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 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 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'ntr»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 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* »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 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. ( 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 <■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„//,/■ //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'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.trmii 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. aK!i8*2L\jL HiUctter _ Hie Battery ParkXatioxm-Baxk *°.1¥"1 Amount — Expires, ^ea^&.- *£kh € Min i / /#/-L /a//. &ia£ irUu, AAysa-jMad^^ flr / srsrs*//n/fsp P JLasl* (% ~.?A 4~ Atw •Sy^fc i/inmtefctjr/y s/i /Y'//i///rJ/J>// /vrs/rj, s/ sy/t y s/ 4//s ////r-rrr , ,JS/s /r/nr///u/ty /*//?//// ////.) f -c ti h * *W£_ - Mr&t/dtn/n >.'untfarU&>/&vefii '■»*/,# '/ss/r /m 4/v/r/'//Y me r/rrr/) Wrr////' /, ////) 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 >|) 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 Xtpwaiv\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. (A 6 X 4-1 O c 1m 3 O pi J m 1- . rv •— « W u s ^ 3 d W> . to O ^ ~ < .S O c ►— 1 3 J >> > °> O a "8 J3 rt 1- Ph > 4_> Ph O > K* ■ £ 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 ,. 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 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. ) 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 '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 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