is the Railway liable for these laces?
71. Are telegraph and telephone companies common carriers? What is
their liability? May they contract against their negligence? May the addressee
of a message sue for negligence f How ?
CHAPTER VI
INSURANCE CONTRACTS
72. Nature and kinds of insurance. Insurance is a system for
distributing the losses of a few persons among a large class of
persons similarly situated. This is accomplished by raising a
general fund through small contributions by many persons, each
contributor being entitled to indemnity out of the fund in case
a loss falls upon him. If iooo persons, having in the aggregate
property valued at $5,000,000, pay annually into a common fund
1 per cent upon this valuation, a fund of $50,000 will be raised,
out of which losses by fire falling upon any of these persons could
be paid. If these 1000 persons live in widely separated parts of
the country, it is unlikely that many of them will suffer losses
by fire in the same year.
Almost every conceivable risk may now be insured. The main
heads of insurance are marine insurance, fire insurance, and life
insurance, but there are companies which insure against tornadoes,
steam-boiler explosions, breakage of plate glass, defects in titles,
defaults or embezzlements by agents, injuries to employees,
injuries to oneself, and numerous other hazards.
Marine insurance — that is, insurance against the risk of the
loss of vessels and cargoes at sea — is probably the oldest form
of insurance and has been traced back to the twelfth or thir-
teenth century. Fire insurance came into prominence after the
great London fire of 1666. Life insurance began practically in
the eighteenth century.
In marine and fire insurance the properties insured are classi-
fied according to the risk, and the premium is higher or lower as
the risk is greater or less. In life insurance only those persons
who are regarded as good risks are insured, and the premiums
are graded according to the age of the insured. Statistics have
been accumulated upon which average results may be predicted
and the premiums based.
222
§§73,74] POLICIES — DEFINITIONS 123
73. Kinds of policies. The policies, or contracts of insurance,
issued by insurance companies are of various kinds, but it is
necessary to distinguish the valued and the open policy.
The valued policy is one that fixes the amount to be paid in
case of loss. These policies are always used in life insurance,
and are very generally used in the insurance of ships, though
not of cargoes. In case of the death of the insured or the loss
of the ship the sum specified is paid.
The open policy is one in which the amount to be paid in case
of loss, not exceeding a certain sum, is left to be fixed after the
loss occurs. These policies are generally used in fire insurance.
Life-insurance policies are either the life policy, payable only at
the death of the insured, or the endowment policy, payable when
the insured reaches a certain age or upon his death at any prior
date. There is also a term policy for a fixed number of years,
payable only if the insured dies within that time.
74. Definitions. Insurance is a contract whereby for a stipu-
lated consideration one party agrees to compensate or indemnify
the other for loss on a specified subject by specified perils.
The insurer is the one agreeing to indemnify ; he is some-
times called the underwriter. The insured is the one to whom
the promise runs. The premium is the agreed consideration.
The policy is the written contract. The risk, or peril, is the
event insured against. The insurable interest is the subject,
right, or interest to be protected ; it is such an interest as
will entitle the person possessing it to obtain a lawful contract
of insurance (see sect. 76 post).
Life insurance is a contract to pay a designated or determi-
nable person a certain sum, or an annuity, in the event of the
death of the- person whose life is insured. Endowment life
insurance is a contract to pay a certain sum or annuity to the
person whose life is insured if he lives a certain length of. time,
or to a designated person if he dies before this time. There are
various forms of the tontine, or dividend, system. An endow-
ment policy is a form of investment by the insured as well as
an insurance proper.
Accident insurance is a contrad to indemnify the insured
against personal injury resulting from accident, and usually
124 LNSl RANCE CONTRACTS [Ch. VI
includes a contract to pay a specified sum to his estate or to a
designated person in case of death resulting from accident.
Workmen's compensation insurance is a contract to indemnify
an employer against loss suffered from bavin-;' to pay to an em-
ployee a sum due because of injuries sustained by the employee
in the course of his employment.
Marine insurance is a contract to indemnify the insured
against loss to property (ships and cargo) arising from the
perils of the sea during a certain voyage or a certain period of
time. It may be issued to cover risks arising on any navigable
waters, whether sea or inland.
Fire insurance is a contract to indemnify the insured against
loss of property or damages to it by fire.
Casualty insurance is a contract to indemnify the insured
against damage to property arising from accidents, such as
boiler explosions, floods, tornadoes, hail, failure of crops, break-
age of -plate glass, death of cattle, burglary, etc.
Guaranty and fidelity insurance is a contract to indemnify the
insured against loss arising from fraud or dishonesty of agents
(fidelity insurance) ; the negligence of employees resulting in
damage to other employees for which the employer is obliged
to pay (employers' liability insurance) ; the injury to passengers
for which the carrier is obliged to pay damages (carriers' lia-
bility insurance) ; the insolvency or dishonesty of debtors (credit
insurance) ; the failure of tenants to pay rent or the loss of rents
incident to fires or other injury to premises (rent insurance) ; the
defect or failure of title to real property (title insurance) ; or the
interruption to business by strikes among employees (strike
insurance).
Reinsurance is a contract whereby the reinsurer agrees to
assume the risk, in whole or in part, which was undertaken by
the original insurer. If the reinsurance policy binds the rein-
surer to pay the insured, the latter may maintain an action
against the reinsurer upon the theory of a promise made to one
person for the benefit of another person (see sect. 33 ante) ; but
in the absence of such a clause the insured can look to the origi-
nal insurer alone, and the original insurer will look to the rein-
surer for indemnity. It often happens that an insurer takes a
§75] CHARACTERISTICS 125
very large risk and thinks it prudent to divide it by reinsuring
some portion of it in another company. The reinsurance is a
kind of guaranty insurance.
75. Characteristics. There are these main characteristics in
the insurance contract.
1 . The contract is aleatory ; that is, depending upon an uncer-
tain event. It is a wagering contract. If one insures property
or a life in which he has no insurable interest, the contract is
called a wager and is illegal. If he has an insurable interest,
the contract is valid, although it is still in the nature of a wager.
2. The contract is one of indemnity ; that is, to make good
against loss in the event that loss occurs. In the open policy
the amount of the loss is to be ascertained after it occurs. In
the valued policy the parties agree in advance upon the value
of the subject matter of the contract; if it is then destroyed,
the loss is taken to be that so fixed by the parties. In life-
insurance policies the sum is always fixed, subject to a possible
increment by way of dividends.
There is one important difference between an open fire policy and an open
marine policy. If, in an open fire policy for $10,000 upon property worth
< 20.000, property worth $5000 is destroyed, the insured recovers its full
value. In an open marine policy he would recover only that proportion of
the amount insured (S 10.000) which the loss ($5000) bears to the true
value of the property insured ($20,000); namely, one fourth, or 52500. In
order to be fully protected in a marine risk, the insured must insure to the
full value and, of course, pay a larger premium.
Another incident of the indemnity feature is that if the property insured
be destroyed by the negligent act of a third person, so that the owner
might maintain an action against the wrongdoer f'>r the damage, the insurer,
upon paving the loss to the insured, is subrogated dli.it iv. substituted) to
the rights of the insured in such action. Were it otherwise, tin- insured would
roovcr his loss twice over. This does not apply, however, to life insurance
where the insured is killed by the wrongful or negligent ad <.f another.
If the insured has two fir<- policies in different companies upon the same
:.crty, the companies contribute ratably t.. indemnil ny loss. II one
1 the whole loss, it may secure a ratable contributi tin- other.
t,. 'II,,- contract indemnifies even againsl tin- carelessness
,,r neglig ; the insured. This is highly important, because
if the insurer could defend after 1<>ss upon the ground thai the
insured, by his negligence, contributed to the disaster, tin- policy
126 INSURANCE CONTRACTS [Ch. VI
would not be nearly so valuable a security against serious pecu-
niary losses. It does not indemnity against willful destruction by
the insured, except that suicide will not, by the weight of author-
ity, defeat a life-insurance policy unless the insured can be shown
to have taken out the policy with the intent to commit suicide.
There are also many terms and some warranties in insurance
contracts, the breach of which may prevent the insured from
recovering; for example, in accident policies, that the insured
shall not voluntarily expose himself to unnecessary risks, or in
fire policies, that the insured shall use reasonable care and means
to save property after a fire begins.
The case of suicide has caused the courts much perplexity. The federal
courts and some state courts refuse to allow the estate of the deceased to
recover where the insured committed suicide when sane, regarding it as
against public policy. Some states allow a third person named as benefi-
ciary to recover where they do not allow the estate of the deceased to
recover. All courts allow a recovery in any case where the insured com-
mitted suicide while insane, unless the policy expressly excepts that risk ;
but the exception of the risk of " death by suicide " covers only suicide
while sane ; in order to exempt the insurer the policy should read " death
by suicide whether sane or insane excepted." One or two states have by
statue forbidden insurance companies to insert such a clause.
In case the insured is executed by the law for a capital offense the insurer
will not be liable on the policy, even though that risk is not expressly excepted.
Many life-insurance policies now contain a clause declaring the policy
to be incontestable after a certain period (say two or three years after it
is issued). In such case it is generally held that the insurer can contest
the policy only for a lack of any insurable interest or for actual fraud in
procuring it.
4. The insured must have an insurable interest (see sect. 76).
5. The contract requires the highest good faith on the part of
the insured (see sect. yj).
6. The contract contains warranties, the breach of which may
avoid the policy (see sect. 78).
7. The statutes often prescribe the form of policy which must
be issued (see sect. 79). Insurance contracts may be oral. Stat-
utes prescribing a form of policy do not prevent oral contracts, but
subject an oral contract to the provisions of the statutory policy.
It is usual in large insurance offices to issue to the insured tem-
porarily a " binding slip," which is a brief memorandum of the
§76] INSURABLE INTEREST 127
insurance contract and gives protection pending the delivers- of
the formal insurance policy.
76. The insured must have an insurable interest. In order
that a policy may be valid it is necessary that the one taking it
out shall have an insurable interest in the property or the life
upon which the policy is issued.
1 . Insurable i)itcrcst in property. An insurable interest in
property is an interest in property, or a liability in respect of
property, of such a nature that the loss of the property might
cause a pecuniary injury to the one possessing such interest or
under such liability.
Example. A pledgee has such an interest in the pledge that its destruction
would or might result in a pecuniary loss to him ; so also, of course, has the
pledgor. Both the mortgagor and the mortgagee of property have an insurable
interest. A stockholder has an insurable interest in the property of the cor-
poration. A farmer has an insurable interest in crops to be raised in the future
upon his land. A mere expectancy, like that of an heir who expects to inherit
his ancestor's property, does not create an insurable interest. If one insures
his property and afterwards sells it, the policy does not pass to the new owner
without an assignment with the consent of the insurer.
■,-.'
2. Insurable interest in a life. This is very difficult to define.
Any reasonable expectation of pecuniary benefit from the con-
tinued life of another creates an insurable interest in that life.
If one depends upon another for support or education, in whole
or in part, he has an insurable interest in that other's life. Thus,
a wife has an insurable interest in the life of her husband. If one
is entitled to the services of another, he has an insurable interest
in that other's life. Thus, a husband has an insurable interest in
the life of his wife, and a father has an insurable interest in the
life of his minor ehildren. If one has a pecuniary claim upon
.■mother, he may insure that other's life. Thus, a creditor has an
insurable interest in the life of his debtor. Mere relationship by
blood or marriage 'Iocs not of itself create an insurable interest.
One brother has no insurable interest in the life of another
brother merely because of the relationship; he mighl have if he
wen- dependent upon the brother. < me may value his interest
in his own life, or in the life oi one upon whom lie depends, or
to whose services by virtue ot family relationship he is (untied,
[28 INSl R \NCT. CON TRACTS [Ch. VI
at any sum agreed upon ; but a creditor cannot insure the life of
his debtor for a sum greatly in excess of the debt. It seems to
be necessary that the person whose life is insured by another
should consent to the insurance, but this matter is in some doubt.
There are grounds of public policy which might require the con-
sent of a person to have insurance taken out upon his life.
The insurable interest in property must continue throughout
the term of the policy, or at least exist at the time of the loss.
It is enough in life insurance that it exist at the time the policy
is taken out. So also in life insurance the policy may be assigned
to one who has no insurable interest, if it was taken out in good
faith by one who had an insurable interest ; and the insured may
make his policy payable to anyone if he takes it out himself.
Where a policy designates the beneficiary, the right under the
policy becomes vested in such beneficiary and cannot be disturbed
without his consent, except in mutual-benefit insurance — such, for
example, as that provided by fraternal orders. Should the bene-
ficiary die, however, before the insured, a new beneficiary may
be named.
77. The contract of insurance is one requiring the highest good
faith. In ordinary contracts a party is not bound to disclose what
he knows about the subject matter of the contract ; it is for the
other party to discover whatever he may deem important. So long
as there is no misrepresentation the contract is valid and bind-
ing, notwithstanding the fact that one party knew and did not
disclose certain material defects ; but insurance contracts stand
upon a peculiar basis in this respect.
1. Concealment. The insured is bound to disclose to the in-
surer every material fact known to him which affects the risk.
But this rule is qualified in the United States, except as to marine
insurance, by requiring that bad faith be shown in order to avoid
a policy because of concealment.
Examples: i . An attempt has been made to burn B's property. B becomes
alarmed and effects insurance without disclosing this fact. The policy may be
avoided by the insurer upon the ground of B's concealment.
2. B effects insurance upon his house, omitting to state that it is within a
few feet of a fireworks manufactory. This concealment as to the risk is fatal
to the validity of the policy.
§7S] WARRANT IKS 129
The rule is very strict in marine insurance and extends to inno-
cent nondisclosure due to forgetfulness or inadvertence, but in
fire and life insurance it now probably extends in this country
only to intentional concealment of some material fact, amounting
to bad faith. Where the insurer asks a series of questions in an
application blank, a truthful answer to these questions is all that
is generally required ; but even in this case the insured cannot
intentionally conceal a highly material fact, as that an attempt has
been made to set fire to the property.
2. Representations. Representations are statements as to ma-
terial, existing facts, made by the insured, usually to give informa-
tion concerning the risk, and inducing the insurer to issue a
policy, but which do not become terms in the contract itself. A
material false representation, however innocently made, will avoid
the policy ; there is an implied condition that a policy shall be en-
forceable only if the representations which induced the insurer to
issue it are true. But a representation as to future conduct, that
is, a promissory representation, is not technically a representation,
because not made as to an existing fact. It is of no effect unless
it is made a term in the policy. So representations as to opinion
or belief are not material ; no one should rely upon them.
Examples : 3. B insures C's warehouse. C by mistake states that there is
already $200,000 of insurance on the building: there was in fact but 530.000.
This is material, since with $200,000 of insurance B's ratable portion in case
of loss would be less than if there were but 530,000. If the building burns,
C can recover nothing from B. It makes no difference that C believed his
statement to be true.
4. C orally states to B that if B insures his building he (C) will cease using
a certain fireplace in it. The building burns. B seeks to avoid the policy by
showing that C continued to use the turpi. ice. This is a promissory Statement
and it will not avoid the polity. If I! wants the benefit of a promise, he must
rporate it into the written contract.
78. Warranties. Unless there be a waiver of it. or an estoppel
to set it up, the breach of a warranty in an insurance contract
will avoid the policy.
1. Warranties explained. A warranty, is a statement or promise
which is included in the policy itself, or in a separate paper in-
corporated into the policy by reference, and which is made an
ential part of the contract. Its falsity or nonfulfillment will
130 INSURANCE CONTRACTS [Ch. vi
avoid the policy. A representation is merely an inducement to
the making of the contract. A warranty is a part of the contract
itself. Representations must be shown to he material, and it is
enough that they are substantially complied with. Warranties are
material because inserted in the contract, and they must be strictly
and literally complied with. They may be either affirmative of an
existing fact or promissory. Note that "warranty" has one mean-
ing in insurance contracts and another in contracts of sale (see
sects. 53, 54, 57 ante). In the latter the buyer may, under the
Uniform Sales Act, treat the warranty as collateral or as vital,
while in the former it is always a vital term in the main contract.
If a warranty in a sale is broken, the buyer may elect between
an action for damages and rescission : but if a warranty in insur-
ance is broken, it discharges the contract ; no action for damages
for its breach results.
Exatnples : \ . B represents that his vessel has twelve guns and twenty
men. She has substantially this number and the policy is good.
2. B warrants that his vessel has twelve guns and twenty men. She has
substantially this number, but the policy is avoided because there is a breach
of the warranty in not having precisely the armament and force warranted.
3. B represents that ashes are taken out of his factory in iron hods. They
are taken out in copper hods. The representation is substantially true and the
policy is binding. But if B warrants that the ashes are taken out in iron hods,
there is a breach of the warranty and the policy is avoided. (So stringent is
this rule that the courts incline to hold statements to be representations when
possible, and some states have statutes to relieve against forfeitures for tech-
nical breaches of warranty.)
4. B, in answer to the printed questions which are made by reference a
part of the policy, states that he is thirty years old. He is in fact thirty-five.
The policy is not binding on the insurance company. This is a warranty.
5. B states as a warranty that the building insured is used " for winding
and coloring yarn." He afterwards uses the building for another purpose.
There is no breach of warranty. He did not warrant that the building would
continue to be used for the purpose it was used for when the policy was
taken out.
These rules as to warranties are so strict and work so many
hardships that statutes in many states provide in substance that
warranties shall not avoid an insurance policy unless they are in
fact material. This makes warranties more like representations.
In general, courts will, if possible, construe an insurance policy
§79] STANDARD POLICIES 1 31
so as to save the just rights of the insured against forfeiture for a
merely technical breach that does not in fact injure the insurer.
2. Waiver and estoppel. The doctrines of waiver and estoppel
are frequently invoked to prevent the insurer from taking advan-
tage of a misrepresentation or breach of warranty by the insured.
Waiver is the voluntary relinquishment of a known right. Estop-
pel is a bar raised by the law to prevent one party from denying
that he has relinquished a right when by his conduct, though
unintentionally, he has led the other party reasonably to rely
upon the conclusion that he has relinquished it.
Examples : 6. A policy provides that it shall be forfeited if the insured
increases the risk. The insured increases the risk by using the property for
manufacturing puposes. The insurer with knowledge of the facts tells the
insured that the forfeiture is waived ; this is binding. Again with knowledge
of the facts the insurer accepts the premium ; this estops the insurer from
denying that he has waived the forfeiture.
7. The policy provides that if the building insured is on leased ground, the
policy shall be forfeited. Although this is a warranty that the building is not
on leased ground, still if the insured informed the insurer, when the application
was made, that the building was on leased ground, the insurer is estopped to
set up a forfeiture. 1
Whether a particular agent has authority to waive a stipulation
in the policy is often a question of great nicety. Whether a re-
striction upon an agent's authority contained in the policy itself
will operate as notice to the insured of such restricted authority
is a question upon which the decisions are inharmonious. The
weight of authority is that the agent who issues the policy may
make a contemporaneous waiver, although he might not have
authority to make a subsequent one.
79. Statutory or standard policies. In order to avoid the diffi-
cult questions and the uncertainties raised by the- widely differing
forms of fire-insurance policies, many states have passed statutes
requiring the insurance companies to issue a uniform standard
policy prescribed by the statute- itself. The leading form is the
1 Massachusetts and Ww Jersey hold that there is no waiver or estoppel in such
a case, because they refuse to permit a written stipulation t" be varied 1>\ parol evi-
dence of prior or contemporaneoui oral 1 -11)111111]!. a ts, though it mighl be varied
ubuquent communications. It is the theory that all prior and contemporaneous
communications arc merged in the written contract This is the doctrine held by
the United States Supreme Court also.
l 3 2 INSURANCE CONTRACTS [Ch. VI
*
Now York standard policy. Copies of this may be obtained of any
fire-insurance agent, and it should be carefully read by all who
carry fire insurance, in order that there may be no inadvertent
violation of the terms by the insured. Massachusetts has a
standard policy which differs in some important particulars from
that of New York.
For example, the New York form provides that the policy shall be void if
the building insured becomes vacant or unoccupied and so remains for ten
days, while the Massachusetts form allows thirty days. Many clauses found in
the New York form are absent from the Massachusetts form. For example,
the New York form provides that the policy shall be void " if the interest
of the insured be other than unconditional and sole ownership," or " if the
building be on ground not owned by the insured in fee simple," or " if per-
sonal property be or become encumbered by a chattel mortgage," while the
Massachusetts policy is silent as to all of these conditions.
80. Marine insurance. In the insurance of a ship or cargo
against risks at sea there are always three implied warranties :
namely, that the ship is seaworthy, that there shall be no vol-
untary deviation from a specified route, and that the adventure
shall be for a legal purpose.
General average is a contribution made by the various owners
of a- ship and cargo toward a loss sustained by one owner whose
property has been voluntarily sacrificed for the common safety,
as where, in a storm, goods are cast overboard to lighten the
ship. But the one whose goods are thrown over loses his pro
rata share of the goods also. Throwing property over for such
a purpose is called jettison. General average is a rule of the
admiralty courts based upon the usages of maritime commerce.
Example. B's property, valued at $4800, is cast overboard in order to save
the ship and the rest of the cargo. The ship is valued at $50,000 ; it earns
$2000 on the goods saved and loses $200 on the goods jettisoned ; the rest of
the cargo is C's and is valued at £43,000.
Loss: $4800 + $200 = $5000.
Contributors: $4800 + $200 + $52,000 + $43.°°° = $100,000.
Percentage loss for each, 5 per cent.
B gets $4800 — $240 = $4560, of which the ship pays $2600 -$190
= $2410, and C pays $2150.
This is a rule in admiralty only. If B's building is torn down to stay the
spread of fire, he recovers no contribution from property thus saved.
§80] REVIEW QUESTIONS AND PROBLEMS 133
A marine insurer is bound to make good to the owners of
property saved the contribution they pay to one whose property
was sacrificed. So also the marine insurer is bound to pay in
full the loss of the one whose goods were sacrificed, and is
then subrogated to his rights of contribution against those whose
property was saved.
If the policy on a vessel or goods is merely a fire policy and not
a marine policy, the rule of general average has no application.
REVIEW QUESTIONS AND PROBLEMS
Section 72. Explain the system and object of insurance. How did it
originate? How are premiums fixed?
73. Distinguish between valued and open policies. Distinguish life,
endowment, and term policies.
74. Define insurance; insurer; insured; premium; policy; risk; insurable
interest. What is life insurance? What is accident insurance? marine insur-
ance? fire insurance? casualty insurance? guaranty or fidelity insurance and
its kinds? What is reinsurance? May the party originally insured recover
against the reinsurer?
75. Name the characteristics of the insurance contract. Is it a wagering
contract ? Is it an indemnity contract, and why ? How much may be recovered ?
How much in an open marine policy? If one has two policies, how is the loss
adjusted? What is subrogation? May one recover insurance on his building
burned by his own negligence? If the insured commits suicide, may his estate
recover on the policy? May an insurance contract be by parol?
76. What is an insurable interest in property? Illustrate. What is an
insurable interest in a life? Illustrate. When and for how long must the
insurable interest exist?
Problem /. C owned a patent and leased the exclusive use of it to B. C
then insured the property used by B in order to protect the claim for royalties
for the use of the patent. B's property burned. The insurance company
claims C had no insurable interest in B's property. Result?
Problem 2. C is a stockholder in a corporation. He insures the corporate
property, which afterward burns. Had he an insurable interest?
Problem J. An uncle insured his nephew's life. I'pon the nephew's death
the insurance company I payment of the policy upon the ground that
the uncle harl no insurable interest in the nephew's life. Result?
77. In what important respect do insurance contracts differ from ordi-
nary contracts? What is the duty "f the insured as to disclosures? How lias
rule been modified? What an- representations? What are promissory
representations? What is the effect of innocent misrepresentation
134 INSURANCE CONTRACTS [Ch. VI
Problem 4. C's building is threatened from a neighboring fire. He at
once secures insurance on it, concealing the danger. Is the policy binding
on the insurance company?
Problem $. C secured insurance on the life of X. No information con-
cerning X's habits was asked or given, but other questions were asked and
truthfully answered. X was to C's knowledge very intemperate. Is the policy
binding on the insurance company?
Problem 6. C secures insurance on a vacant building and states orally
that it will be occupied. It is not occupied, and it burns. Is the insurance
company liable?
78. What is*a warranty? How does it differ from warranty in a con-
tract of sale? How must it be fulfilled? Distinguish it from representation.
What is a waiver? What is an estoppel? What is the effect of a breach
of representation or of warranty?
Problem 7. C in the written application for insurance on his building
(which becomes a part of the policy) states that " there is a watchman
nights." The fire occurred on Sunday morning before daylight when there
was no watchman. C tries to show a custom not to keep watchmen after
twelve o'clock Saturday night. Should he be permitted to do so? Is the
warranty broken?
Problem S. C represents his building as " occupied as a dwelling house."
(a) It is in fact vacant. Is the insurance valid? (b) It is occupied when
insured, but afterwards becomes vacant. Two days later it burns. May C
recover the insurance?
79. What is the standard policy? Must it be used? How are its terms
fixed ?
80. What three implied warranties in marine insurance? What is general
average? What is jettison?
Problem g. (a) B's cargo is worth $29,000 ; the freight to be paid on it
is $1000. B's goods are thrown overboard to save a ship in a storm. The
ship and the rest of the cargo are saved. The ship is worth $50,000 and
earns on the voyage $2000 net freight (not including that on B's goods).
C's goods are worth $33,000 and D's are worth $35,000. Figure the general
average and how much B will receive and how much he will lose ; how
much the ship will receive and how much it will lose, (b) In case B's goods
are fully insured and the insurance is paid him, what are the rights of the
insurance company?
PART III. PARTICULAR CONTRACTS
CONCERNING CREDITS
CHAPTER VII
CREDITS AND LOANS
81. Capital and credit; money and exchange; payment. In
the conduct of a business it is necessary to consider the subjects
of capital, credit, money, exchange, and the mode and effect of
payments.
i. Capital. In any business enterprise capital is the total
amount, measured in money, that is invested in the business.
This capital sum is divided into that which goes to provide a
business plant, equipment, stock, etc. and that which remains in
available cash after these are installed. The latter is the working
capital, for the equipment and stock must be kept intact or, if
stock is sold, as in merchandising, it must be replaced in order
that the business may go on. The working capital should be
sufficient to enable the business to be carried on when collections
are slow or when debtors become insolvent. Some of it may be in-
vested in live interest-bearing securities, which in case of need can
be quickly sold or used as collateral security for temporary loans.
An individual, partnership, or corporation starts a manufacturing business.
The plant and equipment cost $100,000. The annual manufactured product
amounts to $1,500,000. It costs $600,000 for raw material and SK00.000 for
labor, repairs, insurance, and other expenses, leaving an annual profit of
5100,000. How much working capital should there be over and above the
plant and equipment? This will depend upon the readiness of sales and ml
•ions, and upon other 1 onsidi Bui il tin- manufacturer wishes to be
able to carry on his business t"i time months with practically no income, he
must hi quarter of his total annual cosl oi operation ; namely, <35o,ooo.
There would then be invested .-450,000, with an annual profit of about
5100,000, or say on the average 20 per < int.
'35
i3<> CRKDITS AND LOANS [Ch. VII
2. Credit. Credit consists in the ability to secure some present
benefit under an agreement that the return therefor shall be post-
poned to some future day, — as the ability to borrow money or
obtain goods or services to be paid for Ulrica Iter. It is the result
of the favorable opinion of the mercantile community or of the
particular lender or seller as to the solvency, honesty, and busi-
ness capacity of the borrower 'or buyer. Commercial agencies
publish periodical estimates of the ability of business concerns to
meet credit obligations, and these are largely used by those who
are requested to extend such credit. The two principal agencies
in this country are Bradstreet's and Dun's. In addition to these
two agencies there are a number of trade agencies which specialize
in the particular trades they serve. Every business man needs
credit, and his rating in these publications is of great importance
to him. If he gives false information in order to secure credit, he
may be liable in deceit to anyone injured thereby. If false in-
formation is given in the publications, injurious to his credit, he
may have an action against the agency for damages. Should the
agency through negligence give false information to the subscribers
about the credit of a person rated, and if one of the subscribers,
by extending credit on the strength thereof, should suffer a loss,
the agency might be liable to the subscriber.
Good credit is of the first importance to a business man.
Whether he wishes to borrow money or to purchase goods on
deferred payments, he must have the reputation of possessing the
ability and inclination to meet promptly his pecuniary obligations.
Often he must give security, which may take the form of a pledge
of things of value, like bonds, or of a mortgage on property, or
of a guaranty by some third person. If one borrows money at a
bank, he may be required to have his note indorsed by one or
more persons, who are known as accommodation indorsers.
Aside from the credit system above mentioned, there is a system of using
credit temporarily in place of money for present payments. This is by issuing
checks. Including these, the larger part of the business of the country is done
on credit, and money is, after all, only an auxiliary to it. Enormous trans-
actions take place without the actual transfer of a dollar in cash. Every day
the New York clearing house meets to strike the balance among the banks
belonging to it. If bank A presents checks which it has received against banks
B, C, and D to the amount of $1,125,382, and if all the banks combined
§81] CAPITAL, CREDIT, AND MONEY 137
present checks which they have received against bank A to the amount
of Si. 31 5.460, then bank A owes the clearing house $190,078. If bank B
presents checks against banks A, C, and D to the amount of $1,847,625,
and they present checks against it to the amount of $1,620,347, then the
clearing house owes bank 13 $227,278. In this way the balances are struck
and the clearing house receives the cash from the debtor banks and pays it
out to the creditor banks, being at the close of the transaction not a penny
richer or poorer. But while there is an average of about $200,000,000 of
checks thus passed through the clearing house daily, only about 5 per cent
of cash balances is paid in and paid out. Thus 95 per cent of the business is
done by a system of check credits.
Even banks themselves sometimes need credit in order to meet their obli-
gations. Upon depositing with the clearing house its bills receivable or other
securities, a bank may obtain clearing-house certificates to 75 per cent of the par
value of the securities, and these certificates will be received by the clearing house
in payment of balances. In times of panic these clearing-house certificates may
enable a bank to avoid a suspension of payments. The certificate simply states
that Bank has deposited securities, and the certificates, each for $5000,
based thereon will be received in payment for balances at the clearing house.
3. Money. Money has two meanings. In the general sense
it means whatever has currency as money in payment of debts ;
this is called currency or current funds. In a more restricted
sense it means whatever is legal tender in the payment of debts,
that is, money which a creditor must receive ; this is called
legal-tender money.
There are eleven different kinds of current money in circulation
in the United States.
1. Gold coin, now coined in denominations of $2.50, $5, $10, and $20,
called respectively quarter eagles, half eagles, eagles, and double eagles. An
eagle weighs 258 grains, of which > is gold and ,'„ alloy. The others w< igh
proportionally. These coins arc full legal-tender money to any amount.
2. Standard silver dollars. A silver dollar weighs 4i2.\ grains, of which ,'•'„
is silver and X alloy. These arc full legal tender to any amount, unless
otherwise expressly stipulated in the contract.
3. Subsidiary silver, namely, half dollars (1^2.9 grains), quarter dollars
(9 ( '-45 K ra 'ns), and dimes (3K.5* grains), all ,''„ silver and ,'„ alloy. These
il tender for amounts not exceeding S10 in any one payment
4. Nickel coin, namely, the five-cent piece, weighing 77.1'' grains, of whi( h
jYn is copper an< 1 ,-,-■„ nickel. Tin ! for amount ding
25 cents in any one payment
5. lironze coin, namely, the one-cenl piece, weighing 48 grains, ol which
is copper and ,';,, dn and zinc. This u legal tendei foi amounts not
exceeding 25 cents in any one payment
138 CREDITS AND LOANS [Ch. VII
6. United States notes ("greenbacks "). These arc full legal tender except
for duties on imports and interest on the public debt.
7. Treasury notes of Act of 1890. These are full legal tender except when
otherwise expressly stipulated in the contract.
<s. Gold certificates, issued against gold and bullion deposited in the
United States Treasury. These arc not legal tender, but are receivable for
all public dues.
9. Silver certificates, issued against silver dollars deposited in the Treasury.
These have practically taken the place of the silver dollars for general circu-
lation. They are not legal tender, but are receivable for public dues.
10. National bank notes, issued by national banks against United States
bonds deposited in the United States Treasury. These are not legal tender,
but are receivable for all public dues except duties on imports, and one
national bank is bound to receive the notes of other national banks.
11. Federal reserve bank notes, issued against commercial paper, against
which there is required a 40 per cent gold reserve. These notes are obligations
of the United States and are receivable by all national and member banks and
federal reserve banks and for all taxes, customs, and other public dues.
Of course, gold certificates and silver certificates do not increase the volume
of money. They simply represent so much coined money (or gold bullion),
which is held for their redemption, and they circulate instead of the less
convenient coin. They are a kind of warehouse receipt for money.
4. Exchange. Exchange is an operation by which debts may
be paid at distant points, through a transfer of credits ; it always
requires three parties and two payments. A claim or credit which
one living in New York has against a debtor in London may be used
to pay a debt one owes in London, or it may be sold to another
debtor in New York and used by him to pay his creditor in
London. A bank in New York may keep a credit with a bank
in London, and so be able to sell to New York debtors its checks
on the London bank, with which the New York debtors may pay
their London creditors. It is of course far cheaper and safer to
send to London an order on a London merchant or a London
bank than to send gold coin.
Example. B in New York sells to C in London cotton to the amount of
,£600, and draws a bill of exchange (order for money) on C payable to B's
order sixty days after sight for that amount, (a) B may sell this bill to a
banker or bill broker in New York. If D in New York owes E in London
;£6oo, D may buy this bill of the broker and send it to E, who presents
it in London to C and gets his money, (b) B may discount the bill at his
bank in New York. The bank may send it and other like bills to its corre-
spondent bank in London and thus get a credit there. D may purchase of
§ 81] EXCHANGE 1 39
the New York bank its bill of exchange on the London bank and send this to
E. who presents it at the London bank and gets his money.
Domestic exchange is that between different parts of the same
country. It is sold by banks, express companies, telegraph com-
panies, and even by the government in the form of post-office
money orders.
Foreign exchange is between a city in one country and a city
in another country. It is of two kinds : (a) bankers' bills, that
is, bills of exchange or checks drawn by one bank on another ;
{b) commercial bills, that is, bills of exchange drawn by one mer-
chant (creditor) upon another merchant (debtor). The latter may
be drawn against a shipment of goods and be accompanied by
the bill of lading, in which case they are called " documentary " ;
or they may be without accompanying documents of title, in which
case they are called "clean bills."
Foreign exchange is reckoned, but is not always expressed, in
the money of the country on which the bill is drawn. The rate
of exchange is the expression of the value of the money of one
country, recorded in the terms of the money of another country.
In this country the rate is usually expressed in the terms of our
money, with the exception of the French rate. Thus, the rate
for English exchange is $4.8666 (for a pound sterling) ; for Ger-
man, $.95 (for four marks) ; for Dutch, $.40 (for a guilder). But
the French rate is expressed in the terms of French money, as,
for example, 5.15, meaning that this number of francs will be
exchanged for one dollar. 1 There may be, however, a slight pre-
mium or a slight discount equal approximately to the actual cost
of shipping gold, which is about : \ of 1 per cent on the amount
shipped. As this is scarcely 2 cents on $4.8666, the premium or
discount will rarely be more than 2\ cents.
To the natural rate fixed by the par of exchange, with pre-
mium or discount, is added the commercial rate, depending on
the abundance or scarcity of commercial bills and the price fixed
for accommodating a person in New York with a bill of exchange
on London or any other foreign city.
1 The United Si 1 rcasury will, on application, scn<l an official table <>(
values of foreign coins.
CRED] is AND LOANS [Ch.VII
5. Payment. Payment is the discharge of a debt in money or
its equivalent. It is the duty of the debtor to seek out his creditor
and tender payment at the proper time. It is not the duty of the
creditor to give a receipt unless the statute so provides, but it is
customary to do so. The tender, to be legally and technically cor-
rect, must be of the exact amount in legal-tender money. If the
creditor refuses a lawful tender, his refusal has the effect of stop-
ping interest upon the debt, and, if the tender be kept good, of
preventing costs in case he resorts to legal process to collect
the debt.
If the debtor owes the creditor different debts, he may direct
that a payment be applied toward the extinguishment of any one
of them he may select. If the debtor makes no application, the
law will apply the payment in the manner deemed most equitable
and just to both parties.
A receipt, when given, is strong but not conclusive evidence
that the sum named in it has been paid. It may be impeached
for mistake or fraud.
As stated above, the larger part of the payments in the com-
mercial world are now made by the use of checks or bills of
exchange, while money, save in the case of small transactions,
is used mainly to settle balances at the clearing house or between
foreign cities.
82. Interest and usury. Interest is the compensation allowed
by law or fixed by the parties for the use or forbearance or
detention of money.
Legal interest is the rate of interest allowed by law. Parties
may agree for less than this, but not for more unless a higher
rate by special agreement is permitted by statute. If they agree
for interest with no rate specified, the legal rate will be under-
stood. In many states a legal rate is fixed for cases where there
is no specific agreement, and a maximum rate for cases where
there is an agreement. These statutes often provide that an agree-
ment for a rate higher than the legal rate but within the maximum
rate shall be in writing. 1
Usury is unlawful interest ; that is, an agreement for interest
greater than that allowed by law. Such a contract is illegal, but
1 See Interest Table at end of this chapter.
§82] INTEREST AND USURY 141
the effect of such illegality varies in different jurisdictions. In
some the lender cannot recover any interest at all ; in some he
can recover neither principal nor interest ; in some he forfeits
only an excess above the specified rate.
In England, Massachusetts, and some other jurisdictions no
maximum rate of interest is specified by statute, and parties may
contract freely concerning the rate, except that an unconscion-
able rate might be evidence of oppression or undue influence.
In most American states the rate is fixed by statute, ranging
from 6 per cent to 12 per cent, and any agreement for interest
above that rate would be usurious and illegal ; but some of these
states allow corporations to contract to pay any rate of interest
agreed upon, and some allow banks to make large call loans upon
negotiable security at any rate agreed upon. The object of fixing
the maximum rate is to avoid oppression of borrowers, ana it
is thought that corporations and dealers upon stock exchanges
(who secure call loans) are not likely to be subject to such oppres-
sion and should be left free to contract for any rate they may
think the loan worth to them. Special rates, higher than ordinary
rates, are also usually allowed to be charged by pawnbrokers.
L'p to the time a debt becomes due and payable there is no
interest allowed upon it unless the parties have provided for
interest.
A sale of goods for S500 upon sixty clays' credit would carry no interest
during the sixty days unless it was provided that the credit should be " with
interest." So a negotiable promissory note carries no interest until maturity
unless interest is specified in the note. All debts bear interest after they are
due and payable, such interest being regarded as a measure of damages for the
wrongful detention of the mom
Compound interest is not favored in tin- law and will be
allowed only when the interest due has by some new agreement
been incorporated with the principal or where expressly contracted
for in tin' original agreement.
/ />///>/,-. i; frees to paj 1 -1000 three years from date, with intrust al
6 per 1 rut per annum, payable annually. B pays no interest and the three years
ha\ I. ( ' may ro over tin- principal with simple interest ; namely, si 180
(plus also inter. I maturity to the date of the judgment). After judgment
C is allowed in' J judgment debt at the legal rate.
14- CREDITS AND LOANS [Cu. VII
83. Banks. Ranks are financial institutions which receive money
on deposit, loan money, sometimes issue money, deal in commer-
cial paper, and facilitate exchange. Commercial hanking consists
essentially of the exchange of (a) credit for money and (/>) credit
for credit. A customer delivers his money to the bank and re-
ceives in exchange the bank's credit. The legal title to the money
is in the bank. The depositor has a right to demand hack an
equivalent sum, but not the specific money deposited. He has
received the bank's credit for his cash. If a customer discounts
his note or bills receivable at a bank, he is exchanging his credit,
payable at some future time, for the bank's credit, payable on
demand. There are several kinds of banks in this country.
National banks are chartered by the United States government
with power to issue national bank notes upon depositing as security
therefor United States bonds. They are banks of deposit, dis-
count, and loans, doing a general banking business. They may
charge the rate of interest which the state where they are located
has fixed for its own state banks. The penalty for usury is the
recovery by the borrower of twice the amount of interest paid.
National banks may be organized by not less than five persons.
In any place having less than 3000 inhabitants they must have a
capital stock of not less than $25,000 ; in a place of from 3000 to
6000, not less than $50,000 ; in a place of from 6000 to 50,000,
not less than $100,000 ; in a -place of over 50,000, not less than
$200,000. On September 2, 191 5, there were 7613 national
banks, with an aggregate capital of $1,068,863,507.70. On the
same date the outstanding national bank notes amounted to
$718,496,591.50.
State banks are chartered by the state in which they are located,
and, like national banks, are usually banks of deposit, discount,
and loans. Owing to a national tax of 10 per cent on all bank
notes issued by state banks, none of them can profitably issue
such notes.
Trust companies are chartered by states and are given many
of the powers of banks of deposit, and are also authorized to act
as fiscal agents, trustees, executors, administrators, etc. When a
corporation wishes to issue bonds secured by mortgage, it usually
selects a trust company as trustee for the bondholders. They
§ 83] BANKS 1 43
often serve as agents or trustees in the organization or reorganiza-
tion of corporations. Trust companies have increased greatly dur-
ing the past few years, and now in New York City outnumber
the national banks. Their powers are so large as compared with
national or state banks that capitalists find it more profitable to
invest in them than in the older and more conservative institutions.
They are also much less restricted as to investments and security
for loans.
Savings banks are, as the name implies, depositories for
savings and not ordinary banks of deposit for live accounts.
They pay interest on deposits and loan money on mortgages or
other permitted securities at a higher rate. They are organized
under state laws.
Private bankers are persons who carry on a banking business
without forming a corporation. They may unite with banking
proper a variety of other enterprises, and some of the largest
financial operations are conducted through private bankers who
promote or finance them. They often combine with a banking
business that of stock or bond brokers.
By act of December 23, 1913, the federal reserve banking
system was established. This act provides for the creation of
not less than eight nor more than twelve federal reserve dis-
tricts, in each of which there shall be located a federal reserve
bank. All national banks within the district are required to, and
other banks may, become members of the federal reserve bank.
Each federal reserve bank is required to have a capital of at
least $4,000,000, which is subscribed by the member banks.
Each federal reserve bank is entitled to rediscount paper of the
member banks and thus to relieve such banks in time of finan-
cial strain ; to receive deposits from any of its member banks or
from the United States; and to issue federal reserve bank notes
to the member banks in exchange for commercial paper. The
federal reserve system has as two of its primary objects the
creation of a more elastic currency and the establishment of a
more effective supervision of banking.
If a bank receives deposits subject to check, it usually allows
no interest; but savings banks, trusl companies, and sometimes
private bankers receive deposits not subject to (heck and allow
Mi CREDITS AND I.oANS [Ch. VII
interest, while national banks and state banks generally do
not. A bank of deposit makes its profits on loans. Even if it
pays interest, it loans at a higher rate than it pays. Loans of
banks of deposit are made on indorsed commereial paper or on
collateral security. National banks are forbidden to loan on
real-estate security, but savings banks and trust companies
loan on such security.
84. Bank deposits. When money is deposited in a bank, the
depositor becomes the creditor of the bank to the amount of
his deposit. In ordinary banks of deposit there is an implied
understanding that the depositor may draw checks upon his
deposits in favor of third persons, and that the bank will honor
them. There is no such understanding in the case of ordinary
debtors, and the debtor is not bound to honor any order upon
him unless it be for the full amount of his debt. In savings
banks and in the case of interest-bearing deposits in other
banks it is usually provided that some notice shall be given of
an intention to withdraw any portion of the deposit, and that
the deposit book shall be presented with the check or order.
Ordinary deposits do not bear interest.
When money is deposited in a bank subject to check, the
depositor usually receives a bank book in which each deposit
is entered. This constitutes the evidence of his credits. When
a check is paid, the bank keeps it and this constitutes the evi-
dence of its credits as against its depositor. The book and
vouchers (paid checks) are then returned to the depositor, who
should at once examine each check in order to ascertain that
it is genuine, and should verify the account. If a forged or
raised check has been paid, the loss falls upon the bank as
between the bank and the depositor, but unreasonable delay
in examining the checks after they are returned to him, or in
notifying the bank of any irregularity, may estop the depositor
from asserting his rights in this respect.
A depositor may have a note made by him payable at his
bank. In that case, when the note falls due it is equivalent to
an order upon the bank to pay it, and it is paid like a check
and the note is included as a voucher when the account is
written up. A depositor may, however, direct a bank not to
§85] LOANS AND DISCOUNT 145
pay from his deposit a note or check which he has made pay-
able there. In this event the bank is bound to refuse payment
unless it is itself the owner of the note, in which case, as credi-
tor to that amount, it may offset the note against what it owes
to the depositor.
Where one does not wish to draw checks against a deposit,
he may take a " certificate of deposit " from the bank. This
is in the form of a receipt stating that " A. B. has deposited in
this bank five hundred dollars payable to his order upon return of
his certificate," and is signed by the cashier. If certificates are
for a definite period, as three months, they are often made with
interest. They are practically the promissory note of the bank.
85. Loans and discount; security. If one wishes to borrow
money for temporary use in his business, he usually applies at
his bank for a loan. Assuming that he wishes to borrow $1000,
he would make his promissory note for that amount (with or
without security), payable at a specified time after date, and the
bank would discount it and place the amount, less the discount,
to his credit.
Discount is the price paid for the present use of money or
credit in change for the promise of future payment. In other
words, it is the taking of interest in advance upon a loan ; it is
incidental to banking, and bank discount is not usury, although
the lender may thereby secure slightly more than the legal rate.
It is technically discounting one's own commercial paper in order
to raise money.
I 'iscount is also used in the sense of purchasing for their present
worth, or lor less, notes made by one person and owned by another.
/ .unfile-;. B wishes to raise money. He owns a note made by C; he
sells this note to I). If he sells it for its present worth, there could be 110
question in any event of the validity of the transaction. But if he sells it
for kss than its present worth, the buyer will make a profit greater than the
rate of interest. This, however, is not essentially usurious, any more
than to buy a horse and make a profit upon it. If B does nol indorse the
note so as to ! liable upon it himself, the sale may he for any price
<■<! upon. If I! does indorse it. t -nil hold that the sale (if
: >r usui any pri n, although
some (ourts hold this to he uskiious d the buyer makes thereby more than
the legal rate of inti
146
CREDITS AND LOANS
[Cn. VII
1 n i iK is i' Table
The following tabic shows the ordinary legal rate of interest and the
maximum rate by special agreement in each state and territory. The special
agreement must in most states be in writing.
State, i p
1 BGAl
Rati
Maximum
Rate
State, etc.
1 ■BGAl
Rate
Maximum
Rate
Alabama
s
8
Montana ....
8
12
Alaska . . .
8
1 2
Nebraska .
7
IO
Arizona . . .
6
10
Nevada . .
7
12
Arkansas . .
6
10
New Hampshire
6
6
California . .
7
.Any rate
New Jersey .
6
6
Colorado .
8
Any rate
New Mexico .
6
12
Connecticut
6
12
New York
6
6
Delaware . .
6
6
North Carolina
6
6
District of Colum
jia
6
10
North Dakota
6
10
Florida . . .
S
10
Ohio . . .
6
8
Georgia
7
8
Oklahoma .
6
10
Hawaii
■ ■
S
12
Oregon . .
6
10
Idaho .
7
12
Pennsylvania
6
6
Illinois
5
7
Rhode Island
6
Any rate
Indiana
6
S
South Carolina
7
8
Iowa .
6
8
South Dakota
7
12
Kansas
.
6
10
Tennessee
6
6
Kentucky . .
6
6
Texas . . .
6
10
Louisiana . .
5
8
Utah . . .
S
12
Maine ....
6
Any rate
Vermont . .
6
6
Maryland
6
6
Virginia
6
6
Massachusetts .
6
Any rate
Washington .
6
1 2
Michigan . .
5
7
West Virginia
6
6
Minnesota . . .
6
10
Wisconsin
6
10
Mississippi . .
6
8
Wyoming .
8
12
Missouri .
6
8
In no case may a bank discount or purchase notes at a greater discount
than the legal rate of interest. This limitation upon banks has created a
class of dealers known as bill brokers, or popularly as " note shavers," who pur-
chase such instruments at an agreed price for themselves or for other persons.
If in borrowing money one has to give security, this may be
done by getting another person to indorse or guaranty his note,
or by depositing collateral in the form of a pledge, or by giving
a mortgage upon property. When there is an accommodation
§S5] REVIEW QUESTIONS AND PROBLEMS 147
indorser, the note is usually made payable to him, indorsed by
him, and discounted at the bank by the accommodated party. If
it is not paid by the maker when it is due, the indorser is noti-
fied and he is then liable to pay it. If the note is guarantied,
it is made payable to the bank, and the guaranty is written
upon the back and signed by the guarantor. Upon nonpayment
by the maker, the guarantor is liable without notice. Pledge
of collateral security has already been treated (see sect. 65 ante).
A mortgage is in form a conveyance of property upon condition
that if a specified sum be paid to the mortgagee at a specified
date, the mortgage shall be void and of no further effect.
REVIEW QUESTIONS AND PROBLEMS
Section 81. What is capital? What is working capital? What is credit?
How is it estimated? How are checks used for credit purposes? Explain the*
methods of a clearing house. What is a clearing-house certificate? What is
money ? What is currency ? What is legal tender ? State the kinds of United
States money. Which are legal tender and to what amount? What is ex-
change ? What two kinds of foreign exchange ? What sends foreign exchange
above par or below par ? What is the natural limit of such fluctuation ? What
determines the commercial price of exchange? What is payment? What is
the effect of refusing it? How is it applied if there are different debts? Must
the creditor give a receipt? What is its effect?
Problem 1. B owes C $32. B tenders C silver in payment as follows:
15 silver dollars, 20 half dollars, 25 quarter dollars, 7 dimes, 1 nickel. C re-
fuses to accept this, alleging it is not legal tender. C then sues B, and to avoid
costs and interest B pleads the prior tender. Result?
Problem 2. 15 owes C a debt of $25 contracted in 1898, and one of $36
contracted in 190 1. B in 1903 pays C S25 and directs C to credit it on the
debt of 536. C credits it on the debt of £25. In 1905, after the debt of $25
is outlawed, C sues B for $36. 15 pleads payment of 525. How much may
C recover?
Problem j. In the above case B makes no request as to application of
payment. How will it be applied?
82. What is interest? What is usury ? What is the effect of usury upon a
inn t ? What is the K-^al rate and the maximum rat'- <>i interest in your state?
What debts carry interest? What is compound interest? When is it allowed?
Problem /. B bought goods of (' to the amount of %Z\ 5 Oil three months'
credit, which expired July 7. On September 3, C brought suit in New York
against B for this debt. On November 10 a judgment was entered for C.
14S CREDJ IS AND LOANS [Ch. VII
On January i 5 this judgment was paid, (a) Assuming that the disbursements
and costs allowed C by the court amounted to $24.25, how much should the
judgment be entered for? (/>) How much would be paid to discharge it on
January 15?
Problem 3. B borrows of C in New York $100 for one year, and gives his
promissory note for that amount with 6 per cent interest. In addition B pays
C a bonus of £5 ; that is, C really pays over to B on the loan only #95. C
sues B on this note. B pleads usury. Result?
Problem o. In the above case B is a corporation. Result?
83. What is a bank? Name and describe the different kinds of banks.
How much capital must a national bank have in your city or village? Is there
a state bank there? a savings bank? a trust company? a private banker?
What advantages have trust companies over state or national banks? What
is the federal reserve system ? What are live .accounts ? What banks take
deposits and allow interest?
84. What is the relation of a bank to a depositor? Who loses the money
•paid by a bank upon a forged check? If one has a note due and payable at a
bank, explain what is done on the due date. What is a certificate of deposit?
85. Explain the process of borrowing money at a bank. What is discount?
How great may it be? What is purchasing a note? For what price may a
bank purchase a note made by X and owned by A ? For what price may an
individual purchase it? In what forms may one give security for a loan?
What is a mortgage?
CHAPTER VIII
THE CONTRACT OF GUARANTY
86. Guaranty defined. A guaranty 1 is a promise to be answer-
able for another's debt, default, or obligation. It is a contract
collateral to the main contract of the principal party.
Example. B purchases goods of C on credit ; D gives C a guaranty that
B will pay for them, or, in case B does not, that D will.
The guarantor is he who gives the guaranty. The guarantee
is he to whom the guaranty is given ; that is, the creditor. The
principal is he whose debt is guarantied ; that is, the debtor. The
word "surety" is sometimes used interchangeably for "guarantor."
But strictly a surety is one who is bound with the principal upon
the original contract and in the same terms, while a guarantor
is bound upon a collateral contract to make good in case the
principal fails.
" We, A. B. as principal and C. D. as surety, hereby agree, etc." would be
a case of suretyship; while "I, A. B., hereby agree, etc.," followed by the
indorsement, " I hereby guaranty 2 the performance or payment of the within
contract. C. D.," would be a case of guaranty.
An indorsement of a negotiable instrument is a special form of guaranty,
the indorser promising that he will be answerable for the amount of the note
in case the holder makes due presentment to the maker, gives due notice of
dishonor to the indorser, and, in case of a foreign bill of exchange, makes due
protest. This is considered under the head of Negotiable Instruments.
A guaranty of payment differs from a guaranty of collection.
In the first case the guarantor agrees to pay if the principal does
not; in the second he agrees to pay if the debt cannot be collected
of the principal.
1 This is the same word ns "warranty," having preserved the Norman-French
vhich has been converted into the English .-■■ in "warranty," as the French
Guillaume bi "William"in I nglish. \ warranty is a guaranty of the title or
quality of goods. A guaranty is ;i warranty of i redit, solvency, etc. (see < Guaranty
Insurance, sec t. 7 1 ante).
• The '• ther " guaranty " or " guarantee." Sometimes one, sometimes
ill' oth< I. The noun also is written in both forms.
1 19
150 (.1 ARANTY [Ch. VIII
A continuing guaranty is an agreement to be responsible for
moneys, goods, or 'services to be furnished the principal from
time to time in the future.
87. A guaranty must be in writing. Under the Statute of
Frauds (see sect. 22 ante) a promise to answer for the debt, de-
fault, or miscarriage of another must be in writing and signed by
the party to be charged. Hence a guaranty of another's debt or
promise must comply with this provision.
If the contract is strictly one of indemnity, namely, a promise
to save another harmless from the results of some transaction
into which the promisor induces him to •enter, it is to be distin-
guished from a guaranty and need not be in writing. In such
a case there are but the two parties.
Examples : i . B promises C, an officer, that if the latter will attach D's goods,
he will guaranty him against loss or damage. This is an indemnity and not a
guaranty, and need not be in writing. There arc really but two parties here.
2. Sometimes it is very difficult to say whether a contract is one of guaranty
or of indemnity. B promises C that if the latter will go upon D's bail bond, he
(15) will make good any loss C may suffer. In England and in many American
states this is treated as a contract of indemnity, while in other states it is
treated as a contract of guaranty.
3. Again, the promise may be an original instead of a collateral one, in
which case it is not a guaranty and need not be in writing. "If you will let
B have these goods, I will pay for them." The promisor is primarily and not
collaterally liable. Had he said. " I will pay for them if B does not," it would
have been a guaranty.
4. Again, the promise may be to pay the debt out of funds put into the
hands of the promisor for that purpose. D has moneys of C put into his
hands to pay for goods sold to C by B. D promises B to pay. This is not
within the Statute of Frauds. It is really a case of a trust.
In all doubtful cases it is safer to have the promise put into
writing and signed. In some states it is necessary, also, that
the writing should express the consideration upon which the
guarantor's promise is based.
88. Consideration. When the contract of guaranty is made at
the same time as the contract which it guaranties, the considera-
tion which supports the principal's promise will also support the
guarantor's.
When the contract of guaranty is made subsequent to the main
contract, a new consideration is required to support it.
§§S9,90] NOTICE OF DEFAULT 151
Examples: 1. "If you let B have these goods, I will guaranty pay-
ment for them. C." The delivery of the goods supports B's promise and
also C's.
2. B owes A for goods already sold and delivered. C writes A, " I will guar-
anty B's debt to you." There must be some new consideration for this or the
promise will be unenforceable. Such a consideration might be that A should
bind himself to give B an extended time in which to pay.
89. Notice of acceptance by guarantee. Whether the creditor
(guarantee) must notify the guarantor that he accepts the guar-
anty has been a very much discussed question. It is not neces-
sary, of course, in the case of a contemporaneous guaranty ; that
is, a guaranty made at the same time as the main contract. The
difficulty arises in a case. of a guaranty as to future advances.
Example. C writes A, " I will guaranty payment of all goods you may let
B have during the next year." Must A notify C that he accepts the guaranty,
or will the delivery of goods to B constitute an acceptance ? Generally in this
country it is held that notice must be given in such a case, because the guar-
antor is entitled to know that his offer of guaranty has been accepted. In
England and in some of our states no notice is necessary, the acceptance con-
sisting in the doing of the act specified; that is, letting B have the goods. In
view of this conflict it would always be safer to notify the guarantor that the
guaranty has been accepted.
90. Notice to guarantor of the default of the principal. Whether
the guarantee must notify the guarantor that the principal has
defaulted in the payment or other obligation covered by the guar-
anty is also a disputed question. Some states require no notice,
while others require notice but do not agree as to the cases in
which it must be given.
In states requiring notice these different holdings arc found :
1. That the guarantor is always discharged for want of such
notice if he is damaged thereby.
2. iii) That the guarantor is discharged for want of such notice
if the amount for which he is bound is an indefinite one; but
</>) that he is not discharged for want of notice if the amount for
which he is bound is definite.
In view ol this conflid and the nicety of the distinctions, it is
safer for the creditor to notify the guarantor, upon default of the
debtor, of the fact of such default and that the creditor looks to
the guarantor for payment.
152 GUARANTY [CH.VIII
There is also much conflict as to the conditions under which the
guarantee is bound to disclose to the guarantor at the time of mak-
ing the guaranty any fact known to the guarantee concerning the
Honesty, fidelity, or solvency of the principal. In some cases a
guarantor has been relieved of liability because the guarantee con-
cealed such knowledge, but the cases are by no means clear as
to what constitutes fraudulent concealment.
Examples: 1. X has been state treasurer, and, known to the state officers
who are required to take and approve his bond, he has been guilty of defalca-
tion. They take a bond from B and others as sureties for the fidelity of the
treasurer, concealing this knowledge. This is fraudulent concealment and B
and the other sureties are not liable. The same result would be reached if an
employer, knowing of the dishonesty of his clerk, afterwards took a fidelity
bond to assure his honesty, concealing the prior dishonesty.
2. X is known to C to be financially weak or insolvent. C takes an obliga-
tion from X with B as guarantor, concealing this fact. B is not relieved. This
is not fraudulent concealment. So it has been held not to be fraudulent to con-
ceal the fact that the principal has been gambling or is already indebted to
the guarantee. If, however, the guarantor asks the guarantee about such
matters, he must answer fully and fairly if he answers at all.
91. What will discharge the guarantor. A guarantor may be
discharged from his liability, and it remains to consider what will
operate to work such a discharge.
1. Discharge of the principal. If the principal is voluntarily
discharged or released, the guarantor is also discharged, unless he
consents to such release. But he is not discharged by an involun-
tary release, as a release in bankruptcy by force of law.
A covenant by the creditor not to sue the debtor, coupled with
a reservation of the rights against the guarantor, is held in Eng-
land and in some of our states not to discharge the guarantor ;
and an agreement for release with such reservation is construed
to be a covenant not to sue. But this exception is not recognized
in some of our states.
Examples : i . B guaranties X's debt to C, who discharges X from liability,
giving him a release under seal. B is also discharged.
2. In the above example, X becomes embarrassed and creditors agree to
take 6o cents on the dollar and release X. C receives his 6o per cent. X is
released. So is B.
3. In Example 1, X goes into bankruptcy and is discharged by payment
of 60 per cent. X is released but B is not. C may recover the additional
40 per cent from B.
§91] DISCHARGE OF GUARANTOR 153
2. Alteration of contract. If the creditor has altered the terms
of the contract with the debtor without the consent of the guarantor,
the latter is discharged.
Examples : \. C guaranties payment for a specified engine, to be sold by
B to A. Afterwards A decides to take a different engine at a different price.
C is discharged.
5. C guaranties payment of a note from B to A, due on September 1 1.
B and A by mutual consent change the note to read October 1 1 . C is dis-
charged. His contract is destroyed by an alteration made without his consent.
1 1 would be the same if the date were changed to August 1 1 .
3. Extension of time to debtor. If the creditor definitely ex-
tends the time of payment to the debtor without the consent of
the guarantor, the latter is discharged.
Example 6. C has guarantied to B the payment of a debt due from A on
April 1. B, in consideration that A will give him a note, extends the time to
June 1. C is discharged.
7 (Exception). There is an exception to this rule in the case where the
creditor, while extending the time to the debtor, expressly reserves his right
against the guarantor. This is because the rights of the guarantor against his
principal are not impaired, since the latter impliedly agrees that the guarantor
may at once pay the debt to the creditor and proceed against the principal
for indemnity.
A mere forbearance to sue, or an unenforceable promise to forbear, is not
an extension of time to the debtor.
4. Surrender of securities by creditor. If the creditor sur-
renders to the debtor securities held for the enforcement of the
debt, the guarantor is discharged to the extent he may be injured
thereby.
5. Failure of creditor to proceed against debtor after notice.
In New York and some other states, if the guarantor directs tin-
creditor to proceed against the debtor, and the creditor fails to do
. the guarantor is discharged if the debtor afterwards becomes
insolvent. This is also a statutory rule in some states ; but gener-
ally it is not in force, and it does no! apply, even in New York,
to an indorser of a negotiable instrument.
6. Revocation by guarantor. If the C< msideration for a guaranty
consists of an act t<> be done in the future by the guarantee, a
notice of revocation before tin- ad is done will be effectual and
will relieve the guarantor. If the consideration consists of a series
154 GUARANTY [c.i. vm
of acts to be clone by the guarantee, notice of revocation will be
effectual as to those not yet done, but will be ineffectual as to
those already done.
Example 8. B writes to X, " If you let C have goods for his store during
the coming year, I will guarantee payment." On January 10 X lets C have
goods to the value of 5150. and on February 5 to the value of #175. On
March 1 1> notifies X that he will no longer be liable for goods sold to C. On
March 15 X lets C have $250 worth of goods. B is liable as guarantor for
J, hut not fur the S250.
7. Death of guarantor. The death of the guarantor has the
same effect as an express revocation, though some states require
that the guarantee shall have actual notice of the death in order
that it may operate as a revocation.
Example 9. In Example 8, suppose B died on March 1. In many states
this would operate to revoke the guaranty as to any advances made thereafter.
In other states it would operate only from the time X had notice of it. In any
event B's estate" would be liable for the advances made before his death.
Surety. In the case of a surety, as distinguished from a guarantor, some
special results of revocation or death must be noted :
a. It is a technical rule of the law (when not modified by statute) that where
an obligation is joint, the death of one joint obligor extinguishes the liability
as to him, and the survivor alone is liable. If A as principal and B as surety
jointly promise to pay C, the death of B relieves his estate. But if the promise
is joint and several (" We, A as principal and B as surety, jointly and severally
promise to pay C $100"), the death of one party does not relieve his estate.
This technical rule has now been very generally changed by statute so that the
death of a joint obligor does not extinguish the claim as to his estate. Under
the above rule the death of a joint surety would of course revoke liability as
to future advances.
b. If the suretyship is joint and several, the death of the surety does not revoke
the suretyship, as does the death of a guarantor. A guaranty is collateral, but
a suretyship is a part of the original contract itself and stands or falls with it.
c. (1) In the case of an indemnity bond for an indefinite period the surety
may at any time give notice of revocation, leaving the employer whose em-
ployee's fidelity was assured a reasonable time to get other sureties. (2) But
in the case of indemnity bonds for a definite period the surety cannot with-
draw unless the employee or officer has defaulted so that he may be removed,
or unless the surety has reserved in the bond the right to withdraw upon due
notice. (3) The death of a surety on a joint and several bond does not termi-
nate the liability of his estate even as to a breach by the principal occurring
after the death of the surety.
An indemnity is in some respects like a suretyship and in some respects
like a guaranty.
§§92,93] LIABILITY OF GUARANTOR 155
8. Retention of principal after knowledge of his dishonesty.
If the guaranty be against the dishonesty or defalcation of the
principal, the guarantor will be discharged if the guarantee,
after knowledge of the principal's dishonesty, continues him in
his service.
9. Main contract nonenforceable against principal. If the main
contract is illegal, and so not enforceable against the principal, the
collateral contract of guaranty is also nonenforceable. This rule
has been applied to usurious contracts. So also, if the main con-
tract was procured from the principal by fraud and cannot for
that reason be enforced, the guaranty of it is also unenforceable
if the principal has avoided the main contract on the ground of
fraud. The same has been held of contracts procured by duress,
but some cases have escaped this rule where the guarantor
signed with knowledge of the duress. Failure of consideration,
which renders the main contract nonenforceable, also relieves
the guarantor. But the fact that the principal is an infant,
or of unsound mind, or a married woman, and so may escape
liability, will not release the guarantor. These are defenses
personal to the principal, and the guarantor cannot avail himself
of them.
92. Guarantor's liability. The guarantor's liability is fixed by
the terms of the contract. This may stipulate for a definite sum
or for such sum as the debtor is liable for. The guarantor may
be 1 ompelled to pay without resorting to the principal debtor, un-
less, indeed, he has merely guarantied the collection of a debt,
in which case the creditor must first exhaust his remedies against
the debtor.
Examples: 1. "I hereby guaranty the within note. C." The holder of
the note may proceed against C without first proceeding against the maker of
the i:
2. " I hereby guaranty the collection of the within note. C." The holder
must first exhaust his remedies against the maker before proceeding against C.
93. Guarantor's remedies. A guarantor who has paid his prin-
cipal's debt or obligation is entitled to the following remedies.
1. Indemnity against principal. The guarantor may recover
from his principal all money properly paid on account of the
guaranty, together with any costs reasonably incurred in defending
156 GUARANTY [Ch. VIII
the creditor's claim. In order to safeguard himself the guar-
antor should notify the principal of an intended payment, in order
that the principal may interpose to the creditor's claim any
defense he thinks fit.
2. Subrogation to rig/its of creditor. The guarantor is entitled
to be subrogated to all collateral securities held by the creditor
for the payment of the debt.
Example i. B borrows money of A and gives as security certain bonds
in pledge and also the guaranty of C. C pays the debt to A. C is entitled to
the bonds in pledge as security for his claim against B.
3. Contribution from coguarantors. If two or more persons
are joint guarantors for the principal, and one of them pays the
entire debt, he is entitled to a pro rata contribution from his
co-guarantors. If one be insolvent or out of the jurisdiction the
others may be compelled to contribute ratably.
Example 2. C, D, and E are coguarantors for a debt of $1200 owed to
B by A. C pays the entire debt. He is entitled to recover at law $400 each
from D and E. If E be insolvent and unable to pay, then C may recover in
equity $600 from D.
Forms of Guaranty
A general guaranty, or " letter of guaranty," of future advances
may be as follows :
I hereby guaranty to any person advancing money (or selling goods, or
whatever the act may be) to [Principal] not exceeding dollars, the
payment therefor at the expiration of the credit which shall be given.
(Date) (Signature) [Guarantor's Name]
(Address)
A special guaranty of future advances may be as follows :
To [Guarantee or Creditor]
I will be responsible for goods (specify a particular kind if desired) sold
by you to [Principal] to an amount not exceeding in value an aggregate
of dollars.
(Date) (Signature) [Guarantor 's Name]
(Address)
§93] REVIEW QUESTIONS AND PROBLEMS 157
A guaranty of contemporaneous credit may be as follows, and
would usually be attached to another contract :
In consideration of the agreement of {Principal} above set forth, I hereby
guaranty to the said (Creditor) that the above-named {Principal} will well and
faithfully perform everything by the foregoing agreement on his part to be
performed at the times and in the manner above provided.
(Date) Signature [ Guarantor}
A guaranty of a past credit should state a new consideration.
In consideration of one dollar to me in hand paid, the receipt whereof is
hereby acknowledged, I hereby guaranty, etc. ; or,
In consideration of the extension of time given by {Creditor-Guarantee']
to {Debtor-Principal] upon the above agreement, I hereby guaranty, etc. ;
or,
In consideration of the discontinuance of proceedings by {Creditor-Guar-
antee] instituted by him against {Debtor-Principal] I hereby guaranty, etc.
REVIEW QUESTIONS AND PROBLEMS
Section 86. Define guaranty; guarantor; guarantee; principal. Distin-
guish a surety from a guarantor ; an indorser from a guarantor ; guaranty of
payment from guaranty of collection. What is a continuing guaranty ?
87. How must a guaranty be evidenced? Does this extend to an indemnity
contract? Distinguish an indemnity contract.
Problem /. X buys goods of C. B says, " If you let X have the goods,
I will pay you if he does not." X does not pay. C sues B. Result?
88. Does a guaranty require a consideration? What constitutes the con-
sideration in a contemporaneous guaranty? in a subsequent guaranty?
Problem 2. X buys goods of C, payable in thirty days. At the end of
the thirty days B writes C, " If you will x'wc X thirty days more, I will be
answerable for his paying the claim." C takes X's note for thirty days more.
It is not paid. C sues B. Result?
Problem ?. In the above case C does not take a note, but simply refiains
from suing X for thirty days. Result?
89. Is it necessary to communicate to the guarantor an acceptance of the
guaranty? When?
90. Is it m to give the guarantor notii e of the defaull <>i tin- prin-
cipal? If so. under what circumstances? Is the guarantee bound to inform
tin- guarantor of fads known to him affo ting tin- lisk? Illustrate.
91. What will discharge a guarantor? Will bankruptcy of principal? Will
covenant not to sue principal? Will release of pi in. ipal reserving rights against
i;S CI VRANTY [Cn. VIII
guarantor? Illustrate alteration of contrail. What is an extension of time to
the debtor? Effect of surrendering securities by creditor? Is creditor bound
to proceed against debtor if requested by guarantor? When may a guaranty
be revoked? What is the effect of the death of a guarantor? of a surety?
Difference between joint promises and joint and several promises? What are
the rights of a surety on an indemnity bond? When will inability to enforce
the main contract discharge the guarantor and when not?
Problem 4. B guaranties X's debt to C. Afterwards C gives X a release
and then sues B on the guaranty. Result ?
Problem 5. In the above case C releases B and then sues X. Result?
Problem 6. B guaranties X's debt to C. Afterwards C gives X "a release
in full of said claim, reserving, however, all rights in respect thereto against
B." C sues B on the guaranty. Result?
Problem 7. B guaranties X's debt to C. Afterwards C gives X a valid and
enforceable extension of time. When this time expires X does not pay and
C sues B. Result?
92. May the guarantee proceed against the guarantor without first pro-
ceeding against the principal? Illustrate.
Problem 8. X gives C a promissory note. B writes and signs on the back
of the note, " I hereby guaranty the collection of the within note." X does
not pay the note. C sues B. Result ?
93. What are the guarantor's remedies against the principal? What is his
right of subrogation ? of contribution ?
Problem g. X gives C a promissory note secured by a mortgage on X's
property. B guaranties the payment. After maturity C sues and recovers from
B. W T hat are B's rights against X ?
Problem jo. X owes C, and B, D, and E guaranty the debt. C recovers
from B. What are B's rights?
CHAPTER IX
NEGOTIABLE INSTRUMENTS
I. Nature and Characteristics
94. Kinds of negotiable instruments. Negotiable instruments
are written contract obligations which can be transferred from
hand to hand like money. They are instruments of trade or of
credit ; that is, they are a substitute for money or an evidence
of a postponed debt. They may be issued by private persons,
or by banks, or by the government.
Examples: i. If B buys a bill of goods of C he may {a) pay money,
which may be either coin, promises of the government to pay or promises
of a national bank to pay ; (b) give a check on his bank ; (c) give his prom-
issory note ; (d) accept a bill of exchange drawn on him by the seller ;
(e) transfer D's check, promissory note, or bill of exchange drawn or payable
to his (B's) order or to bearer ; or (_/") draw and deliver a bill of exchange on
E (who owes B), payable to C's order. In any case, as above, B has given
C a negotiable instrument, except where he pays coin. But even coined
money is in fact a negotiable chattel, for, whatever title or want of title there
may have been in B, the taker of it for value gets a good title.
2. If any instrument given above is payable on demand, it is essentially
an instrument of trade taking the place of money; but if it is payable it
some future day, it becomes essentially an instrument of credit, because B
secures a postponement of the payment of his debt, that is, secures a term of
credit from C. But even an instrument payable on demand is also one of
credit, because until actually presented for payment it is taken on the credit
of the one issuing it.
The principal kinds of negotiable instruments are as follows:
a. Bills of exchange, foreign and inland. These are orders
by one person to another to pay money to a third person or
someone named by him, oi to bean t. 96).
b. Promissory notes, including notes and certificates of de-
posits by banks. These are promises by one person to pay money
to another or someone named by him, or to bean t. 96).
«59
160 M'.C.OT I ABLE INSTRUMENTS [Cu. IX
c. Checks, or orders by depositors on their banks to pay
money to a third person or someone named by him, or to
bearer (sect. 96).
J. Bonds, or promises in a special form by corporations,
cities, or governments to pay money to a person, or to a person
named by him, or to bearer (sect. 96).
The instrument first used was the foreign bill of exchange,
by which merchants in one country were enabled to pay debts in
another country without the risk of sending money across seas.
The Florentines or the Venetians introduced these instruments
into England as early as the thirteenth century. The inland
bill was later introduced to serve the same purpose between
different parts of the same country. In this country an inland
bill is one drawn and payable within the same state. A bill
drawn in New York and payable in Chicago would be by our
law a foreign bill.
Example 3. B in New York wishes to pay a debt to C in London.
(a) If B has a debtor, D, in London, he may draw a bill of exchange on D
payable to C or order and send it to C, who can present it to D and obtain
payment, (b) B may buy in New York a bill of exchange drawn by F in
New York on his debtor, E, in London, payable say to G's order. G sells and
indorses it to B, and B indorses it to C and sends it to C, who presents it to
E and obtains payment, (c) B may buy at a New York bank a bill of exchange
drawn by that bank on a London bank, payable to C or his order ; B sends it
to C, who presents it at the London bank and receives payment. By these
methods payments are made between New York and London, or vice versa,
without transferring money. In the end some big banking concern in one
place may export gold to the other place to settle balances.
A check is a special kind of bill of exchange, being a bill
drawn by a depositor on his bank, payable on demand. A bill
of exchange drawn by one bank on another is often called
a draft. It is simply a check and is more properly called a
cashier's check.
Promissory notes were once held by the English courts not
to be negotiable instruments, but Parliament in 1704 passed
an act providing that they should be negotiable the same as
bills of exchange, and such is the law in this country. When
these are issued by banks, we call them bank notes. A certifi-
cate of deposit is another form of promissory note issued by a
§95] NATURE AND CHARACTERISTICS 161
bank to one who deposits money and takes the note of the bank
for it. Corporations and governments issue long-time promises-
to-pay in the form of bonds, which in the case of private corpo-
rations are usually secured *by a mortgage on the corporate
property.
Bills of lading at common law and warehouse receipts by statute are
given a quasi-negotiable character, but these do not fall within the generally
accepted category of negotiable instruments. By the Federal Bills of Lading
Act and by the Uniform Bills of Lading Act order and bearer bills of lading
are rendered fully negotiable. By the Uniform Warehouse Receipts Law and
the Uniform Sales Act, warehouse receipts and other documents of title run-
ning to order or bearer are given a limited negotiability but are not negotiable
in the hands of a thief or finder. Stock certificates have also a quasi-negotiable
standing. The first two are promises to deliver goods, and the last is an
evidence of an interest in a business enterprise, while negotiable instruments
have to do with unconditional promises or orders to pay money. The above
instruments resemble negotiable instruments mainly in that they are trans-
ferred from hand to hand by indorsement, but they are not, like negotiable
instruments, a kind of substitute for money. They are paper evidences of
some property right.
95. Characteristics of negotiable instruments. There are three
characteristics that serve to distinguish negotiable instruments
from ordinary contracts.
i. Presumptive consideration. If a contract is in the form of
a negotiable instrument, it has a presumption of consideration,
whereas in an ordinary contract one who brings an action upon
it must prove that the promise he is seeking to enforce rests
upon a consideration.
Example i . (a) " On April i next, I promise to pay to the order of
A. B. one hundred dollars. C. D." (/') " On April i next, 1 promise to
deliver to the order of A. B. one hundred bushels of wheat. C. I>." In the
first example A. B. in an action against C. I >. need not prove any considera-
tion; it is for C I), to prove that there was none, if he can do so. In the
second example A. B. in an action against ('. I), must prove the consideration
for the promise to deliver the wheat, and if he fails to do so he will be
defeated in his action.
2. Days of grace. Unless abolished by statute, three days of
grace beyond the time fixed ate allowed tor the payment "I
otiahle instruments, whereas in ordinary contracts nn days
of grace arc allowed. In the examples given above, A. 1'.. could
162 NEGO'l I. MJI.K INSTRUMENTS [Ch. IX
not demand payment of the money until April 4, while he
could demand delivery of the wheat on April 1. Days of grace
have been very generally abolished by statute. They were
established when means of communication between distant
places were uncertain and slow ; with the introduction of steam
the need for them has disappeared. 1
3. Negotiability. Negotiability is the important characteristic
of these instruments. As we have seen (sect. 35), ordinary con-
tracts are often assignable, but the assignee cannot sue in his
own name except by force of statute, and when he sues he is
subject to all the defenses that might have been set up against
his assignor. Bills, notes, and checks, however, are negotiable,
not merely assignable. Negotiability carries with it the following
results : (a) the transferee gets a legal title and can sue in his
own name ; (d) if the transferee is a holder for value and without
notice of defenses and obtains title before maturity of the instru-
ment, he is free from the defenses that might have been set up
against his transferor, except those that operate to destroy the con-
tract altogether. He is not subject to the personal defenses of
fraud, duress, want of consideration, want of title in the transferor,
and the like, but is subject to the absolute defenses of forgery,
alteration, infancy of maker, that the statute declares the in-
strument void (as it does a gambling contract), etc. It is this
element of negotiability that makes it necessary to treat these
contracts separately.
Example 2. (a) In Example 1, given above, assume that A. B. indorses
and delivers the note to E. F. on March 15, and that E. F. sues the maker
C. D. If E. F. paid value and had no notice of any defect in A. B.'s title,
C. D. cannot defend on the ground that A. B. procured the note by fraud or
without consideration ; but the defense that C. D.'s name is forged, or that the
note has been altered, would be a good defense, {b) In Example 1 assume
that A. B. indorses and delivers to E. F. the promise to deliver the wheat, and
that E. F. pays value and has no notice of any defect. If E. F. sues C. D.,
any defense that would be good against A. B. is still good against E. F. This
is an assignment, and an assignee stands in his assignor's shoes.
1 Days of grace are still allowed in Mississippi, Texas, and Wyoming. In
Massachusetts and North Carolina days of grace are allowed only on bills
payable on sight, while in Alaska they are allowed only on paper payable at
a future day.
§96]
NATURE AND CHARACTERISTICS
163
96. Definitions. The various negotiable instruments are named
and defined as follows :
1 . Bill of exchange. A bill of exchange is an unconditional
order in writing addressed by one person to another, signed by
the person giving it (called the drawer), requiring the person to
whom it is addressed (called the drawee) to pay on demand
or at a fixed or determinable future time a sum certain in
money to the order of a designated person (called the payee)
or to bearer.
The person upon whom the bill is drawn, that is, the drawee,
may be asked to signify his assent to honor the bill, and if he
does so he becomes an acceptor. This assent is usually signified
by writing his name with the word "Accepted" across the face
of the bill. When a bank so signifies its assent to honor a check,
the check is said to be "certified."
If not payable to order or bearer, the bill would be non-
negotiable.
Bill of Exchange with Acceptance
The above bill was accepted Novembei 2 1,1912. It was due ninety days
from sight, and hence became due ninety di 1 November 23, or on
I iruary 21, 1913. It could be transferred by an indorsement on the back
by Everett, Moore & Co., the payees.
A foreign bill of exchange is often drawn in a set of two or
three duplicate parts, each pari numbered and referring to the
others. The parts are used i<» avoid the chance <>l Loss in the
mails or to save time in securing an acceptance.
i(«4
\i GOTIABLE tNSTRUMENTS
[Ch. ix
li there were three parts, the first would read, "second and third of same
tenor and date, unpaid." and the second would read, "first and third of same
tenor and date, unpaid," and the third would read, "first and second of
same tenor and date, unpaid."
a. Suppose Sherwood & Co. buy the above exchange in New York in
order to pay a debt to James ,S; Co. in Calcutta, India. Were it payable at
Sight or at a fixed future time, they would indorse each part to James & Co.
and send one part by one steamer and another by a second steamer in order
to avoid danger of loss or delay. In such case two parts would be enough.
Bills in a Set
THE BATTERY PARK NATIONAL BANK
n*w vonK
Tfr*'2~r' • — 5*-
/ten. ptj&f yr / ii^ / ^ti^/^*t^ s 7^^tu.'/^^^'
c<C crx^^n^
THE BATTERY PARK NATIONAL BANK
«aW7
o&-
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CD
'.>„//,/<///„.>■ //r/'j/s/sf Cj./v//sr///7r'
7 ^L
^4^yt-£^
b. As it is payable after sight, if it is all sent to Calcutta and from there to
London, it would be weeks before any part could be presented for acceptance,
and it would then run ninety days after such presentation. But if one part is
sent direct to London for acceptance, the final due date will be hastened and
the present worth of the bill increased. Therefore one part is sent to London
indorsed, " At the disposal of the second or third, duly indorsed." The second
§96]
NATURE AND CHARACTERISTICS
165
and third will then be indorsed to James & Co. and sent to Calcutta by different
mails, with the information that the first has gone direct to London for accept-
ance. James & Co. in Calcutta can then deal with the bill, assuming it would
be accepted about December 1 and would become due ninety days thereafter.
They will send parts two and three to London in time to have them there
when the bill becomes due, or they will sell them in Calcutta and the buyer
will send them to London.
The drawee should accept but one part ; for if he accepts two, each might
be indorsed to a different holder, and the acceptor would be liable on each.
A holder should not indorse parts to different persons, or he will be twice liable.
When the bill is paid, the acceptor should take up the part he has accepted.
2. Promissory note. A promissory note is an unconditional
promise in writing made by one person (called the maker) and
signed by him, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to the order
of another person (called the payee) or to bearer.
If not payable to order or bearer, the note would be non-
negotiable.
Promissory Note
IEW YORK.
M THE BATTERY PARK NATIONAL BANK °ZE
^
It is not necessary to state the place where the note is payable, but this
is usually done in commercial paper in order to facilitate presentment for
payment. This note may be indorsed on the back by Robert 1 1. Moore & Co.
The words "with interest" may be written in alter the words "value
received " if the note is to draw interest. The above note may be discounted,
say at the bank where payable; that is, the payee maj indorse and sell it to
the bank for its present worth. How mui h is S2500, payable in three months,
worth in New York where into it?
3. Certificate of deposit. A certificate of deposit is in erred a
promissory note given by a bank to a depositor, acknowledging
ICO
NEGOTIAHI.K INSTRl'MKNTS
[Ch. IX
the receipt of the deposit and promising to pay it to the order of
the depositor. It may be made payable on demand, or it may be
made payable at a fixed future time with interest. If one has a
special fund which he wishes to put into a bank but against which
he does not wish to draw checks, he ordinarily takes a certificate
of deposit.
Certificate of Deposit
S \&> O cr=*=- \o.^99S
jS THE BATTERY PARK NATIONAL BANK.
o
w
g
cn-/ne'^uMe^u/( > // ///.) ~^t/^A«i/e/i4//iMm/yn^ti)e^
* cvnntHT ■•■*ni
4. Check. A check is a bill of exchange drawn on a bank and
payable on demand. If payable at a future time, it would be an
ordinary bill of exchange. When one deposits money in a bank,
he receives a bank book with the amount he has deposited
Chfxk
THE BATTERY PARK NATIONAL BANK
13 1 4^" \n "^/
*r
'£fi^€+y ?L t^< ^7j>^/ 7/^ J^y ^Og^g* V~ / nnu.iiK
entered in it. He can then draw checks against this deposit. If
a payee wishes to be sure that the check is good, he can present
the check to the drawee bank for certification or ask the drawer to
have it certified. When certified, the bank becomes liable to the
§96]
NATURE AND CHARACTERISTICS
167
payee, and it charges the certified check against the depositor's
account as a check which it has actually paid.
Certified Check
THE BATTERY PARK^NATIONAL BANK
-Dollars
CL^n^^t/, J&~ £*^, Y ^° _1
The words " Accepted," " Certified," " Good " are all used to signify
that the bank has honored the check.
5. Bank draft or check. A bank's check, often called a draft,
is a check drawn by one bank upon another bank and payable on
demand. If payable at a future time, it is a bill of exchange but
not a check. One bank often keeps deposits in another bank in
order to be able to furnish these bank drafts or bills. A country
Bank Draft or Check
f yr// s//
aai^ru^l^omiMtnn
( / >/// &
} f. jr/i n t,. - — 7*^L
9^ /fj»^
tutm>IITHOI'<II.IT.V.N Trust Cc. | y£^
01 1HECIIYOF MEW YORK I
bank will need to be able to furnish New York exchange, and
even a New York bank, if not a member of (lu- New York Clear-
ing House, will need to be able to furnish (halts or checks upon
a New York bank that is a member of the clearing house. So
a large bank may keep accounts with a London bank in order to
issue its checks or bills on London and furnish London exchange.
Bond of Corpora rn >n
raj~3J^J~2J~ej~2J~BJ~3J~3J~£S2J~£
-VNWATJi?
FIRST MORTGAGE BOND" V
t JTIu- jflttn Ualicn gtetet Companp, a corporation duly organized
and twisting under the laws of the Stat,- of Pennsylvania, for value
received hereby promises to pay to The Safe Deposit Company of Pittsburgh ,
County of Allegheny, in the State of Pennsylvania, or bearer, the sum of
e^jfive IHundred 5>ollarsJ^s>
lawful money of the United States of America, on the first day of October in
the sear nineteen hundred and thirty-five, together with interest on said
sum from the date hereof at the rate of six per centum per annum, payable
semiannually on the first days of October and April in each year at the office
of The Safe Deposit Company of Pittsburgh, in the State of Pennsylvania,
on presentation of the coupons hereto attached as they severally become due.
(gtbis bonb is one of a series of thirty bonds, numbered consecutively from one
to thirty, both numbers inclusive, each of the denomination of five hundred
dollars, all being of like tenor and date, and all secured by first mortgage
upon the water works of said The New Haven Water Company, in and near
the Borough of New Haven, in Fayette County, Pennsylvania, together
with lands, machinery, pipes, properties, rights, privileges and franchises
now held and owned or hereafter to be acquired by it, and all its tolls, in-
come, rents, issues and profits, executed by said The New Haven Water
Company to The Safe Deposit Company of Pittsburgh, of the County of
Allegheny, in the State of Pennsylvania, Trustee, and dated the first day
of October, iprj, and duly acknowledged according to law and recorded in
the proper records in the Recorder's Office in Fayette County, in the State
of Pennsylvania. This bond shall not become obligatory until authenticated
by the execution by said trustee of the certificate hereto attached.
3In destimotu? I©bcreof, the said The New Haven Water Company has
caused this instrument to be sealed with its Corporate Seal, and to be signed
by its President and Secretary and the coupons hereto attached to be signed
by its Treasurer, at New Haven aforesaid this first day of October, ipij.
The New Haven Water Company,
fohn> &. (HvaMXA,e>e,
President.
Secretary.
I 04.
§96]
NATURE AND CHARACTERISTICS
169
These drafts or banker's checks are usually drawn without being counter-
signed by the president or other official, but some banks require this out of
extra caution. Drafts may be drawn a given number of days after sight or
after date.
In the example of a bill in sets, given above, we have a banker's bill of
exchange. .It is drawn by a New York bank on a London bank and is payable
ninety days after sight, that is, ninety days after it is first presented at the
London bank. This is called London exchange
bill of exchange drawn on a bank in London.
it is a
**-BOND N?
6. Bonds. A negotiable bond is
in effect a promissory note under
seal issued by a corporation, gov-
ernment, or governmental political
division like a city or county. At
common law a negotiable instru-
ment could not be under seal ;
if an instrument otherwise ne-
gotiable was duly sealed,
it thereby ceased to be
negotiable. But by
custom recognized
^affom iftAjs mttfirji 'tifauu 1. 1 a 6 J
L.. /-.y-Mlt-fo tKpnfj /tf'TMESAFlOCPOSITCOMMNY*'
Uy CUUI lb LllCbU /Ui^*/i*t,&,j**^/,r.trmi<oi/iwiJM_ml_
instruments
issued
WBtMMkW **M/S tTV/W ^^UL I. I J I J :
'^i/Tme Safe DcpositCompany** - =
~ flf/J Fl(«*| MOBTTGACE BOHO N' I
y/7/^,/THE Safe Deposit Company^
/i£tA&& ftMJtsrftMUUii frr.frmi <uu!u<7/ tM/trrxt
US FIRSTMOHTOtCEJIONO H9
l^ggg;
tiMmmsmit
Ol/if FIRST MOflTTGAGC BOND N
rrsai/il&v? tfiJUs --nujMVi <i/t4r UL 1. 1 D \ d
/ ,/Tmi Safe DepositCompany/V f
AXWiw6.fcr/rsttiitrjr/ . Xrr.tr m/<txju&2/ or&vr& \
- "/if nmj yoRTo*CE sono n« J
■S/r /riSi'/ i^APK. I B23 1
\WZ DEPOSlTCOMPANY-r 3
v*tMAt frrvtni ' ,rfijui/tl ' yrirmf 3
imtfj FIRST MCffTOAGC BONO **'■ p -w.,u r.- m . —■ — — -»
Coupons
corporations and governments under the corporate or govern-
mental seal came to be regarded as negotiable. Hut not all bonds
are negotiable. Bonds arc either coupon bonds or registered
bonds. The latter are bonds payable to a specified person whose
name is registered in the hooks of the corporation or government,
and they are transferable only by registering the name of the
transferee. Coupon bonds are bonds payable to a person, or
order, or bearer, and h u bed to them coupon not< u h
170 NECOT1 ABLE INSTRUMENTS [Ch. IX
installment of interest as it falls due. These coupons arc cut off
and presented for payment of interest, or they may be severed
before maturity and negotiated like a promissory note. The nego-
tiable bond is usually a coupon bond payable to bearer. A bond
is a quite formal instrument containing not only the negotiable
promise but also specifications concerning the particular issue of
bonds of which it is one, and the mortgage security therefor.
Since a mortgage cannot well be made to each bondholder, it is
made to a trustee or trustees for the benefit of bondholders. The
bond is signed by the proper officials and usually bears the cor-
porate or governmental seal. But these instruments are some-
times issued without a seal, and although, when so issued, they
are not technically bonds, they are nevertheless classed as bonds.
97. Negotiable Instruments Law. The law of negotiable in-
struments has been codified and a uniform act passed in all the
states and territories except two. 1 This Negotiable Instruments
Law will be followed in this chapter. It supersedes the common,
or unwritten, law of negotiable instruments.
This law is based upon a similar codification in England
known as the Bills of Exchange Act. This English act is also
in force in most of the English colonies.
II. Form
98. What a negotiable instrument must contain. An instru-
ment, to be negotiable (and not merely a common-law contract),
must conform to the following requirements.
i. It must be in writing and signed by the maker, or drawer.
A writing includes print, and the writing may be in pencil.
Examples : I. One may sign in a trade or assumed name. Even the
indorsement by figures I, 2, 8 has been held sufficient.
2. Only the person who signs is liable. The signature " A. B., agent," or
" C. D., treasurer," binds only A. B. or C. D., and not his principal, for these
are mere terms of description. The signature should be " X. Y., by A. B., agent,"
or " X. Y. Co., by A. B., treasurer." By the custom of banks the signature
" E. F., cashier," binds the bank whose name appears on the instrument.
3. A forged signature does not bind the one whose name is forged. No
rights can be acquired by any holder under a forged signature.
1 The act is not adopted in Georgia and Porto Rico.
§9SJ FORM 171
2. It must contain an unconditional promise or order to pay
a sum certain in money. A promissory note contains a promise.
A bill of exchange, or check, contains an order. The point is
that these must be unconditional.
Examples : 4. " I O U twenty dollars " is not a promise but a mere
acknowledgment. So also, " Due you twenty dollars."
5. " Be so kind as to let the bearer have twenty dollars " may, perhaps, be
too civil to be regarded as an order.
6. " I promise to pay to order of A. B. twenty dollars out of proceeds of
Blackacre farm " is conditional and therefore nonncgotiable. There may not
be proceeds from that farm sufficient to pay.
7. " Pay to order of A. B. twenty dollars and charge to account of Black-
acre farm " is unconditional, because it merely indicates the fund from which
reimbursement is to be made.
8. " Pay to the order of A. B. all the proceeds of Blackacre farm " is non-
negotiable because the sum is uncertain. But the law permits payment " with
exchange " or with " costs of collection or attorney's fees in case not paid at
maturity," although these may render the sum uncertain. It also allows pay-
ment by installments, with a provision that upon default in the payment of
any installment the whole sum shall become due.
9. "Deliver to order of A. B. 100 bushels of wheat " is nonncgotiable
because not payable in money.
10. The instrument may specify a particular kind of money, as gold coin,
silver dollars, greenbacks, or a foreign money, as Mexican silver dollars.
There has been much conflict as to whether instruments payable in " current
funds " are negotiable, since current funds may include the promissory notes
of banks fthat is, bank notes), which are themselves merely negotiable instru-
ments. If payable in any kind of legal-tender money, there could be no ques-
tion ; but current funds include more than legal-tender money, and courts
have differed as to whether that phrase is the equivalent of money.
3. It must be payable on demand or at a fixed or determinable
future time.
Examples: \\. "On demand, pay, etc.," "At sight, pay, etc." are pay-
able on demand. So also if no time for payment is expressed, tin- instrument
is payable on demand. Such instruments are due at once and become o\ erduc
after the expiration of a reasonable lime.
12. "Thirty days aftei d "On "i before [an. 1. [916," "Within
after my death," are all fixed 01 determinable dates. "When
A. B nty-one" i • not, because A. B. maj never reach that age. " Thirty
; after sight, determinable.
4. It must In- payable t" ordei <>i to bearer.
NEGOTIABLE [NSTRUMENTS [Ch. IX
Examples: 13. "I promise to pay A. B. twenty dollars "is nonnegotiable.
14. " 1 promise to pay A. B. or order twenty dollars" is negotiable when
indorsed by A. B.
15. "I promise to pay the bearer twenty dollars" is negotiable without
any indorsement.
16. "I promise to pay cash twenty dollars " is payable to bearer.
17. If the payee is known by the maker to be a fictitious person, the
instrument is payable to bearer.
18. When an instrument payable to the order of A. B. is indorsed in blank
by A. B., it is then payable to bearer. An indorsement is in blank when A. B.
simply writes his name upon the back of the instrument.
19. An instrument may be made payable to the order of the maker, or
drawer, or drawee, or two or more persons jointly.
5. If the instrument is a bill of exchange, it must name or
otherwise indicate the drawee with reasonable certainty.
Examples : 20. "To , Mobile, Alabama," is not a bill, because the
drawee is neither named nor indicated.
21. "To the owner of the steamer Dorrance'" is sufficient, because the
drawee is indicated, though not named.
99. What a negotiable instrument must not contain. The rule
and the exceptions upon this point may be stated as follows :
1. Rule. Subject to the exceptions enumerated below, a nego-
tiable instrument must not contain a promise or an order to do
any act in addition to the payment of money.
Examples : 1. " I promise to pay to the order of A. B. fifty dollars and
also deliver to his order 100 bushels of wheat" is nonnegotiable.
2. " Pay to A. B. or order fifty dollars and also deliver to him my horse
Billy B." is nonnegotiable.
2. Exceptions. The exceptions to this rule are given below:
a. The instrument may give the holder an election to require
something to be done in lieu of the payment of money. In such
case the maker promises the payment of money and has no elec-
tion to do anything else. The holder may require the payment of
the money, but he may if he chooses take something in place of it.
Example 3. " I promise to pay to the order of A. B. fifty dollars, or at his
election deliver to him 100 bushels of wheat" is negotiable.
b. The instrument may authorize the sale of collateral securities
in case of nonpayment at maturity. The note given to a bank
§100] FORM 173
that lends money on collateral security usually contains a provision
for the sale of the securities in case of default in payment.
c. The instrument may authorize the confession of judgment
upon nonpayment at maturity. Judgment notes are not used in
some states, but where they are in use the Negotiable Instruments
Law regards them as negotiable.
d. The instrument may waive the benefit of any law intended
for the advantage or protection of the maker unless such waiver
is forbidden by the statute creating the exemption. In some
states it is allowable to insert a clause waiving the benefits of
homestead and exemption laws.
100. Nonessentials. There are certain things which may or
may not appear in a negotiable instrument, and their presence
or absence will not affect its negotiability.
1. Statement of consideration. A negotiable instrument need
not state that any value was given. It is usual to insert the words
" for value received," but this is not necessary to its validity, and
the instrument has a presumptive consideration without the use of
these or equivalent words. In some states there are special stat-
utes requiring that the consideration shall be stated in negotiable
instruments given for patent rights, and these statutes must be
observed. An instrument is not rendered nonnegotiable merely
because it states the consideration, as, for instance, if it reads,
' In payment for one horse I promise to pay, etc."
2. Date. A negotiable instrument need not be dated. If it is
issued undated, the true date, which is the date when issued, may
be inserted by any holder. The insertion of a wrong date binds
prior parties in favor of a holder who afterwards takes the instru-
ment for value and without notice of the error. It is always best
to date a negotiable instrument, in order to avoid difficulties.
3. Place. A negotiable instrument need not state the place
where it is drawn or the place where it is payable. It is, of
course, best to insert the place and the date, but these are not
ntials.
4. Effect of seal. A sealed instrument is generally nonnego-
tiable, but the seal of a corporation or municipality is regarded as
part of the signature and does nol affect the negotiability of com-
mercial paper or negotiable bonds. The Negotiable Instruments
i;4 NEGOTIA I TK INSTRUMENTS [Ch. IX
Law extends this doctrine to private seals, but this is probably
limited to the ease where there is merely a signature followed by
a seal, and might not extend to a case where there is a full recital
of the seal, as where the instrument reads, " In witness whereof,
I have hereto affixed my hand and seal." Negotiable bonds are
usually sealed.
101. Effect of blanks. If an instrument is issued with blanks,
a person who takes it has notice that it is to be filled up, and is
put upon inquiry as to how it is to be filled. Any holder may fill
the blanks in accordance with the authority given ; if he fills them
in excess of that authority, he cannot recover upon the instrument.
But if he fills them in excess of the authority and then transfers
the completed instrument to a holder for value and without notice,
the prior parties are liable to such holder. It is better that one
who puts out an incomplete instrument should suffer loss than
that the innocent purchaser should suffer it. A space which the
writing does not completely fill, as the space for the amount, is
not a blank if something is written in it.
Examples : i . A. B. indorses C. D.'s note with the amount left blank, and
authorizes C. D. to fill it up for an amount necessary to renew another note
then due; this amount is in fact $240. C. D. fills up the note for $1000 and
discounts it at a bank which knows nothing of these facts. A. B. is liable to
the bank as indorscr for $1000.
2. A. B. draws and delivers to C. D. a check with the amount left blank,
and authorizes C. D. to write in an amount not exceeding $100. C. D. writes
in S500 and the bank pays the check. A. B. must suffer the loss.
3. A. B. draws and delivers to C. D. a check for $2 upon a printed form
thus: "Two Dollars." C. D. writes in the word
,f hundred " and changes the figures to correspond : " Two hundred
Dollars." The bank pays C. D. $200. This is alteration, not filling a blank.
The loss is that of the bank, although some states say that A. B. may be
estopped to set up the alteration if he has by his negligent manner of drawing
the check " invited " alterations. The general rule is that the alteration destroys
the instrument, but the Negotiable Instruments Law allows a holder in due
course to recover upon it for the original amount, and under this law the bank
could charge A. B.'s account with $2.
102. Delivery. Ordinarily a negotiable instrument must be
delivered in order to be valid. As between immediate parties,
such as maker and payee, indorscr and indorsee, this rule is abso-
lute ; but as between a prior party, as maker, and a remote
§103] NEGOTIATION 175
purchaser for value without notice, a valid delivery by the maker
to the payee is conclusively presumed if the instrument was
completed by the maker, but not if it was incomplete.
Exa»iplcs : 1. A. B. makes a promissory note payable to the order of
C. D. and leaves it on his desk. C. D. takes possession of it without A. B.'s
consent. C. D. cannot recover against A. B., because there was no delivery.
2. In the above case C. D. indorses the note and transfers it to E. F., who
is a holder in due course. E. F. may recover against A. B. The case would
be the same if A. B. locked the instrument in his desk or safe and C. D. broke
in and took it. It is especially dangerous to keep undelivered completed
instruments payable to bearer, because any thief, by getting possession of
such an instrument, could give good title to it.
3. If in the above case the instrument was incomplete in some respect, and
it was stolen, completed by filling blanks, and negotiated, the maker would
not be liable.
III. Negotiation
103. Negotiation; indorsement; delivery. Negotiation may be
by indorsement and delivery, or by deliver}' alone, according as
the instrument does or does not require an indorsement.
1. Negotiation. An instrument is negotiated when it is trans-
ferred from one person to another in such manner as to constitute
the transferee the holder thereof. If payable to bearer, or if the
last indorsement is in blank, it may be negotiated by delivery,
the same as money. If payable to order, it is negotiated In the
indorsement of the holder, followed by delivery. An indorsement
without the words "to the order of is not restrictive. If the
body of the instrument is in terms to make it negotiable, this
negotiability cannot be taken away by the mere failure to repeat
the words of negotiability. Indorsements are written on the back of
the instrument. If that is filled, another strip, called an " allonge,"
is attached, and the indorsements are continued upon that.
2. Indorsement. Indorsements may be either special or in
blank, and may be unqualified or qualified or restrictive.
,i. A special indorsement specifies the indorsee, as " Pay to
I.. i''. A. B." This could not again be negotiated without !•'.. F.'s
indorsement.
/>. A blank indorsement pe< ifies no indorsee. The indorser
simply writes his name on the bat k <>t the instrument, and it then
176 NEGOTIABLE INSTRUMENTS [C11. IX
becomes payable to bearer. Any bolder may, bowever, convert
this into a special indorsement by writing " Pay to (his name) "
over the blank indorsement.
<-. An unqualified or unrestricted indorsement places no restric-
tion upon the further negotiation of the instrument or upon the
indorsees liability. The indorsements given above are unqualified
and unrestricted.
J. A qualified indorsement simply passes title without render-
ing the indorser liable upon the paper. The form used for this
purpose is "without recourse," written above the indorser's name.
This does not impair the negotiability of the paper ; it simply
exempts this indorser from liability upon it.
e. A restrictive indorsement constitutes the indorsee an agent
of the indorser, usually for the collection of the paper. The form
commonly used is " Pay to E. F. for collection. A. B." Other
forms are : " Pay to E. F. only. A. B." ; " Pay to the X Bank
for deposit only." This indorsement is notice that A. B. owns the
paper, and practically prohibits further negotiation except for collec-
tion purposes. The indorsee may receive payment or may transfer
to another person who is to receive payment, but there cannot sub-
sequently be a holder in due course free from the claims of A. B.
The indorser may waive presentment, notice, and protest by so
specifying above his indorsement. The phrase " waiving protest "
is ordinarily used for this purpose. This waives the conditions in
his contract (see sect. no).
A transfer without indorsement of paper payable to order is a
mere assignment and not a negotiation. The transferee is entitled,
however, to have the indorsement of the transferor, and negotia-
tion takes effect from the time he secures it.
The last transferee or indorsee is the holder. He may be a
'holder in due course" or "not a holder in due course," and
his rights may depend upon his position in this respect.
Examples of Indorsements
[Refer to the promissory note on page 165.]
Blank indorsement: Robert H. Moore & Co.
Special indorsement : Pay to order of John Spearing.
Robert H. Moore & Co.
§104] NEGOTIATION 177
Qualified indorsement : Without recourse.
Robert H. Moore & Co.
or
Pay to John Spearing, without recourse.
Robert H. Moore & Co.
Restrictive indorsement: Pay to John SPEARING for collection.
Robert H. Moore & Co.
Waiving conditions : Waiving protest.
Robert H. Moore & Co.
or
Pay to John Spearing, waiving protest.
Robert H. Moore ..v Co.
The indorsee may indorse to another and he to another, and so on.
Successive indorsements: Pay to John Spearing.
Robert H. Moore & Co.
Pay to Ralph Lear.
John Spearing.
Pay to Goldberg & Morton.
Ralph Leak.
104. Holder in due course. A holder in due course is a holder
who takes completed and regular paper before maturity in good
faith and for value and without notice of any defects or defenses.
He is often called a " bona fide holder for value without notice."
The phrase " holder in due course " is used in the Negotiable
Instruments Law. In order to be a holder in due course a trans-
feree must take the instrument under the following conditions.
a. The instrument must be complete and regular upon its face.
Any blank, any erasure, any irregularity, indicates that the
paper is not issued in the usual course of business, is not in con-
formity with business usage, and the holder is put upon inquiry
by this fact. As to what appears upon the face of the paper,
the rule is caveat emptor (let the buyer beware).
b. The instrument must not he overdue.
When the instrument is payable at a fixed time, its due date is
certain. A transfer on the day of maturity is before the instru
ment is overdue.
When an instrument is payable on demand, it is ilne .1 reason-
able time after its issue. What is a reasonable time is a question
i;S NEGOTIABLE INS I'lUMKNTS [Ch. IX
of fact to be determined by the nature of the instrument, the
usages of trade, and the facts of the particular case. No case
shows that more than three months can be allowed, and some
cases have held three months to be too long; some states
by statute specify what is to be regarded as a reasonable time in
the case of paper payable on demand. A promissory note payable
on demand is due without regard to intermediate negotiations, but
a bill of exchange payable on demand, if negotiated at reason-
able intervals, is due within a reasonable time after the last
negotiation.
c. The holder must take the instrument in good faith and for
value.
Bad faith may be gathered from circumstances, as where an
instrument to which the maker has a good personal defense is
transferred for a sum so out of proportion to its face value as
to raise a suspicion of collusion. Such grossly inadequate con-
sideration may be evidence of bad faith and is to be considered
in deciding that question of fact. If an officer of a corporation,
authorized to draw checks of the corporation, wrongfully makes
a check to himself, a bank receiving this check is charged with
notice of the wrongdoing because of the suspicious character of
the transaction. Taking a note with an actual suspicion that there
is some defect in the transferor's title is taking in bad faith even
if full value be given.
Value is any consideration sufficient to support a common-law
contract. If the holder suffers any detriment in taking the instru-
ment, he has furnished value. The disputed question has been
whether the taking by C of a negotiable instrument made by A,
and owned by B, as collateral security for an antecedent debt due
from B to C constitutes C a holder in due course. New York
and some other states have held that it does not, while the United
States Supreme Court and the courts of many states have held
that it does. The Negotiable Instruments Law sought to adopt the
rule that it does, but the language used was held by a New York
court ineffective for this purpose. It is argued that C suffers no^
very real detriment in taking the instrument merely as security
for an antecedent debt. If C took it as security for a contem-
poraneous debt, or in payment of a past debt, or as security for
§105] NEGOTIATION 179
a binding extension of time upon the old debt, there would clearly
be a detriment to C sufficient to constitute value.
Example 1. "New York City, Jan. 5, 191 6. Three months after date I
promise to pay to the order of B one hundred dollars, value received. A." On
February 10 B indorses and delivers the above instrument to C as collateral
security for a prior debt which he owed to C. When the note is due, C sues A
upon it and A sets up that B procured it by fraud. If C is a holder for value (and
without notice of the fraud), this defense is not good against him; otherwise
it is good. Is he a holder for value? In New York and in several other states
it is held that he is not, while in the federal courts and in many states it is
held that he is. But if on February 10 C took the note in payment of a past
debt, or as security for a debt then contracted, he would undoubtedly be a
holder for value.
d. The holder must not at the time of the negotiation to him
have notice of any infirmity in the instrument or defect in the
title of his transferor.
Notice in the law of negotiable instruments means actual knowl-
edge or knowledge of such facts as to constitute bad faith. It is
the state of the holder's mind that is important. Negligence, even
gross negligence, is not notice, although it may be evidence of bad
faith. The question is not, Would an ordinarily prudent man in
like circumstances have had notice or have had a suspicion of some
defect ? but, Did this holder have notice or have a suspicion ?
The title of the transferor is defective when he obtains the
instrument or any signature thereto by fraud, duress, or other
unlawful means, or for an illegal consideration, or negotiates it
in breach of faith or under circumstances amounting to fraud.
e. A holder who derives title through a holder in due course is
himself a holder in due course, even though he does not comply
with the above requirements.
Example 2. B procures from C a negotiable instrument by fraud. B nego-
tiates it to D, who is a holder in due course. D negotiates it to E, who has
knowledge ol the fraud (but is not a party to it). E is a holder in due course
With all tin; rights of 1). This rule protl Cl I 1. tl"'' holder in due eouise. who
otherwise might have the instrumenl lo< lad up in his hands aftei knowli
of the fraud became general. Hut if I> negotiated it bad to B, the lattei
would not he a holder in ' he was a party lo the hand.
105. Rights of holder in due course. The following rules
govern the rights of a holder in due course.
[80 NEGOTIABLE INSTRUMENTS [Ch. IX
,i. The holder in due course holds the instrument free from all
persona] defenses, and may enforce payment for the full amount
against .ill parties liable upon it; but he docs not hold it free
from the absolute defenses.
(i) Personal defenses are fraud, duress, illegality not made
an absolute defense by statute, want of consideration, release of
maker or other party, want of title in the transferor, etc.
Examples: I. B purloins a negotiable instrument payable to bearer and
negotiates it to C, a holder in due course. C may recover upon it and may
hold it even against the true owner. It is in the latter respect on the same
basis as stolen money.
2. B induces A by a false representation to buy a horse, and A gives B his
promissory note for ;?ioo. B negotiates the note to C, a holder in due course.
C may recover the full amount. A cannot set up B's fraud against C.
3. B gets A to make a promissory note without any consideration whatever.
B negotiates it to C, a holder for value. C may recover from A upon it.
4. A anticipates the due date of his note and pays B in full, leaving the
note in B's hands. Before it is due B negotiates it to C, a holder in due
course. A must pay it again to C.
(2) Absolute defenses are forgery, alteration, infancy, illegality
when made an absolute defense by statute, want of execution and
delivery as and for a negotiable instrument, etc.
Examples : 5. A gives to B a negotiable instrument for a gambling debt.
B negotiates it to C, a holder in due course. C cannot recover upon it in
those states which by statute have made instruments given for gambling debts
void. (The Negotiable Instruments Law has sought to change the rule as to
such absolute defenses as statutory illegality in gambling, usury, etc., and some
courts have given effect to it as substantially repealing the statutes making
such instruments void ; but at present it is unsafe to say that this will be the
general result.)
6. A is asked by B to sign a lease. By a trick B substitutes a negotiable
promissory note, which A signs, thinking it is the lease. B negotiates the note
to C, a holder in due course. C cannot recover upon it unless he shows that
A was so negligent as to work an estoppel. The defense is absolute unless A
is estopped by his own negligence to set it up against an innocent holder.
There was no execution and delivery as and for a negotiable note.
7. A gives to B a note for 5 10. B alters it to read $100 and negotiates
it to C, a holder in due course. C cannot recover upon it. Alteration is an
absolute defense. (The Negotiable Instruments Law has now provided that
C may recover upon it according to its original tenor, namely, to the extent
of 5 1 o.j
§§106,107] MAKER'S AND ACCEPTOR'S CONTRACT 181
b. Every holder is deemed presumptively to be a holder in due
course. But when fraud, duress, illegality, or defective title has
been proved by way of defense, the holder must then show by
proof that he gave value, and must show the circumstances under
which he took the instalment.
Example 8. C, the holder, brings an action against A, the maker. C proves
A's signature, introduces the note in evidence, and rests his case. This is all
the proof necessary, as there is presumption of consideration and presumption
that C is a holder in due course. But if A now proves that the note was
obtained by B by fraud or for an illegal consideration, then C must prove the
value he gave and establish good faith and want of notice by proving the
circumstances under which he took the note.
IV. Maker's and Acceptor's Contract
106. Maker's contract on a promissory note. The maker of a
promissory note contracts that he will pay it absolutely. No step
is necessary to fix the maker's liability. The holder need not for
this purpose seek the maker or present the note to him. If it
is not paid at maturity, the holder may at once bring an action
against the maker and recover from him.
Presentment to the maker at maturity is necessary to fix the
liability of an indorser but not to fix the liability of the maker
himself.
107. Acceptor's contract on a bill of exchange. An acceptor's
contract is absolute. It may be upon the bill or in a separate
instrument. Only the drawee can accept.
i. The contract. When the drawee of a bill of exchange ac-
cepts it by writing his name, usually with the word "Accepted,"
across the face of the bill, he thereby undertakes that lie will
pay the bill according to the terms of his acceptance. lie also
admits that the drawer's signature is genuine and cannot afterwards
dispute that point. An acceptance may Ik- general or qualified.
a. If the acceptance is general and unqualified, the acceptor
to pay according tO the tenor of the hill ; thai is, lie assents
fully to the order of the drawee, lie is then liable like the maker
of a promissory note.
/'. If the acceptance is qualified, the a< ceptor < hanges the tenor
ot the bill, that i not assent fully to the order of the drawer.
182 NEGOTIABLE INSTRUMENTS [Ch. IX
An acceptance is qualified if it makes payment depend upon
any condition, or is for only a part of the amount specified, or
changes the time of payment, or positively changes the place of
payment. Changing the place of payment does not necessarily
qualify the acceptance so long as the new place is not made the
exclusive place of payment. " An acceptance to pay at a partic-
ular place is a general acceptance unless it expressly states that
the bill is to be paid there only and not elsewhere." The holder
may refuse to take a qualified acceptance and may protest the bill
for nonacccptance. If he does take it, he releases the drawer and
prior indorsers, unless they also assent to it or after due notice of
it fail to dissent.
Examples :
$500 New York, Feb. 27, 191 5
Thirty days after sight pay to the order of Foster McKinnon five hundred
dollars, and charge to the account of
Albert Howard
To John Drurv,
Chicago
1. "Accepted, March 7. John Drurv." This is a general acceptance.
The date of acceptance should be added to fix the due date, since the bill is
payable not thirty days after date, but thirty days after sight. It is due thirty
days from March 7, namely, on April 6.
2. "Accepted, March 7, 191 5, payable at the Franklin National Bank.
John Drury." This is still a general acceptance, although it specifies a place
of payment and to that extent qualifies the bill. Custom has permitted this.
3. "Accepted, March 7, 1915; payable at the Franklin National Bank
only. John Drurv." This is qualified. It positively changes the place of
payment, which by the tenor of the bill would be at the drawee's place of
business.
4. "Accepted, March 7, 191 5, when in funds. John Drurv." This is
qualified. There is a condition which may never be fulfilled.
5. "Accepted, March 7, 191 5, for $350. John Drury." This is qualified.
It changes the amount.
6. "Accepted, March 7, 1915, payable April 16, 1915. John Drurv."
This is qualified. It changes the time of payment from thirty days after sight
to forty days after sight.
If the holder takes acceptance 3, 4, 5, or 6, he releases the drawer from
liability unless, after due notice of the kind of acceptance, the drawer fails
within a reasonable time to dissent. If the holder will not take these accept-
ances, he must protest the bill and give the drawer due notice of dishonor.
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[84 NEGOTIABLE INSTRUMENTS [Ch. IX
j. Acceptance by separate writing. Letter of credit. The
holder is entitled to have the drawee accept upon the bill Itself,
and may treat the bill as dishonored it' he refuses to do so. Hut
an acceptanee on a separate sheet of paper is perfectly valid and
binds the acceptor in favor of the holder and all who afterwards
take the hill on the strength of such acceptance. Moreover, there
may be a promise in writing to accept a hill or hills thereafter to
he drawn, and this binds the acceptor in favor of all who take the
bill or bills for value upon the faith of such a written promise.
A letter of credit issued to travelers in order to enable them to
obtain money in foreign cities is merely a banker's written promise
to accept bills drawn upon him up to a certain amount.
Example. B, who is going abroad, buys of a New York banker a letter
of credit for ^200. The letter names B, often describes him, contains his
signature, and says to foreign bankers that the New York bank will accept
bills drawn upon it by B up to /200 if each bill refers to the New York
bank's " letter of credit No. — ." Each draft so cashed by a foreign bank is
entered upon the letter of credit, so that the balance undrawn is always a
simple matter of computation. The foreign banker compares B's signature on
the draft with the signature on the letter, and satisfies himself in all reasonable
ways that the person drawing the bill is the person named in the letter. He
then discounts the bill and forwards it to New York (or it may be, by arrange-
ment specified in the bill, to London), and the New York banker is bound to
pay it, because he has promised in advance to do so. It is customary for New
York banks to agree that these bills shall be payable at some London bank,
since London is the great financial clearing house for the whole world.
3. Who may accept. No one but the drawee named in the bill
can accept it. But there are two exceptions to this rule, (a) A bill
may refer to a secondary person to whom resort shall be had in
case the bill is dishonored by the first drawee. Such a person is
called a "referee in case of need." The usual form is to write below
the drawee's name, " In case of need apply to G. H." It is in the
option of the holder to resort to the secondary person. (l>) When
the bill has been dishonored by the drawee, any person can accept
it for the honor of the drawer or a prior indorser. This acceptance
is called " acceptance supra protest for honor." Such acceptor be-
comes liable to the holder upon condition that the bill be again
presented to the drawee at maturity for payment, and if not paid,
that it be protested and due notice given to the acceptor for honor.
§10S] MAKER'S AND ACCEPTOR'S CONTRACT 185
108. Presentment of bill of exchange for acceptance. Present-
ment for acceptance is for the purpose of ascertaining whether
the drawee intends to pay the bill when it is due. Presentment
may be necessary or it may be optional with the holder.
1. When necessary. When a bill is payable after sight, it must
be presented for acceptance in order to fix its maturity. A failure
so to present it within a reasonable time after it is issued, or after
its last negotiation, would discharge the drawer and the indorsers.
A bill payable at a day certain need not be presented for accept-
ance ; it is enough to present it for payment when that day arrives.
Such a bill may, however, be presented for acceptance before its
maturity, if the holder wishes to do so. The drawee is allowed
twenty-four hours to decide whether to accept ; if he refuses to
return the bill thereafter, he is deemed to have accepted.
2. Hoiv and when. Presentment to the drawee for acceptance
must be by or on behalf of the holder at a reasonable hour of a
business day. Presentment cannot be on holidays ; if Saturday is
not otherwise a holiday, presentment for acceptance (but not for
payment) may be made before twelve o'clock noon of that day.
Presentment of a bill naming two or more drawees must be
made to all, unless they are partners, when presentment to one is
sufficient. Presentment is excused if the drawee is dead or has
absconded, or if after the exercise of reasonable diligence he
cannot be found.
3. Refusal to accept. If the drawee refuses to accept the bill,
or if presentment is excused, the bill is said to be dishonored.
In such case the holder must give due notice of the fad to the
drawer and indorsers, in order to hold them liable on the instru-
ment; if he fails to do so, they are discharged. If the bill is a
foreign bill, the holder must also have it protested, that is, pre-
sented by a notary public and certified by him as duly presented
and dishonored.
4. Effect of acceptance, [f the drawee ;icce;>ts the bill, the
holder retains it until maturity or negotiates it, and then he or
the new holder presents it again for payment, [f it is not then
paid, the bill is dishonored and must be protested and due notice
given to the drawer and indorsers. A failure to take these steps
discharges the drawer and prior indorsers.
186 NEGOTIABLE INSTRUMENTS [Ch. IX
V. Drawer's and Indorser's Contract
•
109. Drawer's contract on a bill of exchange. The drawer's
contract is conditional. He undertakes that he will pay the bill
on those conditions : (a) that it be duly presented to the drawee
for acceptance or payment, as the case may be ; (/>) if it be dis-
honored, that due notice of that fact be given to him ; (c) if a
foreign bill be dishonored, that it be also duly protested.
These conditions are strict, and in order to hold a drawer
they must be strictly complied with unless a recognized excuse
be shown for not doing so. The steps necessary to fulfill these
conditions are treated in sects, in- 113 post.
110. Indorser's contract on a bill or note. The indorser's con-
tract is both a contract of assurance of payment and a contract
of warranty. One who negotiates without indorsement also
gives certain implied warranties.
1. Contract to pay. An indorser by an unqualified indorse-
ment contracts that he will pay the bill or note upon these con-
ditions : (a) that it be duly presented to the acceptor or maker
for payment or, if necessary, to the drawee for acceptance ;
(/>) if it be dishonored, that he be given due notice of that fact ;
(c) if it be a foreign bill, that it be duly protested. A qualified
indorser (" without recourse ") does not undertake any contract
to pay, but he does undertake a contract of warranty.
2. Contract of warranty. The indorser in transferring nego-
tiable paper also impliedly warrants (a) that the instrument is
genuine and in all respects what it purports to be ; (b) that he
has good title to it ; (c) that all prior parties had capacity to
contract ; (d) that the instrument at the time of his indorsement
is valid and subsisting. An indorser by qualified indorsement, or
a transferor by delivery alone, impliedly makes the same or sub-
stantially the same warranties. The sale of a negotiable instru-
ment is in some respects like the sale of a chattel and has
warranties accompanying the sale.
Examples : 1. B by delivery without any indorsement sells to C a note
of A payable to bearer. Unknown to either party, A's name is forged. C may
maintain an action against B for breach of the implied warranty of genuine
ness. The same result would follow if B had indorsed " without recourse " or
§110] DRAWER'S AND INDORSER'S CONTRACT 187
had made an unqualified indorsement. In the latter case, however, he would
have been sued upon his contract to pay.
2. In the above case, instead of forgery, A pleads infancy and escapes
liability. B is liable to C for breach of the warranty that prior parties had
capacity to contract. So also if A pleads that the note was given for a
gambling debt and thus escapes liability, B is liable for breach of the war-
ranty that it is valid. The Negotiable Instruments Law, however, makes a
seller by delivery or by qualified indorsement liable in such case only if he
knows the instrument is invalid.
3. Order of indorsers liability. If there are several indorsers
upon a negotiable instrument, they are, as among themselves,
presumptively liable in the order in which they indorse ; but it
may be shown by proof that they agreed otherwise.
Examples : 3. A note made by X payable to A is indorsed A, B, C, D,
and is in the hands of E. E presents the note at maturity to X, who refuses
payment, and E notifies each indorser. E may sue any one of them. Sup-
pose he recovers from C. C may then recover from either A or B, but not
from D, because, had D paid, he could have recovered from the prior indorsers,
of whom C is one. If C recovers from B, B may then recover from A. The
only recourse of A is against X, the maker.
4. If A, B, C, and D are shown by proof to have agreed to become joint
indorsers, then, if C paid E, C could recover one fourth of the payment against
A, B, and D respectively.
4. Irregular indorser. An irregular indorser is one who
indorses before the payee, and generally to lend his credit to
the maker, although it may be to lend his credit to the payee.
If an instrument is made by X payable to the order of A. B.,
we expect to see A. B.'s indorsement first in the list ; if we find
E. I'.'s first, we call E. F. an irregular indorser. Under the
Negotiable Instruments Law the rule is that if E. F. indorses
in blank before delivery to A. B., he is liable to A. B. as
indorser; but if he indorses to accommodate A. B., he is not
liable to A. B., although he is liable to subsequent holders. Some
states hold E. I", a comaker, and some hold him a guarantor
for the maker; but the prevailing rule is that stated.
5. Accommodation indorser. An accommodation indorser is
our who indorses in order to lend his credit to another party
to the instrument. The simplest case is where ( '. 1>. wishes to
borrow money at a bank and asl.s A. B. to lend his credit. In
such case C. D. makes a promissory note payable to A. B.'s
[88 NEGOTIABLE INSTRUMENTS [Ch. IX
order, A. B. indorses it in blank, and C. D. discounts it at the
bank. Had A. B. been the ordinary payee, he would have owned
the note and discounted it himself. Suppose A. B. had owned
it, but the bank would not discount it on A. B.'s and C. D.'s
credit. A. II. asks E. F. to lend his credit. A. B. indorses the
note in blank, E. F. then indorses it in blank, and A. B. dis-
counts. E. F. is the accommodation indorser for A. B., the
payee. If E. F.'s signature appears before that of A. B., he is
called an " irregular indorser."
6. Guarantor. A guarantor is one who writes a guaranty
upon the back of a negotiable instrument, instead of an ordi-
nary indorsement. His contract is to pay if the maker or other
prior party does not, without any condition as to presentment
or notice. There has been some question whether such a guar-
anty is negotiable, that is, whether it will pass to new holders
upon the negotiation of the paper. It is generally held not to
be negotiable ; but when a negotiable instrument with a general
guaranty written upon it is negotiated, there is also an implied
assignment of the guaranty to the new holder.
Example 5. X makes a negotiable note payable to the order of A. B.,
who writes upon the back, " For value received, I hereby guaranty the pay-
ment of the within note. A. B.," and delivers the note to C. D. The latter
indorses it, " Pay to E. F. C. D.," and delivers it to E. F. At maturity
E. F. presents it to X, who refuses payment. No notice is given to A. B.
Some jurisdictions hold that the guaranty passed by implied assignment
with the negotiation of the note to E. F., and E. F. may recover upon it
as assignee of C. D., and no notice to A. B. is necessary. Other jurisdictions
hold that the guaranty was to C. D. and did not pass to E. F. upon negotia-
tion. The better way for C. D. is to take an indorsement by A. B. and avoid
these questions. If C. D. wishes to escape the risks of presentment and
notice, he should have A. B. indorse " waiving protest."
111. Presentment for payment. The first condition in the
drawer's and the indorser's contract is that there shall be due
presentment upon the maker or acceptor for payment. Unless
this condition is met, the drawer or indorser will be discharged
from all liability except in case he waives the condition or
some allowable excuse be shown for not fulfilling it. We have
therefore to consider how and when presentment is to be made
in order to fulfill this condition.
§111] DRAWER'S AND INDORSER'S CONTRACT 189
1. Time of presentment. If the instrument is payable at a
fixed time, presentment must be made on the day fixed. 1 If
this falls on Sunday or a holiday the instrument is payable
on the next succeeding business day. If the due day falls on
Saturday the Negotiable Instruments Law provides that the
instrument is to be presented the next Monday, unless that is
a holiday.
If the instrument is payable on demand, presentment must
be made within a reasonable time after its issue or, in case of
bills (not checks), a reasonable time after the last negotiation.
Demand instruments may be presented on Saturday up to
twelve o'clock noon, unless it happens to be wholly a holiday.
Presentment must be at a reasonable hour on a business day.
This ordinarily means business hours, but presentment at a
residence at a later hour may be justified by circumstances.
In computing time a month is a calendar month. Thus, a note dated
January 30, due one month from date, is due February 28 or, in leap year,
February 29. If dated February 28 and due in one month, it would be due
on March 28. In computing days the actual time is taken. A note dated
October 13 and due in ninety days is due January II. If the due date so fixed
is a holiday, the next business day is taken as the due date. The day of the
date is excluded in both cases. A note dated January 1 and due one month
from date is not due January 31, but February 1. A note dated January 1 and
due thirty days from date is due January 31, not January 30.
2. Place of presentment. Where a place of payment is speci-
fied in the instrument, presentment must be at that place. Where
no place is specified, the place of business of the maker or accep-
tor is understood or, failing that, his residence. If neither can
be found, then presentment may be mack- to the maker or the
acceptor wherever he may be, or at his last-known place oi busi-
ness or residence.
Example i. A note is made "payable at the X Bank." Presentment must
be made .it the bank. Presentment at the maker's place <>i business would be
ineffective. The note is equivalent to an order by tin- makei to the bank
to pay the same ami charge againsl his deposit. II tin' note is deposited in
the bank by the holder and is there on thi maturity, presentment
is compl
1 If flays of grace arc allowed, three 'lavs must !>,■ added before the present-
ment can be made We .lull assume that days of grace arc abolished.
190 N KGOTI A PLE INSTRUMENTS [Ch. IX
3. Mode of presentment. The instrument must be exhibited
to the maker or acceptor (or drawee) and payment demanded ; if
it is paid, it must be delivered up. If it is secured by collateral,
this also must be delivered up.
4. To whom presented. Presentment of a note is made to
the maker or, if he is absent from the place or inaccessible,
to any person found in charge of his place of business. Pre-
sentment of a bill is made to the drawee for acceptance or
to the acceptor for payment in the same way. If the maker
or acceptor is dead, presentment may be made to his personal
representative (executor or administrator). If an instrument is
made by partners, presentment to one is sufficient ; but if
made by joint parties who are not partners, presentment must
be to all of them before the instrument can be deemed to be
dishonored.
5. Excuse for delay. If circumstances beyond the control of the
holder cause a delay in presentment beyond the day of maturity,
this delay will be excused if presentment is made with reasonable
diligence after the cause of delay ceases to operate.
Example 2. H in New York holds a note on M payable in Chicago. He
forwards it by mail in due season to his agent in Chicago. The mail train is
wrecked and the mail is delayed until the day of maturity is past. The note
arrives in Chicago two days after maturity and is promptly presented. The
presentment is sufficient, as the delay is excused.
6. Presentment dispensed zvitJi. If after due diligence the
holder cannot make any presentment upon the maker or acceptor,
presentment is dispensed with. Such would be the case if the
maker could not be found in any place of business or residence.
Due diligence requires that the holder make proper inquiries
as to the residence of the maker.
7. Waiver of presentment. The indorser may waive present-
ment. This is often done by writing above his indorsement the
words "waiving presentment" or "waiving protest." But the
waiver may be oral and may be made at any time. A promise
to pay after he is discharged for nonpresentment, if made with
knowledge of the fact, will constitute a waiver.
8. Effect of dishonor. If the instrument, after presentment to
the maker or acceptor (or drawee), is dishonored by nonpayment
§112] DRAWER'S AND INDORSEE'S CONTRACT 191
(or nonacceptance), the first condition in the drawer's or indorser's
contract has been fulfilled. It then remains for the holder to take
the next step and give due notice of the fact and, in case of a
foreign bill, have due protest made.
9. Payment for honor. 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. This must be attested by
a notarial act of honor founded upon the declaration of the payer
as to his intention to pay the bill for the honor of the person
specified. The payer then pays the holder and takes the bill. All
parties subsequent to the one for whose honor he paid are dis-
charged, but that person and all prior persons are liable to the
payer for honor.
112. Notice of dishonor. The second condition in the drawer's
or indorser's contract is that due notice shall be given him that
the primary party has dishonored the instrument by refusing to
pay it, or it may be, in the case of a bill, by refusing to accept it.
Failure to give such notice will discharge the drawer or indorser
unless he has waived notice or unless some allowable excuse is
shown for not giving it. We must therefore consider what con-
stitutes due notice.
1. By whom given. The holder may give the notice, or his
agent may give it, or a notary employed by him may give it.
A notary is employed to present the instrument whenever it is
intended to protest it, and the notary may give the required
notice also.
In addition, any party who, by getting notice, is himself liable
to the holder may give notice to a prior party who would be
liable to him.
Example 1. X is the maker, A. 15, C, I) arc indorscrs, and II is holder,
of a note. H presents the note to X. who refuses payment. II gives notice
of dishonor to C; C gives notice of dishonor to B; and B gives notice to A.
The liahility of A, B, and C is fixed. Bui C could not give notice to I), be-
cause, if I ' paid H, C could not recover from D. The notice b) each indorser
to his prior indorser inures to the benefil oi the holder, who could sue A or
B or. C as he might choose. Of course ll mighl have given notice to all four
l he wished. The holder may choose which of the indorsers he will give
notice to; each ind > notified should make sure thai his prior indoi
have also been notified or Bhould notify them himself.
192 NEGOTIABLE INSTRUMENTS [Ch. IX
2. Form. The notice may be written or oral. It is sufficient
if it identifies the instrument and indicates that it has been dis-
honored by nonacceptance or nonpayment. The notice may be
delivered personally or it may be sent by mail. When notice of
dishonor is in due time properly addressed and stamped and
deposited in the post office or regular letter box, the sender is
deemed to have given due notice, notwithstanding any miscarriage
in the mails.
3. fii/ic allowed. If the person giving and the person receiv-
ing the notice reside in the same place, personal notice must be
given at a reasonable hour of the day of dishonor or of the day
following, and a notice by mail must be deposited in the post
office in time to reach the addressee in the usual course not later
than the day following.
If the person giving and the person receiving the notice reside
in different places, the notice should be deposited in the post
office in time to go out by a mail not later than the day follow-
ing the day of dishonor or, if there be no mail at a convenient
hour of that day, by the next mail thereafter. Notice in this case
might also be personal, but it must be so given as to reach the
drawer or indorser as soon as if sent by mail.
Where the holder gives notice to an indorser, the indorser has,
after receipt of such notice, the same time for giving notice to a
prior indorser.
Example 2. The holder, H, resides in New York ; the third indorser, C,
resides in Chicago; the second indorser, B, in San Francisco; the first indorser,
A, in New York. H on April 1 presents the note and it is dishonored ; on
April 2 H mails notice to C which is received by him in Chicago on April 4 ;
on April 5 C mails notice to B which is received by him in San Francisco
on April 9: on April 10 B mails notice to A which is received by him in
New York on April 16. Each notice is duly given, and the liability of all
indorsers is fixed. If H had notified A, the notice would have been received
by A on April 2.
4. Place. If the drawer or indorser has added an address to
his signature, notice of dishonor must be sent to that address. If
he has not added an address, then notice must be sent either
to the post office where he is accustomed to receive his letters or
to the post office nearest to his place of residence. If he lives in
one place and has a place of business in another, notice may be
§112] DRAWER'S AND ENDORSER'S CONTRACT 193
sent to either place. If he is sojourning in another place, notice
may be sent to that place. If notice is actually received within
the time allowed, it will be good, though it may have been sent
to the wrong place.
Examples : 3. The indorser lives in Boston but is a senator and sojourn-
ing at Washington. Notice may be sent either to Boston or to Washington.
A mere temporary, indefinite visit may not amount to sojourning.
4. The indorser lives in Montclair, New Jersey, and has a place of busi-
ness in New York City. Notice may be sent to either place.
5. The indorser has a city residence in New York City and a summer resi-
dence at Stockbridge. Massachusetts. Notice should ordinarily be sent to New
York City, but may be sent to Stockbridge if the indorser is sojourning there.
5. Waive?' of notice. Notice may be waived by drawer or in-
dorser. It may be waived orally or in writing, and either before
or after the time for it has arrived. The usual method is to write
' Waiving notice " or " Waiving protest " above the indorsement.
The phrase " Waiving protest " is construed to cover all steps, —
presentment, notice, and protest, — but "Waiving notice" does not
dispense with presentment or protest. The indorsement " Waiving
protest " makes the indorser essentially a guarantor.
6. When notice is excused. Notice is excused when, after the
exercise of due diligence, it cannot be given or when, in the case
of notice by mail, it does not reach the addressee. Due diligence
requires that suitable inquiries should be made to ascertain the
indorser's address. Merely looking in a directory is not enough.
Notice need not be given to a drawer who lias no right to expect
that the drawee would accept or pay the hill, as where he draws
upon one who has no funds of his and has made no agreement,
expressed or implied, to honor his hills. Notice need not he
given to an indorser for whose accommodation the instrument
was made or accepted.
Example 6. A promissory note is made by X payable to the order of B
and is indorsed by li and discounted by B. X signed tin- note as accommo-
"ii to li merely, that is. loaned B his credit t" raise money. In SU( li 1 ■
not entitled to notice of nonpayment, 1 B'sdut) to provide foi
payment, and not X's.
•
7. Effect >>f failure t« give notice. It .1 bill is presented foi
acceptance, and acceptance i- refused, a failure to give the drawer
194 NEGOTIABLE INSTRUMENTS [Ch. IX
and indorsers (if any) notice of this fact will discharge the drawer and
indorsers as to this holder. The bill, however, is not yet due, and
it is then fore possible for the holder to negotiate it to a holder in
due course who (.Iocs not know that it has been dishonored ; as to
such a holder the drawer and indorsers are not discharged.
If a bill or note is presented for payment and is dishonored,
the failure to give notice will discharge the drawer or indorsers as
to this holder and all subsequent holders, because as the bill or note
is now due there can be no negotiation to a holder in due course,
unless, indeed, it be at a later hour on the same day of maturity.
If a bill has been dishonored by nonacceptance and due notice
given, and it is afterwards presented for payment and dishonored,
no further notice need be given, unless the bill was in the mean-
time accepted.
If a bill has been dishonored by nonacceptance and no notice
given, and it is aftenva'rds negotiated to a holder in due course,
the latter must present it for acceptance or payment and upon
dishonor give due notice.
113. Protest. Protest is a solemn declaration by a notary in
behalf of the holder against any loss to be sustained by the holder
in consequence of the nonacceptance or nonpayment of a bill
or note. The word "protest" signifies "to testify before," and a
protest is therefore testimony before or in the presence of the
notary that the instrument has been presented, demand for accept-
ance or payment made, such demand refused, and the instrument
dishonored, followed by a formal declaration, or "protest," that
any loss arising therefrom shall be borne by the drawer or in-
dorsers and not by the holder. In practice the notary must him-
self make the presentment and demand, in order that he may have
this evidence of dishonor ; he cannot, unless statutes so provide,
take the word of the holder or any other person as to these facts,
or protest an instrument on hearsay evidence. In case a notary
cannot be found to make such protest, it may be made by any
respectable citizen of the place where the dishonor occurs, in the
presence of two or more credible witnesses.
Protest must be made in the cas,e of foreign bills of exchange,
for in such cases the notary's certificate is the only admissible
evidence of presentment, demand, and dishonor. Protest may
§113] DRAWER'S AND INDORSER'S CONTRACT 195
be made in the case of other negotiable instruments, and the
notary's certificate used as evidence, but protest is not necessary,
and the fact of dishonor may be proved by the oral evidence of the
person making presentment and demand. It is now usual to protest
all negotiable instruments, particularly those payable at a bank. In
most banks some clerk is a notary, and if at the close of business
hours his examination of the books shows that the maker of an
instrument has not funds there to pay it, he protests the instrument.
Certificate of Protest
"Unfteb States of Hmerica, )
00.
State of flew JPorfc
BE IT KNOWN, That on the 2J-&~ day of- d^i.
in the year of our Lord, One Thousand Nine hundred 'VMAJLI'I'V , at the request of
First National Bank of Ithaca, N. Y., /, BENfAMIN L. JOHNSON Notary Public duly Com-
missioned and Sworn, dwelling in the City of ITHACA. County of Tompkins, and State aforesaid, did
present the original 'K^C of &tn**ohL TyLoXcoOv^v/ . f or
0/w*_ y^^^-d^shi. — ; — " : ~ Dollars,
hereunto annexed, at the vJA^-^fc lUM W*L — OXt^AK^y where the same is payable,
and demanded ->Ux\suy>~<-Sl*-tZ which teas re/used.
WHEREUPON, /, the said Notary, at the request aforesaid, did protest, and by these presents
do publicly and solemnly protest, as well against the Maker and Endorser of the said 'VVjIL-
___ as against all others ivhom it doth or may concern, for exchange or re-
exchange, and all costs, charges, damages and interest, already incurred, and to be incurred for want of
^-jauOjMv^ie^X if the same.
And I, the said Notary, do hereby certify, that on the same day and year above written, due
notices of the foregoing Prttest were put into the Post Office at Ithaca, postage paid, or served as
follows :
Notl<:c 1 >|<y^_llHiW«w»*v' . durcltd _ fct»~»/v<U f TJj XL
_ : h^^K.f^3^r^ do 7 0£&w At,
n
Each of the above named placet bring the reputed place of residence of the person to whom the
ii"tice was directed.
IN WITNESS WHEREOF, I have li, 1,1111! i my mime and
, -. affix, ft my Seal oj 1 j
\%*2\ T a; /w,/ "
196 NEGOTIABLE INSTRUMENTS [Ch. IX
The notary also usually gives the necessary notice of dishonor
to the drawer or indorsers, but this may be done by the holder or
by any other agent of his. It" the notary gives such notices, he
may include a statement to that effect in his certificate. Practice
in that respect varies. If the statement that notices have been
duly given is not included in the certificate, that fact would have
to be proved at a trial by the oral evidence of the notary or other
person who gave them.
When protest has been made, the notary prepares a certificate
under his hand and seal setting forth (<?) the time and place of
presentment ; (/>) the fact that presentment was made and the
manner thereof ; (c) the demand made and the answer given, or
the fact that the drawee, acceptor, or maker could not be found ;
(<•/) the cause or reason for protesting the instrument. This certifi-
cate is annexed to the instrument protested, or to a copy thereof,
and is handed to the holder of the instrument as his evidence of
presentment, demand, and dishonor. It may also, of course, contain
evidence that notices were duly sent to the drawer or indorsers.
Protested Promissory Note
/FI1
ffacgF
i
R ST NATIONAL BANK. ITHACA. N.Y. V
fyZ&e.'Ae&X'Ve*/-' . Jft;*^^^.. ^Z ^*~r&~^ - °t
_y-/ _/v»vy
The protest must be at the place where the instrument is dis-
honored and on the day of the dishonor. But it is not essential
that the certificate should be made on that day. Protest itself
may be sufficiently indicated by a " noting " on the bill or note
in very brief form, thus : " Payment demanded and refused,
27 April, 191 5. B. L. J. Fees 75 £." This means that on that
date the notary whose initials are written made due presentment
and demand, that the instrument was dishonored and protested,
§113] DRAWER'S AND INDORSER'S CONTRACT 197
»and that the notary's charges are 75 cents. The notary may at
any subsequent date " extend " the protest by making out his
formal certificate.
The costs of protest are added to the amount to be paid by any
party liable on the instrument. These fees are fixed by statute
and include so much for protest and so much for each notice of
dishonor. There is also added interest from the time the instru-
ment was due until the drawer or prior party pays it to the holder.
Notice of Dishonor
■lthi
SIR—
ica, N. Y CU^V:..^ 1915*
TAKE NOTICE, that a 1M^.
:vvm>ujIjiu. i )y Xtpwai<C TiloJU^yy^
For $5~0~Q =#=-. _
Dated ... H. «VW. . £1y..l { jJ.S'
Payable . iJkjU- >v\X>vjfclkx> a(u . r t]atc
at MiJL. VA^votT. National Bank, of Ithaca,
and endorsed by you, was this day PROTESTED for non-payment
and that the holders look to you for the payment thereof, payment
having been demanded and refused.
Yours respectfully,
" Notary Public.
10S NEGOTIABLE INSTRUMENTS [Ch.-IX
In case of a foreign bill the holder may recover the cost of
reexchange. This is measured by the sum for which a sight draft
must be drawn on the drawer of the dishonored bill, in order to
realize immediately the amount of the dishonored bill plus the
cost of protest.
Example. D in London draws a bill for $1000 on E in New York, and
it is transferred to H in New York, who presents it for payment. It is dis-
honored and the protest fees amount to #1.25. It is obvious that D now owes
II on that day $1001.25, II may draw a sight draft on D for such a sum as
at the ruling rate of exchange between New York and London will realize in
New York $1001.25. The difference between that sum (say #1081.35, Ameri-
can money) and the sum realized ($1001.25) is the cost of reexchange which
must be borne by D.
In the United States the matter of reexchange has been simpli-
fied by statutes which fix a definite percentage on a foreign bill
to be recovered in lieu of reexchange. This varies in different
states, but the amount is from 10 per cent upward.
114. Checks. The contract of the drawer of a check is different
from that of the drawer of an ordinary bill of exchange so far as
concerns presentment and acceptance.
1. Presentment. A check must be presented for payment
within a reasonable time after its issue, or the drawer will be dis-
charged from liability thereon to the extent of the loss caused by
the delay. If he is not damaged at all, he will not be discharged,
no matter how long the delay.
Example. B draws a check for $100 and delivers it to C, who keeps it six
months. In the meantime the bank fails. When it failed, B had more than
5 1 00 on deposit. The bank pays 40 per cent to depositors. C may recover
from B $40 on the check, but not the other $60, because B is damaged to
that extent by C's delay. Had this been a bill of exchange payable on demand,
B would have been discharged altogether by C's unreasonable delay.
A reasonable time for the presentment of a check is much
shorter than that for the presentment of a bill and cannot be
prolonged by negotiation. If the holder and the bank are in the
same place, the check should be presented before the close of
banking hours on the next business day following the day of its
issue. If the holder resides in a different place, the check should
be started, not later than the day following its delivery, by a
§115] DRAWER'S AND INDORSER'S CONTRACT 199
reasonably direct route to the place where the bank is located.
The sending of checks by indirect routes through various corre-
spondent banks has been held in some states to constitute
unreasonable delay in presentment.
2. Certification. If the holder of a check procures it to be
certified, the drawer and indorsers (if any) are discharged from
further liability. This is because when a holder takes the check
to the bank to be certified he is entitled to the money and elects
to take the promise of the bank in place of it. But if the drawer
procures it to be certified before delivery to the payee, the latter
takes the check with the same effect as an accepted bill of ex-
change. When a check is certified the bank immediately charges
up the check to the depositor's account so as to preserve a fund
from which to pay the check.
3. Rights of holder of check. A holder of an uncertified check
has, ordinarily, no rights against the bank upon which it is drawn,
even though the drawer has funds enough there to pay it. The
promise of a bank to honor the checks of a depositor runs to the
depositor only, and the payee of the check cannot sue the bank,
any more than the payee of a bill of exchange can sue the drawee
before acceptance. The sole right of the payee is to present the
check promptly and, in case it is dishonored, give the drawer due
notice, and thereafter sue the drawer.
4. Rights of drawer against bank. If a bank wrongfully dis-
honors a depositor's check, the depositor has an action against the
bank for the injury to his credit. If he is a business man the
damage to credit is presumed to follow such dishonor, and he may
>ver a substantial sum in the discretion of the jury.
115. Position of indorser after liability is fixed. After tin-
necessary steps have been taken to fix an indorsees liability (or
without such steps if he has waived them), the indorser's posi-
tion is essentially that of a guarantor. His rights and remedies
an- those already discussed under the head of Guaranty (see
BeCtS. 91-93 a>id ).
If an indorser pays an instrument upon which In- is liable, he is
entitled to the possession of the instrument and may proi eed upon
it against all prior parties. He may strike out his own and all suh
Sequent indorsements, and again transfer the paper if he wishes.
200 NEGOTIABLE INSTRUMENTS [Ch. T *
REVIEW QUESTIONS AND PROBLEMS
Section 94. In what sense is a negotiable instrument an instrument of
credit? In what sense an instrument of trade? Illustrate methods of payment.
Wli.it are the principal kinds of negotiable instruments? Explain the use of
a bill of exchange. Distinguish inland and foreign bills. Is a check a bill of
exchange? Name different kinds of promissory notes. Are bills of lading and
warehouse receipts negotiable?
95. What are the three characteristics of negotiable instruments? Explain
each. Are there three days of grace in your state ? What distinguishes nego-
tiation from assignment? Illustrate.
96. Define bill of exchange. Name the parties in a bill of exchange.
What is acceptance? How is a bill transferred? What is a bill in a set?
What two different purposes does a bill in a set serve? Define promissory
note. What is the effect of stating a place of payment? Is it necessary?
Explain discount. What is a certificate of deposit? What is a check? What
is a certified check? What is a cashier's check and what is it used for? What
is a cashier's bill of exchange? What is a bond? When is it negotiable?
What is a coupon bond?
97. What is the Negotiable Instruments Law? Where is it in force?
What is its effect?
98. State the five essentials of a negotiable instrument. How should a
negotiable instrument be signed by A. B. if he is agent for C. D. and if he
is treasurer of the X Y corporation ?
Problem i. A promissory note is signed "A. B., President; C. D., Treas-
urer." It reads, " We promise to pay, etc." Across the end is printed,
" X V Co." The note has been transferred to a holder in due course, who
sues A. B. and C. D. personally. They set up that it is the note of the X Y
Co. Result?
Problem 2. "I, A. B., promise to pay to the order of C. D. one hundred
dollars on July i." Action is brought against A. B. upon a promissory note.
Result ?
Probletn j. A check on a savings bank reads: "XY Savings Bank. Pay
to A. B. or order one hundred dollars and charge to my account, No. 25. C. D."
Underneath is printed, " The bank book of the depositor must accompany this
order." Is this negotiable ?
Problem 4. " I promise to pay to the order of A. B. one hundred dollars
and also one half the net profits of the sale of our crop of oats. C. D." Is
this negotiable?
Problem 5. " I promise to pay to the order of A. B. one hundred dollars on
July 1. with interest at 6 per cent, or 10 per cent if not paid at maturity, and
with costs of collection if not paid at maturity. C. D." Is this negotiable?
REVIEW QUESTIONS AND PROBLEMS 201
Problem 6. " I promise to pay to the order of A. B. one thousand dollars
within one year after he is married. C. D." Is this negotiable?
Problem J. " I promise to pay to the order of A. B. five hundred dollars
ninety days after the dissolution of the partnership between him and me. C. D.''
Is this negotiable ?
Problem 8. B's clerk made out checks to fictitious persons and B signed
them, thinking they were for persons who had dealings with his concern. The
clerk indorsed the ficdtious names, obtained the money, and absconded. The
bank charged the checks to B's account. B claims they should not be charged
to him and that the bank should stand the loss. Which is right?
99. What must a negotiable instrument not contain? State the exceptions
to this rule.
Problem g. " I promise to pay to A. B. or order one hundred dollars, or
at my election deliver to him one share of stock in the X Y Co. C. D." Is
this negotiable?
100. Need a negotiable instrument state the consideration ? Why? What
is the effect of issuing a negotiable instrument undated ? without a place of
issue or payment? What is the effect of adding a seal?
101. When a note is issued with blanks, state what may be done as to filling
them. How if it is issued without a blank but with a partly filled space?
Problem io. A note made by X and indorsed by A is issued June io,
but without any date expressed, and is payable "one month after date." It
is transferred to B, who inserts the date June I and transfers it to C. It is
presented July i, and on dishonor due notice is given to A and B. Are
they liable ?
102. Is delivery necessary? When is it conclusively presumed? When
not? Illustrate.
Problem //. C. D. writes his name on a blank piece of paper to verify his
signature. A. B. writes above the signature a promissory note for fifty dollars
payable to his order, indorses it, and transfers it to E. F., who is a bona fide
holder for value. Is C. D. liable to E. F. ?
103. What is negotiation? How is it accomplished? Whit is a blank in-
dorsement? a special indorsement? an unqualified indorsement? a qualified
indorsement? a restrictive indorsement? an indorsement waiving conditions?
When is a transfer a mere assignment? Who is tin- holder?
Problem u. A note is payable to the order of A. !'>., who transfers it to
E. F. without any indorsement. What is the- position of E. F.?
Problem rj. A note payable to A. B. or order is indorsed, " Pay to E. F.
for collection. A. P.." E. I', then indorses it. " Pay to <,. II. I.. F." <.. II.
collects the money from the maker. Whose money is it ?
Problem //. A note payable to the order of A. B. is indorsed. "Without
recourse. A. 15." and transferred t> E. 1'. The maker is insolvent, and
NEGOTIABLE INSTRUMENTS [Ch. IX
after due presentment to the maker and notice to A. B., E. F. sues A. B.
Result?
104. Who is a holder in due course ? State essentials. When is an instru-
ment payable on demand overdue? What is bad faith? What is value? When
is an antecedent debt value? What is notice of defenses or defects? State a
case where a holder with notice is a holder in due course.
Problem /•,-. A note payable to order of A. B. on demand is transferred
by him to E. F. six months after it was first issued. E. F. sues the maker,
who sets up failure of consideration, a defense good against A. B. Is it good
against E. F. ?
105. What defenses are not good against a holder in due course? What
are good? Illustrate. What presumption in favor of a holder? How is it
overcome, and what then must the holder show ?
Problem 16. C. I), in New York gives A. B. a note payable to his order
for $100 upon A. B.'s false representation that he has worked two months for
C. D. upon the latter's Kansas farm. In fact A. B. has never worked for C. D.
at all. A. B. at once indorses the note for value to E. F., who does not know
the above facts. Is C. D. liable to E. F. on the note?
Problem ly. C. D. borrows $100 of A. B., gives him a negotiable note for
5 too at 6 per cent interest and also a bonus of $5. A. B. before maturity
transfers the note to E. F. for value and without notice. Is C. D. liable to
E. F. on the note?
106. State the maker's contract. Is it absolute or conditional? When is
presentment to the maker at maturity necessary ? When not ?
Problem 18. A note is payable " on demand at the X Bank." Is it neces-
sary to present it at the X Bank before bringing an action against the maker?
107. What is the acceptor's contract? What does he, admit? What is a
general acceptance? What is a qualified acceptance? Must the holder take it?
Result of taking it ? Effect of specifying a place of payment ? Effect of accept-
ance on separate paper? Must the holder take such acceptance? What is a
letter of credit ? Who may accept bills ? State exceptions.
Problem ig. " To C. D. : Pay to order of A. B. one hundred dollars ten
days after sight. E. F." A. B. indorses to G. H., who presents it to C. D. The
latter writes, " Accepted, April 4, 191 5. C. D." G. H. sues C. D. The latter
sets up that A. B. forged E. F.'s signature. Is this a good defense against
G. H., who is a holder in due course?
Problem 20. The drawee accepts a bill as follows : " Payable when in funds.
C. D." The holder presents it for payment at maturity and the acceptor
refuses to pay. Due notice is given the drawer. Is the acceptor liable to the
holder? Is the drawer?
108. In what cases must a bill be presented for acceptance? When is it
optional? Effect if drawee keeps and refuses to return the bill? On what days
REVIEW QUESTIONS AND PROBLEMS 203
may presentment for acceptance be made? When is it excused? If drawee
refused to accept, what should the holder do? What results if he does not take
these steps ? What results if the bill is accepted ?
Problem 21. A bill payable ten days after sight is issued January 8, 1914,
is indorsed to A February 6, and is presented to the drawee for acceptance
August 5. The drawee refuses to accept. A protests the bill and duly notifies
the drawer. Is the drawer liable to A?
109. What is the drawer's contract? State the conditions. Effect of failure
to fulfill them ?
110. What is an indorser's contract as to payment? What warranties does
he make ? What is the order of the indorsers' liability ? Who is an irregular
indorser? What is his contract? Who is an accommodation indorser? Illus-
trate. Who is a guarantor? Is the guaranty negotiable?
111. When is a presentment for payment made? How is time computed?
What if the due date falls on a holiday? on Saturday? When is an instru-
ment payable on demand due ? At what place must presentment for payment
be made? State the mode of presentment. To whom is presentment made?
What will excuse delay in presentment? When is it excused altogether? What
is waiver? If the instrument is dishonored, what is the effect? What is pay-
ment for honor ?
Problem 22. A note falls due on Saturday. The holder presents it to the
maker on that day. It is not paid. The holder duly notifies the indorser. Is
the indorser now liable to the holder ?
Problem 23. A note is payable at ' r 114 South Main Street, St. Louis."
It is presented at another place of business of the maker in St. Louis, and
on dishonor clue notice is given to the indorser. Is the indorser's liability
fixed ?
112. By whom must notice of dishonor be given? Illustrate. What should
the notice contain? Must it be written? If written, how may it be delivered?
Within what time must it be given when the holder and the indorser live in
the same place? when they live in different places? If an indorser receives
notice, what may he do? To what place should notice be sent? What is
waiver? When is notice excused? What is due diligence? What is the
effect of failure to give due notice? Suppose a bill dishonored for nonaccepl
ancc and no notice to drawer or prior indorser, are the drawer and indorser
absolutely discharged ?
Problem .'/. A note made by X is indorsed by A, B, < '. and I >. and is in
the hands of E. E presents it to X and it is dishonored. E gives due notice
tO I), who then gives due notice tO B, and the latter tO A and C. Who are
liabl<
113. What is protest? By whom made! When is protest necessary?
When allowable? What ia the evidence of it? How must the certificate be
204 nkcotiablk ins iri mknts [ch. ix
made and what must it contain? What is noting? May the notary give
notice? Who pays the cost of protest? What is rciixchange?
Problem 2J.
New York, Jan. 5, 191 6
Two months after date pay to the order of A.B. one hundred dollars.
To C. P.. Chicago. E. F.
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P. R. now holds the bill at maturity (March 5, Sunday) for the owner, N. O.
(ii) State exactly what P. R. should do as to presentment, (b) In case C. D.
refuses to pay, state what P. R. should do in order fully to protect all the
rights of N. O.
114. When should a check be presented? What is the result of delay?
How should a check be sent by mail for collection? What is the effect if the
holder has a check certified ? if the drawer has it certified ? May the holder
of an uncertified check sue the bank? If a bank wrongfully dishonors a
check, has the drawer any remedy?
Problem 26. A check drawn by B on a Bristol (Vermont) b^nk and pay-
able to A's order is mailed to A at Trumansburg, New York, and received
there August 9. It is sent the same day to an Ithaca (New York) bank for
collection. On August 10 the Ithaca bank mails it to its correspondent bank
in New York City, where it is received on the eleventh. On the twelfth the
New York bank mails it to its correspondent in Burlington, Vermont. The
thirteenth is Sunday. The Burlington bank receives it on the fourteenth, and
sends it at once to Bristol, but the Bristol bank had already suspended on
the fourteenth. If sent direct, the check would have reached Bristol in
twenty-four hours after it was mailed at Trumansburg or Ithaca. A sues B
on the check. Is B liable for the whole amount?
115. When all the steps have been taken to fix an indorser's liability, what
right has the holder against him? What are the indorser's rights if he pays?
PART IV. AGENCY: THE CONDUCT
OF BUSINESS THROUGH
REPRESENTATIVES
CHAPTER X
PRINCIPAL AND AGENT
116. Agency: its divisions and problem's. Agency is a term
signifying the legal relations established when one man is author-
ized to represent and act for another and does so represent
and act for another. Most of the things that a man may do in
person he may do through a representative. An individual often
does, and a corporation necessarily must, employ persons to trans-
act affairs and perform services essential to the proper conduct
of a business. A single concern often has hundreds and even
thousands of such employees. In an era of large business enter-
prises like the present the subject of agency is one of the most
important in the whole range of business law.
The acts which a representative may perform for his employer
fall into two classes: (i) the making of contracts for the em-
ployer; (2) the doing of operative or mechanical acts in the serv-
ice of the employer. In order to mark the distinction the subject
is divided into two corresponding heads — the law of principal
and agent and the law of master and servant. In the first thru-
are three persons involved, namely, the principal, the agent, and
the third party with whom the agent brings the principal into
contractual relations. In the second then- are normally but two
persons involved, namely, the master and the servant ; but if in
performing the assigned service the servant rauses some injury
to a third person, then three persons become involved.
In either class the relation itself is generally created by con-
tract. The employer engages to pay an agreed compensation, and
the employee engages to perform agri rvices; hut an employee
205
joo PRINCIPAL AND AC.KNT [Ch. X
(agent or servant) may ad gratuitously. So far as third parties
are concerned, the important question is whether the agent or
servant was authorized to act, not whether he was promised com-
pensation fordoing so. [f the agent or servant was not authorized,
the principal or master would not be liable for what was done
unless the act was subsequently ratified. Prior authorization or
subsequent ratification is therefore the basis of a principal's or
master's liability. The main problem of agency is to discover
when and under what circumstances a man is liable for the acts
of another who represents him or assumes to represent him.
The problem is not an easy one. If an employer were liable
only for the specific acts which he expressly authorizes or ratifies,
there would be little difficulty. But the law may hold a principal
liable for a specific contract which he never authorized, or which
he even forbade, upon the ground that he held his agent out to
the world as authorized to make such contracts ; in other words,
it estops him from denying that an agent had the authority which
he led others reasonably to suppose that such agent possessed.
And it may hold a master liable for a specific act of a servant
which was unauthorized or forbidden, upon the ground that the
act was performed in the course of the business intrusted to the
servant and in the furtherance of it.
Examples : I . P authorizes A to travel and sell goods for him as his agent,
but forbids A to hire a horse on credit, furnishing A with funds for the pur-
pose. A hires a horse on the credit of P while traveling about P's business.
P is liable. The general power conferred to travel and sell goods carries with
it, as to third persons, the incidental power to contract for the means necessary
to this end. This cannot be limited by secret instructions to the agent.
2. P intrusts A with goods to sell, but forbids A to receive the payment.
The buyer pays A, who absconds with the money. P cannot recover again
from the buyer. An agent having possession of goods with power to sell them
has implied authority to receive payment. But if the agent has not possession
of the goods which he sells, he has no implied authority to receive payment.
3. M tells S, his servant, to drive a load of goods to the railway station.
S drives negligently and injures C. M is liable because S was about M's
business.
4. As above. C is blocking the road. S becomes angry and drives his
wagon into and injures C's wagon. If S does this to further M's business,
that is. to get the goods sooner to the station, M is liable. If S does it solely
to vent his own spite, M is not liable. This is a question for the jury.
§117] APPOINTMENT OF AGENTS 207
I. Appointment of Agents
117. Who may appoint agents. Generally speaking, a person
competent to make any contract is competent to appoint an agent
by contract or ratification.
1. Infants. An infant's contracts are usually voidable at the
election of the infant ; they are not absolutely void. It is some-
times said, however, that his appointment of an agent is abso-
lutely void ; but this rule is now generally confined to one form
of appointment, namely, by a formal sealed document known as
a power of attorney. The decided tendency of the courts is to
hold the appointment of agents by infants, in any other form, to
be voidable at the infant's election, like his other contracts. Thus
an agency to sell the infant's horse would be voidable, while a
power of attorney to sell and convey his lands would by most
states, but not by all, be held void and of no effect. There seems
to be no sound reason for such a distinction.
2. Insane persons. An insane person's contracts are voidable
by him or his guardian if he has been judicially declared to be in-
sane or if the other party to the contract knew him to be insane.
In other cases the contract is binding if it has been so far executed
that the other party to it cannot be put in statu quo. Perhaps a
deed by an insane person is absolutely void.
3. Married -<.coiuc)i. At common law a married woman could
make no contracts in person, and could not therefore appoint an
agent. But under the modern married women's acts a married
woman may generally contract as freely as an unmarried woman,
and so far as she may make contracts in person she may appoint
agents to make them for her.
4. Corporations. Corporations can act only through agents.
The directors are the (hid agents, and they may appoint such
additional agents as an- authorized by the charter or as arc
neo to cany out the objects authorized by the charter (see
t. 151 post).
5. Unincorporated associations. Unincorporated associations,
such as clubs and other societies, are nol legal entities like
corporations. If they appoinl agents, the members individually
and collectively are the principals so far as they authorized the
208 PRINCIPAL AND AGENT [Ch.X
appointment. Such aul hi >rity may be gathered from the constitution
and by-laws to which each member assents, or may be found in
a specific vote of a meeting at which members were actually
present. If the constitution provides that a majority vote shall
bind all members, assent to the constitution is assent to any action
thus taken under it. An agent or committee of a club may be
personally liable when the other members are not.
Example. A college class voted to publish an annual and elected A busi-
ness manager. A contracted with C for the printing. All the members of the
class were present at the meeting except G. All are liable to C except G. If
H had been present and had voted against the publication, the question whether
he was also liable would be determined by a finding as to whether H acquiesced
in the decision of the majority.
6. PartncrsJiips. In a partnership each member is both prin-
cipal and agent. Each is liable as principal for the acts of the
other partners within the scope of the partnership business, and
each, by acting as agent for the partnership, may bind them.
One of the implied powers of a partner is to appoint necessary
agents. If rightfully appointed, an agent may by his acts bind
the partnership.
7. Subagency. A principal, P, may empower an agent, A, to
employ a subagent. If under such authority A appoints B as
subagent, B becomes agent of P. If there is no authority to
appoint a subagent, the agent must act personally in all matters
involving judgment, skill, or discretion, but may delegate merely
ministerial or mechanical duties to another. In such a case the
subordinate is the agent not of the principal but of the agent, and
the latter is liable to the principal for any default of the subagent.
118. Who may be an agent. Any person may be an agent and
be vested with authority to bind his principal. An infant, a mar-
ried woman, and probably a lunatic may be the instrumentality for
bringing the principal into contractual relations with third parties.
If the principal chooses and empowers an agent, he must be
responsible for the results.
A principal may appoint joint agents. Ordinarily joint agents
must act jointly ; but if a partnership is acting as agent, one partner
may act alone ; and if a corporation is acting as agent, a majority
of the directors may decide for all.
Power of Attorney
2inoto all jWen bp tijese presents,
That *• Tnoma3 Martin, of the city of Elmira, county of Chemuns, and
state of New York,
have made, constituted and appointed, and by ChfSe Prcficntfi do make, con-
stitute and appoint..y. a l te T... Brow . n v...?. f ... t ? 1 ?...?. a >. d ...|rA>y. ; ..! n y.
true and lawful attorney for P. e and in ?. y name, place and
stead to Brant, bargain, and sell all such lands, tenements and heredita=
ments whatsoever, situated in the state of New York, whereof I now am,
by any ways or means howsoever, entitled to or interested in, either in
severalty or jointly, or in common with any other person or persons, or
any part, share, or proportion thereof, and all such right, title, inter=
est. claim and demand, both in law and in equity, as I may have in the
same, for such sum and price and on such terms as to him shall seem
meet,
giving and granting unto P.Y said attorney full power and authority
to do and perform all and every act or thing whatsoever requisite and necessary
to be done in and about the premises, as fully to all intents and purposes
as — * might or could do if personally present, with full power of sub-
stitution and revocation, hereby ratifying and confirming all that P! y .
said attorney or ft.*. 3 . substitute shall lawfully do or cause to be done
by virtue thereof.
3PH WXttlt$$ 3#fKrC0f,- I -/ /(7 ve hereunto set— T.">y___
hand and seal the t 1 ?.^ day of. J . a .Hy. a .ry • One thousand
nine hundred and 8 . i.H?. ?."•.
/
3 11 presence of
&tatc of .ftctu P.orh,
County of Chemung
City ,,f Elmira
> ss.
'inti.i^ fi . ftl1 .— .day <.f — — . J . a . nuarv .— - — in the year One thousand
nine hundred and sixteen before me, the subscriber, personally
appeared Tnoraa8 .. Mar ' ' n t<> nn- p.-i ^- >ii.illy known to I>e
the mat person described in and who executed the foregoing instrument, and
he—. acknowledged to me thai he exei Uted the same.
j NOTARY'S ~l
I SEAL J
, f ■ . . ■ )' y
Notary Public for Chemung County, New York.
210 PRINCIPAL AND AGENT [Ch. X
119. Form of appointment. Generally an agent may be ap-
pointed by parol. To this there are two exceptions.
i. The Statute of Frauds in a few states requires that where
a contract between P and C must be in writing and signed by P
or his agent, the latter's authority to sign shall also be in writing.
This is not generally found in the statute. As between the prin-
cipal and agent, a contract of agency not to be performed within
one year must be in writing; but if an agent acted under a parol
contract, the principal would, as to third persons, be bound by
the agent's acts.
2. Where the contract between the principal and a third per-
son is required to be under seal (as a conveyance of lands), the
authority of the agent to execute the contract must also be under
seal. Such a formal authorization is commonly called a power
of attorney. A power of attorney may be used in any case.
120. Ratification. Ratification consists in assenting to an act
done in one's name or on one's behalf either by a person who had
no authority to represent one at all or by a person who, having
some authority, exceeded it. When such unauthorized act comes
to the attention of him in whose name or on whose behalf it was
ostensibly done, he has an election to repudiate it or to adopt it.
If he elects to adopt it, this constitutes ratification, and he is in
precisely the same situation as if he had originally authorized it.
Example i. A, knowing his friend P is on the lookout for a rare book,
and seeing one at a bookshop, buys the book in P's name and upon P's credit.
When P learns of this he tells the bookseller to send him the book, but
later, before receiving it, countermands the order. P has ratified and cannot
afterwards withdraw his assent. P's contract dates from the time of the sale
to A, not from the time of ratification.
i . Essentials of ratificatioii. The essentials of ratification are
given below.
a. The contract must have been made in the name of and
in behalf of an existing and ascertainable person. If one con-
tracts in the name of a corporation not yet formed, the corpo-
ration, when formed, cannot strictly ratify, although its assent may
amount to the acceptance of an offer. So if A, intending to act
without authority for P, makes a contract in his own name, P
cannot ratify.
§120] APPOINTMENT OF AGENTS 21 1
b. The one in whose name the contract was made must assent
to it. Such assent may be implied, for example, by accepting bene-
fits under the contract. Silence alone, where there is no duty to
speak, is not sufficient evidence of assent ; but where, for example,
an agent who has some authority exceeds his authority, his prin-
cipal's silence after full knowledge of the facts may amount to
assent. The assent must be as to the whole act ; the principal
cannot ratify a part and disaffirm a part. If he takes the benefit,
he must bear the burdens.
Example 2. A without any authority sold and delivered to C a load of
coal belonging to P. In delivering the coal he negligently broke C's window.
P sent C a bill for the coal. P thereby ratified A's acts and became liable to
C for damages for the broken window.
■\-? v
c. The principal must be competent. If he could have
appointed an agent, he can ratify with the same results as if
he had previously authorized (see sect. 117 ante).
d. If the principal must adopt a particular form in order to
appoint, he must follow the same form in order to ratify (see
sect. 1 19 ante).
2. Ratification of forgery. If A forges P's name to an instru-
ment, as a promissory note, can P ratify the act ? Upon this
the cases differ. Some hold that P may ratify, because he could
have authorized ; others hold that P cannot ratify, because A does
not in fact assume to act for P in a forgery, and that P's only
motive in ratifying would be to conceal the crime of A. But all
cases agree that P may be estopped to deny the validity of the
signature where, after P acknowledges such validity, the instru-
ment is taken by an innocent holder for value relying upon such
acknowledgment.
3. Legal effect of ratification. Ratification relates back to the
time of the formation of the contract or the doing of the act,
and the principal and the third person are in the same position
as if the agent had in fact had full authority at that time.
4. Effect of nonratification. It' the principal refuses to ratifv,
the agent is liable to the third party in damages for a breach
of his implied warranty of authority. Every agent who makes
a contract in the name of another warrants that he has authority
from that other to make it.
212 PRINCIPAL AM) AGENT [Ch. X
121. Agency by necessity. A wife has implied authority given
her by the law to pledge her husband's credit for necessaries.
This exists independent oi the will of the husband. But the one
furnishing the goods has the burden of showing that they were
in fact necessaries and that they were not otherwise provided.
An infant child has not, in England and in some of our states,
any similar authority to pledge his father's credit for neces-
saries, but some states give him such implied authority. This
is therefore a disputed question.
In some cases an unpaid vendor in possession of the goods
has implied authority to sell them for the vendee and charge
the vendee the difference between the contract price and the
amount received upon the resale (see sect. 58 ante).
122. Termination of agency. An agency may be terminated
in various ways, some of which are as follows :
1 . By tlie parties. The principal and the agent may agree to
terminate their relation, or (subject to the exception noted in the
next section) the principal may dismiss the agent, or the agent
may quit the employment. If either principal or agent wrong-
fully terminates an agency which was created by bilateral con-
tract, he is liable to the other party for breach of contract. If
the principal terminates it, he should notify third persons with
whom the agent has been accustomed to deal, or he may, as to
them, be estopped to deny the agency if the agent makes further
contracts with them. If the agent or servant wrongfully quits the
employment before the contract term has expired, he cannot in most
states recover any compensation for what he has already done ; but
a few states allow him to recover the value of such services, less
the damages the principal or master has suffered from the breach.
2. DcatJi. Subject to the exception noted in the next section,
the death of either party terminates the agency. If, after the
death of the principal, the agent, though ignorant of such death,
makes a contract with a third party, also ignorant of such death,
the contract binds no one. The dissolution of a corporation has
the same effect as the death of an individual.
3. Illness of agent. The illness of an agent may create an
impossibility of performance, which will terminate the agency.
The illness of the principal would ordinarily have no effect
§§123,124] APPOINTMENT OF AGENTS 213
4. Insanity. The insanity of either party would terminate
the agency. But if the principal becomes insane, a person who
deals with the agent in ignorance of such insanity, and before
the principal has been judicially declared to be insane, would
be protected.
5. Impossibility. If the subject matter of the agency is
destroyed, the agency would of necessity be terminated. If the
agent is arrested and imprisoned, this, like illness or insanity,
renders further performance by him impossible. If two agents
are authorized to do the same act and one accomplishes it, the
agency of the other is terminated.
123. Irrevocable agencies. The above rules are subject to the
exception that if an agency be "a power coupled with an
interest," the agency is irrevocable. An agent has a power
coupled with an interest when to his authority to act for his
principal is added an interest in the subject matter of the agency
itself, as distinguished from an interest in the compensation he
is to receive for his sen-ices.
Examples : 1 . P pledges goods to A for a debt and gives A power to
sell the goods upon default. P cannot revoke this power nor will it be revoked
by P's death or insanity. A has an interest in the subject matter to secure
his debt.
2. P sends goods to A, a commission merchant, to sell for him and
requests A to make an advance of a specified sum. A docs so. P cannot
revoke this agency, nor will the law revoke it. A has an interest in it beyond
the interest of acting as agent, because he is to reimburse himself to the
extent of the advance from the proceeds of the sale. IJut the interest in the
compensation alone docs not constitute a power coupled with an interest.
II. Obligations of Principal and Agent to Each Other
124. Obligations of principal to agent. The obligations of tin-
principal to the agent may be briefly enumerated under the heads
of compensation, reimbursement, and indemnity.
1. Duty A' compensate agent. The principal must pay to the
lit the agreed compensation, if any, or a reasonable com-
pensation where none has been agreed upon. If the principal
ratifies an unauthorized act, the same result follows. If the
principal wrongfully revokes the authority 1 reated by a bilateral
2i 4 PRINCIPAL .WD AGENT [Ch. X
contract of agency, the agent may sue for the breach. His
damages are presumptively the entire stipulated compensation,
but the principal may show what the agent might have earned
in a similar occupation during the unexpired term, and thus reduce
the damages. An agent would not be justified in remaining idle
after his discharge if he could by reasonable diligence secure
other and similar employment. If the agency is revoked by
impossibility, the agent may recover the reasonable value of the
services actually performed. If the agent renounces his contract
of employment, he can recover no compensation in most states ;
but some permit him to recover the reasonable value less the
damages sustained by the principal from the breach. An agent
cannot recover compensation for illegal services, as lobbying,
betting, and the like.
2. Duty to reimburse agent. The principal must reimburse the
agent for all expenses necessarily incurred by him in the discharge
of the agency, unless the agent's compensation is intended to
cover these expenses.
3. Indemnity. If an agent is compelled to pay damages be-
cause of his innocently following his employer's instructions, he
is entitled to be indemnified.
Example. P directs A to sell certain goods. A does sell them. C after-
wards claims the goods were his and sues A for conversion and recovers from
A their full value. P must indemnify A. But if A had known the goods did
not belong to P, he could not recover indemnity.
125. Obligations of agent to principal. An agent owes to his
principal the duties of obedience, prudence, skill, and good faith,
and is also bound to render accounts. He cannot delegate his
duties.
1. Obedience. The agent must follow his instructions faith-
fully. If he does not, and loss ensues, he must make it good.
Example 1. P sends to A goods to be sold for cash. A sells them to C
and takes C's check. The check is dishonored and C absconds. A is liable
to P for the loss.
2. Prudence and skill. An agent is bound to possess and to
exercise the prudence, skill, and diligence necessary to the proper
conduct of the business intrusted to him.
§125] MUTUAL OBLIGATIONS 215
Examples : 1. P sends A money to loan upon security. A loans it upon
worthless securities which a prudent investor would not take. A is liable to
P for the loss.
3. P authorizes A to effect insurance on P's property. A takes a policy
in a company which prudent men believe to be of doubtful solvency. Loss
ensues. A must make it gcod.
3. Good faith. The relation is a fiduciary one. The agent is
bound to act with entire good faith toward his principal. He
cannot act for both his principal and a third party. He cannot
buy his principal's property, or sell his own to his principal,
without the latter's full knowledge.
Examples : 4. P directs A to buy a horse. X directs A to sell a horse.
A sells X's horse to P. Neither P nor X is bound. A cannot act for both
parties unless each knows that his agent is also acting for the other. A can
recover no compensation.
5. P directs A to buy a horse. A sells P his own horse. When P discovers
this, he may rescind the contract. A cannot be both buyer and seller.
6. A works for P in the manufacture of a secret compound. Afterwards
A begins to manufacture the same compound. P may enjoin A from doing
so. An agent or servant cannot disclose, or use for his own advantage, trade
secrets learned while in the employment of another.
4. Accounting. The agent must keep and render accounts.
He must keep his principal's money or goods separate from his
own ; if he mixes them and any loss results, the agent must
bear it. He can make no secret profits out of his principal's
business. He cannot, by the weight of authority, even keep moneys
obtained for the principal in an illegal transaction.
Examples: 7. An agent deposits his principal's money in a bank in his
own name. The bank fails. The agent must bear the loss. Had he deposited
in his principal's name (P, by A, agent), the loss would have fallen on the
principal if the agent acted prudently in selecting the bank.
8. P diro ts A to purchase coal. The trade price is $5 .1 ton. X agrees that
if the agent will purchase of him he will return to the agent 50 cents on each
ton. A buys of X and P pays X at the rate of $$ :i ,<m - x 6* ves A 5° cents
on each ton. P may compel A to account to him for this mom
5. Nondelegation of duties. An agent cannot delegate to
another the exercise of any discretion or judgment unless his
principal has authorized him to do so. He may delegate the
performance of merely mechanical duties, like the writing of
2l6 PRINCIPAL AND AGENT [Ch. X
contracts or other documents, but of course he is liable for the
result, [f he delegates discretionary duties without authority,
he is liable tor any loss. If he has authority to select sub-
agents, he is liable only if he fails to exercise due care in
selecting them.
Examples: 9. P directs A to sell goods. A engages B to sill them and
turns them over to 1>. A is liable in tort for conversion of the goods in
delivering them to 1> to sell.
10. 1' deposits a check in the X bank in New York for collection. The
check is drawn upon a bank in Chicago, and the X bank sends it to the Y
bank in Chicago for collection. The V bank negligently fails to present it in
due time, and loss ensues to 1'. Is the X bank liable to 1'? Upon this courts
differ. Some say 1' impliedly authorizes the X bank to employ a subagent, and
if the X bank uses due care in selecting the Y bank, it is not liable; other
courts say P contracts with the X bank alone and assumes no responsibility
for the acts of those whom the X bank engages to assist in the collection.
The real question is, Had the X bank authority from P to appoint a sub-
agent for P?
6. Del credere agent. A del credere agent undertakes to
guaranty the principal against loss from credits given by the
agent to third persons in the course of the agency. In the
United States it is generally held that the agent is liable pri-
marily and not as a mere guarantor, and that therefore his
promise need not be in writing. This agency is pretty close to
a sale by the principal to the agent and resale by the agent
to third persons, but it differs in that the title to the goods
remains in the principal until they are sold to third persons.
7. Gratuitous agent. If an agent promises to act gratuitously,
the promise is unenforceable ; but if he does act, he is bound
to act with care and prudence. It is generally said that he is
bound to use slight care and is liable only for gross negligence.
The true standard is the care that reasonable men give under
like circumstances. For example, bank directors serve gratui-
tously ; a particular board is not bound to use as much care and
vigilance as an individual banker gives to his own business,
but must exercise the care which is ordinarily and reasonably
given by such boards, as that is fixed by usage and experience
(see sect. 63 ante).
§§126,127] LIABILITY OF PRINCIPAL 217
III. Liability of Principal to Third Parties
126. General Rules. The principal is liable upon all contracts
made by his agent within the scope of the actual authority given
to the agent.
The principal is also liable upon all contracts made by the
agent within the scope of the apparent or ostensible authority
conferred upon the agent.
The principal is not liable upon contracts made by his agent
beyond the scope of the actual or ostensible authority unless he
ratifies such contracts.
Examples : 1 . P authorizes A to sell goods, but at not less than market price
and to responsible parties only. A sells to X. P seeks to escape the contract
on the ground that X is not a responsible party and that A has sold X the
goods at less than the market price. P is bound by the sale. His instruc-
tions to his agent, not communicated to X, could not limit the ostensible
authority of the agent. Of course A is liable to P for any loss occasioned by
his disobedience of instructions.
2. P authorizes A to sell goods. A barters P's goods for X's horse and
buggy. P is not bound. An authority to sell is not in any sense an authority
to barter.
3. P authorizes A to buy goods on credit. A buys goods of X for I'
and gives X a promissory note signed " I', by A, agent." P is not bound. An
authority to buy on credit is not an ostensible authority to make negotiable
paper. {Problem : What is X's remedy upon this note? Sir sect. 120, par. 4.)
127. Agent's apparent authority. Apparent authority is that
authority which may reasonably be inferred from the circumstances
of the agency. In determining whether an agent has apparent
authority to do a particular act the following circumstances may
be considered.
1. Powers actually conferred. The powers actually conferred
may be the limit of powers real and ostensible. This is particu-
larly the ease where the authority is contained in a formal power
of attorney. Such an instrument is construed strictly, and the
third person is bound to examine it in order to determine the
tent of tli' nt's authority. A power of attorney to sell
lands in New York would confer no authority to sell lands in
Massachusetts ('sec page -'<><)). If the power is conferred in an
instrument not under seal, or orally, the construction is more
218 PRINCIPAL AND AGENT [Ch.X
liberal ; but in such a case the third person cannot claim to rely
upon an apparent authority if he knows the exact terms of the
actual authority.
2. Powers incidental to those conferred. With every actual
authority goes the implied authority to use the means reasonably
necessary to carry out the actual authority. An authority to soil
and convey real property carries with it the power to make a
deed containing the usual covenants of warranty and to receive
the purchase money upon delivery of the deed. The authority to
travel at the principal's expense in order to sell goods carries
with it the power to hire a horse or use other reasonable means
of travel.
3. Powers annexed by custom. The incidental powers may be
enlarged by custom or usage. Some agents, like factors, brokers,
and auctioneers, follow a customary calling, and naturally many
usages of the calling have grown up. One who employs such an
agent is supposed to do so with knowledge of established usages,
and must be held to clothe the agent with all the authority
customarily exercised by agents in that calling.
4. Powers inferred from the conduct of the principal. Over
and above the actual, incidental, and customary powers of an
agent, there may be apparent powers gathered from the conduct
of the principal. If a principal by his conduct leads third persons
reasonably to infer that he has given his agent certain powers, and
they act upon this appearance of authority, the principal will be
estopped to deny that his agent did possess those powers. If,
after an agent has made a mortgage investment for his principal,
the principal permits the agent to retain the bond and mortgage,
he will be estopped to deny that the agent had authority to receive
the interest or installments due upon the securities.
5 . General and special agents. A general agent is one author-
ized to act for his principal in all matters pertaining to a particular
business. A special agent is one (other than an agent following a
customary calling) who is authorized to act for his principal in a
single specific transaction. A principal impliedly confers larger
powers upon a general agent than upon a special one. A third
person should know that an agent engaged to do one special act
is likely to have special instructions, and should inquire into the
§12S] LIABILITY OF PRINCIPAL 219
extent of the authority. In such a case the actual authority is
less likely to be enlarged by any of the considerations above
enumerated ; but even in such a case private instructions not
communicated to the third person may not avail the principal.
Examples : 1 . P puts his grocery store in charge of A, as general manager,
to buy and sell goods and transact the necessary business. A exchanges sugar
for eggs. This is within his implied powers.
2. P authorizes A as a special agent to sell a barrel of sugar. A exchanges
the sugar for eggs. This is not within his implied powers.
128. Agents following customary calling. Some forms of
agency are so well established and have been so long practiced
that they have gathered a considerable body of customs in
conformity with which such agencies are conducted. A few of
these will be briefly considered.
1 . Factors. Factors or commission merchants are agents whose
regular business it is to receive consignments of goods and sell
them for a commission or percentage. The principal is bound by
the customs of the calling. These customs have been adopted in
order to protect innocent purchasers who are unable to know
whose goods the factor is selling or what instructions the owner
may have given. The factor may sell at any price, for cash or
credit, may warrant the goods if such goods are customarily sold
with a warranty, and may take negotiable instruments in a sale on
credit. He cannot barter the goods. At common law he cannot
pledge them for his own debt, but under the Factors Acts an
innocent pledgee is protected. The factor has a general lien upon
the goods of his principal in his hands, or upon their proceeds
for all sums due him from the principal for advances made or
obligations incurred in connection with the relationship.
2. Brokers. Brokers arc agents whose regular business it is
to make contracts without having possession of the goods, or to
negotiate for the purchase of property, or for loans, or for insur-
ance, and the like. A merchandise broker who sells goods has
less apparent authority than a factor, because he has not posses-
sion of the goods. He cannol receive payment; he cannot usu-
ally warrant the goods; custom may permit a sale on credit,
but the custom in this respect is not so broad as in the case
of factors.
PRINCIPAL AND A.GENT [Ch.X
3. Auctioneers. Auctioneers are agents whose business it is to
sell property publicly to the highest bidder. Until the fall of the
hammer he is the agent of the seller ; after that he is also agent
of the buyer so as to enable him to make the note or memoran-
dum required by the Statute of Frauds. He must sell for cash,
and not, unless specially authorized, on credit or for other goods
or for negotiable paper. He may receive payment. He cannot
warrant unless specially authorized, nor can he rescind the sale
when once made.
4. Attorneys at law. An attorney at law is an agent whose
business it is, as a duly qualified officer of the court, to represent
his principal in the conduct of litigation or other legal proceed-
ings. He has implied authority to control the proceedings, but
he cannot compromise or release his client's claim or give up
any substantial right of his client unless specially authorized.
He may receive payment in full and give a release. He is
bound to the highest good faith toward his client, and is liable
to the client for the negligent management of the affairs intrusted
to him.
5. Bank cashiers. A bank cashier is the chief executive offi-
cer of a bank. Tellers and other subordinate officers are under
his control. He has power to draw checks or drafts upon the
funds of the bank deposited with other banking or trust com-
panies ; to indorse and transfer for collection, discount, or sale
the negotiable paper or other securities owned by the bank ; to
certify checks drawn upon the bank by depositors ; to collect
moneys due the bank ; to borrow money and to loan money.
129. Undisclosed principal. An agent, in making a contract,
may do so in his own name without disclosing to the third party
that he is in fact acting for a principal. Factors usually make
contracts in this way. In such cases the agent is always liable,
but the principal may be also. Conversely, the principal may
enforce such a contract against the third party.
1. General rule. Subject to some exceptions, an undisclosed
principal is liable to third parties with whom an authorized agent
has dealt within the scope of the agency, in the same way and
to the same extent as a disclosed principal, although the third
person supposed he was dealing with the agent as principal.
§129] LIABILITY OF PRINCIPAL 221
The rule works both ways. An undisclosed principal may
claim the benefits of a contract made by his agent in the course
of the agency.
Examples : I. A business is conducted in the name of A, who buys goods
of X. Later X discovers that P owns the business. X may recover the price
of the goods from P.
2. A business is conducted in the name of A, who sells goods to X. The
owner, P, may recover the price of the goods from X.
2. Exceptions. To these rules there are some exceptions, and
a few of them may be noted.
a. If the principal or the third party has in good faith settled
his account with the agent, he is no longer liable.
Examples .-3. If A conducts P's business in his own name and buys goods
of X, and A and P have an accounting which includes this item, X cannot
afterwards sue P.
4. If under like circumstances A sells goods to X, and X has paid A or
otherwise settled with him, P cannot afterwards sue X.
b. In contracts under seal only the parties named in the con-
tract can sue or be sued, and hence an undisclosed principal could
neither sue nor be sued upon such a contract.
Example. 5. A sealed instrument is signed " A. B., C. D., E. F., Trustees
of the X Church." The church is not liable. The instrument should be signed
" The X Church, by A. B., C. D., E. F., Trustees." Had this been a simple
contract (not under seal), the church could have been sued upon it.
c. In negotiable instruments, only the party named as maker,
drawer, or indorser can be sued. Hence, if an agent signs such
an instrument in his own name, he alone is liable upon it. So
also only the payee can sue ; but this part of the rule is not
important, since the payee, by indorsing the instrument, could
confer upon the undisclosed principal or any other person the
right to sue.
Example 6. A buys goods for 1' without disclosing P, and gives a promis-
sory note to \"s order, signed "A, agent." X cannot sue 1' upon this. The
word "agent" has no more effect than if A had signed "A, shoemaker, 11 or
"A, Republican." These are mere words of description. A alone is liable.
Had this been a nonnegotiable instrument, 1' could have been sued upon it.
//. If, after discovering the principal, tin- third party unequiv-
ocally elects to hold the agent, he cannot afterwards proceed
PRINCIPAL AND AGEN I [Ch.X
against the principal. The third person has an option to hold
the agent to the contract made in the agent's name, or to dis-
regard the agent and proceed against the principal. But he
cannot do both. He must elect, and his election, once made, is
binding upon him.
130. Frauds by agent. If in the course of an authorized nego-
tiation for the principal an agent makes unauthorized false repre-
sentations, amounting to fraud or deceit, concerning the subject
matter of a contract, the principal is liable in the same way as if
he had made them personally (see sect. 29 ante).
If the agent commits a fraud for his own benefit and not for
his principal's, but by means of instrumentalities intrusted to him
by his principal, the latter may be liable.
Examples ; 1. A stock transfer agent of a corporation fraudulently issues
stock certificates and sells them for his own benefit. In many American states
the corporation is held liable.
2. An agent, authorized by a railway company to receive goods and issue
bills of lading, fraudulently issues bills of lading for wheat where no wheat is
received, and sells the bills of lading to innocent buyers. In New York and
many other states the railway is liable, but England and some of our states
huld otherwise.
3. A is both telegraph operator and express agent at M. He telegraphs X
in the name of X's agent, requesting the transmission of money by express.
X sends the money by express. The agent takes it and absconds. The
telegraph company is liable to X.
IV. Liability of Agent to Third Parties
131. Where agent alone is liable. If an agent exceeds his
authority so that his principal is not bound, the agent is liable to
the third party for the breach of his warranty of authority. He is
not liable on the contract itself when that was made in the prin-
cipal's name. The agent is liable for any fraud, deceit, or other
tort committed by him while about the principal's business.
If an agent contracts for a fictitious principal, he is liable upon
the contract himself.
If an agent signs a sealed instrument or a negotiable instru-
ment in his own name, or in his name with merely descriptive
matter after it, he alone is liable unless the body of the instrument
shows by its recitals that it is the principal's promise.
§132] REVIEW QUESTIONS AND PROBLEMS 223
Example. " We, as trustees of the X Church, promise to pay to the order
of G. H. one hundred dollars. A. B., C. D., E. F., Trustees of the X Church."
This binds the X Church. But if it had read, " We promise to pay, etc.," and
had been signed in the same way, the church would not have been liable
(see sect. 1 29, par. 2. b. ante).
132. Where both principal and agent are bound. In a contract
made by an agent for an undisclosed principal both are bound ;
that is, the third party may elect to hold either. Even a written
contract (other than a sealed or negotiable one) signed by the
agent alone may be shown by parol evidence to be in fact the
contract of an undisclosed principal. This has already been
sufficiently considered.
REVIEW QUESTIONS AND PROBLEMS
Section 116. What is the meaning of agency? Into what two branches
does the subject fall? Explain each. How is the relation created? What is
the problem as to third persons ? Why is it difficult? W T hy is or is not the
principal or master liable in each example given ?
117. Mayan infant appoint an agent? Is the appointment voidable? Is
it void? Same questions as to an insane person? a married woman? If one
contracts in behalf of an unincorporated club, who is bound? Is a member
bound who votes against the making of the contract? May one partner bind
another by appointing an agent? May an agent, by appointing a subagent,
bind his principal?
Problem 1. An infant P authorizes an agent A by power of attorney to sell
and convey P's real property. A sells and conveys P's property. When P
comes of age, can he ratify this sale and conveyance, or, in order to make it
valid, must he then execute a new conveyance? What of an infant's authority
to an agent to sell a horse ? to buy one ?
Problem 2. P when sane authorizes A to buy goods for him. P becomes
insane, and A afterwards purchases of X, who does not know of P's insanity.
Is P bound ?
118. Who may be an agent? How must joint agents act? Exception?
119. Winn must an agent's appointment be in writing? When must it be
under seal? Draw a power of attorney to collect debts and give receipts for
the same.
120. What is ratification? What are the essentials? If in Example 1 A
had bought the book in his own name, could P ratify? Is silence ratification ?
Can one ratify a forgery of his name to an instrument? How can one be
pped in such a case? II one 1 from what time docs the contract
obligation date? If one refuses to ratify, what arc the third party's rights?
224 PRINCIPAL AM) A.GENT [Ch.X
Problem ,\ A is the promoter of an intended corporation. He makes a
contract for it. When it is duly chartered, the corporation ratifies the contract.
Is it liable Eor a subsequent breach of the contract?
Problem 4. A without authority makes a contract in his own name, but
intending it lor the benefit of 1'. When 1' hears of it. lie ratifies it. Is P hound ?
Problem J. A without authority coin eyed P's land to X. 1' received the
purchase money. X claims this was a ratification. Is it SO?
121. What is a wile's implied authority as agent? an infant child's? an
unpaid vendor's?
122. How may an agency be terminated by act of the parties? If a prin-
cipal terminates it, what are the rights of the agent? of third parties? If the
agent terminates it before the contract expires, what may he recover for serv-
ices already rendered ? What is the effect of the death of cither party ? of
illness? Effect of impossibility?
Problem 6. V authorized A to sell his lands. Later he also authorized B to
sell them. On September 9 A sold them to X. On September 10 B sold them
to Y. P conveyed to X, and Y sues P for breach of contract. Result?
Problem 7. P authorizes A to receive payments of X. P dies. X pays A,
neither knowing of P's death. Is the payment binding upon P's estate?
123. What is an irrevocable agency? What is a power coupled with an
interest? Illustrate.
Problem S. P borrowed $2000 of A and gave the latter a power to collect
certain rents and pay himself from the proceeds. P died. Was the agency to
collect the rents terminated ? Suppose a tenant had paid rent to A after P's
death ?
124. What are the obligations of the principal to the agent? What are an
agent's damages when the principal wrongfully revokes the agency? When an
agency is revoked by impossibility or by the death of the principal, how much
may an agent recover ? What is reimbursement ? What is indemnity ?
Problem g. A agrees to work for P for a year at $20 a month. At the end
of four months A quits the employment without cause. How much may A
recover of P ?
Problem 10. In a similar case P discharges A without cause at the end of
four months. How much may A recover?
125. What are the agent's duties? Illustrate each. If an agent acts for
his principal and also for a third person, what is the result ? If an agent makes
a secret profit, what is the result? May an agent delegate his duties? Explain
and illustrate. What is a del credere agency? How does it differ from a sale?
What are the obligations of a gratuitous agent ?
Problem 11. P directs A to pay taxes on P's land. A neglects to do so.
The lands are sold for taxes. A bids them in and takes a tax deed. Is it good
against P?
REVIEW QUESTIONS AND PROBLEMS 225
Probleni 12. A sold for P certain prize packages which it was illegal to
sell, and received the money for them. P sues A for the money. A sets up
the illegality. Result?
Problem ij. P authorizes A to accept bills of exchange drawn on P. When
a bill comes in, A decides to accept it and tells -B, a clerk, to write the accept-
ance. B writes, " Accepted, P, by B." Is P bound ? How would it be if A
had told B to exercise his judgment and accept bills, and B had accepted this ?
126. State the rules as to a principal's liability to third persons for the acts
of his agent. Illustrate.
127. How is an agent's apparent authority determined? What is actual
authority and how determined ? What are incidental powers ? Illustrate.
What are customary powers? What are powers arising from the conduct
of the principal? Illustrate. What is the distinction between general and
special agents? Illustrate.
Problem 14. P gives A general authority to sell goods. A sells them to X
and warrants them. Is P bound by the warranty?
Problem ij. P directs A to loan money and take a note and mortgage.
A does so. The note and mortgage remain in A's hands. The borrower
pays A. Is P bound by this payment?
Problem 16. P authorizes A to make collections. X gives A a check pay-
able to the order of P. A indorses the check in P's name, obtains the money,
and absconds. Does the loss fall upon P or the bank ?
128. Define factor. Explain his powers. Define broker. Distinguish from
factor. Define auctioneer. Whose agent is he? Define attorney at law and
state some of his powers. State the powers of a bank cashier.
Problem ij.K broker is authorized by P to sell goods and sells them to X.
P delivers the goods to X. The broker then collects the price from X and
absconds. P sues X for the price. Can he recover?
Problem iS. P authorized an auctioneer to sell his farm for $500 cash
down, balance of the price bid in thirty days. These terms were publicly stated
at the time of the auction. The auctioneer sold to X for $3000, and took X's
check for the $500. X had no funds in bank to meet the check, but two days
later deposited funds and the check was paid to the auctioneer. Meanwhile
P had learned of the transaction and repudiated the sale. X now sues 1'
for breai h of contract. Result?
129. What is an undisclosed principal? State the general rule as to the
liability of an undisclosed principal. State the general rule as to his rights.
State the exceptions and illusl h.
Problem n>. P owns a hotel. Me conducts it in the name of A. ami it
is supposed that A is the proprietor. X sells ml;. us mi credit to A for tin-
hotel. P has forbidden A to buy cigars on credit. Is 1' liable to X for the
cigars?
226 PRINCIPAL AND AC.KNT [Ch. X
Problem fo. In the above case P, after learning that A bought on credit,
settled \\u!i the agent, paying him in full for the cost of the cigars. Can X
then recover oi P ?
Problem 91, In the above case (Problem 19) X, alter learning that P is
the true principal, sues A and obtains a judgment against him. This remains
Unsatisfied, and he then sues P. Can he maintain this action?
Problem 92. In the above case (Problem 19) X warranted the cigars.
They turned out to be inferior to the warranty. Can P recover against X for
breach of the warranty ?
Problem 2J. In the above case (Problem 22) the agent, before X knows
that P is the true principal, settles with X for the breach of warranty. Can
1 ' now sue X ?
130. Is the principal liable for the frauds of the agent committed for the
principal's benefit? for the agent's benefit? Illustrate.
Problem 24. P authorizes A to sell his land. A sells to X and fraudulently
represents the land to be well timbered and well watered. When X discovers
the fraud he sues P, who has received the purchase money without knowing
of his agent's fraud. Is P liable to X in this action for deceit ?
131. How is an agent liable to the third person upon an unauthorized
contract? How is he liable if he deals in the name of a fictitious principal?
How is he liable if he signs in his own name a sealed or negotiable instrument?
Problem 2j. P authorizes A to issue insurance. A without authority repre-
sents to X that he may keep petroleum upon the insured premises. X's prem-
ises burn. P successfully defends an action upon the policy because X kept
petroleum. X sues A for breach of his warranty of authority to make such
representation. Result?
132. Who are liable on an authorized written or oral contract made by an
agent in his own name ?
CHAPTER XI
MASTER AND SERVANT
I. Injuries to Third Persons
133. Negligent torts by servants. If in the conduct of his
master's business a servant negligently injures a third person
(other than a fellow servant), the master is liable to the injured
person ; the servant is of course also liable, because everyone
is liable for his own torts. But if the injury is due to some
contributing negligence of the third person, he cannot recover
from either the master or the servant.
Examples : I. A railway engineer negligently runs over X at a railway
crossing. The railway company is liable to X. The engineer is also liable.
2. A workman negligently allows a brick to fall from a building into the
street. It strikes and injures X. The employer of the negligent workman is
liable to X. The workman also is liable.
3. A servant at a hotel negligently spills soup upon a guest's dress. The
hotel keeper is liable for the damage. The servant also is liable.
4. X negligently fails to look and listen at a railway crossing. The engineer
negligently fails to sound a signal. X is struck and injured by the locomotive.
He cannot recover, because of his contributory negligence.
134. Willful torts by servants. A master is liable for willful
torts committed by his servant in the course of the employment
and in the supposed furtherance thereof. If the servant is acting
for the master and supposes, however mistakenly, that his act
will further the master's interests, the master is liable.
Examples: 1. X's vehicle obstructs the M. Street Railway Company's
track. S is motorman on one of its cars. S orders X to get off the track.
There is a dispute and S purposely drives his car against X's vehicle and
damages it. The Railway Company is liable if S did this in order to get a
: track and make his schedule time. S also is liable for his own tort.
2. S sells tickets for the M. Elevated Railway. X buys a ticket and lays
down a bill. S gives X the change and then mistakenly thinks the bill is
counterfeit and has X arrested. The Railway Company is liable for false im-
prisonment if S did this in order to get good money for the ticket; but if S
227 .
228 MASTKR AND SERVANT [Ch. XI
did it to serve the public and punish a supposed criminal, the Railway
Company is not liable. In either case S is personally liable.
A public carrier of passengers is liable for any willful injury
done to a passenger by one of its employees, whether clone in
the supposed discharge of a duty or out of personal malice. The
carrier owes a very high duty to passengers.
Example 3. A street-car conductor sees one of his enemies on the street car
and assaults him to pay off an old grudge. The street-car company is liable.
The conductor is of course personally liable.
II. Injuries to Servants
135. Injury to one servant by another. The master is not
liable to one servant for an injury occasioned by the negligence
of a fellow servant. He is liable for an injury occasioned by the
negligence of a vice principal.
A vice principal is one who is charged by the master with
the performance of any of these duties : {a) providing a safe
place to work ; (b) providing safe tools ; (c) providing a suffi-
cient number of competent servants ; (<7) providing suitable
rules and regulations to govern the service ; (c) providing
inspection and repair of instrumentalities ; (/) providing special
warning of any extraordinary danger. If one charged with per-
forming any of these duties is negligent in the performance
thereof, and an employee is injured in consequence of such
negligence, the master is liable. The master does not insure
safety in these respects ; he insures that due care will be taken.
A fellow servant is one who performs operative acts. If in
operating machinery or in any similar act one fellow servant
injures another, the master is not liable. It is said that a servant,
in entering the employment, assumes the risk as to the negligence
of his fellow servants.
Examples : 1 . S and T are both employed by M. S is told to repair a
machine and does so negligently. The machine breaks down while T is
operating it, and injures T. M. is liable to T. In repairing the machine S
was a vice principal.
2. Owing to the negligence of S in operating a machine T is injured. M is
not liable to T. In operating the machine S is a fellow servant of T.
§§ 136, 137] INJURIES TO SERVANTS 229
3. Owing to the negligence of a railway engineer a train is derailed and
a brakeman injured. The railway company is not liable to the brakeman. An
engineer is a fellow servant of a brakeman ; so also is a conductor ; so also
is a switchman. But a train dispatcher is a vice principal.
In Ohio and some other states a superior officer, like a con-
ductor or a manager or a foreman, is always a vice principal,
even if he performs operative acts ; but the general rule is that
it is the nature of the act and not the rank of the actor that
is decisive. Employers' liability acts exist in several states,
enlarging the liability of the master to one servant for the neg-
ligence of a coservant.
136. The master's nonassignable duties. The duty to use care
to furnish safe machinery, safe tools, proper inspection, and the
like, as specified in sect. 135, is called a nonassignable duty,
because, no matter who is delegated to perform it, the master
remains liable to his servants for any negligence in that regard.
This rule is qualified by the further rule that if a servant, with
full knowledge of some defect, remains in the employment, he
assumes the risk as to the defect and cannot recover from the
master if he is injured in consequence of it.
Example 1. S is told to operate a machine. He knows it is defective. He
operates it and is injured because of this defect. He cannot recover.
But if the master promises to repair the defect, the servant
may remain a reasonable time without assuming the risk.
Example 2. As above. S objects to the machine because it is defective.
The master promises to repair it. The next day S is injured. The master
is liable to S.
In any case a servant cannot recover if his injury is due to
his own contributory negligence.
Example 3. S, after the master's promise to repair, operates the machine.
He is injured by his own negligence in the manner of operating it. He cannot
recover.
137. Employers' liability acts. Statutes called employers'
liability acts have been enacted in many jurisdictions. These
laws materially change the common-law rules laid down above
(sects. 135—136). The Federal Employers' Eiability Act provides
_>30 MASTER AND SERVANT [Ch. xi
that all common carriers by railroad which arc engaged in inter-
state commerce shall be liable to employees for injuries sustained
in the course of their employment which are due to the negli-
gence of other employees of the railroad or which are caused
by defects in engines, cars, track, or other equipment. This is
an abolition of the fellow-servant rule. The statute also abolishes
the rule that contributory negligence bars recovery and adopts the
rule of comparative negligence. If both employer and employee
have been negligent, the employee will not be wholly barred from
recovery", but his recovery will be reduced by the jury according
to the relative importance of his negligence. The rule of assump-
tion of risk is also partially abolished by this act, and the carrier
is prohibited from exempting itself from liability for its negligence.
In at least thirty states employers' liability acts have been
enacted, limiting or abolishing the fellow-servant rule, the rule
of contributory negligence, and the assumption-of-risk rule. Their
variations are numerous, and it is impossible to give them in detail
here. Some apply only to railroads and their employees, while
others are concerned with all employers and employees.
138. Workmen's compensation and insurance acts. Within
the past ten years many legislatures have enacted workmen's
compensation and insurance laws for the purpose of providing
financial relief to workmen injured in the course of their employ-
ment, regardless of the cause of the injury, unless it were in-
tentionally self-inflicted or in some cases due to gross negligence
or intoxication. The theory of these acts is that losses due to
injuries suffered by workmen in the ordinary course of their
employment ought to be borne by the industry, and ultimately
by the consuming public, rather than by the workmen.
The compensation acts are of two classes, elective and com-
pulsory. In fourteen states and two territories 1 the elective system
is in force as to all classes of employment covered by the acts.
In ten states 2 the laws are elective as to private employers, but
1 Alaska, Colorado, Connecticut, Illinois, Kansas, Kentucky, Massachusetts,
Minnesota, Nebraska, New Hampshire, Oregon, Porto Rico, Rhode Island,
Texas, Vermont, and West Virginia.
2 Indiana, Iowa, Louisiana, Maine, Michigan, Montana, Nevada, New Jersey,
Pennsylvania, and Wisconsin.
§138] INJURIES TO SERVANTS 231
compulsory as to public employers, as, for example, the state,
counties, and municipalities. In eight states and one territory, 1
and under the federal act, it is compulsory for all employers to
abide by the provisions of the statutes.
In some states these acts apply to all industries, in some to
extra-hazardous employments only, while in others all occupations
except domestic and farm labor are included.
Under the elective system neither employer nor employee is
bound to come under the act and accept its liabilities and bene-
fits, but both must elect to do so before the act will apply. In
many states election to come within the act is presumed in the
absence of written notice to the contrary. Under the compulsory
system, on the other hand, the employer must accept the com-
pensation law, although the employee is allowed to sue as at
common law in some cases, as in New York when the employer
fails to secure payment of compensation under the act.
Under the elective system the defenses of assumed risk and
contributory negligence, and the fellow-servant rule, are generally
abolished, and suits for damages outside the act are not allowed
after the workman has elected to come under the act.
Generally, under all the compensation statutes, waivers of the
provisions of the acts are prohibited and the employer is required
to give proof of solvency or to insure against the risks. The em-
ployee is not eligible for compensation unless his disability con-
tinues for a period of some appreciable length, the time ranging
from six days to three weeks. The amount which the employee
is entitled to obtain for any given injury is fixed by these
statutes. These sums vary greatly, but are usually a certain
proportion of the employee's weekly salary for a given period.
Thus, in New York, if the employee is killed, the employer
is required to pay reasonable funeral expenses, not exceeding
$100, and to the widow 30 per cent of the deceased's wages
until the death or remarriage of the widow, and 10 per cent
additional for each child under eighteen years, the total weekly
payments, however, not to exceed two thirds of the weekly
wages of the deceased.
1 Arizona, California, Hawaii, Maryland, New York, Ohio, Oklahoma, Wash-
ington, and Wyoming.
232 MASTER AND SERVANT [Ch. XI
Disputes under the acts arc sometimes settled by the courts,
but more often by an industrial commission having charge of the
enforcement -of the statutes.
The states having the workmen's compensation statutes arc
divided into two classes with respect to the question of securing
to the workmen the payments due them under the acts. In
twenty-five states and two territories * the employer must cither
secure the payment of the compensation by insurance or furnish
evidence of his financial responsibility. In seven states and one
territory 2 the employer is not compelled to insure or make other
provision for securing the payments, but he may do so if he desires.
The methods of insurance are various. In sixteen states and
one territory there are insurance funds operated wholly or in
part by the state. In four states and one territory 3 the employer
is compelled to insure in a fund administered wholly by the
state. In nine states 4 a state-operated insurance company is
maintained in competition with private insurance companies. In
three states 5 insurance is compulsory on the part of the employer
either in a private company or in an insurance fund operated by
the state and the employers in combination. In sixteen states and
two territories 6 there are no insurance funds operated in whole
or in part by the state, and the employer, if he insures his risk
under the workmen's compensation acts, either voluntarily or
compulsorily, must do so in a private insurance company.
1 Colorado, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine,
Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New
York, Ohio, Oklahoma, Oregor^ Pennsylvania, Porto Rico, Rhode Island, Texas,
Vermont, Washington, West Virginia, Wisconsin, and Wyoming.
2 Alaska, Arizona, California, Kansas, Louisiana, Minnesota, Nebraska, and
New Jersey.
'■'■ Nevada, Oregon, Porto Rico, Washington, and Wyoming.
4 California, Colorado, Maryland, Michigan, Montana, New York, Ohio, Penn-
sylvania, and West Virginia.
5 Kentucky, Massachusetts, and Texas.
6 Alaska, Arizona, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Loui-
siana, Maine, Minnesota, Nebraska, New Hampshire, New Jersey, Oklahoma,
Rhode Island, Vermont, and Wisconsin.
REVIEW QUESTIONS AND PROBLEMS 233
REVIEW QUESTIONS AND PROBLEMS
Section 133. When is a master liable for negligent injuries by his
servant to a third person ? What will bar the action ?
134. When is a master liable for willful injuries inflicted by his servant
upon a third person? What is the rule as to public carriers?
Problem 1. B, a boy of twelve, steals a ride on a freight train. The brake-
man discovers him and pushes him off while the train is in motion, and the
boy is injured. Is the railway company liable?
Problem 2. B is employed to repair electric lights in X's building. W T hile
he is on a stepladder X's janitor, who is sweeping the room, pushes the ladder
intentionally and B falls and is injured. Is X liable?
135. Who is a vice principal? Who is a fellow servant? Is a superior
officer a vice principal? What is the usual test as to the master's liability
to one employee for a negligent injury by another employee? W T hat is the
purpose of employers' liability acts?
Problem j. Owing to the negligence of a switchman a train is derailed
and the engineer injured. Is the railway company liable to its engineer for
the negligence of its switchman ?
Problem 4. B was a laborer in X's factory. C was superintendent of
the factory. B was lifting a flywheel of an engine off from its center, when
C negligently turned on the steam and started the wheel, injuring B. Is X
liable to B ?
Problem 3. A workman in the X Railway Company's repair shops negli-
gently repairs a locomotive boiler. When it is used it explodes and injures an
engineer. Is the railway company liable?
136. What are the master's nonassignable duties? How may the risk as
to these be shifted to the employee ? What is the effect of a promise to repair
a defect ? What is the effect of contributory negligence ?
Problem 6. B was X's domestic servant, and X agreed to furnish board
and lodging. The roof over B's room leaked. X promised to repair the roof.
B stayed and owing to the leak took cold and was ill. Is X liable to B ?
137. What arc the employers' liability acts? Is one in force in your state?
How do they change the common-law rules regarding the master's liability
to his servant for injuries?
138. What arc the workmen's compensation laws? Is one in force in
your state? When is such a law elective? When compulsory? What are the
rights of a workman under such a law when he is injured? Are all industries
included within these laws? May an employee obtain damages in the courts
in addition to what he secures under tin- compensation laws? What are the
compulsory and elective insurance systems provided by some statutes?
PART V. BUSINESS ASSOCIATIONS
CHAPTER XII
PARTNERSHIPS AND JOINT-STOCK COMPANIES
139. Forms of conducting business. Business may be con-
ducted by a sole trader, or by a partnership, or by a joint-stock
company, or by a corporation.
A sole proprietor or trader is one who conducts his business
in person or through agents, without admitting anyone else to
share in the profits. He alone owns the property embarked in
the business ; he alone has a decisive voice in the management
of the business ; and he alone is liable for debts and entitled
to credits. He may, of course, have agents to whom he intrusts
many important matters, but they are his employees and are
responsible to him alone.
It is the combination of persons in business that calls for
special consideration.
i. Partnerships. In order to increase capital and make it pos-
sible to do a larger business, two or more persons may combine
and do business together as one firm. A partnership involves
a high degree of confidence in the ability, fidelity, and integrity
of one's partners, without relieving one of personal liability to
third persons for contract obligations and torts. The partnership
has three important characteristics : (a) the death or retirement
of one partner dissolves the firm ; (/;) each partner is an agent
for the firm ; (r) each partner is individually liable for the debts
of the firm.
2. Joint-stock companies. The joint-stock company is a large
partnership in which the interests are represented by shares of
stock, as in a corporation. It differs from a partnership in that
the death or retirement of a shareholder does not dissolve the com-
pany and in that a shareholder is not an agent of the company
*35
236 PARTNERSHIPS [Ch. XII
unless duly elected or appointed as such. It is like a partner-
ship in that each member is individually liable for the debts
of the company.
3. Corporations. A corporation is a distinct legal entity inde-
pendent of its stockholders. Partnerships and joint-stock com-
panies are formed by the agreement of the members and require
no statutory authorization. A corporation is the creature of
statute and is by statute given a legal being and invested with
legal powers as a separate entity. Title to property vests in it,
not in its members ; it acts through its agents as a legal person ;
it is liable for its debts and torts, and no liability (unless expressly
fixed by statute) rests upon its members. The last feature is
highly important. Persons may invest money in a corporation
without becoming individually liable for the debts of the corpora-
tion, while in a partnership or joint-stock company each partner
or shareholder is individually liable.
Statutes, of course, may and often do modify these results. Thus we have
full-liability corporations authorized in some states, while we also have limited
partnerships in some. In the full-liability corporation each shareholder is
individually liable, while in the limited partnership a limited partner is not in-
dividually liable beyond a specified amount. In some corporations the statutes
make shareholders individually liable to a limited amount, but the type is as
stated above.
I. Partnerships
140. What constitutes a partnership. A partnership may be
general or limited, and partners may be real or ostensible, active
or dormant.
1. General partnerships . A general partnership is a voluntary
association of two or more persons under an agreement to
carry on in common, as if they were one person or an entity,
a business or occupation, and to share as common owners the
profits of the enterprise. A partnership agreement need not be in
writing. It usually is in writing, however, and the document is
called the Articles of Partnership (see page 244 post).
The mere sharing of profits is not a conclusive test of the
existence of a partnership, although it is strong evidence of it ;
an agreement to share both profits and losses is still stronger
evidence. It is often difficult to decide whether or not a particular
§140] WHAT CONSTITUTES 237
agreement constitutes a partnership. In general it may be said
that there must be a community of interest and control in carry-
ing on a business by which each is usually agent for the others
and under which there is a division of profits. This is a highly
technical subject, and it is impossible to treat it here in detail.
Two persons may be partners as to third persons while by force
of the agreement between themselves they are not partners as to
each other. We are now chiefly concerned with the problem
whether they are partners as to third persons.
Examples : 1. A and B agree to carry packages, etc. for hire. A is to
furnish horse and cart and to give his services. A is to receive a fixed sum.
They are to divide the expenses and to share the profits over and above
A's fixed salary. This is a partnership. They are carrying on a business
in common, with a view to profits. One may in such case be paid specially
for services.
2. An owner of a farm lets it on shares under an agreement to take one
half the products of the farm as rent. This is not a partnership, but a lease,
with an uncertain and contingent rental.
3. A manufacturer engages an agent to sell goods, agreeing to give him
one third of the net profits on any sales made by him. This is not a partner-
ship, but an agency. The agent does not carry on, in common with the
manufacturer, the business of making and vending the goods.
4. M furnishes capital to start a retail store. N puts in his services in
managing the business. They agree to share the profits. This is a partner-
ship. They carry on a business in common, with a view to profits.
5. M and N each put in services to carry on in common a law business,
with a view to profits which they are to share. This is a partnership.
2. Ostensible partner. If a man holds himself out as a partner
or permits others to hold him out as a partner, when in fact he is
not, he becomes liable as partner to third persons who deal with
the supposed firm relying upon this appearance of partnership.
Examples: 6. M and N dissolve partnership. M allows his name to
remain over the door of the establishment and upon the letterheads used in
the business. X sells goods to the supposed firm, believing M to be still a
partner. X may hold M liable for the price of the goods. M is estopped by
his conduct to deny that he is a partner. He should give notice to former
customers of his withdrawal from the partnership.
7. W introduced Y to X as the moneyed partner. Y was not a partner,
but he did not deny W's statement X trusted to this representation and
suffered loss. Y is liable. He is estopped to deny that he was a partner. " If
a man won't speak when he should, he shan't when he would."
238 PARTNERSHIPS [Ch.^II
3. Dormant partner. A dormant partner is one who is un-
known as a partner. He occupies much the same position as
an undisclosed principal. He is liable on the firm contracts when
discovered, and he is entitled as a partner to the benefit of them.
4. Limited partnerships. These exist only by force of statute.
They are partnerships in which one or more of the partners are
not liable for partnership debts beyond the sum each has con-
tributed to the capital. Such partnerships must have at least one
general partner whose liability is unlimited. The general partners
manage the business, sharing the profits with the limited partners.
The statutes prescribe how such a partnership may be formed,
and the statutes must be strictly followed ; any violation of them
will render the concern a general partnership. The theory is that
it is a general partnership except so far as the statute, duly com-
plied with, renders it a limited partnership. These partnerships
have never been authorized in England.
5. Who may be a partner. Any person who can make con-
tracts may become a party to a partnership contract. By modern
statutes married women may make contracts and hence may
become partners, although some states do not permit a married
woman to become a partner with her husband. Infants may
become partners, but the contract is voidable at the will of the
infant. So far, however, as an infant has actually put his property
into a partnership, he cannot withdraw it to the prejudice of credi-
tors. A corporation cannot become a partner unless permitted to
do so by its charter.
141. Rights and duties of partners as to each other. Each part-
ner is bound to exercise toward his associates in the partnership
the highest good faith. He can make no secret profits.
Examples : 1. A and B are partners in a grocery. A is individually a
dealer in sugar. A without B's knowledge sells sugar to the firm at a profit.
A must share this profit with B.
2. A, B, and C as partners are lessees of a store. When the lease expires
A renews it in his own name. A is held a trustee of this lease for the benefit
of the partnership.
Each partner is bound, unless otherwise stipulated, to use due
diligence in the conduct of the business, and can claim no com-
pensation except his share of the profits. But if one partner
§142] POWERS OF PARTNERS 239
willfully neglects the business and throws all the labor upon
another, the active partner may be allowed compensation, at the
discretion of a court, upon a final accounting.
Each partner may claim the right to take part in the business,
and each is entitled to have the business conducted according to
the terms of the agreement. No change can be made in the
nature of the business, and no new partner can be admitted, with-
out the consent of each ; but as to incidental matters a majority
may rule.
If the partnership is for a definite period, a withdrawal of one
partner before the expiration of the period, without the consent
of the others, is a breach of contract for which they may recover
damages. If the partnership is at will, a partner may retire at
any time. One partner cannot be expelled by the others. If a
partner sells his interest, the buyer gets only the seller's share
of such interest as remains after the firm creditors are paid and
the partnership is wound up.
Each partner is entitled to an accounting of profits. No action
at law can ordinarily be maintained by one partner against the
others, but an accounting in equity may be had. If one has paid
more than his share of expenses, he is entitled to contribution
from the others.
142. Powers of partners. Each partner is an agent for the
others in the conduct of firm business, and the partnership is
bound by any contract made by a partner within the scope of his
authority. So extensive are the powers of each partner that one
ought not to form a partnership with another unless he has the
utmost confidence in that other's integrity and judgment. The
following are some of the powers possessed by a partner in a
trading partnership.
1. To sell or mortgage any personal property belonging to the
firm, and even to dispose of the entire stock at one sale ; but
not t<> sell real property, because the conveyance must be by all
the partners or by one authorized by power of attorney from
the others ; and not to transfer firm property in payment of his
individual debt.
2. To purchase any goods dealt in l>v the firm or usually
employed in such a business, but not other or differenl goods;
240 PARTNKRSIIIPS [Ch. XII
a grocery partnership would not carry any implied power to
purchase shoes.
3. To receive payment of debts due the firm and give receipts.
4. To make, accept, and indorse negotiable instruments in the
name of a trading firm, that is, a firm that buys or sells ; but in
a nontrading partnership, as a law firm, a hotel firm, or a mining
firm, a partner does not possess this implied power.
5. To borrow money on the credit of a trading firm and give
security by pledge or mortgage upon the firm property, but not
in the case of a nontrading firm.
6. To engage agents and servants for the conduct of the
business.
The following are some of the powers which a partner may not
exercise without the consent of his copartners.
1. To bind the firm by deed.
2. To bind the firm by a guaranty of his own or another's debt.
3. To bind the firm by a submission to arbitration or by a
confession of judgment.
4. To assign the entire firm property to pay the firm debts un-
less the other partners are inaccessible and the matter is urgent.
After the dissolution of a firm some powers remain in each
partner for the purpose of winding up its affairs. A partner
may still sell property and receive and pay debts. He cannot
make new contracts, or issue negotiable instruments, although he
may indorse an instrument " without recourse " in order to sell
or collect it.
143. Liabilities of partners. The obligations of a partnership
are the joint obligations of its members ; that is, the action to
enforce it is brought against all jointly. But although the creditor
brings an action for his debt against all the members of the part-
nership jointly, and judgment is entered against them jointly, he
may satisfy his judgment out of the individual property of one
partner, and is not bound to levy upon the joint-partnership
property. If creditors do exhaust the partnership property, they
may then go against the individual property of the partners to
make up any deficiency. A partner who thus satisfies a firm
debt out of his property is entitled to contribution from his
fellow partners.
§H4J RIGHTS OF CREDITORS 241
An outgoing partner remains liable to creditors for debts con-
tracted while he was a partner, unless they release him. An incom-
ing partner is not liable for debts contracted before he became a
member of the firm, unless he assumes and agrees to pay them.
Partrfers are liable for torts committed by a copartner or a serv-
ant in the course of the firm business. Such liability is joint and
several ; that is, the action may be against all jointly or against
one or against several.
144. Rights and remedies of creditors. A partner may be liable
to creditors of the firm of which he is a member and also liable
to individual creditors ; he has partnership property and also
separate property. The problem arises as to the rights of the
two classes of creditors in the two classes of property.
1. Firm creditors. Firm creditors have a right to have the
partnership property applied first to the payment of the partner-
ship debts. An individual creditor of a partner cannot attach the
partner's interest in the partnership to the prejudice of the part-
nership creditors. After the firm creditors are paid, the separate
creditors of a partner are entitled to any surplus belonging to him.
Examples : 1. A and B, partners in a grocery, purchase flour of X, and
A purchases a watch of Y. Y obtains judgment against A for the watch, and
levies upon A's interest in the partnership. X afterwards obtains judgment
against A and B for the flour, and levies upon the partnership property. Y's
attachment is not good as against X's. Y can obtain any interest remaining
in A after X's judgment is satisfied.
2. In payment for the watch, A turns over to Y a horse and wagon belong-
ing to the firm. If Y knew this was firm property, he cannot hold it against
firm creditors. If he took it believing it to be A's, the courts differ as to
whether the firm creditors can recover A's interest in it.
2. Separate creditors. The weight of authority is in favor of
the converse of this rule, namely, that the separate creditors of
a partner are entitled to be paid first out of his separate estate.
After the separate ereditors are paid, the partnership creditors
are entitled to the surplus.
unfile* : 3. A and B, partners, arc insolvent. They owe X $15,000.
The partnership property is valued at > 10,000. A's separate property is valued
at 56000, and he owes Y S4000. B has no te property. Y will be paid
in full out of A's separate property. X will gel the 510,000 of joint property
and the surplus of 52000 from A's separate estate.
242 PARTNERSHIPS [Ch. XII
4. As above. A ami B owe X 57000. A owes Y $14,000. X will be paid
in lull. V will get the 50000 from A"s separate estate ami A's portion of the
surplus of 53000 from the joint property after X is paid in full.
These rules are thus stated : The joint estate is applied to
the payment of joint debts, and the separate estate to the pay-
ment of separate debts, any surplus from either estate being
carried over to the other if necessary. Hut this applies only
when there are partnership assets. If there arc no partner-
ship assets, the firm creditors share equally with the individual
creditors.
145. Dissolution. A partnership may be dissolved in conse-
quence of the happening of any of the following events :
1. By the withdrawal of a partner. If the term is indefinite, a
partner may withdraw at will. If the partnership is for a definite
period, the withdrawal of a partner before the expiration of the
period subjects him to an action for damages, but the partnership
is dissolved.
2. The alienation of a partner's interest works a dissolution,
but the remaining partner may form a new partnership with the
purchaser.
3. The bankruptcy of a partner works a dissolution unless
otherwise agreed.
4. The bankruptcy of a firm works a dissolution.
5. The death of a partner works a dissolution unless other-
wise agreed. Title to partnership property remains in the surviv-
ing partners for the purpose of winding up the partnership. They
must first pay the firm debts and then distribute the remainder,
accounting to the estate of the deceased partner for his share.
They alone sue or are sued upon firm accounts. But if the firm
assets are insufficient to pay the firm debts, recourse may be had
against the estate of the deceased partner as well as against the
estates of the survivors.
6. If the partners are subjects and residents of different
countries, and their respective countries declare war against each
other, this works a dissolution of the partnership.
7. A court may decree a dissolution for the misconduct or
insanity of a partner or upon a showing that the business is carried
on at a loss.
§146] JOINT-STOCK COMPANIES 243
Upon a dissolution there should be notice to third persons, in
order that each partner may be protected against further contracts
made in the firm name. Special notice should be given to those
accustomed to deal with the firm, and general notice, by publica-
tion in a newspaper, to the public at large. Existing creditors
must be paid before the firm assets are divided.
Surviving partners have power to wind up the affairs of a
partnership after dissolution. The representatives of a deceased
partner, or an assignee of a bankrupt partner, cannot interfere
except to protect the rights of the deceased or bankrupt partner.
The property may be sold if necessary. The good will is a
property that should be sold if it has pecuniary value ; the pur-
chaser acquires the right to carry on the business under the old
name, with himself named as successor to that business.
Upon the dissolution of a partnership, if there is a loss, it must
be paid first out of profits, next out of capital, and lastly, if neces-
sary, by the partners individually in the proportion in which they
were entitled to share profits. If there is a gain, the assets should
be used first in paying the debts and liabilities of the firm to per-
sons who are not partners therein ; secondly, in paying to each
partner what is due to him from the firm for advances as dis-
tinguished from capital ; thirdly, in paying to each partner ratably
what is due from the firm to him in respect of capital ; fourth lv,
the ultimate residue should be divided among the partners in the
proportion in which profits are divided.
II. Joint-Stock Companies
146. How distinguished from ordinary partnerships. Joint-
stock companies are large partnerships in which the capital is
divided into shares and each partner's interest is represented
by his ownership of these shares. Such partnerships are legal
at common law, but they have very generally been regulated by
statutes.
These companies differ from ordinary partnerships in the
following respects :
1. They are not dissolved by the same causes. The shares arc
transferable. If a shareholder dies, his shares pass to his estate;
-?.(.} PARTNERSHIPS [Ch. XI]
if he becomes bankrupt, his shares pass to his assignee ; if he
sells his shares, the transferee succeeds to his rights. There
may be the withdrawal of partners and the introduction of new
partners without a dissolution of the company.
2. The shareholders do not all participate in the management,
but eleet directors or other officers who conduct the business.
Members who are not officers have no authority to bind the
company. The articles of association usually regulate this.
147. How like ordinary partnerships. Joint-stock companies
are like ordinary partnerships in the following respects :
i. Each member is personally liable for the debts and contracts
of the company. If he sells his shares he remains liable for
debts contracted while he owned them.
2. Unless otherwise provided by statute, all the members must
join in an action by the company, and as many as the creditor
wishes to hold must be joined in an action against the company.
By statute in New York and some -other states, such a joint-stock
company may sue or be sued in the name of its president,
treasurer, or other designated officer representing all the members.
Partnership Agreement
Articles of Agreement, made the first day of May, one thousand nine
hundred and thirteen, between George Rice, of the city of Albany, county of
Albany, state of New York, and Alfred Post, of the same place,
Witnesseth, as follows :
I. The said parties above named have agreed to become partners in busi-
ness, and by these presents do agree to be partners together under and by the
name or firm of Rice and Post, at the said city of Albany, in the dry goods
business, buying and selling all sorts of goods, wares, and merchandise to the
said business belonging. The partnership to commence on the first day of
June, 1913, and to continue ten years.
II. To that end and purpose the said George Rice has contributed the sum
of five thousand dollars ($5000) in cash, and the said Alfred Post has con-
tributed the lease of the store at 1 10 Main Street, in the said city of Albany,
to be occupied by them, and the stock of goods and good will of the business
there heretofore carried on by him, which are together estimated and valued
by the parties at the like sum of five thousand dollars ($ 5000), the capital stock
so formed to be used and employed in common between them, for the support
and management of the said business, to their mutual benefit and advantage.
III. At all times during the continuance of their partnership they and each
of them will give their attendance, and to the utmost of their skill and power
§147] PARTNERSHIP AGREEMENT 245
exert themselves for their joint interest, profit, benefit, and advantage, and
truly buy, sell, and merchandise with their joint stock, and the increase thereof,
in the business aforesaid. And they shall and will at all times during the said
partnership bear, pay, and discharge equally between them all rents and other
expenses that may be required for the support and management of the said
business ; and all gains, profit, and increase that shall come, grow, or arise
from or by means of their said business shall be divided equally between them
on the first day of June, September, December, and March, in each year during
the continuance of said partnership ; and all loss that shall happen to their
said business by ill commodities, bad debts, or otherwise, shall be borne and
paid between them equally.
IV. And at the end or sooner termination of their partnership the said
partners, each to the other, shall and will make a true, just, and final account
of all things relating to their said business, and in all things truly adjust
the same ; and all the stock, as well as the gains and increase thereof, which
shall appear to be remaining, either in money, goods, wares, fixtures, debts,
or otherwise, shall be divided between them.
In Witness Whereof, the parties hereto have hereunto interchangeably
set their hands, the day and year first above written.
In the presence of George Rice.
Warren Jones. Alfred Post.
State of New Vorkl
/■ ss
County of Albany J
On this first day of May, one thousand nine hundred and thirteen, before
me, the subscriber, personally appeared George Rice and Alfred Post, to me
personally known to be the same persons described in and who executed
the foregoing instrument, and they severally acknowledged to me that they
executed the same. Andrew Johnson,
Notary Public for Albany County, New York
REVIEW QUESTIONS AND PROBLEMS
SECTION 139. What is the object of forming a partnership? What are its
chief characteristics? Distinguish a joint-stock company from a partnership.
What is the advantage of forming a corporation?
140. Define partnership. How would you determine whether or not a
parti' 11! institutes a partnership ? What is an ostensible partner ?
a dormant partner? What are limited partnerships? Who may be a partner?
Problem 1. I) loaned a firm (B and C) 52000 to be used in the busi-
ness, upon an agreement that he was to have one third of the profits.
X Bold 1 iln- firm. X sues n as a partner along with B and C. Is D
liable to X?
Problem .?. In the above case I) is tn receive 6 per cent interest in any
case, and 15 per cent of the profits in addition. Is D liable as partner?
j. )( , PARTNERSHIPS [Ch. XII
Problem J. J. II. lias carried on business in his own name, and X has dealt
with him. He sells out to A and r>, who continue the business under the name
1. H. & Co. 1'1h'\ order goods of X in that name and X supplies them. X docs
not know that J. II. his -one out of the business. J. H. knows the business is
carried on under the name of J. II. & Co. Is J. H. liable to X?
Problem 4. I) is a dormant partner in the firm of B and C. X docs not
know this. He sells goods to 13 and C. D afterwards withdraws. X then sells
more goods to B and C. (</) Is D liable on the first sale? (/>) Is he liable on
the second ?
141. State the duties of a partner toward his fellow partners. State his
rights. Can one partner claim extra compensation ? Can one partner withdraw ?
Can one sue the other at law?
Problem 5. A, B, and C agree to enter into partnership, and A is intrusted
with the purchase of a horse. He buys one for $200, but charges it to the
firm at $300. In an action for an accounting, B and C seek to recover from
A 5 1 00 as firm money. Result?
Problem 6. A and B are partners, and each is to give his services to the
firm business. A becomes ill, and all the work devolves upon B. May B
claim compensation for this extra labor?
Problem 7. In the above case A neglects the business willfully and refuses
to perform any services. B is compelled to manage the whole business alone.
May B claim extra compensation ?
142. What are a partner's powers? Can he sell real property, and why?
Can he make negotiable instruments? Can he borrow money? Can he
exercise any powers after the dissolution of the firm ?
Problem S. A and B are partners and owe C $650. A gives C a mort-
gage in the firm name on the personal property of the firm to secure this
debt. Is this binding on B or on the firm A and B?
Problem g. A gave the above mortgage to secure his individual debt. Does
this bind B ?
Problem 10. B and C are partners in the conducting of a theater. B bor-
rows money for the business and gives a promissory note in the firm name.
Is C bound ?
143. State the liabilities of a partner. How is an action brought on a
debt against a firm? How is a judgment satisfied? What is contribution? Is
an incoming partner liable for debts contracted before he became a member
of a firm? How may an action for tort be brought against a firm?
144. State the rule as to the relative rights of creditors of the partnership
and creditors of a partner.
Problem 11. A, B, and C are equal partners. The partnership property is
worth 5io.ooo. A has 55000 individually, B $4000, and C no assets. The
partnership debts amount to 5 [2,000. A's debts amount to $3000, B's to
REVIEW QUESTIONS AND PROBLEMS 247
$6000, and C's to $2000. Adjust these sums among the firm and individual
creditors.
Problem 12. Same problem if firm debts were only $8000.
145. How is a partnership dissolved? What should be done after disso-
lution? What interest have the representatives of a deceased partner in a
partnership of which the deceased was a member? What is done with a surplus
after firm debts are paid ?
146. How do joint-stock companies differ from partnerships?
147. How do they resemble partnerships?
CHAPTER XIII
CORPORATIONS
148. Definition and classification. A corporation is an artificial
entity created by statute law and endowed with many of the legal
capacities of individuals, as the power to take, hold, and convey
property, make contracts, sue and be sued, and the like.
It is a legal entity distinct from its members, individually or
collectively. It may, for example, sue a member or be sued by
a member. It may sue any person without joining its members,
and may be sued by any person without joining its members.
The title to property vests in it and not in its members. Were
all the members to unite in one deed, they could not convey the
property of the corporation. It is, within its charter powers,
regarded for all purposes as an artificial person — a distinct
member of the business community.
Public corporations are political entities created for govern-
mental purposes, as counties, cities, and the like.
Private corporations are created for the promotion of some
interest in which their members are concerned. These fall into
two main classes : stock corporations, which are for private
pecuniary gain, and membership, or nonstock, corporations,
which are for a variety of purposes, as clubs, charitable societies,
educational institutions, and the like.
Stock, or business, corporations are those with which we are
concerned. They are intended to enable a number of persons
to unite their capital in one enterprise, with two important
results : first, the power to transfer their shares to other holders
without affecting the business ; and, second, an exemption from
any personal liability for the debts, contracts, or torts of the
corporation. A partnership accomplishes neither of these results.
A joint-stock company accomplishes the first but not the second.
149. How a corporation is formed. A corporation is created by
legislative grant. Some are created by a special statute which
248
§149] HOW FORMED 249
names the corporation and defines its powers, but state con-
stitutions very generally prohibit the legislatures from chartering
private business corporations by special act. Business corpora-
tions are now usually created under a general statute which per-
mits a number of persons to form a corporation by executing and
filing with some designated public official articles of association or
incorporation. The certificate contains the name of the corpora-
tion, its object, the amount of capital stock, the number of shares
into which the capital stock is divided, the place where its prin-
cipal business office is to be located, the duration of the corpora-
tion, the number of its directors, with the names and addresses of
those who are to serve at the outset, and in some states the names
and addresses of the subscribers to the stock, with the amount sub-
scribed. Often the statute requires that a specified number of the
incorporators shall be citizens of the United States, and a specified
number citizens of the state under whose statute the certificate is
filed. Some statutes require that the name of an officer or agent
upon whom legal process may be served shall also be specified.
The statute under which a certificate is made and the certifi-
cate itself together constitute the charter of the corporation and
define and limit its powers.
Example of New York Certificate
We, the undersigned, all being persons of full age, and at least two thirds
citizens of the United States, and at least one of us a resident of the state
of New York, desiring to form a stock corporation, pursuant to the provisions
of the Business Corporation Law of the state of New York, do hereby make,
sign, acknowledge, and file this certificate for that purpose, as follows :
First. The name of the proposed corporation is The Cayuga Manufac-
turing I ompany.
Second. The purposes for which it is to be formed are to manufacture,
sell and trade in agricultural implements and machinery.
Third. The amount of capital stock is one hundred thousand dollars.
Fourth. The number of shares of which the capital stock shall consist is
one thousand, and the amount of capital with which said corporation will
in business is twenty thousand dollars.
Fifth. The principal husiness office is to be located in the city of Ithaca,
in the county of Tompkins, state of New York.
sixth. It, duration shall In- fifty years.
Seventh. The number "I its directors is to !»■ five.
250 CORPORATIONS [Ch. XII]
rkth. The names and post-office addresses of the directors for the first
year are as follows :
[ Here insert five names and addresses.]
Ninth. The nanus and post-office addresses of the subscribers, and a
statement of the number of shares of stock which each member agrees to
take in the corporation, are as follows :
[Here insert names, addresses, and amounts subscribed.]
In WITNESS WHEREOF, we have signed, acknowledged, and filed this
certificate in duplicate.
Dated this 10th day of January, igi6.
John Doe
Richard Roe
Henry Fenn
John S. Dale
, . . .. . . Wm. Blackheatii
State of New York ]
f SS.
County of Tompkins J
On the ioth day of January, 1916, before me personally appeared John
Doe, Richard Roe, Henry Fenn, John S. Dale, and Wm. Blackheath, to me
personally known to be the persons described in and who made and signed
the foregoing certificate, and severally duly acknowledged to me that they
had made, signed, and executed the same for the purposes therein set forth.
George Redrank, Notary Public.
[This is filed and recorded in the office of the Secretary of State, and a certified copy or
duplicate original is filed and recorded in the office of the clerk of Tompkins County. Fees
are required for filing and recording. An organization tax must also be paid to the State
Treasurer.]
150. Members. The members of a business corporation are
those who hold its stocks ; they are called stockholders or share-
]] .lders. The relation of stockholders to a corporation and to
each other is contractual. At the outset individuals subscribe
for shares of stock, that is, contract to take them when issued,
and thereby agree to associate themselves as stockholders accord-
ing to the provisions of the charter and the terms of the sub-
scription. They also agree to pay for the stock when issued or
when payment may be called for. When a stockholder has fully
paid for his stock, he is under no further liability unless the stock
is by statute or contract made subject to assessments.
When a stock certificate has been issued, the owner may trans-
fer it and the transferee becomes a stockholder. The so-called
§150] MEMBERS 251
Uniform Stock Transfer Act, now in force in fourteen jurisdictions, 1
governs the method of stock transfer and the rights of transferor
and transferee. According to this act the transfer is completed
Form of Stock Certificate
, r No. of shares, 10
Par value of each, $100
The Cayuga Manufacturing Company
(Fbtfi 16 tO CCrttfP that John Doe is the owner of ten shares of the
capital stock of the Cayuga MANUFACTURING Company, transferable only
on the books of the company by the holder thereof, in person or by attorney,
upon the surrender of this certificate properly indorsed.
2frt 32?irriCS5 H?brrC0f, the said Company has caused its corporate seal
to be affixed hereto and this certificate to be signed by its presi-
dent and treasurer.
Corporate
Seal
Ithaca, New York, Jan. 24, 1916
Henry Fenn, President
\Y.M. Blackheath, Treasurer
Form of Transfer ox Back of Stock Certificate
For value received, I hereby sell, assijn, and transfer, unto
, shares of the within-
mentioned stock, and do hereby constitute and appoint
my true and lawful attorney
to transfer the same on the books of the company. .
Witness my hand and seal, this day of ,
'0
Witness :
(Seal)
by indorsement of the certificate in blank or to a specified p< rson
or by the execution and delivery of a separate instrument assign-
ing the certificate or giving a power to assign it, coupled with a
1 Alaska, Connecticut) Illinois, Louisiana, Maryland, Massachu 1 tl . Mil h
New Jersey.. New Vork,Ohio, Pennsylvania, Rhode Island, Tennessee, and Wyoming.
252 CORPORATIONS [Ch. XIII
delivery of the certificate. The registration of the new holder's
name on the books of the corporation is not necessary to the
complete transfer of the stock under this act. It is usual to in-
dorse on the certificate of stock a power of attorney to the new
holder to make the transfer. When a certificate is so indorsed
with the name of the transferee left blank, the certificate may
pass from hand to hand until some holder chooses to insert his
name and have the transfer made to him upon the books. Stock
certificates do not generally have the characteristics of negoti-
able paper, but under the Uniform Stock Transfer Act they
have been given a limited negotiability. Infants and others not
competent to contract may become transferees and holders of
stock in a corporation.
A stock certificate is the written evidence issued by the cor-
poration that the person named in it is registered on the books
of the company as the owner of a specified number of its shares
of capital stock, each of a certain par value.
151. Directors. In a corporation the members (stockholders)
are not, as such, agents of the corporation. They have the power,
however, to elect the directors, who are the ultimate managers
of the business and who appoint the necessary active agents
and officers.
Directors are elected by a majority vote of the stockholders,
each stockholder usually having one vote for each share of stock
he owns. It follows that if one person, or a group of persons
acting together, owns a majority of the stock, he, or they, can
elect all the directors. To avoid this, some statutes provide for
cumulative voting. For example, if three directors are to be
elected, a stockholder with ten shares may cast ten votes for each
of three or may concentrate thirty votes upon one. If there are
iooo shares of stock, and the majority acting together own 740,
and the minority 260, the latter, by casting triple votes for one
candidate, would give him 780 votes, or more than the majority
casting single votes for each of three could muster. Thus the
minority would elect one director and the majority two. The
registered stockholder is usually the only one entitled to vote. It
is commonly provided that a stockholder may vote by proxy, that
is, authorize another to vote for him.
§152] OFFICERS AND AGENTS 253
The powers of the directors are very extensive and are fixed by
the charter of the corporation. The directors are, when convened
as a board, the embodiment of all corporate powers except those
which must be exercised by the stockholders. They could not
change the nature or the purposes of the corporation, increase
or decrease its capital stock, dissolve it, or consolidate it with
another corporation ; these powers are vested in the stockholders ;
but in the management of the corporation within the limits of
the charter powers the directors are supreme.
Directors are bound to exercise reasonable care in the conduct
of the corporate business, and may become liable to the corpora-
tion for losses resulting from their negligence. Directors also
stand in a fiduciary relation to the stockholders, and cannot secure
to themselves any advantage at the expense of stockholders.
Statutes often require directors to file annual reports with
some public officer, and fix a penalty for failure to do so or for
the filing of a false report.
152. Officers and agents. The officers of a corporation are
appointed by the directors in conformity with the by-laws. Agents,
other than officers, are sometimes appointed by the directors and
sometimes by an officer. The general law of agency governs the
ostensible powers of such officers and agents, except that third
persons are supposed to know the provisions of the charter as to
the powers of the corporation itself, and perhaps the provisions
of the by-laws as to the powers of the officers. Officers and agents
are entitled to compensation, but directors are not unless it is
especially voted by the shareholders.
The powers of the officers are usually fixed by the by-laws of
the corporation. When the by-laws do not fix the powers, they
may be prescribed by the directors.
The president is always a member of the board of directors,
and usually presides as its chairman. He is ordinarily empowered
to execute contracts, deeds, and other documents, either by gen-
eral or by special vote of the directors, and is the chief officer,
in whom is vested the largest measure of authority.
The vice president acts when the- president is absent, or, in
large corporations, he has some special department of the busi-
ness confided to him. In large corporations there are often
254 CORPORATIONS [Ch. XIII
several vice presidents, known as first vice president, second
vice president, etc.
The secretary keeps the records of the meetings of the directors
and stockholders. He is also usually the custodian of the seal
of the corporation and attaches it to documents requiring a seal ;
he may also attest the signature of the president to contracts,
deeds, etc., although this is more commonly done by the treasurer.
He has charge of the transfer of the stock certificates on the
books of the corporation, and may be designated as an assistant
to the treasurer.
The treasurer is the fiscal agent of the corporation. He has
charge of its funds, its bank account, its securities and general
assets. The books are kept under his supervision. He usually
countersigns the obligations issued by the corporation in the form
of contracts, checks, notes, etc., indorses for deposit or collection
the checks payable to it, and in general handles its money and
negotiable paper.
The general manager is the chief assistant of the president,
and the officer with whom persons having business with the
corporation generally deal. He usually appoints the subordinate
agents and servants, makes contracts for ordinary supplies and the
sale of products, and conducts the routine business affairs of the con-
cern. In the case of unusual contracts it is always best to ascertain
from the president whether the general manager has authority.
As there are some contracts which even the president cannot
make without special authority of the directors, such as the issuing
of bonds and notes for borrowing money, the sale of corporate
assets and franchises, and the like, it is necessary in cases of
doubt to make sure that the act is duly authorized. It is not
uncommon for a corporation to repudiate a contract upon the
ground that the officer making it exceeded his authority.
153. Powers of a corporation. A corporation as such may be
saift to possess at the least these necessary powers and qualities :
i . To have a corporate name, as an individual has a name ;
but, once adopted, the name of a corporation can be changed
only as prescribed by law.
2. To have a corporate seal.
3. To sue and be sued in its corporate name.
§154] POWERS 255
4. To appoint such officers and agents as its business may require.
5. To make by-laws for the management of its business, the
transfer of its stock, the calling of meetings, etc.
6. To acquire and dispose of such property (in its corporate name
or under its corporate seal) as may be necessary to its corporate
existence or purposes. The amount of real estate it may hold is
often limited by law. In the absence of such express restriction,
it may hold only what is reasonably necessary. It could not,
unless expressly authorized, engage in real-estate speculations.
7. To make such contracts as are reasonably necessary to carry
out the purposes for which it is organized. This includes the
power to borrow money, give security, and issue negotiable paper,
as well as to make the ordinary contracts of sale, agency, etc.
But a corporation cannot, unless expressly authorized, enter into
a partnership with other corporations or with individuals ; nor can
it enter into a so-called trust in order to create a monopoly or
eliminate competition.
8. In general, a corporation may engage in such business as
its charter contemplates, and in no other. A partnership may
engage in almost any lawful business, but a corporation has no
powers except those expressly conferred or those reasonably inci-
' dent to those expressly conferred. A corporation authorized to
manufacture and sell machinery cannot engage in the banking
business or the transportation business. Such acts in excess of
powers granted are said to be ultra vires. It has been held that
a railroad company could not run a steamboat beyond its terminus,
though it might run one as a ferry to connect its lines. So a
steamboat company could not run a railroad, though it might run
a short line as a "carry" between two navigable points. Certain
powers are regarded as incidental to the express powers, but these
do not extend beyond the necessities of the corporate business,
and are not to be so broadly construed as to lead the corporate n
into unauthorized enterprises.
154. Stockholders' rights. Each stockholder has these rights
as against the corporation :
1. To have issued to him a certificate of stock representing his
interest and, if he is a transferee, to have the transfer entered
on the hooks of the company.
j 5" CORPORATIONS [Ch. XIII
2. To vote at stockholders' meetings. By the generally pre-
vailing rule each stockholder has as many votes as he has shares
of stock. He may exercise his right personally or by proxy. The
stockholder of record (that is, the one whose name appears on
the books of the corporation) is entitled to vote even though he
has transferred the stock.
3. To inspect the books of the company when a demand to
do so is made in good faith and for a proper purpose.
4. To participate in dividends when the same have been
declared. The profits of the corporate enterprise are from time
to time divided among the stockholders in the form of dividends,
each stockholder getting a per cent upon the face value of his
stock. If dividends are about equal to the interest upon normal
safe investments, the stock remains at or near par ; that is, a $100
share of stock sells for $100. If the dividends are large, the
stock goes above par ; if small or uncertain, the stock goes below
par. If no dividends are paid, the stock may become valueless
except for voting purposes and to enable holders to control the
corporation.
Profits are what remains after deducting running expenses,
improvements, accrued debts, interest on bonds, a fair reserve
for depreciation in buildings, machinery, or other equipment, *
and, perhaps, a sinking fund for the payment of the bonds.
Directors have a large discretion in the matter of declaring
dividends, and may add profits to capital instead of distributing
them, so long as they act in good faith.
Preferred stock is that upon which it is agreed to pay a fixed
rate, practically an interest rate, before any, dividends shall be
declared upon the common (nonpreferred) stock.
Bonds are promises to pay a principal sum with interest, and
are usually secured by mortgage upon the corporate property.
Bondholders are simply creditors. A coupon bond is one to
which separate interest coupons are attached for each annual
or semiannual interest payment (see p. 169 ante).
5. A stockholder, in behalf of himself and other stockholders,
may invoke the aid of a court to restrain the officers from com-
mitting a breach of trust, or the corporation itself from engaging
in ultra vires acts, that is, acts beyond the scope of the charter
§§155,156] STOCKHOLDERS' LIABILITIES 257
powers. While the majority rule, they must rule within the limits
of the charter powers ; and if they exceed these, or if their acts
are fraudulent, the minority may obtain an injunction.
155. Liability of stockholders. Stockholders are liable to the
corporation for any unpaid portion of their subscriptions. This
liability is enforced by an action at law, like any action to collect
a debt.
Stockholders are not liable to creditors of the corporation
unless the statute or charter provides for some personal liability ;
but creditors may compel original stockholders, if they have paid
to the corporation less than par value for the stock issued to
them, to pay the balance if the creditors have been led to believe
that stockholders were paying in to the capital stock the full par
value. It is a kind of fraud on creditors for a corporation to
advertise a capital stock of say $100,000 fully paid in, when in
fact it issued the stock at forty cents on the dollar and the capi-
tal stock is therefore only $40,000. So also most courts hold
that if the capital stock is fully paid in, but a part of it is there-
after returned to stockholders under the guise of dividends,
the creditors may compel the stockholders to refund it so far
as necessary to pay the debts of the corporation.
If the statute makes stockholders personally liable for the debts
of the corporation, or liable to an amount specified (for example,
to an amount equal to the face value of their shares of stock),
a creditor who has a judgment against the corporation which he
cannot satisfy out of its property may proceed against stock-
holders who were such when his debt was contracted or, as in
some jurisdictions, when his action was begun.
156. Reports of corporations. The statutes generally provide
that a stock corporation shall make an annual report of its affairs
and file the same in some public office where any person may
inspect it. This is in order that persons who may wish to do
business with the corporation may ascertain whether it is in a
sound and solvent condition. The report usually contains a state-
ment as to the amount of capital stock, the amount actually
issued, the amount of the debts, and the amount of the assets.
The statutes quite generally make directors personally liable for
debts in case they fail to file such a report, and also for debts
j-S CORPORATIONS [Ch.XIII
contracted upon the faith of the report filed in case it is false in
any material particular, and sometimes for damages suffered by
poisons purchasing stock upon the faith of such false report.
157. Receivers of corporations. When a corporation becomes
insolvent, the court may, upon the petition of the directors, bond-
holders, or general creditors, appoint a receiver of the property
and assets of the corporation. A receiver may also be appointed
upon the petition of a stockholder, if the directors are wasting or
misapplying the funds or property. A receiver is an officer of
the court and, as such, takes entire charge of all the property and
business pending a dissolution or reorganization of the corporation.
The property until final decree is therefore in the custody of the
court appointing the receiver.
A receiver's certificate is an obligation issued by a receiver
under authority of the court for the purpose of raising money to
carry on the business of the corporation during the term of the
receivership. It takes precedence over all other obligations of
the corporation, even its first-mortgage bonds.
158. Dissolution of corporations. A corporation is dissolved
by the expiration of the time for which it was chartered.
A corporation may be dissolved by the decree of a court for
various causes, among which may be mentioned insolvency, non-
use of franchises, abuse of charter powers, violation of law, and
other fraudulent or illegal acts. The directors or stockholders may
also apply for permission to surrender the charter whenever they
deem such a course beneficial to the interests of the stockholders.
Upon dissolution, after all debts and claims are paid, the re-
maining assets are divided among the stockholders in proportion
to their holdings.
REVIEW QUESTIONS
Section 148. Define a corporation. What is meant by saying it is
a legal entity? What are public corporations? What are private corpora-
tions? What two mam classes of private corporations? Object of a stock
corporation ?
149. How is a corporation created? Explain what constitutes the
charter where a corporation is formed under a general act. Draw articles
of association to incorporate a stock company to quarry and sell stone.
REVIEW QUESTIONS 259
150. Who are members of a stock corporation? How does membership
change? What is a stock certificate? How is it transferred?
151. Who are the directors? How are they chosen? What is cumulative
voting, and what is its object? What are the powers of the directors? What
is their duty ?
152. How are corporate officers and agents appointed? Which officers
are entitled to compensation? How are the powers of officers fixed? Define
the powers of each. In a corporation what is the ultimate authority as to
contracts ?
153. Enumerate the powers of a corporation. How much real estate may
it hold? May it become a partner? What business may it conduct? What
are ultra vires acts?
154. What are the rights of stockholders? How many votes does each
stockholder have? What are dividends? How fixed? What are profits?
What is preferred stock? What are bonds? When may a stockholder seek
the aid of a court to protect his interests?
155. When is a stockholder liable to the corporation? When is he liable
to creditors of the corporation in the absence of statutory liability ? What is
statutory liability ?
156. What reports of corporations are required? What do they contain?
Where are they filed ? What is the effect if they are not filed or are false ?
157. Who is a receiver ? Whose agent is he ? What are receiver's certifi-
cates? Are they more or less valuable than bonds?
158. How may a corporation be dissolved? After dissolution, what is
done with the assets?
PART VI. PROPERTY IN LAND AND
MOVABLES
CHAPTER XIV
REAL PROPERTY
I. Estates ix Real Property
159. Meaning of the term "property." Property may be re-
garded as an object or as a right or estate in or to an object.
It may be corporeal or incorporeal, and it is classified as real
and personal.
i. Property as an object. The word "property" is used con-
cretely to designate an object or thing (lands or chattels) in which
one may have a proprietary right ; it is used abstractly to designate
the right, interest, or estate one has in such an object or thing.
Property in the legal sense is the right, often but not always
exclusive, to possess, enjoy, and dispose of lands and chattels.
As an object of ownership, property falls into two classes :
(a) immovables, or land and things so annexed thereto or con-
nected therewith as to be regarded as a part of the land ; (/;) mov-
ables, or things not so annexed to land as to be considered a
part thereof. The first class is popularly called real property,
and the second personal property ; but in the view of the law
not all interests in land are real-property interests. It becomes
necessary, therefore, to classify the interests which one may have
in land into real estate, or real property, and personal estate, or
personal property.
2. Property as an estate. Real estate, or real property, consists
of the estate in land, known as a freehold estate because it was
that by which the freemen held lands under the eld feudal sys-
tem. This estate is either an estate of inheritance, which descends
to one's heirs, or a life estate, which terminates with the life of
261
RIAL PROPERTY [Ch. XIV
the possessor of it or the life of some other designated person.
All other estates in land are personal property and are known as
estates less than a freehold; they consist of estates for a deter-
minate time, as a leasehold estate for a definite period of years.
Mortgages and liens on land are also personal estate.
Real property, then, includes all estates in land except lease-
holds and liens.
Personal property includes leasehold estates in land, liens upon
land, and all interests in movables.
The terms " real property " and " personal property " are derived not from
the nature of the object owned but from the forms of action used by one who
had been deprived of possession. If one could recover the thing itself, he
used a " real action " ; if he could recover only the money value of the thing,
he used a " personal action." Hence it came to be said that a thing which
could be recovered specifically was a " thing real," or " real property," while a
thing which could not be so recovered, but only damages for its withholding,
was a " thing personal," or " personal property." This serves to explain why
all interests in land are not real property. These forms of action have disap-
peared, but the names remain to puzzle the student.
3. Corporeal and incorporeal property. Property may be corpo-
real or incorporeal. Corporeal property is tangible and material ;
incorporeal property is intangible and ideal.
Corporeal real property consists of land and its fixtures ; incor-
poreal real property consists of certain permanent rights of enjoy-
ment or profit in another's land, as a right of way over it.
Corporeal personal property consists of physical movable arti-
cles ; incorporeal personal property consists of rights granted by
government, as a patent right or copyright, and of rights of action
against another (known as choses in action), as a right to a debt
or to damages for a breach of contract, etc. Stock, bonds, nego-
tiable instruments, and the like are incorporeal personal property.
4. Lands, tenements, and hereditaments. Real property is
often described as " lands, tenements, and hereditaments." These
terms call for definition.
a. Land comprehends the soil and those things annexed to it either by
nature or by man. such as waters, trees, ores, houses, fences, etc. The land,
in contemplation of law, extends downward to the center of the earth and up-
ward to the highest heavens. Thus, one owning ten acres of land would have
his possession defined by a pyramid with its apex at the center of the earth
§159] KINDS OF PROPERTY 263
and with its sides passing through his boundaries indefinitely into space.
Anyone breaking into this pyramid, or " close," at any point is said to be
a trespasser.
b. The term " tenements " is broader than the term " land," and includes not
only lands but also whatever else could be held under feudal tenure, such as
easements in lands. If B owns tract X and C owns tract Y, C may acquire for
the benefit of tract Y a right of way over tract X. C therefore owns lands
(tract Y) and tenements (right of way over tract X). The modern use of the
term " tenement " to describe a building rented to tenants is to be distinguished
from this technical meaning.
c. The word " hereditaments " is the broadest of all, and includes whatever
may be inherited by an heir from an ancestor. It includes not only lands and
tenements but also heirlooms, such as an historic powderhorn, family jewels,
etc. Heirlooms, while common in England, are not known to our law, and
therefore hereditaments and tenements are substantially equivalent terms in
the United States. Corporeal hereditaments, or tenements, are things material,
such as lands, houses, etc. ; incorporeal hereditaments, or tenements, are intan-
gible rights arising out of material things, such as the right to collect rent out
of lands, the right to exercise the franchise to maintain a toll bridge or a ferry,
or the right to take ore out of another's land.
5. Practical dijfcrcjiccs between real and personal property.
These practical differences once existed, and unless modified by
statute still exist, between real and personal property.
a. On the death of an owner leaving no will, real property
goes to his heirs, while personal property goes to the adminis-
trator to pay debts and then to be distributed among the next of
kin. The next of kin who take personalty are often different
from the heirs who take realty, but modern statutes tend to make
the two classes identical. So also statutes often give the realty
as well as the personalty into the hands of the administrator.
b. The right of a wife to an estate of dower, or of a husband
to an estate by the curtesy, exists in realty but not in personalty.
c. In genera], more formality is necessary to transfer realty,
as a deed, while personalty maybe transferred merely by delivery.
<l. The law of the place where realty is situated governs rights
in it, while rights in personalty are governed by the law of the
place of domicile of its owner.
r. In general, the law as t<. realty is technical, derived from
feudal times, while the law as to personalty is more liberal and
modern.
264 REAL PROPERTY |cu. xiv
The logical distinction is between movables and immovables. This dis-
tinction exists in the nature of things, but the historical distinction based
upon estates in lands is fundamental in the English and American law.
160. Estates in land ; duration. An estate is the interest which
one has in real property. As land is permanent and is not con-
sumed or diminished in the ordinary use of it, there may be dif-
ferent estates in the same parcel of land, one succeeding another
in possession and enjoyment. One persop may own an estate
and have possession and enjoyment, while another also owns an
estate but his possession and enjoyment are postponed until the
termination of the first estate.
Estates in land are first of all divided into (i) freehold estates and
(2) estates less than freehold. The first we have seen are real estate,
while the second are personal estate and are often called chattels real.
i. Freehold estates. A freehold estate is one which is to endure
for a period not fixed or ascertained, that is, either forever or for
a life. Freehold estates are therefore of two kinds : (a) estates of
inheritance, also called estates in fee ; (b) life estates, either for
the life of the owner or for the life of some other person.
a. Estates of inheritance, or estates in fee, are of two classes :
first, estates in fee simple, which descend to one's heirs generally,
collateral heirs as well as lineal heirs ; second, estates in fee tail,
which descend only to one's heirs in the direct line and may be
limited to particular heirs, as male heirs, the eldest male heir, etc.
Estates in fee tail have been abolished or modified in many of our
states. The estate in fee simple is the usual estate of inheritance
in this country. In order to create it in a deed, the conveyance at
common law, and still where not changed by statute, must run to
the grantee and Ids heirs, as " to A. B. and his heirs." If it runs
"to A. B.," or even "to A. B. and his children," or "to A. B.
forever," it would give A. B. only a life estate. This technical
rule has been quite generally changed by statutes which provide
that a deed " to A. B." shall carry a fee simple unless a contrary
intention appears. In a will the use of the word " heirs " is not
necessary to carry a fee, if it appears to be the intent of the testator
to devise a fee.
b. Life estates are of two classes : first, conventional life es-
tates, or those created by deed or will ; second, legal life estates,
§ 160] ESTATES 265
or those created by law. A life estate of the first class may be for
the life of the tenant or for the life of another person {pur autre
vie). A life estate of the second class may be an estate of dower
or an estate by the curtesy. An estate of dower is the estate which
a surviving wife has during the rest of her life in one third of the
lands and tenements of which her husband was seised in fee dur-
ing the marriage, and which she has not released by joining with
him in a deed of conveyance or otherwise. Dower has been abol-
ished in some states, and the widow is often given an absolute
share instead of a life estate in a third. An estate by the curtesy
is the estate which a surviving husband has during the rest of his
life in all the lands and tenements of which the wife was seised
in fee during the marriage, provided there was a child of the
marriage born alive and capable of inheriting, although the child
may have died before the mother. The husband may release this
right by joining with the wife in a conveyance. Curtesy has been
abolished or modified by statute in many states.
A homestead estate is a creation of statute, and consists in the right to
enjoy, free from liability for debts, a certain specified quantity of land occupied
as a residence. It is not strictly an estate, but a right of exemption attached
to an estate. It extends generally to the head of a family, that is, one who is
under a legal or moral duty to support those living with him. The amount of
land so exempted differs in different states, and in the same state more is
allowed in the country than in a city. Some states fix it by area, some by
value, and some by both. It is usually provided that a husband cannot transfer
a homestead estate without his wife's consent. In many states on the death of
a husband the widow succeeds to the homestead right, or, if there is no widow,
the minor children. These statutes vary so widely that it would be impossible
to consider them here in detail.
2. Estates less than a freehold. These estates are also called
leasehold estates and chattels real, and are for a fixed or deter-
minable period of time. They are of four classes : (a) estates
for years, (/>) tenancies at will, (e) tenancies from year to year,
(d) tenancies by sufferance.
(a) An estate for years is an estate limited for a certain definite
time, as an estate for one month, or for one year, or for ten years,
or for one hundred years. It is usually created by a lease, and
hence is often called a leasehold. Wh.it remains in the owner
is called a reversion, because possession reverts to him upon the
266
REAL PROPERTY
[Ch. XIV
termination of the lease. Leaseholds are considered under the
subject of Landlord and Tenant (see sect. 177 post).
(/>) A tenancy at will is a tenancy which may be terminated at
the will of either the lessor or the lessee. These arc not favored
in the law, and wherever possible a tenancy is construed as from
year to year instead of at will. Some statutes require a previous
notice in order to terminate the tenancy.
(<■) A tenancy front year to year is a tenancy for one week,
month, quarter, or year certain, continuing for a successive simi-
lar period unless due notice be given to terminate it at the end
of the first or any subsequent period. In case of a tenancy for a
year continued into a second year, notice of an intent of cither
party to terminate it is required. The statutes fix this ; in some
states it is six months, in others three months, etc. In case of
a tenancy from quarter to quarter, month to month, or week to
week the notice must usually equal the period in length, being
a quarter, a month, or a week respectively.
{d) A tenancy by sufferance is a tenancy which arises when a
tenant remains in possession at the end of his term without the
landlord's consent, as where he has had notice to quit. If the
landlord consents to the holding over, the tenancy becomes one
from year to year. If he does not consent, he may by proper
proceedings have the tenant removed from the land. Most states
now have statutes forbidding a forcible entry by the landlord.
The above estates may be thus outlined :
' Freehold
estates
Estates
in
land
In fee J Fee simple
(inheritance) (.Fee tail
Estates less than
a freehold, or «
leaseholds
For life
' For years
At will
From year to year
By sufferance
Conventional
For one's own life
For the life of another
(pur autre vie)
Legal
Dower
Curtesy
Homestead
§ 161] ESTATES 267
161. Future estates in land : reversions and remainders. When
an estate for life or for years is created, there is an estate in
residue to commence in possession when the life estate or estate
for years ends. Such an estate is either a reversion or a remainder.
1. Reversions. A reversion is the residue left in the grantor
or his heirs after the granting of the lesser estate. It commences
in enjoyment only when the lesser estate is ended. Meanwhile it
can be freely disposed of and other lesser estates may be carved
out of it.
Examples : 1 . R leases land to T for ten years. R has a reversion in the
land to commence in possession when T's leasehold expires.
2. R afterwards grants L a life estate in the land. R now has a reversion to
commence in possession when both T's and L's estates are at an end. L's
estate for life is subject to T's leasehold, and can commence in possession
only when T's estate is ended. Should L die before T's tenancy expires, the
life estate would be of no value.
3. R may sell his reversion, and the grantee will get the same rights as R
had. So also L and T may sell their estates.
2. Remainders. A remainder is an estate granted to take
effect in possession at the termination of another estate created
by the same instrument. The other estate must be less than a
fee simple, for nothing remains to be granted after a fee simple.
A remainder is vested if the person who is to have it is in being
and ascertained ; it is contingent if the person is not in being or
is uncertain, but it becomes vested when such person is ascer-
tained. A vested remainder may be transferred, and if not trans-
ferred it will pass to the heir of the remainderman upon the
death of the latter.
Examples : 4. X grants by deed a life estate to L and a remainder in fee
to R. R has a vested remainder, and may sell or otherwise dispose of it.
5. X grants by deed a life estate t<> I., with a remainder lor lite t<> M and the
remainder in fee to K. I [ere M has a remainder for life after L's death, and R a
remainder in fee to In- enjoyed in possession after the death of both 1. and M.
6. X grants a life estate to I . with the remainder in fee to L's eldest son.
L has no son. The remainder is contingent. If a son be born to L, the
remainder is then vested in the son.
7. X grants a life 1 1 L, with the remainder to L's eldest son living
at L's death. 'I he remainder is contingent and cannot become vested until L's
death, and then only if there he a soil '<f |. living at the tune. Should there
be none, the estate would revert to X or his heirs.
268 REAL PROPERTY [Ch. XIV
\ grant to L for life, with a remainder in fee " to His heirs," was construed
at common law to give a fee to L. 'This is known as the "rule in Shelley's
." This technical rule has been abolished by statute in many states, but
as it remains in some, it is undesirable to use that phrase to describe the
remaindermen.
162. Estates held jointly or in common. Any estate in land
may be owned by one person in severalty or by two or more con-
currently. The two principal concurrent estates are known as a
joint tenancy and a tenancy in common.
Joint tenancy. When two or more persons were granted an
estate together by the same instrument, the common law con-
strued the estate to be one in joint tenancy unless the language
showed some different intent. The characteristic of the estate
was that if one of the persons died, the survivors took his share
to the exclusion of his heirs or devisees. Many statutes now
provide that such an estate shall be a tenancy in common.
Example. X by will devised his farm to his three sons, A, B, and C. This
was a joint tenancy. If A died, B and C owned the farm. If B then died, C
owned it in severalty. But if A conveyed his interest to D, the joint tenancy
was destroyed and it became a tenancy in common by B, C, and D. (A devise
or grant to A, B, and C would now in many states be held to create a tenancy
in common.)
Tenancy in common. When two or more persons hold un-
divided interests in land under separate instruments, or under
an instrument which shows an intent that each shall hold his
interest as a separate or individual one, there is a tenancy in
common ; and statutes now generally provide that all convey-
ances or devises to two or more shall be deemed to be tenancies
in common unless expressed to be joint tenancies, and that
heirs shall take as tenants in common. The characteristic is
that on the death of a tenant in common his share goes to
his heirs or devisees. The tenancy may be ended by a partition
of the estate.
Example. X devises his farm to A, B, and C as tenants in common. Each
owns an undivided one third. On the death of one his part will go to his
heirs. They may partition the farm so that each will get a definite portion of
it in severalty. Should A purchase B's and C's portions, A would own the
whole farm in severalty.
§ 163] ESTATES 269
Partnership real estate. As a partnership is not a legal entity, it cannot
take title to real estate, and a conveyance to the partnership would be in-
effective for want of a grantee. The title is conveyed to the partners individ-
ually, and they become tenants in common, but hold the property subject to
partnership debts and to the final accounting among themselves. Upon the
death of a partner, title to his share in the realty goes to his heirs, but they
hold it practically in trust for the partnership business until that is wound up.
Tenancy by entireties. When an instrument conveys lands to two persons
who are husband and wife, they take an estate by the entireties. The charac-
teristic is that whichever survives gets the whole estate, and this result cannot
be defeated by a prior conveyance by the deceased party. This estate has
been somewhat modified by statute.
Community property. In Arizona, California, Idaho, Louisiana, Nevada,
New Mexico, Texas, and Washington whatever is acquired by the labor or
efforts of either a husband or his wife after the marriage belongs one half to
each. This does not include property owned at the time of the marriage, or
property received by way of gift, devise, or descent. This idea came through
the civil (modern Roman) law at a time when the Spanish or the French
owned the territory from which these states were carved.
163. Equitable estates : trusts. It is also possible to divide
the estates in land so that one person has the recognized estate
and title in a law court and another person in an equity court,
and thus create what are known as trusts. A trust is the obliga-
tion, enforced in an equity court against the holder of the legal
title to property (the trustee), to account to another person (the
beneficiary) for the income and profits of the property.
Example 1 . X devises lands to T to receive the rents and income and
pay the same to B during B's life, and then to convey to C. T has the legal
title in fee simple. B has an equitable life estate and C has an equitable fee in
remainder. No one could disturb T's title in a law court ; but in an equity
court B and C may compel him to perform the trust. When 1» dies, there
must be a conveyance to C, who will then have the legal title.
A charitable trust is one created for the benefit <>t the public
or of an indefinite number of persons constituting a class of the
public. Such trusts arc enforced by a public officer, usually the
attorney-general of a state.
/ rm/i/e 2. X conveys land or other property to '1' (and his successoi
be named by the court,. t<. receive the rents and profits and apply the same
the relief of the poor of the city of A, or to the maintenance "i a ■■< hool,
or to maintain a publil park, el
2jo REAL PROPERTY [Ch. XIV
11. Land: its Constituents, Growths, and Fixtures
164. Extent of ownership : soil, air, minerals, waters. When
one owns land he controls the space above and below it. If limbs
oi trees project into the air above his land, he may cut them off
to the boundary line. If roots grow into his soil from an adjoin-
ing estate, he may cut them off. He owns all the minerals in the
land, including mineral oils and gases, subject only to any reserved
right in the state. In England all gold and silver mines belonged
at common law to the king, but in this country such rights are
in the landowner. Congress has provided by legislation for the
establishment of mining claims in public lands.
A lode, or vein (a line of metal embedded in quartz or rock), may be located
to the extent of I 500 feet in the direction in which it runs, and 300 feet on
each side. A placer (ground containing mineral in earth, sand, or gravel in a
loose state) may be located by one person or association of persons to the ex-
tent of 1 60 acres. The locator of a claim must do work or make improvements
thereon at least to the extent of $ 1 00 in each year, or he forfeits his claim.
The owner of land has a right to use a reasonable quantity of
the water flowing over his land in a stream, although he cannot
unreasonably divert the waters to the damage of a lower owner.
If he owns the lands, he owns the ice formed over them. Lands
under navigable waters generally belong to the state. This is
almost invariably true as to tide waters, but states differ as to the
ownership of the lands under navigable streams. In the case of
lakes, the larger ones generally belong to the state, while smaller
ones belong to private persons. If one owns the fee under
waters, he has the exclusive right to fish in such waters.
165. Vegetable products. Vegetable products are divided into
two classes.
1. Fructus naturalcs. Vegetable products that are not the
result of annual labor and fertilizing are classed as perennials,
ox fructus naturalcs. Such are trees, bushes, and grasses. Some
perennials, as hops, have been excluded, because the crop is
dependent upon annual cultivation. Fruit upon trees and
bushes has usually been included, although often the result of
annual cultivation. Fructus naturalcs are regarded as a part
of the realty.
§166] LAND AND FIXTURES 271
2. Fructus industtiales. Vegetable products that are the result
of annual labor and fertilization are classed as fructus industtiales.
Such are grains, vegetables, and other annual crops. These are
regarded as personalty and not as a part of the realty. If one has
an estate of uncertain duration, and it is terminated before the
crops he has planted have ripened, he or his representatives may
enter and cultivate and gather the crops. This is called the right
to emblements. But if his tenancy is for a definite period, he
cannot enter after the tenancy expires. If the owner of a fee dies
while crops are ripening, they go to his executor and not to his
heir. Growing crops are personalty, and hence a sale of them
falls within the seventeenth section of the Statute of Frauds. A
sale of growing perennials to be severed under the contract of sale
is regarded as a sale of goods under the Uniform Sales Act.
3. Border trees. A tree growing on the boundary line between
the lands of different owners is owned by them as tenants in com-
mon. Neither can lawfully move or destroy it as a whole ; but
one may cut the branches on his side if he does not injure the
trunk. If the trunk is wholly on one side of the boundary, the
tree belongs to that landowner ; the other landowner may cut off
the overhanging branches but cannot appropriate them or the
fruit on them.
166. Fixtures. A fixture is an article which, originally personal
property, has by annexation to land come to be regarded as realty.
It is often a nice and difficult question whether or not the article so
annexed has become a fixture and so has ceased to be personalty.
This question often arises between a vendor and a vendee of lands ; between
a mortgagor and a mortgagee of lands ; between the heir or devisee of a land-
holder and his executor; between the reversioner, or remainderman, and the
tenant for years or the executor of a tenant for life; between the mortgagee
of the owner's lands and the mortgagee of his personalty ; between the land-
owner and a judgment creditor who levies on the article as personalty; etc.
The question usually is, however, whether one who is taking possession of
the land may hold the article as a part of the realty of whether the one who
is quitting the land, or his representatives, may sever the article and take it
as personalty.
While the matter is a complicated and tangled "tic, the l"l
lowing rules will serve as a fairly reliable guide through the
labyrinth.
REAL PROPERTY [Ch. XIV
1. In order to be in any event classed as a fixture, the article
must be physically annexed t<> tin- land or to some structure or
thing itself physically annexed.
Exceptions. (./) If the article is an essential part of an annexed article, it
may Ik- a fixture, although itself a movable, as an adjunct or part of a machine,
or the kevs to a house. (/>) If the article is of great weight and is kept in
place by gravity without actual physical attachment, it may be a fixture, as a
building, or a machine, or a colossal statue, (c) If the article has been fitted
and appropriated to a purpose which, when carried out, would make it a fixture,
it may be constructively a fixture, as fence rails laid along a line for a fence
begun but not yet finished.
2. If the article is so annexed that to remove it would materi-
ally injure what remains, or destroy the article itself, it must be
regarded as a fixture and irremovable.
Example i. Water and gas pipes built into a house are so annexed that
they cannot be removed without tearing out floors or partitions. But if simply
attached to walls or floors by hooks, they might be removed under 3, below.
3. If the article may be removed without injury to the free-
hold or destruction of the article itself, then the question whether
it is or is not regarded as a fixture often depends upon the
relation of the one who annexed it to the land.
a. If the annexer is the owner in fee of the land, and the arti-
cle is calculated to improve the land, then the article becomes
a fixture. If the owner sells or mortgages the land, the fixture
goes with it. If the owner dies, the fixture goes to the heir or
devisee and not to the executor. Of course the owner, while
he is owner, may sever the article and make it again person-
alty, or he may by express stipulation reserve it from a sale or
mortgage, or he may by will direct it to be severed and treated
as personalty.
Example 2. Buildings, fences, machinery attached to a structure, furnaces
and steam-heating apparatus, bars and counters in business structures, book-
cases attached to the walls, paintings on canvas cemented to the walls, heavy
stone statues, and the like have all been held to be fixtures. But gas fixtures,
such as chandeliers, have been held to be removable furniture.
b. If the annexer is a tenant of the land, and the annexation
was for purposes of trade or domestic convenience, the article
may be removed by the tenant at the expiration of the term.
§§ 167, 168] RELATIVE RIGHTS 273
The law favors the tenant in adapting the land and structures
to the use to which he wishes to put them during the tenancy,
and permits him to remove annexations if he can do so without
too serious an injury to what remains. He must exercise this
right before he surrenders possession. If he renews his lease,
he should in the new lease expressly reserve the right to remove
articles annexed under the former lease or, according to some
authorities, he abandons them as fixtures.
Example 3. Buildings not let into the soil, engines, boilers, and other
machinery of trade, counters, cases of shelving, and other store furniture, chairs
fastened to the floor of a theater, gas fixtures, and the like have all been held
to be removable by a tenant. The limit would be fixed when the removal would
do a serious injury to the building belonging to the landlord, and upon this
test many of the above articles have been held to be fixtures even as between
landlord and tenant. Moreover, courts differ sometimes even upon substantially
the same facts.
III. Relative Rights of Adjoining Owners
167. Fences : cattle trespass. At common law the owner of
cattle is bound to fence them in or otherwise restrain them.
The owner of crops is not bound to fence against trespassing
cattle. Statutes have in many states changed or modified these
rules, and in some the matter is left to local authorities to regu-
late. Very generally, however, statutes have imposed upon rail-
roads the duty of fencing their property so as to avoid injury to
trespassing cattle.
In many states there are statutes compelling adjoining owners
to maintain a partition fence at their joint expense.
168. Air and waters; support of land. One owner is not per-
mitted to pollute the air over a neighbor's land by smoke, dust, or
odors in a manner unreasonably to disturb the neighbor's enjoy-
ment of his property. Neither can he unreasonably disturb it by
noises or vibrations. These acts constitute a nuisance for which
damages may be recovered or an injunction issued.
< >nc owner cannot pollute waters flowing 1 n >m his land to thai 1 if
a neighbor, nor unreasonably divert the waters or appropriate them.
One owner cannot remove the lateral support of a neighbor's
land by digging so near the boundary as to cause the neighbor's
.■- i REAL PROPER IT [Ch. xiv
l.uul to cave in. This does rft>t extend to the support of buildings
but only of the land in the natural condition. But one excavating
may be liable for negligence or for want of notice if another's
building is injured therein-.
169. Easements. An easement is a right by one person to do or
to compel another to refrain from doing some act on that other's
land. It may be acquired by grant or, in some cases, by prescrip-
tion, that is, by the adverse use of the right for a specified period,
usually twenty years.
One cannot by prescription acquire a right to have light and
air come to his land from his neighbor's land, but he may by
grant. Thus, A buys land of B, and the latter agrees not to
build nearer the line than twenty feet. This gives A an easement
to that extent in the light and air from B's land.
One may by prescription or by grant acquire a right of way
over another's land. If one sells to another land not adjoining a
highway, there is a "way of necessity" over the seller's remaining
land in order to reach the highway.
One may acquire a right to use a party wall, or to drain water,
or to take water, or to compel another to maintain a partition
fence, and the like. All these are easements.
A highway over one's land is an easement for the benefit of
the public generally, who acquire thereby a right'to pass to and
fro. Of course the public may, and sometimes does, own the fee
also. But if the fee remains in a private individual, he may use
it for any purpose not inconsistent with the right of the public.
He is entitled to the vegetable growth, and he may forbid others
to cut trees or grass, or pasture cattle, or hunt or fish there.
IV. Transfer of Interests in Lands
170. Contract of sale. A contract to sell lands or any interest
in lands must be in writing and be signed by the party to be
charged (see sect. 22). While the writing may be an informal
instrument (a memorandum), it is usual to have a somewhat
formal one setting out the terms of the agreement in full. It
should be signed by both parties in order that both may
be held.
Land Contract
SlrticlcB" of Agreement, Made thisr-—.^.?.^.--- day of~7.£g»<
in the year One thousand nine hundred and.?.ix. t .?.?n.:— — -
of the city of Binghamton, County of Broome. State of New York,
an j Nelson Hopkins.
'.of the first part,
of the City of Syracuse, County of Onondaga, State of New York,
of the second part, in the manner following : The said parties have and hereby
do mutually covenant and agree as follows : The part y of the first part to sell,
and the party of the second part to purchase, 9111 that (Tract Or Cartel
Of LanU, situate in the f}\}.Y. of Birighamton County of
^f~.°. Qme . and State of New York, briefly described as follows:
Beginning at a point one hundred (100) feet east of the northeasterly
corner of Ashland Avenue and Summer Street, on the northerly line of
Summer Street, and running thence northerly and parallel with Ashland
Avenue one hundred and fifty (150) feet; thence easterly and parallel
with Summer Street forty (40) feet; thence southerly and parallel with
Ashland Avenue one hundred and fifty (150) feet; thence westerly along
the northerly line of Summer Street to the place of beginning,
for the sum of... twe . lv ?. * h0 . U3 . and . Dollars
(5 x 2 -. 99.?.-. .99. .tttt:), which sum the said party of the second part hereby agree s
to pay to the part y of the first part as follows :... «?**.. .^ousand dollars
($6,000.00) on the first day of July, 1916, and six thousand dollars
($6,000.00) on the fir9t day of January, 1917. .
Said part y of the second part also agree s to pay ALL taxes and assessments
which shall be taxed or assessed upon said premises from the date hereof until
the said sum shall be fully paid as aforesaid.
And the said part y of the first part, on receiving such payment
■ at the time and in the manner above
mentioned, shall, at ???.?. own proper cost and expense, execute and
deliver to the said party of the second part, or to hi . 3 assigns, a
warranty deed, for the conveying and assuring to him, or them, the fee
simple of the said premises.—
It is agreed that the pari y of the second part shall have possession of said
premises from and after, the first day of July .1916 .
And it is agreed that the stipulations aforesaid are to apply to and bind the
heirs, executors, administrators and assigns of the respective parties.
5fU WitnCSS WhCrCOf, The said parties have hereunto set theii
hands and s'-.iU the day and year first above written.
%n presence of Sdl^O/i
/••• tfsKAI.V
[Acknowledj menl by both lanics (see p. 245). The 1 I without u .u km-wlcdg
mem, but 1 ould doi be recorded,]
276 REAL PROPERTY [Ch. xiv
The legal title docs not pass at the time of making the con-
tract, as it does in the case of the sale of personal property; but
equity for many purposes regards the title as having passed to the
vendee from the time the contract is made, although payment
and delivery of the deed are postponed. As equity regards the
vendee as the true owner, it will compel the vendor to execute the
conveyance by what is known as specific performance of contract.
Equity regards the land as already a part of the vendee's realty, so that if
he dies, his heir can compel his executor to pay for it out of the personalty,
and the deed from the vendor will be made to the heir ; it regards the unpaid
purchase price as a part of the vendor's personalty, and the money, when paid,
will go to the vendor's executor in case the vendor has died.
Since equity regards the land as that of the vendee, he must bear the loss if
buildings burn, and cannot escape paying the purchase price on that account;
but at law the risk will follow the legal title, and the loss from destruction of
buildings will fall on the vendor.
171. Conveyances. Conveyances of interests in lands other
than leases are by deed. Of these there are two kinds : quit-
claim deeds and warranty deeds.
A quitclaim deed conveys whatever title the grantor may have,
and throws upon the grantee the risk as to whether there is a
good or a bad title or no title at all.
A warranty deed conveys the title of the grantor, and he cove-
nants, or warrants, (a) that the grantor is seised of the lands and
has the right to convey them ; (b) that they are unencumbered (un-
less otherwise stated) ; (c) that the grantee shall have quiet enjoy-
ment, that is, shall not be evicted by any superior title ; {d) that
the grantor will warrant and defend him in this ; (c) that the
grantor will execute any further instrument necessary to perfect
the grantee's title.
Many states provide by statute for a short form of deed which
shall be deemed to carry with it all these warranties.
A deed must be signed by the grantor and, unless otherwise
provided by statute, must be sealed ; in some states it must also
be witnessed. In order to be recorded it must be acknowledged
before a notary or other authorized official. Recording is neces-
sary in order to prevent a subsequent sale to an innocent pur-
chaser. The deed must be delivered to the grantee ; usually this
§ 172] TRANSFERS 277
is a manual deliver)-, but less than this has been held to be suffi-
cient where the intention was clear. A delivery in escrow is a
delivery to a third person upon condition that the deed shall not
take effect until some condition is fulfilled. An agent duly author-
ized by power of attorney may execute and deliver a deed for his
principal (see sect. 119).
If a deed is made by a married man, it is usual to have his
wife join in it ; otherwise, should she survive him, she could claim
her right of dower in the property conveyed. If a deed is made
by a married woman, her husband should join in it in order to bar
his possible estate by the curtesy. But in many states by statute
the wife is given power to destroy the husband's curtesy by her
conveyance, and no joinder by the husband is necessary to free
the property from the incident of curtesy. If property is owned
jointly, the owners may convey by joining in one deed.
A deed consists of the following parts : (a) the premises, con-
taining the names of the parties, sometimes the date (though this
may be at the end), a statement of the consideration and of its
payment, the words of conveyance, and the description of the
land ; (/>) the habendum, or statement of the estate granted, be-
ginning often, but not always, with the words "To have and to
hold " ; (c) any reservation that is to be made ; (d) the covenants,
or warranties ; (c) the conclusion, containing the statement that
the grantor has signed and sealed, together with his signature
and seal and the signatures of the witnesses, if any ; (/) the
acknowledgment before a notary of the due execution of the
instrument.
172. Wills. Property may be transferred by will. In order that
a will shall be valid it must be signed (in some states subscribed)
by the testator, and his signature attested by two or more witnesses.
In some states the testator must actually sign in the presence of
the witnesses, and they in his presence and in the presence of
each other. In many states one who is named as a beneficiary
in the will and also signs it as a witness cannot take the devise
or bequest; hence it i> important that the witnesses should not
be interested in the will.
As a will does not take effed until the death of a testator.
a devise or bequest lapses if the donee dies before the t< I it"!.
Warranty Deed
Cijts 3fafocnturc,
Made the. — — . firs . t day of— — APT?. 1 in the year One thousand
nine hundred and..?... 3 ?. 1 :?.?"
■CfttUfCn Charles Lewis, unmarried, of the City of Syracuse, County
of Onondaga, and State of New York, _ , —
of the first part, and
Walter Cooke, of No. 310 Mill St. in said City of Syracuse
of the second pari,
iPitnrGGCtl). That the said/ov/y of the first part, in consideration of the sum of
six thousand dollars
(S . 6 .\9.99'.9.9— 7— ), lawful money of the United States, paid by the part y of the
second part, do es hereby grant and release unto the said party of the second
part, — ni9 heirs and assigns forever,
9UI tljat Cract or parcel of lanU, situate in the CAS?. of
■ Syracuse County of 9. n . or ??. a .g. a and State
of New York situate, lying and being in .the ; tenth ward of ] the .City of
Syracuse, and known as lot numbered three hundred and thirty (330) on a.
"Map of Land in the city of Syracuse lying between Tenth and Twentieth
Streets" and filed in the County Clerk^s office of Onondaga .County on
the tenth day of June, 1B99, bounded and described .as ..f.o.VA ows .'...Y.i •?.•.;...
Commencing on the northwesterly^ corner ..of .Fir8t_.Ayenue # and Thirteenth..,
Street and running thence northerly along the westerly side of First _
Avenue forty- three (43) feet, thence westerly and parallel with
teenth Street eighty (80) feet^thenee.aputherly . an .4..5 a r. a .^A e .?:. w A$Lr?r.r. B .^
Avenue forty-three (43) feet to the northerly side of Thirteenth Street,
and thence easterly along the ..northerly .Bide, of ..T.y.r.t'. e . 8 n^..r'.J'.r. e . e ?'...?ASl 1 .*?
(80) feet to the place of beginning.
CogCthcr with the appurtenances, and all the estate and rights of the said part j
of the first part in and to said premises. STo |)aDC anil tO |)0lB the above granted
premises unto the said party of the second part, ft. 1 . 8 . heirs and
assigns forever.
2tllB the said Charles Lewi s . party of the fir st par t
do es covenant with the said party of the second part as follows :
278
J^itSt. — That the party of the first part i . 3 seised of the said
premises in fee simple, and ha s good right to convey the same.
£>CC0nb. — That the party of the second part shall quietly enjoy the said
premises.
(£hirb. — That the said premises are free from incumbrances.
fourth. — That \)az party of the first part will execute or procure any further
necessary assurance of the title of said premises.
J?lftf). That the said Charles Lewis, party of the first part.
will forever warrant the title to said premises.
Jll W\t\\t$$ StyCrCOf, The said party of the first part Aa s here-
unto set.—— ni ?-— — hand and seal the day and year first above written.
%n presence of /f) f /} r •
State of Jficto gorfi,
County of Onondaga.
City Q f Syracuse
> SS.
On this— — fAr^.TTTTTTTT.day of— A P ri1 .— — — .in the year One thousand
nine hundred and.. 8ixteen - — —before me, the subscriber, personally
appeared Charles Lewi s
to me personally known to be the same person described in and who executed
the foregoing instrument, and he acknowledged to me that
he executed the same.
r NOTARY 'SI ' ^ G^^ 1
1 SEAL J
Notary Public for Onondaga County, New York.
[A quitclaim deed would read like tin- above except tint it would say "does hereby
remise, release and forever quitclaim unto the said party," and would mint tin- warranties.
A deed may be a yj\\, that is, the grantee m ithing. In such case it is usual to
say "in consideration of one dollar to me in band paid, and other good and sufficient
considi-r.it.
I
♦
280 REAL PROPERTY [Ch. xiv
unless, as in sonic states, the statute provides who shall take in
that event. In ease a devise of land lapses by the death of the
devisee, i! will ,u<> to the testator's heirs, unless there bea residuary
devise ("all the rest of my property to ") ; in this case,
in most states it will pass to the person named in the residuary
clause, but in some it will even then go to the heir.
At common law the marriage of a woman after making her
will revokes the will ; but this has to some extent been changed
by statutes. The marriage of a man after he makes his will, fol-
lowed by the birth of a child, revokes his will ; but this also has
in some states been modified or regulated by statute. If a child
is born after the will of a married man or woman is made, and
there is no provision in the will for such after-born child, most
states provide that the child shall take what would have descended
to him had the parent died without a will.
In most states a person may not make a valid will of real prop-
erty until he is twenty-one. This is also frequently true of a
will of personalty, but some states permit a will of personalty at
eighteen. A person of unsound mind cannot make a valid will.
The law of wills is so much a matter of statute that local legis-
lation must be consulted, in order that the necessary formalities
may be observed and the intention of the testator consummated.
It is not prudent for a person to make his will without good
legal advice.
173. Descent to heirs. If an owner of real property dies with-
out a will, the real estate (that is, any estate of inheritance) goes
to the persons designated by law as his heirs, subject to the estate
of dower or curtesy in a surviving wife or husband. The statutes
provide who shall be deemed heirs. They are usually the follow-
ing : first, children and the children of a deceased child, the latter
taking among them the share which their parent would have
taken had he lived- second, if there be no lineal descendant,
the father ; third, if there be none of the above, the mother,
brothers, and sisters, and the descendants of deceased brothers
and sisters ; fourth, failing these, collateral relatives, beginning
with the uncles and aunts and their descendants. There are
many variations in the statutes, and only a general notion of
them can be given here.
Will
7, James Brown, of the City of Ithaca in the County of Tompkins and State
of New York, being of sound mind and memory, do make, publish and declare
this my last Will and Testament, in manner following, that is to say:
First. — I direct that all my just debts and funeral expenses be paid.
Second. — I give and bequeath to my son, William Brown, five thousand
dollars ($5,000.06).
Third. — I give and bequeath to the Home Orphan Asylum of New York
city three thousand dollars ($3,000.00).
Fourth. — I give, devise and bequeath to my daughter, Mary Brown, my
farm in the town of Dryden, county of Tompkins, state of New York, known
as *« Oakdale," for and during the term of her natural life, and after her
death to ber lawful issue her surviving.
Fifth. — I give, devise and bequeath to my wife, Elizabeth Brown, all
the rest, residue and remainder of my estate, both real and personal, in lieu of
her right of dower.
Lastly, I hereby appoint Henry Wilson executor of this my last Will and
Testament : hereby revoking all former wills by me made.
In Witness Whereof, I have hereunto subscribed my name the tenth day of
June, in the year of our Lord one thousand nine hundred and sixteen.
We whose names are hereto subscribed do certify that on the 10th day of
June, 10/6, James Brown, the testator, subscribed his name to this instrument
in our presence and in the presence of each of us, and at the same time, in our
presence and hearing, declared the same to be his last Will and Testament,
and requested us, and each of us, to sign our names thereto as witnesses to the
execution thereof, which we hereby do in the presence of the testator and of
each other, on the said date, and write opposite our names our respective place*
of residence.
*
i/zviae, JboAMxiMyn residing at c/f/..< (•
(SAcviLtA, ('cltiKULclo, residing at ;, . crf&w- I/01A,.
1
282 REAL PROPERTY [Ch. xiv
It an owner of personal property, including leasehold estates
in land, dies without a will, the property goes to his adminis-
trator to pay dehis, ami is then distributed among the persons
designated by statute as next of kin. These statutes are much
like those defining heirs, except that a widow is usually given a
considerable portion of the personalty absolutely, say one third
if there he children, and one half, or often more, if there he no
children or grandchildren.
174. Adverse possession. One may lose and another gain title
to real property by adverse possession. This is an open, actual,
exclusive, and continuous possession hostile to the true owner for
a period of time, usually twenty years, which by statute bars the
right of the true owner to bring an action to recover the posses-
sion. Residing on the land, cultivating it, or fencing it may be
enough to show adverse possession. A tenant or other person
holding under the owner could not get adverse possession.
V. Mortgages and Liens
175. Mortgages of real property. A mortgage is in form a
conveyance of the title to lands, with a defeasance clause stating
that in case the mortgagor pays to the mortgagee a certain sum
to secure which the mortgage is given, the conveyance shall be
null and of no effect. It is a form of giving security for a debt
by creating a lien on land, and is executed, acknowledged, and
recorded like a deed. If it is not recorded, a subsequent mort-
gage, taken without notice of the first and duly recorded, would
take precedence, or one purchasing the land without knowledge
of the mortgage would get the land free from the lien.
The debt to secure which the mortgage is given is usually evi-
denced by a note or bond. The debt and the mortgage which
secures it may be assigned. The assignment is formally executed
and also recorded. *
When the mortgage is paid, a formal discharge or satisfaction is
executed by the mortgagee or his assignee, and is also recorded.
If the mortgage is not paid when due, the mortgagee or assignee
may foreclose it and sell the land to pay the debt, interest, and
costs, any residue above this going to the mortgagor. The.
§176] MORTGAGES AND LIENS 283
mortgage may give a power of sale without requiring the mort-
gagee to resort to a judicial proceeding for foreclosure. If the
land does not sell for enough to pay the debt, a judgment may be
had against the mortgagor for the deficiency in case he has also
given a note or bond or has undertaken a personal liability.
176. Liens on real property. In some states an unpaid vendor
of land has a lien on the land for the unpaid purchase money,
and a contract vendee of land who has paid part of the purchase
price has a lien on the land to the extent of his payment.
In many states one who makes improvements on lands, believ-
ing them to be his, and who is afterwards ejected by one having
a better title, is allowed a lien on the lands for the betterments.
Statutes often provide for a lien in favor of unpaid mechanics
who have performed labor upon buildings, or in favor of those
who have furnished material for them.
A judgment against a person, rendered in a federal court, is a
lien on all the lands of the judgment debtor situated in the state
in which it is rendered. A judgment in a state court is a lien on
the lands of the judgment debtor situated in any county of that
state in which such judgment is docketed.
In most states taxes on a particular piece of land constitute a
lien on the land until paid.
Before purchasing land one should have all the records care-
fully searched in order to ascertain whether the vendor's title is
good and whether any liens are recorded against the property.
An abstract of title is usually furnished by the vendor, showing all
instruments of record affecting the title ; this should be examined
by the vendee's attorney, and his certificate that it discloses a
good title should be attached.
The so-called Torrens system of registering titles to land is in
force in thirteen states. 1 Under this system one desiring to have
his title registered applies to a designated court. The title is
.mined by an official examiner of titles. All persons claiming
to have any interest in the property an given notice "i tin- pro-
ceeding. Tin- court gives a judgment in which it adjudges who
1 I 1 lifornia, Colorado, Illinoi . Mai t< hu • tl , Minne iota, Mississippi. Nebi
New Vork, North Carolina, Oh »n, Virginia, and Washington, and also
1 1 iwaii and the Philippim I land
Mortgage
Cljts Sxtomtnxt*
Made the .fl.f.ffl. .day of f>?.W?*r. in the year One thousand
nine hundred and four . te . e . n .-77-777— -
IjlIUUt.ll Th^mao P"°""-°
of the City of Rochester, County of Monroe, and State of New York,
/>,;/•/ y of the first part, and fo.Pr.g. 9 ..** 3 -. *•.?>?
°. f ... **??... 8 *P??...P.^P.?.'. put y of the second part.
li%rrae, the said I*™*?..?™*™.
}.?.. justly indebted to the
said/cr/y of the second part in the sum of 8 A* . .foP.?. 8 *"?. Dollars
(5 6 -.P°.°.-..99..TTTr:.), lawful money of the United States, secured to be paid by
h .?. 8 ... certain bond or obligation, bearing even date herewith, conditioned for
the payment of the said sum of..Bi*.* h .°H 3 .?-. nd Dollars
/* 6,000.00 — ) on the first._day_of November, nineteen hundred and
sixteen, and the interest thereon, to be computed from this date at the
rate of five per centum per annum, and to be paid semiannually on the
fifth days of April and October in each and every year until the whole
of said principal sum be fully paid, with the privilege to the party of
the first part, his executor, administrator or assigns, on any day when_
interest is payable, to pay off the principal of said mortgage in sums
of one thousand dollars or more. .
Jftotl) tl)ifi 3fn&Cnture Witntattttl), That the said part y of the first part,
for the better securing the payment of the said sum of money mentioned in the
condition of the said bond or obligation, with interest thereon, and also for and
in consideration of one dollar paid by the said part y of the second part, the
receipt whereof is hereby acknowledged, do es hereby grant and release unto
the part y of the second part, and to... 1 }. 1 .. 3 ... heirs (or successors) and assigns
forever,
811 that Cract or Parcel of ianU, situate in the 9>.&. of
: R?,9. he . 8 * er . County of M?. n . r P. e . and State
of New York DOUnded and described as follows ....viz..: .Beginning at a
point in the northerly line of Forest Avenue three '.hundred ..and ..twenty- __.
three (323) feet easterly from the easterly line of North Street; run-
ning thence easterly along said line of Forest Avenue three hundred a^d_
seventy (370) feet; thence northerly two ...hundred . and fi fty-two ...(252) ..
feet; thence westerly and parallel with Forest Avenue three hundred
seventy (370) feet; thence southerly two hundred and ..fifty- t. w °..(.25.2.)
feet to the place of beginning.
^Together with the appurtenances, and all the estate and rights of the
part y of the first part in and to said premises.
284
QTo £)aDC anil tO UOlU the above granted premises unto the said party of
the second part, hi .?.. heirs and assigns forever.
{JrODlUdJ SUtuaPS, That if the said party of the first part,. M<?.. heirs,
executors or administrators, shall pay unto the said part y of the second part,
h*. 3 .. executors, administrators or assigns, the said sum of money mentioned
in the condition of the said bond or obligation, and the interest thereon, at
the time and in the manner mentioned in the said condition, then these presents,
and the estate hereby granted, shall cease, determine and be void.
/dull the said/<7r/y of the first part covenant s with the party of the sec-
ond part as follows :
That the part y of the first part will pay the indebtedness as hereinbefore
provided, and if default be made in the payment of any part thereof, the part y
of the second part shall have power to sell the premises herein described, accord-
ing to law.
2Fn 32?itltC$£ S^hCrCOf, The said part y of the first part ha 8 here-
unto set. }}.}.?.. hand and seal the day and year first above written.
In presence of ....1^^'/'.^:....^!'^^ £^X
10i . <yyi \ //
.t-tatc of pxm gorfc,
County of M .°P. r .?«? I ss.
C**?! of Rochester
On this f . iftt ? day of 0ctober . in the year One
thousand nine hundred and.. f . 0lir . leen — — — — before me, the subscriber,
personally appeared Th0 . m . a . 3 .. I ' .y. e r 8 . to me personally
known to be the same person described in and who executed the foregoing
instrument, and he acknowledged to me that he executed
the same.
f NOTARY ■ S "1 /—•& /
I SEAL J
Notary Public for Monroe County, Now York.
[If Thomas Powers were a married man, it would be unsafe foi Hati li t.> take the mort-
gage unless the wife ol joined In it, because a foreclosure ol Powers' Interest would
^tt'ect the right of t; lurvived her hu^bjiid.J
Assignment of Mortgage
€f)i0 "3 U£truniCnt, Made thi3 — fifth — ( i. iyo f — .April. __, 9 16i
•UrtUJffll Ge0r .8 e Hatch, of the City of Rochester, County of Monroe, and
State of New York, ()f tlu . , nst ])alli :m( j
Albert Jones, of the City of Ithaca, County of Tompkins, and State of
New York of the second part,
Tjl'ItnCSSCtl), That the party of the first part, for a good and valuable
Consideration to n A m in hand paid by the said party of the second
part, ha 9 sold, assigned, transferred and conveyed, and do es hereby sell,
assign, transfer and convey to the/w/y of the second part a certain mortgage
bearing date the f A f .?ft day of 9.9A'P.P. e .r.-. 19 14, made by
Th^maa Powers t George Hatch, said party of the
f. i. r .?.t . .P.fr.r.t. .• to secure the payment of the sum of..?. i . x ..* n .?. us . a : n . d .— — — T7
Dollars {$$.1. 9?.?. :.9.9. tttt), and interest thereon from the date thereof,
■recorded in the Clerk's office of M P n .r.P.P.
County, State of New York, in Liber— — .4?.?..Tr.of Mortgages, at page rTTTr. I. 4 .!-. 777??.
on the— — fifth — — -day of — — :9?.$?*?J.t.— — 19 14, at r— -.*«?. .tttttt. o'clock
P. M., together with the bond accompanying said mortgage and therein referred
to, and all sums of money due and to grow due thereon. And the party of the
first part hereby covenants that there is.. n .P w due
on said bond and mortgage the sum of.. f°. u r..t. h ° u ?.f. n d.. dollars ($4.000.00) .
3 f lt WlW\l$$ WtyCtCOf, The said party of the first part ha s here-
unto set . h A?. Jiand and seal the day and year first above written.
/ U SEAL Y,
[L.S.]
&tatc of J^cw Boris,
County of M ° nr .? e .
City f Rochester
>ss.
On this— — fif . th .—-—. day of APT. 1 . 1 in the year One thousand
nine hundred and . B A x teen before me, the subscriber, personally
appeared: — pPPJg.P, ,H atc h to me personally known to
be the same person described in and who executed the foregoing instrument,
and he acknowledged to me that he executed the same.
J NOTARY ' s 1 ffi^™ /t:. W** 4 *^
\ SEAL /
Notary Public for Monroe County, New York.
2S6
Discharge of Mortgage
State of New York
County of Tompkins
City of Ithaca
SS.
I. Albert Jones, of the City of Ithaca, County of Tompkins, and State
of New York .
SDO ii)CrCDp CCrtifp, That a certain Indenture of Mortgage, bearing date
the .... . fl .f.t, h day of. P.?*° b . e . r in the year One thousand
nine hundred and.*'. 0Ur . te . e H made and executed by.. T h° m . a3 ..P° w . ers ....°f
the first part, to George Hatch, of the second part,
and recorded in the office of the Clerk of the County
o f M°. n . roe ..- State of New York, in Liber— -—.456 — — - f
Mortgages, page.TTTT.. 141 .'..-TTT7.on the.-— -.*".*.?. ^..r— -day of °. ct ° b . e . r ...
19 . 1 . 4 .-..rr^-.at..* w . .o'clock . P A^l.,..*^. i .?.^..^i. d .. m Rr^.f. a S?... w as duly assigned
to me by the said George Hatch, the mortgagee above named, by assignment
dated the fifth day of April, 1916, and recorded in the Clerk's office
of Monroe County, State of New York, in Liber 460 of Mortgages, at page
210, on the fifth day of April, 1916, at four o'clock, P.M.
bond:
is, together with the
•.secured thereby, fully paid, satisfied and discharged.
Dated the *•?*£ day of
January 10 1?
&tatc of jftctij gorfc,
County of £.«*■!**"■
City f Ithaca
hit 9mic) /=\
■
.7. an M ar y.." in the year One thousand
•.before me, the subsi riber, personally
On this— — .. tentn - -day of —
nine hundred and.. 8eve . n . t ' een —
appeared Albert Jones to mi illy known to be
the same person described in and who executed the foregoing instrument,
and he acknowledged to me that he executed the same.
r NOTARY'S "1
t SEAL J
y ■
Notary Publ : ompki ne County . Now York.
288 REAL PROPERTY [Ch.XIV
arc the owners of the property and the nature of the interest of
each. An official registrar of titles then issues a certificate of
the validity of the title as adjudged by the court. All subse-
quent transfers of the property are noted on this certificate. The
title as thus registered is perfect, and subsequent dealers with the
property need not search back of such registration.
VI. Landlord and Tenant
177. The lease and its covenants. Estates for years have already
been explained (see sect. 160 ante). The relation of landlord and
tenant, or lessor and lessee, is created by a lease, which conveys an
estate for years to the tenant and leaves a reversion in the land-
lord. By the Statute of Frauds all leases for more than a speci-
fied number of years must be in writing ; in many states the
specification is three years, but in some it is one year. A lease
need not, however, be under seal.
The estate in the lessee is not created until he enters under
the lease (that is, he could not bring an action as owner of an
estate), although he has, of course, his contract right against the
lessor for a refusal to allow him to take possession, and is him-
self liable as for rent if he refuses to enter. When he enters he
has thereafter the exclusive right to possession during the life
of the lease, and may maintain an action against anyone who in-
jures the property. If the wrongdoer also injures the reversion,
the landlord may have his action as well.
A lease is in form a conveyance of lands for a term of years
or at will, in consideration of a return of rent or other recom-
pense. The person conveying is called the lessor, and the person
receiving the conveyance is called the lessee. The words of
conveyance are usually "grant," "demise," "lease," "let," but
any words expressive of an intention to transfer possession are
sufficient.
Any express covenant upon which the parties agree may be
. inserted in a lease. Those almost always present are the lessee's
covenant to pay rent, a covenant that one party or the other will
pay taxes and assessments, and the lessee's covenant to surrender
the premises in good condition at the end of the term. Other
Lease
& 3Lcase
Made and executed 33fttUCCn. — — John Richards
of
the TT7--7. c .ity. -r T -- T .of Batayia, New Y ork, of {he
first part, and H?. n .ry.J. a . clc9 . . n of the- —City
of gatayia. New Yo rk, of the second part,
this fi. ri l* day of April in the year 0ne
thousand nine hundred and. ?.}. f.t, e ?P, .-
£ H <L01tSIuCrtllI0n of the rents and covenants hereinafter expressed, the
said party of the first part has iDcmtSCi anfc Lfclfirtl, and does hereby demise
and lease to the said party of the second part
the following premises, viz. :
a dwelling house situated on the east side of Park Street, between Allen
Street and North Street, and known as 124 Park Street, Batavia, New
Yorlc ; with the privileges
and appurtenances, for and during the term of P ne . . y e . ar from
the — — f *™t-_— .day of for. 1 .!,., 19 15, which term will
end..?. n ..^.?..^. i .r.!'.y. ; .f.^.r. 9 .^..4. a y..?r.. M . a r.?.^.\..^.?l. | 5.-... And the said
fart y of the second part covenant s that he will pay to the party of the first
part for the use of said premises, the rcorUMy rent Q {
— • f : o . r . t y. Dollars ($ 40 -.°°.— - ), to be paid.! no .P. th . 1 y.. in ...
advance.
3ritl PrOutfictl, said/tfr/y of the second part shall fail to pay said rent, or
any part thereof, when it becomes due - — — — — —
it is agreed that said party of the first part may sue for the same, or reenter said
premises, or resort to any legal remedy.
The part y of the f i rat : part agrees to pay all — — — —
taxes to be assessed on said premises during said term.. e . xce .?.* .. t : h . e .. wa * e . r
tax.
The party of the second part covenant* that at the expiration of said
term he will surrender up said premises to the party of the first part in .1^
good condition as now, necessary wear and damage by the elements excepted.
iUll\\C&$ the hands and seals of the said parties the day .mil yeai firsl ahove
9oA 11 /iV . /^\
'' ' "' A
written
290 REAL PROPERTY [Ch. xiv
express covenants may be that the lessor will repair buildings or
renew the lease, or that the lessee will repair, or not assign or
sublet, and the like. Words not plainly expressive of a covenant
mav be construed to indicate an intention to make one.
The implied covenants are that the lessor has the right to
make the lease and that the lessee shall have quiet enjoyment of
the premises. These covenants mean that the lessee shall not
be disturbed by the lessor or anyone claiming superior title ; the
lessor does not warrant the lessee against the acts of trespassers
or other wrongdoers.
178. Defects, repairs, and waste. The law is not very favor-
able to the lessee as regards defects, repairs, or the cutting of
timber or the working of mines. He has but a temporary inter-
est and must use the property so as not to decrease the value of
the reversion.
i. Defects. Except so far as there are express covenants in
the lease to the contrary, the lessee takes the premises in the
condition in which they are when the lease is executed. There
is no implied covenant that they are in good condition or fit for
occupation.
There are two exceptions to this rule, (a) The lessor is liable if, known to
him, the premises contain some concealed and dangerous defect which the
tenant could not observe and which works him an injury, as, if the concealed
portions of a building be dangerously defective or if the building has been in-
fected with the germs of some dangerous disease, (b) In England and in some
states it is held that in the lease of a furnished house for a short period there
is an implied covenant or condition that it shall be habitable.
2. Repairs. The tenant is bound, unless otherwise stipulated,
to make repairs to an extent necessary to return the premises
in substantially the same condition as when he received them,
ordinary wear and tear excepted. To this end he is entitled to
estovers, that is, to take from the premises timber needed for
repairs. The common law compelled him to restore buildings
destroyed by accident or fire, but in many states this harsh rule
has been changed.
3. Waste. The tenant cannot commit waste ; that is, he cannot
cut trees (except for estovers for repairs and for fuel), tear down
buildings, open mines, take clay or sand, or otherwise substantially
§§179,180] LANDLORD AND TENANT 291
injure the freehold. He may work mines already opened, unless
restrained by his lease. A tenant committing waste is liable in
treble damages, and in some states forfeits his lease. He may also
be enjoined by an equity court from continuing to commit waste.
4. Title. The tenant cannot deny his landlord's title while in
possession under the lease. It would be a fraud on the landlord
for a tenant to get possession under a lease and then set up an
adverse claim to the premises.
179. Assignment and subletting. The tenant may, unless he
has contracted not to do so., either assign his whole interest or
sublet the premises.
1. Assignment. Unless restrained by the lease, the tenant may
assign his estate. If he assigns it, he ceases to have any estate,
although he remains liable upon his covenant to pay the rent
and other covenants, unless the landlord releases him from such
covenants. The law may work an assignment by the sale of the
tenant's estate for debt or by his death. As an estate for years
is personalty, it passes to the executor of the deceased tenant
and not to his heir.
2. Subletting. Unless restrained by the lease, the tenant may
sublet the premises or any part of them. A grant of the lessee's
whole interest is an assignment ; a grant of a part of his inter-
est is a sublease. If he has an estate for ten years and grants one
for eight, or if he grants a part of the premises, this constitutes
a sublease. It has been held that granting a part of the prem-
ises for the whole unexpired term is an assignment as to thai
part, but the authorities do not agree as to this. A sublessee is
the tenant of the first lessee, not of the landlord. Hut neither
an assignee- nor a sublessee, while in possession, can deny the
landlord's title.
180. Rent and remedies for nonpayment. The rent reserved
by the landlord who owns a tee is itself real property until due and
payable, when it becomes personalty. Hence all rents due at the
death of the owner go to the executor, while rents not accrued
go to th<- heir.
The remedies of the landlord when the tenanl fails to pay the
rent arc (a) an action in debt or covenant t<. recover the amount
due; (b) reentry on the premises if such right is reserved in the
292 RKAL I'ROl'KRTY [Ch. XIV
lease or is given by statute ; (c) in some states a lien on the crops
grown on the leased premises ; and (</) in some states the right
of distress, that is, the right to seize the chattels of the tenant
which are on the premises and sell them to satisfy the rent.
Many states forbid by statute the landlord to take forcible
possession of the premises in case the tenant is delinquent,
and nearly all states provide a summary judicial proceeding for
the eviction of a tenant who is in arrears.
181. Termination of lease. A lease is terminated as follows:
i . When the time fixed in it expires (as to tenants at will and
from year to year, see sect. 160) ;
2. When surrendered by voluntary act of the tenant, acquiesced
in by the landlord ;
3. When there is a breach of the tenant's covenant, which,
by the terms of the lease, gives the landlord a right to terminate
the tenant's estate and the landlord enforces the forfeiture ;
4. When the landlord's title is extinguished, as when a life
tenant who lets the premises dies, or when the landlord is dis-
possessed of title by an adverse claimant ;
5. By statute in some states when the buildings on the prem-
ises are destroyed without the tenant's fault ; but at common law
the destruction of the premises will not terminate the lease except
where the tenant has hired only a part of the building.
REVIEW QUESTIONS
Section 159. How is property classified when considered as an object?
What two main classes in the law ? What is real estate ? What is personal
estate? What is corporeal real property and what incorporeal real property?
What is corporeal personal property and what incorporeal personal property ?
Define land ; tenements ; hereditaments. What practical differences exist
between realty and personalty ?
160. 1 low are estates in land divided? What is a freehold estate? What
two classes? Define each. How is each divided ? Define dower; curtesy; home-
stead estate. What four classes of estates less than a freehold ? Define each. .
161. What is a future estate ? What is a reversion ? What is a remainder?
Illustrate.
162. What is a joint tenancy and how is it created? What is a tenancy in
common? Characteristics of each? How is realty held by a partnership?
What is a tenancy by the entireties? What is community property?
REVIEW QUESTIONS 293
163. What is a private trust? How enforced? What is a charitable trust ?
How enforced? Illustrate.
164. What is included in the term " land " ? What may one do with over-
hanging branches? Explain the ownership of waters.
165. What two classes of vegetable products? Which is realty? Which
personalty? Who owns a border tree?
166. What is a fixture? State the rules to determine whether an article is
a fixture. What is meant by physical annexation ? When is an annexed article
clearly a fixture ? When is it doubtful ? What difference does it make who
annexes the article? What may a tenant remove?
167. What is the common law as to cattle trespass? What do statutes
provide as to fences?
168. What is a nuisance? What is lateral support ?
169. What is an easement? How may it be acquired? How in the case
of light and air? How in the case of a right of way? What is a way of
necessity ? Explain rights in highways.
170. How must a contract to sell land be made? When does title pass?
How does equity regard this? Illustrate.
171. How are conveyances of land made? What is a quitclaim deed?
What is a warranty deed? What are the warranties? How must a deed be
executed? Is delivery necessary? What is an escrow? What are the parts
of a deed?
172. How must a will be executed? Explain who should not be witnesses,
and why. If a devisee dies before the testator, what becomes of the devise?
What effect has subsequent marriage on a will? Who may make a will?
173. If one dies without a will, to whom docs his realty go? his personalty?
174. Explain title by adverse possession.
175. What is a mortgage? How is it executed? Why should it be re-
corded? What is an assignment? What is a discharge? What is foreclosure?
176. What other liens besides mortgages may be created upon lands?
When is a judgment a lien? What is an abstract of tide?
177. How is an estate for years treated? When does it begin? What
is the form of a lease? What express covenants may it contain? Wli.it
covenants are implied?
178. Who takes the risk as to defects in the premises ? I icceptions? Who
must make repairs ? What are estovers ? Wl1.1t is waste i What is th<- penalty
for waste? Why can the tenant not deny the landlord's title.-'
179. What is the effeel ol an assignment of .1 lease? When will it occui ?
H'.v. does a sublease differ from an assignment ?
180. Is rent realty or personalty? What are the landlord's remedies
against a tenant for rent? I forcible entry allowed?
181. I low is a lease terminated?
CHAPTER XV
PERSONAL PROPERTY
I. Classification : Kinds and Estates
182. Classification. Personal property consists of the following :
i . Chattels real, that is, leasehold interests in land. These have
already been considered.
2. Chattels personal, including all property except property in
land. Chattels personal are further divided into :
a. Choses in possession, or corporeal personal property, of
which one may take physical possession and control, like coin,
cattle, books, etc.
b. Choses in action, or incorporeal personal property, that is, a
legal right regarded as an object, as a right to sue for and recover
a debt, a right to share in the profits of a corporation, the right to
a patent, copyright, or trademark. Such a right may be evidenced
by a chose in possession, as where a debt is evidenced by a promis-
sory note, an interest in a corporation by a share of stock, or a
monopoly to make and vend an article by letters patent. In such
case the paper on which these evidences are inscribed is a chose
in possession, but the right is incorporeal or " in action."
Personal property may become real property by being annexed to
land as a fixture. This has already been discussed. Real property
may become personal by being severed from the land, as when
a tree is felled, or minerals are dug, or buildings are pulled down.
Some things growing upon land or attached to it are personalty,
as growing crops, or articles annexed but not fixtures. A few
movable articles are realty, as the keys to a house, the title deeds
to land, or separable parts of a machine fixture.
Of the various kinds of personal property only a few can be
considered here.
183. Property in animals. Animals are either domesticated
or wild. In the former the owner has absolute property. In the
294
§ 1S4] CLASSIFICATION 295
latter one may have a qualified property, and this may ripen into
an absolute property.
1 . The owner of the land upon which there are wild animals has
the exclusive right to hunt, capture, and kill them while they are
there. Any person coming on his land for such a purpose without
his permission is a trespasser ; if such trespasser kills an animal
there, it belongs to the landowner, according to the better view.
2. One who captures a wild animal and keeps it in captivity
has the exclusive right to it while it is in his possession. If it
acquires the habit of returning after wandering at large, it is still
his ; but if it regains its natural liberty and remains at large, it
is no longer his, but belongs to anyone who captures or kills it.
A mere temporary escape, however, may not amount to regaining
its natural liberty, as where a canary escapes into the street, or
where an animal escapes from a menagerie.
3. One who rightfully kills a wild animal has the exclusive
property in it.
4. One who keeps a wild animal of a dangerous or mischievous
disposition does so at his peril. If it injures another, he is liable.
5. One who keeps domestic animals is liable if they escape and
trespass upon another's land. But he is not liable for injuries due
to their vicious disposition unless he knows of such vicious propen-
sity in the particular animal doing the injury. Wild animals and
vicious domestic animals, known to be such, one keeps at his peril.
184. Trademarks ; good will ; names. These are incorporeal
property rights which call for special mention.
I. Trademarks. A trademark is a name, symbol, or other
device put upon goods by a manufacturer or dealer in order to
distinguish them from like goods of other persons. It is a kind
of commercial seal or signature
If the name or device is invented or fanciful, the user of it gets
a property right in it; but if it is u word of common use, he
cannot get ;m exclusive property right in it, although he might
prevent another from using it in the same connection for the pur-
pose of deceiving the public. Words which merely describe tin-
article, however, cannot Income in any sense ext lusive trademarks ;
nor can geographical names, because others in the same place have
an equal right to the name <,i the place of manufacture.
l'KRSONAL PROPERTY [Ch. XV
Examples. Excelsior Stoves, Hoosier Drills. Electro-Silicon Powder, Con-
gress Water, Champion Flour, 303 Pens, and tin- like are good trademarks.
Lackawanna coal is not, as against another miner in the same locality, nor
Worcestershire sauce, nor Philadelphia cement, But il one makes tobacco at
Durham and calls it " Durham tobacco." he may prevent another person mak-
ing tobacco elsewhere from using the same name. So if one changes but a
single letter, the legend may he deceptive though a different word is used, as
where A has used the words "Royal Pens" and B puts out a product called
" Loyal Tens."
2. Good will. The good will of a business is the good opinion
of customers concerning the business and the probability that
they will continue to patronize it. It is a valuable asset and may
be sold with a business. Usually its sale is evidenced by the right
to use the old name, perhaps with that of the successor added.
The seller, if he has included good will in the sale with the right
to use his name, cannot set up a rival business under the same
name. If there is no sale of the right to use his name, he may
set up a rival business under the name but cannot represent him-
self as carrying on the old business or as the successor of it.
3. Names. A man may choose his own name, although he
usually bears his father's surname and the Christian name given
him at his birth. In order to avoid the loss of evidence as to
identity, statutes provide for a record of change of name if one
chooses to avail himself of it, but one may nevertheless acquire
a new name by usage. The law disregards all middle names ; it
is legally sufficient to use the first Christian name and the sur-
name. So the word "junior" or "senior" is merely descriptive
and no part of the name. A man cannot prevent another from
using his name unless the other uses it for fraudulent purposes.
And one may even be enjoined from so using his own name in
trade as to work a fraud, as where, after A. 15. has sold a certain
kind of gun as "A. B.'s gun," another person of the same name
puts a gun on the market stamped "A. B.'s gun."
185. Estates in personal property. Personal property, like real
property, may be owned by two or more persons as joint tenants,
tenants in common, partners, and in community (see sect. 162 ante).
There may be a life interest or estate in personal property with
a remainder or reversion in another. If the property is corporeal,
the life tenant may possess and use it ; but if it is in the nature
§186] ACQUISITIOxM AND TRANSFER 297
of money or security, the executor usually invests it and pays the
income to the tenant for life. If the property is such as is con-
sumed in the use, it must be intended that the remainderman
shall have only what may be left at the life tenant's death.
There may also be a trust of personal property (see sect. 163 ante).
II. Acquisition and Transfer
186. Acquisition by occupancy and by finding lost property.
The title to personal property may be acquired by taking posses-
sion of what no one owns or by taking possession of what some
one has lost but never reclaims.
1 . Occupancy. Personal property may be acquired by occupancy,
that is, by taking into one's possession what previously belonged
to no one or what has been abandoned by a previous owner. The
taking of wild animals, the taking of fish, and the taking of sea-
weed on one's own property or on property common to all are
examples of the first method. Raising a sunken vessel abandoned
by the owner would be an example of the second.
2. Lost property. Lost property calls for special consideration.
The general rule as to the title of the finder is that if one finds
and appropriates lost property, he has a title good against all but
the true owner.
The law distinguishes, however, between lost property and mis-
laid property. If one finds a poeketbook on the Moor of a store, it
is lost property and belongs to the finder unless the true owner
reclaims it. But if he finds a poeketbook on the counter of a store,
it is mislaid or left property and belongs to the owner of the store
as bailee for the true owner, instead of to the finder. Should the
true owner never reclaim it, the storekeeper retains it.
Treasure-trove is money, coin, or bullion hidden or concealed
in the earth or other secret place. In England it belongs to the
crown if no true owner claims it. In this country it is generally
treated as lost property and belongs to the finder as againsl the
owner of the lands where it is discovered.
Statutes often regulate the rights of finders of lost property,
and generally require the finder to advertise the property found.
Jn case the true owner docs not reclaim it, some statutes provide
298 PERSONAL PROPERTY [CH.XV
that the property or its proceeds shall, in whole or in part, go to
some public fund. The rights of finders of estrays (lost cattle)
are particularly governed by statute.
If the tinder knows who the owner is, or if the property dis-
closes to whom it belongs, the finder is guilty of larceny in keep-
ing the property as his own. But in order that this rule shall
apply, the finder must know these facts at the time of the finding,
and then form the felonious intent.
Examples: i. X bought an old safe and delivered it to A to repair. A
found in the space between the outer wall and the lining a sum of money.
A may retain the money as against X.
2. A customer in a shop laid his pocketbook on a table and went away and
forgot it. Another customer found it there. The shopkeeper is entitled to it
as against the finder.
3. A was working for X in the latter's paper mill, and in picking over rags
and paper found a number of bank bills. A is entitled to them as against X.
4. A conductor on a railway train finds a pocketbook in the train. It
belongs to the conductor as against the railway company.
5. A and B, while working for X in removing an old building, discovered a
rusty tin can containing a large sum of money. Who hid it there is unknown.
The money belongs to A and B as against X.
187. Accession and confusion. Title by accession arises from
the following circumstances : the natural increase from land and
animals ; the uniting of the property or labor of one with the
property of another ; the confusion of the goods of one with the
goods of another.
1. Natural increase. It is, of course, too plain for argument
that if one owns land he owns its increase, whether produced by
nature or by industry. So, too, if one owns animals he owns
their young, the rule being that the offspring go with the dam,
or mother.
2. Accession of chattels, {a) If the chattel of one is, without
his consent, united with the land of another so as to become a
fixture, the chattel becomes realty and belongs to the owner of
the land ; the owner of the chattel has only an action for dam-
ages for conversion. This is because the land is regarded as the
principal thing and the chattel as an accessory.
(/)) A similar rule applies when the chattel of one is insepara-
bly united with the chattel of another : the whole belongs to the
§187] ACQUISITION AND TRANSFER 299
owner of the principal chattel, while the owner of the accessory
chattel has only an action for conversion. Should the chattels be
of approximately similar kind and value, the owners would become
owners in common of the new product. A thing may be acces-
sory, however, which is of greater value than the principal chattel,
if the latter gives its name and character to the whole, as where
materials of greater value than an old wagon are used to repair
and renovate it. So, too, things of inferior value may by their
owner be united by his labor or skill with things of greater
value so as to create a practically new thing which will belong
to him, as where with a smaller quantity of his wool, united
with a greater quantity of another's wool, he weaves cloth, or
with a smaller quantity of his material, united with a larger
quantity of another's, he makes a ship, or furniture, or gold or
silver ornaments.
((■) If a workman makes a new product by putting labor upon
another's chattel so that there is a complete change of identity,
the product belongs to the workman. If there is not a com-
plete change of identity, the chattel will belong to him if the
labor innocently bestowed is the principal item in the value of
the new product, but will belong to the owner of the chattel
if the latter is the principal item in the value of the new
product. This last rule is qualified where the workman knows
the material is not his, many courts holding that in such case
he must lose his labor, although it may be more valuable than
the chattel.
Examples : 1 . B uses some links belonging to C in making a chain most
of which was made from his own links. The chain is wholly B's. Had the
links of C about equaled those of 15 in number, the two would have been
owners in common.
2. B takes $8 worth of canvas belonging to him and ^40 worth belonging
to C, adds ?io worth of labor, and makes a sail. The sail belongs to ( '.
3. B by mistake cuts wood on ( "s kind. The wood as it was while K"' w -
ing was worth about $3 a cord. B's labor in cutting it is worth about
a cord. The wood belt 1 C.
4. B by mistake takes C's trees, worth about »:;, and makes them into
hoops WOIth about £700. Tin- hoops belon to B. A small excess of value of
the labor would not be enough to deprive C of his property, bul if the
is great, the labor becomes clearly the principal thing and the material the
accessory thing.
3 oo PERSONAL PROPERTY [Ch. xv
5. As above, B knows the trees belong to C, and puts the labor upon
them. C ma\ claim the hoops. B loses his labor because of his own conscious
wrong in converting C's property.
6. In Example 5, B sells the hoops to X, an innocent purchaser. C may
reclaim them. Since B had no title, he could give none.
3. Con fusion of goods. If the goods of one are so confused
with the like goods of another that they cannot be distinguished
and separated, the title to the mass will depend (a) upon the inno-
cence or willfulness of the owner who caused the confusion, and
(/>), if willful, upon the possibility of clearly proving how much of
his product is in the mixture, (a) If the confusion is innocent,
each will be entitled to his aliquot portion of the mass as that
may be reasonably established. The same rule applies where the
confusion is by consent, as where wheat of several owners is min-
gled in a warehouse. (0) If the confusion is willful, the one caus-
ing it can claim his share only if he can clearly and decisively
prove how much of each was mingled ; failing in this, he forfeits
the whole mass to the innocent party.
188. Transfer by gift. A gift is a transfer of property by the
owner without consideration. A gift inter vivos is a gift to- take
effect at once by transfer of absolute possession to the donee, and
is irrevocable. A gift causa mortis is a gift made, by one in peril
of imminent death, by transfer to the donee, but upon condition
that if the donor survives the peril, he may revoke the gift and
reclaim the property.
In a gift inter vivos, delivery is the essential requisite, coupled,
of course, with the intent to transfer as a gift. An intent to give
is not enough. A promise to give is not effective, because there is
no consideration for the promise. There must be actual delivery,
so as to put the subject matter of the gift out of the control of
the donor. If the article is one that may be delivered by manual
transfer, that form should be followed. But if it is bulky, or in
the hands of a third person, a symbolic delivery will do, as the
delivery of a key to the place where the article is kept, or the
transfer of a warehouse receipt ; but the delivery of the donor's
own check (order) on a bank is not effective as a gift unless,
before the death of the donor, the donee actually obtains the
money. If the donee is already in possession, no new delivery
§188] ACQUISITION AND TRANSFER 301
is necessary ; it is enough to show clearly the words of the gift.
So a deed of gift duly delivered will take the place of the delivery
of the subject matter itself. If one wishes to forgive a debt, he
should give the debtor a release under seal ; but a receipt in full
duly delivered and the balancing of the account on the books of
the donor have been held sufficient.
In a gift causa mortis delivery is also necessary. The peculi-
arity of this gift is that it must be made in contemplation of im-
minent death (not merely of human mortality), and that it is to
become absolute only in case the donor dies, of the illness or peril
then existing, without having revoked the gift. If he recovers or
escapes the peril, he may reclaim the gift, and he may before his
death revoke it. One in his last illness may make an absolute gift
inter vivos or a conditional gift causa mortis, and it is a question
of fact whether he intended to make the one or the other. A gift
causa mortis bears considerable resemblance to a legacy in a will,
differing mainly in this, that the article is delivered to the donee
before the death of the donor, and no writing: is
&
necessary.
Examples : 1 . A father places in an envelope certain articles and securities,
indorses it, " The inclosed are for my son John," signs his name, and puts the
envelope and its contents into his safe, where they are found after his death.
This is not a valid gift. There has been no delivery.
2. A father gave to X a bag of coin, saying the contents were for his daughter.
This was a valid gift. The delivery may be to a third person for the donee.
3. A father loaned his son a horse and buggy. Alter the son had posses-
sion, the father said, " I give you that horse and buggy." This was a valid gift
There need not be a new delivery at the time of the gift.
4. A father in contemplation of immediate death gave to his son his (the
father's) promissory note for $1000, and to his daughter his (the father's)
check on a bank for $1000. The first gift is invalid ; it is a mere promise to pay
or to give. The second gift is valid if the cha k is cashed before the father's
death, but the death of the father revokes the authority of the hank to pay it.
5. A father gives and delivers to his son the promi 1 \. and to
his daughter the check of Y. Th( valid j^if ts. If tin- instruments are
payable to the father's order, he should indorse them, but his failure to do so
will not, it seems, render the gift invalid, although the COUIta are not entil
in harmony upon that point
6. A donor in his last illness told the nurse that his po< ketbook was under
the pillow, and that she was to take il and give it to his son. After Ins death
the nurse took it and gave it to the son. This was not a valid gift, because
there was no delivery in the lifetimi donor.
3 o2 PERSONAL PROPERTY [Ch.XV
7. The donor has money deposited in a savings bank. He delivers the
savings-bank book to the donee as a gift. Most courts hold this sufficient to
constitute a valid gift. It would not be sufficient in the case of an ordinary
deposit in a hank of deposit; in such case then- must he a due and formal
assignment of the claim against the hank.
8. If B, with the intent to make a gift to C, deposits money in a savings
bank in the name of C, and takes the savings-bank book in C's name, there is
a valid gift. But intent must be established; it may be that the deposit was
made in this way because B had already deposited in his own name all that
the rules of the bank permitted. The delivery of the book to C would be quite
decisive of intent, but this is not essential if intent otherwise appears, as from
a declaration that he has made the gift.
9. One may make a gift in the form of a trust either (a) by declaring that
he holds a sum of money in trust for C or (b) by transferring the sum to T to
hold in trust for C. In the first case there is an " equitable gift " without any
delivery and by a mere declaration.
189. Other modes of transfer. Other modes of transfer are by
sale, will, distribution when the owner dies intestate, seizure and
sale for debt, mortgage, and at common law by marriage. Only
a word need be added as to these.
A chattel mortgage is the transfer of the title to personal prop-
erty as security for a debt, upon condition that if the debt is duly
paid, the mortgage and transfer shall be null and void. It is gen-
erally provided that in order to be valid against subsequent pur-
chasers or mortgagees in good faith, the chattel mortgage must
be duly recorded, and some states require it to be renewed annu-
ally in order to remain valid. Unless otherwise stipulated, the
mortgagee is entitled to possession, but it is usual to leave the
mortgagor in possession until default or until the mortgagee feels
insecure. When possession is taken after default, the mortgagee
becomes the owner of the goods at law, but equity gives the
mortgagor a right to redeem them. To cut off this right the mort-
gagee forecloses it by a sale of the goods either under a judicial
proceeding or, if the mortgage gives him a power of sale, without
such proceeding. Most states have statutes regulating foreclosures.
At common law a husband was entitled to all the personal
property owned by the wife at the time of the marriage. Most
states have changed this rule by providing that a married woman
shall continue to own and control all her property the same as
an unmarried woman.
REVIEW QUESTIONS 303
REVIEW QUESTIONS
Section 182. Of what does personal property consist ? What are choses
in action? When does personal property become realty? When does real
property become personalty ? What property attached to land is personalty ?
183. What right has a landholder in wild animals on his land? What
sort of property has one in a captured animal? How is it lost? If one kills a
wild animal, whose is it? For what damage done by his domestic animals is
one liable? by wild animals kept in captivity?
184. What is a trademark? When is it property? If not property, has
anyone a right to use it? What is good will? What property has one in his
name? What is the name recognized by the law as sufficient?
185. What estates in personal property?
186. What is title by occupancy? Who owns lost and found property?
What is mislaid property? What is treasure-trove? Who owns it? When is
a finder of lost property guilty of larceny?
187. What is title by accession? If the chattels of different owners are
annexed, who owns the article so made? If one puts labor on another's chattel
and increases its value, who owns it? Distinguish and illustrate. If one inno-
cently mixes his goods with those of others, who owns the mass? If one
willfully mixes them, who owns the mass?
188. What is a gift inter vivos} What is a gift (-ansa mortis? Explain
the essentials of each. How can one make a gift of a debt to his debtor? Is
a gift revocable? Can one make a gift of his own promissory note or check,
and why? When is a gift of a savings-bank deposit good? Can one make a
gift inter vivos without delivery?
189. What other modes of transfer of personalty ? What is a chattel mort-
gage? Why should it be recorded? Who is entitled to possession of the
mortgaged chattels? After default where is the title? What. is the equity of
redemption and how is it disposed of? What effect has marriage on the title
to personalty?
GLOSSARY
[Terms fully defined in the text are not included in this Glossary. For such terms the
Index should be consulted.]
Abstract of title. An outline history of
the title to land, consisting of a synop-
sis, or summary, of all conveyances,
mortgages, liens, and charges affect-
ing the parcel of land in question.
Acceptance, (a) The assent of the of-
feree to the proposal of the offeror,
thus concluding a contract ; (t>) the
act by which the drawee of a bill of
exchange assents to the request of
the drawer to pay it and makes him-
self liable to pay it.
Acceptor. The person who accepts a
bill of exchange.
Acceptor supra protest. The person
who, after it is protested, accepts a
bill of exchange for the honor of the
drawer or an indorser.
Accession, (a) That which is united to,
or produced by, pmperty; (/') the right
to all that one's property produces or
that is united to one's property.
Accommodation paper. A bill or note
to which the accommodating party
puts his name as indorser, maker, or
drawer without consideration, in order
to lend his credit to another.
Acknowledgment, (a) In conveyancing,
act by which one who I
cuted a deed or other instrument
goes before .t notary publii or •
authorized officer and dei lares or
acknowledges thai hedidexei ute the
same; {/>) the cei ffii ei
to that effe< t.
ActofGod. Inevitable accident bi
hum. in foresight or control. S| e I'is
major.
Act of honor. The instrument drawn
up by a notary certifying that a bill
has been protested and that a person
named has accepted or paid it for the
honor of the drawer or an indorser.
Action. The proceeding in a court for
the enforcement of a right ; also called
a suit.
Administrator. A person appointed by
the court to administer the estate of
a deceased person who has not by will
named an executor. The feminine
form of this word is "administratrix."
Admiralty. (</) The system of law gov-
erning maritime causes; (/') the court
administering this law.
Adult. One of full legal age, usually
twenty-one years.
Adverse possession. A possession of
real property adverse to the right or
title of another. If continued for a
specified period, usually twenty years,
it cuts off the right of the other to
reclaim the property.
Affidavit. A written de< laration under
oath.
Agistor. One who pastures cattle for
.11!' ll
Aleatory (Latin alea, a die, or < ha
Depending upon an uncertain event.
Alienate. To convey; to transfei tin-
title to property.
Allonge. The strip of papei attached
i bill or note to receivt fui thei
indorsement - after the bai 1^ of the
instrument is filled.
Alteration. A change in the trims of
a written Instrument.
305
3oo
GLOSSARY
Ambiguity. Doubtfulness, or double
ness, of meaning.
Ancestor, i >ne from whom a person has
descended in a direct line. Sometimes
used in the broader sense of one tioin
whom a person has inherited lands.
Annuity. A yearly sum stipulated to
be paid to -a person.
Answer, (a) In pleading, the matter set
up by way of defense to an action ;
(/>) a formal written statement con-
taining the defense to an action.
Ante (Latin) before. Used in referring
to a preceding part of a book.
Appeal. The removal of a cause from
an inferior to a superior court in
order to have the action of the lower
court reviewed.
Articles. A contractual document con-
taining the terms of an agreement.
Assets, (a) Property of a deceased
person or a bankrupt available for
payment of debts; (Z>) the aggregate
available property of a merchant.
Assignment. The transfer of rights or
interests.
Attachment. A process by which prop-
erty is seized pending a suit.
Bankrupt. A person who under the
bankruptcy laws is liable to have his
property seized and distributed among
his creditors.
Beneficiary, (a) A person entitled to
the income or enjoyment of property
the title to which is held by another
as trustee; (o) the person to whom
a life-insurance policy is payable.
Bequeath. To give personal property
by will to another.
Bequest. A legacy or gift of personal
property by will.
Bilateral. In contract, signifying an
agreement executory on both sides.
Bona fides (Latin) good faith. Bona
JiJe, in good faith.
Bond. A sealed obligation to pay
money. A bond and mortgage con-
sists of a bond with a mortgage to
secure its payment.
Bought note and sold note. A bought
note is given to the seller and a sold
note is given to the buyer by a broker
who acts as agent between the parties.
These are memoranda of the contract.
Boycott (from the name of one Boy-
cott, who was agent for an estate in
Ireland), (n) A combination to cease
dealing with a person ; (/>) a conspir-
acy to induce others to cease dealing
with a person.
Breach. The violation or nonfulfill-
ment of an obligation.
By-laws. Regulations or rules adopted
by a corporation for its own govern-
ment.
Cargo. Goods and merchandise put on
board a ship to be carried from one
port to another.
Case. A statement of facts upon which
an action in a court is based.
Caveat emptor (Latin). Let the buyer
beware.
Caveat venditor (Latin). Let the seller
beware.
Champerty. A bargain by which an
attorney agrees to carry on a suit at
his own risk and cost in considera-
tion that he shall receive in case of
success a part of the proceeds of
the suit.
Chancery, (a) A court of equity; (/') the
system of jurisprudence administered
in a court of equity.
Charter, (a) A legislative act, together
with proceedings taken thereunder,
by which a corporation is created ;
(/') to hire or lease a vessel.
Charter party. The contract by which
a vessel or some principal part there-
of is let for a voyage.
GLOSSARY
307
Chattel. An article of personal prop-
erty. A more comprehensive phrase
than "goods," since it includes chat-
tels real.
Chattel real. A chattel interest in
land, as a leasehold.
Chose. A thing; any article of property.
A chose in action is a right of ac-
tion to recover a debt, demand, or
thing.
Civil action. An action to establish a
private right, as distinguished from a
criminal action.
Civil law. The Roman law as distin-
guished from the English law.
Code. A legislative enactment intended
to embody the law on a particular
topic or, as in some states, on all
topics.
Collateral, (a) In the law of descent, in
a side line, not direct or lineal; (6) in
commercial law, a security additional
to the personal obligation.
Commercial paper. Bills, notes, and
checks given in the course of com-
mercial transactions. It does not in-
clude accommodation paper.
Common law. (<i) The law of Eng-
land, as distinguished from the < ivil
law; (f>) that part of the law of Eng-
land developed by the common-law
courts.
Complaint. The name of the pleading
by the plaintiff in an action at law.
Sometimes tailed a dei laration.
Composition. An agreement between
an insoh ent 1!' btoi and his t reditors
whereby the Litter agree to take
than the whole of their 1 hums.
Compromise. An agreement to Bettle
a dispute made in view of the un
certainty of legal rights.
Conversion. An unauthorized assump
tion and exeri ise ol ownei hu> over
goods belonging to another. It is a
tort.
Conveyance. An instrument in writing
under seal, by which any estate in real
property is created, aliened, mort-
gaged, or encumbered.
Copyright. An exclusive right granted
by the government to multiply and
sell a literary or artistic production.
Corporeal. Having an objective, mate-
rial existence.
Costs. An allowance made to a success-
ful party to a suit, to compensate
for his expenses in conducting it.
Covenant. A promise contained in a
sealed instrument.
Custom. In law, a usage so well estab-
lished as to be regarded as having
the force of law.
Damages. A pecuniary compensation
recovered in a court for some in-
jury or loss sustained through the
wrongful act or omission of an-
other.
Deceit. A fraudulent representation or
device by which a person is misled
to his damage.
Declaration. The pleading in which a
plaintiff states his cause of action.
See Complaint.
Decree. The name given to the judg-
ment of a court of equity.
Deed. A sealed instrument containing
a contract or conveyance.
Defendant. The person against whi m
an :u tion is begun.
Del credere (Italian) of trust or credit.
Applied to an agent who guaranties
that pun hasers will pay foi goods of
the principal sold to them.
Descent. In real property, the title
given by fort e of l.iw upon the death
of .in owner.
Devise. A ^i ft of real propertj con
t. lined in a will. The de\ isee is the
to whom u is r.i\ en 1 th<
be "lie who ^ives it.
308
GLOSSARY
Earnest. A Bum p-iiil to bind a bargain.
Easement. A right in the owner of one
parcel of land, .is owner, to a use in
the land of .mother.
Emblements. Annual products of the
soil raised by labor and industry.
Encumbrance. A claim, lien, or liability
attached to property, as a mortgage,
judgment, etc.
Equity. The system of jurisprudence
administered in the ecpiity courts.
See Chancery.
Equity of redemption. The period
allowed by equity for a mortgagor,
pledgor, etc. to reclaim his property
by paying the debt secured by it.
Escrow. A deed delivered to a third
person to be held until the happen-
ing of some contingency, and then
delivered to the grantee.
Estate. The interest one has in prop-
erty. Sometimes used broadly to in-
clude all of one's possessions.
Estoppel. A bar raised by the law to
preclude a man from setting up cer-
tain facts because of some prior
admission or conduct. The verb is
" to estop."
Estovers. The right of a tenant to take
wood necessary for fuel, fences, and
repairs is called a right to estovers.
Executor. A person appointed by the
maker of a will (the testator) to carry
out its provisions. The feminine form
of the word is " executrix."
are cut off and only particular heirs
are designated.
Fiduciary. (</) As a noun, a person in
a relation of trust or confidence ;
(/») as an adjective, signifying a rela-
tion of trust or confidence.
Forcible detainer. Keeping possession
of lands by force.
Forcible entry. Taking possession of
lands by force.
Foreclosure. A proceeding for extin-
guishing the right of a mortgagor or
pledgor to redeem the property given
as security for a debt.
Forgery. Fraudulently making or alter-
ing a writing which purports to create
or modify a legal right against an-
other.
Franchise. A special privilege con-
ferred by law upon an individual or
a corporation, which does not belong
to persons of common right.
Fraud. Some willful act or device cal-
culated to influence or mislead a
person to his prejudice.
Fructus industrials (Latin). Fruits of
industry; .products of land raised by
labor.
Fructus naturales (Latin). Fruits of
nature ; natural products of land.
Fungible. Capable of being estimated
or replaced by weight, measure, or
number without reference to the
particular characteristics of each
unit.
Fee (same as feud or fief). Originally
land held of a superior lord in
consideration of military service.
Now an estate of inheritance in
lands.
Fee simple. An absolute, unqualified
fee ; the largest estate one can have
in lands.
Fee tail (from French faille, a cutting).
A fee from which the general heirs
Good consideration. A consideration
based on family relationship or love
and affection. A valuable considera-
tion is one based on the surrender of
something having a legal value.
Goods. Articles of personal property.
Usually applied to inanimate mov-
ables. " Chattel " is a broader term.
Grant. A term signifying a transfer by
deed of an interest in real property.
GLOSSARY
309
Heir. The person to whom by law the
title to real estate descends upon the
death of his ancestor.
In statu quo (Latin). In the condition in
which (one was before).
In transitu (Latin). In transit.
Incorporeal. Without body or material
substance.
Indemnify. To save harmless ; to se-
cure against loss or damage.
Indenture. Formerly a deed in two
copies with cut or serrated edges so
that one would fit into the other. Now
any deed by which two or more parties
enter into reciprocal obligations.
Indorse. Literally, write on the back of.
Injunction. A writ issued by a court
of equity, forbidding or commanding
something.
Insolvency. Inability to pay debts in
due course.
Inter vivos (Latin). Between the living.
Intestate. Without a will or testament.
Joint and several. An obligation by
two or more which may be enforced
against all jointly or each individually.
Judgment. The decision of a common-
law court in an action before it ; the
final determination of the rights of
the parties.
L.S. Abbreviation for locus sigilli( place
of the seal).
Law. The rules by which courts are
controlled in the administration of
justi' >■.
Legacy. A gift of personal property by
will and testament.
Levy. A seizure of property to satisfy
a judgment.
License. A permit to do an a< t which
would otherwise be illegal, ■> - to enter
another's lands, but 1 1 eating an
easement.
Lien. A charge imposed upon property
by which it is made security for a
debt or other obligation.
Liquidated damages. Agreed or as-
certained damages, not uncertain
damages.
Majority. Full legal age ; usually
twenty-one years.
Minority. Under legal age; infancy.
Municipal law. The law of a partic-
ular country as distinguished from
international law.
Negligence. A failure to use the care
that a reasonably prudent man would
use under like circumstances.
Next of kin. Those relatives who share
by law in the personal property of a
deceased person.
Nominal damages. A trifling sum
awarded to vindicate a legal right
where no substantial damages have
been suffered.
Notary public. A public officer author-
ized to certify or attest documents,
take acknowledgments of deeds, etc.
Nuisance. A wrongful act which dis-
turbs another in the enjoyment of
real property or of a public highway.
Obligation. A legal duty to do or not
\<> do a certain thing. An obligor is
one who has undertaken an obliga
tioii. An obligee is one entitled 1"
the perform. tin e < >t .111 obligation.
Orphans' court. The name given to
ii,,- probate court in a few Btati
Ownership. The right to possess and
|,,, .petty )'• the exi lusion >•! others.
Parol. \ word •■' 1h.1t whii h
is expressed orally, not in writing.
Patent. An exi lusive right granted by
the go\ smmenl t" make, w a, and
vend an .nticle.
3io
GLOSSARY
Per procuration (abbreviated "per pro.").
By proxy. Used in England to indi-
cate an agent that is acting under a
spei i.il >'i limited authority.
Personal representative. An execu-
tor or administrator of a deceased
person. The "real representative"
is the heir of the deceased person.
Plaintiff. The person who brings an
action in a court.
Pleadings. The written allegations as
to claims and defenses in an action
in a court.
Post (Latin) after. Used in referring to
a subsequent portion of a book.
Prescription. Title by adverse posses-
sion. The law indulges the fiction
that there was a prior writing which
is now lost.
Probate. To prove, as to probate, or
prove, a will. A probate court is
one in which wills are proved.
Proof. The establishment of a fact by
evidence.
Pur (sometimes per) autre vie (French).
For another's life.
Quantum meruit (Latin). As much as
he deserved. Refers to an action
for the reasonable value of serv-
ices.
Quantum valebant (Latin). As much
as they were worth. Refers to an
action for the reasonable value of
goods sold and delivered.
Quasi ( Latin). Like; corresponding to.
Ratification. The confirmation of a
previous contract or act which is not
binding.
Receiver. A person appointed by a
court to take possession and control
of property pending litigation and
some final decree of the court.
Recording acts. Statutes providing for
the recording of deeds, mortgages,
etc. in some public office, and pro-
viding that the record shall be con-
structive notice to all subsequent
purchasers or encumbrancers.
Redemption. The act by which a mort-
gagor, pledgor, etc. reclaims the title
and possession of the property by
paying the debt so secured.
Release. The giving up of a claim, by
the person entitled, to the person
against whom it exists.
Replevin. An action to recover posses-
sion of goods.
Rescission. The canceling, or annul-
ling, of a contract or deed.
Residuary devisee. The person who
under a will takes all the lands of
the testator not specifically devised.
Residuary legatee. The person who
under a will takes all the personal
property of the testator not specifi-
cally bequeathed.
SS. An abbreviation used after the
statement of the venue (state and
county) and supposed to be a con-
traction of scilicet {scire licet), mean-
ing "as one may learn," or "to wit,"
or " namely."
Seised. The technical term describing
the possession of a fee in lands. This
is the verb. The noun is "seisin."
Seisin. Under the feudal system the
completion of the formalities by which
one was given possession of a fee in
lands. Now the possession of a fee.
Set-off. A counter claim or cross de-
mand which a defendant sets up
against the claim of the plaintiff.
Simple, (u) In real-property law, ab-
solute, unconditional, as fee simple;
(/>) in contract law, unsealed.
Specialty. A contract under seal.
Specific performance. A decree by an
equity court that a party shall nctu-
ally perform his contract promise
GLOSSARY
3ii
instead of paying damages for the
breach.
Status. Legal position or condition.
Statute. An act of the legislature.
Statute of Limitations. A statute fix-
ing a time within which actions must
be brought.
Stock, (a) The total capital put into a
corporate enterprise ; (/>) the interest
of each stockholder in the corporation.
Subrogation. The substitution of one
person in the place of another with
respect to rights, claims, or securities.
The verb is " to subrogate."
Subscribe. To write under; to write
the name under the contract. To
sign is to write the name at any place,
not necessarily underneath.
Successor. One who succeeds another.
Used to describe those who constitute
a corporation after the retirement of
preceding corporators.
Suit. A proceeding in a court. It is
not uncommon to call a proceeding
in a law court an action, and one in
an equity court a suit ; but this is not
a necessary distinction.
Supra protest. Over protest. Used in
the sense of " after protest."
Surrogate. Literally, one who is sub-
stituted for another. By present
usage the judicial officer who presides
over a probate court for the admin-
istration of the estates of dec<
person-.
Testator. One who makes a will. The
feminine is " testatrix."
Title, (a) The right to property; (i) the
evidence of the right to property.
Tort. A wrongful act, other than a
mere breach of contract, for which a
common-law court will give damages.
Transcript. An official copy of a court
record, as a transcript, or certified
copy, of a judgment.
Treasure-trove. Treasure found. [Travi,
Old French for " found.") Gold or
silver or money found hidden in a
secret place.
Trespass (Old French trespasser, to pass
over or beyond). To invade another's
right of security of person or of prop-
erty. Commonly, to enter another's
lands wrongfully.
Trover (Old French trover, to find). An
action for the recovery of damages
for the conversion of goods, based
originally on a fiction that the de-
fendant had found the goods and
refused to return them to the right-
ful owner.
Trustee. A person appointed to exe-
cute a trust.
Ultra vires (Latin). Beyond the power.
Applied to acts of corporations be-
yond the charter powers.
Unilateral. One-sided. Applied tocon-
ti.»< ts where only one promise is still
unperformed.
Tenant. Broadly, one who holds land;
1 ifically, one who holds land for
life or for years; popularly, one who
holds land for years of a landlord 01
lessor.
Testament. That which is witn<
The word is employed 1 >nym
for " will." Formerly it mean) a will
of personalty, but now it is u
changeably with the term "will."
Vendor. The seller. Usually applied
to the Bellei "t real property.
Venue. (</) Locality; place. (/') The
heading of legal documents showing
th< state and c OUnty.
Verdict. The decision of a jury upon
matters submitted to it.
VU major (Latin). Superioi force. In
. inch-, more than an acl of I ■■ id, as
the a. t of a publii enemy.
312
GLOSSARY
Void. Null; of no effect. This is the
correct meaning) but the term is some-
times used in tin- sense of " voidable."
Voidable. Capable <>t being rendered
void, usually at the election of one
party to a contract.
Waiver. The surrender of some right
or privilege which the law gives.
Waste. The name given to any act of
a tenant whereby the value of the
reversion is diminished, as the cut-
ting of trees.
Will. A written instrument executed
as the statute directs, by which a
person makes a disposition of his
property to take effect after his
death.
Witness, (u) One who gives evidence
in a court ; (/>) one who sees a docu-
ment executed and signs his name to
it as evidence thereof.
INDEX
[Numbers refer to pages]
Abstract of title, 283
Acceptance, of bill, 163, 1S1-1S5
for honor, 1S4
of offer, 13-17
and receipt, 68
Accession, 298-300
Accident insurance, 123
Accommodation indorser, 1S7
Accounting, by agent, 215
by partner, 239
Act of God, 106, 108
Action. See Remedies
Administrative law, 3, 48
Admiralty court, 8
Adverse possession, 282
Agency, 205-226
by necessity, 212
Agent, 38, 6S, 131
appointment of, 207-213
authority of, 217-220
of a corporation, 253
liability to third parties, 222-223
obligations to principal, 214-216
Agreement in contract, 12-16
Air, 273
Alteration of contract, 153, 180
Animals, 294
Answer, 8
Antecedent debt as value, 64
Appointment of agents, 207-21 \
Assault and battery, 5, 30
Assignment, of contract, 46-49
of lease, 2<yi
of mortgage, 282, 286
Attorney at law, 220
Auctioneers) 220
Authority, of agent, 217-222
of con fficers, 253
of partner, 236-238
Baggage, 117
Bailee's duties, 94, 95, 96-97, 98-99,
100-101, 103
Bailment, 90-1 18
carriers of passengers. 1 1 6—1 iS
common carriers, 107-116
gratuitous, 93-95
innkeepers, 104-107
mutual-benefit, 97-104
telegraph companies, 1 iS
Bailor's duties, 94, 96, 9S, 100, 102
Bank deposits, 144-145
Bankruptcy, 4S, 56-58, 242
Banks, 104, 142-144
Barter, 66, 91
Bilateral contract, 14
Bill, of exchange, 163
of lading, 1 12
of sale, 65, 66
Bills in a set, 163
Blanks in bill or note, 174
Bona fide holder for value, 63, 177
.Bond, 19, 26, 27, 169, 256
Boycott, 15
Breach, of contract. 53-56, > s ; s |
of warranty, So
Brokiis. j ].,
Business, 1
Business law
Buyer's duties, 75
< all.
Capital, 135
1 ids, oi gOOds, 107 11''
(if ; 1 [6, 228
Cashier, 220
< asualty insurant e, 1 1 1
( 'attic t;.
3'3
314
INDEX
.-.' emptor^ 56, 79, 177
Certificate, <'t deposit, 145, 165
of incorporation, -4<j
of protest, 195
Certified checks, 199
Champerty, 30
Chancery court, 7
Charter of a corporation, 249
Charter party, 1 1 2
Chattel, personal, 4, 294
real. 4, [98, 199. 294
Chattel mortgage, 302
Checks, 50, 136, 144. 166
Chose in action, 4, 62, 66, 294
Clayton Act, 31
Clearing house, 136
Clearing-house certificates, 137
Clubs, 207
CO. I), sales. 74
Codification, 2
Collateral security, 97, 172
Commercial agencies, 136
( 'ommodatum, 92
Common carriers, 107-116
Common law, 2
Communication, of acceptance, 14
of offer. 14
of revocation, 16
Community property, 269
Compensation, in agency, 213
in bailment, 101, 102
in corporations, 253
in partnership, 239
Complaint, 8
Composition with creditors, 21
Compound interest, 141
Concealment, 36, 128
Conditional sales, 63
Confusion of goods, 91, 300
Consent, reality of, 33-37
Consideration, 19-23, 26, 63-66, 90,
150, 161, 173
Constitutional law, 3
Contracts, 5, 1 1-59
of bailment, 90-1 18
of carriers, 109-1 12
negotiable, 159-199
Contracts of guaranty, 149-157
of insurance, 122-134
of sale, in 89
to sell lands, 274, 275
Contribution, 125, 132, 156
Conveyances of lands, 276
Corporations, 207, 236, 248-259
Corporeal property, 4, 262
Coupons, 169
Courts, 6, 7
admiralty, 8
equity, 7
law, 7
Covenants, 276, 2S8
Credit, 136
Creditors, of a corporation, 257
of partnership, 241-242
Criminal law, 3, 27
Crops, 25, 67, 271
Cumulative voting, 253
Currency, 137
Current funds, 137
Curtesy, estate of, 265
Custom, 2, 48, 218
Damages, 54, 81, 84
Date of bill or note, 173
Days of grace, 161
Death, 17, 48, 53, 97, 154, 212, 242,
263
Deceit, 5, 35
Deed, 19, 276, 27S
Defenses to negotiable instruments,
179-181
Del credere agent, 2 1 6
Delegation by agent, 215
Delivery, by carrier, 1 1 1
of deed, 276
of negotiable instrument, 174
by seller, 75
Demand bills or notes, 177, 189
Deposit (ttepositum), 92
Deposits in banks, 104, 144
Description, sale by, 70, 77
Directors of a corporation, 253
Discharge, of contract, 13, 49-58
of guarantor, 152-155
INDEX
315
Discharge, of mortgage, 2S2, 287
Discount, 145
Dissolution, of corporation, 258
of partnership, 242
Distress, 292
Dividends, 256
Divisible contracts, 32,' 53
Dormant partner, 23S
Dower, 265
Draft, 167
Drawee of bill, 163, 172, 184
Drawer of bill, 163, 186
Duress, 36
Earnest money, 24
Easements, 274
Emblements, 271
Employers' liability acts, 229
Equitable estates, 269
Equity courts, 7
Escrow, 277
Estates, 4, 261, 264-269, 296
of inheritance, 264
for years, 265, 288
Estoppel, 131, 218
Exchange, 138
Executed contract, 14
Executed sale, 62
Execution, 9
Executory contract, 14
Executory sale, 62
I'.xpress contract, 1 \
Express warranty, 76
Factor, 219
Factors Ai ts, 63
Federal reserve bank notes, 138
ral reserve banking system,
143
Federal Trade Commission, ;i
ral Uniform Hills of Lading Ai 1.
1 12
Fee-simple 1 264
Fee-tail
Fellow servant, 228
Fences, 273
Fidelity insurance, 124
Finder of lost property, 91, 297
Fire insurance, 124
Fitness, warranty of, 78
Fixtures, 271-273
Foreclosure, 98, 282
Foreign exchange, 138
Forgery, 1S0, 211
Forms of documents :
Acceptances of bill, 182
Assignment, of contract, 39
of mortgage, 286
Bill, of exchange, 163
of lading, 1 13
of sale, 65
Bills in a set, 164
Bond, 27, 168
Bond coupons, 169
Cashier's check, 167
Certificate, of deposit, 166
of incorporation, 249
of protest, 195
Certified check, 167
Check, 166
Contract, 37-39
Contract of sale, 69
Discharge of mortgage, 2S7
( ruaranty, 1 56
Indorsements, 176
Land contract, 275
Lease, 289
Letter of credit, 183
Mortgage, 284
Noti< e of dishonor, 197
Partnership agreement, 2 \.\
Power of attorne) . 209
1 imissoi v note, 165
Protested note. I I ii .
Tuts and ( alls, 29
Sto( k < ertificate, 251
insfer of ato< k 1 ertifii at< . 1
\\ arrant) deed, 278
Will. .-Si
Fraud, 15, 6
Fraud . Statute ■ I
/ ///1 industrialety
316
INDEX
Frtuhu natumUs, 270
Fungible goods, 72
Futures, 29
Gambling contracts, 28, 33
Garage keepers, 103
General agent. 218
General average, 13;
General manager, 254
General partnership, 236
Gift, 300
causa mortis, 301
inter vivos, 300
Good faith, 128, 178, 215, 238
Good will, 243, 296
Goods, 62, 66
Grace, days of, 161
Gratuitous agent, 216
Gratuitous bailment, 93-95
Gratuitous promise, 19
Guaranty, 38, 149- 1 57' '88
Guaranty insurance, 124
Guests of an innkeeper, 105
Habendum, 277
Heir, 280
Hereditaments, 263
Hiring in bailment, 92, 99-104
Holder in due course, 177-181
Homestead estate, 265
Illegality, 22, 27-33, J 55
Implied contract, 14
Implied warranties, 77-79
Impossibility of performance, 51-53,
213
Incorporeal property, 4, 262
Indefinite agreements, 13
Indemnity, 125, 150, 155, 214
Indivisible contracts, 32, 53
Indorsement, 175-177
Indorser's contract, 186-188
Infants, 17, 155, 207, 238
Initial carrier, 11 1
Injunction, 11, 45
Innkeepers, 104-107
Insanity, 18, 207, 213, 242
Insolvency, 56, 57
Insurable interest, 127
Insurance, 30, 122-133, 232
Interest, 140-141, 146
International law, 3
Interstate Commerce Act, 31, 108, no,
1 1 1
Intoxication, 19
Irregular indorser, 187
Irrevocable agency, 213
Joint agents, 208
Joint obligations of partners, 240
Joint and several obligations, 240
Joint tenancy, 268
Joint-stock companies, 235, 243
Judgment, 8, 283
Land, 262, 270
Landlord and tenant, 288-292
Lateral support of land, 273
Law, 1-3
Lease, 288-292
Legal-tender money, 50, 137, 138
Letter of credit, 184
Levy, 9
Libel, 5
Lien, bailee's, 103
Liens, factor's, 219
garage keeper's 103
on property, 283
seller's, 82
Life estates, 264
Life insurance, 123
Limitation of liability, no
Limited partnerships, 238
Loans, 145
Lobbying contracts, 30
Lost property, 90, 297
Mail, notice of dishonor by, 192, 193
offer by, 14
Maker's contract, 181
Mandate (mandatum), 92
Marine insurance, 124, \\2
INDEX
317
Married women - , 19, 49, 207, 23S, 2S0,
302
Master and servant, 22S-232
Memorandum of sale, 6S
Minerals, 270
Misrepresentation, 35
Mistake, 33
Money, 137
Moral obligation, 20
Mortgage, 147, 2S2, 302
Mitiuum, 92
Names, 296
National banks, 142
Necessaries, 17, 18, 212
Negligence, 5, 94, 96, 98, 100, 103, 104,
106, 117, 11S, 125, 216, 227-232
Negotiability, 47, 162, 170-173
Negotiable instruments, 159-199, 221
Negotiable Instruments Law, 170
Negotiation, 175
Next of kin, 282
Nonvital term, 54, 55
Notary, 194-196
Notice, of defect in bill or note, 179
of dishonor, 191-194, 197
by guarantee, 151
Noting of protest, 196
Novation, 12
Obligation, 5
Occupancy, title by, 297
Offer and acceptance, 13-17
Officers of a corporation, 253
Open policy, 123, 125
Opinion, 36, 77
Option contracts! 16, 29
Orphans' court, 7
QSible partner. 2 37
Overdue bills or notes, 177
Part payment, 68
ncrship agreement, 244
Partnership real est
nerships, 208, 2 55-2
' I
Past consideration, 21
Pawn. See Pledge
Pawnbrokers, 99
Fayment, 6S, 76, 140
for honor, 191
of smaller sum, 21
Performance of contract, 50, 75
Personal property, 294-302
Pledge, 97-99
Policy, of insurance, 123
open, 123
valued, 123
Power of attorney, 209, 217, 252
Power coupled with an interest, 213
Powers, of an agent, 217-222
of a corporation, 254
of a partner, 239-240
Preferred stock, 256
Presentment for acceptance, 185
Presentment of bill or note for pay-
ment, 18S-191
Price, 66, 84
Principal, and agent, 205-223
and third party, 217-223
Probate court. 7
Procedure in courts, 3, 8, 9
Promissory note, 165
Property, 4
in goods, 62
in lands, 261-292
in personalty, 294-302
Protest, 194-198
Provisions, sale of. 79,
Public enemy. 10S
Purchaser in due course. 63, 177
Puts and calls, 29
Qualified acceptance of bill of
change, 181
of offer, 1 5
lifted Indorsement, 175
<,)u.isi . ontracts, 6
Quiti laim deed,
Ratifii adon, 18, 210 .• 1 1
1
I :pt, 140
KCCI :
ex
318
INDEX
Receiver's certificate, 258
Reexchange, iqS
Referee 111 c.isc of need, 1S4
Reinsurance, 124
Release, 1;,, 49
Remainder, estate of, 267
Remedies, for breach of contract, 54,
for breach of contract of sale,
cSi-85
for breach of warranty, 80
of corporate creditors, 257
of firm creditors, 241-242
of landlord, 291
Rent, 291
Repairs under a lease, 290
Report of corporation, 257
Representations in insurance, 129
Resale, 82-S3
Rescission, 49, 83
Restraint of trade, 31
Restrictive indorsement, 176
Re%'ersion, estate of, 267
Revocation, of agency, 212
by guarantor, 153
of offer, 16
Reward, offer of, 14, 22
Risk by servant, 229
Risk of loss of goods, 74
Safe-deposit company, 104
Sales of goods, 61-85
Sample, sale by, 78
Savings banks, 143
Seal, 25, 173, 210
Sealed instrument, 20, 25, 221. See
Deed
Security for loans, 146
Seller's duties, 75
Seller's lien, 82
Servant, 227-232
Sherman Anti-Trust Act, 31
Simple contract, 19
Slander, 5
Special agent, 218
Specialty, 19
Specific goods, 70-72
Specific performance of contracts, 12,
55
Standard fire-insurance policy, 131
Start decisis, 2
State banks, 142
Statute law, 2
Statute of Frauds, 23-25, 66-69, 150,
210, 288
Statute of Limitations, 22, 24, 27, 55
Stock certificate, 251
Stock corporations, 248
Stockholders, 250, 255, 257
Stoppage in transitu, 82
Subagent, 208, 215
Subletting by tenant, 291
Subrogation, 125, 133, 156
Subscriptions, 21
Substantial performance, 50
Substituted contract, 49
Suicide, 126
Surety, 149, 154
Surrogate's court, 7
Telegraph companies, 118
Telephone companies, 118
Tenancy, in common, 268
by entireties, 269
joint, 268
by sufferance, 266
at will, 266
from year to year, 266
Tender, 50, 140
Tenements, 263
Third party, in agency, 217-223
to contract, 45-46
Title, to goods, 62-66, 69-74
to lands, 276, 291
warranty of, 77
Title insurance, 124
Torrens system, 283
Tort, 5, 45, 227-232
Trademarks, 295
Treasure-trove," 297
Trees, 25, 270
Trespass, 5, 273
Trust, 6, II, 269, 302
Trust companies, 142
INDEX
Ultra vires acts, 255, 256
Unascertained goods, 72-74
Undisclosed principal, 220-222
Undue influence, 37
Uniform Bills of Lading Act, 112,
161
Uniform Sales Act, 25, 54 , 6i, 66, 67,
74- 79- 80, 161, 271
Uniform Stock Transfer Act, 250
Uniform Warehouse Receipts Law,
104, 161
Unilateral contract, 14
Usury, 140
Value, 20, 63, 178
Valued policy, 123, 12;
Vegetable products, 270
Verdict, 8
Vice principal, 228
Vital term, 54
319
Void contracts, 17, ,S, 207. See Illegal
contracts
Voidable contracts, 17, 18, 207
Wagering contracts, 28, 125
Waiver, 49, 131,173.176,190,103
Warehouseman, 103, 104
Warranty, 36, 54
of authority. 222
of goods, 76-81
in insurance, 129
in lease, 288
in sale of bill or note, 1S6
of title, -jj
Warranty deed, 276, 278
Waste, 290
Waters, 270, 273
Wharfinger, 104
Will, 277, 2X1
Workmen's Compensation, 124, 230
Writing. See Statute of Frauds
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