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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Conyngton, Thomas Title: Business law 2v Place: New York Date: 1920 MASTER NEGATIVE « COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED • EXISTING BIBLIOGRAPHIC RECORD tm4 ^»«>auaUir I Conyngton, Thomas. Business law; a workin^^ manual of evcry-day law, by Tlionuis Conyn^ton ... iM od. Xew ^'ork. The Ronald pross ronipaTiy, 1920. 2 V. 22'"^. f 'aRcd contimioiisly. 1. Commercial law .U. S. 2. !«i\\--U. S. IJI>rarv of Conpress ^ ITF1239.C63 1920 - UUJU' z. - ■ % CoiiyriRltt A SfiSfiW) ^ ,4- 20-73&f RESTRICTIONS ON USE: HLM SIZE • -K-^w? yv| V^ TECHNICAL MICROFORM DATA REDUCTION RATIO: . n>^ DATE RLMED : #fa IMAGE PLACEMENT: Ia/i^ IB IIB INITIALS: C ( TRACKING * : MSU Ml^^ ^ Mi,V\ OO^If RLMED BY PRESERVATION RESOURCES. BETHLEHEM. 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ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 2.5 mm 1234567890 ^ ^j^^%. ^^t^ 'iy '4' '^ 1— * i^a ro • • • cn o cn 3 3 z 3 3 n % ABCDE cdefghi 2.m c FGH jkim 3l n3 ^ ii CJ |i LMNOPQRS >qrstuvwxyz cn a> ^. 00 o^x ^-< 00 IM 8 cn< CT^X ^-< OOM -A# 8 ^%v ^/^f^ jOV^o C76\l fatt)tCitpof^tog«* LIBRARY School of Business \ ill IIM Pi m [f i ' \ Business Law A Working Manual of E very-day Law By THOMAS CONYNGTON Of the New York Bar; Author of " Corporate Organization and Management," " The Modem Corporation," etc. VOLUME I SECOND EDITION NEW YORK THE RONALD PRESS COMPANY 1920 Copyrigiit, 1918, by The Ronald Pbess Company Copyright, 1920, by •The Ronald Piess Company AU RigMs Raenti JL 150 C1U\ V* I. PREFACE Law and order are the necessary foundations for civilized life. A pastoral people with few possessions needs few and simple laws. A populous, modem state with complex social, industrial, and commercial relations requires intricate and far- reaching regulations. In this country the latter condition prevails, and our present legal system has not kept pace with our perhaps too rapid progress in other ways. Our system of laws is an inheritance from our Anglo- Saxon ancestors, supplemented by written constitutions and multitudinous legislative enactments. Much of our law is judge-made. Like our forebears, we revere precedents and decisions and have more of this kind of law than we know how to use. We have our federal courts and forty-eight separate state systems, all grinding out innumerable volumes of reports. In consequence, this source of law has become cumbersome and somewhat unmanageable. Beyond this we are subject to the Constitution of the United States with its eighteen amendments, as well as the constitutions of our individual states ; to the enactments of Congress and to those of our state legislatures ; to the ordinances of boards of alder- men; to the regulations of boards of health and education; and to the orders of many other boards, bureaus, commissions, and officials. With the multiplicity of regulation that all this entails, it requires no small amount of care and study to avoid unwitting entanglement in the far-extended meshes of the law. Yet from this unwieldy mass of law may be elicited cer- tain guiding principles that everyone should know— general rules that will guide us safely past most of the difficult places. **• lii i I \ IV PREFACE Knowing these, it is possible for a man so to shape his business course and his relations with his fellows as to have little to do with courts or lawyers. Courts and lawyers are necessary institutions — so are doctors and hospitals— but all of us prefer to avoid both so far as possible and so long as possible. It is the admirable theory of the law to secure right and justice to all men. The practical application of the law through the courts, however, does not always attain these ends. Some reasons for this are set forth in the following pages. Also suggestions are given as to how one may shape his conduct and manage his affairs in order to avoid the more serious legal difficulties. The man or woman who owns prop- erty, who does business and engages in affairs, should know the principles upon which our law is based, should know how to apply these principles to the more usual happenings, and should know when and how to employ "counsel learned in the law." The advice here given is, as near as may be, such as would be given by a conscientious lawyer who desired to keep his clients out of the courts, rather than to win cases. All men should know some law, and it is devoutly to be hoped that the day will come when even those who write romances and photo-plays will know enough law to avoid the pre- posterous legal situations that cause so much trouble to their heroes and heroines. To better adapt the book to the needs of those intending to become professional accountants, the C.P.A. examinations of the various states for the past five years have been ex- amined and, where necessary, the text has been expanded to cover all the more important questions. Many of the questions given in these examinations refer purely to local statutes, and answers must be found in the laws of the state in which the examination is held. In such cases the fact has been indicated. Other questions, outside the scope of this work, are apparently brought in by the examiners for the purpose of keeping quali- PREFACE V fied students from receiving the C.P.A. degree. This seems a hard thing to say but The Journal of Accountancy for October, 1919, expresses editorially the same opinion: Apparently some state boards in the past have been chiefly concerned with an effort to convince the public of their innate cleverness. They have presented questions which it would be ridiculous to expect a candidate to answer with- out reference to authorities, and as a result they have ex- cluded many men fully qualified to practice as public accountants. Out of this condition has grown the quite fre- quent allegation that accountants are trying to build up a close corporation by preventing newcomers. To assist students of business law, questions have been appended to each chapter. Some of these have been taken from C.P.A. examinations, some are intended to provoke in- quiry rather than direct answers, and others are the usual type of review questions. The author desires to acknowledge his indebtedness to Elizabeth A. Smart of the New York Bar for her valued collaboration on the first edition of this work; to W. J. Grange, of the New York Bar, for careful reading and helpful comment; to P. W. Pinkerton, of Indianapolis, for his many excellent suggestions and improvements in the text; to James H. Wilhoit, of the New York Bar, for assistance in pre- paring the chapter on bills of exchange; and to Katharine S. Keane, for careful and intelligent research in connection with the preparation of this edition and for good work in the compilation of the index. The author desires further to extend his thanks and testify his appreciation of all those interested readers throughout the country who by their questions and comments on the original text have enabled him to make the present edition more accurate and comprehensive than would otherwise have VI PREFACE been possible. He bespeaks for the present volumes a con- tinuance of their kindly interest Blackstone has said in his famous Commentaries that "the science of the law should in some manner be the study of every free citizen." If this work can make plain to its readers some of the practical features of the law under which we live, so that they may appreciate its virtues and know its faults, and from that knowledge may, by their influence and votes, strive to simplify its procedure and remedy its defiden- cies, the book will have served its end. Thomas Conyngton New York City, March i, 192a CONTENTS VOLUME I Part I— The Law of the Land Chapter I Evolution of Law . . . . . § I. Definition Page 3 2. The Origin of Law 3. Law and Liberty 4. Sources of J^w n The Written Law §5. Definition 6. Constitutional Government 7. The United States Constitution 8. Laws of Congress 9. State Constitutions 10. Constitutional Amendments 11. Constitutions that Legislate 12. Legislative Enactments 13. Statute Law 14. Subsidiary Laws ni The Unwritten Law (15. Definition IS 16. The Doctrine of Precedents 17. Court Reports 18. The Volumes of Reports 19. Citations 20. The Common Law 21. Law-Merchant and Commercial Law 22. Unconstitutional Laws 23. The Recall of Judges IV Law and Equity § 24. Remedial Law 25. Equity in the Legal Sense 26. Suits at Law and in Eqiiity 27. Bringing a Suit at Law 28. Trial at Law 29. Bringing a Siait in Equity 30. Appeals to a Higher Court 31. AdvisabiUty of Litigation 22 Criminal Law § 32. Criminal Procedure 33. Classes of Offenses Against the Criminal Law 34. Penalties vH 35 CONTENTS CONTENTS i IX Part II — Contracts Chapter VI Essential Features oi a Contiact $35. Introductory 36. Definition 37 Essential Features 38, Competency of Parties 39. The Subject Matter Must be Lawftu 4a The Law of Place ^ 41. The Subject Matter Must Exist 42. Agreement of the Parties 43. Oral Agreement 44. Consideration Pace 4» Yn How Contracts Are Made . . . § 45. Classification of Contracts 46. Oral Contracts .47. Written Contracts 48. The Statute of Frauds 49. Contracts Under Seal 50. Contracts of Record 51. Express and Implied Contracts 52. Quasi Contracts 53. Executory and Executed ContfBCts 54. Conditions Precedent and Subsequent 55. Void and Voidable Contracts 56. Drafting a Contract VIII Effect of Contracts . . . • §57. Illegal Contracts 58. Effect of Mistakes 59. Effect of Fraud 60. Duress 61. Undue Influence 62. Law as to Alteration 63. Interpretation of Contracts S^ 68 Chapter XII Actions on Contracts— General Rules § 73. Introductory 74. Specific Performance 75. Rules of Evidence XIII Tender of Payment or Performance . S 76. Definition 77. Time to Tender Performance 78. Extent and Kind of Tender 79. Acceptance of Tender XIV Joint and Several Contracts .... § 80. Contracts Made by More Than Two Parties Part III— Sales Page 103 III "5 XV Contracts to Sell § 81. Sales and Contracts to Sell . 82. Uniform Sales Act 83. What is Necessary to the Contract of Sale 84. The Agreement 85. Sales to Persons Incompetent to Contract 86. The Consideration 87. Nature of Subject Matter 88. Destruction of Subject Matter 89. Sales to Arrive 90. A Contract of Sale Must Be Legal 121 IX Assignment and Novation . §64. Assignment of Contracts 65. Novation X Discharge of Contracts § 66. Discharge by Performance 67. Discharge by Agreement 68. Discharge by Various Other Causes • • • 79 84 1 XI Enforcement of Contracts 1 69. Breach of Contract 70. Remedies for Breach of Contract 71. Law Governing Remedy 72. Statute of Limitations 93 XVI Passing Title 129 §91. Delivery 92. Selection Necessary to Delivery 93. When the Title Passes 94. Sales Without DeUvery 95. Conditional Sales 96. State Laws on Conditional Sales 97. Requirement of Affidavits to Conditional Sales Contracts 98. Rights in Illinois and Pennsylvania 99. Protection Against Landlord's Lien 100. Protection Against Destruction of Property XVII The Statute of Frauds 138 § 1 01. Description of the Statute of Frauds 102. Contracts to S^U 103. When the Contract of Sale Must be in Writing 104. Exception for Part Pajrment 105. Exception for Part DeHvery 106. Exception for Amounts Below Specified Value 107. Exception for Work or Services »• X CONTENTS Chapter XVIII Warranties § io8. Introductory ^ 109. Conditions Precedent 110. Conditions Subsequent 111. Express Warranties 1 12. Implied Warranties Page 144 Chapter XIX Remedies § 113. Rights of Unpaid Seller Under the Contract 114. Rights of Buyer 1 15. R^dssion of Sale XX Sales at Auction 5 1 16. Regulations for Sales at Auction 1 1 7. Compliance with Conditions 118. Duties of Auctioneer iSi tS9 Part IV— Agency XXI Principles op Agency • » '- 1 1 19. Introductory 120. Definitions 121. The Principal 122. The Agent 123. General Agents* 124. Special Agents 125. Del Credere Agents XXII The Contract of Agency § 126. Appointment 127. Express Appointment 128. Implied Appointment 129. Ratification 130. Sealed Contracts 131. Appointment of Subagents 132. Servants and Employees 133. Void Contracts of Agency XXIII The Principal 1 134. Principars Duty to Agent 135. Prindpal's Duty to Third Piuty 136. Principal's Liability 137. An Undisclosed Prmdpal XXIV The Agent . . . . . f 138. Agent's Duty to Principal 139- Agent's Obedience 140. Agent's Good Faith 141. Agent's Care, Skill, and Diligence 142. The Agent's Signature i6s CONTENTS 1 143. Agent's Duty to Third Party 144. Limitation of Agent's Authority 145. Agent's Fraudulent Conduct 146. Agent's Liability Page XXV The Third Party ( 147. Third Party's Relation to Agent 148. Third Party's Relation to the Principal XXVI Termination of Agency .... § 149. Termination by Fulfilment y 150. Termination by Either Party 151. Termination by Disability 152. An Agent with an Interest Part V — Negotiable Instruments ao3 305 XXVII Form and Interpretation ai3 «73 } 153. The Quality of Negotiability 154. Signature 155. Unconditional Promise 156. Certainty as to Sum 157. Payable on Demand 158. Certain Future Time 159. Payable to Order 160. Payable to Bearer 161. The Date 162. Consideration 163. Delivery 164. Rules of Construction i6k. Allowable i^rovisions 166. Non-Essentials i8t 188 XXVIII Negotiation § 167. Method of Negotiation 168. The Indorser's Contract 169. Blank or Special Indorsement 170. Restrictive Indorsement 171. QuaUfied Indorsement 172. Conditional Indorsement 173. EfiEect of Indorsement XXIX Rights of Holder ...... 1 174. Holder in Due Course 175. Defects of Title 176. The Rights of a Holder in Due Course 177. Effect of Irregular Transfer 322 226 Xll CONTENTS CONTENTS xm Chaftek XXX Liability lIArT£A CONTENTS 411. Easements 412. Joint Tenancies and Tenancies in Common 413. Trusts Page 4Sa 454 LX Title to Real Property } 414. Original Title 415. Acquired Title LXI Transfer of Real Property . . . . § 416. Conveyance of Real Property 417. Warranty Deed 418. Record of Deeds 419. Restrictions in Deeds 420. Searching Title 421. Mortgage of Real Property 422. Foreclosure 423. Kinds of Mortgages LXn Landlord and Tenant wj- i 424. Lease of Real Property 425. Parties to a Lease 426. Rights and Duties of a Landlord 427. Rights and Duties of a Tenant 428. Expediency of a Written Agreement Part XI— Wills and Inheritance LXIII Distribution of Property of an Intestate 1 429. Definitions 430. Rules of the Common Law 431. What Will Become of Real Property 432. What Will Become of Personal Property 433. Is It Wise to Make a WiU? 475 LXIV How to Make a Will S 434. Who Can Make a Will 435. Restrictions on the Power of Making a Will 436. General Form for Wills 437. Kinds of Wills 438. Executors 439. Trustees 440. Trust Estates 441. Statutes 442. How to Dispose of Real Property 443. How to Dispose of Personal Property 444. The Residuary Clause and Its Vses 445. What to Do with the Will LXV How TO Change or to Revoke a Wm §446. How to Change a Will 447- How to Revoke a Will 485 501 CONTENTS Chapter LXVI Other Ways of Disposing of Property After Death § 448. Deeds of Trust 449. Gifts in View of Death LXVII The Settlement of an Estate § 450. If the Deceased Person Left a Will 451. If the Deceased Person Did Not Leave a Will 452. Settlement Without Administrator LXVTII Duties of Executors and Administrators § 453- The Procedure of Administration 454. Inventory 455. Advertising for Claims 456. Paying Legacies 457. Caring for Funds 458. An Executor's Authority LXIX Questions Between Life Tenant and Remainderman § 459. How Conflicting Rights Arise LXX Intermediate and Final Accounts .... § 460. The Obligation Account 461. Kinds of Accounts to be Filed 462. Final Accounting 463. Preparing Accounts LXXI Rights in Property When There Is no Will § 464. In the Case of Real Property 465. In the Case of Personal Property 466. Rights of a Husband or a Wife 467. What Creditors Must Do LXXII Rights in Property Left by Will .... § 468. If Real Property Has Been Devised By Will 469. If Personal Property Has Been Left By Will 470. Contesting a Will Part XII — ^Personal Relations LXXIII Husband and Wife § 471. Persons WTio May Marry 472. What Constitutes a Marriage 473. Personal Rights of Husband and Wife 474. Rights of Husband and Wife in Each Other's Property 475. Rights of Husband or Wife In Case the Other Is Injured 476. Divorce XIX Page 504 506 512 S18 521 524 528 535- CONTENTS CONTENTS XXI Chaptek LXXIV Parent and Child § 477. Duties and Rights of Father in Relation to Child 478. Duties and Rights of Mother in Relation to Child 479. What Duties and Rights May Be Claimed By Adopted Children 480. Children as Criminals LXXV Guardian and Ward ....... § 481. Personal Guardian 482. Guardian of Property Part XIII— Suretyship LXXVI The Contract OF Suretyship OR OF Guaranty . §483. Definition 484. Nature of Contract 485. Written Contract 486. Parties 487. Consideration 488. Delivery and Acceptance LXXVil Rights of Surety or Guarantor • • • • {489. Notice 490. Defenses 491. Reimbursement 492. Subrogation 493. Contribution 494. Extension of Time 495. Discharge Part XIV— Debts and Interest IXXVin Debts Page 546 Chapter LXXX Interest Page 584 551 591 557 561 5 512. Interest 513. Discount 514. Usury 515. Compound Interest 516. Partial Payments Part XV — ^Bankruptcy LXXXI Assignment for the Benefit of Creditors §517. Introductory 518. Rights of Debtors 519. Rights of Creditors 520. Void Assignments 521. Rights and Duties of an Assignee 522. Form of the Assignment 523. Revocation of Assignment 524. Insolvency LXXXII Bankruptcy Proceedings enS § 525. Receivership 526. Bankruptcy 527. Voluntary Bankruptcy 528. Involuntary Bankruptcy 529. Persons Who May Bring Bankruptcy Proceedings 530. Persons Who May Become Involuntary Bankrupts I S496. Definitions 497. Evidences of Debt 498. Open and Stated Accounts 499. Receipts and Releases 500. Part Payment in Pull Settlement 501. Accord and Satisfaction 502. The Appropriation of Payment 503. Equitable Jurisdiction m Actions for an Accounti2]g LXXIX Enforcing Payment of Debts . . . §504. When the Creditor Has Some Security for the Debt 505. Where There Is No Security for the Debt 506. Attempts to Defraud Creditor 507. The Modem Theory of Credit 508. Liens 509. Attachment 510. Execution 511. Garnishment 569 LXXXIII Bankruptcy Proceedings (Continued) § 531. How Bankruptcy Proceedings Are Instituted 532. The Referee 533. Procedure 534. Creditors 535- Rights and Duties of Receiver 536. Rights and Duties of Trustee 537. Rights and Duties of Bankrupts in Bankruptcy Proceedings 538. Preferred Creditors 604 575 LXXXrV Discharge in Bankruptcy § 539- Discharge of a Bankrupt 613 540. What Debts Remain Undischarged Part XVI— Bailments and Common Carriers LXXXV Bailments § 541. What Is Meant by Bailment 542. Kinds of Bailment 543. Mandate and Deposit 544. Commodatum or Loan 619 xxn Chapter CONTENTS §545. Pledge or Pawn 546. Hiring of a Chattel 547. Bailment for Custody, Services, or Transport 548. The Contract of Bailment 549. Property Rights 550. Duties of a Bailee 551. Dissolution of Bailment Page LXXXVI Common Carriers 629 Common Carriers The Lien of The Common Carrier The Termination of the Bailment Interstate Commerce Commission 556. Bills of Lading 557. Carriers of Passengers 558. Telephone and Telegraph Companies §552- 553- 554- 555 Part XVII— -Patents, Trade-Marks, and Cop3rright8 LXXXVII Patents ......... i 559. Constitutional Authority 560. Introductory 561. Who May Obtain a Patent 562. What Inventions are Patentable 563. What Is Unpatentable 564. Procedure to Obtain Patent 565. Procedure in the Patent Office 566. Interference Proceedings 567. Final Decision 568. Government Fees and Grant 569. Marking a Patented Artide 570. Design Patents 571. Foreign Patents 572. Assignments and Licenses 573. Joint Inventors 574. Infringements 575. Official Publication 576. Practical Information LXXXVIII Trade-Marks 5577. Description • * 578. Common Law Trade-Marks 579. Essential Elements of a Trade-Mark 580. What May Not Be Used 581. WTiat Can Be Used 582. The Common Law Right 583. Trade-Marks are Not Assignable Apa.*t from Business 584. Summary 6$9 CONTENTS Chapter LXXXIX Registration or Trade-Marks § 585. The Federal Trade-Mark Law 586. The Ten- Year Clause 587. Who May Register a Trade-Mark 588. Procedure for Registration 589. What Will Bar a Trade-Mark 590. Opposition to Registration 591. Amendments, Rejections, and Appeals 592. Certificate of Registration 593. Assignments 594. Foreign Registration XC Trade-Names and Unfair Competition § 595- Unfair Competition Defined 596. Trade- Names 597. Secondary Meaning 598. Personal and Corporate Names 599. Geographical Names 600. Imitation of Packages 601. Other Forms of Unfair Competition 602. Price Cutting XXlll Page 660 666 XCI Copyrights § 603. Definition 604. Who May Obtain Copyright 605. Subject Matter of Copyrights 606. The First Step 607. Subsequent Ptocedure 608. Making Out the Application for Copjrright 609. The Affidavit 610. The Fees 611. The Books Deposited 612. Time for Filing Copyright 613. Renewals 614. British Copyright Part XVIII— Taxation 075 i9^ XCII Laying Taxes S 615. Who Has the Right to Lay Taxes 616. Purposes for Which Tax May Be Laid 617. Methods of Taxation 618. Extent to Which Persons May Be Taxed 687 XCIII Collecting Taxes .... § 619. Assessment of Real Property 620. Assessment of Personal Property 621. Payment of Taxes 622. Taxation of Corporations 623. The Federal Income Tax ^3 CONTENTS Pittt XIX— Arbitration Chapter XCrV Arbitration and Law §634. 625. 626. 627. 628. 629. 630. 631. 632. Advantages of Arbitration Objections to Arbitration Statutory Arbitration Agreement for Arbitration Withdrawal from Arbitration Hearings Signing the Award Enforcing the Award Setting Aside the Award Page 701 Part XX — Law and Lawyers XCV Study of Law for Business Men 1 633- Law Books for Study 634. Law Books for a Busy Man 635. The Case Method of Legal Study 636. Taking a Law Course 637. Courses in Commercial Law CONTENTS Chapter XCIX Evidencing an Instrument .,,... Form 2. Agent's Signature 3. Corporate Signatures to Letters 4. Corporate Signature 5. Testimonium Clause — Two Corporate Signatures 6. Testimonium Clause— Corporate and Individual Sig- natures 7- Attestation Clause 8. Attestation Clause in a Will 9. Acknowledgment of Individual Person 10. Acknowledgment of Attorney 11. Clerk's Authentication 12. Affidavit Page 744 711 XCVI Choosing a Lawyer 638. The Legal Profession 639. The Domination of Precedent 640. The Conservatism of the Law 641. Ethical Standards of the Bar 642. The Criminal Lawyer 643. Selecting a Lawyer 644. Lawyers' Compensation 716 XCVII Law as a Vocation C Contract Forms Form 13. Simple Contract 14. Contract by Letters 15. Unilateral Contract 16. Formal Contract 17. Corporate Contract 18. Assignment of Contract 19. Assignment of Contract— Indorsement Form CI Forms op Sales Contracts . . ; ; Form Memorandum of Sale Contract of Sale by Letters Conditional Sales Contract Bill of Sale— Personal Bill of Sale— Personal Contract of Warranty 757 762 20. 21. 22. 23. 24. 25. ( 645. Necessity of the Work of a Lawyer 646. The Work of the Family Lawyer 647. Business and PubUc Life 648. The EflFect of Legal Training 649. The Dignity of the Profession 650. Law as a Practical Vocation 651. Succeeding in the Law 652. Deceptive Statistics 653. Practical Directions Part XXI— Forms 736 XCVIII Drafting a Contract Form I. The Contract as Drafted 739 Cn Agency Forms .... Form 26. Appointment of Special Agent 27. Appointment of General Agent 28. Power of Attorney 29. Power of Attorney — Corporate 30. Revocation of Power of Attorney 31. Proxy — Simple Form 32. Proxy— Unlimited 33. Revocation of Proxy CIII Forms of Negotiable Instruments Form 34. Check by Individual • 35. Corporate Check 36. Corporate Indorsement of Check 37. Voucher Check 38. Note by Individual 39. Corporate Note— by President 767 773 XXVI Chaftei CONTENTS CONTENTS I i Ponii 40. Corporate Note— By Treasurer 41. Corporate Note— Collateral Security 42. Sight Draft ' 43. Bank Acceptance 44. Trade Acceptance 45' Certificate of Protett CIV Forms of Employment Contiacts Form ' * 46. Contract of Employment — Simple Form 47. Contract of Employment 48. Contract of Employment by Letters 49- Contract of Employment with Share in Profite CV Partneeship Forms . Pomi 50. Simple Articles of Partnership 51. Articles of Copartnership 52. Sundry Partnership Clauses CVI Corporate Organization Forms Form 53. Subscription list 54. Stock Certificate— Common Stock 55. Assignment of Stock Certificate 56. Certificate of Incorporation — New York 57. By-Laws— Simple Form CVII Forms for Corporate Meetings . Form 58. Call and Waiver for Special Meeting of Oirettors 59. Agreement to Consent Meeting of Directors 60. Notice of Special Meeting of Directors 61. Minutes of Special Meeting of Stockholders 62. Minutes of Regular Meeting of Directors 63. Motions 64. Directors' Resolutions 65. Certified Resolution Designating Bank CVin Miscellaneous Corporate Forms orm 66. Resignation of Director— Tentative 67. Resignation of Director— Peremptory 68. Report of Committee on By-Laws 69. Treasurer's Affidavit— Cdrporate Statement CIX Real and Personal Property Forms Form 7a Chattel Mortgagt 71. Lease 72. Deed With Full Covenant! 73. Real Estate Mortgage Pagb Chapter CX Sundry Forms 7CooIey*s Constitutional Limitations, Chapter III. THE LAW OF THE LAND Review Questions I. 2. Give the legal definition of "the law/' What do you understand by "the supreme authority" in the definition? 3. Mention some action legally right but morally wrong. 4. How far is the law a guide to what is morally right? 5. Can you make men moral by law? 6. What is the origin of law? 7. What is the origin of the laws regulating the operation of auto- mobiles? How far do they date back? 8. If a body of men were wrecked on an uninhabited island would they be subject to any law? What would probably happen? 9. Why are we willing to submit to law and lose our freedom to do as we choose? ID. What would be the condition ot a community without any law? II. What are the sources of the law in this country? Outline them in order of time. Outline them in order of authority. f t CHAPTER II THE WRITTEN LAW § 5. Definition The technical term "written law" means law that is em- bodied in constitutions, acts of Congress, of state legislatures, and of other bodies with legislative authority. In many coun- tries all the governing law is this so-ca' -^d "written law." Napoleon, who had a better title to fame in the code of laws to which his name is attached than in all his conquests, called together the persons most learned in law to reduce into one orderly, compact body all the varying laws at that time pre- vailing in France. The "Code Napoleon" which was the result has from that time to the present day been the major law of France and is what we call "written law." No similar codifi- cation of all existing laws has ever been attempted in the United States, and our so-called "written law" is only a part of the body of law by which we are governed. §6. Constitutional Government Nevertheless in our country the written constitution is the basis of all law. This is true of the United States as a whole and also of each separate state. A written constitution is the fundamental law on which all other laws are based and to which they are all subject. A constitution has been explained as that written instrument which defines the powers of govern- ment and limits the exercise of those powers for the protection of individual rights. The power of Congress is derived from the Constitution of the United States. Each state legislature has only the power granted by the state constitution. "Con- 7 r I I 8 THE LAW OF THE LAND gress can pass no laws but such as the Constitution authorizes expressly or by clear implication." § 7. The United States Constitution The Constitution of the United States is the highest au- thority in the United States. Next in rank come laws enacted by Congress in pursuance of the powers enumerated in the Constitution. For example, Congress has power to regulate commerce with foreign nations and among the several states, and under this authority it has passed the "Anti-Trust Law." On the other hand, the Constitution does not grant Congress any legislative power in regard to marriage and divorce, and for this reason Congress is not authorized to enact a federal law regulating divorces, however desirable such a uniform law might be. Under the present Constitution this matter is left to the discretion of the separate states, and divorce laws change as state lines are crossed. At the time of the adoption of the Federal Constitution the representatives of the separate states were every whit as jealous of the rights of the states as we as a nation were jealous of the rights of the United States in the matter of the League of Nations. They clung to the sovereign rights of states and feared, worse than men ever feared war and pestilence, the sinking of the state in the nation. There is an extremely interesting parallelism between the arguments ad- vanced against the adoption of the National Constitution by the states and those advanced against the adoption of the inter- national constitution by the nation. The National Constitution as adopted was a compromise whose makers held that the powers of the United States as a nation were to be limited, so as to leave to the separate states the maximum of sovereignty. Their purpose in drafting the Constitution was to define these limits to national supremacy with exactitude and carefully to mark out the powers of Congress beyond which it could not THE WRITTEN LAW 9 go. Fortunately, grants of power as expressed in the Con- stitution were couched in general language, and in interpreting their meaning the Supreme Court of the United States has, in many instances, placed a liberal construction upon them, so that Congress today is a far more powerful body than it otherwise would have been. For example, at the time the Constitution was adopted no one dreamed of the enormous power granted to Congress in the right "to regulate commerce between the states." The commerce between the states at the time the Constitution was adopted was of little significance and the power to regulate was of small moment. With the vast extension of our interstate commerce, however, the con- gressional power of regulation has grown to tremendous pro- portions. The recent decision of the Court in regard to the constitutionality of the Adamson railroad wage law would seem to extend this power almost without limit. The great war necessitated federal control of the railroads. Even though the roads are returned to their corporate owners, it is likely that there will be an increased supervision by the central gov- ernment that will vastly and permanently expand the authority of the Federal Government. The wonderful thing about the Constitution of the United States is that though it was devised over a century and a quarter ago, and though the changes in our country and in its modes of life, in its social relations, and in its methods of business have been tremendous, the old Constitution, with but few changes, still serves as the fundamental law of the land and chafes in but few places. Well did Bryce in his "American Commonwealth" say of it: The Constitution of 1789 .... after all deductions .... ranks above every other written constitution for the intrinsic excellence of its scheme, its adaptation to the cir- cumstances of the people, the simplicity, brevity, and preci- sion of its language, its judicious mixture of definiteness in principle with elasticity in detail. lO THE LAW OF THE LAND THE WRITTEN LAW II S 8. Laws of Congress The legislative power of Congress is limited to specific tTto^^ZT "^ *' ''°"^*""^'°"- Congress hTs" power to regulate commerce with foreign nations and among Ae several states, and with the Indian tribes." but hTno S which" ""^.'""^ ''^'^•^"^ ' '^''^^y - -y J^ind 7f other hand Congress is authorized to "coin money reflate t:^u:'^r' "'^ °» 't^ '"'"• -'^ «^ *^ SnS « Sp^^^nr'^r '.'^•^ P°*^'- ^^" "^ « system of entire country. If ever we adopt the metric system it will be of^tr "'°° °' ''*'"^"^' "^'^ '^•^ consdtutionallll^ Whenever Congress acts under a constitutional grant of power. Ae states are excluded from legislation on that subject For instance Conpess has power to pass "uniform law on the subject of bankruptcy." and when the present bankrupt^ law was passed m 1898 it at once nuUified all the existing sUte laws on the subject of insolvency. Laws passed by Cong el *n pursuance of its constitutional powers are superior to state constitutions and state laws. §9> State Constitutioiis At the time of the adoption of the National Constitution each of the thirteen original states was exercising the powers of government under some form of written constitution These instruments remained in effect, except in those particu- lars which were overniled by the Constitution of the United Mates The newer states have adopted constitutions, and be- fore the states were admitted it was necessary for Congress to accept the proposed constitutions But within the limits of each particular state the state constitution is supreme The state legislature cannot enact a law which goes counter to any of the provisions of the state constitution. § 10. Constitutional Amendments It was intended by those who framed our system of gov- ernment that amendment of the Constitution of the United States should be both difficult and slow. They did not intend that a majority of the voters should at any time amend the Constitution. They did not have such entire confidence in the wisdom of the common people as to be willing to empower a bare majority of the voters to set aside the constitutional provisions they had so carefully devised. So they provided that no amendment should be valid as a part of the Constitu- tion unless it were first proposed by two-thirds of both Houses of Congress and afterwards ratified by three-fourths of the several states. As it was purposely made difficult to amend the United States Constitution, so most of the states have likewise made it more or less difficult to amend or to change their constitutions. In some states a convention for the special purpose of revising the constitution is called at stated periods ; others leave to the legislature the calling of the conventions, while the usual plan is for the legislature to submit separate amendments to the people from time to time. § IX. Constitutions That Legislate Constitutions are intended to be permanent, and therefore should lay down only broad principles. They should not be encumbered with legislation on any subject on which the policy or the best interests of the people are likely to change. The pressure for change has been quite as strong as the framers of the constitution foresaw. At the present time many persons desiring to introduce reforms and to secure liberal legislation fret at the delays and the difficulties of overcoming constitutional impediments, and I2 THE LAW OF THE LAND h«^ce advocate making our constitutions, both federal and vl;r'T. '"'"'r"' ^"' '^" ^^^^""^t'- - their pro visions. There is such a distrust today, moreover of the :^Z:' '^'^^'^'T *^* •" '"^"^ '' *^ newer sLe con! SnTft fril^r- \'"'" T''"''''^ *^^ ^''-'^ have o^ OkLL ^ T^ f "°"- ^°' "^^""P'^' *^ Constitution of Oklahoma provides that eight hours shall constitute a day's work throughout the state; that railways shaU not cha'ge passengers more than two cents per mile, while the corporation commission may exempt any railway in case its earnLgs are so low as to justify a higher rate; that railways shall have adequate, comfortable, and clean stations, etc By incor! porating sud, detailed legislation in a state constitution, its function, which ,s to provide fundamental and basic law is confused with that of the legislature, which is to provide laws § la. Legislative Enactments mJ^.T 1^ ^'^'^ ^""^ ^"*°"*y *° *^ st^te constitutions come the laws or acts of the separate state legislatures so far as A^ conform to the Constitution of the United States and the constitution of the particular state. These are known as statutes and are of authority in the state where they are en- 1ft ? r M^" '" ^'^'^ '""'' *^ ordinances or laws ^fi^^il °i /"""" ^""^ '^°'™"°" '=°""^i's 'n towns and ernes. The law from all of these different sources-constitu- Tl^7 ? ^"^''''' ''"^ "^ legislatures, and ordinances of mun cipal governments-may be said to make up the body of what IS called the "written law." in contradistinction to rifcTaVer "" ''"" "''* '^ "'^""''^ '" the THE WRITTEN LAW 13 §13. Statute Law The term "statute law" or "statutory law" is frequently used in contradistinction to the common law. In its general use it means all law expressed in constitutions, codes and en- actments of the legislature, and is identical with the term "written law" as used herein. In a narrower sense it means the legislative enactments of the states or of the United States, which are published in volumes of statutes, or revised statutes, as "The Revised Statutes of the State of New York." In such a work will be found all the laws regulating the conduct and activities of the citizens and others in the state. The common law gives way whenever it comes in conflict with the statute law. The legislature in each state has au- thority to supersede, extend or abrogate the common law. The common law is the old law that prevails until it is over- ruled by statutes of the United States or of a state legislature. § 14. Subsidiary Laws In late years there has come into existence an immense additional body of written law consisting of the rules and regulations issued by boards of health, building boards, school authorities, and various bureaus and commissions. For in- stance, the Interstate Commerce Commission is empowered by Congress to regulate particular matters concerning the rail- roads. In most of the states there are railroad commissions with similar authority to regulate traffic within state boun- daries. Moreover, the different transportation companies and the other corporations operating public utilities have the right to make reasonable regulations for the government of those using their facilities. Thus, in tlie aggregate, the "written" or "statutory" law comprises a vast number of legal and semi-legal enactments, from articles of tlffe Constitution down to the rules of the trustees of the smallest school district. 14 THE LAW OF THE LAND Review Questions 1. What is written law? 2. What is a constitutional government? 3. Does a constitution have to be written ? 4. What is meant by a government of limited powers? 5. What is the highest source of law in the United States? 7. Why cannot Congress give us a system of uniform divorce laws > a Has Congress the right to debar from interstate commeT'; articles made by child labor? Give reason for your answer Why has It been made difficult to amend our constitution ? ' What IS the difference between matters that should be embodied m a constitution and matters that are properly subject to legislative action? f f J !.uujeci to Name in order of authority and dignity the sources of "written Why has New York State a constitution, while New York Citv has not? ^ 13. Name some congressional laws passed within recent years 14. What laws are superior to a state constitution ? IS Name some laws passed by the legislature of your state within recent years. 9. 10. II. 12. CHAPTER III THE UNWRITTEN LAW § 15. Definition To the layman, perhaps, the term "unwritten law" is some- what misleading. It is called unwritten law because there was a time when it was not written. As soon as men commenced to live in com.munities they found it necessary to conduct their intercourse and dealings according to rules, and these customs or uniform methods of doing things are supposed to be the foundation of what is now called the "common" or "unwritten law." For instance, when vehicles meet it is the custom in this country to turn to the right. This custom is not the enactment of any legislature, and yet it is practically a law, for if anyone driving a vehicle failed to observe it he would be liable for any damage that resulted. It might be possible to find cases where this particular matter had come up and received the ratification of a court decision, but in such cases the court did not make either the custom or the law; it merely recognized that the custom was general and hence had the force of law. That is, the court recognizes the custom as law, because men have acted in one way until that way has become a rule of action; the court is bound by it although there is no written record. When so recognized by a court, it would be placed upon the court records and so would actually be written down, yet it is still called "unwritten law" because it is based on the earlier un- written custom instead of upon legislative enactment. Lawyers distinguish these classes by the Latin terms lex scripta — written law — and lex non scripta — unwritten law. IS 1 6 THE LAW OF THE LAND § i6. The Doctrine of Precedents The courts do more than record customs ; they create law by decisions that then become precedents. In primitive days when men had differences of opinion they would get someone older and supposedly wiser than the rest, to arbitrate or decide the matter. When a given matter had once been decided in a certain way, the inhabitants of the country would shape their conduct according to this decision; it would be a precedent for future action and future decisions and in this way would become part of the unwritten law. Gradually, as civilization increased and these precedents accumulated, a "body" of un- written law grew up, founded partly on customs and partly on precedents established by the courts. Moreover, if a question came before one of these early courts and no custom could be found on which to base the decision and no precedent to guide it, the judge would decide according to his ideas of right and justice and thus would add a new item to the sum of this unwritten law, which in turn would become a precedent for later cases like it. England has been eulogized by its poet laureate as: A land of settled government, A land of old and fair renown. Where Freedom broadens slowly down, From precedent to precedent. §17. Court Reports In the old days when writing was a rare accomplishment, individual lawyers used to make their own notes of cases in what were called "Common-Place Books," which they would use as authorities when similar cases were tried. In this way there grew up the custom of making court reports. Today the decisions of the courts are most carefully recorded and published, and the court reports are the greatest repositories of this so-called "unwritten law." THE UNWRITTEN LAW 17 § 18. The Volumes of Reports The difficulty in our country at the present time is that we have over forty-eight different and independent systems of courts, all grinding out decisions, which are recorded and published in long rows of volumes. In the first place the number of reports has become so great that it is impossible for even the most industrious lawyer to keep up with them. The existing law reports of this country fill thousands of volumes, and every year they are growing in number and complexity. In the second place, there are forty-eight separate jurisdictions, the decisions do not always harmonize, and then occurs a conflict of laws. Lawyers depend on large law libraries to which they have access, kept up usually on a co-operative basis. Meanwhile, they subscribe for volumes of digests and use encyclopedias of law to guide them in their searches through this ever-increas- ing maze of judicial decisions. In each state the decisions of the highest state courts are paramount, and the lawyers in the state try to familiarize themselves with at least the trend of these decisions. Whenever political, economic, and social conditions change so radically that the decisions of the higher courts become unjust or restrict legitimate activity too much, the state legisla- ture interferes and enacts laws that supersede the judicial decisions. In other words, the written law prescribed by the legislature overrules the unwritten law that comes from the decisions of the court. § 19. Citations When a lawyer wishes to use a case in argument, he cites it by naming the parties, the number and name of the report, and the page on which the case is found. Only by practice can a person know, when a case reference is given, what court i8 THE LAW OF THE LAND decision the author cites. It is no small part of a lawyer's training to know where to find the decision he wants. This matter of finding cited cases is explained in Appendix B. §20. The Common Ltaw The unwritten law was also called, as has been said, the "common law," and old-school lawyers were fond of extolling it as the perfection of human wisdom. When this country broke away from England at the time of the Revolution we retained the English common law, and it became the founda- tion of the general system of law prevailing throughout most of this country. In Louisiana, however, and to a certain ex- tent in Texas and California, the so-called Roman or "civil law" was introduced and became largely the foundation for the systems of law in those states. This system based on the old Roman law, prevails in Italy, France, and other Latin countries in Europe and is utilized by the Teutonic peoples as well. The EngHsh law is indebted to the Roman system more than English common law advocates are willing to admit, and it might have been better had more been borrowed. The original English common law was a harsh and bar- barous code, having little or no consideration for the rights of women and children and making man the tyrant of the family. Any infractions of its provisions were punished with drastic penalties. The smallest theft by man, woman, or child, was punished by death. At the present time most of the harsher features of the common law have been eliminated. Juries refused to convict prisoners on account of the cruel penalties, and the law has been modified by numberless legisla- tive enactments and expanded by judicial construction, to fit a more civilized and cultivated society than that in which it originated. It is evident that the term "unwritten law" covers a wider field than "common law." Therefore it is used in this work THE UNWRITTEN LAW 19 to designate the law that is contained in the reports of the courts. §21. Law-Merchant and Commercial Law The law-merchant was originally a part of the general law of nations, being concerned with bills of exchange and the like, freights, average, demurrage, insurance, bottomry and other matters of the same nature pertaining to commerce. Chancellor Kent in his commentaries says that the law- merchant "consists of certain principles of equity and usages of trade, which general convenience and a common sense of justice had established to regulate the dealings of merchants and mariners in all the commercial countries of the civilized world." Blackstone refers to it as "The particular system of cus- toms used only among one set of the king's subjects, called the custom of merchants, or lex mercatoria: which, however diflFerent from the general rules of the common law, is yet ingrafted into it, and made a part of it; being allowed, for the benefit of trade, to be of the utmost validity in all com- mercial transactions." While the law-merchant had its origin in international usage, as a matter of fact it was incorporated into and made a part of the body of the common law of England and was with it transplanted to this country and made a part of our own com- mon law so far as it was applicable to our conditions. In later years it has been largely extended and modified by statute but still remains part of our unwritten law and as such governs in the present course of trade and business. The term law-merchant is generally applied to the old laws or customs of merchants. The corresponding modem term is commercial law, which is defined as the body of principles and rules, drawn chiefly from the customs of merchants, by which the rights and obligations arising in commercial transac- Ir ' 20 THE LAW OF THE LAND tions are determined. It is also defined simply as the law applicable to commercial transactions. § aa. Unconstitutional Laws It frequently happens that a legislative enactment designed to overrule some objectionable decision of the courts comes into conflict with a provision of the state constitution or of the United States Constitution and the courts may decide this new law to be unconstitutional. If the people in the state should still desire to maintain the legislative enactment, they would have to amend the state constitution except in states, Colorado for example, whdse constitution provides for the 'Recall of judicial decisions" by the vote of the people. So far as the writer knows, however, this power has never been invoked, and indeed it seems a dangerous right since popular passion might easily be swayed to commit on occasion, in this way, great injustice. In case the law were in conflict with the Constitution of the United States, the people must either submit or else undertake the very arduous task of stirring up all the people in the country to amend the Federal Con- stitution. A notable instance of this is the income tax law, which was passed by Congress but declared unconstitutional by the Supreme Court. Then the Constitution was amended, where- upon Congress passed the present income tax law which, with its amendments, will doubtless be a permanent feature of our system of taxation. §33. The Recall of Judges Within the last few years many persons have become im- patient with the slow process of changing the Constitution This has led them to advocate, as a short cut to securing better laws, the recall, that is, the dismissal, of any judges who decide that popular laws are unconstitutional. If this law went into THE UNWRITTEN LAW 21 effect any judge who rendered decisions opposed by the major- ity of the voters could be recalled and a more subservient arbitrator elected. For several reasons such a procedure seems unwise. It would be better to facilitate the process of amend- ing the Constitution than to seek judges who will disregard the plain letter of existing law and will support, as legal, laws that plainly are not in harmony with the provisions of the Constitution. But this is too large a subject for treatment here. Review Questions 1. Give some examples of custom-made law. 2. When a custom is recognized by a court and its decision is recorded, what is the effect? 3. What is the argument for observing precedents? 4. What is the disadvantage of our numerous volumes of reports? 5. In what cases do legislative enactments supersede court deci- sions ? 6. Give the arguments for and against the recall of judges, 7. What is the relation between the common law and statute law? 8. Where do we get our common law? 9. What countries have laws most nearly like ours? CHAPTER IV LAW AND EQUITY §24. Remedial Law When anyone has suffered wrong and his legal rights have been infringed, he seeks a remedy. Jhe law itself may be ideal, but if the machinery to enforce the rights defined by the law be defective, abstract perfection will avail but little. Therefore a study of what is called remedial law is necessary before we can tell what real help we are likely to obtain from the law. The "law's delay*' is proverbial. In all matters of judicial procedure there has always been a tendency to formal- ity and "red tape." Too often this tendency becomes so ex- cessive that it nullifies the remedy and results in a denial of justice. The remedy may be so costly and long deferred that it were better left unsought. The man with limited means is too often, on this account, barred from seeking justice. Suits or actions to redress wrongs or to enforce rights are classified as suits at law and suits in equity. It is not easy to explain briefly the distinction between the terms "law" and "equity" as they are used in our administration of justice. The two words are used in this connection without any refer- ence to the ordinary meaning attached to them. A real, technical distinction exists between a case at law and a case in equity which a lawyer must thoroughly understand. Whether it would pay a business man to study out the exact and full distinction between the two is doubtful. But, as it is impossible for a lawyer to avoid using the terms in their technical sense, it is important that the layman should have a general idea of what the lawyer means, so that the plain 22 LAW AND EQUITY 23 man may not be misled by confusing the ordinary English use of the words with the legal signification. § 25. Equity in the Legal Sense In England many years ago the proceedings at law had become so cumbersome and so limited in scope that it was difficult to obtain justice in the courts of common law. King Henry VII then provided that in those cases in which the common law did not afford a remedy, relief could be obtained by applying directly to his chancellor. This official, who was also a dignitary of the church, favored the Roman or civil law and adopted a procedure founded on that law in contra- distinction to the common law. Such a procedure before the chancellor was called a suit in "chancery*' or "equity," as dis- tinguished from the procedure "at common law" or simply "at law." It should be noted, however, that while at first it was simpler to bring a suit in equity than at law, this dis- tinction soon vanished and equity proceedings became even more complex and technical than the procedure at law. The chancellor, however, gave relief in many cases for which the common law gave no remedy. The common law was adapted to a simple life and a crude social system. As the English people advanced the deficiencies of the common law were manifest and the introduction of the courts of equity was a long step in legal reform. The two distinct systems both con- tinued; the procedure was different, the rules were different, and the relief given was different. The lawyers who practiced before the chancellor were called solicitors; the lawyers who appeared in the common law courts were counselors or barristers. In equity the remedies are different from those provided by a suit at law. To illustrate the difference, if anyone breaks down your fences and makes a road across your property, at law you can sue only for damages; in equity you can ask an M 24 THE LAW OF THE LAND LAW AND EQUITY 25 injunction restraining the offender from further trespass, and also recover for any damage he may have done. § a6. Suits at Law and in Equity The distinction between law and equity was brought to this country and as a result there are in all the states the two divisions of the work of the courts and the two methods of bringing suit. In a few states the law and the equity courts are kept entirely separate, as is the case in New Jersey ; and in these states the public realizes more readily the real dif- ference between law and equity administration. But in most states today, the actions are brought in the same courts, the only differences being in the preliminary procedure, in the remedies which the courts grant, and in the fact that in most cases at law there is a jury trial, while in equity cases a judge or judges alone hear the case. A court of law hears both civil and criminal cases. Civil cases are the ordinary suits about contracts and property rights and are brought by private parties against other private parties. Criminal cases are suits brought by the state itself against those who are accused of having broken the law, and who are punishable by fine or imprisonment. In such a case the fine goes to the state. (See Chapter V.) A court of equity hears only civil cases. If a person is interfering with another's rights, a court of equity will grant an injunction forbidding him to do so in the future, and will at the same time make him pay damages to the injured party for the wrong which has already been done. §27. Bringing a Suit at Law When A refuses to pay a debt that is due, or fails to do what he has contracted to do, or by his negligence or wrong- doing has caused damage to B, if B wishes to bring suit against A he employs a lawyer who prepares a written statement ».. setting forth his client's cause of action. This paper is called a complaint and must be served upon A. At the same time with or before the service of the complaint, B must serve a notice or summons on A requiring him to answer within a certain number of days. If A does not appear, the court will consider that A does not mean to defend and, in some in- stances, if the claim is definite, it will grant a judgment by default against A and in favor of B, without a trial or any- thing more than a sworn complaint to prove the case. Service of a summons must be made personally upon a defendant except: 1. Where the person is an infant, it may be delivered to a parent or guardian. 2. Where the person is adjudged insane or incompetent to manage his own affairs, it may be delivered to a guardian or to the defendant. 3. Where a person, firm, or corporation is without the state, simimons may be served by publication of the summons in two newspapers, most likely to be seen by the defendant, for a specified time of not less than once a week for six successive weeks. (The details given are for publication in New York. They vary in the different states.) The party bringing the action is called the "plaintiff," or in some states the "complainant." The party against whom the action is brought is called the "defendant." If the de- fendant does not wish to allow judgment to go against him by default, he or his lawyer must within the time set serve an answer to the other party's complaint against him. In this paper the defendant usually brings forward any cause of action which he may have against the other party. This is called a counterclaim. The written papers by which the parties bring their cause before the court are called "pleadings." If the 96 THE LAW OF THE LAND defendant denies the facts alleged or sets up a counterclaim, the pleading is called an answer. The other party then replies to the counterclaim. There may in some states be several such replies after the service of the complaint The procedure depends on the law of the particular state where the action is being brought. Each party must serve a copy of each paper in the action on the other party or his attorney. If what has been stated in the complaint does not make a legal cause of action, tlie defendant through his lawyer may object to it by filing a demurrer. A demurrer objects to the complaint on legal grounds ; for example, that it is not brought in the right court, or that the facts alleged, even if true, do not constitute a cause of action. Then the matter of the demurrer comes up before the court. It is argued by the lawyers on each side, and if the court decides that the demurrer presented by the defendant is well taken, the complaint is dismissed. The plaintiff can then usually get leave (by paying the costs up to date) to file a new complaint in which his lawyer will try to avoid the particular legal difficulty. If the court decides, however, that the demurrer is not well taken, it is dismissed, and this leaves the defendant to answer the complaint as to the facts, that is, as to the matters which have been alleged on the part of the plaintiff and denied on the part of the defendant. The foregoing statement of proceedings before trial pre- supposes very simple proceedings, but usually there are re- quests to amend and much incidental procedure, which tend to delay the trial of the main issue. § 38. Trial at Law A¥hen the parties have finaHy come to an issue, i.e., when the plaintiff has alleged certain things and the defendant has LAW AND EQUITY 27 denied them or has interposed a defense, then the case is set down for trial, and takes its place on the court calendar. When cases that are ahead of it on the calendar have been tried, or postponed, the case is called, and the lawyers on each side are asked if they are ready. When both sides are ready, or have no excuse for longer delay, a jury is assembled and the judge proceeds with the case. In a court of law a party has a right to have a jury decide any disputed facts. The witnesses for each side are sworn and testify, then the case is argued by counsel for each party and goes to a jury to decide or is decided by the judge, or is taken under advise- ment by the judge, who will give his decision after due con- sideration. If the case goes to a jury, the jurymen are placed in the custody of a court officer until they reach a decision or find that they cannot agree. If the judge is to decide the case and takes it under advisement, it may be days, weeks, or months before he will render his decision. Since a jury is composed of human beings, it is likely to show certain very human characteristics in its decisions. The sympathies of the jury are usually with the under dog, whether he is plaintiff or defendant. Often the plaintiff, by the mere fact of going to court with his troubles and then by being heard first, has the better chance. If one party is a corpora- tion, the jury is inclined to regard it as a soulless oppressor, and to award damages in favor of the poor workingman, widow, etc., whom the corporation is supposed to be injuring. Very frequently clever and unscrupulous lawyers get in some touch to appeal to the sympathies of the jury, as a photo- graph of an injured man's wife and children, etc. These are usually ruled out by the court, but the effect on the jury has been gained just the same. It is to be remembered that if one man on the jury is stubborn, prejudiced, or dishonest, he can prevent a verdict and the whole expense and trouble of the trial has to be repeated. The law frequently breaks down in 28 THE LAW OF THE LAND vindicating rights because of the imperfect workings of the jury system. Note: I. Consider all the chances before bringing a lawsuit. § ag. Bringing a Suit in Equity The outline given applies to a court of law. If the court is a court of equity jurisdiction, the procedure is essentially the same except that the first statement may be called a peti- tion or a bill in equity. In New York complaints are also used in equity. All procedure in courts follows generally the lines laid down, with many variations as to details and inci- dentals. A suit in equity can be brought only when the party cannot obtain justice at law. The other party must answer the peti- tion or the bill. Copies of all papers must be served on the opposite party by the party making the charges. In a suit in equity, only a judge, or several judges, hear the case. For this reason a court of equity is not so strict about keeping out evidence that does not properly have anything to do with the case, or that might prejudice a jury. The judge is supposed to know the law and to be guided only by such evi- dence as ought to be allowed to affect the decision of the case. A court of equity tries to give a remedy to fit the nature of the wrong that is being done. If the wrong consists in a refusal to perform a contract, the court will, in some instances where the contract should be performed, compel the offending party to carry out his agreement. (See Chapter XII.) If the wrong alleged consists in the defendant's continuing to do anything which is injuring another, the court will issue wha* is called an injunction forbidding the continuance of the in- jurious conduct Practically speaking, however, the courts are chary of granting an injunction where it may be avoided. It is useless to attempt to bring an action in equity unless LAW AND EQUITY 29 the party is certain that he can prove to the court that the damages which he can obtain at law will not compensate him for his injury, and unless he is willing to do everything which the court may require from him in the interests of justice. The maxim is that he who seeks equity must do equity. Another maxim in equity is that he who comes into a court of equity must come with clean hands, i.e., if the complainant alleges fraud, he must show that he has been scrupulously fair in all his own dealings. If the party resorts to equity when he should have in- stituted an action at law, he will merely find that he is obliged to go to the added expense of bringing action at law. The practice in equity is no less complicated than that at law. § 30. Appeals to a Higher Court The decision of a trial may be appealed from by the dis- satisfied party. The unsuccessful litigant has to pay the dam- ages adjudged to be due his opponent, the costs of the suit, and the fees of his own lawyer. His fighting blood is stirred by the evidence that brings to mind the original dispute and the perverseness of the opposite party, by the arguments of the counsel on each side, and by the failure of the court and jury to give them the weight he feels they have, and he feels as if he would spend all he has to vindicate himself and to punish those who have wronged him. His lawyer feels much the same way, and, as he is paid for appealing instead of having to pay, he can better afford to indulge his feelings. Usually the first thing is to file excep- tions to the alleged irregularities in the trial ; that is, happen- ings of the following nature: That evidence was admitted which should have been shut out. That evidence was rejected which should have been ad- mitted. no THE LAW OF THE LAND That questions were allowed which should have been barred. That questions were disallowed which should have been allowed. That the judge charged the jury in a way he should not have charged it. That the judge refused to charge the jury as requested and as he should have charged it. That the verdict was excessive, or inadequate, or not supported by the evidence. Then a motion is made for a new trial and, if this is overruled, counsel announces that he will appeal. The losing party cannot commence a new action. He is barred from any such proceeding, otherwise a wealthy plaintiff could ruin his opponent by continued new actions. He can, though, in most cases appeal to a higher court. The appeal is a costly and complicated proceeding. All of the papers and much, in some cases all, of the evidence must be printed. Then the arguments of each of the opposing counsel, ironically termed "briefs," are printed. After more delay and often much sparring of counsel over points of procedure, the case will take its place on an appeal docket and in due course will be reached by the appellate court. Next the case is heard, which means that counsel for both sides appear and argue the case on appeal. Finally the court takes it under consideration and if a new trial is granted it must be tried again in the original court. In most states there may be indefinite appeals until the case has reached the court of last resort, been decided there on the last technicality, and a rehearing has been asked for and refused. There is always delay between appeals, and it is entirely possible for a law- suit to go on for years and become an heirloom, which is handed on from generation to generation. It will be seen LAW AND EQUITY 31 that the person or the corporation with the longest purse has a great advantage. Such a one can employ more experienced and abler counsel and can stand the mounting costs better than the person who has nothing but a just cause. Attempts have been made from time to time to simplify procedure and to make litigation less costly and less dilatory, but so far without any great measure of success. To laymen both courts and counsel often appear much more concerned in observing the rules of the game than in administering justice as between man and man. As stated in one of our legal periodicals: ^ While every other profession has been practically made over in the past twenty-five years, the conservatism of the legal profession has stood in the way of substantial changes in the rules of procedure and practice. >» Elihu Root, in the foreword to "Justice and the Poor' states : We have had in the main just laws and honest courts to which people — poor as well as rich — could repair to obtain justice. But the rapid growth of great cities, the enormous masses of immigrants (many of them ignorant of our language), and the greatly increased complications of life have created conditions under which the provisions for ob- taining justice which were formerly sufficient are sufficient no longer. I think the true criticism which we should make upon our own conduct is that we have been so busy about our individual affairs that we have been slow to appreciate the changes of conditions which to so great an extent have put justice beyond the reach of the poor. Ex-President Taft, in an address before the Virginia Bar Association, said: Of all the questions which are before the American people, I regard no one as more important than the improve- ^ Case & Comment' for July, 1917. $2 11 THE LAW OF THE LAND mcnt of the administration of justice. We must make it so that the poor man will have as nearly as possible an equal opportunity in litigating as the rich man, and under present conditions, ashamed as we may be of it, this is not the fact. Note: LAW AND EQUITY 33 I. Before becoming involved in litigation reckon the cost, to the limit of the last appeal. § 31. Advisability of Litigation There are circumstances under which it is necessary to go to law, and then its advisability is not open to discussion. Such circtmistances may be compared with cases in which surgical operations have become imperative. The only ques- tion then is to be sure that you secure a skilful attorney to represent you. But many cases arise where there is strong temptation to bring suit, but where it might be more prudent to compromise or settle by other means. What follows applies to these debatable cases. When you feel that you have been wronged and consult a lawyer, you want him to sympathize with you, to assure you of the merits of your case, and to advise you to show the other party that he cannot ride rough-shod over you. This is the lawyer's selling talk that you expect. You tell him to go ahead and cheerfully give him a check for a few himdred, which he says will be plenty to keep things moving until the case comes to trial. If instead, he tells you judicially that, while you have a good case, it will save time and money to compromise in some way rather than to litigate, you take it as an unfriendly act,' grudge him his modest fee for saving you a lawsuit, and tell your friends that he is too cautious ever to make much at the bar. Next time you have trouble you think you will find a lawyer with a little more "sand." Lawyers know that most men who consult them fed this way. As one lawyer expressed himself, it is easier to get a $i,ooo fee for trying a case than $ioo for effecting a com- promise. Therefore do not expect that your lawyer is going to punish himself to do you an unwelcome service. You can try this plan: Ask your lawyer to make you an estimate of what the case will be likely to cost in counsel fees, preparation for trial, court costs, and incidentals. Then inquire as to what amount of your time will be required for consultation, attend- ance on trial, waiting for the case to be called, etc. Estimate what your time is worth in your business and add to the previous amount. Estimate how much thought and worry you will put into it and how much this will detract from your business efficiency. Assume you get judgment in your favor and the case is not appealed. How does the account stand? You may have a good case and still lose out. Such things have happened. Appeals are possibilities. There is a chance of heavy costs and fees. Consider all eventualities before you decide on your course. Notes: I. Prevention is better than cure. "Beware of en- trance to a quarrel." Calculate your costs in advance. This discourages litigation. Tell your lawyer you would rather pay him to keep you out of litigation than to win your case. If he is young at the business he may take you at your word. 2. Suggestions to Readers If possible, attend the trial of a ciznl case before a magistrate. This is the court where suits for small sums are brought ; its processes are simple and rapid. But its procedure is typical. Note the function u THE LAW OF* THE LAND of the magistrate, the counsel, the constable, marshal, or other officer of the court. Note how witnesses are called, sworn, examined, cross-examined. Note the arguments of counsel. Then answer these questions : I. After hearing the witnesses, how would you have decided the case? After hearing the lawyers argue, would you have decided otherwise ? Was the actual decision just? Allowing fair rates of payment for the time of the men engaged in the trial, for the judge, constable, parties, lawyers, and witnesses, how much did the trial cost the community? What was the amount involved in the litigation ? 5, Was the suit a fair average as to time, amotmt involved, number in attendance, etc? 6. Could you devise any better system for settling disputes? 2. 4. Review Questions 1. Why is legal process to redress a wrong usually unsatisfactory? 2. What is the distinction between "law" and "equity" ? 3. In your state are there separate courts of law and equity? 4. Can suit be brought against a person without giving him notice ? 5. What is the object of the procedure in a suit before trial? 6. What defects are there in trial by jury? 7/ If you were party to a suit, would you rather have it decided by a jury or by a judge? Why? If a party fails to get a verdict or decision can he bring a new suit? What could be done to make justice cost less in time and money? Can you suggest any method of judicial reform? Should a lawyer advise litigation or compromise? What cir- cumstances should influence his advice? a 10, CHAPTER V CRIMINAL LAW § 32. Criminal Procedure Criminal law is administered in a manner different from the usual procedure at law and in equity. The state prose- cutes for crime, and, while the accused person is called the defendant, there is no plaintiff save the state. The designa- tion of a criminal case might be : "State of Ohio v. John Doe (name of accused)." In the different states there is more or less variation in the administration of criminal law. Criminal prosecutions are usually instituted by a warrant sworn to by the aggrieved party before a magistrate. The magistrate then summons the accused person to appear or issues a warrant for his arrest. In minor cases the magistrate tries the person, or in some instances the accused may demand a trial by jury. Where the offense is serious, the magistrate has only jurisdiction to commit the accused to await the action of the grand jury. In most cases the accused person is allowed to give bail to insure his appearance when the grand jury meets. Serious crimes must always be prosecuted by indictment; i.e., a written accusation authorized by a grand jury. The grand jury consists of eighteen or more men and is convened from time to time in each county to investigate any charges of crime that may be brought before it. Proceedings before a grand jury are, of course, ex parte, i.e., only one side is heard. These proceedings are under the supervision of the legal representative of the state, the prosecuting attorney. The object of the grand jury investigation is to ascertain what 35 3^ THE LAW OF THE LAND CRIMINAL LAW 37 persons should be tried before a trial jury and whether the evidence against people accused of crime is sufficient to justify the state in prosecuting them. If an indictment is foimd and the person has not been arrested, the authorities try to arrest him. The names of all who are indicted are placed on a criminal docket to await trial before a trial jury. The grand jury system is painfully cumbrous. In darker ages the criminal law was so often used as an instrument of oppression and for the punishment of political offenders and the criminal laws were so cruel, that popular sympathy was with the man accused of crime and gradually he was given various rights and privileges to even up his unequal contention with the powers of the state. It is not unlikely that this process has gone too far. In many states criminal procedure has become so complex and so overridden with technicalities that any criminal who can afford to pay skilful cotmsel may escape all penalty except the large payments he makes to his own lawyers. The diffi- culty of convicting a wealthy criminal is the scandal of our legal administration of justice. On the other hand, the criminal law as it exists is in- credibly unjust to the poor and ignorant. A widow with a dependent family started to sell fish in New York and failed to cover them over to protect them from the flies. She was arrested and fined two dollars. She did not have so much and was sent to jail for a short term, leaving her family of young children unattended.* If a wealthy young man is arrested for speeding, he is released on his own recognizance or a deposit of cash. The next day he is fined twenty-five dollars, promptly writes a check and walks away. Meanwhile we marvel at the growth of anarchistic thought! ^Scribner's Magazine, July, 1919- Page 115. § 33. Classes of Offenses Against the Criminal Law It is well to know that offenses against the criminal law are divided into two classes: felonies and misdemeanors, ac- cording to the degree of the offense. A felony is a grave offense, punishable by heavy penalties. A misdemeanor is a lighter breach of the law and is punish- able by lesser penalties. Burglary— the breaking into a dwelling house after dark with criminal intent— is a felony and is punished by confine- ment in a penitentiary. Driving an automobile too fast is a misdemeanor and may be punished by a fine or confinement in the county jail. Criminal offenses are also divided on another basis into two classes: those which are wrong in themselves and those which are wrong merely because the law prohibits them. In order to make this distinction easier to keep in mind, lawyers use the Latin terms "malum in se" (wrong in itself) and ''malum prohibitum" (wrong because it is prohibited). At the present time there are a great many naturally indiflFerent actions which have been made into ' rimes by the procedure of the legislature, and there is such a multitude of these laws that it is very hard for anyone even with the best intentions to avoid violation of the law at some time. §34. Penalties The penalties for violation of the criminal law are fines, imprisonment, and, for a few offenses, death. In this country the Constitution of the United States prohibits banishment and forbids cruel and unusual punishments. In no direction is there greater room for reform than in our treatment of criminals. Many of these are as they are by reason of environment and lack of training. Others are mental defectives who should be humanely kept from tempta- tions they cannot withstand. It may safely be said that our If ■HP 38 THE LAW OF THE LAND criminal law as it is generally administered does not prevent crime, reform the criminal, or deter others from crime. The most dangerous and vicious criminals are those who are mtelligent and educated and use these advantages to keep clear of the clutches of the law, while they do things that in effect injure their fellows far more than aU the burglars and murderers in the country. These are the "malefactors of great wealth" that roused Roosevelt's honest wrath. The criminal law always lags behind, and enactments to check the crimes of such as these unfortunately catch only their clumsy imitators. Review Questions 1. Who is the plaintiff in a criminal case? Why? 2. What is the function of a grand jury? 3. Can you suggest any method of improving the administration of our criminal law? 4. If a certain action, harmless of itself, has been made a crime, does it thereby become morally wrong? 5. If a man is willing to pay the penalty, say for speeding, does that justify him in disregarding the law? 4 What are the two classes of offenses against the criminal law ? Give an example of each. 7. Outline the usual criminal procedure. a What is the primary object of legal penalties for crime: (i) retaliation, (2) protection of the community, or (3) the re- formation of the criminal? What should be the object, or objects of the criminal law? 9. Which are the greater deterrents of crime— severe penalties, or more moderate punishments? Why? PART II CONTRACTS CHAPTER VI ESSENTIAL FEATURES OF A CONTRACT^ § 35. Introductory Civilized life may be said to be founded on agreements. Whenever an individual buys or sells something, he makes an agreement. Our whole social and business life is based upon a series of understandings with those with whom we come in contact. The more complex our civilization becomes, the more agreements are made and the more extended be- come our contractual relations. Whenever an agreement is of such a nature that it may be enforced in a court of law, it is called a contract. Most of the laws on our statute books and most of the laws affect- ing the daily life of the individual have to do with the sub- ject of contracts. The sale of goods is a contract, the appointment of an agent is a contract, and the business done by an agent is that of making contracts. Insurance, whether of life or of property, is a contract; partnerships and corpora- tions are both based on contracts; in fact, there is no business relation but is either itself a contract or else is based upon a contract. § 36. Definition A contract is defined as an agreement between two or more parties, for a sufficient consideration, to do or not to do some specified thing or things. This is the accepted legal definition of a contract. > For forms of contracts, se« Chapters XCVIII-CI, Forms 1-25. 41 42 CONTRACTS fi It is an agreement, and the minds of the parties, to use the technical phrase, "must meet." There must be two legally competent parties to a contract; there may be many. There must be a consideration, without which there can be no legal obligation. If a man agrees to do something, there must be a valid reason or inducement for him to bind himself. This, in legal parlance, is the consideration. If the promise were gratuitous, that is, if there were no induce- ment for the promise, it might be a matter of honor to carry it out, but it would not be a matter of legal compulsion. A naked promise, without consideration, cannot be enforced in a court of law. There must be the obligation, or thing to be done. This promise may be to pay money, to do work, or to deliver goods; or it may be merely not to do something which the person contracting had a right to do. §37. Essential Features In order to make any agreement legally enforceable as a contract, there must be the following essentials: The parties to the agreement must be legally com- petent to contract. The agreement must be to do something lawful. The parties must agree to the same thing. There must be a sufficient consideration. I. 2. 3- I i These several elements of a contract will be explained in the following sections. § 38. Competency of Parties The parties to a contract may be individuals, partnerships. or coiporations. The partnership name mav be diflferent fronj ESSENTIAL FEATURES OF A CONTRACT 43 the names of the partners composing it. The laws of most states provide that one or more persons may associate them- selves under any name they choose to assume for business purposes, and upon recording it in the proper offices together with their own names and addresses may do business and contract under the assumed name. A person would bind himself if he contracted under an assumed name. The other party might not be bound, if he was deceived. Generally all persons are able to bind themselves by con- tract. It is a positive right. But there are exceptions to the general rule. Certain persons are not competent to con- tract, and certain other persons have only a qualified right to make contracts. If a person has been legally declared a lunatic or a spend- thrift, and a guardian has been appointed by the court to look after his property, such person has no power to enter into a binding contract. No agreement made by him could be enforced, even though the person dealing with him did not know that he was insane or a spendthrift and had been legally declared incompetent. There is one exception to this rule— a contract to buy absolute necessities for life and health A person may supply an insane person with necessary things and will be legally entitled to payment for them. As it is necessary for a party to give his free consent to an agreement and to know what he is consenting to, intoxi- cated and insane persons who have not been legally declared to be such, cannot make enforceable contracts if the insanity or the intoxication prevents them from understanding the nature of their acts at the time the contract is entered into The Law Varies with Location. This question of com- petency depends on tiie law of the place where the contract was made. If a person legally declared a spendthrift should go into another state, he would be perfectiy capable of making I i ii 44 CONTRACTS m contracts there until he has been declared a spendthrift in the courts of that state. A person legally declared insane, if he had lucid intervals, might in a state other than that in which he had been declared insane make an enforceable con- tract in a lucid interval. The age at which a person becomes legally competent to contract varies in different states. The^ local law should always be consulted. Indians. Indians living on government reservations are protected by the federal law, and may make enforceable con- tracts only imder such conditions as that law prescribes. If they leave the reservations and enter into ordinary business relations, they are usually held liable in the same way as any other business men. Married Women. "K married woman does not have entire freedom of contract. As a usual rule a married woman can- not make an enforceable contract with her husband. Formerly a married woman could not make a contract at all without her husband's consent, but this has been changed. It is safest to consult the law of the state in which one resides before entering into a contract with a married woman, as a few states still give her a measure of irresponsibility. A married woman may, in any state, act as an agent for her husband. (See § 128.) Minors. Minors (persons who are under legal age, which is generally 21) have only a qualified ability to make con- tracts. That is to say, the minor may make a contract but the other contracting party cannot enforce it if the minor chooses not to perform his part. The minor may even annul th^ contract after it has been performed, return the property and demand his money back, or vice versa. If the minor has taken a fraudulent advantage of the other person by lead- ing that person to think he is of full age, the law will later prevent the minor from stating that he is under age when he comes into court, and will therefore make him perform ESSENTIAL FEATURES OF A CONTRACT 45 his agreement. If under the contract the minor has received property or money from the other party, he will be made to repay or to return it if possible; but if he has spent or other- wise disposed of it he may, as a rule, still refuse to repay or return it. People dealing with young persons are supposed to look out for their own interests and to find out whether such parties are of age or not. The minor, because of his in- experience, IS guarded by the law not only against the designs of other persons but also against his own carelessness. He IS not, however, guarded against his own wrong-doing If he injures property he will be obliged to pay damages. After a minor has come of age he may confirm any con- tracts made while he was a minor. He may do this either by words or by acts. If he keeps the property obtained under such a contract for an unreasonable length of time however, the court will consider that he has confirmed it' Moreover, unless the minor pleads his infancy in court a contract may be enforced against him as against anv other person. No one else may plead this for him. If he becomes insolvent, a receiver of his property may not call off any of hie contracts for him, no matter how unfair. If the minor himself chooses to stand by them, they are legally binding. Note: I. It is not safe to have any business dealings with a minor. § 39. The Subject Matter Must Be Lawful The subject matter of a contract is that which the agree- ment is about. It may consist of any property, commodity or service which could be the subject of a business transaction' or It may be to do or not to do something, such as to pay for the privilege of naming a child, or to pay a young man to abstain from using tobacco. i ^( ii 46 CONTRACTS An agreement to do anything contrary to law would be unenforceable. An agreement to do anything which, while not directly contrary to any special statute, would be in- jurious to the peace and good order, the health, or the morals of the community, would be against public policy and would be unenforceable. The following agreements would be contrary to law or to public policy and therefore unlawful: 1. An agreement to prevent a person from marrying or to break up a marriage. 2. An agreement to persuade one person to marry an- other. 3. An agreement in restraint of trade. The Supreme Court has decided that agreements in reasonable restraint of trade are not contrary to public policy. Where a person sells out his business to another he may agree not to engage in that business again within certain reasonable territorid limits and for a limited time, but the majority of the cases in this country condemn contracts to restrain trade throughout the entire state or in the entire country for an indefinite period. It is considered to be against public policy that the people of the whole state should for any length of time he deprived of the industry and skill of anyone engaged in a useful em- ployment. 4. Gambling contracts. Contracts for the buying and selling of "options" and "futures" and of stock "on margin," are regarded as gambling contracts in some states, and will not be enforced unless the party selling the stock was in some way entitled to it or was selling it as agent for the real owner. 'Fire insurance can be taken out on property only by a party who has some interest in it, and life insurance only by the party insured, his wife, child, or some other person who would be entitled to support, or by a creditor who had a claim against the person whose life was insured, or by a feSSENTIAL FEATURES OF A CONTRACT 47 business partner or employer. Otherwise it would merely amount to a wager as to whether the property would be de- stroyed or when the person would die. 5. Contracts in which usurious interest is charged. Some- times the contract itself will be enforced, but the partv will be prevented from collecting interest; sometimes he will not be allowed to enforce any part of the contract. 6. Contracts to commit a fraud or a crime. 7- Contracts for the sale of adulterated goods 8. Contracts to bribe public officials, or contracts of bribery with such officials. 9. Agreements by candidates to appoint persons to posi- tions in case said candidates are elected, or to do anything else m return for aid in securing their election. i^; ^^[^^""^"^^ "^^ to prosecute a person for a crime All of these last cases are contrary to public policy be- cause the subject matter pertains to something unlawful and injurious to the community. II. An agreement made in advance not to take a dispute into court. The law favors the settling of disputes out of court as much as possible; but it is contrary to public policy It'^l'^r^""'^ '" "^"""'^ "^ ^'' '''^^' '^ be heard in court whether by agreement or otherwise. But, while two parties may not contract to refrain from taking a possible disagreement to court, they may contract to arbitrate in a specified manner before the court is resorted to. 12 A contract to perform services in return for money made by a medical student before he has been licensed, bv a law student before he has been admitted to the bar, or by anv other person who is required by the law to submit to certain requirements before being licensed to practice his profession or vocation and who is not yet so licensed, is void; any fees which may have been agreed upon cannot be collected. When an illegal contract has been made, the courts will •*^ 48 CONTRACTS ii i refuse to interfere at all. The parties are simply left as they are, to straighten the matter out as best they can. Notes: 1. A contract to do anything unlawful cannot be en- forced. 2. No money paid on such a contract can be recovered. 3. No services so rendered can be made the basis of a suit. § 40. The Law of Place The law which governs a contract is the law of the place where it was made. If it is to be performed elsewhere, the parties may, if they wish, expressly state that it is made in conformity with the law of the state where it is to be per- formed, provided they do not do so in an attempt to evade the law of the state where it was made. A contract made in good faith to be performed elsewhere need not comply with the law of the state where it was made if there is a conflict between the two laws, but the fact that it is to be governed by the law of a state other than that in which it was made must always be expressly stated in the contract. (See also §38) § 41. The Subject Matter Must Exist There must be some subject matter in existence to contract about. If the contract were to add a wing to a house and the house were burned down at the time of the agreement without the knowledge of the contracting parties, there would bC'no contract If, however, the contract was about some- thing that has been lost or destroyed but that might be re- placed, such as a contract for the sale of grain, the contract is valid and the party who agreed to deliver the grain must procure it elsewhere. (See also § 88.) ESSENTIAL FEATURES OF A CONTRACT 49 § 42. Agreement of the Parties It is essential that the parties to a contract agree on the terms ; or, m legal phraseology, tliat "their minds meet " This agreement results usually from an offer made by one party which is accepted by the other. The offer or proposal may be oral or written, and the acceptance may be oral or written. 1 he simplest form of contract is an offer to sell goods at a specified price and an acceptance of the goods at that price. If this offer is made by letter and the acceptance is made by letter, the two letters taken together constitute a complete contract of sale. Some other points might be mentioned, but these the law will supply. When nothing is said as to terms, the law implies cash. When nothing is said about delivery the law implies that the buyer will be entitled to deliver^^ when he pays the price. ( See Chapter XVI. ) Acceptance by Mail or Telegraph. If the party making tl^ offer requests an answer by mail or telegraph, the post- office or the telegraph company becomes his agent to receive the acceptance, and the agreement becomes effective the mo- ment a properly stamped and addressed letter of acceptance IS deposited in the mail-box (even though the letter does not reach its destination) or the moment a prepaid telegram (un- less the other party had directed that it be sent "collect") with the proper address, is given to the telegraph company to be sent. ' The point is important because the person makin? the offer has a right to withdraw it if he informs the other party of his change of decision before the other party has accepted >.e., has put a letter in the mail or has sent a telegram of acceptance. In other words, a contract may be complete before the acceptance is actually received, and it is then too late to withdraw the offer. If a party makes an offer by mail or telegraph, he is regarded as having requested a reply by the same means so CONTRACTS unless he expressly asks for a reply in some other way; so that if the party receiving the offer replies in the same wav his acceptance becomes effective from the moment he mails It or gives it to the telegraph company to send. If, on the contrary, he replies m some other way, there is no agreement until the aiisiuer actually reaches the other party. In this last case, if the first party sends a letter withdrawing the offer and this letter arrives at its destination before the letter of acceptance reaches the first party, there is no agreement Manner of Acceptance, The offer must be accepted in accordance with its terms. To accept an offer in any terms other than those in which it was made amounts to a refusal The first party may decide to accept the new terms, in which case there wiU be a new and different agreement, but he has the privilege of rejecting the proposed contract entirely If the offer was made to one person only, another could not accept It; if made for a limited time, it must be accepted within that time. Advertisements offering a reward for the return of lost articles are made to the public in general and the offer may be accepted by anyone who finds the goods An offer cannot be accepted, however, after the party who made it dies or becomes insane, and it must in any case be accepted within a reasonable time; people cannot be held to offers made long ago and forgotten, or after the circumstances which led to the offers have changed. What constitutes a reasonable time will depend on the circumstances. The party who makes the offer may set a time limit for its acceptance after the expiration of which the offer is no longer open for acceptance. It is always prudent to accept a desirable offer promptly. Options, In negotiations an option or refusal may be given, good for a certain time. Unless something has been paid for an option, it may be revoked at any time because It is an agreement without consideration. An option so given ESSENTIAL FEATURES OF A CONTRACT 51 is a contingent offer and may be accepted at any time before withdrawal or expiration of time. § 43- Oral Agreement In many cases of contract the parties agree upon the terms orally by discussion, proposal and counter-proposal, suggestion and objection, until they think that they have arrived at substantial agreement. At this stage the contract should be reduced to writing. When this is attempted it will usually develop that each party has understood the discussion differently and a renewed discussion results. Finally, when the written agreement is agreed to by both, it is signed ; and then it supersedes all understandings and binds the parties. In most cases an oral contract is as good as a written one except that it is harder to prove. After a discussion of terms each party has a different impression of the conclusions reached. Certain parts deemed favorable by one party are most strongly impressed upon his memory, while other parts not so agreeable are not so well remembered, and after a year or so two men can honestly go into court and swear to absolutely contradictory accounts of the same transaction. Here the great advantage of the written agreement becomes apparent. That which is written changes not; and the law will not allow oral evidence to be introduced to contradict that which the parties have agreed to in writing. If, mean- while, one of the parties has died, the written contract is vet more essential for proof. Hence, in business, one should never entrust to memory anything that can possibly be put mto writing. (See §§ 46, 47.) Notes: 1. In most disputes over contracts, the trouble arises because part or all of the contract is not written. 2. On this account the exchange of letters makes for certainty in contracts. 52 CONTRACTS !l i § 44- Consideration ■ a cotrC"'"' "" ^'^ soniething or to give something is not a contract, since a mere promise rann^f u ."""""« '^ not There must be a con.irlL. f T ^ enforced by law. tion being soletZ.;" ""^ *' P™*"'^^' *^ "^^n^idera- party "^ something done, given, or promised by the other One party's promise is a good consideration tr. .u promise of another party. If A agrees to n, r ^ *^ service and B agree' to^erform'S e^fce f ^.hr"" tract has been created and A must fnlfiM '°"' B has fulfilled his Or if A Z ' ^'"""'^ ^'^^" delivered to C. when B hi'^^^Je^X^VmLf ofV^""^ promise in return for .„^*u . ^ P^'''°" '"^es a require him t^™ie ^0..- ^"■'°" ' P'^™^^' *^ ^^^ ^iU has fulfille" Us^W^:j:Zlf^ *^ ^^^^ ^^^ sideration for each other An P™""'"' ^''^ «=«"- ordinal, real eTtJe Xf Ih^r^ o^Tart^ '°""' ^ ^" seU and the other party promiles Tbu; The' o'n'r'":- '' for an enforceable contract may be vert ;,n.ll '*'""^Y^"«" the vali«» nf «,»,..* • ''^'- "ay oe very small compared with uie value of what is agreed to by the other oartv it m, k inadequate or even insignificant. ^' ^ "^ For instance, a man might offer to rive hi^ <^n «, ~^ -r he woi^d ref^ f.om smoLg until he'^;:';^/^^ It money, but he is giving up the right to smokp_n„^ *i, tract will be enforced. In this case fh! ~^^"d the con- $1,000 is the surrender of a privS^*' consideration for the It IS very common to mention the sum of "*««-<= obligation in a contract. to make contracts? If a person not competent to make a contract s.gned an agreement, what would be the effect" ^n^LhVriire- " """'"'' *°-^"'^ =°™ - "^-^ -te 7. What ,s the legal age of majority in your state? 8. If a mmor represents himself as of age, what is the effect' '" i^yTr it^tu" ""t^t' =°"'' '^ ''-' '-"^ -"- to ,„ H^r^ Suppose he had wrecked it? o. When may a creditor enforce a contract against a minor' ".^is%re;r'""°^'''"''^"^-"-"°^— ^««e? why '^o'diltit^i mip -""^'^ ''■■-''"-■^■•"•' ^-^ ^^ ^' -afe What two classes of contracts are unenforceable? What aeree ments about marriage are unenforceable ' ^ '" wSlare "ir" '' '° "'^'^"'^'^ i" restraint of trade"? wnatare wagenng contracts" ? It' wh« '!J'" "" ''^ '° "^"'y •" y°"' *'«e? a wu ° agreements are illegal ? ■ of" ht'iat whirTT • '' ^ T''"' ''"-'^' 'y ♦"« '- delivered in Vr^-f " u"**^'' ^ ^^^^^ '^^cuted and ^''vered m California is the subject of a suit in New York. 12. 13- 14. 15. 19. 20. 21. 22. ESSENTIAL FEATURES OF A CONTRACT 55 What laws govern the vah'dity and construction of the con- tract? What laws govern the remedy? What is the rule as to existence of the subject matter? If a sale were made of a particular horse at another place and the horse had died before the contract was made, what would be the effect? Suppose the purchaser had paid for it? What terms as to payment are implied in a contract? As to delivery ? When do the minds of the parties meet in a contract made by mail or telegraph? What is the rule as to the method of acceptance ? A writes and offers goods to B, in another town, at a stated price. B receives the offer and immediately writes back to A his acceptance. The letter is deposited in the mail-box but never reaches A. A, not hearing from B, offers his goods to C, whose acceptance reaches A. B sues A for breach of contract. Has he a cause of action? Why? A, on March 21, wrote B, a day's journey away, and offered B a position. He ended his letter by saying: "You will confer a favor by giving me your answer by return mail." B received the letter on March 22. B on the 23d wrote her acceptance and gave it to a boy to mail. The postmark showed that it was not mailed until the 25th. A not receiving answer offered position to another. B sued for breach of contract. Has she a cause of action? What is the effect of accepting with a slight variation of terms? How long does an offer stand open? Why is a written contract better than an oral contract? Why should the terms of an agreement be definite? 26. Why cannot an agreement without consideration be enforced? 27. If a man owes $100 and agrees to pay $50 in discharge of the debt, can he be made to pay the remainder ? Why ? 28. Without other consideration is payment of a smaller sum ever satisfaction for a debt of greater amount? 23- 24. 25 CHAPTER VII HOW CONTRACTS ARE MADE §45- Classification of Contracts In this book contracts have been class}fi«l =,..„ a- function, into contracts of sale con^rffT according to tain other more arbitrary T:'^^T 1 ^^""'^' ^*^- ^er- only occasionaDy reS t f 0^^ 'T'*=''' ^^"^"^ subject of examfnation queslns X";t ""' ^'"'"'"*'^ *«= sifications are explained rrpL^rchtter^" ^'^^^ ^'- who Xif tht s^rs^o'Lirt 1^'^^*'°"^"^' •'"^ *- the required contS, ranrr^aHf^r '! ^ ^^^ rules of loric For pv=.™„i '^ ^''^ ^°"ow the are contracTs of ^l^t;r? o'fT" ''""'7 '^^ ^^^ Judgnients and -ognLc^^^As a ^ar^ffaTV' a judgment nor a recoenizanr^ ;= , . *^' "*'**='" legal definition. CSS^^n^rS ^tV^ ^ «s no agreement Nevertheless the text IJkc " n V ' entries "contracts of record." " *^'^ '^^"'^ i^ther common question is: What is a «mni» * , and the answer exnected ic • a . f "^'^ contract ? seal. In fact. Stord Imn. "t* °^ ''~^^ °' ""'J^^ pound. compi;xtrI^carSirrantarf °' ^°'"- simple contracts are more complex aTJhr u "^'"^^^ tract under seal such as , I P'^"" ,*"^ ^^^'^sc than a con- / uu not make it complex or affect its 56 HOW CONTRACTS ARE MADE 57 Character in any way. Nevertheless, those who are preparing for exammation must know how to answer questions of this sort upon occasion. Contracts, then, may be classified in regard to dignity and facility of proof as follows: (i) oral contracts. (2) written contracts not under seal or of record. (3) contracts under seal, and (4) contracts of record. AU contracts not under seal or of record are caUed simple or parol contracts whether in writing or not Fomal contracts are contracts of record, bonds and recognizances, and contracts under seal, which include all deeds and instruments affecting land that are required to be recorded in offices of pubhc registry. § 46. Oral Contracts A contract may be made simply by word of mouth or by words and acts. Such a contract is called an oral contract ; '* r^ """^^ necessary to go into court in order to enforce it It will be necessary to prove it by oral testimony. The parties to It will be called on to testify as to what was said and do^e Z. ^"5: °*"^ P^°P'^ ^^^« P>-«ent either party may call them as witnesses. j y-o^^ In such a case the difficulty is that the agreement has not been reduced to writing and the various parties present prob- ably have enbrely different ideas as to the meaning of what Aey heard. The court may decide that the testimony as to what happened is so vague and contradictoiy that it cannot insist rt.,r ' '""'•■''^ ^^' P"'*^^"* •'"^•"^^^ ^^ will insist that an agreements be made in writing and properly X ^hl" '; ^1. *"^ "^^ "^ "^ ^"^^''«" -« to just what obligations he has assumed or what he may properly expect from the other party to the contract. . Some contract! must be in writing or the courts will refuse to enforce them ^oee 8 40.) 5^ CONTRACTS Notes: 1. Avoid oral contracts. 2. Have all contracts written and signed by the parties thereto. § 47- Written Contracts The written contract need not be a formal document Two letters, one making a proposition and the other accepting it constitute a contract just as much as a legal document duly signed and sealed and acknowledged before a notary. The written contract should contain all the terms— the names of the parties; a statement of the consideration, with the tune and the method in which it is to be paid or per- formed; a dear statement of just what is agreed upon, when It IS to be done, and in what manner; together with any arrangements the parties wish to make if something happens to render the contract impossible of performance, or in case It is only to be performed under specified conditions. (See Chapter XCVIII, "Drafting a Contract.") Business men are accustomed to expressing themselves clearly, concisely, and explicitly in their letters. Letters and copies are always carefully filed and preserved. For this reason when legal assistance is dispensed with, a letter from the party making the offer and a reply from the party accept- ing or rejecting it are usually the most satisfactory method of securing a written contract Each party has his own records. Since they are accustomed to expressing themselves by letter, they understand what thev have agreed to better than if the terms were expressed in formal, legal phraseology Even if a lawyer is called in later, the exchange of letters is a good way of making an agreement. If there is an extended correspondence before the parties finally arrive at an agree- ment, the last letter should sum up all the terms on which HOW CONTRACTS ARE MADE . 59 they have finally agreed, and this should be answered by a simple letter of acceptance, repeating the terms as therein stated. (See Chapter C, Forms 13, 14.) Note: I. Write all contracts. Never trust to an oral under- standing. § 48. The Statute of Frauds In order to do away with the uncertainty of relying on people's memories in contracts by word of mouth, there was passed in England in 1676, a law called the Statute of Frauds, which required certain contracts to be in writing. This statute has been copied into the law of most of the states of the Union. The Statute of Frauds requires that the contract shall be proved by some memorandum in writing. It is not necessary to make the memorandum at the time the contract is agreed upon. If any memorandum or letter containing the essential terms of the contract, i.e., the names of the parties, the con- sideration, and enough to show the nature of the agreement, and signed by the party to be held, is written at any time before the other party comes into court to enforce the con- tract, the requirements of the law are satisfied. Form of the Memorandum, The memorandum must be signed by the party against whom it is to be enforced, or he will not be liable under it. It need not be signed by the other party. Under the law as enacted in some states, this signature must be at the end; in others it is sufficient if it is put in any part of the memorandum with the intention of signing. This written memorandum need not be one paper ; it may be written on two or three sheets if all refer to each other plainly and together make a complete memorandum of the terms of the contract. At an auction or a sheriff's sale, the auctioneer or II II 6o CONTRACTS II i I the sheriff is the agent for both of the parties and may sign a memorandum for either of them. Contracts Which Must Be in WriHng. The following contracts must be proved by a written memorandum : 1. A contract where the consideration is marriage. 2. The promise of an executor or an administrator to pay a- claim against an estate which is in his charge out of his own money. If any property of the estate is left, the claim wdl be payable out of that, but in any case the executor or the administrator will not be liable personally unless there is a wntten agreement 3- A promise to be responsible for the debt, the default, or the miscarriage of another. This means a contract of suretyship or guaranty, which wiU be explained later. (See Part XIII, "Suretyship.") I f i^?"^^^^ ^°' *^ ^« of land or of any interest in land. This does not refer to a deed, but to a contract to give a deed. A deed must always be in writing. A deed which is not in proper form to operate as a deed may some- times operate as a contract to seU the property, and the party will be compelled to give a good deed. A defective deed can- not be corrected without much trouble. If a person makes a contract to sell or to buy land through an agent, the agent must in most states be given authority m wnting to sign the contract Growing things, such as trees, grass, and plants that come up of themselves every year are regarded as part of the land and a contract to sell or to buy them must be in writing Crops which have to be planted every year are not regarded as part of the land even while they are growing. A lease of real property, if it is to last for over a year must usually be in writing. ' 5- A' contract which is not to be performed within a year from the time it was made. A contract which might possibly HOW CONTRACTS ARE MADE 6i be performed in a year, although it might take longer, need not be in writing to be enforceable. It is always better, how- ever, to have such a contract in writing. 6. A contract for the sale of personal property of over a certain fixed amount in value. (This is explained fuUv in Chapter XVII, "The Statute of Frauds.") Note: I. The fact that an oral contract may be unenforceable because of the Statute of Frauds is another reason why all contracts should be in writing. § 49- Contracts Under Seal The use of the seal is a survival from the time when very few people could read or write. The seal was used on the most important documents as we use a signature today Be- cause of the importance that was attached to it then, the seal IS still used on documents of the greatest importance. Deeds and mortgages of land, and in some states wills must be under seal. A power of attorney to deed land alsci requires a seal. A seal on any document such as a deed or a contract is regarded as showing that there was consideration for the deed or the agreement whether any is mentioned in the document itself or not In this country, however, a person IS usually allowed to prove that there was no consideration even if there is a seal. ' A seal may in many states be merely a scroU. In others a little red wafer is used. In New York the letters L.S {locus stgtlli, the place of the seal) which were originally intended as instructions as to where the seal should be placed, are now regarded as a sufficient seal. A corporation generally verifies papers, particularly im- portant documents, with its corporate seal. A contract under seal is also called a contract by specialty \ 62 CONTRACTS The word "covenant*' is applied as follows: (i) It may be a written agreement under seal; (2) It may be a modifying agreement contained within a deed or other sealed instrument; (3) It may be a clause of an agreement contained in a sealed mstrument. Note: I. Seals are generally required in connection with legal papers dealing with real estate, on bonds, and sometimes on wills. § 50- Contracts of Record Contracts may be distinguished as to whether or not they are of pubUc record ; that is, filed or recorded in some court or public office. The highest form of contract of record would be a judgment, which may be called a contract of record although it lacks any element of a contract. It may be founded upon a contract, but when a judgment has been secured so tnat it is of record, it becomes a claim that can be collected at any time at the option of the party in whose favor it has been rendered. Another form of contract of record is what is called a recognizance. In certain legal procedures a party is required to give bond or furnish surety that he will appear before the court at a certain time or that he will keep the peace, observe the terms of an injunction, or do some other thing. Though this is a compulsory proceeding, and has no single trace of an agreement or a consideration, it is nevertheless caUed a con- tract of record. Othei- contracts of record are deeds, mortgages, contracts to convey land, or other instruments which, after being ac- knowledged before a notary public, are filed or recorded in the office of registry for record for the particular locality. Acknowledgment is a prerequisite to registration. (See IIOW CONTRACTS ARE MADE (,^ Chapter XCIX.) These have been referred to alreadv as ^r^ under seal because most of them are evide^S b; § 51. Express and Implied Contracts An express contract is a contract the terms of which have l^en spoken or written and agreed to by both partie Jt i ri ts ir"" TT ''^ -"t-^-tinction to'implied con! AniS '7' ^ '"^'"'"'^ '"^ "°* ^^'^ express words, nro^r 7 t '*'"*'^*^* '' ^ '^^"^"■^^t *^t arises where no prfce thaf Se £ I" T^' '^ ^^^ '"' ^'^' "^^ -"y Sue It .-f f ""ght charge, but at their reasonable value. It ,s not necessary that he should promise to pay for the law holds that a contract to pay for them at what thev the service may claim compensation in court rent uT Y u^ '"'P^"' " P""*""'^^ *« P^y ^ reasonable thel **7~P'^ ^^^' ^ "^"ning account with each other the law considers that they have promised each other that S one from whom a balance is found to be due shaU pay tha that the party has willmgly taken the benefit of what was done If somethmg was done for him without his making any rel quest, and without his afterwards making any use of U he could not be charged for it ' r.n!l' "^'^T '""^"""' ^ "'^" '"^* ^''^^ ^t your door every morning, and you used it. the law would imply a promise o^ your part to pay for the bread. If he put a n'ew roofTn you^ house m your absence without orders, he could not collet for 64 CONTRACTS It, because you would have to use the new roof whether you desired such repair or not. In case the person who performed the service intended to do it without claiming payment for it. It would be a gift and there would be no implied contract to pay for it. Note: I. It is always most satisfactory to have a distinct understanding as to prices for services rendered. Even .lawyers, dentists, and plumbers are some- times believed to overvalue their services. § 53. Quasi Contracts It win require close observation to distinguish implied con- tracts from quasi contracts. A quasi contract is a contract implied in law from the circumstances and without regard to the intention of the party who is bound. For example, a man staying at a hotel suddenly dies. The proprietor of the hotel calls in an undertaker who takes charge of the funeral preparations. The undertaker sends his bill to the executors of the man's estate. In this instance there was no consent on the part of the man or his representatives, yet by law it was unplied that his estate should be bound for the obligation, and that there was a quasi contract to that eflfect. The following is another case of quasi contract : In Cali- fornia a law was passed providing for a certain number of pilots to meet ships coming into the bay of San Francisco and take the ships in. Each ship was to pay its pilot a certain sum. Therefore, if a pilot took the trouble to go out to meet a ship and the officers did not wish his services, he would have to be paid a sum, if not the full and usual fee, enough to pay for his time and trouble in meeting the ship. HOW CONTRACTS ARE MADE 6S § 53. Executory and Executed Contracts An executory contract is a contract that has been made Dut has not as yet been carried into effect .ff ^AT"u''' '"""■^'^ '' *'"" *^t has been carried into effect by both parties. A contract that has been carried out by one party and not the other would be executory from one pomt of view and executed from the other point of view. § 54. Conditions Precedent and Subsequent fh. ^r"'^'''°" P''^"<^«"t is something to be performed before fte otiier party can be required to do his part. It is some! emptoyment it is necessaiy to do the stipulated work before there IS any clami for payment. The performance of the work IS the condition precedent. (See also §§ 109 no ) f™.f TT^^ subsequent is a condition attached to a con- tract the fulfilment of which will discharge the obligation The simplest instance of this is the purchase of goods wih ?al,T !^ '?™"^ "^'"^ ^'*'" ^ "rtain number of contrt. f 1^°'^' "'' ^'^- " *^ ^"^^ ^'^ '^turned the contract of sale is annulled, and the purchaser is not liable it^rSdi:' '^ '" '''' '' ^'' ^ ^"^^^^ *° •^^ *^ ,«,.f f^«^] mortgage is another instance of a condition sub- sequent. If the condition is performed and the pavment «^cured or made, the chattel mortgage becomes void and the person who makes the payment has clear title to the goods. § 55- Void and Voidable Contracts leJelli °'. unenforceable contract is one which has no legal effect and on that account cannot be enforced. It is not necessarily an illegal contract, though an illegal contract would DC a void contract. A voidable contract is not absolutely void, but it can be I 66 CONTRACTS avoided by one of the parties concerned. A contract with a minor can be enforced by the minor but if he does not wish to carry it out he can avoid it. (See § 38, "Minors.") § 56. Drafting a Contract Where an important contract is to be drawn up, a lawyer should be employed. Where the contract involves nothing more than a simple sale, a contract of hiring or other ordinary busmess transaction, any inteUigent man who knows how to use the English language should be able to draw up a plain, understandable statement of what the parties undertake to do! A chapter in the latter part of this book has been given to this subject. (See Chapter XCVIII, "Drafting a Contract") Review Questions I. 2, Qassify contracts as to grade or ease of legal proof. What is the difference between simple and formal contracts? How must an oral contract be proved? 3. What data should a written contract contain ? 4. What is the Statute of Frauds? What was the object of it? By whom must the required memorandum be signed ? Which arc the contracts that must be in writing? 5. Where must written contracts be signed in your state? 6. In marriage, is the contract a written one? 7. When is one liable for a debt, default, or miscarriage of another ? Does a loan have to be evidenced by writing? 8. Is an oral contract to sell real estate enforceable ? Give reason for answer. 9. What amount of personal property would require a written con- tract for its sale in your state? Would a contract to write a book have to be in writing? What instruments require a seal? What form of seal is re- quired ? What is a contract by specialty ? What is a covenant ? Define contracts of record. What is a recognizance? What is the object of acknowledgment? 10. la. HOW CONTRACTS ARE MADE 67 13. What is the difference between express and implied contracts? 14. What is a quasi contract? 15. What is the difference between an executory and an executed contract? May a contract be executed on one side and executory on the other? 16. What is a condition precedent? What is a condition subsequent ? 17. What is the difference between a void and a voidable contract? If you contracted to rent a house that burned before the tenant moved in, would it be illegal? Would it be a void contract? CHAPTER VIII EFFECT OF CONTRACTS § 57- Illegal Contracts What constitutes an illegal contract has been explained in § 39. The point to make is that no contract which is against the law or against public policy can be enforced. If the parties come into court, both are equally chargeable with knowledge of the law and therefore with guilt in breaking it; and the court will refuse to help either or to interfere at all. If one of them has been defrauded out of his property by inability to enforce the contract, that constitutes his punishment for en- tering into such a contract Such a party cannot get his property back nor can he enforce the contract. There is a legal maxim to the effect that "ignorance of the law excuses no one/' This seems harsh, but it is rigidly en- forced. Therefore, if there is any doubt about the legality of a contract, the parties should assure themselves that it is in accordance with the law. Ignorance or good intentions will not excuse a man if he makes an illegal contract CSee also § 59.) ^ Sunday Contracts. In almost every state contracts made or to be performed on Sunday are illegal, unless they are for some purpose of charity, necessity or mercy. To be necessary, however, the thing done must be something intended to pre- serve life, health or property. § 58* Effect of Mistakes There are two kinds of mistakes possible in making a contract: 6B EFFECT OF CONTRACTS 69 Jl • 2. A mistake as to whom one is dealing with, what the agreement is about, or what is to be done under the contract. A mistake as to the quality or the value of the sub- ject the contract deals with, or its legal effect. A mistake under the first heading will mean that there is no contract. A party cannot be forced to observe a contract with someone with whom he did not intend to contract or in regard to something he did not consider. The parties must be considering the same thing and must be agreed as to what is to be done about it, or there is no meeting of their minds and no contract. If, however, there was no mistake as to the parties, or as to what the contract was about or what was to be done the fact that either or both of the parties believed that the subject of the contract was more or less valuable than it actually was will not make any difference as to its binding effect. An agreement has been made and they will be held to it even if it means loss to one of them. Neither will it make any difference if either or both of the parties did not realize that he would be bound by the contract or did not know just what he was required to do under the law to carry out his agreement. Every man is supposed to know the law, and it is his own fault if he failed to find out about it in the first place. If a person knows that the instrument he is signing is a contract, and fails to read it, he will be bound by it even though It is a contract to do something entirely different from what he intended. No one should ever sign contracts without read- ing them. In case, however, through the fault of some clerk in writ- ing the contract an error of some sort gets into the written document so that it misrepresents the actual agreement be- i 70 CONTRACTS tween the parties, the court will order it rewritten to express what they really agreed upon. That is, a clerical error wiU be corrected. Note: I. The terms of a contract should be written down clearly and in simple language. Both parties should then read them over, and any questions that arise should be cleared up before signing. Much trouble and litigation would be saved if this course were followed in all cases. §59. Effect of Fraud If there is any fraud in inducing a party to enter into a contract, he may refuse to perform his share of the agreement. If the contract is already carried out, he may recover his property or its value. If he wants to annul the contract, how- ever, he must return anything he has received under it unless it has been used up or destroyed at the time he discovers the fraud. If he prefers, he may let the contract stand and claim damages for any loss he may have suffered. What Constitutes Fraud, If any false representation is made by a person who knows it to be false or has no positive belief or adequate knowledge in regard to the matter, intending to induce action and to create a false impression in the other party's mind, or to prevent him from investigating to find out the truth about the transaction, it amounts to a fraud. Mis- statements about unimportant matters, or mere expressions of opinion in recommending an article for sale, do not affect the contract The buyer must be on his guard against overstate- ments of opinion by the seller as to the virtues of the article he is selling. Overstatements are to be expected everywhere. When a party relies on the opinion of an expert, however, or when he seeks advice from a person in whom he has a EFFECT OF CONTRACTS 71 right to repose confidence, such as a father, a guardian or an . attorney, it is a different matter. Then an expression of opinion without sound grounds would amount to fraud If the reading of a contract be dispensed with as the result of fraud, the injured party may refuse to live up to the terms of the contract, or he may claim damages for the injury sus- tamed. This rule holds good also whenever the legal effect of the contract has been misrepresented or when a fraudulent value IS placed on that which is being bought or sold. The injured party must act promptly as soon as he dis- covers the fraud. By delay he may lose his rights, since he will be considered to be content with the terms of the contract. Taking advantage of another person's mistake is fraud In Shelton v. Ellis, Shelton & Co. learned of a mistake in the rate sheet of the Western and Atlantic Railroad Company by which the fare from Atlanta, Ga., to Rogers, Ark., was quoted as $21.25 when it should have been $36.70. They in- duced Garland, a traveling salesman, to buy a large number of tickets for them before the railroad company discovered the mistake. The court held that the tickets must be returned.^ If any part of the representations which induced the other party to enter into the contract was fraudulent and had any effect m inducing him to agree to it, the fact that most of the representations were honest will not make the contract good But if the fraudulent representations referred to matters of no consequence and were not material to the contract they will not affect It. Also, if the other party relied on his own judgment m the matter, rather than upon what was told him, the f raudu- lent misrepresentations will make no difference. What Fraud Will Nullify a Contract. Fraud in any of the negotiations leading up to a contract will nullify it If fraud has prevented the party from making an independent investi- gation^or if it has led him astray in regard to the facts, it will * 70 Ga. 397. 72 CONTRACTS make the contract void. Fraud not connected with the im- mediate contract but with previous negotiations will not affect the present contract Specious Schemes. Ordinary people of the salaried and the professional classes lose money running up into millions of dollars by investing in aU sorts of specious get-rich-quick schemes. If they would study the prospectuses of these schemers, they would see how carefully they are written so as to avoid any positive statements but to give a strong impres- sion by a series of carefully worded opinions, estimates, etc. Such phrases as, "it is estimated," "it is expected," "there is every reason to believe," "it is the opinion of old miners," are used again and again. It is astonishing how plausible a prospectus can be made without giving any positive statement, except as to comparatively immaterial matters. The important matters in deciding upon an investment are: 1. The character and the experience of the manage- ment 2. The amount of capital there will be available. 3. The subject matter of the business. On these essential points there is rarely any positive in- formation in prospectuses of this sort. Note: I. Consult your own lawyer or banker before investing money. § 60. Duress A party must consent to a contract of his own free will. That is the essential element of an agreement. Consequently, if his will is overpowered by that of someone else, the result cannot be a contract that will hold him. There are two ways in which a person may induce another party to make a contract against his own free will. One is by EFFECT OF CONTRACTS 73 the use of intimidation or force, the other is by taking ad- vantage of mental weakness or of affection to influence him. If a party signs a contract in order to escape from im- prisonment or detention of some kind, he has signed under duress and not of his own free will and the contract cannot be enforced. If he signs it in fear of immediate bodily harm, which he has every reason to believe the other party is capable of inflicting, the same holds true. In a case where there is no detention but merely threats, the threats must be either of bodily harm or of imprisonment to the person himself or to some member of his family, or of an injury to his property, and must have been made under such circumstances that a man could reasonably believe that there was immediate danger of their being carried out As soon as a party escapes from duress or from fear of the threats that coerced him, he may rescind his contract and re- cover any property or other consideration, or value therefor, that was taken from him under the contract §61. Undue Influence Undue influence is when one party takes advantage of another through near relationship, such as that of attorney and client, doctor and patient, guardian and ward, etc. ; or when the second party is mentally weak and at the mercy of his more keen-witted fellow men. A deficient person can hardly be said to exercise his own free will; contracts can readily be imposed upon him by others, and when this imposition can be proved, contracts made with him have no legal standing. When a person takes advantage of mental weakness, or of near relationship, or of confidence reposed in him to influence another person to make a contract, it is not the free action of the second party and is no contract. People who are merely friends are not considered to be in such a position that the one can exercise an undue influence over the other. Where the 74 CONTRACTS a suspicion of undue influence. If die person recovers his mental health, or is senaratw! from the party who influen«d him. he may "fu e to ca ^ o^ bs contract and recover anything he has tunied over to the other party under it. His friends and relatives may also act for him in order to protect his property while he is still under the inZce of the other party, or too incapacitated mentally to act for h7mif Note: 1. No contract is of any value unless it is made by the free and unbiased will of both parties. § 6a. Law as to Alteration Any alteration in a written contract by one of the oarties without the consent of the other, makes'the contra^ 'i" effect as against the other. The parties to a contract may alter it if they can agree on ^e changes to be made. If it is a written contract, one of th^ parties may make the alterations in the contract itself with the consent of all the other parties, or the parties may m kTa „ t wntten contract If parties attempt to modify a written con" for I H-^." or^^ agreement there must be a new consideration for t distinct from that of the original contract, so that in effect a new and oral contract has been made mJ 1^,1^''^^^^«^ I^ Ae same parties make a new agree- ment about the same subject which is entirely inconsistent with the old agreement, the old agreement will be regarded as set aside by the new. If, however, there is any part of it which L^f^rTf '"^, with the new, that part still remains en- forceable. ( See also § 69. ) If one of the parties to a contract makes alterations in it witiiout the consent of the other parties to it, this amounts to fraud, and the contract becomes unenforceable by the guilty EFFECT OF CONTRACTS 75 party. If a person, not a party to the contract, and not acting for any of the parties to it, should make alterations in it, they would be treated as though they did not exist. The nature of the original contract could be proved by the testimony of the parties, and the contract would be enforced as it stood before the alterations were made. Filling in a Contract If the contract is not complete, how- ever, but blank spaces have been left for any of the terms to be filled in later, any party to it to whom it is entrusted may fill out the blank spaces in any way which would be consistent with the other terms of the contract and enforce it as he has made it. If he were given instructions for filling it out, he himself could not enforce any other contract than one that was in accordance with the instructions, but he might fill it out contrary to the instructions and transfer it to another party, who, knowing nothing of the instructions, would be entitled to enforce it as he received it. This question arises more often in the case of negotiable instruments and will be spoken of under that heading. (See § 161.) Notes: 1, The best way to change an existing contract is to make a new written agreement signed by all the . parties. 2, A new contract may be made by letters if they point out clearly what the new agreement is. 3, It is not safe to leave any writlen instrument with unfilled blanks. §63. Interpretation of Contracts A contract should be so clear that its meaning may be easily understood. As a matter of fact, many contracts are far from clear and all sorts of disputes arise over their meaning. A contract should be interpreted so as to carry out the in- tention of the parties as nearly as may be. TTie court will 76 CONTRACTS ^ A «™. .a, ^ r;,:- :;tr„r.: r;,n; the state where it was entered into. we law ot . fc getting at the intention of the parties where the contract js not dear, anything which is unessential and tends to conS the meaning will be disregarded. If there are two statemen I which absolutely conflict, the court will considerXleT gives the true meaning and will disregard the latter The parties may bring in evidence to show the meaning of any technical terms which were used Jtr.T "'^^"'"^ wpII T^r^^: A . • °^ *° prove some weU-recogn.zed custom or usage of business which will explain Srt ofT"^ "l "'■*"° ''^'- °' ""*=^ ^y ^ consider d part of the contract. tnese will be read in connection with it. /?«/^.y /o Ascertain Meaning of Contracts. There are cer- tain general rules which the court will always follow to get \?l TT"^ ""^ ^ '^"*'^"*- ^^ ^^ that in a printed form which has been filled out, if the written and the printed wor^ are inconsistent, the court will disregard the printed words and follow the written ones. If any words or phrases are inconsistent with the rest of the contract, and a clear intention can be gathered from the rest without them, the court will treat them as surplusage. ^^ If a general term is used, such as an agreement to do the mason work on a building, and it is followed by the mention of any specific kinds of mason work, such as "stone and brick work, plastering, 'etc., it is a contract to do only the special kinds of mason work mentioned and not all the mason work on the building. In order to make a general contract for all the mason work, this intention should be clearly stated If any of the terms of a contract were intentionally made ambiguous by one of the parties for the purpose of taking EFFECT OF CONTRACTS 77 advantage of the other party, the court will interpret the doubtful terms in the way that will least favor the party at fault. In trying to decide what the parties intended where the meaning is doubtful, the court will be influenced by the words and the acts of the parties at the time of making the agree- ment, or the manner in which they have carried it out since. Their manner of carrying out the conditions shows what they understood by the agreement. Notes: I. A contract should always be stated in the simplest and most intelligible language possible, and the parties should go over it carefully to make sure that all of the terms are clear. If it be desired to make it with reference to some particular business custom, it would be well to mention that custom in the contract so that there can be no doubt that both of the parties under- stood that it was to be part of the contract. mm Review Questions I. 2. Is the rule in regard to ignorance of the law just? Why is it enforced? What is the law in your state in regard to Sunday contracts ? Explain the distinction between mistake of party, subject matter or obligation, and mistake of the quality, value, or legal effect. 3. What is the effect of signing a contract without reading it? If the party had dispensed with reading because of fraudulent statements of the other party, would that affect the situation? What is the effect of a clerical error? 4. Broadly, what is the effect of fraud on a contract? What is fraud ? 5. Distinguish between misrepresentation and expression of opinion. When is the expression of opinion liable to be fraudulent? 78 CONTRACTS 7 Sr/rS'".*"'' '^'"'°'"^' °* '"°"'*' P''^"''^ "intake? ^' wi«1^,'?K "P'^^'«="'°"» »>-«>» "ake a contract void? What are the exceptions? & How are proq^ctuses worded to avoid open fraud? What are „ WK ! ]■"* .T"" P"'"'* •" »"y proposed investment? 9. Wha does duress" mean? What is its effect on a contract' ^V "T* ^ """""' •"""'"""• What is iu legal effect on a contract? * "■ ^aif *' "* f" *V"fr« "^ ~"'"^'^ What is the best way to alter a contract? Why? It wkT "' l^'^'ir'"'^ °^^^ ^»»« interpretation of contracts. Why> It rt \f" """T "' ''' ""^^^ '"^ interpreting contracts? "^^ 14. A bought a cash register on the statement that it would save AfUT"l' 1 ^ ^^^^^P^' ^d one-half of the clerks' time. After a short time he alleges that the statement was false and seeks to rescind the sale on the ground of fraud. Was this fraud, or statonent of opinion, and what is the result? CHAPTER IX ASSIGNMENT AND NOVATION § 64. Assignment of Contracts A contract which calls for personal services cannot be assigned by either of the parties to it. No one can be com- pelled to work for a person unless he agrees to it; and no one can be compeUed to have another working for him whom he did not choose, and these conditions would result if sucli contracts could be assigned. A contract which depends on the skill, ability, or trust- worthiness of one of the parties to it cannot be assigned by that party, but may be assigned by the other party. For example, a contract to write a poem cannot be assigned by the poet, but may be assigned by the publisher. The rights in any other contract may be assigned by either of the parties to it unless there is something said in the con- tract to forbid it. A party may assign a contract by simply handing the written contract over to the party to whom he assigns it, or by informing the other party to the contract by word of mouth that he has given up all his rights under it to the person to whom he wishes to assign it. Where the party desiring to assign a contract is under obligations under the contract, he cannot assign these without the assent of the other party to the contract (see § 65, "Nova- tion") ; otherwise he would still remain liable for whatever he had bound himself to do or to pay in the contract. Form of Assignment, The proper way to assign a con- tract is in writing, usually on the back of the contract, if it is in writing, or if it is an oral contract, by a written assi^ment. 79 8o CONTRACTS In the case of contracts under the Statute of Frauds, the law requires the assignment to be in writing. No particular form of words is necessary if the intention to transfer all the rights in the contract is plain. (See Chapter C, Forms i8 and 19.) _ Liahhhcs of the Assignee. A person to whom a contract IS assigned by one of the parties becomes liable to perform aU the duties of the party who assigns the contract He re- ceives only such rights as the original party enjoyed under the contract If the contract was obtained by fraud, duress or undue influence, or the other party to it was not competent to make a contract, such other party may refuse to perform It just as much as though the assignee were one of the original parties. ^ If the party who assigned the contract owed the other party anything which could have been offset against the con- tract, the other party may offset that amount against the person to whom the contract has been assigned. Rights of Assignee. If a party should assign all his rights under a contract to one person and afterwards assign them to another, the second person would get no rights under the contract If the party assigned only part of his rights to the first person, the second person might enforce such rights as remained. The second person would be entitled to sue for damages the party who claimed to assign the contract to him. Subject to the rights of the other party, the person to whom a contract has been assigned may bring a suit to enforce It m all cases where the party who assigned it to him would be entitled to do so. In some states, if he sues in a court of law, he must bring his suit in the name of the person who assigned the contract to him. He may sue in a court of equity m his own name. In a case where there have been several assignments, the suit must be brought in the name of the party who gave the first assignment ASSIGNMENT AND NOVATION 81 A person to whom a contract has been assigned should notify the other party to the contract at once that the rights under the contract have been assigned to him. If there has been an assignment to any other parties, the one who is the first to give this notice will be entitled to have his rights en- forced first. Then, too, it prevents the other party from pay- ing out anything to the person who has assigned the contract If such payment has been made in ignorance of assignment, the party to whom the contract has been assigned could not compel payment again to himself. Notes: 1. All contracts which do not involve the personal element may be assigned unless prohibited by the law or by public policy. 2. Any form of assignment which cuts off all control of the assignor over the contract will be sufficient 3. The assignee takes aU the rights which the original party had in the contract, and the contract is sub- ject to all the defenses which have arisen prior to its assignment 4. The assignee should always give the other party prompt notice that the contract has been assigned to him. § 65. Novation Novation is the substitution of other parties, or another party, for one of the original parties to the contract. Where John Smith has an agreement with Henry Jones to buy a horse for a certain sum, and instead of doing so he assigns the contract to Samuel Brown, and Henry Jones agrees to take Samuel Brown as party to the agreement, this is a novation. Samuel Brown has been substituted for John Smith in the contract, which can now be enforced against him, Samuel Brown. 82 CONTRACTS Agreement of ParHes. In order to constitute a good novation, all the parties must agree to the arrangement. Henry Jones must discharge John Smith from his agreement to pay for the horse, and take Samuel Brown's agreement in place of It; John Smith must have assigned all his interest in the contract to Samuel Brown, whose agreement to pay for the horse is the consideration for Henry Jones's acceptance of him as a substitute for John Smith, If any of these considera- tions are lacking, the novation will not be enforceable. In Ford V. Adams,* Jacob Schyer owed Ford some money He gave a written order to Adams, who owed him, Schyer to deliver 40 cords of wood to Ford. Ford accepted the substitution. Adams did not deliver the wood, and Ford sued him for it. The court said that there was not a good novation, because it was not shown that Schyer had released Adams's debt to him, and without that there would be no consideration to Adams for his promise. Notes: 1. To constitute a good novation, the other party to the contract must accept the substitution and must release the party making it from his obligation to him, 2. The party making the novation must assign to the new party all his interest in the contract. 3. All of the parties must accept the new arrangement. Review Questions 1. Why cannot a contract for personal services be assigned? 2. Can a written contract be assigned orally? 3. Write an assignment of a written contract. 4. What does the assignee of a contract have to do? ASSIGNMENT AND NOVATION 83 5. What rights would an assignee have? Can an assignor relieve himself of his liability under a contract by making an assign- ment? 6. Why should an assignee notify the other party to the contract promptly ? 7. What is novation? How many parties to a novation? 8. Distinguish a novation from an assignment. 9. Write an assignment of an account. ^ a Barb. (N. Y.) 349. CHAPTER X DISCHARGE OF CONTRACTS § 66. Discharge by Perfonnaiice The usual way to discharge a contract is by performance or fulfihnent This means performance by both of the parties. Performance by only one of the parties releases that party from liabiKty on the contract, but does not discharge the contract or release the other party from his obligation. Under the old common law rule, the performance must be strictly in accordance with the provisions of the contract. This has worked so much hardship and real injustice that equity has modified the doctrine, and allows a substantial per- formance with damages to compensate the other party for any loss he has sustained Substantial Performance in Construction Contracts. If the variations in performance of an agreement were inten- tional, they would amount to breach of the contract. Where they were not intentional, the other party is entitled to deduct from the price the value of any such omissions as there may have been, and to have them repaired himself if he desires. This rule applies especially to construction contracts, and even in an action at law substantial performance will be sufficient. In Heckman v. Pinkney, Heckman had a contract to do the carpentry work on a house that was being built for Pink- ney. He failed to make cornices and to put centerpieces in some of the rooms according to the agreement; and the material for deadening the floors did not have hair in it, as had been stipulated. The court said that the variations were 84 DISCHARGE OF CONTRACTS 85 not intentional or material, and that the contract had been substantially performed.* At law, time is of the essence of a contract; that is, performance must be within the time specified, or the party guilty of delay will be liable for damages for non-performance. If, however, the injured party accepts performance after it is due, he must pay the fair value of what is done, though he is allowed to deduct damages for the delay. In equity, time is not of the essence of the contract unless it has been expressly agreed that it shall be. That is, a court of equity will often enforce the contract in favor of the party who has delayed, unless in fact or by express agreement failure to perform on time amounts to failure to perform at all. Where the parties agree that the contract must be per- formed to the satisfaction of one of them, nothing which does not satisfy him will be performance. At the same time, he must be honest about his dissatisfaction and not pretend to be dissatisfied when he is not really so. Sometimes there is an agreement that the judgment of a third person shall be the test as to whether the contract is performed or not. In such case, the contracting parties must abide by his judgment, unless he is mistaken or fraud is shown. Notes: I. 2« Performance must be substantially in accordance with the terms of the contract. Where time is material to the contract, the per- formance must be within the time set. Where the parties agree that the performance must be to the satisfaction of one of them, or to the satisfaction of a third party, the honest judgment of that party is the test of whether or not the contract has been performed. «8i N. V. aii. 86 CONTRACTS i § 67. Discharge by Agreement . An agreement between the parties to rescind a contract, or a later agreement between the same parties with regard to the same subject matter, the provisions of which later agree- ment are inconsistent with the contract, will discharge the original contract. The agreement to rescind the contract must, like all other agreements, conform to all the rules governing contracts. The release of one party from his obligations is the consideration for the release of tht other from his. But, where one party has performed his part of the contract, there must be some new consideration to him for releasing the other, or the agree- ment to rescind will not be enforceable. There is only one case in which the parties may not agree to cancel a contract, and that is when it was made for the benefit of a third person and the third person has notified them that he accepts it At any time before he accepts they may declare the contract void. For instance, a farmer might come into town and tell a storekeeper to send away and get a suit of overalls for his hired man and he would pay for them. He informs the hired man of what he has done and the hired man tells the storekeeper that he will call for the overalls when they are expected. At any time before the hired man told either the farmer or the storekeeper that he would take the overalls, they might have cancelled the contract, but not afterwards. In all the states, with the exception of Massa- chusetts, Michigan, New Hampshire and Vermont, a third person may maintain an action for the breach of a contract for his benefit If two parties to an agreement make a new agreement about the same subject matter which is inconsistent with the old agreement in any way, the old agreement will be dis- charged to that extent. For instance, in an agreement of novation (see § 65), by accepting the substituted party, the DISCHARGE OF CONTRACTS 87 2. Other party discharges the party making the novation from his obligations under the contract If the parties put an oral agreement into writing or instead of a written agreement make a new contract under seal, the old contract is discharged and they are bound only by the new agreement. Notes: I. The parties may agree together to rescind a con- tract, except that where it was made for the benefit of a third party, they may not rescind it after he has given notice of acceptance. A later agreement, between the same parties and with regard to the same subject matter, the terms of which are wholly or partly inconsistent with a prior agreement, revokes that agreement so far as it is inconsistent with it An oral agreement is superseded and discharged by a later written agreement, and a contract in writ- ing but not sealed is superseded by a sealed in- strument. § 68. Discharge by Various Other Causes Operation of Law. A contract may be discharged by the operation of law. When a contract is discharged by the making of a new written or sealed contract, as has already been explained (§ 67), it is discharged by the operation of the law which declares that a written instrument is of greater value than an oral agreement, a sealed instrument than a written contract. When a person goes into bankruptcy, the law discharges all of his contracts with a few exceptions. Impossibility of Performance. There are some cases in which impossibility of performance discharges a contract. If it were for some particular article which could not be replaced and the article were destroyed, or if it were a contract for 3. 88 CONTRACTS personal services and the person to render the services became ill or died, the contract would be considered discharged, and there would be no liability for damages. The parties are considered to have realized that if such a thmg were to happen the contract could not be performed, and to have made the contract on the understanding that it would be carried out only in case the article were in existence or the person were able to perform at the time. If the one party to a contract by his acts made performance impossible, it would discharge the other party from all obligation. Contracts for the pay- ment of money are not discharged by the death of either party, but contracts involving personal skill, trust or confidence be- tween the parties are discharged by the death of one of die parties. This does not, however, apply to contracts which can be carried out by the executors of the deceased, such as to have a house built or painted. Act of God. Where the performance becomes impossible by what is known as an "act of God," that is, a tornado, a . hurricane, a flood, a conflagration, or some other accident or disaster amounting to a public calamity, the contract is discharged. Ordinarily a person takes the risk of the contract being impossible to perform if he does not make some provi- sion for it in the agreement, and impossibility of performance is no excuse. In the case mentioned in § 41, where the subject matter was destroyed at the time the contract was made, if one of the parties knew of it, he will be held liable for a breach of the contract, notwithstanding that it is impossible for him to perform it. In the case of a contract where one of the parties promises to do one of two things, if one of those things was impossible at the time the contract was made, he must perform the other. In Case of War. When two countries go to war, all possibility of friendly relationship between them ceases. All I 11 f k DISCHARGE OF CONTRACTS 89 contracts between their citizens on which nothing has yet been done are discharged. If anything has been done by either party under a contract, and it is possible to do so without injustice to either party, the contract will merely be suspended until the war is over, when it must be carried out fully in accordance with its terms. Effect of Strikes. A contract may provide in itself that it is to be discharged on the happening of certain conditions. It is very common to provide against strikes, etc., in this way. The provision, however, must be in the body of the contract to be good. A notice at the top of the firm letterhead that all sales were to be subject to strikes or accidents would not form part of a contract written under such letterhead. As a general rule, printed conditions on a letterhead are not binding on the party receiving the letter. If any matter is important it should be written in the body of the letter. Lapse of Time, Any contract is supposed to be performed within a reasonable time. Even if no time for performance be given in the contract, it will nevertheless be discharged if a long period of time goes by without anything being done on it by either party. Offer to Perform. If due performance is offered by one party and is not accepted by the other, the first party is dis- charged. Notes: Contracts may be discharged: I. By the operation of conditions agreed to by the parties. By merger or alteration of a written instrument, or by the discharge of the party in bankruptcy. By lapse of time if delay is unreasonable. By an offer to perform, if it was refused by the other party. 2. 3- 4. ; 90 6. CONTRACTS By impossibility of performance, where the im- possibility is caused by the act of the other party; by the operation of law; by a declara- tion of war; or by the destruction of the subject matter where the contract concerned a par- ticular article or was for personal services; but not otherwise. In making contracts to handle orders, to carry on construction work, etc., involving large amounts, where there is a possibility of strikes and various labor disputes preventing the finish- ing of the work at all, or at least within the tune hmtted by the contract, parties should always provide against such delays. It is usually safe to have a fire clause, and to pro- vide against destruction by floods, tornadoes etc. ' DISCHARGE OF CONTRACTS 9t Review Questions ^' ^^ '* ""^^ ^ *^ discharge of a contract? 2. What IS meant by substantial performance > 3. What is the rule as to time of performance, at law? In equity? ,n W Vr" "','"'"'" performance to the satisfaction of an interested party? 5. What is meant by "discharge by agreement"? 6. If one party had performed his part of the contract, could the parties agree to rescind? What element would be needed legally to rescind a contract? « ^^* .efff t does the interest of a third party have? than the old contract? ^ lo I^!I •M'" f'"* "/ '^■^"'Pt'y on pending contracts? 10. What IS the effect of impossibility on a contract? What is the situation when a contract becomes impossible but the contract IS not discharged? la. 13 II. In what cases does impossibility discharge the contracts ? What kinds of contracts are discharged by the death of the party to perform? What is the effect of specifying certain causes as operating lo discharge the contract? A father conveyed land to his son on his son's covenanting to pay an annuity to his mother on her widowhood. May the mother maintain an action, not being a party to the covenant ? 14. B orally requested A to do certain carpentry work around his house in the nature of repairs. B died. A subsequently performed the work and brought suit against the administra- tors for the price. Can he recover? If so, why so; if not, why not? 15. Does outbreak of war nullify contracts if it simply changes prices ? 16. What is the effect of lapse of time and non-performance ? 17. If one party offers to perform and the other party does not accept, what is the effect as to each party? ENFORCEMENT OF CONTRACTS 93 I. 2. CHAPTER XI ENFORCEMENT OF CONTRACTS § 69- Breach of Contract The obligation of a contract is an obligation created and The h ^^^^^^"f /'^ <=^"^^--^ from all other branches of lavv possible to the intention of the parties, and all the rules of imerpreting contracts go back to this fundamental pHndpIe and are controlled by it* p""i.ipic Failing to perform the contract. Refusing to perform the contract. 3- Making it impossible for himself to perform the contract, or denying that there is such a contract. Faaure to Perform. If a party breaks a contract by fail- »g to perform it, the other party must have done all that can to b37 > t'^J"" ""•^"' *' '=°"*^"*^ '^^^■•^ "^^ « -"titled to bnng suit If h.s part of the contract was to pay after the If a party was to perform work or to deliver goods for which the other party was to pay, he must be able to show that he has either performed or offered to perform the work hejias^ny nght to claim damages. A party must remain 'Eocyc. Brit., iitb Ed., VoL VII. page 38. 92 ready and willing and in a position to perform what he agreed during the entire time of the contract; it is not enough once to have made the offer. It is often hard to determine just when a contract has been broken by failure to perform. Unless the time within which it was to be performed was an important part of the value of the contract, the courts usually give parties what they consider a reasonable time in which to complete it, whether the contract sets a definite time for its completion or not. A Reasonable Time. The difficulty is to know what the court will consider a reasonable time. The parties may, how- ever, have this determined beforehand by stating in the con- tract that "time is of the essence (that is, an essential part) of this contract," in which case the court will enforce it within the time specified. Or, if this has not been done, the party for whom the services were to be performed or to whom the goods were to be delivered, etc., may demand that the other party fulfil his part of the contract within a certain time or he will consider it broken. If he has really given the other party a reasonable time, he will have a right to bring action if the services agreed upon have not been performed within that time. A party is always allowed until the last minute of the time set to perform, and the day on which the contract was dated or the demand made will not be cotmted as a part of that time; for instance, if the contract was dated or the demand made on July i, giving him 30 days in which to perform the contract, the time will not be considered to have expired until midnight of July 31. Refusal to Perform. If a party refuses to perform the conditions of the contract when the time comes for per- formance, he also relieves the other party from further obliga- tion and gives him an immediate right to sue for damages. 94 CONTRACTS ENFORCEMENT OF CONTRACTS 95 If a party refuses to carry out a contract before the time for Its performance has arrived, in some states the other party has a right to regard this as final, but in the other states he must wait until the time for performance has passed before nc IS entitled to bring suit When a party notifies the other party that he does not intend to perform his part of the agreement and tells him to stop work on it. the latter, if he accepts the noUce, should stop work immediately. He may. if he prefers, however. Ignore the noUce and treat the contract as still existing by contmmng to perform his part, though he may not coUect for work performed after notice. Denial of Contract If a party denies that there is a con- tract, or makes it impossible for himself to perform it by disposing of its subject matter in some way, the other party IS immediately relieved from all obligations and has the ririit to sue at once for the damages he has sustained. Nates: I. Refusal to pcrfonn a contract is a breach of the contract Making it impossible for one's self to perform a contract is a breach of the contract. In either of the cases cited above, the other party may abandon the contract and sue at once for damages. Failure to perform one part of a divisible contract is not a breach of the entire contract, and does not excuse the other party from performance of the rest. In case of a breach by failure to perform, the other party must show that he has performed his part, or was ready and willing to do so, before he can claim damages. 2. 5. 6. Where a contract has been partly performed by one party, the other party must carry out his part of it, unless the first party has refused to perform further, or the circumstances are such that he would not be able to perform the rest of it. 7. The party who broke the contract must be paid the reasonable worth of what he has done on it, unless his breach of it was wilful or the contract pro- , vided that he should have nothing unless he per- formed the whole. § 70. Remedies for Breach of Contract The party who is injured by a broken contract may either (i) sue for damages, or (2) he may abandon the contract and sue for the value of his services or of the goods furnished. The moment a contract is actually broken the other party has a right of action for damages, but there must be an actual breach. People are inclined to rush into court when they think that their contract rights are disregarded, without stop- ping to make sure that there has actually been a breach. When parties to a contract agree on the amount that shall be paid in case of breach or default, such amount is called liquidated damages. The plaintiff in an action for breach of contract can sue only for profits proved to have been lost, and not for estimated profits lost. The jury would judge the amount of his actual loss from the evidence submitted. Action for Breach of Contract. If an action for breach of contract is to be brought at all, it is best to do it as soon as possible after the contract has been broken, as the court may consider that a person has voluntarily surrendered his right if he waits too long, or possibly something may happen that will excuse the other party from performance. But there is one class of contracts in regard to which a great deal of care must be taken when bringing suit; these are contracts 9^ CONTRACTS I li ."«"otr„"r "^"^/P^'^^ -«-'y separate irom and hav- ing no connecbon with each other. If it is perfecUv clear XS oi:roT^'' ^"^ -^^' "- ^ rfg^tttuet: riX ,. t. ^^^ P*"^" *' «"" without affecting his ofwarir "■"' '' *^ ^°"^'^'=*- ^- instance, a bfeal ftat warSit'" T*'''' "''"^'^ ^^'^ ^ "^' '« damages for c^ntrTcr^ °"' "" ^^ "^^ ^'^^^""S the rest of the of th'e parttTdreXr ^art^haf '"^^^^^ t' °"^ from wLf hoc K J \^ P ^ "^^ received any benefit W'Aen specific Performance Can Be Had. There are some excepuonal cases in which an action for damages would sons"of''?ule\f '^'"' """• "'^"'^ ^^^^ -■* Ae two wfdith fof^f I" *^J^' "^ °^ *^'^ f^^^er until IMS death for $2 a week. They later notified her that thev refused to perform the contract The court said that it loulj be impossible to compute the damages with any certainTv as t^-sT:lr^U^1r. "^^ '^"^ of'judgTSac ! Z^r^Si """^^ f"'^""'' •^•^"'P^' *^ t^o sons forZL.") "^^ ^^"^ ^ ^^' "^P^"'^*^ ^''- Instalment Contracts. But in contracts for Jncf which are to be j^rformed by instalments, su«i as a co^raS to^r I.OOO barrels of oil at the rate of loo barrel? a nJ^SbM'- "*• ""-^ ^"^ <™' ""•"«». befor. tie Wgl co.. „, «„•„, b««.e ENFORCEMENT OF CONTRACTS 97 ) month until the contract is completed, it is not perfectly clear whether a failure to deliver one lot of lOO barrels would be a breach of the whole contract or not. The courts in the various states hold different views on this question. If a party brought an action for damages at once, he might find himself cut off from any further damages in case of the other party's failing to deliver the rest of the oil; or if he treated the contract as broken he might find himself the one guilty of breaking it. The only safe thing to do in these cases is to consult a local lawyer. When a contract is to be performed to the satisfaction of a party thereto or of a third person, such as an architect or an engineer, the work must satisfy the person designated, but, as a general rule, the court will hold him to what it considers reasonable. Breach by Failure to Perform. A breach by failure to perform does not usually take place until the time for per- formance has passed. However, in contracts where goods are to be paid for in instalments, or rent is to be paid by the month, if the contract is an entire and not a divisible con- tract, failure to deliver one instalment or to pay one month's rent will be a breach of the entire contract. Where the con- tract is a divisible one, failure as to a separable portion is a breach of that part of the contract, and the party may sue on that while the rest of the contract is being performed. It must be borne in mind that if the breach was of one provision of a divisible contract, the party suing must show that he performed whatever was due from him under that provision before he can claim damages for its violation. A divisible contract is one in which the obligation consists of independent parts, not necessarily united, as, if one agreed to deliver lOO bushels of com in March and lOO in April, or to deliver at the same time 50 bushels of onions and 25 bushels of potatoes. An agreement to do several things at \ I. I I 9K CONTRACTS several times is divisible, unless the consideration to be paid IS entire. ^ ■ Breach by Refusal or Denial. Where the party positively refuses to perform, or denies the existence of the contract, an action may be brought at once for a breach of the contract me other party does not need to do anything further on the contract himself, and, if he does do anything further, cannot recover anything for the extra work, for the plaintiff has no nght to aggravate the damages. There must be, however, a positive refusal to perform under any conditions. Time to Bring Suit. The party has always a right to Ignore an intermediate breach and to wait until the time for final performance arrives before bringing suit; but if he does this he takes the risk that some other happening may dis- charge the contract before that time. If, on the other hand he waits until the time for performance, he is entitled to all the damages which he has sustained up to that time. In any case professional advice should be secured and followed. Notes: I. Where there is a contract for the delivery of goods or the performance of work by instalments, and there is a failure to perform one of the parts of the contract as agreed upon, a party ought to consult a lawyer as to his rights before making any statements to the other party about it. 2. It is always a matter for serious consideration whether a breach of contract justifies a remedy so costly and uncertain as a suit at law. (See Chapter IV, "Law and Equity.") § 71- l>aw Governing Remedy It has already been explained (§ 40) tiiat a contract is interpreted in reference to the law of the place where it was made, unless the parties state that they intend it to be governed I ENFORCEMENT OF CONTRACTS 99 by some other law ; but if they specify some other law merely to evade the law of the place where the contract was made, the local law will govern despite their provision. In bringing an action on a contract, the method of bring- ing it, the right to bring it, and the defenses that may be made to it, are all governed by the law of the place where it is brought, and defenses which may be made in some states cannot be used in others. The Statute of Limitations (§72) differs in the different states, so that a contract on which an action may not be brought in one state may be sued on in another if the party to be sued is subject to its jurisdiction. Note: I. The place to bring suit is a matter regarding which it is necessary to seek legal advice. § 7a. Statute of Limitations The Statute of Limitations is the law that specifies the time limit within which an action may be brought. For the sake of peace and in order to put some limit to the time in which rights of property, etc., can be upset by lawsuits, laws have been enacted in every state providing that after a certain length of time specified in the law actions may not be brought in the courts. These laws apply to all the various forms of actions, including those on contracts. If the contract is under seal, the law usually gives a longer time in which to bring action on it. The Statute of Limitations begins to run, not from the date when the obligation was made, but from the date when payment is due. In cases in which demand is necessary before a party is liable, the statute begins to run from the time the demand was actually made. In the case of a checking account in a bank, the time on each check does not begin until demand is actually made or some act of the banker has dispensed with CONTRACTS (I it If each of tiie parties has an account with the other, and if they clearly intended to balance these accounts against each other, the statute begins to run against the balance at the date of the last entry. A written promise to pay the debt is sufficient to renew the contract and to furnish a new date from which the statute runs. A part payment of principal or interest of the sum due will likewise renew the contract. Sometimes the Statute of Limitations provides that, after the time specified, the party shall have no further right of action. This means that the cause of action is dead altogether, and thus cannot be enforced anywhere. If the law of the state where the contract was made has such a statute, the contract cannot be sued on anywhere after that time has passed, because the statute is said to "go to the right of suit" ; that is, it ceases to exist. Usually, however, the Statute of Limitations merely "goes to the remedy"; tiiat is, the cause of action remains, but tiie law does not allow the courts to enforce it after a certain time, and, if suit is brought after that time, the other party may plead that the law has barred the right of remedy. If, however, the other party does not plead the Statute of Limita- tions in such a case, the action may be brought, because it was passed only to protect him from the bringing of a suit at a time when he might not be able to get the evidence for his side, and if he is willing to fight the case on its merits he can do so. Where the Statute of Limitations in the state where the contract was made affects only the remedy, it does not affect the contract ; and the question as to whether the action may or may not be brought depends on the law of the state in which it is desired to sue. Therefore, a contract on which an action could not be brought in the state where it was made might be sued on and enforced in some other state where ENFORCEMENT OF CONTRACTS loi a longer time is allowed by the Statute of Limitations for the bringing of the action, provided the other party lives there. Note I It is right and just that if a party sleeps on his rights he should lose his cause of action, and that men should not have to fight stale claims. I. I. 2. 3- Review Questions To take legal action against a person who has failed to perform his part of a contract, what must the other party show? What is the rule as to time? What is "reasonable time"? If a tailor was to have a suit finished on the 20th of the month and it was not ready till the 25th, could he hold his customer? How would it be if the customer had told him that he was to sail for Europe on the 21st? 4 If a person had agreed to sell 60 barrels of flour and 10 barrels of apples and only delivered the apples, could he collect the agreed price for the apples? Why? Suppose that the price of flour and apples had advanced at the time of delivery, how would that affect the situation? 5 If a person is working by the month and leaves ten days before the end of his period because he can get a better job, can he collect for the time he worked? 6. How soon is it best to bring suit for a breach of contract? What is to be considered before bringing suit? 7. What law governs the interpretation of a contract? Where may suit be brought? Why? ,. • •* 8. What is the Statute of Limitations and on what policy is it founded? Explain fully. 9. In the state in which you live: ' How soon must a crime be prosecuted? How soon must action be brought for a personal injury? How soon must action be brought on an oral contract? How soon must action be brought on an open account? How soon must action be brought on a written contract? • The data required wUl be found in the Revised Stetutes of the State. I ' 102 ;i 10. II. 12. CONTRACTS How soon must action be brought to recover land? How soon must action be brought on a sealed contract? State two ways of renewing a debt so that the Statute of Limita- tions will recommence to run. Give three ways that will prevent the statute from running against an ordinary debt Define liquidated damages in relation to a building contract. If. by admitted breach of contract of A. B's business is stopped for a period can B recover damages for profits estimated or only for profits proved to have been lost? I ! CHAPTER XII ACTIONS ON CONTRACTS— GENERAL RULES § 73. Introductory Besides the particular provisions of the law of the state where the action is brought, there are certain general rules which apply to actions anywhere. Assigned Contracts. Where a contract, or a cause of action arising out of a contract, has been assigned, the party to whom it has been assigned must bring the action in the name of the party to the contract from whom he received it, unless there is a law allowing him to sue in his own name. This is the rule of the common law, but now in most states the party who has the actual interest in the contract is allowed to sue in his own name. Joint Contracts. Where there is a joint contract, all the parties to it must be brought into the action ; that is, if other parties are jointly interested with the party suing, he must join them with himself as plaintiffs. If, however, they refuse to join as plaintiffs, the law in many cases provides that they may be joined as defendants, in which case the party so join- ing them must explain that they refused to be joined as plain- tiffs and mention the statute by which he is allowed to join them as defendants. If several parties are jointly obligated to the plaintiff by the same contract, when he sues he must include them all as defendants. If any of the parties to the contract are left out of the suit, they are released from all obligations under it, unless they agreed in the contract to be liable individually for the whole contract apart from all the others. 103 I04 CONTRACTS II Assumption of Legality, The law always assumes that a contract is legal and proper; therefore the person who asserts that it was illegal, or the result of fraud, undue influence, duress, etc., must prove the fraud or other allegation. Notes: 1. The law of the place where the contract is made governs its interpretation unless tlie contract ex- plicitly specifies otherwise. 2. The law of the place where suit is brought governs the right to bring action on it, and the defenses which may be made. 3. Where the Statute of Limitations of the place where the contract was made takes away the right of action, no action may afterwards be brought on the contract in any state. 4. In suing on a joint contract, all the parties must be joined, either as plaintiffs or as defendants. § 74. Specific Performance There are some cases where damages do not repay the party for what he lost on the contract, as, for instance, if the contract was to buy some valuable work of art which he could not duplicate elsewhere. In contracts for the delivery of goods, where it is possible for the party to go out and purchase other goods of the same nature, his loss can easily be computed and covered by damages; but where it is im- possible to compute the damages, or where the property pur- chased is a work of art, an heirloom, or something else which cannot be duplicated 6r easily purchased elsewhere, so that damages do not compensate him for his loss, the court will compel the other party to perform the contract. This is known as "specific performance," and is granted by what is termed a court of equity. f ACTIONS ON CONTRACTS — GENERAL RULES 10$ I Land, with everything relating to it, is always regarded as having a peculiar value; so that a contract for the sale of land may always be specifically enforced. In cases where the contract is for personal services, or cannot be carried out because the other party has disposed of the property involved, or for any other cause, the court will refuse to make a useless decree. In the case of personal services, it is not considered that any services which the other party might perform in order to escape imprisonment would be worth much. If, however, the other party has disposed of the property or otherwise put it out of his power to per- form the contract after the suit in equity has been begun, the court of equity, contrary to its usual custom, will award damages. Requirements of Courts of Equity. The party who brings a suit in equity must show that he has not been careless or negligent regarding his rights, but has insisted on them and promptly taken action to protect them. This carelessness and negligence are known in legal parlance as "laches," and, unless there is some excuse for them, will prevent the delinquent party from recovering in a suit. The party who brings such a suit must also be able to show that he has been in all respects just and fair himself, and he cannot ask the court to enforce any contract which is in the slightest degree unfair to the other party. He must show, too, that he has done everything in his power to fulfil the contract on his own part, and, if the other party has pre- vented him from performing it, he must show the court that he was and is able and willing to do all that was required on his part A court of equity will not enforce an illegal contract, or one that has been obtained by duress, fraud, or undue in- fluence. Nor will it enforce a contract that is unconscion- able, or where an unfair advantage has been taken of another io6 CONTRACTS » party's ignorance or inexperience. (See Chapter IV, "Law and Equity.") Notes: I. No court will enforce a contract which is illegal or improper. Specific performance is granted only where damages would not compensate the party for his loss. Courts of equity will see justice done as nearly as possible, and therefore, the party who seeks their aid must be prepared to do justice himself. .2. 3. § 7S. Rules of Evidence Certain rules have grown up with regard to the admission of evidence before a court. Some of these rules have been dictated by convenience, in order not to take up the time of the court unnecessarily; others for the sake of being fair to both parties. Some of the rules of evidence particularly concern contracts. An oral contract must be shown by testimony. The testi- mony of the parties themselves, and of any witnesses who were present and heard the transaction, is competent; but anything in their conversation or relations which has no bear- ing on the contract will be excluded. It often happens that contracts are agreed upon between the two parties, and each remembers only the part that favors himself, and in such a case a court cannot give any relief, because the evidence balances. Where it is not possible to prove the making of the contract itself satisfactorily, evidence that the party in some way acknowledged or ratified it, or that he has partly performed it, may be introduced to show that there was such a contract. Competent evidence is that which is admissible. Material evidence is that evidence which applies directly to the point at issue. ACTIONS ON CONTRACTS — GENERAL RULES 107 Relevant evidence is evidence relating to the matter in dispute. "Whatever naturally and logically tends to establish a fact in issue is relevant and that which does not answer requirements is not." ^ Irrelevant evidence lacks close connec- tion with the fact to be proved: is collateral to the issue. The general rule that hearsay evidence is excluded, is based on the principle that a witness may testify under oath as to what he himself has seen or heard, but that there is no value in a man's taking oath as to what another, not under oath, has told him. The Burden of Proof, The burden of proof is always on the party who makes an assertion; thus many cases fail, not because the party is in the wrong, but because he cannot prove his case. Judges and juries can act only on evidence brought before them, and if a case is good but there is no evidence to prove it, a court cannot give relief, and the law should not be blamed for it. This is why written contracts are so important. (See §§ 42, 43.) The Parol Evidence Rule. The meaning of this rule is that other evidence will not be admitted to vary the terms of a written contract, because the contract itself is the best evidence of what its terms are. Oral evidence may always be introduced to support the contract. Necessarily, the per- formance of the contract, or a breach of it, will have to be shown by oral testimony. The same is true of abandonment of the contract; and anything which would show adequate motive may be introduced as tending to support the proof of the abandonment There are exceptions to the parol evidence rule. Where the contract is not clear in itself, it becomes necessary to resort to parol evidence to explain it. Any other paper or matter to which the contract refers may be proved in con- nection with it, and, if such paper shows on its face that the > Jones on Evidence, Vol. I, Sec 135. loS CONTRACTS transaction outlined was not complete, the whole transaction may be proved. Oral evidence may always be introduced to show fraud, duress, undue influence, or illegality in the con- tract. The rules of evidence may even be stretched in such a case to allow the proof of other transactions not directly con- nected with the contract under consideration, tending to prove a fraudulent contract. Admissions. A party will never be allowed to use his own statements and acts unconnected with the actual contract or the transactions leading up to it, to prove that there was a contract, or that what he claims as to its terms is true, but he, however, may prove anything which the other party said against his own interest, and must also show any other state- ments made in connection with the admission which might have limited its effect Where a party employs an agent to deal for him, any admission against the employer's interest which the agent made at the time of, or during the transactions leading up to, the contract, may be used against the employer; but not admissions which the agent made after the execution of the contract. Books of Account Books of account regularly and fairly kept as books of original entry supported by oath are admitted as prima facie evidence of the entries therein contained.* If the clerk who made the entries is dead his handwriting may be proved. The rules in regard to admitting books of account as evi- dence are as follows: I. - They must be regularly kept in due course of busi- ness. The entries must be made by the party or an author- ized clerk at or about the time of the transactions. .2. •Jones on Evidence, VoL III, i 567. ACTIONS ON CONTRACTS — GENERAL RULES 109 3. The books must be identified by oath. 4. The entries must be pertinent to the issue. 5. The books must come from proper custody. ■ • These rules apply only to books of original entry, not to ledgers and other books footed from original entries. The books of a deceased person may be used as evidence both for and against him. The books, however, must first be properly proved by the clerk who made the entries or by some- one who can testify as to the handwriting of the deceased. Transactions with a Party Later Deceased, In order to protect estates against fraud, where a person is suing to en- force a contract against the executor or the administrator of a person who is dead, he will not be allowed to testify to any transactions with the deceased person, where there were no other witnesses present to testify as to what the deceased person said or did. This is very important to remember, because, in the case of an oral contract where no witnesses were present, the party who is still living might not be able to prove the contract at all; and this is another reason why all contracts should be reduced to writing. Notes: The burden of proof is on the party who makes an assertion. % Any evidence, in order to be introduced, must have some direct bearing on the contract itself, or on the transactions connected with its making and discharge. Parol evidence cannot be introduced to vary the terms of a written contract except in case of fraud, duress, undue influence, or illegality; or where the contract is not complete in itself or its terms cannot be understood without reference to outside circumstances. I. 2. 3- no t 5. CONTRACTS A party cannot use his own words and acts as evidence in his favor; but his admissions against his own interest may be used against him. A party may not testify to his transactions with a deceased person where no other witnesses were present. Review Questions I. What is the rule as to actions where there are joint parties to a contract? a. Does a person bringing suit have to prove that the agreement was fair and that the defendant went into it voluntarilv> Why not? ^' 3. When can a person be compelled to carry out a contract? In what court would such a suit be brought? 4- Can you give three "rules of equity"? 5. What is the difficulty in proving oral contracts ? 6. In a suit who has the "burden of proof"? 7. What is the rule as to parol evidence? What exceptions to this rule? a What is the rule as to transactions with a man who has since died? % What is an admission? 10. What is meant by the rule, "Hearsay evidence is excluded"? Illustrate. 11. What is relevant evidence? 12. What is competent evidence? 13. State the rules as to admission of books of account as evidence in court 14. When are books of account of a deceased person admissible evidence? CriAPTER Xllf TENDER OF PAYMENT OR PERFORMANCE § 76. Definition When a person is prevented by the other party to the con- tract from carrying out his part of it, he may make sure of his own rights under it by tendering (that is, offering) to pay or to perform. The offer must be made by the party himself, or by someone he has authorized, at the time the contract was due to be performed, and either at the place specified in the contract for goods, etc., to be delivered, or directly to the other party or any agent he has appointed to receive them. For instance, if the other party had ordered goods to be delivered to a railroad company, the goods might be offered to the railroad as an agent authorized to receive the goods. It is safer, however, to offer them to the party himself, as then no question can arise as to the validity of the tender. Where there are bulky goods, the person desiring to make the tender may ask the other party to name a place where they are to be delivered, and, if he fails to do so, may notify him that the goods will be delivered to him at a certain time and place most convenient for that other party. Then delivery at that time and place will be good tender although the other party is not there to receive the goods. § 77. Time to Tender Performance The tender must be made at the exact time specified in the contract, and before sunset on that day, in order to give the other party a chance to examine the goods, etc. A tender III 112 CONTRACTS before the time for performance has arrived does not meet the requirements for a tender and will not save the rights df the party making it. If the contract specifies "on or about" a certain day, or "within" a certain time, a tender made a few days before the day set would be good. If a party cannot make the tender before sunset because the other party has remained away aU day, he may make it as soon as the other party returns. If a party positively states that he will not accept a tender under any circumstances, or has the party making it put off his premises, or refuses to hear him, it is not necessary to make the offer. The party from whom tender is due may explain to the court, and will be excused. Unless it is absolutely certain that it will be impossible to make a tender, however, the party should at least try to make it. Only the absolute certainty that the attempt would be useless will excuse him. § 78. Extent and Kind of Tender The exact amount of goods or money called for by the contract, including any interest due, and, if the other party has begun an action or suffered any damages, his expenses or the damages due, also must be offered. If it is money, the party should take care that it is in "legal tender.*' This really means, as a usual rule, that too much small change should not be offered. Five-cent pieces are a legal tender up to $5 and not over, while silver coins less than one dollar are a legal tender up to $10 and not over. United States treasury notes, gold coins, and silver dollars are a legal tender to any amount. Ordinary bank notes are not legal tender, but, unless objected to at the time, a tender in bank notes would be good. If it is not possible to ascertain the exact amount, the party should take care to offer more than enough, as too little will not make a good tender. TENDER OF PAYMENT OR PERFORMANCE 1 13 If the contract called for services, the tender will consist of notifying the other party that the party is ready and wiUing to perform the services whenever required. A tender must be made unconditionally. The party must simply offer what is due without calling for anything in return, not even a receipt or change, or it is not a good tender. In all cases the party making the tender should be accompanied by a competent witness. A tender is held to be vitiated by coupling it with a demand for a receipt for the sum offered, unless, as is the case in a few jurisdictions, a statute exists which allows the demand for a receipt.^ § 79. Acceptance of Tender If a party keeps property or money that has been left with lum after he has had a sufficiently long time to examine and refuse it, it amounts to an acceptance of the tender. If he refuses to accept, the party making the tender may take the goods or money away, and inform the other party that he will hold them subject to his orders; he will then keep the goods or money separate from his own property and ready at all times for the other party if he calls for them. If the money is deposited in a bank, it must be put in a separate account and not drawn upon. Review Questions 1. What is "tender" in legal phraseology? When must tender be made? What will excuse tender? 2. To whom may tender be made, other than to the contracting party himself? ^. What is the rule as to the amount tendered? »38 Cyc. XS4* 114 CONTRACTS 4. What constitutes acceptance of tender? 5. What kinds and amounts of money are "legal tender"? 6. What proofs should be secured of fact of tender? Can a receipt for the amount paid be demanded? 7. If tender is refused, what may party making tender do? CHAPTER XIV JOINT AND SEVERAL CONTRACTS § 80. Contracts Made by More Than Two Parties Very frequently we find contracts to which there are more than two parties ; and these may be of two kinds, namely, what is known as a joint contract, in which all the parties on one side agree to be liable together for what is promised in the contract, eadi one being bound for the whole; or a several contract, where each of the parties agrees to be separately liable for his part. In some cases parties agree to be both jointly and separately liable, and then the person with whom the agreement was made has his choice of holding all of them liable together or each one liable separately. It is unwise to become involved in a joint contract. Where the parties to a joint contract are liable : 1. Each is liable for the whole. 2. They must be sued together, not separately. 3. Where one dies he drops out, and the remainder are liable. If all died, the estate of the last de- cedent would be liable. 4. If one party is released, all are released. Where the contract itself does not expressly state whether the parties are to be liable separately or all together for the whole contract, the court decides the nature of the contract from the probabilities of the case. If the promise by two or more is in the plural, the contract will be held joint, unless by the whole agreement the intention appears to hold them severally. For instance, the ordinary subscription agreement Il6 CONTRACTS is a several, not a joint, contract, and no one would imagine that each party who signed expected to be held liable for the whole amount to be raised. Where, instead of being an agreement by several parties to do something, the agreement was to do something for the benefit of several parties, the test as to whether it is a joint or a several contract is whether the agreement has to be per- formed for aU of them together, or whether it can be per- formed for each one separately. Wherever two or more are jointly to benefit by a contract, (i) aU must join to bring suit on the contract; (2) if one dies the survivors have the legal right to sue. If it is a contract made to a corporation, the corporation wiU be regarded as one person; but all the mem- bers of a firm wiU have to join in any suit on such a contract If, on the contrary, it is an agreement to perform services for several persons as individuals, it usually amounts to a separate agreement with each of the individuals, and each of them may bring suit to enforce the agreement with the first party without paying any attention to the other persons. Where there is more than one person on either or on both sides of a contract, it should be stated in the contract whether their obhgation is joint or several, or whether the obligation to them IS jointly or severally. To do so will save much trouble in enforcing the contract, as, if a person brings suit on a joint contract against one person only, he releases all the rest of them from their obligations ; while, if it were a several contract he may bnng suits against one after the other until he hai managed to coUect the entire amount due him. If one of the parties to a joint contract pays the whole obligation, he may collect from the others who were bound with him their proportion of the amount he had to pay. Notes: I. Where it was cleariy not the intention of the parties * to be liable for each other, the contract is several. JOINT AND SEVERAL CONTRACTS 117 2. 4. 5- Where their interest is identical and in the whole contract, it is joint. Where they intend to be both jointly and severally liable on the whole contract, the contract is joint and several. A joint contract must be enforced by or against all of the parties to it. A party to whom others are jointly and severally liable may sue all of them together, or he may sue one at a time. Review Questions 1. What is a joint contract? May more than two parties contract severally ? 2. What is the liability of a person who is party to a joint contract? 3. If two or more parties sign a bond beginning "We, the under- signed, are held and firmly bound," etc., what kind of contract is it? 4. A note begins, "Ninety days after date, we or either of us, promise to pay," etc. What kind of contract is it? 5. Distinguish between a joint and a joint and several contract. 6. What may a person do who has been forced to pay the whole amount on a joint contract? 7. Give examples of contracts that are either joint, several, or joint and several. ' CHAPTER XV CONTRACTS TO SELL^ §8i. Sales and Contracts to Sell A sale is a completed transaction. The ownership of the goods has passed from the seller to the buyer, even though the seller may still hold the goods in his possession and the price may not yet have been paid. There is no substantial difference between a sale and an exchange or barter, and the term "sale" is frequently applied to the latter transaction. But a technical sale is a transfer for a consideration in money, while an exchange or barter is a transfer of property for other property. A contract to sell means that the ownership of the goods is to be transferred at some time in the future. The definitions given in the Uniform Sales Act are as follows : A sale of goods is an agreement whereby the seller trans- fers the property in goods to the buyer for a consideration, called the price. A contract to sell goods is a contract whereby the seller agrees to transfer the property in goods to the buyer for a consideration, called the price. The distinction between a contract to sell and a sale is this: in a contract to sell the goods are not delivered and title does not pass; while in a sale delivery is made or the title passes. A contract to sell is an executory contract. A sale or a bargain and sale is an executed contract. A sale is the transfer of the property or the thing from the seller to the buyer for >For forms of sales contracts, see Chapter CI, Forms 20-25. 121 122 SALES a price. The Statute of Frauds applies only to contracts to sell. (See § 102.) § 83. Unifonn Sales Act On account of the confusion of the law in regard to com- mercial transactions, commissions have been appointed by the various states to unite in working out uniform laws governing such transactions. Largely as a result of the activities of these commissions, two laws have been passed by many states: (i) The Uniform Negotiable Instruments Law has been adopted in all of the states and territories with the exception of Georgia and Porto Rico. (2) The Uniform Sales Act has been adopted in the following states: Arizona Connecticut Idaho Illinois Iowa Maryland Massachusetts Michigan Minnesota Mississippi Missouri Nevada New Jersey New York North Dakota Ohio Oregon Pennsylvania Rhode Island Tennessee Utah Wisconsin Wyoming Territory of Alaska The object of these acts is not to change, but to combine, the best features of the existing laws of the different states. In some cases the states have adopted these acts with slight modifications, but for all practical purposes the law is imiform. CONTRACTS TO SELL 123 § 83. What Is Necessary to the Contract of Sale A contract of sale (or contract to sell) must have the same elements as any other contract. In other words, there must be: 1. Parties who are competent to contract. 2. An agreement between those parties. 3. Consideration for the agreement. 4. A legal contract. 5. A subject matter. These elements have all been explained at length in the preceding chapters relating to contracts in general. ( See Part II.) A few peculiarities which concern sales alone will be taken up in the following sections. Note: I. A sale is completed when the goods are transferred, but, if the buyer was not competent to make a con- tract, or the contract was illegal, the seller could not collect the price. §84. The Agreement This has been fully explained under contracts (§42). In the sale and in the contract to sell, there must be the proposal of terms on the one hand, and the acceptance of those terms on the other. Notes: 1. To make a legal sale, there must be an agreement of the parties which can be proved. 2. A written contract signed by both parties is the best evidence of such an agreement. 3. A letter making an offer, which is accepted by an- other letter; is the simplest form of written con- tract. 134 SALES § 85. Sales to Persons Incompetent to Contract The rules which have been laid down under the subject of contracts (§ 38) with regard to the contracts of certain per- sons who are by law made incompetent or are given of Le "^""^^'^^ ^"^^ *° *'°"*'***' ^^'"'^ "^^ ^ ^^ ^°°''^"=* The exception to the rules laid down, is an actual sale of (not a contract to sell) necessaries. A person who sells necessanes to a person who is not competent to make a con- tract may recover a reasonable price (not necessarily what he asked) for them. The Uniform Sales Act says that the goods must be necessary at the time they are delivered. If a merchant furnishes necessaries to a married woman or an mfant, he may charge them (i) to the woman or the infant, or (2) he may charge them to the husband or the father. He cannot charge them to both. He must make his choice and afterward bring suit against the party charged In this country necessaries include only food, clothing, and ^elter of a grade suited to the means of the person to whom they are furnished; and in this connection it is well to bear in nund that such things as riding horses and automobiles are not necessaries. Notes: I. In supplying necessaries to a minor or married woman the merchant should inquire (i) whether the incompetent person is already provided ; (2) whether he or she has any property from which a claim for necessaries could be collected. 2. li the incompetent person is an infant or a married woman, and the merchant desires to charge the amount to the father or the husband, he should inquire as to his credit. CONTRACTS TO SELL 125 I §86. The Consideration A sale or a contract of sale which did not name a price might still be good, because the court which was asked to enforce it would assume that the goods were to be paid for at a reasonable price and charge the buyer accordingly. The price fixed may be dependent on outside circumstances that would affect it, as for instance the market price at the time and place of delivery. The general question of consideration has been very fully dicussed under "Contracts" (§ 44). Note: I. Parties in making a sale should agree on the price. Neither the seller nor the buyer may be satisfied with what the law will consider reasonable. § 87. Nature of Subject Matter A person might make a contract to sell a crop which he had just planted, or grass which might grow in the future on land which he owned, or chickens to be hatched from eggs which his hens might lay; but if he had not the land or the hens, he could not make a contract to sell grass on land which he might buy in the future, or eggs from hens which he might later acquire. Goods which are already in existence and in shape to be delivered may be contracted to be sold, and also : 1. Goods which still require some process to render them ready for delivery ; i.e., cloth to be made by a tailor into a suit. 2. Goods to be acquired by the seller in the future ; i.e., a commission merchant selling so many dozens of eggs which he has yet to buy from the producer. 3. Goods which may or may not be acquired by the seller in the future, depending on the happening 126 SALES of some condition; i.e., the same commission merchant selling so many dozens of eggs provided that he can obtain that number from the producers. 4. An undivided share in goods; i.e., a tenth part of a crop of wheat. 5. A definite niunber, weight, or measure of goods in mass; i.e., a bushel of oats out of a bin of oats. Under the Uniform Sales Act, the goods mentioned in i, 2, and 3 cannot be the subject of a sale, but only of a con- tract to sdl, since they are not yet in shape to deliver. § 88. Destructioii of Subject Matter When the goods which the seller is offering for sale have been entirely destroyed without his knowledge at the time the agreement is entered into, the contract of sale does not take effect. When they have been partly destroyed, the buyer may refuse to take any of them, or he may take those which are left and pay the full price which was agreed upon. In the last case, if the price was divided up, as so much a quart, a barrel, etc., he may pay for what he gets. If there was one lump price named for the entire lot, he must pay the entire amount, because the court will not attempt to split it up for him. To do so would be to make a new contract for the parties. If there has been an actual sale and the ownership of the goods has passed to the buyer, the loss falls on him if they are destroyed without fault of the seller, even though they remain in the seller's possession. If the ownership still remains with the seller, the loss would fall on the seller, wherever the goods may be,' even though on their way to the purchaser. Goods are sometimes sold with the privilege of returning if not sold at a certain time. In such a sale the title passes and in event of destruction by fire, the buyer would lose. The agreement to take the goods back is a condition subsequent. CONTRACTS TO SELL 127 The case is to be distinguished from that in which the goods are sent on consignment. (See § 93.) Where the contract was not for any specific articles, but only for so many feet of lumber, bushels of wheat, etc., the destruction of the wheat or lumber which the seller had at the time the contract was made would not excuse him from per- forming it. He must go out and buy more to replace what was lost. Note: I. The agreement of sale should be very definite as to the time when the ownership is to pass from the seller to the buyer. Much may depend on this fact. § 89. Sales to Arrive Contracts are made at times for the sale of specific goods to arrive on a named ship. This arrival is a condition pre- cedent. If the goods do not arrive, or if they arrive on another ship, the contract is nullified. § 90. A Contract of Sale Must Be Legal Every contract must be legal to be enforceable. A contract for the sale of liquor in a prohibition state could not be en- forced, and, if liquor had been sold, the seller could not recover the purchase price. This is also true where a license is re- quired to sell any particular commodity. An unlicensed seller could not collect. ( See general discussion of illegal contracts, §§ 39, 57.) Note: I. Where there has been an illegal contract, the courts will leave both parties just where they found them, and refuse to help either. !i SALES Review Questions I. 2. Distinguish sale and barter. Distinguish between a sale and a contract to sell. Why is it important to know whether a particular contract is an executed or an executory sale? 3. Why are uniform sales laws desirable? Has the Uniform Sales Act been adopted in your state? 4. Can there be an executed sale of articles not in existence? 5. When a seller ostensibly makes a present sale of goods which are not then in existence, what is the effect on the contract ? 6. If goods sold are partly destroyed at time of sale, what right has the buyer? 7. If the sale had been executed before the damage happened, what would be the rights of the parties? 8. Give meaning and legal effect of a sale to arrive. 9. B made sales, without a license, of kerosene and liquor. Can these accounts be enforced against the customers? A, a retailer, bought goods of B with the understanding that unsold goods would be taken back at the end of the season. Fire destroyed the goods without fault of A, while in A*s possession. Who bears the loss? 10. CHAPTER XVI PASSING TITLE § 91. Delivery In a sale — ^not a contract of sale (see § 81) — ^the delivery is made at the time, and there is no question in regard to the passing of title from seller to purchaser. The delivery may consist in merely setting aside the goods for the new owner, but the title passes, and, if the goods are afterwards destroyed, the loss is the purchaser's. In one case delivery consisted in giving the purchaser the key to the building where some machinery was stored.^ A flood or a railroad accident which delays the delivery of goods is not an excuse for failure to perform a positive contract. It is a general rule that, where an engagement to do a certain thing is positive in its terms, an accident, or change of conditions, will not excuse performance. The Japanese, it is said, look at this matter exactly the other way, and say that if conditions change after a contract has been made it would be unjust to compel performance. § 92. Selection Necessary to Delivery It is impossible to transfer the ownership of goods that have not been identified or set aside. A contract to sell an automobile of a certain make does not transfer the title to any automobile until a particular automobile has been desig- nated as the subject matter of the contract. The precise article or articles that are to constitute the subject matter of the sale must be agreed upon. This means that the subject >Kdlogg Newspaper Co. v. Peterson, 163 111. 158. 129 r 130 SALES matter of the sale must have been selected. Usually the selec- tion is made by the buyer, but in some cases the buyer directly or indirectly authorizes the seller to make the selection for him. In the case mentioned in heading 4 under § 87, where there is the sale of an undivided interest in goods, no actual delivery or selection is necessary. By the sale, the purchaser acquires whatever the seller's rights were in the whole. If the seller had the right to have his share taken out of the mass, the buyer would have the same right ; if the seller had a right to a proportionate share only in the price received when the goods were sold, the buyer would get only the same right. The time, present or future, when the title will pass depends on the agreement. In a contract to sell, the time for the title to pass depends on the contract ; if the intention of the parties is clearly ex- pressed, it passes at the time they have fixed upon. The rules given in the next section will determine when it passes in case the intention is not clearly expressed Note: I. Any act which the parties intend to represent de- livery of the goods will be a sufficient delivery. If a suit of clothes has been selected and set aside for the purchaser, it becomes at once his property. §93. When the Title Passes The following are rules for determining the intentions of the parties as to the time at which the title passes, i.e., at which the buyer becomes the owner: 1, Where goods are picked out and are in the shape in which they are to be delivered at the time the con- tract is made, the buyer becomes the owner at that time. 2. When the goods have to be picked out, or something • PASSING TITLE 131 further remains to be done to them before they can be delivered, the buyer does not become the owner until that is done. 3. When a contract is made to sell a certain number, weight, or measure of goods, or goods to be ac- quired in the future by the seller, the buyer becomes the owner after goods answering the description in the contract are turned over to him, or he takes possession of them. 4. (a) When goods are delivered "on trial," or "on approval," the buyer becomes the owner upon their delivery. He may, however, cease to be the owner and make the seller again their owner by returning them or notifying the seller within the time speci- fied in the contract, or a reasonable time if none was specified, that he will not accept them. (b) When the buyer lets the time fixed for the re- turn of the goods pass without returning them, or keeps them beyond what is a reasonable time under the circumstances, or signifies his approval and his intention to keep them either by words or acts, he becomes their permanent owner. 5. If the agreement requires delivery to the buyer at a particular place, or pa)mient of freight to the buyer or to a particular place, the title does not pass until the goods have reached the buyer or the place agreed upon. 6. When goods are to be manufactured the title does not pass until they are completed and delivered to or accepted by the party who ordered them. 7. If goods are ordered and shipping directions are given, delivery is made when the goods are de- livered to the railroad or other means of transport. After that they are the property of the buyer. 132 SALES Nofe: I. A contract to sell should specify precisely when title to the goods is to pass. , § 94. Sales Without Delivery Whether or not there has been a legal delivery such as described in § 91, it is always a risk to leave property in the seller's possession. In those states where the Uniform Sales Act has been adopted, the law makes a seller who has the goods left in his possession the agent of the buyer to sell, pledge, or otherwise dispose of them. The very fact that the property is in the possession of the seller is likely to mislead innocent third parties who have no notice of the sale. If the seller was dishonest enough to sell the property again, there would be no chance of recovering it from any third party to whom he sold or pledged it. This is likewise the case in California, Colorado, Kentucky, Maine, Montana, Oklahoma, South Dakota, Vermont, and Washington. The laws in the states enimierated above regard leaving the prop- erty with the seller as opportunity for fraud on other persons ; hence the party who so left the property must lose, if the goods are sold to an innocent buyer. This is just, as, if a man has property in his possession it is fair to asstune that it is his, and if he sells it again, the new buyer should be protected. In other states, the court will presume that leaving the property with the seller amounts to a fraud, but the first buyer may prove that the sale to himself was a real one, made in good faith, and not a mere sham for the purpose of cheating anyone, Jmd in this way may recover his property. If it can be shown in any case that there was no real sale, but only a pretended one, a creditor of the seller may treat the goods left with the seller as belonging to the latter and levy on them in payment of his claim. PASSING TITLE 133 Where for any reason possession is to be left with the seller, the only safe method for the buyer is to take a formal bill of sale and to file it on record in the proper office of registry for the locality. Notes: 1. If a sale is made the seller should not keep the goods. 2. If the seller is allowed to keep the goods and sells them to an innocent buyer, the first buyer or- dinarily loses. § 95. Conditional Sales It is possible for the seller to give the purchaser possession of the article that has been sold, and still to retain the ownership himself until the full price or a certain amount of the price has been paid. This can be done only by agreement, however, and where sales are made on the instalment plan it is very common to provide in the agreement of sale that the ownership shall not pass from the seller to the buyer until the last instal- ment has been paid. Such sales are known as "conditional sales." The law always enforces such an arrangement as between the buyer and the seller. For the sake of ready proof and avoidance of misunderstandings, the contract should be in writing and must be so expressed in many states. A common plan is for part payments to be made as rent, with a proviso that the title passes to the purchaser when the last instalment is paid. The difficulty arises from the fact that, as the buyer has the property in his own possession, third persons are likely to be misled into believing that he owns it and has the right to dispose of it. Most of the states get around the difficulty by providing that the seller must file the contract in an office of public record. Everybody is then required to know that it exists, as in the case of a mortgage. If the seller does not 1^ 134 SALES put the contract on record, and the buyer is dishonest enough to dispose of the property to a third person who had no knowledge of the seller's rights, the seller loses the property in the majority of instances. § 96. State Laws on Conditional Sales In the following states conditional sales are good against third parties without acknowledgment or filing in any public office: Arkansas Nevada California Rhode Island Idaho Tennessee Indiana Utah The District of Columbia, Massachusetts, Oregon and Louisiana have substantially the same law with a few ex- ceptions. In the following states the contract recorded is merely signed by the purchaser: Alabama Montana Kansas New York Maine Oklahoma Maryland Texas Minnesota Vermont West Virginia In some of these states more formality is required if the contract is for the sale of railroad equipment. Those states which demand a record require different formalities in order to permit the contract to be put on record. § 97. Requirement of Affidavits to Conditional Sales Contracts Some states require an affidavit by the seller stating cer- tain facts of the sale. These are Michigan, Nebraska, New ' \ > PASSING TITLE 135 Hampshire, Ohio, Pennsylvania, and Wyoming. In others, if the signature to the contract is attested by a witness, the witness may prove it, and it is then admitted to record ; very few of the states require that the contract shall be acknowl- edged in person by the buyer. Colorado, Connecticut and District of Columbia require acknowledgment where the sale is over $100 in amount. In Iowa it may be acknowledged by either the seller or buyer and is then entitled to be ad- mitted to record ; while in Florida the seller must acknowledge in person, or his or its signatures must be proved by one of two subscribing witnesses. § 98. Rights in Illinois and Pennsylvania In Illinois the rights of the seller under a conditional sale will not hold against a third party to whom the buyer may have sold the goods. The seller may protect himself, how- ever, by taking a chattel mortgage on the article sold and recording that. In Pennsylvania where the property is not attached or to be attached to realty, the seller makes a con- tract to lease the property, the purchaser to pay a regular rental instead of instahnents and to give back the property at the end of the rental period. Then a clause is added giving the purchaser the right to elect to keep the property instead of returning it at the expiration of the lease. Where the property covered is attached or to be attached to realty, then either a conditional sale contract or a lease with option to purchase may be used, but it must be recorded with an affidavit. § 99- Protection Against Landlord's Lien In those states where a landlord has a lien on property in rented buildings, the contract of conditional sale should be recorded before the property is moved into the building in order to protect it against his lien. If fixtures such as gas and electric chandeliers, etc., are I 136 SALES sold under a contract of conditional sale, they will be pro- tected by recording the contract and may be removed as readily as any other personal property. If, however, tlie property sold was afterwards attached to the building itself and could not be removed without injury to it, such as a mantel or built-in chma closets and book-shelves, the onlv remedy which the seller has is to claim a lien against the building for the amount due him. § 100. Protection Against Destnictioii of Property Where the property is destroyed while it is held under a contract of conditional sale, the decisions are in conflict. In some states the buyer loses; in others the seller; and in other states the matter has not been decided. Usually, under such circumstances, the buyer refuses to make further payments but may be held Hable for the value of the goods. Unless the buyer can afford such a possible loss, it is prudent to provide for insurance. Notes: 1. If a sale on condition is to be made, and the value of the article justifies it, a lawyer should be em- ployed. 2. If articles are to be sold on instalments in different states, the laws of each must be considered and much care will be required in making the con- tract* Review Questions 1. When does title pass in "a sale"? 2. When does title pass under a sale "on trial" or "on approval"? 3. When does title pass when goods are manufactured under order? a The standard authority on tliis general subject is Haring's "Conditional Sale Laira»" published by the author. Fred Benson Hartuff, Buffalo, N. Y. PASSING TITLE 137 \ 4. When does title pass when goods are ordered to be shipped by rail? 5. If the buyer desires to leave the goods he has bought with the seller, how can he protect his title? 6. If the buyer after taking title leaves the goods with the seller, who sells them to a third party, does the third party take good title in your state? What recourse would the original buyer have? 7. How can the seller part with possession and yet keep title? What is such an arrangement called? 8. In your state what is the law as to conditional sales ? 9. In your state if a farmer bought a binder on instalments and it was burned down when he had paid but half the purchase price, whose would the loss be? *u 'I CHAPTER XVII THE STATUTE OF FRAUDS § loi. Description of the Statute of Frauds The English law known as the Statute of Frauds was passed in 1676. Part of this famous law has been examined in § 48. The part we are here concerned with is the seventeenth section, which in some form has been enacted in most of the states and is as follows : No contract for the sale of any goods, wares and mer- chandise, for the price of ten pounds sterling or upward shall be allowed to be good; except the buyer shall accept part of the goods so sold and actually receive the same, or give some- thing in earnest to bind the bargain or in part payment, or that some note or memorandum in writing of the said bargain be made, and signed by the parties to be charged by such contract or their agents thereunto lawfully authorized. The Statute of Frauds applies to contracts to sell, not to sales. "Goods, wares and merchandise" are held in this country to include all that is usually classed as personal property, goods, chattels, and choses in action, i.e., accounts, claims' contracts, stocks, and securities. A contract for the sale of corporate stocks or bonds is good if some memorandum is made by the broker before suit is brought § 102. Contracts to Sell The definition in the Uniform Sales Act is given as fol- lows : 138 THE STATUTE OF FRAUDS 139 A contract to sell goods is a contract whereby the seller agrees to transfer the property in goods to the buyer for a consideration called the price. The distinction between a contract to sell and a sale is this: in a contract to sell, the goods are not delivered and title does not pass; while in a sale, delivery is made or the title passes to the purchaser. § 103. When the Contract of Sale Must Be in Writing The Statute of Frauds discussed in § loi applies to con- tracts of sale where delivery is to be made later and where the value is over a certain amount. This amount ranges from $30 in Arkansas, Maine, and Missouri, to $500 in Arizona, Massachusetts, New Jersey, Rhode Island and $2,500 in Ohio. Fifty dollars is usual. The words "in value" apply where the Uniform Sales Act has been passed. In the old statute, the words were "in price." The price is the amount fixed by the parties themselves ; the value, what the goods are actually worth in the market. For this reason, contracts purely by word of mouth have become more risky under the Uniform Sales Act. In order that a contract of sale above the limited amount may be enforceable, a written memorandum of the terms of the agreement must be signed by the party against whom it is sought to enforce the contract, or his agent. The written memorandum of sale required by the Statute of Frauds need not be formal. It may be a note, a letter, a telegram, a receipt, or may consist of several papers so con- nected as to make an intelligible sales-contract. The written memorandum of sale need not be made at the time of the con- tract, but it must state all the material facts, the parties, the price, if a price was agreed upon, and specify the articles to be sold. It must be signed by the party, or by the agent of the party whom it is desired to hold. In states where the Uniform I I I40 SALES Sales Act does not prevail, the written memorandum of sale may have to be subscribed; that is, signed at the end of the contract Exceptions to the rule that a sale of goods above the limited amount must be in writing, occur: ( i ) when the buyer has paid part of the price, or (2) where the buyer has accepted and actually received part of the goods. The last two methods of satisfying the statute wiU be considered in the following sections. Notes: 1. Any contract of sale above the specified minimum must be in writing. 2. All contracts should be in writing. § 104. EsEception for Part Payment A payment made at the time of entering into the con- tract of sale makes it enforceable, though it may be above the limited value. The payment may either be a part of the price, or something given or paid to "bind the bargain." This should, strictly speaking, be in addition to the purchase price. In England this earnest is no part of the price of the goods. Usually in this country it is part of the price. The amount is not material. The thing delivered in part payment must be of some value, but if of any value at all, it will be sufficient to bind the bargain.^ Note. I.- Part payment will bind the bargain, but it is no evidence as to time, terms, and essentials of the agreement, and it is a poor substitute for a written contract THE STATUTE OF FRAUDS 141 •Wdr ▼. Hndnut, iij Md. 5*5. § 105. Exception for Part Delivery The second case mentioned in § 103 was: "Where the buyer has accepted and actually received part of the goods.'* The word "received" means taken into actual physical possession, the word "accepted" means that the buyer must have deter- mined in his own mind to become the owner of the goods. Both conditions must be fulfilled to make the contract en- forceable. The buyer may show his consent to become the owner of the goods either by his words or by his conduct The "part of the goods" must be taken out of the actual amount of the goods to be delivered. Samples or specimens which do not come out of the buyer's share are not "part of the goods." If the buyer has directed the goods to be delivered to a railroad company for transportation, a delivery to the railroad company is a delivery to him and their receipt for the goods will be his receipt. If he has not so directed, there is no receipt and acceptance until the buyer or his agent accepts the goods from the railroad company. Note: I. Although he may have accepted the goods, the pur- chaser could still dispute the price, the warranties, and the other terms of the agreement. The writ- ten contract is the only dependable means of prov- ing the agreement. § 106. Exception for Amounts Below Specified Value Contracts of sale below the minimum established by the law need not be in writing. If the transaction were below the value set in any particular state, ^uit could be brought on an oral contract ; i.e., a contract not in writing. If it were proved, it could be enforced, but an oral contract is always hard to prove. (See §46.) ^ 142 SALf£S 2. 3. If the contract of sale is above the minimum value, suit cannot be brought upon it unless it is in writing. If the parties to such a contract (not in writing) carry it out, it becomes an executed sale and stands, as does any other sale, but if either party refuses to carry it out, the other cannot enforce it at law. A single contract for the sale of a number of articles, each of which is below the limited amount in value, must neverthe- less be in writing if the value of all together is greater than the limited amount. Notes: I. It is safest to make all contracts in writing. Any contract of sale above the specified minimum must be in writing except in cases of part pay- ment or part delivery. Any contract of sale below the minimum should be in writing. It is never safe to enter into any contract without some memorandum in writing. Especially is this true when there is anything indefinite about the possible value of the goods to be sold. § 107. Exception for Work or Services If the article purchased involves work or services which make it suitable only for the original buyer, the contract may be oral. For example, a man goes to a dentist and orders a set of false teeth. The dentist takes some porcelain and other materials worth very much less than $50 and out of them makes a set for which he charges considerably over $50. His work and skill are what give the teeth their value, and the teeth which are made for one man cannot be sold to another. In such a case the law says it is the dentist's .•services, not the materials, for which the man is paying, and the contract is not one of sale and need not be subject to any of the conditions mentioned in § 103. That is, the dentist can bring suit without a written contract. . THE STATUTE OF FRAUDS 143 If the article to be made is something which can be sold to someone else, the contract is one of sale and must satisfy the requirements of the Statute of Frauds. The foregoing is a statement of the law where the Uniform Sales Act applies. There have been two other views of the case: one of them, the English rule that if any article was to be made as a result of work and services, the contract was one of sale; the other, the former New York rule, that if there was any work to be performed on the article, the contract was not a sale but for work and services, and the Statute of Frauds did not apply to it. Either of these two rules may still apply in a state which has not adopted the Uniform Sales Act. Note: I. Have a written contract in all cases where the price is more than you can afford to lose. I. 2. 3- 4. Review Questions Distinguish between a "sale" and "contract to sell." Has the Uniform Sales Act been adopted in your state? In your state what is the amount over which contracts must be in writing? Must this amount be "in value" or "in price"? Who must sign the memorandum required by the Statute of •Frauds? Why should both parties sign? When should the memorandum required by the Statute of Frauds be made and what should be its form? What exceptions are there to the rule in the Statute of Frauds as to the written memorandum? 7. What is the rule in your state as to contracts for work and services ? 8. What are "goods, wares and merchandise" within the meaning of the Statute of Frauds? 6. i II CHAPTER XVIII WARRANTIES^ I io8. Introductory The definition of a warranty in the Standard Dictionary An assurance or undertaking by the seller of property, express or implied, that the property is or shall be as it is represented or promised to be, as to quantity, quality, or title. If a farmer goes into an agricultural warehouse and asks to look at mowing machines, and after having inspected the stock and obtained prices to his satisfaction, says he will take the one which he has selected, he has assumed the responsi- bility for its fitness himself and has no recourse as to the seller for damages afterward if it should prove unsatisfactory. The court would apply the maxim caveat emptor, the ancient and harsh doctrine of the common law, signifying, "let the buyer beware." The common law took a sporting view of the dealings between buyer and seller, and did not wish to discourage skill in barter by stressing too much any ethical considerations. At the present day, however, both law and trade morality have advanced a long way beyond this primitive conception of the rights of buyer and seller. Nearly all trade transactions are now based on certain contract conditions, expressed or implied, by which the risk to the buyer is largely eliminated. A change of property for a consideration rarely takes place >For fonn of warnmty contract, tee Chapter CI, Form 25. 144 WARRANTIES 145 without some conditions or warranties as to quality, utility, or other characteristics of the commodity sold. Note: I. The buyer should take care that he has a warranty that what he purchases will serve his purpose. § 109. Conditions Precedent An agreement that an article must be up to a certain standard is known as a condition precedent. A condition precedent is a specification of the kind of article that is wanted with which the article must comply before there can be any sale at all. If it is agreed that the article to be sold is to conform to a certain standard, there is no sale tmtil an article is produced according to that standard. For instance, if the seller agreed to furnish a steam pump that would raise lOO gallons a minute to a height of 50 feet, he must furnish a pump that will do exactly this before the buyer is obliged to take it. Another example of a condition precedent occurs in a provision that work to be done or goods to be delivered must be satisfactory to or approved by some third party, as when a church organ is installed, to be approved by some musical expert. All executory contracts are, in fact, contracts with per- formance as a condition precedent to payment. Note: I. Where there has been an agreement that the article to be sold shall be of a certain kind and quality, the buyer is not obliged to take any article that is not of that kind and quality. 146 SALES §110. Conditioiis Subsequent A condition subsequent is a condition that may defeat the sale after its completion, and give the buyer the right to return it and recover the price if he had paid for it. The technical distinction between a condition subsequent and a warranty has been wiped out by the Uniform Sales Act. Formerly, a breach of warranty entitled the injured party only to damages, while a breach of condition gave him his choice of suing for damages or returning the goods. By the Uniform Sales Act the buyer who suffers a breach of warranty now has the same choice of remedies that the buyer who suffers a breach of condition has always had. Wherever this act is in force the buyer, whether under warranty or under condi- tion, has his choice of suing or of returning the goods. § III. Express Warranties An express warranty is a statement made by the seller about the quality, durability, working ability, etc., of the article sold in order to induce the buyer to purchase. The purchaser must have bought the goods in reliance on that statement. If he relies on his own judgment and selects the goods himself, there is no warranty even though the seller makes a statement of fact Any statement of fact or any promise by the seller in regard to the quantity, quality, or title of a commodity is an express warranty, if the natural effect of such a statement is to induce the buyer to purchase the goods, and if the buyer does purchase the goods relying on such statements. If there is a warranty, and upon using the goods it turns out to be untrue, under the Uniform Sales Act the buyer may return the goods, or he may sue the seller and recover damages in the amount of the difference between what the article is actually worth to him and what it would have been worth had the warranty been true. (See § 114.) WARRANTIES 147 « If a merchant tells you that his goods are the best on the market, this is not an express warranty, as it amounts merely to his opinion of them, and is what is called "merchant's puffing." If, on the other hand, he makes an express state- ment that these goods will wear better than certain similar goods manufactured by another firm, you may rely on his statement as an express warranty. It is always well to get a warranty in the most definite terms possible, for if a merchant is really willing to warrant his goods he will not be afraid to say so in plain language if the buyer insists upon it. If the merchant is not willing to make a definite warranty, it is better for the buyer to know it beforehand and to realize that he is relying on his own judgment and can claim nothing from the merchant in case the goods prove unsatisfactory. A written warranty prevents forgetfulness on the part of the seller. Notes: 1. In all purchases, make sure that all terms are plainly written out, in positive language. 2. In all prospectuses, analyze the statements and note the positive assertions as to material matters. § 112. Implied Warranties 111 every sale today there are certain implied warranties which the law compels the seller to make good. In regard to his right to sell the property, he warrants by the mere act of selling goods: 1. That he has a right to sell the goods, or, if it be a contract of sale, that he will have the right to sell them when the time for the sale arrives. 2. That the buyer shall not be disturbed by any claims made by others against the goods. 148 SALES 3. That the goods are free from any claim, charge, or incumbrance at the time of the sale. These warranties do not apply to sheriff's sales and auction sales. There the buyer takes the risk that the article may be claimed by someone else. If the seller sells stolen goods, the buyer will be forced to return the goods to their rightful owner, but he may, if he can, recover from the seller the damages which he has suffered because of the sale. Special Situations. There is what seems to the public a curious situation here. If the seller had actually stolen the goods, the buyer would have to give them up to the rightful owner even though he knew nothing of the theft; whereas, if the seller had obtained the goods with the consent of the rightful owner through fraud, the buyer, ignorant of the fraud, might be allowed to keep them. There is a case where a man bought some jewelry on credit by representing himself to be another man, and afterwards sold the jewelry to a third person who had no knowledge of the fraud, and the third person was allowed to keep the jewelry. This is because the jeweler gave up the property of his own accord to the fraudulent seller and therefore enabled the seller to lead the third person into buying the jewelry and paying out his money for it. Other Implied Warranties, There are two other war- ranties which go with a sale of goods even though nothing is said about them. I. If the buyer makes known to the seller the purpose for which he intends to use the goods, or if this purpose was known to the seller, there is a warranty that the goods are fit for the purpose. Whenever a person goes into a market or a grocery store to buy food, the butcher or the grocer is supposed to know WARRANTIES 149 that he is buying it for the purpose of eating it and there is, therefore, a warranty that the food is fit to eat. If the buyer orders goods by their trade-names (Quaker Oats, Ivory Soap, etc.), the seller is relieved from any war- ranty that they are fit for his purpose. 2. If goods are bought from a person who regularly deals in that kind of goods, there is a warranty that they are of merchantable, that is, salable quality. When a person orders goods from a description in a sales catalogue, or from a sample, there is also an implied warranty that they are similar to the description or sample. The seller is liable in damages to the buyer if any of these warranties are broken. He is liable only to the im- mediate buyer, however, and not to other persons to whom the buyer sells the goods, although he may, if he manufactured the article himself, be liable for any injuries suffered as the result of a defect in it. Note: I. The fact that the law implies certain warranties should not prevent the buyer from obtaining posi- tive written warranties on all important pur- chases. Review Questions I. 2. What is a warranty? Is a warranty of quality of a chattel implied by the mere fact of sale? What is the rule? Distinguish a condition precedent from warranty. Distinguish a condition subsequent from warranty. 5. May an injured party treat breach of a condition subsequent as a breach of warranty? 6. What two elements constitute an express warranty? Distinguish between a "statement of fact" and an "expression of opinion." 3 4 I ISO SALES 7- What are the implied warranties of ownership where a sale is made? What are the implied warranties of quality? & To what classes of sales do the implied warranties of ownership not apply? 9. Does a warranty follow the goods through successive sales? What exception is there to this rule? To whom only is the seller liable for a breach of an implied warranty ? 10. W CHAPTER XIX REMEDIES § 113. Rights of Unpaid Seller Under the Contract The various sorts of warranties protect the buyer in all business transactions. It is necessary also that the rights of the seller be protected. Most breaches of contract in cases of sale arise from the failure of the buyer to make the required payments. In such cases the goods may be in the possession of one of the following three parties: 1. The unpaid seller may still have the goods in his own possession; or 2. They may be in the possession of a railroad, a steam- ship, or an express company for the purpose of shipment to the buyer; or 3. They may be in the possession of the buyer himself. A seller is still unpaid if he has been given a bad check or note in return for the goods. I. If the seller has the goods in his own possession, and if they were not sold on credit, any of the following courses is possible: (a) The seller may in most cases refuse to give them up until they are paid for. If, however, the sale is on credit, and the seller has no reason to believe that the buyer is insolvent, the seller's duty would be to deliver the goods. (b) If the goods are of a perishable nature, or if the buyer has failed to pay for an unreasonable length of time, or if the seller has reserved that right in his agreement of sale, he may resell them to 151 152 SALES another person, keep the price, and sue the buyer for damages for any loss he may have sustained by the transaction. (c) The seller may, if the time for payment has arrived, notify the buyer that he holds the goods for him and sue him for the price. (d) The seller may, if the time for payment has arrived and no payment has been made, sue the buyer for damages for breach of the contract. The measure of damages will be the difference between what the seller can sell the goods for to someone else, and the contract price. If the seller was manufacturing the article, he may claim damages for whatever loss he has sustained in time or otherwise up to the time the buyer notified him that he refused to take the article, not for any loss through con- tinuing the work after that. Of course, if he can sell the article when finished to someone else at the same price, there is no loss. If the goods were sold on credit, and the term of credit has expired while they are still in the seller's possession, or if the buyer has become insolvent, then the seller may exercise either of the last two rights. 2. If the goods have been delivered to a railroad com- pany, etc., for transportation, the seller's rights may be sum- med up as follows: (a) If in giving the goods to the railroad company for transportation the seller reser\'es the right of ownership to himself, he may refuse to allow the goods to be delivered to the buyer until the latter pays the purchase price. The seller may keep control by shipping to himself at the destina- tion. Then, until he assigns the bill of lading to the buyer, the control is in his hands. REMEDIES 153 (b) If the buyer becomes insolvent and the goods are in transit, the seller may stop their delivery and enforce any of the remedies mentioned under (i), provided the railroad, express company, or other carrier, has not informed the buyer that they are holding the goods subject to his orders. The seller cannot, of course, stop the delivery of the goods after they are in the possession of the buyer or his agent, even though it was before they reached their destination. If there has been a bill of lading issued for the goods, the railroad company may refuse to give them up until the bill of lading is returned. Until the goods have come into the possession of the buyer, the seller's right of stoppage in transitu is superior to any other claim. Other creditors have tried to attach goods under such circumstances, but the courts have always maintained the seller's priority unless the buyer himself had received them, or they had rightfully passed under his control. The buyer could not defeat the right of stoppage by selling the goods in transit to a third party. The third party would have the same rights as the first buyer and no more. A seller who stops goods in transit on a mere rumor of the buyer's insolvency will be liable for damages if the buyer is really solvent. 3. If the goods have come into the possession of the buyer, they are his property and the seller has lost all claim to them. The seller can only bring suit for the price if it is not paid when due. Note: I. A provision permitting the seller to resell the goods in the event of non-payment before delivery should be inserted in the contract in those cases t I 154 SALES where the buyer's credit is not dependable. This allows him to protect himself by selling them without running the risk of being held guilty of breaking the contract. § 114. Rights of Buyer When a salesman sells goods to a customer, the employer has the right to refuse to accept the order of the customer, but, if the customer can prove actual damage, the employer will be liable to the extent thereof. By allowing the salesman to hold himself out as an authorized agent with the power of sale, the employer makes himself liable for his acts. Where the seller refuses to give up the goods to the buyer except where the buyer does not pay at the proper time (see§ 113): I. The buyer may have the right to the ownership of the goods. In this case he may sue the seller for damages for withholding the goods, or he may bring what is known as an "action in replevin" to get possession of the particular goods. . 2. Or the buyer may have no right of ownership over the goods, but only a right under the contract to have the goods delivered to him. In this case: (a) The buyer may sue the seller for damages for breach of the contract ; or (b) If the article was of a special kind or made to order so that he could not get it any- Avhere else, the buyer may go into a court . of equity and sue to compel the seller to perform his contract. The measure of damages in any of these cases is the difference between what the buyer could go out into the market and buy the goods for, and the contract price. If he REMEDIES 155 could get them for the same price or less in the market, he would, of course, have suffered no damages. Where the seller delivers or tenders the goods but they fail to come up to a warranty which he has made for them, the Uniform Sales Act allows the buyer the foUowmg remedies: I. He may accept or keep the goods and set up against the seller the breach of warranty by way of re- coupment in diminution or extinction of the price. 2 He may accept or keep the goods and maintain an action against the seller for damages for the breach of warranty. 3 He may refuse to accept the goods, if the property therein has not passed, and maintain an action against the seller for damages for the breach of warranty. 4 He may rescind the contract to sell, or the sale, and refuse to receive the goods, or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. When the buyer has claimed and has been granted a remedy * in any one of these ways, no other remedy is thereafter ^^^ The buyer must send back the goods in as good condition as that in which they were received, unless the damage has resulted because of the fact that they were not as warranted. He cannot return them if he has once accepted them knowing that they were not as warranted, or if he has failed to notify the seller within a reasonable time that he refuses to take If the goods are really not as warranted, and notice has been given to the seller that the buyer refuses to take the iS^ SALES goods, the buyer cannot be held liable for the price If he has paid any part of the sum due, he is entitled to have that money back before returning the goods, and, if necessary, may sell the goods to another party in order to get back what he Has paid on them, handing over the surplus to the seller. The measure of damages which the buyer may recover for a breach of the contract of warranty is the difference between what the goods were actually worth at the time they were delivered, and what they would have been worth if thev had been as warranted. Note: In any case where the buyer intends to assert his rights, he should act promptly. Delay may be fatal. A buyer should never accept goods without examining them. Where there was a warranty of durability, he should notify the seller of his dissatisfaction, or refusal to accept the goods, just as soon as he discovers that they are not up to the warranty. It is a prudent thing in such a case to provide in the agreement of sale that the buyer may keep back part of the purchase price till he has tested the article warranted. § 115. Rescission of Sale M rescission results from failure to perform a contract of s^e. Both parties may now agree or one party may call it off and the other may acquiesce. If the other does not ac- quiesce, the rights of the parties must be determined by suit as set forth in the earlier part of this chapter. In case of rescission: (i) The buyer and the seUer may agree to cancel the contract. (2) When the seller has the goods in his possession or has stopped them on the way to the buyer, he may caU off the sale if he has reserved that REMEDIES 157 right in the contract and the buyer does not carry out his agreement: or if the buyer fails to pay for the goods within a reasonable length of time. (3) The buyer may call off the contract if the goods are not as warranted. When the sale is called off by agreement, the buyer must return the goods to the seller, and the seller must return the price to the buyer. But the buyer may keep the goods until the seller pays him back what he has paid, and the seller may keep the price until the buyer returns the goods. Either party may take the initiative. The one who most desires to cancel the sale will probably move first. When goods are not up to the warranty the buyer must return the goods in the same condition in which they were when he received them. He may either actually return them or notify the seller that he refuses to accept them and will hold them subject to his order. Note: I. Either party who wants to caU off the sale should do so just as soon as he finds out that he has good reason to cancel it. The court will not look with favor on any delay, as it is not fair to the other party. The buyer may sell the goods if necessary and get out of the money realized what he has paid on them. If he has paid the entire price and the goods do not realize that amount when sold, he may sue the seller for what he has lost on the transaction. 1^8 SALES Review Questions I. 2. 3. ^1 10. What recourse has a seller who has the goods still in his posses- sion: (a) If a sale was to be for cash; (b) if it was on credit; (c) if the goods are perishable? How can goods be shipped so that title remains in the seller? What is meant by the right of "stoppage in transitu"? If this right is exercised on a false rumor of the buyer's insolvency what is the effect? 4. A seller of goods under contract that no payment is to be made till all goods are shipped, ships some, and then finds that the buyer has' failed. What can the seller do ? 5. If a seller wrongfully refuses to deliver goods, what remedy has the buyer? When can the buyer enforce specific per- formance of his contract? 6. A salesman sells a bill of goods. The employer refuses to accept the order. Has the buyer any recourse? 7. When goods are ordered and on arrival they fail to come up to a warranty that has been made, what two alternatives has the buyer ? 8. How can a sale be called off? 9. Jackson bought 70 cords of wood of Smith. The wood was piled and measured on Smith's property, and Jackson was to come to get it. Nothing more was said. Before Jackson paid for or took the wood away, he went into bankruptcy. His receiver claimed the wood, which the seller refused to give up. Who was right? Farley sold a carload of furniture to a retail firm. While the goods were en route over the railroad, he learned that the firm was insolvent, and accordingly ordered the railroad to return the lot to him, offering freight and other charges. The railroad, however, claimed that it had attached the goods to satisfy a claim of its own against the insolvent firm. Could such attachment take precedence of the seller's lien? CHAPTER XX SALES AT AUCTION §116. Regulations for Sales at Auction A sale at auction is held in accordance with terms printed in the auction bills. The sale is made when the auctioneer lets his hammer fall. He need not accept any bid unless required to do so by the terms of the printed auction adver- tisement. Generally such an advertisement will specify that the property is to be sold to the highest bidder. An auctioneer may refuse to recognize bids that are not substantially higher than the last bid, the amount depending on the value of the article offered for sale. If the seller had printed in the auction bill a provision that he reserved the right to take part in the bidding himself, he might bid at the sale or have his friends do so for him. Otherwise if the seller himself bids, or has bids made for him, the person to whom the goods are finally knocked down may refuse to take them if he discovers the situation. §117. Compliance with Conditions The sale may be made on some condition. The buyer must then comply with the condition before he can receive the goods. Sometimes bidders are required to make a deposit before being allowed to bid ; sometimes they are required to make a deposit after the bid is accepted. If the bidder does not comply with the terms of the sale he forfeits this deposit, unless it appears that the seller could not give him good title to the property, in which case he may recover his deposit and refuse to take the goods. 159 i6o I SALES A purchaser at an auction sale must always pay cash before he is entitled to the property unless the printed terms provide otherwise. The seller may sue the purchaser for damages if the pur- chaser fails to take property which was knocked down to him. The seller may also seU the goods to someone else for what he can get for them. This amount will be deducted from his damages. § ii8. Duties of Auctioneer The auctioneer acts as an agent for the seller in selling the property; for the buyer in signing a memorandum of the sale. The seUer will be bound to carry out the sale which the auctioneer makes, and the buyer to take the goods accord- tng to the memorandum of sale. An auctioneer is not allowed to bid for himself at a sale, but he may make bids for some- one else. If he does not state for whom he is selling the property, he is personally responsible to the purchaser for seeing that the terms of the sale are carried out. An auctioneer who sells property that does not belong to the seller is personally responsible to the owner of the property even though. he honestly thought it was part of the goods to be sold. Because of all this responsibility, the law usually requires an auctioneer to have a license. In New York a man must take out a license to act as auctioneer in order to sell even his own property. The auctioneer has a lien on the property for his com- mission, and may require the commission to be paid him before giving up the property to the purchaser. Note: I. In planning for an auction sale, all the terms should be decided upon and printed in the handbills ad- vertising it. If the owner of the property wants SALES AT AUCTION i6i 10 reserve the right to bid or to have bids made for him, it must be definitely stated. Review Questions 1. Has the owner of goods sold at auction the legal right to bid on them? 2. What should be announced in the auction bills? 3. Whose agent is the auctioneer? 4. In your state does the auctioneer have to be licensed? May a man sell his own goods at auction without a license? 5. What lien has an auctioneer? I i I PARI' IV AGENCY CHAPTER XXI PRINCIPLES OF AGENCY §119. Introductory In the complex commercial life of today much of the world's business is of necessity transacted by proxy. The amount of business that one man can do is limited. Hence, to conduct the great activities of the world, those with execu- tive ability empower others to act for them. At the present time the larger proportion of business men are not doing business for themselves, but are acting as agents for others. On this account the subject of agency is of primary im- portance. Many men are principals, yet more are agents; and all have to do with agents and should know what agents' powers are and just how far they represent their principals. The matter of agency enters into all departments of business and will come up again and again in the treatment of other subjects in this work. The subject of agency is of vital im- portance in insurance, partnership, and corporation law. § 120. Definitions An agent is one who represents, or is authorized to repre- sent, another person in a business transaction or transactions with third parties. The person represented is known as the "principal." The person appointed may be known as "agent," "factor," "broker," "attorney," "proxy," "delegate," or "representative." The relation between the principal and the agent is termed "agency." i6s 1 66 AGENCY §iai. The Principal Anyone capable of transacting his own business may ap- point an agent to act for him in the same matters. A standard text-book expresses it thus: It may be stated as the general rule, by the common law every person who is competent to act in his own right, and in his own behalf, may appoint an agent* In the California Code it is expressed as follows: Any person having capacity to contract, may appoint an agent. The legal doctrine of agency is based on the principle that whatever a person may do for himself, he may do by another person. The person who appoints an agent must be, therefore, capable of transacting his own business; that is, when he appoints an agent, he njust be sane, sober, and capable of acting for himself, and also, he must be of full age— hence a minor cannot appoint an agent. The following are legally qualified to be principals: 1. Corporations may appoint agents to accomplish their corporate purposes— in fact, a corporation can act only by its agents. 2. Partnerships may appoint agents, and apart from this each partner is held to be an agent for the firm. 3. Married women may appoint agents. 4. Unincorporated clubs and societies may appoint agents. Notes: I. The principal must be competent to act, and in his sane mind. ' Mechem on Agency, 129; Cyc. 31, p. 1175, PRINCIPLES OF AGENCY 167 2. Infants are not competent to act for themselves, and hence cannot appoint agents. 3. Partnerships, clubs, and societies may be principals. 4. Corporations can operate only through agents. § laa. The Agent Any person who is qualified to perform a particular act may do it as the agent of another. Anyone who has capacity to act for himself is ordinarily capable of acting as agent for another .... it is generally thought he may be capable of acting as agent for another, although he is not capable of acting for himself. ^ The point to be noted in this statement is that a person may be legally incompetent to act for himself, but yet may lawfully act as agent for someone else. For instance, a minor, i.e., anyone under age, cannot contract for himself, but he may act as agent for an older person and what he does will bind the older person.* A child may be the agent of his parent. But it must be because the child has been appointed an agent, not simply because he is the child of, or is living in the house with, the parents. In such cases, to be an agent, the child must have been directly authorized by the parent to act along certain lines, or else it must be shown that the child had been in the habit of so acting with the approval of his father or mother. In a New Hampshire case the judge said: A son has no authority, as such, to lend his father's property, and there is no presumption that such authority has been given the son.* •31 Cyc. 1212; Lyon & Co. v. Kent, 45 Ala. 56. « Sheldon v. Newton, 3 Ohio State 494. « Johnson v. Stone, 40 N. H. 197, y 1 Ii M Notes: I. AGENCY A minor who cannot contract for himself may con- y/ tract as an agent for someone else. Anyone can be an agent to do anything he is suffi- ciently intelligent to do. A parent is not bound by the contract of a minor y child unless he has expressly or impliedly made V the child his agent. § 123. Genera! Agents A general agent is one authorized to assume entire charge of his principal's business, or all of one phase of the business, or all of his principal's business at some particular place. Unless notified to the contrary, people dealing with an agent have the right to presume that his agency is a general one, and that he is authorized to do anything usually done in such a business. A general agent has unrestricted powers to deal along the line he is engaged in. The manager of a business is a general agent with power to use his individual judgment and to act largely upon his own initiative. His employer controls and limits his general policy, but he does many specific acts at his own discretion, and delegates authority in minor details to subagents who answer to him for what they do. For instance, the manager of a grocery store is a general agent for that purpose and has authority to purchase all kinds of goods that are sold in the store, and to contract for neces- sary repairs and improvements in the store. He has no authority to buy dry-goods, hardware, or other things outside his line of business. He has no authority to sell the whole store, or to buy real estate, or to build a new store. If such an agent wanted to contract for an addition to the existing store, the contractor would do well to find out whether or PRINCIPLES OF AGENCY 169 not the agent had authority to do this, because this would seem not to be included in his general authority. An agent may possess direct authority to bind his prin- cipal in a particular transaction ; that is to say, the principal may expressly empower the agent to bind him; and this direct authority will carry with it, by implication of law, such powers as are suitable and reasonably necessary to accomplish the intended purpose.'^ A superintendent of a factory is a general agent for the purpose of running the factory, and is presumed to have power and authority to do anything necessary to keep it in operation, and in case of emergency to preserve the business and the building and to protect the employees. Notes: 1. A general agent has wide powers in his particular line of business. 2. He has no authority to bind his principal outside of his general line of business. 3. It is expedient to know, when you are dealing with an agent, whether he is a general agent or a special agent. 4. A third person, having ascertained the general character and the scope of an agency, may rely on the agent's having such powers as naturally and properly belong to his position. 5. In doubtful cases, it is safest for those dealing with a general agent to ascertain the extent of his authority. § 124. Special Agents A special agent is one authorized to act in a specific trans- action or in a limited line of business. The authority of a » Hackett ▼. Frank, 105 Mo. App. 384. f 17© AGENCY special agent is not so broad as the authority of a general A special agent is authorized to do some special thing. He may make, for instance, but the one contract or the one sale for which he has been appointed. Should he do some other special thing, which he honestly considers more to the mterest of his principal, he would depart from his instruc- tions and he alone would be liable; the party represented would not be bound. For example, an agent authorized to sell a particular painting would have authority to sell that painting and to bind his principal in what he did in connection with the one transaction, but he would have no authority to do anything else. Similarly, a special agent might be authorized to buy wheat for his principal ; in that case he would have no right to buy lumber, coal, or another grain, but he could bind his principal in any transaction for the purchase of wheat If the agent has an established office or place of business where he has been doing business for some time with a sign or signs indicating his agency and line of business, a third person would be safe in doing business with him in the particular line. In dealing with a special agent engaged for a particular transaction, a third party should ask to see the agent's au- thorization, which is usually in writing. In a New York case, a father authorized his son, to accept a draft for $2,000, drawn upon the father at not less than thirty days. The son accepted a draft for $482, payable ninety days after date, in the name of his father. The court held that he was a "special agent," and had no right to ^o outside of his authority.^ A written request to a real estate broker as special agent to find a purchaser for real estate, does not confer upon him •^txoB ▼. Palmer, 8 N. Y. 3^ PRINCIPLES OF AGENCY 171 any authority to sign a binding contract of sale for his principal. To do this, he must also have authority from his principal to sell. Notes: 1. A special agent has limited authority. 2. This authority may be indicated by: (a) Written authorization. (b) An established office with signs and adver- tisements. (c) A continued course of dealing. 3. No one can become the agent of another except by the will, expressed or implied, of the principal. 4. An agent cannot create in himself a particular au- thority merely by the performance of the act. § 125. Del Credere Agents A del credere agent is one who guarantees to his principal that any goods sold by the agent will be paid for. An agent employed to sell goods sometimes guarantees his principal against loss from any of the customers to whom he sells ; in such case, the agent is termed a del credere agent. It is not a common arrangement, but nevertheless it is used occasionally in mercantile circles. A factor with a del credere commission or agency is one who in consideration of a higher compensation expressly agrees to pay his principal the price of the goods he sells himself, if the purchaser does not,^ A contract of a commission merchant whereby he, for a commission of 5 per cent, undertakes to sell goods and guaran- tees his sales, need not be in writing." 'aoCyc. 186. XT V r » Sherwood v. Stone, 14 N. Y. 267. 172 AGENCY Review Questions 1. Who may appoint an agent? 2. Who may act as agent though not as principal? 3. Distinguish between genera] and special agents. 4. Can a real estate agent as such sign a contract binding his prin- cipal to sell? 5. What is a rfel cr^rfer^ agent? 6. If a boy came into a store and wanted to buy an Ingersoll watch and have it charged to his father, what would you advise ? CHAPTER XXII THE CONTRACT OF AGENCY* § 126. Appointment The appointment of an agent may be oral, written, or by u^age. An agent can be legally appointed for most purposes by an oral or spoken contract. The objection to an oral con- tract is the difficulty of proving it, and the strong probability that there will be some misunderstanding as to the terms of the contract between the parties. For all ordinary purposes, an oral contract of agency is just as binding as a written con- tract, provided its terms can be proved. Usually an agent is appointed in writing; either a formal contract is drawn up and signed by both parties, or a letter or a telegram is sent and the other party replies to it, in which case the letter or the telegram and the reply thereto would constitute the written contract. When an agent is appointed to vote at a corporate meet- ing, his written appointment is called a "proxy,*' and is usually signed by the principal and by a witness. Some corporations require acknowledgment of the proxy before a notary public; but this is not usually necessary. (See Chapter CII, Forms 3^-33) „ , ^ , , When an agent is appointed to sell land, or to perform any important act, or to conduct any important negotiations, he' is given formal power of attorney under seal (see Form 28). A power of attorney is a particular kind of written contract of agency. Where land is to be deeded or a mortgage executed, the agent is called an attorney in fact and it is iFor forms of agency contracts, see Chapter CII, Forms 26-33. 174 AGENCY absolutely essential to have the formal power of attorney executed just as carefully as a deed, and acknowledged before a notary so that it can be filed in the registrar's office with the deed or the mortgage. (See § 130.) In many cases of agency, the agent is appointed to an office where he exercises certain powers without any formal specification of what he can do and what he cannot do. In such instances, the agent will be held to have all the powers usually attached to such an office. For instance, a ticket-seller for a railroad is an agent of the company and has certain well- known powers; beyond these he cannot go. ^ An agent appointed to conduct a given business for his principal has authority to do all things incidental or essential to the performance of his duties as agent. If the duties of the agent involve the management of a mercantile business, and it is necessary to employ salesmen, the principal will be bound for the salaries whether he has given express authority to the agent to employ assistants or not.* Notes: 1. An oral contract is hard to prove, and is liable to be misunderstood. 2. An agent should be appointed by a written contract signed by both parties. 3. An agent to sell or to mortgage land must be ap- pointed by a sealed power of attorney executed and filed like a deed. 4. An agent conducting business for his principal has the usual powers of anyone doing such a business. § 137. Express Appointment The express appointment of an agent requires a specific designation of the agent by the principal. Such an appoint- ' Baldwin ▼. Garrett, iii Ga. 876. THE CONTRACT OF AGENCY 17s ment consists of a definite contract for the agent's services. Most agents are appointed in this way. The express autJwrity of an agent is that authority which the principal directly grants to him. This includes of necessity (whether the agency is general or special) all such powers as are necessary and proper as a means of effecting the purpose for which the agency was created.* The apparent authority of an agent is that which the prin- cipal knowingly permits the agent to exercise, or which the agent exercises without objection from the principal. § 138. Implied Appointment The appointment of an agent is implied when it is just to infer it from the circumstances. If A stands by and sees B sell goods which belong to A and makes no protest, but ac- quiesces, A will be held to have appointed B his agent and will be bound by B*s transactions. This is also called "agency by estoppel,** because A will be estopped from denying the fact of B's agency after acquiescing in B's acts as agent and per- mitting a third person to so regard him. When in the usual course of the business of a corporation an officer has been allowed, in his official capacity, to manage its affairs or to make certain contracts, his authority to repre- sent the corporation will be inferred from the manner in which he has been permitted by the company to conduct its business.* A wife, as the domestic manager of the house, may buy all things that are naturally and ordinarily necessary for the management of a household. She may contract for house- hold supplies, domestic service, medical attendance, articles of clothing for the use of herself and children, suitable to the style in which the husband lives. It is implied that she is authorized to do this, and the husband is held responsible for * Dispatch Ptg. Co. v. Nat'I Bank, 109 Minn. 440. * Martin v. Webb, 1 10 U. S. 7. 176 AGENCY |l 2. 3. the cost She is not held to be authorized beyond this, unless expressly made the agent of the husband for some particular purpose, in the same manner in which he would appoint a stranger. Notes: I. An agent's authority should be expressed by a writ- ten contract. But an agent's authority may be implied from the conduct of his principal. An agent placed in a position requiring authority has implied authority to do all things that are necessary. § 129. Ratification Where one acts as the agent of another without authoriza- tion, his acts as agent may be ratified by the acquiescence of the principal or by the principal's taking the benefit of the agent's performance. It happens not infrequently that an agent, appointed for a definite set of duties, sees opportunity to do something for which he has no authority, but which will benefit his principal. Sometimes a person volunteers to act as agent for a principal whom he has not had opportunity to con- sult After an unauthorized act of this kind has been done, the principal may (when he learns of it) : 1. Refuse to be bound by it 2. Expressly ratify the act, 3. Impliedly ratify it, by taking the benefit of the action. If the principal ratifies the unauthorized action, he must ratify jt as a whole. He may not ratify part of the agent's act and refuse to recognize the other part Ratification, to be eflFectual, must be made with full knowl- tdg^ of everything which has any material bearing on the transaction. THE CONTRACT OF AGENCY 177 Notes: 1. Ratification has the same effect as an original au- thorization. 2. Ratification may be express, or by acquiescence. 3. Taking the benefit of an unauthorized act (with knowledge of the circumstances) is a ratification of the act § 130. Sealed Contracts An agent, in order to execute a deed or sealed instrument, must be appointed by an instrument of like formality. For most purposes an agent may be appointed by a simple written agreement or by word of mouth; and sometimes his authority may be implied from circumstances. When, how- ever, land is to be conveyed or mortgaged, or some important instrument like a deed or a mortgage which is to be recorded in some office of public registry is to be executed, it must be done by the principal himself or by an agent appointed by power of attorney executed with all the formalities of a deed or instrument for record, which must be filed in the same office of public registry as the deed itself. An agent appointed by a power of attorney is called an "attorney in fact." The most important feature of a deed is the fact that it is executed under seal. It is usually witnessed and is then ac- knowledged before a notary public. The power of attorney requires the formal execution and the same acknowledgment that a deed would require. The doctrine may be summarized thus: An agent to contract under seal must be appointed under seal. Authority under seal is necessary to enable an agent to bind his principal by a deed or other instrument under seal. It is a technical, but a thoroughly settled rule of the common law, that an agent cannot bind a principal by a deed of con- 17^ AGENCY veyance, bond or other instrument under seal, unless his authority to do so is also under seal* There is no doubt about the general rule that a power to execute an instrument under seal must be conferred by an instrument under seal executed with equal solemnity.* Note: I. A deed must be executed by the owner of the land or by his agent or attorney appointed under seal. § 131. Appointment of Subagents Unless expressly or impliedly authorized, an agent is not empowered to appoint a subagent. When an agent is appointed, he is appointed because the principal places special trust and confidence in him. It would not be right for an agent to have power to delegate his authority to someone else, whom the principal might not care to have represent him. This is a maxim of the law— that delegated authority cannot be passed on to someone else unless the agent has been expressly authorized to do so, or unless it is customary in the particular line of business. A distinction is to be taken in this matter between acts requiring discretion and acts that simply involve some mechan- ical performance. An agent authorized to perform some im- portant work could employ others to help him in the mechanical details. If it were customary, he could employ an assistant superintendent and supervisors, but he could not delegate the active supervision to someone else. Notes: I. An agent cannot appoint a subagent. £ If he attempts to do so, ( i ) his appointee will have no power, and (2) the agent will be personally liable for the subagent's wages. ■Clark & Slcyles on Agency. •Long ▼. Hartwell, 34 N. J. L. laa. THE CONTRACT OF AGENCY 179 §133. Servants and Employees An employee or servant may also be an agent if authorized to do business with third parties. The distinction between an employee or servant and an agent is that the employee or servant is employed to do certain things and has no relation with third parties, while an agent is employed to represent the principal in dealings with third parties. It happens in many cases that an employee is also an agent, but his functions as an agent are distinct from his functions as an employee. A servant employed in domestic activities becomes an agent when he or she is authorized to buy supplies, or to do anything else that involves dealing with third parties. (See § 136.) If a delivery man has been in the habit of making collec- tions, it would be safe to pay him. If a package has been sent t. O. D. the bearer is thereby authorized to receive the amount. If an employer acquiesces in his employees* acting as his agents, he will be estopped from denying their agency. (See § 128.) Notes: 1. It is not safe to deal with a servant or an employee unless he or she is authorized to do business with third parties. 2. It is not safe to pay money to truck drivers, delivery men, and errand boys, unless it is known that they are authorized to make collections. § 133. Void Contracts of Agency Contracts of agency for an unlawful purpose, as is the case with other contracts (see § 39), are illegal and cannot be enforced. For example, a contract to conduct a gambling establish- ment would be absolutely void. The principal could not com- ^! i8o AGENCY pel the agent to carry out the contract, and the agent could not collect any compensation for the unlawful service. A contract to procure an agent to commit a positive crime, to bribe legislators, to forge a wiU, or to commit a burglary, is void absolutely and entirely. Any contract opposed to public policy is void. Certain things are said to be against public policy. The following are examples: to employ a lobbyist to influence legislation; to contract with a lawyer to organize a trust in restraint of trade; to employ a broker to negotiate a marriage; or to bribe a purchasing agent to buy from you. ^ In any contract to do an unlawful act, both agent and principal are liable to damages and to criminal prosecution. If an agent or an employee were engaged to smuggle silks, both the subordinate and the principal are liable to prosecution and whatever penalties are imposed. In legitimate business the agent acting within his authority makes his principal liable but does not make himself responsible. In any illegal business, the responsibility attaches to principal and agent alike. (See § 146.) Notes: Any contract for an illegal or immoral purpose is void. An agent employed to act illegally cannot collect any compensation. In a contract for an illegal or immoral act, both principal and agent will be liable to damages and to criminal prosecution. I. mm 3- 2. 3» Review Questions How may an agent be appointed? What is necessary to appoint an agent to convey land.? What may an agent do in the absence of formal specification? THE CONTRACT OF AGENCY 181 4. To what extent is a wife the implied agent of her husband? 5. How may a contract be ratified? 6. Define "power of attorney" and "attorney in fact." 7. Can an agent appoint a subagent? Explain answer. 8. Distinguish between a servant and an agent. 9. What contracts of agency are void? 10. Can an agent who collects a gambling debt recover^ an agreed commission ? 11. What is agency by estoppel? 12. A's wife was ill and the family physician said that he would like to consult with a specialist. A said that he was willing. The family physician called in the specialist, whose diagnosis afterwards proved to be erroneous. Later the specialist brought suit for his services, to which A made the defense that he did not employ the specialist, and that the diagnosis was erroneous. Can the specialist recover? Give reason for answer. 13. What general facts are necessary to validate an unauthorized assignment by an agent? 14. Does the relation of agency always rest on consent? 15. In your state is there any provision of the law with which one must comply in order to conduct a general mercantile or manufacturing business in a fixed location as agent for an- other? i CHAPTER XXIII THE PRINCIPAL § 134- Princiiml's Duty to Agent The principars duty to his agent is to pay him his com- pensation and proper expenses. The relation of the principal to the agent is one of contract. The agent agrees to render services and the principal promises to pay him a salary, a com- mission, or a fixed sum. If no amount of compensation has been fixed, the agent will be entitled to whatever his services are reasonably worth. Unless provided otherwise, the prin- cipal is bound to reimburse hira for whatever expenses he has properly incurred. The contract should be a written one to avoid misunderstandings and to supply evidence of what the agreement really was. The usual rules which govern employment prevail in this relation. If the principal terminates the agency before the end of the period of employment, he must compensate the agent for the unexpired term less any amount the agent can secure from some other employment. If the agent were to be paid a com- mission or a gross sum and the principal were to terminate the agency unreasonably, the principal would be liable to pay damages for the breach of his contract. If the agent had completed his undertaking, even though the principal did not take advantage of what the agent had done, the agent neverthe- less would be entitled to full payment for his services. In a Missouri case, one Gelatt, a real estate agent, was employed by the owner of a business block to find a purchaser for the property. He found a buyer, but the owner advanced 183 THE PRINCIPAL 183 the price and broke up the deal. The court decided that Gelatt was entitled to his full compensation.* If the principal makes it impossible for the agent to com- plete the undertaking, he must compensate the agent. Note: I. The principal's duty to his agent is simply to deal fairly. An express contract in writing will pre- vent misunderstanding. § 135. Principal's Duty to Third Party If the principal leads the third party to think that the agent has authority beyond his express authorization, the principal will be bound by whatever the agent does in the exercise of his apparent authority. In many such cases, the principal be- comes bound, not by any positive thing which he has said or done, but because of his acquiescence in what the agent was doing, or his failure to protest at the proper time. In other cases the principal has allowed the agent to do certain things beyond the latter's authority; and this has continued imtil a course of dealing has become established. In all such cases, third persons are justified in assuming that the agent's ap- parent authority is real, and the principal will be bound. The principal is liable for all acts done by the agent within the apparent, as well as actual, authority given. (See § 128.) Third parties dealing with an agent do not know his secret instructions, and whatever authority the agent appears to have can be used by him to bind his principal. The third party must, however, (in good faith) believe that the agent has the authority.^ The agent's own representations as to the extent of his authority, if false, will not bind his principal. An agent to sell goods who has possession and is in position to deliver is authorized to receive payment; but if he is not in » Gelatt V. Ridge. 177 Mo. 553- 'Johnson v. Hurley, 115 Mo. 513. n i 184 AGENCY possession of the goods he is not authorized to receive pay- ment. Usage and trade customs count heavily in deciding what constitutes the apparent authority of an agent * Notes: 1. When an agent is appointed, he is given as much authority as his position seems to warrant. 2. Secret instructions or limitations on the agent's au- thority do not bind third parties unless such in- structions are known to these parties. § 136. Principars Liability A principal is liable for all fraudulent, negligent, or wrong- ful acts of his agent in the scope of his employment. If this were not so, it would be possible for a man to perpetrate all manner of fraud and wrong, and to escape punishment by employing some agent of no repute to do the dirty work. A principal is liable for carelessness, deceptions, false pretenses, or wrongful acts of any kind committed by the agent in carry- ing out the purposes of his principal. The principal is liable for any damages to third persons arising from the mistakes or the negligence of an agent or an employee while acting in his service. In a case in Rhode Island, a salesman suspected a woman customer of stealing a package of spoons. He detained her, sent for a policeman, had her taken to a police station and searched. She brought suit against the firm that employed the salesman for the wrongful arrest and search, and was awarded damages. The court said: ' If in the performance of his duty he, the salesman, mis- took the occasion for it or exceeded his powers or employed an improper degree of compulsion, the mistake and the ex- cess must be answered for by the master.' H k THE PRINCIPAL I8S 'Staples ▼. Sduaidt, 18 R. I. 324. If an automobile salesman takes out a machine belonging to his employer to show to a prospective customer, and care- lessly runs over a foot traveler, the employer will be respon- sible. If the salesman takes the machine out after hours for his own pleasure and does the same thing, the employer will not be responsible, because the accident did not occur within the scope of the salesman's duties. Notes: 1. A principal is responsible for whatever is done by his agent within the scope of his employment. 2. A principal is not responsible for the acts of his agent done outside the scope of his employment. § 137. An Undisclosed Principal An undisclosed principal may take the benefit of any con- tract made by his agent. As has been stated, an agent may conceal the fact that he is acting for a principal. In such a case, the agent renders himself personally liable, but a princi- pal has the right to take whatever benefit may come from any advantageous contract made by his agent. The undisclosed principal is liable if the third party discovers his existence. With this liability the principal has the right to take the benefit of the contract. Byington v. Simpson was a case in which a building con- tract was signed "J- ^- Simpson, Agt." The third party knew that Simpson was in fact contracting for his wife. The wife was held liable though her name was not mentioned.* The third party, upon discovery of an undisclosed principal, may hold responsible either the agent or the undisclosed princi- pal. He must elect to hold one or the other; he cannot hold both. To this rule there are the following exceptions: I. If the contract made by the agent is in the form of a negotiable instrument or a sealed contract, the undisclosed * Byington v. Simpson, 134 Mass. 169. i86 AGENCY principal has no rights or liabilities. He cannot sue or be sued, as such instruments are considered as having been taken solely on the face of the names appearing thereon. 2. If the principal, before his identity was disclosed, in good faith paid the money due on the contract to the agent, he cannot be held liable. This is perfectly fair to the third party because he gave credit to the agent and expected to get payment from him and had no knowledge that there was somebody behind the agent. The third party may collect from the agent if he can, but it would be unfair to let him collect from the unnamed principal who in that case would have to pay a second time. 3. If the third party after learning that there is a certain principal, unequivocally chooses to hold the agent, he cannot alter his decision and proceed against the principal. 4. If the contract states dearly that it is made only by the parties signing and that no other parties are to be intro- duced into the contract, the undisclosed principal rule would not apply. Notes: 1. The agent who does not disclose his principal takes the entire responsibility on himself. 2. The undisclosed principal is liable when discovered. Review Questions Jl* What are the duties of a principal to his agent? What rules usually prevail in the relation between agent and principal ? 3. For what acts of the agent is the principal responsible? 4. What docs the "scope of employment" mean? 5. Do false representations of an agent in the "scope of his employ- ment" bind the principal? 6. What is an undisclosed principal ? What risk does his agent take? THE PRINCIPAL 187 7. What may a third party do on discovery of an undisclosed principal ? 8. May the principal benefit by any transaction in which the agent conceals the fact that there is a principal? 9. What is the rule as to an undisclosed principal in the case of a sealed instrument or negotiable paper? II CHAPTER XXIV THE AGENT § 138. Agent's Duty to Principal An agent is, in the line of his duties, subordinate to his principal. Therefore, it is an essential feature of his employ- ment that he should obey orders, act with good faith, and use such prudence, skill, and diligence in his duties as are requisite for their proper discharge. He must, if necessary, keep proper accounts and render statements to his principal. He cannot delegate any duty demanding discretion to others without special authority. If he does not do all this, if he fails in his duty, he may be discharged, his compensation may be denied, and he may be responsible in damages. Any profits made in the course of an agent's employment belong entirely to his principal. An agent may not use his agency for his own advantage. One Cummings, an agent for the sale of stock for the Diamond Match Company, sold stock of the company amount- ing at par to $170,000 for $200,000, and kept the profit of $30,000 for himself. Later this was discovered by the com- pany, which brought suit and recovered the whole amount/ In making a contract with an agent or confidential em- ployee, it is safest to contract that he shall not at any time, either while he is employed or thereafter, reveal or use for the benefit of others any special information, secret processes, lists of customers, or other private matters that may be learned in the course of his duty. The courts will protect such an agree- ment. * Graliam ▼. Cummings. 208 Pa. St. 516. 188 THE AGENT 189 In a Michigan case, a party employed in a manufactory of fly paper, under contract not to use methods elsewhere, after severing his connection with the factory, made plans to give others the benefit of his information. The court granted an injunction to prevent him from revealing the processes.^ Where a salesman or solicitor is employed to work up trade, he necessarily becomes familiar with the list of cus- tomers. In such a case, a contract with an agent that he shall not, for a period of years, engage with any other house in the same line doing business in the same territory, will be sus- tained by the courts. What is here said as to the duty of the agent refers to a general agency, where the agent gives his entire services to one principal. In cases of special agency, what is said of the agent's duty applies only so far as is necessary to effect the object of the agency. A bank may be an agent to collect a draft, but is not called upon to exercise general obedience, loyalty, etc. Notes: 1. A general agent must be obedient, loyal, careful, skilful, honest, and of good habits. 2. A special agent is required to exercise only such qualities as are requisite to effect the purpose of his agency. § 139* Agent's Obedience Disobedience is good cause for discharge or refusal to compensate an agent, and renders him liable for any resulting damage. It is an agent's duty to obey orders ; and by so doing he relieves himself of any responsibility in case of misadven- ture. If, however, circumstances should arise which make it 'Thurm Company v. Tloczynski, 114 Mich. 149. igo AGENCY necessary to act contrary to the instructions he has received, it is his duty to do this, provided, of course, that it is impos- sible to consult his principal before acting. Emergencies may ocair where it is the duty of the agent to do the best thing possible, even though it involves his disregarding orders. Where no emergency exists, however, the agent violates his directions at his own risk It is the principal's right to decide how he wishes his matters attended to; and if the agent obeys and loss ensues, it is the loss of the principal. If a shipping agent or railroad varies directions that goods are to go over some particular line, the agent or the railroad incurs the liability of an insurer. An agent who has been instructed to sell for cash has no authority to allow credit. If he gives credit and loss ensues, he is responsible. If he is authorized to buy or to sell at a certain price, he may not go beyond this. This is not to be understood as prohibiting trifling departures and immaterial variations from exact instructions. The law does not regard negligible things. An agent who is instructed to ship goods or to r«nit money in a particular way must obey his instructions to the letter. Notes: An agent must obey orders if he does not want to make himself liable. When an emergency exists he may act contrary to instructions. A principal should, where possible, give explicit orders to his agent I. m» 3- §140. Agent's Good Faith Good faith is essential on the part of anyone acting in the capacity of agent. If an agent is found to be working for his own interests as opposed to those of his employer, he may be discharged summarily. If he makes false reports or deceives THE AGENT 191 his employer, or defrauds him in any way, he may be dis- charged ; and he wiU have forfeited any claim to compensation. If he learns of anything in the line of his business to the pnncpal s advantage, it is his duty to let his principal know and have the benefit of it. A broker, in a Michigan case, sold land to a party whom the owner had previously excepted from those to whom the broker might sell. It was held that the latter was not entitled to commission.^ In a Massachusetts case, an agent made a sale of some property, and in rendering the account to his employer charged h.m $50 as paid to an attorney for examining the title, whereas he really paid only $25. The court held that he lost his right to commission.* ° The Agent Must Not Act for Both Parties. An agent may not represent both parties to a transaction. He may not earn a commission from both buyer and seUer. This is a rule that holds good everywhere. But it is said that a double agencv may be valid where both parties know of the double agencv and agree to it; it is then understood that the agency requires no independent discretion. The Agent Must Not Act for Himself. If the agent is employed by a principal to manage his business, what he does is done for the principal. It is not right for the agent to be mterested adversely; and all the profits that are made in con- nection with the principal's business belong to the principal unless he has previously agreed to give the agent a share of the profits as part or aU of his compensation. If the agent in the course of acting for his principal obtains any particular advantage to himself, and the principal dis- J covers it, the latter can hold the agent accountable for the ^ profits or the property so obtained. • Ranney t. Henry. t«o Mich. 597. Little V. Phipps et «/., 208 Mass. 33 1. 192 AGENCY An Agent Must Not Compete With His Principal. An agent must not be interested adversely to his principal. Neither may he represent and sell goods for a competitor of his principal. An employer has a right to his agent's absolute loyalty. If an agent uses his knowledge of his principal's affairs to secure an advantage for himself, the courts will compel him to make restitution. The law moves on a high plane in matters of this kind. The Agent Must Be of Good Habits, Any habits which interfere with the proper discharge of the agent's duty are sufficient reason for his discharge. Drunkenness in the day- time or while attending to business is undoubtedly sufficient reason for dismissal. As in the case of other employees, the circumstances must be considered. Generally speaking, an agent may be discharged for dnink- cnness, gambling, or licentiousness. Possibly, the courts wotild not in all cases justify too dose an inquisition into the private habits of employees. A bank, however, employs detectives; and if an employee indulges in loose living he is discharged and has no recourse. Usually an agent who is discharged for any reason of this kind cannot afford to risk the notoriety involved in an attempt to hold his employer for damages. Non-Payment No Excuse for Non-Performance, The fact that the agent is unpaid does not affect his responsibility. The agent's liability does not depend upon how well he is paid for what he does, or whether he is paid at all ; for, if he under- takes to do anything for another, he must do it well ; and he is responsible in case of bad faith, negligence, or lack of skill. Notes: ' I. The doctrine of the law on the subject of the agent's good faith is on an exceptionally high plane. 2. The agent must not act as the agent of both parties unless both know of and agree to it THE AGENT 193 3. The agent must not act for himself in the principal's affairs. 4. The agent must not compete with his principal. 5. The agent must be of good habits. § Z4X. Agent's Care, Skill, and Diligence If anyone undertakes the duties of an agent, he is assumed to have the necessary skill and ability to perform the said duties. In all matters connected with his agency, he is ex- pected to act as an ordinarily prudent, careful business man would act in the conduct of his own affairs. If the agent is a lawyer, he undertakes to have professional ability to repre- sent his client in an adequate manner. If he is a financial agent and invests his client's funds imprudently, he is responsible. The rule is well settled that an agent is not only bound to act in good faith, but to exercise reasonable diligence, and such care and skill as are ordinarily possessed by persons of common capacity engaged in the same business.^ A firm engaged as insurance brokers, if it takes out poli- cies for its clients in irresponsible companies, will, in event of loss, be required to make good the damage resulting from its neglect to use proper care.® Custody of Funds. It is the duty of the agent to account for all funds and property of the principal which come into his possession. In this particular he must obey the rules that govern one person who holds the property of another. The agent should not deposit funds belonging to his prin- cipal to his own bank account; but should open a separate account in the name of his principal, or in his own name as agent. If he does this, he is not responsible in the event of the bank's failure and the loss of part or all of the funds. In the same way, it is his duty to turn all money and other ■ Whitney v. Martine, 88 N. Y. 535. * Sheppard v. Davis, 42 A. D. (N. Y.) 46a. |/ 194 AGENCY THE AGENT 195 property in his possession over to the principal or to the principal's order. Any money held by an agent for his principal is a trust fund. In an Indiana case the judge said: In case it becomes the duty of an agent or a trustee to deposit money belonging to his principal, he can escape risk by making the deposit in his principal's name; or by so dis- tinguishing it on the books of the bank as to indicate in some way that it is the principal's money. If he deposits it in his own name, he will not, in case of loss, be permitted to throw the loss on his principal^ Notes: 1. The theory of the law in these matters is better than the results in actual practice. It is in most cases impossible to obtain legal redress for the common lack of care, skill, and diligence in agents. 2. In all matters relating to the care and the custody of money belonging to others, too great care cannot be exercised. 3. The treasurers of clubs, informal organizations, and unincorporated associations, should observe the rules that have been given for agents in charge of ftmds. § 14a. The Agent's Signature The agent is acting for the principal, therefore when he signs a contract he should sign the principal's name, followed with his own in this form: "By Henry Parker, Agent." When there is a regular course of business, a rubber stamp will prob- ably be used with a blank for the written signature of the agent, as follows: "George Wayman, By , Agent'* Such * Walmer v. Dolan, 108 IncL 500. a signature is safe and in no case can it bind the agent per- sonally. A corporation can act only by its agents. The rule as to the signature of contracts is the same and the name of the corporation followed by the name of the officer signing is the proper form. Letters are often signed by the officer, as "James Haywood, President," the letterhead showing the name of the corporation and that the individual signing holds the office he claims. The better practice is to have the full corporation signature : Edgemont Water Company, By Harvey Gray, Treasurer. Where notes or other negotiable papers are to be signed by the agent for a corporation or other principal, it is not safe to sign except in the approved form, the principal's name in full followed with "By , Agent." Any other signature may not only fail to bind the corporation or other principal but may involve the officer or agent in a personal liability as maker or indorser. § X43. Agent's Duty to Third Party Observance of the usual rules of fair dealing and honest treatment is the only duty owed by the agent to the third party. The agent is the representative of his principal, and is to work in the interests of his principal. If he resorts to trickery or fraud, he himself is liable for any damages caused to the third party. An agent cannot be held for a legitimate business con- tract within the scope of his authority. He binds his principal, not himself. But his principal cannot authorize him to do wrong; and if he does wrong both he and his principal are held. The agent may legally do whatever the law allows his principal to do. The law is not at its best when it defines the I 196 AGENCY THE AGENT l|)| lit rights of buyer and seller. The better business houses, in their actual practice, act on a plane far higher than that which the law compels. In other words, good business prescribes a much higher standard of morality in the matter of sales than does the law. On this account the standards of good business are given here, rather than the legal requirements. Let your dealings be characterized by fairness and liberal treatment. Deal with the third party in such a manner that you can deal with him again. All good and permanent business is to the advantage of both parties. Make every customer a lasting business friend. Treat him as you would like to have him treat you in a like case. Note: I. If an agent has a principal who does not believe in the above standard of good business, he had better look for another job. § 144. Limitation of Agent's Authority The agent rarely has unlimited authority. In established positions, such as that of a bank cashier, a railroad conductor, or a retail salesman, the duties are settled and the authority of the incumbent is known to his principal, to those he deals with, and to himself. Usually an agent in such a position keeps to his routine, and his powers are entirely familiar to all concerned. As between his principal and himself, the agent's authority is limited: (i) by the limitations usual to the employment, and (2) by the limitations expressed in the agreement. If he ex- ceeds these limitations, he may be discharged from his position, and may be held for damages if he is responsible. Iti dealing with third parties, the agent, in all those cases where his apparent authority exceeds his real authority, may bind his principal. In such an event, the agent must answer to his principal for his abuse of authority. 197 Notes: 1. An agent has the usual authority pertaining to his position, unless restricted by special agreement. 2. An agent has always such authority as his agreement with his principal permits. 3. An agent may bind his principal wrongfully when his apparent authority exceeds his real authorit3\ § 145. Agent's Fraudulent Conduct The question of the agent's bad faith to his principal has already been discussed. If he perpetrates a fraud on a third party while transacting his principal's business, both principal and agent are liable. The agent will not be able to shift re- sponsibility to his principal. A principal cannot authorize his agent to commit fraud. In Weber v. Weber, the action was against Caroline Weber for stating positively that there was no mortgage on a piece of land which she was selling as the agent of her husband. The court said: All persons who are active in defrauding others are liable for what they do, whether they act in one capacity or an- other.* In a case where the president of a medical institute was made a party defendant in a proceeding against the institution for defrauding a patient, the judge said: We are not aware of any rule of law which will excuse and absolve a person from the consequence of his own wrong doing, because he happened to be the agent of another at the time of the perpetration of the wrong.* Notes: I, An agent cannot use his agency to protect him in doing wrong. • Weber ▼. Weber, 47 Mich. 569. * Hedin ▼. MinneapoLts Medical Institute, 6a Minn. 146. igB AGENCY THE AGENT 199 II 2. In case of fraud or misrepresentation, the agent as well as the principal is liable to the person injured. § X46. Agent's Liability The agent makes himself liable with his principal, as we have seen, when he is guilty of any fraudulent conduct Where the business is illegal, the agent is liable with the principal. He also makes himself liable when he exceeds his authority, unless the third party knows the nature of the agent's action. In most cases where an agent deals with third parties, the third parties depend upon the agent to inform them correctly as to the extent of his authority. If the agent deceives them as to this, he makes himself personally liable to the third party to the same extent that he would be had he made the contract in his own name instead of that of his principal. One Kroeger insured his premises through Pitcaim, an agent, who told Kroeger that he could keep a small amount of gasoline on the premises without making his policy void. Pitcaim had no authority to do this. The premises were burned, and Kroeger could not recover from the insurance company on account of the storage of gasoline. The court did, however, allow him to recover his damages from Pitcaim." If the agent has apparent authority but is limited by pri- vate instmctions from his principal, he can nevertheless bind his principal by his contract within the scope of his apparent authority. In such a case, he is liable to his principal for any unwarranted action. It happens sometimes that an agent deals with third parties and, assumes to be the principal; i.e., he does not represent himself to be an agent, or disclose the fact that he is acting for someone else. In such a case he will be held personally, as though he were the principal. This is plainly just and right. 1* Kroeger ▼. Pttcaim, loi Pk. St 311. Where an agent represents a principal who is non-existent or irresponsible, he binds himself. On occasion agents have y represented themselves as having a principal who did not exist / — in such cases they bind themselves. Thus, parties acting as^ directors in a non-existent corporation may be held. If an agent represents any irresponsible body, such as a social club, a meeting, or any informal organization, he will in all such cases render himself liable. If the agent is authorized by a motion, all members who voted for the motion are liable, and those who are forced to pay can hold for contributions all others who joined in authorizing the expense.^^ The Northeastern Pigeon & Bantam Society, a voluntary association, held an exhibition of fancy stock and offered premiums. The expense exceeded the receipts. The court held that those members who paid the loss could bring suit to compel all the other members who had voted to hold the ex- hibition to pay their pro rata.^* A common case under this general head is that of a pro- moter who incurs liabilities for a corporation before it is in- corporated. Until the corporation has come into being, it cannot appoint an agent ; therefore the general rule is that the corporation cannot be bound, and that those who deal with the promoter must look to him for compensation. The general doctrine that no one is authorized to contract for a corporation before it is formed, applies to all contracts with and by promoters. The promoter himself is liable on these pre-corporate contracts, unless otherwise expressly provided; but the corporation is not.^^ Where an agent commits an assault in the discharge of his duty, he may be held responsible. The agent in charge of the grounds of a fishing club in ** Lewis V. Tilton, 64 Iowa 220. "Ray V. Powers, 134 Mass. 22. » Conyngton's "Corporate Organization and Management" (Edition of 1917), I 3a. 900 AGENCY Kentucky, assailed a party whom he accused of trespassing. The party assaulted brought suit for damages against the agent and the club, and got judgment against both." If the agent got into a quarrel independently, and not in the discharge of his duty, his principal would not be affected. Sometimes, even when the agent acts in entire good faith, he may become personally liable for his blunders. For in- stance: In a California case, Wilson, a broker, sold some mining stock for a customer. The stock turned out to have been stolen from a party named Swim, who brought suit against Wilson for the value of the stock. The court held that the principal who employed Wilson to sell the stock had no title and could give none to Wilson, who was therefore compelled to pay the value of the stock." Notes: I. An agent is liable for fraudulent conduct. An agent is liable for exceeding his authority. An agent is liable if he does not disclose his prin- cipal. An agent is liable if he represents a non-existent or irresponsible principal. An agent is liable for wrongful acts within the scope of his emplo)mient. An agent may be liable for blunders. 2. 3» S Review Questions 1. What are the general duties of an agent to his principal ? 2. Can C, an agent, in the course of his duties make any profit for himself? 3. When may an agent disobey orders? 4. A refuses to pay B commissions for sale of stock on the ground Stewmrt, las Kf. 8. MNew EUerslie FisMiiff Qub ▼. *Swim ▼. Wilson. 13 Cal. 126. 1 THE AGENT 201 10. II. that B received commissions from the parties who bought the stock. B proved that A knew at the time that B was also being paid by the buyers. Must A pay? 5. If an agent has not been paid promptly, can he collect money due his principal and pay himself? 6. May a lawyer act for both sides in a controversy? How would it be in negotiating a contract? 7. If money ot the principal is deposited by an agent in his own name, can the agent's creditors take it? 8. Is an agent liable for money of his principal if he put it in his own cash drawer over night and it is stolen? If he puts it in a bank in his own name with a designation "Agent's Name, No. 2," to distinguish it from his own personal account, and the bank fails? 9. How should an agent execute negotiable paper in order that it may be binding on his principal and not upon himself? What do you understand by the "apparent authority" of an agent ? A was a cashier of the Second National Bank. B was a depositor therein, and was on his way to the bank one day to make a deposit. When about half way to the bank he met the cashier, stopped him, told him that he was about to make the deposit, and asked him if he would take the money, there. The cashier agreed, took the money, made the proper entry in the deposit book, and handed it back to B. A, the cashier, how- ever, did not put the money to B's credit, but kept it and con- verted it to his own use, and B sued the bank for the amount. Is he, or is he not, entitled to recover? Did the cashier have any apparent or real authority to receive the deposit? When may the members of an unincorporated club be held for an agent's acts? 13. When is an agent personally liable to third persons? 14. What is the agent's liability on promissory notes signed? (a) A, by B, Agent (b) B, Agent for A (c) B, Agent of A B, as Agent X Y Company, by A. President corporation be bound by contracts made before it was 12. 15. (d) (e) Can a organized ? THE THIRD PARTY 203 CHAPXER XXV THE THIRD PARTY § 147. Third Party's Relation to Agent Strictly speaking, the third party has no relation to the agent The agent represents the principal, and the third party is dealing only with the principal. When the agent goes be- yond his powers, then he makes himself responsible and may be held; the same is true when he represents an imdisclosed principal, or a fictitious principal. The third party should know that the agent with whom he is dealing has authority to represent his principal, and how far this authority justifies the action of the agent. A third party dealing with an agent in excess of his author- ity does so at his own risk. It is obvious that an agent cannot go beyond his authority. He is authorized for such general or special purposes as the principal indicates, and further than this he may not go. Where an agent is empowered by a written instrument to do certain things, it is very plain that he has no authority to do anything more than what is specified; but, as in most cases of general agency the agent has the right to do everything inci- dental to his main agency business, it is sometimes not easy to tell what is in excess of his authority and what he has the right to do. Law sold goods amounting to $320 to Stokes. The sale was made by Sheridan, Law's salesman. The sale was on a credit till the end of the month. Next day the goods were shipped and a bill was enclosed in a letter. The letter, signed by Law, said, "Please remit amount direct to me.'* The bill had on its face in red ink, "All remittances on account, or in settlement of bills, must be made direct to the principal." About a month later Stokes paid Sheridan the amount of the bill. Sheridan absconded with the money ; Law brought suit and obtained judgment.^ In this case the salesman had no authority to collect. The case was clear for the plaintiff. Law, because he had given notice on his billhead and in his letter of his limitation on the salesman's authority. Usually there would be more trouble in a case of this kind because the proof would not be so clear. The agent himself would be liable to suit by the third party ; but in such a case the probability would be that the agent was judgment-proof or had left for fresh fields and pastures new. In each case the third party should know for his own safety just what power the agent has to bind his principal, and that the principal is responsible. He cannot always rely on the representations of the agent himself as to the extent of his authority. It is the third party's duty to make due inquiry into the matter, as in case of a dispute later the burden of proof is on the third party to show that the agent had authority for the particular act. Notes* 1. It is unsafe for a third party to deal with an agent without sufficient information as to his authority. 2. Care should be taken never to make payments to an unauthorized agent. 3. Where salesmen are not expected to collect payment, customers should be informed of the fact. 4. In dealing with an agent, it is necessary to know whom he represents and how far his authority extends. » Law V. Stokes, 32 N. J. L. 249- AGENCY § 148. Third Party's Relation to the Principal The third party is really dealing with the principal, and the agent is merely the'means of communication. When the con- tract is signed, the name of the agent is attached as agent, and the principal, not the agent, is bound. Therefore the relation between the third party and the principal is the same as be- tween any other parties to a contract The third party is brought into the contract relation as a principal, and after that in most cases the agent is disregarded. The principal and the third party contract with each other, and, if the contract has not been executed, each has the right to compel the performance or to recover damages for any breach or failure in performance. In any dispute in regard to the contract, the resulting suit will be between the parties, and the agent will not figure save as a witness able to give material evidence. If there has been fraud or false representation on either side, the fact that the transaction has been negotiated through an agent does not affect the liabilities or the remedies. Note: I. When dealing through an agent, the third party should bear in mind that it is the principal with whom he contracts. I. 2. 3- Review Questions How can a person dealing with an agent ascertain his authority? Why is it hard to tell what the agent has a right to do ? With whom does the third party really contract? If any suit arose, who would be the parties? When does an agent make himself responsible to the third party ? CHAPTER XXVI TERMINATION OF AGENCY § 149. Termination by Fulfilment The agent's authority is terminated when he completes the purposes of his agency, or at the expiration of the period for which he was engaged. It is obvious that if an agent has been employed to purchase a farm and the farm has been purchased, the agent's authority is ended; or if a salesman has been en- gaged for a year to sell goods, it is plain that the agency, unless renewed, terminates at the end of the year. Generally, the mle . is that the agency ends at the termination of the period for^^ which the agent has been engaged, or the completion of the undertaking for which he has been retained. The principal should in some way inform those who have been dealing with the agent that the agent no longer has au- thority to act. If the principal fails to do this, and the agent continues to act, the principal is bound. Note: I. An agency terminates naturally (a) when the term ends, or (b) when the undertaking is completed. § 150. Termination by Either Party The contract of agency may be terminated at any time by either the principal or the agent. It is obvious that the con- tract between principal and agent (like any other contract) may terminate at any time by agreement of the parties. It is also true that the contract (since it is one of mutual trust and confidence) may be terminated at will by either one of the parties against the consent of the other party, except in the 205 y 3o6 AGENCY TERMINATION OF AGENCY 207 case of an agent having an interest in the subject matter; in which event the principal cannot terminate the relation without the agent's consent. (See § 152.) If the principal and the agent contracted for a certain period of time or for a certain undertaking, and the principal revoked the agent's authority without good cause, the former would be liable to suit for damages by the agent for breach of contract. Where there is einpIo3rment for a definite period of time, express or implied, and the agent is discharged without cause before the expiration of the period, the principal will be liable to the agent as in the breach of any other contract; in such cases the agent may elect to treat the contract as rescinded and bring an action to recover the value of his services and money expended.* The agent can renounce his employment at any time. The courts will not force a man to work for another against his will. If, however, the agent has agreed to act for a certain time, or to do some particular thing, he may be liable to pay damages if he breaks off before the expiration of the period. Also, if he tries to act for someone else in the same line of business before the expiration of the term, it is probable that the principal could obtain an injunction to prevent his working for a competitor. In a contract of agency, there is often inserted a clause providing that the agent shall not leave the employ of the principal and represent anyone else in the same line of business for a specified period of time after his con- tract terminates. (See § 138.) If the «;ubject matter of an agency is destroyed, the con- tract is thereby terminated. A case of this kind would occur wheil a building which is to be leased by an agent is burned before the lease is effected. *GloTer V. Henderson, 120 Mo. 367. Notice of Revocation. So far as the agent is concerned, the act of revocation becomes operative only from the time he has actual notice thereof; notice to third parties without notice to the agent will not effect a revocation as to the agent. Conversely, a notice only to the agent is not effective as to third parties. The acts of the agent in dealing with third parties without notice are binding on the principal. Whatever is sufficient to put an agent or third party on inquiry will serve as a legal notice of revocation. Notes: 1. Either party may terminate a contract of agency at any time. 2. Either party breaking a contract of agency for a specified period or undertaking without just cause is liable in damages. 3. An agent who breaks his contract may be prevented during the term of the contract from taking em- ployment with a business competitor. § 151. Termination by Disability An agent's authority is revoked by the death, insanity, or bankruptcy of his principal; in like manner the relation is destroyed by the death or disability of the agent. This is a principle of universal application. When a man dies, all con- tracts of agency cease at once; all powers of attorney, and every authority to anyone else to act for him are terminated. If in ignorance of his principal's death an agent did business for him, the business would be void and of no effect. A case which often happens is that of a person of ad- vanced years who gives personal property to an agent to deliver to someone else and then dies before the property has been turned over. In such cases the courts hold that the agency is revoked by the death of the principal, and the gift cannot take effect. /y 3o8 AGENCY TERMINATION OF AGENCY 209 In an Illinois case, Mrs. Trubey had her lawyer take from a bank vault a metal box of jewels and securities. She made parcels of these and designated to whom each parcel was to go. Then she put them in charge of her lawyer, but set no time for delivery. He receipted for them and placed them in another vault. Within three months Mrs. Trubey died. The matter came before the courts for adjudication. It went to the Supreme Court of Illinois, which held that the lawyer was undoubtedly Mrs. Trubey's agent to deliver the property; but when she died the agency was revoked by that fact, and that, as the property had not been delivered, it belonged to her estate and the people designated had no claim to it. The court expressed regret that it was not possible under the rules of law to give effect to what Mrs. Trubey evidently intended. It would seem that her lawyer was much at fault* The death of the agent also terminates the relation. When the relation of principal and agent is broken up by the sick- ness or other disability of the agent, the condition will be the same as when any other employee finds his term of employment broken by disability. In all such cases the general rule is that the agent or the employee is entitled to recover for the time he acted, whatever the services were worth to the principal or the employer. In a New York case it was held that when an agent is prevented by sickness or death from completing his contract, he or his executor is entitled to the vaJue of the services actually rendered.* Insanity of the principal has the same effect as death. If insane, a principal can no longer contract himself, and neither can he contract by an agent. The insanity of the agent terrtiinates the relation because he has no longer the capacity to represent his principal ■Tmbey ▼. Pemte, 240 111. 513. • Wolfe ▼. Howes, ao N. Y. 197. The bankruptcy of the principal, and in some cases of the agent, would destroy the relation. In the case of bank- ruptcy, the bankrupt can no longer continue his business, but it is taken over by the court or the trustees in bankruptcy; and as he cannot do business himself he cannot do it through an agent. Insolvency would not have this effect. (See Chapter LXXXI.) If the principal parts with the subject matter, that ter- minates the agency. Notes: 1. An agent can act only for a party who can act for himself. 2. An agent's authority ends when the capacity of the principal to contract ends. 3. An agent's incapacity to act ends the relation. § 152. An Agent with an Interest An agency coupled with an interest cannot be revoked by the principal nor will his death or insanity revoke it. When the agent is also himself interested in the matter to he ac- complished, it places him in a di ffer ent relation to the prin- cTpal; ana tne prmcipal cannot at will destroy the relation^ It, loY instance, an agent is employed to jell a horse , and the agreement is that he is to advance the principal one-ha lf the price and pay himself when he sells the horse, the princip al cannot prevent him from selling the horse. The agent would have an TlTLeicsL hi LlrETnatter himself, and could go on and do that which he had agreed to do. The interest that causes a power of attorney to survive after death must be an interest in the subject matter of the agency and not in that which is produced by the exercise of the power. y I 1 2IO AGENCY Note: An agent with an interest in the property itself | \ V cannot be discharged, as he is to that extent a^ partner with the principal. Review Questions 1. How may the contract of agency terminate? If an agent con- tinues to act after his engagement has ended, does he bind his principal? 2. How is it possible to prevent an agent's going to work for a competitor when his engagement terminates? If the principal revokes the authority of his agent, who must be notified? 3. What is the general rule as to the death or insanity of the principal? Why? What is the rule as to compensation when the contract is terminated by the death or disability of the agent ? 4. What is the effect of bankruptcy ? Of insolvency ? What is the distinction between bankruptcy and insolvency? 5. A borrowed money of B, giving B as collateral a power of attorney to collect certain rents. A died. Was B's power of attorney terminated? Is the tenant's obligation discharged by payment to B? 6. What is the effect when an agent has an interest in the subject matter? Why? PART V NEGOTIABLE INSTRUMENTS ft CHAPTER XXVII FORM AND INTERPRETATION^ § 153. The Quality of Negotiability The negotiable instruments in ordinary use are: (i) promissory notes, (2) drafts or bills of exchange, and (3) checks. In all the states that have adopted the Uniform Bills of Lading Act, bills of lading are made negotiable instruments. The quality of negotiability lies in the fact that any person, not an original party, who takes a negotiable instrument in the ordinary course of business, may sue on it when due, in his own name, and the person who is the obligor will be compelled to pay it. Negotiable instruments are also called "commercial paper." Any ordinary contract may be assigned by executing an assignment, but in such case the assignee merely steps into the shoes of the person who assigned it, and if there has been any reason, as between the parties, why it should not be paid, this can be set up against the assignee, if he brings suit, exactly as if he were the original party. If this were true of a note, no one would dare to discount it, for, when the time of payment came, any reason for non-payment that might exist between the original parties could be used to destroy the whole value of the note. Hence, for the convenience of business, the law of negotiable instruments has grown up, to protect the man who takes them "in due course of business." "In due course of business" means taken before its date for payment, for a valuable consideration and without knowl- edge of anything that would affect the title. The law says: »For forms of negotiable instruments, see Chapter CIII, Forms 34-43. 213 214 NEGOTIABLE INSTRUMENTS A holder in due course holds the instrument free from defect of title of prior parties, and free from any defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. Non-NegoHahle Contracts. A simple agreement or promise to pay a sum of money could not be enforced unless there was a valid consideration for the promise, and an assignee would have no more rights than the original holder. That is, if suit were brought on such an agreement, and the maker could prove that no consideration had been given, he would not be made to pay. The same rule would hold as between the original parties to a note, and the defense of no considera- tion would prevent collection, but if the note or other negotiable paper had been negotiated, that is, if it had passed in the course of business into the hands of an innocent holder for value, the matter of consideration would not figure, and the full amount would have to be paid. Notes, drafts, and checks are used so extensively that the laws governing their transfer are of great importance. WTien the subject of imiform laws was brought up, the law of negotiable instruments was the first to be reformed and the one most widely adopted. The Uniform Negotiable In- fitniments Law as devised by the commissioners having the work in hand has at the present time been adopted by every state and territory except Georgia and Porto Rico. In discussing this subject, the Uniform Negotiable In- struments Law has been followed as closely as possible, and the quotations are from the text of the law. . The following are the requirements for negotiable instru- ments as laid down in the law itself : § I.— An instrument to be negotiable must conform to the following requirements : FORM AND INTERPRETATION 21$ • 1. It must be in writing and signed by the maker or drawer. 2. Must contain an unconditional promise or order to pay a sum certain in money. 3. Must be payable on demand, or at a fixed or determin- able future time. 4. Must be payable to order or to bearer; and 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. § 154. Signature The signer of an instrument is liable, and anyone signing a trade-name or assumed name will be liable personally. A duly authorized agent can sign for his principal, and if he is duly authorized and signs as agent or in a representative capacity, he will not be personally liable. If, however, he signs as agent without disclosing his principal, he will be personally liable. The indorsement of a corporation or an infant passes the property in the instrument, though the corporation or infant may not be liable. A note signea by a minor cannot be collected. A forged signature is absolutely void and passes no right or title. $ 155. Unconditional Promise The Uniform Law allows two variations of the require- ment of an unconditional promise or order to pay. § 3. — ^An unqualified order or promise to pay is uncondi- tional within the meaning of this act, though coupled with: 1. An indication of a particular fund out of which reim- bursement is to be made, or a particular account to be debited with the amount; or 2. A statement of the transaction which gives rise to the instrument. ai6 NEGOTIABLE INSTRUMENTS But an order or promise to pay out of a particular fund is not unconditional. § 156. Certainty as to Sum It is to be noted that the law allows certain variations as to the certainty of the sum: § 2.— The sum payable is a sum certain within the mean- ing of this act. although it is to be paid: 1. With interest; or 2. By stated instalments; or 3. By stated instalments, with a provision that upon de- fault in payment of any instalment or of interest, the whole shall become due; or 4. With exchange, whether at a fixed rate or at the current rate; or 5. With costs of collection or an attorney's fee, in case payment shall not be made at maturity. § 157. Payable on Demand § 7- — ^An instrument is payable on demand : 1. Where it is expressed to be payable on demand, or at sight, or on presentation ; or 2. In which no time for payment is expressed. Where an instrument is issued, accepted or indorsed when overdue, it is, as regards the person so issuing, accepting or indorsing it, payable on demand. § 158. Certain Future Time The law clearly expresses that the time must be certaia §4.— An instrument is payable at a determinable future time, within the meaning of this act, which is expressed to be payable: 1. At a fixed period after date or sight; or 2. On or before a fixed or determinable future time specified therein; or 3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain. FORM AND INTERPRETATION 217 An instrument payable upon a contingency is not negoti- able, and the happening of the event does not cure the defect. § 159. Payable to Order ♦■ • § 8. — The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: 1. A payee who is not maker, drawer or drawee; or 2. The drawer or maker; or 3. The drawee; or 4. Two or more payees jointly; or 5. One or some of several payees; or 6. The holder of an office for the time being. Where the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable cer- tainty. §160. Payable to Bearer § 9. — The instrument is payable to bearer : 1. When it is expressed to be so payable; or 2. When it is payable to a person named therein or bearer; or 3. When it is payable to the order of a fictitious or non- existing person, and such fact was known to the person mak- ing it so payable; or 4. When the name of the payee does not purport to be the name of any person ; or 5. When the only or last indorsement is an indorsement in blank. § 161. The Date The law pro\^ides that the date on the face of the instru- ment is presumed to be the true date, and that it may be ante- dated or post-dated, provided it is not done for a fraudulent purpose. It is also provided that if a date is left blank, any holder may insert the true date. If an instrument is issued with any material particular left out, the holder may fill in the blanks. 2l8 NEGOTIABLE INSTRUMENTS FORM AND INTERPRETATION 219 m A ncte dated on a legal holiday other than Sunday is valid. In New Jersey a contract, bill. note, or check drawn or made accepted or delivered, on Sunday is void. In Massachusetts a note or check made on Sunday is void as between the onginal parties. In Connecticut, a defense to an action on a note made on Sunday wiO be good if the consideration is restored. Both Massachusetts and Connecticut protect the bona fide holder of a note made, accepted or drawn on Sun- day. In New York a note dated and delivered on Sunday § 162. Consideratioii AM negotiaMe paper is presumed to have been given for a valuable consideration, and everyone whose signature an- pears on it is presumed to have become a party for a valuable considerauon. Any consideration that would support an or- dinaiy contract will be sufficient. An existing debTwould be a good consideration for a note or draft in settlement .^^^n^J ^^"T ""^ ^^^"^i^^^^^n is not a good defense against a holder in due course for value. If a gambling debt has been paid widi a negotiable instru- ment, the maker can generaUy set up the defense of iDe^alitv only against the original party. In a few states, howVver gambling contracts are absolutely void, and there the maker of such an mstrument cannot be held, but the indorscr can inasmuch as an indorser warrants the legality of the instn/ ment Anymt having a Hen on a negotiable instrument, is a holder for value to the extent of his lien. §163. Delivery A negotiable instrument is incomplete until delivery If an incomplete instrument is completed and delivered without authonty of the maker or drawer, it wiU not be valid unless it comes in due course to an innocent holder for value, in which case it will be presumed conclusively to be good. § 164. Rules of Construction § 10. — The instrument need not follow the language of this act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. § i7,_vv^here the language of the instrument is ambigu- ous, or there are omissions therein, the following rules of construction apply: 1. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, references may be had to the figures to fix the amount ; 2. Where the instrument provides for the payment of in- terest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof ; 3. Where the instrument is not dated, it will be consid- ered to be dated as of the time it was issued ; 4. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail ; 5. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; 6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser ; 7. Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. §165. Allowable Provisions 1 5. — An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which : 220 NEGOTIABLE INSTRUMENTS 1. Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or 2. Authorizes a confession of judgment if the instrument be not paid at maturity; or 3. Waives the benefit of any law intended for the advan- tage or protection of the obligor; or 4. Gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. § 166. Non-Essentials § 6. — The validity and negotiable character of an instru- ment are not affected by the fact that: 1. It is not dated; or 2. Does not specify the value given, or that any value has been given therefor; or 3. Does not specify the place where it is drawn or the place where it is payable ; or 4. Bears a seal ; or 5. Designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. I. 3- 4. 5. Review Questions Give a succinct but clear idea of commercial paper. If the assignee of an ordinary contract has to bring suit to enforce it, what may happen? What is meant by "due course of business" ? What are the five requirements for negotiable instruments? What are the usual negotiable words? How should an agent sign a note? What effect has a minor's note? A minor's indorsement? Would a note payable from "rents for March, 1919, from the maker's apartment house. No. 154 Clinton Avenue, Baltimore, Maryland," be negotiable? FORM AND INTERPRETATION 221 10. 6. Is a note payable in instalments good? Is a note good that adds costs of collection? 7. Would a note payable ninety days after the death of the maker be negotiable? What if it were payable ninety days after the payee came of age? 8. Is a note with no time expressed good? g. Is a note or a check invalidated if dated on a legal holiday? Dated on Sunday? Explain fully. A affixes his signature to a blank paper and delivers it to B for the purpose of converting it into a negotiable note. B writes a larger amount and a shorter time than agreed on. Is A liable to a holder in due course without notice? C pays a note that apparently bears his signature as maker. Later he finds that the signature was forged. May he recover the money paid? State the principle. A bank discounts a note having a genuine indorsement, but forged signature of maker. Who bears loss? 13. If in a note there is a conflict between words and figures as to sum payable, what prevails? As between printed words and written words which prevails? 14. Is it necessary that a note or a bill should contain the words "value received" ? That it should be dated? 15. What provision can be made in a note as to the sale of collateral securities? What are "collateral securities"? II. 12. CHAPTER XXVIII NEGOTIATION^ § 167. Method of Negotiation § 30. — An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery ; if payable to order it is negotiated by the indorsement of the holder completed by delivery. § 31. — The indorsement must be written on the instrument itself or upon a paper attached thereto. The^ signature of the indorser, without additional words, is a suflBcient in- dorsement. §32. — ^The indorsement must be an indorsement of the entire instrument. An indorsement, which purports to trans- fer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more in- dorsees severally, does not operate as a negotiation of the in- strument But where the instrument has been paid in part, it may be indorsed as to the residue. § 168. The Indorser's Contract The contract of any one who indorses negotiable instru- ments is that he warrants to all subsequent holders in due course : 1. That the instrument is genuine. 2. That he has good title to it. • 3. That all prior parties had capacity to contract. 4. That the instrument is, at tiie time he indorses it, valid and subsisting. NEGOTIATION 223 * For f oniif of indorsement, see Chapter CIII, Forms $6, 44. 323 He also warrants that on presentment when due it will be accepted or paid or both according to its tenor, and that if it be dishonored and the necessary protest and notice be given, he will pay the amount thereof to the holder or to any subsequent indorser who may have to pay it. § 169. Blank or Special Indorsement § 33. — An indorsement may be either special or in blank ; and it may also be either restrictive or qualified, or con- ditional. § 34. — A special indorsement specifies the person to whom, or to whose order the instrument is to be payable; and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is pay- able to bearer, and may be negotiated by delivery. §35. — The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. § 170. Restrictive Indorsement ^36. — An indorsement is restrictive, which either: 1. Prohibits the further negotiation of the instrument; or 2. Constitutes the indorsee the agent of the indorser ; or 3. Vests the title in the indorsee in trust for or to the use of some other person. But the mere absence of words implying power to negoti- ate does not make an indorsement restrictive. § 37. — A restrictive indorsement confers upon the indorsee the right: 1. To receive payment of the instrument; 2. To bring any action thereon that the indorser could bring; 3. To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. H 224 NEGOTIABLE INSTRUMENTS I' § 171* Qualified Indorsement §38.— A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without re- course" or any words of similar import. Such an indorse- ment does not impair the negotiable character of the instru- ment. § 172. Conditional Indorsement The payee is not concerned about a conditional indorse- ment. Such an indorsement affects the rights of only those who take the instrument after the indorsement. A conditional indorsement imposes some condition on payment, as "Pay to Henry Alford upon delivery of motor truck, on March I, 1920. Mark Anderson." In such a case, the payee may take no notice of the condi- tion and may pay any lawful holder of the note whether the condition has been fulfilled or not. But any holder of such a note would hold it. or any amount paid him upon it, subject to the rights of the conditional indorser. § 173. Effect of Indorsement * An instrument payable to bearer may be indorsed specially to some particular person and after that may again be passed on by delivery. §41.— Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse, unless the one indorsing has authority to in- dorse for the others. §42.— Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or cor- * poration, it is deemed prima facie to be payable to the bank or corporation of which he is such officer; and may be negotiated by either the indorsement of the bank or corpora- tion or the indorsement of the officer. NEGOTIATION § 43- — Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he think fit, his proper signature. § 44. — Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. § 45. — Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. §46. — Except where the contrary appears every indorse- ment is presumed prima facie to have been made at the place where the instrument is dated. 225 Review Questions 1. What is the difference between assigning a simple contract, and negotiating a note or other commercial paper? What is the form? 2. What is a contract of indorsement? What obligation is assumed by the indorser? 3. If an instrument payable to bearer is indorsed specially to some particular person and after that is passed on by delivery, can the holder by delivery collect from the special indorser or the special indorsee? 4. Give pro forma illustrations of the following indorsements of promissory notes and show the purpose and effect of each indorsement: (a) in full, (b) conditional, (c) restrictive, (d) qualified. 5. What is the procedure where the name of a payee or indorsee has been misspelled or his initials are not given correctly? I! I i* CHAPTER XXIX RIGHTS OF HOLDER § 174. Holder in Due Course The Uniform Negotiable Instruments Law uses the phrase "a holder in due course" to express the idea of an innocent holder for value, that is, one who has taken the instrument without knowledge of anything unusual in connection with it and who has given a valuable consideration for his tiUe. Such a holder of a negotiable instrument may sue on it in his own name. § 52— A holder in due course is a holder who has taken the instrument under the following conditions : 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was over- due, and without notice that it had been previously dis- honored, if such were the fact; 3. That he took it in good faith and for value; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. §53.— Where an instrument payable on demand is ne- gotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course. 554.— Where the transferee receives notice of any in- firmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid hy him. 326 RIGHTS OF HOLDER 227 1 175. Defects of Title § 55. — The title of a person who negotiates an instrument is defective within the meaning of this act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. § 56. — ^To constitute notice of an infirmity in the instru- ment or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. § 176. The Rights of a Holder in Due Course A holder in due course of a negotiable instrument is in a strong position. He has a good claim against any of the prior parties to the instrument regardless of any claim they may have for fraud, duress, lack of consideration, and, with a few exceptions, illegality. Of course, if the holder knew of any of these defects before taking the instrument, he would- not be a holder in due course. If he occupies the position of , holder in due course, he may take any negotiable instnunent without inquiry and without any fear that in the event of having to bring suit he may meet with any of the defenses named. 1 57. — ^A holder in due course holds the instrument free from any defect of title of prior parties and free from de- fenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount there- of against all parties liable thereon. § 177. Effect of Irregular Transfer If a holder of negotiable paper not "a holder in due course" brings suit to collect, he must face all the defenses f '111 |ill 228 NEGOTIABLE INSTRUMENTS tibat can be brought up in a suit between the original parties. There may have been fraud as between the original parties or other cause why the note should not be paid. If it has come into the hands of an innocent holder, he can collect notwithstanding, but if the holder did not take the instrument m due course, any of the defenses existing between the original parties may be used against him. §97-— In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. If negotiable instruments payable to bearer are lost, the finder does not have good title, but if he manages to transfer them to an innocent holder for value, such holder has a good title. This rule does not apply to certificates of stock or other instruments that are only quasi-negotiable. Review Questions 1. What IS a "holder in due course"? If a person takes an undated note, IS he a holder in due course? If a note is overdue, will an indorsee be a holder in due course? If the indorsee pays only half the face of the note, will he be a holder in due course ? 2. Distinguish the position of a bona fide holder of a negotiable instrument and an assignee of an assignable obligation in the event of their suing for their respective claims. 3. An indorsee who has notice of illegality of note indorses it to a bona fide holder for value, and takes up the note at maturity Is he entitled to sue maker? 4- If A lost bearer bonds and certificates of stock indorsed in blank, and C took them from the finder in good faith, paying value' what interest would C have? CHAPTER XXX LIABILITY OF PARTIES § 178. Liability of Maker The maker of a promissory note engages to pay the note he issues according to its tenor and effect, and he is primarily liable. Should it be paid by one of the indorsers, the maker will later have to reimburse him for what he has paid. The maker is liable even if the note is not presented to him when due. He remains liable upon it until it is outlawed by the Statute of Limitations. He is not liable on a forged instru- ment or on an incomplete instrument lost or stolen and filled out by the finder or thief. § 34. — ^Where an incomplete instrument has not been de- livered it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. § 42. — ^Where a signature is forged or made without au- thority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, and to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. § 179. Liability of Indorser When any person other than maker, drawer, or acceptor places his signature upon an instrument he is deemed to be an indorser. 229 m 230 NEGOTIABLE INSTRUMENTS l« §64.— Where a person, not otherwise a party to an in- strument, places thereon his signature in blank before de- hvery, he is liable as indorser in accordance with the foUow- ing rules : 1. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. 2. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. 3. If he signs for the accommodation of the payee he is liable to all parties subsequent to the payee. § 65.— Every person negotiating an instrument by delivery or by a qualified indorsement, warrants : 1. That the instrument is genuine and in all respects what it purports to be; 2. That he has a good title to it ; 3. That all prior parties had capacity to contract; 4. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. § 67.— Where a person places his indorsement on an in- strument negotiable by delivery he incurs all the liabilities of an indorser. The contract of the indorser, like that of the drawer, is a conditional promise to pay. The conditions are that the prior parties fail to pay and that due notice of their failure be given. The amount of the indorser's liability is the face of the instrument, and in addition, interest and notary's protest fees. Indorsers are liable in the order in which they indorse, but evidence may be admitted to show that they have agreed otherwise as between or among themselves. § x8o. Discharge of Indorser If the holder and maker agree to an extension of the time of payment, it will discharge any indorsers of the instru- LIABILITY OF PARTIES 231 ment. Mere delay in bringing suit does not have this effect. As set forth in subsequent chapters, failure to present the note for payment on the due date will discharge the indorsers, and if the note is presented for payment and not paid, the indorsers must be duly notified if they are to be held. § z8z. Liability of Guarantor If instead of the usual indorsement or indorsement in blank, a guaranty is made, as, "For value received, I hereby guarantee payment of within note, Warren Colwell," the effect is that the guarantor waives the usual presentment and notice of non-payment. Some courts hold that this contract of guaranty is not strictly negotiable and will not pass to any but the next holder. The usual form of indorsement is in most cases preferable. A guarantor of collection instead of payment is liable only if the maker is sued promptly and then cannot by legal means be made to pay. § 182. Liability of Accommodation Signer Accommodation paper is distinguished from business paper by lack of consideration. Thus a man may give his note to a friend, in order that the latter may discount it and so secure funds to meet a temporary emergency. In the same way he may write his acceptance upon a draft (see § 205), or indorse a note made by a friend in need of funds. The distinction is often made between real instruments and ac- commodation paper that the former represent past and the latter future transactions. In the first case, a man gives a note for goods received ; in the second, he indorses a note in order that its maker may receive goods. Since the one who is accommodated is not a holder for value, he cannot sue upon accommodation paper. But anyone who for accommodation signs his name to any negotiable I 2^2 NEGOTIABLE INSTRUMENTS lolTT.!, '%'""''";' '*''""• "'"P**'^' °^ •"''•'«^^. '« liable to any holder for value. The accommodation signer is liable Z. rf f.' '°''" '"''"^ *^^ '^^ ^'^^^ forTccommoda! tion and that he received no value. But an accommodation signer is never liable to the party accommodated. Review Questions Jk# & °of t?*- 'h '"'''*''' T •'""" '" ''"^ '°"'^' o* '^^ '"»'^er and of the mdorser of a promissory note * ^f thU f' ''^'^' °' indorsement of a negotiable instrument m this form, "Henry Baldwin, without recourse"' ^ tL Mf '" '"f u'" """' "'■'" *"*= '"="'" '>«~'"« insolvent P«'" m J; anTr 1^^^'' ""^ P'^'"' '' '^^'^^ ^'^ the instru- ment and It IS there presented; drl n^^"'* "*" ^^"""^ °^ ^^'"'""^ '' ^P^^^^fi^^* but the ad. - mZl lU . ^T '"^ '"^^ P*^'"^"^ " ^^^« '» the instni- ment and it is there presented; 3. Where no place of payment is specified and no address IS given and the instrument is presented at the usual Se of business or residence of the person to make payment «34 PRESENTMENT FOR PAYMENT 23$ 4. In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. §74. — The instrument must be exhibited to the person from whom payment is demanded, and when it is paid must be delivered up to the party paying it. If the instrument is payable at a bank, presentment must be made during banking hours imless payee has no funds there, in which case any hour before the closing of the bank will do. If the bank holds such a note for collection and it is in the bank on its due date, no other presentment is necessary. Speaking generally, it is the bank^s duty to use all diligence in respect to negotiable paper left with it for collection. This involves prompt presentation for acceptance if acceptance is necessary ; and presentation for payment on the date of pay- ment within banking hours, at the place specified in the instru- ment, if any, and if not, at the maker's place of business. In case the instrument is not paid on presentation when due, it is the bank's duty to protest it, if not otherwise instructed by the owner, and to give due notice of its dishonor to all indorsers, and to do any other things necessary for the col- lection of the instrument. The bank is liable for any failure in its performance of its duty. § Z85. Presentment Excused § 82.— Presentment for payment is dispensed with : • I. Where, after the exercise of reasonable diligence pre- sentment as required by this act cannot be made; 2. Where the drawee is a fictitious person ; 3. By waiver of presentment, express or implied. § z86. When Due § 85. — ^Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instrument is payable on the I wm i* 236 NEGOTIABLE INSTRUMENTS n«rt succeeding business day. Instruments falling due on Sanrday are to be presented for payment on the nex" su" ceedmg busmess day. except that instruments payable o„de mand may. at the option of the holder, be present^ W payment before twelve o'clock noon „„ c . Presented for entire day is not a honda^ '' "''" *•"' aftefdail^r *! '"'*™"^"* ''' P^'y""' « « Axed period "e d^ofttr """^ '° ■-- '^ - - •>' '^^^^^^^^ If an instrument is due a month or more after date a calendar month is meant A note dated Februar^ 6 and due a month from date win fall due on March 16 wheAerIn leap year or any other year. wnemer m Review Questions I. 2» What were "days of grace" as understood in the law relating to commercial paper? reianng to 4. A note held by the bank at which it is payable is not paid at matunty. Must there be a presentment and demand ofjay ^' ""TsZ'^^let'Jj '5 ^^r""'^ P^P^^ determined? .What 6. Hnw i" ^i "^"^ ^''" ^""' ^'^ ^ '^^^^^^y ? On a Saturday ? tx How should presentment be made? ^"ru«iy. ^* ^^Jnt'^' ™''^'^ ""^ ^'''P'°' "^^^^ *^^^" ^^^"gh the instrument IS not presented on the due date ^ «ruinent a^ Would it be proper under any circumstances to present a note o If th' 'T'"' '' ''\'"''"' ^^^ "^^ ^^^^-^ -Jong the street 9. I^ tJ>« niaker cannot be found, what is the situation? CHAPTER XXXII NOTICE OF DISHONOR § 187. Necessity of Notice § 89. — Except as herein otherwise provided, when a nego- tiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. The holder must give notice. If the note has been left with a bank for collection, it as agent for the holder would give notice. If the note has been given to a notary for protest, he usually gives the required notice. § 188. Effect of Notice 1 92. — ^Where notice is given by or on behalf of the holder, it enures for the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. § 93.— Where notice is given by or on behalf of a party entitled to give notice, it enures for the benefit of the holder and all parties subsequent to the party to whom notice is given. §189. Form of Notice The notice may be informal provided it is so clear as not to mislead the party to whom it is sent. It may even be oral. It may be delivered personally or by mail. It may be given to the party or to someone acting as his authorized agent 337 *4 4ii i li II II 238 NEGOTIABLE INSTRUMENTS § X90. Time of Notice Where both parties reside in the same place, the time when notice must be given is as follows: § 103.— I. If given at the place of business of the person to receive notice, it must be given before the dose of business hours on the day following; 2. If given at his residence, it must be given before the usual hours of rest on the day following; 3. If sent by mail, it must be deposited in the post-office m time to reach him in usual course on the day following. If the parties reside in different places, the rule is as follows: § 104.— I. If sent by mail, it must be deposited in the post-office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day, by the next mail thereafter. a. If given otherwise than through the post-office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post-office within the time specified in the last subdivision. Where a notice is duly deposited in the post-office, within the specified time, it is deemed a good notice, whether or not It reaches its destinatioa The party receiving notice is aflowed the same period of time to send notice to antecedent parties that was permitted to the last holder. § 191. Where to Send Notice If the party has given an address, notice should be sent there; otherwise — § 108.— I. Either to the post-office nearest to his place of residence, or to the post-office where he is accustomed to receive his letters; or KbtlCE OF DISHONOR 239 2. If he lives in one place, and has his place of business in another, notice may be sent to either place; or 3. If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this act, it will be sufficient, though not sent in accordance with the requirements of this section. Delay in giving notice is excused when caused by circum- stances beyond the control of the holder. § 192. When Notice Is Not Required Notice of dishonor is not required to be given to the drawer in the following cases: H 114. — I. Where the drawer and drawee are the same person ; 2. Where the drawee is a fictitious person or a person not having capacity to contract; 3. Where the drawer is the person to whom the instru- ment is presented for payment; 4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; 5. Where the drawer has countermanded payment. § 193. Protest A protest is practically a certificate by a notary that the instrument has been presented, a demand for payment made, and such demand refused, and that the notary has protested against such non-payment and has sent notice of such protest and non-payment to the party concerned. This is followed by the official signature and seal of the notary. The object of protest is to hold those secondarily liable. The acceptor of a draft and the maker of a note, are principal debtors and are held with or without protest. Foreign bills of exchange must always be protested, as 240 NEGOTIABLE INSTRUMENTS ^ I I •i| the notary's certificate is the only admissible evidence of the bill's dishonor. In case a bank protests a draft ahead of time, it is liable to the acceptor for injury to his credit Any negotiable instrument may be protested for non-ac- ceptance or non-payment, but such procedure is not legally required, except for foreign bills of exchange. The costs of a protest are added to the amount to be paid by any party liable on the instrument. Fees for protest are fixed by statute. Protest is advisable, as the notary will send the required notice and put the evidence of non-payment and due notice in the best possible- shape for use, if htigation results. If it is desired to avoid the expense of protest, it is necessary to attach notice of "No Protest" to any instrument sent through a bank for collection, otherwise the bank will give its notaries a chance to make fees. 2. 3- Review Questions Notice of dishonor is to be given by whom? To whom must notice be sent? What is the effect if notice is not given? What is the rale as to the time of notice: (a) Where the parties live in the same place? (b) Where they reside in different places ? 4. If notice was sent by mail and owing to a train wreck the letter was destroyed, would the person to be notified be released? 5. Who pays the cost of protest? What does the term "protest" mean ? 6. E holds an unpaid note and gives due notice to fourth indorser, who gives due notice to second indorser, who gives due notice to first and third. Who are liable to E? 7. ' What form of negotiable instruments legally require protest and for what defaults? CHAPTER XXXIII DISCHARGE OF NEGOTIABLE INSTRUMENTS § 194. When Discharged A negotiable instrument is discharged : 1 119. I. By payment in due course by or on behalf of the principal debtor ; 2. By payment in due course by the party accommodated, where the instrument is made or accepted for accommoda- tion; 3. By the intentional cancellation thereof by the holder; 4. By any other act which will discharge a simple con- tract for the payment of money; 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. A person secondarily liable on the instrument is dis- charged: 1 120. I. By an act which discharges the instrument; 2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party ; 4. By a valid tender of payment made by a prior party. Also by release of the principal debtor or by extension of his time of payment. Merely letting the time of payment go by without beginning suit is not granting an extension. § 195. When Not Discharged When paid by a party other than the maker or drawee, the instrument is not discharged, but the party paying it may enforce payment against all prior parties on the instrument. 241 Ill I 1 242 NEGOTIABLE INSTRUMENTS §196. Effect of Alteration Any material alteration, unless made with the assent of aU parties concerned, will invalidate the instrument, except as agamst the parties who made the alteration. Any alteration is material which changes : §125.-1. The date; 2. The sum payable, either for principal or interest; 3. The time or place of payment; 4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; Or which adds a place of payment where no place of payment ,s specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. Review Questions How is liability of indorser affected when maker and holder agree to extend time of payment? If an indorser pays a note to avoid suit, what rights has he^ An mstrument which has been materially altered is in due course in the hands of a holder not a party to the alteration. May he enforce payment according to original tenor .^ What alterations in negotiable instruments are material? A negotiable note executed and delivered by A to B passes in due course to and is indorsed in blank by B, C, D, and E. • 1 i-^m'* ^'"^^^ """^ '*"^^" °"^ ^^' indorsement. What IS the liability of C, D, and E ? 6. Under what circumstances is an indorser relieved from liabilitv as such? •' 3. 4. 5» I. 2. 3- 4, CHAPTER XXXIV PROMISSORY NOTES § 197. Definition A note is described and defined by the Uniform Negotiable Instmments Law as follows : It is a written promise without condition, By the maker to another, or to the maker's order, To pay a sum certain in money to order or to bearer, On demand at a fixed or determinable future time. I lg4. — A negotiable promissory note within the meaning of this act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. § 198. Liability of Maker The liability of the maker of a promissory note may vary in nine different ways as follows: * I. Where the note is signed with his name by another at his direction, he is liable in the same manner as though he had personally signed the note. 3. Where he signs and delivers the note without con- sideration to the party who seeks to enforce it, he is not liable if he raises the question and prop- erly makes the defense of lack of consideration. »C. p. A. Problems. Vol. I, page 235- This differentiation <5f liability is far- fetched and even fantastic. It is brought in here only because required to answer a question actually asked. a44 ^ 4- 6. NEGOTIABLE INSTRUMENTS Where he signs and delivers the note without con- sideration and it subsequently comes into the hands of a holder in due course, he is liable. Where his signature is forged by the party who seeks to enforce it, he is not liable. Where his liability is sought to be enforced by one to whom It was negotiated for value by the party forging his signature, he niay set up that the in- strument was forged even against a holder in due course. Where the instrument sued on is not dated, does not state that it is given for value, and does not specify the place where it is drawn or the place where it is payable, he is liable. Where the holder of the note has, without the assent of the maker, changed its date, he is not hable on the note either in its present or its original form. Alteration of date is a material alteratioa Where the holder of the note has, without the assent of the maker, changed its place of payment, he is not hable. Place of payment is a material term of the note. Where the holder of the note has muntentionaUy marked it canceUed, he is liable, provided the holder can prove that the canceUation was unin- tentional. The burden of proof is on the holder. § 199- Interest The holder of a note on which interest is payable at fixed periods need not protest or take any action in case of default of interest payments. He may simply wait mitil the principal is due and then proceed to collect the whole amount of L note. PROMISSORY NOTES 245 a The legal rate of interest at the place where payment is to be made will determine the rate if not specified in the note. §20o. Demand Notes If an indorser on a demand note is to be held, payment must be demanded within a reasonable time; the maker will be bound even if demand is not made for a very long time. The only limitation protecting the maker is that imposed by the Statute of Limitations. It is held that the statute begins to run from the time a cause of action accrues. In the case of a demand note, this is from the time the note is delivered by the maker to the payee. § 201. Effect of Renewal If a new note is taken in exchange for an unpaid one, it operates only as a suspension of the old debt, not as an extinguislmient of it, unless by special agreement. In case the new note is not met, the old note may be sued upon. This is true whether or not the old note is retained by the creditor. § 202. Note as a Gift If a gift is made of a promissory note payable to the order of the donee, and he should indorse it and transfer it to an innocent holder for value, it would be good. The donee could not collect by suit himself because he would be met by the defense of no consideration. If the note were made payable to the donor's order and he indorsed it in blank, the immediate party who received it and gave no value in return could not enforce pa)mient of the note. 246 NEGOTIABLE INSTRUMENTS I. 2. 3. Review Questions If a note is given to A and the donor dies, can A collect? If A has discounted the note at the bank can the bank collect? What are the essentials of a promissory note? The holder of a demand note failed to present it for two years. Then the maker had vanished. Could the holder collect from the mdorsers? What are nine different ways in which a note may be issued or handled, and the varying liabilities of the maker in each case? CHAPTER XXXV BILLS OF EXCHANGE AND ACCEPTANCES^ § 203. Definition § 126. — A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is ad- dressed to pay on demand or at a fixed or determinable future time a certain sum in money to order or to bearer. An inland bill is one drawn and payable within the states Any other is a foreign bill. A bill of exchange when accepted becomes an acceptance. A draft is an order to pay money — it includes bills of exchange, checks and all other forms of orders to pay money. § 204. Liability of Maker, Drawer, and Acceptor The maker of a draft is called the drawer. He is anal- ogous to the maker of a note. The maker of a promissory note engages to pay the note he issues according to its tenor and admits the existence of the payee and his capacity to indorse. The drawer of a draft assumes the same liability. if it is not paid by the drawee and the necessary proceedings on dishonor are taken. A draft may be presented to the drawee before payment to make sure that he will accept its obligations. § 205. Acceptance § I32.--The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It ^ For forms see Chapter CIII, Forms 42-44. 247 ^48 NEGOTIABLE INSTRUMENTS must not express that the drawee will perform his promise by any other means than the payment of money. An acceptance is an engagement to pay a bill of exchange as requested by the drawer. An acceptance is usually accord- ing to the tenor of the bill, in which case it is called a general or absolute acceptance. Qualified Acceptance. A qualified acceptance is sometimes given. § 141.— An acceptance is quahfied which is : 1. Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; 2. Partial ; that is to say, an acceptance to pay part only of the amount for which the bill is drawn ; 3. Local; that is to say, an acceptance to pay only at a particular place; 4. Qualified as to time; 5. The acceptance of some on^ or more of the drawees, but not of all. The holder may require that the acceptance be written on the bill. It should not be written on another piece of paper. The drawee has twenty-four hours to decide whether he will accept or not. If he destroys the bill or fails to return it, he will be held to have accepted it Mode of Acceptance. Upon presentation of the bill of exchange, the drawee, if he wishes to pay the order according to its terms, may do so by writing across its face the word "Accepted," followed by signature and date. When this is done by the drawee he becomes the acceptor, and thereby agrees to pay the bill at maturity, according to its tenor, with- out qualifying conditions. Effect of Acceptance. The effect of the acceptance of a bill of exchange is to constitute the acceptor the principal debtor. The bill of exchange becomes, by the acceptance, BILLS OF EXCHANGE AND ACCEPTANCES 249 similar to a promissory note — the acceptor being the promissor, and the drawer standing in the relation of an indorser or surety. § 206. Dollar Acceptance By the term "dollar acceptance," as used in international trade, is meant an accepted bill of exchange drawn in Ameri- can dollars. The term has become familiar in this country since the enactment of and amendments to the federal reserve banking law, which created a system of modern bills of exchange for American business. Prior to the establishment of this system, it was the usual custom to draw bills of exchange in pounds sterling. Most of the international trade was financed through London; that is to say, financial in- stitutions of London granted to traders acceptance credits which authorized the drawing of bills of exchange on such institutions. By this agreement, the trader was assured that the London bank would accept his bill. Thus, such institutions lent their credit, for which they charged a commission, and a merchant in London or even in South America would deal with both his creditors and his debtors in this country in terms of pounds sterling. Under the amendment of September 7, 19 16, to the Fed- eral Reserve Act, in addition to the power to accept bills involved in the exportation and the importation of goods, federal reserve banks have the power to accept bills drawn upon them by foreign banks or bankers in the same way that London banks accommodate foreign traders. The reserve banks may accept drafts or bills of exchange drawn upon them, having not more than three months to run, exclusive of days of grace, drawn under regulations to be prescribed by the Federal Reserve Board, by banks or bankers in foreign countries or dependencies or insular possessions of the United States, for the purpose of furnishing dollar exchange as re- 2SO NEGOTIABLE INSTRUMENTS quired by the usages of trade in the respective countries, dependencies, or insular possessions. It is likely that in years to come New York will be as important financially and commercially as London; and, as the use of a decimal currency has much to recommend it, there is good reason to believe that the future will see dollar exchange more generally used than sterling exchange has been in the past. It is certain that every business man should imder- stand clearly what is meant by "dollar acceptances/' and its synonyms "dollar exchange," and "dollar credits," as the terms are used by bankers. § 307. Bank Acceptances Under the federal reserve law, member banks of the fed- eral reserve system are empowered to grant bankers' accept- ance credits ; that is to say, "Any member bank may accept drafts or bills of exchange drawn upon it and growing out of transactions involving the importation or exportation of goods having not more than six months' sight to run." * A bankers' acceptance, as defined by the Federal Reserve Board, "is a bill of exchange of which the acceptor is a bank or trust company, or a firm, person, company, or corporation engaged in the business of granting bankers' acceptance credits." When the bank, trust company, firm, person or corpora- tion, accepts the bill of exchange, it has loaned its credit, not its funds. The direct responsibility for the payment of the bin of exchange that has become an acceptance, rests on the bank or concern granting the acceptance credit. Such accepted bills of exchange are payable in our country and hence are known as "dollar acceptances." § 20^. Domestic Bank Acceptances The rules of the Federal Reserve Board are somewhat more rigid with regard to bank acceptance credits covering ■ I 13 of the Federal Reserve Act. BILLS OF EXCHANGE AND ACCEPTANCES 251 domestic shipments. Such acceptances are used mainly to finance domestic transactions involving major staples. And the federal reserve law provides that "Any member bank (of the federal reserve system) may accept drafts or bills of exchange drawn upon it, having not more than six months' sight to rim, exclusive of days of grace .... which grow out of transactions involving the domestic shipment of goods, pro- vided shipping documents^ conveying or securing title are attached at the time of acceptance; or which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily market- able staples." Such acceptances are known as dollar acceptances against domestic shipment of goods, or domestic bank acceptances. §209. Trade Acceptances In this country most of the credit business has been done on the open-account system whereby goods are sold at thirty, sixty, or ninety days, or in many cases without any definite time of payment. This system has many disadvantages. It compels the seller to carry the financial burden of the buyer and so ties up his capital for an indefinite period. Also, the expense involved in collecting slow accounts and granting extensions constitutes in the aggregate a heavy tax on business. ' All these disadvantages are eliminated by the use of the trade acceptance. A trade acceptance is a bill of exchange drawn by the seller directly on the purchaser of goods, and accepted by the purchaser. The direct responsibility for the payment of the bill rests on the person, firm or corporation accepting the bill of exchange. The Federal Reserve Board has defined the all the documents required to prove title to the ship- irance policy, consular invoice, and so on. Principles • "Shipping documents" are all the documents required to prov ments — the bill of lading, insurance policy, consular invoice, and of Foreign Trade. Savay, page 306. dS^ NEGOTIABLE INSTRtTMENTS trade acceptance as a "bill of exchange, drawn by the seller on the purchaser, of goods sold and accepted by such pur- chaser." Functions of the Trade Acceptance. Trade acceptances are instnunents of credit, and when properly created are eligible for purchase by federal reserve banks. They thus add to the circulating medium, just as do eligible bank ac- ceptances. The extensive use of the trade acceptance in American business is urged as a remedy to cure the defects of the open- account system, as it provides the seller with an instrument which he may sell to his bank, broker, or other persons en- gaged in discounting such commercial paper, thus enabling him to keep liquid and mobile the capital that would otherwise be tied up in open book accounts. ■i' §210. The Discount of Acceptances Under Section 14 of the federal reserve banking law, and under rules and regulations prescribed by the Federal Reserve Board, federal reserve banks may purchase and sell in the open market bankers* acceptances and bills of exchange from banks, firms, corporations, or individuals. It should be borne in mind that federal reserve banks proper do not "accept" bills of exchange, but may purchase acceptances in the open market (discount them), or may rediscount eligible acceptances for member banks. § 211. Rules for Discount of Bank Acceptances § 182.— A bankers* acceptance may be discounted with any ^federal reserve bank, under the following rules prescribed by the Federal Reserve Board: 1. The acceptance must have maturity at purchase of not more than three months. 2. The bill must have been drawn under credit opened 3- BILLS OF EXCHANGE AND ACCEPTANCES 253 for the purpose of taking care of transactions in- volving (a) Foreign shipment of goods, (b) Shipment within United States, provided bill is accompanied by shipping documents, or (c) Storage within United States of readily mar- ketable goods, provided acceptor is secured by proper receipt, or (d) Storage within United States of goods ac- tually sold, provided the bill is secured by pledge of such goods. Or the bill must be drawn by a foreign bank or banker for the purpose of furnishing dollar ex- change. § 212. Rules for Discount of Trade Acceptances Federal reserve banks may purchase trade acceptances under the following rules prescribed by the Federal Reserve Board: The bill must have arisen out of an actual commercial transaction, domestic or foreign; that is, it must be a bill which has been issued or drawn for agricultural, industrial, or commercial purposes or the proceeds of which have been used or are to be used for the purpose of producing, purchas- ing, carrying or marketing goods in one or more of the steps of the process of production, manufacture or distribu- tion. It must have a maturity at time of purchase of not more than ninety days, exclusive of days of grace. The word "goods" has been construed as meaning goods, wares, merchandise and all agricultural products including live stock. § 213.' The Drawee The drawee is not liable unless and until he accepts the bill. A bill may be addressed to two or more drawees, but not in the alternative, or in succession. 254 NEGOTIABLE INSTRUMENTS Where drawer and drawee are the same person, or tne drawee is fictitious, or where the instrument is ambiguous, the holder may consider the instrument either a promissory note or a bill of exchange at his option. § 214. Presentment for Acceptance Presentment for acceptance must be made: § 143. — I. Where the bill is payable after sight or in any other case where presentment for acceptance is necessary in order to fix the maturity of the instrument; or 2. Where the . bill expressly stipulates that it shall be presented for acceptance; or 3. Where the bill is drawn payable elsewhere than at the residence or the place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Presentment for acceptance follows the general rules given for presentment for payment (See Chapter XXXI.) § 215. Protest for Non-Acceptance A foreign bill appearing on its face to be such must be protested on the day of its dishonor by non-acceptance, if the owner desires to hold the drawer and indorsers. § '53* — ^The protest must be annexed to the bill, or must contain a copy thereof, and must be under the hand and seal of the notary making it, and must specify: 1, The time and place of presentment: 2. The fact that presentment was made and the maimer thereof ; 3, The cause or reason for protesting the bill ; 4. The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. § 154. — Protest may be made by: 1. A notary public ; or 2. By any respectable resident of the place where the BILLS OF EXCHANGE AND ACCEPTANCES 255 bill is dishonored, in the presence of two or more creditable witnesses. § 157— A bill which has been protested for non-accept- ance may be subsequently protested for non-payment. Acceptance for Honor. An outside party may accept or pay a bill of exchange to save the credit of the drawee. In such case the acceptor makes himself liable, and if he must pay the bill, he has a right to be reimbursed by the person who should have paid it. A bill payable in a foreign country would be protested according to the law of that country, and not according to the law of the place where the bill was made. §216. Bills in a Set § 177— Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitute one bill. In such a case, the acceptance should be written on one of the sets and on one part only. If the drawee accepts more than one part, he may be held liable on each part as if it were a separate bill. Usually, "where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is dis- charged." When the acceptor of a bill drawn in a set pays it with- out requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. 9S6 'fi' NEGOTIABLE INSTRUMENTS Review Questions JL« A foreign bill? What is a bill of exchange? An inland bill? An acceptance? A draft? 2. What is a general acceptance? A qualified acceptance? What is the form of acceptance? Its effect? 3. What is meant by "dollar acceptances"? Why is the term significant? 4. What is a "bankers' acceptance" as defined by the Federal Reserve Board? What is necessary to make a bankers' ac- ceptance eligible for discount at a federal reserve bank? 5. What are domestic bank acceptances? 6. What are trade acceptances? What are their functions? What is necessary to make a trade acceptance eligible for discount at a federal reserve bank? 7. When is presentment for acceptance of a bill of exchange necessary? What is the effect if such a bill is not presented? 8. What must protest of a foreign bill of exchange specify in order to hold drawer and indorsers? Who can protest a bill? Must a bill payable in a foreign city be protested by the law of the place where it is payable or by our Negotiable Instruments Law? 9. When bills are drawn in a set, what is the duty of the acceptor? 10. When must bills of exchange be presented for acceptance? 11. What is the rule as to protest of foreign bills of exchange? CHAPTER XXXVI BANK CHECKS § 217. Definition A check may be defined as an unconditional order on a bank or a banker to pay on demand a specified sum to a person named or to his order, or to the bearer. § 185. — ^A check is a bill of exchange drawn on a bank, payable on demand. Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange payable on demand apply to a check. § 2x8. Checks as Evidence of Payment At the present time bank checks are used extensively as a substitute for cash payments. Few business men pay bills except by check. If actual money had to be constantly in transfer from one person to another, it would limit the amount of business that could be done at one time as the volume of cash in circulation is not adequate. The use of checks is an elastic medium of exchange that meets any possible demand of modem business. The use of checks for the payment of debts affords the very best possible evidence of the fact of payment. A check given to pay a debt can only be cashed by the indorsement of the recipient, and his indorsement is the best evidence that he received the check and collected the money. This important function has been amplified in modern accounting by the use of voucher checks. A voucher check contains a clear state- ment of the exact obligation that the check is intended to 257 asS NEGOTIABLE INSTRUMENTS BANK CHECKS I I pay. Anyone who accepts a check with the statement on the check of the puqx>se to which the payment is to be appHed is estopped thereafter from applying the payment to any other obligation or indebtedness. These checks are found in many forms. The chief difference between an ordinary bill of exchange and a check is that the latter is always drawn on a bank and is always payable on demand. In addition, these points of difference are to be noted: 1. Grace is not allowed on a check. 2. The check must be drawn on funds actually in the bank. 3. The death of the drawer of a check revokes it. § aig. Signature of Drawer The signature of the drawer is necessary, but it need not be placed at the bottom of the instrument. The order may be written under the signature, or some form such as "I, Henry Adams, direct you to pay to, etc.," may be used. The bank will have the signature on file and will be able to verify it in whatever form it occurs. § 220. Presentment for Pajonent § 186. — ^A check must be presented for payment within a reasonable time after its issue or the drawer will be dis- charged from liability thereon to the extent of the loss caused by the delay. Thus if the holder keeps the check two weeks, and the bank fails before the check is presented, the liability of the drawer will be reduced in proportion to his total loss. That is, if the bank paid depositors only forty cents on the dollar, the holder of the check would be able to get only 40 per cent of its amount from the drawer. The courts will hold that 259 the other 60 per cent was lost to the holder by his own un- reasonable delay. That is, the drawer is discharged from his liability to the holder only to the extent of the actual loss caused by the delay. If the check must be sent to another place for collection, it should be started on the day following its receipt, and should go by a reasonably direct route. In some states it has been held that unreasonable delay is caused by sending a check over an indirect route through various correspondent banks. §221. Bank's Relations with Depositor The depositor in effect lends money to the bank, and the bank promises to repay it on demand. The bank is in no sense a trustee, unless there has been an express agreement to that effect. The bank may charge against a depositor's account any notes of his which it holds and which are due. If the depositor has made an overdraft, the bank may apply subsequent deposits against it. A bill or note made payable at a bank authorizes the bank to pay it when due out of the depositor's account. If the funds of a depositor on hand are not enough to pay a check in full, the bank need not pay it in part, but it may legally do so. If the bank wrongfully refuses payment of a check, the drawer may sue for damages. If he is a business man and can prove that his credit has actually been injured, he may recover a substantial sum. In general practice, a bank does not, except by special arrangement, take checks of depositors for collection, but accepts them outright for deposit. By this method the de- positor is able to draw checks against his deposits without waiting until the bank has made sure that they can be collected. On the other hand, if the depositor does not wait a reasonable time for the collection of the checks he has deposited before 36o KEGOTIABLE INSTRUMENTS drawing against them, the bank may legaUy refuse to honor his checks. If a depositor gives a check dated some days ahead and It IS presented to the bank before its date, the bank wiU pay It or certi fy it at its own peril. § aaa. Bank's Relations with Holder § i^.— A check of itself does not operate as an assign- "^TuX ^\ •*"" "^ ""* ^""'•^ *° ^"^ "«"t of the drawer w,th the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. The holder of an uncertified check has ordinarily no riehts against the bank. If the bonk refuses to pay when it has funds of the drawer on hand, the depositor may sue the bank for damages to his credit, but the holder's recourse is only against the drawer of the check. •II ^r"" '^-^^ ^"^ ^"^^ *** *^^ *«* *as given for an dlegal considerauon. as in payment of a wager, the bank must ^di It. and the drawer win have no claim against the bank for so doing. The bank will pay checks in the order of Aeir presentment If two or more checks are presented at X^^ ^^ "^^ ^^ ^ ^^^'''' °"^^' '* §22$, Revocation ..a'^\uT^I ''^ *.' "^^' *° ^**'P P^y""'* °" » check, and If Ae bank pays die check after it has been notified no to do so. It win be liable. The drawer alone has a legal righ b^ws of fraud ought to mform the bank at once if he camiot reach the drawer In such a case the bank will probably delay payment of the check until the matter has bee^ cleared up. ^ Even though the drawer is successful in stopping payment BANK CHECKS 261 of a check, he will be liable to an innocent holder for value if the indorsements are proper. After a check has been certified, payment may not or- dinarily be stopped. The death of the drawer will revoke a check, but the bank must have notice, on the general principle that agency ceases only after the agent has received notice. Insolvency, when the bank is notified of it, also acts as a revocation. § 224. Certification When a bank certifies a check, it assumes the obligation formerly held by the drawer. The bank will not certify unless it accepts the signature of the drawer as correct, and unless it has funds of the drawer on hand with which to pay; and as soon as it certifies it sets aside the proper amount from the drawer's account and holds it for the holder of the check. Under the Negotiable Instruments Law certification must be in writing. There is no legal obligation on a bank to certify any check for anybody. It is a matter of courtesy and con- venience. § 187. — Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. § 188. — Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are dis- charged from liability thereon. Acceptance or certification of a check discharges the drawer, but if the drawer takes his own check to the bank for certification, he still remains secondarily liable, in case the certification be refused for any reason, or the bank becomes insolvent. If a bank becomes insolvent, the holder of a certified check simply ranks among the other creditors. 362 NEGOTIABLE INSTRUMENTS BANK CHECKS 263 § 335- Fraud The bank's agreement with the depositor is that it will pay out money on his account only on his order. If it honors a forged signature, therefore, it must bear the loss. But in New York, if a bank is not notified within one year after the return of a forged or raised check it cannot be held liable. The bank's liability is to the drawer, not to the payee or subsequent indorsers. The drawer cannot hold the bank for a loss if he has been negligent in drawing the check or has delivered the check to the wrong person, or if he has signed and allowed to go into circulation a check with unfilled blanks, or if he has so negligently filled in a check that insertions might readily be made. The depositor should always examine his pass-book and vouchers carefully, and report promptly any errors he may discover. The bank will not be liable to a drawer whose acts amount to acquiescence in what the bank has done. If a raised check is paid by a bank, it must bear the loss as against the drawer, unless his negligence in filling in the amounts made possible the forgery. As against the person to whom the money has been paid, the bank must bear the loss unless he was a party to the forgery or unless he can return the money to the bank without making his situation worse than it would have been had the bank refused payment. That is, if the payee has not yet done anything that he would not have done if payment had been refused, the bank may recover. In most cases, however, he will have "delivered goods, given up security or otherwise have done something that he would not have done if the bank had refused payment. If the amount is altered and the bank pays out money in gfood faith, it will be able to recover from the one who got the money. Even in case of alteration before certification, the bank will be able to recover from the one to whom payment was made. In case a check is raised after certification, if the bank's carelessness was not responsible for the alteration or the payment, it will be able to recover the excess paid from an innocent holder to whom it paid the raised amount. Re- covery is allowed in these cases because the bank is not sup- posed to warrant the body of the instrument by certifying it, but only the drawer's signature, the sufficiency of the funds, the existence of the payee and his capacity to indorse. In New York and Pennsylvania the bank's certification is a warrant only of the signature and the funds. The bank after certifying a check will be liable to a holder in good faith, even though the funds are insufficient or the signature is forged. It will be liable also to such a holder even though the payee is fictitious or the blanks fraudulently filled. If a certified check has been stolen or lost, even though advertised, a holder in good faith will be able to recover. An overdraft is not usually a criminal offense. If a man draws a check out with intent to defraud and with knowledge that he has no right to draw on the bank for the amount he does, he is guilty of stealing and is punishable accordingly. § 226. Checks as Gifts If a check is given as a present, it will be valid, and sub- ject to the defense of no consideration only as between the donor and donee. A check given as a gift causa mortis if not cashed or certified before the death of the donor, is revoked. I. 2. 3- Review Questions Prepare a voucher check which is a negotiable instrument and evidence of the payment of a particular account or obligation. What liability, if any, does a bank assume in paying a check to a holder who claims under a forged indorsement? The maker of a promissory note sends the payee his check for the amount on the day of maturity. The payee has the check 264 NEGOTIABLE INSTRUMENTS I certified at the bank, but before it is paid the bank fails. Is the maker relieved of liabUity on the note by such certification? Give reasons for your answer. 4. A bank certified a check that had been altered by changing the date, name of payee, and raising the amount, and the bank subsequently paid the same to the defendant. Thereafter the bank sued the defendant for the amount thus paid. Can' tt recover? Or does its certification of the check amount to a warranty of the genuineness of the body of the check as to payee or amount? Explain. 5. Is a depositing and checking customer of a bank obliged to verify the balance shown by pass-book and vouchers? 4 A retailer received a check for some goods. Before delivering them he telephoned the bank, and was told that the check was good. When he presented it for payment several hours later he found that other checks had been presented in the interval, and that the bank refused to honor his on the ground of insufficient funds in the depositor's account. Could the retailer rely on the telephoned approval of the bank as a certification? 7. How should a check be sent by mail for collection? May the holder of an uncertified check sue the bank? If a bank wrongfully dishonors a check, has the drawer any remedy? & What IS the liability of the parties to a certified check? If a bank pays a check drawn on it by a depositor, after payment has been stopped, can the depositor recover the amount so paid? 9. In your state what is the statutory limitation to a bank's liability for payment of a forged or raised check after its return to a depositor? Liability of a bank for payment of a check after drawer's death? Drawer of check has it certified, gives it to payeg. Next day bank fails. Can payee collect from drawer? On the morning of January 5, A gave B a check for $100 on account On the evening of January 7 the bank suspends payment. B has not yet presented the check. Is A's debt cancelled? 10. II. PART VI INSURANCE L \ I CHAPTER XXXVII FIRE INSURANCE §227. The Parties Insurance is a contract by one or more parties to indemnify another for some loss which he may suffer in the future. If there is no loss, the agreement does not have to be carried out. The consideration is the premium paid. The written contract is called the policy. Insurance is of various kinds. Fire, life, and marine in- surance are the oldest forms of insurance. In addition, there have grown up accident insurance, burglary insurance, boiler, plate glass, and tornado insurance, credit, fidelity, title, and liability insurance, and other special forms of insurance too numerous to mention. There are two parties to a contract of fire insurance, the insured and the insurer. The person whose property is insured is called the insured. The person or company who insures it is called the insurer. The insurer may be a single individual, or a corporation, or an unincorporated company ; or a group of individuals may get together and insure themselves. This last system of in- surance is called mutual insurance. It is quite common in the country districts, where there may be a township mutual insurance. Whenever a fire occurs all the members of the fund are assessed proportionately to pay the loss. In the non-mutual companies a fund is created by the pay- ment of premiums, out of which the insurer pays for the losses which may occur. 267 268 INSURANCE FIRE INSURANCE 269 f § aa8. Nature of the Contract The contract of fire insurance is a speculative one; that IS to say the event on the happening of which the payment is to be made, namely, the fire, may never happen. The person msunng the buildmg must himself have some actual financial interest m the property insured, otherwise it would amount merely to a bet on his part as to whether the building would be destroyed by fire or not, and would be a gambling contract Ta "K" -.^ ° '^ *' '"'"'"'^ •'^^ °° '"'"«t i" the building, and the bu.M.ng were destroyed by fire, it would be to his prow, and such an inducement might lead to crime. Note: I. The exact interest of the person insured in the prop- erty should always be made a part of the policy, to show that the contract is legal. § aag. Agents Most insurance is taken out through agents. These may be of two kmds: those who are paid by the company and are tile agents of the company, and those who act merely as brokers and solicit insurance for various companies. Agents acting for the company bind the company by their agreements If they have the power to close contracts of insurance. If the contract is required to be sent first to the company for its approval, any agreement of the agent wffl not bind the com- pany Sometimes, by means of a short written agreement rafled a binder, or even by an oral contract, an agent may bind his company for a certain Umited or contingent period as for mstance, until the poUcy is made out or while the company is investigating the risk. The laws of the various states are very strict with reeard to insurance agents. In most of them an agent must receive a hcense from the state superintendent of insurance, or what- ever officer exercises corresponding duties, in order to be permitted to act. Notes: 1. In dealing with an insurance agent, always find out whether the company has to approve his agree- ments before relying on any changes he offers to make in the policy, etc. It is always safer to get the authorization of the company itself. 2. If you wish to act as an insurance agent, look up the law to see if you must take out a license. 3. If you deal through a broker instead of an agent of the insurance company, the broker is your agent. § 230. The Policy Policies may be either open or valued. Most fire insurance policies are open. In an open policy the amount payable in case of loss is not fixed by the policy but merely the limit up to which the company will be liable. Then when a fire occurs the company pays the actual value of the loss up to ^he amount named in the policy. A valued policy, on the other hand, specifies the amount payable in the event of a total loss. Life insurance policies are valued. It is a legal maxim that "to include is to exclude" and the insurance policy covers only what is stated therein. Some states allow oral agreements with, or representations made by, agents to be proved in order to alter the policy, but others do not. If it is desired to make other agreements not included in the policy form, they may be made in written form and made a part of the policy by referring to them in the policy. Standard Forms of Policies. New York, Massachusetts, and some other states have a standard form of policy, which by law must be used by all insurance companies. Massachu- setts adopted this form in 1881 ; New York in 1887. The Massachusetts form provides that a building must not be left 270 INSURANCE FIRE INSURANCE 271 unoccupied for thirty days or the insurance will lapse. In New York it must not be left for over ten days. In addition, the New York form contains certain stipulations, including the following: The company may replace or repair the property instead of paying the loss and may take damaged property by paying the full appraised value for it It does not hold itself liable under certain circumstances, such as war or riot, usurped power, or destruction by order of civil or military authority; likewise it is released by the neglect of the insured to use all reasonable means to save his property when it is menaced by neighboring flames. It is not liable if the insured made any false representations or practiced any kind of fraud in pro- curing the contract. The policy does not cover such things as deeds, book accounts, and shares of stock, etc., which merely represent obligations to the insured, nor does it cover money. It does not cover a building after it or part of it has fallen from any cause other than fire. These provisions may not be altered. If a building is left vacant for ten days, or a factory runs after ten o'clock at night or is shut down for more than ten consecutive days, the policy becomes of no effect, unless the policyholder shall have obtained a permit from the insurance company. This permit must be in proper form and must be attached to the policy. Any changes in the use or occupation of a building, or the installation of such things as electrical wires, gasoline stoves, etc., must be consented to by the company or the policy is void. In the absence of a provision to that effect, a policy is not nullified by the erection of neighboring buildings that increase the risk. • A common clause, known as "builder's risk" provides that mechanics such as gasfitters, plumbers, etc., may not be en- gaged to work upon a building without the consent of the company. For the use or storage of inflammable or explosive sub- stances, such as paint and gunpowder, in an insured building, a special permit is necessary. The policy does not cover certain enumerated articles, such as jewelry, curios, office furniture, architects' plans, etc., unless they are expressly mentioned in the policy. What the Policy Should Include. Every policy of fire in- surance should include as full and accurate a description of the property covered as possible. It should also include the amount for which the insurance is taken out, the term for which the policy is to last, the rate of premiums and at what time payable, and any other conditions which the parties wish to make a part of the agreement. Personal property must be described as located at such and such a place; and if it is moved, a new policy must be taken out or the original policy extended to cover it, as the character of the building in which it is kept affects the risk very materially. Cancellation. A fire insurance policy may be cancelled by either party upon five days' notice ; a proportionate amount of the premium paid being returned to the insured when the com- pany makes such cancellation. Notes: . 1. Everything you want included in the agreement should be put in writing and incorporated in the policy. 2. If the policy is a standard policy and the company's permission is obtained to make any changes in it, these should be in writing and made a part of the policy by a reference in it to the changes. §231. Prwniums The premiums are the consideration the insured pays for the agreement to insure his property. They are based 272 INSURANCE FIRE INSURANCE 273 ! on a certain percentage of the amount for which the property is insured and are payable periodically, generally either annu- ally or semiannually. A failure to pay a premium when it is due causes the policy to lapse and be forfeited, but the com- pany may consent to an extension of the time for its payment or may agree to take notes for the payment of premiums. Note: I. If an extension of time is procured for the payment of a premium, it is safest to have it in writing. Make your application for the extension by letter, retain copy, and enclose postage for a reply. The company's letter will be your protection. § 232. The Property Insured The property insured may be either real or personal. A policy may cover both, as for instance a dwelling-house and furniture. A policy made out to cover "merchandise" or "household goods" will cover such as may be acquired later as well as those which the insured owns at the time of taking out the policy. Insurable Interest The party who insures a property must have what is known as an insurable interest in it. He may either own the property outright, or have some claim upon it, such as a lien or mortgage. The standard form of policy in New York provides that the insured must be the sole and absolute owner of the property, free from any claims of anyone else, but anyone who is not the sole and absolute owner may insure his interest with the company's consent. If a mortgagee or trustee wishes to take out a policy, a clause must be inserted that the loss shall be payable "as his -interest may appear." The company's consent must also be obtained to a chattel mortgage, or the policy will be void. A man who insures another's property has an insurable in- terest therein and may protect himself by reinsuring it. A man may have an insurable interest in property which he does not own at all. Thus a salaried agent whose employ- ment is contingent upon the continued existence of a given property, may insure it. But the value of his indirect interest must somehow be determined and agreed to by the insurer and the insured. In like manner, a stockholder of a corporation has an interest, real though difficult to determine, in the prop- erty of the corporation. Alienation. Any change in ownership or possession of property, including sale for taxes or under a lien, will make it necessary to assign immediately the policy to the new owner, unless he chooses to take out a new policy. Assignment must be with the consent of the insurance company and recorded on the company's books. What May Be Insured. Any kind of tangible property may be insured. Deeds, bonds, shares of stock, book accounts, bank notes, promissory notes, and bills of exchange, etc., are not insurable. These merely represent an interest which the party has in some property and, if they are destroyed, the claim may be proved by witnesses without them. Money may not be insured ; the United States Treasury will redeem what remains of it. What May Be Insured Against. A fire insurance policy insures for damages other than those caused by actual flames. Injury due to the heat of a fire in an adjoining building would be recompensed, as would also damage caused by the means used to extinguish a fire, or damage caused by removing the goods to a place of safety even though it later developed that such moving need not have been done. To insure against damage by lightning where there was no actual ignition, a special lightning clause must be attached to the policy. Floating Stock. A merchant may insure his stock with the understanding that it is to be replaced by other material of the 274 INSURANCE FIRE INSURANCE 275 i|! t I I same kind. His policy would be known as a floating one, and in case of damage, he may recover on the stock on hand when the fire occurred, regardless of what stock was on hand when the policy was issued. Coinsurance. A coinsurance clause stipulates that, in re- turn for a reduced rate, the insured must insure his property lip to a certain percentage of its value, usually 80 per cent, and if he fails in so doing he must himself bear a proportion of any loss, thus making him ? coinsurer with the company of his own property. For instance, if his property were worth $10,000, an 80 per cent coinsurance clause would obligate him to carry insurance to the amount of $8,000. If he carried only $6,000 and a loss occurred, he would be paid only such a proportion of his loss as the insurance he carried bore to the amount he agreed to carry, in this case three-fourths. Therefore, if fire damaged his property to the extent of $4,000, he would receive only three- fourths of this amount, or $3,000. Reinsurance. For the better distribution of risks, a com- pany after writing a policy often insures itself for the whole or a part of the risk it has just insured. If then, the original insurer has to pay, the reinsurer is liable to the insurer for the amount paid, or for the proportionate part of it, as may have been agreed. The insurer may not reinsure for more than the original policy. The amount to be paid by the rein- surer is the amount the insurer has to pay, or a part of it, with one exception. If the reinsurer pays the claim of the insurer before the claim of the insured is settled, then it does not matter to the reinsurer what terms the insurer makes with the insured. If the insurer becomes insolvent, makes a final settlement and is discharged, he will receive from his reinsurer only what he paid. But when the insured has been paid off, then the other creditors can have no claim on what is due the insurer from the reinsurer unless the reinsurance has been taken into account in making the calculations of dividends under which the insured was paid. Notes: 1. In changing the location of personal property always be sure to take out a new policy. 2. In buying buildings of any kind, the first thing to do is to arrange for their insurance. 3. A person living in a house for which he is paying by instalments has an insurable interest in it. § 235. Warranties and False Representations False representations are misstatements made to the com- pany and its agents when applying for the policy, or after- wards as to any change in the condition of the property of which the company has a right to know. If such misstate- ments materially affect the policy they will render it void. Concealment is the suppression of any material facts which the insurer does not know or is not presumed to know. Such suppression may be of the fact at the time application is made or of some later change in the condition which the insurer ought to know. Any fact is material that might properly influence the insurer in taking or refusing the risk or that would affect the amount of the premium charged. Warranties are representations which are included in the policy. They may consist in answers to a schedule of questions which are attached to the policy and made a part of it. If any of the warranties are false the policy is of no value. Even an inaccurate statement made through an honest mistake, if it is made a part of the policy, renders it useless. Other Insurance. Misstatements as to other insurance where the policy is of the standard form will render it of no effect whether they are warranties or mere representations. I 376 INSURANCE Increasing the insurance on the property increases the tempta- tion to be careless or to have "accidental" fires, and the law is strict that the company must know of and consent to insurance on the property in any other company. Where a property is covered by policies in different companies, any one insurer is liable only for the proportion of the loss that his policy bears to the total amount of insurance. Notes: 1. Be very careful to make only the most accurate statements in answer to any schedule of questions to be filled out in making application for the policy. If these statements are wrong, and the schedule is attached to and made a part of the policy, your policy may be of no value. 2. To conceal matters material to the risk may avoid the policy. § 234. Settlement of Losses When a loss occurs the insured must at once notify the company and then make out an inventory of the damaged property, stating the value of each article separately. This in- ventory must be sworn to. The New York standard policy gives the company the option to require that it be confirmed by the certificate of a magistrate or of a notary public. In this inventory the insured must state if there are any other claims against the property; or, if it is partly owned by others, who they are and what is their interest in it, and what, to the best of his knowledge, was the cause of the fire. The company usually sends out an adjuster to investigate ' the loss. He must be shown all the damaged property and any papers relating to its value, or plans, specifications, etc., which would aid in determining the value of the property destroyed. The insured must be ready to submit to any ex- FIRE INSURANCE 277 aminations which the company may wish to make and to make any relevant affidavits it may require. If the insured and the company cannot agree on the amount necessary to cover the loss, the company and the insured each appoint one appraiser and the two go over the property and value it. They select an umpire who decides between them in case there is any dispute as to the proper valuation. Their decision settles the amount which the company is liable to pay. A mortgagee has the right to recover from the insurance company whatever is due him under the mortgage at the time of the damage, provided of course the face of the policy covers the amount due and that the policy bears the customary mort- gagee clause. This right, however, does not run with the land. That is, if the mortgagor sells the property subject to the mortgage, the buyer, who assumes the mortgage, may insure it without the mortgagee's having any interest in the policy. But if the buyer insures it, making the loss payable to the mortgagee, he may not revoke or cancel the insurance without the mortgagee's consent. In the same way, if a policy taken out by the owner, is made payable to the mortgagee as his interest may appear, his rights cannot be destroyed by any act of the owner. If the owner assumes to accept a settlement of a claim without the mortgagee's consent, he will not be bound by it. Options Which the Company May Exercise, Under the standard policy in New York, the company has the right to replace or repair the property instead of paying for the loss. Or it may take the property on paying the appraised value for it. If the property is capable of being repaired, the company pays only the amount which is adjudged necessary to restore it to its former condition. If the insured has any claims against persons other than the company for the value of the property, he must transfer them to the company when he is paid the amount adjudged i i! 278 INSURANCE FIRE INSURANCE proper to cover the loss, and the company may sue and collect on the other claims. Notes: 1. It is wiser to leave property in its damaged condition after a fire until the adjuster arrives. But if there is danger of its becoming more damaged by being left, it should be removed to a place of safety. The insured should take every precaution to keep the loss as low as possible. 2, Be sure to include everything in the inventory and to state its full value. It will be very difficult to prove any greater value afterwards. 279 9. What representations are material ? What is a concealment and when must it take place in order to avoid the policy? 10. An insurance company fails, and can pay but 6 per cent of its liabilities. Some of its risks are reinsured. Is the solvent reinsurer liable for the whole amount insured by it, or only for the amount which the bankrupt insurer pays? Answer fully and give reasons. Review Questions ii I. .2. What is a contract of insurance? Why must the person insuring have an interest in the property insured? Has a mortgagee an insurable interest? 3. What is the difference between an insurance broker and an insurance agent? 4. What is the distinction between an open and a valued policy ? 5. What occurrences may invalidate a policy? 6. What phrase is used if a mortgagee insures property? What will be the extent of the mortgagee's recovery if the mortgage had been reduced before the fire occurred? 7. A notice of the premium due is sent to the insured with no mention of a penalty for failure to pay. Does policy lapse if payment is tendered one month late and refused by the company ? & What is the meaning of an 80 per cent clause in a fire insurance contract or policy, and what would be the cash settlement by the insurance company in case the property insured inven- toried at the time of the fire $150,000 but was insured for only $100,000? What would be the settlement if the property insured inventoried only $75,000 but was insured for $100,000? I it LIFE INSURANCE 281 t CHAPTER XXXVIII LIFE INSURANCE §935. Nature of Contract Life insurance today is one of the most important busi- nesses in tlie country. Before the invention of the mortality tables the rates were high and the business was on too uncer- tain a basis to be widely utilized. With its present develop- ment it has become of the greatest value as a means of saving, investing, and protecting business. Its value as a protection against a dependent old age has caused governments through- out the world to become interested in it, different forms of old- age insurance being in use in various countries and among the state employees of Massachusetts. This form of insurance has been imder discussion for the past few years by the various state legislatures and commis- sions appointed for that purpose, but aside from Massachusetts has not actually come into being. The main objection, of course, to such insurance is that it will raise the taxes, and legislatures do not feel that the need is great enough to justify the increase of taxes at the present time. § a3 Dunham on Insurance, I, 298. 284 INSURANCE cause new members ceased joining and those re- maining could not pay the increased assessment. 3, To cheat the company by answering questions on an application blank falsely is useless. The policy will be worthless when the insurance is needed. a, § 339. Premium Rates The premium rates in life insurance are worked out by means of the mortality tables. These are tables based on an examination of statistics, giving the probable length of life at certain ages. Accordingly a yoimg person can take out in- surance at a smaller premium rate than a middle-aged person. The rate increases as one grows older and death becomes more imminent If these premiums are not paid when they are due the policy becomes forfeited; but the company must give notice to the person whose life is insured, or to the assignee if the policy has been assigned, and notice to him again each time a premium becomes due. The company may extend the time of payment or take a note for the amount. In fraternal insurance the members of the association are usually not charged premiums but are assessed on the basis of their interest in the common fund. Sometimes these assess- ments are made from time to time and a fund accumulated; more frequently they are made when some member dies and Ms family becomes entitled to the benefit. Note: I. It is much cheaper to take out insurance early in life. § 340. Agents Life insurance agents, as well as fire insurance agents, must procure a license from the state department in charge of in- LIFE INSURANCE 285 surance. In New York these licenses have to be renewed every year. (See Part IV on the general subject of agency.) § 241. Right to Change Beneficiary Unless there is a clause in the policy reserving the right to change the beneficiary, no change can be made without his consent in writing. The beneficiary has a vested right in the policy — one which he can himself transfer to someone else. In some states, even if he dies before the insured, the profits of the policy will go to the beneficiary's estate and no one else can be named. The beneficiary cannot be changed without his consent if the insured has taken out the policy under an agreement with him, or if the beneficiary has paid any of the premiums. The consent of the company must always be obtained to any change of beneficiary. This consent must be in writing. Note: I. The policy should always contain a clause permitting a change in the beneficiary. If such a change is not provided for, anyone taking the policy as se- curity must get the written consent of the bene- ficiary to the arrangement § 24a. Assignment of Policy A policy of life insurance belongs to the insured if he has taken it out and by its terms has the right to change the beneficiary, or to make his own estate the beneficiary. The beneficiary in such case has only a contingent in- terest, and has nothing he can assign to anyone else. If, however, under the terms of the policy the insured cannot change the beneficiary, then the beneficiary has a vested in- terest and he alone can assign it. The company must be notified of any assignment. a86 INSURANCE LIFE INSURANCE 2%^ § 243. Settlement of Losses When he makes his claim for the proceeds of the policy, the beneficiary must send with it a proof of death filled out on one of the company's forms and certified by a physician. Where there has been a change of beneficiaries or the policy has been used as security, there may be conflicting claims for the proceeds. If the various claimants can agree among themselves, the company will generally pay the loss to those who are admitted to be entitled to it, upon receiving releases from all the claimants. If there is a dispute which cannot be settled otherwise, it usually has to be decided in court The company will resist the payment of claims if there was any fraud in the procuring of the policy or if misrepresenta- tions as to the health of the insured come to its knowledge. In one case known to the writer, the beneficiary in the proof of death made a statement as to the age of the insured person which differed from that made in the policy. The company discovered that there had been a misrepresentation and re- sisted the payment of the claim. Suicide, unless committed within a year from the time the policy was taken out, does not generally excuse the company from payment. Many policies provide that if the insured is killed while engaged in the commission of crime or executed as a punishment for crime, the policy will not be payable. The death must be the result of the crime in order to render the policy void. Dying of apoplexy while attempting to hold up a train would not excuse payment. Notes: I. In order to make sure that the proceeds of a policy will go to the person whom the insured intends to benefit, without an expensive lawsuit, it is wisest, when making any change in a policy, to get a written release from any party who may be af- fected by the change, and keep it attached to the policy. 2. Under the New York law, creditors can collect all insurance over the amoimt a $500 a year premium will bring. § 244. Government Insurance for Soldiers and Sailors At the entrance of the United States into the Great War, the government announced, as a substitute for the pension system, a plan of insurance for officers and men of the army, navy and marine corps. Under this plan, the government undertook the costs of administration, and offered term in- surance on the monthly income plan. (See § 238.) The term extended from the beginning of the war to five years after the declaration of peace. By the monthly income plan is meant a system of paying the beneficiary, not a lump sum to be kept as capital, but a monthly sum to be used as income, payment to run in this case, for a period of twenty years. By this system a man taking out the maximum insurance of $10,000 would pay approximately $6.50 per month for it, the rate increasing slightly each year. In case of his death from any cause his beneficiary (who must be a relative) re- ceives $57-50 each month until 240 payments have been made). Within about six months after the armistice was signed, the government announced a plan of converting any of these term policies into one of six forms more closely resembling ordinary commercial insurance. The new forms offered pro- tection to ex-soldiers, sailors and marines for the remainder of their lives. Conversion may be made at any time within ^\t years after peace has been declared; if not made at all, the insurance simply stops. The six policies now offered holders of the original term insurance are: 1 1 288 INSURANCE LIFE INSURANCE 289 "t I. 2. 6. Ordinary life Twenty-payment life Thirty-payment life Twenty-year endowment Thirty-year endowment Endowment at age of sixty-two In all cases except where the policyholder lives to draw the endowment himself, the benefit is paid on tlie monthly income plan, payments covering twenty years. A disability clause is attached to all these policies, whereby if the policy- holder is totally and permanently disabled, the government waives premiums and pays him for the remainder of his life, the monthly income his beneficiary would have had. This deprives the beneficiary of any payments except where the insured dies before 240 payments are made to him. In such a case, the beneficiary receives a monthly income for the re- mainder of the twenty years. All matters relating to this subject are controlled by the Bureau of War Risk Insurance, Washington, D. C. In case the Bureau gives an adverse decision on any claim, appeal may be taken to the federal courts. 5. 6. 7- 8. afterwards his son wrote the office of the company in care of the president, and told him that his father was ill, and asked that the time be extended. The president wrote back that if he would pay the premiums within one week it would be all right. Williams died the following day, and before the week elapsed, the son came and tendered the premium, which the company declined to receive, and denied any liability on the policy. Is the company liable thereon? Give your reasons for your answer? Can the beneficiary be changed? When can the beneficiary assign his rights? Why did the government arrange to insure its soldiers and sailors ? Into what forms was this converted at the close of the war? I 1 I. a* Review Questions What is meant by an insurable interest in another person's life? What are the three methods of life insurance? Explain each. Explain the following classes of policies: Participation, non- forfeitable, whole life, limited payment life, endowment, and term. 4. One Williams had a life insurance policy in the American Life Insurance Company for $10,000. The policy provided that if the annual premium was not paid on the day it became due the policy should become void. Williams became ill and failed to pay the premium on the day it was due, and about a week SUNDRY INSURANCE CONTRACTS 291 l! CHAPTER XXXIX SUNDRY INSURANCE CONTRACTS § 245. Enumeration In addition to fire and life insurance, there are sundry other insurance contracts, such as marine, accident, health, group, liability, title, burglary, plate glass, automobile, boiler, burial, credit, fidelity, hail, live stock, rent, strike, and tornado. In all of these the policies call for certain representations which must be truthful ; and proofs of loss must be made out and, as a rule, sworn to, when payment of a loss is claimed. § 246. Marine Insurance This is the oldest form of insurance, older than either fire or life insurance. It originated in Lloyd's Coffee House in London, and the policy is known as Lloyd's. The policies were passed around among the dealers in insurance, and each took such share of any given risk as he cared to. These subscribers were called underwriters and in case of loss they were assessed in proportion to their subscriptions to pay the loss. The busi- ness is handled by regular incorporated companies today. Its object is to protect the insured against losses on a vessel at sea. Marine policies may also be taken out on ships traveling m any navigable waters. The policy covers losses by fire, various forms of ship- wreck including losses incurred in trying to avert shipwreck, and losses from piracy. The insured is by custom held to be in duty bound to give the insurer all information in his power with regard to the ship, the voyage, the cargo, or anything else that might affect the risk. If he conceals anything or 290 I. 2. 3. makes any false representations, the policy will not take effect. The person taking out marine insurance must fulfil the following requirements: He must have an insurable interest in the goods or vessel insured. He must warrant that the vessel is seaworthy. He must warrant that the goods insured were in good condition when taken on board. If any of these conditions are not met, the insurer will not be liable. In a marine policy, the amount payable in case of loss is fixed by the policy, and no attempt at valuation is made unless the loss is incomplete. Marine policies also cover what is known as general average. Proofs of loss, giving full particulars of the nature, amount, and cause of the damage must be made out and sworn to by the master and crew of the vessel ; and then an investiga- tion is made either by some government surveyor of the port, or by experts chosen by the parties to the contract. In the event of a dispute as to the amount of the damage, the damaged goods are sold at auction and the amount determined in that way. The insured must show bills of lading or other documents to prove his ownership of damaged goods, and the policy cannot be assigned without the underwriter's consent. In the American Lloyd's policies it is provided that if there is any prior insurance on the vessel the underwriters shall be liable only to the extent that the prior policies do not cover the loss. § 247. General and Particular Average From the eariiest times, it has been the custom, where goods were jettisoned (i.e., thrown overboard at sea to save the vessel), for the other owners of merchandise on board and iwusiuaiiiitiiittb aga INSURANCE SUNDRY INSURANCE CONTRACTS 293 III the owners of the vessel to contribute proportionately to make good the loss. This is called "general average." In calculating the assessment the owner of the lost goods is included; it follows that he is never reimbursed by general average for his full loss. The assessment is a lien against the goods until the entire amount is paid. The underwriter takes upon himself the responsibility of collecting this contribution. The term "particular average" is applied to the payment for partial loss. This refers to actual insurance on the particular thing or goods insured and is paid by an insurance company. The clause reads generally to this effect: "no partial loss or particular average shall in any case be paid, unless amounting to 5 per cent" Then if less than 5 per cent of the goods is completely lost, no claim at all can be made against the in- surance company; or if the whole cargo is damaged to a slight extent, no claim can be made. The term to indicate that a policy does not cover partial losses, is "free of particular average," often abbreviated to F. R A. The opposite term, indicating more complete insurance at a higher rate, is "with average" (W. A.) or "against all risks" (A. A. R.) Note: I. Anyone taking out a marine policy should be care- ful to note just what dangers it protects against, especially what provision it makes in case of war. In the Lloyd's policy it is necessary to make a special arrangement, as the ordinary policy ex- pressly releases the insurer from damages arising from the perils of war. . § 248. Accident Insurance Accident insurance is insurance against injury or death by accident. The policy may cover injury only, or it may also provide for a payment to a beneficiary in case of the death of the insured by any accident. The proceeds are payable to the person himself in case of injury. These policies do not cover mere illness, but such things as ivy poisoning, etc., which arc regarded as accidents, are included. Sometimes there is a dispute as to what constitutes an acci- dental injury. Thus, although infected water might be drunk through accident and serious illness result, one could not col* lect an indemnity; whereas one could collect on injuries due to inhaling gas, poison taken by mistake, etc. Many companies will not pay if the insured exposed him- self to unnecessary risk such as jumping on a moving street- car ; nor will they pay for injuries received while intoxicated, though in this regard there is sometimes great difficulty in deciding if a person's intoxication were such as to make him more liable to injury, and if it were not they would have to pay. All accident policies provide lump-sum indemnities for such injuries as the loss of a hand, etc. § 249. Health Insurance Some companies insure against sickness and ill health. Usually these policies name a list of diseases in event of which a weekly indemnity is granted. In some cases the health insurance is allowed only in conjunction with accident insur- ance. Some of the fraternal orders allow their members sick benefits which are the equivalent of health insurance. Practi- cal difficulties in administering the business of insuring against sickness have limited its development. A savings account is probably the best provision against ill health. §250. Group Insurance Group insurance is a plan to insure a number of the em- ployees of one employer offering an eligible group, without individual medical examination, under one blanket contract ill 294 INSURANCE SUNDRY INSURANCE CONTRACTS m issued to the employer. It is generally applied only to life insurance though the principle of insuring a group could logically be applied to accident and health insurance at least. The premiums for this insurance are paid monthly by the employer and the insurance is payable to the beneficiary named by the employee. Ordinarily the basis of insurance is one year's salary with a maximum of $3,000 to any individual. Any employee receiving annual remuneration in excess of that sum would receive only $3,000 insurance. If it is desired by the employer, the insurance company will settle the insurance benefits in twelve monthly payments. This would amount to a continuance of the pay check for a full year in the event of death while in service— during which time the beneficiaries would be able to adjust themselves to the changed conditions caused by the death of the breadwinner. The operation of the plan is simple. New incoming em- employees are automatically included upon passing a simple health test and the insurance by the employer on outgoing employees ceases upon termination of service. The cost depends on the age and annual wage of each employee. It would be approximately ij4 per cent to i J^ per cent of the annual pay-roll. § 351. Liability Insurance Liability insurance is to protect the employer from liabili- ties arising under the Employers* Liability or Workmen's Com- pensation Acts. (See §§ 279, 280.) In many states it is possible to take out this form of insurance with a state fund. There is also automobile liability insurance, which covers lia- bility for injuries to others resulting from the use of the auto- * mobile. Railroad companies may take out insurance (carriers' liability insurance) to protect them against liability to pas- sengers and others, for injuries arising from railroad acci- dents. 29s § 352. Title Insurance In order to protect purchasers of real estate against the expense of lawsuits arising from possible defects in the title to the property, a business of investigating and insuring the title has grown up. Title insurance companies generally fur- nish both title searches and insurance. As with most other insurance of this nature, the company generally settles the claim or defends the suit on notice from the insured that he has been served with a notice of suit § 253. Burglary Insurance This is one form of what is known as casualty insurance, that is, insurance against accidents to property of various kinds other than loss by fire. It is, as the name implies, insurance against loss of property by theft. It applies only when the theft is committed by someone breaking into the house or building where the property is kept, unless the policy states otherwise. It would not cover having one's pocket picked. § 254. Plate Glass Insurance This is insurance on large plate glass windows because of the great expense of replacing them. It also is a form of casualty insurance. Where the windows are injured in a fire, if there is any insurance other than the glass insurance policy on them or on the building, only an amount proportioned to the relation of that policy to the whole amount of insurance on the building can be collected on the plate glass insurance policy. § 255. Automobile Insurance Many companies offer automobile insurance. What is known as a full cover on an automobile includes insurance against the hazards of: 296 INSURANCE SUNDRY INSURANCE CONTRACTS 297 m m ii|i 1. Fire or explosion. 2. Transportation, i.e., derailment and coUisioa 3. Theft. 4. Damage by fire to personal effects carried upon the car. 5. Damage to other property by being in coUision with the automobile insured— known as property dam- age. 6. Damage to the automobile insured by being in col- lision with some other object 7. Loss of life or injury to the occupants of the car and legal liability for expenses in connection therewith. 8. Loss of life or injury to others and legal liability for expenses in connection therewith. The rates are high to compensate for the very considerable risks. What is known as the "moral hazard," i.e., the risk of unfair dealing by owners, is great, and hard to guard against. The enumeration of hazards shows the varied possibilities of loss and damage. § asC. Other Forms of Insurance BoUer Insurance. This is insurance against injuries to property arising from boiler explosions, another form of casualty insurance. A fire insurance policy does not cover such a loss unless the explosion resulted from a fire. BurUU Insurance. This form of insurance is in operation among the very poor. In return for certain weekly or monthly payments, the company guarantees to pay the expenses of a decent burial. Credit Insurance. Credit insurance is insurance against *the dishonesty or the insolvency of debtors. Fidelity Insurance. Fidelity insurance is insurance against losses arising from fraud or dishonesty on the part of agents or employees. There are three forms of fidelity bonds: first. the larceny or embezzlement bond; second, the culpable neg- ligence bond ; and third, the faithful performance bond. The last is the most comprehensive and the most costly. Hail Insurance. This is common in the grain states, where the farmers often suffer heavy loss because of the damage hail- storms do their crops. Live Stock Insurance. Blooded animals are so valuable that their owners find it necessary to protect themselves against loss by carrying insurance against disease or death. Rent Insurance. This is insurance for the loss of rents owing to the failure of tenants to pay rent, or to a destruction of the property by fire or some other calamity. Strike Insurance. An employer can even insure himself against strikes on the part of his employees, and the consequent losses. Tornado Insurance. As its name indicates, this is insur- ance against damages and loss of property arising from tor- nadoes. Review Questions 1. What three requirements are essential to the contract of marine insurance ? 2. Has a stockholder an insurable interest in a steamboat owned but not insured by the corporation? 3. What is "general average"? 4. What is "particular average"? 5. What risks are usually covered by an accident insurance policy? 6. What is group insurance? 7. What is the usual purpose of liability insurance? Who takes out the policy? 8. What is title insurance? 9. What does the owner of an automobile want insurance against? 10. Who takes out fidelity insurance? What is the simplest form? Under this form could the holder of the policy recover if his employee lost the money ? Wit n\ - i ill i! Hi nil 4il!l «lll ill f : fill PART VII EMPLOYMENT ill r, I CHAPTER XL THE CONTRACT OF EMPLOYMENT* § 257. Introduction The contract of employment is perhaps the one which most concerns the ordinary man in his every-day affairs. All the relations between employers and employees are governed by contract and the laws regulating the subject. In recent years, these laws have undergone almost a revolution ; and they are still being rapidly changed to meet the modern ideas of what such relationships should be, and the new sense of the obliga- tions which the employer owes to those under him. It is most important for everyone to know exactly what these changes in the law are, and how they may affect him individually. The Federal Employers' Liability Act, which defines the rights of all employees engaged in the business of interstate commerce, has been followed in many of the states by acts of like tenor ; and various efforts have been made to introduce some of the schemes for workmen's compensation and old-age pensions from abroad. Both of these plans have already been adopted in some of the states ; and, it would appear from the trend of modem legislation, they are likely in the near future to be enacted into some form of law in most states of the Union. Too much importance cannot therefore be given to the con- tents of this particular chapter. For this reason the subject of the relations of employer and employee has been treated with some fulness of detail. *FoT forms of contract of employment, see Chapter CIV, Forms 46, 49. SOI 302 EMPLOYMENT THE CONTRACT OF EMPLOYMENT 303 III IHll' ! 35a Definitton A contract of employment is a contract for the performance of services, by the terms of which the employer is to direct how tibe work IS to be done and what results are to be accomplished. This personal direction by the employer is the essential fea- ture. A contract with a tailor for a suit of clothes is not a contract of employment because it lacks the element of per- sonal supervision. In the older law books the subject of this part of the book was treated under the head of "Master and Servant " It is far from modem habits of thought and speech to consider a member ol a labor union or the auditor of a corporation as a servant. Hence, the obsolete terms are not used in this work. § 359. What Constitiites a Contract of Employment There must be an agreement by competent parties. One party agrees to perform services for the other. There must be a consideration. One party gives his services in return for the payment of wages or salary by the other party. The con- tract may be expressed or implied. If a man does any work for another on request, the law wiU usually imply a contract to pay a reasonable compensation. If services are rendered for another with his knowledge and acquiescence, a contract is usually implied. A contract to do work on shares is an agreement by one party to perform some labor, such as raising a crop for a share m the crop. For instance, a man may agree to cu't grass for a land owner for half the grass. Such contracts are com- mon in farming communities. The fact that the wages arc paid otherwise than in money does not alter the relationship As has been stated (§ 258), the peculiar and distinguishing element of the contract of employment is that the party for whom the services are to be performed has the right to direct the other party in what he is to do. A contract to build a house where the builder merely agrees to construct a house according to certain plans to be furnished by an architect and to the satisfaction of the person for whom he is building it, is not a contract of employment. But where a man agrees to do the manual work of building the house under another's orders as to how it shall be done, he is that other man's employee. The essential element of the relation of employer and employee is the right of the employer to give orders to and direct the employee in the performance of his work. Most of the work on public buildings, roads, canals, etc., is done by letting the entire contract to a contractor who in turn lets out parts of it to subcontractors. The question of the liability of the main contractor to the employees of his sub- contractors rests on this principle. If the employees are taking orders from his foremen, the chief contractor is liable to them as he would be to his own employees (see § 271 ). If the sub- contractors are to do their own directing and give the orders to their own men, being responsible to the main contractor only for the finished results of the work, then he is not liable to their workmen any more than he would be to outsiders. §260. Independent Contractors Independent contractors are not employees. An inde- pendent contractor is a man who engages with another to hand over to him in completed form some particular piece of work, and to receive a certain sum of money for doing it. In build- ing, the excavating, the mason work, the plumbing, and the painting are usually undertaken by such independent con- tractors. Where a contractor merely engages to do a piece of work for another and retains the right to direct its doing himself through his own foremen, his employees do not ordinarily stand in the relation of employees to the person with whom he 304 EMPLOYMENT has contracted. Sometimes, however, the law says they shall Most of the state enactments as to employers' liability and ^Ws compensation give employees'o/independ nT i:. toactors the same nghts against the principal contractor that his own workmen have. ""tractor mat § 36i. Interpretation of Contract U.h^t Tjf u ^ ""P'°y™^»t is to be interpreted in the Ihe same rules that apply to contracts in general govern this type of contract. (See 8 40 ) In raeo th» „ • • indpfin.f. ♦!,- „ .• ^ ^y--' ^" *^ase the provisions are indefinite, the question as to when it will be understood to begin and to end is answered in § § 265. 266 ^^"^^"^ ^ Any weU-recognized customs in the particular trade or busmess to which the contract under coLderatL 'eiateT sudi as a custom of paying a certain percentage as omm s on o msurance agents, etc.. wiU be considered in seekTng to Sd the meaning of the contract. ^ ° *"* §262 An Express Contract Camiot Be Proved by Custom it UnT""^''! '° ^r' ^ "P*"^'^ ~"t'^<=t of employment fs SiL S m^ir'' '" ""^"^ ^"^^'^ ''''''''''■ The house is entifled to make a separate contract with every emolovee- the duties and rights of each employee are regdl^ted Jv S contact without regard to dealings with otSerXtyeef For instance, m an Alabama case, an employee dafmed that there was a custom in the firm to engage emDlov!«K .? THE CONTRACT OF EMPLOYMENT 305 Sometimes provisions may be read into a contract from customs which are universally known in the line of business in which the contract of employment was made. For instance, if there was a universal custom to pay employees by the week, the court might find from the testimony that both parties had it in mind at the time of the making of the contract. In order to prove this to be the fact, however, the custom must be so universal that everybody in the business ought to know of it, and either party may prove that they expressly agreed other- wise. Note: I. In making a contract, it is not safe to rely on custom. All provisions of the contract should be stated expressly. § 263. Wages Wages are payable by the day, the week, or the month where the contract expressly provides that they shall be, or where it is the custom to pay in that way, so that the parties might be supposed to have intended to make it part of their agreement. If there were no such custom and the contract said nothing about it, the employee would not be entitled to his wages until the end of the entire period for which the contract was to run. The custom of paying wages at short periods, by the week or month for example, is pretty well established. If the parties desire to arrange otherwise, it should be so stated in the con- tract. § 264. Modification of Contract The contract of employment, like every other contract, may be altered by the consent of all the parties to it. The question of whether there must be consideration or not, or what con- 3o6 EMPLOYMENT stitutes consideration for the new contract, has already been taken up under the subject of contracts in ge;eral. ( S^g ^ § »65. When Contract Begins Where the contract does not state when it is to berin it k^eSr for r^ ' il"*" '' ""P'^y"' t° »« as book- bSitrsSf ° '"^" "^ "°'' °' ^'^^ •^'^ -^^'^ -tU the Nate: I. Both parties should see that the time when the em- ployment is to begin is made part of the contract. § a66. Tennination of Contract end. t w II end when either party desires to terminate it If a definite time is fixed for the payment of wages, snh as a SiJ^ y; ' "'f ' "^^ ^^"^^^^^ ^*» ^-^ ^- -t least that penod of time, and camiot be terminated before If the Z^^rr -t^ "^^ ^''^' '"""^' ^'^ y^^^' ^^ cannot be ter. mmated by either party except at the termination of such a penod. If the employer discharges the employee (excS for good cause before the end of such a perioS, he w U SuaWe for the employee's wages until the end of the period felt lu^l """^^r"" ^"''^"' ^" "^^ P^"^' ^' ^i"' strictly, for. feit all claim for compensation. Some courts allow in such SrJvHf" ^"'"^^t^^'PWee can show for his services, less any damage caused by his leaving before his time was up * Notes: I. A defmite understanding as to the duration of the employment is better for both employer and em- THE CONTRACT OF EMPLOYMENT 307 ployee. It will avoid unpleasant disputes and may save a lawsuit. 2. Both employer and employee should act fairly about terminating the employment. To leave without notice at end of period or to discharge without notice at end of period is in most cases unfair. §267. Termination of Contract by Breach A contract of employment may end either when it is com- pleted, or when it is broken by either of the parties to it. What the Employee May Do. On the part of the em- ployee, the contract may be broken either by leaving the employment or by doing something which would justify his employer in discharging him — by acts of disobedience or insub- ordination, or by acting contrary to his employer's interests. The disobedience or insubordination must be such as will prevent the employer from being able to rely on the employee to do good work. And the employee is under no obligation to obey an order to do anything not called for by his contract. A department store owner discharged the head of his dress- making department because she refused to obey his orders to perform the work of a seamstress. The court held the discharge a breach of contract. Either incompetence or habitual drunkenness constitutes a breach of the contract. The employee undertakes to be only reasonably competent, however, and he cannot be dis- charged for not being an expert, unless there is some express understanding calling for a specified degree of skill. An illness of the employee which keeps him from work also puts an end to the contract, though it may hardly be re- garded as a breach. What the Employer May Do. The employer may break the contract either by discharging the employee without justi- fication, or by rendering the work in some way unsafe to his 1^, 3o8 EMPLOYMENT THE CONTRACT OF EMPLOYMENT 309 I ' health. h.s hfe. or his morals. Or he may break it by re- qmnng the employee to work for less wages Aan we agre^ upon or to perform different services. He can make noni of these requirements without the employee's consent lations'^nr'' ^^TP'^y^*^"* is one involving personal re- partTe TheTr ^. r^^ '^ "*^^ °^ the contracting part.es. Therefore, ,f the employer sells out his business to other parues. h.s employees cannot be compelled to work fo^ a Lrcr-f "^ r'°^^^ ''''- ^ p^^*-- -"^o- far Z th?; , ' "" ^'°"''' incorporated, the result, so in^In'orh-7ff ^ or insolvency of the employer or the wind- mg up of h,s affairs by a public officer, as in the case of a ilr.'".^"'"''"" '"'"P""^ '" ^S*^ °f »«>Ivency. puts an end to the contract. ^ will?.'. W.*^* f 7"'°^"' ''^ "° ^^'•'^ fo"- «n employee wdl not justify a discharge before the end of the contract Notes: 1. In selling out a business, or changing the nature of a business, an announcement of the new arran^e- ment should always be made to the employees. 2. Remainmg m the employment with knowledge of the change amounts to an acceptance of the new arrangement. §a68. Rights and Remedies In any case, except where the employee has been guilty o actua disloyalty to his employer by engaging in compel mion wuh him, or has offered physical violence to his emt whfrh .'' Tf '" '^' ^'^'^' '"^'^y^ ^' commissions which he has already earned, and, if a bonus has been de- dared, he is entitled to that too. This is true whether the breach of the contract is due to his own action or to that of his employer. (See also § 273.) Employee's Rights to Damages. Where the employer is guilty of a breach of the contract, the employee is entitled to damages. He may sue at once and collect what is already due him, or he may wait until the contract period is over and then sue for the total damages he has sustained. It is his duty to try to obtain other employment, and the damages which he may recover are limited to the difference between the wages he would have received and any sums which he has been able to earn since. Where the wages or salary are to be paid at stated periods, the courts in some states allow the employee to sue at the end of each period for the amount then due him ; as for instance, where the wages are payable by the month, at the end of each month. In other states the employee may bring only one action, and if he sues before the end of the contract period he may recover only such damages as he has suffered up to that time, and will have no further remedy. Where a contract of employment provides for notice on both sides, the employer must give the required notice or pay the employee wages for the period of notice before discharg- ing him; and if he fails to do this the employee is entitled to recover this amount as damages. Employer's Grounds for Damages. If the employee breaks the contract, the employer is entitled to recover any damages he can prove. He must prove that it is impossible for him to procure anyone to do the work in the employee's place. He cannot recover any damages if the employee leaves his em- ployment because of illness. He will be entitled to retain wages equal to the amount of notice the employee is required to give, only in case there was such a provision in the contract. Interfering Between an Employer and Employee. If a third person, knowing that a workman is employed by another 3IO EMPLOYMENT l^™'" and that the term of his employment is not over induces an employee to leave his employer before the clm;act of e^ Ployment has expired the third person is responsibe toX ^P^oyer m damages should he have acted with full knowkd^e of the circumstances. Knowieage with"hfm*ifter'Tt-"'^Tu'" ""^'^^^ *° '"^'^ « ^^n^^ct r„ th. , . ^^ °^ •"' '""^-^^ ^'th Ws employer is fL f