207 HIGH SCHOOL THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW GIFT OF Harold E. ives WILLIAM HOWARD TAFT CHIEF JUSTICE OF THE SUPREME COURT OK THE UNITED STATES BURGESS' COMMERCIAL LAW A TEXT BOOK FOR ALL CLASSES OF SCHOOLS AND COLLEGES IN WHICH COURSES ARE OFFERED IN COMMERCIAL LAW BY KENNETH F. B.URGESS A MEMBER OF THE WISCONSIN BAR AND JAMES A. LYONS AUTHOR OF LYONS* COMMERCIAL LAW, ETC. . LYONS & CARNAHAN CHICAGO NEW YORK T COPYRIGHT, 1915, 1921, BY LYONS & CARNAHAN - - .- PREFACE Those who compose classes in commercial law are, as a rule, without business experience, in fact, without much of any sort of experience in life. The subject consists almost wholly of a study of business situations and relations that have been unthought of by the pupil. Given a certain state of facts; the law is a state- ment of the rights and obligations of the parties growing out therefrom. It is therefore of itself a generalization. To be com- prehended the particulars on which it is founded must be clearly understood, for a knowledge of the particular in this case must precede a knowledge of the general. The subject is therefore not an easy one to teach and the teacher needs every aid he can secure from his textbook. In the ^ preparation of this book both the teacher and the pupil have been kept constantly in mind; classroom conditions have been ever before the authors. The experienced teacher comes to know where pupils have difficulty and what they comprehend without great effort. A knowledge of these matters has enabled the authors to give unusual attention to many topics in the text that have in the past given some trouble to teachers. It has also been found that some very important matters of frequent occurrence in business have not heretofore been men- tioned in any text. Such topics as the standing of the merchant's rule in case of partial payments; when a creditor is entitled to annual interest and when not; when title to goods passes in case of C.O.D. shipments, are but illustrations. These and many others like them are considered in this text in an authoritative manner. It is believed that this text will be found to be well balanced, giving proper attention to each topic; and above all things the authors express their confidence in the superior teaching quali- ties of the book, fully believing that a textbook is valuable not so much for what it contains as for what the pupil may be able to get from it and make his own. The time allotted to the study of Commercial Law varies widely in different schools. Burgess' Commercial Law is designed iii IV PREFACE to meet the needs of the average school in this respect. For schools that devote unusually short periods to the subject, or where the time allowed is unusually limited, the authors suggest the omission of chapters XXXI, XXXII, XLI, XLII, XLIII, and XLIV. It is believed that it will be much better to omit bodily the topics treated in these chapters than to attempt to shorten the course by hasty work throughout. CONTENTS CHAPTER Contracts in General PAGE I. Kinds of Law 1 II. Property 7 III. Contracts 11 IV. Competent Parties 21 V. The Agreement 30 VI. Consideration 40 VII. Subject Matter . . . 47 VIII. Discharge of Contracts 52 IX. Discharge of Contracts by Breach 62 X. Remedies 69 XI. Special Defenses 74 XII. Miscellaneous Matters 85 Negotiable Instruments XIII. Negotiable Instruments 93 XIV. Drafts . 104 XV. Checks 112 XVI. Notes 119 XVII. Holder in Due Course 126 XVIII. Transfer 135 XIX. Presentment for Acceptance 144 XX. Presentment for Payment 151 XXI. Interest 160 Guaranty and Suretyship XXII. Guaranty and Suretyship 167 Sales of Personal Property XXIII. Sales of Personal Property 178 XXIV. Form of Contract of Sale 184 XXV. Transfer of Title 191 XXVI. Transfer by Bills of Lading and Warehouse Receipts . . . 200 XXVII. Warranties 207 XXVIII. Remedies of Parties 212 Bailments XXIX. Bailments , . . . 218 XXX. Bailment for Benefit of Bailee 225 XXXI. Bailments for Mutual Benefit Hire 231 XXXII. Exceptional Bailments 238 V VI CONTENTS CHAPTER Agency PAGE XXXIII. Agency 248 XXXIV. Agency Duties of agent 256 XXXV. Agency Duties of principal 262 XXXVI. Agency Liabilities of third persons 269 Partnership XXXVII. Partnership 275 XXXVIII. Partnership Authority of partners 282 XXXIX. Dissolution of Partnership 288 Corporations XL. Corporations " 296 XLI. Corporations, continued 310 Joint Stock Companies XLII. Joint Stock 'Companies 318 Insurance XLIII. Insurance 320 XLIV. Insurance, continued 329 Real Estate XLV. Real Estate 337 XLVI. Real Estate Conveyances Deeds 347 XLVII. Real Estate Conveyances Mortgages 358 XLVI 1 1. Real Estate Conveyances Leases 367 Index 375 Appendix 381 BIBLIOGRAPHY It may at times be found advantageous to supplement the discussion in the text with reference books. The student may often obtain access to such books in a law office or law library. If these sources are not available, the following books are suggested as appropriate for reference. The pub- lisher's name is shown in parenthesis following the name of the author. These books may be purchased through any standard law book dealer, and second hand copies may often be secured. One book on a subject will be found sufficient. CONTRACTS p rice Harriman, E. A. (Little, Brown & Co., Boston, Mass.) $3.00 Clark, W. L. Jr. (West Publishing Co., St. Paul, Minn.) 3.75 NEGOTIABLE INSTRUMENTS Norton, Ed. by Moore & Wilkie (West Publishing Co., St. Paul, Minn.) . 3 . 75 Bigelow, M. M. on Bills and Notes, (Little, Brown & Co., Boston, Mass.) 3.00 GUARANTY AND SURETYSHIP Spencer, E. W. (Callaghan & Co., Chicago, 111.) 4.00 SALES Burdick, F. M. (Little, Brown & Co., Boston, Mass.) 3.00 BAILMENTS Goddard, E. C. "Outlines" (Callaghan & Co., Chicago, 111.) 2.50 Schouler, J. (Little, Brown & Co., Boston, Mass.) 3.00 AGENCY Mechem, F. R. "Outlines" (Callaghan & Co., Chicago, 111.) 2.00 Tiffany, F. B. (West Publishing Co., St. Paul, Minn.) 3.75 PARTNERSHIP Mechem, F. R. (Callaghan & Co., Chicago, 111.) 2.50 Burdick, F. M. (Little, Brown & Co., Boston, Mass.) 3.00 CORPORATIONS Marshall, W. L. (Callaghan & Co., Chicago, 111.) 5.00 REAL ESTATE Tiedeman, C. G. (F. H. Thomas & Co., St. Louis) 6.00 Goodwin, F. (Little, Brown & Co., Boston, Mass.) 4.00 LAW DICTIONARIES Anderson, W. C. (T. H. Flood & Co., Chicago, 111.) 5.00 Cyclopedic Law Dictionary (Callaghan & Co., Chicago, 111.) . . . . .6.00 vii GENERAL OUTLINE OF MUNICIPAL LAW of which Commercial Law is a part {1 . National 2. State {a. Civil b. Criminal II. Statute (a. Civil b. Criminal {1. Civil [a. Suits at law enforced by < 2. Criminal (b. Suits in equity BURGESS' COMMERCIAL LAW CHAPTER I KINDS OF LAW 1. Law is a rule of action or conduct, prescribed by an authority able to enforce its will. Law is in its nature a command. The head of the family, who in the most ancient times regulated its encampments and employments, was among the first of "law-givers," and his direc- tions, being the orders given by one who had power to enforce them, were the earliest "laws." If his laws were not observed he provided a suitable penalty, and his power to inflict the penalty gave him indirectly the power to enforce the law. 2. The Object of Law is to protect persons in the enjoyment of their rights and to punish others who interfere with these rights. The rules of action or conduct, of which law consists, define, limit, and protect the rights of the individual living in organized society. A person of suitable age has a right to attend a public school, because the law declares that he may do so. His father has a right to vote for public officers, because the law has given him this right. Each person has thousands of these law-given rights. He has among other things, the right to life, the right to liberty, the right to marry, the right to acquire property, and the right to make contracts. Each time that the law declares that one person may have certain rights by conforming to certain standards, it likewise declares that other persons must respect these rights. The object of law being therefore to define rights and to protect persons in their enjoyment of these rights, it is essential that our inquiry be directed in every instance, not only to determining what the law is, but to discovering the individual's rights and duties in respect to the law. 1 2 KINDS OF LAW 3. Municipal Law* is that body of rules which govern the conduct of the individual, prescribed by the supreme power in the state, f commanding that which is right and prohibiting that which is wrong. If the law-giving authority is the state, then the rule which it prescribes is termed "municipal" law. The word "municipal" is a survival of the language of ancient times when the city (municipality) was the supreme power, as were Athens and Rome. In modern times the term is applied also to laws prescribed by nations and independent states, as England, the United States, Illinois, or Texas. That municipal law is necessary to the existence of a state, or other gov- ernment, is seen when one realizes that without laws the state could not be kept together. It would be only an unorganized mass of individuals. In such unorganized society there would be present a tendency on the part of some individuals to be unjust to others. In order to protect itself, and to protect the individual, society must group itself into units, or states, with power to create and enforce municipal laws. 4. Extent of Laws. Each unit, which may be either a nation or the sub-division of a nation, must have its own laws governing the conduct and property of individuals within its boundaries. It follows that the laws created by a unit of society can be enforced only within its boundaries, and have no appli- cation to persons residing in other units, except when they come within its boundaries to reside or to transact business. 5. Kinds of Municipal Law. In our own country there are three kinds of municipal law, namely, (1) Constitutional Law, (2) Statute Law, and (3) Common Law. They are here stated in the order in which they have precedence when they conflict. 6. Constitutional Law is that body of laws which enumerates the rights and limitations of the government, the mode of * The terms "Natural" and "Moral" Law are frequently employed, but the use of the word "law" in such connection is with a meaning different from that in which it is used in this text. A discussion of International Law is also omitted from the text for the reason that its source, manner of enforce- ment and rules are of little value to the business man or to his correct under- standing of the principles of commercial law. t The term "State" must not be understood to be restricted to one of the political units of the United States, but to have that broader meaning that includes any political body of people who are united under one government, whatever the form of it may be. KINDS OF LAW 3 exercising those rights, and the relation of the sovereign state to the citizen. In the United States there is a divided sovereignty. When the original states met to form the Union, they voluntarily surrendered some of their rights to the Federal government, keeping the remainder to themselves. In the Federal constitu- tion, which they formed, they enumerated the powers which the new Federal government should have, and strictly limited it to these specified powers. The powers and rights which were not expressly delegated to the Federal government in this Federal constitution were reserved to the states. Each state also has a constitution which represents the will of the people of the state, declaring and limiting the powers of the state toward its citizens. 7. Statute Law is that body of rules of conduct and action enacted by the legislative body of a state or nation, by virtue of the powers given in the constitution. These usually take the form of defining the rights and duties of persons toward each other and toward the state. When it is desired that new rights and duties should be defined and created, a bill is presented before the legislative body. If it is adopted by the legislative body and approved by the executive officer of the unit of government, the bill becomes a statute and is binding on all persons within the boundaries of the unit declaring it. Thus if the Federal government desires to create a law regulating train service between two states, a bill to this effect may be passed by the U. S. Congress. When approved by the President the bill becomes a new Federal statute, which will then be binding on the railroads. Or if a state desires to regulate the sale of cigarettes within its boundaries, a bill to this effect may be passed by the state legislature. When approved by the governor the bill becomes a state statute, which will be binding on all persons within the state. 8. Common Law. Not all rights and duties as between individuals have been defined by either state or Federal statutes. When no statute exists so defining these rights and duties on a particular subject, a body of rules of conduct and action known as the common law applies. This common law is also called the unwritten law, because it is not formally expressed as is statute law. It is found in the reported decisions of the courts. It 4 KINDS OF LAW came into existence at an early day when English courts were frequently called upon to decide disputes about matters which were not covered by statutes. The courts decided these matters on principles of justice, and when a similar case again came before the court, it decided this in the same way that the previous case had been decided. The policy was thus established of looking back to see how former disputes of a similar nature had been decided, and when a decision was found on a similar point it was caHed a precedent. The general body of the common law consists of these precedents. The following will show how the different states adopted the English law. "That the common law of England so far as the same is applicable and of a general nature, and all statutes or acts of the British parliament made in aid of, and to supply the defects of the common law, prior to the fourth year of James the First, and which are of a general nature and not local to that kingdom, shall be the rule of decision, and shall be considered as of full force until repealed by legislative authority." Act of the General Convention of Delegates of the Colony of Virginia, held at Williamsburg, Monday, May 6, 1776. Similar statutes have been passed by most if not all of the states except Louisiana, which being colonized by the French adopted the system of law in vogue in France, known as the Civil Law* 9. Order of Precedence. The Federal constitution con- sists of an enumeration of certain rights and powers relinquished by the states to the general government; it is, therefore, the supreme law of the land in regard to all matters contained in it. The Federal statutes, being made in strict accordance with the constitution, must necessarily come next in order. The states, as we have seen, reserve to themselves supreme authority on many questions; they have also placed numerous restrictions upon their own government. In regard to all these matters the state constitutions of the several states are supreme in authority. State statutes made in accordance with the state constitution are next in authority. The common law applies when there is no constitutional law or statutory law which will apply. When there is a conflict between a statute and the common law, the statute takes precedence. * The term Civil Law as employed in this connection is used only in the sense of distinguishing it from the Common Law of England. KINDS OF LAW 5 Since the common law is in force wherever there is no statute upon a sub- ject, it supplies what in many cases would be a great deficiency in our statute law. No legislature could possibly foresee and provide for all the possible contingencies and difficulties that could, and do, arise in the business relations of a complex civilization. 10. Courts. Their Function. Not only has organized society adopted a body of rules of action and conduct, but it has provided a means by which these rules can be enforced. The organized instrumentalities for interpreting and enforcing laws are called courts. A court has three functions. These are, (1) to decide in case of dispute what the law is, (2) to punish persons who violate the law, and (3) to compel one person to render justice to another. Federal statutes are usually enforced by Federal courts only, ^hich courts also decide matters arising under the Federal constitution, and disputes between citizens of different states. State courts enforce the state statutes, decide questions arising under the state constitution, and interpret and enforce the common law in cases that come under the jurisdiction of the state. In the present text we shall study only questions of civil law as distinguished from criminal law. Criminal law defines, and provides penalties for, offenses against the state and society at large; civil law regulates the conduct of individuals towards each other. Both are often enforced by the same courts. We shall treat of the courts as deciding the questions which may arise between business men, but the student must bear in mind that the courts of the present do not make the law that is the function of the legislative branch of our government. Courts merely interpret and enforce the law A suit at law is the method by which a dispute over legul rights and duties is brought before the court. It is the method by which one person, who believes his rights to have been violated by another, may compel the latter to come before the court to have decision made in the matter. If it be decided that a right has been violated, the person who has been injured is given an appropriate remedy. The term suit at law is sometimes used in a more restricted sense as distinguished from a suit in equity. The word equity means justice. Equity courts are special courts to which are 6 KINDS OF LAW taken disputes in which substantial justice can not be secured under the statutes and precedents by which courts of law must be guided. Today the chief distinctions between a suit at law and a suit in equity is that the former is usually tried by a jury, the latter by a judge; and that in the former money damages are usually the only remedy, while in the latter the remedy may be of a more personal nature, as compelling a man to do that which he prom- ised to do, called remedy by specific performance, or prohibiting him from doing something unlawful which he threatens to do, called remedy by injunction. Equity courts also deal with matters of divorce, mortgages and trusts. The distinction is of little practical importance to the business man except that he should understand the nature of the remedy which he may secure in the different courts. Some matters can be tried by a suit at law only; some by a suit in equity only; some by either as the person injured may elect. 11. Commercial Law is that part of municipal law applicable to business transactions. It is not an isolated branch of law, but includes a variety of topics whose only relation to each other is that they are all of importance in the transaction of the ordinary affairs of commerce. It is the existence of law which differentiates civilized from barbaric society. Because of law the man of business dares to engage in ventures which may bring him no immediate return. He dares to acquire property, to place his money in the bank or to invest it in commercial undertakings, to agree to buy and to sell commodities in the future. Without law and law-defined rights he could not safely do any of these things. It is therefore of importance for every business man to know the municipal law in so far, at least, as it deals with the affairs of commerce. CHAPTER II PROPERTY (1. Real I. Kinds < (a. Things in possession (2. Personal < (b. Things in action {1. In possession 2. In expectancy III. How held 1 . In Severalty 2. In Joint Tenancy 3. In Tenancy in Common 4. By Partners 5. By Corporations 6. By Joint Stock Companies 12. Property in its legal sense is anything to which one has title. A property right is the power or dominion over a thing to the exclusion of others. Property is not, as commonly sup- posed, the thing itself, but is the right to the thing. By the ownership of property one is given the right to use, enjoy, and dispose of it, without any limitation except that it must not be used to the injury of another, or contrary to law. That one is possessed of a property right may be evidenced by actual physi- cal control, or the evidence may consist merely of an instrument of title, that is, some legal document in writing, such as a ware- house receipt, a deed, a note, or a bill of lading. Actual pos- session is not necessary to establish a property right. 13. Property may be either real or personal. Real property, realty, or real estate, includes all property which is fixed or immovable, such as land, together with what is permanently attached to it, or is built or growing upon its sur- face, and the minerals which are beneath the surface. Things 7 8 PROPERTY which are annexed to the soil or the building, with the intention that they shall become permanent improvements, or things which cannot be removed without injury to the soil or buildings, are also real property, and are called fixtures. Such are chim- neys, pumps, fences, and the like. There are three apparent exceptions to the rule that things annexed to the land become real property. These are where the thing so annexed is (1) a trade fixture, (2) a domestic fixture, or (3) an agricultural fixture. Such things are installed by the occupant for his own convenience while he occupies the premises. He may remove them at any time before he leaves. But if he surrenders possession of the land without removing them, even such things are considered to be real property and may be treated as such by the person to whom he has surrendered possession. EXAMPLE Josslyn rented a store of McCabe and put into the store shelving loosely attached to the walls, to hold dry-goods. When Josslyn moved to another store he left this shelving, intending to remove it later, but when he attempted to remove it McCabe refused to allow him to do so. In a suit at "law, the court decided that McCabe was right, and that, although the shelves were trade fixtures and could have been removed by Josslyn so long as he had pos- session of the store, he lost his right to remove them when he surrendered possession and they were then to be treated as annexed permanently to the land and as real property. Josslyn vs. McCabe, 46 VVis. 591*. 14. Personal property is anything that is movable, that a person may take with him wherever he goes. The legal term "chattel" is often used to designate an article of personal prop- erty. Trees while growing upon the land are usually considered real estate, but when cut and lying as logs or lumber, they are personal property, or chattels. Similarly, minerals while yet in * This is the uniform -method adopted by all legal text-books in referring to a decision rendered by a supreme court of a state or nation. The first figure refers to the volume and the last to the page. In the above example this case will be found in volume 46 of the supreme court reports of the state of Wiscon- sin on page 591. Similarly, 91 U. S. 52, refers to volume 91 of the supreme court reports of the United States on page 52. The terms "N. W.", "N. E.", "Atl." etc., refer to a collected series of state reports in which the decisions of several states in a section of the country are bound together in one volume. For example, the N. W., or Northwestern reports, include thj states of Iowa, Nebraska, Minnesota, North Dakota, South Dakota, Wisconsin, and Mich- igan PROPERTY 9 the earth are a part of the realty, but when dug and thrown out on the ground they become personal property. It is therefore evident that a thing which is personal property may become real property, by being permanently annexed to the land or buildings, and also that a part of the real estate may be severed and become personal property. 15. Personal property is divided into things in possession and things in action. Things in possession are those things % which the owner not only has the right to, but also actually possesses. All material objects, such as money, tools, garments, or vegetables and plants when not growing in the ground, and all domestic and tame animals, may be things in possession. Things in action naturally include all those things to which one has merely a right, but not the actual possession. This name is given them because at the proper time the owner may, if he wishes, bring an action at law to give him possession of them. All forms of indebtedness, whether evidenced by notes or on account, are things in action. EXAMPLE 1. If A has a thing in possession, as a horse, and sells it to B, taking B's written promise that at some future time he will pay $200 to A for the horse, B's obligation to pay, which is evidenced by the note, is a thing in action to A. When the debt is paid, the money is a thing in possession. 2. If Ames injures Bates by striking him wilfully, Bates has a right to recover all the damages which he suffered because of the injury from Ames. This right is also a thing in action, which may by a suit at law be reduced to a right in possession. 16. Time of Enjoyment. It is usual for the person who owns property to have also the right to its present enjoyment, that is, to use it at once if he so desires. There are some instances, however, in which the owner is considered as having a property right in the thing, but his enjoyment of it is postponed until some future time. In such a case his property right is said to be a right in expectancy. For instance, it often happens that a man wills his home to his wife to enjoy during her life-time, and after her death to his son. At the death of the husband both the wife and the son get property rights in the home, but the son's right to enjoy his property is postponed until the wife's death. 10 PROPERTY 17. Property is held in severally when it is all owned by a single individual. It is held in joint tenancy when two or more persons take ownership of the same piece of property at the same time, with the same interest, and by the same written document, or instrument. These joint tenants each own an equal interest, not only in every part of it, but in the whole, and each is entitled to possession of the whole. Each receives an equal share of the proceeds of the property. The striking peculiarity of this way of holding prop- erty is what is called the right of survivorship; when one of the joint-tenants dies, the entire property belongs to the surviving joint-tenant or joint-tenants, until finally the last survivor is entitled to the whole estate. Both real and personal property may be held in joint tenancy, though a joint tenancy in personal property is extremely rare. Joint tenancies were favored by the early common law, but are not now favored in the United States, and in many states* the right of survivorship has been abolished by special statute, in whole or in part. Other states require that unless the intention to create a joint tenancy is clearly expressed, the tenancy will be, considered to be a tenancy in common. Property is held in tenancy in common when two or more owners possess either equal or differing shares in it, without the right of survivorship. On the death of one such tenant in com- mon, his share passes to his heirs, or personal representatives. 18. Property may also be owned by partnerships, corpora- tions or joint stock companies. * Arkansas, California, Iowa, Kansas, New York, Pennsylvania, South Carolina, Ohio, Connecticut, Kentucky, Mississippi, Colorado, and Tennessee. CHAPTER III CONTRACTS 1 . Competent Parties 'I. Essentials J2. Mutual Agreement or Assent 3. Consideration 4. Legal Subject Matter 1. Valid 13. Voidable 4. Unenforceable III. Kinds as to Solemnity 1. Formal, or Contracts under Seal {a. Written b. Oral c. Implied IV. Kinds as to Expression V. Kinds as to Time of Performance< 1 . Express 2. Implied 1. Executory Executed VI. Relation to Each Other fl. Several of Parties on Same <2, Joint Side (3. Joint- and Several 19. Introductory. In the preceding chapter it was stated that one of the law-given rights of the individual was the right to make contracts. Without this right the transaction of present day business would be impossible. The right to make contracts is the basis of even the most minute of the individual's commer- cial activities. When he pays a nickel on entering a street car, when he orders groceries sent to his home, even when he buys a 11 12 CONTRACTS newspaper on the street, he is exercising this right to make contracts. The contract is the instrument, the medium, by which modern business is transacted, and by its use one person may acquire a special control over the acts and property of others. 20. A Contract is an agreement between two or more competent parties, based upon a sufficient consideration, to do or not to do some lawful, possible thing. This definition con- tains four important essentials, or conditions necessary to create a contract, which are discussed in detail. These conditions are: 1. Competent parties, 2. Mutual agreement, 3. Consideration,* and, 4. Legal subject-matter. For the present it will be necessary to consider a contract only from the standpoint of offer and acceptance, which together make up the mutual agreement. Every offer which is accepted does not become a contract, because the other conditions of the contract relation listed above may not be present. But every contract does consist in its essential parts of these two things offer and acceptance. When Ames offers to sell his horse to Bates for $100, if Bates says, "I accept," then there comes into being a contract. Thereafter if Ames refuses to deliver the horse, Bates may sue him for the refusal ; or if Ames has delivered the horse and Bates refuses to pay, then Ames may sue for the agreed price. At the outset we must conceive of every contract as consisting of these two elements. EXAMPLES 1. Smith says to Jones, "If you will agree to dig my well, I will pay you fifty dollars for your work." Brown, who overhears this statement, says, "I will accept that offer." This does not create a contract, because Smith made no offer to Brown. 2. Baldwin says to Rogers, "I think I would sell my house for $1500." Rogers says, "I accept that offer." This does not create a contract because Baldwin's statement is not an offer. 3. Murphy says to Hawley, "I will pay you seventy-five dollars to paint my house." Hawley replies, "I will accept for ninety dollars." This does not * Consideration is the thing of value which is transferred from one party to the other at the time of making the contract. It may be money, a thing, or a promise. Subject matter is that about which the agreement is made. CONTRACTS 13 create a contract, because Hawley has not accepted Murphy's offer. He has changed the terms of the offer and has in reality himself made a new offer an offer to paint the house for a larger sum. EXERCISE Illustration. Ames meets Bates on the street and offers Bates his watch for $10.00. Bates takes the watch and pays Ames the $10.00. In this case Ames and Bates are the parties; the agreement is for the exchange of property, and is mutual; the consideration is $10.00; and the subject matter is Ames' watch. Analyze the following examples of common forms of the con- tract relation, and select in each example the four necessary elements parties, mutual agreement, consideration, and legal subject-matter. 1. Mrs. Brown goes to the Acme Company and purchases a sewing machine for twenty dollars. 2. Black has contracted to build a house for Simpson for the sum of $3000. 3. Mellen purchases a ticket from the local agent of the C. B. & Q. Railroad Company from Chicago to Minneapolis, paying the sum of $10.22. The detailed rules governing offer and acceptance are dis- cussed in a later chapter. For the present we shall continue to view a contract as an offer by one party which has been accepted by the party to whom it was made. We shall now examine some of the features common to all contracts. 21. Further Classification. Even though we recognize an accepted offer, which creates a contract, we may still know little about a contract unless we determine its 1. Validity, 2. Solemnity, or manner of execution, 3. Mode of expression, 4. Time of performance, 5. Relation to each other of parties on the same side. These will be discussed in order. 22. Validity of the Contract. Frequently persons try and intend to make a valid contract and fail in their attempt because they have neglected to comply with some rule which they should have observed. In that event their contract may be void, voidable, or unenforceable. 14 CONTRACTS If void, it has no standing whatever in the eyes of the law, and is without effect of any kind from the beginning. The parties to it have wholly failed to create any new rights, but stand in precisely the same position as if they had never attempted to make a contract. If voidable, it may be set aside at the pleasure of one of the parties who exercises a right which the other party does not have. A voidable contract may be carried out if the injured party desires to do so; but it is not a valid contract, in the proper sense of the term, because one of the parties may legally refuse to carry out the agreement. If he does refuse, the other party is without power to compel him to perform. If unenforceable, it will not be enforced by the courts if either party objects. An accepted offer may possess all the elements of a valid contract, and yet there may be some statute applicable to this particular case which the makers have failed to observe, and because of this failure neither party can compel the other party to perform his part of the agreement. EXAMPLES Void Contracts. 1. Poole, a dealer in lard, formed a scheme to "corner the market" by securing control of the supply of lard and raising the price. He employed Leonard to carry out the details of the scheme. When Leonard sued Poole for his wages, the court refused to allow him to recover. Such contracts are designed to restrain trade, and are illegal and void. Leonard vs. Poole, 114N. Y. 371. Voidable Contracts. Smith, aged seventeen, offers to buy a horse from Morgan for $200. Morgan accepts the offer. If Smith thereafter refuses to take the horse and pay the money, Morgan can do nothing. This is because Smith was not twenty-one years old when he made the contract, and it is a rule of law that persons under that age, who are called minors, cannot be bound by contracts against their will. The contract in this case is not void, but voidable. If Smith desires to do so he can perform the contract. Unenforceable Contracts. Johnson offers to sell his farm to Mahoney for $5000. Mahoney says, "I accept," but the parties do nothing further. Contracts to sell real estate are not enforceable by action unless some memo- randum is made in writing signed by the parties. If either party refuses to perform his part of the contract, the other party cannot go into court and recover anything the contract is unenforceable. 23. Solemnity. When persons desire to make a contract, they must first decide whether to make (1) a contract under seal, or, (2) a parol, or simple contract. CONTRACTS 15 A contract under seal exists when the parties have written their agreement and placed opposite their signatures a seal. The presence of this seal gives to the contract a formality which it would not otherwise possess. This is because the courts decided at an early time that if the parties to a contract chose to perform this extra act, they showed a delibera- tion and an intent that the contract should be enforced if possible. It was therefore said that such contracts under seal would be enforced regardless of the presence or absence of any consideration. The contract under seal derived its validity from the presence of this seal alone and not from the presence of a consideration. SHAKESPEARE'S SEAL Seals are of ancient origin; they are mentioned often in the Bible.* When few people were able to write even so much as their own names, a seal was used instead of a signature. The body of the contract was written for them by a public writer, and a drop of molten wax or a thin plate of wax, called a wafer, was placed at the end, and the imprint of the maker's seal was made upon it. In order to have the seal always with him, ready for instant use, the owner of it often had it engraved upon a ring. Seals are often indicated by a scroll inside of which the word "Seal" is written or typewritten. The necessity for seals has long ceased to exist, yet when called upon to determine the rights of parties to a contract the courts of most states will recognize a difference if the contract be under seal. This difference will be more particularly noted under our later discussion of Consideration in Contracts. For the present it is sufficient to say that a contract under seal is the only formal, or solemn kind of contract known to the law, and that its use at present is confined almost exclusively to contracts for the sale and transfer of land. In such cases the seals usually appear in one of the following forms: Name of party to be written here or Name of party to be written here * I Kings, Chap. 21. Daniel, Chap. 6. Esther, Chap. 8. Jeremiah, Chap. 32. 16 CONTRACTS Contracts by parol (parol, a French word meaning "word, or promise") are all contracts not made under seal. They depend for their validity upon the presence of a legal consideration. They may be by word of mouth or in writing. It is preferable to make all contracts in writing, because thereafter there dan be little opportunity for dispute as to the exact words used, but written parol contracts have no greater solemnity than oral ones. Throughout our treatment we shall designate parol contracts as simple contracts, because no particular formality is necessary in their execution. EXAMPLES 1. Crookshank offered to employ Burrell to repair a wagon and promised to pay him $25. Burrell accepted the offer and did the work. The entire agreement was verbal. This was a valid parol, or simple, contract. It was also an oral contract. Crookshank vs. Burrell, 18 Johnson (N. Y.) 58. 2. Shores offered to sell some growing timber to Emerson, who accepted the offer, and the parties signed the following writing: "This is to certify that I have sold the timber growth on my fifty-acre lot to Emerson for $85. Signed C. D. Shores, Accepted Stephen Emerson." This was a valid parol, or simple, contract. It was also a written contract. Emerson vs. Shores, 95 Maine 237. 24. Mode of Expression. Contracts may be either (1) ex- press, or, (2) implied. An express contract is one whose terms are stated and agreed to by the parties. It may be either written or spoken. An implied contract is one whose terms are inferred from the acts of the parties. EXAMPLES Express Contracts. Burr offers to construct a woodshed for Abrams for $200. Abrams accepts the offer, and Burr proceeds with the building of the woodshed. Abrams thereupon becomes bound to pay Burr the agreed price. This result will follow regardless of whether the contract was written or entirely oral. It is a simple express contract, and if Burr performs his part, i.e., the construction of the woodshed according to agreement, then Abrams becomes liable to pay the $200, even though it should afterwards develop that the work was only worth SI 25. It is to be noted in this connection that in express contracts the parties are bound by the terms in which they make their offer and acceptance. CONTRACTS 17 Implied Contracts. 1. Jones, being ill, telephones Dr. Brown to come and attend him. Dr. Brown does so and on Jones' recovery sends him a bill for $500 for services. Although no actual express contract was made, Dr. Brown can collect this $500 provided his charge is a reasonable one. This result follows because the law implies a promise on the part of Jones to pay the reasonable value of Dr. Brown's services, for it was at Jones' request that the services were rendered. Jones is not held, however, to pay whatever Dr. Brown may choose to charge, but only to pay a reasonable charge. That is the only contract which the law will imply. 2. Adams, who is going away for the summer, calls across to his neighbor. Moore, and says, "You might turn your hose on my flowers once in a while, Moore, if you feel like it." Moore does so, and on Adams' return presents a bill for $25. Here no contract will be implied, because the whole transaction will be viewed as a neighborly act for which no pay was intended, or expected. As there was no express contract, and as the law will not imply a contract from the acts of the parties, Adams need not pay the bill. The ordinary contract of a business man is a simple, express contract. It is this kind of contract which we call to mind when we speak of the subject, "Contracts." Yet from the above examples it is to be observed that it is just and proper in many cases to have the law imply a contract, even though there may have been no verbal or written offer and acceptance. Implied contracts are not, however, the ordinary medium of business, and exist only when the acts of the parties show strongly that they must have intended to create a contract. The law will imply such contracts only in the interest of justice. 25. Time of Performance. Contracts may be either (1) executed, or, (2), executory. They are executed, when they are completely performed and nothing remains to be done. They are executory when any condition which either party has agreed to perform remains unperformed. EXAMPLES 1. Ames and Bates agree to exchange horses. If they make the exchange immediately, the contract is executed, because everything is done which each party has, by the contract, agreed to do. Thereafter Bates has the horse which originally belonged to Ames. He owns it and keeps it in his stable. Ames has no rights over it. And similarly with the horse which Bates formerly owned, and which by the contract has become the property of Ames. 2. If, in the above example, the parties agree to exchange horses the Monday following, the contract will remain executory until the time of per- formance, i.e., Monday. During the time when the contract remains execu- tory, Ames keeps his own horse, and Bates keeps his. Each has acquired 18 CONTRACTS merely the right to have the other's horse at a later date, called the time of performance. On account of this difference in the effect of an executed and an executory contract, it is stated by one of the earliest of English law writers (2 Black- stone's Commentaries, 443) that an executed contract conveys a thing in possession (the horse, in the first example above) ; while an executory contract conveys a thing in action (the right of each to have the other's horse at the end of the week, in the second example above.) The time of performance of a contract depends entirely upon the agreement of the parties. It is important because it deter- mines the time when an executory contract should become executed. 26. Relation to each other of parties on same side. While a contract must from its nature have two parties, there may be more. As many persons as desire may, on the one side, contract with either a single person, or a number of persons on the other side. Ames, Bates, and Call may contract with Dale to build the latter's house. The first three are the parties of the one side, and Dale is the sole party of the other side. If there are two or more parties on the same side of a con- tract, that is, who have contracted together on one side of a contract, a new relation is created. They not only have an obligation which they have agreed to perform as to the party, or parties, on the other side of the contract, but they have certain rights and duties as between themselves. Their obligations may be either joint, or several, or joint and several. A joint obligation exists when all the parties on one side of a contract agree to act as a single person. Thus in cases in which the subject matter of the contract is entire, such as a sum of money which is to be paid to a number of specified persons, it is a joint contract as to those persons. The effect of a joint con- tract is that no single one of the persons contracting jointly can sue alone, or be sued alone, for his share. All joint contractors must join, or be joined together, when the contract is sought to be enforced in court. If, however, the contract be to pay to each person a specific sum, or one in which each agrees to perform distinct and separate duties, the contract is said to create a several obligation. In such a contract any one of the parties may sue or be sued alone CONTRACTS 19 for his share. Such a contract would exist in case A, B, and C agreed to pay $500 to D, A to pay $250 of the amount, B $150, and C $100. When, in a written contract, the words, "I promise," or "We, or either of us, promise," or "We bind ourselves and each of us," are used, the obligation is joint and several and any failure to perform the agreement makes possible a suit against all those who promised jointly, or against one or more severally. A joint and several obligation is the most favorable to the person to whom it is made and the most unfavorable to those who make it, because any one of them may be compelled to carry out the whole agreement. The old common law idea was that all con- tracts were deemed to be joint, unless the parties specified that they should not be. This view has been changed by the statutes of some states, so that in them it is presumed that all contracts are joint and several, unless it be shown that the parties specified some other relation. EXAMPLES 1. A group of shareholders in a corporation agreed with Marie to transfer their shares of stock to him and accept in return shares in a new corporation, or a sum of money. Marie failed to pay them for their shares as agreed, and when they sued him the court said that the obligation was joint and that they must all sue him together, because he had agreed to pay them all and not each one severally. The nature of the arrangement was such that the shares might be without value to him unless he received all of them. Marie vs. Garrison, 83 N. Y. 14. 2. Four persons bought a printing press for $1500, payable in four install- ments, each party agreeing to be responsible for one-fourth of the entire sum, or for one installment. One of them was sued alone for his particular install- ment, and the court said that this was proper because the obligation was several and not joint, and no one person could be held liable for more than one- fourth. Larkin vs. Butterfield, 29 Mich. 254. 3. In the last example above if the four persons who agreed to pay for the printing press had signed an agreement as follows: "We, the undersigned persons, or either of us, promise to buy, and pay $1500 for a printing press, in four installments," then any one of them would have been liable for not only a single installment, but for the entire purchase price, and the contract would have been joint and several. 27. Effect of Death of Joint Contractor. Upon the death of a person all debts for which he is individually liable "survive" against his estate, that, is, they are payable out of the property 20 CONTRACTS which he owned at his death. If the deceased was one of two or more parties on the same side of a contract, the liability survives against his estate if the obligation was a several one, or was joint and several. If the obligation was joint, the estate by common law is discharged from liability, but such cases are rare, since the tendency of courts is to regard all contracts where there are two or more parties on one side as joint and several. Some states, notably Massachusetts, New York, Ohio, Tennessee, and Wyoming, have declared by statute that even joint debts survive against the estates of deceased debtors. CHAPTER IV COMPETENT PARTIES All parties are competent except: {1. Insane Persons 2. Intoxicated Persons 3. Spendthrifts II. Legally Incompetent 1 . Infants 2. Married Women 3. Aliens 4. Agents (certain con- tracts only) Corporations (cer- tain contracts only) 28. Who Are Parties. Persons who create, or attempt to create, new rights or obligations in themselves or others by means of a contract, are the parties to it. Ordinarily all persons capable of transacting business may make valid contracts. Exceptional classes of persons, however, are particularly designated by law as being incapable of making contracts, and their attempts to do so result merely in creating voidable, and sometimes void, contracts. Such parties are said to be incapable of making mutually enforceable contracts, because of disabilities. 29. Disabilities. A disability to create valid contracts may exist for either of two causes. These are (1) that the party is mentally incapable, or (2) that the party is legally incapable. The affairs of such persons may be placed in the hands of a guardian (sometimes called a conservator) by order of court. 30. Mental Incapability. If persons who are mentally incapable of protecting their own interests, are parties to con- tracts, such contracts are not enforced against them, but are voidable at their option. Such persons are those who are (1) in- sane, (2) habitual drunkards, and (3) spendthrifts. The result of attempts by such persons to create contracts is explained by the examples under the next section. ?t 22 COMPETENT PARTIES 31. Insane persons. Insane is a general term applicable to any person who is of unsound or deranged mind. It may indicate absolute loss of reason, or partial lunacy. The latter condition is frequently caused by grief, sickness or accident, and the mental capacity of the person may be restored by proper treatment or by the lapse of time. Idiot and imbecile are terms applied to persons whose mental development has been arrested. Insanity as a defense to a contract must be such that the party could not comprehend the force of his act. The effect of an attempt by insane persons* to create a con- tract results only in creating an apparent obligation which is voidable. Such contracts may be either ratified or disaffirmed by the insane person on recovering his sanity, or by his guard- ian, but unless ratified cannot be enforced by the other party. Two exceptions to this general rule exist. The first exception is that insane persons may make valid contracts in their lucid intervals; the second, that they may create implied contracts to secure the necessaries of life. If a party to a contract wishes to escape liability on the ground that he was insane when he made it, he will have to prove his insanity.' If a person has actually been declared insane by the court, and thereafter attempts to make a contract, which the other party attempts to enforce against him, the party attempting to enforce the contract must prove to the court that the insane person had a lucid interval when the contract was made, or ratified. It would be unfair to insane persons to destroy their right to secure the necessaries of life. In such instances, the court allows the party who has furnished the necessaries to recover the reasonable value. The party furnishing such articles to an insane person must show to the court (1) that they were neces- sary, and (2) their reasonable value. He cannot recover what the insane person agreed to pay, but merely what a reasonable * In regard to contracts with an insane person, note the following rule, which is not applicable to contracts made with other persons under disability: If a party contracts with an insane person, without knowledge, or reasonable suspicion as to the other's insanity, the contract is valid and not voidable, provided the contract has been executed and the parties cannot be restored to their original position. Bollnow vs. Roach, 210 111. 364, 71 N. E. 454. If the contract is executory, or the consideration can be restored, it may be avoided by the insane person, or his guardian. COMPETENT PARTIES 23 man, under all the circumstances of trade and commerce, would consider they were worth. Furthermore, if the insane person had a guardian, a party who attempts to recover the value of necessaries must also show that the guardian had failed in his duty to provide them. EXAMPLES 1. Ames, a merchant, sells a piano, an automobile, and a barrel of flour, to Bates, who promises to pay for these articles $400, $2000, and $7, respec- tively. He fails to pay and when Ames sues him he proves to the court that he was insane when all these sales were made. The piano was worth $500, the automobile worth $2000, and the flour $6. Bates did not need either the piano or the automobile. Ames may recover only $6 for the flour. 2. A, a merchant, sold goods to B, which were suitable to his needs and his station in life, after B had been legally declared insane and C had been appointed his guardian. C was in Europe at the time, and had failed to make provision for B. On C's return he refused to pay for them, and A sued him. The court said that he must pay the fair value of the goods out of B's money, which he held. Fitzgerald vs. Ree, 9 S&M (Miss.) 94. 3. The question in all cases in which incapacity to contract because of defect of mind is set up in defense, is, not whether a person's mind is generally impaired nor whether he is afflicted by any form of insanity, but whether the powers of his mind have been so affected by his disease as to render him incap- able of transacting business like that in question. Dennett vs. Dennett, 44 N. H. 531. 32. Intoxicated persons. Slight intoxication of one of the parties to a contract has no effect on the validity of the contract, but if a^party is so completely intoxicated at the time of making a contract that he could not act intelligently, or was incapable of knowing what he was doing, the contract is voidable. It is extremely difficult for a person to escape his contract on this ground, unless he can prove that the other party took advantage of his condition. EXAMPLE Van Wyck sold his farm to Brasher for a fair price, having been attempt- ing for a long time to sell it to others. Later he attempted to recover the farm, and offered to return the money, showing that he had been drinking heavily the day he sold it. Brasher showed that Van Wyck's real reason for wishing to recover the farm was that he had an opportunity to sell it to someone else at a higher price, land values having increased after the sale. The court refused to return the farm to Van Wyck, and said there was no proof that Brasher had taken advantage of him. Van Wyck vs. Brasher, 81 N. Y. 260. 24 COMPETENT PARTIES Habitual drunkards may be placed in the care of guardians appointed by the court, and in that event the duties of the guardian, and the rights of third persons furnishing necessaries, are the same as in the case of insane persons. 33. Spendthrifts. A guardian may also be appointed to care for the business affairs of a person who is so dissolute in his habits, or so lacking in judgment* as to be incapable of properly caring for his own property. Such a person is called a spend- thrift. If a guardian is appointed, his duty, and that of third persons furnishing necessaries, is the same as that of a guardian of an insane person. The right to appoint a guardian for a spendthrift depends upon the statutes of the different states. 34. Legal Incapacity. Certain types of persons are speci- fically designated by the law as incapable of making valid con- tracts. In some instances, they are totally prohibited from contracting, and in other instances they are allowed to contract, under certain conditions, and subject to certain limitations. Persons whom the law declares to be either totally or partially incapable of making contracts are (1) infants, (2) married women, (3) aliens, (4) agents, and (5) corporations. Particular rules, which are discussed in the following paragraphs, exist for each class. 35. Infants. An infant is a person who has not reached a legal age, which is the age fixed by law as that at which he should have arrived at years of discretion, and be capable of safeguarding his own affairs. At common law this age is twenty-one years for both sexes, but by statutes in many states the legal age for women is reduced to eighteen years. f 36. Voidable Contracts of Infants. The general rule is that an infant is not competent to bind himself by contract, except for necessaries, and that he may avoid any contract made * Aged persons frequently lose their mental faculties and became incapable of caring for their own property. In such cases, a guardian may be appointed for them, with the same effect as in the case of spendthrifts. t Alabama, Arkansas, Colorado, Connecticut, Delaware, Georgia, Illinois Indiana, Iowa, Michigan, Minnesota, Montana, Mississippi, Maine, Maryland, New Jersey, New York, New Hampshire, Nebraska, Ohio, Nevada, Okla- homa, Oregon, Rhode Island, South Carolina, North Carolina, Texas, Utah, Wyoming, Wisconsin. Washington. COMPETENT PARTIES 25 by him during infancy. This is true even though he may have been self-supporting and living apart from his parents. It is to be observed that the infant is the party whom this rule of law seeks to protect and therefore the defense of infancy is open to him alone and not to the other party with whom he contracted. It is therefore said that the contracts of an infant are voidable "at his election," and may be ratified or disaffirmed by him. When Necessary to Ratify. If a contract made by an infant is executory, or unperformed, when the infant attains his majority, it is void unless ratified by him at that time or within a reasonable time thereafter. Failure to disaffirm will not be sufficient; there must be a positive ratification. When Necessary to Disaffirm. If a contract made by an infant is executed, it is necessary for the infant to disaffirm it, at the time of reaching his majority or within a reasonable time thereafter, if he wishes to avoid it. Failure to ratify will not be sufficient; there must be an express disaffirmance. Until such disaffirmance the contract has a prima facie validity. EXAMPLES 1. Clemmer, 19 years of age, executed a contract which he had previously made, by paying Price $2,000 for his farm. Clemmer took possession of the farm, but five years later offered to return it and demanded that Price repay the $2,000. The facts were presented to a court which ruled that as the contract was executed and had not been expressly disaffirmed within a reason- able time after Clemmer became 21 years of age, it could not be set aside, but was binding between the parties. Clemmer vs. Price, 125 S. W. (Tex.) 604. 2. Morton, an infant aged 20 years, promised in writing to pay Steward $90 for a horse two years later. Nothing further was done until the two years had elapsed, when Steward offered to deliver the horse and demanded the $90, which Morton refused to pay on the ground of his infancy at the time the con- tract was made. The court ruled that this was a good defense as there had been no ratification and express disaffirmance was not necessary to avoid executory contracts of infants. Morton vs. Steward, 5 111. App. 533. If an infant disaffirms an executed contract within a rea- sonable time after attaining his majority, he cannot ordinarily recover his property or goods without first restoring the property or goods which he may have received from the other party. If he no longer has these goods he must in some instances pay the other party their value, though the courts are by no means uniform in the several states in applying these rules. 26 COMPETENT PARTIES If an infant desires to ratify an executory contract on attain- ing his majority, he must ratify the whole contract, and hot merely a part. Thereafter his liability is treated as complete and binding from the beginning. EXAMPLES 1. Bardwell, an infant, contracted with Wallis who agreed to build an addition to the infant's house, for which the infant promised to pay a stated sum. Later the infant refused to pay for the work, and the court said that this work (which was the building of a new porch) was not necessary, and allowed no recovery. Wallis vs. Bardwell, 126 Mass. 366; Bloomer vs. Nolan, 36 Neb. 51. 2. A, an infant, needed money to complete his education, and sold his house to B, who paid a fair price. After A reached legal age he found he could then sell the house for a larger price and notified B to give it back to him, offering to return the price B had paid. This B refused to do, but A neverthe- less proceeded to sell the house to C, who sued B. The court gave C the house, saying that A had exercised his right of election promptly. Shipley vs. Bunn, 125 Mo. 445; Dixon vs. Merritt, 21 Minn. 196. 3. Young, an infant, purchased land from Potter and paid the agreed price. He then contracted to sell the same land to Carrell, who promised to pay him $250. After arriving at legal age, the infant continued to keep the land and refused to convey it to Carrell or to accept the purchase money. Carrell sued him, but the court allowed the infant to keep the house, since he had made no act of affirmance after reaching twenty-one. Carrell vs. Potter and Young, 23 Mich. 377. 37. Infants' liability for necessaries. An infant, however, owes the same duty to pay the reasonable value for the neces- saries of life which he has received, as exists in the case of insane persons. It is necessary for a person who sues an infant for the value of necessaries to show to the court that the articles were actually necessary in the light of all the circumstances of the case. What may be a necessary to one person may be a luxury to another. If it can be shown that the articles furnished an infant were actually necessary, the person furnishing them may collect the reasonable value, but not the price which the infant promised to pay, if this was more than the reasonable value.* * The student should here note, however, that a person suing an infant, even though he may be able to recover a judgment for the value of the neces- saries, may be unable to collect any money, because the infant may own no property. In such cases the judgment is without money value until the infant acquires property of his own. COMPETENT PARTIES 27 EXAMPLE Archer, an infant, receives from Jones, a grocer, some potatoes for which he promises to pay $2.00. Archer is living alone at the time and uses the potatoes for his meals. The potatoes are actually worth only $1.50. In a suit against Archer, Jones can recover only $1.50. Jewelry, walking-canes, liquor, tobacco, bicycles, a saddle and bridle, in certain cases have been declared by courts to be unnecessaries, in the light of the particular facts. Under other facts, including the infant's station in life, a watch, wedding clothes, school books, a microscope, dental service, and room-rent, and in some cases even some of the articles enumerated in the preceding sentence have been declared to be things for which the infant should be compelled to pay the reasonable value, being necessaries. 38. Married women. Married women now generally have the same rights to make contracts in their own name, to hold real and personal property, and the use their earnings, as they had before marriage.* A married woman may also make contracts by which she may bind her husband to pay for necessaries, but not other articles, unless she is acting as his agent, in which case she is subject to the same limitations as other agents. (See section on agency.) At common law a married woman was not capable of making a valid con- tract, and was therefore not liable on any contract which she might make; neither could she enforce it. The common law idea was that when a woman married, all her property, rights, and even her separate existence became bound up, and merged, with that of her husband, who alone was deemed capable of engaging in business. The contracts of married women were absolutely void, and not merely voidable as in the case of infants. This harsh view has been changed by statutes in the various states, so that little is left of the old rules. 39. Aliens and Alien Enemies. A contract made with an enemy in time of war is illegal and void, both at common law and under many state statutes. This principle was applied to many contracts made during the Civil War. There are laws in many of the states restricting aliens' prop- erty rights, f These serve as a restriction on their power to acquire many property rights by contract, or otherwise. * Women under legal age, though married, mayavail themselves of the defense of infancy, unless living in a state whose statute specifically declares them of age at marriage. Such states are: Iowa, Oregon, Washington. t Aliens have the same property rights as do citizens in Alabama, Colorado, Indiana, Iowa, Maryland, Massachusetts, New Jersey, Alaska, Florida, Georgia, Maine, Michigan, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Wyoming. 28 COMPETENT PARTIES 40. Agents. An agent is one who acts for another, in mak- ing such contracts as he has been authorized to make. He is not personally liable for his acts if he makes only such contracts as he was authorized to make, and he binds only the person who so authorized him (called the principal}. (See chapter on agency.) 41. Corporations. A corporation is a form of business organization which may act in many ways like a natural person. It may only perform such acts, however, as it is specifically empowered to do by statute, and then only in the particular manner which the statute permits. A complete treatment of this subject is presented in the chapter on Corporations. PRACTICAL SUGGESTIONS Don't contract with persons whom you fear to be mentally or legally incompetent, because you do so at your peril. Don't sell goods to married women and charge the items to their husbands unless you are certain the goods are necessaries, or know the husband will pay regardless of his legal rights, because you cannot make him. The hus- band's consent is sometimes easier to get before the sale, than after. Avoid selling any goods on credit to infants except necessaries, unless you are willing to rely upon the good nature of the parents to pay their children's bills, because you create a contract which is binding on you alone. It is improvident to buy real estate from an incompetent person, without a court order, because if the value goes up he may want it back, and can get it. Don't, if in spite of this advice, you feel that you must do business with an incompetent person, take any advantage of his condition, because the court will protect him and censure you. Don't sue incompetent persons without consulting your lawyer, because, even though they may be legally liable, you can sue them only by following a complicated legal procedure. Don't make verbal contracts when you could as well make written ones. There is less opportunity for dispute later. REVIEW QUESTIONS 1. Sands, a dealer in butter and cheese, entered into a written contract whereby he agreed to employ Potter for three years and in addition to paying him wages, agreed to give him a share in the profits. At the end of three years he paid the wages, but refused to pay the one-half of the profits. Potter sued Sands, who defended on the ground that he was insane when he made the con- tract. The court declared that Sands at the time he made the contract, was insane, but that f 'he was then possessed of mind, memory, and senses sufficient to know and comprehend the scope, force, and effect of the particular contract." Can Sane ; escape from paying Potter a share of the profits? Why? COMPETENT PARTIES 29 2. Wanamaker sued Weaver for the purchase price of a dress which he had sold to Mrs. Weaver. This was the first time the Weavers had ever pur- chased anything of Wanamaker. It was admitted that dresses were ordinarily necessary articles, but Weaver showed to the court that his wife had more dresses than she needed before she made this purchase. Can Wanamaker recover the price of the dress from Weaver? from Mrs. Weaver? Why? 3. Jonas, a real estate dealer, was particularly acute in business when intoxicated. One day when he was so intoxicated that no one believed he knew what he was doing, Baldwin, believing he could take advantage of Jonas in this condition agreed to buy Jonas' farm for $9000. This was really $3000 more than it was worth, though Baldwin did not know it. Later he discovered this fact and refused to take the farm on the ground that Jonas was so intoxi- cated at the time he made the contract that he did not know what he was doing. Was there a contract? Why? Can Jonas make Baldwin take the farm? Why? 4. Mahoney, who claimed to be Christopher Columbus whenever he saw a ship, and Simpson, who believed himself to be married although he was not, were both conducting real estate business. Aside from these peculiarities, each was looked upon as a sound business man. Mahoney agreed in writing to sell Simpson a house for $5000, which Simpson agreed to buy. Later Mahoney discovered that the value had advanced and refused to carry out the contract. Was there a contract? Why? ' Has Mahoney a good defense? Why? 5. Jacob Schneider, an infant, bought some shoes of Bule, a dealer, for which he promised to pay two dollars. A year later he became of age, and on being asked to pay by Bule, stated that he considered his obligation binding on him and would pay shortly. Later he refused to pay altogether and was sued by Bule. The reasonable value of the shoes was one dollar and twenty- five cents. What amount, if any, can Bule recover? Why? CHAPTER V THE AGREEMENT I. Common Inten-l tion to Cre-i fl. Real a. ate Contract 12. Unreal-!.,' c . [d. II. Offer III. Acceptance Mistake Fraud Duress Undue Influence 42. Mutuality. There can be no contract in the true sense, as distinguished from an implied contract, unless there is an accepted offer. At the moment the offer of one party is accepted by the party to whom it is made, there is a meeting of the mind? of the parties. This meeting of the minds is called niutua' assent, and the presence or absence of this mutual assent deter- mines whether or not an agreement exists. 43. Agreement. Its Essentials. An agreement, therefore, exists when two or more parties assent to be bound by 'a contract. Its essentials are: 1. A common intention' to create a contract; 2. A communicated offer; 3. An unqualified acceptance. The conception of a contract as an accepted offer makes it necessary that there be at least two parties. A person cannot enter into an agreement with himself so as to create this legal relation, called contract. He may make as many New Year resolutions as he likes, but these are not contracts, because the law will not enforce them. 44. A common intention to create a contract. Not only must there be at least two parties, but these parties must have a common intention to enter into the contract relation. Even though the offer be formal and complete, it cannot be the foun- dation of an agreement if it was made and accepted with no intention to create a contract but as a mere jest or joke. 30 THE AGREEMENT 31 EXAMPLE Holderman wrote out a bank check for $300.00 and gave it to Kellar in payment for Kellar's watch, worth $15.00. It was proved that the whole transaction was carried on in sport. This did not create an agreement, and Holderman could not keep Kellar's watch, nor could Kellar collect the $300.00. Kellar vs. Holderman, 11 Mich. 248. OFFER fl . Unconditional {a. As to Time of Acceptance b. As to Place of Acceptance c. As to Manner of Acceptance 45. A communicated offer. Not only must there be two or more parties with a common intention to create the contract relation, but one of the parties must communicate to the other a definite offer. The party making the offer is called the offerer; the party to whom it is made is called the offeree. The offer made by the offerer consists of some statement, or some act, by which he indicates to the other party, the offeree, three things. These are: (1) the offerer's desire to create a contract, (2) the terms of the contract which he is willing to make, and (3) the manner in which he desires his offer to be accepted. In other words, an offer is the expression by one party, who desires to create a contract, of the terms by which he is willing to be bound. EXAMPLES 1. Compton said to Stagg, "I mean to sell this property if I can get $100.00 for it." Stagg replied, "I will give you $100.00 now." This did not create a contract, because Compton's statement showed no present desire to create the contract relation. Compton vs. Stagg, 81 Ind. 171. 2. Paige's wife was in a burning building, and Paige called out to a crowd of men standing nearby, "I will give $1000.00 to anyone who will bring out my wife's body." Reif, a fireman, at the risk of his life brought out the body, thereby complying with the terms of the offer. This created a contract, and Paige was bound to pay the $1000.00. Reif vs. Paige, 55 Wis. 496. 3. A steel mill offered to sell a railroad 5000 tons of iron rails at a certain price, providing in the offer, "if accepted, we shall expect to be notified by December 20." This constituted a condition which the offeror imposed on the offeree, i.e., acceptance within a specified time. Minneapolis & St. Louis Railway Company vs. Columbus Rolling Mill, 119 U. S. 149. 32 THE AGREEMENT 46. Offer May Be Conditional. Not only may the offerer make his offer in a variety of forms, but he may attach as many conditions as he pleases. He may limit the means, the manner, and the place of acceptance, provided the offer does not thereby become so uncertain as to be meaningless. When a conditional offer is made, the person to whom it is communicated can accept it so as to create a contract, only by complying with all the conditions contained in the offer. The most usual conditions attached to offers are that they be accepted, if at all, within a given time; or in a given manner, as by mail, telegraph, or tele- phone; or at a given place, as Chicago, New York, St. Louis. ACCEPTANCE fl. An Act I. Form< [2. A Promise II. Quality Unconditional III . Communi- cation 1. Before Revocation of offer a. By Notice 2. After Revoca- tion of offer By Lapse of Time By Operation of Law 47. Acceptance of Offer. An offer is without legal effect, and may be withdrawn at any time before the person to whom it is made, the offeree, has accepted it. Acceptance is therefore the assent of the offeree to the offer of the offerer. Acceptance may be made either (1) by a promise, or (2) by an act. EXAMPLES Acceptance by a promise. A water company offered to extend certain water mains if a lumber company would agree to pay $250.00 a year for ten years. The lumber company promised to make the payments. Muscatine Water Company vs. Muscatine Lumber Company, 85 Iowa 112. Acceptance by act. 1. "Graff and a number of other persons together signed a subscription paper in which they offered to pay a total sum of $10,000.00 to a designated railroad, provided trains were running by October 1, 1864. The railroad had trains running on that date. Des Moines Valley R. R. Company vs. Graff, 27 Iowa 99. 2. Cooper sent a quantity of leather to Orme, without request, and then wrote Orme offering to allow him to keep it at 20 cents a pound, or to take it THE AGREEMENT 33 back and pay the freight. Orme did not answer the letter, but used the leather. The court decided that this act by Orme constituted an acceptance of Cooper's offer. The act in this case in reality consisted in Orme's taking the benefit after he knew that Cooper expected to be paid. Orme vs. Cooper, 1 Ind. App. 449. 48. Sufficiency of Acceptance. To create a contract, the acceptance must further 1. Comply with the conditions of the offer, 2. Be itself unconditional, and, 3. Be communicated to the offerer. These elements of the sufficiency of an acceptance are illustrated in the following examples : Compliance with conditions of offer. 1. A railway company wrote Lawrence offering to carry a certain quantity of logs for him at a certain rate, on condition that he would provide chains for the logs if necessary. Lawrence wrote back, "I accept your offer," saying nothing about chaining the logs. The court decided that by this general acceptance Lawrence agreed to comply with all the conditions of the offer; that a contract existed by which the rail- road was compelled to carry his logs for the price; and that Lawrence was compelled to provide chains. Lawrence vs. Milwaukee, Lake Shore & Western Railway Company, 84 Wis. 427. 2. Snedaker posted a notice offering to pay $500.00 "to any person who will give such information as shall lead to the apprehension and conviction" of a certain murderer. Fitch performed the act of giving the information necessary to convict the murderer, but at the time knew nothing of the offer. The court decided that no contract was created. Even though on6 complies with the terms of an offer, one cannot thereby accept an offer of which one is ignorant. Snedaker vs. Fitch, 38 N. Y. 248. Acceptance must be unconditional. 1. Brown wrote to Hough offering to transport Hough's freight from Chicago to New York by way of Boston for ten dollars a ton. Hough replied, "I accept your offer, with the under- standing that if we ship direct to New York and not by way of Boston, you will charge us only nine dollars." This acceptance failed to create a contract. Hough vs. Brown, 19 N. Y. 111. 2. McCotter offered to sell to the city of New York all the land which he controlled on Ward's Island for a certain price per acre. The city council of New York passed a resolution by which it agreed to buy all of Ward's Island for the price per acre contained in McCotter's offer, and sent McCotter a copy of the resolution. The court decided that this varied the terms of the offer by imposing new conditions and failed to create a contract. McCotter vs. Mayor, etc., of New York, 37 N. Y. 325. Acceptance must be communicated to offerer. Harvey made Maclay an offer, and Maclay wrote out an acceptance which he gave to a messenger 34 THE AGREEMENT boy to take to the post-office. The messenger lost the letter of acceptance. No contract resulted from this act. Maclay vs. Harvey, 90 111. 525. 49. Communication of Acceptance. The offerer may desig- nate the particular means by which he wishes acceptance to reach him, and if he does this an acceptance communicated in the manner specified is always sufficient. If no means of communi- cation of acceptance be designated by the offerer, an acceptance by the same medium as that used by the offerer is always suffi- cient. In such cases the risk of the acceptance actually being received is upon the offerer, and the contract is made upon the delivery of the acceptance to the agency of communication selected, such as the government mail, the telegraph company, or the messenger who delivered the offer. If the offeree communicates his acceptance through a medium other than that designated, or if in the absence of a designated medium, the offeree accepts through a medium not used by the offeror, the acceptance has no effect until it actually reaches the offeror, and even then can be refused if it does not reach him within a reasonable time. EXAMPLES 1. Kempner at Hot Springs mailed to Cohn at Little Rock an offer to sell his house for $10,000.00. Cohn immediately, and on February 7, mailed a letter of acceptance, which because of the fault of the post-office department did not reach Kempner until February 10. In the meantime and on February 9, Kempner wrote Cohn withdrawing the offer. The Court decided that there was a valid contract between the parties, created on February 7. Kempner vs. Cohn, 47 Ark. 519. 2. Wood made Callaghan an offer by letter. He failed to receive Callaghan's acceptance of his offer, and claimed that no contract ever existed between them. Callaghan proved that he had deposited a letter of acceptance, proper in form, in a street letter-box. That was held by the court to be suffi- cient, the previous correspondence between the parties having been by mail. Wood vs. Callaghan, 61 Mich. 402. If, however, the letter is not properly addressed (Potts vs. Whitehead, 20 N. J. Eq. 55), or is not stamped (Blake vs. Hamburg-Bremen Fire Insurance Company, 67 Tex. 160), no contract results unless the acceptance actually reaches the offeror within the proper time. 3. A mailed a letter accepting an offer which B had made to him by letter. Thereafter, A found that the contract would not be advantageous to him and telegraphed to B, declining the offer. The telegram was received by B before the letter reached him, but the court nevertheless said that a contract THE AGREEMENT 35 existed between A and B from the time when A had deposited his letter of acceptance in the post-office. Halleck vs. Insurance Company, 26 N. J. Law 268. Cancellations, even after acceptance has merged an offer into a contract, are frequently tolerated by business men, but the student must remember that such toleration is a matter of business policy, and not of law. 50. Withdrawing the Offer. Until an offer is withdrawn it may be accepted, and when accepted it ripens into a contract. Before acceptance takes place in one of the forms previously noted, the offer may be withdrawn by the party who made it. This is called revoking the offer. As no contract exists until the offer is accepted, it is logical and just that the party who makes it be permitted to change his mind, provided he notifies the offeree of the revocation before the offeree accepts it. The revocation of an offer may be accomplished in one of three ways. (1) The offerer may expressly revoke his offer, in which case actual communication of the revocation* must be effected, except that if the offer was by public notice a revocation by the same means is effective. (2) The offer may be revoked by lapse of time. If the offer was made with a time limit, the offer is automatically revoked when the time expires. If no time was stated in the offer, the lapse of a reasonable length of time will effect revocation. (3) The offer is revoked by opera- tion of law if the offerer dies or becomes insane before the offer is accepted, because there can then be no legal "meeting of the minds" of offerer and offeree. 51. Unreal Mutual Assent. Although the parties may have apparently created an agreement by mutual assent, through the medium of an accepted offer, there are two conditions under which the contract may be unenforceable for the reason that their apparent mutual assent was unreal. These are (1) when there has been a mistake of fact, and (2) when one of the parties would not have entered into the agreement except for the fraud, duress, or undue influence practiced upon him by the other. 52. Mistake of Fact. An agreement to be valid requires, as we have already seen, that the minds of the parties shall have met on the same subject matter, at the same time, and with the * Dropping a letter in the post box will not be sufficient in this case. The letter must be actually received. 36 THE AGREEMENT same intention. If any one of these conditions is lacking, there is a mistake of fact,* which will enable one, or both, to avoid the resulting contract. Such a mistake must be as to some material matter, and not merely as to a trifling detail, and may arise in one of three ways: (1) From the nature of the transac- tion ; (2) concerning the person with whom the contract is made ; or (3) concerning the subject matter of the transaction. EXAMPLES 1. McGinn and Tobey intended to enter into a contract, the terms of which they had discussed. McGinn then wrote out the terms to which they had agreed, and also wrote out and sent to Tobey at the same time a second paper containing different terms, as an alternative proposition. Tobey signed both these papers, believing that they were duplicate copies of the agreement. No contract was created by the second paper, because there was a mistake as to the nature of the transaction. McGinn vs. Tobey, 62 Mich. 252. 2. Gordon, who had a bad reputation, advertised under the name of "Addison" that he had money to lend. Street read the advertisement and agreed by letter with "Addison" to borrow a sum of money and to pay "Addi- son" a commission for lending it to him. He would not have made any agreement with Gordon, on account of his bad reputation. On discovering his mistake, the court allowed Street to avoid the agreement, and he did not have to borrow the money or pay Gordon the commission for lending it to him. This was because there was a mistake as to the identity of the parties. Gordon vs. Street, 2 Q. B. (Eng. 1899) 641. 3. A agreed to buy, and B agreed to sell, at a specified price, certain, cot- ton which the parties described as "cotton to be delivered ex Peerless from Bombay," referring to the steamship on which it was to be transported. There were, however, two ships named "Peerless," the buyer referring to one and the seller to the other. No contract resulted from this agreement, because there was a mistake as to the subject matter of the transaction. Raffles vs. Wichelhaus, 2 H. & C. (Eng.) 906. 4. Ames agrees to buy a house from Bates, which Bates agrees to sell. The house, however, has burned down before the making of the contract, without the knowledge of either party. This avoids the contract, because the *A mistake of fact is to be distinguished from a mistake of law. A mistake of law occurs when a party misunderstands the legal effect of his word or acts. He cannot escape from a contract on this ground. Such a mistake occurred when A and B agreed to buy and sell, respectively, a house which the parties described as "being in first class condition." A, the buyer, thereafter refused to complete the bargain, claiming that he had always understood that the law would require B to repaint the house, and that he was mistaken. This did not excuse him, as a party to a contract is judged by his acts, and not what he believes to be the legal consequences of his acts. "Ignorance of the law excuses no one." THE AGREEMENT 37 subject matter has ceased to exist. At the time of making the agreement both Ames and Bates believe the house to be in existence, and if it has been destroyed there is a mutual mistake as to the subject matter. 53. The second kind of unreal mutual assent arises by the wrongful act of one of the parties, which permits the other party to avoid the agreement. This wrongful act may be (1) fraud, (2) duress, or (3) undue influence. The presence of any of these elements makes the contract voidable (see Sect. 22), and the inno- cent party may refuse to carry out the contract. Fraud is the wilful misrepresentation of a material fact. Mere exaggeration of the good qualities of the thing sold, or of the advantages of the proposed contract, does not constitute fraud. The other party must be on his guard against such exaggeration and must form his own conclusions of the merits of the proposition. If fraud be proved, it must be shown that there was a misstatement as to some actual fact, not merely an expression of biased opinion. EXAMPLES 1. A and B were doing business together, and in order to get C to buy an interest in the business, they made false statements as to the profits which they had made during the preceding year. C relied on these statements and agreed to buy an interest in the business. Thereafter he discovered that the statements were false, and the court allowed him to refuse to buy or pay for the interest which he had agreed to take. Bower vs. Fenn, 90 Pa. St. 359. Note. If, in the preceding example, A and B had merely told C of the profits they expected to make in the future, and C had promised to buy into the business, the contract would not be voidable, because a statement concern- ing what may happen in the future is not a fact but an opinion, and there would have been no wilful misrepresentation of a material fact. Duress is that which induces a person to perform an act, not of his own will, but because of the threats, or acts of violence, of some other person. Duress may be brought about by impris- oning, or threatening to imprison, a person wrongfully, or from an improper motive, or by threatening him with bodily injury, in order to compel him to enter into a contract. The threat or force must be sufficient to deprive a person of his free will, and sufficient to impress a person of average firmness of mind. A owed B for some groceries. B wrote out a notice which stated that unless A gave him his horse and a sum of money, A would be put in prison for a long time. A became frightened and delivered his horse to B. He was 38 THE AGREEMENT allowed to recover the horse, because he delivered it only because of the threat of B. Seiber vs. Price, 26 Mich. 518. Other examples of duress are: Holding a gun at a man's head and com- pelling him to sign a contract; threatening to "beat you within an inch of your life unless you agree to this;" locking a person in a room until he accepts an offer made to him. Contracts resulting from such acts are voidable. Undue influence exists when a person who occupies a position of confidence, or trust, toward another, takes an unfair advantage of his position, and thereby induces a contract. An attorney occupies such a relation toward persons who consult him; as also does a physician toward his patient. If such a person induces another to do some act, by means of statements of such a character that it is clear that the act is not voluntary, but is really the act of the person making the statements and not of the person performing the act, the contract resulting is said to have been induced by undue influence, and is voidable. EXAMPLES A young lady who had just become twenty-one years old consulted her uncle about all her business affairs. He induced her to sign an agreement that if a bank would lend^him money, she would pay it if he did not. The uncle ran away with a large amount of money which he secured from the bank. The court said that the bank could not recover this money from the young lady, because her uncle had secured this agreement by means of undue influence and the bank, knowing the relation of trust existing, should have been on its guard. Rider vs. Kelso, 53 Iowa 367. Note. All contracts made between such persons are not voidable, how- ever. If they are fair and just, they will be enforced, because in that event no one can say that they were induced by undue influence. REVIEW QUESTIONS 1. Perry in Rhode Island wrote a letter to an iron company in Boston, offering to sell five tons of boiler plate at a certain price. The iron company telegraphed to Perry, "We accept your offer; ship the boiler plate." This telegram was received by Perry. Did these acts create a contract? Why? Who was the offerer? the offeree? 2. A promised to teach B dressmaking if B would promise to work for her for six months. How may this offer become a contract? 3. The governor of Mississippi received the following telegram: "There are many cases of yellow fever at Cooper's Well; send out a physician this afternoon. Signed, I. Williams." The governor posted the telegram on a bulletin board, and Dr. Brickell, who saw it, went to Cooper's Wells, where he spent four days aiding the sick. He then sent a bill to Williams for $250 for his services. Was this proper? Was a contract created? Who was the offerer? the offeree? THE AGREEMENT 39 4. A Chicago street car company posted the following notice: "$5000.00 June 24, 1895. "The above reward will be paid for the arrest and conviction of the murderer of C. B. Birch, who was fatally shot while in the discharge of his duties, on the morning of June 23d, at the car-barn. Signed, Charles T. Yerkes, Pres. W. Chicago Street R. R. Co." Before the notice was posted an employee of the Company had given the police information which subsequently led to the arrest and conviction of the murderer. Did the employee have a right to secure the reward? Why? Was there an offerer in the above example? an offeree? 5. Henthorn called on Fraser in Liverpool and asked for an offer on some houses. Fraser handed him a written offer and Henthorn returned to his home in Birkenhead. The next day at one o'clock Fraser mailed a letter at Liver- pool to Henthorn, withdrawing the offer. This letter did not reach Henthorn until five o'clock, and he at three o'clock had deposited a letter in the post- office at Birkenhead accepting Eraser's offer of the day before. Was a contract created? Why? Who was the offerer? the offeree? PRACTICAL SUGGESTIONS To Offerers If you wish to limit the time in which an offer may be accepted, be sure to specify this limitation in your offer, because if you fail to do this the offer can be accepted within any reasonable time. In making an offer, say exactly what you mean, because the offer may be accepted before you have an opportunity to explain. Then it will be too late. Don't make an offer and then forget about it, because it may be unex- pectedly accepted. Don't wait until tomorrow to withdraw an offer if you have changed your mind, because the other party may make it a contract in the meantime. To Offerees Don't change the terms of the offer by your acceptance, because no con- tract will result. Accept an offer at once if the bargain is a good one, because the offer may be withdrawn. Remember to stamp and properly address your letter of acceptance, if you mail it, because it may never be delivered and the fault will be yours. In accepting an offer, use the designated medium n of communication, if any; if not, use the same means of communication that the offeror used. In General Don't fail to be clear in your language, preventing all chance of mistake, because your contract may be declared invalid on account of mistake. Don't make verbal contracts when you could as well make written ones. There is less opportunity for dispute later. CHAPTER VI CONSIDERATION fl. Sufficient I . Simple Contracts 2. Not usually, sufficient II. Formal Contracts a. Benefit to Promisor b. Detriment to Promisee c. Mutual Promises a. Impossible b. Moral Obligation Only c. Past Considera- tion d. Previous Obligation e. Illegal 54. Consideration is a benefit given to the party promising to do an act (who is called the promisor}, or a loss or detriment suffered by the party to whom the promise is made (called the promisee). It is something given or done by one party to a contract, on account of which the other party agrees to perform his share of the obligation. The consideration for a contract, which must be present if the contract is valid, may exist in three different forms. These are, 1. A benefit received by the person making the promise, or someone in his behalf. 2. A loss or detriment suffered by the person to whom the promise is made, or someone in his behalf, or 3. The exchange of mutual promises between the parties. Note. The word consideration may mean the whole consideration, or a part of the consideration, however small. If anything be paid or done, it binds the bargain, whether more remains to be paid or done, or not. 55. Benefit received. If at the time of the making of the contract, the party who has made a promise to another receives 40 CONSIDERATION 41 something for making the promise, this is said to be a benefit to the promisor. It does not matter how much or how little he receives, provided it is something of value. EXAMPLES 1. Ames says to Bates, "I will promise to pay your expenses at the university next year, if you will pay me $500 now." If Bates pays the $500, Ames receives the benefit of having this amount at present, and a contract exists between the parties. The $500 is the consideration. 2. Call owes Dale $1000, which he will have to pay a year later. Egan says to Call, "If you will pay me $200 now, I will pay your debt to Dale when it falls due." When Call pays Egan the $200, this constitutes a legal benefit to Egan, even though he will have to pay five times this amount to Dale a year later because of his promise. An exchange of one sum of money for another, both payments being made at the same time, does not come under this rule. In Schnell vs. Nell, 17 Ind. 29, the court held that an exchange of $600 for l left a balance due of $599.99, for which balance no consideration had been paid. 56. Loss or detriment suffered. The most usual form of consideration is some loss or detriment suffered by the person to whom the promise is made, or by some other person for him, in reliance on the promise. In the example under the preceding paragraph there is present, not only a benefit to the person making the promise, but also a loss or detriment to the person to whom the promise is made. This loss or detriment may take any one of a variety of forms. EXAMPLES 1. John Bridgers owed a bank a large amount of money. The bank promised his wife that it would not sue him, if she would pay the debt out of her own money. This she agreed to do. By so agreeing she suffered a detri- ment, since she became bound to do something that she would not otherwise have been obliged to do. This consideration was sufficient to bind the bank to observe the terms of its promises. Bank of New Hanover vs. Bridgers, 98 N. C. 67. 2. An uncle promised his nephew that he would give him $5000 if he would refrain from drinking liquor, swearing, and playing cards or billiards for money until he was twenty-one years old. The nephew agreed so to refrain. This agreement constituted a detriment, because while it would have been better for the nephew not to have done these things any way, he could legally have done them before he agreed not to. A valid contract was created. Hamer vs. Sidway, 124 N. Y. 538; Talbott vs. Stemmens, 89 Ky. 222. 3. A agreed to pay B $100 if B would change his residence. B changed his residence, and thereafter A tried to avoid paying him the $100, claiming 42 CONSIDERATION that he had received no benefit from B's change of residence. The court said that a benefit to the promisor was not necessary, inasmuch as B, the promisee, had suffered a detriment by moving when he was not otherwise bound to do so. Burgess vs. Mendel, 62 Ala. 994. 57. Mutual promises. The exchange of mutual promises between parties to a contract constitutes a consideration. Such mutual promises may involve either, or both, of the previously mentioned elements, i.e., benefit to promisor, or detriment to promisee. EXAMPLE Rich promised to act as a director of a bank and to deposit his money in the bank. In consideration of this, the bank promised to transfer to him a part of the stock in the bank. This was a valid contract. Rich vs. Lincoln State Nat'l Bank, 7 Neb. 201. 58. An Apparent Consideration may be unreal because, 1. It is impossible, 2. It represents only a moral obligation, 3. It is an act previously performed (a past consideration), 4. It is something that the doer was already bound to do regardless of the promise, or 5. It is illegal. If any one of these five conditions exist there is no consideration, and the contract is unenforceable. EXAMPLES Impossibility. A agrees with B that if B will promise to pay him $500 he will go from New York to London in one day. This is impossible at the present time, and there is no consideration for the promise of B to pay $500. Moral obligation only. Bates' brother was taken sick, while penniless and among strangers, who cared for him, and nursed him until he recovered. Bates afterwards promised to pay for the services, but the court said that Bates was not thereby obliged to pay, as there was no consideration, aside from a moral obligation. Past consideration. Riley sold his farm to Stevenson, who paid the agreed price, and the bargain was fully completed. After the contract had been thus executed, Riley met Stevenson one day and said, "I will paint that house I sold you free of charge." Stevenson said, "I accept." This did not create a contract to paint the house, as there was no consideration for the promise to paint the house, the former contract to sell the house having been completed. Riley vs. Stevenson, 94 S.W. (Mo.) 781. Doing what one is already bound to do. 1. Hatch secured a warrant which ordered Mann, the village constable, to arrest Gallup. This Mann refused to do unless Hatch would pay him five dollars. Hatch promised to CONSIDERATION 43 pay this amount, but after the arrest had been made refused to do so. The court said there was no consideration for this promise, because Mann was bound to make such arrests from the nature of his position. Hatch vs. Mann, 15 Wend. (N. Y.) 44. 2. If public officers perform services which would not ordinarily be required of them, they may recover on contracts offering them extra compen- sation for performing such services. See Reif vs. Paige, 55 Wis. 496, in which case the court held that a fireman was not bound to risk his own life to bring out dead bodies. Illegal consideration. Cummings promised to buy liquor of a whole- sale company, which agreed to sell it to him. The wholesale company, how- ever, had no government license, and was prohibited by law from selling liquor. The company later sued Cummings because he refused to complete his contract and buy the liquor. The court said that he could not be compelled to do so, as the consideration was illegal. Perkins vs. Cummings, 2 Gray 258. 59. Failure of Consideration. If any of the conditions discussed in the preceding paragraph exist, there is no contract, because there was no consideration at any time. On the other hand, a contract may have been valid when it was made, but it may subsequently be invalidated by destruction of the consid- eration. This is called failure of consideration. Contracts in which the consideration totally fails after the contracts have been created, will not be enforced. EXAMPLE 1. A contracted to sell to B a warehouse, which B promised to buy for an agreed price. After the contract was made, but before it was executed, the building was destroyed by accident, without the fault of either party. The court said that both of the parties were discharged from their obligations, because the consideration had failed. This contract was also impossible of performance. Powell vs. Dayton, 12 Ore. 488. 60. Third Persons may claim rights because of contracts made for their benefit, by other parties, even though they con- tributed no part of the consideration. It is first necessary for such a third person to show that the parties to the contract clearly intended to confer a personal right upon him. If the benefits are merely incidental to the main object of the contract, the third person cannot himself enforce the contract. EXAMPLES 1. A loaned B a sum of money, in consideration of which B promised to pay the same amount on a future day to C, to whom A was indebted. C sued B on the contract, and the court said that there was a consideration for the 44 CONSIDERATION agreement between A and B, and that although C had contributed nothing to it, the contract was made for his benefit and he could recover. Lawrence vs. Fox, 20 N. Y. 268. 2. A water company contracted to supply a city with water for public purposes, including fire protection. Davis lost his house by fire, because the water supply failed, and sued the water company for his loss. The court said he could not recover on this contract against the water company, since the contract was not made for his benefit, which was merely incidental to the main object of the contract. Davis vs. Clinton Water Works, 54 la. 59. 61. Options. In the preceding chapter it was stated that an offer could be revoked at any time before acceptance. If, however, an offer is made to be open a definite time and there is a consideration for keeping the offer open, the accepted offer becomes an option which cannot be revoked until the time stated has elapsed. Options have great business importance, because a man to whom an offer is made may wish time to consider and investigate it. He may not wish to spend his time and money investigating if the offerer can withdraw the offer at any time. He is, therefore, at liberty to ask the offerer to promise to leave the offer open and in force for a definite time, if he will pay a consideration to the offerer for this promise. An option is in itself a contract, and requires a consideration. EXAMPLE A, having a piece of real estate, offered it to B for $5000. B, wishing to investigate its value, paid ten dollars for a thirty-day option at that price. Before the thirty days had elapsed A had an opportunity to sell it to someone else at a higher figure and claimed that no contract existed between him and B. The court said there was a consideration for his promise to keep the offer open. Clarno vs. Grayson, 30 Ore. 111. 62. Formal Contracts. In discussing the subject of consider- ation the examples have all been instances of simple contracts. If the contract were under seal, we have already seen that at com- mon law no consideration was required. A formal contract offered the only means of making a valid, enforceable contract to make a gift to another. The rule has been changed by many states* so that the presence of a seal is only presumptive evidence of a consideration, and if it can be shown that nothing of value * California, Illinois, Iowa, Indiana, Kentucky, Kansas, Massachusetts, Wisconsin. CONSIDERATION 45 was given, the contract may be set- aside.* Other states have by statute abolished seals altogether, and the same rule applies where they are used that applies to simple contracts. In other states sealed instruments, with their quality of needing no con- sideration, are retained for contracts for the sale and transfer of real estate. EXAMPLES 1. A contract under seal stated that the sum of one dollar had been paid by one party to the other as a consideration. It was shown that this amount had never been paid. The court said that the contract could nevertheless be enforced because of the seal. Southern Bell Telephone Company vs. Harris, 117 Ga. 1001. Note. In states where a seal is merely presumptive evidence of a con- sideration the facts in the above case would destroy the contract. PRACTICAL SUGGESTIONS In making a contract, assure yourself that there is a valuable considera- tion, because otherwise it will not be enforced. Don't agree to do illegal acts, because your duty as a citizen directs you to uphold the law, not to break it. Similarly, paying, or promising to pay, other persons for doing illegal acts is to be avoided, because you may lose your money, and certainly cannot compel them to perform their promises, which were invalid when made. Don't make a contract which you think may require a seal, without consulting a lawyer, because only a lawyer can inform you as to the law of your particular state in this regard. . Insist upon paying something for another's promise to leave an offer open, because only then will it become an option; otherwise he may revoke it at his own pleasure. Don't make verbal contracts when you could as well make written ones. There is less opportunity for dispute later. REVIEW QUESTIONS 1. Libbey promised to pay Eaton $100 for the privilege of naming Eaton's child. Eaton gave this privilege to Libbey, who named the child, but refused to pay the $100. Was there a contract? a consideration? Who received the benefit, if any? Who suffered the detriment, if any? 2. A city in July, 1862, adopted an ordinance, which it posted in promi- nent places, and in which it stated that it "hereby agreed to pay to every * The difference between a formal contract and a simple contract, in the matter of consideration, is that in case of a formal contract consideration is always presumed until it is proved that there was none, while in a simple contract consideration is never presumed but must always be shown. 46 CONSIDERATION person who had enlisted, or who should thereafter enlist in the Civil War, the sum of $200." Frey had enlisted in May; Johnson enlisted in October. Can either collect the $200 from the city? Was there a contract? with whom? What was the consideration? 3. Bray was engaged to marry Bertha Snell. He promised to pay her $3000 if she would marry someone else. This she did, but Bray refused to pay her the $3000. Can she collect it? Was there a contract? a consideration? 4. Cowling believed himself indebted to Hicks for $5000, due a year later. Hamilton promised to pay this debt when it came due, it Cowling would give him (Hamilton) Cowling's house, and also agreed to pay Cowling $10,000 in cash. To this Cowling agreed and gave up his house to Hamilton, who paid him $10,000. Later it developed that Cowling had owed Hicks nothing. Can Hicks collect the $5000 from Hamilton? Why? Who furnished the consideration, if any? 5. A's property was on fire, and he promised the chief of the fire depart- ment $1,000 if he would do his utmost to put it out. He also offered him another $1,000 if he would rescue a child on the top floor of the burning building. The chief did both these things and attempted to collect $2,000. A claimed that both his promises were without consideration. Was any contract created? What? What was the consideration? 6. Woods wrote to Marks as follows: "Chicago, September 1, 1915. "I, Harry Woods, offer to sell you 60,000 bushels of spring wheat at 85 cents per bushel, delivered. Harry Woods." Later and on September 3 he added the following: "In consideration of $60, the receipt of which I acknowledge, I promise to leave the above offer open for acceptance until the hour of 1:15 P. M. September 14, 1915. Harry Woods." Marks wrote accepting this offer September 13 and was informed by Woods that he had sold all his wheat. Was a contract created? Why? What was Woods' second writing called? Why? CHAPTER VII SUBJECT MATTER All Subject Matter is Valid Except: {a. In restraint of trade b. In restraint of marriage c. Obstructive of Public Justice 3. Fraudulent 4. Forbidden by Law 5. Criminal [a. An Act 1. Form. EXAMPLES 1. Ames agrees to employ Bates as a stenographer at the salary of fifty dollars a month, and Bates accepts. Later Ames employs another sten- ographer and Bates secures other employment. Both agree to cancel their contract. This discharges both parties. 58 DISCHARGE OF CONTRACTS 2. Paine owed Doe $100, and Doe owed Foster $100. The three parties met and agreed that Paine should pay Foster $100. As a consideration for this agreement Doe promised to release Paine and Foster promised to release Doe. Later, Paine refused to pay Foster, and the court said that the novation destroyed the original contract and allowed Foster to recover from Paine. Foster vs. Paine, 63 Iowa 85. 3. Taylor made a contract to build a rosewood cabinet for Pulliam for the sum of $100. He was unable to secure any rosewood, and offered to fur- nish Pulliam other specified furniture instead. Pulliam accepted and the other furniture was delivered to him, but he refused to pay the price. The court said he must do so, and declared that the original contract to deliver a rose- wood cabinet had been discharged. Pulliam vs. Taylor, 50 Miss. 251. 81. Discharge by Operation of Law. One or both parties to a contract may be discharged from their obligations because of changed conditions, or because of acts on their part, other than performance, which the law expressly declares shall discharge the contract. These may be either (1) wrongful alteration of a written instrument, (2) creation of a merger, (3) becoming bankrupt, or (4) death. 82. Alteration of instrument. If a deed or any simple contract in writing be wrongfully altered by an addition, inter- lineation, or erasure, by one of the parties, the other party to the contract is thereby released from further obligation. This rigid rule of law was adopted to prevent parties from tampering with the written evidence of their contracts. EXAMPLE Clark, by a written contract promised to pay McGrath $100 on April first, with interest at the rate of five per cent. McGrath changed the rate of interest to six per cent. He later sued Clark on this contract, and the court said that he could not recover, because he had altered the contract. McGrath vs. Clark, 56 N. Y. 34. 83. Merger. A contract is discharged if its terms are included in another contract of higher legal value. This can take place when the terms of a simple contract are included in a con- tract under seal. If this is done the simple contract is discharged, for it is supplanted by the sealed contract. Similarly, an open account may be merged in a judgment based upon it. EXAMPLE Myers agreed orally to transfer stock in a corporation to Hewitt, who agreed to buy it. Later they made a similar agreement to the same effect DISCHARGE OF CONTRACTS 59 under seal. Thereafter the rights and duties existing between them were determined by the contract under seal and not by their original agreement. Myers vs. Hewitt, 16 Ohio 453. 84. Bankruptcy is a third condition under which the law will discharge the rights and duties of parties to contracts. Bankruptcy is a proceeding by means of which all of a person's property is divided among those whom he owes, called his creditors, after which all his liabilities, on contract and otherwise, are discharged. It often happens in business that a man becomes hopelessly involved with self-imposed duties and liabilities. If he were to continue through life with this burden, he could improve his own condition only in rare instances, and might become a drag' on society. The law has therefore said to him, "If you will turn over all your property to the Federal court to distribute among your creditors, you may become discharged from your debts, and start anew." Or it may happen that his creditors believe him to be unable to pay all of them, or discover that he is trying to pay part of them at the expense of the rest, or that he is trying to conceal his property to defraud them. If so, the law declares that they may, through the medium of a Federal court, have his property divided among them, but provides further that if they do so they must discharge him from all his duties and liabilities. It is customary to call any person who is in financial difficulties, a bank- rupt. This is not a correct use of the term, for no person is a legal bankrupt until one of the Federal courts of the United States has declared him so. If a person wishes to secure a discharge of his debts in a bank- ruptcy court he first files a petition asking that the court declare him to be a bankrupt. If he pursues this course and becomes a bankrupt of his own will and act he is called a voluntary bankrupt. If the creditors of a man desire to have his property divided, they file a petition with the court. They must show, however, that he is insolvent and that he has committed what is called an act of bankruptcy. Such an act may be that he has preferred some of his creditors to others while insolvent, or that he has dealt with his property so as to defraud creditors, or has con- sented in writing to be declared a bankrupt. When the bankruptcy proceedings are brought by the creditors, the debtor is called an involuntary bankrupt. i If the court declares the debtor a bankrupt, it also appoints some person to be receiver of his property. The bankrupt files a list, or schedule, of all his property and all his debts. The 60 DISCHARGE OF CONTRACTS receiver collects all the money, and other properties, belonging to the debtor, which he can find, reduces all to cash, and holds the proceeds for division among the creditors who have filed claims with the court. The debtor, however, is entitled to keep certain things, called his exemptions. These are usually his home, and his furniture and similar articles. What these are depend on the state law. If the bankrupt has acted fairly throughout all these proceed- ings; if he has actually surrendered all his property; has not been declared a voluntary bankrupt then within six years, preceding and prior to bankruptcy did not obtain credit by a materially false statement in writing; he will be entitled to petition for a discharge. If the court grants his petition he will then be discharged of all his old debts, and may begin his busi- ness care r anew, untroubled by old liabilities, unless he wishes to renew them expressly by a new promise to pay.* 85. By death. The only classes of contracts discharged by death are executory contracts for personal services, in which personal skill and taste are involved, or personal trust and confidence between the parties. If these conditions are present, the death of one of the parties discharges the contract. But in contracts which do not involve these elements, and which can be as well performed by another, the contract is not discharged by the death of one of the parties, and may be enforced against his estate. The effect of the death of a joint contractor has been discussed. (See Sec. 27.) PRACTICAL SUGGESTIONS Respect the conditions imposed upon you by a contract, because otherwise you may thereby become disabled to demand performance by the other party. * All debts, on contract or otherwise, may be discharged by a court of bankruptcy, except: (1) taxes levied by the United States, state, county, district, or city in which he lives; (2) judgments in actions for fraud, or obtaining money by false pretenses or false representations, or for willful and malicious injuries to the person or properties of another; (3) alimony or maintenance of his wife and children as decreed by a court: (4) claims which were not duly included by him in his schedule in time for proof and allowance, unless the creditor knew of the proceedings, or, (5) debts which were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer in a capacity of trust. DISCHARGE OF CONTRACTS 61 Perform the conditions imposed upon you at the proper time, because you have given the other party the right to expect that you will do as you agreed, and if he is disappointed he will probably sue you. The alteration of written contracts without the consent of all parties is perilous and the law is drastic and severe as to such offenses. Don't transact business with anyone in danger of bankruptcy, because, no matter how much he may wish to prefer you to his other creditors, it is the purpose of the bankruptcy law to treat all creditors alike. Don't make verbal contracts when you could as well make written ones. There is less opportunity for dispute later. REVIEW QUESTIONS 1. On February 2, 1914, Pope in New York agreed to sell and Hager in St. Louis to buy 300 tons of No. 1 Iron at a specified price. On January 8, 1915 the iron arrived in St. Louis and Pope offered to deliver it, but Hager refused to accept it. Pope then sued Hager for the agreed price, proving a tender on his part of the iron. Can he recover the price from Hager? Why? 2. The following is a copy of an agreement between two parties: "For value received, I promise to pay or deliver to Catharine Corbitt. $100 in such articles of merchandise, and at such times, as she may select. (Signed) L. Stonmetz. Accepted, Catharine Corbitt." Later Miss Corbitt wrote the following to Stonmetz: "I call upon you to perform your promise. Catharine Corbitt"; and he doing nothing further, she sued him. Was this proper without any further act on her part? What conditions did the contract impose on each party? 3. Ames contracted to build a woodshed for Bates for an agreed price, promising to complete it before June first. When the woodshed was half built on May first, Ames fell from the roof, breaking his leg and further disabling himself. He then employed Call, without Bates' consent, to com- plete the woodshed, and when it was completed, which was before June first, he sued Bates for the agreed price. Was this a proper performance on his part? Why? 4. Jones went to Black, a tailor, for a suit of clothes to be made to order. He selected the cloth from Black's stock and said to Black, "If I am not per- fectly satisfied with these clothes in every respect, after they are finished and I have tried them on, I will not take them." Black replied, "All right." After the suit was finished and Jones had tried it on he refused to keep it on the ground that one shoulder did not suit him. Black sued him for the price and proved by other tailors that the shoulder was an excellent "fit," and that no one could do any better on account of the fact that Jones had a broken collar- bone which had been improperly set. Under all these circumstances could Jones properly refuse to take the suit? Why? CHAPTER IX DISCHARGE OF CONTRACTS Continued I. As to Con- sequences 1 . Money Damages II. As to Time Divisible Contracts Breach of Subsidiary terms Discharge from further Performance Specific Performance Anticipatory Breach At Date of Performance 86. Breach of Contract. The fifth method by which one's obligation, or duty, created by a contract, may be discharged, is by a wrongful act of the other party. A wrongful act which discharges the innocent party to a contract may be either the failure of the other party to do something which by the con- tract he has agreed to do, or the act of the other party in doing something which by the contract he has agreed not to do. Such omissions or acts violate the terms of the contract, and are called breaches of the contract. 87. Consequences of Breach. When there has been a breach of contract, the injured party is entitled to either (1) money damages, (2) discharge of his own obligation to perform, or (3) the right to enforce performance. Which of these rights he is entitled to depends upon the circumstances and the law covering the particular case. Whether the injured party is limited to damages, or whether he may also be excused from his own performance, depends on the nature of the terms which the other party has violated. The injured party will be discharged from the contract, in addi- tion to having an action for damages, unless, 1. The contract is divisible, or, 2. The term which was violated was subsidiary to the main purpose of the contract. 62 DISCHARGE OF CONTRACTS 63 88. Divisible Contract. A contract may consist of a number of promises to perform a series of acts, really a series of separate contracts. If this be true, the failure of one party to perform one of these acts does not discharge the other from the whole contract, or even entitle him to sue as for breach of the whole contract. A breach in such a contract operates only on that part of the contract which it affects, and no other. It is often difficult to determine whether a contract is entire or divisible, and each case must depend entirely upon its own facts. If, how- ever, the contract be divisible, a breach gives rise only to an action for damages, and does not operate to discharge the contract. EXAMPLES 1. Under a contract Norrington agreed to sell to Wright "5000 tons of iron rails, for shipment from a European port, or ports, at the rate of about 1000 tons per month, beginning February, 1880, but the whole contract to be shipped before August first, 1880." Norrington shipped in February 400 tons, which Wright received and paid for, but when Wright learned that only 885 tons had been shipped in March he refused to receive them and cancelled the whole contract. The court declared the contract to be entire, and said that the failure to ship 1000 tons a month was a breach of the entire agreement as that was what had been contemplated. Norrington vs. Wright, 115 U. S. 188. 2. Cahen sold to Platt 10,000 boxes of glass to be delivered during the months of October, November and December, to be paid for on delivery. Cahen delivered 4000 boxes in October which were not up to specifications agreed upon in the contract and Platt cancelled the whole agreement. The court, however, interpreted this as a divisible contract and declared that a breach only affected a part of the contract and did not permit of cancellation of the whole. Cahen vs. Platt, 69 N. Y. 348. Note. The two examples above may seem very similar, but it will be observed that in the first example Norrington's failure to ship 1000 tons a month had already violated a principal clause of the whole contract, while in the second example Cahen still had plenty of opportunity during November and December to fulfil his contract, even though the first shipment of 4000 boxes was unsatisfactory. 89. Breach of Subsidiary Terms. It would be grossly unfair to allow a party to refuse to proceed with a contract because the other had violated, perhaps unintentionally, some term which was of little vital importance. The law has recognized this and does not permit such a result to follow. If the term which is violated does not go to the essence of the contract, it 64 DISCHARGE OF CONTRACTS will merely give rise to an action for damages, but will not entitle the innocent party to cancel the entire agreement. 90. Specific Performance. Sometimes damages, which are always measured in money, will not compensate a person for the loss of benefit which he has suffered by reason of the violation of the terms of the contract by the other party. Such a condi- tion often exists in case one has contracted to buy a house or farm, desiring, for some personal reason, to secure the particular house or farm for which he contracted. No other will satisfy him, and no amount of damages will entirely pay him for his loss. Recognizing this fact, courts of equity enable a party who has made a contract regarding real estate to compel the other party to do actually as he agreed. If he agreed to sell a farm, he will be compelled to convey it; and the rule works both ways, for the purchaser may be compelled to accept it and pay the price. This remedy is called specific performance and applies, with few exceptions, only to contracts for the sale and purchase of land. If, after one has been so ordered to perform his promise, he continues to refuse, the court of equity will declare him to be in contempt of court and order him punished. In contracts to buy or sell personal property it rarely happens that money damages will not suffice as compensation, but in rare instances, as where one has agreed to sell another an heirloom, or a patent right, which can be pur- chased of him alone, the innocent party may secure a decree of specific perform- ance, as it is called, of a contract to sell personal property. EXAMPLES 1. Ames contracts to sell Blackacre to Bates for $5000, who agrees to accept it at that price, the contract being in writing. Later Ames refuses to perform his part. Bates makes a tender of the money, which is refused, and then sues Ames in a court of equity, which will, in the absence of fraud or mis- take, order Ames to accept the money and convey the land. 2. Parker, a contractor engaged in building a court house, entered into a contract with Neal to buy 200,000 feet of pine boards to be cut from a specific tract of pine timber situated in Caroline county, known as the "Bennett Todd Tract." He desired this particular lumber in order to comply with the speci- fications for the court house, and no other lumber in the vicinity was satis- factory. When Neal broke the contract, the court declared that the circum- stances were exceptional and would entitle Parker to have specific performance by Neal, even though it was a contract to sell personal property. Neal vs. Parker, 98 Md. 254. DISCHARGE OF CONTRACTS 65 91. Anticipatory Breach. Violations of a contract may occur before the time of performance. Ames, who has agreed to sell his house to Bates on the first of July, may have declared on the first of May that he repudiated his contract and refused to be bound by it, or he may have torn down his house. In either event, whether it be by express renunciation or by act, Ames is said to have committed an anticipatory breach of his contract, being a total violation of it before the time of performance. If such anticipatory breach be committed, the innocent party need not wait until the time of performance, holding himself always ready to perform his own part of the contract, but is at once discharged from his obligations, and may immediately sue the other party for his damages. This is subject to the limitation that except in mutual promises to marry, or similar contracts calling for continued steadfastness, the party committing such an anticipatory breach may repent and withdraw his repudiation, even against the other's protest, at any time before it is acted upon by the innocent party or has caused him damages. EXAMPLE Clark employed Marsiglia to clean paintings from a picture gallery, but before the latter began the work Clark countermanded his directions and refused to continue the contract. Marsiglia, however, proceeded with the work and when it was completed sued Clark for the entire contract price. The court decided that he could only recover the expenses which he had suffered at the time Clark repudiated the contract and the profits on the whole contract. He had no right to continue the work. It was his duty to keep the damages as low as possible. Clark vs. Marsiglia, 1 Denio (N. Y.) 318. 92. Damages for Breach of Contract. If the injured and innocent party to a contract which has been broken, sues for damages, he may recover the amount of loss which he has suffered. This loss is estimated in money, and is measured by the net value of the contract, or what he would have realized had the contract been performed. The net value includes the actual outlay and the profits which could have been reasonably anticipated. Remote and uncertain, or speculative, damages cannot be recovered, but only those which can be readily com- puted and ascertained. If no anticipated profits be proved, the injured arid innocent party may recover the net expenses which he incurred in preparing to perform his part of the contract. 66 DISCHARGE OF CONTRACTS The fundamental idea of the assessment of damages is that the party who has been injured by the other's breach of contract may recover for the loss of the benefit which he would have received had the contract been performed. This loss of benefit is measured by the difference in value between what he received and what he should have received. No one can recover damages for breach of contract if he himself caused the breach to be committed. If one party contracts to build another a house by May first, from materials to be furnished by the latter, the party for whom the house was to be built cannot object because it is not completed within the time specified if he failed to furnish the materials promptly. "One cannot recover for his own wrong." The assessment of damages for breach of contract is largely a matter of computation from the facts of the particular situation, the aim always being to determine the money value of specific losses and the money value of the loss of the benefit caused by the breach. EXAMPLES 1. Deeds contracted to purchase from Gardner 500 buggies of specified description and at stipulated prices, to be ordered as needed. Gardner, relying on the contract, purchased all the necessary material and constituent parts, but Deeds repudiated the contract. Gardner sued for damages, without manufacturing the buggies, and was allowed to recover at once the profits which the contract would have yielded, in this case the difference between the contract price and the cost of production. Gardner vs. Deeds, 116 Tenn. 128. 2. Meech contracted to furnish a hall for the performance of a theatrical company, and to retain one-half the gross profits for the use of the hall. Later he refused to furnish the hall and the theatrical company sued him and attempted to recover an amount which they claimed would have been one-half the gross profits. This they could not do, because such profits were purely speculative and not susceptible of proof. The amount of their damages was limited to the expense which they had incurred preparing for the engagement. Bernstein vs. Meech, 130 N. Y. 354. 93. Summary of Rights Caused by Breach. (I) One who seeks to recover damages because of another's violation of the terms of a contract must show: 1. That he did not cause the breach of the other, and that the breach was of a condition precedent to any duty on his part, or, 2. That it was the breach of a condition concurrent, and that at the time and place of performance he was himself ready and willing to perform, or, 3. That it was an anticipatory breach, which he acted upon. In each of the above cases he must show that he was thereby damaged in an amount capable of proof. DISCHARGE OF CONTRACTS 67 (II) One who seeks to cancel a contract because of another's breach cannot do so, if 1. His own promise was independent, 2. The contract was divisible, or 3. The term which was violated was subsidiary to the main purpose of the contract. (III) One who seeks a decree of specific performance for breach by the other must show: 1. That he is ready and willing to perform his part, 2. That damages will not adequately compensate him for his loss. PRACTICAL SUGGESTIONS Avoid making oral contracts to buy land, because if the price goes up the other party may decide to keep his land and you cannot ask the court to order specific performance of such an agreement. A continuation of performance of your side of a contract after the other party has committed a total anticipatory breach is unnecessary and improvi- dent, because you can only recover for the loss you suffered up to that time, not afterwards. The performance of acts which may result in the other party committing a breach of his contract with you is dangerous, because you may thereby become the one at fault both morally and legally. Don't make verbal contracts when you could as well make written ones. There is less opportunity for dispute later. REVIEW QUESTIONS 1. Gregory agreed to work for Mallory for nine months at thirty dollars a month, payable at the end of his employment. Two weeks before the work was to begin, Mallory informed Gregory that he did not need him. What can Gregory do about this? 2. The White Sox, a Chicago baseball club, contracted with Whitney, a noted pitcher, agreeing to pay him $12,000 for the next season's playing, and Whitney accepted this agreement. Before the season 'opened he made a new contract with another club at a higher salary, and refused to play with the White Sox. What can the White Sox do about this? 3. Jordan employed Wright to renovate and cleanse the rugs and carpets of his hotel for a certain sum. Wright called for and obtained them 68 DISCHARGE OF CONTRACTS and took them to his place of business and began work upon them, but before he was half done Jordan told him he need not clean the others, as he was about to sell the hotel. As Wright had gone to the trouble to get them from the hotel and had been at expense in employing an assistant for the entire work, he went ahead and cleaned them all, and redelivered them to Jordan, who had not sold as he expected. Jordan refused to pay anything and Wright sued him. How much, if anything, can he collect? 4. By a valid contract Ames promised Bates to paint him a picture to be delivered at Bates' public gallery at a certain date. A month before that date Ames' arms were permanently paralyzed. Bates did his best to find some one else who could paint a suitable picture to take the place of Ames' work, but failed, Ames being the best artist in America. The agreed price for painting the picture was $4000, and on account of its absence the exhibition was a failure and Bates lost $3000. Bates sued Ames for $3000, and Ames sued Bates for $4000, claiming that it had become impossible for him to perform his conditions under the contract. Who is in the right? Why? 5. Morgan employed Moore to clean his sidewalks for the winter, prom- ising to pay him $3.00 each time it was necessary to clean them. Moore cleaned them sixteen times and then secured a permanent position and refused to continue his work. It was necessary for Morgan to employ another man at $4.00 for each of ten additional cleanings, and he refused to pay Moore anything, claiming that Moore had broken his contract and that this excused him from any further performance on his part. Moore sued him for $64.00. Can he recover? CHAPTER X REMEDIES 94. Purpose of Remedies. It has long been the boast of our law that under it there is provided a redress for every wrong. The legal means which the law uses for this purpose are called its remedies. In case the wrong is a public one, it is called a crime, and its punishment is provided by the criminal law. Commercial law, however, is directed particularly to the rights and injuries of individuals arising out of contracts. The rem- edies provided for injuries to these rights are called civil remedies. These are always secured through the formality of "a suit at law," for it is a maxim of the law that "No man shall be condemned unheard," and that "Every man has his day in court." 95. Legal Steps. The following are the formal steps which make up "a suit at law," and enable a party who has been civilly wronged, whether by breach of contract or otherwise, to recover his damages: 1. Summons, 4. Judgment, 6. Levy, 2. Pleadings, 5. Execution, 7. Sale. 3. Trial, 96. Summons. The first step is to secure from the clerk of the court a summons, * and have it served upon the party whom one wishes to sue, called the defendant in the action. This sum- mons gives the defendant notice of the commencement of the law-suit, and of the day, place, and hour of trial, that he may have the opportunity to be present and make his defense. 97. Pleadings are the written or oral statements of the parties, to the court, describing the nature of their claims. Copies are usually required to be furnished to the opponents so that they may know on what matters to prepare for the trial. *In many states the clerk of court no longer issues the summons, but it is drawn up and signed by any lawyer, being deposited with the clerk of court only after it has been served on the defendant., 69 70 REMEDIES 98. The trial is conducted by a regular and well understood code of rules, each party being allowed at the proper time to offer evidence in his own behalf. The person who began the law-suit is called the plaintiff, or complainant, and he must prove his side of the case by the weight of evidence. If the testimony appears to be balanced, the suit will be dismissed, for he who sues another must always prove his claim. Thus if the law-suit be one in which a debtor is made the defendant and the action be started to collect the debt, the trial begins with the presumption that the defendant owes nothing, and the plaintiff must overcome this presumption by producing more evidence to the effect that he does owe it than the defendant produces that he does not. 99. Judgment. If the case be heard by a jury its decision is called a "verdict." The verdict, when "entered" upon the records of the court is called a judgment. The judgment varies according to the relief sought. It is generally expressed in terms of money, since money is usually the best measure of damages for a wrong. When a judgment is entered by a court of record* it usually becomes a lien on the real estate owned by the defend- ant within the county. This means merely that the plain- tiff can collect his claim out of the real estate, if the defendant refuses to pay him in money, and that it makes no difference even if the defendant sells the real estate, because the judgment continues to be a lien upon all the real estate which the defendant owned in the county when it was rendered, until it is paid. When the judgment is rendered the legal steps have proved of little actual satisfaction to the plaintiff, for the debtor still owes him and he has merely substituted the judgment for the original evidence of the debt. The law, however, provides a manner in which a judgment can be collected, provided the debtor has any property not exempt. (See table of exemptions in appendix.) This step is not applicable except when the debt has been reduced to a judgment, for only by following the three preliminary legal steps can it be fully determined that no injus- tice is being done and that the debtor actually owes the debt. * Courts of record are those whose acts and judicial proceedings are required by law to be enrolled and preserved fora perpetual memorial. Inferior courts such as justice courts, and in some states, municipal or city courts, are not courts of record. REMEDIES 71 At the point where judgment is rendered the steps taken have been to fix the liability with certainty; the remaining steps are provided as a means of realizing upon that established liability. 100. Execution. This is an order issued by the court to its executive officer (constable or sheriff), directing him to seize the property of the debtor and convert it into cash, that the judgment may be paid. The execution is usually first served upon the debtor, by reading it to him, with a demand made upon him by the officer for either cash or property with which to satisfy it. 101. Levy. In case the debtor refuses or neglects to turn over property in satisfaction of the execution when it is served upon him, the officer may seize any property, not exempt, that he may find belonging to the debtor. This is called "making a levy." Property so seized is, after being advertised according to law, exposed for sale, usually at auction to the highest bidder. The proceeds are first applied in satisfaction of the costs and expenses of the suit and of the levy, then to the claim itself, after which, anything remaining is turned back to the debtor. 102. Exemptions. Not all property owned by the debtor is subject to levy under an execution. The several states have passed statutes called "exemption laws," by the terms of which a debtor may, in any event, retain certain of his property. This is to prevent the individual from being deprived of the necessities of life, or of the resources by which these necessities may be obtained, so as to be in danger of becoming a public charge. As a rule, the heads of families are the most favored class in this regard. The exemption laws are entirely a matter of statutory regulation, and the student should consult the statutes of his own state for further details. (See appendix.) 103. Garnishment. The debtor may have no property subject to execution, but it may be that a third person owes him on account, on a note or in some other form of indebtedness. This person is called in and made to testify as to the amount of the indebtedness. A judgment is then rendered against him for such amount as may be due, in favor of the plaintiff. This is called "garnisheeing the debt of another." 72 REMEDIES It is also possible to employ this means of collection at the commencement of the original law-suit, in order to prevent the person to be garnished from paying the defendant while the law-suit is in progress. Government, municipal, and other public employees are not subject to garnishment of their salaries. 104. Replevin. When a party fails to perform that which he contracted to do, the law, as we have seen, gives to the injured party a redress, which is, in nearly all cases, a money damage. The law does not usually compel a party to perform his contract literally, neither can he, as a rule, be imprisoned for not doing so. There are cases, however, when the law does not deem a money compensation a just equivalent for the wrong suffered. One of these is a case in which the defendant unlaw- fully takes and detains the goods of another. The remedy for this wrong is called replevin. The executive officer of the court takes possession of the goods, by virtue of a statement of author- ity issued by the court called a writ of replevin, and if after the trial the judgment is in favor of the plaintiff, the actual goods are delivered to him; but if in favor of the defendant, the goods are returned to him. The scope of this action has been generally much enlarged by statute, until now it embraces all cases where the property of another is unlawfully detained, regardless of whether the original taking was lawful. It is certainly, where applicable, a wholesome remedy, and without it the law would in many cases fall far short of giving complete redress. 105. Attachment. Before the plaintiff could go through the long formalities of a suit at law, obtain a judgment, and secure an execution, the defendant might, if he desired to do so, put all his property out of his hands, or perhaps flee from the state. In such cases the court will issue an attachment. This is in effect reversing the order of the steps, bringing the exe- cution first, after which comes the trial, judgment, etc. A suit can be commenced by means of an attachment only when the plaintiff will state on oath before the court that the debtor is planning to flee from the state, has disposed of or threatens to dispose of his property, or in some other manner, specified by statute, has acted or threatens to act in such manner as to make REMEDIES 73 the plaintiff's judgment uncollectible, unless the debtor's prop- erty be seized immediately. It is a grave thing to deprive a man of his property before it is legally determined that he is indebted to the plaintiff, and in most states the court will not issue a writ of attachment, ordering the executive officer to seize the goods, unless a bond is filed with the court, by which the plaintiff agrees that he and his bondsmen will pay the defendant for all the damage he has suffered, if it should finally be deter- mined that he did not have a right to the writ of attachment. 106. Injunction. This is called a negative remedy. It is designed to prevent a prospective injury rather than to give redress for a wrong already committed. If a person can prove to the court that some other person is about to do that which would be an irreparable injury to him, for which money damages would be an inadequate remedy, he can secure an injunction against the wrong-doer. This is the order of the court which informs the wrong-doer that he must not commit his threatened act, and restrains him from committing it. If he persists he will then violate the injunction and will be said to be "in con- tempt of court," for which contempt the court will fine or imprison him. Ordinarily one cannot secure an injunction to prevent another from breaking his contract. 107. Specific Performance. This remedy has been previously mentioned. It is a remedy which consists in the decision of the court that the defendant shall do the particular act which he agreed to do. It has already been stated that this remedy is applicable in only a few well defined cases, usually being con- fined to contracts for the sale or purchase of real estate. CHAPTER XI SPECIAL DEFENSES* I. Statute of Frauds II. Statute of Limitations REQUIRES A WRITTEN MEMORANDUM IN CONTRACTS For sale of real property For leases of real property When not to be performed within one year In consideration of marriage To answer for debts or de- faults of others . For sale of personal property above specified value REQUIRES SUIT TO BE COMMENCED WITHIN SPECIFIED TIME UNLESS a. Injury has been fraudulently concealed b. Injured party has been under disability c. The claim has been revived III. Set-off or Counterclaim IV. Accord and Satisfaction 108. Special Defenses. Not only may one who is sued for a breach of his contract offer in defense the fact that his breach was caused by a violation of duty on the part of the other, by operation of law, or by such impossibility as the law will recog- nize, which defenses have been previously considered, but he may offer, in defense, his rights under two notable statutes, known as the Statute of Frauds and the Statute of Limitations and generally adopted in all states, or he may defend by proving a set-off or an accord and satisfaction. These defenses are dis- cussed in the order named. *So called to distinguish them from the regular defenses previously enumerated, which go to the merits of the contract. 74 SPECIAL DEFENSES 75 STATUTE OF FRAUDS 109. Origin. The Statute of Frauds was a famous English statute, enacted in the year 1677, during the reign of Charles II, and declared to be a statute "to prevent frauds and perjuries." The Fourth and Seventeenth sections of the English statute have been embodied in the statutes of nearly all of our states, with few changes. 110. Purpose. The Statute of Frauds provided that certain classes of contract were not enforceable in court unless some note or memorandum in writing, signed by the party to be charged, or by his agent, was presented to the court as evidence of the contract. This note or memorandum was sufficient if it plainly indicated that it referred to the contract between the parties, and showed that the party to be charged with an obli- gation, had signed or initialed it. The fact that no such note or memorandum in writing exists is entirely a matter of defense, and if the defendant in a law- suit does not raise the point, he will be deemed to have waived his rights to object to the enforcement of the contract on this ground. This is because the contract is not void if it fails to comply with the Statute of Frauds, but merely not enforceable if the point be raised. The contract not being void, the parties may carry out their oral obligations as they wish. Furthermore, if one party has performed his part of the contract, the other party, by accepting the benefit of such performance, will lose the right to object on the ground that the contract was not in writing. Thus it is said that "performance by one party takes the contract outside the Statute of Frauds." 111. Provisions. The statute as adopted generally through- out the United States provides that the following classes of contracts will not be enforced by the courts unless there be some note or memorandum in writing signed by the party to be charged : From the Fourth Section. I . Contracts for the sale of any interest in lands ; II. Leases of land for more than one year (with a limited number of exceptions) ; 76 SPECIAL DEFENSES 111. Contracts by their terms not to be performed within one year; IV. Contracts made upon the consideration of marriage, except mutual promises of marriage; V. Contracts to answer for the debt, default, or miscar- riage of another ; From the Seventeenth Section. VI. Contracts for the sale of goods, chattels, or things in action for the price of fifty dollars or more, unless: (a) The buyer receives a part of the thing purchased, or (&) The buyer pays part of the purchase price, or (c) The sale be by auction. 112. The memorandum. While the statute provides only for a note or memorandum of the agreement, stating its essential terms, careful persons will make a full memorandum, including all the terms, the consideration, the parties, and the conditions to be performed, and will have it signed by both parties. All this is not necessary under the wording of the statute, but if it be done there can be no question as to the sufficiency of the memorandum. 113. I. Contracts for sale of interests in land are placed within the statute and its terms apply in every detail to them. Without such a provision, requiring that they be evidenced by writing, fraud could easily be practiced, for with long legal descriptions of land it would be a simple matter for a shrewd, unscrupulous person to mislead another by his verbal statements. EXAMPLE A, the owner of land, orally agreed with B to convey it to B upon B's paying the agreed price. B tendered the price, which A refused to accept, saying that he had changed his mind. When B sued A for this violation of the agreement, the court declared that B had no legally enforceable rights against A because no written memorandum of their agreement existed. Shel- ton vs. Cookay, 138 Mo. App. 389. 114. II. Leases of land for more than one year were not enforceable under the English Statute of Frauds unless evidenced by a memorandum in writing. The same provision is adopted in many states of the United States. A few states have modified SPECIAL DEFENSES 77 this restriction so that it operates only in case of leases for more than three years. In applying these restrictions the courts generally compute the year (or three years) from the date of making the lease, though a few states begin the computation at the time the tenant is entitled to enter into possession of the land. Unless the statute states that the term begins at the time of the date of the lease, the common law rule must be applied, which rule is that the term begins at the date of making the contract. EXAMPLE On March first, A orally agreed to rent B's farm for a period of two years beginning April first, and to pay B $500 annually. Nothing was paid, how- ever, and later A refused to accept the premises. When B sued him for violating the contract A said that he did not have to take the farm because of the Statute of Frauds. The court upheld him in his refusal to continue the contract on this ground as the law of the state required contracts for leases of land for more than one year to be in writing. Barlow vs. Wainwright, 22 Vt. 88. 115. III. Contracts not to be performed within a year are those contracts which by their terms cannot possibly be per- formed within that time. These must be in writing, as provided by this statute. If the contract be one for the performance of services for an indefinite time, or is based upon a condition which may happen within a year, or is a contract which one party, though not the other, may perform within a year, no writ- ten memorandum is necessary. EXAMPLE Drew purchased some lots from Wiswall under an oral agreement that as soon as he built a house Wiswall would construct a street. He built the house but Wiswall refused to construct the street, claiming that the work was not done in one year and that the agreement was unenforceable because not in writing. The court decided that written evidence was not necessary, because the agreement could have been performed within a year, even though it was not so performed. Drew vs. Wiswall, 183 Mass. 554. 116. IV. Contracts in consideration of marriage are seldom made in modern business. They were formerly made with the prospective groom by the parent, guardian, or relative of the prospective bride, and by them the former agreed to pay, or settle upon, the bride a certain amount of money at the time of the marriage. Such agreements were not enforceable unless they were in writing. 78 SPECIAL DEFENSES At present such contracts are rarely made, except in an occasional instance in which a prospective husband promises to settle a certain amount of money on his wife. This is called an ante-nuplial agreement and must be evidenced by writing. On the other hand, the mutual exchange of promises to marry need not be evidenced by writing, and such a promise, if broken, will give cause for an action for breach of promise without any written proof. EXAMPLE John S. Rowell promised to settle a specified amount of money on his intended bride, provided she would marry him. The agreement was never reduced to writing, and when after their marriage the wife attempted to enforce the contract, the court declared that she could not do so because there was no memorandum in writing. This contract did not come within the exception because the consideration was not the mutual exchange of promises to marry, but the payment of money. Rowell vs. Barber, 142 Wis. 304. 117. V. Contracts to answer for the debt or default of another. These contracts are of importance to every business man. Frequently one presses a man who owes him for payment of an account, and satisfies himself with the promise of a third person to pay the debt, if the debtor does not. Yet such an agreement cannot be enforced unless it is in writing, and not even then unless a consideration be given the guarantor. Or it may be that Ames goes to a store with Bates, who wishes to buy goods, and says to the store-keeper, "This is Bates, who wishes to buy some goods. If he does not pay you, I will." The promise of Ames cannot be enforced if it is not in writing. If, however, in the foregoing example, Ames had said, "Let Bates have what he wishes, and charge the goods to my account," his promise would be enforceable, because then the merchant would have sold the goods on Ames' sole credit, and Ames' promise would not have been to answer for the debt of another. EXAMPLE The foreman of a railroad construction party arranged with a hotel keeper to supply his men with lodging, promising that he would see that the bills were paid, if the men did not themselves pay. The men failed to pay and when the hotel keeper sued the foreman the court refused to enforce the prom- ise because of the statute of frauds. Obert Brewing Company vs. Wabash Ry. Company, 129 S. W. 991. 118. VI. Contracts for the sale of goods. This provision of the Statute of Frauds originally applied to cases in which the SPECIAL DEFENSES 79 value of goods was more than fifty dollars. Some states do not have this portion of the statute.* In adopting the old statute some states have increased the limit to $200, f while a few have decreased it to $30. J The Uniform Sales of Goods act, which we shall discuss later in connection with the sales of personal property, places the limit at $50, and has been adopted in some states. In connection with this provision of the Statute of Frauds it is to be noticed that there are four means by which a contract for the sale of goods in excess of the statutory amount may be made enforceable, the first being to have a note or memorandum in writing. The other means are (a) that the buyer shall have received a part of the thing purchased, or (6) that the buyer shall have paid a part of the purchase price, or (c) that the sale shall have been by auction. In the last three cases, no note or memorandum need exist, to make the contract enforceable. 1. Millard ordered a quantity of clapboards from Cooke, agreeing to pay $400. Cooke immediately began preparing the boards, dressing them down and putting them in condition for delivery. Millard refused to accept the boards, and when Cooke sued him he defended on the ground that there was no memorandum in writing. The court refused Cooke recovery. Cooke vs. Millard, 65 N. Y. 359. 2. A ordered a bill of goods amounting to several hundred dollars from B, paying five dollars down when the order was given. A later attempted to get out of his contract obligation on the ground that he had signed no memorandum, but the court said that the part payment made writing unneces- sary. Weis vs. Hudnut, 115 Ind. 525. STATUTE OF LIMITATIONS 119. Object. After the lapse of a reasonable period the law will not offer its aid to an injured party. The law will not help a man who has "slept on his rights" too long. Statutes have been adopted in the various states naming a limit of time * Alabama, Arizona, Delaware, Illinois, Kansas, Kentucky, Louisiana, New Mexico, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, West Virginia, Virginia. t California, Idaho, Montana, and Utah. J Maine, New Jersey, Missouri, Arkansas; it is $33 in New Hampshire; $40 in Vermont; and applies to all contracts regardless of value in Florida and Iowa. In the majority of states the limit of value is $50, as under the English statute. 80 SPECIAL DEFENSES in which law-suits to recover damages must be brought, if at all. These statutes are frequently called statutes of repose, for after the stated time the right of action is at rest so far as the law is concerned. Thereafter only a moral, but not a legal, obligation continues. 120. Tables of limitation. In adopting these statutes of limitation, or repose, the various states selected different periods of time for different kinds of actions. The principal classes are actions on open accounts, demands on written con- tracts, and demands on judgments. There is also a difference in case the contract be under seal, in which event the period of limitation is usually longer than on a simple contract. After the expiration of the time in which the action must be brought, if at all, the claim is said to be "barred by the Statute of Limi- tations," or "outlawed." At this point, examine the "Tables of Limitation," in the appendix. 121. When time begins to run. Generally the time men- tioned in the statute begins to run from the very first day on which an action could properly have been brought, even though the party injured did not know that he had such a right of action until long afterward. In a running account, as for merchandise, and on a note on which some payments have been made, the time begins to run from the date of the last payment or purchase. The payment of interest will have the effect of keeping a debt alive for the full statutory time after payment. An important distinction is also observed in courts of equity, which have declared that fraud of the wrongdoer, preventing the discovery of the right of action, will prevent the time from beginning to run until the fraud is discovered. EXAMPLES 1. Ames owes Bates $200 on a note due on August 1, 1904. The statute of limitations on notes is six years in their state. In December, 1911, Bates sues Ames on this indebtedness. Ames claims that the note is outlawed, but Bates shows that Ames paid interest up to January, 1909. This prevents the statute of limitations from beginning to run until that time. 2. Call owes Dale for groceries, some having been purchased in 1905, some in 1906 and some in 1907. Dale sues Call for the entire account in 1912, the statute of limitations in his state on such accounts being six years. Call SPECIAL DEFENSES 81 claims that a part of the account is outlawed, but this is not true because the statute only begins to run from the date of the last item. 122. Saving clauses. There are certain provisions, called "saving clauses," which provide excuses in some instances for not bringing the action within the time limit. If the person injured is an infant, an insane person, or a person imprisoned; or if the wrong-doer is absent from the state, the law will excuse failure to bring the action within the time of limitation. These excuses are called "disabilities," and the person who objects to his claim being outlawed on any of these grounds is said to be laboring under a disability. As a rule, if the disability exists at the time the plaintiff begins to hc.ve the right to bring his law-suit, the statute does not begin to run until the disability has been removed. Except in case of one's absence from the state, which inures to the benefit of the other party, all the disabilities extend only to protect the person disabled. The Statute of Limitations has no effect on actions in which the state sues in its sovereign capacity. Thus a state does not lose its right of action for debt on delinquent taxes, by the lapse of time. EXAMPLES 1. Perry maintained a cess-pool on his land for a number of years, without protest from the state authorities. It was admitted, however, that the state could have ordered him to remove it at any time on the ground that it was a public nuisance. After many years the state brought an action for this purpose and Perry defended on the ground that the Statute of Limitations barred the action. The court declared that the state could maintain its action. Commonwealth vs. Perry, 139 Mass. 198. 2. A girl six years of age suffered an injury by another person taking possession of her land. Later she became of legal age and commenced an action to recover possession of the land. The wrong-doer defended on the ground that any claim which she might have had was outlawed. The court allowed recovery because the girl had been under disability and the statute of limitations did not affect her rights during that period. Bunce vs. Wolcott, 2 Conn. 27. 123. Revival of claims. Even though the lapse of time under the Statute of Limitations may have barred the claim, it is possible for the parties to revive any right which originally existed, by an express promise to do so, and no consideration is needed for this promise. If the debtor, or person who may 82 SPECIAL DEFENSES claim the benefit of the lapse of time under the statute, makes such an express promise to revive the debt, or makes a payment on the debt, the claim is revived and the Statute of Limitations again begins to run from the date of the new promise. In a few states, the promise to renew the debt must be in writing. EXAMPLE Ames owes a debt to Bates, which is allowed to run until it is outlawed by the statute. After this Ames writes to Bates, acknowledging the debt, and stating that he would pay it as soon as he could. This revives the debt and the statute begins running anew. Payment on a debt after it is outlawed revives the debt. SET-OFF AND COUNTERCLAIM 124. Set-Off and Counterclaim. When suit is brought against a debtor, he may, in the same suit, defend on the ground that the person who is the plaintiff in the suit is actually indebted to him, the defendant. Litigation is often simplified in this manner, for the validity of the claims of both parties may be then tested in the same suit. The party whose claim is the larger will be awarded the judgment for the amount of the difference in the claims. If the claim of the defendant is a definitely ascer- tained amount, his defense is called a set-off. If the defendant's claim is based on damages which must be ascertained the defense is called a counterclaim. In some states the latter is called a right of recoupment. EXAMPLES 1. A owed B the sum of $100 on a contract to repair a building. When B brought a suit to recover this amount, A showed that the contract had not been fulfilled according to its terms and that he had been obliged to pay out $125 to repair the damage which B had caused him. The court allowed A to have judgment against B for $25. McGuire vs. Bransfield, 147 111. App. 541. 2. Ames owes Bates fifty dollars for groceries. Bates owes Ames twenty dollars for coal. If Bates sues Ames, Ames may defend by way of set-off and Bates can recover judgment only for thirty dollars. 3. A agreed to work as a salesman for B on a salary and commission, devoting all of his time to B's work. As a matter of fact, A carried a side-line of goods, which he sold for his own benefit, and B discharged him on learning this fact. A sued B for his salary and commissions, but B was allowed to counterclaim and recoup for A's lack of diligence in seeking his own customers, and for the time which he had devoted to this side-line. Alberts vs. Stearns, 50 Mich. 350. SPECIAL DEFENSES 83 125. Accord and Satisfaction. A fourth special defense to a suit for the violation of a contract may be set up, called an accord and satisfaction. When there has been a breach of contract on the part of one party the parties may agree on what the one in default is to be required to do or pay by way of settle- ment. This is a new agreement, and if fulfilled it is a complete discharge of the original contract and no further action can be maintained on the original contract. If, however, it is not carried out, the aggrieved party may sue the other on the original contract, and may recover all the damages which he can prove, even though they be in excess of the amount agreed upon in the accord. The agreement to accept a stated sum, or a specified act, as compensation for breach of a contract is called the accord ; the carrying out of the terms is the satisfaction. Both elements must concur to complete the defense. PRACTICAL SUGGESTIONS Don't make oral contracts when written ones are required by law, because you thereby furnish the other party with a defense for his refusal to perform. Don't refuse, however, to perform an oral contract, after the other party has fully performed his part, evert though it be a contract required to be written, because full performance by one party makes the defense of the Statute of Frauds inapplicable. Don't postpone collections until they are outlawed, because they then cease to be legally collectible. It is unwise to take advantage of the Statute of Limitations to escape a claim which you should pay, because you will thereby destroy your own credit in the community, even though you may have a legal defense. Try to collect interest or small payments on all bad accounts, because such payments prevent the claim being outlawed, and the debtor may some day inherit property and the claim thus become collectible. It is often wise to sue on debts which are nearly outlawed, because you may thereby add many years to their collectibility. It is futile to sue a man if you owe him as much as he owes you, because his right of set-off against you is as valuable as your claim against him. Don't make verbal contracts -when you could as well make written ones. There is less opportunity for dispute later. REVIEW QUESTIONS 1. Miss Withers sued Ward Richardson for $10,000 damages for his failure to marry her, claiming that he had asked her to be his v/ife, and that she had accepted, but that he had later married another woman. Richardson 84 SPECIAL DEFENSES admitted all these things, but defended himself on the following grounds: (1) That the consideration of his promise was the marriage of the parties, and that there was no memorandum of the agreement in writing; (2) that they had not intended to be married until three years later, and (3) that he and Miss Withers were first cousins and that marriages between first cousins were illegal and void in their state. Wete any of these defenses valid? Why? 2. Hastings offered Bruce $200 for commission if Bruce would find a purchaser for Hasting's 200-acre farm at a specified price. Bruce within two weeks introduced to Hastings a purchaser who offered to buy the farm at the price, but Hastings unreasonably refused to sell to him on the ground that the proposed purchaser had once been divorced. Bruce then sued for his commissions of $200, and Hastings defended on the ground that the agreement between them was one for the sale of real estate and that there was no written memorandum. Was this a valid defense? W T hy? 3. Bernier sued Cabot for wages for 15 months at $50 a month. Cabot defended on the ground that Bernier had agreed to work for him for two years and had promised not to leave his employ at any time during that period, but that he had left at the end of 15 months, damaging Cabot to the extent of $300, for w r hich Cabot claimed a right of set-off and counterclaim. Would it make any difference whether this agreement was in writing? Why? 4. Ferris, a negro, in 1872, sued Henderson for wages due him for work during the years of 1866 and 1867, claiming that Henderson had compelled him to work for him during that period as a slave, fraudulently keeping him in ignorance of the fact that slavery had been abolished by a constitutional amendment in December, 1865. Henderson defended on the ground that such actions must be brought within four years. What further would Ferris have to show in order to recover? Why? 5. William Jackson died in 1886 and left his house to his son, Robert Jackson, who was born in 1870, and his farm to another son, George Jackson, who was born in 1885. In 1886 Conrad Johnson went upon the farm and occu- pied both it and the house continuously as his own until 1914 when Robert Jackson sued him to recover his house and George Jackson sued him to recover his farm. Johnson defended on the ground that by the statute of limitations in his state such actions to recover real estate must have been brought within twenty years after he first wrongfully took possession. Were the claims of either, or both, the Jacksons outlawed? Why? 6. What length of time is allowed in which to bring suit in your state, on open account? on a promissory note? on a debt which the court has declared to be due you? CHAPTER XII MISCELLANEOUS MATTERS 126. Two Rules of Evidence. Rules of evidence are ordi- narily of interest to lawyers only. There are, however, two rules as to the manner in which facts may be proved which are of the greatest importance to the man of business, and which, unfortunately, are not generally understood by him. The first of these rules is called the Parol Evidence Rule, and the second, the Rule Regarding Transactions with Persons Now Deceased. 127. Parol Evidence Rule. This is a rule of evidence in force in every court where parties seek to prove their claims against others. It is in substance, that if a contract, or other agreement stating the rights of the parties, has been reduced to writing, the writing only is to be taken as the evidence of what the parties intended, and the contract which they created. Oral evidence is not considered in so far as it changes or modifies the terms of the written instrument. The only points on which oral evidence can be used at all in court in such cases, are points on which the written document is ambiguous and further evi- dence is necessary to show what the parties meant. The exceptions to this rule are too technical to be considered here, but it is of the greatest importance for the business man to know that when he has put his contract into writing, the writing will be taken by the courts to represent the contract which he entered into, and he cannot tell the court later that he left something out, or intended to put something else in. The student has been advised in the chapters on contracts, to make his contracts in writing because there is less opportunity for dispute later. Not only should he do this, but he should be careful that the written contract is clear, and unambiguous, and that it contains the precise terms of the contract which he intended to create and no others. If he does this, he will find that disputes and troubles growing out of contracts will in a large measure be eliminated. 85 86 MISCELLANEOUS MATTERS EXAMPLES 1. Ames, a book-agent, solicits a subscription from Bates, and because Bates is a prominent person in the city, offers to sell him the book for five dol- lars, the regular price being fifteen dollars. Ames tells Bates, however, that he prefers to have him sign the regular blank order for the fifteen dollars/but will only charge him the lesser price. Bates signs the subscription blank. Later, delivery of the book is made by another agent who demands the entire sum of fifteen dollars, and Bates is without remedy, for the court will not allow him to modify his written contract by oral evidence. 2. Call and Brown enter into a contract whereby Brown is to buy an automobile and pay $1500. Call agrees to keep the automobile in good repair for one year. The parties make a written contract, but neglect to put into the contract Call's agreement as to the repair of the automobile. Later, if Call refuses to repair, Brown is without remedy, because the written contract will be assumed to state all the terms of the agreement, and to have superseded any prior oral agreements between the parties. 128. Second Rule. Proof of Transactions with Deceased Persons. A person is not allowed to testify as to agreements made with a person who has died, in suits which are brought or defended by the executor or administrator of such deceased person. This is a rule which perhaps affects business men more than any other rule of evidence. If A owes B a sum of money and dies, leaving considerable property, the court appoints a person known as an executor or administrator of A's estate, to manage the estate and divide it among A's heirs. B may then collect his debt against the executor or administrator, if it was a valid claim at A's death, but in proving his claim he cannot testify as to the conversations which he had with A without witness. The result is that he may be totally unable to prove his claim. The reason for this rule is that if a person could testify to obligations incurred during another's life-time, when they could not be denied because of the other's death, there would be great opportunity for fraud. Business should be conducted with this rule in view. The evidence should always be arranged so as to make the proof of the indebtedness easy. This may be done by insisting upon having debts and contracts reduced to writing. A promissory note is to be preferred to an open book account, for then the debtor's signature to the note may be proved by third persons. Similarly, a written contract is always to be preferred to an oral one, for then it may be presented before the court to prove the nature of the claim. MISCELLANEOUS MATTERS 87 EXAMPLE Sargent owed Smith $200 on a promissory note, which, however, was not collectible' because it had been due more than six years and was therefore "outlawed." Sargent recognized the debt as valid, however, and meeting Smith one day promised that he would pay him. This promise was sufficient to make the note collectible, but, unfortunately for Smith, Sargent died before paying it. In a suit against Sargent's estate, Smith could not testify as to this promise of Sargent, and in default of such testimony could not collect on the note, because the six years had elapsed. Smith vs. Wells, Administrator, 58 N. H. 201. 129. Assignment of Contracts. By assignment is meant the transferring of the rights of one person under a contract to another, who was no party to the original contract. The benefits or rights which one has acquired by means of a contract may be assigned, except when they consist in the right to personal service from another, and are purely of a personal nature. On the other hand, the liabilities or duties which rest on one party by reason of a contract cannot be assigned by him to another so as to release him as the party liable. If such an assignment of liabilities be attempted without the consent of all the parties to the original contract, the first party still remains liable to perform all that he agreed in the contract to perform. EXAMPLES 1. A agrees to buy from B, who agrees to sell, 500 tons of anthracite coal to be delivered in Albany on October first. A then sells his right to receive the coal, to C, who may demand the delivery by B in Albany according to the terms of the original contract between A and B. 2. The White Automobile Company sold an automobile to Amos, con- tracting to keep it in repair for one year free of further charge. The White Automobile Company then sold its business to Jones & Brown, partners, and notified Amos that Jones & Brown would carry out the contract and that he should look to them for repairs. This is an attempt to assign a liability, and if Jones & Brown fail to carry out the original agreement, Amos may sue the White Automobile Company for breach of contract. 130. Result of Assignment. One important result follows, however, upon the assignment of any contract, and this is the continuation of any set off or counterclaim, which may have existed against the original party who assigned, against the person to whom he assigned his benefits. It is therefore said that a person taking rights under a contract by an assignment takes those rights subject to the same limitations and defenses which existed against the original party. 88 MISCELLANEOUS MATTERS EXAMPLE Jordan contracted to sell to Wheeler 5000 bushels of wheat at an agreed price, which Wheeler paid in promissory notes. Wheeler then assigned his right to receive the wheat to Carter, who demanded its delivery from Jordan. Jordan delivered 4000 bushels, but refused to deliver the balance, claiming a set-off against Wheeler because one of Wheeler's notes given in payment had not been paid. He was justified in this because Carter took Wheeler's right to receive the wheat subject to any defense which might have been urged against him. Another feature regarding assignments of contract rights is that for his own protection any person who acquires such rights should at once notify the other party to the contract that he is the assignee. Otherwise the latter may continue to perform for the benefit of the original party to whom he was bound by the contract, being protected because he is ignorant of the change in parties. If A owes B $500 on a contract, B might assign his right to receive the $500 to C, but until A is notified of this assignment he would be under no obligation to pay C. If B were dishonest he might still collect the money, and C's only remedy would be against him and not against A. In closing the subject of the assignment of contracts, atten- tion is especially drawn to these facts : that the person claiming contract rights by assignment, called the assignee, takes no other rights than his assignor, from whom he acquired his rights, had, and his acquired rights are subject to the same defenses which might have been urged against his assignor; and further that, for his own protection, he must immediately notify of the assignment the party still held bound by the contract. In only one particular form of contract, called a Negotiable Instrument, are these rules subject to any exceptions. PRACTICAL SUGGESTIONS FOR WRITTEN CONTRACTS The business man may rarely be required to draw his own contracts, but it will often be necessary for him to inspect con- tracts to discover the rights and duties which are thereby created. For this purpose it is well for him to be familiar with the usual forms in which such agreements are made. Should he ever be required to prepare his own contracts he will find the following points and suggestions of value for a working model. MISCELLANEOUS MATTERS 89 Arrangement The following matters should appear in every contract, and it is best to devote a separate paragraph to each, although the 3d, 4th and 5th items are frequently grouped together. 1. Date and names of the parties, 2. Purpose of the agreement, 3. Consideration, 4. Conditions to be performed by each party, 5. Time and place of performance of conditions, 6. Signatures of parties. (Witnesses and seals, when required.) This suggested arrangement is illustrated in the contract for the sale of a harvest of wheat shown herewith. Contract Dte, Names, THIS AGREEMENT made this 25th day of February, 1916, and Addresses between Parke Knapp, of Oregon, Illinois, hereinafter called the seller-, and George Jenkins, of St. Louis, Missouri, hereinafter called the buyer: Purpose of WITNESSETH that the seller having agreed to sell, and Agreement the buyer to buy, certain wheat; Consideration NOW in consideration of ninety cents per bushel, the seller hereby sells and agrees to deliver to the buyer at his warehouse at St. Louis, Mo., all the wheat raised and harvested by him on his two farms in Mayburn township. Place of Performance Ogle County, Illinois, during the present year. Conditions Said wheat is to be delivered at said warehouse in good, clean, and merchantable condition, on or before the Performance 15th day of September, 1916. and Payment The said buyer agrees to pay for the same immediately upon such delivery. WITNESS the hands of the parties. a~*i*A Parke Knapp Signatures S Igned - r -'- George Jenkin' 90 MISCELLANEOUS MATTERS Further Comments Clear and concise language is of the greatest importance in drawing contracts. Useless language should be avoided, but every important term should be included, because the written instrument is presumed to include the entire agreement between the parties. Always state the consideration clearly, as well as the act which each party has promised to perform. It is the better practice to place each separate element or condition in a separate paragraph, because there will be less opportunity to overlook them, either in drawing the contract or performing it. The formal opening and closing of contracts suggested in the preceding illustration is of value, in that it is the usual form and shews plainly that the parties intended to make a contract. If, as in some states, it is necessary for contracts to sell land, to be under seal, the usual closing is as follows: WITNESS our hands and seals the first day and year above written. Signed Parke Knapp [Seal] George Jenkins [Seal] When witnesses are required, they sign at the left of the contract in a form similar to this : Witnesses Adam Smith. Wilbur Young. PROBLEMS Write contracts suitable for the following situations: 1. Lillian Mauston is to be employed as a teacher in the Brownsville District School for one year beginning September 1, 1915. George McCarthy is the Director of the School District. Miss Mauston is to devote her entire time to the work and is to be paid $65 a month. Her duties are the usual duties of a teacher in a country school, and she is to be excused only in case of her ill-health. She is to lose $4 a day when absent during the term, or is to furnish her own substitute. The school year terminates June 15, 1916, and she is to have four days' vacation at Thanksgiving, two weeks at Christmas, MISCELLANEOUS MATTERS 91 and one week at Easter, the precise dates to be determined by the trustees of the district. 2. Albert Black, a farm laborer, is to be employed by Austin Marcum^ a farmer, for six months, at $30 a month, to be paid every two months. He is to agree to devote his entire time to the usual work about the farm, and Mar- cum is to furnish his room and board. Should Black be guilty of misbehavior at any time, Marcum is to have the privilege of discharging him and retaining one month's salary for the damages. 3. Walter Grant, who while an infant, bought groceries of Mallery & Stout, grocers, has become of legal age. He wishes to ratify the debt, which amounts to $225, and Mallery & Stout agree that he may pay it in installments of $25 a month, without interest, if he will agree in writing to pay it, and will not sue him if he pays it according to these terms. 4. Henry Morgan wishes to contract with Smith & Cohen, building con- tractors, they to agree to build him a house on his property, Lot One, Block Two, Dubuque, Iowa, according to the plans and specifications made for him by Shipley Stark, an architect. The contractors are to furnish all materials, begin work in March of the current year, and complete the house not later than October first. Their bid for construction, which Morgan accepted, was $6280. Their work is to be under the supervision of the architect, and all workmanship and materials are to be of the highest grade. They are to keep the building adequately insured during its construction, and to remove all rubbish. They may receive pay in monthly installments on furnishing archi- tect's certificates stating the value of the work then completed, and are to receive seventy-five per cent of the amount represented by such certificates on demand. They will be paid for additions and variations in the plans only when such variations are agreed upon in writing before being made. Suggestions in preparing above contracts. List every item which you wish to include in the contract. Follow the general scheme suggested for all contracts. Devote a separate paragraph to each material matter. State each term in simple, clear and concise language. Supply names and dates. REVIEW QUESTIONS 1. A writes to B that he will take 100 barrels of apples at $4.00 per barrel, (a) Must B furnish the apples? (b) If B desires to furnish the apples, how soon must he accept? 2. A offers by letter to sell his house to B for $1,000. B replied by letter, "I accept, subject to your first putting the house in thorough repair." Is there a contract or not? Why? 3. A agreed to sell a horse to B, each supposing the price was agreed on. Before delivery it transpired that A thought the price was to be Si 75. 92 MISCELLANEOUS MATTERS while B thought it was to be $125. Was there a sale? Why? Suppose this misunderstanding was not disclosed until after delivery, what would be the rights of the parties? 4. In the above case, no delivery having been made, B writes to A that he will split the difference, and adds, "If I do not hear from you by return mail, I shall consider the horse mine." A gets the letter but does not reply. Is there a contract? Give reasons. 5. A contracted to deliver a cargo of lumber on board a vessel within ten days. He began the delivery, but a sudden frost made it impossible to bring any more lumber from the mills by boats navigating the canal. For this reason the work was delayed twenty days. Is A liable, and why? 6. A, in ignorance of the fact that B is an adjudged lunatic under guar- dianship, enters into a contract with him. Can B's guardian enforce the contract? Would your answer be different if B were a minor instead of a lunatic? Why? 7. A agrees orally to purchase a house and lot of B at a certain stipu- lated price. They are to meet on a future day and complete the sale. Before the day mentioned, B writes A that he will not make the sale at the price agreed upon. What remedy has A? 8. A, a minor, agrees to sell B a horse for $250. (a) Suppose before delivery A refuses to be bound, (b) Suppose delivery has been made and money paid when A insists on a rescission, (c) Suppose that B sells the horse to C and then A rescinds. What are the rights of the parties in each case? 9. A, in the presence of several persons orally hires B for one year begin- ning the following September first, at a yearly salary of $1800. B enters upon his employment and continues for seven months, when he is discharged through no fault of his own. Can he recover from A, and if so how much? 10. A owes B a sum of money. C, for a valuable consideration, agrees with A to pay his debt to B. Should this contract be in writing? Why? 11. F sells property to G, intending to put the proceeds beyond reach of creditors. Can G, knowing all the facts, hold the property as against the creditors of F? Can he hold it as against F's creditors, if he had no knowledge of F's scheme? Give reasons for your answers. 12. A dispute arose between A and B as to the amount due from B to A. A claimed $90 while B conceded only $60. Under these circumstances what is the best thing for B to do? If A sues B for $100 what can B do, if anything, to relieve himself from coets and what will be his defense? If upon trial it is found that $60 only is due, who must pay the costs and why? CHAPTER XIII NEGOTIABLE INSTRUMENTS I. Essentials 1. In writing 2. Payable in money 3. Payable absolutely 4. Negotiable in form 5. Payable in specified time (1. Checks II. Kinds{2. Drafts |3. Notes III. Rights and Liabilities of Parties 1. Maker's or Acceptor's Contract fa Conditional 2. Drawer's or) Indorser 's I Contract (b liability to pay Warranties 1 . Make r , a. As Drawer, or 3. of Rights Holder against Acceptor 2. Prior Holders in Due Course 1. Present- ment for ac- 1 b. May depend on ceptance 2. Present- ment for payment 3. Proceed- ings on dis- honor 131. Inadequacy of Assignment. As we have seen, any contract may be assigned if the assignee is willing to accept it subject to the defenses that might have existed against it in the hands of the original holder. Such an assignment, how- 93 94 NEGOTIABLE INSTRUMENTS ever, does not facilitate business, because a purchaser of rights under a contract could never be entirely certain of realizing the full value of the thing he thought he was buying, for there might be set-offs against it. Not only might there be set-offs, but if the original contractor had been guilty of fraud which might have been a defense against him, the same defense could be urged against his assignee. These uncertainties would seriously inter- fere with the free circulation of such contracts among business men. 132. Negotiability. Certain forms of business papers, such as checks, notes, and drafts, pass freely from hand to hand, the law protecting the holder in his right to collect face value at maturity from the party originally responsible for its payment. If Ames gives his note for $100 to Bates, Smith has a right (if the note is properly made out and passes under proper conditions) to assume that the note is worth its face value, $100, and he may buy it for $100 without fear that Ames in paying it will hold back a part in settlement of any debt Bates might owe Ames, or that it might be subject to a defense of fraud. The law covering such cases requires Ames to pay the full amount called for by the note. Such papers are said to possess the quality of negotiability, or easy negotiation. To be negotiable, a paper must possess certain elements, and must pass from hand to hand under certain conditions. What these elements and conditions are, and what are the principal negotiable instruments, it is the purpose of this chapter to show. A brief history of negotiable instruments wilt be of interest at this point. Origin. Under the old rule of the common law, contract rights could not be assigned. Later, assignment was permitted, but this was still unsatis- factory to merchants, owing to the inadequacy of assignment, previously discussed. Existing laws being unsatisfactory, merchants began to make their own rules, under which checks, notes, and drafts were permitted to pass freely from hand to hand, purged of all claims against them when once they passed into the hands of third parties, under proper conditions. To enforce these rules, merchants organized their own courts, by which all agreed to be bound. The rules as enforced by these merchants' courts came to be known as the Law Merchant. In the reign of Queen Anne, the rules of the Law Merchant were finally recognized by statute in England, and similar recognition has been given them in other countries. NEGOTIABLE INSTRUMENTS 95 In the United States the character of negotiable instruments has been recognized by statute in the several states. Minor differences in these state statutes led to much trouble in dealings between merchants in different states. For this reason a conference of lawyers and business men in 1897 formulated the Negotiable Instruments Law (N. I. L.), and efforts have been made to secure uniformity by inducing all the states to adopt this law. The N. I. L. has already been adopted in many states,* and there are prospects of its early adoption by others. States which have not yet adopted the N. I. L. are still governed by their own original statutes, in matters concerning commercial paper. 133. Assignability Contrasted with Negotiability. The principal difference between a negotiable instrument and an ordinary contract to pay money lies in the distinction between assignability and negotiability. Assignability is the quality by virtue of which contracts and other rights may be transferred to a third party, called the assignee, whose rights are thereafter measured by the rights of his assignor. Negotiability is the quality of a certain class of written contracts by virtue of which rights thereunder may be transferred to a third party, called the endorsee, whose rights thereunder are thereafter measured by the wording of the instrument itself. A holder may often secure a better title than the original holder had. This is because in the original holder's hands the paper may have been subject to set-offs or the defense of fraud, which could not be urged against a subse- quent holder in due course, f In the case of the assignment of a contract it is always neces- sary for the assignee, in order to protect his rights, to give notice of the assignment to the original debtor. Otherwise the original debtor might pay a prior party and the assignee would lose his * Alabama, Arizona, Colorado, Connecticut, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Mary- land, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Jersey, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming. f A holder in due course, sometimes called an innocent bona fide holder for value, is one who under the rules of the Law Merchant receives a title to nego- tiable paper free from special defenses which might have been urged against a prior holder. The terms are frequently used and in general describe a trans- feree (one to whom the negotiable paper has been transferred) who has paid value for the negotiable instrument, and who has received the instrument in the usual course of business before maturity without notice of the existence of any defenses. These points are discussed in detail in a subsequent chapter. 96 NEGOTIABLE INSTRUMENTS right to demand payment. On the other hand, negotiation may take place without the knowledge or consent of the person who signed the negotiable paper, thereby promising to pay its face to whomever might legally hold it at maturity. With these general characteristics in mind it is important to learn what sort of contracts may be negotiated instead of merely assigned. EXAMPLES 1. Ames, through fraud, induced Bates to sign and deliver to him a con- tract agreeing to pay Ames $50.00 at a given time. Ames sold and assigned this contract to Call for a money consideration, Call knowing nothing about the original transaction. Nevertheless Call was not able to collect on the contract from Bates because of the fraud in the original transaction. 2. Dake, through fraud, secured a negotiable note from Fell, and sold and endorsed it at once and before maturity to Goes for a money consider- ation. Goes knew nothing of the transaction between Dake and Fell. At maturity he brought suit against Fell to recover the amount of the note and as he was a holder in due course was allowed to recover the amount of the note. If this paper had remained in Dake's hands, Fell could have urged the fraud in defense of a suit to collect it. 134. A Negotiable Instrument is a written contract possess- ing certain necessary elements, and w r hich when transferred under certain conditions, passes to the purchaser free and clear of any defenses that might have existed against it in the hands of the original holder. It is a special form of contract to pay money. The four elements of the ordinary contract competent parties, mutual agreement, consideration and legal subject matter are neces- sary to its validity. When it is about to be, or has been, trans- ferred, other requirements are necessary to impart to it the added quality of negotiability. These are, that the instrument must be, 1. In writing, 2. Payable in money, 3. Payable absolutely, 4. Negotiable in form, and 5. Must have definite date of payment. 135. Forms of Negotiable Instruments. Negotiable instru- ments are of three kinds. These are drafts, checks, and notes, each of which is treated in detail in a subsequent chapter. The following are typical forms of each : NEGOTIABLE INSTRUMENTS Draft or Bill of Exchange 97 0/^Z Check Note 136. Parties. It has been seen that competent parties are essential to the validity of all contracts. This includes contracts evidenced by negotiable instruments. The parties to a nego- 98 NEGOTIABLE INSTRUMENTS tiable instrument may be divided into, (1) original, or those who are named in the instrument, and (2) subsequent, or those into whose hands it may fall later. The original parties must all be designated with certainty. This is necessary in order that he who is to pay may know to whom or for whom payment should be made, and that he who is to receive payment should know from whom to demand it. The original parties must also be the exact parties named in the instrument, and if the name of one be a forgery, no liability is created on the part of the person whose name is forged, not even to a subsequent holder. When the name of one of the original parties is signed by an agent, in order to charge the principal and not the agent it is necessary for the agent to sign both his own name and that of the principal in some such manner as this, "John W. Jones, by Adam Smith, his agent." If the agent merely signs his own name, even though he add the word, "agent," he himself, and not his principal, becomes one of the original parties to the instrument. EXAMPLE CHICAGO, AFTER DATE. /..PROMISE TO PAY TO THE ORDER OF.. One Hundred and n /joo ^ - DCH,I \u- WITH INTEREST AT-....PER CENT PER ANNUM. James Brown, Agent. The above is a negotiable instrument, called a promissory note. Because of the manner in which Brown signed, he alone is bound to pay the note, and not some person for whom he may claim he was acting as agent, but whose name does not appear. 137. Made in Writing. To be negotiable, a contract must be either in writing or printing, or both. In fact a large pro- portion of the negotiable paper of business is made on printed blanks, only those portions wherein one may differ from another NEGOTIABLE INSTRUMENTS 99 being inserted in writing. The writing should be in ink, though a negotiable instrument written with a pencil is valid. 138. Payable in Money. A negotiable instrument must be payable in money, and not in goods and chattels. If payable in specific articles it becomes a special contract, and loses its character as a negotiable instrument. It may in all other respects be in correct form, and may be transferred by delivery, yet unless it is payable in money it is not negotiable in the sense of giving a superior title to a subsequent party. The amount to be paid must be stated with certainty, or the means given by which it can be readily ascertained. It is not negotiable if it be a promise to pay a certain amount, "and all other sums which may be due." If, however, there be added to the amount the words, "with current exchange," the paper is nevertheless negotiable, because the amount can be readily ascertained. The amount is usually expressed in both figures and words. If these differ, the written amount prevails in the absence of other evidence. By the special statutes of two States,* a note or other instru- ment payable in specific chattels is negotiable, and in some States it has been enacted that even negotiable words are not necessary. Neither of these special rules, however, has been adopted by the N. I. L., which states the rules of the old Law Merchant. 139. Payable Absolutely. There must be no condition or contingency attached to the payment. A negotiable paper, it has been said, "is a courier without luggage." It must con- tain a definite direction or order, or a certain promise, to pay. A mere acknowledgment of an indebtedness, such as "I. O. U. $100," is not generally sufficient to satisfy this requirement, for while a promise to pay may be implied, yet none is expressed. If any condition be attached to the payment, such as, "provided a certain ship arrives," or "when A shall marry," the negotia- bility is destroyed, because it may be that neither of these con- ditions will happen. So also if it be payable out of a certain fund, and limited to that fund alone, the instrument is not negotiable, for the fund may not prove sufficient. A note to be payable "ten months after my death," is absolute in form, * Indiana and Minnesota. 100 NEGOTIABLE INSTRUMENTS because the maker is certain to die, and the note will then be payable out of his estate. If a note is made payable by installments, with a condition that if default be made in the payment of any installment, the whole shall be immediately payable, this form is not so uncertain as to destroy the negotiable character of the instrument of debt. If the student will remember that the object of negotiable paper is that it may serve as a substitute for money in facilitating the exchange of money, the reasons for these rules will be easily seen. It was the aim of the Law Merchant to give the character of negotiability only to such paper as really corresponded to money as a medium of exchange, and, of course, the only promises that can approximate the quality of money are promises to pay a certain sum absolutely and at all events. EXAMPLES Mission, Outagamie Co., Wis., June 1, 1897. To Buckstaff -Edwards Co.: Please pay to the order of G. E. Woodward and Ed. Erickson, the sum of $600, the same to be the last $600 due me on my contract, and charge the same to my account. Joseph Smith. This instrument was in the form of a draft, but the addition of the words, "the same to be the last $600 due me on my contract," limited the payment to whatever sum was actually due on the contract, and as there was no ready means of knowing whether this was more or less than $600, the court decided that the draft was not negotiable. Woodward vs. Smith, 104 Wis. 365. 2. If, however, in the above example the objectionable words had been substituted by the words, "on account of contract between you and me," the payment would not have been limited to the fund due on this contract, but any excess would have been payable absolutely because no direction was given to pay the whole sum out of a particular fund. In such a case the draft would have been negotiable. The courts incline toward holding paper nego- tiable, and construe such provisions as being merely directory to charge to the specified fund so far as it shall suffice, and to pay the excess out of other funds, where it is possible to do so. First Nat. Bank vs. Lightner, 74 Kans. 736. 140. Negotiable in Form. This means that the written instrument must contain negotiable words. The instrument must show on its face that the parties intended that it should pass from hand to hand, and not be limited to remain in the hands of the original holder. The recognized words of negotiability are "bearer," "or bearer," and "or order." NEGOTIABLE INSTRUMENTS 101 141. Specified Date of Payment. Like all written contracts, negotiable instruments should be dated, but this is not absolutely necessary. They should, however, state the time when due, or at least give the facts by which this can be determined readily. This is for two reasons: (1) That the holder may know when to demand payment, and (2) that the time may be fixed when the statute of limitations begins to run, which is always the date on which the note became due. The common expressions in this connection are "on demand," "at sight," " days after sight," and " ...days from date," and these are sufficiently definite. An instrument may be antedated or postdated, provided this is not done for an illegal purpose, and when the date is given in this manner, even though it is not the actual date on which the instrument was made, it is the one used in determining the date when the instrument will become due, called its date of maturity. If the date is left blank, any holder has the right to insert the true date on which the instrument was made; and should he insert an improper date, the parties will still be bound by the date so inserted when the instrument has, by indorsement or delivery, passed into the hands of a holder in due course. If the date is left blank by all the parties the time will be computed from the date on which the instrument was actually made. 142. Delivery. In addition to the above essentials of the paper itself, it must be delivered before it has effect. If an otherwise valid instrument gets into circulation without the consent and through no fault of the maker, the maker will not be liable on it. EXAMPLE Ames writes out a note payable to bearer which he intends to deliver to Bates. Call, who is standing near by, seizes the note as Ames writes his name on it, and runs out, transferring it to Smith, an innocent bona fide holder. Smith cannot enforce the note against Ames, because Ames never delivered it. The qualities so far discussed are essential to the validity of all forms of negotiable paper. In the next three chapters the three forms of negotiable instruments commonly used in business, are described and discussed. These, as previously stated, are drafts, checks, and notes. 102 NEGOTIABLE INSTRUMENTS REVIEW QUESTIONS 1. Inspect the following promissory note: .J\/r 3~&tf_ When this note was not paid H. Swift and Company brought suit against the Wallis Iron Company. Could they recover the $1100 from the Wallis Iron Company? Could they have recovered this amount from Wallis and Smith personally? Why? 2. Inspect the following promissory note: ison.nn - Mt. Morris, H. Y. , Jan. 1. 1890. At0mul6>Jbfa#ut ' <7 nii?er Janea 5ice- thfi sum of Fifteen Hundred 4 no/lQQ- wViftn hn la g] yeara nf agp , with interest from date. L c/|_aa fifia*- ^^mntfitivvMa-'At^ Is this a negotiable instrument? Why? 3. Inspect the following promissory note: Is this a negotiable instrument? Why? NEGOTIABLE INSTRUMENTS 103 4. Inspect the following instrument: RUTLAND AND BURLINGTON RAILROAD COMPANY No. 253 $1000.00 BOSTON, MASS., Apr. 1, 1850. In four years from date, for value received, the Rutland and Burlington Railroad Company promises to pay in Boston, to Messrs. W. S. & D. W. Shuler, or order, $1000, with interest thereon, or at its option to transfer to the said W. S. & D. W. Shuler ten shares of capital stock in this company of the par value of $100 each. , RUTLAND AND BURLINGTON RAILROAD COMPANY, BY T. Follett, President, Sam. Henshaw, Treasurer. Is this a negotiable instrument? Why? 5. Mary Brown contracts to work for Mrs. Smith as a domestic for $5.00 a week. Mrs. Smith sellb her right to Mary's services to Mrs. Jones for $20.00. Can Mrs. Jones compel Mary to work for her at the salary agreed upon by Mrs. Smith? Why? 6. Ames and Bates were partners in a hardware business. Ames bought Bates' interest in the business for $5000, Bates agreeing never again to engage in the hardware business. Within a month after the dissolution Bates had again started in the hardware business in the same city. What could Ames do about it? Why? 7. On June 15, 1915, Ames loaned Bates $200.00 in cash in the presence of Call. A month later, Bates and Call were both killed in a train wreck, Ames sued the estate of Bates for $200. Was he allowed to recover? Why? CHAPTER XIV I. Parties< II. r'orms DRAFTS [a. Drawer fl. Original& Matthew M.. Murphj Five Hundred & no/100 ^ Walter H. Underwood 44 4 Anne Street Hew Orleans, La. The parties are the same as in the preceding examples. Presentment to Underwood for acceptance is necessary in order to fix the time when the thirty days begins to run, and also in order to charge the parties with their obligations; that is, to charge Underwood with paying S500 to Murphy, or a subsequent holder, and to charge Baldwin with paying if Underwood does not. Acceptance This is an inland bill of exchange. Hatch is the drawer, Welsh the payee, and Sumner the drawee. When Welsh presents the draft to Sumner, Sumner accepts it by writing across the face, "Accepted, March 18, 1915, * Days of grace are three extra days added to the date on which an instru- ment is due and payable, during which time it could not be sued upon or treated as over-due. They have been abolished in the majority of states. Arkansas, Mississippi, and Wyoming still allow days of grace on all drafts and notes; and Maine Massachusetts, Michigan, Minnesota, Rhode Island, South Carolina, and Texas, on sight drafts alone. DRAFTS HI George Sumner." After this is done, Sumner is bound to pay the $45 sixty days after March 18, to Welsh, or to any person to whom Welsh has endorsed the paper. If Sumner had dishonored the bill and it had been protested by a notary public, Ward, a third party, might have accepted it, with the consent of Welsh. He would then have bound himself to pay it if Sumner should again refuse. REVIEW QUESTIONS 1. Inspect the following draft: Castine, Me., Jan. 5, 1860. For value received, please pay to the order of G. F. and C. W. Tilden forty dollars, and charge the same against what- ever amount may be due me for my share of fish caught on board schooner " Morning Star," for fishing season of 1860. Yours, etc., To Messrs. Adams & Co. Frank R - Blake ' Accepted to pay. Adams & Co., Jan. 6, 1860 Is this a negotiable instrument? Why? Who is the maker? payee? drawee? 2. Archer in Boston purchases furniture of Wilson in Grand Rapids, Michigan, of the value of $200. Wilson ships the furniture, and then draws on Archer for the price. How does he do this? Write a draft, designating a Boston Bank as the Continental Exchange Bank. The bank in Grand Rapids is The First National Bank. How does Wilson secure his money? 3. Inspect the following draft: La Crosse, Pa &"i The Union State Bank ^~\^ ^~)/^ -^^s^^t^^^^^Y^Z^- - DOLLARS Value received and charge to the account of When this draft is presented to Clarke, he writes across the face, "Accepted, June 22, to be paid half in money and half in bills, M. M. Clarke." Is this a proper acceptance? Why? What is its effect? 4. How is a bill of exchange dishonored? What is the result? CHAPTER XV I. Parties CHECKS [a. Drawer 1. Original Jg&afea r.MirA^r. lit Va^?^ J 191 o^T N? s ^-7^ /^ The First National Bankof Englewood^-ioa PAY TO THE ORDER or DOLLARS A check is a form of draft. Note the similarity. 159. Certified Checks. If the payee who is about to receive a check, perhaps as payment for goods, is doubtful whether the drawer has to his credit in the bank the amount of money represented by the check, or is fearful that although the drawer may have the money in the bank at the time of giving the check it may be withdrawn before his check is paid, he may insist on a certified check, or he may accept the check and himself take it to the bank for certification at once. A certified check is an ordinary check, across the face of which is written a certifi- cation by the bank. The bank makes this certificate by writing or stamping across the face of the check the word, "Certified," or some word of similar import, together with the date and the signature of a proper official of the bank. By this certifi- cation the bank agrees to pay the check. It then reserves the amount of the check out of the drawer's deposit. Until this is done there is only the original contract between the drawer and the bank; after it is done a new contract is created between the bank and the payee. After certification a bank is obliged to pay the certified check, even though it should prove to be a forgery, for the rule is that a bank is obliged at its peril to know the sig- natures of its depositors, and if it negligently certifies a forged check, or if it pays a forged check, it must assume the risk. Certification does not, of course, furnish protection against a subsequent alteration of the check; it is a guarantee to pay the check as it read at the time of certification. CHECKS Certified Check 115 a 2*5 .n. No. 160. Cashier's Checks are sometimes issued by banks instead of certificates of deposit or drafts. A cashier's check is in form simply an ordinary check, drawn on the bank by the cashier in his official capacity, and made payable to the depositor or someone he may designate. It is payable on demand, and has the advantage that the payee may usually receive payment from banks in other cities, if he can identify himself as the payee named, without waiting for it to be returned to the drawee bank. The cashier's check will, however, ultimately have to be returned by any bank so advancing money on it, to the issuing bank, for payment. Cashier's Check FORT DEARBORN RATIONAL BANK CHICAGO, HIS. 161. A Bank Draft differs from the ordinary cashier's check in that instead of the drawee being the bank issuing the check, the drawee is a bank in some other city, usually Chicago, New* York, St. Louis, San Francisco, Milwaukee, or other central banking point. This has a superiority over the ordinary cashier's 116 CHECKS check in that it does not have to be returned to the issuing bank for payment, but is payable at the city of the drawee bank. Bank Draft or Check J8L4T Fo RT DEARS o RK NATIOMAL BANK Iterwrnogmn* (^^^^^^c^^~^fa^ ^e>4^*sr &^- DOLLAR 5 162. A certificate of deposit is another form of voucher for money deposited in a bank. Instead of desiring to open a check- ing account, the depositor may merely wish to leave the money at the bank for safe-keeping indefinitely or for a specified period of time on the promise of the bank to pay him interest. If this is done the depositor receives a certificate of deposit which states the conditions of the deposit. Money deposited, and represented by a certificate of deposit, cannot be drawn out by check. If a portion of it is desired, the certificate may be presented at the bank, and the payment written on the back of the certificate, or the old certificate may be surrendered and a new one issued for the amount remaining undrawn. The latter method is considered to be the better. Certificate of Deposit ~^?/,<,| * with interest at 6% per annum. sn^r7 J ^L~ 167. Joint and Several Notes. A note which is signed by a single maker is a several note, for he alone is liable. When more than one name appear as signatures on the face of the note, that is, when there are two or more makers, the question arises as to whether there is a several promise by each or only a joint promise by all. This is the same question that arises under joint and several contracts, previously discussed in the chapter on Contracts. If the note be*drawn, "We promise to pay, etc.," and is signed by two or more parties, it is a joint note. A note signed by more than one person and beginning, "I promise," or "We or either of us promise," is several as well as jdint. In a joint and several note the holder can sue all the makers together, or he may sue them separately, for in such a note each assumes the entire responsibility for paying the entire sum. If the note be joint only, all the makers must be sued together. At common law it is well settled that if one of the joint makers dies, his estate is discharged, and the survivor, or survivors alone, can be sued. This is not true in the case of a joint and several note. Statutes in some states have changed this rule, so that even by a joint note the estate of the deceased is bound, while others have accomplished the same result by abolishing all distinctions between joint and several notes, making all obligations signed by two or more parties, joint and several. (See Section 26.) 168. Essentials. While in commercial usage it is customary to print forms for notes with the words "value received," and to make them payable at a bank, neither of these things is necessary NOTES ]21 to impart negotiability, according to the N. I. L., and according to the rules of a majority of the states which have not adopted the uniform act. A note in the following form possesses every requirement essential to its negotiability: ST. Louis, Mo., T AFTER DATE. /...PROMISE TO PAY - TO THE ORDER OF THE SUM oF.P.^ w .r__an_ Casper Whiting. It is payable absolutely, within a specified time, in money, to a person named, and is an instrument in writing with words of negotiability. Provisions for the payment of interest, state- ments of the consideration, place of payment, and even a pro- vision that the maker agrees to pay a reasonable attorney's fee in case collection be made by suit, can be added. In some states where the N. I. L. has not been adopted the addition of a provision regarding attorney's fees, or of a seal after the name of the maker, is held to destroy the negotiability of the instrument. 169. Transferability. Negotiable notes may be transferred by indorsement the same as accepted drafts. The payee becomes the first indorser. Subsequent parties who acquire rights in the note by indorsement and delivery or delivery without endorsement may also become indorsers by writing their names on the back of the note and transferring it to another. A person who becomes an indorser in this manner also enters into a special contract with the parties who acquire rights under his indorse- ment, the nature of which contract w r ill be discussed in a later chapter. All notes, except those payable to bearer or indorsed in blank or to bearer, must be indorsed in order to be trans- ferred. If they are delivered by a holder to a subsequent party without indorsement, the latter has a right to demand the indorsement. (Section 49 N. I. L.) 122 NOTES 170. An Accommodation Note exists when the maker, or one of the makers if the note be joint, has without receiving any consideration signed it for the accommodation of the payee or joint maker, thereby enabling the latter to more readily nego- tiate it. The party thus lending his credit is called the accommodation party and is defined by Sec. 36 of N. I. L. as "one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." The accommodation party is liable to all subsequent holders in due course. If he suffers any loss he may recover from the party whom he accommodated, the latter obviously being unable to enforce the instrument against the one who accommodated htm. 171. Incomplete Notes. Another way to loan credit, which is sometimes adopted when the exact amount needed cannot be determined at the time the loan is made, is to issue a note in which the space for the amount is left blank, the payee being given authority to fill in the blank up to a specified amount. Issuing such notes is an extremely dangerous practice, and should be avoided because the authority given may be exceeded, and if the note then passes into the hands of a holder in due course the maker will have to pay it, even though at great loss. EXAMPLE Ames gave Bates a note in which the space for the amount was left blank, with the understanding that Bates would buy between $400.00 and $500.00 worth of goods, filling in the amount when his purchase was completed. Bates bought from Call $1,000.00 worth of goods, filled in the amount $1,000.00, and endorsed the note to Call. Call sued Ames and collected $1,000.00, as Ames was not able to show that Call knew of the restriction that Ames had placed upon Bates. 172. Frequently the date of payment and the name of the payee are left blank. The rule of the Law Merchant, which has been adopted by the N. I. L., is that any holder has the right to fill in these blanks so as to make a complete instrument, provided the note was actually delivered. 173. Judgment Note. A judgment note is an ordinary note to which is added a "power of attorney," enabling the holder to secure a judgment for the amount due (and frequently, at any NOTES 123 time, regardless of the maturity of the note) without the prelimi- nary steps of serving a summons and having a trial.* By including this added provision the maker waives his right to be heard in court before the entry of the judgment. The advan- tages of such a note are with the holder. To this "power of attorney to confess judgment," as it is called, are generally added (1) a waiver of exemption laws, and (2) a stipulation for the addition of attorney's fees. As we have seen, not all of the property of a debtor is subject to levy under an execution to enforce a judgment, by virtue of the Judgment Note -dndtoseacre the pat/matt of saitf amount izl Hereby authorize, trrenxatfy, any attorney of any Court of Record to appear fbK2S*e^in sitffi Court, in term time or vacation-atony time hereafter, and confess a judgment without process, in finvrofthe noideroft/iis^'o/e, fir such amount- as may (if pear la be unpaid thereon , together wiSi costs inH dinars attorneys fees, and to waive and release alt errors which may intervaie in any sudi proceedings, and consent to immediate execution' upon stuhjudamaiLhertby ratifying and con- firming aUtfiat srrf/M^^ said attorney may do - -^^-^ < exemption laws of the several states. The right to such exemp- tions is usually waived in a judgment note. In the typical form of note printed below there is also a provision permitting a five per cent addition to the judgment for an attorney's fee. It was originally supposed that the addition of these conditions made the instrument lose its character of negotiability and become nothing more than a contract, but it is now well settled in most states that such notes are negotiable, and they are recognized as such by the N. I. L. If, however, the authorization be to bring suit before maturity, the note is made non- negotiable because the time of payment is then made uncertain. The advantage of such notes is that it is unnecessary to sue upon them in the ordinary way, in order to secure a judgment. No summons is necessary, * A "power of attorney" is a legal instrument empowering the person named in it to act as the attorney of the person signing it, in certain specified matters or in all matters of a kind indicated. In this case, the holder of the "power of attorney" is given authority to go into court as a lawyer for the dtbtor and admit the claim, or "confess judgment" for him. 124 NOTES and while an ordinary suit upon a note requires considerable time between its commencement and the judgment, the entire proceedings of taking judg- ment on a judgment note may take only a fraction of a day. 174. Collateral Note. Notes secured by the deposit of securities, such as stocks, bonds, or mortgages, which are described in the note itself, are called collateral notes. It fre- quently happens that a banker lending money on a note will require such a pledge for its payment. Read the note carefully. Observe that it contains all that any note contains, and in addi- tion contains stipulations as to the confession of judgment, and the sale of the collaterals. If the amount received from the sale is more than enough to satisfy the debt and the cost of the judgment, the excess should be turned over to the debtor. The negotiability of such notes has not been very generally recognized until the adoption of the N. I. L., which recognizes them as negotiable instruments. Collateral Note with interest at the rate of _T_.per cent, per annum . after due, having deposited with the legal holder hereof as collateral rJf^-^ and. < ~21herby give the said legal holder, his. her or their assign or assigns, authority to sell the same, or any part thereof, on the maturity of this Not, or at any time thereafter, or before, in the event of aaid security depreciating in value, at public or private sale, without advertising the same, or demanding payment, or giving notice, and to apply so much of the proceeds thereof to the payment of this Note, u may b necessary to pay the same, with all interest due thereon, and also to the payment of all expenses attending the sale of thr^aid collaterals, and in case the proceeds of the sale of the sane hall not cover the principal, interest and expenaeaV fc- ^' promise to pay the deficiency forthwith after such sale, with in- terest at...^ZLper cent, per annum. And it is hereby agreed and understood that if recourse is had to said collateral, any money realiied on sale thereof in excess of the amount due upon this Note ahall be applicable to the payment of any otbei note or claim which the said legal bolder may have ajrainat^?7-7_X- *** in case of any exchange of, or addition to the collateral above named, the provisions of this Note ebali extend to such new or additional collateral. The above is called a "short form" of collateral note. Many collateral notes are much longer, containing more provisions, all stated at greater length. NOTES 125 REVIEW QUESTIONS 1. Johnson induced Ebert, a German unable to read and write English, to sign an instrument which was in form a promissory note, representing to Ebert that it was a contract appointing him agent to ^ell patented farm machinery. Johnson completed the note and transferred it to Walker, who paid value and knew nothing of the transaction. Walker sues Ebert on the note. Can he recover? Why? 2. Who is liable on the following promissory note? In what manner? Why? RIPON Wis DATE. J... PROMISE TO PAY OR ORDER, Four hundred and no /ioo^" ""DOLLARS WITH INTEREST AT THE RATE OF.?%.P?L9I l Jl Um .' J. C. Sherwood, Wm. C. Sherwood. 3. Is the following a negotiable promissory note? Why? $1600.00 Chicago, III, Nov. 4, 1914. When sixty days after this date have elapsed, I, the under- signed, William Day, agree and promise that I will upon the demand of Ernest Young, pay to him, the said Ernest Young, the sum of Sixteen Hundred Dollars, in lawful coin of the realm. William Day. 4. At the request of Hines, Smith signed a note with Hines for in favor of Carter, without receiving anything for so doing, in order to aid Hines in borrowing the money. Hines signed the note first, Smith placing his name just below that of Hines. If Smith is forced to pay, can he recover from Hines? Why? If Hines pays, can he recover from Smith? Why? From whom may Carter collect? If Carter endorses to Roscoe, from whom may Roscoe collect? CHAPTER XVII HOLDER IN DUE COURSE I. Conditions Necessary II. Rights 1. Transfer for Value 2. Transfer to an Innocent Holder 3. Transfer in the Usual Course of Business 4. Transfer before Maturity Incapacity of Parties Void Instruments Alteration or Forgery Fraud Lack or Failure of Consideration Illegality Payment to Prior Party Set-offs {a. Inc 1. b. Voi c. Alt fenses of a. b. 2. Not Subject < c. to Defenses d. of e. CONDITIONS OF TRANSFER 175. Required Conditions. To be fully negotiable, a paper must be transferred, (1) for value; (2) to an innocent holder; (3) in the usual course of business; and (4) before maturity. Unless all of these conditions attend the transfer of a negotiable instrument, the new holder takes only the rights which he would have taken had the document been a mere contract. If these four conditions are all complied with, the new holder is called, by the N. I. L., a holder in due course. 176. Transfer for Value. No one can become a holder in due course unless he has paid value for the instrument which is transferred to him. The consideration, or value, which he must pay need not be money, but must be something which the law treats as having value. It may be cash, goods given, liabilities incurred, or rights surrendered. A finder of lost paper is not a holder in due course and cannot enforce it against the defenses 126 HOLDER IN DUE COURSE 127 which might have been urged against a prior holder. The same thing is true of one who receives such paper as a gift. Prior to the adoption of the N. I. L., there was much differ- ence of opinion as to whether taking a note in payment of, or on account of, a pre-existing debt, constituted the giving of value. Section 25 of the N. I. L. states the rule as follows: "Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value, and is deemed such whether the instrument is payable on demand or at a future time." EXAMPLES 1. Parsont, induced by Brown's fraudulent misrepresentations, issued a check to Brown as payee. Brown indorsed it to Rosenthal as a loan. When Rosenthal sued Parsont the defense was made that the note had been induced by fraud and that Rosenthal occupied the same position as Brown, the payee. The court refused to allow recovery, stating that Rosenthal had not paid value, and so was subject to the same defenses as Brown would have been. Rosenthal vs. Parsont, 110 N. Y. Supp. 223. 2. A bank canceled a certificate of deposit and credited the amount to the account of the depositor. The question later arose as to whether the bank was holder in due course, and the court declared that this transaction did not constitute the giving of value, being a mere readjustment of the account of the depositor. Commercial National Bank vs. State Bank, 132 Iowa 706. 177. Transfer to an Innocent Holder. To be a holder in due course, one must not only have paid value, but he must have received the paper without knowledge, or notice, of any defects in the seller's title, or right to enforce it. If he accepts the paper, paying value for it and yet knowing that the seller's title is defective, or that there is a valid defense to the instrument, he is not an innocent holder; he takes only the seller's title, and no better. Nor can a buyer of paper deliberately close his ear to any suggestions of fraud or defects in the seller's title, for if he receives any suggestions or if the circumstances are such as would arouse the suspicions of an ordinarily prudent man, he is charged with the duty of investigating before buying. EXAMPLES 1. A note was drawn by A, payable to himself, and by him indorsed and given to B to sell for cash and to return the proceeds to A, is invalid in the hands of C, who knowing the facts and conditions of B's possession of the 128 HOLDER IN DUE COURSE note, took the note from B in satisfaction of a debt due from B to C. Bruggestadt vs. Ludwig, 184 111. 24. 2. A gave to B a demand note payable to B or order with the understand- ing that it should not be negotiated. B, however, indorsed the note for value to C. Afterwards A paid B the amount of the note, supposing that he had retained the note. Later C sued A, and A was compelled to pay him because he was a holder in due course and had known nothing of A's payment to B Nash vs. DeFreville, 2 Q. B. (Eng. 1900) 72. 178. Transfer in the Usual Course of Business. A third condition is that the holder must acquire the paper in the usual course of business. By this is meant that it must come as a regular transfer according to the custom of commercial trans- actions. Thus a receiver or assignee appointed by a court to take charge of an insolvent person's business, who comes into possession of a bill or note, by virtue of his appointment, does not get it in the regular course of business, nor do those who acquire title through him get it in the usual course of business. EXAMPLE A trustee in bankruptcy found a note among the bankrupt's assets. This he sold to a third party, who claimed that although the note could not have been enforced by the bankrupt, the transfer to him had made him a holder in m due course and that he took title free from defects. He was denied recovery, however, as not having received the paper in the usual course of business. Conley vs. Nelin, 128 S. W. (Tex.) 424. One who takes a note or bill as collateral security, that is, to secure the performance of some other obligation, is considered under the N. I. L., and by a majority of states that have not adopted the uniform statute, to have taken it in the usual course of business. One who has taken paper as collateral, however, can recover upon it only to the amount of the loss which he suffers on the original debt which it is taken to secure. 179. Transfer before Maturity. He who takes paper after maturity, simply takes the rights of the prior holder. If the prior holder's right and title are good, so will his be, but if there are any defenses against his transferrer's right and title, they can also be raised against him. Thus if a thief steals a note after maturity and sells it for value, the taker will acquire no title whatever, as the thief had none to convey. Or, if the maker of a note pays it at maturity, and it is set in circulation HOLDER IN DUE COURSE 129 again, accidentally, without the fault of the maker, he will be able to resist another payment of the same obligation even though the paper has passed into the hands of an innocent holder for value. EXAMPLE A note provided that any delinquency in the payment of interest "shall cause the whole note to become due and collectible immediately." The note was for five years, but the interest was not paid the first year, and the second year a third party bought it. The court declared that he could not thereby become a holder in due course, because by reason of the additional provision the note had become due and he had purchased it after maturity. Hodge vs. Wallace, 129 Wis. 84. 180. Holder after Holder in Due Course. Although the paper, while in the hands of the original holder, may have had many defects and been subject to many defenses, yet when it has once passed through the hands of a holder in due course it is freed of these imperfections. After such a holder in due course has possessed it, any party claiming under him takes the rights, not of the original holder, but of the first holder in due course. Consequently, a holder subsequent to a holder in due course may take paper with knowledge of defenses which might have been urged against an original party and yet not take his rights subject to such defenses. If, however, such a subsequent holder had been a party to a fraud or illegal transaction whereby the note was originally secured he could not escape on the ground of the intervention of a holder in due course. EXAMPLES 1. B buys a horse, giving a note in payment, and finds that fraud was practised on him in the sale, so that had he paid cash he could have rescinded the purchase and demanded the return of his money. The note, however, has passed from the fraudulent seller of the horse to C, a holder in due course. A, who knows of the original fraud, but was not a party to it, buys the note in due course from C. By so doing, A acquires the title which C had as a holder in due course, although he could not himself have purchased the note from the original seller so as to have become a holder in due course. The reason for this exception to the rule that the holder should be innocent is that C's rights as an innocent holder to negotiate the instrument must be fully protected. 2. The payee of a note, whose title was defective, sold it to a holder in due course and then repurchased it, claiming to be entitled to take the note free from defects because of the intervention of a holder in due course. This 130 HOLDER IN DUE COURSE he could not do, because his title is determined as of the time when he first became a party to the note. Andrews vs. Robertson, 111. Wis. 334. 181. When Paper Matures. The exact date of maturity is always an important fact, and one about which there should be no opportunity for dispute, for upon this date the rights of a subsequent holder frequently depend. When the time of a bill or note is stated in days, the actual number of days are counted, excluding the day of issue; when it is stated in months, calendar months are understood as the measure of maturity. The maker has the whole of the business day on which the paper falls due to make payment. By the N. I. L., Section 85, the time of pay- ment, or maturity, is further specified as follows : "When the day of maturity falls upon Sunday, or a holiday, the instrument is payable on the next succeeding business day. Instruments falling due on Saturday are to be presented for payment on the next succeeding business day, except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday." 182. Consideration. So long as the immediate parties to negotiable paper are the only ones interested in it, there must be consideration, the same as in any contract. While the existence of the paper, drawn in negotiable form, presumes that a con- sideration was given for it, this presumption may be defeated by proof to the contrary between the maker or drawer, and the payee. If the paper has been transferred to a holder in due course, the absence or failure of consideration will not prevent him from recovering upon it in accordance with its terms. A common practice is to insert the words "value received," in a bill or note, although this is not required by the N. I. L., or by a majority of the states. The N. I. L., Section 25, states the law regarding considera- tion, as follows:- "Absence or failure of consideration is a matter of defense as against any person not a holder in due course." 183. Defenses. The defenses which may be urged against negotiable paper are of two kinds: (1) Real, or absolute, defenses; and (2), Equities, or personal defenses. HOLDER IN DUE COURSE 131 184. Real Defenses are those which attach to the instru- ment itself, and which are good against all persons, regardless of whether or not they are holders in due course. Such defenses exist in case th'e note or bill is defective because of (1), inca- pacity of the parties; (2) illegality by statute; and (3) alter- ation or forgery of the instrument. Incapacity of a party renders him incapable of making an ordinary contract which can be enforced against him, and the same rule applies to negotiable paper. Such a party may indorse a note or bill so as to transfer it, but he does not thereby become liable on any of the special contracts which the Law Merchant implies. He cannot be sued as drawer, maker, or indorser. Void instruments are not enforceable, even by a holder in due course. For instance, a note bearing a higher rate of interest than is allowed by law cannot be enforced by any party, in states where the effect of usury is to make the note void. In some states contracts made on Sunday are void, and where this is true a note made on Sunday would be void even in the hands of a holder in due course. Alteration of an instrument as contrasted to the forgery of a signature consists in the changing of some material term without the consent of prior parties. Thus it not infrequently happens that the amount, date of payment or rate of interest is fraudulently altered. At common law a material alteration which changed the nature of the original obligation became an absolute defense to any action on the altered instrument no matter who brought the action. This rule is still in force in states which have not adopted the N. I. L. In other states, however, the N. I. L. in Section 124 provides that such an instrument may be enforced by a holder in due course according to its original form before alteration. The only instance in which the obligation of a prior party may be changed by alteration without his consent is where the active negligence of the party has contributed to the alteration. Courts are not agreed on what this negli- gence must consist in. It is good business practice, however, never to leave any blank spaces in an instrument. If the signature of a party is a forgery such party is not liable thereon whether he be a maker, payee, drawer, acceptor or indorser. This is because no one can be made liable for an obligation which he has never assumed. 132 HOLDER IN DUE COURSE An alteration may be ratified by the party injured, by his agreement to pay the bill or note in accordance with its terms. This ratification may be made by express promise, whether written cr oral, and may even be implied when another has, with reasonable cause, relied on the apparent ratification, to his injury. 185. Personal Defenses are those which can be urged against those directly responsible for the injuries claimed, and others whose title is no better, but which cannot be urged against a holder in due course. Such defenses are: (1) Fraud in the transaction; (2) lack, or failure, of consideration; (3) illegality which does not render the instrument void; (4) payment, or cancellation before maturity, and (5) set-offs as against a prior party. Fraud in the transaction in which a paper was issued, if the paper has been delivered, is a defense which cannot be urged against a holder in due course. Thus, if a person is induced to give his note for a specified amount in payment for a horse which he later discovers is not as represented, he may have a defense against the person practicing the fraud and others who have come into possession of the instrument with no better title, but not against a holder in due course. If, however, the instrument was never delivered as a nego- tiable bill or note, but by fraud was later made into one, this constitutes a defense on the part of the supposed maker against any person. Such a case may occur when one who is blind or infirm signs a paper by mistake, supposing it to be an ordinary contract, whereas it proves to be a negotiable instrument; or when one signs his name to a blank paper which is later filled in without authority. In neither instance is the instrument actually delivered as a bill or note, and the fraud may therefore be a defense against any holder. Lack, and failure, of consideration are matters of personal defense which can be urged by way of set-off or counterclaim, against all persons not holders in due course. If as between the original parties the instrument was executed as a gift, it cannot be enforced by the party to whom it was given, because of lack of consideration; but it can be enforced by a holder in due course. Conversely, if a paper was given for an apparent consideration, HOLDER IN DUE COURSE 133 as for services to be performed, which consideration subsequently fails (as when the party agreeing to perform the services refuses to do so) , defense may be made against the original party, or any person claiming merely his rights, to the amount to which the consideration has failed; but this defense cannot be urged against a holder in due course. Illegality, when not such as is declared by statute to make an instrument completely void, can be urged only against the immediate parties, and not against holders in due course. Thus, when a note is given as part of an agreement in restraint of trade, or for a gambling debt, it is not collectible as between the imme- diate parties, but can be enforced by a holder in due course. Payment to prior party. Payment before maturity discharges the maker's obligation towards the party paid, but if the nego- tiable instrument is not surrendered to the maker or drawer and destroyed it may still pass into the hands of a holder in due course at any time before maturity, and if it does such a holder can compel payment again. The careful business man, paying his obligations on bills and notes, requires the party whom he pays to surrender the negotiable instrument when payment is made, whether it be before or after maturity. 186. Set-offs and counterclaims have been fully treated under the subject of contracts. Even though the maker of a negotiable instrument may have such a right against the first holder, this right is not effective against a subsequent holder if such subsequent holder be a holder in due course. 187. Recapitulation. Negotiable paper, being a substitute for money, is accorded the fullest measure of protection pos- sible by law, so that one who takes it as a holder in due course may feel reasonably safe in accepting it. If the paper is made out in proper form, and is not yet due, the only conditions which a buyer of the paper need inquire into are the credit of the maker and the genuineness of his signature. When the instrument has passed into the hands of a holder in due course the maker loses practically all of his possible defenses. Often it seems a hardship thus to restrict an original party in his defenses, but as between two parties, the more innocent should be protected, and he who has made possible the existence of the 134 HOLDER IN DUE COURSE wrong should bear the consequences. If it were otherwise, negotiable paper would have little value as an aid to business, and the exchange of goods by means of such instruments of credit would be very limited. REVIEW QUESTIONS 1. Davies made a note payable to Sandal, or order, due on November 13. The note was not paid at maturity. Some weeks later Davies paid the amount to Sandal but did not receive the note from him. Sandal then trans- ferred the note to Brown, who paid value and had no notice of the maker's payment. What are Brown's rights? Why? Davies rights? Why? 2. Clark, a person to whom a note had been indorsed, and who received the note in good faith and for value, sued Johnson, the maker. This note had been made payable to Bush, but was not completed as to amount, and had been snatched away from Johnson by Bush, without any intentional delivery on the part of Johnson, and indorsed by Bush to Clark. What are Clark's rights? Why? 3. A issues to B a check for $100, payable to B or order, and drawn upon the Peoples' National Bank of Bloomington, 111. B indorses the check to C, who pays value, and who then raises the amount from $100 to $1000, and indorses it to D, who is a holder in due course. D takes the check to the bank, and receives the money. What are the rights of the bank against A? B? C? D? 4. Ames gave Bates his promissory note for $5000, Bates agreeing that he would in consideration of this deliver to Ames certain bank stock. This he failed to do, but transferred the note to Call, a holder in due course. Call presented the note as a gift to Dale, who sued Ames. What are Dale's and Ames' rights? 5. A stranger asked Jonas, a farmer, with whom he stopped for dinner, to cash a note for $25.00, due in ten days, payable to the stranger, and signed by Burnham, a neighboring farmer. Jonas produced a hundred dollar bill, which was all he had, whereupon the stranger said, "Give me that, and I'll just change these figures to $100 in this note." This he did and Jonas gave him the hundred dollars. When the ten days had elapsed he sued Burnham on the note for $100. What are his rights? 6. Suppose in Example 5 that Jonas had before maturity sold and indorsed the note to Welcome, a holder in due course. Would Welcome's rights have been different from those of Jonas? Why? CHAPTER XVIII TRANSFER (I. When Payable to Bearer I. By Delivery<2. When Already Indorsed in Blank II. By Indorse- ment and Delivery 1. Requisites 2. Kinds Written on Instrument Order to Pay Transferee Order to Pay Entire Sum Accompanied by Delivery In Full In Blank Restrictive Qualified Conditional f. Irregular I. Conditional Liability II. Warranties I |3. Prior Parties are Competent 14. His Own Title is Good Instrument is Genuine Instrument is Valid 188. Transfer by Delivery without Indorsement. One type of negotiable paper only, viz., that payable to bearer, may be transferred by delivery alone. When paper is payable to bearer, no further act beyond delivery is necessary on the part of the transferrer to give to a holder full rights in due course. This delivery must be voluntary. Delivery may be voluntary or involuntary. When the transfer is made in the usual course of business with the intention to transfer title to the instrument, and the rights thereby rep- 135 136 TRANSFER resented, the delivery is voluntary and passes the full rights represented by the negotiable paper. When, however, the paper is transferred by theft or finding, the delivery is involuntary. The thief or finder cannot enforce the rights represented by the instrument, but an innocent purchaser from him can. EXAMPLE Hays brought suit on a note payable to bearer, of which Hathorn was the maker. Hays produced the note in court and proved Hathorn's signature. Hathorn then attempted to show that the note had been stolen from him although he did not claim that Hays was the thief. This was not a sufficient defense. Hays vs. Hathorn, 74 N. Y. 486. 189. Transfer by Indorsement and Delivery. The only manner in which negotiable paper, other than that payable to bearer, can be transferred so as to create in the new owner the rights of a holder in due course, is by indorsement. Popularly speaking, indorsement consists in the writing by the payee, or the holder, of negotiable paper, of his name on the back of the instrument, and the delivery of the paper so indorsed to a new and subsequent holder. But an indorsement is more than this, in that it must conform to four requirements. These are that it must be (1) in writing, by the payee, on the instrument itself; (2) an order, express or implied, to pay the person to whom the paper is transferred; (3) an order directing payment of the whole sum due on the face of the paper; and (4) accompanied by delivery. An indorsement on a separate paper is insufficient. The indorsement must be written, though this includes writing with either pencil or ink and also stamping or printing the signature of the person so transferring the instrument, who is called the indorser. There must be further, either express or implied, an order to prior parties to pay the sum promised to be paid on the face of the instrument to the person to whom the instrument is transferred, who is called the indorsee. In accordance with this rule it is the law in most states that words similar to "I assign the within note," or "I assign all my right, title and interest in and to the within note," are insufficient to constitute the new taker a holder in due course. An assignment is merely the giving of authority to the assignee to collect as on a simple contract; the element of demand upon the maker to pay is missing. A TRANSFER 137 few states by recent decisions have overlooked this distinction and view a written assignment on the instrument as of the same force and effect as a simple indorsement.* The law in regard to partial indorsements, as it has always existed in the Law Merchant, is stated in Section 32 of the N. I. L., as follows: "The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, does not operate as a negotiation of the instrument. But when the instrument has been paid in part, it may be indorsed as to the residue." The person taking an instrument which has been indorsed in part only, becomes merely the partial assignee of a simple contract, and .in no wise a holder in due course. No transfer by indorsement is completed until the instrument has been delivered voluntarily to the new holder. EXAMPLE A, payee of a note signed by B, wrote upon it, "Pay to X, (Signed) A," and placed the note in his safe, intending to deliver it in the morning. X broke open the safe during the night and stole the note. As the note had never been delivered to him, he could not enforce it, but if he in turn had transferred it to a holder in due course, the latter could have enforced the note. Greeser vs. Sugarman, 76 N. Y. Supp. 922. 190. Kinds of Indorsement. While every indorsement, to be effective to negotiate an instrument, must include the four elements just enumerated, endorsements may be of several kinds. The principal kinds of indorsements are as follows: 1. Indorsement in Full (called a special indorsement by the N. I. L.) 2. Indorsement in Blank. Wisconsin, North Carolina, Minnesota. 138 TRANSFER 3. Restrictive Indorsement. 4, Qualified Indorsement. 5. Conditional Indorsement. 191. Effect of indorsement. Before discussing in detail the various kinds of indorsement, the attention of the student is directed to the fact that whenever any of these indorsements is properly made the endorser does three separate and distinct things: (1) He transfers to the endorsee the right to collect the paper in his own name. (2) He promises (except in case of a restricted or qualified indorsement) to pay the indorsee if the party primarily respon- TRANSFER 139 sible fails to do so (provided a proper attempt has been made to collect from the maker, and prompt notice has been given to him, the indorser, of the maker's failure to pay). (3) He warrants that the instrument is genuine; that he has good title; that the note is not void because of illegality; and that no prior party was incompetent. If the party primarily responsible fails to pay the instrument when it is properly presented and the indorser is promptly notified of the default, or if any of the indorser's warranties fail, the indorsee may sue the indorser. 192. An indorsement in full designates the person to whom the indorser desires to make the instrument payable. It can be paid to no one else, and can be further negotiated only by his indorsement. The advantage of such an indorsement is that a finder or thief would be compelled to forge the indorsee's name in order to negotiate the instrument further, and when an indorsee's name is thus forged the prior indorser is not liable on his implied contract. The words "or order" are not necessary to an indorse- ment in full, under the N. I. L.; the phrase, "Pay to (indorsee's name)," written over the indorser's signature is sufficient. The indorser may further negotiate the instrument by indorse- ment in the same manner as though the words, "or order" were present, the reason being that the instrument, having originally been negotiable on its face, will be presumed to continue so unless specifically qualified or limited. EXAMPLE May held News' negotiable note. He sold it to Ong. In transferring it to Ong he endorsed it as follows: Pay J. C. Ong, signed L. C. May. What kind of an indorsement was this? Can Ong in turn transfer it by indorsement? 193. An indorsement in blank is simply the signature of the indorser written upon the back of the instrument. It is so called because the indorsement proper is left blank, to be filled in by any subsequent holder. Thus if E. C. Becker is the payee or holder of a negotiable instrument he may indorse it by writing his name on the back and delivering it. In such a case the law implies that he has given authority to any subsequent holder to write above his name a direction to the maker or acceptor to pay. 140 TRANSFER If Arthur Long were the holder he would be authorized to write above Becker's signature the words, "Pay to Arthur Long, or order," making the blank indorsement full. The effect of indorsing a paper in blank is to make it payable to bearer, because any holder has this implied authority to complete the indorsement. It may, as long as the indorsement continues blank, pass from hand to hand without further indorsement. Blank indorsements are not entirely satis- factory from the view-point of the cautious business man, because if the instrument is stolen or lost, the paper, having the effect of an instrument payable to bearer, may be readily negotiated and pass into the hands of a holder in due course, after which the true owner will be without redress. 194. Restrictive indorsements are of three kinds. A restrictive indorsement (Sec. 36, N. I. L.) may be one which either (1) prohibits the further negotiation of the instrument; or (2) constitutes the indorsee the agent of the indorser (as for collection); or (3) places the title to the instrument in the in- dorsee for him to use for the benefit of some other person. 195. A Qualified indorsement is a form of indorsement by which the indorser limits his implied contract with subsequent parties. The usual form is to write such a phrase as, "Pay to G. W. Burke, or order, without recourse to me. Allen Moore." It is sufficient if the words, "Without recourse," alone be written above the signature of the indorser. In this manner the indorser escapes a portion of his liability as an indorser. He does not escape his warranty, however, that the prior signatures are genuine, that the note is not invalid for illegality or incompe- tency of the parties, and that he has a good title. 196. Conditional indorsement. When a condition is im- posed upon an instrument in connection with an indorsement, it is said to be indorsed conditionally. The legal effect is to limit the negotiable character of the paper as to subsequent parties, and to prevent further negotiation by them until the terms of the condition have been complied with. The party required to pay an instrument may disregard a condition imposed by an indorser, but the party receiving the money must hold it subject to the rights of the party who indorsed conditionally. (Sec. 69, N. I. L.) 197. Exceptional Cases. In connection with the indorse- ment of a negotiable instrument, it is necessary for the business TRANSFER 141 man handling commercial paper to understand the effect of three unusual sets of circumstances : Blank Indorsement Followed by Full Indorsement. It has been stated that the indorsement of an instrument in blank has the effect of making the instrument payable to bearer, because any holder has the right to fill in the blank. (If, instead of filling in the blank, a subsequent holder indorses the paper in full, the instrument can then be transferred to another only by indorsement, and not by mere delivery.) This rule is adopted in Section 30 of the N. I. L., as follows: "An instrument is payable to bearer when the only or last indorse- ment is an indorsement in blank." Morris signs a note payable to bearer and delivers it to Jones, who indorses it "Pay to order of Higgins," and delivers it to Higgins, from whom it is stolen. The thief forges Higgins' name and the note is then transferred to Smith, an innocent holder in due course. Smith may thereupon collect the note from Morris, but has no rights against Jones or Higgins. Full Indorsement of a Bearer Note. A bearer note is trans- ferable by delivery, and it does not lose this characteristic if a holder indorses it in full. It will continue to be transferable by delivery, and will be valid against the maker, though the indorser in full is liable only to those who claim rights in the instrument through and under his indorsement. The Indorsees Contract. It has already been noted that every indorser by his indorsement makes certain warranties and that he contracts with all subsequent parties that he will pay the instrument indorsed if the maker does not; but this engagement upon his part is conditioned upon proper present- ment for payment and prompt notification to him of non-payment. Each indorser may look to all prior indorsers for satisfaction, in case of loss to himself, because he acquired his rights from or through them. The contract of warranty applies not only to indorsers but to persons who transfer a bearer instrument by delivery without indorsement for value; the latter, however, cannot be held for payment if the maker fails to pay. 198. Irregular Indorsers. An irregular indorser is one who places his name on the paper without being a party to the instrument in the regular chain of title, or without receiving any 142 TRANSFER consideration for so doing. There was much difference of opinion as to the nature of his liability before the N. I. L., and each state had its own view. The N. I. L., Section 63, declares that such a person is to be deemed an indorser as to all subsequent parties, and assumes the liabilities of an indorser. EXAMPLE On the following instrument, Mapes is deemed an indorser. $ 6 CHICAGO, DATE ./...PROMISE TO PAY ;^^^^^ OR ORDER> Six Hundred and no [iwr- "DOLLARS WITH. ^.%. INTEREST. Edgar Mapes. (Signed) Walter A. Call. REVIEW QUESTIONS 1. Inspect the following note: Chicago, Jan. 18, 1916. Three years from date I promise to pay to the order of John Gordon, Five Hundred Dollars, with interest at six per cent per annum. (Signed) Richard Meyer. This note was indorsed: Pay to George Wheeler if my house is completed before the maturity of this note. (Signed) John Gordon. Suppose that at the maturity of this note it is presented for payment to Meyer, who pays Wheeler, and Gordon's house has not been completed. What are Gordon's rights, if any, against Meyer? against Wheeler? Why? 2. Goss, an infant, makes a note for $125, payable to Baldwin, or order, which Baldwin indorses by a full indorsement to Castle, who indorses without recourse to Dawson, who in turn indorses it in blank to Edison. The note TRANSFER 143 not being paid at maturity, what are Edison's rights, if any, against Goss? against Baldwin? against Castle? against Dawson? 3. Inspect the following draft: Chicago, June 1, 1916. Two months after date pay to the order of Call the sum of Five Hundred Dollars, and charge to the account of To Bates, (Signed) Cleveland. Ames. Call indorses this draft in blank and loses it. It is found by Dale, who fills out the blank indorsement to himself, and indorses it without recourse to Evans, a holder in due course. At maturity Bates refuses to pay it. What are Evans' rights against Ames? against Bates? against Call? against Dale? 4. Butler by fraud secures a promissory note payable to his order from Warren. Butler indorses it without recourse to Campbell, a holder in due course, who in turn indorses it in blank to Dore, who knew of the original fraud, but was not a party to it. What are Dore's rights against Warren? 5. If in the above example Warren refuses to pay the note, what are Dore's rights against Butler? against Campbell? 6. (a) Write a note embodying the following conditions: Maker is yourself, payee is Harvey Rew, amount is $50, payable sixty days from date. (b) Indorse it in full by Rew to Herman Anderson, who indorses it.to George Caldwell without recourse, who restrictively indorses so as to be payable only to Samuel Morgan. CHAPTER XIX PRESENTMENT FOR ACCEPTANCE {1. Instruments payable after sight 2. Express stipulation 3. Place of payment not drawee's home or business address (1 . By whom and to whom made 2. Place of presentment 3. Time of presentment 4. Manner of presentment III. Proceedings [1. Notice to prior parties on dishonor-! [2. Protest of foreign drafts 199. When Presentment for Acceptance is Necessary. In the chapter entitled "Drafts," the rights and liabilities of the three parties to the instrument have been discussed. Accepted Draft The three parties in the above draft are Bliss, the drawer; Neagle, the payee; and Eagan, the drawee, who may become the acceptor. By drawing the instrument, the drawer, Bliss, agrees 144 PRESENTMENT FOR ACCEPTANCE 145 that he will pay the sum of $300 to Neagle,* or any indorsee sub- sequent to Neagle, if the drawee does not accept it if properly presented. The student should carefully distinguish between presentment for pay- ment and presentment for acceptance. Presentment for payment is necessary in connection with all negotiable paper when it is desired to charge those secondarily liable. Presentment for acceptance is a procedure relating only to time drafts. The drawer's contract is a conditional one, similar to that of an indorser. The payee or his indorsee, however, may lose all rights against the drawer by failure to present the draft for acceptance. Presentation for acceptance is made to the drawee, and is necessary only in three instances. These are: (1) when the draft is payable after sight, or when from the nature of the promise in the draft, presentation is necessary to fix the date of maturity of the instrument; (2) when it is expressly stipulated in the draft that it shall be presented for acceptance; or (3) when the draft is drawn payable elsewhere than at the residence or place of business of the drawee. In all other cases no presenta- tion for acceptance is necessary, and the drawer may be made liable if the drawee refuses to pay on the presentation of the draft for payment. (N. I. L., Sec. 143.) 200. Why Presentment is Necessary. The drawee of negotiable paper is usually under no obligation to accept unless he has agreed to do so, and the holder cannot sue him even though he have funds belonging to the drawer which he refuses to pay, for there is no contract between the payee, or holder, and the drawee. Such suit could be brought by the drawer only. If the drawee refuses to accept and thereby promise to pay, the holder may ordinarily require payment from the drawer. But if the draft is one requiring presentment for acceptance, and such presentment has not been properly made, the holder has failed to perfect his rights against the drawer and has acquired none against the drawee. * As between drawer and payee, if lack of consideration can be shown the drawer is freed from liability. This would be the case if in the above instance the draft had been given for collection Neagle would have been merely an agent for Bliss. 146 PRESENTMENT FOR ACCEPTANCE 201. By and to Whom a Draft Should be Presented. The draft should be presented by the lawful holder, or his authorized agent, to the drawee or his authorized agent. The party in possession of the draft is presumed to have the right to present it, and the drawee assumes no unusual risk when he accepts a gen- uine draft on presentment, that is, he is not required to investi- gate the holder's right to the instrument. If the draft is drawn on a firm, presentment to any partner is sufficient, but if it is drawn on two drawees, not as partners, it should be presented to both, and if the acceptance of one only is taken, it is at the risk of the holder, unless the one accepting has authority to accept for both. If the drawee cannot be found, inquiry should be made for some person authorized to accept for him, but if acceptance is made by an agent of the drawee, it is necessary for the holder, before he can collect, from the drawee, to prove that the agent was authorized to accept. If the drawee is dead, the draft should be protested at once so as to permit charging the drawer. 202. Where Presentment Should be Made. Presentment for acceptance should be made either at the drawee's place of business, or at his residence. Even when a draft specifies the place of payment, it should be presented for acceptance, not at that place, but at the office or home of the drawee, for the place of payment is not material until after acceptance. If the drawee has moved, diligent inquiry should be made to ascertain his new residence or place of business, and presentment should be made there. If he cannot be found, the draft should be treated as dishonored. 203. Time Presentment Should be Made. Presentment for acceptance should be made within the usual business hours, and except when a bank is the drawee, these usually extend until bed-time. It does not matter when it is made, provided some authorized person is seen and presented with the instrument, though if the hour is an unreasonable one, and no answer is received, the presentment is without legal force and effect. The draft must be presented within a reasonable time after the holder has received it. If it is not so presented, the drawer will be discharged of all liability, even though he may have suffered no actual damage from the delay. What is a reasonable PRESENTMENT FOR ACCEPTANCE 147 time, differs with the circumstances of different cases. In general the holder must act as any ordinarily prudent business man would act. When he receives a draft he must either indorse it to some other person, and so keep it in the process of negotiation, or he must present it for acceptance. The safer course for the business man to adopt is to present promptly all drafts in which presentment for acceptance is required. If the holder has delayed for an unreasonable time, the drawer is excused from all further liability, unless the holder can show that he was prevented from presenting it because of some lawful excuse, such as sickness, inevitable accident, war, pestilence, or disease. Such excuses, to be valid, must include circumstances which were beyond the holder's control, and which he could not with due diligence have overcome. 204. How a Draft Should be Presented. The holder should make an actual exhibit of the draft to the drawee or his agent, and request its acceptance. This is because the drawee's accept- ance is properly written across the face of the draft, and unless actually presented this cannot be done. If, however, the person making presentment should describe the draft with sufficient accuracy and no demand should be made for its actual production the exhibition of the draft itself would be waived, and the presentment would be sufficient to hold the drawer liable for the refusal to accept. Upon presentment the drawee has the right to hold the draft for twenty-four hours, in order to give him time to investigate his financial affairs, and those of the drawer, before deciding whether he will accept or refuse the draft. 205. Result of Presentment for Acceptance. The result of a proper and sufficient presentment of a draft for acceptance may be either (1) an acceptance by the drawee; or (2) a refusal to accept, called a dishonor of the instrument. If the drawee accepts in legal form, the elements of which are discussed in the following paragraphs, he becomes liable to the holder and all subsequent parties on a new contract, and the drawer is liable contingently in the event that the acceptor fails to meet his obligations. 148 PRESENTMENT FOR ACCEPTANCE If the drawee dishonors the draft, the holder may at once, by appropriate legal proceedings, called protesting the instrument and giving notice of dishonor, establish his right to collect the amount of the instrument from the drawer. 206. Proceedings Upon Non- Acceptance. If instead of accepting the draft by means of one of the forms of general acceptance, after a proper presentation of the instrument has been made to him, the drawee refuses it or neglects to accept it, the draft is said to be dishonored, and the holder is at liberty to hold the prior parties liable to pay to him the amount of the draft. He does this by giving immediate notice to all prior parties (the drawer, payee, and previous indorsers) that the draft has been dishonored by the drawee and that they will be held liable to pay it. The holder need not wait for the maturity of the instrument, but may at once collect from all these prior parties who were conditionally liable. If the draft is a. foreign bill of exchange (See Sec. 144) it should also be protested, and then notices should be sent. (For forms and discussion of protest, see Sec. 219.) Unless such notices of dishonor are deposited in the mail addressed to the prior parties conditionally liable, or are left at the place of business or residence of the prior parties on the day of or the day following such refusal to accept, they cannot be held liable to pay the instrument to the holder. Notice to all prior parties is ordinarily given by the holder, but may be given by one prior party to another. EXAMPLE If Bliss is the drawer; Neagle, the payee and an indorser; Walker, an indorser; and Selden, the holder; and the draft is refused acceptance by the drawee, Eagan; the normal method would be for Selden to give notice of dishonor to Walker, Neagle, and Bliss. It might be, however, that he knew Walker to be reliable and so notified him alone. In this event Neagle and Bliss would be discharged from liability for payment, unless Walker in order to protect himself should give notice to them. This notice would be sufficient to them, and if Walker were forced to pay the" draft, he in turn could collect from Neagle, and Neagle from Bliss, each recovering from the party, or parties, named in the draft, or on its back, prior to his own name. The function of notice of dishonor is to give an opportunity to parties who, because of the refusal of the drawee to accept, PRESENTMENT FOR ACCEPTANCE 149 are charged to pay the draft, to protect themselves by appro- priate action against either the drawee or parties prior to them- selves. The drawee, payee, and indorsers are conditionally liable, and the condition on which their liability to pay the draft depends is that the drawee should on proper presentment refuse to accept it and that they should be given sufficient notice of that refusal. REVIEW QUESTIONS 1. A draft payable to order is stolen from the payee. The thief forges the payee's indorsement, and transfers the draft to Holden, a holder in due course, who presents it to the drawee, who accepts it. Holden then transfers it to Rawson who is also a holder in due course. At maturity the acceptor refuses to pay it. What are Rawson's rights? against the acceptor? the payee? the maker? against Holden? 2. Write a draft in which you are the maker; David Davis, the payee; Edgar Evers, the drawee; which requests the drawee to pay the sum of $500 thirty days after sight. , Write the drawee's general acceptance on the draft; also a, full indorsement from the payee to Morris Levy; also a blank indorsement by Morris Levy to Benjamin White. 3. Inspect the following draft: NEW ORLEANS, AFTER SIGHT, PAY TO ORDER, HlUjdred_Fifty_a^ AND CHARGE TO THE ACCOUNT OF Charles Roberts. TQ L. Graves, 1 ampa l _L i la. On September 25, Jenkins presented this to Graves, who wrote across the face the words: "Accepted, Sept. 25, 1916, to pay $700 in cash and $50 by my own note, (Signed) L. Graves." Jenkins then indorsed the draft to Wilfred Munday. Graves failed to pay Munday $750. What rights has Jenkins against Roberts? Why? 4. Suppose that in the above draft Jenkins had gone to Graves' house at two o'clock in the morning with the draft, and that when Graves put his head out of an upper window Jenkins had exhibited the draft and demanded 150 PRESENTMENT FOR ACCEPTANCE its acceptance, saying that he had to take an early morning train for Key West. That Graves had told him to "go home where you belong," and had closed the window. What rights would Jenkins then have against Roberts? 5. Inspect the following draft: Kansas City, Mo., Jan. 22, 1916. Thirty days from sight pay to Louis Weber, or order, Five Thousand Dollars, and charge to the account of To Sam Dawson, Vroman Main. St. Joseph, Mo. This draft is indorsed on the back as follows: Louis Weber, Claude Grundy, Kent Murray. On January 25, 1916, Charles Moore, a holder in due course, presented the draft to Dawson, who dishonored it. Moore at once notified Murray and Weber of the dishonor. Weber immediately notified Main. From whom can Moore collect the $5000? from Dawson? from Weber? from Murray? from Grundy? If Weber should have to pay it, would he have any rights? Against whom? 6. Make a draft with imaginary parties which will .lot need to be pre- sented for acceptance in order to charge the drawer. 7. Ames and Bates signed a note reading, "We or either of us promise to pay to Call $1000." At 'maturity it was not paid. Name three ways in which Call can bring suit for collection. 8. Windmuller entered into a contract to sell and Pope to buy "about 1200 tons of old iron rails for shipment from Europe at the seller's option at any time from May first to July first at $35 a ton." Before the first of May Pope notified Windmuller that he would not accept any rails under the contract. Was Windmuller entitled to any damages? If so, how much? 9. Smith paid Brown for groceries by giving him an order on Jones, Smith's employer, for $15.00, due thirty days after sight. Jones refused to accept the draft, and two months later Brown sued Smith for the $15.00. Smith had in the meantime left Jones' employ and claimed that in settling with Jones he had allowed the $15.00. "xould Brown collect from Smith? Why? CHAPTER XX PRESENTMENT FOR PAYMENT The student should carefully distinguish between present- ment for acceptance, which has been discussed in the preceding chapter, and presentment for payment, which is the subject of this chapter. Wherever the word presentment is used alone in this chapter, it means presentment for payment. 207. When Presentment for Payment is Necessary. The acceptor of a draft and the maker of a note are the parties who are primarily liable, for they have engaged absolutely to pay the paper on the day of its maturity. No formal presentment is necessary to charge either of them, for it is their duty to pay it, and if they fail in this, suit may be brought against them at once. If no place of payment is specified in the instrument, it is the duty of the party primarily liable to seek out the holder and make a tender to him. If a place of payment be designated in the instrument, and the maker or acceptor is ready and willing to pay the instrument at that place, his readiness there amounts to a tender. On the other hand the contract of the drawer of a draft after acceptance, and of the indorsers of a draft or note, is condi- tional upon the proper presentment of the instrument to the party primarily liable and his refusal to pay it. Presentment for pay- ment is therefore a preliminary to charging those parties who are secondarily liable, for their contract to pay is conditioned on presentment to the acceptor or maker and his refusal to pay. 208. By Whom Presentment Should be Made. Present- ment of the instrument for payment must be made by the holder, or by some person authorized to receive payment in his behalf. So far as the acceptor or maker is concerned, payment may be safely made to anyone who appears by the instrument, or its indorsements, to be the legal holder. A presentment by such a person will be sufficient to charge the drawer or indorsers in the event of refusal to pay. 151 152 PRESENTMENT FOR PAYMENT 209. To Whom Presentment Should be Made. Present- ment for payment should be made to the person who is primarily liable on the instrument, or if he is absent or inaccessible, to the person apparently in charge at the place where the presentment is made. If the instrument be a draft the presentment should be made to the acceptor; if a note, to the maker. If the primary liability be joint, the presentment must be made to all makers or acceptors. Should the maker or acceptor be dead, the pre- sentment should be made to his personal representative, who is either the executor or administrator. 210. Where Presentment Should be Made. When the paper is payable generally, that is, when no place of payment is designated, it should be presented at the place of business of the maker or acceptor, or at his home. If his address be unknown and cannot be discovered, the presence of the instrument in the city named in the hands of the holder or his agent on that day will be sufficient. Presentment is usually made by sending the instrument to some bank for collection. The bank then makes the necessary demand. Under all circumstances, clue diligence must be used to find the principal debtor, and present the paper to him, or if a place of payment be specified, to present the instru- ment at that place, and that place alone. 211. Time of Presentment. Presentment must be made on the day of maturity. If made either before, or after, the pre- sentment is insufficient to charge those parties who are secondar- ily liable. Not only must the presentment be made on the proper day, but it must be made at a reasonable hour. If the place of pre- sentment be at a business office, the usual business hours of the day form the time limit for presentment; if payable at the maker's or acceptor's home, the limits are the hours of rising and retiring customarily followed in the community. Presentment is necessary to charge the parties secondarily liable, they having agreed to pay in the event that the maker or acceptor is given a reason- able and proper opportunity to pay, and refuses. It would be unreasonable to call one out of bed at midnight to pay a draft or note, and it would be improper to ask the maker or acceptor to pay before the paper became due. Therefore such a presentment will not be sufficient to throw the responsibility for the maker's or acceptor's refusal upon the drawer or indorsers. PRESENTMENT FOR PAYMENT 153 212. Presentment of Checks. A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Checks are drawn on a bank, requiring the bank to pay the payee out of the funds of the drawer on deposit in the bank. The drawer has impliedly promised to pay if the bank fails to do so. His contract is conditioned on the presentment of the check for payment within a proper time, because should the check be outstanding for a long period the bank might become in'solvent and fail and the money which he had left there to pay the check might be lost. The rule is designed to cause the payee, who has slept on his rights, to be the' loser in such a case, rather than the drawer of the check. Reasonable Time. It is generally considered among busi- ness men that twenty-four hours is a reasonable time to hold a check, and that it should be presented for payment, started on its route of collection, or indorsed to another person within that period. Business usage allows each indorser twenty-four hours as a reasonable time in which to dispose of the check. 213. Drafts Payable on Demand. The general rule that presentment must be made on the day of maturity does not apply to sight drafts, for the obvious reason that they are matured whenever presented. The only requirement as to them is that they must be presented within a reasonable time or the parties secondarily liable will be discharged. This length of time depends upon business usage. It has already been noted that under the N. I. L. instruments payable "at sight," are treated as payable on demand. 214. Holidays. In fixing the period of maturity of nego- tiable paper, the question as to presentment of paper becoming due on a holiday is often of importance. Each state fixes its own holidays, and negotiable paper becoming due on a legal holiday, as Christmas, Thanksgiving, or New Year's Day, or on a Sunday, is properly presentable the day following, or on the next succeed- ing business day (except in States where days of grace are still allowed). Thus, when paper falls due on Saturday, the Fourth of July, it is properly presentable on Monday. 154 PRESENTMENT FOR PAYMENT 215. Manner of Presentment. Presentment for payment should be made by an actual exhibition of the paper. This is for the reason that the acceptor or maker has the right to demand that on his payment the instrument should be delivered to him. If the place of payment be at a bank, the presence of the instru- ment in the bank at maturity, ready to be delivered to any one who may be entitled to it on payment of the amount due, will be sufficient. Delay in making presentment for payment until after the day of maturity is excused only when the delay is caused by circumstances beyond the control of the holder, and is not due to his fault or misconduct. If there be such delay the holder must prove that it was due to unavoidable circumstances. 216. Presentment Dispensed With. Presentment for pay- ment is not necessary in order to charge the drawer or indorsers, (1) when after the exercise of reasonable diligence it is impossible to find the party primarily liable and presentment cannot be made; and (2) when presentment has been expressly or impliedly waived by the parties secondarily liable. A waiver of present- ment is made if the indorsers write on the instrument words similar to "Presentment and notice waived," or if they have at or about the time of maturity entered into an agreement with the holder that they will pay the instrument, because of the threat- ened dishonor by the maker or acceptor. The first is an express waiver; in the second instance the waiver is implied. 217. The Instrument is Discharged if, upon presentment for payment, it is paid. The drawer and indorsers are relieved of all further liability, and the instrument itself is usually delivered to the party making payment, or is canceled upon its face, or (usually) both. 218. When Payment is Refused, the instrument is said to be dishonored, and the holder's rights against the parties secondarily liable, the drawer or indorsers, become important. If the holder has performed the necessary acts of presentment for payment, and the instrument is dishonored, only one more process remains necessary for him to perform before he can charge the drawer or indorsers with trfe payment of the instrument. This process is called protest and notice of dishonor and is designed to protect PRESENTMENT FOR PAYMENT 155 the parties secondarily liable by requiring that they be given notice of the dishonor by a formal method. 219. A Protest is a form of solemn declaration written by a notary public to be attached to the instrument, or to a copy of it, stating that he duly presented the note or draft for payment and that it was dishonored. Protest is required in the case of a foreign draft, as distinguished from inland drafts and notes, and is usually made even when -not required, because the signed and sealed statement of a notary public is effective evidence that the presentment was properly made and payment refused. Business usage is for the holder to employ some notary public to make this presentment, and in the event of dishonor, to make, on the day of the dishonor, a certificate of protest of the instrument. The protest is usually written on a blank form and enumerates the following facts: (1) Time of presentment; (2) Place of presentment; (3) Fact of, manner of, and reason for presentment; (4) Fact that payment was demanded; (5) Fact of dishonor; (6) Name of party to whom presented; (7) Name of party by whom presented ; (8) Copy of the instru- ment presented, attached to protest. Certificate of Protest State of Illinois, \ Cook County, j J&t tt J<OtDIt, That on this 30th day of January, in the year of our Lord one thousand nine hundred and sixteen, I, E. J. Hoskins, a Notary Public, duly commissioned and sworn, and residing in the City oj Chicago, in said County and State, at the request of W. F. Cad-well, went with the original note, a copy of "which is hereto attached, to the office of Oscar E. Bart- lett, and demanded payment thereon, which was refused. Whereupon I, the said Notary, at the request of the aforesaid, did protest, and by these Presents, do SbtAtmnlp 9tt*t, as well against the maker of said note and the endorsers thereof, as all others whom it may or doth concern, for exchange, re-exchange, and all costs, charges, damages, and interest already incurred by reason of the non-payment of the said note. And I, the said Notary, do hereby certify that on the same day and year above written, within forty-eight hours from the time of such protest, due notice of the foregoing Protest was put in the Postoffite at Chicago, III. as follows: Notice for Samuel H. Phillips, Ottawa, III., notice for Harry Watkins, LaGrange, III., notice for M. J. Morris, Chicago, III. Each of the above named places being the reputed place of residence of the person to whom this notice was directed. 3n QCes!timon|> BUIttreof, I have hereunto set my (Place for Seal.) hand and affixed my Official Seal, the day and- year first above written. E. J. HOSKINS, Notary Public. 156 PRESENTMENT FOR PAYMENT Notice of Protest * at Pram < Mt. This certificate, being executed by an official of the state, is evidence that the proper presentment was made, and if any question is raised about the presentment it may be shown to the court, making it unnecessary to produce further witnesses. 220. Notice of Dishonor. The holder of dishonored paper, whether he protests the paper or not,* must always send notice of the dishonor to all prior indorsers whom he wishes to hold, the notice being a statement of the fact of dishonor and of an intention to hold liable the party notified. The notice should be presented or mailed within twenty- four hours after the dishonor. This prompt- ness is necessary in order to give the parties secondarily liable sufficient opportunity to protect themselves by appropriate steps against the party primarily liable, who tote of Coontjr of. fr- Dated _ JOT f Being this day due and unpaid, and by me PROTESTED for non-payment, 1 hereby nstify you that she payment thereof has been duly iemaudsd, and that the holders look to you for payment, damages, interest and costs. Done.at the request i dishonored the instrument, and against other parties secondarily liable. When a notary is em- ployed to protest a note or draft, he usually also mails notices of dishonor, and his fees, which are specified by law, are added to the amount to be paid by the indorser, drawer, or maker. 221. If Notice be Waived by a party secondarily liable, as described in Sec. 216, neither protest nor notice is required to charge him with liability. * Notice of dishonor is always required, to hold the parties secondarily liable. (Protest is ahvays desirable, but is not required by law in case of inland bills, though it is required in case of foreign bills.) PRESENTMENT FOR PAYMENT REVIEW QUESTIONS 1. Inspect the following draft : 157 This draft was presented for payment by Morton to Farnsworth at his home in Cambridge, at nine o'clock in the evening of July 12, and Farnsworth,- who had retired for the night, put his head out of an upper story window and told Morton to go home and keep still. Morton immediately sent notice of dishonor to Gray, who claimed to have been discharged because of an improper presentment. Was Gray right? Why? 2. The Victoria Hotel Company was an indorser of a draft which had been dishonored. The holder sent a notice of dishonor to the hotel by a messenger boy, who left the notice at the cashier's window, but failed to call the attention of anyone to it. Was this notice sufficient so that the hotel company could be held liable to pay the instrument as an indorser? Why? 3. A gives his note to B payable in wheat. C innocently purchases the note from B for value before maturity, and in the usual course of business, but at maturity A refuses payment, claiming that the paper was secured with- out consideration. Can C collect it from A? 4. A secures B's note without consideration and indorses it before matur- ity and for value to C, who has knowledge of the lack of consideration. Can C collect it from B? 5. In the above case, suppose C purchased the paper innocently before maturity and for value, and then transferred it to D, who had knowledge of the lack of consideration between A and B. Could D collect it from B? 6. What would be your answer to No. 5, provided the sale from C to D was after maturity? 7. A playfully writes his name on a blank paper and hands it to B. B fills out a promissory note above it and at once sells it to C, who knows nothing of the deception practiced by B. Can C collect it from A? 8. A owing B $100 writes and signs a promissory note for that amount, payable to B or bearer, intending to deliver it next day. A locks the paper in his safe, but in the night a burglar breaks open the safe, gets the note and sells it to C, an innocent purchaser, for value and before maturity. C, after maturity, sells it to D. Could any of these parties collect the note from A? If so, which ones? 158 PRESENTMENT FOR PAYMENT 9. A sells a bill of goods to B for $1,000, for which B indorses to A C's note, payable at the First National Bank of Chicago. At maturity C is insolvent. What steps must A take to hold B? 10. Suppose that A draws a draft on B, in favor of C; but B has no funds in hand belonging to A. What steps must C take to charge A? 11. Suppose a note reads: "I, J. S. Lee, president of the E. & M. Ry. Co., promise to pay, etc.," and is signed J. S. Lee, Pres. E. & M. Ry. Co., whose note is it? 12. Write a negotiable promissory note for $250, at three months, and state the day of the month when the same will mature. Also a draft for same amount and time, and give the technical names of all the parties. 13. A makes his note to B's order, and before delivery C signs his name on the back. B indorses it over to D. What is C's liability to B? to D? 14. A forges the name of B as drawer of a draft payable to himself, at ten days' sight. The drawee accepts and the bill passes by indorsement to C, an innocent holder, for value, and before maturity. What are the rights if any, of each holder against the acceptor? What rights has the acceptor against B? 15. A note payable "to order" was indorsed by A to B, "without recourse." B indorses in full to C. The note proved to be a forgery, and the maker refused payment. Can C collect from B? If so what steps must he take? Can he collect from A? Why? 16. A gives his negotiable note to B for $475. B alters the amount so that it calls for $575, and indorses the paper in full to C for value, before maturity, C knowing nothing of the alteration. Can C collect the $475 from A? What is the liability of A? Are there any circumstances under which C could collect the $575? If so, what are they? 17. A gives B his note payable "to order," and B indorses it "Pay C only." C indorses the paper to D in payment of a personal debt. What are D's rights? 18. Give the facts of a case in which A, in his own name, would have the right to sue B, though they never had any dealings with each other, and B does nor even know of the existence of A. 19. A gives B his non-negotiable note, which B transfers to C by an indorsement in full. What is the liability of A to C? 20. On the 18th of August A gave B his check in payment of a debt. B presented the check at the bank on the 25th, but the bank had failed, clos- ing its doors at the close of business hours on the 19th. On whom will the loss fall, and why? 21. In the above case, suppose that on the 19th B indorsed the check to C, who goes on the 20th to present it, but finds the doors closed, as did B. On whom will the loss fall? 22. A drew his check in favor of B for $100. B indorsed it over to C, who raised it to $190. On presentation at the bank it was paid. Can the bank recover from C, and if so, how much? Are there any circumstances under which A or B would be liable? PRESENTMENT FOR PAYMENT 159 23. A gave his note to B at 60 days., After the note was given B was adjudged a lunatic, and a conservator appointed for him. B, however, still retained the note and sold it to C for value. C indorsed it without recourse to D, who held it at maturity. What is C's liability? 24. A engaged B to make a large purchase of corn for him, and left with him for that purpose a blank promissory note signed. B did not make the purchase, but filled out the note for a large amount and indorsed it over to C for value before maturity, C knowing nothing of B's bad faith. C indorsed it for value to D, who knew of the origin of the paper. Can D col- lect it? 25. B sent his collector to A for a settlement of his account. A gave him his check payable to B or bearer, but on his return the collector lost the check. C found the check and sold it to D. Can B stop payment of the check by notifying the bank? 26 . Inspect the following instruments: ^L. ffll 36.00 ./a/' fhe> tlnlon Stqtf) TtejK 6)//> , x/~y..^/ -tfrttv Interest at 7 per. cent. ^JK per. cent . M^Z*Lj JZsCLseA _S z^^z^^^^-ja^^^^- 432 Washington Street Iff? Milwaukea, Wisconsin In each of the above instruments, who are the parties primarily liable? Who secondarily liable? To whom should presentment for payment be made and where? To whom should notice of dishonor be sent, if the draft is not paid? CHAPTER XXI INTEREST 222. Interest is the use of money. For this use the user pays the owner a consideration, usually stated as a given per cent of the principal sum for each year of use. In popular language the money paid for interest in itself called the "interest," though this is not strictly correct. 223. Simple Interest is interest computed solely upon the principal sum, as distinguished from compound interest. 224. Compound Interest is interest computed upon the prin- cipal sum and also upon unpaid sums due for interest. Com- pound interest is of two kinds : (a) Simple interest upon unpaid interest due upon principal, often called annual interest; (b) interest upon interest upon interest ad infinitum. The general rule is that in the absence of contract therefor, express or implied,* or of some statute requiring it, f compound interest is not allowed to be computed upon a debt. This rule includes both classes of compound interest. Even when there is a contract therefor, the right to collect compound interest is denied in some states, unless such contract is independent of the principal contract and be made after the simple interest is due. Leonard vs. Villars, Admr., 23 111. 377; First National Bank of Galesburg vs. Davis, 108 111. 633; Harris vs. Bressler, 19 111. 467. Compound Interest ad infinitum is legal only in California, Montana, Iowa, Tennessee, Missouri, Nebraska, and Texas. In Missouri interest may not be compounded oftener than once * Compound interest has been implied in specific cases, because of a gener- ally prevailing usage in a given line of business or because peculiar circum- stances have required it, in California, Dakota, Iowa, Tennessee, Kentucky, Massachusetts, Michigan, New Hampshire, New Jersey, New York, and Vermont. f Compound interest is usually allowed by statute in the calculation of refunds in case of misappropriation of trust funds by executors and adminis- trators. In this case it is in the nature of a penalty. 160 INTEREST 161 a year. In Nebraska and Texas interest may be compounded up to the point where the total interest equals what it would be at the maximum legal rate, but not beyond that. Annual Interest. The general rule is that if interest is not paid when by the terms of the original contract it falls due, it does not draw interest, but in most states, the parties have a right to contract in advance that if unpaid it may itself bear simple interest.* Simple interest upon principal, in case of a note, is sometimes evidenced by coupon notes attached to the principal note, these coupon notes being themselves interest-bearing. 225. Simple Interest Always Presumed. The court will never assume that compound interest of either class is due. In the absence of a specification in the contract, simple interest is always presumed. 226. When Interest is Payable. The general rule is that interest becomes due and payable at the same time as the prin- cipal, and not before, except by contract. Therefore, a note running longer than one year and bearing interest should state that the interest is payable annually if such is the intention; otherwise it cannot be collected until the note is due. 111. National Bank vs. School Trustees, 211 111., 500; Motsinger vs. Miller, 59 Kans., 573; Tanner vs. Dundee Land Inv. Co., 12 Fed. 646. 227. Legal Interest is that rate of interest prescribed by the law of the state or country which will prevail when there is no special agreement as to rate of interest between the parties. Most states have also adopted a maximum lawful rate, beyond which parties may not validly contract for the payment of interest. This is called the maximum rate. 228. On What Interest is Allowed. The law allows interest only on contracts, express or implied, for the payment of interest, or as damages for the wrongful detention of money. Interest is * Annual interest will be allowed by contract but not by inference in all states except Connecticut, Delaware, Idaho, Maine, Massachusetts, New Jersey, Nebraska, and Utah. In Nebraska the total interest contracted for must not exceed the interest upon the original principal at the maximum legal rate. 162 INTEREST created expressly when the parties to a contract agree as one of its terms that interest shall be paid, which is usually done by insert- ing a clause which reads, "bearing interest," "with interest," or some similar expression. Interest is payable by implied contract when the parties make no express agreement therefor, but from the circumstances of their dealings the law implies that they contracted in reference thereto. Such circumstances may exist by virtue of the customs or usages of the particular trade which the parties are considered to have had in mind as a part of their contract, or because of the nature of previous dealings between the parties. The commercial importance of interest is confined largely to debts, either in the form of negotiable instruments or otherwise. As a general rule interest is allowed on all written instruments stipulating the payment of money, interest being allowed after the payment is due. In accordance with this rule, no interest is allowed on negotiable paper before maturity unless the words "with use," "with interest," or some equivalent expression be made a part of the note. The statutes of the various states pro- vide for the allowance of interest upon judgments after they have been rendered, and the rate allowed is ordinarily that rate which is the legal rate in the state where the judgment is rendered. 229. What Law Determines the Rate. The rate of interest which a contract bears, and also the question whether it bears interest at all, are both determined by the law of the place where the contract is expressly or impliedly to be performed. If no place of performance is specified, it will bear interest according to the law of the place where it was made. If a draft be drawn in Wisconsin for a debt payable there, upon a person in Illinois, and the draft be not accepted, an action may be brought by the holder against the drawer, and the laws of Wisconsin respecting interest will apply. On the other hand, if the draft had been accepted in Illinois and an action were brought against the acceptor, the laws of Illinois respecting interest would govern. All misunderstanding may be avoided by the parties expressly providing for a rate of interest, or providing that the laws of a par- ticular state shall control. 230. Interest on Accounts. If goods are sold on terms of credit which make the bill payable on a certain day, and the bill is not paid on that day, interest is due thereafter, whether so INTEREST 163 specified or not.* Many business houses specify this, however, so that there shall be no misunderstanding. If goods are sold on credit without any specified date of payment, interest cannot be collected unless there is a special agreement to that effect. If a balance be agreed upon as of a certain date, however, this will render it liquidated so as to draw interest thereafter. When there has been a demand for payment of a balance due, and this demand has been wrongfully refused, the demand has the effect of a liquidation of the account and interest is allowed from the date of the demand. 231. Interest on Partial Payments. When a debt is carry- ing interest, and a partial payment is made, a question arises as to whether this payment should be credited upon the interest then due or upon the principal debt. Three rules, known as the United States rule, the Connecticut rule, and the Merchants 1 rule, have been developed by the courts. The United States rule is the rule applied in practically all the states in the absence of a special agreement between the parties. This rule is as follows: "When a partial payment is made, apply the payment in the first place to discharge the interest then due. If the payment exceeds the interest, the surplus goes towards discharging the principal and the subsequent interest is to be computed on the balance of the principal remaining due. If the payment be less than the interest, the surplus of the interest must not be taken to increase the principal; but interest continues on the former principal until the period when the payments, taken together, exceed the interest due, and then the surplus is to be applied toward discharging the principal ; and interest is to be computed thereafter on the balance."! * The student must bear in mind that the forbearance of creditors the fact that creditors do not as a rule insist upon this right does not in the least affect the legal status of the right. Interest can be legally collected on overdue accounts, by any creditor, in any ol the cases above enumerated. t This statement of the rule was made by Chancellor Kent in the case of Connecticut vs. Jackson, 1 Johns Ch. (N. Y.) 13. It has been expressly approved in Delaware, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Hamp- shire, New Jersey, New York, North Carolina, Ohio, Tennessee, Texas, Utah, Virginia, Wisconsin, West Virginia and Kansas. It is not followed in Connec- ticut, as is noted in the text, but in all other states it may be safely predicted that the United States rule would be applied by the courts should the question be presented to them. 164 INTEREST The Connecticut rule has application in Connecticut only. It is a modification of the United States rule to the extent that it provides that the first partial payment shall not be applied to the extinguishment of the interest, unless such payment be made at least one year from the time when the interest began to run, nor shall subsequent partial payments be so applied unless there is at least one year between them. This is upon the ground that interest cannot be due except from year to year.* The Merchants' rule is also comparatively unimportant. The custom is prevalent in some mercantile centers in the settling of accounts to charge interest on all debit items and to allow interest on all credit items, interest on each item being figured from the date of the item until the date of the settlement or adjustment. This is known as the merchants' rule. It is only applied by the courts when there is an express or implied agree- ment between the parties to adopt this as the correct means of computing the interest. In a few instances proof of a course of dealings, or custom between the parties, has been recognized as sufficient to establish an implied contract to apply the merchant's rule. In general, however, it is stated that he who seeks to em- ploy this rule has the burden of proving an agreement to adopt it. \ 232. Usury is an illegal or exorbitant rate charged for interest. Any rate beyond the maximum rate allowed by law is usurious. The penalty for contracting for a greater rate varies in the different states, and a contract may be usurious in one and perfectly valid in another. All kinds of subterfuges are resorted to in order to avoid the penalties provided for usury. Sometimes the borrower is required to receive a small article of personal property at an * This rule was adopted by the Supreme Court in Connecticut at an early date, i.e., 1784. Kirby's Reports, p. 49; Kissam vs. Burral,Kirby335; Treat vs. Stanton, 14 Conn. 457. It continues to be the law in that jurisdic- tion. t The following cases have recognized the merchants' rule as the correct method of computation of interest under special circumstances: Stoughton vs. Lynch, 2 Johns Ch. (N. Y.) 210; Smith vs. Shaw, 2 Wash. 167; Hart vs. Dewey, 2 Paige (N. Y.) 207; Backus vs. Minor, 3 Cal. 231; Pearson vs. Grice, 8 Fla. 214; Berkey vs. Gay (Mich. 1904) 100 N. W. 920. In the last named case this rule was confused by the court with the Connecticut rule. The right to imply an agreement to use the merchants' rule has been expressly denied in Averill vs. Verner, 22 Oh. St. 372, and Lewis vs. Bacon, 3 Hen. & M. (Va.) 89. INTEREST 165 exorbitant figure, and in this manner the lender endeavors to get an extra return on his money over the legal rate. In all such cases the law looks to the intent, and if the contract appears to have been devised for the purpose* of securing a usurious rate the courts will impose the penalties. As a general rule, if an obligation has already been paid together with a usurious rate of interest, the penalty will not be applied, and the debtor cannot recover his money, though this rule is modified in some states. When a note executed in one state is made payable in another, the law of the state of performance will govern in determining whether or not the instrument is usurious. 140 U. S. 101. It is not deemed usurious for interest to be taken in advance, neither is it unlawful to purchase a third person's note at a great reduction from its face value, for in such cases the reduction is not intended as a means of escaping the penalty for an unlawful rate but represents the profits which the buyer demands as return for his assuming the risk of being able to collect the obligation. Similarly, if money is loaned at a risk, and the contract provides that interest is to be paid out of the profits or not at all, the collection of a high rate is not usury, for the lender is entitled to large returns in the event of the success of such an enterprise. When a borrower pays a broker a fee for finding him a lender, this fee does not make the contract usurious. But if the money which the borrower receives really belongs to the broker, and the fee is not paid merely as a charge for his time and expenses in negotiating the loan, the contract may thereby become usurious, for otherwise the purpose of the statutes relating to lawful interest would be thwarted. A table showing the legal rate, maximum lawful rate, and the penalties provided for usurious contracts in the several states is given in the appendix. REVIEW QUESTIONS 1. Ames gave Smith his note for $500 payable on demand. No pro- vision was included as to the payment of interest. May Smith collect interest on this obligation? From what date? What rate? Why? * The fact that the consideration is small will not of itself be considered evidence of usurious intent, for the law does not weigh consideration. 166 INTEREST 2. On July 1 Jones gave Brown his note at sixty days for $100, but no mention was made of any interest. If this note is paid at maturity what amount may Brown demand? 3. In the above case, the note was not paid until October 1 following. What amount may Brown claim in your state? 4. A, being pressed for funds, borrowed 500 from B and agreed to pay him two per cent a month for interest. If the note be for nine months, how much can B collect in your state at maturity? 5. A, of Denver, borrows of B, of Chicago, $1000, on a note for ninety days, payable at the First National Bank of Chicago. The note bears interest at twelve per cent per annum. Is this usury, and if so, how much can be collected? 6. On Oct. 26, 1916, Erskine gives two notes to Blair each for $3000 and due in three years. One reads "With interest at 6% per annum"; the other reads, "With interest at 6% per annum payable annually." If each of these notes is paid in full when due and no part is paid until due, what must be the amount of the check given to pay each of the notes on Oct. 28, 1919? 7. A, a minor, was indebted to B. He gave in payment his note, which B indorsed in full to C. Is A liable to C? Is B liable? 8. In the above case suppose B had indorsed without recourse. Would he then be liable? 9. A purchased from B a bill of goods to the amount of 200. A gave him, without indorsement, C's note payable to bearer for $200. (a) Sup- pose C is a minor; (b) suppose C's signature be forged; (c) suppose C prove to be insolvent; is A liable in any case? 10. A draft on B payable to C and purporting to be drawn by A was presented to B and he accepted it. B afterward learned that A's signature was forged and when the draft was presented for payment by D, an innocent indorsee, B refused to pay it. W 7 hat are the rights of the different parties? 11. A note is payable to L. M. Swift and he wishes to transfer it to C. M. Miller without becoming responsible for its payment. Write his indorsement. 12. Suppose he wished to indorse it so it would not be further negotiable, how could he do it? 13. A note payable to order was stolen from the owner and his indorse- ment forged thereon. After passing through several subsequent holders' hands, the owner discovered the note in a bank. What are his rights as against the bank can he secure the possession of the note and if so what is the name of the action he must bring? 14. A, when indorsing a negotiable promissory note wrote over his sig- nature the words "presentment, demand, protest, notice, and waived." At maturity the note was not paid, in fact was not even presented. Is A liable? Why? 15. A gives his note to B payable at Union National Bank. B presents the note there at maturity. Is the bank authorized to pay it and deduct the amount from A's account? CHAPTER XXII GUARANTY AND SURETYSHIP 233. Definitions. A surety is one who makes an uncondi- tional promise, in writing, to be responsible for the debt of another. A guarantor is one who agrees, in writing, that under certain conditions he may be held responsible for the payment of some debt or the performance of some duty by another. The contract of a surety is called a contract of suretyship ; the contract of a guarantor is called a guaranty. Degrees of Liability. There are in general four degrees of liability assumed by those who become liable with or for others. Named in the order of onerous liability they are: 1. Co-Maker. 2. Surety. , - ~ }a. For Payment. 3. Guarantor < , _ ,, 10. For Collection. 4. Indorser. v I 234. In Writing. Contracts of guaranty or suretyship, being contracts to answer for the debt, default, or miscarriage of another, come under the Statute of Frauds and must be in writ- ing. The writing may be on the original instrument of debt or obligation, or may be on a separate paper. 235. Consideration. If a contract of guaranty or surety- ship be made at the same time as the original contract which it supports, the making of the original contract is considered suffi- cient consideration to support the contract of guaranty or surety- ship. This is because the performance of an act which one would not otherwise perform, is a consideration, and the making of the original contract is; such an act. There need be no other con- sideration. But when the contract of guaranty or suretyship is made sub- sequent to the original contract which it seeks to support, there must be a separate consideration, since a past consideration will not support a new contract. This new consideration may be 167 168 GUARANTY AND SURETYSHIP something given to the guarantor, for instance, a payment of money; or the relinquishment of a right by the creditor, for instance, the surrender of securities in his hands. Some states* require that the consideration be stated in the contract of guar- anty or suretyship. EXAMPLE Sol way owes Jenkins $500. Kasson writes to Jenkins as follows: "I will pay what Solway owes you, if he does not, (Signed) Kasson." This is a guar- anty of past credits and unless some consideration passes between Jenkim; and Kasson the agreement cannot be enforced. If, however, Kasson writes "If you will extend Solway's credit for ninety days, I will pay you what he now owes you, if he does not, (Signed) Kasson," and this offer is accepted by Jenkins, there is a sufficient consideration to support the promise of the guarantor. 236. The Contract of Surety. The surety usually signs the original instrument with the promisor for whom he becomes liable. He should write the word surety after his name, to indicate the nature of his liability. If he fails to do this, he is a co-maker, except as to those who are cognizant of the suretyship. 237. Liability of a Surety. It is the duty of the surety to seek out the creditor at maturity and see that the debt is paid. Surety and principal are jointly and severally liable to the creditor. The surety is therefore liable as soon as default is made, and no demand upon the principal debtor or notice of his default is necessary. This liability on the part of a surety is a continuing liability. Delay on the part of the creditor to enforce collection from the debtor will not release the surety. EXAMPLE Ames talks with his banker about the loan of $1000. The bank agrees to lend him the money if he will secure the joint note of himself and Bates. They sign such a note and the bank advances the money. Upon non-payment, the bank may sue both Ames and Bates jointly, or may sue Bates alone. 238. The Contract of Guaranty. A guarantor either signs a paper separate from that signed by his principal, or signs the same paper in such a way as to indicate clearly that his contract is not one of primary liability. *A statement of the consideration is required in Alabama, Georgia, Minnesota, and New York to validate a contract of suretyship or guaranty. GUARANTY AND SURETYSHIP 169 EXAMPLE Caldwell desires to secure credit from the Hub Clothing Company for a suit of clothes. He takes with him a letter from Murphy to that company in which Murphy agrees that if the company will give Caldwell credit up to $75 he will pay it if Caldwell does not. If in reliance upon this letter the Hub Clothing Company extends credit to Caldwell, Murphy becomes liable as a guarantor. 239. Guarantor's Liability. A guarantor's liability is less stringent than that of a surety, or to speak more exactly, he has an opportunity of avoidance that is denied to the surety. The guarantor has a right to expect that demand for payment will be made upon the principal within a reasonable time after maturity, and that notice will then be given to him (the guarantor) in case of default. If this be not done, the guarantor is discharged to the extent that he was damaged by the delay. In this respect the contract of guaranty is more onerous than that of indorsement, for failure of due presentment and notice discharges an indorser absolutely, whether or not he has suffered by the delay. It is not always easy to determine whether a sponsor is a surety or a guarantor. This is more often determined from the nature of the agreement than from any express wording or form used. If the nature of the agreement is such that sponsor and principal are jointly and severally liable, the sponsor is a surety. If the liability of the sponsor is secondary to that of his principal, the sponsor is a guarantor. Contracts to answer for the performance of the duties of others are always guaranties, not contracts of suretyship. Fidelity bonds are contracts of this kind. 240. Classification of Guaranties. Guaranties are variously divided, the following being the most common and important classes : . ~ i a. General As to Operation Classes of Guaranties b. Special a. For Payment As to Subject-matter < , ' ; . (b. For Collection A . (a. Limited As to Amount < , TT .. . , [b. Unlimited . (a. Temporary As to Time <.. ~ . . (b. Continuing 170 GUARANTY AND SURETYSHIP A special guaranty is one directed to a particular person. A general guaranty is directed to whomsoever may accept the offer made. Being in the nature of a proposition, it must be accepted before it is binding, and the guarantee must notify the guarantor. This is necessary that he may know to whom he is liable, and for what amount, that he may take proper steps to protect himself against loss. In case of any guaranty it is safer to notify the guarantor of its acceptance. GENERAL GUARANTY Temple, Tex., Sept. 1, 1916. To any one who shall accept and retain this letter of guaranty, I will guar- antee the payment of any bill of goods which may be sold the bearer, G. W. Brown, to an amount not exceeding four hundred dollars. This should be considered for one transaction only. N. Y. BLAIR. SPECIAL AND LIMITED GUARANTY Ross Grove, III., Aug. 16, 1916. A. C. McClurg & Co., Chicago, III. Gentlemen: If you will sell the bearer, James Allen, a bill of goods on ninety days' credit, I will cheerfully guarantee the payment thereof to an amount not exceeding one thousand dollars. JOSEPH B. LYONS. Guaranty for Payment. A holder of a negotiable paper writes on the back thereof: For value received I hereby guarantee the payment of the within note. A. This is an absolute guaranty, for the guarantor is liable immediately on the default of the debtor. But he is entitled, according to the weight of authority, to demand and notice within a reasonable time. Guaranty for Collection. If the guaranty be as follows: For value received I hereby guarantee the collection of the within note. A . or For value received I warrant this note good. A . it is a guaranty for collection. The sponsor does not absolutely guarantee that the note will be paid at once without diligent effort to collect, including suit if necessary or worth while, but that the debtor can be made to pay it. GUARANTY AND SURETYSHIP 171 As to Amount. A guaranty may be for a certain amount, in which case it is said to be limited, or it may be for an unlimited amount. As to Time. A guaranty may be either temporary, that is, limited to a single transaction, or continuing. A continuing guaranty applies to successive transactions. 1 1 is often extremely difficult to determine whether the contract be a tempo- rary or continuing one, and therefore it is best to have the instrument itself state plainly which is intended. If it contains such expressions as "from time to time," or "at any time," or "for any debt," etc., it is usually construed as a continuing guaranty. A continuing guaranty will not only cover bills up to the amount of the guaranty, but if they are paid and others bought it will cover any balance due within the limit named until extinguished. CONTINUING GUARANTY Chicago, III., July 18, 1916. J. W. Butler Paper Co., City. Gentlemen: For all goods that you may sell E. P. Farr, upon the usual terms of credit, I will for value received, guarantee the payment in an amount not exceeding one thousand dollars. You are at liberty to consider this letter a Continuing Guaranty until further notice. H. TEMPLETON. 241. Rights of Surety. Up to the time when the surety has been compelled to pay, he has the right to bring suit in a court of equity to compel the debtor to pay. In the absence of statutory provisions permitting it, however, he cannot bring such a suit in a court of law. After the surety has paid the obligation for which he became surety, he has three separate rights: (1) The right of indemnity against the principal debtor. (2) The right of contribution from co-sureties. (3) The right of subrogation, against the former creditor. It is the possession of these rights that makes the liability of the surety less onerous than that of the co-maker. Indemnity. This is the right of the surety who has paid his principal's debt to sue the principal in his own name for the amount paid, plus interest and costs. Contribution. If there are two or more co-sureties, and one pays the debt for which both or all became surety, the one paying 172 GUARANTY AND SURETYSHIP the debt has the right to compel each of the others to pay him such an amount that the burden of the loss will be distributed equally among the co-sureties. This is called the right of contribution. EXAMPLE A, B, and C jointly become surety for D. When the debt is due D fails to pay it, and the creditor demands payment of C, who pays it. C now has the right of contribution against A and B to compel them each to pay one-third. Subrogation. When a surety pays the creditor, the obliga- tion is not discharged as to the debtor. The latter is just as much in debt as ever, but to a different person. The surety now stands in the place of the erstwhile creditor. He has a right to insist on all the securities which the creditor had, for the payment of the debt. If the creditor has secured a judgment against the debtor, the surety is now entitled to the benefits of it. This is called the right of subrogation. Rights of Guarantor. The four rights enumerated above, for the surety, also belong to the guarantor under the same conditions. 242. Discharge of Surety. Of course a surety is discharged from further liability by paying the obligation for which he be- came surety, but there are a number of conditions under which he may be discharged without payment. The most important are: I. Fraud practiced on the surety. II. Diversion from the agreed purpose. III. Alteration. IV. Release. V. Extending time to principal. VI. Parting with security. Fraud Practiced on the Surety. When one is induced to become a surety, or, for that matter, a drawer or endorser, for another, and there is a misrepresentation or concealment of a material fact, which if known to him would have prevented his entering upon the contract, it is void as to all parties having knowledge of the fraud. GUARANTY AND SURETYSHIP 173 EXAMPLE A, securing a position of trust with a corporation, induced B to go on his bond for the faithful performance of his duties for one year. During the year A was found to have embezzled, but nothing was done about it, and the com- pany, relying on his promise to make it good, took his note. The next year B, in ignorance of A's former misdeeds, again became his surety. In a short time A was again an embezzler, when the company notified B of their intention to hold him responsible on his bond. B was not liable, for he had been imposed on. The concealment practiced by the corporation was a fraud on the surety. Diversion. When a bill is drawn or accepted, or a note made or endorsed for accommodation, with an agreement that it is to be used for a particular purpose, any diversion in its use dis- charges the accommodation party as to all who have notice of the diversion. Any one taking such a paper with a knowledge of its diversion, is not a bona fide holder. Alteration. Any alteration in the original contract which will release the principal will also release the surety. Any alteration in the contract of guaranty which would make any other contract void will make void the contract of guaranty. Extending Time to Principal. The creditor should preserve his right against the debtor intact, not for himself alone, but for the benefit of the surety as well. When he relaxes his hold upon the debtor, he impairs the hold the surety would have when substituted (subrogated) in his place, and such an act releases the surety. If the creditor makes a new contract with the debtor, extend- ing his time, the surety is released. It does not follow, however, that mere forbearance to sue releases the surety, for if the right to sue has not been relinquished by a binding contract, the surety is not deprived of any of his rights. If the creditor wishes to extend the debtor's time, he should first obtain the surety's assent. EXAMPLES 1. Callahan has guaranteed that Bell will pay a bill owing to Jordan which is due in thirty days. Jordan, without securing Callahan's consent, and for a consideration, extends the time of payment to ninety days. This releases Callahan. 2. Morgan is the guarantor of an obligation owing from Green to I,um- ley. The obligation becomes due and Lumley delays bringing suit against Green for three months. This does not discharge Morgan. 174 GUARANTY AND SURETYSHIP Parting with Securities. Upon the payment of the debt, the surety is entitled to all the rights, remedies, and securities which the creditor could have enforced. The creditor must, therefore, use every care that he do nothing to impair the surety's rights. He must not part with any securities he may have belonging to the debtor, and if he does so, the surety is released to the extent that he is damaged thereby. This has been held true even when the surety did not know of the existence of the security at the time of its release. 243. Discharge of Guarantor. A guarantor is discharged by any act of the creditor that would discharge a surety. All that has been said in this connection in regard to sureties applies equally to guarantors. In addition, however, a guarantor may be discharged by failure to make demand, or by lack of notice. It would perhaps be speaking more accurately to say that his liability in this case had never been perfected. 244. Miscellaneous Matters Indorsers and drawers and guarantors may become sureties. Those who make themselves liable for the debts, defaults, or miscarriages of others become fully liable as soon as conditions precedent to their liability fasten this liability upon them. The distinction between them, then, is not one of degree of liability; but of greater or less oppor- tunity for the avoidance of the liability. The indorser is discharged absolutely if presentment is not properly made and notice promptly given, but if these things are properly attended to, his responsibility at once becomes as great as that of the surety. Similarly, the guarantor has a loophole for the avoid- ance of liability that is denied the surety, but if the creditor properly attends to those matters necessary to fix liability upon the guarantor, including an unsuccessful attempt to collect, then the liability of the guarantor is as great as that of the surety. Death of a Joint Guarantor. By the common law, the death of a joint guarantor releases his estate from obligation as guar- antor. This rule has been changed by statute in some States. Guaranty Not Negotiable. In many States guaranties are held to be non-negotiable. It would seem prudent, therefore, to rely but little on an assigned guaranty. GUARANTY AND SURETYSHIP 175 EXAMPLE B held A's note, which he sold to C, writing under his blank endorsement the words, "I guarantee the payment of this note. B." A subsequent holder of the note sued B on this guaranty, but the court held that the guaranty was personal to C. The guarantor can always make sure that his guaranty is personal to the one to whom given by adding to it the words, "This guaranty is non-assignable." Guaranty Valid Though Principal Debt Not Enforceable. Sometimes a guaranty or surety is requested because the prin- cipal debt is not enforceable, as when a minor asks for credit, which is granted if security be given. In such cases the guar- antor or surety is liable even though the principal debtor is not. Promises to Pay One's Own Debt. A guaranty to pay one's own debt need not be in writing. If A induces B to give an ac- commodation note for A's debt to C, A's guaranty of the note is valid even though verbal. If A orders goods to be delivered to B, saying to the merchant, "Charge them to me," or "I will pay for them," it is A's own debt and the promise to pay need not be in writing. If he says, "If B does not pay, I will," it is a guaranty and is not valid unless in writing. Failure to Receive Notice of Acceptance or Default. While the better course is for a creditor to give immediate notice of the acceptance of an offer of guaranty, many states adopt the view that there is a sufficient acceptance if the creditor advances money or goods to the principal debtor in reliance upon the contract of guaranty. In more than half of the states, however, the rule followed is the so-called Massachusetts rule, which declares that the guarantor is not bound until he has had notice of the extension of credit. Revocation by Surety or Guarantor. A notice of revocation of the agreement of guaranty is effective if it is given to the creditor before he has made advances in reliance upon it. But if he has already acted upon the offer the guarantor cannot escape liability by revoking the contract. After notice of revo- cation of a continuing guaranty has been received the creditor can hold the guarantor only as to past advances. 176 GUARANTY AND SURETYSHIP PRACTICAL SUGGESTIONS If You Are a Surety or Guarantor. Protect yourself by limiting the agreement of suretyship as much as possible. - Require notice of acceptance and default within a reasonable time, and limit your liability to a maximum amount. Otherwise, you will assume a much greater liability than you would as a partner. Never sign an agreement of suretyship without carefully investigating the person whom you are guaranteeing. Make a specific request for informa- tion from the creditor. Never become surety for a man with whom you would hesitate to enter into a partnership agreement. If You Are a Creditor Relying on an Agreement of Suretyship or Guaranty. Require that the agreement be in writing and signed by the surety. Also require that it state the consideration. Be careful to conform to all the requirements of the agreement, and to protect yourself against all possible question give notice within a reasonable time of acceptance and of any default of the principal. Disclose all material facts to the surety regarding the prin- cipal. Do not alter the agreement, or vary its terms, or surrender any secur- ities in your hands to the principal, without the consent of the surety. The court will never enlarge the liability of the guarantor or surety, by construction. Contracts of guaranty and suretyship are always construed strictly according to their wording. REVIEW QUESTIONS 1. A went into B's clothing store with C and said to B, "You fit C out with a suit of clothes and I will pay for them." B furnished C a suit and sent the bill to A, who ignored it. B thereupon sued A, who defended the action on the ground that his promise was not in writing. May B recover against A? Why? 2. Jones owes Smith $100, Brown owing Jones a similar amount. Brown promises to pay Smith $100 for Jones if Jones will release him (Brown) from his debt of $100, and this is agreed to by Jones. What, if any, defense would Brown have to a suit by Smith against him for $100? 3. Steele and Newson both signed a promissory note, on which money was to be loaned by Wood to Newson, Steele signing as a surety. Newson later, with the knowledge of Wood, altered 'the date from September 11 to October 11 and delivered it to Wood. It being unpaid, Wood sued Steele, who claimed that these acts had served to discharge him. May Wood recover against Steele? Why? 4. Jones, an employe of Railton, requested Matthews to execute a bond for the performance of his duties as Railton's cashier. Matthews made inquiries regarding Jones, and was informed by Railton that Jones was con- sidered a reliable man. As a matter of fact Jones had ten years previously GUARANTY AND SURETYSHIP 177 embezzled $560 of his employer's money, but had repaid the amount and had been guilty of no misconduct since that time. Railton failed to inform Matthews of any of these facts. Matthews executed a surety bond to Railton for Jones' fidelity. Two months later Jones absconded with $10,000 and Railton sued Matthews on the bond. May he recover? Why? 5. Ames, a surety on a note that was due and unpaid, was sued. His defense was that the maker of a note was an infant. Was Ames liable? 6. The Fidelity Bond Company gave a cash bond of $10,000 to the State of Wyoming for the faithful performance of contract by the National Bridge Co. The bridge contracted for collapsed a week before the date when it was to have been completed. Two weeks later the officers of the National Bridge Co. left the country for parts unknown, after realizing all they could from the assets of the company. The State then notified the Fidelity Bond Company that its bond was forfeited. What rights had the bond company? Why? CHAPTER XXIII SALES OF PERSONAL PROPERTY I. Essentials II. Transfer of Title The Contract of Sale 1. Competent parties 2. Mutual assent 3. Consideration 4. Legal subject matter 5. Conformity to Statute of Frauds 1. Between fa. Ascertained goods buyer and ' "ft**.**.**?,*** "^i^g^. w ** t ** r prt*** * ""***'*!" k Th rate of freight ***** -_._.._.- *<* . ' In Cent* per 100 Ibs. g .. r^pT^p^ ,,..,.y- M c..,|,F^. K p^ |.,^|., M | ffi ig Consigned U Destination,_l^ZZ ll Roote, 50 nty of_ - J rteuAl oESCKinie* of UTKUS uu> IKCUI. tunics Cb^rfK AdTunxd: Order Bill of Lading (Negotiable) Heading only Uritam BiD of Lxffiig stttMrt Fora of Orttr HI of Uo~m tirmti b; Ike (ottnMt Ccmnent toomisskxi oy Order Ho. 787, of 1m 17. 190 (3 K-ei&c*tion> aadlanSi in eSect OB the dat&,o( issue of this Original Bill of Lading. ar^^a^^^lS ^S^^^^^^^SSi^^JSK& wblctl tBId ro.l. to d.Li'lo.i. . M^IO M^p.ny^l^oy '^J,^',,"^'^ 1 ',,^"',,^'^',!*^^'^- ('".VlaVlo'/rool'tloM ^J ta^km r/w ffal of frtigM from n ^^^^^-^^^^^^^^^^^^^''^ :v7^ lo. li in etnli ttr 100 Itn. VUM> NT If **,!, 1 Iflncwi ITKCKn IF1I Ml mCIU> IF MCmi IflCUl IF1C11 IFCCU1 IFDCIUI VtCU " It will be observed that the only material difference between these two forms is that in the negotiable type the goods are con- signed "to order of" the consignee, while the words of negotia- bility are omitted in the straight, or non-negotiable bill. There 202 TRANSFER BY BILLS OF LADING is al?o added to the negotiable type a provision requiring its surrender properly indorsed before delivery of the goods will be made. 268. Methods by which the seller retains possession. When goods are shipped on a straight bill of lading, the title in them is in the buyer. If the seller wishes to retain possession, he should at the time of shipment secure from the railroad an order bill of lading. This order bill of lading may be made out in one of three ways. 1. The seller may name himself as consignee, and hold the bill of lading until the buyer pays him or pays someone else for him. . He will then indorse the bill of lading and deliver it to the customer. 2. The seller may name the buyer as consignee, or may name himself as consignee and immediately endorse in favor of the buyer, but instead of sending the bill of lading to the buyer, send it to some bank or other collecting agency in the buyer's city, with a draft upon the buyer attached and with instructions to deliver the bill of lading to the buyer only upon payment of the amount of the draft. 3. The seller may name as consignee a third person, say a bank in the city of the buyer, and send the bill of lading to the bank with instructions to release it to the buyer upon his payment of a certain sum of money. The second plan named is the one most commonly adopted and is the best. The first plan is desirable only when the con- signee is unknown at the time of shipment, as in case of produce shipped to be sold en route or at destination. The third plan is undesirable ordinarily because it places the collecting agent in apparent temporary possession. All three plans are alike except that the consignee is different in each case. The object in each case is the same each is a plan by which the seller keeps possession until he gets his money. In case of goods stored, the same three plans can be followed, but the evidence of title is in this case a warehouse receipt instead of a bill of lading. TRANSFER BY BILLS OF LADING 203 269. Transfer of Title by Means of Documents of Title. Not only are bills of lading and warehouse receipts used in com- merce to protect the seller as to the purchase price, but they are further used as a means by which to transfer the title to goods while they are in transit or stored in a warehouse. A buyer in New York may purchase grain of a seller in North Dakota. While this grain is being conveyed to New York, or after it has reached New York and is stored in a warehouse, the seller, to whom title has passed, may wish to dispose of it. If a negotiable receipt has been issued by which the bailee has promised to deliver the grain to the buyer, or to his order, he may readily dispose of it without ever receiving the grain. He does this by negotiating the document of title. When goods are shipped by rail, title passes at the time of delivery to the transportation company unless the shipper reserves the right of disposal, as by having the bill of lading made to the order of himself or his agent. If the shipper reserves the right of disposal, title passes only when he disposes of it to the buyer, which is usually done by a transfer of the bill of lading itself. If it can be proved from the original contract that the inten- tion of the parties was that title should pass to the buyer at once, this result will follow. 270. Parties Who May Negotiate. There are two classes of persons who may negotiate a bill of lading so as to transfer the interest and title in the property itself to another. These are (1) the owner of the bill of lading, and (2) a person who has been intrusted with it by the owner, in case the form is such that it may be transferred by mere delivery. Neither a thief nor a finder of lost documents of title can transfer them so as to give a valid title, even to an innocent purchaser for value. EXAMPLE Poor, residing in Superior, is the purchaser and consignee of goods in tran- sit, for which he has received a bill of lading naming him "or order" as con- signee. He indorses the same in blank and sends it to Cook in Milwaukee to sell the goods for him for $600. Instead Cook sells them to Jones, an innocent purchaser for value, for $400, and absconds with the proceeds. Poor cannot 204 TRANSFER BY BILLS OF LADING reclaim the goods from Jones, or even prevent the railroad company from delivering them to Jones on presentation of the document of title, for Cook was given the authority to transfer the document of title and the fact that he violated the terms of that authority is not the fault of Jones. 271. Bills of Lading Which May Be Transferred. All bills of lading and warehouse receipts may be transferred, but only by means of negotiable receipts can the owner transfer the property and title in the goods without further act. If a "straight" bill of lading, or non-negotiable document, be sold and transferred, the buyer does not thereby secure the title to the goods. The bailee may still deliver them to the original con- signee, should he demand them. The purchaser of such a "straight" receipt may, however, protect his rights by notifying the bailee that he is the holder of the document of title and has the title to the goods. After such notice the bailee cannot, without incurring liability to the latest purchaser, deliver the goods to the original consignee. Common carriers have at times sought to destroy the nego- tiable quality of order bills of lading by marking them across their face "non-negotiable." There has been much difference of opin- ion in the courts of the various states regarding the effect of this practice. Section 30 of the Uniform Sales Act states that if by its form the receipt was negotiable aside from these words, it will continue so in spite of them. 272. Rights of Purchaser of Negotiable Bills. The pur- chaser of a negotiable bill of lading or warehouse receipt receives the right to demand a delivery of the goods by the bailee in whose custody they have been placed. Furthermore, he not only takes the title in the goods which the seller has, but he secures a valid title if he be a purchaser for value without notice even though the seller's title was voidable. He can not, however, acquire title except from an owner, and in this respect his rights are less than those of a buyer of negotiable paper. EXAMPLE Senn, a wholesale dealer, shipped merchandise by the Bell Central Rail- road' to Poor, a grocer in Muskegon, who had misrepresented his assets and financial responsibility to Senn. Senn sent the bill of lading in the form of a negotiable receipt to Poor, who immediately sold it to Tyson, an innocent TRANSFER BY BILLS OF LADING 205 purchaser, for value. Before this sale to Tyson, Senn could have reclaimed the goods and avoided the sale to Poor, because of Poor's fraud. After the sale he can only sue Poor for fraud, but cannot reclaim the goods from Tyson, who alone can secure them from the railroad company. 273. Limitations of Rights of Purchaser Against Bailee. Although it is the general rule that the purchaser of a bill of lading has the right to receive the goods themselves from the bailee, he cannot receive them if the bailee hasn't the goods or if the shipper was not the true owner. If the bailee never had the goods, or parted with them, or they were destroyed, the bailee is answerable in damages. If the seller of the bill of lading was not the true owner of the goods, he is answerable in damages. REVIEW QUESTIONS 1. White ordered from Jones in Chicago a dozen typewriters, to be charged to his account. Jones wrote: "Order received and will ship at once." Jones then delivered the typewriters to the railroad,^ but in the bill of lading named himself as consignee, and retained the bill of lading. While the type- writers were on the way to White, Jones stopped them and sold them to Lewis, delivering the bill of lading. May White, claiming that the goods were his property from the moment of shipment and that Jones no longer had title to sell, reclaim the goods from Lewis? Why? 2. In response to a written order from Bates, Ames shipped goods consigned to the order of Bates. Ames then attached the bill of lading to a sight draft for the purchase price and mailed both documents to Bates with a letter requesting Bates to pay the draft, or to return both documents at once. Bates did not pay the draft, but with the bill of lading obtained the goods from the railroad company and sold them to Call for value. Ames attempts to reclaim the goods from Call. May he do so? May Ames recover from the railroad company? May Ames recover from Bates? 3. Murphy was a lawyer in Milwaukee. Logan in LaCrosse sent him a typewriter to try for thirty days and also sent him for examination and for a legal opinion a negotiable bill of lading for some apples in transit from St. Paul to LaCrosse. The bill of lading was indorsed in blank by Logan. Murphy at once sold both the typewriter and the bill of lading to Jones, an innocent purchaser for value. Both Jones and Logan now claim the right to^receive the apples from the railroad company. Who is entitled to the apples? May Logan reclaim the typewriter from Jones? Why? 4. If Morrison offered to sell you a negotiable bill of lading made to "Morrison, or order," as the consignee, at a fair price, indorsed by him, what further inquiry, if any, would you make in order to safeguard your rights? Would you pursue any different course if the bill of lading were in the form of a "straight" receipt? 206 TRANSFER BY BILLS OF LADING 5. Gordon & Co. are wholesale grocers in Milwaukee. Waters is a retail merchant in Galena. Waters by telephone orders ten barrels of sugar at $30 a barrel from Gordon & Co. to be shipped to him in two weeks. Gordon & Co. deliver the sugar to the office of the Northwestern Railway Company on the same day that the order is given and receive a bill of lading with Waters, or order, named as the consignee, which they retain. While the sugar is still at the depot, Gordon & Co. are declared bankrupt and their creditors, through a trustee, claim that the sugar is still their property. Waters also claims it. Who has title to the sugar? Why? CHAPTER XXVII WARRANTIES 274. A warranty is a statement by the seller, given as a tact either express or implied. It is an express warranty if it is a statement of fact made at the time of or before the sale, which has a natural tendency to induce the buyer to purchase the goods, and upon which he does rely in purchasing the goods. It is not a condition of the contract which must be performed by the seller before a liability arises on the part of the buyer to pay the price, but it is in the nature of a separate, collateral promise, and if broken gives rise to an action for damages for its breach. 275. Express and Implied Warranties. Warranties may be either express or implied. They are express warranties if the seller at the time of, or prior to, the sale makes statements regard- ing the thing sold which are inducements to the other party to purchase and which are relied upon by him. They are implied warranties if they are not made by express language, but depend for their existence upon the entire surroundings of the transac- tion and the general nature of business dealings of that kind, being then implied by law and fact. EXAMPLES Condition precedent. Ames makes Bates the following offer, "For $6000, I will build you an automobile which will run 60 miles an hour on the track at Ormond Beach when you try it out." Bates accepts this offer. The attain- ment of this speed is a condition precedent to any liability on the part of Bates to receive the automobile as his property, and to pay for it. Express Warranty. Call says to Dale, "I will sell you this horse for $125 and warrant him to be sound." Dale accepts this offer, receives the horse and pays the money. The horse is internally diseased; this constitutes a breach of an express warranty. Implied Warranty. Egan sells and delivers to Fair a threshing machine at a fair price. It later develops that Gould is the true owner of the machine and he reclaims it from Fair, who may then sue Egan for damages for breach of an implied warranty, the warranty which such a seller makes by implication 207 208 WARRANTIES that at the time of the sale he is the owner and has title to the property sold. (The selling of another's goods in this manner also constitutes a criminal offense, the taking of another's goods being larceny and the fraudulent sale being the obtaining of money under false pretenses.) 276. Nature of Express Warranties. To be a warranty, the statement of the seller must be the affirmation of a fact and not a mere statement of opinion. Thus a statement as to the value of the thing sold is not a warranty, for value is always a matter of mere opinion. The statement must also be positive and not a mere supposition. It must also be a statement of such a nature as will in the ordinary course of events be relied upon by the purchaser. A purchaser cannot recover for damages for breach of a warranty against defects which he knew existed at the time of the sale, for he cannot assert truthfully that he relied on the warranty. Nor can he recover for damages for breach of warranty when there was no warranty but he relied upon independent informa- tion as to the character of the thing sold. If a warranty is made at the time of the original contract of sale, it is supported by the original consideration and is enforce- able by the buyer. If it is made at a time later than the original sale or contract to sell it must be supported by a new considera- tion, or it will not be enforceable. EXAMPLES 1. Jones sells to Murphy a fire-prood safe, saying, "That safe is easily worth $300, for I am told that it will withstand any fire without damage to papers which it contains." Murphy pays $300 for the safe, and in a fire later the safe is damaged so that many valuable papers are destroyed. There is no breach of warranty, for the statement of Jones was a mere matter of opinion. 2. Olson sells Herring a suit of clothes and warrants that it is all wool and will not "shoddy," the promise of Olson a^ to the quality being one of the inducements that leads Herring to buy the suit. Herring suffers a detriment (the payment of the price of the suit) in reliance on this promise. If, therefore, the suit proves to be not all wool, Herring is damaged upon a warranty which is supported by a sufficient consideration. 3. Ames, a hardware deale'r, sells Bates-a bath-tub and installs it in Bates' house. A month later Ames says to Bates, "That was a fine bath-tub I sold you; it will not discolor in ten years." Five years later the bath-tub discolors, and Bates sues Ames for breach of warranty. In this case Ames has a good defense in that the alleged warranty was not supported by a sufficient consid- eration. WARRANTIES 209 277. Caveat Emptor. This is a Latin phrase which means, "Let the buyer beware." It has been adopted by the courts as a maxim concerning sales in general, the rule which it rep- resents being that the seller is not liable for defects which the buyer should have discovered had he used reasonable care in examining the article bought. The effect of this rule is to throw the risk of loss on the buyer in case he fails to use due diligence. The buyer has the right, however, to rely upon an express warranty. In consequence of this rule the buyer should require that all doubtful matters be covered by an express warranty. He may also usually rely upon the implied warranties later enumerated, though in the sale of specific articles examined by the buyer there te no implied warranty except as to the title of the seller. 278. Implied Warranties. There are two general classes of implied warranties. There are (1) warranties of title, and (2) warranties of quality. Warranties of Title. In early law there was no implied warranty as to the title of the seller, but it is today everywhere recognized that by the very act of selling the goods the seller represents to the buyer that he has a good title, and if it later proves that he had not, the buyer may recover damages for breach of this warranty. This is true in aii sales except when the situation of the seller is such as to disprove any such represen- tation. EXAMPLES 1. Dewey sold Burt a horse, which had previously been stolen from Dysart, though both Dewey and Burt were ignorant of that fact. Upon the reclaiming of the horse by Dysart, Burt was entitled to recover damages from Dewey. Burt vs. Dewey, 40 N. Y. 283. 2. Colby, being heavily in debt, transferred his property to Ammidown as a trustee to distribute it among his creditors. Ammidown sold the property as the trustee at a public sale to Cohn, who on discovering that Colby's title had been defective sued Ammidown. He was refused recovery for the reason that no personal warranty of title could be implied against Ammidown, the particular circumstances of the sale plainly showing that he did not intend to assert any title in himself. Cohn vs. Ammidown, 120 N. Y. 398. Warranties of Quality. The rule of caveat emptor applies generally to prevent a warranty of quality. There are, however, 210 WARRANTIES five instances in which, in spite of this rule, the law creates an implied warranty of quality on the part of the seller. These are: (1) When the goods are purchased from a manufacturer there is an implied warranty that there are no hidden defects in the goods; (2) when the buyer, relying on the seller's skill and judgment, orders goods for a stated particular purpose, there then is a warranty that the goods are suitable for that purpose; (3) when the goods are ordered by description only, with no opportunity for examination, in which event there is an implied warranty that the goods are reasonably merchantable; (4) in sales of provisions there is an implied warranty that they are fit for food, though in most states this is limited to sales by one who is ordinarily a dealer in such commodities, and this warranty is not applied when the goods were open to ready inspection and their condition apparent to casual examination; and (5) in sales by sample there is an implied warranty that the goods will correspond to the sample. EXAMPLES 1. Randall bought from Newson a buggy and a pole for a team to be used with it. Because of a defect in the pole the team became frightened and ran away causing much damage. It being established that the pole was neither reasonably fit nor proper for the use for which it was ordered, Randall was allowed damages for breach of an implied warranty of quality. Randall vs. Newson, 2 Q. B. (1877) Eng. 102. 2. Drummond sold woolens to Van Ingen by sample, both parties know- ing that Van Ingen intended to use them to make suitings. The goods when furnished were according to the samples, but were wholly unsuitable and not merchantable as suitings. When Drummond sued for the price Van Ingen recouped for damages for breach of an implied warranty. Such damages were allowed him, the fact that goods were sold by sample not changing the implied warranty as to merchantability. Drummond vs. Van Ingen, 12 App. Cas. (Eng.) 284. 3. Dounce, who was not a manufacturer, sold Dow a quantity of pig iron. Dow was an iron worker and could have tested the iron easily, but did not. Dow used the iron for construction purposes. It later proved to be very brittle and Dow claimed damages for breach of an implied warranty of merchant- ability. He was denied recovery because Dounce, not being a manufacturer, could not be presumed to have known the precise quality of the iron or to have warranted it, and also Dow, by using the iron, waived any claim which he might have had. Dounce vs. Dow, 64 N. Y. 411. In this case the doctrine of caveat emptor was applied. WARRANTIES 211 4. Bollett saw a carcass of a pig hanging in the shop of a butcher and bought it. Burnby later saw it and inquired the price of the butcher, who informed him that Bollett was the owner. Burnby then bought it of Bollett, and on later discovering that it was wormy and unfit for use, sued Bollett for breach of an implied warranty. He was denied recovery because Bollett was not a dealer in provisions and no warranty was presumed. Burnby vs. Bollett, 16 M. & W. (Eng.) 644. Note. This is the general rule, although a warranty of wholesomeness is implied in every sale of provisions, without regard to the occupation of the seller, in Michigan and New York. REVIEW QUESTIONS 1. Coon, a sewing machine agent, sells a machine to Mrs. Randall, telling her that it is the best machine on the market, and that it runs so easily that it will practically run alone. She finds later that the machine runs harder than other makes, and does not work well; and seeks to recover damages for breach of warranty. Does this representation of the agent constitute a war- ranty? Why? 2. Howe bought a horse from a dealer who guaranteed him to be gentle and fit for any lady to drive. While Howe was trying the horse before the sale, the horse snapped at him twice, and became frightened at a train. May Howe later recover from the dealer on his warranty if it turns out that the horse is not gentle and fit for ladies to drive? Why? -3. Frank sold a carload of apples to Jeffreys, nothing being said at the time as to their quality. They were in the possession of Frank at the time they were sold and each party had ample opportunity to inspect them, but did not do so. It was later found that they were badly rotted, and Jeffreys sued for damages for breach of an implied warranty of quality. May he recover? Why? 4. Armour & Company's Wholesale Company sold a quantity of soap to Heyman & Company, retail merchants. They in turn sold a bar of this soap to Hasbrouck, who used the soap and because a needle which was imbedded in the soap scratched his hand, contracted blood poison and was ill for seven months. May he recover for breach of an jmplied warranty? If so, from whom, and for what? 5. Smith sold Brown an improved hayrack which he had made according to Brown's specifications for a particular purpose. Brown resold the hayrack to Jenkins, who resold it to Ordway. Subsequently Brown repurchased the hayrack of Ordway and then for the first time discovered that it was not at all suited for the purpose for which he had ordered it. He sued Smith at once for damages for breach of warranty. May he recover? Why? CHAPTER XXVIII REMEDIES OF PARTIES 279. Remedies of Seller. One who contracts to sell, or who sells goods, has certain well-defined remedies for wrongful acts of the buyer. These are of two kinds primary and secondary remedies. The primary remedies are (1) recovery of the sale price, and (2) recovery of damages for wrongful refusal of the buyer to accept the goods. These primary remedies rest upon personal rights of the seller against the buyer and are enforced by means of a suit against him. The secondary remedies of the seller rest upon rights, not against the buyer personally, but against the goods themselves. They are four in number, being (1) right of lien; (2) right of stoppage in transit; (3) right of resale, and (4) right of rescinding the contract. 280. Recovery of the Price. When the property in goods has been transferred to the buyer, the seller may recover the contract price. Similarly, if the buyer unreasonably refuses to receive goods covered by a contract of sale, when the seller tenders them to him, the seller may sue at once for the price. EXAMPLES 1. Solomon contracted to buy of White a manikin for $35, $10 to be paid when the manikin was delivered at the express company's office and $5 every rvonth thereafter until the whole was paid. White delivered the manikin to the express company, but Solomon refused to receive it. White sued and recovered the whole price, although the parties had stipulated in their contract that title should not be transferred until the whole price was paid. The seller had performed all his conditions and the wrongful total breach by the buyer gave rise to a right in the seller to recover the whole price at once. White vs. Solomon, 164 Mass. 516. 2. Putnam sold a pair of horses to Glidden and delivered them at Glid- den's barn. Glidden refused to accept them, claiming a defect. Putnam sued Glidden for the price. Recovery of the price was allowed, Glidden failing to prove any defect. Putnam vs. Glidden, 159 Mass. 47. 212 REMEDIES OF PARTIES 213 281. Recovery of Damages. On a refusal by the buyer to perform his contract, the seller may elect to retain the goods and recover the money damages which he has suffered by reason of the buyer's refusal. The amount of these damages is the difference between the market value of the goods and the contract price. This difference represents the profit to which the seller was entitled by his contract. If the goods sold have no market price, the seller is entitled to the actual damages which he has suffered by reason of the refusal of the buyer to perform. This may in some instances be merely the outlay which the seller has made in preparing to perform; in others it may be the entire price of the goods. EXAMPLE Allen ordered from Funke twenty toilet sets, at a stated price, the order being in writing and accepted by Funke's salesman. Later Allen cancelled bhis order. Funke was allowed to recover the difference between the contract price and the market price of these goods. Funke vs. Allen, 54 Neb. 407. 282. A seller's right of lien is the right of the seller of goods to retain possession, even after title has been transferred to the buyer, as security for payment of the price. This right is lost if the goods are delivered to the buyer, and the seller's remedies are thereafter limited to the primary rights discussed in the two preceding sections. This right of lien is seldom exercised except when the seller suspects insolvency or bad faith on the part of the buyer. EXAMPLE Ames sells goods to Bates for $500 to be delivered one month hence, the goods being specified and in existence. The risk of loss and all other incidents :>f ownership are transferred at once to Bates, but Ames retains the right to keep the goods until the purchase price is paid. This is his right of lien. 283. Stoppage in Transit. Although the seller loses this lien the moment the goods pass from his possession, he is allowed to re-establish this lien and regain possession in some cases when the goods are in the hands of a common carrier for shipment to die buyer. If after shipment has been made the buyer becomes insolvent, the seller may regain possession of the goods by notifying the carrier not to deliver them to the buyer but to hold them for him. The right to do this is the right of stoppage in transit. If the notice is given before the carrier has delivered 214 REMEDIES OF PARTIES the goods, the seller regains his right of lien, though he then must pay the transportation charges. If the goods are represented during transit by a negotiable receipt, the carrier is under no duty to redeliver the goods until this has been surrendered. The right of stoppage in transit is therefore lost when a negotiable receipt has passed into the hands of an innocent purchaser for value, for he thereby becomes the owner of the goods and entitled to possession on demand. EXAMPLE Eveleth sold logs to Ware and delivered them to a log booming and driving company to be floated down the Kennebec river to Ware's mills. While the logs were in the possession of the driving company, Ware became insolvent and transferred his property in the logs to Johnson, a trustee, to hold for Ware's creditors. Eveleth rightfully reclaimed the logs and retained them by his re-established lien for the purchase price. Johnson vs. Eveleth, 93 Me. 306. 284. Right of Resale. After the making of a contract of sale, if the buyer without cause fails, for an unreasonable length of time, to pay the price and accept the goods, the seller may resell the goods to another. In so doing he really acts as the agent of the buyer, in whom the title rests, and makes the resale merely to realize upon his lien for the unpaid purchase price. No notice of such resale need be given to the defaulting buyer. If upon the resale the amount realized is insufficient to compen- sate the seller for the original purchase price, he may then sue the original buyer for the difference, which will be the measure of his damages because of the buyer's wrongful refusal or neglect. It also is a logical conclusion that if the resale is for a greater sum than the original price, the excess belongs to the original buyer, though this case has never been presented to the courts. EXAMPLE Wrigley sold Cornelius 10,000 world's fair pictures at 15 cents each and delivered 6,000 of them. Cornelius refused to accept the balance and Wrigley sold them to another person for 10 cents each and sued Cornelius for the difference. He was allowed to recover this amount as damages for the wrong- ful refusal of Cornelius to perform the contract of sale. Wrigley vs. Cornelius, 162 111. 92. 285. Rescinding the Sale. Upon the refusal of the buyer i to complete his contract, the seller may rescind the sale and keep I REMEDIES OF PARTIES 215 the goods as his own in satisfaction of his damage. If the value of the goods be less than the damage he has suffered, he may also sue for the excess. In cases where the buyer has committed a fraud, the seller may recover the goods even though they have been delivered to the buyer, for fraud makes transfers of property voidable. EXAMPLE Ackerman sold Rubens some goods, and while they were still in the possession of the seller, the purchase price being unpaid, the buyer notified Ackerman that he had changed his mind and did not wish the goods. Acker- man immediately sued for the difference between the contract price and the market value of the goods. This he was allowed to recover, retaining the goods as his own. Ackerman vs. Rubens, 167 N. Y. 750. The following clear statement of the rights of the unpaid seller is made in the above case. "When the buyer of personal property, under an executory contract of sale, refuses to complete his purchase, the seller may keep the article for him and sue for the entire purchase price; or he may keep the property as his own and sue for the difference between the market value and the contract price, or he may sell the property for the highest sum he can get, and, after crediting the net amount received, sue for the balance of the purchase money." 286. Remedies of the Buyer. The remedies of the buyer for wrongful breach of the contract of sale by the seller are of two general types, depending upon whether or not title to the goods has been transferred. If the title has been transferred and the seller wrongfully refuses to carry out the terms of the contract, as by delivering possession, the buyer may either recover the goods or their money value. If title has not been transferred he can recover the amount of the damage which he has suffered by the breach of the seller, which is usually the difference between the contract price and the market price at the time of delivery, together with other expenses which the buyer has incurred in reliance upon the contract of sale. EXAMPLES 1. Abraham contracted to purchase from Karger a quantity of goods red in a warehouse subject to Karger's order, for the sum of $2500. Abra- ham later tendered to Karger this amount of money, but Karger refused to make delivery and offered to pay the difference between this sum and the market price of the goods. Instead of accepting this, Abraham brought an action, called replevin, to recover the particular goods as his own property, and this he was allowed to do, it being deemed that title had passed and that on the tender of the purchase price Karger was no longer entitled to retain even the possession of the goods for his lien. Abraham vs. Karger, 100 Wis. 387. sto 216 REMEDIES OF PARTIES 2. Walters contracted to buy of Simpson a certain lot of hardwood lumber, to be delivered in thirty days, at a specified price. Simpson instead sold this lumber to Jordan at an advanced price. Walters will be allowed to recover the difference between the price he agreed to pay and the market value of the goods, and the amount which Jordan paid will be evidence of this market value. 287. Remedies for Breach of Warranty. There has been much disagreement among the several states regarding the rights of a buyer for a breach of warranty by the seller. They have uniformly agreed that the buyer may always recover the damage which the breach of warranty has caused him, and some states have allowed the buyer to rescind the sale and return the goods as well. The uniform sales act, Section 69, adopts the latter of these views. It permits the buyer to refuse the goods if title has not been transferred, or if title has passed, to may rescind the contract, return the goods and sue for damages, upon the discovery of a breach of warranty. Or he may keep the goods and sue for damages resulting from the breach of warranty, which would be measured by the difference in value of the goods actually received and goods such as the seller represented them to be. REVIEW QUESTIONS 1. Bates shipped goods to Ames by railroad in compliance with an order, and took from the carrier a bill of lading to Ames, or order. He sent the bill of lading to Ames, who indorsed it and sold it to Call for value. Before the goods reached their destination Bates discovered that Ames was insolvent and sought to exercise the right of stoppage in transit. May he do this? Why? 2. Maxon sells goods to Williams, to be delivered in thirty days, the price to be paid at once. Williams fails to pay the price and Maxon notifies Wil- liams that he intends to hold the goods for his lien. Thereafter and before the thirty days have elapsed, the goods are destroyed. Who bears the loss? Why? May Maxon recover the purchase price from Williams? W T hy? 3. A sells goods to B and delivers them to a carrier for shipment to B, receiving a straight bill of lading naming B as the consignee. B is insolvent at the time of the sale, but A remains ignorant of that fact until the goods have arrived at their place of destination. A orders the goods stopped when they are on the railroad's trucks ready to be taken to B's place of business. A then receives the goods and sells them at private sale without giving any notice to B. Has B any remedies? What? Why? Suppose that A received more for the goods than B had agreed to pay. Would this make any difference? Why? REMEDIES OF PARTIES 217 4. Cox contracts to sell Adams 150 cases of shoes to be manufactured according to specifications furnished by Adams. When 50 cases have been completed, Adams notifies Cox that he does not want any of the shoes and will not accept them. Cox proceeds with the manufacture and completes the 150 cases and offers to deliver them, but Adams refuses to accept them. May Cox recover any damages? If so, what will be the measure of his dam- ages? Why? 5. Ames, a dealer in Madison, orders furniture from Bates, a wholesaler in Grand Rapids. When the furniture arrives in Madison, Ames discovers that it is defective in several particulars and differs materially from the furni- ture described in the catalogue from which he ordered it. Bates refuses to take it back. Enumerate the rights of Ames. CHAPTER XXIX BAILMENTS I. For Benefit of Bailor !1 Deposit 2 . Mandate II. For Benefit of Bailee fl. Pledge 2. Hire !a. For use b. For repairing, etc c. For care d. For carriage INVOLVE III. For benefit of Both IV. Exceptional 288. Definition. A bailment is a contract relation resulting from the delivery of personal property by the owner, called the bailor, in trust to a second person, called the bailee, for a specific purpose other than a sale, upon the accomplishment of which the property is to be dealt with according to the owner's direction. In the study of bailments we shall therefore discuss the law relating to the borrowing, lending, hiring, the storing of goods for safe-keeping, the possession of goods by one doing work on them, and also their transportation by a common carrier or private carrier. Any personal property may be the subject of a bailment. The delivery necessary to constitute one a bailee may be either actual, constructive, or by operation of law. The delivery of a watch to a jeweler for repair, of a horse to a smith to be shod, or of a package to an expressman to be carried, are familiar examples of actual delivery. The delivery of a key to a warehouse may be the constructive delivery of the goods therein. The holder of lost goods or of goods that have been seized under legal process is a bailee by operation of law. 218 BAILMENTS 219 289. Importance. When personal property is delivered by a bailor to a bailee, certain duties are created on the part of the bailee. Among these are the duty of returning the goods to the owner, or some other person designated by him, when the purpose of the bailment is satisfied; and the duty of preserving them during the existence of the bailment with varying degrees of care, depending upon the nature of the bailment. As goods are often in the hands of bailees warehousemen, inn-keepers, common carriers, and the like as a part of ordinary commercial transactions, the subject is of the utmost practical importance. 290. Kinds of Bailment. The subject of Bailment is divided into four general classes, based upon the nature or character of the relation between the bailor and the bailee. These, with their sub-divisions, are : I. Bailment for the sole benefit of the bailor. (1) Deposit, when the property is to be kept by the bailee without charge, and is to be later returned to the bailor. (2) Mandate, or Commission, when the bailee is to perform work on the goods without charge, and to return them. II. Bailment for the sole benefit of the bailee, as when property is loaned by the bailor to the bailee without compensation. III. Bailment for the benefit of both bailor and bailee. (1) Pledge, or Pawn, when property is deposited as security for the payment of a debt, or the performance of some obligation. (2) Hiring, which may be (1) Hiring a thing to use; (2) hiring, or employing, work to be done on a thing; (3) hiring, or employing, one to care for a thing; and (4) hiring the carriage of a thing from place to place. IV. Exceptional bailments involve: (a) Inn-keepers, (b) Common Carriers. 291. Degrees of Care. As soon as a bailee receives prop- erty, he should have a clear understanding of the degree of care 220 BAILMENTS which is expected of him, so that he may know how to be held blameless if the property is lost or damaged. Because of the varying nature of the relation of the parties to a bailment, three degrees of required care have been established. These are: Kind of Bailment Care Required De g[ f Negligence for which Bailee is Liable For benefit of bailor Slight Gross For benefit of bailee Great Slight For mutual benefit Ordinary Ordinary By ordinary care is meant that degree of care which the aver- age reasonable and prudent man in a similar situation would exert; by slight care, that degree of care that a man of common sense, however careless, absent-minded and inattentive, applies to his own affairs; and by great care, such care as one who had insured the. property might exert, or that degree of care which a man remarkably exact and thoughtful gives his own property. BAILMENTS FOR BENEFIT OF BAILOR 292. Deposit is a delivery of goods to another to be kept and returned without recompense. A distinction is drawn between the ordinary deposit of money in a bank, subject to be withdrawn by check, and a deposit within this definition. The relation between the bank and the depositor is that of creditor and deb- tor, as the identical funds which are deposited are not to be returned, but merely an equivalent amount of money, upon demand. This is not a bailment. EXAMPLES 1. Smith took a package of bonds to a bank for safe-keeping, leaving them with the cashier. This was a special deposit, without compensation by either party, and Smith was entitled to demand and receive the return of the bonds at any time. Smith vs. First National Bank, 99 Mass. 605. 2. Stewart, a traveler, in passing through a city, stopped for a few hours, and not wishing to be burdened by his suit-case, left it with a clerk in a drug- store. The accommodation was given without expectation of pay, and was a deposit for the benefit of Stewart solely. Stewart vs. Head, 70 Ga. 449. 293. Bailment for Mandate or Commission is that class of bailment in which the bailee undertakes to do something for the bailor with reference to the thing bailed, without compensation. In deposit, the principal thing is the keeping, but in commission it is the work to-be done. The word commission, in the sense in BAILMENTS 221 which it is used here, is not like the commission or fee allowed to a broker on a sale of goods, but consists wholly in the doing (committing) of some act or service on the subject matter at the direction of the bailor, without reward for the service. EXAMPLES 1. Taylor offered to carry money for Colyar to another town and to deliver it to Marlow, but finding it inconvenient to make the trip, gave the money to a neighbor, who undertook to carry it and deliver it as requested by Colyar. The neighbor, however, had his pocket picked while in a crowd. Colyar sued Taylor for the money and was allowed to recover, Taylor having been guilty of gross negligence in violating the terms of the bailment, and giving the money to another person to carry. Colyar vs. Taylor, 41 Tenn. 372. 2. Gill asked Middleton, a watchmaker, to examine his watch and make such repairs as were necessary. Middleton, out of friendship, offered to do this and to perform the necessary repairs without charge. Before Gill called for it, the watch was injured without fault of Middleton. The bailment was a commission, and Middleton was not liable for the damage caused Gill. Gill vs. Middleton, 105 Mass. 477. 294. Rights and Duties of the Parties. Formerly the two bailments of deposit and mandate were treated separately, but the same sort of custody and service are actually involved in the two types, and consequently the obligations of the parties to each other are subject substantially to the same rules. The only difference is one of emphasis. In deposits custody is the chief purpose, and the performance of an act is incidental. In man- dates the service is primary, and custody is the incidental feature. Diligence. In bailments for the benefit of the bailor, it is the duty of the bailee to take reasonable care of the goods. As he receives no benefit, the care required to free him from respon- sibility is slight, and he is liable only in the event that he be guilty of gross negligence. Reasonable care depends on the nature and value of the goods, and the circumstances of the particular transaction. EXAMPLES 1. Foster deposited a cask of gold of the value of $50,000 with the Essex Bank for safe-keeping. This was stolen by the bank's cashier and chief clerk, together with a considerable amount of the assets of the bank. Foster sued the bank, but was denied recovery on the ground that the bank had used the same care to preserve his property as it had taken with its own money, and that this was a reasonable care under the circumstances. Foster vs. Essex Bank, 17 Mass. 479. 222 BAILMENTS 2. Knowles was notified by a railroad company that a shipment of hay had arrived for him. He acknowledged its receipt, paid the freight and asked that as a matter of accommodation it be left in the car for a few days. The car was side-tracked onto a wharf which two days later broke down because it was over-loaded and precipitated the hay in the river. When Knowles sued for damages he was denied recovery, it being decided that the railroad had ceased to be a common carrier as to him and was a mere deposi- tary, and that it had not been guilty of gross negligence. Knowles vs. Atlan- tic etc. R. R. Co., 38 Me. 234. Ordinarily such a bailee is responsible only when he does an act improperly or an improper act regarding the thing bailed, but is not liable for failing to do an act which an owner exercising great care of his own property might have performed. EXAMPLES 1. Thorne asked the permission of Deas to leave a vessel at his wharf, and Deas volunteered to place insurance upon it, but failed to do this. The vessel was injured and Thorne sued Deas for his loss, but was denied recovery, as the bailment was a mandate, and Deas could not be held liable for failing to pertorm an act, though had he done an act with negligence he would have been liable. Thorne vs. Deas, 4 Johns. (N. Y.) 84. 2. A guest at a hotel requested the clerk to receipt and care for a regis- tered letter which he was in expectation of receiving. The letter, containing $100, was delivered, receipted for and placed in the letter box of the hotel, from which it was stolen. It was shown that the hotel letter box was an unsafe place to leave letters, and the clerk and proprietor of the hotel were forced to pay the guest for the damage he had suffered, they having performed an act, which they undertook to dp, and one which required special care, in a grossly negligent manner. Joslyn vs. King, 27 Neb. 38. Right to Use. Any use -of the article bailed by the bailee would change the deposit or mandate to the form of bailment for the mutual benefit of the parties. Only such use, therefore, as is incidental to the proper preservation of the thing, is allowed. If the bailee uses the thing other than in this manner, not only does the bailment become one of mutual benefit demanding a greater degree of care, but the bailee who wrongfully uses such an article becomes absolutely liable for any damage which may be done to it. EXAMPLE Preston deposited $12,000 in U. S. bonds with the bank conducted by Prather, for safe keeping. Subsequently, Preston secured a loan of a large BAILMENTS 223 amount, leaving these bonds as security. The bonds were later stolen by Prather's cashier, whom Prather had every reason to believe was dishonest, he having a short time before been discovered in a gross irregularity in his books. It was admitted that Prather had not been guilty of gross negligence, but merely of a want of ordinary care. Preston was allowed to recover dam- ages for the loss, the deposit having been changed to a bailment for mutual benefit, ai?d as such a lack of ordinary care was sufficient to make Prather liable. Preston vs. Prather, 137 U. S. 604. Redelivery of Property. In bailments for the benefit of the bailor, the bailee has nothing to gain by the 'continuance of the relation, and consequently the bailor may terminate it at any time and demand a return of his 1 property. He must allow a reasonable time for redelivery and cannot put the bailee under any liability to incur any expense in making the return. The same privilege of terminating the relation belongs to the bailee. He must, however, like any other bailee, make redelivery to the right party at his peril. If he should deliver it to the wrong party he is liable for damages. Ordinarily, readiness on the part of the bailee to return the property, in case of bailment for the benefit of the bailor, is sufficient. A bailee has a lien upon the goods bailed, for the collection of reasonable or agreed expenses incurred by him in the keeping of the thing bailed. EXAMPLE 1. Wear suedGleason to recover the value of a trunk left atGleason's hotel by one of Wear's traveling salesmen. It appeared that the salesman had asked permission to leave the trunk for his own convenience and that later Gleason had delivered the trunk to a third person, unknown to him, who called and requested its delivery, making no effort to find whether the claim to the property was based on any right. It developed that the third person was a thief. Wear was allowed to recover the value of the trunk and its contents from Gleason. Wear vs. Gleason, 52 Ark. 364. 2. A, for reasons of his own, desired B to see a valuable picture owned by C. He borrowed the picture of C and sent it by a son of B's, to B's house, where it was placed on a mantel, without the knowledge of B. The picture was injured by heat from the fire in the grate and C sued B for the damage to the picture. His right to recover damages was denied, although it was admitted that to place a picture in this place was gross negligence. This was because no one can be made to assume the responsibility of a bailee without his consent. Lethbridge vs. Phillips, 3 E. C. L. (Eng.) 523. 224 BAILMENTS REVIEW QUESTIONS 1. Bernard agreed as a matter of accommodation to remove some sugar and cider belonging to Coggs from one cellar to another. He removed the sugar, but set it down in a wet place, where it was ruined. He refused to move the rider at all, and Coggs was compelled to pay $30 to get this removed on account of the scarcity of labor. He now sues Bernard (1) for the value of the sugar, and (2) for the expenses in removing the cider. Could he recover? 2. Wilson entrusted a horse to Brett, to ride to the town of Middleboro to show a prospective buyer. Instead of so doing Brett drove the horse to a race track beyond Middleboro, where as he was witnessing a race, the horse was run into and killed. Brett could not have avoided the collision. Could Wilson recover the value of the horse from Brett? Why? 3. Corcoran, a liveryman, agreed to take Chase's horse and train him to drive double with a horse which Chase was to purchase. Corcoran was to receive no compensation. He incurred expenses for horse-shoes while the horse was in his possession and refused to redeliver the horse until these expenses were paid by Chase. Chase, however, claimed that Corcoran was responsible for the expenses, as he derived a certain benefit from the use of the horse. Could Chase reclaim the horse without paying these expenses? \Vhy? 4. Youl put certain goods on board Harbottle's packet boat running from London to Gravesend, Harbottle agreeing to carry them as an accommo- dation and to deliver them to Youl's agent at Gravesend. When the boat reached Gravesend a stranger came aboard, claimed to be Youl's agent and showed letters from Youl to him. Harbottle delivered the goods and it later developed that the stranger was an impostor who had found the letters. Youl sued Harbottle for the value of the goods. Could he recover? Why? 5. Manchester borrowed a horse to drive from Worcester to Clinton and return. On his return from Clinton he went out of his way on an errand to another cii-y. Although he drove very carefully the horse stepped in a hole before he got back to Worcester, broke its leg, and had to be shot. Spooner, the owner of the horse, now sues to recover its value. May he do so? Why? CHAPTER XXX BAILMENT FOR BENEFIT OF BAILEE 295. Gratuitous Loans constitute the principal form of bailments made solely for the benefit of the bailee. In this sense the use of the word "loans" must be understood to refer to articles of personal property borrowed for use by the bailee, or borrower, without compensation to the bailor or lender. 296. Rights and Duties of the Parties. The borrower, though not liable for every possible injury which may befall the property while it is in his hands, is held responsible to use the highest possible degree of care which careful men use in the transaction of business, and in the conduct of their own affairs. Even slight negligence will render such a bailee liable to compen- sate the bailor in damages for his loss. This is because the rela- tionship exists solely for the benefit of the bailee and while he cannot be deemed to insure the property he is required to guard it with the highest degree of care. EXAMPLE Green borrowed Hollingsworth's watch. He removed the chain, fastened a twine string and a key to it, put it in his pocket, and about three weeks' later while on a hunting expedition lost the watch. Green was found to be liable as having been guilty of at least slight negligence. Green vs. Hollingsworth, 5 Dana (Ky.) 173. Use of the Thing Borrowed. The borrower is confined strictly to the use for which the thing was loaned, whether this use was actually agreed upon or must have been implied from the nature of the article and the surrounding circumstances. A slight departure from the purpose of the bailment is at the peril of the bailee and makes him absolutely liable for any damage to the property. EXAMPLE A loaned a lathe to B for his personal use. B, having finished using it, loaned it to C, who without his fault damaged it. A immediately sued B for the damage and recovered, B by his wrongful act having become liable for anything which might befall the lathe. Fox vs. Young, 22 Mo. App. 386. 225 226 BAILMENTS FOR BENEFIT OF BAILEE Special Items of Liability of Borrower. A borrower is required to pay all of the expenses necessarily arising from the use of the property. This is just, for he alone receives the benefit. Thus he is required to pay for the feeding, stabling , and shoeing of a borrowed horse. If he borrows machinery he must keep it in repair. On the other hand, he is not liable for extraordinary expenses, not incident upon the ordinary use of the article bor- rowed, and which arise without his fault. EXAMPLE Ames borrowed a valuable violin from Bates. Later the violin was stolen from Ames' house, during the absence of Ames, the doors having been securely locked. It also appeared that the thief entered through a window and stole a number of Ames' goods as well. Ames is not liable for the loss of the violin, he having used the greatest care. Liability of the Lender. When a bailment is for the benefit of the borrower, the lender is liable for damage caused by defects in the article loaned if the damage is the result of an unsafe con- dition of the thing loaned, known to the lender and not communi- cated to the borrower, but not otherwise. EXAMPLE A had a defective steam boiler, which he loaned to B to use in certain work. B knew nothing of the condition of the boiler, and while in his posses- sion it blew up without his fault and did considerable damage to his property. He was allowed to recover damages from A. Gagnon vs. Dana, 69 N. H. 264. Borrower's Right to Retain. The borrower has the right to retain the article loaned for the period of the bailment, if specified, but upon its termination he must return it to the lender. EXAMPLE Lawson loaned Lay his team to take a load of corn to a neighboring market. On the way Lawson overtook Lay and demanded the return of his team. Lay had the right to refuse to redeliver the team until he had the corn at market. Lay vs. Lawson, 23 Ala. 377. Return of Property. The bailee, or borrower, is under the duty of returning the property immediately at the end of the period for which the loan was made. He must also return all increase and profits of the borrowed property, except of coui the benefits which come to him from the use of the property foi BAILMENTS FOR BENEFIT OF BAILEE 227 which it was loaned. The property must be returned to the bailor personally, and it is not sufficient merely to return it to his premises, unless his attention is specifically directed to the return. Nor does the borrower have any right of lien which entitles him to retain the property for the payment of a debt due him from the bailor. Neither can he retain the property by claiming that it did not belong to the bailor, for by his accepting the bailment he recognized the bailor's title and this he cannot later deny. EXAMPLE Esmay loaned his horses and carriage to Fanning to use, on an agreement that Fanning should return them to Esmay on demand. The property was in a livery stable belonging to Jones, where Fanning secured it, but later, having finished using it, he returned it to Esmay's private stable, in Esmay's absence, where it was destroyed the same night by fire. Esmay sued Fanning for the value of the property and was allowed damages. Esmay vs. Fanning, 9 Barb.(N. Y.) 176. BAILMENT FOR MUTUAL BENEFIT PLEDGE 297. A Pledge or Pawn is a bailment to secure the perform- ance of some obligation, with power of sale in case of non-per- formance. Every form of personal property may be the subject of a pledge. Evidences of ownership of property, such as bills of lading, warehouse receipts, negotiable instruments, stocks and bonds, as well as clothing, jewelry, and other forms of personal property may be deposited by the owner with another person to secure the performance of some obligation by the owner. This obligation often consists in the payment of a debt; in some instance, it consists in the performance of an act. 298. Rights and Duties of the Parties. Since this is a form of bailment for the benefit of both parties, the bailee is required to exercise ordinary care and is liable for ordinary negligence. He must guard the property, while it is in his possession, with the same degree of care with which the average, reasonably prudent man would guard his own property. EXAMPLE Jenkins pledged some stock at a bank as security for a loan of money. The stock was placed in the vault with the moneys and securities of the bank. Safe-blowers robbed the bank, taking Jenkins' stock, together with other valuables. The bank was not liable to Jenkins for this loss. Jenkins vs. National Bank, 58 Me. 570. 228 BAILMENTS FOR BENEFIT OF BAILEE Use of the Property. As a general rule the pledgee, as the person who receives pledged property is called, does not have the right to use the property, except with the express permission of the bailor. His only right is to hold the property as security for the obligation for which it is given. The usual exception to this rule is in the case of animals which require moderate use to keep them in good condition and health. EXAMPLE Heath held stock belonging to Jones as security for a debt which Jones owed to him. Heath attempted to vote as a stock-holder of the company at an annual election. This he could not do, as he acquired no rights by virtue of the pledge, except the custody of the shares of stock as security for the payment of the debt. Heath vs. Silverthorn Company, 39 Wis. 147. Surrender to True Owner. The bailee acquires no better rights than those of the bailor, and if the article pledged has been stolen, or found, or is wrongfully pledged by one not the owner, the bailee must surrender the property on demand by the true owner. Remedies of Bailee on Non-Performance of Obligation. The bailee can retain the article pledged so long as the debt which it secures is unpaid. After the time has passed at which the obli- gation should have been performed, or the debt paid, the pledgee has certain additional rights. He may (1) sue the bailor and debtor upon the debt, without selling the pledge; (2) proceed in a court of equity to foreclose his lien against the property pledged, or (3) give reasonable notice to the bailor to pay the debt and redeem the property, and on his failure to do so may sell the property at an open and public sale, which must be free from all suspicion of fraud. An agreement in advance that the pledged goods can be sold at a certain time if payment is not made, is valid. v When the third remedy is used the bailee cannot himself be a purchaser of the article, nor can he sell it at a private sale, unless the conditions of the pledge particularly provide for it. Until the bailee resorts to one of these remedies he continues to hold the property solely as security for the debt, and when the debt is paid, or payment is tendered, he must redeliver the BAILMENTS FOR BENEFIT OF BAILEE 229 property in the same condition in which he received it. Should he return the property before the payment of the debt, he loses his right of lien and security. As previously noted, the terms under which the sale may be made, including a waiver of notice, may be, and generally are agreed upon between the parties at the time the pledge is made. In the absence of such agreements the state statute governing the sales of pledged property must be allowed, and these statutes usually provide the time and manner in which notice of the sale must be given and also that the sale must be an advertised public sale. If the pledged property be sold as provided in the agreement between the parties or as provided by statute, and the amount realized be insufficient to satisfy the debt, the bailor still owes the balance. If an amount greater than the debt be realized, the bailee must pay the excess to the bailor. EXAMPLE Marsh deposited ten cases of boots with Stearns to secure the payment of a note, which became due on November 8. On November 15, without notice to Marsh, Stearns sold the boots at public auction, realizing slightly less than the note, and sued Marsh for the balance of the note. Stearns was denied recovery and damages were allowed to Marsh, for the failure to give him notice to redeem was wrongful, and made the act of Stearns amount to an unlawful appropriation of Marsh's property. Stearns vs. Marsh, 4 Denio (N. Y.) 227. REVIEW QUESTIONS 1. Goodman pledged his life insurance policy with a bank to secure notes on which he owed money, and for sums to be borrowed from time to time at future dates. The notes were paid, Goodman died, and his executor demanded the return of the insurance policy, but the bank refused to deliver it, claiming that Goodman had borrowed other money which he had never paid. Assum- ing that the bank's claim is true, may the bank retain the policy? 2. Wilson bought a cargo of goods in London to be shipped to New York. Needing money to carry on his business, he took the negotiable bill of lading which he received to Little, a banker, and borrowed money on this security. He then sold the goods by means of a bill of sale to Johnson, who claimed the goods on their arrival in New York. Who would be entitled to receive them? Under what conditions? 3. Ames held property of Bates as security for a loan of $400. Being himself indebted to Call, he transferred the property of Bates to Call as 230 BAILMENTS FOR BENEFIT OF BAILEE security or his debt to Call of $500. Ames demands the return of the property from Call, who refuses to give it up unless Ames will pay the $500 indebtedness. What are the rights of the parties? 4. Egan takes Dale's horse in order to try him before buying. Egan, not being able to drive himself, permits Fair, a competent horseman, to drive the horse. While being so driven, the horse is injured without the fault of either party. Who bears the loss? Why? 5. Murphy lends his horse to Simpson to drive. It is known to Murphy that the horse is a vicious animal and easily frightened by automobiles, but he does not inform Simpson of these characteristics. The horse runs away and injures both himself and Simpson. Who is liable in damages and for what? CHAPTER XXXI BAILMENT FOR MUTUAL BENEFIT HIRE 299. Hire is a delivery of personal property to another to be used by him, or to be stored, transported, or worked upon by him, for a compensation. If the property is to be used by the bailee the compensation is to be paid by him to the bailor; but if the property is left with the bailee for some service to be per- formed on it, then the bailee receives compensation from the bailor. In either event the bailment is of the type of bailment for mutual benefit, for one party receives compensation and the other receives the use of it, or one party receives compensation and the other party receives the improvement, storage, or trans- portation of the thing bailed. Hire is treated under these two general sub-divisions: (1) Hire by the bailee; and (2) hire by the bailor. 300. Hire by the Bailee is a contract by which the bailee hires the use of the thing bailed, agreeing to pay to the bailor some compensation for its use. 301. Rights and Duties of Parties. The bailee for hire becomes entitled to the possession of the article for the period of the contract of bailment. The bailor must deliver the thing promptly and as agreed, and if it has become broken or is out of repair, the hirer may rightfully refuse to accept it. The bailor must not interfere with the hirer's possession during the period of the contract, and while he, being the owner, can sell his rights to a third person, he cannot sell the right to possession, for during the contract of bailment that right belongs to the hirer-bailee. The hirer is responsible for keeping the thing bailed in ordinary working condition, or for providing the ordinary food if the thing bailed is an animal, but the owner is responsible for extraordinary expenses necessary to preserve the property, occurring without the fault of either party. 231 232 BAILMENTS FOR MUTUAL BENEFIT. HIRE EXAMPLE French hired his horse to Devereux, and while in Devereux' possession the horse became ill without the fault of anyone. In order to save the life of the animal Devereux employed the nearest veterinary surgeon and on the recovery of the horse, the veterinarian sent his bill to French, who was com- pelled to pay the reasonable value of the services rendered. If the horse had become ill because of Devereux' fault he would have had to bear the expense Leach vs. French, 69 Me. 389. Defects Known to Bailor. The bailor is under the duty of informing the bailee of any known defects in the thing bailed which may injure the bailee. If he fails to do this he is respon- sible for any damage which may befall the bailee, who may rely upon the silence or statements of the bailor as to the condi- tion of the thing bailed until he discovers the true facts to be otherwise. EXAMPLE Copeland, a mounted policeman, rented a horse of Draper, a liveryman who knew the horse was afflicted with a disease called "blind staggers," but failed to inform Copeland of this fact. While Copeland was riding the horse it staggered and threw him to the ground, breaking his leg and three ribs. Draper was compelled to pay Copeland for the injury sustained. Copeland vs. Draper, 157 Mass. 558. : Right to Use. The bailee-hirer must, in absolute good faith, use the thing hired only in the manner and for the purpose for which it was hired, or for purposes which may be fairly implied from the contract. If he should use the property for a different purpose, this would be a wrongful act, and he would be absolutely liable for any damage, regardless of the degree of care he used. Where one hires a horse to drive and uses it for heavy teaming, drives to a place other than that which he designated at the time he hired the horse, or otherwise materially and intentionally deviates from the purpose of the particular bailment, he is said to have dealt with the property as though it were his own, denying the rights of the owner. He is said to have "converted the thing to his own use." The result of such conversion is to make him liable for damage of any kind or nature which may befall the thing bailed before its return. BAILMENTS FOR MUTUAL BENEFIT. HIRE 233 EXAMPLE Wallace bought a barge load of coal of Cobb and hired Cobb's barge to transport the coal from Hawesville to Louisville, agreeing to return the barge immediately upon the conclusion of the trip. Instead of so doing Wallace used the barge on trips out of Louisville for two weeks. The barge was con- fiscated by persons in the military service of the United States. Wallace was responsible to Cobb for the value of the barge. Cobb vs. Wallace, 3 Cold. (Tenn.) 539. Degree of Care. The degree of care required of the hirer while using the property within the purposes of the bailment is the same as in other bailments for mutual benefit. He is respon- sible for failure to use ordinary care. At the termination of the period of bailment he must return the property to the bailor in the same condition as it was when he received it, less the ordinary wear incident upon its reasonable use. He must also compensate the owner for its use according to the terms of the contract of bailment. i EXAMPLE Hofer, having agreed to do certain hauling for Hodge, was unable to fulfill the agreement because of the illness of his teamster. He thereupon took the team to Hodge and told Hodge to employ a driver and have the hauling done, charging the expense to him.. This Hodge did, but employed to drive the team an incompetent person, who backed them off a dock, the horses being drowned. Hodge was liable to Hofer for the value of the animals, as he had not used ordinary care in selecting a driver. Hofer vs. Hodge, 52 Mich. 372. - 302. Hire by the Bailor includes the deposit of the bailed property with the bailee, under a contract of bailment by which the bailee agrees either to perform work on the thing bailed, to transport it, or to keep it safe for the bailor, for a compensation. Bailments for Performance of Services. When the bailor delivers the property to the bailee, who agrees to perform work upon it for a compensation, the bailee is under the duty of exer- cising ordinary care both in keeping the article and in performing the services. This care must correspond with the care ordinarily exercised under like conditions. 234 BAILMENTS FOR MUTUAL BENEFIT. HIRE EXAMPLES 1. Ames takes some fine gold ornaments and costly gems to a jeweler to be made into a necklace. The value of the articles and the character of the work required to be done make it essential that a highly skilled workman be employed upon it, and if the jeweler employs an apprentice who does the work in such a manner that the materials are injured, he assumes a liability for the damage to Ames. 2. Mrs. Lincoln took cloth to Miss Gay, a dressmaker, to be made into a dress. Miss Gay made up the dress with the goods wrong side out. Mrs. Lincoln was entitled to recover the value of the goods, for Miss Gay was bound to employ that degree of skill and care ordinarily possessed and used by dressmakers. Lincoln vs. Gay, 164 Mass. 537. Completion of Services. The bailee must complete the work which he was employed to perform, before he can recover com- pensation. It sometimes happens that the thing bailed is destroyed while in his possession, preventing the completion of the work. If the article be destroyed without the fault of either party, the owner of the goods bears the loss and must also com- pensate the bailee for the work done at the time of destruction. If the fault of the bailor prevents the completion of the services, the bailee may recover for the services rendered and for any loss naturally resulting from the bailor's wrong. If, however, the bailee without cause abandons the work before completion, he cannot recover at all in many states, while others allow him to recover the value of the services actually performed less the amount of damage caused to the bailor by his refusal to complete the contract. EXAMPLE Ames delivers lumber to Bates, to be put into a building to be erected according to certain plans and specifications. Bates has performed half of the work when the building is destroyed by fire, without his fault. Bates is entitled to recover the value of the services already performed, and Ames must bear the loss of the building. Bailee's Right of Lien. A workman employed to make up materials, or to alter or repair an article, has a lien upon it for his pay, and cannot be compelled to redeliver the article until he is compensated for his services. His lien gives him the right to retain possession of the article, but does not, except by special statutes in some few states, give him the right to sell the article BAILMENTS FOR MUTUAL BENEFIT. HIRE 235 to secure his payment. This lien is terminated when the article is returned to the bailor, or to the bailor's agent, and cannot be re-established. It is likewise terminated by payment, or by the tender of payment, by the bailor, for the services performed. The lien for the entire charges of a single transaction may be enforced against such goods as remain in the bailee's possession, even though a part of the goods on which the charges accrued may have been delivered to the bailor. EXAMPLES 1. Sensenbrenner delivered his buggy to Matthews to be provided with new iron tires. This work Matthews performed and then at Sensenbrenner's directions delivered the buggy to Maxwell, a painter, who had a shop in an adjoining part of the same building. Maxwell painted it and when it was, completed Matthews took it back to his own shop where he claimed the right to retain it until he was paid for his services in tiring the buggy. This he had no right to do, having lost his lien by allowing the buggy to get out of his possession. He still had the right, however, to sue Sensenbrenner for the value of his services. Sensenbrenner vs. Matthews, 48 Wis. 250. 2. Minney mortgaged his boat to Scott, but retained possession, and ran it into Delahunt's dry-dock so that Delahunt might make repairs on it. Scott demanded the boat, but Delahunt was allowed to retain it until the charges for repairs had been paid. Scott vs. Delahunt, 65 N. Y. 128. Hire by Bailor for Safe-keeping. An owner may leave his property with another for safe-keeping, compensating the keeper for his trouble. Warehousemen, grain elevator-men, bankers who maintain safety deposit vaults, agisters, and wharfingers are bailees for safe-keeping. An agister is one who takes in domestic animals to feed and keep, as a livery man who operates a boarding stable. The duties of the bailees in such bailments are similar to those of bailees in any other form of bailment for mutual benefit. They are required to use ordinary care in guarding from injury the article bailed, to preserve and care for it according to the- contract of bailment, and to return it to the owner at the termi- nation of the period of bailment in the same condition as that in which they received it. They have a lien on the property for their charges for storage. In the case of warehousemen a receipt is often issued, and if this receipt be negotiable in form, the rules regarding the transfer 236 BAILMENTS FOR MUTUAL BENEFIT. HIRE of property by means of negotiable receipts, already discussed under the subject of Sales of Personal Property, apply. Another bailee of this class is the commission merchant who has received goods to sell for the owner; he is required to keep them safely until they are sold. EXAMPLES 1. Hensel left several horses and cows with Noble to pasture for him. He later attempted to remove one of the horses, but Noble refused to allow him to do so until the charges for pasturage were paid. Hensel proved that the other horses and cows were sufficient security for the payment of Noble's charges, but this proof did not entitle him to remove the horse, for an agister has a right of lien to all property in his possession until he is paid. Hensel vs. Noble, 95 Pa. St. 345. 2. Leidy placed poultry in a cold storage warehouse in good condition; but because the warehouse was kept too moist they became mouldy. The warehouseman was liable for the damage, as it was negligence to fail to keep the warehouse in fit condition for the storage of produce received. Leidy vs. I. C. Cold Storage Co., 180 Pa. St. 323. Hire by Bailor for Transportation. The owner of goods may desire to have them transported from one place to another. For this purpose he employs some person to carry them, and this person becomes a bailee of the goods while they are in his custody. Such persons are called carriers and may be either (1) private or (2) public carriers. The duties of public carriers are discussed in the next chapter on Exceptional Bailments. A private carrier is one who occasionally carries goods of another, but who does not hold himself out as a carrier of goods for the general public. He differs from the common carrier in that he has the full right to contract when and with whom he pleases, without any special regulations or duties imposed by statute. Private teaming contractors, draymen, messengers, I and occasional carriers by boat, wagon, or other vehicle, come' within this classification. Since they are carriers for hire their: only duties are to exercise ordinary care for the preservation of j the goods, to perform the services agreed upon, and to deliver' the goods on payment of their charges. BAILMENTS FOR MUTUAL BENEFIT. HIRE 237 EXAMPLE Sackrider at the request of Allen carried a load of grain on his boat at an igreed price between two river towns. Sackrider was not regularly engaged n this business. During the journey the grain was destroyed during a storm. It was admitted that Sackrider had exercised ordinary care. If Sackrider lad been a common carrier he would have been liable, but Allen was denied recovery because Sackrider was a private carrier and had used ordinary care. \llen vs. Sackrider, 37 N. Y. 341. REVIEW QUESTIONS 1. McDuffie hired a horse and buggy to drive to Durham, but drove t to Hampton, two miles from Durham. Without any fault of McDuffie, :he horse was run into at Hampton and killed. Wentworth, who owned :he horse and had hired it to McDuffie, sued for its value. Could he recover? Why? 2. An officer of the American District Telegraph Company hired from Walker a team and surrey for the company's business. Having completed :heir use he sent them back in care of a small boy, who stated he was expe- ienced with horses. The boy was not familiar with horses, however, and the :eam ran away, one of the horses being injured so that it had to be shot. Can Walker recover of the American District Telegraph Company for his loss? 3. Ames stored his goods in Bates' warehouse. While making repairs ipon the timbers and beams of the warehouse, Bates removed some of the foods, but allowed Ames' to remain. During the process of repair, which vas being done by competent workmen, the building collapsed and Ames' foods were damaged. Ames sued Bates for the amount of loss. Could he ecover? Why? 4. Cox placed a box of dry goods on a dock belonging to O'Reilly to be :arried on one of O'Reilly's boats, but neglected to give any notice to O'Reilly )f the delivery of the goods. The goods were lost and Cox sued O'Reilly for :heir value. Can he recover? 5. Schmidt stored 99 tons of hemp with Blood, a warehouseman. At various times he received all but six tons, which Blood refused to deliver until ill the charges for storage on the entire lot of hemp had been paid. Schmidt oied to recover the six tons, claiming that Blood had lost any lien which he night have had by allowing a part of the hemp to leave his possession. He :tlso offered to pay Blood the storage charges on six tons of hemp. May he -er it? Why? CHAPTER XXXII EXCEPTIONAL BAILMENTS 303. Introduction. There are two types of bailees regarding whom the ordinary rules concerning the bailee's rights and duties in respect to the thing bailed do not apply. These are (1) inn-keepers, and (2) common carriers. The exceptional rules applying to these two classes of bailees also apply in general to the operations of telegraph and telephone companies though neither are bailees in the strict sense of the term. An Inn-keeper is one who offers to accommodate all comers with the conveniences usually supplied to travelers. One is not an inn-keeper when he provides occasional entertainment only; nor is one who keeps a restaurant and provides food only. Neither is the keeper of a lodging house who makes separate contracts with each guest and reserves the right to refuse enter- tainment arbitrarily; nor are sleeping car companies considered to be inn-keepers. A steamboat company may or may not be an inn-keeper, depending entirely upon all the circumstances of its business. Who are Guests. Those who take accommodations at an inn as transients, not including those who make the inn their perma- nent home, are rated as guests. This is true even though they be given special rates, as is frequently done with commmercial travelers, ball players, or other frequent patrons. 304. Rights and Duties of Inn-Keepers. The inn-keeper having taken upon himself a public employment must serve the public. His first duty is to receive to his inn as guests withouf discrimination such travelers as may ask for entertainment. He cannot select his guests. This is a duty imposed by law, and if when he has adequate accommodations, an inn-keeper refuses without cause to receive a guest, he is liable to compensate the person refused, in damages. An inn-keeper may, however, justify a refusal by showing that his accommodations were 238 EXCEPTIONAL BAILMENTS 239 already exhausted or that the person refused was without funds to pay for the accommodations; was disreputable, drunken, or disorderly; was affected with a contagious disease; or resorted to the inn for an illegal purpose. As soon as a person becomes a guest, the inn-keeper under the common law practically insures his safety and the safety of his personal property of the kind which travelers usually carry with them. This liability does not depend at all upon whether the inn-keeper has used care to prevent the loss, or injury, but he is liable regardless of his own carefulness. The only exceptions to such liability, under the common law, are when the loss or injury is caused (1) by an inevitable accident, as a flood, called an act of God, (2) by the act of a public enemy, or (3) by the negli- gence of the guest. These rules have been somewhat relaxed by statute in the several states, though there is no uniformity in this regard. It is, however, now quite generally established that the inn-keeper is freed from responsibility for damage occasioned by accidental fire, not due to his fault, or by other similar accidents. He is also allowed to limit his liability by special contract with the guest to that of an ordinary bailee for hire. For example, by giving notice to the guest that he will be responsible for valuables only when deposited in his safe, the inn-keeper may limit his liability in that regard. He cannot, however, escape liability for damage or loss to wearing apparel, or articles usually worn on one's person. Some statutes limit the total amount of an inn-keeper's liability to any one guest. The inn-keeper has a lien on the property of a guest for the payment of the bill of the guest. EXAMPLE Caswell, a traveling salesman for DeWald & Co., left a valise containing $235 in the cloak room of a hotel, from which it was stolen. The hotel had no checking room, nor safe for the keeping of valuables. Recovery was allowed against the hotel, even though the clerk had not been notified of the contents of the valise, and regardless of the fact that it was not shown that the hotel keeper had been guilty of a want of ordinary care. Bowell vs. DeWald & Co., 2 Ind. App. 303. 240 EXCEPTIONAL BAILMENTS 305. A Common Carrier is one who regularly undertakes for hire to transport goods or passengers between different places, for such as may choose to employ him. To be a common carrier one must (1) carry on a public employment and (2) his business must be one of carriage for hire. As a consequence of his occu- pation he is then required (1) to carry any goods which may be offered of the kind he professes to carry, (2) by the means and over the route he has established; and upon his refusal to carry such goods must compensate the person refused in damages. For convenience the carriers of goods and of passengers are treated separately. 306. Rights and Duties of Carrier of Goods. To Accept Goods. The common carrier, being engaged in a public under- taking, is obliged to accept for carriage all goods offered him for transportation which come within the limits of the classes of goods he represents himself as carrying. A freight-carrying road cannot be compelled to carry money, nor an express com- pany grain in bulk, or iron ore, which are properly carried by companies with suitably constructed cars. But the carrier can- not discriminate between persons, and must render the same services alike to all who request them. The carrier must exert reasonable dispatch, and must take notice if the goods are specially marked, as "Glass," "Perishable," and use suitable care to prevent loss or injury. Transportation may be refused, however, on the ground that the facilities are inadequate, or on account of special conditions outside of the carrier's control. EXAMPLES I 1. Rae offers grain to a railroad company to carry from Rockford to Chicago. The company at first refused to furnish cars, though it finally did so, but after providing them, delayed the shipment. Rae sued for damages and recovered the difference between the market price of the grain when it was finally delivered and the market price when it should have been delivered if it had been shipped promptly upon receipt. G. & C. U. R. R. Co. vs. Rae, 18 111. 468. 2. The Milwaukee Malt Extract Company offered a railroad a con- signment of boxes labeled "beer," directed to a city in Iowa, which state had a statute forbidding the sale or delivery of liquor within the state, and provid- ing a penalty for its violation. The railroad refused to accept the shipments EXCEPTIONAL BAILMENTS 241 on this ground. The shipper sued for damages but could recover nothing. The refusal was rightful. Milwaukee Malt Ext. Co. vs. Railroad Company, 73 Iowa 98. 3. Shanley offered a railroad company a package for carriage. The package was unlabeled and contained nitroglycerin. The railroad refused to carry it unless labeled. This Shanley refused to do and sued the railroad for damages. He was allowed no recovery, the demand of the carrier being reasonable and for the protection of other property. B. & M. R. R. Co. vs. Shanley, 107 Mass. 568. Right to Compensation. Rates. The primary right of the car- rier is to be paid for the services rendered, and like other bailees for mutual benefit he has a lien on the goods while in his posses- sion for the payment of his charges. Except as controlled by statute the rate of compensation is fixed by the contract of bail- ment and carriage, though it cannot be more than a reasonable rate. It is, however, the right of the state to regulate rates to be charged by common carriers, providing a reasonable rate, and this has been done quite generally. The Federal government also can regulate the rates to be charged on interstate shipments. The Interstate Commerce Commission, created by Congress in 1887, has the power to establish and fix uniform rates, to investi- gate complaints, and regulate common carriers generally. Rebates have been prohibited and discriminations between shippers have been declared unlawful by statute. The purpose of these statutes has been to prevent a common carrier from favoring a shipper, or a class of shippers, at the expense of some other person or class. EXAMPLES 1. Wilson sued a railroad company for $2700 as excess freight on a shipment of lumber. Freight was charged according to a public circular, but Wilson claimed that there had been an oral agreement for a lower rate. The goods were represented by a bill of lading which stated that the regular rates should apply. Wilson was denied recovery, it being impossible to modify a written contract by oral evidence. Louisville etc. R. R. Co. vs. Wilson, 119 Ind. 352. 2. Cook shipped goods by a railroad and paid the rate of $60 a carload. He later discovered that the railroad, while requiring a similar rate from other shippers of like commodities, had rebated them parts of this amount of from $3 to $20 a car. He then sued for $2700, representing the excess which he had paid over that of preferred shippers for a number of years, and was allowed recovery, the duty of a common carrier being to render service impartially. Cook vs. C. R. I. & P. Ry. Co., 81 la. 551. 242 EXCEPTIONAL BAILMENTS Liability for Loss and Damage. The liability of a common carrier of goods is an exceptional one, being that of an absolute insurer of the safety of the property while in its custody and control. If the property is lost or injured the law presumes that the carrier was negligent and he can escape liability only by showing that the loss was occasioned by (1) Act of God; (2) Act of public enemy; (3) Act of the Shipper; (4) Nature of the Goods; or (5) Act of Law. With these exceptions, the liability of a common carrier for the safe delivery of the goods is one of the most stringent and severe liabilities known to law. These exceptions are briefly denned as follows : An Act of God is some unusual force of nature, without the interposition of any human agency, which the shipper could not anticipate. Thus lightning, tempest, cyclones, or floods will excuse the carrier from liability for loss. Because of its extra- ordinary character the Johnstown flood in Pennsylvania in 1889 was an act of God which relieved the railroads from liability. Ordinary spring freshets which occur annually and which might easily be guarded against do not excuse the carrier. An Act of a Public Enemy is an act of the enemies with whom the country is at war. The acts of mobs, rioters, robbers, strikers, and insurgents will not relieve the common carrier from liability. An Act of the Shipper may relieve the carrier of liability for loss, in case the act is negligent and is one of the principal causes of the resulting loss. Thus the misdirecting of goods by a ship- per or the concealing of value of goods when asked as to value thereby preventing the carrier from knowing how to safely guard the shipment, are acts which may contribute to the loss, and relieve the common carrier of liability. The Nature of the Goods may sometimes cause the loss and when this is the case the carrier is not liable. Thus it is the nature of fruit to ripen and rot, and of animals to trample upon each other, and when the loss is caused in this manner, the com- mon carrier is not liable without proof of other negligence. EXCEPTIONAL BAILMENTS 243 Acts of the Law may also relieve the carrier, as when goods are seized and confiscated by a public officer and destroyed by him as injurious to the public health or for some other cause, or when goods are seized under a levy and execution against the owner. EXAMPLES 1. Kinnick shipped a carload of hogs by a common carrier. The hogs crowded about the car door for air at each stop of the train and several were killed. Kinnick was entitled to no recovery. Kinnick vs. C. M. & St. P. Ry., 69 la. 665. 2. A flood caused by a cloud-burst destroyed Wald's property in the possession of a common carrier. The carrier was not responsible to Wald for the loss. Wald vs. Railroad Company, 162 111. 545. 3. Pingree shipped goods by a carrier to Belden, and while en route the goods were seized by a sheriff on a levy and execution against Pingree. This levy was later declared invalid and illegal by the court and Pingree then sued the carrier for allowing the sheriff to seize the goods. He could not recover against the carrier, who was not bound to defend against an officer of the law with papers which purported to be regular. Pingree's proper remedy was against the sheriff. Pingree vs. D. L. & N. R. R. Co., 66 Mich. 143. 4. Hart shipped goods, horses and provisions by a carrier and placed his servant, Black, in the car to care for the animals and property. While Black was asleep, his lantern set fire to the goods, which were destroyed. Hart then sued the railroad for his loss. He was denied recovery. Hart vs. C. & N. W. R. R. Co., 69 la. 485. ' Limiting Liability. Limitations of liability for loss or damage to goods, when contained in the bill of lading under which the goods are shipped, are binding on shippers unless contrary to law or public policy. The carrier cannot, however, limit its liability for at least ordinary care. In 1916 Congress enacted a law making all limitations of liability in bills of lading respecting interstate shipments unlawful, unless the limitations were first approved by the Interstate Commerce Commission. It also provided that no such approval should be granted in respect to ordinary live stock. Termination of Liability. The liability of the common carrier ends when the goods have been delivered to the person to whom they are consigned. The carrier is responsible for wrongful delivery to unauthorized persons. 244 EXCEPTIONAL BAILMENTS When the goods are at the end of their journey and are held for the order of the consignee by the railroad as a mere custodian, the extraordinary liability of a common carrier terminates, and the railroad is then liable only for ordinary care as a warehouse- man. The Massachusetts rule, followed in Illinois, Indiana, Missouri, and Iowa, is that when the goods are stored at the end of their journey the railroad is merely a warehouseman. The New Hampshire rule, followed in Vermont and Wisconsin, is that the liability as a common carrier continues until the con- signee has actually received the goods, or has had an opportunity of inspecting them and removing them in the ordinary course oi business. The Michigan rule, followed in New York, is that the liability as a common carrier continues until the consignee has been notified of the arrival of the goods and has had a reasonable opportunity to remove them. The Michigan rule is favored in the majority of other states. It therefore is important for the carrier to notify the consignee on the arrival of the goods and foi the consignee to remove them within a reasonable time. Hasse shipped goods "C. O. D." to three parties, and on the arrival of the goods, two of the parties were notified, but the third could not be found, The parties notified asked permission to leave the goods for a week. Hasse was notified of all these facts and telegraphed to hold all the goods at the destination until they were paid for. Two days later the railroad warehouse was destroyed by fire without the fault of the company. Hasse sued for the value of the goods, but was denied recovery, the liability of the common carrier having been changed to that of a warehouseman. Hasse vs. American Express Co., 94 Mich. 133. 307. Common Carriers of Passengers. Passengers are not "goods" or personal property, and the common carrier of passen- gers is not a bailee in the strict sense, but his liability is very similar to that of a bailee and is therefore considered in this chapter. Any one who is being transported in the vehicle of a carrier for hire from place to place, or who is at a station of a carrier with the intention of entering as soon as possible the vehicle provided, is a passenger. It is not essential that he shall have paid his fare, though he must be ready to do so upon demand, either in cash or by ticket. EXCEPTIONAL BAILMENTS 245 Liability of Carrier. The liability of a common carrier to passengers is quite different from his liability for shipments of goods, for he is only responsible for injuries resulting from negligence. He is in no sense an insurer, though he must exercise a high degree of care in providing suitable and safe means of transportation, commensurate with the class of service which he represents himself as furnishing. The approaches to vehicles, platforms and stations must be kept in a safe condition, and protection must be furnished against insult, violence, and theft. The common carrier is responsible for the conduct of his servants. He must serve all comers without discrimination. EXAMPLES 1. After Mrs. Brown purchases a ticket from the N. & O. R. R. Co., and while she is checking her baggage at the station, she is injured by persons scuffling. She can recover damages for her injury, as the company owed her the duty of providing safe facilities for the transacting of business incidental to her journey. 2. Putnam was riding on a street car, and becoming annoyed at the actions of an intoxicated man, requested the conductor to quiet him. This the conductor did by taking him to the front platform, where he was quiet until the car stopped, when the intoxicated man seized the car-hook, re-entered the car and killed Putnam. The street car company was not responsible for this death, the conductor having no reason to believe that there was any danger after he quieted the intoxicated man, and having used sufficient care. Putnam vs. Broadway etc. Railroad, 55 N. Y. 108. 3. Magoffin, a railway mail clerk, while on a mail car performing his duties, was killed by a collision between two of the carrier's trains. He had paid no fare, but was riding by reason of a contract between the government and the carrier. As such he was a passenger, and the collision being due to the negligence of some of the railroad employees, the carrier was held liable. Magoffin vs. M. P. Ry. Co., 102 Mo. 540. Rights of Carriers. In order to protect his interests and to properly conduct his business, a carrier may make reasonable rules and regulations for the operation of his vehicles and conduct of the passengers, and may insist upon being paid in advance. The carrier's liability ends as soon as the passenger has left the vehicle and has had a reasonable time to leave the platform or station of the carrier. 246 EXCEPTIONAL BAILMENTS Conditions printed on tickets bind the passenger only if they are reasonable and not contrary to public policy. Whether the liability for negligence may be limited by contract is a disputed question. Such limitation is allowed in England and New York, but the United States Supreme Court and most state courts regard such contracts as violations of public policy, although it is generally permitted for the carrier to limit his liability to a pas- senger carried without charge. EXAMPLES 1. Parry bought a reduced rate excursion ticket, which stated that it was good for transportation only on certain trains. To save time on the return trip he boarded an earlier train, the conductor of which refused his ticket, and on Parry's refusal to pay the regular fare ejected him. Parry sued, but was denied recovery of damages as the right of the carrier to limit the ticket by special contract in this manner was a reasonable one. Penn. R. R. Co. vs. Parry, 55 N. J. L. 551. 2. Warner had been a passenger on a train and was told to alight at a place some distance from the station. He was required to cross tracks and in doing so stepped into a hole in the planking and was injured. He was awarded damages for his injury, the railroad still being liable to him as a passenger. Warner vs. Railway Co., 168 U. S. 339. Baggage. A passenger is entitled to carry with him such per- sonal effects as are necessary for his journey. The carrier may limit the amount which will be carried free, and is responsible as an insurer only for personal baggage unless he accepts other articles as baggage with full knowledge of their character. 308. Telegraph and Telephone Companies are treated as common carriers by the courts of many states, on the theory that they are the carriers of intelligence, or news. They are generally held liable for the highest degree of care, and are required to serve all who apply without discrimination, like all common carriers. They are liable for the non-delivery of mes- sages, for erroneous transmission, and for failure to maintain efficient and proper means of communication in accordance with their representations to the public. Their rates are subject to public regulation. 309. The Post Office Department, or that branch of the government which carries mails, performs functions similar to EXCEPTIONAL BAILMENTS 247 a bailee for hire. It is a public, or common, rather than a private carrier. But while its operations are in their nature like those of common carriers, yet the government incurs no liability, since the sovereign state cannot be sued except by its own consent and consequently the courts cannot lay down rules of liability. The liability of the post office department is determined by its own rules and regulations. REVIEW QUESTIONS 1. Sibley left his horse over night in the stable of Aldrich's inn, where he was a guest. The horse was kicked by the horse of another traveler, and his leg broken. Aldrich proved that this was due to no fault of his. Could Sibley recover for the damage? Why? 2. Hinkle sued to recover damages due to delay in shipment of a car- load of cattle. The cattle were injured, had to be fed en route, and missed the Saturday market. The contract on the bill of lading provided that the rail- road should not be liable for injuries not caused by the gross negligence or fraud of its employees. It was admitted that the delay was caused by care- lessness of a train dispatcher which did not, however, amount to gross negli- gence. Could Hinkle recover? Why? 3. Springer, the employee of a tenant in a building, was injured while riding in the public elevator maintained by the proprietor of the building, negligently operated. He sued the proprietor of the building for his injury. Could he recover? Why? 4. Udell had received a transfer from one branch of a car-line to another, and was required to cross a track to take the second car. While so doing, he was struck by a trolley pole, which broke while being changed from one end of the car to another. This was the pole on the car which he had left. Udell sued for damages for his injury. Could he recover? Why? CHAPTER XXXIII AGENCY fl. Kinds< l. General Special II. Manner of Appointments 1 . Express agreement Implied agreement III. Duties of Agent IV. Duties of Principal 1. To fa. Loyalty to trust Principal jHanufacturmg Company To be Incorporated under the Laws of New York Capital Stock, $50,000 Shares, $100 each We, the undersigned, hereby severally subscribe for and agree to take at its par value the number of shares of the capital stock of The Everready Manufac- turing Company set opposite our respective names, and agree to pay therefor in cash on demand of the treasurer as soon as said company is organized. Albany, New York, February 24, 1916. Names Addresses Shares Amount Gordon Ambrose Suffern, N.Y. 10 $1000 H. C. Mackey Albany, N.Y. , 5 500 REVIEW QUESTIONS 1. Henry Ames, a brother of George Ames, desires the latter to assist him in financing a manufacturing business, suggesting that they form a partnership. George Ames is a wealthy man, while Henry Ames has been unsuccessful many times in business, but apparently has a valuable proposition this time. What advice would you give George Ames regarding the kind of business organiza- tion which should be formed? Why? 2. Samuels has loaned $5000 to Johnson and seeks to collect payment. He secures a judgment against Johnson. He learns that Johnson owns thirty shares of stock, valued at $100 a share, in the Acme Manufacturing Company, a corporation. This is one-third of all the capital stock of the company, which has assets of $20,000, having been a profitable undertaking. How may Samuels collect his claim? Why? 3. Ames and Bates acquire all the stock in the Cool Dairy Company, a corporation, and desiring to sell the real estate belonging to the company, execute a deed in their own names as the owners of the property to Dale. Does Dale secure a title to the property? Why? Would he have done so if the Cool Dairy Company had been a partnership between Ames and Bates? Why? 4. The A corporation receives a charter from the state empowering it to build a toll-bridge across a river and to charge a fee for travel, the charter providing that this corporation shall have the exclusive right to maintain a toll-bridge within one mile of that place for thirty years. Two years later the state grants another charter to the B company empowering it to operate a steam ferry within a hundred yards of the bridge. This cuts the revenue of the A corporation in half. Has the A corporation any remedy? Why? CHAPTER XLI CORPORATIONS Continued Powers 1. Express 2. Implied a. To buy and sell land b. To acquire property by will c. To borrow d. To issue notes e. To pledge its property f. To make by-laws g. To use a seal 363. Powers of a Corporation. Upon its organization a corporation possesses the power to act in accordance with the provisions of its charter. In addition it has certain implied pow- ers. Among these are: (1) Power to acquire land, necessary for the business of the corporation, by purchase; (2) power to sell and transfer the title to land; (3) power to acquire property by will from another; (4) power to borrow and issue negotiable instruments; (5) power to mortgage or pledge its property; and (6) power to make by-laws, rules, and regulations for the conduct of its business; (7) power to use a seal. These express charter powers and the powers implied from the creation of the corporation are exercised by the stockholders, acting through officers elected by them, called the board of direc- tors. The stockholders may be very numerous and too large and unwieldy a body to assume personally the active management of the corporation. They control the corporation, therefore, only through the medium of the board of directors. These directors are elected at the annual meeting of the stockholders, and as they represent the will of the holders of the majority of the stock, it is said that the control of the corporation is in the hands of the holders of the majority of the stock, whose power is absolute so long as they act within the provisions of the charter and the implied powers of the corporation. 310 CORPORATIONS 311 364. Directors Powers and Duties. The powers of the directors are very extensive and are fixed by the charter. While the control of the corporation is in the hands of the majority of the stockholders, the active management of the corporation is in the hands of the directors. When assembled as a board, they are the embodiment of all the corporate powers, except those exer- cised by the stockholders. They could not engage the capital of the corporation in an unauthorized enterprise, nor could they increase or decrease the capital stock, dissolve the corporation, or consolidate it with another corporation, for these are powers vested in the stockholders and many of them cannot be exercised even by them without the unanimous consent of all the stock- holders together with the consent of the state. But in the active business management of the corporation within its express and implied powers, the directors are supreme. The position of the directors is virtually that of business agents of the majority of the stockholders. They are bound to exercise reasonable care in the management of the corporate business, and are liable for losses resulting from their carelessness and neglect. They cannot be held liable for losses occasioned by bad business judgment if they have acted in good faith. Being agents, they cannot make a secret profit in transacting the cor- porate business, nor secure to themselves any personal advantage at the expense of the stockholders. 365. Officers and Agents. The board of directors usually elects the officers of the corporation in accordance with the provisions of the by-laws of the corporation. These officers are usually the president, vice-president, secretary, and treasurer. Sometimes there is a business manager. The president is usually also the chairman of the board of directors. His duties are provided by the by-laws of the corporation, and when no business or general manager is elected he is the active business head of the corporation. As the chief officer of the corporation, he is generally empowered to execute deeds, negotiable instru- ments, and other documents, in the name of the corporation. The duties of the vice-president, secretary, treasurer, and business manager if any, are the usual duties falling to such 312 CORPORATIONS officers. Their acts are binding upon the corporation if within the scope of their general authority. Other officers and agents are sometimes appointed in accordance with provisions of the by-laws. These officers and agents are authorized to act in certain matters only, and they are answerable to the corporation in the same manner that an ordi- nary agent would be answerable to his principal. They may bind the corporation when acting within the scope of their special authority, and are liable for their negligence. 366. Rights of Stockholders. In addition to the right of the majority of the stockholders to control the corporation within the scope of its charter powers, the individual stockholders have certain rights which cannot be taken from them. They have the right to inspect the books and records of the corporation, and to inquire at all reasonable times into the affairs of the corporation. They may request the corporation to sue a director believed to be guijty of a breach of duty, and if the corporation fails to act may themselves sue in the name of the corporation, and similarly may prevent the officers or directors of the corporation from engaging in unlawful enterprises or from performing unwar- ranted acts, and dissipating the resources of the corporation. They have the right to receive dividends after they have been declared. They are entitled to be notified of all meetings of stockholders, to attend all meetings and participate in them by voting on all matters. In some states by statute they are allowed to vote by proxy. They have the right to transfer their shares. Upon the dissolution of the corporation, those who hold stock at that time have the right to participate in the division of the corporate assets. 367. Liabilities of Stockholders. One advantage that has tended to popularize corporations more than any other is that in general the stockholders are not personally liable for the corpo- rate debts, beyond the amount of their unpaid stock subscrip- tions. If the corporation should become insolvent, the stock- holders may lose their investment in the stock, but if their stock is fully paid for they cannot be called upon to pay any part of the corporate debts from their private fortunes. They are, however, liable to creditors to any amount which may be unpaid CORPORATIONS 313 on their stock subscriptions. The creditors are entitled to reiy on the supposition that the stockholders have paid for their stock at its face value, and have contributed to the capital and assets of the corporation in the amount which their stock certificates would indicate. If the stock has been issued without full payment the creditors may compel the stockholders to pay for it. For this reason it is dangerous to buy stock that is sold at less than par. In many states there are special statutes providing that the stockholders in banking corporations are liable for an additional amount equal to the par value of their holdings. Holders of National Bank stock always have this liability. A few states have applied this rule of "double liability" to all corporations. If a stockholder has received a division of the assets of the corporation at a time when the corporation owed creditors which it could not pay, he must return the amount which he received for the benefit of the creditors. It would be extremely unfair to allow a corporation in failing circumstances to divide the capital among the stockholders and leave the creditors without assets from which to collect their debts. EXAMPLE A corporation was organized with a capital stock of $100,000, only seventy- five per cent of the stock being subscribed for, and the remaining twenty-five per cent being given to the purchasers of the stock as a bonus. Later the corporation became insolvent, and the creditors were permitted to compel the stockholders to pay in full for unpaid portions of their subscriptions, and for the stock issued as a bonus. Fogg vs. Blair, 133 U. S. 534; Hosper vs. Car Co., 48 Minn. 174. 368. Rights of Creditors. As previously stated, the creditors of a corporation are entitled (1) to assume that the amount of capital purported to be invested in the corporation is in fact so invested and fully paid up; and (2) to be paid out of the assets of the corporation upon its insolvency before its distribution among the stockholders. A further right of creditors is to protect their claims against fraudulent acts which will cause irreparable injury to their security, but creditors cannot object to acts of the stockholders which are outside the scope of their charter powers so long as they are not fraudulent, or do not make the corporation insolvent. 314 CORPORATIONS 369. Unauthorized Acts. Acts which are not authorized by the charter are called ultra vires acts, the term meaning beyond the lawful power and authority of the corporation. When the majority of the stockholders of a corporation seek to perform an ultra vires act they are in reality violating the two contracts which the corporation represents, the contract between the state and the corporation and the contract between the stockholders, both providing that the corporation shall act only within its charter powers, express or implied. Consequently, any stock- holder who discovers that the corporation is acting, or is about to act, through its directors, representing the majority of the stockholders, in such a way as to hazard the property of the corporation in unauthorized undertakings, may bring a suit to restrain such action. The state may also protect itself against the violation of the contract represented by the charter, and pre- vent usurpation of powers, by bringing a suit to dissolve the corporation and terminate its charter. 370. Defective Organization. Sometimes the incorporators fail to comply strictly with the general incorporating act, but nevertheless proceed to act as if they had created a corporation. Such an organization has not a valid, legal existence as a cor- poration, but is known as a de facto corporation. The failure to comply with the necessary requirements of organization has prevented it from being a true corporation. To constitute a de facto corporation three things must be shown: (1) A charter, or general incorporation law; (2) an unsuccessful attempt to organize a corporation under the law; and (3) a use of the rights claimed to be conferred by it. When these three elements are present, and the incorporators have attempted to form a cor- poration, and despite their failure, have acted as though they were a corporation, only two classes of people can object to their acting as a corporation. These are the state, which may com- mence legal proceedings, known as ouster proceedings to prevent a further use of the powers, and stock subscribers, who may refuse to pay for their stock until a true and valid corporation is created. The rights of creditors and others who deal with the organization as a corporation are the same as though a true corporation had been created, except in a few states, most CORPORATIONS 315 notably Illinois, where it has been decided that the members of a de facto corporation are liable to creditors as partners; that is, they cannot claim the benefit of limited liability. EXAMPLE An effort was made to incorporate under a state law requiring the certi- ficate of incorporation to be subscribed and acknowledged by five members, and recorded in the county in which its principal office was located. Only four members signed the certificate, and the state brought suit to prevent the corporation from transacting business. The court granted the state the relief requested. People vs. Water Company, 97 Cal. 276. 371. Dissolution of Corporation. A corporation may be dissolved: (1) By expiration of the time mentioned in the charter; (2) by a surrender of the charter, accepted by the state, or made in accordance with the provision of the general act; (3) by -forfeiture of the corporate charter, through a proceeding in the courts for that purpose, because of non-use or mis-use of the charter and powers granted ; or (4) by repeal of the corporate charter by the legislature, in states where the power to repeal such charter is reserved to the state in the state constitution. Upon the expiration of the time for which a corporation was created it is dissolved automatically. It can no longer transact business except such as is necessary to wind up its affairs. Meth- ods are usually provided by which a certain proportion of the stockholders may vote to close up the affairs of the corporation, dissolve it, and divide its capital after payment of creditors. The statute must be carefully followed to effect a valid dissolu- tion. The state is at all times empowered to forfeit the charters of corporations which have mis-used their powers, or to prevent corporations from continuing in business when their creation was defective. Not only may the state do this, but in nearly all of the states there are constitutional provisions declaring that the power to repeal, alter, and amend corporate charters is reserved to the legislature and cannot be granted away. Hence, although the charter is a contract between the state and the corporation, this reserved power of the state enables future legislatures to enact many corporate laws which would otherwise be forbidden. 372. Liquidation of -Assets. The management of the dissolving corporation is placed in the hands of a liquidating 316 CORPORATIONS officer. His duties are to collect all the corporate assets, reduce them to money if possible, pay off creditors, and distribute the balance proportionately among the stockholders. The right of creditors to the assets of a defunct corporation are primary, and the rights of the stockholders secondary. 373. Foreign Corporations. One state cannot authorize a corporation to transact business in any other state, but by the reciprocal courtesy and good-will of states, the right of a cor- poration chartered by one state to do business in another is quite generally recognized. This privilege, however, is subject to many restrictions, and conditions are frequently imposed upon these corporations, called "foreign" corporations, with which they must comply before engaging in business in a state in which they were not chartered. Among the usual conditions are that the corporation shall file with the state in which it proposes to do business a copy of its charter, a statement of its financial resources, and a list of its officers. i REVIEW QUESTIONS 1. Malone, a minority stockholder in the Morris Service Company, a corporation, discovers that the directors have unanimously agreed to engage the funds of the corporation in booming a tract of land owned by them for their personal benefit. The directors are also the majority stockholders, but the act in which they are engaged is beyond the corporate powers. May Malone sue them in the name of the corporation without any further act on his own part? Why? 2. The Belden Machine Company, a corporation authorized to engage in manufacturing and trading, invests its money in a banking enterprise. What persons, if any, may object? How? Why? 3. Several men meet and attempt, in good faith, to organize a corporation under a general act of the legislature. They fail to conform to a certain pro- vision of the law with which they are unfamiliar, but proceed to act and trans- act business as a corporation. Lawson, who has subscribed for twenty shares of stock in the corporation, on discovering this fact, refuses to pay for it; and Wilson, who has contracted to build an office for the corporation, refuses to perform his contract. Has the organization any rights against Lawson? Against Wilson? Why? 4. The directors of the Congress Hotel Company, a corporation, spent large sums of money in improving the dining room service, hiring orchestras and employing entertainers. The dining room had never been a revenue- CORPORATIONS 317 producing part of the establishment, and continued to lose money, the com- pany eventually becoming insolvent by reason of the expenditures of the directors. They had hoped to attract patronage from rival hotels in the city, but it was generally admitted that their course had been an unwise business policy. May the directors be held liable for the loss? Why? To whom? PRACTICAL SUGGESTIONS In a corporation: I. As a stockholder you are subject to no financial liability, except in case of a banking corporation, beyond the amount still to be paid on your subscription. A creditor of a corporation can satisfy his claim out of the assets of the corporation only. II. A stockholder is not an agent to bind the corporation by his acts unless he has special authority. III. A corporation is not dissolved by the death, insanity, or bankruptcy, of a stockholder. IV. A stockholder may sell his stock without working a dissolution of the corporation. V. The holders of the majority of the stock have the right to manage the business of the corporation so long as they remain within the powers contained in the charter. VI. You have no voice in the corporate management within the charter limits beyond the power to vote in proportion to your stock holdings, unless yju are an officer. CHAPTER XLII JOINT STOCK COMPANIES 374. A Joint Stock Company is a company that is similar, in business organization, to a corporation, but is in reality a partnership with a large number of members. The joint stock company is a form of business organization so little used that it would not be necessary to treat it were it not for the fact that many persons confuse joint stock companies with corporations, and it is important that the distinction between the two be fully understood. 375. The organization of a joint stock company is similar to that of a corporation in that stockholders' meetings are held, a board of directors is elected, and business is transacted by officers selected by the directors. The interests of the various members of the company are represented by shares of stock, as in a corporation, and the profits of the business are distributed in the form of dividends. 376. Liability of Members. The resemblance to a corpora- tion is in the form of organization as described above, and ends there. The members of a joint stock company are partners, and as a partner each is liable for all of the debts of the company. 377. Compared with Partnerships. As above stated, joint stock companies are like partnerships in the liability of members. They also resemble partnerships in that their formation requires no special state authority, but simply the agreement of those who thereby become members. Like a partnership, a joint stock company must sue or be sued in the names of its members, and not in the name of the company. 378. Compared with Corporations. It has been shown that in their organization and manner of doing business, joint stock companies are like corporations. They also resemble corpora- tions in having the "power of succession" they are not auto- matically dissolved upon the death of a member. They are 318 JOINT STOCK COMPANIES 319 dissolved by lapse of the time for which they were organized, or by decree of court. They cannot be dissolved at the demand of a member. Stock companies being similar in organization to corporations, it sometimes happens that ineffectual attempts to create a corporation result in the formation of a stock company, if the company goes ahead and transacts business without its charter. If a corporation continues in business after its charter has expired, without renewal, it continues as a stock company. The corporation is the outgrowth of the joint stock company. Though the two are organized and managed in the same way, the promoters of new organizations of the kind usually seek corporate charters, because of the freedom from personal liability enjoyed by the stockholders in a corporation. This is the principal reason for the practical disappearance of the joint stock company. CHAPTER XLIII INSURANCE 379. Introduction. Insurance is a form of contract by which one party, in consideration of a sum of money, agrees to reim- burse another party in the event of the loss of, or injury to, or death of, the subject matter specified in the contract. The party assuming the risk is called the insurer: the other party to the contract is called the insured. Since insurance is a contract, the ordinary rules of the law of contracts are applicable to it. The theory of insurance is that while a loss might overwhelm an individual, if the same loss is distributed among many, it can be borne without serious inconvenience to any one of them. The manner in which the loss is borne by the many is by their making relatively small periodical payments to create a fund from which any loss is paid when it occurs. Insurance is an economic necessity and performs an important function in commercial transactions. 380. Policies and Premiums. The contract by which the insurer agrees to compensate the insured in case of loss of the nature specified in it is called an insurance policy. The maximum amount which the insurer will pay in case of loss is called the face of the policy. The amount which the insured must pay for complete or partial indemnity in case of loss is called the premium. This premium, together with other premiums received from similar insurance policies, is used to form a fund sufficient to pay indemnities as required. The insurer ordinarily derives his profit from the business by using this fund and receiving interest for its use. 381. Kinds of Insurance. The principal kinds of insurance are: (1) Fire; (2) life; (3) marine; and (4) casualty. Fire insurance is a contract by which the insurer agrees to indemnify the insured against loss by fire. 320 INSURANCE 321 Life insurance is a contract to pay a designated person a sum of money in the event of the death of the person whose life is insured. Marine insurance is a contract to indemnify the insured against loss of property in ships and their cargoes by the perils of the sea. Casualty insurance is a contract to indemnify the insured against accidental injury, some policies insuring the person and others insuring property. FIRE INSURANCE 382. Form of Policy. The contract of fire insurance speci- fies: (1) The insurer; (2) the insured ; (3) the property insured ; (4) the conditions under which the insurer will bear the loss, if any ; (5) the term and premium of the policy, and (6) a maximum amount beyond which the insurer will not be responsible for loss. Contracts of insurance containing the last mentioned speci- fication are designated as open policies, and are the customary form of fire insurance. In the event of loss suffered under such a policy the insured must make claim showing the amount of damage actually suffered. If this be less than the total amount of the policy, he can only recover for the actual loss suffered. In no event can he recover beyond the maximum amount speci- fied in the policy. This form of policy is distinguished from a valued policy in which the value of the property to be insured is conclusively agreed to by the parties and in the event of loss no question is raised as to the amount of the damage, but solely as to whether the loss which the policy covered occurred. The valued policy is occasionally used in fire insurance, but is generally confined to life and marine policies. In many states the form of policies of fire insurance has been regulated by statute, the New York Standard form of policy being popular at present. Other states have made some variations in the form of policy required, but in general the New York form has been adopted as the standard fire insurance policy. 322 INSURANCE 383. Who May Be Insurer. At common law any person could become an insurer, but the exercise of this right is now quite generally limited in practice to corporations created and existing under special laws relating to insurance companies, and as the business of these companies is public in its nature, they are controlled and regulated for the protection of the public. In addition to the regular insurance companies, doing business for a profit, there are several so-called fraternal orders or mutual benefit companies, which instead of attempting to make a profit by the accumulation and use of premiums, aim to distribute the losses as they occur in the form of annual assessments among the members. 384. Who May Be Insured. The fire insurance policy being a contract, it is essential that the parties shall have capacity to contract. If a person under legal or physical disability enters into a contract of fire insurance the contract is voidable at his option like any other contract. Not only do the ordinary requirements of contracts apply to fire insurance policies, but in addition the insured must possess what is known as an insurable interest in the property insured. 385. Insurable Interest. A person is said to have an insur- able interest in property when he is so situated in reference to it that by its destruction he will suffer an actual loss of money or legal right, or incur a legal liability. If this insurable interest were not required to be present, an insurance policy would be a mere wager in which one person would virtually be wagering a small amount of money against a larger sum that a contingent event would happen. The insured could purchase a policy by payment of the premium on property which he did not own, and would be in a position to receive a specified amount in the event of its destruction. He would have no interest in its preservation, but would be concerned only with its demolition, and to permit the creation of such contracts would be antagonistic to public policy. If, however, the insured has an insurable interest in the thing insured, there is not so great a temptation on his part to destroy it for the purpose of recovering the insurance, and the contract is deemed valid in law. The doctrine requiring the presence of this insurable interest in the property insured is a reasonable one. INSURANCE 323 It is not necessary that the insured shall actually own the property insured, provided he possesses a valuable interest in it. He must possess some property interest, not purely speculative, but real, which is of such a nature as to make him concerned with its preservation. EXAMPLE A stockholder in the Merchants' Steamship Company, a corporation, purchased a policy of insurance on property belonging to the corporation, paying the premium. Upon the destruction of the property he sued the insurance company for the amount of his loss and was allowed to recover, his insurable interest in the property being found in the fact that as a stockholder in the company he was interested in the preservation of its property so that profits might be distributed in the form of dividends. Riggs vs. Insurance Company, 125 N. Y. 7. 386. Representations. A written application is often required for a fire insurance policy. A statement made in this application, or one made orally at the time of applying for the insurance, is called a representation. If a representation is material and is made falsely or fraudulently the policy will be void, for the insurer has a right to inquire into the circumstances of the risk which he is assuming and to rely on answers to his questions. It is presumed that the insurer will request informa- tion on all material points and that the insured is not bound to advance information except in answer to questions. The con- cealment of facts will not ordinarily render a fire insurance policy void unless it clearly appears that the concealment was a part of a general scheme to defraud the insurer. EXAMPLE The following question: "For what purpose is the building occupied and by whom?" was answered, "By the applicant; for the manufacture of lead pipe only," while as a matter of fact the building was also used to manufacture reels on which to wind the lead pipe. This was not a misrepresentation, how- ever, for it was immaterial and was reasonably included in the general business of manufacturing lead pipe. Collins vs. Insurance Company, 10 Gray (Mass.) 155. 387. Warranties are express promises or undertakings by the insured which are made a part of the policy. They differ from representations which are statements made preliminary to the contract of insurance and are merely inducements for entering 324 INSURANCE into it and which are not written into the policy. Being included as terms in the policy of insurance, warranties have the effect of conditions precedent to liability under the contract and the contract may be avoided if they are not fully performed. A representation need only be substantially correct, and it avoids the policy only if false on so material a point that it actually induced the company to enter into the contract. On the other hand, a warranty must be exactly performed, and its materiality cannot be questioned, since the parties have made it one of the conditions of the contract. Among the usual warranties included in fire insurance policies are clauses prohibiting an increase in the hazard of the risk by changes in the subject matter, prohibiting a change of ownership, the keeping or using of dangerous articles on the premises, the permitting of the premises to become vacant and unoccupied for more than a limited period of time, and the taking out of insurance in furtherance of an illegal act. \ EXAMPLES 1. An insurance policy, containing a clause that it did not insure property used in an illegal business, was taken out to cover a stock of liquor exposed for sale in territory where the sale of liquor was prohibited by law. Upon the destruction of the stock of liquor no recovery was allowed against the insurance company.' Kelly vs. Insurance Company, 97 Mass. 288. 2. A saw-mill was insured, the policy containing the usual clause pro- hibiting vacancy for more than ten days. Because of the breaking of a saw and the low stage of water, the mill was not used for more than ten days, although all the machinery remained and there was lumber to be sawed as soon as there was sufficient power. The court decided that the clause against vacancy and unoccupancy had not been broken. Whitney vs. Insurance Company, 72 N. Y. 117. 3. The owner of a house moved out for six months, leaving only a few pieces of furniture and occasionally sleeping there. This amounted to a vacation of the house, the attempted use being insufficient to keep the insur- ance alive. Insurance Company vs. Hamilton, 82 Md. 88. 388. Assignment of Policies. The New York Standard form of fire insurance policy and most other policies specifically require the consent of the insurance company to an assignment of the policy. This is in accordance with the general policy of the law to hold insurance contracts non-assignable without the consent INSURANCE 325 of the insurer, and void if assigned without the consent of the insurer. If the insurer consents to an assignment there is virtually a new contract formed between the insurer and the person to whom the contract is assigned. After an assignment with consent the policy will be unaffected by any future act of the original holder. EXAMPLE Smith owned certain property, insured it, sold it to Brown, and assigned the insurance policy to Brown with the consent of the insurance company. Brown then mortgaged back the property to Smith, and reassigned the policy to Smith without the consent of the company. Later Brown committed an act which violated the policy. Upon the destruction of the building by fire, Smith sued on the policy but was refused recovery, the company not having consented to the second assignment, and the act of Brown being a violation of which the company could take advantage. Smith vs. Insurance Company, 120 Mass. 90. 389. Proof and Recovery of Loss. It is generally provided in the insurance policy that notice of loss must be given immed- iately to the company, and that proofs of the nature and amount of loss must be presented to the company within a limited period, usually sixty days. EXAMPLES 1. After the great Chicago fire in 1871 notice of the loss by fire was not given to the company until five weeks after the fire. This was considered to be an "immediate notice of loss" under the peculiar circumstances, on account of the resulting general confusion at that time. Insurance Company vs. McGinnis, 87 111. 70; Insurance Company vs. Gould, 80 111. 388. 2. A delay of forty-eight hours in giving notice of the loss was a failure to comply with the provision requiring "immediate" notice, where there was no good reason for the delay. Brown vs. Insurance Company, 40 Hun. (N. Y.) 101. 3. A fire continued for several days and within sixty days after it was extinguished, but more than sixty days after it originated, proofs of loss were made to the company which had insured the building. This was a compliance with the provision requiring that proofs of loss be made within sixty days, as the time does not begin to elapse under this provision until the fire is extin- guished and the ruins sufficiently cooled to permit an examination of the loss. Wall Paper Company vs. Insurance Company, 175 N. Y. 226. The policy usually insures against "all direct loss or damage by fire." Fire is defined to me.an combustion plus light and heat, and destruction by chemicals so as to leave a charred surface, 326 INSURANCE but damage when there has been no flame is not a loss covered by a fire insurance policy. Similarly, damage caused by lightning without a resulting combustion is not a loss by fire. The policy also covers only hostile fires as distinguished from friendly fires, a friendly fire being one which was intended by the insured, but which incidentally produces certain unintended losses. These losses are not recoverable under a fire insurance policy. A fire may, however, originate as a friendly fire and get beyond control so as to become a hostile fire in which event any loss will be recov- erable from the insurance company. There can be no recovery from the insurer if the damage by fire is intentional on the part of the insured, but the insurer cannot refuse payment for losses on the grounds that the fire was caused by the carelessness of the insured. EXAMPLES 1. A flue in the drying room of a sugar refinery was left closed one night and the following morning the sugar was found to be ruined by smoke from the heating plant. No recovery was allowed as the only fire in the place was the one in the heating plant which had been intended. Austin vs. Drewe, 6 Taunt. (Eng.) 436. 2. Way built a fire in the stove to burn some papers, and the soot in the chimney became ignited and damaged the chimney. This loss was recoverable for the fire had become a hostile fire. Way vs. Insurance Company, 166 Mass. 67. The insurer is liable for losses which (1) follow directly from a hostile fire without intervening cause, and (2) which, although not directly following from the fire, are the natural consequences from it which result in the ordinary sequence of events. EXAMPLE Damages resulting to goods while they were being removed from threat- ened injury by fire, were promptly chargeable to the insurance company. White vs. Insurance Company, 57 Me. 91. 390. Special Right of Insurer Paying Loss. Upon the pay- ment of a fire loss the insurer acquires whatever rights the insured had, to have recovery against third persons for the loss. The insurer is said to be surrogated to the rights of the insured. Thus when one's house has been destroyed by a fire originating from the negligence of a third person, the owner may recover for his INSURANCE 327 loss either from the insurance company or from the person start- ing the fire. He cannot do both. If he recovers from the insur- ance company, the company then acquires the right to recover from the third person. If the owner should first recover damages from the third person and thereafter collect for the loss from the insurance company, the latter could, upon discovering the facts, recover from the owner the amount paid on the policy. 391. Double Insurance. In the event that the insured holds policies from a number of companies, he could in the absence of statute or special provisions in the policy collect his loss from any one of the companies, provided it did not exceed the max- imum of that particular policy. That company in turn could recover a pro rata share from each of the other companies. To avoid this circuitous procedure, it is customary for policies to provide that the company shall be liable for only that proportion of the loss which the amount of its policy bears to the total amount of insurance. REVIEW QUESTIONS 1. Armour applied for an insurance policy and in answer to a question on on the application blank as to the amount of insurance on his building stated that he had $10,000. The company issued him a policy for $3000, relying on this statement, but would have refused to do so had he carried a smaller amount of other insurance. As a matter of fact all his other insurance had expired, though he did not know it. Could the insurance company avoid its policy for $3000? Why? 2. Peyson insured his home for $5000. His wife left shortly afterwards to visit her parents and was absent for eight months. The furniture remained in the house and Peyson, who was a commercial traveler, slept in the house whenever he was in the city, which was frequently. A fire destroyed the house. The insurance policy contained a clause providing that the policy was void if the premises were vacant and unoccupied for more than ten days. Could Peyson recover for his loss? Why? 3. Jenkins took out an insurance policy on his home. He sold the house to Smith and, with the consent of the insurance company, assigned the policy to Smith. The policy provided that no gasoline should be used on the prem- ises with the consent of the owner. After the sale and assignment of the policy, Jenkins ordered a barrel of gasoline delivered to his house, and the deliveryman, not knowing of his removal, delivered the gasoline to the house occupied, by Smith. Before Smith discovered the gasoline, it ignited by 328 INSURANCE spontaneous combustion and started a fire which destroyed the house. May Smith recover from the insurance company? Why? 4. Johnson had taken out insurance on his barn. In order to drive out wasps he lighted a wisp of hay and thrust it into the dry timbers of the barn. Other hay in the vicinity was ignited and the barn destroyed. May Johnson recover for his loss from the insurance company? Why? 5. Murphy insured his store building and its contents against loss by fire. A fire occurred which caused the following items of damage: $3000 by destruc- tion of merchandise; $2000 by injury to the building; $500 by injury to goods from water in attempting to check the fire; $200 by goods stolen while being removed from the building; and $400 for medical services and nursing occa- sioned by his falling from a ladder while attempting to remove the goods'. The policy stated a maximum of $15,000. For what losses may Murphy recover? Why? CHAPTER XLIV INSURANCE Continued t LIFE INSURANCE 392. Form of Policy. Life insurance, being conditioned for the payment of a definite sum upon the happening of a particular event the death of the person whose life is insured requires a valued policy. It is immaterial whether the death of the person has occasioned a loss in a greater or less sum to the person to whom payment is to be made, for the valuation stated in the policy itself is the controlling factor. 393. The Types of Valued Policies which predominate in life insurance are: (1) Straight life, (2) limited payment life, and (3) endowment policies. The first two types are similar in that the insurance company contracts to collect a stated annual or semi-annual premium and to pay a definite sum to a designated person upon the death of the person whose life is insured. These two types differ only in the fact that under a straight life policy these payments continue until death, while under a limited payment life policy it is provided that the payment of premiums shall cease after a specified period, usually ten, twenty, or thirty yqars. The purpose of these policies is the protection of those depend- ent upon that person. These policies have given rise to the popu- lar statement that "in life insurance one must die to win," which merely means that the conditions of the policy are such that no direct benefit can be derived during the life-time of the person whose life is insured. They fill an economic function, however, in that they provide adequate protection against death without a sufficient estate to provide for those dependent. The endowment policy contains the provision that the insur- ance company will, at the end of a stated term, usually ten or twenty years, pay a stated sum to the person insured, regardless of death, or that if death occurs before that time the sum will be paid at the time of death. It is popularly designated as "invest- 329 330 INSURANCE ment" insurance, because it provides, not only for protection against death, but also for a return of the fund invested in the form of premiums. The premiums for this kind of insurance are much higher than for straight life insurance, because the company not only insures the life of the insured but promises a return at the end of a stated period if the insured does not die. 394. Parties. There are three parties to contracts of life insurance. These are: (1) The insurer, being the person or company assuming the risk; (2) the insured, being the person taking out the policy and with whom the contract of insurance is made; and (3) the beneficiary, being the person to whom the money is to be paid upon the death of the insured. The second person is generally person whose life is insured, though not necessarily so. The third person, the beneficiary, is sometimes eliminated as a separate person, by the insured taking a policy payable to himself or to his "estate," and in the event of his death the money is treated as any other part of his personal property, and distributed among his heirs accordingly. 395. Insurable Interest. The person paying the premiums must have an insurable interest in the life insured in order to create a valid contract of insurance. One, of course, has such an interest in his own life, and a creditor also has an insurable inter- est in the life of his debtor to the extent of the debt. A partner has an insurable interest in the life of his co-partner, and a child, if dependent on a parent for support and education, has such an interest, as also has a parent if dependent upon his child for support. A married person has an insurable interest in the life of his wife or her husband. In life insurance it is sufficient if this interest exists at the beginning of the policy. (In fire insurance an insurable interest must continue throughout the life of the policy.) Blood relationship is strong proof of an insurable interest, though it is not conclusive, and the rule is generally observed, except in New Jersey, where the doctrine of insurable interest is immaterial in life insurance policies, that there must be some INSURANCE 331 pecuniary interest, not wholly contingent and remote, in the person whose life is insured. If an applicant for life insurance has paid premiums but no insurance has been effected, as would be the case if the company should show that he had no insurable interest, he may as a rule recover the premiums paid, unless he has been guilty of fraudulent misrepresentation. This is because the consideration has failed. If, however, the risk has in fact attached, although it has after- wards terminated, and the insured has therefore had some benefit from the contract, he cannot recover the premiums. This might happen if the insured has violated some term of the policy so as to give the insurer the right to cancel the policy. EXAMPLE A college which had received many gifts from its founder, purchased a policy of insurance on his life, paid the premiums, and on his death claimed the amount of the policy. Its right to receive this was denied by the courts, as the college had no insurable interest in the life of its founder, there being a mere speculative expectation of future advantage. Trinity College vs. Insur- ance Company, 113 N. C. 244. As to Beneficiaries. The general rule is that the beneficiary of a life insurance policy does not need to possess an insurable interest in the life of the insured. This is because the beneficiary is not a direct party to the contract. The contract exists for his benefit, but it was created between the insurer and the insured, and an insurable interest in the life insured, possessed by the person contracting, is sufficient. 396. Assignment of Policies. Policies usually contain provisions in reference to their assignment, and when they do, the provisions are binding. It is no uncommon thing for policies to be assigned for security or otherwise, and the usual require- ments are that notice to the company and its assent to the assign- ment are necessary to validate it, and in addition there must always be a delivery of the policy to the assignee. An invalid or unauthorized assignment of a policy does not destroy its validity, but is a mere nutlidity, and leaves the insurance money payable to the parties originally designated in the policy. 332 INSURANCE 397. Representations and Warranties. The same general principles as to representations and warranties apply in life insurance as apply in fire insurance. It is sufficient if the answers to questions in the application blank are stated with substantial accuracy, unless there is actual fraud, and words and phrases are given their ordinary meaning. EXAMPLE The question, "To what extent do you use alcohol?" was answered, "None." The policy could not be avoided by the company for misrepresen- tation by showing an occasional use. Grand Lodge vs. Belcham, 145 111. 308. Nor will the falsity of volunteered information avoid the pol- icy unless it was both material and relied upon by the company. EXAMPLE The question, "To whom do you wish your insurance payable in the event of death?" was answered, "To my wife, Emily Louise Vivar." This woman had not yet become the applicant's wife, but this did not avoid the policy, for the information was not material, and the beneficiary was sufficiently designated. Vivar vs. Supreme Lodge', 52 N. J. L. 455. It is customary to incorporate answers to questions regarding the physical condition and health of the applicant in the policy of insurance. Statements so made are warranties and must be substantially true or the company may refuse to perform its contract. The good faith of the applicant will be insufficient, if the statement was actually false. EXAMPLES 1. Grattan applied for a policy of life insurance, naming his brother as beneficiary. He answered an inquiry on the policy as to the condition of his health, by stating that he had "good health." Upon his death his brother sought to recover the insurance money and the company sought to avoid the policy by showing that Grattan had dangerous symptoms at the time of issu- ance of the policy and was not in good health. The brother was permitted to recover, for the term "good health" refers to the general condition in which one believes oneself. Grattan vs. Insurance Company, 92 N. Y. 274. 2. Yung stated in answer to a question in a policy that he did not have Bright's disease. As a matter of fact he was in an advanced stage of the disease, though he did not know it. The company could avoid the policy. Insurance Company vs. Yung, 113 Jnd. 159. INSURANCE 333 Incontestable clause. Most insurance policies provide that after a stated period, usually one or two years from the issuance of the policy, the company cannot avoid the policy on the ground of misrepresentation or breach of warranty by the applicant at the time of the issuance of the policy. This is to protect the policyholder, and is based upon the idea that the company should discover any facts which it intends to take advantage of within that time and should not be permitted to allow the insured to continue paying premiums if the policy is to be avoided. By this clause the company waives all defenses, except that of insurable interest, which is a requirement imposed by public policy and cannot be waived. 398. Payment of Premiums. It is usual for insurance pol- icies to contain a clause requiring premiums to be paid on or before a certain fixed date. If the company should accept an overdue payment of premium, the right to object to the delin- quency is waived. The amount of the premium in life insurance is based upon tables of average life of persons of the age of the applicant, called mortality tables. The premium is increased with the age of the applicant. 399. Deaths Covered by Policy. Not all deaths are covered by a life insurance company, among the usual limitations being that the company shall be relieved from paying insurance if the insured is executed as a criminal by the state, or is killed while engaged in the commission of a crime. Much confusion has resulted over the question as to the liability of an insurance company to pay for death by suicide. The American courts have generally allowed recovery for death by suicide on the ground that the person committing the act of self-destruction is insane at the time, and is not committing the act for the pur- pose of defrauding the company which has insured his life. If it be shown, however, that the taking out of the insurance was a part of a fraudulent scheme, payment may be successfully contested. It is now customary for policies to provide that they are incontestible in the event of suicide committed at any time after three years from the time of their issuance. 334 INSURANCE CASUALTY INSURANCE 400. Casualty Insurance includes a great variety of policies, covering many different forms of risks. The condition upon which the insurance company agrees to pay for a loss is that some accident shall injure the person or property of the insured. The form of policy may be either open or valued, the latter being often adopted in the case of personal accident insurance an agreed valuation being fixed for certain injuries, as the loss of a limb, the loss of an eye, or death. New forms of casualty insurance are being constantly created to satisfy the demands of the commer- cial world, which through this medium seeks protection against the uncertainties of trade and commerce. Personal Accident Insurance. This is insurance by which the insured is protected against accidents causing him personal injury. The amount of premium is regulated by the hazard incident upon the business in which the insured is engaged. The indemnity is conditioned for payment upon circumstances resulting from an external, violent, and accidental cause. Thus a death by accidentally inhaling gas, or by drowning, is the result of an external cause, as is illness caused from poisons. Violent causes may include even slight physical injuries, such as the sting of a bee, the contact of an injurious substance with the skin, resulting in blood poison, and even' an injury resulting from fright. Accident policies usually provide a complete list of payments which will be made by the company upon the happen- ing of specified events, and as the forms of policies differ mater- ially, no valuable generalizations can be made. Employers' Liability Insurance is designed to protect employ- ers against liability for injuries sustained by workmen in their employ. The agreement on the part of the company is to indem- nify the insured, in the event that he becomes legally liable to pay damages, and to undertake to make all legal defense necessary. Title Guaranty Insurance is a means popular in the larger cities, of protecting the purchasers of land against defect in the title previous to their ownership. The insurance company, through its attorneys, investigates the title and then guarantees, or insures it, against defects. INSURANCE 335 Plate Glass Insurance protects the owner of glass windows against loss by breakage, the insurer of the glass usually replacing it upon breakage. Steam Boiler Insurance is designed to protect the owner or occupant of a building against immediate loss or damage caused by the explosion, collapse, or rupture of a boiler, and protects the insured against personal responsibility to others by reason of such breakage. Fidelity Insurance protects employers against the dishonesty of their employees, or against the wrongful acts of others occupy- ing positions of trust. Credit Insurance protects the business man against loss caused by the dishonesty or insolvency of his debtors. Burglary Insurance protects against loss by theft. In addition to these many forms of casualty insurance, new forms are constantly being devised, such as Automobile Insur- ance, Rent Income Insurance, Insurance against Sickness. The premiums vary with the nature of the risk. Hail and Cyclone insurance is popular among farmers, protecting them against damage to crops by these causes. Many of these forms of insurance are issued by mutual companies in which the fund for the payment of losses is collected by annual assessments upon the members, but in nearly every form it is also possible to find an insurance corporation which will assume the risk upon the advance payment of an annual premium. REVIEW QUESTIONS 1. Ames, a creditor of Bates, took out an insurance policy on Bates' life for $15,000. Bates at that time was indebted to Ames for $1200. What objection, if any, might be made to this policy and by whom? 2. Sarah Innes, an orphan, was reared by George Carpenter. She was never legally adopted by him, however, although he paid her various expenses, including a course in a university. When she was twenty-two, she insured Carpenter's life for $20,000, payable to her on his death. What objection, if any, might be made to this policy and by whom? Why? 336 INSURANCE 3. Paterson insured the life of a woman to whom he was married, and whom he supposed to be his wife. As a matter of fact she had another husband living from whom she had not been divorced, so that the marriage to Paterson was a nullity. Upon her death may Paterson recover the amount of the policy? Why? 4. Wilkinson in answer to the following question in an application for life insurance, "Have you ever met with any accidental or serious injury, and if so, what?" answered "No." The company, when sued for the insurance money after his death, defended on the ground that he had, several years before taking out the policy, fallen a considerable height from a tree and was sick for two weeks at the time, but that this in no way contributed to his death. May the beneficiary recover? Why? CHAPTER XLV REAL ESTATE ESTATES 1 . As to Length 1. Inheritable, or estates in fee-simple {a. For power 2. * life; Bates, Call and Dale will own the entire property as joint tenants, all owning the same thing at one and the same time, and on the death of either his share going to the others, until finally the last survivor will own the entire estate in fee simple. 346 REAL ESTATE Or Ames may create a TENANCY IN COMMON Bates Call Dale Bates, Call and Dale, will in that event each own an undivided one-third interest in Whiteacre, but, unlike an estate in joint tenancy, upon the death of any one his share will go, not to the survivors, but to his own heirs, for the estate of each is a fee simple in an individed one third of the land. Or Ames may rent a portion of the land to Tupper for a TERM OF YEARS Lease to Tupper for 5 years Ames This is not an estate of inheritance, but merely a right of use for a term of years, and the title continues vested in Ames, subject to the outstanding right of Tupper to use the land. Or Ames may create a TRUST ESTATE Small and heirs as trustees Death of Arthur Arthur as beneficiary Arthur's heirs in fee simple He may do this by leaving Whiteacre by his will to Small and his heirs, as trustees, to hold the land for the use and benefit of Arthur Ames, and on the death of Arthur Ames, the title to vest forever in his heirs. Small and his heirs hold only a naked legal title. They hold this title only during the life of Arthur Ames. They have no right to the beneficial use or enjoyment of the land. CHAPTER XLVI REAL ESTATE CONVEYANCES 416. How Title is Transferred. With the nature of the various estates in land common in the United States in mind, the different instruments of conveyance, by means of which these estates may be transferred from one owner to another, will be considered. As the estates themselves have their origin in the feudal system, so the instruments of conveyance were also taken from the same military age, and this fact accounts for much of the general form and phraseology of these instruments. Title to land may be transferred from one owner to another by either (1) descent, or (2) purchase. Title by descent is acquired when the owner dies and the estate of which he was the owner passes to his heirs. Title by purchase is acquired by me j Alabama 1 67 20a Montana 5 8 HU- Alaska 6 67 10 Nebraska 4 S 5 Arizona 4 5 Nevada 41 6 Arkansas 3 S 10 New Hampshire 6 6 tn 20 California . 7-4 4r S New Jersey 6 6 ?0 Colorado 6 6 6d New Mexico 4 6 7 Connecticut 6 6 New York 6 6 ?0tr Delaware 6V 20 North Carolina. 3 lOo District of Columbia. . ^ North Dakota. . . 6 6 10 Florida 7 5 ?0 Ohio 6 1S Georgia 4 61 7 Oklahoma . . 3 S S Idaho 4 S 6 Oregon 6 10 Illinois S 10 20e Pennsylvania 6 ?0 Indiana. . . . . 6 10 Rhode Island 6 6 ?0 Iowa ... S 10 20f South Carolina . . . 6 6 70 Kansas s S South Dakota 6 67' Kentucky S* s 15 Tennessee 6 6 10 Louisiana 3 5 10 Texas 4 10 Maine 6 6 20 Utah 4 6 8 Maryland 3 12 Vermont 6 6 8 Massachusetts 6 67 20 Virginia Sj 103 Michigan 6 67 10 Washington 3 6 6 Minnesota 6 6 10 West Virginia S 10 10 Mississippi 3 6 7 Wisconsin 6 6? Missouri. . . S 10 10 Wyoming 8 10 10 (a) J. P. judgment 6 yr. (6) 3 yr. unless both parties are merchants. (c) 2 yr. if executed outside of state, (d) 20 yr. on judgments rendered in Court of Record, (e) J. P. judgment 10 yr. (/) 10 yr. if not in Court of Record in state, (g) 5 yr. if between merchants, (h) 12 yr. if under seal, (i) 20 yr. if under seal, (j) 10 yr. if under seal, (k) J. P. Courts 5 yr. (/) 2 yr. if incurred out of state, (m) 20 yr. on mortgage. () Inferior courts 6 yr. (o) 7 yr. if not in Court of Record, (p) May be kept alive indefinitely alive by execution once in five years, (g) 20 yr. if execution made and returned. 381 382 APPENDIX The following table shows the rates of interest and penalties for usury in the several states. States and Territories v a & n M E J Highest Rate Allowed Penalty for Usury Alabama 8% 8% Forfeiture of all interest. Alaska 8% 12% Loss of interest if uncollected; forfeiture Arizona 6% 12% of double the interest if collected. Same as Alaska. Arkansas 6% 10% Forfeiture of principal and interest. California . . 7% any None. Colorado 8% any None. Connecticut 6% 12% Forfeiture of principal and interest; fine. Delaware 6% 6% Forfeiture of sum equal to amt. loaned. Dist. of Columbia. . . Florida 6% 8% 6% 10% Forfeiture of all interest. Forfeiture of all interest. Georgia 7% 8% Forfeiture of excess of interest. Hawaii 8% 12% Forfeiture of excess of interest. Idaho 7% 12% Forfeiture to debtor of balance clue and Illinois 5% 7% to state 10% per year on contract. Forfeiture of all interest. Indiana 6% 8% Forfeiture of excess of interest over 6%. Iowa 6% 8% Forfeiture of interest and costs; debtor Kansas 6% 10% pays 8% to school fund. Forfeiture of double the excess over 10%. Kentucky 6% 6% Forfeiture of excess of interest. Louisiana 5% 8% Forfeiture of all interest. Maine 6% any None. Maryland 6% 6% Forfeiture of excess of interest. Massachusetts. . . . 6% any Forfeiture of all over 18% on loans Michigan 5% 7% under $1,000. Forfeiture of all interest. Minnesota 6% 10% Forfeiture of interest. Mississippi 6% 8% Forfeiture of interest. Missouri. 6% 8% Forfeiture of all interest and security. Montana 8% any None. Nebraska 7% 10% Forfeiture of all interest. Nevada . .* 7% any None. New Hampshire. . . . New Jersey 6% 6% 6% 6% Forfeiture of three times the excess of interest. Forfeiture of all interest and costs. New Mexico 6% 12% Forfeiture of double excess; fine. APPENDIX 38J States and Territories 4) OJ K "c3 M JS Highest Rate Allowed Penalty for Usury New York 6% 6% Forfeiture of principal and interest. North Carolina.... North Dakota 6% 7% 6% 12% Forfeiture of double the amount of interest. Forfeiture of all interest. Ohio 6% 8% Forfeiture of excess of interest over 8%>. Oklahoma 6% 10% Forfeiture of all interest. Oregon 6% 10% Forfeiture of interest and principal. Pennsylvania 6% 6% Forfeiture of excess of interest. Philippine Islands. . Porto Rico .... 6% 6% any 12% Loss of entire interest. Rhode Island 6% any None. South Carolina . . . 7% 8% Forfeiture of all interest. South Dakota 7% 12% Forfeiture of all interest; also a mis- Tennessee . . . 6% 6% demeanor. Forfeiture of principal and interest if Texas 6% 10% in writing; otherwise, forfeiture oV interest. Forfeiture of all interest. Utah 8% 12% Forfeiture of principal and interest. Vermont 6% 6% Forfeiture of excess of interest. Virginia 6% 6% Forfeiture of all interest. Washington . . 6% 12% Loss of interest if uncollected; forfeiture West Virginia . . 6% 6% of double interest if collected. Forfeiture of excess of interest. Wisconsin 6% 10% Loss of all interest; forfeiture of treble Wyoming 8% 12% interest if collected. Forfeiture of interest. 384 APPENDIX EXEMPTIONS In most states debtors are protected by laws which exempt certain pro- perty from seizure by creditors. The property so exempt usually includes homestead, personal property specified as to kind or value or both, and part or all of the wages of the debtor for a specified period. Homestead and other exemption laws can usually be waived by special agreement and exemp- tions are generally not valid as against the purchase price of the property exempted. In some states exemptions are not valid against properly recorded mortgages, even in the absence of waiver. The following list of exemptions by states is as nearly correct as these can be stated in abbreviated form. The statutes of the various states should be consulted for exact statements of details. Alabama Homestead, house and lot in city or 160 acres in country; must not exceed $2000. Personal property, $1000 and specified items. Wages, $25 a month. Alaska Homestead, ^ acre in city or 160 acres in country; must not exceed $2500. Personal property, specified items with various limits of value. Earnings for 60 ( days preceding levy when necessary for the support of family. Arizona Homestead, $4000; claim must be recorded. Personal property, specified items with various limits of value. Half of earnings for 30 clays preceding levy. Arkansas Homestead, 1 acre in city, 160 acres in country, not exceeding $2500 in value; or 5 acre in city or 80 acres in country, any value. Per- sonal property, married man $500; single man $200 and wearing apparel. Laborer's wages for 60 days preceding levy. California Homestead, $5000. Personal property, specified items in varying amounts. Wages for 30 days if necessary for support of family. 2 of wages is liable for debts for necessities. Colorado Homestead, $2000; claim must be recorded. Personal property, specified items in varying amounts. 60% of wages. All wages if S5 per week or less. Connecticut Homestead, $1000; claim must be recorded. Personal property, specified items in varying amounts. Wages, $50. Delaware Homestead, none. Each county has a special law for exemp- tions of personal property. District of Columbia Personal property, specified items in varying amounts. Wages for 2 months preceding levy, not to exceed $100 per month. Florida - Homestead, % acre in city, 160 acres in country. Personal prop- erty, $1000 to heads of families residing in the state. All wages. Georgia Homestead, the state constitution allows $1600 realty or person- alty, or both; the statutes allow 50 acres of land and five acres additional for every child under 16. Personal property, specified items. All labor- ers' wages. Idaho Homestead, $5000 for head of family; $1000 for single person. Per- sonal property, specified items. Wages for 30 days. Illinois Homestead, $1000. Personal property, married, $400; single, $100. Wages, $15 a week for head of family. Indiana Homestead, $600, real or personal property, or both, to resident householders and resident married women. 1 month's wages, not ex- ceeding $25. APPENDIX 385 Iowa Homestead, \ acre in city, 40 acres in country, or any size if less than $500 in value. Personal property, specified items in varying amounts. Wages for 90 days. Kansas Homestead, 1 acre in city, 160 acres in country. Personal prop- . erty, specified items. Wages for 3 months preceding levy. Kentucky Homestead, $1000. Personal property, specified items. Wages 90% if $75 per month or less; $67.50 if more than $75 per month. Louisiana Homestead, $2000 if not over 160 acres; claim must be regis- tered. Personal property, specified items. All wages of laborers. Maine Homestead, $500; must be recorded. Personal property, specified items. Wages, $20, not good as against debts for necessities. Maryland Personal property, $100. Wages to the amount of $100. Attachment does not reach wages accruing after date of levy. Massachusetts Homestead, $800; claim must be recorded. Personal property, specified items. Wages, $20; only $10 against debts for necessities. Michigan Homestead, $1,500; must not exceed 1 lot in city or 40 acres in country. Personal property, specified items in varying amounts. Household goods, $250. Stock in trade, $250. Wages, householder, $8 to $30; single man, $4 to $15. Minnesota Homestead, 1 lot in city, \ acre in town, 80 acres in country. Homestead not allowed single men unless they actually reside on the lot. Personal property, specified items in varying amounts. Wages for 30 days preceding levy, not exceeding $35. Mississippi Homestead, $2,000; if in the country must not exceed 160 acres; may be increased to $3000 by filing homestead declaration. Per- sonal property, specified items in varying amounts. Wages, $50 per month to head of family, except when due for board and lodging. Missouri Homestead, $3000 in city; $1500 in country and small towns. Personal property, specified items and $300 in personal property or real estate. 90% of wages for 30 days. Montana Homestead, $2500. Not to exceed \ acre in city or 160 acres in country. Personal property, specified items. Wages for 45 days. Nebraska Homestead, $2000; not to exceed 2 lots in city or 160 acres in country. Personal property, specified items; also $500, if debto r has no land. 90% of wages of head of family. Nevada Homestead, $5000. Personal property, specified items. Wages not exceeding $50 earned in calendar month during which process issues. New Hampshire Homestead, $500. Personal property, specified items. Wages, $20, not good as against debts for necessaries. New Jersey Homestead, $1000 if advertised and recorded. Personal property, $200 and wearing apparel. All wages. New Mexico Homestead, $1000. Personal property, specified items. Wages for 3 months except for necessaries. New York Homestead, $1000, provided deed creating the estate states that property is to be held as a homestead. Personal property, certain specified items and $250 worth in addition. Wages of self and minor children for 60 days if necessary for support of family. North Carolina Homestead, $1000. Personal property, $500. Wages for 60 days if necessary for support of debtor's family. North Dakota Homestead, $5000; if widow or widower occupy premises the same. Personal property, specified items. Wages, none. 386 APPENDIX Ohio Homestead, $1000, $500 in lieu of homestead. Personal property, specified items. Wages, personal earnings of self and minor children earned within 3 months if necessary for support of family. If debt is for "necessaries," 10% of personal earnings is not exempt. Oklahoma Homestead, 1 acre in city or town, 160 acres in country, in- cluding improvements to $5000. Personal property, specified items. "Current wages for 90 days" to head of family. Oregon Homestead, $1500, but in no instance less than 1 lot in city or town or 20 acres in country. Personal property, specified items. 30 days' wages not exceeding $75 if necessary for support of family. When debt is for family expenses within last 6 months, 50% of wages not exempt. Pennsylvania Homestead, none. Personal property, $300; not limited to personalty, but may be allowed out of real estate. Wages, all. Rhode Island Homestead, none. Personal property, household furniture to $300, working tools, books to value $300, professional library and sev- eral other items. Wages, $10 exempt except as against debts for neces- sities; salary and wages of wife and minor children. South Carolina Homestead, $1000. Personal property, $500 to head of family; $300 to single man. Wages for 60 days, if family depends on them. South Dakota Homestead, 1 acre in town or city, 160 acres in country, value $5000. Personal property, $750 to heads of families; $300 and specified items to single persons not heads of families. Wages for 60 days if necessary to support of family. Tennessee Homestead, $1000. Personal property, specified items. Wages 90%, up to $40. Texas Homestead, $5000 lot in city and improvements or 200 acres and improvements in country. Personal property, specified items. Wages, all. Utah Homestead, $1500, also $500 wife, and $250 each child. Personal property, specified items not exceeding $1000. Wages, 3 wages for 30 days, $30 per month if wages be less than $2 per day. Vermont Homestead, $500. Personal property, specified items. Wages, $10. Virginia Homestead. $2000. Personal property, specified items. Wages, not exceeding $50 per month. Washington Homestead, $2000; homestead declaration necessary. Per- sonal property, specified items; to householder $1000 in addition. Wages, current wages to the amount of $100, if family is dependent thereon, with certain exceptions. West Virginia Homestead, $1000. Personal property, specified articles. Wages, none. Wisconsin Homestead, \ acre in town or 40 acres in country, if less than $5000. Personal property, specified items. Wages, 3 months not exceed- ing $60 per month. Wyoming Homestead, $1500. Personal property, $800 to married man; $300 to single man; also wearing apparel. Wages, ^ of wages for 60 days if necessary for support of family. GLOSSARY Abandonment. The relinquishing of salvage to the insurers with a view to claiming the full amount of insurance. Abatement. Discount or reduction in price. Acceptance. The agreement (usually written on the bill) by the drawee of a draft to comply with the request of the drawer. Accord and satisfaction. The settlement of a dispute by an executed agree- ment between the parties whereby the aggrieved party takes something different from his claim. Acknowledgment. The avowal of the genuineness of one's signature to a document. Acquittal. A judicial discharge; a verdict of not guilty. Action. A legal process or suit. Act of God. An inevitable accident against which ordinary prudence could not guard. Adjudication. A judicial decision or sentence. Administer. To settle, as an administrator, the estate of a person dying without making a will. Administrator. One appointed by a competent authority to settle the estate of a person who died without leaving a will. Advancement. A payment made to a child by a parent to be considered as a part of his share of such parent's estate. Affidavit. A statement or declaration sworn to before some one authorized to administer oaths. Affirm. To make a solemn promise to tell the truth under the penalties of perjury. Alias. A Latin word meaning otherwise. Alibi. Elsewhere. Alien. A foreigner who is not naturalized in the country of his residence. Alienate. To transfer property, particularly real property. Alimony. The allowance granted to a woman on a legal separation from her husband. A mensa et thoro. From table and bed; a limited divorce. Appraise. To set a price upon. Appurtenance. Something belonging to another thing and which passes with it as an incident such as a right of way. Arbitration. The trial of a cause in controversy by an unofficial person or persons chosen by the contestants. Arraign. To call to answer to an indictment before a court. Assault. An attempt to do corporal injury to another. Assign. To make over to another. Assignee. One to whom a right or property is made over 387 388 I.LOSSAKY Assignor. One who transfers an interest in property. Assigns. Persons to whom property mentioned in a deed may be assigned. Attach. To take by a writ of attachment. Attestation. The act of witnesses in avowing the execution or signature to a deed or other document. Attorney in Fact. An agent appointed by a power of attorney. Bail. To release on security. Bailee. One to whom the goods of another are delivered. Bailment. The delivery of goods to another in trust for a certain purpose. Bailor. One who delivers goods in trust. Bankrupt Law. A law by which if an insolvent debtor assigns all his property to another to be used for the common benefit of his creditors he is forever discharged from further payment of his existing debts. Barter. To traffic by an exchange of commodities. Battery. The unlawful beating of another. Beneficiary. One who receives an income from a fund or an estate. Betterment. Improvements made on real estate. Bigamy. The offense of contracting a second marriage while an undivorced husband or wife still lives. Bill. A formal complaint or petition to a court of equity. A proposed law. Bill of Lading. A written contract of a transportation company acknowledg- ing the receipt of goods and undertaking" to carry and deliver them to a certain place for a consideration. Bill of Sale. A writing under seal conveying the title to personal property. Bona fide. In good faith. Bond. A writing under seal agreeing to pay a certain sum of money or perform a certain act. Burglary. The crime of breaking open and entering the dwelling or phu < of business of another with intent to commit a felony. By-law. A rule or law agreed upon by the members of a society or corporation for their action. Caveat. A warning or caution; an instrument securing to an inventor exclusive rights to his invention before the patent is granted. Cestuy que trust. The beneficiary in a trust. Chancery. A court of equity. Charge. To lay or impose a duty or obligation. Charter. A written instrument executed by the sovereign power granting a special provilege or exemption. Chattel. Any specie of personal property. Chattel Mortgage. A mortgage on personal property. Chose in Action. Any personal chattel of which one has not the possf --io;i but a right of action to reduce it to possession. Chose in Possession. Personal property in possession. Civil Law. The Roman law; the municipal law. Client. One who employs an attorney. Collateral. Side by side and not in a direct line. GLOSSARY 389 Collateral Security. An obligation given to guarantee the performance of another contract. Common Law. Those customs, rules and decisions that in consequence of long usage have now come to have the full force and effect of law. Concurrent. Running side by side in point of time. Condition Precedent. See page 53. Condition Subsequent. See page 53. Consanguinity. Relationship by blood or birth. Conservator. A guardian. Consideration. The motive; the legal inducement to enter into a contract. Contract. An agreement between two or more competent persons based on a consideration to do or not to do some lawful thing. Copyright. The exclusive right given an author to his production. Corporation. An artificial person; a body of persons associated together by law and endowed with the power of acting for some purposes as a single individual. Coverture. The legal condition of a woman during marriage. Curtesy. The life estate a husband has in real property of his deceased wife when there has been a. child born capable of inheriting the same. Covenant. A mutual agreement in writing. Crime. A violation of law, punishable by death, a fine, or imprisonment. Damages. A money satisfaction for an injury. Declaration. The plaintiff's cause of action in a suit, set forth in a legal and orderly manner. Decree. The judgment or decision of a court of equity. Deed. A writing, signed, sealed and delivered. De facto. In fact; in reality. Default. An omission to do that which ought to be done. Defendant. The party against whom an actions brought. Demise. The conveyance of real property. Demur. To pause; to raise an objection. Deponent. One who makes oath to a written statement. Devise. To grant by will, mostly used of real estate. Devisability. Want of the legal capacity to do a thing. Dishonor. Refusal or neglect to accept or pay a draft. Distrain. To seize the goods of a tenant for payment of rent. Domicile. The habitation of a person. Dower. The estate a widow has in the real estate her husband owned during marriage. Draft. An order or request drawn by one party on another for a certain sum of money. Due Bill. An acknowledgment of a debt in writing. Duress. The state of compulsion in which a person is illegally influenced to incur a liability or release a claim. Earnest. Part of the purchase price paid to evidence the ratification of a bargain. 390 GLOSSARY Easement. A privilege, such as a right of way. Eminent Domain. The right of a sovereign body to take private property for public use. Emblements. Growing crops. Entailment. The act of giving an estate and directing its future descent. Equity. A system of jurisprudence supplemental to law. Equity of Redemption. The estate still held by a mortgagor. Escheat. The falling back or reverting of the title to lands on the death of the owner leaving no heirs. Escrow. A deed or other written instrument delivered to a third person to be held till some certain contingency happens and then delivered to the grantee. Estate. The quantity of interest a person has in property. Estop. To bar or hinder by some rule of law. Execution. That writ which empowers an officer to execute a judicial sentence; the signing, sealing and delivering of a deed. Executor. One who is named in a will to execute its provisions. Ex post facto law. A law which makes an act done before its passage a crime. Fee Simple. An absolute estate of inheritance free from any conditions. Fee Tail. An estate of inheritance descendible to a certain line of heirs. Felony. A crime punishable by death or imprisonment. Feme Sole. An unmarried woman. Foreclosure. A legal proceeding which extinguishes a mortgagor's estate. Franchise. A right or privilege. Freehold. Any estate of inheritance or a life estate. Grant. To convey by deed. Guarantor. One who agrees to warrant the performance of some act by another. Guardian. One named to have the care and custody of the person or property of one legally incapable of managing his own affairs. Heir. One who inherits. Heirloom. Any chattel which by law descends with land to the heir. Hereditament. Anything which may be inherited. Incorporate. To form into a corporation. Indorse. To put one's name on the back of an instrument with intent to evidence a contract. Infant A person not of age. Injunction. A writ issued by a court of equity prohibiting a person from doing a certain thing. Inquest. A judicial inquiry. Intestate. Dying without making a will. Joint Stock Company. A partnership partaking of some of the features of a corporation. Joint Tenancy. That peculiar method by which two or more persons hold real property in common, the share of one to go, on his death, to the survivor or survivors. GLOSSARY 391 Judgment. Decision of a court. Jurisdiction. The legal authority of a court. Law Merchant. A system of rules deduced from the customs of mer- chants, by which trade and commerce are regulated. Lease. The instrument by which an estate for years is conveyed. Legacy. A gift of goods and chattels by will. Legal Tender. That money which the law authorizes a debtor to offer in payment of a debt. Lien. A right to retain another's property until a demand is satis- fied; a charge upon real or personal property. Liquidated Damages. That sum of money agreed upon in advance as damages in case of a breach of an agreement. Malfeasance. A wrongful act. Mandamus. A writ issued by a superior court to an inferior, or to an officer, commanding something to be done. Merger. The absorption of one contract by another. Misdemeanor. An offense punishable by a fine only. Mortgage. A deed with a clause of defeasance; a pledge. Negotiability. That property of certain contracts by virtue of which when they are transferred under certain conditions, they pas* free and clear of defenses. Notary Public. A public officer before whom acknowledgments of deeds, oaths, etc., may be taken. Ordinance. A law of a minor municipal corporation. Parol. By word of mouth. Parol Contract. Any contract not under seal. Plea. The formal allegation of fact which a defendant makes to the plaintiff's declaration. Pledge. Anything deposited as security. Politic. Promoting good policy. Posthumous. Born after the death of the father. Post mortem. Made after death. Power of Attorney. The sealed instrument by which one appoints another to act in a given matter for him. Presumption. An inference of law from certain facts. Primogeniture. The right of the eldest son to inherit his ancestor's estate to the exclusion of younger sons. Probate. To prove; to prove a will. Property. The exclusive right one has to anything. Protest. An act by a notary done for want of payment of a note or dratt or the acceptance of a draft. Proxy. A substitute. Quantum meruit. So much as it deserves. Quantum valebat. So much as it is worth. Quasi. As though. Quo Warranto. By what right. 392 GLOSSARY Real Estate. Property consisting of lands and all that is permanently at- tached thereto. Realty. Real estate. Recognizance. A bond. Recoup. To keep back part as a claim for damages. Release. A relinquishment of some right; a quit claim deed. Remainder. An estate to take effect after another's estate is determined, Replevin. An action to recover the possession of goods wrongfully taken and detained. Residuary Devisee. The person named in a will to have the balance or remainder after all other devisees are paid. Salvage. A compensation for saving a vessel from wreck. Scilicit. To- wit; namely; abbreviated in legal documents to ss. Sentence. The judgment of the court in a criminal case. Specialty. A contract under seal. Specific Performance. An action in a court of equity to compel a party to perform his contract in precise terms. Statute. A law made by the legislature. Subpoena. A writ commanding the attendance of a person in court under penalty. Subrogation. The substitution of another as a creditor. Summon. To give notice. Tenant. One who has the temporary possession of the lands of another. Tender. An offer of a chattel or money in satisfaction of a debt. Tenure. The mode by which one holds an estate in lands. Testament. A will. Testator. One who dies leaving a will. Tort. A wrongful act for which an action will lie. Trust Deed. A deed conveying real estate to another to be held in trust for the benefit of a third person. Unilateral. One sided. Usury. Illegal interest. Vendor. A seller. Verdict. The decision of a jury reported to the court. Vested. Fixed; already in force; not liable to be set aside by a contingency Waive. To relinquish. Warrant. To guarantee. Waste. The destruction done or permitted to houses or woods of an estate by the tenant thereof. Will. An instrument by which a person disposes of his property to take effect after his death. A 000 682 597 207