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COMMERCIAL LAW
[Illustration]
American Institute of Banking
Section American Bankers Association
110 East 42 Street New York City
Copyright, 1921
by
American Institute of Banking
PREFACE
The Institute standard course of study in "Commercial Law" is not
intended to make lawyers, but simply to impart to bankers sufficient
knowledge of law to enable them to act in accordance with established
legal principles, and refer doubtful questions to a lawyer. It is not
usurping the functions of a lawyer for a banker to know his legal rights
and responsibilities. The banker who does not appreciate the importance
of this knowledge, eventually learns from experience, sad or otherwise,
that he has neglected an important part of the training necessary to
carry on his business with safety and confidence. This text-book is
based on the splendid work, originally prepared for the Institute, by
Samuel Williston, Weld Professor of Law in Harvard Law School. To this
original matter, however, much new material has been added, cases have
been cited, and new chapters on Master and Servant, Estates and Trusts,
Bills and Notes, and Torts and Crimes added. The work of preparing
"Commercial Law" has been done jointly by Richard D. Currier, President
of the New Jersey Law School, and Richard W. Hill, member of the New
York Bar and Secretary of the American Institute of Banking. The main
purpose of this book is to teach bankers to recognize the danger signals
in law, when they appear, and thus be able to distinguish between law
and law suits.
INSTITUTE PLATFORM
Resolution adopted at the New Orleans Convention of the American
Institute of Banking, October 9, 1919:
"Ours is an educational association organized for the benefit of the
banking fraternity of the country and within our membership may be found
on an equal basis both employees and employers; and in full appreciation
of the opportunities which our country and its established institutions
afford, and especially in appreciation of the fact that the profession
of banking affords to its diligent and loyal members especial
opportunities for promotion to official and managerial positions, and
that as a result of the establishment and maintenance of the merit
system in most banks a large number of Institute members have through
individual application achieved marked professional success, we at all
times and under all circumstances stand for the merit system and for the
paying of salaries according to the value of the service rendered.
"We believe in the equitable cooperation of employees and employers and
are opposed to all attempts to limit individual initiative and curtail
production, and, insofar as our profession is concerned, are unalterably
opposed to any plan purporting to promote the material welfare of our
members, individually or collectively, on any other basis than that of
efficiency, loyalty and unadulterated Americanism."
CONTENTS
Chapter Page
Introduction 7
I. Contracts--Mutual Assent 24
II. Contracts--Consideration and Enforceability 57
III. Contracts--Performance and Termination 86
IV. Principal and Agent; Master and Servant 121
V. Partnerships 163
VI. Corporations 192
VII. Transfer of Stock 238
VIII. Personal Property 258
IX. Real Property 298
X. Estates and Trusts 321
XI. Carriers and Warehousemen 344
XII. Bills and Notes 378
XIII. Torts and Crimes 405
XIV. Miscellaneous 425
WHO IS A BANKER?
A successful banker is composed of about one-fifth accountant,
two-fifths lawyer, three-fifths political economist, and
four-fifths gentleman and scholar--total ten-fifths--double
size. Any smaller person may be a pawnbroker or a promoter, but
not a banker.--George E. Allen.
Commercial Law
INTRODUCTION
DEFINITION OF LAW.--The term "law" is used in many ways. We speak of
moral law, law of gravity, divine law, and the like. In each case we are
making proper use of the term, but in no instance are we using it as
we shall use it in this book. To illustrate: You find a beggar on your
front porch when entering your house late at night. Suppose he should
ask you for food and lodging for the night. Although there is no other
house within five miles of your home, you refuse to take him in, or do
anything for him. As a result he contracts pneumonia from exposure,
because he is not able to proceed further. You would, nevertheless,
not be liable in the sense in which we are using the term "law." But,
you say, in an extreme case of this kind, it is one's duty to act. We
grant it, but to be accurate, you must preface your proposition with
the statement, "under the moral law" or "under divine law it is one's
duty to act in such a case." However much it is to be regretted that
moral or divine law sometimes does not harmonize with "law" as we shall
treat it, we must, nevertheless, recognize that fact. Law, as viewed by
the jurist, and this is the way we, as students, are to consider it, is
defined by Blackstone to be "A rule of civil conduct prescribed by the
supreme power in the State, commanding what is right, and prohibiting
what is wrong." Referring again to our illustration, is it not easy to
see that it would be impracticable in the present condition of society
for the legislature of California, for example, to pass a law which
should, in that State, constitute "a rule of civil conduct" commanding
that every one "shall be his brother's keeper" and for a violation
thereof "shall be imprisoned for one year, or fined one thousand
dollars, or both." However much we recognize the obligation of moral
law, jurists and legislators cannot ignore the fact that society is
composed of ordinary human beings, still far from perfection. Assuming,
although perhaps it is doubtful, that it is within the power of the
legislature of California to pass such an act as has been suggested,
there are not courts enough in the whole United States to decide the
cases which would arise in New York City alone in attempting to apply
the provisions of such an act. On second thought, then, it is not such
a startling proposition for us to learn that "law" is not synonymous
with the same term when used in referring to natural law, moral law, and
the like. Much has been written on the essential nature of "law" as we
shall use the term. The time-honored definition of Blackstone, which we
have quoted, is confessedly imperfect. The last clause, "commanding what
is RIGHT, and prohibiting what is WRONG" has been much criticized, and
Mr. Chitty has modified it to "commanding what shall be done, and what
shall not be done." To-day, to attempt to buy a bottle of light wine at
a hotel does not seem to many of us intrinsically WRONG, but legally,
under existing laws, it is, and so perhaps Mr. Chitty's modification of
Blackstone's definition does bring out the correct idea more clearly.
For our purpose, these two definitions are sufficient.
THE SYSTEMS OF LAW.--There are two chief systems of law in use among
civilized peoples to-day, the Roman or civil law, and, the English or
common law. The Roman, or civil law (Roman law is spoken of as civil
law, from the Latin "civilis," belonging to a citizen) as its name
implies, originated in Rome. As the city of Rome developed into the
Roman Empire, its law became that of the ancient world. It was finally
codified by the Roman Emperor Justinian, in the year 530 A.D., and was
eventually absorbed, from the twelfth to the eighteenth century, into
the law of modern Europe. It is the basis of the systems of law used in
the countries of continental Europe, Central and South America, and all
French, Spanish, Portuguese, and Dutch colonies or countries settled by
those peoples.
COMMON LAW.--The common law had its roots in the customary law of the
Germanic peoples of western Europe, and was developed by the English
courts from the thirteenth to the nineteenth centuries. Like the Roman
law, it has spread all over the world wherever English-speaking peoples
have settled, and founded colonies. The common law now prevails in
England, Canada (except Quebec), India, except over Hindus and
Mohammedans in certain instances, and the principal British colonies,
except those in South Africa. The United States is largely an English
settlement, hence the common law prevails with us, except in the State
of Louisiana, where the influence of the French and Spanish settlements
still remains and makes the basis of the Louisiana law the Roman law,
and in the Philippines and Porto Rico, where the law was Roman when we
took those possessions from Spain in 1898.
THE SOURCE OF LAW.--Where does this rule of civil conduct we are to
study come from? At first blush, the superficial observer might suggest
some legislative hall where it is created by a legislative body, a
perfect product, to be imposed on men and women as the guide in their
every act in civil life. The slightest reference to historical
jurisprudence will convince us that this is not the true source of the
law. Mr. Justice Holmes of the United States Supreme Court, in his
classic, "The Common Law," indicates the real source of law when he
observes: "The life of the law has not been logic; it has been
experience. The felt necessities of the time, the prevalent moral and
political theories, intuitions of public policy, avowed or unconscious,
even the prejudices which judges share with their fellow-men, have had a
good deal more to do than the syllogism in determining the rules by
which men should be governed. The law embodies the story of a nation's
development through many centuries, and it cannot be dealt with as if it
contained only the axioms and corollaries of a book of mathematics. In
order to know what it is, we must know what it has been, and what it
tends to become. We must alternately consult history and existing
theories of legislation. But the most difficult labor will be to
understand the combination of the two into new products at every stage.
The substance of the law at any given time pretty nearly corresponds, so
far as it goes, with what is then understood to be convenient; but its
form and machinery, and the degree to which it is able to work out
desired results, depend very much upon its past."
WHERE TO LOOK FOR LAW.--Knowing the source of law does not necessarily
tell us where to look for the law. To-day, in the United States, we have
three primary sources to which the lawyer goes to seek the law on any
particular point. First, the Constitution of the United States and the
Constitution of the State in which he is to ascertain the law, including
the statutes which have been enacted by Congress and by the State
legislature under those constitutions. Second, the decisions of the
courts, particularly those of the United States courts and of the State
where he wishes to learn the law, and, if need be, the decisions of
other States. Third, text-books and treatises on the branch of law to be
investigated.
ILLUSTRATION.--Let us suppose you wish to ascertain the law concerning a
question that comes up in your own daily life. Take two problems. First:
We will assume you keep a clothing store, and an infant, twenty years
old, purchases a suit of winter clothes. His income is $1000 per year.
He already has two perfectly good winter suits. A week after purchasing
this suit, he returns it and demands his money back. You wish to know
whether you have to give it to him. If you should look in the
Constitution of the United States, or of the State of Vermont (assuming
this to be a Vermont contract), you would find nothing that would give
you any help in answering this question. If you should look through all
of the acts of Congress and the laws passed by the legislature of the
State of Vermont, you would find nothing to give you any help. If,
however, you should look in the decisions of the courts, both of the
United States and of the State of Vermont, you would find cases,
probably many of them, covering this particular situation, and you would
find the rule to be laid down as law, that an infant (and by an infant
we mean anyone under twenty-one years) is not liable on his contracts,
except for necessities, and then only in a quasi-contractual action for
their reasonable value. Applying the law to the problem, you would be
obliged to admit the legality of the infant's claim, and if you did not
refund the money to him, he would be entitled to sue for it in a court.
Three winter suits are clearly not necessaries at one time for an infant
with an income no greater than $1000 per year. This is a comparatively
simple problem. Now let us take another case somewhat more difficult.
You live in New Jersey near the plant of an airplane manufacturing
company. Machines are constantly being tried out, and they circle over
your premises within four or five hundred feet from the ground. You have
several children who are using your back yard as a playground and you
are much alarmed, fearing that an airplane may fall in the yard and kill
or injure a child. You wish to ascertain your rights. You look in the
Constitution of the United States, and of the State of New Jersey. You
will find nothing in either about airplanes. You look in the acts of
Congress and the laws of the legislature of the State of New Jersey. You
will find nothing there to help you. You look in the decisions of the
courts, both of the United States and of the State of New Jersey. You
will find nothing there. You look in the text-books, and, except in the
most recent, in all probability you will find nothing there in regard to
airplanes. You may search the recent legal publications and you will
find articles discussing in a purely theoretical way this interesting
topic. You study recent legislation and you will find stray instances of
attempts to deal with aerial matters. For example, Connecticut has a
statute on airplanes. In fact, your whole search will be most
interesting. All you will find, however, is not law in New Jersey, but
is simply theory, based on common law principles or statutes having no
force in New Jersey. Should you then conclude that you have no rights,
that the law cannot help you? Perhaps not. If you turn to treatises
relating to the ownership of land as developed in the English common law
and as applied by the courts in the United States, you will find that
the word "land" is often used as practically synonymous with realty or
ground or soil, and you will also find that it includes everything
attached to the realty or growing on it. As is commonly said, land has
an indefinite extent upward as well as downward, the old books using the
Latin maxim: "Cuius est solum, eius est usque ad coelum usque ad orcum."
(To whomsoever the soil belongs, he owns also to the sky and to the
depths.)
There are three houses in a row on Smith Street, Nos. 1, 3 and 5. Mary
Jones lives in No. 1, and Sarah Green in No. 5. They are friends, and
accordingly arrange to stretch their clotheslines from their rear
second-story windows across the back yard of No. 3. Under common law
principles, this is a trespass upon No. 3. Should Mary Jones and Sarah
Green continue to do this for the required time, usually twenty years,
they would acquire by prescription a permanent right to stretch
clotheslines over lot No. 3. When the owner of lot No. 3 wished to erect
a ten-story building covering all of his lot, he would be seriously
interfered with by the right acquired by his two adjoining neighbors. He
could have protected himself by proper action in a court when the
offense was first committed. Could not, therefore, the court take this
principle of the common law as to the ownership of land and apply it to
the airplane case? If the owner of lot No. 3 could prevent the owners of
lots Nos. 1 and 5 from stretching clotheslines across his land, could
you not prevent the airplane from crossing your land, although it is
five hundred feet above the surface of the soil? Twenty years'
continuation of that practice would interfere with your ability to build
a Woolworth building twenty-five years from now should you desire to do
so. It is simply taking an old principle of law recognized for
centuries, and applying it to new conditions. This is what we mean when
we say that the principles of common law are capable of indefinite
expansion; that the common law is always growing, or, as Mr. Justice
Holmes puts it, it is the product of "the felt necessities of the
time." As soon, however, as you have secured an injunction from the
court preventing the airplane factory from practicing its machines over
your land, all of the other property owners in the neighborhood of the
factory decide to protect their rights, with the result that no airplane
can leave the factory through the air. Does this mean that the airplane
factory must move, and probably be subjected to the same annoyances in
its new location in a short time? We are coming to realize that
airplanes are necessities. When a necessity and a principle of law
cannot exist side by side, something must be done to remedy an
intolerable situation. The illustration here used presents what in the
course of a few years, undoubtedly, will become an intolerable
situation, unless remedied in some way. It has been suggested that we
must modify our principles of the ownership of land, and give airplanes
the right of free passage over the land of any person, when a certain
distance in the air, far enough up to cause no great amount of danger or
annoyance. Such a change in the law would have to be accomplished by the
State legislature or by an act of Congress for such territory as
Congress has jurisdiction over. No doubt, legislation along such lines
may be expected soon. It will be simply a repetition of a situation
created by a leading case in New York in 1902.
In Roberson v. The Rochester Folding Box Company, 171 New York 538, the
suit was brought on behalf of a living person, a young lady, to restrain
a flour company from putting her likeness upon prints advertising its
flour. Mr. Justice Parker, writing the opinion of the court, held that
there was no principle of law which would authorize the court to issue
an injunction restraining this unauthorized use of a photograph. This
created the unfortunate situation in the State of New York of allowing
anyone to make use of another's photograph without that person's
consent, for advertising or other purposes. The court, in its opinion,
admitted the unfortunateness of the situation, observing that "The
legislative body could very well interfere and arbitrarily provide that
no one should be permitted for his own selfish purpose to use the
picture or the name of another for advertising purposes without his
consent. In such event no embarrassment would result to the general body
of the law, for the rule would be applicable only to cases provided for
by statute. The courts however, being without authority to legislate,
are required to decide cases upon principle, and so are necessarily
embarrassed by precedents created by an extreme, and therefore
unjustifiable application of an old principle. The court below properly
said that: 'While it may be true that the fact that no precedent can be
found to sustain an action in any given case is cogent evidence that a
principle does not exist upon which the right may be based, it is not
the rule that the want of a precedent is a sufficient reason for turning
the plaintiff out of court,' provided (I think should be added)," Mr.
Justice Parker continues, "there can be found a clear and unequivocal
principle of the common law, which either directly or mediately governs
it, or which, by analogy or parity of reasoning, ought to govern it."
Relief was denied the young lady. The following session of the
legislature corrected the evil by passing a law making it a criminal
offense to use another's photograph without that person's consent. This
has been a long illustration. It has served its purpose best if it has
left the very distinct impression that the law is a vital, living,
growing thing. True, its roots are in the dim past, but it lives, and
moves, and has its being in the problems of to-day. In no field of law is
this more true than in our subject, Commercial Law.
WHO KNOWS THE LAW.--The layman is frequently of the opinion that a
lawyer ought to be able to give him a definite answer as to just what
the law is in a given set of facts. Why is it not possible to go to the
sources which we have been discussing and from them ascertain definitely
what the law is in a given case? Frequently the lawyer can do this, but
one should not lose respect for the lawyer because he is not, in many
cases, willing to give a definite answer, but may frame his reply in an
opinion beginning "It would seem that the law in this case would be,
etc.--" We have already suggested some of the difficulties that in part
answer the question we now ask. Let us take one more illustration, a
striking example from the United States Supreme Court. Few would
question the statement that that Court is the highest type of judicial
body in the world to-day. We are familiar with the rent profiteering
legislation enacted in the District of Columbia, New York and at least
five other States, as a result of the house shortage created by the
world war. The United States Supreme Court, in the cases of Block v.
Hirsh, 254 U.S. 531 and Marcus Brown Holding Co. v. Feldman et al., 254
U.S. 539, held the New York and the District of Columbia rent
profiteering laws to be constitutional, but this decision is by a vote
of five to four, and the arguments advanced in the two opinions, one by
Mr. Justice Holmes, representing the majority of the court, and the
other by Mr. Justice McKenna, are striking examples of how strongly the
ablest body of jurists in the United States can differ on a legal
question. Speaking for the majority in Block v. Hirsh, Mr. Justice
Holmes says: "The main point against the law is that tenants are allowed
to remain in possession at the same rent that they have been paying,
unless modified by the commission established by the act, and that thus
the use of the land and the right of the owner to do what he will with
his own and to make what contracts he pleases are cut down. But if the
public interest be established, the regulation of rates is one of the
first forms in which it is asserted, and the validity of such regulation
has been settled since Munn v. Illinois, 94 U.S. 113. It is said that a
grain elevator may go out of business, whereas here the use is fastened
upon the land. The power to go out of business, when it exists, is an
illusory answer to gas companies and waterworks, but we need not stop at
that. The regulation is put and justified only as a temporary measure.
* * * A limit in time, to tide over a passing trouble, well may justify a
law that could not be upheld as a permanent change." In the case of
Marcus Brown Holding Co. v. Feldman, involving a similar New York law,
Mr. Justice Holmes says: "The chief objections to these acts have been
dealt with in Block v. Hirsh, supra. In the present case more emphasis
is laid upon the impairment of the obligation of the contract of the
lessees to surrender possession, and of the new lease, which was to have
gone into effect upon October 1, last year. But contracts are made
subject to this exercise of the power of the State when otherwise
justified, as we have held this to be." Mr. Justice McKenna, in writing
the dissenting opinion in Block v. Hirsh, supra, and with whom the late
Chief Justice White, and Justices Van Devanter and McReynolds concurred,
says: "If such exercise of government be legal, what exercise of
government is illegal? Houses are a necessary of life, but other things
are as necessary. May they, too, be taken from the direction of their
owners and disposed of by the Government? * * * An affirmative answer
seems to be the requirement of the decision. If the public interest may
be concerned, as in the statute under review, with the control of any
form of property, it can be concerned with the control of all forms of
property. And, certainly, in the first instance, the necessity or
expediency of control must be a matter of legislative judgment. * * *
The facts are significant and suggest this inquiry: Have conditions come
not only to the District of Columbia, embarrassing the Federal
government, but to the world as well, that are not amenable to passing
palliatives, and that socialism, or some form of socialism, is the only
permanent corrective or accommodation? It is indeed strange that this
court, in effect, is called upon to make way for it, and through an
instrument of a constitution based on personal rights and the purposeful
encouragement of individual incentive and energy, to declare legal a
power exerted for their destruction. The inquiry occurs, have we come to
the realization of the observation that 'War, unless it be fought for
liberty, is the most deadly enemy of liberty.'"
In the Marcus Brown Holding Co. case, he again says for the same
justices: "We are not disposed to further enlarge upon the case, or
attempt to reconcile the explicit declaration of the Constitution
against the power of the state to impair the obligations of a contract,
or, under any pretense, to disregard the declaration. It is safer,
saner, and more consonant with constitutional pre-eminence and its
purposes, to regard the declaration of the Constitution as paramount,
and not to weaken it by refined dialectics, or bend it to some impulse
of emergency because of some accident of immediate overwhelming interest
which appeals to the feelings and distorts the judgment." No more
striking illustration of the most decided differences of opinion among
nine of the ablest jurists in the world can be found. It is no wonder
then that a lawyer at times hesitates in giving an opinion as to what
the law may be.
THE FUNCTION OF THE COURT.--An infant bought a motorcycle on an
installment contract at the agreed price of $325. He made an initial
payment of $125, used the machine a month, damaged it to the amount of
$156.25, and then returned it in this condition and demanded the return
of his $125. These are the facts in the case of Petit v. Liston, 97
Oregon 464, a case decided in the Supreme Court of Oregon. The case
involves the right of an infant to disaffirm a contract made by him,
when purchasing an article which is not a necessity. The Oregon court
had never before been called on to determine what the law in Oregon was
as applied to such a situation. According to the rule in New York, as
laid down in Rice v. Butler, 160 N. Y. 578, the infant could not recover
the $125, but according to the rule in Pyne v. Wood, 145 Mass. 558, the
infant would be entitled to his money. It thus became the problem of the
Oregon court to refer to the theories back of these two decisions. After
doing so, it approved of the New York view, rather than the
Massachusetts view. This case indicates the function of a court. If a
court, from the various sources of law which we have enumerated, can
find an exact precedent for the case before it, or can find a general
principle of law which can be applied, it renders a decision as to the
law, as the Oregon court did. If no law can be found nor any principles
which can be applied, the court is forced to deny the relief, as in the
Roberson case, 171 N. Y. 538, adding, perhaps, to its opinion, as it did
in that case, the suggestion that it is a matter Congress or a State
legislature might properly remedy.
THE COURT SYSTEM.--Knowing the function of a court, the student should
then have an outline of the court system of his own jurisdiction. We
can only sketch, in a book to be used generally throughout the United
States, the court systems. Each State has two sets of courts: the
Federal and the State courts. We have a Federal and a State Government;
it follows that there should be courts to interpret the laws of each of
these two Governments. Matters pertaining to the United States
Constitution, or matters affecting citizens of different States, are
tried in the Federal courts. The same is true of admiralty and
bankruptcy. There is at least one United States District Court in each
State in the country, and Federal cases are begun in these courts. If
either party is dissatisfied with the decision, he may appeal to the
next higher court. The entire country is divided into nine Circuit
Courts of Appeal, to which appeals from United States District Courts
are taken. In case either party is dissatisfied with the decision in
that court, he may, in certain cases, appeal to the court of last
resort, the United States Supreme Court, presided over by a Chief
Justice and eight Associate Justices at Washington. Each State has its
own system of courts. Usually that system is more elaborate than that in
the Federal Government. There is in each State a court of last resort,
which we would expect to find designated the Supreme Court of New York,
or whatever State it might be. Frequently there is a misuse of terms,
as, for example, the court of last resort in New York is the Court of
Appeals, and the Supreme Court is a lower court. This is true in a
number of States. In addition to the court of last resort, there will be
a court of general jurisdiction, frequently one of these courts for
each county of the State, and then courts for the trial of smaller cases
in the various cities and towns. The system of appeals is the same as in
the Federal courts, either party who is dissatisfied having a right to
appeal his case to the higher court. The question as to whether a
particular case must be brought in a Federal court or a State court is
too complicated to be taken up in detail. Sometimes the suit must be
brought in the Federal court, as, for example, a bankruptcy matter, or a
matter involving the United States Constitution, while in other cases,
perhaps the majority, the suit must be brought in a State court. In
other cases a person may have his option of either jurisdiction, as
where a citizen of Texas wishes to sue a citizen of Rhode Island, and
the amount involved is over $3000, then either the Federal or State
courts of either State are open to the parties.
CHAPTER I
Contracts--Mutual Assent
Commercial law is a general term used to cover the legal rules which
relate most directly to everyday commercial transactions. It is a term
of no exact boundary, but most commercial law is based in one way or
another on the law of contracts, which is one of the largest subjects in
the law. Bills and notes, for instance, are special forms of contracts.
In order to understand business law at all, therefore, it is necessary
at the outset to have some knowledge of the fundamental principles of
the law of contracts.
DEFINITION OF CONTRACTS.--What is a contract? Simply a promise or set of
promises which the law enforces as binding. Any promise, if it is
binding, is a contract or part of a contract. So the law of contracts in
their formation resolves itself into this: What promises are binding? A
man may make all sorts of promises, but when has he a right legally to
say "I have changed my mind, I am not going to do what I said I would,"
and when will he be liable in damages if he fails to do as he agreed?
CONTRACT TERMS EXPLAINED.--There are certain terms in contracts which
the student will find repeatedly mentioned and with which he should be
familiar at the outset. For example, contracts are spoken of as express
contracts, and implied contracts. By an express contract we mean a
contract the terms of which are fully set forth. Implied contracts are
contracts the terms of which are not fully stated by the parties. There
is a mutual agreement and promise, but the agreement and promise have
not been expressly put in words. If I say to a man, "I will buy your
horse, Dobbin, for $100" and he replies, "I will sell you the horse at
that price," there is an express contract. I step into a taxi and simply
say to the driver, "Take me to the Union Station." The driver says
nothing, but takes me there. Here is an implied contract. By my conduct
I impliedly agree to pay him the legal rate for the distance carried.
FORMAL AND INFORMAL CONTRACTS.--Contracts are sometimes also divided
into formal contracts, and simple or parol contracts. There are three
kinds of formal contracts recognized in our system of law: (1) Promises
under seal. (2) Contracts of record, such as judgments and
recognizances. (3) Negotiable instruments. Of the three, it may be most
difficult to understand why a judgment is included as a form of
contract, because a judgment is simply a judicial termination of a fact
entered in the office of the county clerk, and generally a lien on the
real property owned by the judgment debtor. The sole reason, apparently,
for calling a judgment a contract, is that an action of debt may be
brought in a court of law upon such a judgment. Sealed contracts and
negotiable paper will be taken up in a later chapter. Simple, or parol
contracts, are those not embraced in the three previous classifications
which constitute the formal contracts. The term parol is a little
ambiguous, as it is sometimes used as opposed to a written contract,
meaning simply an oral one, and at other times it is used as opposed to
the three previous formal contracts.
UNILATERAL AND BILATERAL CONTRACTS.--Contracts are also divided into
unilateral and bilateral contracts. In a unilateral contract, the
contract imposes obligations on one party only. A promissory note is an
example of a unilateral contract. In a bilateral contract, obligation is
imposed on both parties. John and Mary become engaged to each other.
This is a bilateral contract, and either may sue the other for a breach.
Most important results flow from the distinction between unilateral and
bilateral contracts. This we shall consider later.
VOID, VOIDABLE AND UNENFORCEABLE CONTRACTS.--Contracts are also divided
into void, voidable and unenforceable contracts. Strictly speaking, a
void contract is no contract at all. Some statutes provide that no
action shall be brought on certain contracts, and declare them
absolutely void. A voidable contract is one which is good until the
option of avoiding it is availed of by the party who has the option. For
example, an infant with an income of $2000 a year contracts for the
delivery of a Packard automobile on June 1. The car, being a luxury,
makes the contract with the infant voidable on his part, and he may,
before June 1, repudiate the contract and not be liable in a suit for
breach of contract, or he may, if he choses, abide by the contract, take
the car, and pay the purchase price when it is delivered. An
unenforceable contract is one which in itself is perfectly good as a
contract, but because of some rule of law cannot be enforced. For
example, A agrees, orally, with the owner of 1 Broadway, to buy that
property for $1,000,000. The terms of the contract are understood by
both parties. This contract is not enforceable, because, as we shall see
later, the Statute of Frauds requires every contract for the sale of
real property to be in writing.
CONTRACTS UNDER SEAL.--There are two ways of making promises binding,
and unless the promisor fulfils the requisites of one or the other of
these two ways his promise will not be binding. The first of these ways
relates to the form in which the promise is made; the second relates to
the substance of the transaction, irrespective of the form. The way to
make a promise binding by virtue of its form is to put it in writing and
attach a seal to the writing. It is often thought that written promises
are binding in any event, or that a promise that is not written is not
binding in any event. Neither of these propositions, however, is true. A
promise is not binding merely because it is in writing; it is necessary
that something more shall be done. Not only must it be written, but a
seal must be attached in order to make the promise binding by virtue of
its form. Everyone is familiar with the common ending in written
contracts--"witness my hand and seal," that is, my signature and seal.
WHAT IS A SEAL?--A seal may be--and was originally--made with sealing
wax stamped with a crest, initial or what not. This is still a
sufficient seal, but the common kind of seal is simply a wafer attached
by mucilage to the writing. Another kind of seal, in use by corporations
and notaries especially, consists simply of an impression made on paper
without attaching any foreign substance whatever. Any of these methods
of sealing a promise is good. In most States a written or printed scroll
with the letters "L. S." written or printed within, or the word "Seal"
written or printed may also be a seal if so intended. It may seem a
ridiculous formality for the law to attach importance to this lapping a
wafer and attaching it to the end of a writing. In a way it is
ridiculous, but it is desirable to have some method by which a promise
may be made binding. One method, as an original question, may be as good
as another so long as it is an easy method, and attaching a seal is an
easy method, and one which makes it possible to make a promise binding
whenever you wish.
CHANGE BY STATUTE OF THE LAW AS TO SEALED CONTRACTS.--There has been in
this country a certain hostility to the law of sealed instruments. It
has been thought, with reason, that some of the rules governing
contracts under seal have by their technicality promoted injustice. This
has certainly been true of an old rule that contracts under seal could
not be altered or discharged by any agreement not itself under seal. The
rule, however, that a seal avoids the necessity of consideration is a
desirable rule, since it is important to have some means by which those
who so intend may make gratuitous promises binding. It would be better
then to abolish undesirable incidents of sealed contracts by statute
rather than to destroy totally the legal effect of a seal. However, in
many States the distinction between sealed and unsealed contracts is
totally abolished. In a number of other States the common-law rule has
been changed by the enactment of statutory provisions to the effect that
sealed contracts shall be presumed to have been made for a sufficient
consideration, but this presumption is only prima facie, and lack of
consideration may be affirmatively proved, even in the case of a sealed
instrument. And under such statutes unsealed contracts remain as at
common law, i. e., the burden of proving consideration rests upon the
plaintiff who seeks to enforce such a contract.
REQUISITES OF SIMPLE CONTRACTS.--Sealed contracts are comparatively easy
to understand. Simple contracts, which are promises made binding by
virtue of their substance rather than their form, though called simple,
are more difficult to understand, and more complex. They are also much
more common than sealed contracts. A simple contract is a promise, or
promises, to which the parties have assented, and for which a price
called consideration has been paid. One may promise as much as he
wishes, orally or in writing so long as he does not attach a seal to his
signature, and then say he does not care to keep his promise, unless he
has both been paid for the promise and there has been an assent by the
promisor and promisee to the terms of the transaction. Mutual assent and
consideration are, then, the requisites of simple contracts.
INTENT TO CONTRACT.--In the law of contracts, intention, as we
ordinarily understand that term, plays little part. In fact, the Supreme
Court of Connecticut, in the case of Davidson vs. Holden, 55 Conn. 103,
said: "It is of no legal significance that the defendants did not intend
to be individually liable, or that they did not know or believe that as
a matter of law they would be."
It is our overt acts that count in contracts. Or shall we put it this
way: In the eyes of the law overt acts manifest legal intention. A
says to B: "I will sell you my watch for $25, and you may have until 9
o'clock to-morrow morning to decide." A meets B the next noon and says
to him: "I am sorry you did not take the watch. It was a bargain." B
replies: "Here is the price, I will take it. I intended to call you
this morning but have been so busy I did not have an opportunity to do
so. I told my wife last night I was going to accept your offer and I
can produce five witnesses who were in the room and heard me say so."
It is, nevertheless, no contract, for, as has been said, quoting from
an old English case, "It is trite learning, that the thought of man
is not tryable, for the devil himself knows not the thought of man."
Occasionally there may be the overt act and still no contract, although
the mere formalities of contract may have taken place. The facts in the
case of McClurg v. Terry, 21 New Jersey Equity 225, were as follows: The
plaintiff was an infant nineteen years of age, and had returned late in
the evening to Jersey City, from an excursion, with the defendant and a
number of young friends, among whom was a justice of the peace, and all
being in good spirits, excited by the excursion, the plaintiff in jest
challenged the defendant to be married to her on the spot; he in the
same spirit accepted the challenge, and the justice, at their request,
performed the ceremony, they making the proper responses. The ceremony
was in the usual and proper form, the justice doubting whether it was
in earnest or not. The defendant escorted the plaintiff to her home,
and left her there as usual on occasions of such excursions; both acted
and treated the matter as if no ceremony had taken place. In deciding
the case, the court said: "In this case the evidence is clear that no
marriage was intended by either party; that it was a mere jest got
up in the exuberance of spirits to amuse the company and themselves.
If this is so, there was no marriage." The overt act of the parties
manifested no legal intention to be married. Should we change the facts
in the following way, the court undoubtedly would have held a valid
marriage: If, after the parties had gone through the marriage ceremony,
as recited, they went on a two weeks' honeymoon, and on their return
lived together as man and wife for a month and then suddenly decided to
call the marriage off, on the ground that it was a joke and they did not
intend the ceremony to be binding, regardless of what they said as to
the transaction, their overt acts would be taken by the court as showing
their real legal intention at the time the ceremony was entered into.
One more illustration: When leaving the class tonight, there is a sudden
downpour of rain, and the instructor remarks: "I will give ten dollars
for an umbrella." A student offers an umbrella and claims the money.
Here is an overt act, but a reasonable person would not take the words
used literally. Generally speaking, agreements made jokingly and social
agreements confer no contractual rights.
OFFER AND ACCEPTANCE.--The usual way that mutual assent is manifested is
by an offer and an acceptance of the offer. Two persons are not likely
to express at the identical minute the same proposition. It is as a
practical matter, then, essential that one should make a proposition,
and if a contract is to be made, that the other should assent to it. An
offer may be made to one or more specified persons, or to anyone
whomsoever who will do what the offer requests, as in case of an offer
of a reward. An offer is itself a promise, but is a promise conditional
on the payment of a consideration or return for it either by some act or
some promise from the other party. According as the offer asks for an
act or a promise it will fall into one or the other of the two great
divisions of simple contracts; one kind is called unilateral (meaning
one-sided), that is, a promise only on one side; the other is bilateral,
a promise on each side.
ILLUSTRATIONS.--Let us give illustrations of these contracts. We say to
John: "We will promise to give you, John, $100 if you will do a
specified piece of work." That is a proposal to make an exchange of the
work for the money in a sense, but more exactly it is an offer to
exchange an agreement to give the money in return for the work. We are
not saying to John: "If you will agree or promise to do that work we
will promise to give you the money." We are saying that we will give him
the money if he actually does the work. That offer requires the actual
doing of the work before it is binding. Until then the price requested
for the promise has not been paid. It is an offer of a unilateral
contract. Again, when we say to a man: "If you will spade up our garden
we will pay you $2 a day," we are making an offer for a unilateral
contract. We are asking him to spade up the garden; not to promise to
spade it up, but to do it, and when he does it he can hold us liable on
our promise to pay him $2 a day. The promise will have become binding
because we have been given the payment that we asked for in our promise.
But if we say to a man: "If you will agree to work for us the next month
we will pay you $100," and the man says, "All right," then we have a
bilateral contract. We are asking him, as the price of our promise, not
to work but to agree to work, and he has promised to do so. To say "I
accept" is always sufficient acceptance in the case of a bilateral
contract where a promise is requested, but if I said to you, "I will
give you $5 if you will bring me a book here," it would not make a
contract to say "I accept." I said I would give you $5 if you brought
the book here, and nothing but bringing it here will form a contract.
The offeree must always do what the offerer asks him. If an offerer asks
for a promise, any form of words indicating assent would be sufficient,
because they would mean, in effect: "I consent to make the promise you
specify in your offer." The form of wording in simple contracts is
immaterial. Any plain language is sufficient for an offer, and as for
acceptance, it does not matter whether the acceptor says "all right," or
"I accept your offer," or in what form he expresses his assent. The
question is, does he express assent? Now, the offerer is at liberty to
name any consideration in his offer that he sees fit. He can name, in
other words, whatever price for his promise he chooses to ask. If the
person addressed does not choose to pay that price, all he has to do is
to reject the offer, but he can bind the offerer only on the terms
proposed. Therefore, if the offerer asks for an act in return for his
promise, that is, asks for an immediate payment, or work, or the giving
of property for his promise, no contract can be made by the person
addressed saying, "All right, I will do it;" that is not giving the
price the offerer asked. On the other hand, should the offerer ask for a
promise and not for an act, the acceptor must give the promise asked
for.
OPTION WITHOUT CONSIDERATION.--A common business transaction that
presents very well the principles governing the formation of simple
contracts is what is called an option. Suppose the owner of a mine says:
"I will sell you this mine for $50,000, and you may have thirty days to
decide whether you choose to accept the offer or not." Now, it does not
matter whether that statement is oral or in writing; it is merely an
offer, and not binding as the matter stands as far as we have stated.
However, if it were in writing and a seal attached (in a State where
seals still have the force which the common law gave them) it would be a
binding promise to sell the mine at that price at any time within thirty
days. If there is no seal attached, as long as the offer is unaccepted
and unpaid for, it is not binding. The man who makes it may say: "I
withdraw my offer. It is true that I promised to keep the offer open
thirty days, but you did not pay me for that promise and I am going to
break the promise. I withdraw my offer." Any offer for the formation of
a simple contract, while unaccepted, may be withdrawn. But, if before it
was withdrawn and within the thirty days' limit, the person to whom the
option was given says, "Here is the $50,000 which you said you would
take for your mine," the offerer would then be bound, and would have to
perform his part of the contract.
OPTION WITH CONSIDERATION.--Let us change the character of the option a
little. Suppose in consideration of $1000 paid down the owner of a mine
promises to sell the mine for $50,000 at any time within thirty days.
Here the offer, or the contract--for it is now more than an offer--has
been paid for, and it is therefore binding. The person to whom the offer
was made paid $1000 for the promise, therefore the promisor is bound to
keep it. It was not an absolute promise to give the mine to the buyer,
but it was a promise to sell it to him for $50,000 if he chose to take
it within thirty days; that is a conditional promise. A conditional
promise may be binding and paid for just as well as an absolute
promise.
INSURANCE POLICY.--Take the case of a fire insurance policy. That is a
conditional promise, a promise to pay indemnity for the destruction of a
house by fire. Therefore, the performance of the insurance company's
promise is conditional on the suffering by the insured of loss by fire.
An insurance policy is ordinarily a unilateral contract; the premium is
the consideration or price paid for the promise, and the promise is
binding on the insurance company from the time when the premium is thus
paid. Of course, the promise is only binding according to its terms. The
insured has bought a conditional promise, a promise to pay if the house
burns down. He gets that promise, but he will not become entitled to any
money or any damages unless the house burns down nor unless he complies
with the other conditions of his policy.
GUARANTEE.--Another kind of a promise worth referring to is a guarantee.
A question arises whether a business house will sell something to a
buyer on credit, and it decides it will not without a guarantee.
Accordingly, John agrees, in writing, that if the business house in
question will sell James a bill of goods, John will guarantee the
payment of the price. That means, if James does not pay for the goods,
John will. That is a unilateral contract in which the promise is
conditional, and the consideration for that promise is the selling of
goods to James.
PRELIMINARY NEGOTIATIONS--ADVERTISEMENTS.--An offer is sometimes
difficult to distinguish from other things. Suppose the case of an
advertisement. A business house advertises that it will sell goods for a
certain price. Take the case of a bond list issued by a banking house.
The list states that the banking house will sell specified kinds of
bonds at quoted prices. John receives one of those lists, looks it over,
sees something that looks good to him, and goes into the banking house
and says: "I will take five of those bonds at the price named here." The
banking house says: "We have sold all the bonds of that kind that we
had;" or it says, "The market has changed on those bonds and there has
been some advance in the price." Has John a cause of action against the
banking house? He has if that bond list amounts to an offer--that is, if
the list means that the banking house offers to enter into a contract
with anyone receiving the list. But it has been held that that sort of
advertisement does not prima facie amount to an offer, although it might
be put in such clear words of agreement to sell on the part of the
banking house that it would amount to an offer. Generally an
advertisement of this sort, or anything that can fairly be called an
advertisement of goods for sale, is held to mean simply that the
advertiser has these goods for sale and names a price he is putting upon
them; he invites customers to come in and deal with him in regard to
them. It is an invitation to come and make a trade rather than a direct
offer of a trade.
ILLUSTRATION.--Again to illustrate: You are looking at a new model of an
automobile in a show-room window. You like it, enter the salesroom, and
say you will take the car, tendering the price. The manager tells you
that it is simply their demonstration car, that he will be glad to book
your order for a car of the same model, and can make delivery in a
month. You are not satisfied, and wish to sue, claiming that your tender
of the price constituted an acceptance of the dealer's offer. Your
position would be unsound and there would be no recovery in such a case.
The placing of the demonstration car in the window is simply an
invitation to the public to come in and deal with the seller. On the
other hand, suppose you go into a second-hand automobile salesroom.
There are fifty cars of various makes and models on the floor and each
one is labeled with a different price. You pick out a 1918 Packard which
is marked $1500. You tender the price to the salesman and say you will
take the car. He refuses to sell. In this case your tender is an
acceptance of his offer to sell. In the former instance, placing a price
on the demonstration car was not a statement to the public generally
that that particular car was for sale at that price, but in this case,
where the cars are all second-hand cars, the reasonable interpretation
of placing the price on the 1918 Packard is that that particular car is
for sale. Quite likely, the dealer did not have any other Packard car in
stock and would have no way of securing any of that model at that price.
ORAL AGREEMENT PRELIMINARY TO WRITTEN CONTRACT.--Another case of the
same nature that comes up not infrequently is this: Parties talk over a
business arrangement and then they say, "As this is an important matter
let us put it down in writing; let us have a written contract containing
what has been agreed upon." When it comes to drawing up the contract,
however, they cannot agree. One party then says, "Well, we made a
definite oral agreement any way; let us carry that out." The other
replies, "Why, no, all that was dependent on our making a written
agreement." The settlement of their dispute depends on how definite and
absolute the oral agreement was. It is possible to make an oral
agreement binding, although the parties do agree and do contemplate that
it shall subsequently be reduced to writing, but generally the inference
is that the oral agreement was merely a preliminary chaffering to fix
the terms of the writing, and that everything is tentative until the
writing is made and signed.
AUCTION SALES.--Another state of affairs involving preliminary
invitations is presented by auction sales. The auctioneer puts goods up
for sale, a bid is made, the auctioneer gets no other bid, and then
says, "I will withdraw this from sale." Is the auctioneer liable? Has he
made a contract to sell that article to the highest bidder? When the
transaction is analyzed, is this what the auctioneer says in effect: "I
offer to sell these goods to the highest bidder?" If this is the correct
interpretation, then when the highest bidder says, in effect, "I agree
to buy them," there would be a contract. On the other hand, if what the
auctioneer says is in effect like what the advertiser says: "Here are
some goods for sale, what do you bid, gentlemen," then the auctioneer
is not making an offer himself. He is inviting offers from the people
before him, and until he accepts one of those offers from the bidders
before him there would be no contract; and until then the auctioneer
could withdraw the goods. And that is the construction put upon the
auction sale--that the auctioneer is not making an offer, but is simply
inviting offers. Even if the auctioneer promises that he will accept the
highest offer, that is, that he will sell to the highest bidder, his
promise to accept the highest bid, not being paid for, would not be
binding upon him were it not for a statute in some States which, in the
sale of goods, would make an auctioneer bound to keep a promise to sell
without reserve, that is, to the highest bidder, if he made such a
promise.
BIDS OR TENDERS.--Somewhat similar to the case of the auctioneer is the
case of tenders or bids for the construction of buildings, or for the
sale of goods to a city or to a corporation. There, too, the corporation
or the city is simply inviting offers. They do not say, "We offer to
enter into a contract with anyone who makes the lowest bid," but rather,
"We are thinking of entering into a contract, and we want to receive
offers in regard to it." When the offers are made by the bids or
tenders, any or none of them may be accepted, according as the receiver
thinks best. It is sometimes required by law that public corporations,
like cities or counties, shall accept the bid of the lowest responsible
bidder, but, aside from such statutes, any or none of the bids may be
accepted.
IMPLIED CONTRACTS.--An offer and acceptance are ordinarily made by words
either spoken or written; but any method of communication which would
convey to a reasonable man a clear meaning will serve as well as words.
If A goes to his grocer and says "Send me a barrel of flour," he has in
terms made no promise to pay for the flour, but the natural meaning of
his words is that he agrees to pay. In this case A used words, though
not words of promise; but the same result might follow where no words at
all were used. Suppose A went into a shop where he was known, picked up
an article from the counter, held it up so the proprietor could see what
he was taking, and went out; this would be in legal effect a promise by
A to pay for the article. A contract, where the promises of the parties
are to be inferred not from express words of promise but from conduct or
from language not in terms promissory, is called an implied promise or
contract, as distinct from an express promise or contract, which is one
where the undertaking is in express language. This difference between
express and implied contracts relates merely to the mode of proving
them. There is the same element of mutual assent in both cases, and the
legal effect of the two kinds of obligations is identical. There is,
however, another kind of obligation which is frequently called an
implied contract, but sometimes called a quasi-contract, because it is
not really a contract at all, though the obligation imposed is similar.
If a husband fails to support his wife, for instance, she may bind him
by purchases of goods necessary for her support. She may do this even
though he directly forbids the sales to her. There is obviously no
mutual assent in this case; the husband emphatically dissents and
expresses his dissent, but he is bound just as if he had contracted.
TERMINATION OF OFFER BY REVOCATION OR REJECTION.--Since offers do not
become binding until accepted according to their terms, up to that time
they may be terminated without liability. This may happen in several
ways. In the first place an offer may be revoked by the offerer. To
effect a revocation he must actually notify the other party of his
change of mind, before the latter has accepted. We have already stated
that offers may be rejected by the person to whom they are made. For
instance, we say, "We offer you one hundred shares of stock at a certain
price, and you may have a week to think it over." You say, "I do not
care for that offer, I reject it." You come around the next day and say,
"On reflection I have concluded to accept that offer." The acceptance is
within the seven days which we originally said might be used for
reflection, but the offer has been terminated by the rejection. There is
no longer any offer open, and consequently the acceptance amounts to
nothing. A troublesome question in regard to the revocation of an offer
for a unilateral contract is this: Suppose A offers B $5 for a book and
B starts to get it but when he reaches the door, then A refuses to take
the book. The general disposition is to try to hold that promise
binding, and yet the difficulty is that the offeree has not fully done
what he was asked to do, and if he chose to turn back and take the book
away he could do so without liability. He could say, "I did not promise
to bring the book. I brought it part way, the walk was long and I am
going to take it back." If he is thus free to withdraw it seems
impossible to deny that the other party is equally free. Bilateral
contracts are more desirable than unilateral because in bilateral
contracts the mutual promises bind the parties before they begin to
perform and both parties are therefore protected while they are
performing. In unilateral contracts, the contract is not completed until
the act requested is fully done. Until then, therefore, either party may
withdraw.
A COUNTER OFFER IS A REJECTION.--Another way in which offers may be
terminated is by a counter offer on the part of the person to whom the
offer was made. We say, "We will sell you stock for $100 a share, and
you may have a week to think it over." You say, "I will give you $99 a
share." We say, "No, we will not take it." You say, "Well, I will give
you $100." You are too late; you rejected our offer of sale at $100 by
saying you would give us $99. The minute you say you will give us $99,
our offer is rejected. Of course, when you make the counter offer of
$99, if we say we will accept your offer to buy, that would make a
contract. Offers are constantly rejected by counter offers by people who
really intend to enter into a contract. Suppose A says, "I will lease
you my house a year for $800." You say, "All right, I will take it if
you paper the dining-room." That rejects the offer. A new offer has
been made by the person addressed, who offers, if the dining-room is
papered, to take the house at $800.
TERMINATION OF OFFER BY DEATH OR INSANITY.--An offer is also terminated
by the death or insanity of either party before acceptance. After a
contract has once been formed neither subsequent death nor insanity
terminates liability upon it unless the contract is of such a personal
character that only performance by the contractor in person will fulfil
it.
ILLUSTRATION.--In Beach v. First Methodist Episcopal Church, 96 Ill.
177, a fund was being raised to build a new church, and a subscription
paper, as follows, was signed by Lorenzo Beach:
"Fairbury, Feb. 14, 1874.
"We, the undersigned, agree to pay the sum set opposite our
respective names, for the purpose of erecting a new M. E.
church in this place, said sums to be paid as follows:
One-third to be paid when contract is let, one-third when
building is enclosed, one-third when building is completed.
Probable cost of said church from ten thousand dollars
($10,000) to twelve thousand dollars ($12,000)."
Mr. Beach attached and subscribed to that paper the following:
"Fairbury, 1874.
"Dr. Beach gives this subscription on the condition that the
remainder of eight thousand dollars is subscribed.
"Lorenzo Beach, $2000."
In April, 1875, Dr. Beach was adjudged insane by the county court. The
court held that the "subscription made by Dr. Beach was, in its nature,
a mere offer to pay that amount of money to the church upon the
condition therein expressed. There is nothing in the record tending to
show that the church, in this case, took any action upon the faith of
this subscription, until after Dr. Beach was adjudged insane, or that
the church paid money or incurred any liability. His insanity, by
operation of law, was a revocation of the offer." Suppose a letter for a
winter's supply of coal is sent to your coal dealer and is acknowledged
by him, delivery to be made before October 1. On September 15, the coal
dealer dies, and his estate refuses to fulfill the contract. In such a
case, if you were compelled to buy coal at a higher price from another
dealer, you would have a cause of action against the estate for the
damage you suffer. The coal dealer's executor or administrator could
very easily carry out a contract of this character. On the other hand,
suppose you are running a series of lectures during the winter, and you
have engaged a noted lecturer to deliver six lectures. After he has
delivered three, he dies. In this case, death would terminate the
contract, as this is clearly a contract for personal services and the
executor or administrator of the deceased lecturer could not perform the
contract for him, as could be done in the case of the coal dealer.
TERMINATION OF OFFER BY LAPSE OF TIME.--An offer may be terminated by
delay on the part of the person addressed. An answer to an offer must
be sent in time, whether mail or telegraph is used, or whether the
parties are dealing face to face. An offer lapses if it is not accepted
within the time the offer specifies if any time is specified. If no time
is specified, then within a reasonable time. One may specify any length
of time in his offer, and it will remain open for that time provided it
is not rejected or revoked, and neither party dies or becomes insane, in
the meantime. But frequently offers contain no express limit of time;
then it is a question of what is a reasonable time, and reasonableness
depends upon business customs, the character of the transaction, the way
the offer is communicated, and similar circumstances. An offer on the
floor of a stock exchange will not last very long. A reasonable time for
acceptance of such an offer is immediately, and an offer sent by
telegraph will not remain in force long. The use of the telegraph
indicates that the offerer deems haste of importance. An offer sent by
mail will last longer. An offer relating to things which change in value
rapidly will not remain open for so long a time as an offer which
relates to land, or something that does not change in value rapidly.
ILLUSTRATION.--In the case of Loring v. the City of Boston, 7 Met.
(Mass.) 409, the facts were that on May 26, 1837, this advertisement was
published in the daily papers of Boston: "$500 reward. The above reward
is offered for the apprehension and conviction of any person who shall
set fire to any building within the limits of the city. May 26th, 1837.
Samuel A. Eliot, Mayor." In January, 1841, there was an extensive fire
on Washington Street, and Loring, after considerable effort, was able to
secure the apprehension and conviction of the criminal. He then sued to
recover the reward, which the city of Boston refused to pay. The ground
of defense was that the advertisement "offering the reward of $500 for
the apprehension and conviction of persons setting fire to buildings in
the city, was issued almost four years before the time at which the
plaintiff arrested Marriott and prosecuted him to conviction." The
opinion of the court reads: "three years and eight months is not a
reasonable time within which, or rather to the extent of which, the
offer in question can be considered as a continuing offer on the part of
the city. In that length of time, the exigency under which it was made
having passed, it must be presumed to have been forgotten by most of the
officers and citizens of the community, and cannot be presumed to have
been before the public as an actuating motive to vigilance and exertion
on this subject; nor could it justly and reasonably have been so
understood by the plaintiff. We are, therefore, of the opinion that the
offer of the city had ceased before the plaintiff accepted and acted
upon it as such, and that consequently no contract existed upon which
this action, founded on an alleged express promise, can be maintained."
BOTH PARTIES MUST BE BOUND OR NEITHER.--Both parties to a simple
contract must in effect be bound, and until they are, there is no
contract. In a unilateral contract, before the promise becomes binding,
the promisee must have actually performed what he was requested to do,
that is, he must bind himself by actual performance before the offerer's
promise is binding on him. In a bilateral contract, where each party
makes a promise, neither promise can be binding unless and until the
other one is. So that in the case of the proposed agreement to lease, as
the proposed tenant might refuse to take the house if the dining-room
was not papered, the proposed landlord has a similar right; that is,
since one is not bound, the other is not.
CONTRACTS BY CORRESPONDENCE.--Contracts are often made by
correspondence, simple contracts especially. That raises rather an
important question as to how and when the contract is formed. Suppose a
letter containing an offer is addressed from Boston to a man in New
York. A reply is sent by him from New York accepting the offer. That
reply goes astray. Is there a contract? Yes. It creates a contract by
correspondence for a letter to be mailed by the acceptor provided the
offerer imposes no conditions to the contrary, and impliedly authorizes
the use of the mails, as he does by himself making an offer by mail. But
suppose the offerer in his letter says, "If I hear from you by next
Wednesday I shall consider this a contract." Then, unless the offerer
receives an answer by the next Wednesday, there will be no contract. It
will make no difference that an answer has been mailed, it must have
been received; that is a condition of the offer. Suppose an offer is
made by word of mouth, and it is accepted by sending a letter. Does the
contract then become binding, irrespective of receipt of the letter? No,
unless in some way the offerer has authorized the use of the mails in
sending such an answer, and if the circumstances were such that the use
of the mails would be customary, that would amount to an implied
authorization. The use of the telegraph depends upon similar principles.
If an offer is sent by telegraph, an answer may be sent by telegraph,
and an acceptance started on its way will become binding although it is
never received. Similarly, one may authorize a telegraphic answer to a
letter containing an offer sent by mail, and if the use of the telegraph
is authorized, a contract will arise at the moment that the telegram is
sent.
ILLUSTRATIONS.--In the case of an option, if the acceptance was made by
mail and lost in the mails, a binding contract would be formed if the
use of the mail was expressly or impliedly authorized, and similarly if
the option called for payment and a letter was mailed containing a draft
or cash. There is a right to send a check or draft by mail if the
parties had been dealing by mail. That authority would be implied. When
parties are dealing by mail and there is a bargain that a check shall be
sent, the check becomes the property of the person to whom it is sent as
soon as it is mailed, and, therefore, when the letter with the check is
put in the mail it operates as a payment on the option, and the loss of
the draft is not the sender's loss, but the other man's. A lost draft,
however, can be replaced and must be replaced. Authority to send actual
cash by mail would not be so easily implied, especially if the amount
were large, because it is contrary to good business custom; but if
authority were given, the result would be the same as in the case of a
check. It would, however, be a proper business precaution to register
the letter if it contained cash. If the offerer, not having received the
letter of acceptance and thinking none had been sent, sells the property
to another person, though not morally blamable, he would get into
trouble. The second purchaser would get title to the property, supposing
that the property was actually transferred to him. The lost letter
created a contract, but it did not actually transfer title to the
property, and, therefore, when the purchaser actually got possession of
the property he would become the owner of it and could not be deprived
of his title if he took it innocently. If, however, the person to whom
the property was transferred had notice of the prior completion of a
contract, he could not keep the property. In any event the seller would
be liable in damages for breach of the contract completed by mailing the
lost letter. Suppose an option is given by telephone to one who, just
before the option expires, tries to get a connection by phone to accept
and is unable to do so, and ten minutes after the time has expired a
connection is secured? There is no contract and he has no action. It is
no fault of the offerer that the acceptor was unable to accept in time,
and, generally speaking, one who wishes to accept an offer must at his
peril keep the means of acceptance open. It may be asked why does not
the same principle apply in regard to mail as to the telephone; that is,
why does not starting the acceptance by telephone complete the contract?
Because there is no authority to send communication by telephone to the
offerer when the acceptor has no telephone connection. When one sends an
offer by mail the reason that he is bound by an acceptance sent by mail
is because he, in effect, asks that an acceptance properly addressed to
him be started on its course. He takes his chance as to the rest, but an
offerer by telephone does not authorize a reply by talking into the
telephone when there is no connection.
MISTAKES IN THE USE OF LANGUAGE IN OFFER AND ACCEPTANCE.--Another
question which has to do with the express mutual assent of parties
relates to the meaning of language used. Suppose an offerer says, "I
will sell you a cargo of goods from the ship 'Peerless,' due to arrive
from India, at a certain price." The buyer assents. There are two ships
named "Peerless," and the buyer thinks one is meant, but the seller
thinks the other is meant. Is there a contract for the sale of the cargo
of "Peerless" No. 1, or a contract for the sale of the cargo of No. 2,
or no contract at all? The answer is, that language bears the meaning
which a reasonable person in the position of the person to whom the
offer is made is justified in attaching to it. If a reasonable person in
his position would think "Peerless" No. 1 was meant, then there is a
contract for the cargo of No. 1. If he was not justified in thinking
that, and ought to have thought No. 2 was meant, although in fact he did
not think so, there was a contract for the cargo of "Peerless" No. 2. If
either meaning were as reasonable as the other, then each party has a
right to insist on his own meaning, and there would be no contract. This
principle often comes up in contracts made by telegraph, where the words
of the telegram are, by the mistake of the telegraph company, changed.
For instance, a telegram purports to be an offer to sell a large
quantity of laths at $1 a bundle. The terms as actually despatched by
the seller in making his offer fixed the price at $1.20. The telegraph
company dropped off the words "and twenty cents." A telegram is sent
back by the buyer, "I accept your telegraphic offer." Then trouble
arises when buyer and seller compare notes. Well, the offerer is bound.
He selected the telegraph as the means of communication, and he must
take the consequences of a misunderstanding, which arose from a mistake
of the agency which the offerer himself selected. The question may be
asked: Would there be any right of action against the telegraph company
by the offerer, the sender of the telegram? The answer is yes. The
company has broken the contract it impliedly made with the sender to use
reasonable diligence in despatching and delivering the message. But the
trouble with that action is that on telegraph blanks there is always
this in substance: that on unrepeated telegrams this company is liable
for mistakes only to an amount not exceeding twice the cost of the
telegram; and it has been held in many States that that limit on
unrepeated telegrams is not unreasonable. The sender of the telegram has
agreed to the contract on the reverse side of the telegraph blank, and
he ought to have his message repeated if he desires to hold the company
liable in full damages if his message does not reach the party addressed
in absolutely correct form. In other States, however, this limitation of
liability is held to be against public policy and the company is liable
for the full damage suffered.
CONDITION IN OFFER REQUIRING RECEIPT OF ACCEPTANCE.--An offerer, as has
been said, may insert in his offer any condition he sees fit. He may
therefore insert a condition that an acceptance shall reach him, not
merely be despatched. The condition may specify the time within which
the acceptance must arrive in order to be effectual. It is a wise
precaution in all business offers of importance to insert such a
condition in the offer. It will not be sufficient to add to the offer
such words as "subject to prompt acceptance," for prompt acceptance
would be given, within the meaning of the law, by despatching the
acceptance, not by the receipt of it. The condition should be in such
words as "subject to prompt receipt of your acceptance," or "subject to
receipt of your acceptance," by a stated day or hour.
WHEN SILENCE GIVES CONSENT.--There is one way of manifesting mutual
assent, namely, by silence, of which a word should be said. There is a
proverb that "Silence gives consent." Is it so in law? Suppose a man
goes into an insurance broker's and tosses some policies down and says,
"Renew those policies, please." Nobody says anything and he leaves the
policies there and goes out. The next night his buildings burn down. Are
they insured? They are, in effect, if the insurance broker has
contracted to renew the policies; otherwise the buildings are not
insured. Now on the bare facts, as we have stated them, they are not
insured; some other facts must always exist to make silence amount to
assent. If, for instance, on previous occasions, the broker kept silence
when such statements were made to him, and nevertheless carried out the
proposal, it is a fair inference that he means by his silence this time
what he meant the preceding time. Furthermore, silence, when the offer
is unknown, can never amount to assent. In the case as we have put it,
we did not say that the insurance broker even heard the offer; if he
did, then the question would depend on whether he had ever done anything
to justify the other person in believing that silence would mean assent
in such a dealing, or whether business customs justified the assumption.
The offerer cannot by his own act make the silence of the other person
amount to an acceptance. Suppose an offer of this sort: "We offer to
sell you 100 shares of stock at $50 a share, and unless we hear from you
to the contrary by next Wednesday we shall conclude that you have
accepted our offer." The offerer does not get any word before next
Wednesday. Nevertheless, there is no contract. The person addressed has
a right to say, "Confound his impudence, I am not going to waste a
postage stamp on him, but I don't accept his offer. He has no business
to suppose that if he doesn't hear from me to the contrary I assent."
This sort of case is not infrequently referred to: A magazine is sent
through the mails on a subscription for a year, the subscription runs
out, the magazine is, nevertheless, still sent. Is the person who
receives it bound to pay another year's subscription? Here you have a
little more than silence; you have the receiver of the magazine
continuing to receive it. If he refused to receive it, undoubtedly there
would be no contract, but where a man takes property which is offered to
him, he is bound by the proposal which was made to him in regard to the
property. He ought to let the magazine alone if he doesn't want to pay
for it. You may say that the receiver does not know that the
subscription has run out, and if he did he would not take the magazine.
But then he ought to know. He made the subscription originally. The
difficulty is merely in his own forgetfulness, and he cannot rely on
that.
ILLUSTRATION.--The leading case of Hobbs v. Massasoit Whip Co., 158
Mass. 194, is a good illustration. The plaintiff in this case had been
in the habit of sending eel skins to the defendant and had received pay
from him in due course. The skins in the shipment for payment of which
suit was brought, were alleged by the defendant to be short of the
required length, and in a condition unfit for use. They were kept by the
defendant some months, and were then destroyed, without notification to
the plaintiff. The latter sued for the price of the skins and the court
held that the silence of the defendant and failure to notify the
plaintiff that it did not wish to have this particular lot of skins,
amounted to an acceptance. The court said: "In such a condition of
things, the plaintiff was warranted in sending the defendant skins
conforming to the requirements, and even if the offer was not such that
the contract was made as soon as the skins corresponding to its terms
were sent, sending them would impose on the defendant a duty to act at
that time; and silence on its part, coupled with a retention of the
skins for an unreasonable time, might be found by the jury to warrant
the plaintiff in assuming that they were accepted, and thus to amount to
an acceptance."
CHAPTER II
Contracts--Consideration and Enforceability
CONSIDERATION MAY BE ANOTHER PROMISE OR AN ACT.--The second great
requisite in the formation of simple contracts is consideration. A price
must be paid for a promise in order to make it binding. The price paid
may be another promise, in which case the contract is bilateral, or the
price paid may be some act actually done or performed, in which case the
contract is unilateral.
ADEQUACY OF CONSIDERATION IMMATERIAL.--Not any act, or the promise of
any act, is sufficient consideration, as will be seen. Nevertheless, in
general the law does not attempt to gauge the adequacy of the
consideration; that is, parties may make such bargains as they wish as
far as the price is concerned. A may say that he will sell his horse,
which is worth $300, for $100, or for a promise to pay $100. That will
be a perfectly good contract, if accepted, in spite of the fact that the
promised horse is worth more than the promised price. Such difference in
the value of the promise and the value of the price may go to a great
extreme. The horse may be a thousand-dollar animal, and the price
promised only $100, but when you wish to push the case to an extreme you
are likely to get into this difficulty: Did the parties really mean to
make a bargain? If what they were doing was arranging for a gift of the
horse and putting up some little alleged consideration as a blind, that
will not do; but any exchange the parties really in good faith bargain
for, with certain exceptions hereafter stated, is sufficient.
A SMALLER SUM OF MONEY IS NOT SUFFICIENT CONSIDERATION FOR THE PROMISE
SIMULTANEOUSLY TO PAY OR DISCHARGE A LARGER LIQUIDATED SUM.--This is the
principal exception, that in contracts or promises relating to a fixed
sum of money, the consideration cannot be the simultaneous payment or
discharge of a smaller sum of money on the other side. If A promises B
$100, it will not be good consideration for B to promise in exchange
$50, or even $99.99, payable at the same time and place. In other words,
the law does require adequacy in exchanges or agreements to exchange
money. A owes B $100 and says to him, "I can't pay it all," or "I don't
want to pay it all. Will you let me off for $50?" B replies, "Yes, I
will take $50." That agreement is not binding, and even if the $50 is
actually paid, B may afterwards come and say, "You paid me only part of
the debt you owed me. It is true I said I would call the whole thing
square, but there was no consideration sufficient in law for my promise,
since you paid me only part of what you were bound to." This rule of
common law, though generally well established, does not exist or is much
qualified in a few States, such as: Georgia, Maine, Mississippi, New
Hampshire, North Carolina, Virginia.
UNLIQUIDATED CLAIMS MAY BE DISCHARGED BY ANY AGREED SUM.--The case cited
in the preceding paragraph must be distinguished from another. Suppose A
owes B some money for services, the price of which was never exactly
fixed, but which B says are of the value of $100. Then if B agrees to
take $50 in satisfaction of his claim against A, B is bound; the
transaction is effectual. The difference is between what is called a
liquidated and an unliquidated claim.
DEFINITION OF LIQUIDATED CLAIM.--A liquidated claim is one of an exact
amount definitely fixed. Such a claim, as has been said, cannot be
satisfied by partial payment or promise of partial payment. But an
unliquidated or a disputed claim--a claim subject to a real bona fide
dispute, not merely a dispute trumped up for the purpose of disputing a
good claim--may be discharged by any payment on which the parties agree.
The law does not know how much the unliquidated claim is worth, and will
allow parties to bargain for the sale of the unliquidated claim, just as
it will let them bargain for the sale of a horse for which they may fix
such a price as they choose, and that price will not be revised.
EFFECT OF RELEASES AND RECEIPTS.--If, however, the original claim were
liquidated and undisputed, is there any sort of paper the debtor could
get from the creditor that would release him absolutely? A receipt in
full would not do it; a receipt in full is something to which business
men attach more virtue than it possesses. It is merely evidence of an
agreement to accept what has been received in full payment and proof may
be given as to just what consideration passed for the receipt in full.
As we have seen, such an agreement is not valid without consideration,
and payment of part of a debt admittedly due is not sufficient
consideration. The really effective instrument at common law is the
release under seal. That will do the work whether the debtor paid part
of the debt or not, since a sealed instrument needs no consideration. In
jurisdictions where seals have been deprived of their efficacy at common
law an insuperable difficulty, however, exists. In a few
States--Alabama, Arkansas, Connecticut, Michigan, Mississippi, New
Hampshire, New York, North Dakota, South Dakota, Tennessee--a receipt in
full has been given the effect which the common law gave to a sealed
instrument.
OTHER ILLUSTRATIONS.--Suppose the agreement to settle a liquidated claim
were oral and suppose a witness heard the words. Such circumstances
would not make any difference. It is assumed in all that has been said
that the facts are proved. Suppose that neither party denied the facts.
Let the creditor admit that he did receive this $50 as a full payment
and did give the debtor a receipt in full. Still, he can say, "I propose
to break my agreement since it was not supported by sufficient
consideration, and I shall collect the balance." Another question is
this: Suppose a man had a $100 bill and he wanted some change very
badly, and another man had $99. Could the former take that for the $100
bill? He could. If a man wants a particular kind of money, as gold, or
silver, or quarters, the principles stated do not apply; they apply only
to dollars and cents as such.
PAST CONSIDERATION.--Strictly speaking, the term past consideration is a
misnomer; something which is given before a promise is made cannot
constitute a legal consideration. The courts have held that a warranty
made after a sale has been completed is invalid. It has also been held
that a guaranty after the obligation guaranteed has been entered into
also is invalid unless there be new consideration. Although this is the
general rule, there are several exceptions where a past consideration is
recognized. Williston gives these exceptions as follows, although the
boundaries between the groups are sometimes indefinite: "(1) Promises to
pay a precedent debt; (2) Promises in consideration of some act
previously done by the promisee at the request of the promisor; (3)
Promises where past circumstances create a moral obligation on the part
of the promisor to perform his promise. Under this head may be included
cases of ratification and adoption of promises previously made for
sufficient consideration but invalid when made for lack of authority or
capacity."
PAYMENT OF PART OF A DEBT BY ONE WHO IS NOT THE DEBTOR.--Suppose a
little different case: A owes B $100 for a liquidated claim. A's father
says to B, "If you will let my son off, discharge him from this claim, I
will pay $60, not a cent more." B agrees, and the $60 is paid. Now B
never can get any more; the bargain is binding, and the reason is, that
although A was bound to pay the whole $100, and could not, by paying B a
part of the claim, give good consideration to B for his promise to
cancel the balance. A's father was not bound to pay a cent and he may
bargain for any exchange in return for a payment which he was not bound
to make at all. Therefore, he may bargain that the debt shall be
discharged.
PERFORMANCE OR PROMISE OF PERFORMANCE OF A LEGAL DUTY IS NOT SUFFICIENT
CONSIDERATION.--In other words, the thing which will not be good
consideration, whether done or promised, is the performance or partial
performance of something which the man who performs or promises is under
a legal duty to do anyway. If he ought to do it anyway, then it will not
serve as a price for a new promise or agreement to discharge it. Another
illustration of that may be given: Suppose a contractor agrees to build
a house for $10,000; he gets sick of his job when he is about half
through, says that it is not possible for him to make any money at that
price and he is going to quit. "Well," the employer says, "if you will
keep on I will give you a couple of thousand dollars more." Accordingly
the builder keeps on. That won't do. The builder in keeping on building
is doing no more than he was previously bound to do. If he wants to have
a binding agreement for the extra $2,000 with his employer, he must
secure a promise under seal, for his own promise of performance will not
support the promise to pay.
FORBEARANCE AS CONSIDERATION.--Another kind of consideration that is
worth calling attention to is forbearance. A has a valid claim against
B. He says he is going to sue. B says if he won't sue, or won't sue for
the present, B will pay him an agreed sum. That is a good contract so
long as it is not open to the objection referred to a moment ago; that
is, so long as A's claim is not for a liquidated sum of money and B's
promise is not merely a promise to pay part of that liquidated sum. A
may promise what B requests, either to forbear temporarily or to forbear
perpetually. Either will be good. But suppose A has no valid claim
against B, but B is reputed to be rather an easy mark in the community
and A is a person of little scruple; he accordingly trumps up a claim
against B with the hope of getting a compromise. Is forbearance of that
claim by A good consideration for B's promise? It is not. A's claim must
be a bona fide one in order to make surrender of it or the forbearance
to press it, either temporarily or permanently, a good consideration for
a promise of payment.
STATUTE OF LIMITATIONS.--Another case of a promise relating to a subject
of very frequent importance in commercial law, and law generally, is a
promise to pay a debt barred by the statute of limitations, and this
occasion requires a preliminary word in regard to that statute. This
statute prohibits the bringing of an action or a claim after the
expiration of a certain period. It is a different period for different
sorts of claims. Action on a judgment in most States may be begun
within twenty years after such judgment is rendered; so in some States
may an action on a contract under seal. On the other hand, ordinary
contractual claims generally expire in six years. Claims in tort, that
is, for injury to person or property, last even a shorter time, but the
ordinary contractual statute of limitations is six years. The statute
begins to run against a promissory note, or other contract, not from the
time when it is made, but from the time when it is by its terms to be
performed. A note made now, payable the first of January next, will not
be barred until six years from the first of January, not six years from
now; and if it was made payable in ten years, as a mortgage note might
well be, the statute would not bar it for sixteen years.
PROMISE TO PAY BARRED DEBT.--It has been held, though the reasons are
not very easy to explain, that a new promise will revive a debt so far
as the statute of limitations is concerned. There need be no
consideration for such a promise other than the existence of the old
indebtedness; that is said to be a sufficient consideration, although,
of course, it can hardly be said to be given as a price for the new
promise. Take a promissory note payable January 1, 1905. If nothing
happens, that is barred on January 1, 1911, but if in 1911 or 1912 the
maker says, in effect, "I know I owe that old note. I have not paid is,
but I will pay it," he will be liable on that new promise, and the
statute will begin to run again and run for six years from the making of
that new promise. It is not enough that the debtor should admit that
there was a liability; he must promise to pay it in order to make
himself liable. Suppose, instead of a new promise made after the statute
had run in 1911 or 1912, the maker had said before the maturity of the
note, we will say in the course of 1910, "Don't worry about that note, I
shall pay it," that also will start the statute running afresh. In other
words, the new promise may be made before the maturity of the note, or
before the statute has completely run as well as after the statute has
completely run. In either case the new promise will start a fresh
liability and keep the note alive for six years from the time the new
promise was made. Of course, if the new promise is made the day after
maturity of the old obligation, the total effect will be simply to
extend the time of the statute one day, because only one day of the six
years had run at the time the new promise was made, and counting six
years from the date of the new promise gives only one day more.
PART PAYMENT OF BARRED DEBTS.--Not only will a new promise in express
terms keep the statute of limitations from barring a claim, but any part
payment will have the same effect, unless at the time the part payment
is made some qualification is expressly stated. A debtor may say, "I
will pay you this part of my debt, but this is all," and incur no
further liability; but a part payment without such a qualification
starts the statute running afresh as to the balance of the debt. It is
by these part payments that notes are frequently kept alive for a long
series of years. Interest payments are as effectual for the purpose as
payments on account of part of the principal. A new six years begins to
run from each payment of interest. The debtor may, however, say, "I will
pay you half this debt," or "I will pay you the debt in installments of
$10 a month." Such promises are binding according to their terms, and do
away with the statute of limitations to that extent, but they do not
enable the creditor to recover anything more than the debtor promises. A
question may be asked here which is frequently of importance regarding
an outlawed note with a payment of interest thereon by the maker. Would
an endorser who had waived demand and notice be liable for six years
more? Yes, if the payment was made before the statute had completely run
in favor of the endorser. Otherwise, no. And if the endorser had not
waived demand and notice, the statute could in no case be prolonged
against him by any act of the maker.
REVIVAL OF DEBTS DISCHARGED BY BANKRUPTCY OR VOIDABLE FOR INFANCY.--A
somewhat similar sort of revival of an old obligation may occur where a
debt is discharged in bankruptcy. If a discharged bankrupt promises to
pay his indebtedness or makes a payment on account of it, it will revive
his old obligation and he will be liable again. And, similarly, though
one whom the law calls an infant (that is, a minor under the age of
twenty-one) who incurs indebtedness prior to his majority, can avoid
liability (unless the indebtedness was incurred for what are called
necessaries, that is, food, clothing, shelter and things of that sort);
yet if he promises after he has become of age that he will pay these
debts, from which he might escape, thereafter he is liable.
CONTRACTS WHICH MUST BE IN WRITING.--There is, in some contracts, one
other requisite, besides those already mentioned, necessary to make them
enforceable, and that is a writing. It has already been said that
writing is not, as such, essential to the validity of contracts, but
there are exceptional kinds of contracts which the law has required to
be in writing for many years. This is by virtue of what is known as the
"Statute of Frauds." This was passed in England in the year 1676, and is
known as "Chapter 3, of the Statute of 29, Charles II." This statute was
passed for the purpose of preventing frauds and perjuries which were
particularly prevalent at the time it was enacted. It is doubtful as to
how much good the statute has accomplished. There is no question that in
many cases it has caused fraud and perjury rather than prevented it. The
statute, however, as passed in England, has been reenacted in
practically every State in this country with slight modifications, and
it is, therefore, a part of contract law to which attention must be
given. Originally, the statute read as follows: "No action shall be
brought (1) whereby to charge any executor or administrator upon any
special promise to answer damages out of his own estate; (2) or whereby
to charge the defendant upon any special promise to answer for the debt,
default, or miscarriage of another person; (3) or to charge any person
upon any agreement made in consideration of marriage; (4) or upon any
contract or sale of lands, tenements, or hereditaments, or any interest
in or concerning them; (5) or upon any agreement that is not to be
performed within the space of one year from the making thereof; unless
the agreement upon which such action shall be brought, or some
memorandum or note thereof shall be in writing, and signed by the party
to be charged therewith or some person thereunto by him lawfully
authorized." A word of comment is necessary to explain the general
import of these various sections.
Section 1: An executor or administrator is appointed to settle a
deceased person's estate. He is not obliged to personally pay the debts
of the deceased person out of his own pocket, if the estate is not
sufficient. His liability is limited by the assets of the deceased, but
if, in order to save the credit of the deceased or for any other reason,
he chooses to promise "to answer damages out of his own estate" that
promise must be in writing. This is the situation referred to by this
section.
Section 2: This is a very important class and leads us to call attention
to the distinction between a guaranty and a contract somewhat similar.
Suppose A writes to Jordan, Marsh Company: "Please sell B six good
shirts and charge the same to my account." That is not a guaranty. A is
in that case a purchaser just as much as if he ordered the shirts sent
to himself. Nor is it any more a guaranty if it was further agreed
between A and B that B should pay A for the shirts. On the other hand,
if A should write to Jordan, Marsh Company, "Let B have six shirts and
if he doesn't pay, I will," then you would have a guaranty. It is of the
essence of a guaranty that there should be a principal debtor and that
the guarantor's liability should be only secondary. A guaranty must be
in writing. To put the matter in another way, when there are three
parties to a transaction like the above, the writing is necessary. Where
there are two parties, no writing is necessary. Where A says to Jordan,
Marsh Company, "Let B have six shirts, and if he doesn't pay, I will,"
we have three parties: A, the guarantor; B, the principal debtor, and
Jordan, Marsh Company, the creditor. This must be in writing. Where A
says to Jordan, Marsh Company orally, "Give B six shirts and charge to
my account," we have simply two parties, A, the principal debtor, and
Jordan, Marsh Company, the creditor. Hence no writing is necessary. In
connection with this section, it must be kept in mind that some oral
contracts which would be good under this section may not be enforceable
under another section which we shall refer to later, because the amount
involved is over a specified sum.
Section 3: The agreement referred to by this section is not the contract
or promise to marry, but is for a marriage settlement such as a promise
to make a payment of money or a settlement of property in consideration
of a marriage actually taking place.
Section 4: Any contract for the sale of land, or any interest in or
concerning land, requires a writing in order to make it binding. The
commonest kind of contracts in regard to land are leases or contracts
for leases. An oral lease creates what is called a "tenancy at will,"
that is, the agreement, in so far as it specifies a fixed term, is
wholly invalid, but while the tenant occupies he must pay at the agreed
rate; but he has no right to stay in; he may be turned out, even though
he pays his rent promptly, on notice equal to the time between rent
days; and, similarly, he has a right to go out on giving the same short
notice.
Section 5: An agreement not to be performed within a year must be in
writing, and this provision of the statute has been the subject of
rather an odd construction by the courts. The words "not to be performed
within a year" have been construed to mean "which cannot possibly be
performed within a year." Suppose A hires B for a year from to-morrow
and contrast with that case a promise to hire B for B's life, or for the
promisor's life. Now the first of those bargains is within the statute
and must be in writing, but the second, although it seems for a much
longer period, being for the whole life of the promisor or promisee, is
not within the statute. The man on whose death the promise depends may
die within a year, so there is a possibility of performance within a
year. A promise to employ B for all his life, since that may possibly be
done within a year, need not be put in writing. But a promise to hire a
man for a year from to-morrow cannot be performed in a year. True, he
may die within a year, and then the contract cannot be enforced, but
there will be no performance. What was agreed, by the parties, was
service for a year from to-morrow and that cannot possibly be done
earlier than a year from to-morrow.
SALE OF GOODS.--A contract for the sale of goods exceeding in value a
certain amount must also be in writing unless part or all of the goods
have been delivered or part or all of the price paid. The value of the
goods which brings a sale within this section of the Statute of Frauds
varies in different States, and local statutes, therefore, should be
consulted to ascertain the law in this connection.
Besides the kinds of contracts enumerated in the English statute and
which have generally been adopted in this country there are two or three
other classes of contracts which in a number of States are required by
statute to be in writing. Of this sort is a contract to make a will.
That is not a very common sort of contract, but sometimes a man promises
in consideration of certain services to make a will in another's favor.
The possibility of fraud in such cases is considerable. The testator is
always dead before the question comes up, and then if the alleged
promisee were allowed to prove by oral statements a contract to bequeath
the testator's property on terms which the promisee says were agreed
upon between them, it would afford a chance to produce the same effect
as if oral wills were allowed. So a contract of a real estate agent for
commissions is in some States required to be in writing. A contract with
an agent empowering him to sell real estate, though not regarded at
common law as within the prohibition of the section of the statute for
the sale of an interest in land to be in writing, is by special
enactment in many States required to be in writing. A contract for a
loan of money reserving a rate of interest higher than that ordinarily
allowed by law is sometimes required to be in writing.
WHAT CONSTITUTES WRITING.--The writing being a matter of proof, it is
not essential that it be made at the time the contract is entered into.
If made at any time before an action upon the contract is begun, that is
a sufficient compliance with the statute. The writing, in order to be
sufficient, must show who the parties to the agreement are, if not by
naming them, by such a description as points to a specific person. Thus
a letter addressed simply "Sir," and signed by the party charged, but
not containing the name of the person addressed, is not sufficient. It
is also required that all the terms of the contract appear in the
writing, such as the subject matter, price, terms of credit or any
express warranty, but, as often happens, they need not all be expressed
in one writing. Contracts are frequently made as the result of an
extended correspondence, and in such a case the various letters can be
put together and construed as one writing if they obviously refer to one
another, and thus all the terms appear in writing. The statutes in some
States require "subscription" of the signature, and in that case the
signing must be at the end; but where there is not such requirement a
signing in the body of the instrument is sufficient.
ALTERATION OF WRITTEN CONTRACT BY SPOKEN WORDS.--Failure to understand
and observe the rule restricting parol evidence to vary written
contracts leads to a great deal of trouble. The parol evidence rule is
this: Where parties have executed a written contract purporting to state
the terms of their agreement, the court will not receive evidence that
they orally agreed to something less or more or different, at or before
the time when the written agreement was executed. That written agreement
is taken as conclusive evidence of the contract made at that time. In
trying to ascertain what the writing means, however, the court will
permit the surrounding circumstances to be shown, and the meaning of
technical or trade terms or abbreviations may be proved. It may be shown
also that the parties did not intend the written agreement to be
effective until some particular event happened; but if the writing was
executed as an expression of the intention of the parties at that time,
the only endeavor of the court will be to ascertain the meaning of the
written words and to enforce them as written. The question of oral
agreements made subsequent to the writing is not so simple. We must here
distinguish between (1) contracts of which the law requires written
evidence because they are within the Statute of Frauds, and (2)
contracts which the law does not require to be in writing, but which,
nevertheless, are written. Contracts of the latter sort may be
rescinded, added to or subtracted from by any subsequent agreement which
conforms to the requirements of the law governing mutual consent and
consideration, though of course it is very desirable, to avoid dispute,
that any variation or rescission of a written contract should itself be
in writing. If, however, the Statute of Frauds required the original
contract to be in writing, though it may orally be rescinded, it cannot
be varied by oral agreement. To permit such an oral agreement would in
effect violate the Statute of Frauds by permitting an agreement partly
in writing but partly oral to be enforced. Thus, if a written contract
for the sale of goods (exceeding in value the amount permitted to be
contracted for orally) was made, and the parties afterwards orally
agreed to change the price, the time of delivery, or any other terms of
the contract, the subsequent oral agreement would be invalid.
THE LIMITS OF CONTRACTUAL RELATIONS.--As a general rule a contract does
not impose liabilities or confer rights on a person who is not a party
to it. It follows from the very nature of a contract that a person who
is not a party to it cannot be included in the rights or liabilities
which it creates, so that he will be entitled to sue or render himself
liable to be sued upon it. A contract is the result of a voluntary
agreement entered into by the parties. Therefore, any contractual rights
or liabilities existing by virtue of such voluntary agreement between
Smith and Jones are no concern of White and Black. They cannot be bound
by any of the provisions of the contract between Smith and Jones, nor
can a breach of that contract give them any rights. There are apparent
exceptions to the rule we have just mentioned. One is in the case of
agency. Here one person represents another in entering into a contract.
A contract, however, made by an agent can bind a principal only by force
of a previous authority or a subsequent ratification, so that really the
contract which binds the principal is his own contract. The other
exception is where the rights and liabilities created by a contract may
pass to a person other than the original party to it, either by act of
the parties themselves or by operation of law. Such would be the case
where Smith and Jones have performed the terms of their contract except
that Smith has not paid the agreed amount to Jones. Jones assigns his
right to collect this amount to White. Such an assignment is
permissible, as we will learn when we consider that subject later on.
Such is an assignment by act of the parties themselves. Even this
exception is limited, as the obligations incurred in purely personal
service contracts are not subject to assignment. Thus, if I employ
artist Greene to paint my portrait, he could not assign this contract
and compel me to accept a portrait painted by artist Brown.
THE RULE OF LAWRENCE v. FOX.--We shall now take up a very generally
recognized exception to the principle we have just discussed. The
question in its simplest form is this: If Smith and Jones make a
contract for the benefit of Greene, may Greene sue on that contract?
From what we have said in the preceding paragraph a negative answer
might seem to be correct. However, to-day, stated in general terms, and
leaving out of the question the limitations recognized in various
jurisdictions, the very general rule is that a third party (Greene in
our illustration) may enforce a promise made for his benefit, even
though he is a stranger both to the contract and to the consideration.
In other words, it is held not to be necessary that any consideration
move from the third party. It is enough if there is a sufficient
consideration between the parties who make the agreement for the benefit
of the third party. So in the leading case of Lawrence v. Fox, 20 New
York 268, where a debtor of the plaintiff had loaned money to the
defendant and the defendant had promised him to pay the plaintiff,
although the plaintiff was not a party to the contract, it was held that
where a promise is "made to one for the benefit of another, he for whose
benefit it is made may bring an action for its breach."
QUALIFICATION OF RULE.--We must call attention to one qualification
quite generally recognized. Under this rule, that a beneficiary may
enforce a contract, it is necessary that the contract must have been
intended for the benefit of a third person. It is not sufficient that
the performance may just happen to benefit a third person; it must have
been intended for the benefit of a more or less definite person. Thus,
where a county board had entered into a contract with a construction
company which was building a bridge for it and maintaining a temporary
foot bridge during the operation, by the terms of which contract the
construction company assumed responsibility for all injuries suffered by
pedestrians using the temporary foot bridge, it was held that a person
who was injured because of the failure to light the foot bridge
properly, was not such a third person as might sue under the rule of
Lawrence v. Fox, on the contract made between the county board and the
construction company.
APPLICATION OF RULE.--The rule in Lawrence v. Fox has been applied to
contracts under seal in many jurisdictions, although there are some
decisions to the contrary. A common application of this doctrine is
found in the sale of real property with a mortgage upon it. The new
purchaser as a part of the purchase price makes an agreement whereby he
assumes the payment of the mortgagee. The question of whether the
mortgagee, who is really the third party for whose benefit the contract
is made, may sue the new owner, is generally answered in the
affirmative.
CAPACITY OF PARTIES.--All persons are ordinarily presumed to be capable
of contracting, but the law imposes upon some--in varying amounts and
for their own protection--disabilities to make contracts which may be
enforced against them; and, upon some, for considerations of public
policy, disabilities to make enforceable contracts. These persons are
(1) Infants; (2) Insane persons; (3) Drunkards; (4) Married women--to a
limited extent; (5) Aliens; (6) Artificial persons or corporations.
WHO ARE INFANTS.--All persons under the age of twenty-one are considered
infants, except that in some States, by statute, women attain their
majority at eighteen. The law endeavors to protect those who have no
experience and judgment against the loss of their property because of
their inability to deal safely with others who might take an advantage
of that fact. It may well be that one who has nearly attained his
majority is as able in fact to protect his interests as one of full age,
but the essence of the law is that it is a rule of universal
application, and the law cannot measure the ability in each particular
case. To do the greatest good for the greatest number, therefore, it
conclusively presumes that those under twenty-one have not yet gained
the ability to cope with others in the preservation of their property.
CONTRACTS OF AN INFANT.--An infant's contracts are voidable; that is,
though they bind the other party to the bargain the infant himself may
avoid them. If he avoids them the adult with whom he contracted is
entitled to recover whatever he may have given the infant which still
remains in the latter's possession; but if the infant has spent or used,
or for any reason no longer has the consideration which the adult gave
him, the infant may avoid his own obligation if he has not already
performed it, and if he has already performed it he may reclaim what he
has given. After he comes of age, but not before, the infant may ratify
his contracts and they then become binding upon him. The retention after
coming of age of property received by the infant during his minority
amounts to a ratification. There are a few obligations of an infant
which on grounds of public policy are binding upon him. This is true of
a contract to perform military service. The marriage of an infant is
binding though his engagement is not. It is frequently said that his
contract for necessaries is binding; strictly this is not true. The
infant is liable for necessaries, but his obligation does not depend
upon his contract; it is an obligation imposed by law--what has been
called a quasi-contract. The importance of this distinction is shown if
the price agreed upon exceeded the real value of the necessaries. If the
contract were binding, the infant would be bound to pay the agreed
price, but in fact he is liable only for the fair value. What is
necessary for an infant depends upon his station in life, upon whether
he already has a sufficient supply of the necessary article in question,
and upon whether he is receiving proper support from a parent or
guardian. The privilege of an infant is generally held to exist even
though the party dealing with him not only reasonably believed the
infant of age, but had received actual representations from the infant
to that effect.
INSANE PERSONS AND DRUNKARDS--The law affords protection to insane
persons and, to a less extent, to drunkards, for the same reason as in
the case of infants, namely, that those who are incapable of
understanding what they are doing and of comprehending the effect of
their contracts upon their property should be safeguarded against the
designs of the more capable. This protection is given them by declaring
some of their contracts void, and allowing them, or those legally
representing them, to avoid all others with the exception of a few.
Also, as in the case of infants, this privilege as to such contracts is
for the insane person's protection only, and the other party to the
contract may not avoid it by pleading that it was made with an
incompetent person.
WHOM DOES THE LAW CONSIDER INSANE?--Modern science has clearly
established that a person may be insane on one subject, and yet possess
a clear understanding and be perfectly sound on another. If the contract
deals with a subject of which the person has a clear understanding, he
is not in need of protection and is given none. Those only are given the
protection who do not possess the mind to understand in a reasonable
manner the nature and effect of the act in which they engage.
BINDING OBLIGATIONS FOR NECESSARIES.--The insane must live as well as
the sane; consequently they are bound to pay for necessaries furnished
them but only the reasonable value, as has been explained in the case of
infants. The rules for determining what these necessaries may be are the
same as in the case of infants.
OTHER CONTRACTS.--It is often a difficult matter to know when a person
is insane, much more difficult than it is to determine a person's age.
One of the contracting parties may have acted in perfect good faith,
being ignorant of the other's unsoundness of mind and having no judicial
determination of insanity or other warning to put him on his guard. The
contract even may be reasonable in its terms, and it may have been so
acted upon that the parties to it cannot be restored to their original
position. In such a case, while the law should protect the incompetent,
it would be clear injustice to protect him to such an extent as to make
the other party suffer through no fault of his own. It has been quite
generally determined in this country, therefore, that where a person
does not know of the other's insanity and there has been no judicial
determination of such insanity to notify the world of it, and the
contract is a fair one, and has been so acted upon that the parties
cannot be restored to their original position, it is binding upon the
lunatic as well as upon the other party.
VOID CONTRACTS.--In some States it is held, however, that all contracts
of an insane person are void. In such States the rule above stated would
not hold. The law of each State must be consulted to determine the law
in the particular State. In some States, notably New York and
Massachusetts, an insane person's deed of lands has been held to be
void, without reference to whether or not the other party entered into
the contract in good faith without notice, or that it has been so far
acted upon that the parties cannot be restored to their original
position. As in the case of infants, an insane person's power of
attorney has been declared by high authority to be absolutely void.
VOIDABLE CONTRACTS.--In most jurisdictions an insane person's contracts
are voidable by him or by his guardian, provided (1) that the other
person knew of his insanity at the time of making the contract, or (2)
he had been declared insane by some court, or (3) the parties can be
restored to their original position.
RATIFICATION AND AVOIDANCE.--When the insane person's reason has been
restored, if the contract is a voidable one, as explained in the
foregoing rules, though he may by acts or words avoid the contract he
made during his insanity, he may in like manner ratify it, or he may
ratify it by not avoiding it within a reasonable time after recovering
his reason while continuing to keep something capable of being returned,
which he obtained under the contract.
WHAT CONSTITUTES DRUNKENNESS.--It is not ordinary drunkenness which
excuses a man from his contracts, and enables him to claim the
protection given generally to incapable persons. The person must have
been utterly deprived of his reason and understanding, so that he could
not comprehend the nature or effect of the act in which he was engaged.
That he was so much under the influence of liquor that his judgment was
not as good as in his normal state does not excuse him.
MARRIED WOMEN.--It is practically impossible to state in brief form the
law upon the subject of married women's contracts. The difficulty arises
from the diverse changes made in the plain and clear rules of the common
law by statutes in the different States. The old law is wholly
incompatible with the enlightened view now held in regard to women,
their family, social and business standing, and the changes have been
made to give them the rights to which they are justly entitled. But,
inasmuch as the statutes have not been uniform in the different States,
the law to-day is not wholly uniform. The statutes and decisions in each
State must be consulted to determine the law on the subject as it is
to-day. Through these changes the law has become very complicated, and
business men should obtain legal advice before entering into important
business dealings with married women.
THE OLD RULE.--Upon her marriage a woman's existence became merged in
that of her husband, and the husband and wife were regarded for many
purposes as one person. What tangible personal property she had became
his immediately upon marriage, and he had the right to reduce her bills,
notes, bonds and other debts to his possession. Her real property she
retained the title to, subject to the right of the husband to have the
use of it during his life, if children were born of the marriage. He was
bound to supply her with necessaries, and so long as he did this her
contracts for things of even ordinary use were void; but if he failed to
supply the necessaries her contract for them would be valid. All her
other contracts were absolutely void--not voidable. Her position, then,
was worse than an infant's. She could have personal property of her own
only if it was given to someone else to hold the title and pay over the
income to her, and even this "separate estate," as it was called, could
not be bound by her contracts.
CHANGES MADE BY STATUTE.--The law of married women's contracts has been
greatly changed by legislative enactments, to give married women the
rights which the more enlightened view of the present time accords to
them. The first changes aimed quite generally to give her greater
rights over her "separate estate," giving her power to make binding
contracts with reference to it, or to make binding contracts if she were
carrying on a trade or business of her own. But the earlier statutes
frequently did not give her power to contract with her husband, or to
make binding contracts if she had no separate estate, or was not
carrying on a separate business. Later enactments have largely corrected
these defects, but the old rule still stands except as it has been
changed by statute, and, therefore, the statutes of each State and the
decisions interpreting them must be consulted to determine accurately
the law in each State. It may, however, be said that generally a married
woman may now contract except with her husband, and except as surety for
him. In many States she can even make contracts of these excepted
classes.
ALIENS.--An alien is one born out of the jurisdiction of the United
States, of a father not a citizen of this country, and who has not been
naturalized. In times of peace, aliens may hold property and make
contracts and seek the protection of our courts as freely as citizens.
When war breaks out between this country and another the making of
contracts between citizens of the two countries is prohibited. If such
contracts are made during a state of war, they are illegal and void, and
the courts of this country will not lend their aid to enforce them,
either during the war or after its termination. Contracts made before
the war breaks out are good, but cannot be enforced, nor can remedies
for their breach be obtained, while the war is in progress. When the war
ceases, however, the courts will lend their aid to the enforcement of
such contracts.
CORPORATIONS.--A corporation may contract as freely as an individual so
long as its contracts are within the business powers and scope of the
business which its charter authorizes it to conduct. And even if a
corporation has made a contract outside of the scope of its business,
and the contract has been acted upon so that either party has had the
benefit of the contract, an action will lie in favor of the other for
the benefits so conferred. But a contract outside of the business which
its charter permits the corporation to engage in, and which is wholly
executory, the courts will not enforce. Such contracts are said to be
ultra vires. Contracts with a corporation may be in the same form as
contracts between individuals, and the corporation need use its seal
only where an ordinary person is required to use one. The officer or
officers making the contract on behalf of a corporation must, however,
be authorized so to do either by the directors or by the general powers
attached to such officers. In law corporations are deemed to be
artificial persons subject in a general way to provisions governing
natural persons.
CHAPTER III
Contracts--Performance and Termination
PRIMARY RULE.-After a contract has been formed, it does not make much
difference whether it is under seal or whether it is a simple contract;
the rules governing the contract, subsequent to its formation, are very
much the same though there are a few distinctions. The primary rule
running through the law, governing obligations to perform contracts, is
that if a man has once formed a good contract he must do as he agreed,
and if he fails substantially (not merely slightly) to do so the other
party may refuse to perform on his part. If you remember that
fundamental principle you cannot generally go far wrong.
CONDITIONAL CONTRACTS--INSURANCE.-What one agrees to often depends on
the conditions which he includes as part of his promise. Take the
insurance policy previously alluded to. An insurance company promises to
pay $5,000, but it does not promise to pay in any event; the condition
"if the house burns down" is obviously a qualification of the promise.
But there are other conditions in the insurance policy. The insurance
company says that it will not be liable if gasoline is kept in the house
beyond a small quantity necessary for cleaning. That, too, is a
condition of its promise to pay $5,000; so that "if the house burns
down," "if gasoline is not kept in the house," "if the house is not
unoccupied more than three months," and "if mechanics are not allowed in
possession of the property for more than a certain length of time," are
all conditions, and the company's main promise need only be kept if the
conditions are complied with. That is why an insurance policy is not
always quite as good as it seems--because there is a large promise in
large print; but there are a good many qualifications in smaller print
which are really part of the promise and must be taken into account.
CONDITIONS IN BUILDING CONTRACTS.--Another kind of conditional promise
often occurs in building contracts. The employer agrees to pay the
builder or contractor on the production of an architect's certificate.
Now it doesn't do the builder any good to build that house unless he
gets the architect's certificate, for he has been promised pay only on
condition that he produce it. That is the promise between the parties.
That is the only promise.
WHEN PERFORMANCE OF CONDITIONS IS EXCUSED.--It is obvious that these
conditions in promises may be sometimes used to defeat the ends of
justice, and undoubtedly at times they are so used. A person who draws a
contract cleverly will put in a great many conditions qualifying his own
liability, and will try to make the promise on the other side as
unconditional as possible. The law cannot wholly do away with these
conditions, because in general, so long as parties do not make illegal
bargains, they have a right to make such bargains as suit themselves.
The court cannot make their agreement for them, but it is held that if a
condition will lead to a real forfeiture by an innocent promisee, the
law will relieve the promisee. Thus, in the architect's certificate
case, if the house was properly built and it was merely ill temper on
the part of the architect that caused him to withhold giving the
certificate, the court would allow the builder to recover, and even if
the architect had some good reason for refusing the certificate, the
court would not allow the builder to be permanently prevented from
recovering anything on the contract, providing the builder had
substantially though not entirely performed his contract and had acted
in good faith. If, however, his default was wilful, if he had tried to
beat the specifications, and the architect had found him out and
therefore refused the certificate, the only thing the builder could do
would be to go at it again, tear out his faulty construction and build
as he had agreed.
IN CONTRACTS OF EMPLOYMENT, WORK MUST BE PERFORMED BEFORE PAYMENT IS
DUE.--There are other matters which qualify the obligation of a promisor
to perform besides express conditions such as those we have alluded to.
Take this case: John promises to work for the A. B. Company; the A. B.
Company promises to employ him and to pay him a salary of $1,000 a year.
John comes to work the first day and works a while, and then he says he
would like his thousand dollars. The A. B. Company says, "Well, you have
got to do your work first." John says, "Why should I work first and
trust you for pay, rather than you pay first and trust me for the work?
I will keep on working, but I want the pay now." Of course, the employer
is right in refusing to pay until the work has been done, even though
the promise of the employer is not expressly qualified by the statement
that after the work has been done he will pay $1,000. It has been
dictated by custom, rather than by anything else, that where work is to
be performed on one side and money to be paid on the other, in the
absence of any statement in the contract to the contrary, the work must
be done before the pay is given. The result is this: that John must work
anyway, his promise to work being absolute; but the employer's promise
to pay the money is, in effect, conditional. It is subject to an implied
condition, as it is called, that John shall have done the work he agreed
to do. The promise of the employer is, in effect, "I will pay if you
previously have done the work." But John's promise is absolute: "I will
work." He has to trust for the pay.
PERFORMANCE FIRST DUE UNDER A CONTRACT MUST BE GIVEN BEFORE PERFORMANCE
SUBSEQUENTLY DUE FROM THE OTHER PARTY CAN BE DEMANDED.--And that case is
an illustration of a broader principle which may be stated in this way:
where the performance promised one party to a contract is to precede in
time the performance by the other side, the party who is to perform
first is bound absolutely to perform; whereas the party who is to
perform subsequently may refuse to perform unless and until the other
party performs. In the cases thus far alluded to, the promises of the
two parties could not be performed at the same time. You cannot work for
a year and pay $1,000 simultaneously. One performance takes a whole year
and the other performance takes only a moment.
PERFORMANCES CONCURRENTLY DUE.--But frequently there arise cases where
both promises can take place at the same time. The commonest
illustration of that is a contract to buy and sell. You can pay the
price and hand over the goods simultaneously, and when a contract is of
this character, that is, where both performances can be rendered at the
same time, the rule is that in the absence of agreement to the contrary,
they must be performed simultaneously. John agrees to buy James' horse
and pay $200 for it, and James agrees to sell the horse for $200; that
is a bilateral contract of purchase and sale. Now suppose neither party
does anything, has each party broken his promise? It might seem so, for
John has not bought the horse or paid for it as he agreed, nor has James
sold the horse. But where each party is bound to perform simultaneously
with the other, if either wants to acquire any rights under the contract
he must do what is called putting the other party in default, that is,
he must offer to perform himself. John, therefore, must go to James,
offer $200 and demand the horse if he wants to assert that James has
broken his contract. And James, on the other hand, if he wishes to
enforce the contract, must go with the horse to John and say, "Here is
the horse which I will hand over to you on receiving simultaneously the
$200 which you promised me for it." The obligation of the two promises
when they can be performed simultaneously is called concurrently
conditional, that is, each party has a concurrent right to performance
by the other, and has a right to refuse performance until he receives,
concurrently with his own performance, performance by the other party.
INSTALLMENT CONTRACTS.--Sometimes contracts are more complicated than
those which we have stated, such as contracts of service and contracts
to buy and sell. This, for instance, is a type of a very common sort of
contract in business: a leather manufacturer uses large quantities of
tanning extract in his tannery. He makes a contract for a regular
supply, so many barrels each week for a year, for which he agrees to pay
a specified price a barrel on delivery. For a time the extract promised
him is sent just as agreed. We will suppose, then, that perhaps the
extract manufacturer is slow in sending what he promised; there is a
delay; perhaps the extract that is furnished is not as good as it was or
as the contract called for. What can the leather manufacturer do about
it? Of course, he can keep on with the contract, taking what the extract
manufacturer sends him, getting as much performance as he can, and then
sue for such damages as he may suffer because of the failure to give
what was promised completely. But he does not always want to do that.
Suppose it is necessary for his business that he should get tanning
extract and get it regularly. He does not want to wait and take chances
on the extract manufacturer's delays in delivery and inferiorities in
quality. He wants to make a contract with somebody else and get out of
his bargain with the first extract manufacturer altogether. May he do
so? No question in contracts comes up in business more often than that.
And the answer to the question is this: it depends on the materiality of
the breach, taking into consideration the terms of the contract and the
extent of the default. Is the breach so serious as to make it fair and
just in a business sense to call the contract wholly off; or will
justice be better obtained by making the injured party keep on with the
contract and seek redress in damages for any minor default?
MATERIALITY OF BREACH IN CONTRACTS OF EMPLOYMENT.--The same thing comes
up very often in contracts of employment. Suppose an employer hires an
employee for a year, and in the course of the year the employee at some
time or other fails to fulfill his contractual duty as an employee.
He is negligent and in some respect fails to comply with his contract
to render good and efficient service. Can the employer discharge him?
We must ask how serious is the breach. A merely negligent breach of
duty is not so serious as one which is wilful. Or the breach might be
on the other side of the contract. Suppose the employer has promised
to pay a certain sum each month as salary during the year, and does
not pay promptly. Has the employee a right to say, "You pay my salary
on the first day of the month as you agreed, or I leave"? No, he does
not have a right to speak so positively as that. A single day's delay
in the payment of one month's installment of salary would not justify
throwing up a year's contract. On the other hand, if the delay ran along
for any considerable time, it would justify the employee in refusing to
continue. You will see that this principle of materiality of the breach
on one side, as justifying a refusal to perform on the other, is rather
an indefinite one. It involves questions of degree. That is so in the
nature of the case. The indefiniteness of the rule, therefore, cannot
very well be helped.
ILLUSTRATIONS AND DISTINCTIONS.--A few concrete illustrations may help
to bring out the points under discussion. Suppose an agreement for the
sale of real estate, and, for instance, the buyer is unable to be on
hand the day the sale is to be completed, and the owner is present, and,
finding the buyer absent, immediately sells the land to another. Now is
there any action against the owner, or might he justly refuse to go on
with the contract because of the momentary breach of contract? No, he
cannot refuse to go on in the case of a contract of that sort to sell
real estate, unless the contract very expressly provided that the
transaction must be carried through at the specified time and place or
not at all. The case would be governed otherwise by the principle of
materiality of the breach, to which we have alluded. A brief delay would
not be a sufficiently material breach to justify the seller in refusing
to go on, but a long delay, of course, would be sufficient. In sales of
personal property time is regarded by the law as more important than in
sales of land. In contracts to sell stocks varying rapidly in value,
time is a very important element. Suppose now that an option for a piece
of land was given by the owner. May he dispose of the land to another a
few minutes after the time specified in the option for the acceptance of
the offer? That is different from the case previously put. The option is
in effect an offer to make a sale, and the offer is by its terms to
expire, we will say, at 12 o'clock, noon, October 23. It will expire at
that time, and an acceptance a minute later will be too late. The
difference is in the terms of the promise made by the different parties.
In the case put first, there is an unqualified contract to buy and sell.
In the case now put there is a promise to sell only if the price is
tendered or if acceptance is made prior to 12 o'clock, noon, October 23.
The terms of the option, assuming in its favor that it was given for
consideration or was under seal and therefore not merely a revocable
offer, were expressly conditional. The vital thing in contracts is to be
sure of the terms of your promise. The term option indicates a right
which exists up to a certain point; beyond that point there is no right.
PROSPECTIVE INABILITY OF ONE PARTY EXCUSES THE OTHER.--There is one
other thing besides actual breach by his co-contractor, which justifies
one party to a contract in refusing to go on with the contract, and that
may be called prospective inability to perform on the part of the other
side.
INSOLVENCY OR BANKRUPTCY.--Let us give one or two illustrations of that.
You have entered into a contract to sell a merchant 100 barrels of flour
on thirty days' credit. The time has come for the delivery of the flour,
but the merchant is insolvent. He says to you, "I want you to deliver
that flour; the agreed day has come." You say, "But you cannot pay for
the flour." "Well," he replies, "it is not time to pay for it. You
agreed to give me thirty days' credit: perhaps I shall be able to pay
all right then. I have not broken my promise yet, and as long as I am
not in default in my promise you have no right to break yours." You have
a right to refuse to deliver the flour because, though the buyer has not
yet broken his contract, the prospect of his being able to keep it, in
view of his insolvency, is so slight that his prospective inability to
perform in the future, when the time comes, excuses you from going on
now. Insolvency or bankruptcy of one party to a contract will always
excuse the other party from giving credit or going on with an executory
contract, unless concurrent performance is made by the insolvent party
or security given for future performance.
REPUDIATION.--Repudiation of a contract by one party is also a good
excuse. Repudiation means a wrongful assertion by one party to a
contract that he is not going to perform in the future what he agreed.
After such repudiation the other party may say, "I am not going to
perform now what I agreed to perform, since you have said you will not
perform in the future what you agreed. I shall not go ahead and trust
you, even though I did by the contract agree to give you credit, in view
of the fact that you have now repudiated your agreement by saying that
you are not going to do what you agreed." Repudiation may be indicated
by acts as well as by words, and often is indicated partly by words and
partly by acts.
TRANSFER OF PROPERTY TO WHICH THE CONTRACT RELATES.--Still another
illustration of prospective inability arises where a contract relates to
specific property, as a certain piece of land, and before the time for
performance comes, the owner of the land, who had agreed to sell it we
will suppose, transfers it to somebody else or mortgages it. The man who
had agreed to buy that piece of land may withdraw from the contract. He
may say, "You might get the land back at the time you agreed to perform,
but I am not going to take any chances on that. I am off the bargain
altogether."
IMPORTANCE OF EXACT PROVISIONS IN CONTRACTS.--So much for the rather
difficult subject of the mutual duties of parties to a contract in the
performance of it. The best way to avoid doubt or uncertainty in such
matters is to provide very exactly in the contract what the rights of
the parties shall be in certain contingencies. The law always respects
the intention of the parties when it is manifested, and it is only when
they have said nothing about their intention that the rules which we
have considered become important.
FRAUD.--The next question in regard to contracts arises out of certain
grounds of defense that may come up and the most important of these is
fraud. Fraud is deception; it is inducing the other party to believe
something which is not true, and, by inducing him to believe that,
influencing his action. The ordinary way in which fraud is manifested is
by misrepresentations. A purchase or sale of stock or of goods may be
induced by fraud. A loan may be obtained from a bank by fraud, that is,
by misrepresentation of material facts which influence the other side to
act.
MISSTATEMENTS OF OPINION ARE NOT FRAUDULENT.--Now what kind of
misrepresentation amounts to fraud? There must be misrepresentation of a
fact. Merely misrepresentation of opinion is insufficient and what is
opinion and what is fact has been the basis of a good many lawsuits.
John offers his horse to James for sale at $300. He says that it is the
best horse in town. Well, it is not the best horse in town by a good
deal, but that sort of statement cannot be the basis of an allegation of
fraud. That a thing is "good," or "the best in the market," or similar
general statements, all of which ought to be known to the hearer to be
simply expressions of opinion, are not statements of positive fact. Take
these two statements in regard to the horse. "He can trot very fast."
That is a mere statement of opinion. To some minds eight miles an hour
is very fast; to more enterprising persons fifteen miles an hour is
necessary in order to make travel seem fast. Those are matters of
opinion. But a statement that the horse can trot twelve miles an hour,
or has trotted one mile in three minutes on the track, are statements
of fact, and if untrue are fraudulent. A statement of value is a
statement of opinion and cannot be the basis of fraud. A statement that
the horse is worth $300, or is worth twice as much as the owner is
asking for him, cannot be relied upon; but a statement that $300 was
paid for this horse, or was offered for him, is an assertion of fact,
and if untrue would be the basis of an allegation of fraud.
PROMISES ARE NOT FRAUDULENT BECAUSE BROKEN.--A promise is not a
statement of fact. A man may promise to do something and fail to carry
out the promise, and in consequence the person he was dealing with may
regret the bargain he entered into, but his only remedy is to sue for
damages for breach of the promise if it was part of a contract. He
cannot assert that merely because the promise was not kept the
transaction was fraudulent. But if a man makes a promise knowing when he
makes it that he cannot keep it, he is committing a fraud. The commonest
illustration of this is where a man buys goods on credit, having at the
time an intention not to pay for them, or well knowing that he cannot
pay for them.
STATEMENTS MUST HAVE BEEN CALCULATED TO INDUCE ACTION.--Generally
speaking, the statement relied on as fraudulent must have been made with
the purpose of inducing action. For instance, suppose John likes to tell
large stories. He tells James things about his neighbor's horse. John
does not do this for any purpose except to brag about living near a man
who has such a splendid horse, but James suddenly takes the notion he
would like to have that horse and he goes and buys it. Now it was not
legal fraud on John's part to tell those lies about the horse, even
though they did induce James to go and buy it, unless John, as a
reasonable man, ought to have known that James was likely to buy the
horse, as might have been the case if James had been talking about
buying him. Then it would be fraud, and it would not make any difference
in regard to its being fraudulent that John had nothing to gain by
telling these lies, that he was simply doing it for the fun of the
thing.
REMEDIES FOR FRAUD.--What remedy has the defrauded person? The law gives
him two remedies of which he may take his choice; he cannot have both,
but he can have either. One is to sue the fraudulent person for such
damages as have been suffered, and the other is to rescind the
transaction, to get back what has been given, or to refuse to go on with
the contract at all if it is still wholly executory.
DURESS AND UNDUE INFLUENCE.--There are certain defences similar to
fraud; duress, or undue influence, is one of them. However, this is
comparatively rare. It is compelling a person to do what he does not
want to do, making him agree to a bargain that he would not agree to
accept under compulsion, as by fear of personal violence or
imprisonment; and a bargain made under these circumstances can be
rescinded or set aside. Merely threatening to enforce your legal rights
by suit against another is not duress, though it may in fact induce him
to agree to what he would not otherwise have agreed; but to threaten
criminal prosecution as a means of extorting money or inducing an
agreement is illegal and in many jurisdictions is itself a crime.
MISTAKE OF FACT.--In certain cases, also, a mutual mistake of a vital
fact is ground for setting aside a contract, but these cases are not
very common. Mistakes generally do not prevent the enforcement of
contracts. Usually where there is a mistake, it is of a character for
which one party or the other is to blame. If the mistake arises out of
deception it is fraud. If the mistake arises simply because the mistaken
party has failed to inform himself of the facts, as he might have done,
then it is no defence at all. But if both parties were acting under the
mutual assumption that some vital fact was true in making a bargain,
either one of them may avoid or rescind the bargain when it appears they
were both mistaken.
IMPOSSIBILITY.--Impossibility is sometimes a defence to the performance
of a contract. Perhaps the simplest illustration of this arises in a
contract for personal services of any kind. Illness or death of the
person who promises the services excuses performance. Death does not
usually terminate a contract or serve as a defence to it. If a man
contracts to sell 100 bushels of grain and dies the next day his estate
is liable on the contract just as if he continued alive; but if he
agreed to hire a man as an employee for a year, his death or the
employee's death within the year would terminate the obligation of both.
Unexpected difficulty is not impossibility. For instance, take a
building contract: the builder agrees to put up a building within a
certain time; he is prevented by strikes. Nevertheless, he is liable for
not doing as he agreed. He should have put a condition in his promise,
qualifying his agreement to build, that if strikes prevented, he would
not be liable. So, if the foundation gave way and the building tumbled
down before it was finished, the builder must put it up again. Also, if
lightning struck it, he must put it up again.
ILLEGAL CONTRACTS.--One other matter to be considered in connection with
contracts and defences to them is illegality. Some kinds of illegal
contracts are so obviously illegal that it is not necessary to say
anything about them. Anybody would know that they were illegal and that
they could not be enforced for that reason. A contract to steal or
murder or take part in any crime is a good example. But other kinds of
illegal contracts are not so obviously wicked as to make it clear that
they are unenforceable. It may be worth while to mention a few of these
kinds of illegality.
CONTRACTS IN RESTRAINT OF TRADE.--One class of contracts which has
become very important in late years in business is the contract in
restraint of trade, so called. The original contracts in restraint of
trade were contracts by which one man agreed that he would not
thereafter exercise his trade or profession, the object generally being
that the promisee should be freed from the competition of the man who
had promised to refrain from exercising his trade; and the law became
settled a good many years ago that if the promise was general not to
exercise the trade or profession anywhere, or at any time, it was
illegal, but that if it was only for a reasonably limited space of time
it would not be illegal. That old law still exists, but there has grown
up further a much more important class of cases where contracts are made
to further an attempted monopoly, and one may say pretty broadly that
all such attempts are illegal. It does not matter how much business
reason there is for it; any attempt to combine in order to get a
monopoly, or in order to put up prices, is bad. Moreover, if the
attempted restraint of trade or monopoly concerns interstate commerce,
the agreement is a Federal crime under the Sherman law.
GAMBLING CONTRACTS.--Another kind of illegal contract is a gambling
contract. This seems obvious in agreements for the more extreme kinds of
gambling, but in certain business transactions where the matter becomes
important, the dividing line is not so clear; especially in dealings on
stock exchanges and exchanges for sales of staple products, such as
grain, cotton and coffee. The stock exchanges and other exchanges are
made the means of a great deal of speculation, which is virtually
gambling. Now, in what cases does the law regard these transactions as
gambling and, therefore unenforceable, and in what cases are they legal?
The answer is, if an actual delivery of the stock, or commodity bought,
is contemplated, then the transaction is not gambling in the legal
sense; but if a settlement merely of the differences in buying and
selling prices is contemplated, as the only performance of the bargain,
then the transaction is gambling. The difference is between a
stock-exchange business and a bucket-shop business. If you give an order
to a stock-exchange house to buy stock, even though you put up but a
small margin and could put up but a small margin, and the stock-exchange
house knows you could put up but a small margin, nevertheless, the
stock-exchange house actually buys that stock, and it is delivered to
it. The stock-exchange house would then have a right to demand of you
that you pay for that stock in full and take delivery of it, and could
sue you for the price if you failed to comply with the demand. However,
as a matter of fact, it does not ordinarily do that. If it wants to get
the price which you promised to pay, and you fail on demand to take up
the stock, it sells the stock which it has been holding as security. The
bucket-shop, on the other hand, though it takes your order to buy, does
not actually buy the stock; it simply settles with you when you want to
settle, or when it wants to settle, because the margin is not
sufficiently kept good, by calculating the difference between the price
at which the stock was supposedly bought and the price at which it is
supposedly sold, those prices being fixed by the ruling market
quotations at the time. It would be perfectly possible to make a
gambling transaction out of the stock-exchange transaction by a very
slight change. If a stock-exchange house should agree, for instance,
that the customer should not be compelled to take delivery of the
stock, then that added agreement would make the transaction between
broker and customer a gambling transaction, even though the broker
actually bought the stock on the exchange, and, as between himself and
the other broker on the exchange with whom he dealt, there was a
perfectly valid sale of the stock. In some jurisdictions, by statute,
speculative contracts which are not gambling contracts at common law are
made illegal.
BREACH OF FIDUCIARY DUTIES.--Another very important class of illegal
transactions arises from breach of fiduciary duties. A fiduciary is
rather hard to define. He is somebody that owes a duty higher than a
mere contractual obligation, a duty involving something of trust and
confidence. A trustee is a fiduciary, so is an agent. A director or
officer of a corporation is a fiduciary, and any dealing in which a
fiduciary violates his duty to the person for whom he is fiduciary is
illegal, and any agreement for such a violation is an illegal contract.
It is illegal for a trustee to bargain for any advantage from his trust
other than his regular compensation. It would be illegal for a trustee
to bargain with a bank to give the bank a trust account in return for
some personal advantage, as a loan to be made to the trustee personally.
It would be a breach of fiduciary duty for a corporation officer and
director to bargain for any personal advantage by virtue of his official
action.
KNOWLEDGE OF ANOTHER'S ILLEGAL PURPOSE.--The knowledge of another's
illegal purpose will not make the person who knows of it himself guilty
of illegality; but if one not only knows but in any way promotes the
illegal purpose of another, he will be considered a party to the
illegality. A may sell goods to B, knowing that B is going to use them
illegally, and A's sale will not be illegal; but if A does anything to
help B in using them illegally, or if the goods are of such a character
that they can be used only illegally, then A would be guilty of
illegality himself.
MEANING OF ASSIGNMENTS.--Much of the difficulty regarding assignment of
contracts is due to different meanings which may be attached to the word
assignment. When property is assigned the assignee becomes the owner in
every sense, if the person from whom he took the assignment had a valid
title. This is not true of the assignment of contracts. By the common
law, contract rights or "choses in action," as they are termed in law,
were not assignable, the reason being that one who contracted with A,
cannot without his consent become bound to B.
POWER OF ATTORNEY TO COLLECT A CLAIM.--Though when a man had a contract
right he could not by common law make B in a complete sense the owner of
the claim, he could give B a power to collect the claim as his, A's,
agent, and authorize him to keep the proceeds when the claim was
collected. It long ago became established that when an owner of a claim
purported to make an assignment of a claim he thereby gave the assignee
the power to enforce the claim in his stead, and this power given the
assignee is irrevocable.
EFFECT OF ASSIGNMENT OF RIGHTS.--It may be supposed that the effect of
an assignment of a right, though the result may be worked out by
treating the assignee as an agent or attorney of the assignor, is the
same as if the assignee were fully substituted in the position of the
assignor as owner of the claim, but this is not quite true. Assuming
that the claim is not represented by negotiable paper, the legal owner
of the claim is still the assignor. This is shown by the fact that if
the debtor pays the assignor in ignorance of the assignment, the debt is
discharged and the assignee can only go against his assignor for the
latter's fraudulent conduct in collecting the claim after having
assigned it. So, too, if the assignor makes a subsequent assignment,
this subsequent assignee also has a power of attorney to collect the
claim and keep the proceeds; so that if the second assignee in good
faith collects the claim in ignorance of the prior assignment, he can
keep what he has collected; nor is the debtor liable to the first
assignee who must as before seek redress from his assignor. It is,
therefore, always important for the assignee of a non-negotiable chose
in action to give immediate notice of his assignment to the debtor. If
after such notice the debtor should pay the assignor or a subsequent
assignee, such payment would not discharge the debtor, and the first
assignee could collect the claim from him.
NON-ASSIGNABLE RIGHTS.--Rights cannot be assigned which are personal in
their nature. The one who has contracted to paint a picture cannot
delegate the duty to another, no matter how skillful. One who has a
right to the personal services of an employee cannot assign that right
to another. A publisher who has a right to publish all books written by
a certain author cannot assign his right to another publisher.
ASSIGNMENT OF DUTIES.--The duties under a contract are not assignable
under any circumstances. That is, one who owes money or is bound to any
performance can not by any act of his own or by any act in agreement
with any other person except his creditor, divest himself of liability
and substitute the liability of another. This is sufficiently obvious
when attention is called to it; for otherwise debtors would find an easy
practical way of escaping from their debts by assigning the duty to pay
to irresponsible persons. But the principle is not always recognized. A
person who is subject to a duty, though he cannot escape liability, may
delegate the performance of his obligation provided the duty is of such
a character that performance by an agent will be substantially the same
thing as performance by the obligor himself. Thus if a contractor
engages to build a house, he may delegate the actual building to
another, but he cannot escape responsibility for the work. One who owes
a mortgage may delegate the payment of the mortgage to a purchaser of
the land who assumes and agrees to pay the debt. If the purchaser of the
land actually pays, the debt is discharged; but if he fails to do so,
the mortgagee may sue the original mortgagor and the latter will be
obliged to bring another action against the purchaser who promised to
pay the debt and failed to do so. So where a partnership is changed and
a new firm formed, it is very common for the new firm to assume the
obligations of the old firm.
ORIGINAL DEBTOR NOT DISCHARGED UNLESS THERE IS A NOVATION.--Though a
creditor cannot be deprived of his right against his original debtor
without his consent, he may consent. If he does thus consent to take in
lieu of the obligation of his original debtor that of the person who
assumed the debt, what is called a novation is created. That frequently
happens where a new firm succeeds an old one. The new firm goes on
dealing with the old creditors, and they impliedly, if not expressly,
assent to taking the new firm instead of the old firm as a debtor. But
in order to make out a novation you have got to find as a fact that the
creditor agreed to give up his right against the old debtor. If the
creditor does not assent to a novation then the situation is that the
creditor retains his claim against the old debtor, but the person who
has assumed the debt has contracted to pay that debt. If he keeps his
contract he will pay it and the debt will be cancelled. If he does not
keep his contract the creditor will sue the original debtor and the
original debtor will sue the man who assumed the debt.
ASSIGNMENT OF BILATERAL CONTRACTS.--In bilateral contracts each party is
under a duty to perform his promise, and also has a right to the
performance of the other party. If an attempt is made to assign such a
contract the effect is this: the assignor delegates to the assignee the
duty of performing the assignor's promise, but the assignor himself
still remains liable if his agent, the assignee, fails to carry out the
duty. Further, the assignor authorizes the assignee to receive the
payment or performance due from the other party to the contract and to
keep it for himself.
WHAT AMOUNTS TO AN ASSIGNMENT.--No particular words are necessary to
constitute an assignment. Any words which show an intention that another
shall be the owner of a right are sufficient to constitute the latter an
assignee. Especially it should be observed that an order directed to a
debtor of the drawer ordering him to pay the debt to a named payee, is
an assignment of the debt when delivered to the payee. This case must be
sharply distinguished from a bill of exchange or check. A bill of
exchange or check is an order to pay a certain amount unconditionally,
irrespective of the existence of any particular fund. It is only an
order to pay from a particular fund, that is, an order which is
conditional expressly or impliedly on the existence of that fund, which
constitutes an assignment.
PARTIAL ASSIGNMENT.--A creditor may not only assign his whole claim to
an assignee, but he may assign part of it. Such a partial assignment
authorizes the assignee to collect the portion of the claim assigned and
keep it for himself. But the debtor is not bound to pay the claim
piecemeal; he may insist on making but a single payment unless his
contract with his creditor provides otherwise. A bank in accepting a
deposit contracts to pay that deposit in such amounts as the depositor
may indicate on the checks drawn by him, but an ordinary debtor who owes
$100 cannot be required to pay in such amounts as his creditor may see
fit to demand. For this reason a few courts hold that even if the debtor
has notice of a partial assignment, he may pay the whole debt to the
original creditor though that results in defrauding the partial
assignee. Most courts hold, however, that the debtor when notified of
the facts cannot do this, and if he objects to paying fractional parts
of his indebtedness he must pay the whole sum into court to be
distributed by it among the parties entitled. So, on a question of this
character, the local statute should be examined.
ASSIGNMENT OF FUTURE CLAIMS.--Assignments of future claims, as well as
of existing claims, may be made, but there are in many States some
special provisions of statute law in regard to assigning future wages.
Such assignments must often be recorded, and there are certain other
special statutory provisions in regard to them. The assignment of future
debts is also subject to this qualification: The law does not allow the
assignment of a future claim unless the contract or employment out of
which the claim is expected to arise has already been made or is already
in existence.
DISCHARGE OF CONTRACTS.--Contracts are discharged in much the same way
as they are made. The simplest way of discharging a contract is by
performing it. When both parties do exactly what they agreed to do the
contract is discharged by performance. Where seals still retain their
common law effect, it may be discharged without performance by agreement
under seal that it shall be discharged, just as a contract may be made
by an agreement under seal. The agreement under seal to discharge a
contract is called a release. You may release any right that you have--a
right for money, a right to have work done or any right. Just as
contracts may be made either under seal or by an agreement with
consideration, so they may be discharged not only by a release under
seal but by an agreement for rescission of the contract. But this
agreement must have consideration.
ILLUSTRATIONS.--Suppose A has promised to build a house and B has
promised to pay $10,000 for it. Before anything has been done, A and B
agree to call that contract off. This is a valid agreement for
rescission, because each party agrees to give up something--one party to
give up his right to have the house built, the other party to give up
the right to get $10,000 pay. So an agreement between employer and
employee that a contract shall be terminated before the time originally
agreed has sufficient consideration--the employer gives up his right to
the employee's services, the employee gives up his right for future pay.
But compare with these this case: A owes B a thousand dollars; it is
simply a debt. A and B agree to call that square. That agreement is of
no validity, for here only one party agrees to give up anything. The
creditor agrees to give up his thousand dollars, and he does not get any
promised amount in return for it. But that obligation, that debt, could
be satisfied if valid consideration were given for the surrender of the
claim; and anything agreed upon, as a horse, or ten shares of stock, or
anything else the parties agreed to, would be good consideration for the
agreement to surrender the claim, so long as one did not get into the
difficulty alluded to under the heading of consideration, of trying to
surrender a right to a larger liquidated sum in consideration of the
payment of a smaller sum of money.
SENDING A CHECK AS FULL PAYMENT.--It is very common for a debtor in
making payment by check of his debt to seek to make the check operate as
a receipt in full of all claims by the creditor against him. He may do
this by writing on the check itself that it is "in full of all demands"
or "in full payment" of a certain bill; or he may by a letter
accompanying the check state that the check is sent as full
satisfaction. The acceptance by the creditor of the check under either
of these circumstances is an assent by him to the proposition stated on
the check or in the accompanying letter, that the check is in full
payment. Such an assent, however, does not necessarily prove that the
debtor is discharged; consideration as well as mutual assent is
essential to the validity of any agreement which is not under seal.
Accordingly if the debt was a liquidated and undisputed one, and the
check was for less than the amount due, the agreement of the creditor to
take it in full satisfaction is not supported by sufficient
consideration under principles previously considered. On the other hand,
if the debt was an unliquidated one, or there was an honest dispute in
regard to the amount due, the creditor's claim is fully satisfied.
RECEIPT IN FULL.--It may be said generally that though a receipt in full
is often thought by business men to be a discharge irrespective of
consideration, like a release, this is not true in most States. A
receipt in full is good evidence, if payment has been made in full, that
it has been so made; but where payment has not been made in full a
receipt will not be effectual without consideration, as a release under
seal would be.
RENUNCIATION OF OBLIGATION ON NEGOTIABLE INSTRUMENT.--There is one case
where the law allows a party who has a right to surrender it without
consideration. This is by virtue of the Negotiable Instruments Law,
which provides that the holder of a note may discharge any party to it
by a written renunciation of his claim. No particular form of words is
necessary, but the renunciation must be in writing. No consideration is
necessary.
ALTERATION OF WRITTEN CONTRACTS.--The alteration of a written contract
in a material particular with fraudulent intent by a promisee in effect
discharges the contract so far as he is concerned. He cannot enforce it
either in its original form or its altered form, though the other party
to the contract may enforce it against him. If the alteration is not
material, the contract may be enforced even by the party who altered it
whatever the motive of the alteration may have been. If the alteration
is material but not fraudulently intended, that party is generally
allowed to enforce the contract in its original form. No alteration by a
third person affects the rights of a party to a contract. By material
alteration is meant one which if given effect would alter the legal
obligations of the parties to the contract. The rule of the Negotiable
Instruments Law in regard to alteration of negotiable instruments, it
should be observed, is somewhat more severe than that generally
prevailing in regard to other contracts.
SUGGESTIONS FOR DRAFTING CONTRACTS.--While it is unwise to attempt the
drafting of any contract at all complicated, without the services of an
attorney, there are certain times when it may be necessary to act
suddenly, and a few fundamental facts should be kept in mind. If you are
called upon to draft a contract for two other people, the first
requisite is to obtain as full information as possible from both parties
as to the plans they have in mind. After obtaining this, the details
should be arranged in writing, gone over carefully by the draftsman, and
submitted to the parties for their approval. A most common mistake made
by laymen is to fail to cover contingencies which are more or less
likely to happen. For example, what effect would the death of either
party have on the contract? This should be provided for. The careful
draftsman, whether he be a layman or a lawyer, should draw contracts
with the idea of making them so plain that litigation will not result.
Contracts should always be drawn in duplicate, so that each party may
have a copy, and it is well, if you are the draftsman, to keep a copy
for yourself. It is not necessary to appear before a notary public
unless you are dealing with a deed, or a similar formal document. If
there is good consideration for the contract, no seal is necessary, but
under some statutes, a sealed contract is good for a longer period of
time, so that there is an added advantage in having the contract under
seal.
QUASI CONTRACTS.--The term quasi contract is one which has appeared
within the last thirty years. The law in this branch of contracts is
still in the process of development and the field of quasi contracts is
still not one of settled limits. For our purposes we confine ourselves
to those obligations arising from "unjust enrichment," that is, the
receipt by one person from another of a benefit, the retention of which
is unjust. The term "enrichment" has recently been criticized by one of
the ablest writers on this topic, as there are many cases where it is
sufficient to show that the defendant has received something which he
desired, although the question whether he is thereby enriched, is
immaterial. In Vickery v. Ritchie, 202 Mass. 247, we find that where A
renders services, and furnishes materials and supplies for the erection
of a building for B under a supposed contract and the contract itself is
invalid, B is under a supposed quasi contractual obligation to pay A for
the services he has rendered and the material he has furnished,
regardless of whether B's property is increased in value. We may state
the point to be emphasized in quasi contract is the fact that the
retention of the benefit received by the defendant would be unjust
rather than "enrichment."
DISTINGUISHING CHARACTERISTICS.--There are four characteristics which
distinguish quasi-contracts: 1. The obligations of quasi contracts are
imposed by law without reference to the assent of the obligor. 2. They
are imposed because of a special state of facts and in favor of a
particular person and do not rest upon one at all times and in favor of
all persons. 3. Although equitable in their origin they are enforced by
a common law court. 4. They require that the obligee shall be
compensated for the benefit which he has conferred upon the obligor and
not for any loss suffered by the obligee.
APPLICATION OF THE PRINCIPLE.--The following are the more common
illustrations of the application of the principles of quasi contracts.
Where there has been a mistake, and hence the minds of the parties never
really met, yet benefit has really been conferred; or, where the
attempted contract cannot be enforced as a contract, because it did not
comply with the statute, or was illegal, and yet one of the parties has
received a benefit; or, where a benefit has been conferred under
compulsion or duress.
MISTAKE.--Where parties have attempted to make a contract and a mistake
of fact occurs, no contract results. The minds of the parties never
really meet. Yet if benefits have been conferred, justice requires that
the benefit should be returned, or compensation given, and this, in
fact, is just what the law seeks to do when there has been such a
mistake that upon the attempted contract itself no suit can be brought.
The essentials of mistake, and the way in which a mistake usually
arises, are:
(1) It would not be a mistake if a party had paid money when he had any
reason to suppose it was not due. A recovery of money under such
circumstances cannot be allowed.
(2) The payment must have been induced by mistake in order to allow the
recovery. This rule prevents the recovery of money paid in settlement of
a disputed matter; but it must be assumed that it was to the party's
interest to make the payment. However, suppose that a compromise
settlement has been made in the belief that certain facts were different
from what they really were. Here the mistake would have induced the
payment, and, hence, in such a situation a recovery will be allowed.
(3) The fact regarding which a mistake has been made must also be a
material fact, and the fact must have been a part of the transaction
itself, not collateral to it in any way. A mistake as to the value of an
article purchased, for instance, is not a material fact.
(4) Ordinarily, money paid under mistake of law cannot be recovered,
although it is against conscience for the defendant to retain it. A
mistake as to the law of another State, however, is a mistake of fact,
and money paid under such a mistake can be recovered.
(5) Where the party who mistakenly parted with the money did so because
of his own negligence, and to allow a recovery would throw a loss on
the other party, he cannot recover what he parted with. One party cannot
make another suffer because of his own negligence. Where a party paid
money under mistake, and the payee was negligent, the party paying may
recover.
(6) When parties suppose they have made a contract, and money has been
paid, or services rendered, under that supposed contract, but in fact
there was no valid contract at all, or there was a mutual mistake as to
a term, this money, or the value of the services, may be recovered.
(7) When money has been paid for the transfer of something by defendant,
whether recovery will be allowed in case it should turn out that the
defendant had no title, depends on the nature of transaction. If the
defendant made a warranty that he had title, a recovery may be had. If,
however, the defendant simply sold what he had, whether that was
something or nothing, a recovery cannot be allowed unless, as is the law
in some States, a vendor impliedly warrants his title by the fact of
having possession.
(8) In the case of parties mistaking the existence of a subject matter
of sale, if the understanding was that A was purchasing an existing
thing, then he can recover the money paid if it should turn out that the
thing was not in existence. But if he bought simply a chance, he cannot
recover.
BENEFITS CONFERRED UNDER COLOR OF CONTRACT.--Aside from the cases of
mistake, there are other grounds for allowing recovery under the
principle of quasi contract. A group of these is made up of cases where
there cannot be a recovery upon the contract itself, although the
parties have come together and agreed without any mistake or
misunderstanding, because of the absence of some essential necessary to
create an enforceable contract obligation; yet a benefit has been
conferred upon the one party who, but for the lack of that essential,
would have been liable in an action upon the contract itself. Such cases
arise largely where there has been a partial performance of an illegal
contract, or of a contract unenforceable because of non-compliance with
the statute of frauds, or where full performance is excused by
impossibility. Some States also allow recovery on the theory of benefits
conferred, where, after partial performance, a party defaults under
circumstances not excusing default.
BENEFITS CONFERRED WITHOUT CONTRACT.--We next take up that class of
relations where there has been an absence of distinct offer and
acceptance, and yet a benefit has been conferred resulting in an unjust
enrichment of the other party. If A confers benefit on B, though at B's
request, it may be merely a gift. A cannot afterward change his mind and
recover for that, as if there had been a contract. A may have paid B's
debt in order to prevent a sale of his own property. He may then recover
the amount so paid. For example, A left his property with B to have some
repairs made. A third party recovered a judgment against B, and A's
property was seized on an execution. A paid the judgment in order to
release his own property. It was held that he might recover the money so
paid from B, who should have paid the judgment. Or A may have paid B's
debt because he was surety for B. He then may recover from B the amount
so paid; or, if B had two sureties, A and C, and A paid the whole or
more than his share, he could recover the share of such payment which C
should have paid, on the principle of contribution that equality is
equity. But A must have actually made the payment of more than his
proportionate share.
CHAPTER IV
Principal and Agent; Master and Servant
THE IMPORTANCE OF AGENCY.--Now that we have finished our discussion of
the general principles of contract law, it remains for us to apply these
principles to the specific topics of commercial law. Of these, the law
of agency is one of the most important. It is perfectly obvious that a
man can be in only one locality at a given time. Under modern business
conditions he may wish to perform acts in different places at the same
time. When business men were first confronted with problems of this
kind, the principles of the law of agency began to develop. They
resorted to the simple expedient of having others represent them. If
these representatives were properly instructed in their duties and
faithful in discharging them, there was, of course, no reason why the
will of the person who had appointed them was not as fully accomplished
as if he had performed the act himself. The Latin maxim, "Qui facit per
alium facit per se," that is, "He who acts through another, acts
himself," is the basis of the law of agency. The growing importance of
the law of agency is strikingly apparent in one branch of modern
business. Fifty years ago, the great majority of business operations
were conducted either by individuals or by partnerships. To-day,
especially in conducting large business enterprises, corporations have
replaced individuals and partnerships. Although (as we shall see later
in the chapter on corporations) in law a corporation is deemed a
separate, legal entity, distinct from the stockholders, in actual
practice we know that there is no such distinct physical being as a
corporation. It follows, therefore, that every act performed by a
corporation must be performed through an agent. With the enormous
increase in the number of corporations in the last twenty-five years,
and that increase still continuing, we can see that the law of agency is
a most important branch of commercial law and very closely connected
with corporation law.
AGENCY DEFINED.--Merely for purposes of convenience, it may be best to
divide the whole subject of agency into three branches: Principal and
agent; master and servant; employer and independent contractor. The term
"agency," when used in the broad sense, indicates a relation which
exists where one person is employed to act for another. At the outset,
we should keep in mind the distinctions between the agent, the servant,
and the independent contractor. It is difficult to indicate these
distinctions with absolute certainty by definition. An illustration,
however, will show clearly what the difference is. I own an apartment
house in New York, but as I am not in the city, except infrequently, I
employ the real estate firm of Smith & Jones to manage the apartments
and collect the rents. They are, of course, my agents, to act in the
premises. I own an automobile and I employ a chauffeur to operate the
car for me. He is my servant. I own a vacant lot in New York and on it
plan to erect an office building. I employ the Smith Construction
Company to erect the building. It is an independent contractor. What is
the rule, then, to determine the distinction between these three
persons? All three persons represent the principal, or the master, or
the employer, but the line of distinction lies here: An agent is
employed to bring the principal into new contractual obligations; a
servant represents his master in the performance of ministerial, or
mechanical acts or services, with no thought of bringing his master into
new contractual relations with third persons. A person who is employed
to perform ministerial or mechanical acts for another, as we have said,
is a servant, but there are cases where the master retains no control or
right of control of the means or methods by which such work is to be
accomplished. In this latter case, the person performing the work is not
a servant, but is an independent contractor.
HOW AGENCY MAY ARISE.--Although agency undoubtedly originated from the
relationship of master and servant, and that relationship from the
enforced service rendered by slaves to their master, to-day the law of
agency in the broad sense is a contractual relationship. The agent or
servant or independent contractor becomes such upon the express or
implied request of the principal. Although agency may exist, in so far
as third persons are concerned, without any formal contract between the
principal and the agent, yet, in the great majority of cases, there is
an actual contract between the parties to the relation. Compensation,
although usually an element in the contract, is not necessarily a
requisite. For instance, I may be liable for the negligent act of my son
in running my automobile in connection with my business, although he is
acting without any compensation. There are four methods by which the
relationship of agency arises: (1) By contract; (2) by ratification; (3)
by estoppel; (4) by necessity.
WHO IS OR MAY BE AN AGENT.--The law of agency, as between principal and
agent, is simply an application of the general law of contracts, but as
between third parties and the principal, or agent, new questions arise.
The first question is, who is an agent and who is a principal? Any
employer is a principal and any employee is an agent. The employer is a
principal whether he employs the employee for a single act or whether he
employs him for a period of time. Besides the ordinary cases that you
will think of under the head of employer and employee, an officer of a
corporation is an agent, the corporation being the principal. The
president of a corporation is as much an agent as a clerk in the employ
of the corporation. A partner is an agent--of the firm. These different
kinds of agents are distinguished chiefly in the different scope of the
authority which they possess.
DISABILITY.--In our discussion of contracts, we found that certain
persons were under disability so far as making contracts was concerned.
We mentioned the case of infants, married women, insane persons, and the
like. The same disabilities do not exist in the law of agency, so far
as the agent is concerned. Any person may act as an agent or servant. So
infants, married women, slaves, and even lunatics, may be agents or
servants whose acts will bind their principals. It has been held that
even a dog may be an agent. As to who may be a principal, the ordinary
rules of contracts, as we have discussed them, may be relied upon as
giving the correct rule.
AGENCY BY CONTRACT.--Concerning agency which arises by contract, little
need be said. A contract of agency must possess all of the elements of
the ordinary contract, such as mutual assent, consideration, competent
parties, legality of object, and in some cases, a particular form. The
general principles of contract law as we have discussed them are
applicable to this method of forming the agency relationship.
POWERS OF ATTORNEY.--In connection with the formation of agency by
contract, special attention must be given to powers of attorney. A power
of attorney must oftentimes be given in order to convince third persons
that the agent really is an agent, with the powers which he claims to
possess. A power of attorney is nothing more than a written statement
that a particular person is the agent of another person, with the powers
stated in the document. A power of attorney may be very broad, giving
the agent very wide powers, or may be narrow, giving the agent or
attorney power to do only a specific thing. Now, many powers, so far as
the law itself is concerned, might just as well be oral as written, but
you could not induce third parties to deal with the agent and believe
that he had authority unless he showed as proof of it a power of
attorney. That is why a power of attorney is generally given; not that
the law requires it, but that the agent may have evidence of his agency
which will satisfy third persons that he is really the agent. A
corporation would not transfer stock without a written power presented
to it; yet, if it chooses to run the risk, there would be nothing
illegal in doing so. But it does not choose, and an attempt to compel it
to transfer would be held unreasonable unless the authority of the
person claiming to be empowered to transfer the stock were in writing
and shown to it.
WITNESSED AND SEALED POWERS OF ATTORNEY.--A witness is not necessary on
a power of attorney. A witness on a power of attorney has the same
effect as on any other document where a witness is not absolutely
required, and that is this: if the signature of a document is called in
question and the signature is witnessed, the way which the law requires
proof of the signature is by calling the witness to testify, and no
other evidence is permissible until the witness is produced or his
absence accounted for; that is, some adequate reason given and proved
for not producing the particular man who witnessed the signature. For
this very reason it is sometimes more difficult to prove a signature
which is witnessed than one which is not. A signature which is not
witnessed may be proved by anybody who has seen the person sign, or who
is familiar with his signature, and who can testify that the signature
in question is his. The object of a witness is to provide certain
evidence that a signature is genuine. The testimony of a witness may be
more convincing in case of a dispute than testimony of one who merely
recognizes the signer's handwriting. A witnessed power of attorney might
be, however, more difficult to prove if the power of attorney were
contested than if it was not witnessed, that is, if the witness could
not be found. On the other hand, if you had your witness within reach it
would be easy to prove the signature by him. The whole matter of
witnesses to deeds and other documents, where a witness is not
absolutely required, may be thus summarized: it is a good thing to have
a witness if the witness is a reliable, well-known person who can always
or generally be reached. It is a bad thing to have a witness who is a
servant or a person whom you may lose sight of after some time has
elapsed. The question may also be asked: How does a power of attorney,
when given under seal, compare with one without a seal? One is as good
as the other, except that if it is desired that the attorney or agent
shall execute any instrument under seal, such as a deed of real estate,
the power must itself be under seal; but a power to do anything which
does not require the execution of a sealed instrument is just as good
without a seal as with one. This, however, is true; if the power
contains an agreement by the principal not to revoke the power, this
agreement will not be binding if there is neither seal nor
consideration, but will be binding without consideration if under seal,
in a State where seals still have their common-law effect. The principal
will be able, it is true, even in such a case, to revoke the power, but
he will commit a breach of contract if he does.
AGENCY BY RATIFICATION.--Where the assent of the principal to the act of
the agent is given after the act is performed, it is in the nature of a
ratification of the act, and is intended to clothe the act with the same
qualities as if there had been a previous authority or appointment.
Suppose, for example, A and B are acquaintances. Both are wealthy. A is
a good judge of horses and knows B likes good horses. A discovers what
he considers a good horse and buys it for B at a very low price. He
tells B the next day what he has done and B goes to get the horse and
tenders the price, but the dealer refuses to sell, as he has been
offered a higher price. B has a cause of action for breach of contract,
for by ratifying A's act, he has made a binding contract between himself
and the dealer. Suppose in the same illustration, A had selected two
horses for B, but when B saw them he decided to take only one of them.
In that case, there would be no contract, for it is fundamental that a
ratification, to be effective, must be of the whole contract, and not of
a part. A ratification, once it is given, dates back to the original
transaction and is irrevocable.
FORMATION OF AGENCY BY ESTOPPEL.--An estoppel may be said to arise where
a person does some act which will preclude him from averring anything to
the contrary. So, if one holds out another as his agent, he is estopped
to repudiate the acts of such a person within the scope of his
ostensible authority. In the case of Bradish v. Belknap, 41 Vt. 172, the
facts were that for a long time prior to 1863, B was the agent of the
defendants in selling stoves. This fact was generally known and was well
known to the plaintiff. In 1863 B ceased to be the agent of the
defendant, but continued to sell stoves, which he purchased of the
defendants. No public notice of the termination of the agency was given,
nor was the fact known to the plaintiff. B continued to represent
himself as agent of the defendants and was in the habit of taking notes
for stoves sold, payable to the defendants, and this was known to the
defendants. The plaintiff, believing B to be the agent of the defendant,
offered to buy a stove of him and pay him in pine lumber. To this B
assented and the lumber was accordingly furnished to B and the
defendants, together with other lumber which the plaintiff charged up to
the defendants. The defendants later attempted to escape liability for
the lumber furnished in excess of the value of the stove. The court,
holding them liable, said: "B during all this time was perfectly poor
and irresponsible, and this fact was known by both parties. B
represented himself as the agent of the defendants, and the conduct of
the defendants was such as to justify the plaintiff in regarding them as
the principals; and we can hardly conceive it possible under the
circumstances that the defendants did not understand that the plaintiff
so regarded them. And to allow them now to deny the agency and thus
defeat the plaintiff's right to recover for the balance of the lumber
would be permitting them to perpetrate a palpable fraud on the
plaintiff."
ESTOPPEL DEFINED.--This term will occur several times in the different
topics of commercial law. An estoppel may be said to arise when a party
by conduct or language has caused another reasonably to believe in the
existence of a certain state of things and the other party acts on that
belief, the first party is precluded from denying the existence of that
state of things to any one who has justifiably relied on his language or
conduct.
ILLUSTRATION.--There is a common saying in admiralty, that a seaman's
claim for wages is nailed to the last plank of the vessel. So if
boatswain John Silver is left unpaid by his vessel in London and he
later finds the vessel in New York, although its ownership has entirely
changed meanwhile, he may still file a libel for his wages and have the
United States Marshal for the Southern District of New York seize the
vessel. Suppose however you contemplate buying a vessel. You go on board
with the present owner and while all the members of the crew are lined
up on the main deck, you ask him in a voice loud enough to be heard by
everybody whether there are any unpaid wage claims. He replies that
everything is paid to date. The crew remain silent. You purchase the
vessel and a few weeks later members of this same crew seek to collect
from the vessel a wage claim of one year's standing. Their claims
against the vessel or against you as owner are unenforcable. In other
words, they are estopped because of their conduct when you purchased the
vessel. If a person does not speak when he ought, at times the law will
not allow him to speak when he wishes. Boatswain Silver had never done
anything to preclude him from asserting his wage claim. His, therefore,
is not a case of estoppel.
AGENCY BY NECESSITY.--The authority of the agent may be enlarged by some
particular necessity or sudden emergency in which case it is the duty of
the agent to act, even though he cannot receive the advice or directions
of his principal. This method of creating the agency relationship is one
upon which the courts are not agreed, and there is great conflict in the
decisions. The case of Gwilliam v. Twist, (1895) 1 Q. B. 557, and 2 Q.
B. 84, is a good illustration of how close the line may be drawn. The
facts were that the driver of an omnibus belonging to defendants became
intoxicated while on duty and was taken from his seat by a policeman. A
man who happened to be standing near volunteered to drive the omnibus to
the defendant's yard, and the driver and conductor acquiesced, the
former warning him to drive carefully. The volunteer in negligently
turning a corner ran over and injured the plaintiff, who brought action
for damages against the defendants, owners of the omnibus. The trial
court held, with considerable hesitation, that the defendants were
liable for the injury, placing its decision upon the ground of agency by
necessity; but the court of appeal reversed the decision on the ground
that the necessity did not sufficiently appear, since the defendants
might have been communicated with, and left open the question whether,
if there had been an actual necessity, the defendants would have been
liable.
RIGHT OF PRINCIPAL TO DILIGENT AND SKILLFUL SERVICE.--Let us consider,
first, the rights of the principal and agent as between one another. The
rights which the principal has against the agent are, first, a right to
have the employee render reasonably diligent and skillful service. The
amount of skill which the employer can fairly demand from his agent
depends on the character of the contract between the two and on the
circumstances justifying the principal in expecting a greater or less
degree of skill. When a man employs an expert accountant to act for him
he has a right to expect greater skill than if he were employing an
ordinary bookkeeper. It depends on the character of the work and of the
man employed. The amount of compensation paid to the employee may also
have a bearing on the amount of skill the employer has a right to
expect.
RIGHT OF PRINCIPAL THAT AGENT SHALL NOT EXCEED HIS AUTHORITY.--The
second right that a principal has is to demand from his agent that the
agent shall act in obedience to instructions and only within the limits
of his authority. These limits may be fixed expressly in the contract
between principal and agent, or they may be left wholly to implication
from the nature of the employment. Perhaps more commonly they are
partly fixed by express agreement and partly fixed by natural
implications which arise from the nature of the employment.
RIGHT OF PRINCIPAL TO ACCOUNTING.--Thirdly, the principal has a right in
financial dealings with his agent, or in regard to financial dealings of
the agent with third persons, to demand an account from his agent. It is
not enough that the agent actually expend money intrusted to him
correctly; he must furnish a correct account of expenses and of
collections.
RIGHT OF PRINCIPAL TO FIDELITY.--Finally, the agent is under a duty of
fidelity or loyalty to his principal. The principal is entitled to
demand that the agent, unless the contrary is agreed, shall make the
employment or agency his sole interest in regard to that particular
thing. Of course, in many agencies the agent is undertaking a great deal
of outside business besides the particular agency in question, and he
has a right so to do so long as the principal has not engaged his whole
time, and so long as one agency does not interfere with another. But
that last is an important point. An agent who undertakes one task for
one principal which occupies only one-tenth of his time cannot take
another employment which is inconsistent with that. An agent to sell a
particular kind of goods for one principal, even though his agency is
not expected to take the agent's whole time, cannot undertake an agency
for a competing principal. The two things are inconsistent, and the
agent would be disloyal if he accepted.
SIDE COMPENSATION.--Then, again, the agent must not get what may be
called "side compensation" of any sort. His whole compensation as agent
must be what is due him directly from the principal under the agreement.
For instance, if a buyer for a department store gets paid a commission
by a firm from which he buys goods, that is a side commission which the
buyer as an agent has no right to take; and so strict is the law, that
if an agent does take any such extra compensation the principal has a
right to recover it from him. Of course, if the principal agrees to side
compensation, it is all right for the agent to take it; when the
principal agrees to it, it ceases to be what we have called side
compensation and becomes part of the agent's direct compensation to
which he is entitled under his bargain with his principal.
ACTING AS AGENT FOR BOTH PARTIES.--One of the most common difficulties
that agents get into in regard to this requirement of fidelity, and
sometimes with entirely good faith, is undertaking to act as agent for
both parties. That cannot be done unless each party especially agrees
that the agent may act for the adverse party. An attorney-at-law cannot
represent two sides of a case. A real estate broker cannot represent
buyer and seller, and a stock broker cannot represent buyer and seller.
Stock brokers have one practice which perhaps may seem to infringe this
rule. A customer comes into a broker's office and says he wants to buy
100 shares of New York Central. About the same time another customer
comes in and says he wants to sell 100 shares of New York Central. Now,
must a broker go on the exchange and make a purchase for one customer
and then a sale for the other, or may he, so to speak, negotiate through
himself a sale for the customer who wants to buy from the one who wants
to sell? What he frequently does, in fact, is this: He buys and sells
from himself, but publicly, giving other brokers the chance to buy or
sell if they wish. The broker, according to the rules of the New York
Stock Exchange, cannot execute this transaction secretly in his office,
but must offer the securities in question on the exchange, and the
purchase and sale must be recorded on the ticker. If the bidding and
asking prices are more than an eighth apart, he may offer the New York
Central at a price midway between the bidding and asking quotations and
buy it himself and charge each customer a commission, but he must
actually make the offer or bid aloud on the floor. The broker is
technically acting for both parties, but he is not fixing the price. He
makes an open bid on the exchange, and it may be that would save the
transaction.
AGENT'S RIGHT TO COMPENSATION.--What are the rights of the agent against
the principal? They are two. First, a right to compensation; that is, a
right to the pay that has been agreed upon, or, if no pay was agreed
upon but it was understood that there should be some compensation, then
a right to reasonable compensation. It is perfectly possible to have an
agency without compensation. Frequently one man agrees to act for
another without pay, and an agent who is acting without compensation, so
long as he acts as agent, is bound to the same obligations to his
principal as if he were receiving compensation, only he can withdraw
from his agency whenever he sees fit since he is not paid for it. But
unless circumstances show that an agency was understood to be without
compensation, it would be implied that reasonable compensation was to be
paid to the agent for his services.
AGENT'S RIGHT TO REIMBURSEMENT.--The other right of the agent is the
right to reimbursement and indemnity. As the agent is acting for the
principal, the principal ought to pay all the bills of whatever kind
incurred, so long as the agent is acting rightfully within his
authority, and the principal is bound to pay all such bills. This
obligation of the principal to pay all the bills of the agency means not
simply that he must pay actual expenses, but that if liabilities of any
kind arise by reason of third persons suing the agent or holding him
liable, if the action of the agent was within his authority, the
principal must indemnify against any loss.
PRINCIPAL BOUND TO THIRD PERSONS BY AUTHORIZED ACTS OF AGENT.--Now let
us turn from the rights of principal and agent as between one another to
the rights of third persons. When do third persons get rights against
the principal? In the first place, whenever the agent, acting in
accordance with his authority, enters into a transaction with a third
person on behalf of the principal, the principal is bound to the third
person to just the same extent as if he himself had entered into the
transaction; but it is not only in cases where express authority is
given to the agent that this principle applies.
IMPLIED AUTHORITY OF AGENT.--In many cases the authority given an agent
is not expressly stated. One has to rely on the general course of
business and on the nature of the employment to determine the extent of
the agent's authority. A third person deals with a cashier of a bank, or
deals with the paying teller, or he deals with the president; now
whether the bank is bound by that dealing depends on what is by general
custom, or course of business, the authority of a cashier or a paying
teller or a president. If cashiers or paying tellers or presidents
generally have certain authority, then it is a fair assumption that this
particular officer has such authority.
AUTHORITY TO DO PARTICULAR ACTS.--An agent to sell has generally no
authority to make a sale on credit or to receive anything but money; he
cannot barter or exchange the property even in part, nor pledge or
dispose of the property to be sold in payment of his own debts. For the
sale of land an agent's authority ought always to be under seal, and the
provisions contained in this power of attorney will be strictly
construed. In a sale of personal property, an agent has implied
authority to do whatever is usual and necessary in such transactions. He
may receive payment if he has possession of the goods, but not
otherwise, and warrant the quality, if such goods are customarily sold
with a warranty by agents. He cannot sell on credit unless such is the
custom, as in the case of commission merchants, nor pledge or mortgage
the goods. The agent may not buy on credit unless so authorized, or it
is the custom of the trade; but a principal's direction to purchase,
without supplying the agent with funds, will imply authority to purchase
on credit. The agent must purchase precisely as directed. An agent to
manage has an authority co-extensive in scope with the business, and
possesses the same power and authority as the principal, so far as
management goes, but the agent may not sell or dispose of a business,
nor mortgage the property used in carrying it on, nor engage in new and
different enterprises. Public agents, i. e., public officers, cannot
involve their principals, the municipal corporations whose officers they
are, in contract liabilities with third parties unless actually
authorized to do the act in question; and all persons dealing with them
must inform themselves of the scope of their legal powers.
APPARENT AUTHORITY OF AGENT.--But it is not only in cases where the
agent is expressly authorized, or authorized by such implication as we
have just alluded to, that the principal is bound. There is the further
case where the agent has apparent authority, although, as a matter of
fact, he has no authority. Take the case of a cashier certifying a
check. We will suppose that cashiers, generally, have authority to
certify checks. With most cashiers that would be what we have called an
implied authority, as it arises from the general nature of their
positions though nothing was ever said about it by the bank directors.
But suppose in a particular bank it was a rule of the bank, expressly
stated and voted by the directors, that the cashier should not have
power to certify checks. Now, no one can say that his power here is
either express or implied; it is certainly not express, and any
implication that might otherwise arise from his position is negatived by
the express vote of the directors, and yet if that cashier should
certify a check to any person ignorant of this limitation on his
authority the bank would be bound by the certification because the
cashier has apparent authority. He looks to the world as if he had
authority, and seems to the public like any other cashier. Most of the
difficult cases in agency, so far as liability of the principal to third
persons is concerned, relate to this matter of apparent authority.
ILLUSTRATIONS.--Compare the following case with the case of the cashier
above alluded to: A man who is giving some support financially to a book
dealer writes a note in which he says, "I authorize A B to buy a stock
of books not exceeding, at any one time, $5,000." The book dealer shows
that written authority to persons from whom he wishes to buy books. They
sell him books, and, unknown to the last person who thus sells him
books, he has just before bought a quantity which makes the total
largely exceed $5,000. Is the principal liable to the persons who last
sold books to the dealer? The answer is no. And what is the difference
between that case and the cashier case? In the book case the last
seller saw the paper giving authority to the book dealer to purchase. He
had no reason to know that the day before a large quantity of books had
been purchased. He acted in entire good faith and the deception was
natural. Still, the employer, or the writer of the letter, has done
nothing here to make the last seller suppose that $5,000 worth of books
had not already been bought, nor does the course of business justify the
last seller in supposing they might not already have been bought. It was
a hard question for him to find out, but on the face of the letter it
was evident that any one who dealt with the bookseller might have to
determine this question or rely at his peril on the bookseller's word.
Here is another case: a town treasurer was authorized to borrow a
certain sum of money. He gets a certified copy of the vote and goes to
one bank and borrows the money, and goes to another bank with that same
certified copy of the vote and borrows the money over again. Is the town
liable to the second bank? No; on the face of the paper there was but
one loan to the town authorized, and any one who lends the money must at
his peril find out whether a loan has already been made. When we say,
therefore, that a principal is bound if his agent had apparent
authority, we do not mean that whenever a third person is deceived into
the belief that the agent has authority, the principal is bound. Quite
to the contrary, the principal must have in some way been the cause of
that deception; he must have caused it either by some express
representations, or he must have caused it by putting a man in a place
where the general course of business would induce the public to believe
the agent had greater powers than he had.
GENERAL AND SPECIAL AGENTS.--It is much easier to find a case of
apparent authority, which will bind the principal, if the agent is a
general agent than if he is a special agent. A special agent is an agent
authorized to do one act, as this town treasurer was authorized to make
one loan. The cashier is a general agent, authorized to do any of the
great variety of acts which cashiers ordinarily do, and if the directors
vote to take away one of the normal powers of the cashier, they must
make the limitation public or the bank will be bound by the cashier's
act.
UNDISCLOSED PRINCIPAL.--Not only may the third person hold the principal
liable in cases where the agent purports to act for the principal, but
also in cases where the agent does not disclose his principal at all and
purports to act as a principal himself, so long as it is true that the
agent really was acting in the principal's business. Suppose a selling
agent for a manufactory enters into a contract for the sale of goods
produced in the manufactory. The selling agent, we will further suppose,
contracts--as selling agents often do--in his own name; but he contracts
in regard to the sale of the product of the principal, the manufacturer,
and on his behalf. Now, assume that this contract of the sales agent was
authorized; the third person may sue the manufacturing company, though
he did not know of the existence of the manufactory at the time he
entered into the contract, and supposed he was contracting simply with
the agent. As it is phrased in law, an undisclosed principal is liable,
and conversely, the undisclosed principal may sue on this contract made
by the sales agent.
RATIFICATION.--If an agent acts beyond his authority, the principal, if
he chooses, may ratify the acts of the agent. Occasionally in an
emergency it becomes necessary for an agent who has his principal's
interest at heart to take a chance and act beyond the authority given
him. In such a case, if the principal ratifies it, it is all right, both
as far as the agent is concerned, and as far as the third person is
concerned; but, of course, the principal is under no legal obligation to
ratify.
RIGHTS OF PRINCIPAL AGAINST THIRD PERSONS.--Now, the right of the
principal against the third person is the converse of the right of the
third person against the principal, of which we have been speaking.
Generally when a transaction is of such a sort that the third person
would have a right of action against the principal, if the principal
fails to do as he agreed, the principal will have a right of action
against the third person if the latter breaks his agreement.
PRINCIPAL IS LIABLE FOR TORTS OF AGENT.--Not only is the principal
liable for the contracts of his agent, but he is also liable for any
tort which an agent may commit, so long as he is acting in the course of
his business. Of course, accident cases present the commonest type of
that sort of liability. A street railway is liable for the results of
its motor-man's neglect, so long as the motorman was running the car. If
the motorman got off the car on a frolic of his own, the street railway
would not be liable for anything he might do then. The same principle
may be found in other cases than accident cases. Suppose officers of a
corporation wrongfully overissue stock. If those officers were the
officers authorized to issue stock, and, therefore, were acting in the
general course of their business, the corporation would be liable for
that tortious act in overissuing stock.
AUTHORITY MAY GENERALLY BE ORAL AS WELL AS WRITTEN.--The authority given
by a principal to an agent may in general be oral as well as written; it
is just as good. There are, however, a few exceptions to that. In the
first place, an authority given to an agent to execute an instrument
under seal must itself be not only written but under seal. An oral or a
written authority, if not under seal, given to an agent to convey land,
which must be conveyed by a sealed deed, would not enable the agent to
make a valid deed. Where the effect of seals is abolished this principle
is of course no longer applicable. Generally an agent orally authorized
to make a contract to buy or sell land may bind his principal by
entering into such a contract. The contract the agent enters into, must,
because of the Statute of Frauds, be in writing, and signed, but the
agent's authority generally need not be written. In some States,
however, written authority is required by statutes.
PROXIES.--A proxy is simply a written power of attorney to an agent,
authorizing him to vote for a stockholder, and there, too, a corporation
would be held justified in refusing to recognize any proxy that was not
in writing, or any agent who did not have a written proxy even though
proxies were not required to be in writing.
LIABILITY OF AGENT TO THIRD PERSONS.--How about the rights and duties of
the agent as against the outside world? The agent is liable to a third
person if he commits a tort. It does not make any difference that the
principal is also liable, the agent is liable too. The third person may
sue either the principal or agent as he prefers; he cannot get
compensation for his injury more than once, but he can get that either
from the principal or agent, whichever is more convenient. The third
person may hold the agent liable if the agent contracts for an
undisclosed principal. In the case of the sales agent referred to a
moment ago, where the agent was really acting as agent for a
manufacturer but did not say so, the third person might sue the
manufacturer on the contract; but he might sue the agent, and if the
agent was held liable the agent would have to seek reimbursement from
the principal.
AGENT WARRANTS HIS AUTHORITY.--An agent is liable in one other case to
the third person with whom he deals. If the agent did not have authority
to do what he purported to do, the third person can sue him, though the
third person could not sue the principal in this case, since the agent
was exceeding his authority. An agent is said to warrant his authority
to third persons with whom he does business.
AGENT CANNOT DELEGATE AUTHORITY.--An important rule in agency is that an
agent cannot delegate his authority. If A is appointed to do certain
work, A must do it himself, and cannot empower B to do it if it proves
inconvenient to do it himself. There are three exceptions to this rule.
The first is that if he is given express permission to delegate his
authority, he may do so, and, of course, if the principal should ratify
an unpermitted delegation of authority, the ratification would here, as
always, serve as well as original authority. The second case is where
the usage of business is such that the principal must be presumed to
have understood that there was to be a delegation, or partial
delegation, of authority, and in such a case, though the principal has
not expressly authorized delegation, he will be treated as if he had
authorized it by virtue of business usage. The third case where
delegation is authorized is in regard to what are called ministerial or
mechanical acts, that is, acts which involve no exercise of judgment or
skill. The principal is entitled to the agent's judgment and skill, but
if there are parts of the work that do not require skill and that, from
their nature, any ordinary clerical assistant can do, then such acts may
be delegated.
TERMINATION OF AGENCY BY ACT OF PARTIES.--The parties may have agreed in
their contract that it should terminate at a certain time or on the
happening of a certain event. The arrival of that time or the happening
of the event would of course end the relation as between them. It would
not so operate as between principal and third parties, however, unless
the third parties were informed. So, performance of the purpose for
which the relation was created terminates the relation as between
principal and agent. The parties may make a subsequent agreement to
terminate the relation, and such an agreement would be good, the
abandonment of the rights of each party created by the original contract
being a sufficient consideration for the promise of each to surrender
his own rights.
REVOCATION.--Except in the case of irrevocable agency noted below, the
principal may revoke at any time the agent's authority as to matters not
already executed. Any other rule would enslave the principal to his
agent by forcing him, at the agent's will, and against his own consent,
into contracts with third parties. But, while the principal has this
right, the exercise of it may subject him to liability to his agent. If
the contract of employment is for a definite time, and the principal,
without cause, revokes the agent's authority before that time arrives,
the principal is liable to the agent for breach of contract; if no time
is fixed for the termination of the agency, it is an agency at will, and
the principal, with or without cause, may revoke at any time without
incurring liability to his agent. The acts which will amount to a
revocation by the principal are various. For instance, if an agent has
exclusive authority to represent the principal, the appointment of
another agent would amount to a revocation. As to making the revocation
effective, a revocation operates on the agent from the time he has
notice of it. It is effective as to third parties only when notice is
given to those who have dealt with the agent that the agent's authority
is revoked. Without such notice the principal does not escape liability
to third persons by reason of further acts on his agent's part. Where an
agent is appointed in a particular business, parties dealing with him in
that business have a right to rely upon the continuance of his authority
until in some way informed of its revocation. This notice must be actual
to those who have dealt with the agent, and general, as by publication
in newspapers, where persons have not before dealt with the agent.
RENUNCIATION.--The agent may renounce his employment at any time, but if
he contracted to serve for a certain time, and renounce before that time
arrives, he is liable to the principal for breach of contract, unless he
has ground for renunciation, such as the principal's breach of faith
with him. The sickness of the agent is a ground for renouncing the
relation, even though the sickness be caused by his own negligence or
wrong. The principal should inform third persons of the agent's
renunciation if he would fully protect himself against further acts of
the agent.
TERMINATION OF AGENCY BY OPERATION OF LAW.--As in the case of ordinary
contracts, a contract of agency may be terminated by the rules of law
upon the happening of certain events. Thus, the destruction of the
subject-matter of the agency terminates the relation, if the parties
contemplated the continued existence of the subject-matter as the
foundation for what was to be done. A change in the law, as the
enactment of a statute declaring illegal agencies of a certain nature,
that previously had been legal, terminates the relation. So also certain
changes affecting the parties to the relation--i. e., the principal or
the agent--effect a termination. The death of the principal brings the
relation to an end, and this is so although the agent had no notice of
it and subsequently dealt on behalf of his principal with third persons;
such contracts do not bind the principal's estate. The death of the
agent necessarily ends the relation. The occurrence of the principal's
insanity terminates the relation, and a judicial finding of insanity is
notice to all; but without notice of the insanity third persons who deal
with the agent in good faith are protected. The bankruptcy of the
principal terminates the relation as to all matters affected by the
bankruptcy. Impossibility to continue the relation brought about by
restraint of law terminates the relation.
IRREVOCABLE AGENCIES.--An agency to do an act touching a thing in which
the agent has an interest, or in which he is subject to an obligation,
cannot be terminated by act of the principal alone. The principal cannot
terminate the relation so as to leave the agent under obligations to
third persons, thereby shifting his obligations upon the agent; nor can
he do so when the agent has an interest in the subject-matter of the
agency. It is difficult to state concisely what will constitute such an
interest that the principal cannot terminate the relation, but it may be
said to be some ownership or right in the matter dealt with, such that
the agent may deal with it in his own name, and not a mere benefit to be
obtained from the performance of the contract of agency, as a commission
to be realized from sales. Possession of personal property with the
right to sell, with authority to apply the proceeds to a debt due from
the principal to the agent, is sometimes held to constitute an agency
coupled with an interest such that the principal may not revoke it; on
the other hand, an interest arising from commissions or the proceeds of
a transaction, is not an interest which will prevent revocation. The
courts carefully examine agencies claimed to be irrevocable because
coupled with an interest, and are inclined to rule against them.
MASTER AND SERVANT.--As we have said, the function of the servant is to
perform ministerial or mechanical acts for the master. The chief
subject-matter under the law of principal and agent is contracts, while
the chief subject-matter of the law of master and servant is tort. The
servant, in performing acts for his master, may, inadvertently or
wilfully, cause injury to a third person or to the property of a third
person. The question arises: What is the master's responsibility? We
shall consider this from two standpoints; the relationship of the master
and servant, inter se (between themselves), and the relationship of the
master and servant as to the outside world. For example: the driver of a
delivery truck, operated by Lord & Taylor, negligently runs over a
pedestrian. The truck was going at the rate of twenty-five miles an
hour, although the instructions issued by Lord & Taylor to all their
servants is not to run cars more than fifteen miles per hour in the
congested parts of New York City. Is Lord & Taylor liable to the
pedestrian? This question involves the relationship of master and
servant as to outside parties. The same servant, while operating the
delivery truck for Lord & Taylor is run into, negligently, by a delivery
truck operated by R. H. Macy & Co. Is the master, Lord & Taylor,
responsible to its servant for the injury which he suffers as the result
of the collision? This question involves the relationship of master and
servant inter se. We shall consider this latter relationship first.
THE COMMON LAW GOVERNING THE RELATIONSHIP OF MASTER AND SERVANT INTER
SE.--What is the liability of the master towards the servant if the
servant is injured? We shall see in the chapter on torts that a tort is
defined to be a breach of duty imposed by law for which a suit for
damages may be maintained. Hence it follows that the master's liability
in tort flows from a breach of duty owed by him to his servant. If there
is no legal duty, correspondingly there is no legal liability. These
legal duties which the common law developed over a long period of years
may be summed up as follows: (1) To provide a reasonably safe place for
the servant to work. (2) To provide reasonably safe, suitable, and
sufficient tools and appliances with which the servant is to perform his
work. (3) To provide reasonably careful and competent fellow workmen and
in sufficient number for the work in hand. (4) To warn the servant of
any unusual dangers connected with the work. (5) Generally so to conduct
the work as not to expose the servant to dangers which could be avoided
by the exercise of reasonable diligence. From the servant's standpoint,
it was said that he assumed the ordinary risks inherent to the kind of
business in which he was employed. These rules of the common law were
the outgrowth of conditions surrounding the small shop and involving the
use of simple or no machinery. Under modern industrial conditions they
have proved wholly inadequate. We have been unduly conservative in
recognizing this. Strangely enough the Workmen's Compensation Acts, with
which we are now so familiar, had their origin in Germany in 1884.
Nearly all the countries of continental Europe recognized the situation
about thirty years ago, and England in 1897, and the United States
within the last few years.
THE OBJECTION OF THE COMMON LAW THEORY.--Under the old theory, if the
master had observed the duties which we have mentioned, he had performed
his whole obligation to his own servant; thus, if two fellow workmen
were working on the twentieth story of a new steel skyscraper being
erected by the Institute Construction Co., and through the carelessness
of servant A, servant B was precipitated to the street and killed,
there would be no recovery on the part of the estate of the deceased
servant, although he may have left a wife and several children dependent
wholly upon him for support. Even admitting that the Institute
Construction Co. had exercised due care in selecting competent fellow
servants for the deceased to work with, and had, therefore, performed
all of its obligations on this score, nevertheless, it is better, from
the standpoint of society, that the wife and children of servant B
should receive fair compensation rather than be thrown upon the mercy of
the public. The great object of the Workmen's Compensation Act is to
shift the burden of such economic waste from the employer to the
industry, in order that it may ultimately be borne by the consumer as a
part of the necessary cost of construction and production. Thus we are
asking the master to assume a greater financial responsibility for
injuries to his servant under this new theory than he has assumed
heretofore. This can be taken care of by the increased price he charges
for his work and this in turn will ultimately pass the added burden to
the community at large.
ILLUSTRATION.--Again, even if the servant did have a cause of action
against his master, because of the master's failure to observe the
common law requirements we have mentioned, nevertheless, the expense of
litigation and the interminable delays connected with it, amounting at
times to two or three years before the case was finally disposed of by
the court of last resort, all tended to make litigation for the servant
all but impossible. He would ordinarily have no money with which to
begin this long litigation, and would be obliged to retain the services
of a lawyer, who would take the case on a contingent fee basis, and
often take from the workman, should the decision finally be in his
favor, a third, a half, or even a greater portion of the amount that he
recovers. Perhaps this was no greater compensation than the lawyer was
entitled to because of the labor involved and the prospect of no pay if
he lost the case, but regardless of this it was hard on the client. The
Supreme Court of Washington, in the case of Stertz v. The Industrial
Insurance Commission, 91 Wash. 588, has summed up the objections against
the whole system as follows: "Both had suffered under the old system,
the employers by heavy judgments of which half was opposing lawyers'
booty, the workmen through the old defenses or exhaustion in wasteful
litigation. Both wanted peace. The master in exchange for limited
liability was willing to pay on some claims in future where in the past
there had been no liability at all. The servant was willing not only to
give up trial by jury but to accept far less than he had often won in
court, provided he was sure to get the small sum without having to fight
for it.... To win only after litigation, to collect only after the
employment of lawyers, to receive the sum only after months or years of
delay, was to the comparatively indigent claimant little better than to
get nothing. The workmen wanted a system entirely new. It is but fair to
admit that they had become impatient with the courts of law. They knew,
and both economists and progressive jurists were pointing out, what is
now generally conceded, that two generations ought never to have
suffered from the baleful judgments of Abinger and Shaw."
WORKMEN'S COMPENSATION ACT.--To meet the objections we have just
mentioned, the workmen's compensation act principle was developed on the
continent of Europe. Practically all of continental Europe had placed
laws of this character on its statute books before the end of the
nineteenth century; in 1906 England passed similar legislation, and
within the last few years, we have adopted the same principles. With the
exception of a few Southern States, every State and territory of the
United States has a Workmen's Compensation Act. We cannot consider these
acts in detail. The principle underlying them is the same throughout the
country. They are designed to compensate servants for "accidents"
"arising out of," and "during the course of" their employment, and this,
regardless of whether the servant was at fault or not. The whole theory
of the common law had been that the master must be at fault in order
that the servant may recover. The new theory is that the community at
large can better stand the loss suffered by a servant than the
individual servant. For example: a steel girder falls upon a workman
engaged in structural steel work, through no fault on his part and also
through no fault on the part of his employer. Under the common law, he
would have to stand the loss himself. Under the Workmen's Compensation
Act, such an event is an "accident"; it "arose out of" and "in the
course of" his employment. Therefore, he is entitled to a fixed
compensation, and he secures it almost immediately through a workmen's
compensation bureau, or whatever body the act of the particular State
creates for the purpose of settling such matters. This is a burden on
the employer, it is true; he was in no way to blame. Neither was the
workman. The employer may protect himself against the claims of his
workmen by insurance under a plan provided by the State law, or if the
State law does not provide for it, by arrangements with private
companies the same as any other accident insurance is obtained, and by
figuring his cost upon the particular job, he can charge as a part of
his operating expense, the cost of his insurance and include that in his
charge for work. The loss suffered by the individual workmen is then
passed to the community at large. From an economical and sociological
standpoint, this situation is undoubtedly better than that existing
under the theory of the common law.
THE INTERPRETATION OF WORKMEN'S COMPENSATION ACTS.--Although these acts
are comparatively new in this country, there has been a great amount of
litigation, and it is not practical to enter into a discussion of all
the close questions which are raised in interpreting such acts. A vast
amount of the litigation has been concerned with the interpretation of
the three expressions, common to almost all the acts, "accident"
"arising out of" and "during the course of." While the courts have shown
a broad-minded spirit in interpreting these expressions, it is
undoubtedly true that some decisions will suggest further legislation in
order to correct certain evils which exist at the present time. For
example, in defining the term "accident," the leading English case said:
"The expression 'accident' is used in the public and ordinary sense of
the word, as denoting an unlooked-for event which is not expected or
designed." And Judge Siebecker of Wisconsin says "accidental"
contemplates "an event not within one's foresight and expectation,
resulting in a mishap causing injury to the employee," and Mr. Justice
Pound of New York says that the statute contemplates injuries "not
expected or designed by the workman himself." To illustrate: A
window-dresser is decorating the window in Woolworth's. He swallows a
pin. This is an "accident" within the contemplation of the act, and
entitles him to recovery. Again, a workman is employed in a white-lead
factory. During his six months period of service in the factory, he
contracts tuberculosis. This is not an "accident" because you must be
able to put your finger upon a definite time when the unlooked-for event
happened. This leads us to the general statement that Workmen's
Compensation Acts in this country, as at present drawn, do not generally
cover occupational diseases. Separate legislation is undoubtedly
desirable to extend the principle in such cases, for if it is sound that
the window-dresser in Woolworth's should recover, it should be equally
sound that the workman who contracted tuberculosis should recover.
Again, the other two expressions "arising out of," and "during the
course of" have caused much litigation. Perhaps the most satisfactory
statement about these expressions is in the leading Massachusetts case,
In re McNicol, 215 Mass. 497. Here the court says: "The injury must both
arise 'out of' and also be received 'in the course of' the employment.
Neither alone is enough. It is not easy * * * to give a comprehensive
definition of these words. * * * An injury is received 'in the course
of' the employment when it comes while the workman is doing the duty
which he is employed to perform. It 'arises out of' the employment, when
there is * * * a causal connection between the conditions under which
the work is required to be performed and the resulting injury. * * * If
the injury can be seen * * * to have been contemplated by a reasonable
person familiar with the whole situation, * * * then it arises 'out of'
the employment. * * * The causative danger must be peculiar to the work
and not common to the neighborhood. * * * It need not have been foreseen
or expected, but after the event it must appear to have had its origin
in a risk connected with the employment, and to have flowed from that
source as a rational consequence." An illustration will show how these
phrases are applied. The janitor of a building is alone in the building.
An old enemy who has not seen him for years, learns his whereabouts,
comes into the building, shoots him in the leg, causing him to have it
amputated. Is the master liable? It is an "accident," and clearly it
arose "during the course of" employment, but did it arise "out of" his
employment? Manifestly not. The guilty party would have shot the man had
he met him in Central Park, or any other place. It was purely personal
vengeance on his part which caused the act. The night watchman in a bank
is shot by a robber at night in the bank, while on duty. May he recover
from his master? Clearly he can. It is an "accident." It arose "during
the course of" his employment, it arose "out of" his employment also,
because the robber would not have shot him were he not in the bank as a
watchman, standing between the robber and the accomplishment of his
purpose, the securing of money from the bank.
THE RELATIONSHIP OF MASTER AND SERVANT AS RELATING TO OUTSIDE
PARTIES.--If the relationship of master and servant exists, the question
arises, is the master responsible for the torts committed by his
servant, resulting in injury to third parties? It is, of course,
essential that the wrongdoer must be the defendant's servant. It does
not follow that a wrongdoer is the defendant's servant simply because of
a certain relationship, as that of parent and child, husband and wife,
or employer and employee. Within the last few years, a great number of
automobile cases have been decided by the courts, and they are commonly
spoken of as the "family automobile cases." To illustrate: I own a car
which is used by the various members of my family. My son, while running
the car, for his own pleasure, negligently runs over some one. Am I
responsible? Granting the relationship of parent and child, that would
not constitute, per se (of itself), the relationship of master and
servant. The injured man would have to show more than I have indicated
in order to entitle him to recover for my son's negligence. Were members
of my family in the car, being taken out for a ride by my son, I would
be liable. Again, my wife, in discharging a servant, assaults her.
Should the mere fact of the relationship of husband and wife make me
liable on the theory of master and servant? Clearly not. Again, I employ
John Smith as my chauffeur. I never operate my car on Sunday. John
Smith, who lives in the town adjoining mine, is moving, and asks if he
may borrow my car over Sunday to assist in the moving operations. While
using the car for that purpose, he negligently runs over some one. Am I
liable? Clearly not, for, although the relationship of master and
servant exists between me and my servant at the time he did the injury,
he was not acting for me as a servant. What is the rule to be applied to
answer such questions?
THE SERVANT MUST BE ENGAGED IN HIS MASTER'S BUSINESS.--It is clear from
the foregoing that, in order to make the master liable, the servant must
be engaged in his master's business, and he must be acting within the
scope of his employment. The New York case of Rounds v. The Delaware,
etc., Railroad, 64 N. Y. 129, states the general rule: "For the acts of
the servant, within the general scope of his employment, while engaged
in his master's business, and done with a view to the furtherance of
that business and the master's interest, the master will be responsible
whether the act be done negligently, wantonly, or even wilfully." The
Court of Errors and Appeals of New Jersey recently said in Holler v.
Sanford Ross, 68 N. J. Law, 324: "The Supreme Court of Connecticut
states the rule applicable to this class of cases about as clearly as it
can be done, when it says: 'For all acts done by a servant in obedience
to the express orders or direction of the master, or in the execution of
the master's business, within the scope of his employment, and for acts
in any sense warranted by the express or implied authority conferred
upon him, considering the nature of the service required, the
instructions given and the circumstances under which the act is done,
the master is responsible; for acts which are not within these
conditions, the servant alone is responsible.'"
LIABILITY OF A PUBLIC AGENCY FOR THE NEGLIGENT ACTS OF ITS AGENTS.--It
is an old saying that "the King can do no wrong." This principle of the
English common law we have applied in this country, and the Federal
Government cannot be sued unless it gives its consent. While the Court
of Claims has been established, Congress has generally provided that
suits may be brought against the Federal Government only in contract
actions, and not in tort actions, so that ordinarily, if a person is
injured through the negligence of an employee of the Federal Government,
he may not recover against that Government. Thus, my only remedy in case
of an injury, received through the negligent operation of an elevator in
a post-office building owned by the Government, would be the passing of
special legislation by Congress compensating me. I would have no right
to sue the United States for such injury. The same general principles
are applied to the State governments. In regard to cities, the rule may
be generally stated to be that a municipality is not liable for the
negligence of its servants in those departments operated by the
municipality in its governmental activities, as distinguished from its
administrative activities, in which case it is liable. Thus, a city is
not responsible for the negligence of its policemen or its firemen,
although injury results from their negligence, these departments being
examples of governmental activities of a municipality, while the city
would be liable, generally, for the negligence of the employees of its
water department, this being an illustration of its administrative
activities. It is also generally held that public charities, such as
hospitals, and the like, are not liable for torts committed by their
servants, provided they have used reasonable care in the selection of
their servants.
INDEPENDENT CONTRACTORS.--A distinction must be made between one whom we
call an independent contractor and a master. When A desires a particular
piece of work done, he has two options as to doing it. He may either
hire a workman to do it, retaining control of the workman, and telling
him how he shall do it, or he may let the work by contract, simply
stipulating that it shall be done in accordance with plans and
specifications which his architect has drawn up. He retains no control
over the contractor or over his method of work. His sole interest here
is to have the piece of work turned over to him in its completed state.
In the first case, we call the workman a servant; in the second case, he
is an independent contractor. One who employs an independent contractor
is not liable for the negligent acts of the contractor or his servants,
except in a few special cases. In Berg v. Parsons, 156 N. Y. 109, the
majority of the court states: "There are certain exceptional cases where
a person employing a contractor is liable, which, briefly stated, are:
Where the employer personally interferes with the work, and the acts
performed by him occasion the injury; where the thing contracted to be
done is unlawful; where the acts performed create a public nuisance; and
where an employer is bound by a statute to do a thing efficiently and an
injury results from its inefficiency." A few, but not many courts, add
to this list one further fact, that the employer must use due care in
the selection of a competent independent contractor, otherwise he is
liable. This would seem eminently sound.
CHAPTER V
Partnership
RELATIONS ANALOGOUS TO PRINCIPAL AND AGENT.--There are a few relations,
in the law, which are analogous to that of principal and agent. The one
which we shall take up now is the relationship of a partner to a
partnership, and also to the outside world. We shall consider in a
subsequent chapter, the functions, duties and responsibilities of
trustees, executors, and administrators.
THE IMPORTANCE OF PARTNERSHIP LAW.--There is a very common impression
that partnership law is not as important now as formerly. This
undoubtedly is true, as more and more large business enterprises are
being conducted in the corporation form; but there is still a large
amount of business done in the partnership form. What is most important,
however, is the very informality of the type of business conducted under
the partnership arrangement. Whether, in a given case, a partnership
exists, becomes a vital question. Two friends, A and B, in an informal
way, go into a business venture. The enterprise fails and A and B owe
many debts. A has some property of his own; B has nothing. You are a
creditor, but all your dealings have been with B. One simple point will
show you whether your claim is worthless. If A and B were partners, you
may hold A. If they were not partners, your claim probably never will
be worth anything to you. The question, then, whether or not a certain
relationship constitutes a partnership is a most important one, in the
field of commercial law.
PARTNERSHIP DEFINED.--We shall have occasion, in the chapters on bills
and notes, and personal property, to refer to the movement to codify
certain branches of the law. This movement was begun by the
Commissioners on Uniform Laws proposing the Uniform Negotiable
Instruments Act, which has now been adopted in all of the States except
Georgia. One of the most recent codifications is the Uniform Partnership
Act which has been adopted in a number of the States, and which will
undoubtedly follow the same course as the other acts drawn by the same
Commissioners. We shall make frequent reference to the Uniform
Partnership Act in this chapter. Although some of the writers on the law
of partnership state that no satisfactory definition of the term
partnership can be given, the Uniform Act defines it as follows: "A
partnership is an association of two or more persons to carry on as
co-owners a business for profit." It is undoubtedly true that even with
this definition, a considerable amount of further explanation will be
necessary to determine with any degree of certainty, just what is meant
by partnership.
THE DIFFERENCE BETWEEN A PARTNERSHIP AND A CORPORATION.--While we may be
anticipating our chapter on corporations, it is well, at the very
outset, to understand the fundamental differences between a partnership
and a corporation. We may mention six differences:
(1) When a partner dies, the partnership is automatically dissolved. If
a partner sells or transfers his interest in the business, this works a
dissolution of the firm. On the other hand, the situation is precisely
the opposite in the case of a corporation. The death of a shareholder
has no effect upon the corporation. In fact, if all of the shareholders
of the United States Steel Corporation should die at once, the
corporation would still exist. So also the transfer of stock from one
owner to another has no effect upon the corporation's existence. Many
thousand shares are dealt with on the exchange each day without the
slightest effect upon any corporation.
(2) The doctrine of individual liability for the debts of a firm is a
fundamental characteristic of partnership law. Each member of the firm
is absolutely liable for all the debts of the firm. Thus, if the firm
consists of A, B, and C, and the firm goes into bankruptcy and owes
$50,000, and B and C are both individually worthless, and A has his own
private fortune, A will be obliged to pay all of the debts, although,
according to the arrangements that the partners made when forming the
partnership, each was to share the profits and losses equally.
Theoretically, A has the right to contribution from his fellow partners,
and should they later acquire property, he will be able to enforce this
right in a court of equity. In a corporation, a shareholder is liable
only for the value of his share. If he subscribes to a share of stock,
par value $100, and has paid only $50 on his subscription, and the
corporation goes into bankruptcy, its receiver can compel him to pay the
balance of his subscription, $50, but that would be the extent of his
loss. If I buy a share of United States Steel Common, at $79, on the
exchange, and the company goes into bankruptcy, my loss will be only
$79. I would not be obliged to make up to the receiver the other
twenty-one dollars. The only noteworthy exception to this rule as to the
liability of a stockholder is in the case of a shareholder in a National
bank, (this is true of some of the State banking laws also), where a
shareholder is liable to an extra assessment equal to the par value of
the stock he owns.
(3) In a partnership each member of the firm is a general agent for the
partnership, and his acts bind the firm. In the case of a corporation, a
shareholder, by virtue of the fact that he is a shareholder, has no
power to bind the corporation. The position of a shareholder is very
similar to that of a voter. The corporation is run by its board of
directors. They are elected by the shareholders just as we elect a
governor or president. If we are dissatisfied with the conduct of a
governor or president, all we can do is to vote him out of office at the
next election, except in unusual cases where a governor or president
might be impeached. The same is true in the case of a board of
directors.
(4) A partnership may be created by a formal contract, or a simple
contract, in writing or by word of mouth; in fact it may be created in
almost any way. A corporation, in order to do business, must comply with
the corporation laws of the State in which it is incorporated. A regular
formality must be observed. A certificate of incorporation must be
filed, generally with the Secretary of State, and with the county clerk
of the county in which the corporation's principal place of business is
located in the State.
(5) A partnership may do anything that is legal and which the members
decide to do. A corporation exists by virtue of a charter, granted by
the State. The sum total of the powers given in that charter gives the
total of all of the activities the corporation may undertake. Engagement
in activities not authorized in the charter may result in the forfeiture
of the charter by the State.
(6) In legal theory, a corporation is looked upon as a separate entity.
Most States require at least three persons to incorporate. A, B and C
form a corporation under the laws of the State of New York. There are
then four legal persons in existence: A, B, and C, and this separate
person, or legal entity, the Green Corporation, if that is the name
given the company. In the case of a partnership, the law does not, as a
rule, consider the partnership as an entity distinct and separate from
the members who make up the firm. Of course, the business man does, in a
way, look upon the partnership as a separate commercial entity. The very
fact that the members of the firm are all general agents for the firm,
and that the members are individually liable for all of the debts of
the firm, shows that the law does not carry the entity theory into
practice in partnerships as it does in corporations.
DIFFERENT KINDS OF PARTNERSHIP.--What we have said applies to the
ordinary partnership. There are certain forms of partnership which we
can only mention. One of them is the limited partnership. Limited
partnerships are created under the law of the State in which the
business is to be conducted and in a general way, these limited
partnerships are a combination of the principles underlying ordinary
partnerships and corporations. The members may limit their liability to
a certain amount, and in that sense, the limited partnership is like a
corporation. On the other hand, the general principles of partnership,
as we shall discuss them, apply with almost equal force to the acts of a
limited partnership. A person should not undertake to give an opinion as
to a legal problem relating to a limited partnership until the law of
the State in which the limited partnership is organized has been
consulted.
JOINT STOCK COMPANIES.--Occasionally we meet with organizations--joint
stock companies--which occupy a sort of "No-man's land" between
partnerships and corporations. The joint stock company issues shares of
stock the same as a corporation. These shares are listed on the stock
exchange, as for example, the Adams Express Company. The joint stock
company, however, carries with it the individual liability of the
shareholders for the debts of the company, which is technically a
partnership attribute. The New York Court of Appeals in People ex rel.
Winchester v. Coleman, 133 N. Y. 279, has put it this way: "More or
less, they crowd upon and overlap each other, but without losing their
identity, and so, while we cannot say that a joint stock company is a
corporation, we can say * * * that the joint stock company is a
partnership with some of the powers of a corporation."
HOW TO DETERMINE WHETHER A PARTNERSHIP EXISTS.--In a case, not tried in
court, the facts were: A Gloucester cod-fishing vessel made an
unsuccessful fishing voyage. The sailors were to secure a certain
portion of the profits of the voyage as their wages. When the ship
returned to port, an attempt was made to collect bills incurred on the
trip and to hold the seamen liable along with the owners of the vessel,
as partners. It was contended that sharing in the profits made them
partners. While this is true generally, this particular custom, whereby
a laborer receives a certain portion of the profits of an undertaking as
his wages, does not of itself constitute him a partner with the person
operating the vessel. This point has been decided several times. Such
questions as these arise and cause great difficulty in determining
whether a partnership exists. At times it is very important, as in the
case of the seamen, to know whether or not they can be made to assume
the obligations pertaining to the partnership relations. While we cannot
go into these relations in detail, the framers of the Uniform
Partnership Act have laid down, with the utmost care, the rules which
are to be used in determining whether a partnership exists or not. But,
you say, why cannot the parties avoid all this difficulty by making a
written agreement clearing up the entire matter? They could. It is the
simplest matter in the world. But the trouble comes because a
partnership arrangement is so easy to enter into, and requires so little
formality, that it is taken for granted that it will come out
satisfactorily, and the precautions which should be taken are sometimes
forgotten. Hence, we have to have rules of interpretation to help us
when the parties themselves have not taken the necessary precautions to
make matters clear. These rules of interpretation are very clearly and
very definitely laid down in the Uniform Partnership Act, in the
following language:
(1) Except as provided by Section 16, persons who are not partners as to
each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint
property, common property, or part ownership does not of itself
establish a partnership, whether such co-owners do or do not share any
profits made by the use of the property.
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived.
(4) The receipt by a person of a share of the profits of a business is
prima facie evidence that he is a partner in the business, but no such
inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,
(d) As interest on a loan, though the amount of payment vary with the
profits of the business,
(e) As the consideration for the sale of the good-will of a business or
other property by installments or otherwise.
Section 16.--(Partner by estoppel.)--(1) When a person by words spoken
or written or by conduct, represents himself, or consents to another
representing him to any one, as a partner in an existing partnership or
with one or more persons not actual partners, he is liable to any such
person to whom such representation has been made, who has, on the faith
of such representation, given credit to the actual or apparent
partnership, and if he has made such representation or consented to its
being made in a public manner, he is liable to such person, whether the
representation has or has not been made or communicated to such person
* * *.
FOR WHAT PURPOSES MAY A PARTNERSHIP BE CREATED.--A partnership may be
created to carry on any lawful business, and whatever the individuals
may do lawfully as such, two or more may do together in a group as a
partnership. Professional occupations may be carried on in the
partnership form advantageously. This is one case where a partnership
has an advantage over a corporation. A group of lawyers may form a
partnership and do business under a partnership name. But a group of
lawyers seldom or never form corporations to practice law. The reason
for this is that the corporation is a separate entity, and the
corporation as such cannot pass a bar examination and be admitted to the
bar. In fact, in a few States, there are statutes prohibiting a
corporation from practicing law. There is, therefore, very little
advantage in creating a corporation which cannot itself do the thing for
which it was created.
ILLEGAL OBJECT.--A partnership which is formed to carry on any illegal
purpose is, of course, not recognized by law. Thus, if A, B, and C form
a partnership to engage in the gambling business and they elect C as
treasurer and have a successful business so that they have a large
amount of money on hand, A and B may not be able to reap the profits of
the venture. C has the money. The agreement was that all were to share
equally, but C insists on keeping it all. The law will allow him to do
so, because it is beneath the dignity of the court to order an
accounting in a transaction where all parties are equally guilty. The
maxim is "in pari delicto, condicio defendentis potior est", that is,
where the parties are in equal fault, the position of the defendant is
the stronger. C, the guilty party, has the money; he is the defendant,
therefore, he keeps it.
WHO MAY BE PARTNERS.--At common law, a married woman was incapable of
becoming a member of a partnership because of her general incapacity to
enter a contract. Statutes removing the disability of married women have
been passed in practically all the States, and a married woman is
generally free to become a partner, except, and this is true in many
States still, husband and wife may not become partners. An infant may be
a member of a firm on the same general principles as applied to ordinary
infant's contracts. His entering the partnership agreement is not void,
but voidable. When he becomes of age, if he affirms the contract of
partnership, he will be liable the same as an adult. He has, however,
the right to disaffirm his partnership agreement within a reasonable
time after becoming of age, and if he does so, he will be absolved from
all personal liability for the debts of the firm. It is very generally
held that a corporation may not enter into a copartnership with another
corporation or an individual. The reason for this is a general rule of
public policy that in a partnership the corporation would be bound by
the acts of persons who are not its duly appointed agents and officers.
There may be any number of members in a firm, such matters being left to
the choice and wisdom of those operating the business.
DELECTUS PERSONARUM.--While the foregoing is true, one must not reach
the conclusion that an objectionable person may be forced into a firm. I
am a member of a firm of three persons. I decide to withdraw, and tell
my two fellow partners that I have transferred all my interest in the
firm to John Jones. He will take my place. My two fellow partners
believe Jones to be a crook, and do not wish to be in partnership with
him. They would not be obliged to accept him. In other words, the
doctrine of delectus personarum, or the choice of the person, is
strictly applied in partnership, because a partnership relation is a
very confidential relationship. Ordinarily the business cannot be
conducted satisfactorily unless all of the partners have the confidence
of each other. It is for this reason, that we have the rule, heretofore
referred to, that the sale by a partner of his interest in the business
works a dissolution of the partnership. John Jones, who purchased my
rights in the firm, could not compel the other members to take him in,
but the firm would have to be wound up and he would simply be able to
recover what my share of the assets was. It is true that Section 27 of
the Act does read that a sale by a partner of his interest does not of
itself work a dissolution, but the doctrine of delectus personarum is
fully preserved. That section reads: (1) A conveyance by a partner of
his interest in the partnership does not of itself dissolve the
partnership, nor, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of the
partnership, to interfere in the management or administration of the
partnership business or affairs, or to require any information or
account of partnership transactions, or to inspect the partnership
books; but it merely entitles the assignee to receive in accordance
with his contract the profits to which the assigning partner would
otherwise be entitled.
(2) In case of a dissolution of the partnership, the assignee is
entitled to receive his assignor's interest and may require an account
from the date only of the last account agreed to by all the partners.
ARTICLES OF PARTNERSHIP.--We have learned that parties need not
expressly declare themselves partners, or enter into an express
contract, in order to become partners. So the framing of written
partnership articles--a written contract of partnership--is not
essential, though it is the ordinary and advisable course. We may note
here a few rules governing the use and construction of such articles
where they have been adopted. They should, of course, provide for as
many contingencies as can be foreseen, such as the nature, name and
place of business, when the relation is to commence and when to
terminate, what capital shall be contributed by each, what the share of
each in the profits and losses shall be, what the powers of the partners
as between themselves shall be, whether the business shall be continued
after the death of one or more of the partners and how it shall be wound
up. But the important thing to note is, that if provision be not made,
the general law, and particularly that part governing the powers and
duties of partners to each other and to third persons, applies. In other
words, the partners may, by their contract, determine what their rights
as between themselves shall be; but if they do not, the rules of law
will determine them. Thus they may determine that of two partners one
shall have two-thirds and the other one-third of the profits; in the
absence of such a clause the law determines the profits shall be divided
equally. When articles have been once adopted they can be changed only
by the consent of all the partners; this consent need not be formally
expressed in words, but it may be implied from a long-continued course
of conduct. The law provides no means to force a partner to live up to
his contract except in a very few cases; the most it gives is a right of
action for the breach caused by his failure to do as agreed.
FIRM NAME.--The adoption of a firm name is not an essential to a
partnership, but is customary and advisable. The names of the partners
may be combined, or a single name used, or a fictitious name, or any
name, so long as the rights of other persons are not violated. In some
States, notably New York, the use of the name of a person not a partner
is forbidden, as is also the use of the expression "& Co.," unless a
partner is represented by it. Ordinarily, contracts may be made in the
firm name and by one partner, but contracts under seal should be made in
the names of the partners "doing business as," etc., and cannot be made
by one partner without authority from the others. Conveyances of real
property should be made to or by the individual partners "doing business
as," etc., for the law does not generally recognize the firm as a
separate person or entity sufficiently to enable it as such to take or
give a conveyance. If the deed ran to "John Doe & Co.," the title would
be in John Doe only, though he would be said to hold it in trust for the
firm, for if the partnership name is given as the grantee, the title
goes only to those whose names appear, and if the partnership were doing
business under a fictitious name, the deed would convey to no one.
Whether land, the title to which is in the name of one partner, is held
in trust by him as partnership property, is a question of intention, and
that question is determined by asking with what money was the land
bought, what use has it been put to, has it been carried on the books of
the firm, with what money have the taxes, insurance, and other charges
been paid, etc. If found to have been treated as partnership property,
the fact that the title is in one person counts for little, as he will
be said to hold it in trust for the firm; but the careful business man
will avoid trouble by having the property conveyed to the firm in the
manner indicated, if it is actually partnership property.
THE POWERS OF A PARTNER.--As a general agent, a partner has almost
unlimited authority to bind the firm. Because of this, we have here one
reason for not recommending the partnership form of doing business
unless all the members of the firm have the utmost confidence in each
other. These powers of the partners are so general that it is impossible
for us to go into them in any detail. They are summarized in the most
compact form in the Uniform Partnership Act. Sections 9 to 17 of that
act are as follows:
9. (1) Every partner is an agent of the partnership for the purpose of
its business, and the act of every partner, including the execution in
the partnership name of any instrument, for apparently carrying on in
the usual way the business of the partnership of which he is a member,
binds the partnership, unless the partner so acting has in fact no
authority to act for the partnership in the particular matter, and the
person with whom he is dealing has knowledge of the fact that he has no
such authority.
(2) An act of a partner, which is not apparently for the carrying on of
the business of the partnership in the usual way, does not bind the
partnership unless authorized by the other partners.
(3) Unless authorized by the other partners or unless they have
abandoned the business, one or more but less than all the partners have
no authority to:
(a) Assign the partnership property in trust for creditors or
on the assignee's promise to pay the debts of the partnership,
(b) Dispose of the good-will of the business,
(c) Do any other act which would make it impossible to carry on
the ordinary business of the partnership,
(d) Confess a judgment,
(e) Submit a partnership claim or liability to arbitration or
reference.
(4) No act of a partner in contravention of a restriction on his
authority shall bind the partnership to persons having knowledge of the
restriction.
10. (1) Where title to real property is in the partnership name, any
partner may convey title to such property by a conveyance executed in
the partnership name; but the partnership may recover such property
unless the partner's act binds the partnership under the provisions of
paragraph (1) of Section 9, or unless such property has been conveyed by
the grantee, or a person claiming through such grantee to a holder for
value without knowledge that the partner, in making the conveyance, has
exceeded his authority.
(2) Where title to real property is in the name of the partnership, a
conveyance executed by a partner, in his own name, passes the equitable
interest of the partnership, provided the act is one within the
authority of the partner under the provisions of paragraph (1) of
Section 9.
(3) Where title to real property is in the name of one or more but not
all the partners, and the record does not disclose the right of the
partnership, the partners in whose name the title stands may convey
title to such property, but the partnership may recover such property if
the partners' act does not bind the partnership under the provisions of
paragraph (1) of Section 9, unless the purchaser or his assignee, is a
holder for value, without knowledge.
(4) Where the title to real property is in the name of one or more or
all the partners, or in a third person in trust for the partnership, a
conveyance executed by a partner in the partnership name, or in his own
name, passes the equitable interest of the partnership, provided the
act is one within the authority of the partner under the provisions of
paragraph (1) of Section 9.
(5) Where the title to real property is in the names of all the
partners, a conveyance executed by all the partners passes all their
rights in such property.
11. An admission or representation made by any partner concerning
partnership affairs within the scope of his authority as conferred by
this act is evidence against the partnership.
12. Notice to any partner of any matter relating to partnership affairs,
and the knowledge of the partner acting in the particular matter,
acquired while a partner or then present to his mind, and the knowledge
of any other partner who reasonably could and should have communicated
it to the acting partner, operate as notice to or knowledge of the
partnership, except in the case of a fraud on the partnership committed
by or with the consent of that partner.
13. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership, or with the
authority of his co-partners, loss or injury is caused to any person,
not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so
acting or omitting to act.
14. The partnership is bound to make good the loss:
(a) Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and
(b) Where the partnership in the course of its business
receives money or property of a third person and the money or
property so received is misapplied by any partner while it is
in the custody of the partnership.
15. All partners are liable
(a) Jointly and severally for everything chargeable to the
partnership under Sections 13 and 14.
(b) Jointly for all other debts and obligations of the
partnership; but any partner may enter into a separate
obligation to perform a partnership contract.
16. (1) When a person, by words spoken or written or by conduct,
represents himself, or consents to another representing him to any one,
as a partner in an existing partnership or with one or more persons not
actual partners, he is liable to any such person to whom such
representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership, and
if he has made such representation or consented to its being made in a
public manner, he is liable to such person, whether the representation
has or has not been made or communicated to such person so giving credit
by or with the knowledge of the apparent partner making the
representation or consenting to its being made.
(a) When a partnership liability results, he is liable as
though he were an actual member of the partnership.
(b) When no partnership liability results, he is liable jointly
with the other persons, if any, so consenting to the contract
or representation as to incur liability, otherwise separately.
(2) When a person has been thus represented to be a partner in an
existing partnership, or with one or more persons not actual partners,
he is an agent of the persons consenting to such representation to bind
them to the same extent and in the same manner as though he were a
partner in fact, with respect to persons who rely upon the
representation. Where all the members of the existing partnership
consent to the representation, a partnership act or obligation results;
but in all other cases it is the joint act or obligation of the person
acting and the person consenting to the representation.
17. A person admitted as a partner into an existing partnership is
liable for all the obligations of the partnership arising before his
admission as though he had been a partner when such obligations were
incurred, except that this liability shall be satisfied only out of
partnership property.
POWERS OF A MAJORITY OF PARTNERS.--If partners disagree, then a majority
of them have power to decide what shall be done; but there are limits
even to the power of a majority. They can only carry on the business of
the firm, and any vote of the majority, or action of the majority, to
change the character of the business for which the firm was organized,
or to make any fundamental change in the original articles of the
partnership, would be invalid.
RELATION OF PARTNERS TO ONE ANOTHER.--The rules determining the rights
and duties of partners in relation to the partnership are concisely but
fully set forth in the Act as follows:
18. The rights and duties of the partners in relation to the partnership
shall be determined, subject to any agreement between them, by the
following rules:
(a) Each partner shall be repaid his contributions, whether by way of
capital or advances to the partnership property and share equally in the
profits and surplus remaining after all liabilities, including those to
partners, are satisfied; and must contribute towards the losses, whether
of capital or otherwise, sustained by the partnership according to his
share in the profits.
(b) The partnership must indemnify every partner in respect of payment
made and personal liabilities reasonably incurred by him in the ordinary
and proper conduct of its business, or for the preservation of its
business or property.
(c) A partner who, in aid of the partnership, makes any payment or
advance beyond the amount of capital which he agreed to contribute,
shall be paid interest from the date of the payment or advance.
(d) A partner shall receive interest on the capital contributed by him
only from the date when repayment should be made.
(e) All partners have equal rights in the management and conduct of the
partnership business.
(f) No partner is entitled to remuneration for acting in the partnership
business, except that a surviving partner is entitled to reasonable
compensation for his services in winding up the partnership affairs.
(g) No person can become a member of a partnership without the consent
of all the partners.
(h) Any difference arising as to ordinary matters connected with the
partnership business may be decided by a majority of the partners; but
no act in contravention of any agreement between the partners may be
done rightly without the consent of all the partners.
19. The partnership books shall be kept, subject to any agreement
between the partners, at the principal place of business of the
partnership, and every partner shall at all times have access to and may
inspect and copy any of them.
20. Partners shall render on demand true and full information of all
things affecting the partnership to any partner or the legal
representative of any deceased partner or partner under legal
disability.
21. (1) Every partner must account to the partnership for any benefit,
and hold as trustee for it any profits derived by him without the
consent of the other partners from any transaction connected with the
formation, conduct, or liquidation of the partnership or from any use by
him of its property.
(2) This section applies also to the representatives of a deceased
partner engaged in the liquidation of the affairs of the partnership as
the personal representatives of the last surviving partner.
22. Any partner shall have the right to a formal account as to
partnership affairs:
(a) If he is wrongfully excluded from the partnership business or
possession of its property by his co-partners.
(b) If the right exists under the terms of any agreement.
(c) As provided by Section 21.
(d) Whenever other circumstances renders it just and reasonable.
TERMINATION OF THE PARTNERSHIP.--A partnership is terminated either by
act of the partners, or by law. Under the first heading, we may mention
such things as the partnership being terminated by the accomplishment of
the object for which the same was formed, or by the termination of the
time during which the partnership was to exist, or by mutual consent of
all parties concerned. Under the head of termination by operation of
law, we have such topics as the death of a partner, the insanity of a
partner, or the bankruptcy of a partner, and a dissolution by a court,
as for example, where it is absolutely certain, in the opinion of the
court, that the business cannot be successfully continued longer. In
such a case, although some of the partners may not wish to wind up the
affairs of the business, the court may order it done in the interest of
all parties concerned.
OWNERSHIP OF FIRM PROPERTY AND CREDITORS' RIGHTS.--The firm property is
owned by all the partners jointly, but the interest of each individual
partner is not an interest in each piece of firm property, but a right
to have an accounting and to receive on the accounting such share of the
assets as belong to him when all debts due from him to the firm and all
liabilities to the outside world are settled. Consequently, a creditor
of an individual partner cannot seize or attach or levy on firm
property, because that firm property does not belong, nor does any part
of it belong, to his debtor. The creditor must file a bill in equity
asking that the partner's share be determined, and that on an accounting
so much as is found due to the debtor partner be applied to discharge
that partner's indebtedness.
THE DIVISION OF ASSETS.--Upon final dissolution, the question of
division of assets comes up, and the Uniform Partnership Act gives us
the general rule as to how the firm's assets are divided. Section 40 of
the Act reads:
In settling accounts between the parties after dissolution, the
following rules shall be observed, subject to any agreement to the
contrary:
(a) The assets of the partnership are:
I. The partnership property,
II. The contributions of the partners necessary for the payment
of all the liabilities specified in clause (b) of this
paragraph.
(b) The liabilities of the partnership shall rank in order of
payment, as follows:
I. Those owing to creditors other than partners,
II. Those owing to partners other than for capital and profits,
III. Those owing to partners in respect of capital,
IV. Those owing to partners in respect of profits.
(c) The assets shall be applied in the order of their
declaration in clause (a) of this paragraph to the satisfaction
of the liabilities.
(d) The partners shall contribute, as provided by Section 18
(a) the amount necessary to satisfy the liabilities; but if
any, but not all, of the partners are insolvent, or, not being
subject to process, refuse to contribute, the other partners
shall contribute their share of the liabilities, and, in the
relative proportions in which they share the profits, the
additional amount necessary to pay the liabilities.
(e) An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in clause (d) of this paragraph.
(f) Any partner or his legal representative shall have the
right to enforce the contributions specified in clause (d) of
this paragraph, to the extent of the amount which he has paid
in excess of his share of the liability.
(g) The individual property of a deceased partner shall be
liable for the contributions specified in clause (d) of this
paragraph.
(h) When partnership property and the individual properties of
the partners are in the possession of a court for distribution,
partnership creditors shall have priority on partnership
property, and separate creditors on individual property, saving
the rights of lien or secured creditors as heretofore.
(i) Where a partner has become bankrupt or his estate is
insolvent, the claims against his separate property shall rank
in the following order:
I. Those owing to separate creditors,
II. Those owing to partnership creditors,
III. Those owing to partners by way of contribution.
LIQUIDATION OF PARTNERSHIP.--When a partnership is dissolved, it is
common for the business to require liquidation, and frequently one or
more of the partners are what are called liquidating partners. If a
partnership is dissolved by death, for instance, the surviving partners
have a right to be liquidating partners and liquidate the business. That
means they may carry on existing contracts; they may dispose of the
stock on hand to the best advantage. If this requires incidental
purchases of new goods, they may be made, but in general, new business
cannot be undertaken. The function of a liquidating partner is to
satisfy existing contracts, reduce the property of the firm to cash, and
then distribute it to those who are entitled to receive it.
LIMITED PARTNERSHIP.--Statutes, as we have learned, in many States
permit the formation of limited partnerships, the object of which is to
enable one or more partners to avoid unlimited liability for debts.
Partners in a general partnership are each liable, individually, for the
full amount of the firm's indebtedness. If one partner is thus compelled
to pay more than his share, he may seek redress by demanding
contribution from his fellow partners, and if they are not solvent, he
will not be able to secure reimbursement. If there is one solvent
partner, for instance, and two other partners, both of whom become
insolvent, the result will be that the first partner will have to pay
the debts of the firm and will have no redress except such as he may be
able to get from the insolvent estates of his two partners. Now, in a
limited partnership a limited partner does not stand to lose any more
than the amount of money he actually puts in the firm. In order to
create a limited partnership it is necessary to sign a certificate
prepared for the purpose and stating the facts, file it in the office of
the Secretary of State or other official, and also publish it so that
the public may be informed of the circumstances and credit may not be
given by the world at large to the firm on the assumption that the
limited partner is a general partner. He puts a specified amount of
money in the firm and that money may be reached by creditors of the
firm, but they cannot hold him further liable. A good definition of a
limited partnership follows: A limited partnership is one which consists
of one or more persons called general partners and also one or more
persons called special partners. Every general partner is an agent for
the partnership in the transaction of its business and has authority to
do whatever is necessary to carry on such business in the ordinary
manner. Every general partner is liable to third persons, jointly and
severally, with his general co-partners for all of the obligations of
the partnership. A special partner may only advise as to the management
of the partnership and he is liable for the obligations of the
partnership only to the amount of capital invested by him therein.
SILENT PARTNERS.--A silent partner must not be confused with a member of
a limited partnership. A silent partner is a general partner who takes
no part in the active management of the business and frequently is a
secret partner. A member of a limited partnership can never be a secret
partner, since the terms of a limited partnership must be published. A
member of a limited partnership should take no part in the management of
the business, or he may render himself liable as a general partner. The
limited partnership law requires, moreover, that he must have exactly
complied with the law by making out, filing and publishing a
certificate. The statutes of the State should be consulted on this point
and closely adhered to.
LIMITED.--We often see also in print, so and so "Ltd." This does not
mean a limited partnership. The word "limited" is used in the name of an
English or Canadian company organized under the English or Canadian
statutes, but such companies are rather analogous to corporations than
to limited partnerships. The liability in such companies is limited
altogether to the assets in the company's hands. There are no general
partners. The liability of all stockholders is limited. The English and
Canadian law requires that the word Limited be added to the name, so
that the public may not be deceived into believing that the company is a
partnership.
CHAPTER VI
Corporations
THE NATURE OF A CORPORATION.--The nature of a corporation is perhaps
best understood by an illustration. In the case of People's Pleasure
Park Co. v. Rohleder, 109 Va. 439, the facts were as follows: There was
a large tract of land divided up into a number of lots, and in each
deed, when a lot was sold, there was a covenant providing that title to
the real property should never vest in a person of African descent, or
in a colored person. Later, after the lots had been sold, several of
them were conveyed to a corporation composed exclusively of negroes. The
corporation knew, when it purchased the tract of land, of this
restriction in the deed, and the land was bought by it for the purpose
of establishing an amusement park for colored people. Suit was brought
in a court of equity to compel the cancellation of the deed to the
corporation. Stated boldly, the decision of the Virginia court amounts
to an assertion that a corporation has no color. In other words, the
corporation is an entity separate and distinct from its members, and so,
although all the stockholders in this corporation were colored, that did
not make the corporation a colored person. Thus, if A, B, and C, as
incorporators, organize the X Corporation, although they are the sole
stockholders, there are four persons, A, B, C, and the X Corporation.
THE ENTITY THEORY.--It may be doubted if any court would carry the
entity theory to the extent that it would allow an individual who was
the owner of a piece of real estate, which he was not permitted by the
deed to sell to negroes, to deliberately go to a prospective negro
purchaser and say: "I cannot sell my property to you because of a
restriction in the deed, but I will pay the necessary expenses, if you,
with two of your friends, will form a corporation to take title to this
property, in which corporation each of your friends will own one share
and you the balance, thus retaining control yourself. I will then deed
the property to the corporation and will thereby get around the covenant
in my deed preventing a transfer to negroes." We must not allow the
entity theory to work a manifest injustice, as was said in Erickson v.
Revere Elevator Co., 110 Minn. 443: "Where the corporate form is used by
individuals for the purpose of evading the law, or for the perpetration
of fraud, the courts will not permit the legal entity to be interposed
so as to defeat justice."
RESULTS OF THE ENTITY THEORY.--Flowing from the entity theory is the
result that the property of a corporation is owned by the corporation
and not by the individual members. Therefore, all conveyances of such
property, whether it is real property or personal property, must be made
by the corporation, and cannot be made by the members or shareholders as
individuals. It also follows that all suits against or by the
corporation must be brought against the corporation or by the
corporation as an entity and not against the individual members. Again,
a corporation may take property from one of its individual members, and
it may make a contract with one of them, and it may sue them and be sued
by them.
KINDS OF CORPORATIONS.--Corporations are divided into public,
quasi-public, and private corporations. The private corporation is such
as is created for private enterprises, such as manufacturing, banking,
and trading corporations. Religious and eleemosynary corporations are
also included in this classification. The public corporation is such as
is created for the purposes of government, such as cities, towns,
villages, and institutions founded by the State, and managed by it for
governmental purposes. Quasi-public corporations are such as are engaged
in a private business which is affected with a public interest, such as
railroads, both steam and electric, gas companies, water companies,
lighting companies, and the like. The public, and generally the
quasi-public, corporations possess the right of eminent domain, that is,
the right to take private property for public purposes upon payment of
just compensation to the owner. It is the private corporation with which
we are usually concerned in commercial law, and this chapter will be
devoted largely to a discussion of that class.
THE CREATION OF A CORPORATION.--A corporation must be created by
legislative authority. Formerly, a corporation was created by special
act of the legislature, but in recent years the growth in the number of
corporations, and also the political wire-pulling necessary to get an
incorporation bill through a legislature, have resulted in the almost
universal practice of having the legislature pass a general corporation
act, and then without further reference to the legislature, any group of
persons, of the requisite number, may become incorporated by complying
with the provisions of such an act. The formation of corporations under
the laws of most States is a simple process, requiring in general the
preparation of an official document sometimes termed the "certificate of
incorporation" or the "charter," which paper sets forth the facts which
are required under the laws of the State wherein the corporation is to
be formed. These laws, while not uniform, generally require a statement
as to the name to be used by the corporation, the names of the proposed
directors and incorporators, a statement of the general purposes or
objects of the corporation, the location of its principal office and
place of business, how long it is to last, the amount of its authorized
capital, the par value of its stock, as well as a statement in regard to
any preferred stock which may be contemplated. Other details are
sometimes required under the various State laws. This official document
must generally be signed or executed by those persons who are the
incorporators of the corporation. As a rule, three or more incorporators
are required, although in some States five is the minimum. This official
document, after it has been duly executed, is usually to be filed in the
office of the Secretary of State, and usually also in that of the
county clerk of the county wherein its principal office is to be. This
procedure, however, is subject to some variations and the statutes of
the State involved must always be closely followed. As soon as the
official document has been properly filed and the other necessary steps
taken the incorporators hold the first meeting and effect an
organization, after which time the corporation is generally in a
position to transact business, although in some States it is provided in
effect that corporations should not commence business until a certain
share of the capital has been paid into the corporation in cash.
CITIZENSHIP OF A CORPORATION.--Although a corporation is a separate
entity, entirely distinct and apart from its members, such separate
entity is not a citizen in the sense in which we use the term
ordinarily. At a general election a corporation has no right to vote.
Again, Article 4 Section 2, of the United States Constitution, provides
that "citizens of each State shall be entitled to all of the privileges
and immunities of citizens in the several States." A corporation is not
a citizen in this sense. Hence a State may keep all insurance companies,
incorporated outside of its area, from doing business in that State by
discriminating legislation against foreign insurance corporations.
Insurance is not looked upon as interstate commerce, about which the
individual States may not legislate, and as a corporation is not a
citizen within the meaning of Article 4, Section 2, such insurance
companies have no redress. In one sense, however, a corporation is
looked upon as a citizen. Where a suit is between citizens of different
States, and the amount involved is over the prescribed sum, either party
may bring the action in the Federal courts, if he so desires, instead of
in the State courts. In this sense, a corporation is to be regarded as
if it were a citizen of the State in which it is created. If I live in
New York and the American Tobacco Co. is incorporated in New Jersey,
suit between us may be brought in the Federal courts on the ground of
diversity of citizenship on the part of plaintiff and defendant.
POWERS OF CORPORATIONS.--A corporation is unable to do anything beyond
such powers as are granted it by law. As to the extent of the powers
possessed by a corporation, we may conveniently divide corporate powers
into those which are express and those which are implied. Express powers
may be considered as including those which are mentioned in the official
documents used or granted upon the beginning of the existence of the
corporation. These official documents are spoken of as "charters" or
"certificates of incorporation." Whatever term may be applied to them
there is generally in such documents a statement of the general purposes
or objects for which the corporation is formed; in other words, of the
general business in which it is to engage. There is also a statement of
the general powers of the corporation which is to engage in the business
mentioned. The powers so mentioned in such official documents may be
termed, as we have stated, express powers of the corporation. Needless
to say, however, it is not usual or possible to attempt to indicate in
any such official documents all the details of the operations of
business. Therefore, it is necessary to imply that in addition to such
express powers the corporation has power to do such acts as may be
reasonably necessary or incidental to the carrying on of the business
mentioned. Powers so implied, without words, are termed "implied
powers." Therefore, the total powers of a corporation consist of the
express powers, namely, such as are named in the official documents
containing a statement of its purposes and the business in which it is
to engage, and the powers which would be reasonably implied under the
rule just mentioned, as necessary and incidental to the carrying out of
the express powers. Such implied powers do not give the corporation any
power to do acts which are not reasonably necessary and incidental in
its regular business. To allow validity to acts not so reasonably
necessary and incidental would be in reality allowing the corporation to
engage in outside business, which, under its charter, it has no power to
engage in. As an illustration of this let us assume that the X company
was incorporated to build, run and operate a railroad between two towns
named A and B. The official charter of the corporation may state further
details of the corporation's powers or it may not. But, if such details
are not stated, the corporation would, obviously, have as express
powers, the power to build the road and to operate it between the towns
mentioned. It would also have as implied powers the power to do any act
reasonably necessary or incidental to the operation of a railroad, such
for example as the purchase of rails, ties or other railroad supplies,
the hiring of employees, erection of stations and the power also to give
negotiable paper in payment for such supplies or the raising of money by
mortgaging its property or otherwise where necessary to carry on its
business. In other words, the corporation may be said to have as implied
powers all the powers which an individual would reasonably and usually
exercise if he were operating the railroad. However, the corporation
would have no power, express or implied, to do any act not reasonably
necessary to the railroad business, such, for example, as the purchase
of a stock farm or the operation of a steamer line or a grocery store,
or the leasing of its line. If the corporation, then, should make any
contract with relation to engaging in these outside matters--the
corporation having no power to engage in them--a valid contract could
not arise and therefore the corporation could not be held liable
thereon.
ULTRA VIRES ACTS.--Where a corporation attempts to do an act which is
clearly beyond its express or implied powers, such act is generally
termed an "ultra vires" act, and it may frequently consist in an
attempted contract by a corporation. Hence we must consider with some
care contracts of corporations which may be termed ultra vires. As the
corporation lacks power it is generally said that the contract does not
arise and hence neither the corporation nor the person with whom it
attempted to contract would theoretically be bound thereon. Yet, in
many States, a special rule has been adopted whereby a corporation may
be held upon such contract in certain cases even though it had no power
to make it. This may be termed the "doctrine of estoppel," and generally
includes cases where the corporation has assumed to make a contract
which was ultra vires or beyond its powers but which would appear to an
outsider as incidental to the corporate business and therefore as within
its corporate powers. In such circumstances, if the outsider with whom
the corporation assumed to make the contract does in fact rely
reasonably upon the corporate power to make it, having been deceived by
appearances and having no warning that the corporation actually lacked
power, and having paid over money or delivered goods or performed
services or parted with other value under the contract, he may generally
enforce the contract against the corporation. In other words, under such
circumstances, the corporation is estopped or forbidden to evade its
obligation by asserting the point that it had no power to make such
contract. However, this is strictly limited to cases where the
corporation appeared to have the power to make the contract and where
the person dealing with it had no reason to suspect or doubt its power
in that regard, and where the person dealing with the corporation had
parted with some value of the kind mentioned, in his reliance that the
contract was within the corporate powers of and therefore binding upon
the corporation. Thus, where such person has done nothing toward
carrying out his duty under the contract he would have no claim or
right to enforce the same as a binding obligation of the corporation.
Many courts also treat him somewhat differently and take the attitude
that an outsider who has dealt with the corporation is entitled not to
enforce the attempted contract, but is entitled only to recover from the
corporation the reasonable value of such goods or service as it has
voluntarily accepted from him.
DE FACTO AND DE JURE CORPORATIONS.--It sometimes happens that a group of
persons may attempt to organize a corporation and fail to comply with
all the provisions of the law in the State in which they attempt to
organize. The question arises then: What have we? Of course, we do not
have a full completed organization, which we would call a corporation de
jure (by right of law). We may have what is called a corporation de
facto (in fact). In order to constitute a corporation de facto, it is
generally held that the following requisites must exist: There must be a
valid law which authorizes the formation of such a corporation; a
colorable attempt to organize under the provision of such law; and an
assumption of corporate power, or, as is sometimes called, a user. If
these facts exist, we then have a corporation de facto, and persons
dealing with such a corporation are usually held to the same
responsibilities as though it was an actual de jure corporation. The
State, ordinarily, is the only person which can question the existence
of such a body, and this is usually done in a suit by the
attorney-general. If the parties have not even complied with the
requisites of a de facto corporation, the authorities are divided as to
what kind of an organization it is, although, perhaps, the best
decisions would hold the parties liable as partners. They must have
contemplated some kind of liability and failing to create even a
corporation de facto, a partnership liability is all that is left,
except individual liability, and that is apparently just what they did
not intend.
PROMOTERS.--A promoter is a very common person in the modern industrial
world. He is a person who brings about the organization of corporations,
gets the people together who are interested in the enterprise, aids in
procuring subscriptions, and takes general charge of all the matters
incident to the formation of the corporation. In other ways, he is
governed by the rules of agency and his position is that of a fiduciary.
The majority of the courts hold that there is no liability on the part
of the corporation to pay for his expenses and his services, in
promoting the organization, unless the corporation as an organization
expressly promises to pay or otherwise clearly recognizes the
obligation. Because of the fiduciary relationship, which a promoter
occupies, he is not permitted to make any secret profits at the expense
of the corporation. If he secures property for $1,000,000, he may not
turn it over to the corporation for $1,500,000 and pocket the profit
himself. A corporation cannot be liable for the acts of a promoter
before the corporation came into existence. It may, however, after
coming into existence adopt the acts of the promoter and thereby render
itself liable. If, knowing the terms of an agreement made by a
promoter, the corporation takes advantage of the agreement or recognizes
it, it thereby in effect itself becomes a party to the agreement. Unless
the terms of a promoter's agreement expressly state the contrary, the
promoter is personally liable upon it as a contractor.
POWER OF THE STATE OVER A CORPORATION.--It must follow, that if a State
creates a corporation, then it should have certain control over it. The
United States Supreme Court has recognized the right of visitation as
residing in the State. Visitation is, in law, the act of a superior or
superintendent officer who visits a corporation to examine into its
manner of conducting business and its observance of the laws. The
visitation of National banks by the Comptroller of the Currency is a
common example of the exercise of this authority. One of the most famous
cases in the United States Supreme Court is the Dartmouth College case.
In 1769, the King of England granted a charter to twelve people under
the name of "The Trustees of Dartmouth College." They were authorized to
conduct a college and they founded Dartmouth College in Hanover, New
Hampshire. In 1816, the legislature in the State of New Hampshire
undertook to amend the charter in many ways, among other things,
increasing the number of trustees to twenty-one. A furious conflict
ensued between the State and the trustees. The State finally brought
suit to recover the corporate seal and records which were held by a Mr.
Woodward, who held them under the amendatory act to which we have
referred. The case is known as Dartmouth College v. Woodward, 4 Wheaton
518. The Dartmouth College trustees were represented by Daniel Webster,
and this is one of his famous cases before the Supreme Court. He took
the position that the charter granted by the King of England and
afterwards recognized by the State of New Hampshire, was a contract
between the State and the trustees. This being so, it was protected by
the provision in the United States Constitution which provides that no
State shall pass any law impairing the obligation of contracts. The
United States Supreme Court upheld this position. The act of the
legislature of New Hampshire was held invalid. We then found ourselves
in the position of having States creating corporations and then not
being able to control them. Whatever may be said in regard to the law as
laid down by the United States Supreme Court, this situation was
unfortunate. Shortly thereafter in the various State legislatures, a
method to meet the situation was devised, and this is what was done:
When a general corporation law is passed, the State inserts in it a
clause to this effect: "The State hereby reserves the right to alter,
amend, or repeal the charter of any corporation organized under this
act." This, then, makes this clause a part of the contract when a new
corporation is organized. It knows that it is subject to having its
charter amended or repealed without its consent. The effects, therefore,
of the Dartmouth College decision have been practically nullified by
such clauses inserted in the various incorporation laws. Such
incorporation acts do not relate to corporations organized before such
act was passed. Under this method of procedure, the legislature to-day
surely has an efficacious method of controlling the corporations which
it creates.
LIABILITY FOR TORTS AND CRIMES.--A corporation is ordinarily liable, the
same as an individual, for all torts committed by its agents in the
scope of their authority. A corporation may even be liable for acts
which are beyond its authority. For example, in the case of Hannon v.
Siegel-Cooper Co., 167 N. Y. 244, it was held that the department store
of the Siegel-Cooper Company, a corporation, was liable for mal-practice
in dentistry. The charter of the company did not give the company the
right to practice dentistry, but space in the store was rented to a
dentist who conducted a dental parlor. Because of his negligent
treatment of a patient, the court held that the corporation was liable
for the negligent acts of its agent. Corporations may also be held
liable for such torts as involve a mental element, like fraud and libel.
A corporation may be criminally responsible for failure to perform a
duty imposed upon it by law, and in many States there are statutes which
make it a criminal offense for a corporation to do or fail to do certain
acts. It is generally held, however, that a corporation cannot commit a
crime which involves a mental operation, as for example, murder. Murder
involves a mental operation; it is "killing with malice aforethought."
Then again, it would be difficult to punish a corporation for the crime
of murder, because under our State constitutions, the punishment for
murder is either death or life imprisonment. Although a corporation is
a separate person, there is no way to kill it or imprison it for life.
You surely would not do so by inflicting this penalty on all the
stockholders. It is generally provided, then, by statute that such
crimes that a corporation can commit are to be punished either by a fine
or by imprisonment of the directors.
SHERMAN ANTI-TRUST ACT.--On July 2, 1890, the Sherman Anti-Trust Act was
passed by Congress. The first section of this act reads: "Every
contract, combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce among the several States, or with
foreign nations, is hereby declared to be illegal. Every person who
shall make any such contract, or engage in any such combination or
conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction
thereof, shall be punished by a fine not exceeding $5,000, or by
imprisonment not exceeding one year, or by both said punishments, in the
discretion of the court." The second section of this act reads: "Every
person who shall monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons to monopolize any part of the
trade or commerce among the several states, or with foreign nations,
shall be deemed guilty of a misdemeanor, and on conviction thereof shall
be punished by a fine not exceeding $5,000, or by imprisonment not
exceeding one year, or by both said punishments, in the discretion of
the court."
It would be impossible, in a small amount of space, to call attention,
except in a general way, to the importance of this act and the
difficulty of understanding it, without carefully reading the various
conflicting decisions of the United States Supreme Court handed down
since the passage of the act. The act, being a Federal act, relates only
to interstate commerce. That kind of business, conducted by
corporations, which is intrastate, if controlled at all by similar
legislation, would be by virtue of a State act. Perhaps the most famous
of the Sherman Anti-Trust Act cases decided by the United States Supreme
Court is that of the United States v. Standard Oil Co., 221 U. S. 1,
where the majority opinion was written by the late Chief Justice White,
and in which he enunciated the so-called "rule of reason" which brings
the interpretation of that act very much in harmony with the rules of
the common law in regard to illegal contracts and monopolies.
BY-LAWS.--A by-law is a permanent rule for the government of a
corporation and its officers. The purpose of a by-law is to regulate and
define the duties of the members of the corporation toward the
corporation and between themselves. The power to make the by-laws is
vested in the stockholders. There are certain qualifications which all
by-laws must possess. They must be reasonable and not inconsistent with
law or any rule of public policy. It would not be possible for a
majority of the stockholders at a regular stockholders' meeting to pass
by-laws which would deliberately deprive the minority stockholders of
rights which belong to them. The by-laws are, of course, always subject
to the provisions of the charter of the corporation, and if a
corporation is authorized to operate a railroad, it could not, by
passing a by-law, to the effect that it was deemed wise to enter into
the steel manufacturing business, change the nature of the corporation
in that manner.
STOCKHOLDERS' MEETING.--In order that the acts of the majority of
stockholders shall be valid, they must be authorized at a regular
stockholders' meeting. This must be held in the principal office of the
company, and the notice required by the by-laws must be given to all of
the stockholders. After this is done, the majority of the stockholders
may transact business and bind the corporation. Of course, in a large
corporation with a hundred thousand shareholders, as is the case with
some of our bigger corporations like the United States Steel Corporation
and the Pennsylvania Railroad, very few of the stockholders actually
attend the meetings. The directors usually send out with the notice of
the meeting, a proxy, and the stockholders who are not able to be
present send in their proxy authorizing certain persons to vote for
them. In this way, a majority of the stockholders are present at the
meeting, either in person or by proxy. In certain cases stockholders may
interfere with the action of directors in connection with the general
management of a corporation, or may even oust the directors from their
positions. These cases are extremely rare, since the power of directors
is supreme as to all corporate matters as to which the statutes or
by-laws do not provide for concurrence or other action by the
stockholders. Where proof is offered, however, of fraud, violation of
law or gross negligence of the directors whereby loss has been caused or
is threatened, stockholders may in some cases obtain the ousting of
directors. This sometimes results in placing a receiver in temporary
charge of the corporation or in the holding of a special election of new
directors. No complaint, however, will generally be entertained against
directors merely because their judgment does not agree with that of the
stockholders even if some action of the directors may not have resulted
favorably to the corporation, provided such action was taken honestly
and with all due care and regard to law. As an illustration, the
directors of the X Company made a certain contract on behalf of the
corporation whereby it was agreed with Y that property of the
corporation should be transferred to the latter for much less than its
evident actual value. This operation would usually indicate fraud on the
part of the directors, or at least such gross negligence as would in
many cases justify stockholders in asking a legal inquiry into the
action of the directors, which would result, if sufficient facts were
proved, in their removal and an injunction against the performance of
the contract. However, if the value of the property were doubtful and
the directors had used all due care and effort to ascertain its true
value and to obtain the best available price, no complaint could usually
be made although it should later develop that a better price might have
been obtained.
FOREIGN CORPORATIONS.--A foreign corporation is one which is organized
under the laws of some foreign country or some other State. Foreign
corporations are not necessarily confined to doing business in their own
State; they may enter other States. As for example, a company organized
in New Jersey may enter the State of New York and do business. If,
however, the New Jersey corporation comes to New York and makes a
regular practice of doing business, it must comply with the provisions
of the corporation law of New York, and secure a license to do business
in New York. It is not uncommon to enforce this provision in an indirect
method by providing that if a foreign corporation does not take out this
license, it shall not be allowed to sue in the courts of the State where
it is doing business.
MANAGEMENT OF CORPORATIONS.--The management of any corporation rests
directly with the board of directors and they may be considered as the
agents of the corporation to direct its business affairs. The directors,
however, are subject in their action to any limitation upon their power
which may have been included in the charter or certificate of
incorporation or which may have been adopted in the by-laws. The
directors are also subject to any provisions in the statutes of the
State, which frequently provide that they shall not take certain
important actions, such as the mortgaging of corporate property, etc.,
without special procedure involving a meeting and vote of the
stockholders. Where, however, the directors' authority is not limited by
the statutes or the charter or by-laws, they may be considered as having
full power to manage the affairs of the corporation. In connection with
that power they may elect a president and other corporate officers and
may appoint any other agents or employees at their discretion. They may
also define the powers to be exercised by the president and the other
officers and employees. This would give them power to limit the
authority of the president or any other officer. However, where a person
deals with the president or any other officer of a corporation in behalf
of the corporation, he may usually rely reasonably upon the president or
other officer having similar power to that generally possessed by such
an officer, and in many cases the corporation would be held bound by the
acts of such officer even though he actually violated some limits placed
upon him by the directors. This may be illustrated by assuming that the
X Company was in the business of manufacturing furniture, and A, the
president thereof, had made a contract with B, an outsider, for the
purchase from the latter of certain wood to be used in the corporate
business. As a matter of fact, however, A, the president, had no power
to make such contract, since the directors had passed a resolution
forbidding him to purchase any raw materials without first having the
proposed purchase approved by the board of directors. Therefore, A, as a
matter of fact, would have no power to make the contract with B, on
behalf of the corporation. Yet, B had not in any way been warned of this
limitation upon A's power, and as the purchase of materials would be a
usual one for the president or executive head of such a corporation to
make, B might reasonably assume that A had power to make the contract.
Therefore, B would be able to hold the corporation to the contract under
the principle of apparent authority, considered in connection with the
law of agency. Naturally, in turn, the directors would have a claim
against the president for any loss sustained, as he had not only
violated his duty but had also disobeyed and disregarded explicit
instructions. The by-laws of a corporation are generally adopted by the
stockholders and provide for all matters relating to the corporate
management which are not provided for in the charter or certificate of
incorporation. Such by-laws are binding upon all persons who know of
them, or reasonably should know of them, provided they are not in
violation of law and are reasonable. It is the general rule that
meetings called to adopt new by-laws or to alter previous by-laws should
be announced in some special way so that all interested parties may
receive due notice and thus have an opportunity to arrange to be present
and vote on the matters to be taken up at such meeting.
ELECTION OF DIRECTORS.--The directors of a corporation are elected by
the stockholders and the election generally takes place at the regular
annual meeting of stockholders of the corporation. Either the entire
board of directors is elected at that time for the ensuing year, or a
portion of them. In this connection it is provided by the statutes of
many States that at least a certain proportion of the total number of
directors shall be elected annually. The method of electing such
directors at the annual meeting is usually provided for by the statutes
of the various States, but it is commonly the rule that each stockholder
shall have one vote for each share of stock owned by him, although in
some States they also allow what is termed "cumulative voting." This
method of voting generally allows each stockholder to have as many votes
as he owns shares of stock multiplied by the number of directors to be
elected at the meeting and he may cast all of his votes for one or more
of the candidates. In other words if five directors are to be elected he
may concentrate all his votes upon one or more of the candidates and is
not compelled to vote for each one. This cumulative voting is authorized
for the purpose of allowing the minority stockholders to concentrate
their votes upon one or two of the candidates and thus have some
representation upon the board of directors. As an illustration of this,
let us assume that the X Company had an authorized capital stock of
$100,000, composed of 1,000 shares at the par value of $100 per share,
and that all these 1,000 shares are issued and fully paid up. Let us
further assume that six individuals each own 100 shares of stock and act
in unison, thereby constituting a majority, the other 400 shares of
stock being held by the minority stockholders. Each stockholder would
usually have one vote for each share of stock owned by him, and
therefore, if five directors were to be elected under the usual method
of voting, those individuals composing the majority of the stockholders
would succeed in casting a majority of votes for each of the five
directors. This would leave the minority without representation upon
the board. If, however, cumulative voting were used, the minority having
a total of 2,000 votes (400 multiplied by 5, the number of directors to
be elected) could concentrate 2,000 votes upon one or two of their
candidates and this would probably insure the election of such
candidates to the board, thus giving the minority representation. In the
case of a non-stock or membership corporation, each member has simply
one vote for directors or for other purposes. It may be noted that the
directors themselves, in their meetings, have also one vote each and
this is entirely independent of the amount of stock which they may own
in the corporation. It should also be noted that the directors in their
meetings may not vote by proxy, but sometimes the members of a
membership corporation may vote in this way. Voting by proxy is a usual
practice in stock corporations. A proxy is merely a power of attorney or
agency given in writing by one stockholder whereby he authorizes another
person as his proxy to vote, at a corporate meeting, his shares of stock
in his place. A proxy should be in writing and in a form in accordance
with the statutes of the State involved, and is often, but not
necessarily, under seal. A stockholder who has given a proxy may revoke
it whenever he chooses and this would prevent the holder of the proxy
from voting on it. This would be entirely independent of whether the
person giving the proxy had by revoking it violated his contract with
the person to whom it was given. That contract would be only a private
matter between them.
VOTING TRUSTS.--The proxy principle is involved in what are termed
"voting trusts." These arrangements involve the placing by a number of
stockholders of their stock in the hands of certain persons, giving to
the latter the right to vote on the stock; in other words, it is a
concentration of the stock of a number of persons in the hands of one or
a few persons. The latter are termed "voting trustees." It is necessary
to consult the statutes of the various States with regard to the
legality of such voting trusts, but they are generally permitted, with
the restriction, however, that the agreement under which the stock is
deposited with the voting trustee or trustees must be in writing and
that any stockholder may have the right to deposit his stock with such
trustee or trustees and become a party to the voting trust. The statutes
also frequently limit the time during which such a voting trust may
continue.
ISSUE OF STOCK.--The stock of a corporation is in theory issued for an
amount of money or property equal to the par value of the stock. In
practice, however, in many States there is no limitation on the
valuation which the promoters of a corporation may put upon the property
or rights which are transferred to the corporation. The stock is
regarded as fully paid in if property transferred to it is transferred
as having the assumed value of the corporation's capital, however little
the property may actually be worth. In other States, however, an
official must approve the valuation put upon property transferred as
payment for stock, and in such States it may be assumed that the assets
of a corporation when it begins business represent at least
approximately the amount of its capital stock; even in such States,
however, there is no difficulty in promoting a corporation which shall
have a large capital though its property is of slight value. All that is
necessary is to incorporate under the laws of another State which allows
greater freedom. Corporations organized in one State are in general
allowed to do business in other States; so that a corporation which is
intended to carry on business in New York, may be incorporated in
another State, where it is not expected to do business.
PROCEDURE IN ISSUING BONDS.--It is sometimes difficult for the
investor fully to appreciate the vast amount of detail work involved
in the bringing out of a new bond issue. Before the investment
banker underwrites the issue, or makes his purchase from the
corporation--before the bonds are offered to the public--there is
always a painstaking and minute investigation of the new security from
many different viewpoints, made by and in behalf of the banker. The
investor can never know from the banker's printed circular, descriptive
of the issue, the great amount of original work which underlies it and
of which it is a meager reflection. The circular is a summary of the
banker's investigation; it contains the salient features of the issue
and of the issuing corporation, reduced to terms that are intelligible
to the average layman. It is a statement of the principal facts which
led the banker to make an investigation of the business and upon which
investigation he bases his recommendation of the security offered by him
to his clients.
WHAT IS A BOND?--This can be explained best by comparing it with a real
estate bond and mortgage, the nature of which has already been
discussed. When money is loaned on real estate, the mortgagor, or the
one who borrows, executes two papers in favor of the mortgagee, or the
lender. The first is either a promissory note or a bond. The bond is a
sealed writing whereby the borrower binds himself, his heirs,
administrators or executors, or assigns, to pay the lender a given sum
of money at a specified time, together with interest. The second paper
given as security for the note or bond, is a mortgage, which conveys the
title to the property to the lender, with the provision, however, that
if the borrower satisfies the conditions imposed in the bond--that is,
the payment of a certain sum of money at a given time, together with
interest as agreed--this conveyance (mortgage) is to be held null and
void.
WHAT IS A CORPORATION INDENTURE?--The indenture is a more lengthy
instrument than the bond, and, as will be noted, it is called an
"indenture" and not a "mortgage." The mortgage strictly is only that
portion of the indenture whereby the property is conveyed or deeded to
the mortgagee, with the provision that the deed so given is to be held
null and void in the event that the conditions named in the bond are
faithfully carried out. The indenture is broader than the mortgage; it
contains provisions other than those bearing directly on the mortgage.
An indenture is a sealed agreement between two or more parties and any
number of provisions may be inserted in it, in addition to the mortgage
clauses, as may be deemed necessary or desirable. It is always possible
for the individual to obtain a loan secured by a lien on his property,
provided the security is good and considered ample. If, however, his
property was of so great value that he desired to obtain a loan of
several millions of dollars, he would find it difficult, or even
impossible, to find any one person willing to lend him so large an
amount. If, however, the borrower could find a number of persons who
could and would jointly contribute enough money to equal the amount of
the loan, he could divide this total amount into equal parts and each
lender could have such a proportionate interest as might be desired.
This, then, is the case with large corporations, which are legalized
persons. Owing to the fact that the holders of the bonds have only a
fractional interest in the loan and therefore in any property that may
be pledged to secure it, it is impossible to create separate mortgages
in favor of the individual bondholders on any particular part of the
property. No portion of the property can be specifically designated--the
interests of the bondholders are in common. For this reason and others,
corporations are obliged to create what is known as a Mortgage Deed of
Trust--making the mortgage to secure the many bonds in favor of some
responsible individual or trust company, who holds it on behalf of the
various bondholders in accordance with the definite terms of the trust,
and who is therefore known as the Trustee. The indenture of the
corporation must in addition to covering the mortgage, contain other
related and necessary covenants, especially as to the trust that must be
created. As there are so many covenants or provisions necessary in order
to fully protect all interests concerned, the corporation indenture
becomes bulky, but its form in substance is not very different from that
of the bond and mortgage of the individual, which we have already
analyzed, and which for this reason it is well for us to keep in mind as
we follow the corporation indenture.
ANALYSIS OF INDENTURES.--The indenture, or agreement, must of necessity
be made between certain parties, the mortgagor or the corporation and
the mortgagee, in this case the Trustee who holds the security given in
trust for the various bondholders. It is, therefore, proper that we
recite at the very beginning of the indenture the parties in interest,
giving their legal residence, or as in the case of corporations the
names of the States wherein they are incorporated. It is quite essential
that we know in what State a corporation was incorporated, as its rights
and privileges are determined by the statutes of the State which created
it and by the charter which has been granted to it. What are our reasons
for creating the indenture? The very first premise is that the
corporation is legally able to borrow money by law. If it did not have
this right we could proceed no further. To borrow money and mortgage or
pledge property as security therefor is a common law right of
corporations, but the amount which may be borrowed is sometimes limited
by State statutes. In the event that the corporation desired to borrow
in excess of the limitation, additional capital stock is sometimes
authorized thereby creating a larger basis for borrowing. If this
premise is not incorporated, its omission does not affect the status of
the indenture, but it is generally placed, as many other premises are,
in the indenture, for the sake of logic, and to show that the matter has
been considered, and that the fact is admitted by the parties to the
indenture. The purpose for which the bonds are to be issued is sometimes
duly set forth, as for instance, to refund certain maturing obligations,
to construct a certain extension, to build new terminals, etc. While the
purpose may not always be mentioned in the indenture, nevertheless it
must accord with the charter of the corporation and the laws of the
State. The company cannot exceed the powers that have been granted to
it. We next want to know whether the authority to borrow money and issue
bonds therefor has been obtained in lawful manner. Provisions covering
the manner of securing this authority will be found in the by-laws of
the corporation, and the counsel must examine this matter carefully in
order to see whether all legal formalities have been strictly observed
and whether the resolutions are in proper order. There are certain
essential facts that must be stated in the bonds themselves and which
are elaborated in the covenants of the indenture. These facts are
embodied in the resolutions of the Board of Directors and of the
stockholders and are, therefore, incorporated in the premises of the
indenture. These facts include the total amount of bonds authorized,
title, denomination, form, date of issue and maturity, rate of interest
and where payable. In order that there may be uniformity in the wording
and form of the bonds, so that no one holder will perchance receive an
undue advantage over any other bondholder, the form of the bond, its
coupons and trustee's certificate must be duly set forth in the
indenture.
LIMITATION OF POWERS OF DIRECTORS.--There are various matters wherein
directors of any corporation do not usually have power to act on behalf
of the corporation without special authorization. Such matters include
the amendment of the corporate charter (thereby changing the purposes of
the corporation), the change of the name of the corporation, the
increase or decrease of authorized capital stock, the sale of the total
corporate assets and franchise, the consolidation of the corporation
where permitted by statute, and the giving of mortgages upon the
corporate property. This last point is especially important since the
validity of a corporate mortgage as security for a loan of money depends
upon whether the mortgage was authorized and given in all respects
pursuant to statute of the State involved. As these corporate mortgages
not only are given as security for a single loan of money but also
furnish security often for very large amounts of bonds, the matter of
the authority of the directors and the validity of the mortgage
becomes of great importance. Therefore the statutes of the State
involved must be followed closely as to the procedure in connection with
the giving of a mortgage. It may be stated, however, with regard to this
matter and the other special matters mentioned, the statutes generally
provide that some form of authorization should be obtained from the
stockholders, generally through their vote at a special meeting called
for that purpose, of which proper notification and announcement have
been given; that some form of certificate as to the proceedings at such
meeting be made and filed by the secretary and treasurer or other
designated officer of the corporation; that it should also be filed in
the office of the county clerk of the county involved and in the office
of the Secretary of State; and that some notification of the act in
question be also given to the directors as well as the stockholders. It
is, of course, impossible to take up the details as to such matters, the
only safe course to pursue being to follow with extreme care the
statutes of the State wherein such action is to be taken. From the
foregoing, however, the general purpose and effect of prevailing law may
be seen.
DIVIDENDS ON STOCK.--Dividends on the stock of corporations are declared
by the directors, who have power to use their discretion as to the
amount to be disbursed in this way. The statutes are, however, very
explicit in prohibiting the declaration of any dividends except out of
the surplus profits of the business conducted by the corporation. With
respect to dividends properly declared, the declaration of the directors
generally provides that they shall be paid to all stockholders
registered upon the books of the company at a specified date in the
future. Hence, if a stockholder should sell or otherwise transfer his
stock, after that date to another person, the latter, while becoming the
owner of the stock, would not be entitled to the dividend when paid. It
would be payable to the former stockholder, although he might, pursuant
to the agreement made with the person to whom he sold the stock, turn
over to the latter the amount of the dividend.
CUMULATIVE DIVIDENDS.--It frequently happens that a corporation does not
earn any dividends in a particular year. The question arises, is the
holder of a 7% preferred stock in a position to demand that the dividend
be paid the following year. Suppose the corporation earns nothing in
1921 and earns 14% in 1922. The holder of one share of a non-cumulative
preferred stock would receive the usual 7% dividend only in 1922. If the
stock were cumulative he would receive 14%. In other words the unearned
dividends accumulate and become a charge which the corporation must pay
when sufficient is earned in prosperous years before the holders of
common stock are entitled to receive any dividend. Usually the stock
certificate and the articles of incorporation specify whether stock is
cumulative or non-cumulative. If they do not, then reference to the law
of the State where the company is incorporated, is necessary to decide
such a question.
LIABILITY OF OFFICERS AND DIRECTORS TO THE CORPORATION.--Whether a
corporation becomes liable by virtue of action taken by its officers or
directors depends upon principles of agency applied to the law of
corporations. These principles have already been stated. Whether the
directors or officers are themselves personally liable is another
matter. Conceivably they may be liable either to their employer (the
corporation) or to creditors of the corporation. They are not directly
liable to the shareholders as such. Any injury or wrong they may
indirectly do to shareholders is directly done to the corporation, the
shareholders being injured only because the corporation in which he is
interested is injured. Shareholders may, however, institute proceedings
against directors or officers if, as not infrequently happens, the
corporation itself, being controlled by the wrongdoers, fails to take
proceedings. The shareholders in such a case, however, demand redress
for the corporation, not for themselves; and whatever may be recovered,
is recovered for the benefit of the corporation. The duty of the
directors and officers of the corporation is analogous to the duty of
any agent to his principal. That is, each officer or director must
exercise reasonable diligence in the performance of his work and must
observe fidelity to his principal. The application of these principles
to particular fact is not always easy, but the principles themselves are
plain. Especially the degree of care which directors are bound to use
presents a troublesome question of fact. In a small business it may be
the duty of a director to take active control of the policy of the
company and supervise with some minuteness each business operation. Such
direction is impossible where a great railroad or industrial corporation
is concerned. In such a case directors necessarily derive their
information from subordinate agents and cannot investigate facts for
themselves. Directors are not liable for mistakes of judgment if they
use reasonable care; if, however, they wilfully do an act which they
know is not authorized by the charter or by-laws of the corporation,
they will be liable for the consequences. Directors who are cognizant of
wrongs committed by their co-directors and fail to take available
measures to prevent the wrongs, become liable themselves. Directors may
terminate their liability for future acts by resigning, but resignation
will not destroy liability for acts already done even though the
resulting damage does not happen until after resignation. The
corporation requires that a director or other officer shall not act on
behalf of the corporation in a matter in which he has a personal
interest at variance with that of the corporation. Should matters of
this sort arise, as they often do, the interested officer or director
should not take part in the decision of the question, and may render
himself liable if he does so.
LIABILITY OF OFFICERS TO CREDITORS.--So long as a corporation is
solvent, creditors of the corporation have no reason or right to seek
redress from any one but the corporation itself. Creditors of an
insolvent corporation, however, may enjoin action by the company's
officers which is unauthorized or likely to prove detrimental to the
assets of the corporation. If the officers knowingly misapply the assets
of an insolvent corporation they are personally liable to the creditors
for the injury caused thereby. They are liable sometimes by statute, but
also even apart from statute, for false statements of the condition of
the corporation in reliance upon which credit is given the corporation.
Like other agents, the officers of a corporation impliedly warrant to
persons with whom they deal their authority to do the acts which they
undertake; and if authority is lacking, they are liable personally. The
only qualification of this principle is that if the facts from which
authority, or lack of it, may be determined, are known to the person
dealing with them, they are not liable; that is, they do not warrant the
correctness of an inference of authority from known facts.
LIABILITY OF BANK OFFICERS.--The principles governing the liability of
bank directors and other officers of a bank are the same as those which
govern similar questions regarding other corporations. The bank laws,
however, impose certain duties and penalties which affect the
application of general principles. It may be worth while to enumerate
briefly some of the duties of different bank officers, a violation of
which renders them personally liable. As to directors it has been said
that "It is not necessary to show directly that the directors actually
had their attention called to the mismanagement of the affairs of the
bank, or to the misconduct of subordinate officers. It is sufficient
to show that the evidence of the management or misconduct were such that
it must have been brought to their knowledge unless they were grossly
negligent or wilfully careless in the discharge of their duties." They
are liable for the consequences not only of their own fraud but of their
ultra vires acts. They are liable for approving the discount of notes
known to be worthless or of so doubtful value as to be obviously unsafe.
If guilty of negligence in failing to discover that such paper was
worthless they may also be liable. They are guilty of negligence and may
thereby render themselves liable if they wholly neglect to ascertain the
condition of the bank from its books, though a thorough examination of
the books of a bank, especially of one transacting a large business,
cannot be expected of every director; and the law would require no more
than would be demanded by the standard of reasonableness.
THE PRESIDENT.--The duties of the president, and consequently his
liabilities, must be determined by general law, the charter of the
particular institution, its by-laws, and by general business usage.
Thus, if the usage exists for the president to draw and sign checks in
the absence of the cashier, the president will have authority so to act.
He has authority to conduct the litigation of the bank; he may employ
counsel. He may generally indorse negotiable paper of the bank. On the
other hand, he will be personally liable if he permits improper loans or
over-drafts; if he fails to give proper instructions to inferior
officers; if it is his duty to require a bond from an inferior officer,
and he fails to do so; and, generally, if he commits a breach of duty to
the corporation which causes damage. He has no power to execute deeds of
real estate without authority of the directors and, generally, an
instrument which must be executed under the seal of the bank must be
authorized by the board. The discount of negotiable paper also is a duty
of the directors.
THE CASHIER.--The Supreme Court of Maine has thus expressed the
functions of the cashier of a bank: "A cashier, it is well known, is
allowed to present himself to the public as habitually accustomed to
make payment for its bills or notes payable to other persons; to make
payment for bills and notes discounted by the directors; to receive
payment for bills of exchange, notes, and other debts due to the bank;
to receive money on deposit and to pay the same to the order of the
depositors. He is presented as having the custody of its books, bills of
exchange, notes, and other evidences of debt due to it, and, indeed, of
all its movable property; as making entry in its books and as keeping
its accounts and a record of its proceedings. In many banks these duties
are performed in part by tellers, clerks, or assistants, but generally,
it is believed, under his superintendence, and he might at any time
assume the performance of them and perform them, if able to do so,
without such assistance. His true position appears to be that of a
general agent for the performance of his official and accustomed duties.
While acting within the scope of this authority he would bind the bank,
although he might violate his private instructions." He must exercise
proper oversight over subordinate officers; he must use reasonable care
and skill. He may become liable personally for failure to observe
instructions as to a special deposit; for the improper sale of stock
held as security for a loan; for improperly making loans, for failure to
give essential information to the directors; for failing to exercise
proper oversight over inferior officers or agents, as well as in the
more obvious case where he has taken advantage of his position to commit
intentional fraud upon the bank.
BLUE SKY LAWS.--The term "blue sky" has become very familiar to the
corporation lawyer in the last few years. The so-called "blue sky"
legislation is a well meaning, if partly futile, attempt to meet an
existing evil in connection with the sale of corporate securities. We
shall find later that five elements are necessary to constitute the
action of fraud or deceit: (1) a false representation of a material
fact; (2) made with knowledge of its falsity; (3) with intent that it be
acted upon; (4) that it be acted upon; (5) damage follows. The courts
have almost universally held that a mere statement of opinion does not
give rise to a cause of action for fraud, whereas a mistatement of fact
does. Hence if I state to you when selling you 100 shares of the Bonanza
Gold Mining Corporation that the company has never paid less than 20% in
dividends during the last five years and you purchase the stock relying
on this misrepresentation of fact (the situation actually being the
company has never paid a dividend) you would have a cause of action in
deceit against me. If, however, I had simply said in selling you the
stock that the outlook for the company was the brightest in its history,
that the president had told me that dividends of 30% a year were assured
indefinitely and that this stock was by far the best bargain which had
been on the market in over a year, although I know when I made such
statements that there was little or nothing to substantiate them,
nevertheless, I would not be liable in deceit. My statements were merely
matters of opinion or what we call "seller's talk" or "puffing one's
wares."
THE FINANCIAL PROSPECTUS.--If you will examine the average financial
prospectus of a new stock being offered for sale to the public, you will
find that when most of the high sounding terms and flattering statements
are analyzed carefully that they will fall in this second class of
non-actionable statements. There are few statements of fact but many
glowing statements in the nature of "seller's talk." We all know,
however, that enormous quantities of worthless stock are sold each year
by this method. When business conditions are good it sometimes seems as
if the wilder the scheme the easier it is to find a gullible public
ready to purchase such securities. To prevent the perpetration of such
frauds on the public is the object of the so-called "blue sky"
legislation.
THE LAW ANALYZED.--The first "blue sky" law was passed in Kansas in
1911. The evil sought to be remedied was so prevalent that the idea
spread rapidly and now similar legislation, of one type or another, has
been enacted in a majority of the States. Some of the acts are crude,
some have been held unconstitutional, and many are difficult of
enforcement. Recently, however, more care has been taken in drafting
such legislation, and many of the earlier laws will undoubtedly be
amended to conform with this later legislation. We may take the Illinois
statute of 1919 as a good sample of a drastic yet fairly workable Act.
The law may be briefly considered from three standpoints: (1) the
persons affected; (2) the securities affected; (3) the penalties
provided for violation of its provisions.
AS TO THE PERSONS AFFECTED.--Generally any person offering any
securities, and any seller's agent or broker, the issuer, or any agent
or director of the issuer, or any owner or dealer, is covered by the
Act. Illinois fiscal corporations such as banks, trust companies,
insurance companies, building and loan associations and the like are
practically exempt from the provisions of the Illinois securities law.
THE ILLINOIS ACT.--The Illinois act covers the following securities:
Section 3. For the purposes of this Act securities are divided into four
classes as follows:
(1) Securities, the inherent qualities of which assure their sale and
disposition without the perpetration of fraud, which shall be known as
securities in Class "A";
(2) Securities, the inherent qualities of which, or in the nature of one
or both parties to the sale thereof, assure their sale and disposition
without the perpetration of fraud, which shall be known as securities in
Class "B";
(3) Securities based on established income, which shall be known as
securities in Class "C";
(4) Securities based on prospective income, which shall be known as
securities in Class "D";
Section 4. Securities in Class "A" shall comprise securities:
(1) Issued by a government or governmental agency, or by anybody having
power of taxation of assessment;
(2) Issued by any National or State bank or trust company, building and
loan association of this State, or insurance company organized or under
the supervision of the Department of Trade and Commerce of this State;
(3) Issued by any corporation operating any public utility in any State
wherein there is or was at the time of issuance thereof in effect any
law regulating such utilities and the issue of securities by such
corporation;
(4) Appearing in any list of securities dealt in on the New York,
Chicago, Boston, Baltimore, Philadelphia, Pittsburgh, Cleveland or
Detroit Stock Exchange, respectively, pursuant to official authorization
by such exchanges, respectively, and securities senior to any securities
so appearing;
(5) Whereof current prices shall have been quoted from time to time for
not less than one year next preceding the offering for sale thereof, in
tabulated market reports published as news items, and not as
advertising, in a daily newspaper of general circulation, published in
this or in an adjoining State, including the State of Michigan, not
including any trade paper or any paper circulating chiefly among the
members of any trade or profession;
(6) Issued by any corporation organized not for pecuniary profit or
organized exclusively for educational, benevolent, fraternal, charitable
or reformatory purposes;
(7) Being notes or bonds secured by mortgage lien upon real estate or
leasehold in any State or territory of the United States or in the
Dominion of Canada, when the mortgage is a first mortgage on real
estate, and when in case it is not a first mortgage lien or is on a
leasehold, the mortgage and notes or bonds secured thereby (not
including interest notes or coupons) shall each bear a legend in red
characters not less than one-half inch in height, indicating (1) that
the mortgage is on a leasehold, if that be the case, and (2) that the
mortgage is a junior mortgage, if that be the case;
(8) Being a note secured by first mortgage upon tangible or physical
property, when such mortgage is assigned with such securities to the
purchaser;
(9) Evidencing indebtedness due under any contract made in pursuance to
the provisions of any statute of any State of the United States
providing for the acquisition of personal property under conditional
sale contract;
(10) Being negotiable promissory notes given for full value and for the
sole purpose of evidencing or extending the time of payment of the price
of goods, wares or merchandise purchased by the issuer of such notes in
the ordinary course of business, and commercial paper or other evidence
of indebtedness running not more than twelve months from the date of
issue;
(11) Being subscriptions for the capital stock under any license issued
to commissioners to incorporate a company under the laws of this State
where no commission or other remuneration paid for the sale or
disposition of such securities;
Securities in Class "A" and the sales thereof shall not be subject to
the provisions of this Act.
Section 5. Securities in Class "B" shall comprise securities:
(1) Sold by the owner for the owner's account exclusively when not made
in the course of continued and repeated transactions of a similar
nature;
(2) Increased capital stock of a corporation sold or distributed by it
among its stockholders without the payment of any commission or expense
to solicitors, agents or brokers in connection with the distribution
thereof;
(3) Sold by or to any bank, trust company, or insurance company or
association organized under any law of this State or of the United
States, or doing business in this State under the supervision of the
Department of Trade and Commerce; or of the auditor of Public Accounts;
or by or to any building and loan association organized and doing
business under the laws of this State, or any public sinking fund
trustees; or to any corporation or dealer or broker in securities;
(4) Sold or offered for sale at any judicial, executor's or
administrator's sale, or at any sale by a receiver or trustee in
insolvency or bankruptcy, or at a public sale or auction held at an
advertised time and place;
Securities in Class "B," when disposed of by the persons and in the
manner provided by this section, shall not be subject to the provisions
of this Act.
Section 6. Securities in Class "C" shall comprise the following:
Those issued by a person, corporation, firm, trust, partnership or
association owning a property, business or industry, which has been in
continuous operation not less than two years and which has shown net
profits, exclusive of all prior charges, as follows:
(1) In the case of interest-bearing securities not less than one and
one-half times the annual interest charge upon all outstanding
interest-bearing obligations;
(2) In the case of preferred stock not less than one and one-half times
the annual dividend on such preferred stock;
(3) In the case of common stock not less than 3% per annum upon such
common stock.
Section 7. Securities in Class "C" may be disposed of, sold or offered
for sale upon compliance with the following conditions, and not
otherwise:
A statement shall be filed in the office of the Secretary of State:
(1) Describing the evidence of indebtedness, preferred stock or common
stock intended to be offered or sold;
(2) Stating the law under which and the time when the issuer was
organized;
(3) Giving a detailed statement of the assets and liabilities of such
issuer and income of profit and loss statement, and giving an analysis
of surplus account;
(4) Giving the names and addresses of its principal officers and of its
directors or trustees;
(5) Giving pertinent facts, data and information establishing that the
securities to be offered are securities in Class "C."
Such statement shall be verified by the oath of not less than two
credible persons having knowledge of the facts. Not less than
twenty-five copies of such statement, wholly printed or wholly
typewritten, shall at the time of filing the original statement be filed
with the Secretary of State. The printed or typewritten copies so filed
shall bear at the top in bold faced type the expression:
"Securities in Class 'C' under Illinois Securities Law," followed by the
expression, also in bold-faced type:
"This statement is prepared by parties interested in the sale of
securities herein mentioned. Neither the State of Illinois, nor any
officer of the State, assumes any responsibility for any statement
contained herein nor recommends any of the securities described below."
Section 8. All securities other than those falling within Class "A," "B"
and "C," respectively, shall be known as securities in Class "D."
Section 9 gives the requisites of the statement required to be filed
with the Secretary of State before securities of Class "D" may be sold.
Such statement is even more complete than that required in Section 7.
SALES AND CONTRACTS VOID.--Every sale or contract in violation of the
act is void, and the fines vary from not less than $100 to not more than
$25,000, and the imprisonment from six months to five years. Although
there is great need for a Federal incorporation act there is even
greater need for a Federal blue sky law. With different acts in the
different States, the Illinois act being simply an example, even the
most careful business man may unwittingly find himself in a position
where he has violated one of these laws with their severe penalties.
CHAPTER VII
Transfer of Stock
UNIFORM TRANSFER OF STOCK.--Turn now to an entirely different matter,
the transfer of stock. A stock certificate is one of the
quasi-negotiable instruments of commerce, at common law not fully
negotiable like bills and notes, but, nevertheless, having some of the
attributes of negotiability, especially in States where what is called
the Uniform Transfer of Stock Act has been enacted. This statute applies
only to corporations of those States which have passed the statute.
TWO METHODS OF TRANSFERRING STOCK.--Stock may be transferred in two
ways: first, by delivery of the certificate with the indorsement upon it
of the owner of the stock, indicating that he assigns or authorizes the
assignment of the stock, and second, by delivery of the certificate,
with a separate document of assignment attached stating that the owner
of the certificate assigns or authorizes the transfer of the stock. This
second method is not so completely good as the first, where the
assignment is on the certificate itself, because if for any reason the
separate document should become detached from the certificate, the
transferee's right would not be apparent, and therefore the Transfer of
Stock Act provides that if a purchaser should get possession of the
stock certificate with an indorsement upon it, he would take precedence
over even a prior assignee who had a separate paper assigning the
certificate to him. Of course, after the transfer is duly registered on
the books of the company, then it makes no difference whether that
transfer was secured by means of a separate power or assignment or by
means of one written on the certificate itself.
EFFECT OF TRANSFER ON THE BOOKS OF THE COMPANY.--What is the effect of
transfer on the books of the company? Under the common law, stock was
originally transferable just like any intangible right, merely by
agreement of the parties, to which requirement was added, as a necessity
when stock certificates became common, the delivery of the certificate
itself. But it was convenient for the company to know who was owner of
its stock. It was inconvenient to have stockholders buy and sell without
any notice to the company, and therefore a common by-law was that stock
should be transferred only on the books of the company. The Uniform
Transfer of Stock Act goes back partially to the old rule, since the
transfer of the certificate with the indorsement or separate assignment
is what transfers the stock, not the transfer on the books of the
company; but in order that the corporation may not be inconvenienced it
is provided that the corporation shall have the right to pay dividends
to any one registered on the books of the company, such persons being
the apparent owners, and that only such persons have the right to vote.
An analogous custom that shows the importance of registration of stock
transfers on the books of the company is the registry of deeds in the
transfer of real estate. It is the deed, not the record of it, which
creates a title, but an unrecorded deed may be defeated by creditors or
purchasers without notice, so that to protect himself fully the owner of
land is obliged to record his deed.
OWNERSHIP OF STOCK, INDIVIDUALLY, IN COMMON, JOINTLY AND BY
FIDUCIARIES.--Stock may be owned by a man individually, it may be owned
by several persons in common, or it may be owned by several persons
jointly, or it may be owned by a person in a fiduciary capacity, as
trustee, executor or guardian. What is the difference, may be asked,
between the case of ownership of stock by several persons in common and
ownership by several persons jointly. The common law drew this
distinction between joint right and rights merely held in common; that a
joint right survived to the survivors when one of them died, whereas a
right held in common passed, on the death of one of the owners, pro rata
to the personal representatives of the deceased. Therefore if A, B and C
own stock jointly, when C dies A and B are the owners. If A, B and C own
the stock in common, A, B and the executors of C would own it on the
death of C. Generally where several persons own a right now, they own it
in common, but there are two notable exceptions--the case of
partnerships and the case of trustees. Stock held in the name of A, B
and C, when A, B and C are either partners or trustees, will pass to A
and B on the death of C. C's executor will not have to join in the
transfer.
DIFFICULTIES IN TRANSFER AFFECT PURCHASER AND ALSO CORPORATION.--The
difficulties in the transfer of stock may be looked at (1) from the
standpoint of a purchaser of the stock, including within the name of
purchaser one who lends money on the stock as well as one who buys it,
and (2) from the standpoint of the corporation whose duty it is to
transfer the stock on its books. Generally the difficulties which
confront the purchaser are the same which confront the corporation when
it is asked to transfer. If the purchaser should get a defective right
when he bought, then the corporation, if it should transfer, would
generally get into trouble also.
LEGAL AND EQUITABLE DIFFICULTIES IN TRANSFERS.--The main difficulties
which arise may be divided into legal and equitable difficulties. By
legal difficulties are meant cases in which the purchaser will not get a
good legal title. By equitable difficulties, cases in which the
purchaser will get a good legal title but which will be subject to an
equitable right in favor of some other person. The person who has an
equitable right cannot reclaim the stock from one who is, or succeeds to
the rights of, a bona fide purchaser for value without notice.
LEGAL DIFFICULTIES--FORGED CERTIFICATE.--First, in regard to legal
difficulties. The certificate of stock may be forged. The purchaser of a
forged certificate of stock, of course, gets nothing in the way of
stock. He does get the right, however, to sue the person who sold him
the stock on an implied warranty of genuineness. Analogous to the
situation of the purchaser is the situation of the corporation if, on
receiving a forged certificate with a request for a transfer, it should
transfer ownership on the books, completing the transfer by issuing a
new certificate; for any person who took the new certificate, even
though he was a bona fide purchaser for value, would not get any stock
in the corporation, if all authorized stock had previously been issued.
The corporation has no power to overissue stock; it cannot emit any more
even if it tries, and therefore the purchaser gets no stock. He does,
however, get a right against the corporation. The corporation has issued
what purports to be new stock to him, or if he is a remote purchaser he
has paid for stock in reliance on a certificate which the corporation
has issued. The corporation is estopped, as the legal phrase is, to deny
the validity of that certificate as against one who has thus relied on
its acts. The result is that the corporation is bound to pay to him
value equivalent to that of real stock, because the corporation has put
out something which seems to be good stock, and owing to the act of the
corporation the purchaser has been deceived.
FORGED ASSIGNMENTS.--A second legal difficulty arises where the
indorsement or assignment of the certificate is forged. Only the owner
of stock can sell it. Consequently, if anybody else attempts by forgery
or otherwise to make a transfer, the transfer will be ineffectual. The
result will be the same as though the whole certificate were forged. The
purchaser under the forged indorsement will get nothing. If the
corporation relies on the forged indorsement and issues a new
certificate, it will, in the same way as in the case of a new
certificate issued for a wholly forged one, be liable to a purchaser for
value. It is, of course, of vital importance, therefore, to make sure
that indorsements are correct, and generally it is desirable to take
indorsed certificates only from reliable persons. If you take such a
certificate from a reliable person, even though there is no express
guaranty of signatures by a brokerage house or other third person, as
there often is, you will be practically safe because of the implied
warranty of genuineness by the seller which applies to the indorsement
on certificates as well as to cases of wholly forged certificates.
ASSIGNMENTS BY UNAUTHORIZED AGENT.--A third case is where the
indorsement is made by an agent, and the agent has no authority to act.
A corporation transferring stock should require, and a purchaser should
require, the clearest evidence of an agent's authority if the signature
of the transferor is made by an agent. It is not only necessary to be
sure that the agent's authority originally existed, but it is necessary
to be sure that his power has not been revoked, either by the death of
the principal or by express revocation during his life. A question that
sometimes is troublesome, in regard to the agent's authority to make
such an indorsement, arises where the terms of the power given the agent
are general; where he is authorized to do a very broad class of acts
for the principal, but no specific mention is made of the particular
certificate which he seeks to transfer. Such a power, if it certainly
includes the transfer of that certificate, is legally good, but a
corporation would object to make a transfer under a power which did not
specifically mention the particular certificate, unless it was
absolutely certain from its terms that this certificate in question was
included.
LACK OF CAPACITY TO ASSIGN.--A fourth case is lack of capacity on the
part of the owner of the stock to make a transfer. This lack of capacity
may arise from a variety of causes, insanity or infancy, for instance. A
totally insane person is as incapable of transferring stock as of
transferring other property. An infant, that is, a minor, though not
wholly without capacity, if not under guardianship, becomes, presumably,
wholly without capacity to transfer stock if under guardianship. An
elderly person under the charge of a conservator would be incapacitated
to transfer his property. An infant who has had no guardian appointed,
though he could make a transfer, could also, by virtue of his infant's
privilege, revoke that transfer, which, therefore, would be too insecure
either for a purchaser to take or for a corporation to allow. If stock
is owned by an infant, a purchaser or a corporation should require that
a guardian be appointed and that the transfer be made by the guardian.
LACK OF DELIVERY--THEFT OF CERTIFICATE.--A fifth case is where the
signature on the back of the certificate of stock is genuine, but where
there has been no valid delivery by the owner. This is rather a
troublesome case to detect. In the case of full negotiable instruments,
like bills and notes, if the signature of an indorser is genuine, a
purchaser for value of the instrument will get title even though he
purchases from a thief, or though for any reason there was no intention
on the part of the owner who wrote his name on the back to make a
transfer of the instrument. But by the common law stock certificates
were not negotiable to this extent. This case occurred in a law office
in Boston: the head of the firm rather carelessly kept "street
certificates" for stock (that is, certificates made out in the name of
the brokerage firm which was the former owner and indorsed in blank),
not having the certificates transferred to his own name. The stock was
not at the time dividend-paying, so that a transfer on the books seemed
unimportant. He put the certificates into the office safe to which the
office boy had access. This boy took the certificates and sold them
through a broker, and the loss was not discovered for several years.
After it was discovered the loss was traced by the numbers of the
certificates, and action was brought against the brokers who were
unfortunate enough to have taken the stock from the office clerk. Now,
if the certificates had been negotiable paper, the brokers would not
have been liable, but under the law then existing it seemed so probable
that they were liable that they settled the case by paying more than
half the value of the stock. The only thing that could have prevented
their being liable was that, under the circumstances, the contention
was possible that the owner of the stock had been so negligent in his
dealing with the certificates as to preclude him from asserting any
right. Now the Transfer of Stock Act changes the law in this respect so
far as Massachusetts stock certificates are concerned. The act makes
them fully negotiable, but the common law would apparently still apply
to certificates of stock of corporations incorporated in other States.
And similar principles would be applicable in other States which have
passed the same statute.
DEATH OF OWNER OF INDORSED CERTIFICATE.--A somewhat similar case is
this: suppose that after the owner of stock has written his name on the
back of it, he dies; that is a common enough case. Many men have used
their stock certificates to borrow money on, and therefore, after paying
the loan they have them in their possession with their signatures on the
back. They put those certificates back in their safe deposit boxes. Then
suppose the owner dies and an attempt is made to transfer the stock by
virtue of that signature written on the certificate. That is not a valid
transfer at common law. The certificate was owned only up to the time of
his death by the man whose name is on the face; on his death his
executor becomes the owner and the executor's signature is necessary to
transfer the title, and the signature of the man himself written before
his death is not effective for that purpose; and yet a purchaser may not
be aware that that signature is invalid; he may not know that the man
who signed it is dead, and similarly the corporation may allow the
transfer to go through in ignorance that the signer is dead. If the
money which is the proceeds of the stock actually reaches the executor
of the estate, of course he could not object to the validity of the
transfer, and he could not object if he were in any way a party to the
transfer of the stock by means of the signature of the dead man; but if
the proceeds did not get to the hands of the executor and he was in no
way responsible for the transfer, he could assert that the transfer was
invalid and that that stock belonged to him. This, again, is changed by
the uniform law so far as applies to corporations in the States which
have enacted that law. To avoid misapprehension it should be said that
if an indorsed certificate has been delivered for value by the owner,
during his lifetime, to a purchaser or lender, the death of the indorser
does not impair the validity of the signature even at common law. The
purchase of the stock or a loan made on the stock gives the purchaser or
lender a power which cannot be revoked by death or otherwise.
BANKRUPTCY OF THE OWNER OF STOCK.--One other important case, in which a
genuine signature of one who was the owner cannot transfer a good title,
is the case of bankruptcy. The Federal bankruptcy law provides
absolutely that title to property which a bankrupt has at the time of
his bankruptcy shall be vested in his trustee. If, therefore, after A's
bankruptcy, A seeks to transfer stock which he had owned, and which was
in his own name, he cannot do so, for he is no longer the owner of the
stock, and he has no power to transfer it. Therefore, even a bona fide
purchaser from a bankrupt will get nothing.
ATTACHMENT OF STOCK.--A sixth difficulty in regard to transfer of
stock--attachment of the stock by a creditor of the registered owner--is
eliminated in States where the Uniform Transfer Act has been enacted.
Such attachments created considerable difficulty before the passage of
the act. Suppose this case: A is the owner on the books of the company
of 100 shares of Boston & Albany stock. He knows a creditor is about to
attach that stock, and in order to get ahead of the creditor he sells
the stock on the exchange. If he makes the sale before the attachment,
undoubtedly the sale everywhere would prevail over the subsequent
attachment; but suppose the attachment preceded by a little while the
sale of the stock. A still has the certificate, and brokers and
purchasers are accustomed to rely on the certificate as evidence of
ownership. They take the certificate and pay A money for it; then when
the purchaser goes to transfer the stock he finds that an attachment has
been put upon the books of the company. Where the uniform law governs
the case the only way to make an attachment of stock effective is to
seize the certificate itself. But in other States this difficulty may
still arise, of a purchaser being deceived by the certificate itself,
and paying money on the faith of it when there has been an attachment
levied by a creditor immediately before on the books of the company.
TRANSFERS BETWEEN HUSBAND AND WIFE.--One other matter of transfer
deserves attention, and that is a transfer between husband and wife, or
wife and husband. A married woman can contract in most States as fully
as a married man, but generally, though not universally, neither of them
can contract with the other or make a conveyance directly to the other.
A promissory note from wife to husband, or husband to wife, or any other
conveyance or transfer or contract was at common law and still is in
many States invalid. A husband can, however, appoint his wife his agent,
and a wife can appoint her husband her agent, and when such an agent
acts, his act will be legally that of the principal, just as in any
other case of agency. Accordingly, if a husband draws a check payable to
his wife, though he does not become liable as drawer to his wife, and
could not be sued by her if the check was not paid, the bank runs no
risk in paying the check because the husband has authorized the bank to
make a payment to the wife. Similarly, if a husband authorizes a
corporation to transfer stock to his wife it seems that the corporation
is protected, having acted under the authority of the owner, and that
the wife would get a good title to the stock. This question has,
however, been somewhat disputed by lawyers. Therefore it is very
probable that a corporation would, as a matter of precaution, refuse to
run any risk by transferring directly from husband to wife or vice
versa, but would require that the transfer should be made through a
third person in any State where husband and wife cannot contract with
one another. So much for difficulties arising out of defects caused by
the lack of legal title to the stock.
STOCK HELD IN TRUST.--Now let us consider equitable defects. Such
defects chiefly arise where stock is held in trust. It would be the
simplest and pleasantest thing for a corporation if it could refuse to
register stock in trust at all, but it has been decided that it cannot
do this, that it is bound, if requested, to register stock in favor of a
trustee and issue stock to trustees. Now trustees hold under an
appointment by the court. A trustee may cease to be such at any time by
removal of the court as well as by death. Suppose stock in the name of
D, trustee. If D has ceased to be trustee because he has been removed
from office, a transfer by him will not be valid. Accordingly, it is
essential for a corporation and for a purchaser to be certain, not
simply that D was trustee, but that D is trustee at the time he attempts
to make the transfer. We may suppose the case of a certificate which
does not state that there is a trust. Not infrequently trustees, to
avoid complications, do not specify in the certificate that they are
trustees. If the corporation or if the purchaser of that stock has no
notice that D is really holding that stock in trust, the corporation or
the purchaser will have the same rights as if there were no trust. But
if either the corporation or the purchaser learns, from extrinsic
sources, that the stock is really held in trust, they will be bound to
make certain that the seller is still empowered to act as trustee, in
the same way as if the certificate specifically stated on its face that
the stock was owned by D in the capacity of trustee.
ONE HAVING NOTICE THAT STOCK IS HELD IN TRUST MUST ASCERTAIN THE TERMS
OF THE TRUST.--Even if the supposed trustee is actually the trustee he
may not have power to give a good title to the stock. He has the legal
title, undoubtedly, but if the certificate contains notice that he holds
the legal title as trustee, every one is bound at his peril when
purchasing the stock, and also the corporation is bound at its peril
before it allows the transfer of the stock, to make sure that the
trustee is authorized by the terms of his trust to transfer the stock.
A TRUSTEE HAS POWERS NECESSARY TO CARRY OUT TERMS OF TRUST.--Generally
when a transfer of stock is attempted by a trustee it means that the
trustee is selling the stock, though that is not necessarily the case. A
trust may be terminated; that is, a trust may be created for twenty
years, with directions to the trustee to transfer the trust property at
the end of twenty years to certain beneficiaries. A transfer by the
trustee at the close of the twenty years to the beneficiaries would not
be a sale of the stock; it would be a transfer for the purpose of
carrying out the trust, and a trustee always has implied power to make
any transfer of stock that is necessary to carry out the purpose of the
trust.
A TRUSTEE HAS NO IMPLIED POWER TO SELL.--A trustee has no implied power
to sell. The general duty of a trustee is to keep the property which is
left to him in trust or conveyed to him in trust in its existing form,
and no power is implied to change the form to something else.
Accordingly, if no power to sell is in terms given in a trust created by
deed or will, a corporation will require, and a purchaser should
require, the trustee to obtain the authority of the probate court to
make the sale. Carefully drawn trusts generally contain a power for the
trustee to sell if the purpose of the trust is to produce an
income-bearing fund for a long period of years. For that purpose a
change of investment is frequently desirable, and therefore trustees are
expressly given that power. But the corporation which has issued a
certificate to a trustee and a purchaser from the trustee must find out
at their peril whether such a power is given.
A TRUSTEE HAS NO IMPLIED POWER TO PLEDGE.--Another power, and one which
is not commonly given, is the power to borrow on stock, to pledge it or
use it for collateral security. Such a power is not implied and is not
commonly given in trust deeds or wills. Therefore, a bank or other
lender should not lend on certificates of stock which are made out to
the borrower as trustee, or made out to any one as trustee. Of course,
it is improper, even though the trust did give power to borrow, to allow
the trustee not only to borrow money on trust securities but to use the
money borrowed as part of his own assets; that is, to put it in his own
general account. It is his duty to keep trust money separate, and
therefore if the trustee has power to borrow he should keep the funds
which he borrows earmarked as trust property; but as has been said, he
will rarely have power given him expressly to borrow even for trust
purposes.
A TRUSTEE CANNOT TRANSFER TO HIMSELF.--Suppose a trustee is by a deed or
will given power to sell and he asks the corporation to make a transfer
of the stock to himself. The corporation should not do it. He has power
to sell to any one else but himself. A fiduciary cannot make a bargain
with himself in regard to his trust property, and therefore he should
not be allowed to transfer the stock to himself.
A TRUSTEE CANNOT DELEGATE HIS POWER TO SELL.--A trustee cannot delegate
his powers, and therefore he cannot give a general power of attorney to
another, to sell trust stock or any trust property whenever it may seem
wise to the agent to do so. Even though the trustee has himself power to
sell, he must exercise his own discretion as to the occasion when it is
proper to sell.
PURCHASER FROM A TRUSTEE IS NOT BOUND TO SEE TO APPLICATION OF PURCHASE
MONEY.--Though the corporation and though the purchaser from a trustee
are bound to see, if they have notice of the trust by the form of the
certificate, that the trustee is not making an unauthorized sale,
neither the purchaser nor the corporation is bound to see that the
trustee does not make an improper application of the money received from
sale of trust stock. In the current legal phrase, neither the purchaser
nor the corporation is bound to see to the application of the trust
money; but if either the purchaser or the corporation had notice of a
proposed misapplication of the trust money to be received for the stock,
it would be improper to allow the transfer knowing that the proceeds
would be misapplied, and the corporation or the purchaser would be
liable if the transfer was carried out.
AN EXECUTOR HAS IMPLIED POWER TO SELL.--Stock held by a guardian or by
an executor is in many respects treated similarly to stock held by a
trustee. There is this difference, however, in the executor's position,
that as it is his duty to reduce the estate to cash he has in most, but
not all States, an implied power to sell; it does not have to be given
to him in the will. The will, however, may restrict an executor's right
to sell certain stock, and therefore even in the case of an executor it
would be proper for a corporation to make sure that the executor's power
had not been restricted by the will before allowing the transfer.
TRANSFER BY AN EXECUTOR TO A LEGATEE.--Generally the executor will seek
to reduce the property to cash and therefore seek to transfer the stock
in the estate to a purchaser, but he may try to transfer it directly to
a legatee. He may himself be a legatee and endeavor to transfer to
himself. Unless he is a residuary legatee or a legatee of the specific
stock in question it is as improper for him to transfer to himself as
for a trustee to transfer to himself. Even though the executor is a
pecuniary legatee or is entitled to payment for commissions, he would
have no right to take stock in lieu of such pecuniary legacy or
commission, for he cannot make such a bargain with himself though he
might in regard to the legacy of another. If the executor is a specific
or residuary legatee the question of a right to transfer to himself is
the same as to transfer to any other legatee, and that right is only
subject to one qualification. Creditors of an estate have the first
right; legatees do not get their legacies paid unless creditors are
taken care of first. Creditors have a fixed period from the time when
executors or administrators give bonds within which to assert their
claims. If they have not asserted their claims in that period the claims
are barred. After that time has expired it is generally known whether
the assets of the estate are sufficient to pay legacies, and it is
usually then proper to allow a transfer to a legatee. Prior to that you
run the risk--which may be in a particular case a very small one or it
may be a very large one--that the creditors of the estate may exhaust
the assets and the legatees not be entitled to anything.
LOST CERTIFICATES.--Occasionally a question arises in regard to a lost
certificate. The Uniform Law provides for this case in substantially the
same way as the common law would deal with it if there were no statute,
namely, the corporation may demand a bond to indemnify it before it
issues a new certificate. This bond is essential because should the old
certificate turn up and be transferred to a bona fide purchaser for
value, the corporation would be liable on the old certificate, and as it
would also be liable to a purchaser for value of the new certificate it
is necessary that it should have a bond to protect it.
INTERPLEADER OF SEVERAL CLAIMANTS FOR STOCK.--If there are several
claimants for stock, as sometimes happens, the corporation should file a
bill of interpleader, as it is called, against the several claimants,
asking the court to determine which one is rightfully entitled. An
instance of that kind would be where A asks a corporation to transfer
stock to him, presenting a certificate indorsed by B, but B notifies the
corporation that he has been defrauded out of that stock by A, and that
he elects to rescind the transfer to A and demands the certificate back.
The corporation cannot undertake to determine which of these parties is
in the right; it must ask the court to do so. Not infrequently the same
situation arises in a bank where money has been lent on stock, and
notice is given to the bank not to return that security to the borrower
because he obtained it fraudulently or otherwise has acted in violation
of the rights of a third person in pledging it to the bank. The bank, if
it is a bona fide lender, is, of course, entitled to hold the stock for
its own security so far as it may be necessary to repay the loan; but
perhaps the bank can get the loan repaid out of other securities
unquestionably belonging to the borrower. In that event the bank should
do so and then ask the court who is entitled to the disputed stock.
EFFECT OF DELIVERING UNINDORSED CERTIFICATE.--In order to transfer
stock, as previously said, it is necessary that the stock should be
either indorsed or that on a separate paper an assignment or power to
transfer should be written. What is the effect of giving a certificate
without either of these formalities? It virtually protects the person
who receives the certificate, for though he has not title to the stock
and cannot get title without an indorsement, he has the certificate in
his possession which prevents any other person from getting title; and,
furthermore, he has the right to require an indorsement from the person
whose indorsement is needed, provided, of course, that the holder of the
certificate took it from the owner, who impliedly or expressly agreed
that he should have title. If somebody not an owner of a certificate
delivered it without indorsement to a bank, and borrowed money on it,
the bank would not be protected. The true owner could say, "That is
mine," and take it away.
CHAPTER VIII
Personal Property
PROPERTY DEFINED.--Property in the strict legal sense, is the aggregate
of rights which one may lawfully exercise over particular things to the
exclusion of others. "If a man were alone in the world," says Kant, "he
could properly hold or acquire nothing as his own; because between
himself, as Person, and all other outward objects, as Things, there is
no relation. The relation is between him and other people, whom he
excludes from the thing." All things are not the subject of property,
because, the sea, the air, light, and similar things, cannot be
appropriated.
ILLUSTRATION.--An illustration that gives us the idea of property will
make our definition clear. A takes his shoes to a cobbler to be
repaired. When he calls for them, he does not have the price for the
work, and the cobbler refuses to give them up. Both A and the cobbler
have a property right in the shoes. The right to absolute ownership is
in A, that is his property right. The temporary possession, however, is
in the cobbler, and he may hold the shoes under the lien for repairs
indefinitely and until he receives his compensation. The lien is his
property right. When we use the term property in its lowest form we mean
by it the right of possession. In our illustration, the cobbler's lien
gives him the right of possession. When we use the term in its highest
form, we mean the right of exclusive ownership; in our illustration,
A's shoes after he has paid the repair bill and secured the shoes again.
THE RIGHTS OF OWNERSHIP.--Exclusive ownership implies:
1. The right of exclusive possession for an indeterminate time.
2. The right of exclusive enjoyment for an indeterminate time.
3. The right of disposition.
4. The right of recovery if the thing be wrongfully taken or withheld.
But, you say, this is not the idea one ordinarily has of the term
"property." One speaks thus of his watch: "I own this watch. It is my
property." The answer is, property is a term with a double meaning. In
the ordinary sense "property" indicates the thing itself, rather than
the rights attached to it. Therefore it is that we have a law of
personal property, and a law of real property.
PERSONAL PROPERTY AND REAL PROPERTY DISTINGUISHED.--Real property has
been defined to be co-extensive with lands, tenements, and
hereditaments; to put it more simply, we may say that it consists of
land and anything that is permanently affixed to the land. Personal
property embraces all objects which are capable of ownership except
land. One fundamental difference between the two is that real property
is generally considered to be immovable, while such property as is
movable is usually termed personal property. It is important that the
distinction between the two forms of property be kept in mind because
different results follow where the property is held to be one or the
other. For example, on the death of the owner of real property, it
passes to his heir or devisee, while in the case of personal property,
it goes to the personal representative, the executor or the
administrator, and through him to the legatee or distributee. Again, in
settling the estate of the deceased person, personal property is always
to be used first to pay the decedent's debts. The modes of transferring
personal property and real property differ. Real property is transferred
by deed. Personal property may be transferred without any writing and
even in the case of a transfer of personal property, by a bill of sale,
the requirements for recording it are generally quite different from
those relating to the recording of deeds. Again, the transfer of real
property is governed by the law of the place where the real property is
situated, whereas the transfer of personal property is governed by the
law of the domicile of the owner. Taxation is another subject where the
distinction is most important.
SALES OF PERSONAL PROPERTY.--The most important branch of the law of
personal property, in the field of commercial law, is that relating to
the sale of personal property. We shall confine the balance of this
chapter to a consideration of that subject. As we have a uniform
Negotiable Instruments Law, so we also have a Uniform Sales Act which
has now been adopted in many of the States. The Sales Act defines a sale
and a contract to sell as follows: (1) A contract to sell goods is a
contract whereby the seller agrees to transfer the property in goods to
the buyer for a consideration called the price. (2) A sale of goods is
an agreement whereby the seller transfers the property in goods to the
buyer for a consideration called the price. (3) A contract to sell or a
sale may be absolute or conditional. (4) There may be a contract to sell
or a sale between one part owner and another.
SALES AND CONTRACTS TO SELL.--Sales are to be distinguished from
contracts to sell. A sale is an actual transfer of property, whereas a
contract to sell is an agreement to make a sale in the future. Sales at
a shop, for instance, are made without any contract to sell, but orders
for goods at a distance, and agreements to ship them, frequently precede
the actual sale of the goods, which is made in pursuance of the prior
contract to sell. The sale of personal property is subject to different
rules from the sale of real estate. In the transfer of real estate,
formalities of deed and seal are necessary, which are not required in
personal property, and the subjects must be considered separately.
A SALE DISTINGUISHED FROM SIMILAR TRANSACTIONS.--At the outset, a sale
must be distinguished from several other similar transactions. The law
of sales is a branch of contract law, hence consideration is necessary
in a sale. A gift, on the other hand, which may result in the transfer
of personal property in practically the same manner as a sale, does not
require any consideration. Hence, an agreement to sell goods is
unenforceable if not supported by consideration. A promise to make a
gift is always unenforceable because the very idea of a gift negatives
any idea of consideration. A sale and a bailment must also be
distinguished. A bailment is the rightful holding of an article of
personal property by one, for the accomplishment of a certain purpose,
with an obligation to return it after the completion of that purpose.
Where there is a sale, the entire property right passes to the new
buyer, and if the article is destroyed, providing title has passed, the
new buyer must pay the purchase price if he has not already done so,
although he gets nothing for it. In a bailment, the title does not pass.
The case of the cobbler repairing the shoes is an illustration of a
bailment. If, while the shoes are in his possession, his shop is burned,
through no fault of his, the owner of the shoes would stand the loss. If
I borrow a person's automobile, and while using it the car is struck by
lightning and totally destroyed, the loss falls on the owner because
this also is a bailment. On the other hand, had I bought the car and
temporarily kept it in the seller's garage, awaiting the completion of
my own garage, and it is burned while in his garage, the loss is mine.
By such a transaction, I become the owner when the sale is made, and the
former owner becomes the bailee.
FORMALITIES NECESSARY FOR THE COMPLETION OF A SALE.--The Sales Act
provides in section 3, subject to a few provisions, that "a contract to
sell or a sale may be made in writing (either with or without seal), or
by word of mouth, or partly in writing and partly by word of mouth, or
may be inferred from the conduct of the parties." The main qualification
of the right to make an oral sale or contract to sell is found in the
next section (Section 4) which is virtually a copy of a similar
provision in the English Statute of Frauds in regard to the sale of
personal property. Section 4 reads as follows:
"(1) A contract to sell or a sale of any goods or choses in action of
the value of five hundred dollars or upwards shall not be enforceable by
action unless the buyer shall accept part of the goods or choses in
action so contracted to be sold, and actually receive the same, or give
something in earnest to bind the contract, or in part payment, or unless
some note or memorandum in writing of the contract or sale be signed by
the party to be charged or his agent in that behalf.
"(2) The provisions of this section apply to every such contract or
sale, notwithstanding that the goods may be intended to be delivered at
some future time or may not at the time of such contract or sale be
actually made, procured, or provided, or fit or ready for delivery, or
some act may be requisite for the making or completing thereof, or
rendering the same fit for delivery; but if the goods are to be
manufactured by the seller especially for the buyer and are not suitable
for sale to others in the ordinary course of the seller's business, the
provisions of this section shall not apply.
"(3) There is an acceptance of goods within the meaning of this section
when the buyer, either before or after delivery of the goods, expresses
by words or conduct his assent to becoming the owner of those specific
goods."
THE CAPACITY OF PARTIES.--The Sales Act provides in section 2 that
"capacity to buy and sell is regulated by the general law concerning
capacity to contract, and transfer and acquire property. Where
necessaries are sold and delivered to an infant, or to a person who by
reason of mental incapacity or drunkenness is incompetent to contract,
he must pay a reasonable price therefor. Necessaries in this section
mean goods suitable to the condition in life of such infant or other
person, and to his actual requirements at the time of delivery."
IMPORTANCE OF DISTINGUISHING SALE AND CONTRACT TO SELL.--Why is it
important to distinguish between a contract to sell and a sale; what
difference does it make whether title has passed or not? The primary
reason that it makes a difference is because as soon as the title has
been transferred from the seller to the buyer the seller is entitled to
the price. Prior to the transfer of title, if the buyer refused to take
the goods, the seller would be entitled only to damages, which would be
the difference between the value of the goods which the seller still
retained and the price which was promised. If the goods were worth as
much or more than the amount of the price promised, the seller would not
be entitled to any substantial damages. But after title has passed the
buyer must pay the full price, and the seller may recover it if the
buyer refuses to accept delivery. Another consequence flowing from the
transfer of title is that the goods are thereafter at the risk of the
buyer. If they are destroyed by accident the buyer must nevertheless pay
the price, for the right to the price accrued before the goods were
destroyed, and when they were destroyed they were at the buyer's risk.
Bankruptcy is another circumstance which makes it important to determine
who holds title to the goods. If the buyer becomes bankrupt, after title
to the goods has passed to him, his trustee in bankruptcy takes the
goods for his creditors, but if he becomes bankrupt before title has
passed that would not be true. The bankruptcy of the seller would make a
similar difference.
WHEN TITLE IS PRESUMED TO PASS.--There are several presumptions in the
law as to when title will be presumed to pass if there was no specific
agreement between the parties as to when it should pass. If they simply
bargain for the goods without saying anything about the time when the
buyer is to become the owner, the first presumption is that title passes
as soon as the goods are specified and the parties are agreed on the
terms of the bargain, even though no part of the price has been paid and
though the goods have not been delivered. It is often assumed that
delivery is essential to transfer title to goods, but that is not so,
though delivery is strong evidence of intent to transfer title. If the
parties have made their bargain, and definitely agreed on the terms of
the bargain, title passes even though possession of the goods still
remains in the hands of the seller. The seller, however, has a lien for
the price though he has parted with title. As long as the goods are in
his possession he may refuse to surrender until he is paid the price,
unless he agreed to sell on credit.
TITLE PASSES WHEN PARTIES AGREE.--It is only a presumption that, where
the terms of a bargain are fixed and the goods are specified, title
passes at once, for if the parties agree that title shall not pass at
once it will pass when and as they agree. Their intention in regard to
the transfer of title may not be stated in express terms, and it may be
gathered only from the acts or words of the parties. If something
remains to be done to the goods by the seller, to put them in a
deliverable condition, that indicates an intent that title shall not
pass until they are in the condition agreed upon. If the parties provide
that the goods shall be stored at the expense of the seller, for a time
or at the risk of the seller, that indicates title is not intended to
pass, for if they are at the seller's expense and risk, presumably they
are still his goods. On the other hand, delivery of the goods indicates
an intent to pass title, although it is possible, if the parties so
agree, that title does not pass even though the goods are delivered.
Again, payment of the price is evidence tending to show an intent to
pass title, for buyers do not ordinarily pay the price in advance. It is
not uncommon for credit to be given by the seller, but it is uncommon
for the buyer to pay first; but even that is not impossible, and
therefore, though payment of the price is evidence of an intent to
transfer title immediately, it is not conclusive evidence.
TRANSFER OF TITLE BY SUBSEQUENT APPROPRIATION.--Suppose title does not
pass immediately, which may be due to the fact that the parties so
agreed, or to the fact that the goods were not specified at the time the
bargain was made. That is a common case. A and B contract for the sale
of 100 cases of shoes to be made by A. At the time the parties make
their bargain the shoes have not yet been made, but the parties expect
that they will be made later, and appropriated to the bargain, as the
legal phrase is. Or title may not pass at the time the bargain is made,
although the goods are specified. The parties may have expressly agreed
that title should not pass; or though the goods are specified, something
may remain to be done to them by the seller to put them in a deliverable
condition. Now, if title for any of these reasons does not pass when the
bargain is made, it may pass by an express agreement of the parties,
made later, that the buyer shall take title and that the seller shall
give title; or frequently it may pass by what is called an appropriation
of the goods by the seller to the buyer, without any express later
assent of the buyer, by virtue of an implied assent of the buyer given
in the original agreement that the seller should appropriate the goods.
What is meant will be understood by one or two illustrations.
APPROPRIATIONS BY DELIVERY TO A CARRIER.--Suppose A contracts to sell
and ship to the buyer 100 cases of shoes, and B contracts to receive and
pay for them. That shipment to the buyer is an appropriation of the
goods. The very 100 cases with which the seller intends to fulfill the
bargain are indicated by the delivery of them to the carrier, and the
buyer, since he agreed in the first place that they should be shipped,
has assented to the appropriation. Therefore, in such a case, as soon as
the goods are delivered to the carrier the presumption is that title
passes to the buyer. This is by far the commonest case of appropriation
by the seller in accordance with authority given by the buyer in his
original agreement, and it is so common that it deserves a little
further treatment.
ILLUSTRATION.--This kind of appropriation can be very well illustrated
by the case of a supposed sale of tobacco to a minor. A, a minor, lives
in an outlying suburb of Boston where the sale of tobacco to a minor is
not permitted. He buys goods of S. S. Pierce Company in Boston and wants
to buy some cigars from them. He can buy cigars of them in Boston and
send them out to his home, but the title must pass to him in Boston. If
the title passes in the suburb it is an illegal sale by S. S. Pierce
Company, and consequently they do not want to make it. Of course the
buyer can go and get the goods and pay for them in Boston and send them
himself to his residence. But suppose he sends an order by mail; if S.
S. Pierce Company are willing to charge goods to him, giving him credit,
they can send the goods by express, because on their shipment of the
goods the title will pass and the buyer will become a debtor for the
price of the goods in Boston; but they must not send the goods by their
own wagon, as their carrying the goods themselves out to the buyer's
residence leaves them in their possession until delivery, and the
delivery does not take place until the goods are delivered from their
wagon at his house. That would not do. Whereas if the goods are
delivered to a public carrier in Boston the carrier would be the buyer's
agent and title would pass in Boston.
THE SELLER MUST FOLLOW EXACTLY AUTHORITY GIVEN HIM.--Suppose the buyer
specified that the goods are to be shipped by a given route, and the
seller shipped them by a different route. Title would not pass then
because the buyer had not authorized the seller to appropriate them to
him, the buyer, in that way. It may be that the seller's way of sending
them was better than that originally assented to by the buyer, but the
seller, if he wishes to hold the buyer, as owner of the goods from the
time of shipment, must get his approval of that better way. Still more
important than the method of shipment is the character of the goods
themselves. The seller cannot, by putting any goods on the train,
transfer title. He must put on the train the very kind of goods which
the buyer agreed to receive, and that will mean not simply, in the case
supposed, that the goods must be shoes, but they must be merchantable
shoes of the character and sizes which the buyer agreed to take. The
goods must be properly packed and all usual precautions in regard to
them taken. In so far as the original agreement specified what was to be
done, those things must be done. In so far as the original agreement
does not specify how the goods are to be shipped, or what shall be done
in regard to them, the seller has discretion to do anything which is
customary and proper for a careful business man.
SHIPMENT OF GOODS C. O. D.--There has been considerable litigation in
regard to the effect of shipping goods C. O. D. Suppose goods were
ordered and goods of the sort ordered were shipped in accordance with
the directions in the order, but were marked C. O. D. Those letters
mean, as you know, collect on delivery, and two possible explanations
may be given of their effect. One, that the seller retains not only
control of, but also title to, the goods until they are delivered and
the price paid. According to that view the carrier is made the seller's
agent, to hold the title to the goods and transfer it to the buyer when
he pays for the goods. But the better view is that the carrier merely
retains a hold on the goods, a lien on behalf of the seller, while title
to the goods passes on shipment.
EFFECT OF THE FORM OF A BILL OF LADING.--One cannot speak of title
passing or being retained on shipment of goods without referring to
bills of lading, for the general rules which have been given must be
qualified by this statement, that by means of a bill of lading the title
may be at will retained or transferred (if the buyer has authorized a
transfer). The proper way to indicate a transfer of title when goods are
shipped is to have the buyer named as consignee in the bill of lading. A
bill of lading is very much like a promissory note; the carrier promises
to deliver the goods to somebody who is called the consignee, and who
corresponds to the payee of a note. There is this further feature in a
bill of lading: the carrier acknowledges receipt of the goods from the
consignor, that is, the shipper, and the carrier promises to deliver
them.
ILLUSTRATIONS.--Now, when S. S. Pierce Company decide to ship goods to a
buyer, it may consign them to the buyer or it may consign them to
itself; that is, the same person may be consignor and consignee. That is
very common in business, in order that the shipper may retain title to
the goods until he receives payment. He takes the bill of lading in his
own name and then, generally, attaches a draft on the buyer of the
goods, and sends the bill of lading and the draft together through a
bank. The bank notifies the drawee of the draft, who is the man who has
agreed to buy the goods, that the bill of lading with the draft are at
the bank, and that the buyer may have the bill of lading when he pays
the draft. The buyer pays the draft and gets the bill of lading, and
then for the first time does he become the owner of the goods. On the
other hand, if the shipper--S. S. Pierce Company--had consigned the
goods directly to the buyer, the buyer would have become the owner of
the goods on shipment, provided the buyer had authorized that shipment.
The seller cannot, however, by naming a buyer consignee, make the buyer
owner of any goods which he has not agreed to receive. So much for
appropriation of the goods to the buyer by shipment. In another chapter
fuller reference will be made to bills of lading as documents of title
and as bank securities. In this connection they are referred to merely
as indicating an intention to transfer or retain title as between buyer
and seller.
IMPORTANCE OF DELIVERY IN SALES OF GOODS.--Title to chattel property, it
has been said, may pass without delivery. This is true as between the
parties, but as against creditors and third persons delivery is
necessary. Suppose A sells a horse to B and does not deliver the horse,
and A afterwards sells the horse to C and does deliver the horse to C. B
comes around to C and says, "That is my horse. I paid A the full price."
C may say, "I bought him in good faith. I thought it was A's horse. I
have got him and I am going to keep him." C may keep him.
PLACE OF DELIVERY.--Certain contractual rights between the buyer and
seller are implied from the nature of the bargain of sale. A seller is
under an implied obligation not only to transfer title to the buyer, but
to deliver possession to him. Where must the seller deliver possession?
If the contract states the place, the terms of the contract decide that
question. If the contract does not expressly state where the place is to
be, the place of the seller's residence is the place where the seller is
bound to deliver, unless the goods are too heavy for easy
transportation, and in that case the place of delivery is the place
where the goods are at the time of the bargain. That may be the seller's
place of business, and it may not.
DELIVERY AND PAYMENT ARE CONCURRENT CONDITIONS.--Concurrently with the
seller's duty to deliver possession, the buyer is under a duty to pay
the price, unless the contract provides for a period of credit. The
delivery and the payment of the price are, in the absence of contrary
agreement, concurrent conditions. The seller must offer to deliver if he
wants to get a right of action for the price, and the buyer must tender
payment if he wants a right of action for the goods. The tender of price
and delivery must be at the place where payment and delivery is due. It
may be asked, how is the seller to tender the goods at the place
delivery is due if that is the seller's place of business and the buyer
does not appear? The answer is, that it is in effect a tender for the
seller to have the goods in the place where they are to be delivered, he
being ready and willing to deliver them. If the buyer does not come
there the buyer must, nevertheless, pay the seller. By the seller's
readiness to perform, at the place where performance is due, and
deliver, if the buyer with his money is at the place where payment is
due, there is in effect a tender.
RIGHT OF INSPECTION.--The buyer and seller have certain other implied
rights and duties. A right which the buyer always has, in the absence of
agreement to the contrary, is a right to inspect the goods, to see that
he is getting what he bargained for, before he accepts title and pays
the price. He may, however, waive this right of inspection; he may agree
to pay the price without seeing what he is getting, and in modern
business this is not uncommon. One sort of bargain frequently made
contains this term: "Cash against bill of lading." That means the buyer
is to pay the price of the goods on receiving the bill of lading. The
bill of lading will usually reach him before the goods, and, therefore,
before he has a chance to inspect; and by the terms of his bargain he
has agreed to pay cash against the bill of lading and he must do so. Of
course, if the goods when received turn out not to be what he bargained
for, he has a right to sue for breach of contract or recovery of the
price paid. But in the first place, when the bill of lading comes he has
to assume that the goods are going to be right and pay for the bill of
lading. Another case where a right of inspection is waived is where
goods are sent C. O. D. You order goods to be sent in that way and the
expressman brings them. You say you want to open the package and see if
the goods are right. You will find the expressman will not let you. He
will say, "No, you must pay for the sealed package," and until you do
so, you will have no right to the possession of the goods. If the goods
are not all right you have redress by suing the seller, but you must pay
your money first.
WARRANTIES.--Another and most important right which the buyer has is the
enforcement of warranties. Warranties of a chattel may be either express
or implied. An express warranty is a promise or an obligation imposed by
the law because of a representation which the seller has made in regard
to the goods. The simplest form of warranty is where the seller says, "I
warrant this horse is sound," or, "I warrant this piano will stay in
tune for a year." These warranties are promises and are subject to the
same rules as other promises. They are contracts for consideration, the
consideration for the promise being in each case the purchase of the
goods. But we have warranties which are not based on promises, strictly
so called, and yet are express. A tries to sell a horse. He says the
horse is perfectly sound, four years old, broken to harness, and has
trotted a mile in three minutes. Those are in form representations
rather than promises; they are assertions of fact, and when A makes them
it is possible he does not understand that he is binding himself for the
truth of his statements; and yet if they are made as positive statements
of fact, the seller is held to warrant the truth of those statements.
REPRESENTATIONS OF FACT AND OF OPINION.--The great distinction, between
warranties by representation and statements in regard to property which
do not amount to express warranties, is that between statements of
opinion and statements of positive fact. If the buyer said, "I believe
the horse can trot a mile in three minutes any day," it is not a
warranty; even the statement, "The horse can trot a mile in three
minutes" would probably not be a warranty; but the statement, "The horse
has trotted a mile in three minutes," is a direct assertion of fact, and
the element of opinion does not occur, and therefore that would be a
warranty. Statements of value do not amount to warranties. Those are
necessarily to some extent matters of opinion. General statements of
good quality do not, ordinarily, amount to warranties. The courts,
however, are getting stiffer and stiffer in regard to these matters. It
used to be the law that a seller could represent nearly anything he
chose in regard to his goods, and not be bound, so long as he did not
expressly say, "I warrant," or make a promise in terms in regard to
them. That was called the rule of "caveat emptor"--"let the buyer
beware"--but this rule is almost wiped out so far as representations of
fact are concerned. Now, the seller had better beware of what he says,
for he may find himself liable as a warrantor.
NO WARRANTIES IMPLIED IN SALES OF REAL ESTATE.--There are certain
warranties implied, although the buyer does not bargain for them and
although the seller makes no express representations regarding them. In
this respect sales of personal property differ entirely from sales of
real estate. In the case of real estate you get no warranty but what you
bargain for. If you get a deed without words of warranty, and it turns
out that the seller had no title, in the absence of fraud you have no
redress; you cannot get your money back though you have no title to the
land.
WARRANTY OF TITLE IMPLIED IN SALES OF PERSONAL PROPERTY.--In the case of
personal property it is otherwise. The first implied warranty that
exists in the case of a sale of personalty, unless the contrary is
expressly agreed, is the implied warranty of title. The seller impliedly
warrants that he has title to the property and will transfer title to
the buyer. The only exception to this is where a sale is made by a
person in a representative capacity, as by a sheriff or an agent. In
that case the person making the sale does not impliedly warrant title.
In the case of an agent, however, if the agent was authorized to make
the sale, the principal would be liable as an implied warrantor of
title; and if the agent was not authorized to make the sale, the agent
would be liable as warranting his authority--not as warranting title to
the goods, but warranting that he had a right to bind his principal.
Even in the case of a sale by an agent, therefore, the purchaser gets
substantial redress if the title turns out to be defective. It is
possible, of course, by express agreement, for a buyer to buy and a
seller to sell merely such title as the seller may have; but there must
be an express agreement, or very special circumstances, indicating that
such was the intention of the parties, in order to induce a court to
give this construction to a bargain.
IMPLIED WARRANTY OF QUALITY IN SALES BY DESCRIPTION.--Not only are there
implied warranties of title, but there are also implied warranties in
regard to the quality of goods. The fundamental principle at the bottom
of implied warranty of quality of goods is this: if the buyer
justifiably relies on the seller's skill or judgment to select proper
goods, then the seller is liable if he does not deliver proper goods. We
may distinguish in regard to implied warranties of quality, sales of
specific goods--that is, sales of a particular thing--and sales of goods
by description. In the case of sales by description there is always an
implied warranty that the buyer shall have not only goods which answer
that description, but merchantable goods which answer that description.
Suppose a seller contracts to sell so many hogsheads of Manila sugar.
The law formerly was that the seller could tender to the buyer, in
fulfillment of that contract, the worst article that he could find which
bore the name of Manila sugar. The law at present is that the seller
must furnish to the buyer merchantable Manila sugar; that is, Manila
sugar of average and salable quality. It does not have to be the best,
but it must be ordinarily salable as merchantable Manila sugar.
IMPLIED WARRANTY IN SALES OF SPECIFIED GOODS.--Contrast with that case a
contract to sell a specific identified lot of Manila sugar before the
buyer and seller. Is the buyer bound to take without objection that
specific lot, whether or not it turns out to be merchantable? Or suppose
you go to a shop where they sell bicycles and buy a bicycle; you pick
out a specific bicycle, and it turns out that, owing to defects in
manufacture, it is not good for anything. It breaks down the first time
you ride it. May the seller say, "You looked at what we had in stock and
this is the machine you agreed to buy"? It is in this class of cases
that the question of justifiable reliance by the buyer on the seller's
skill and judgment becomes important, and in determining whether the
buyer justifiably relied on the seller's skill and judgment several
things must be considered.
INSPECTION AS AFFECTING IMPLIED WARRANTY.--Was the defect open to
inspection and was there opportunity to inspect the goods? If there was,
there is less reason to suppose that the buyer was relying on the
seller's skill and judgment than if the defect was latent and not open
to inspection.
IMPLIED WARRANTY WHERE THE SELLER IS A MANUFACTURER.--What was the
nature of the seller's business? Was he a manufacturer of the goods in
question? The strictest rules of implied warranty of quality are applied
against manufacturers, and this is, you will see, reasonable, because
the manufacturer ought to know about the goods and the buyer naturally
relies on the manufacturer, as knowing about the character of the goods,
to give goods of proper quality. Therefore, unless the buyer pretty
clearly assumes the risk himself of picking out what is satisfactory to
himself, a seller who is a manufacturer will be held to warrant the
merchantable quality of the goods which he makes and sells.
IMPLIED WARRANTY WHERE THE SELLER IS A DEALER.--The next grade below a
manufacturer is a dealer in that sort of goods. He cannot have the same
knowledge as a manufacturer, but still, a dealer in goods of a
particular kind is much more competent to judge of their quality than an
ordinary buyer and therefore a dealer also, unless there is special
reason to suppose the buyer did not rely on his own judgment, will be
held to warrant that the goods are merchantable.
IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.--Sometimes there
is a warranty of still greater scope than a warranty of merchantability;
that is, a warranty of fitness for a particular purpose. A buyer agrees
to buy glue of a manufacturer. The buyer is, as the glue manufacturer
knows, a furniture manufacturer. The glue manufacturer sells the buyer
glue which is merchantable glue, but it not good furniture glue, as
furniture glue must be of unusual tenacity. The seller is liable here
under an implied warranty. He knew that furniture glue was wanted. He
was a glue manufacturer, and he ought to have understood that the buyer
was looking to him to furnish glue of a sort that would not only be
salable as glue but would fulfill the purpose which the buyer had in
mind when he made the purchase.
KNOWN, DESCRIBED AND DEFINITE ARTICLES.--On the other hand, if the buyer
orders what is called a known, described and definite article, he takes
upon himself the burden of determining whether the thing which he buys
will fulfill his purpose or not. For instance, a buyer in Missouri
ordered of a boiler manufacturer two boilers selected from the catalogue
of the boiler manufacturer, describing them by number. The boilers were
good boilers, under ordinary circumstances, but the amount of mud in the
Missouri River, on the banks of which the boilers were to be used, was
so great that they could not be successfully used there. The buyer had
no redress against the seller in that case. He had taken upon himself to
specify the particular kind of boilers he wanted; he got them and they
were merchantable boilers. The only trouble was that they were not fit
for use in the place where the buyer was intending to use them. If the
buyer had simply ordered boilers for a factory on the Missouri River,
the result might well have been the other way, for that would have put
the duty on the seller to furnish something that was suitable for that
purpose.
RELIANCE ON THE SELLER IS THE ESSENTIAL ELEMENT.--The great thing to
remember throughout the whole subject is that the implied warranty of
quality depends on the justifiable reliance of the buyer on the seller's
skill. If the goods are not merchantable under circumstances where the
buyer does rely, he can recover from the seller, even though the seller
was not guilty of negligence. A warranty is not dependent on negligence
of the seller.
REMEDIES FOR BREACH OF WARRANTY.--One of the remedies, allowed in many
but not all States, for breach of warranty, is to return the goods and
demand the purchase money back; but that is only one remedy. Another
remedy, which is universally allowed, is to sue for whatever damage the
breach of warranty may have caused, and one or two cases will show how
serious these damages may be. A seller sells a pair of sheep to a buyer
with a warranty, express or implied, of their soundness. They have an
infectious disease, and when put with a large flock of the buyer's sheep
they infect the whole flock, and the damage is the loss of the whole
flock. Another actual case was based on an implied warranty of the
quality of rags sold to a paper manufacturer. The rags came from Turkey
and were infected with smallpox. They gave smallpox to the operatives
in the buyer's mill, and the mill had to be closed down, which caused
great loss to the manufacturer. All that loss can be recovered from the
seller of the rags, even though he was not negligent in bringing the
result about.
ONLY ORIGINAL BUYER CAN RECOVER ON A WARRANTY.--Nobody, however, can
recover on a warranty except the original buyer. For instance, the
operatives who caught smallpox could not sue the seller unless the
seller was negligent. If he had been careless or negligent in
disregarding their safety, they could sue him in an action of tort,
though they had no contractual relation with him. And if the buyer
resells the goods the purchaser from him cannot sue on a warranty given
to the original buyer.
EFFECT OF ACCEPTING DEFECTIVE GOODS.--Another matter that has caused
considerable litigation in regard to warranty and the obligation of the
seller in regard to the quality of goods, is the effect of acceptance by
the buyer of goods which are offered to him. Suppose a certain quantity
of Manila sugar is offered to one who has agreed to buy, and he takes
from the seller that quantity of sugar, but finds it is not of as good
quality as it ought to have been. The buyer subsequently objects, but
the seller says, "You should have objected to that at the outset and
refused to take it. Your taking it is an assent or acceptance of it as a
fulfillment of the contract, and any right you may have had is now
gone." It is settled law that if the defect was not observable with
reasonable care, the buyer does not lose any right by taking the goods,
provided he gave prompt notice of the defect as soon as it was
discovered. Further, even though at the time of delivery the buyer
observed the defect or might have observed it, it is the law of most but
by no means all States, that taking the goods does not necessarily
indicate assent to receive them as full satisfaction of the seller's
obligation. The buyer may receive the defective goods as full
satisfaction, but the mere fact of taking them does not prove it. It is
advisable, however, for the buyer as soon as he sees the defect to
protest against it. He may in most States safely take the goods if he
says in taking them, "These goods are defective and I do not take them
in full satisfaction;" or, if he does not discover the defect
immediately on taking the goods, he ought to give notice as soon as he
does discover that the goods are defective, and state that, though he
proposes to keep them, he does so subject to a claim for their defective
quality.
SELLER'S RIGHTS WHERE BUYER FAILS TO ACCEPT GOODS.--Now the seller has
some rights, also, that should be referred to. In the first place, if
the buyer refuses to take title to the goods when they are tendered to
him, the seller has a right to recover damages. The amount of damages
will be the difference between the value of the goods which the seller
still retains, because the buyer will not take them, and the contract
price which was promised. If the goods are worth as much as the price
promised for them, the seller's damages will be only nominal, for he
still has the goods and may sell them to somebody else for as good a
price as was stipulated in the original bargain.
SELLER MAY RECOVER PRICE WHERE TITLE HAS PASSED.--If the title to the
goods has passed, the seller may sue for the price. This right to the
price is secured by a lien on the goods as long as the seller retains
possession of them. If the seller has parted with possession and with
title, he cannot get the goods back except in one narrow class of cases.
STOPPAGE IN TRANSIT.--If the goods are in the hands of a carrier, or
other intermediary between the seller and buyer, even though title
passed on delivery to the carrier, the seller may stop the goods in
transit if the buyer becomes insolvent before they are actually
delivered to the buyer. The right is exercised by notifying the carrier
to hold the goods for the shipper since the buyer has become insolvent.
The right of lien and of stoppage in transit is given the seller to
enable him to secure the price, which is the thing of interest to him in
the contract.
LEGAL AND EQUITABLE TITLES.--A legal title is a full right of ownership
against everybody. The legal owner can take his goods wherever he finds
them. An equitable title is a right to have the benefit of the goods or
property, and, also, it frequently involves a right to have the legal
title transferred to the equitable owner, making him full legal owner.
The peculiar feature of an equitable title, however, is that it is good
only against the particular person who, as the phrase goes, is subject
to the equity, and also against any person who has acquired the
property, either without giving value or with knowledge of the equity.
To put the matter conversely, an equitable title is not good against a
purchaser for value without notice, or, in the language of the
Negotiable Instruments Law, against a holder in due course.
FRAUDULENT SALES.--This principle is important in other branches of the
law besides that governing negotiable instruments. The most common case
of equitable rights in sales arises in fraudulent sales. Where a sale is
induced by fraud of the buyer, he gets the legal title to the goods, but
the seller has an equitable title or right to get the goods back. Let us
see how this works out. The buyer procures goods by fraud and he sells
them to A. Now, the defrauded seller cannot get the goods back from A if
A paid value for them in good faith. If A did not pay value in good
faith, then the defrauded seller may get the goods from him or anybody
who stands in the same position. If the defrauded seller can reach the
goods before they have left the hands of the fraudulent person, he may
replevy them or he may seize them if that is possible. It is not worth
while to go into the various kinds of fraud that may be practiced in the
sale of goods, but there is one specific kind that comes up very
commonly which is worth mentioning; that is, buying goods with an
intention not to pay for them. Generally, in order to create a
fraudulent sale, it is necessary that the fraudulent person shall have
made some misrepresentation in words, but here is a case where, though
it may be said there is a misrepresentation, it is not put in words. It
may be said there is a misrepresentation, for it is fair to say that
every buyer when he buys goods not only promises to pay but represents
that his intention is to pay for the goods, and perhaps that his
financial condition is not so hopeless as to make the expectation
utterly impossible of fulfillment. If the situation actually was that
the buyer either had a positive intention not to pay, or was so
hopelessly insolvent that any reasonable person would know he could not
pay for the goods, the transaction is fraudulent; the seller still
retains an equity, and may reclaim the goods from the buyer who has
acquired a legal title or from any other person except a bona fide
purchaser. (A draft of a statute to punish the making or use of false
statements to obtain property or credit, jointly prepared by the General
Counsel of the American Bankers Association and Counsel for the National
Association of Credit Men, has been enacted in the form recommended, or
with more or less modification, in a majority of the States. This
statute provides, in substance, that "any person who shall knowingly
make or cause to be made any false statement in writing, with intent
that it shall be relied upon, respecting the financial condition, or
means or ability to pay, of himself, or any other person, for the
purpose of procuring in any form whatsoever, either the delivery of
personal property, payment of cash, making of a loan, extension of
credit, etc., for the benefit of either himself or of such other person,
shall be guilty of a felony, and punishable, etc.") This question often
arises in bankruptcy: Suppose the buyer goes bankrupt and the goods come
into the hands of the buyer's trustee in bankruptcy. The trustee in
bankruptcy is in legal effect, in such a case, the same person as the
bankrupt; he is not a bona fide purchaser from him, and thus the seller
may reclaim the goods from the trustee in bankruptcy just as he might
from the bankrupt. In the case supposed the seller has been fraudulently
induced to part with his title and may reclaim it. A case may be
supposed, however, where the seller fraudulently retains his title, and
here the buyer's creditors may seize the goods as if the title were in
the buyer. Thus it is a fraud to make a conditional sale of goods to a
person who intends, and who is understood to intend, to sell the goods
again. The reason why it is a fraud is because it is inconsistent on the
part of the wholesaler to say, "I retain title to the goods until paid
for, yet I give them to you, knowing that you are going to put them in
your stock of trade."
DESTRUCTION OF GOODS SOLD.--The question sometimes arises as to the
effect of the destruction of the goods sold or contracted to be sold.
The Sales Act in Sections 7 and 8 governs this:
Section 7. (1) Where the parties purport to sell specific goods, and the
goods without the knowledge of the seller have wholly perished at the
time when the agreement is made, the agreement is void.
(2) Where the parties purport to sell specific goods, and the goods
without the knowledge of the seller have perished in part or have
wholly or in a material part so deteriorated in quality as to be
substantially changed in character, the buyer may at his option treat
the sale:
(a) As avoided, or
(b) As transferring the property in all of the existing goods or in so
much thereof as have not deteriorated, and as binding the buyer to pay
the full agreed price if the sale was indivisible, or to pay the agreed
price for the goods in which the property passes if the sale was
divisible.
Sec. 8 (1) Where there is a contract to sell specific goods, and
subsequently, but before the risk passes to the buyer, without any fault
on the part of the seller or the buyer, the goods wholly perish, the
contract is thereby avoided.
(2) Where there is a contract to sell specific goods, and subsequently,
but before the risk passes to the buyer, without any fault of the seller
or the buyer, part of the goods perish or the whole or a material part
of the goods so deteriorate in quality as to be substantially changed in
character, the buyer may, at his option treat the contract:
(a) As avoided, or
(b) As binding the seller to transfer the property in all of the
existing goods or in so much thereof as have not deteriorated, and as
binding the buyer to pay the full agreed price if the contract was
indivisible, or to pay the agreed price for so much of the goods as the
seller, by the buyer's option, is bound to transfer if the contract is
divisible.
CONDITIONAL SALES.--Certain transactions in which personal property is
held as security, which are somewhat analogous to mortgages and which
are very common, may now be referred to. They may be classed thus:
Conditional sales, consignments, leases and chattel mortgages. A
conditional sale, as that term is commonly used, is a transfer of the
possession of personal property under an agreement to sell, the seller
expressly retaining the title. Here we have possession and title
divided. If it were not for the express agreement that title should
remain in the seller, the delivery of the goods to the buyer, with his
agreement to pay for them, would indicate a transfer of title to the
buyer. The purpose of the seller in making a conditional sale is to
retain security for the price which the buyer cannot pay all at once.
Conditional sales are most common in regard to furniture and machinery
of various kinds. Creditors of the buyer naturally suppose that the
goods in his possession are his, and it is to avoid deception, or
possible deception, that most States require that the conditional sale
be recorded, so that creditors and everybody else may have notice that,
although the buyer seems to be owner of this property, he is not so in
reality. But, in Massachusetts, record is not required, and conditional
sales, other than those of household furniture, need not even be in
writing. The seller is secured by this sort of bargain in several ways.
If the buyer does not pay the price when it is due, the seller may take
the goods back. They are his goods and therefore he may reclaim them. Or
the seller may conclude that it is better to sue for the price, and may
decide to let the buyer keep the goods and himself collect a judgment
for the price by levying on any property the buyer may have, including
that which was conditionally bought. Even though the buyer has paid a
large part of the price of the goods, the seller may, nevertheless,
reclaim the goods. The seller's course will be dictated largely by how
much of the price has been paid. If a large part has been paid, the
seller will very likely prefer to reclaim the goods unless they are
household furniture. Why, it may be asked, does a buyer enter into a
conditional sale, which is rather a poor bargain as far as he is
concerned? The reason, of course, is that he cannot pay cash and he
wants the use of the goods at once, and the conditional sale enables him
to get them. By statute, in some jurisdictions, the conditional buyer is
protected after he has paid a considerable portion of the price; either
by extending the time within which he may pay the balance due, or by
requiring a sale of the goods and the return to the buyer of any
surplus.
CONSIGNMENT.--How does a consignment differ from a conditional sale?
When goods are sent or consigned it means that the person to whom they
are sent is agent for the person who sends them. The consignment is like
the conditional sale in this respect, that the person who has possession
of the goods has not the title. The consignment differs vitally from a
conditional sale in this respect, however, that the consignee is not a
debtor for the price. If the consignee sells the goods, then he, of
course, must turn over the price to the consignor less such commission
as he takes, or if the transaction was not on commission, then the
consignee must pay to the consignor the price it was bargained the
consignor should receive. But until the goods are resold they remain the
consignor's and at his risk. If goods conditionally sold are destroyed,
the conditional buyer must, nevertheless, pay for them. They are at his
risk and he is an absolute debtor for the price; but the consignee
merely holds the goods as agent until a purchase takes place.
LEASES OF CHATTELS.--Sometimes goods are leased. Here, again, we have
the same point of similarity, that the person who has possession of the
goods is not the owner. The lessee, like a consignee, is not a debtor
for the price; he is a debtor for rent, but he is not a debtor for the
price of the goods. Often leases contain an option to purchase, and a
lease with an option to purchase is used by piano dealers and others as
an alternative mode of dealing with customers unable to pay cash,
instead of a conditional sale; but it is not the same thing, for if a
piano were destroyed without fault of either party after it had been
leased with an option to purchase, the loss would be on the seller. If
the option to pay had been exercised, of course, the loss would be on
the buyer.
CHATTEL MORTGAGES.--The goods are here owned originally by the
mortgagor, and they ordinarily remain in his possession after he has
transferred them by the mortgage. The fundamental principles governing
chattel mortgages are the same as those which govern mortgages of real
estate. Chattel mortgages must be in writing and recorded, or the
mortgaged property must be delivered to the mortgagee; otherwise they
are invalid against the creditors or trustee in bankruptcy of the
mortgagor; that is, one may mortgage his chattels, either by delivering
them to the mortgagee or by making a writing and having that recorded.
Even without record or delivery it is good between the parties, but it
is not good in case of bankruptcy against the trustee in bankruptcy of
the mortgagor, nor is it good against attaching creditors if there is no
bankruptcy.
MORTGAGES OF FUTURE GOODS.--An agreement is sometimes made to make a
mortgage of goods which do not at the time exist, or are not at the time
defined. This is especially common in regard to a stock of goods. A
wants to borrow money on his stock of goods in his shop. His stock may
be worth $25,000 and A has not capital enough to get along without
mortgaging it. Of course, he can mortgage the existing stock of goods
without difficulty, but the trouble is he wants to keep on doing
business, and sell in regular course of business the mortgaged stock of
goods. That, too, would be easy enough if the mortgagee were willing to
agree to it, but the mortgagee is not willing to agree unless equal
security is substituted for any goods that are sold. What they would
like to provide is that the mortgagor shall have power to sell the
existing goods if he chooses in the ordinary course of business,
provided he always keeps a stock of goods on hand equal to that on hand
at the time the mortgage was made, the idea being that as one thing is
released from the lien of the mortgage other things, of at least equal
value, shall replace it. It is not an unreasonable transaction, from a
business standpoint, but the law generally does not allow it validity
except to this extent. It is valid as between the parties so far as to
give the mortgagee a power at any time to take possession, and when he
does take possession the mortgage is valid as to the goods of which he
takes possession against creditors or anybody else. The mortgagee may
thus take possession right up to the time of the mortgagor's bankruptcy,
or at any time prior to actual seizure of the stock of goods on an
attachment. This gives the mortgagee some security if the mortgagor will
be good enough to give the mortgagee a hint when it is wise for the
mortgagee to take possession, because, as the mortgagee can take
possession just before bankruptcy or just before an attachment, the
mortgagee will be protected. But, of course, there is a chance that the
mortgagee may not get the goods, and therefore this form of security, in
most States, is not now advised, although it has been much attempted in
the past. In some States, however, such a mortgage gives a right against
goods afterwards acquired, which is superior to that of attaching
creditors or of a trustee in bankruptcy, even though the mortgagee does
not take possession.
GIFTS.--A gift is the immediate voluntary transfer of personal property.
To make a valid gift, therefore, it must be voluntary, gratuitous, and
absolute. As has been explained, a gift is distinguished from a sale or
a contract to sell by the fact that it is gratuitous. Gifts are usually
divided into two classes: gifts "inter vivos" and gifts "causa mortis."
There is no distinction between these two kinds of gifts, so far as the
necessity of the intent to deliver title and delivery of the property
are concerned, but the distinction lies in the fact that in gifts "causa
mortis," the change in title is defeasible upon certain conditions. The
ordinary gift "inter vivos," "between living people" is irrevocable when
completed. The gift "causa mortis," that is, one made by a person in
immediate apprehension of death, is always subject to the condition that
if the person recovers, the title to the property, which he has given
away, reverts to him. For A, who is in his last illness, to say to B,
who is sitting near his bedside, "I wish you to have my gold watch when
I am gone, but my brother is wearing it now in Europe" would not be a
gift "causa mortis." There is no delivery. It would not pass title, upon
his death, to his friend because in order to dispose of property after
one is dead, a will is necessary. Even between the parties gifts are
invalid unless accompanied by delivery, or made by deed under seal. The
transaction without delivery or deed is, in effect, a promise to give,
and there being no consideration the promisor may subsequently refuse to
keep his promise. If a savings-bank book, a bond, a stock certificate, a
life-insurance policy, a note or check of a third person (but not one
made by the giver), or any chattel property is delivered to the donee,
the gift is binding and irrevocable; but otherwise the donee gets
absolutely nothing and the donor's executor is entitled to the property
attempted to be disposed of by gift, and must treat it as part of the
assets of the estate.
ILLUSTRATION.--A recent case in New Jersey shows clearly the effects of
the application of the rules just described. In Bailey v. Orange
Memorial Hospital, 102 Atl. 7, the facts were that the testatrix died
about June 10, 1893, leaving a will, which had been duly probated, and
under which the complainants had qualified as executors. Among the
papers, which the executors found in the testatrix's safe deposit box
after her death, was a certificate made in her name for fifty shares of
the capital stock of the United N. J. Railroad and Canal Co., bearing
the following indorsement, "For value received I hereby assign and
transfer unto the Orange Memorial Hospital fifty shares of the capital
stock represented by the within certificate and do hereby irrevocably
constitute and appoint ................ attorney to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.
Mary Campfield.
"Dated Oct. 28, 1911.
"Witnessed by James C. MacDonald."
In the same envelope containing this certificate the executors also
found the following letter in the handwriting of Mrs. Campfield: "To my
executors: The accompanying certificate of fifty shares of the United,
etc. Co. is my gift to the Orange Memorial Hospital for a bed to be
called the 'Mahlon Campfield Bed.' The stock has been retained since
its date of transfer because I desire to be benefited by the dividends
thereon as long as I live.
Mary Campfield.
"Dated Oct. 28, 1911."
In this box Mrs. Campfield kept her bonds and mortgages, stock
certificates, and other valuable papers relating to her own property and
to the estate of her husband, of which she was executrix. There were two
sets of keys to the box, one of which was in Mrs. Campfield's
possession, and the other in the possession of one of her executors, who
assisted her for some time in the management of her affairs. Shortly
before the indorsement on the certificate was made, and the letter
written, Mrs. Campfield requested Mr. Everett, the executor, to take the
stock certificate from her box and deliver it to her attorney, stating
that she would let her attorney know in a few days what to do about it.
A few days later the attorney handed Mr. Everett an envelope containing
the stock certificate, and told him there was a letter with it. Mr.
Everett saw the certificate but did not see the letter, and he placed
the envelope containing the certificate in the safe deposit box. The
attorney had sealed the envelope after showing him the certificate.
After Mr. Everett had told Mrs. Campfield what had been done, she said,
"Well, that is for the hospital and that settles it," and she added: "It
is in an envelope, as you probably saw, and addressed to my executors,
and they will find a letter inside telling them what to do with it."
After this, Mrs. Campfield continued to receive the dividends paid on
these shares, and there is some evidence to indicate that she had access
to the safe deposit box and examined its contents during the winter
preceding her death. The court, in its opinion, said: "I do not think
there can be any doubt of Mrs. Campfield's donative intention regarding
these shares of stock, and it is equally clear that she never
consummated that intention to make the gift, by the actual delivery of
the stock to the hospital, or to any one as trustee for it; and it also
appears that she intended the gift should be effective only after her
death. She expressly retained the ownership and dominion over the stock
for the purpose, at least, of collecting and enjoying the dividends paid
thereon. * * * The gift of the stock not having been completed by
delivery, or by the relinquishment of control over the certificate
representing it, the stock must be declared to be an asset of the
estate."
CHAPTER IX
Real Property
DISTINCTION BETWEEN THE LAW GOVERNING SALES OF REAL AND PERSONAL
PROPERTY.--The main distinction between the law governing real and
personal property is the increased formality necessary in transactions
governing real estate. Contracts for the sale of real estate must be in
writing and actual conveyances of an interest in land must not only be
in writing, but, except where seals have been abolished by statute, must
be executed under seal. In order to make the transaction valid against
third persons, record in the Registry of Deeds in the county where the
land is situated is also requisite. Unless a contract for the sale of
real estate is recorded, a subsequent conveyance to a purchaser, for
value and without notice, will destroy the right of the buyer under the
first contract to get the land, though he will still have an action for
damages against the seller. So, in many jurisdictions, creditors of the
man contracting to sell may by attaching the land as the seller's
property satisfy their claims from it to the detriment of the buyer's
right. Therefore, an actual conveyance of real estate must be recorded
in order to protect the grantee. As a pre-requisite for record it is
generally required that contracts and deeds of real estate shall be
acknowledged before a notary public or other official authorized by
law.
DUTIES OF BUYER AND SELLER UNDER CONTRACT TO CONVEY REAL ESTATE.--The
primary duty of the seller in a contract to convey real estate is to
transfer a good title. It is important for the buyer to determine before
the time for performance whether the seller's title is good in order to
determine whether he himself will accept the deed and pay the price.
Accordingly, the buyer has the title examined by search in the Registry
of Deeds. If the search discloses that the seller's title is defective
the buyer does not on that account necessarily have a right to rescind
the contract. The defect of title may be removed before the time of
performance, and if the nature of the defect is such that this is
possible, the buyer can only give notice of the defect and request its
removal. If the title of the seller is so defective that it cannot be
cured, or if the seller manifests by his conduct an intent to repudiate
the contract, as by selling the land to another, the buyer need not wait
for the time for performance, but may at once give notice that he
rescinds the contract. Unless the seller has expressly contracted to
convey by warranty deed, his obligation is generally satisfied by a quit
claim deed. It is well, therefore, for a purchaser, when he contracts to
purchase a piece of real property, to insert in the contract a clause to
the effect that the seller agrees to convey by a sufficient warranty
deed. The seller is also bound not to commit waste on the premises
between the time of the contract and the time of performance. The rule
in regard to accidental injury is stated hereafter, but as to
intentional or negligent injury of the premises, the law is clear that
such an injury is a breach of duty by the seller. The buyer's duty is to
pay the price according to the terms of the contract. The obligations of
the seller to convey, and of the buyer to buy, are concurrent, unless
the contract expressly provides the contrary; that is, the buyer in
order to acquire a right against the seller must tender payment, as he
demands a deed; and the seller in order to acquire a right against the
buyer must tender a proper deed when demanding payment. The obligation
of either party to tender may, however, be excused by circumstances
showing that tender would be useless. Thus, if the buyer is insolvent,
the seller need not tender a deed, and if the buyer has repudiated the
contract or committed waste to a material extent, or conveyed the
premises to a third person, the buyer need not tender payment, in order
to acquire a right of action. But if there is any doubt at all, the
purchaser or the seller, as the case may be, should make a tender, so as
to preserve his legal rights.
DOWER AND CURTESY.--By the common law a wife on her marriage acquired a
right in her husband's land, which, though not vesting until his death,
encumbered the title immediately. On his death she became entitled to a
life estate in a one-third interest of all the lands of which he had
been possessed since the date of their marriage. Accordingly, where the
common law rule of dower still prevails, a husband cannot give an
unencumbered title to real estate unless his wife joins in the
conveyance. Similarly a husband was entitled at common law to a life
interest in the lands of his deceased wife if they had had a child born
alive. This was called the estate by curtesy. Its extent, it will be
observed, is not the same as that of dower. The husband's life interest
extended to all the lands of the wife, but on the other hand, it did not
arise at all unless there was a child born alive; whereas the wife's
dower right arose immediately on marriage. The rules of dower and
curtesy have been changed by statute to a greater or less extent in most
States, but it is still almost universally important that a wife should
join in her husband's conveyance of real estate, and that a husband
should join in a wife's conveyance of her real estate.
DEFAULT IN PERFORMANCE.--The law regards more leniently a default in
time in carrying out contracts for the sale of real estate than it does
a similar default in the sale of personal property. In sales of personal
property, especially if it is of a character which rapidly fluctuates in
value, time is said to be "of the essence;" that is, the failure of
either party to perform at or about the agreed day is fatal to his
rights to enforce the contract; but in the case of real estate it is
generally held that time is not of the essence of the contract unless it
is either expressly so provided in the contract, or the circumstances of
the case are such as to show that time was a matter of vital importance.
DESTRUCTION OF PREMISES.--Where personal property, which the owner has
contracted to sell, is destroyed, the loss is the seller's provided the
title is still in him, and the buyer has committed no default; but in
most jurisdictions, if real estate is similarly destroyed, the buyer
must nevertheless pay the price. In the absence of special provisions in
a contract of sale, if a house on the premises sold has burned between
the time of the contract and the time for its performance, without fault
of the seller, the seller can compel the buyer to accept a deed of the
land without the house and pay the full price. This rule has been much
criticized, and it is not universally in force; for example, it is not
the law of Massachusetts. In some other States the loss will not fall
upon the buyer unless possession of the premises has been delivered to
him under the contract, but in New York, and probably a majority of the
States, even though the seller still has possession, as well as title,
the risk of accidental loss rests upon the buyer. Where risk of
destruction of the premises is thrown on the buyer, immediately after he
has made a contract to purchase, it is of obvious importance that he
should immediately insure the premises. The insurance of the seller,
unless transferred to the buyer at that time with the company's assent,
will not protect the buyer. Insurance is a contract of personal
indemnity, and the seller's insurance only protects the seller's
interest. The result is that if the premises are destroyed, the
insurance company will not be obliged to pay the seller his insurance,
since the seller, under the contract of sale, can recover from the
buyer; and even if the insurance were paid to the seller, the buyer
could not claim the benefit of it.
SPECIFIC PERFORMANCE.--In addition to the ordinary remedy for a breach
of contract, namely an action at law for damages, another remedy, that
of specific performance, is permitted in the case of contracts for the
sale of land; that is, the court will actually compel one who has
contracted to sell land to make a conveyance thereof on receiving the
agreed price, and will similarly compel one who has contracted to buy to
pay the agreed price on receiving a deed of the premises. Specific
performance of such contracts is granted on the theory that money
damages are an inadequate remedy, and that the nature of the situation
is such that it is possible to compel the actual performance of the
contract. In contracts for the sale of personal property, damages are
generally considered adequate, but contracts for the sale of a painting
or a race-horse would be specifically enforced. Sometimes the seller is
unable fully to perform his agreed contract. He may not be able to give
a title free from encumbrances, or he may have committed waste on the
premises. In such a case, though the buyer need not carry out the
contract unless he wishes, he can if he chooses get a conveyance decreed
to him and an allowance deducted from the price commensurate to the
injury caused by the encumbrance or waste. Specific performance will be
granted not only against the seller, but if the seller in violation of
his contract has conveyed the land to a third person who had notice of
the contract or who did not give value in exchange for the land, the
court will compel the grantee of the premises to convey them to the
person who had the original contract to buy. If, however, one who has
agreed to sell the premises actually sells and conveys them to another
who is a purchaser for value without notice of the prior contract, such
a purchaser gets an indefeasible title, and the person having the prior
contract to buy must resort, for his only relief, to an action for
damages against the seller. For this reason it is important to record a
contract to buy or sell. This record operates as notice to all the
world, and no purchaser subsequent to the record will have the rights of
a purchaser for value without notice.
VENDOR'S LIEN.--In some States a seller of land who has not been paid
the price is entitled to what is called a vendor's lien on the land.
This enables him to compel a sale of the property to satisfy his claim
for the purchase money unless the land has been conveyed, before
proceedings are brought to enforce the lien, to a purchaser for value
without notice that the original vendor is still unpaid. In many States,
however, the seller has no vendor's lien and must take a mortgage back
for any unpaid portion of the purchase price if he desires security for
its payment.
DEFINITION OF MORTGAGE.--A mortgage is a transfer of property to a
creditor to secure a debt. Unless there is a debt there can be no
mortgage, and the original idea of a mortgage, still preserved in the
forms of conveyance in many States, is that the mortgagor or debtor
transfers the title to the mortgagee or creditor. In popular
understanding the mortgagor owns the mortgaged premises but the
mortgagee will take or sell them if the debt is in default. The theory
of the common law, however, was that the mortgagee became the owner of
the premises as soon as the mortgage was made, but that the mortgagor
was entitled to re-acquire the ownership by payment of the debt at
maturity. Indeed, early mortgages were often made by two separate
instruments: (1) an absolute deed of conveyance to the mortgagee, and
(2) an instrument called a defeasance which provided that on payment of
the amount of the debt, on a given day, the property should revest in
the mortgagor.
MODERN AMERICAN MORTGAGES.--At the present day in many jurisdictions a
mortgage still remains, both in the form of the instrument and in the
legal conception of the rights of the parties fundamentally, the same as
under the early doctrines just outlined. In other jurisdictions, of
which New York may be taken as a typical State, the theory is no longer
that the mortgagee has title to the property, but that he has only a
lien on it, which he may enforce if the debt is not paid. The difference
in actual results under the two theories, however, is less than might be
supposed. Where the mortgagee is still regarded as having the title, his
power to make use of that title is limited so that he can only make use
of it for the purpose of securing payment of what is due him. On the
other hand where the mortgagee is regarded as having only a lien, the
lien is a legal right against the real estate which enables the creditor
to enforce his claim against it in practically the same way which he
would do were he the owner of the real estate.
COVENANTS AND STIPULATIONS.--A mortgage of real estate ordinarily
contains the same covenants of warranty as a warranty deed of real
estate. Where a mortgage still has its common law effect of transferring
title to the mortgagee, it is essential that the mortgage should contain
a provision that until default the mortgagor shall be entitled to the
possession of the premises. Covenants in regard to the payment of taxes
by the mortgagor and the keeping of the premises insured for a certain
amount, are usual and important provisions. There is also commonly
contained in a mortgage a power of sale; that is an authority or agency
given to the mortgagee to sell the premises free of the mortgagor's
right of redemption in case default of payment is made, or in case such
default continues for a certain specified time. In all States printed
forms of mortgages are ordinarily used. These forms are prepared with
care to suit the requirements of local law; and if you are sure that the
printed form is prepared and sold for use in the State where the
mortgaged land is situated, you may feel satisfied that the terms of the
instrument are suitable to protect the rights of both parties.
EXECUTION AND RECORD OF MORTGAGE.--A mortgage of real estate must
everywhere be executed with the same formality that is necessary for an
ordinary deed of conveyance. Different forms are in use in different
States, and it is always desirable to use the form of mortgage
customary in the State where the land lies. It is important to ascertain
whether a seal is necessary in that State, and the instrument must
ordinarily be acknowledged before a notary public having a seal, or
before a commissioner of deeds for the State in which the land lies.
There is in every State a recording act by virtue of which unrecorded
mortgages are made invalid against subsequent purchasers and sometimes
against attaching creditors. Though an unrecorded mortgage is, as
between the parties, as effective as if recorded, it is of vital
importance promptly to record every mortgage in the Registry of Deeds in
the county where the land lies.
SPECIAL CASES.--Where a mortgage is executed by an agent or by a
corporation, it is essential that the agent or corporate officer have
authority to act. In the case of a corporation it is necessary both that
the corporation have power to make the mortgage in question and also
that the particular officer or officers who attempt to exercise the
power are authorized so to do. The principles here involved, however,
are not different from those generally governing the acts of agents and
corporations. The same may be said in regard to mortgages by husband or
wife, by a partnership, or by trustees. In the case of mortgages
executed by any such person it is necessary to take special precautions.
A mortgage by husband or wife should generally be also executed by the
other. A mortgage by a partnership should be executed in the same form
in which the title is held by the partnership, and if the title is held
by less than all the partners, it is desirable that the other partners
should express their assent to the transaction either in the mortgage
itself, or in a separate instrument executed with the same formality.
INTEREST IN PROPERTY.--Any kind of interest in real estate may be
mortgaged and mortgages of property, not yet acquired by the mortgagor,
have generally been held to attach to the property when acquired by the
mortgagor, and then to give the mortgagee as full a right as if the
mortgagor had owned the premises at the time he purported to mortgage
them.
OTHER PARTICULARS.--The description of land in a mortgage should have
the same exactness as is necessary in a deed. Unlike deeds, mortgages
ordinarily state their consideration and must of course state the
indebtedness which they are given to secure. A mortgage may be given to
secure a past debt if the mortgagor, when he makes the mortgage, is
solvent. If he is then insolvent, to give such a mortgage would be a
preference, which is an act of bankruptcy, and subject the mortgagor to
possible bankruptcy proceedings. If the mortgagee in such a case had
reasonable cause to believe that the mortgagor was insolvent, the
mortgage could also be set aside by a trustee in bankruptcy.
EQUITY OF REDEMPTION.--By the terms of the mortgage the mortgagor's
right is ordinarily made dependent on payment of the debt on a fixed
day, or of installments on fixed days. A day thus fixed in the mortgage
is sometimes called the "law day." According to the terms of the
instrument the only way in which the mortgagor can be revested with
title to the property is by complying with the express terms of the
mortgage and paying the debt on the law day. The result of this
provision, if enforced, would be that if the debt is not paid exactly
when it is due, the mortgagee remains the absolute owner of the
mortgaged premises. Courts of equity, however, long ago limited the
mortgagee's right, holding that the real object of the transaction is to
secure a debt, and that if the mortgagee obtains his debt and interest
he ought to be satisfied. Accordingly if the mortgagor was in default in
the payment of the debt, he was allowed to redeem the property by
payment of the debt and interest until the time of tender. If the
mortgagee refused to accept his debt and interest, the mortgagor could
bring a suit in equity to redeem the property and the court would order
the reconveyance to him of the property on payment of the debt. Because
of this right on the part of the mortgagor, his interest in the property
came to be called an equity of redemption, and it is often so called at
the present day. The position taken by courts of equity, permitting
redemption, might work a hardship on the mortgagee because he could
never feel sure of his title to the property, however long the debt
might remain unpaid. This difficulty was met by allowing the mortgagee
to bring a suit to foreclose the debtor's right of redemption. We speak
of foreclosing a mortgage, but, strictly, it is the debtor's right to
redeem which is foreclosed. When such a suit of foreclosure was brought
equity would fix a time within which the debtor might redeem the
premises by paying the debt and interest, and then the decree provided
that if the debtor failed to pay within the named period, his right of
redemption should be forever foreclosed. At the present time there are
in practically all jurisdictions statutory rules, in regard to the
foreclosure of mortgages, which we shall presently describe, but it is
important to remember the fundamental nature of the mortgage
transaction, and the original remedies of redemption and foreclosure.
A RECONVEYANCE IS NOT NECESSARY ON PAYMENT OF THE MORTGAGE.--If a
mortgage is regarded as a mere lien to secure a debt, it is obvious that
a payment of the debt discharges the lien, and the title already vested
in the mortgagor becomes free from any incumbrance. On the theory of the
common law, though the title passed to the mortgagee, it was subject to
a condition subsequent which would revest the title in the mortgagor if
payment of the debt was made at maturity. By mere operation of law,
therefore, payment of the mortgage when due revested title in the
mortgagor without reconveyance. After a default, however, a subsequent
payment is not strictly a performance of the condition upon which the
mortgaged deed provided that title should revest. Accordingly a
reconveyance was necessary in such a case at common law, but at the
present day it is generally not requisite even in case of payment after
default.
THE MORTGAGOR IS LIABLE AS A DEBTOR.--The mortgagor is bound as a debtor
ordinarily by a bond or promissory note in which he expressly agrees to
pay the amount of his debt. It is perfectly possible that the debt
secured by the mortgage should not be represented by such an instrument,
but should rest merely in oral agreement or should be contained in a
covenant in the mortgage deed itself, but it is usual and desirable to
have a separate obligation. The fact that the debtor has given the
mortgage does not in any way limit the rights of the mortgagee as an
ordinary creditor. He may sue on the mortgage debt when it is due, in
the same manner as if there were no mortgage. It is his option whether
he will foreclose the mortgage, as a means of collecting his claim, or
whether he will get judgment on the debt, and seek to collect that
judgment in the same way that an ordinary judgment creditor would. This
rule is changed by statute in California, and one or two other States,
where by statute the mortgagee is required to realize from the mortgaged
property what he can before seeking a personal judgment against the
mortgagor. In many jurisdictions the creditor may, in a single
proceeding, obtain foreclosure of the mortgagor's rights by sale of the
property, and a personal judgment against the mortgagor for any
deficiency which the proceeds of the property may leave. This is called
a deficiency judgment.
RIGHTS OF MORTGAGOR AND MORTGAGEE IN MORTGAGED LAND.--Even though the
mortgagor is regarded by the law as having no longer the legal title to
the premises, but only an equity of redemption, his interest is regarded
as real estate and descends on his death according to the laws governing
real estate. The mortgagee's interest, on the other hand, is regarded as
personal property since the debt which the mortgagee is intended to
secure is personal property, and even a legal title to the real estate
held by the mortgagee is held merely for security, and is an incident to
the debt. So the mortgagor's interest in mortgaged property is subject
to be seized on execution by his creditors while the mortgagee's
interest can not be so seized. The mortgagee's creditors must reach his
interest by means appropriate to realize upon the debt, not upon the
land. The mortgagor's interest being regarded as real estate will give
rise to the same estates of dower in favor of the wife of the deceased
mortgagor or curtesy in favor of the husband of a deceased mortgagor, as
are allowed by the law in the case of real estate generally. The
mortgagor may, while in possession, deal with the property in any way in
which an owner may, except that he will not be permitted to imperil the
mortgagee's security by any kind of waste. The mortgagor may, subject to
the mortgage, lease, sell or devise it. He may collect the rents and
profits and use them as his so long as he is in possession. Where,
however, the mortgagee is regarded as having the legal title to the
premises, he may eject the mortgagor at any time from possession, even
though the mortgage is not due, unless prohibited by statute or by the
express terms of the mortgage deed. In fact he usually is so
prohibited. Even when not so prohibited, it is not always well for a
mortgagee to take possession because, if he does so, he is bound to
account not only for all profits actually received from the premises,
but also for all that might have been received. He becomes liable for
any waste of the premises or any failure to deal with them in a
reasonably prudent manner.
SALE BY MORTGAGEE OR MORTGAGOR OF REAL ESTATE.--Either the mortgagee or
the mortgagor may assign his interest. The mortgagee in assigning his
interest is in legal contemplation doing two things: (1) assigning the
debt; (2) assigning the title or lien which he holds on the mortgagor's
real estate as security for the debt. As to the assignment of the debt,
the matter is governed by the same principles as govern the assignment
of choses in action generally. That is, if the mortgaged debt is
represented by a negotiable instrument, the instrument may be negotiated
to the purchaser in the ordinary way, and with the ordinary effects of
such instruments. If the mortgaged debt is not represented by a
negotiable instrument, the assignment of the debt is an assignment of a
chose in action. Where the common law view of mortgage still prevails,
that the mortgagee has the legal title, he can only transfer it to an
assignee by a deed executed with the same formalities necessary for the
transfers of real estate. As, however, the law recognizes that it is the
debt which is the essential feature of the relation between mortgagor
and mortgagee, and that the mortgaged estate is held merely as security
for a debt, a valid assignment of the debt is held to make the assignee
equitably entitled to the mortgaged property as security. And, in
effect, one who obtains the mortgage debt will secure the benefit of the
mortgaged property even though the local law regards a mortgagee as
having the legal title. Where the mortgagee is regarded as having merely
a lien, the assignment of the debt involves a transfer of the lien.
INCIDENTS TO MORTGAGE.--If the mortgagor wishes to convey his interest,
he transfers the estate by deed exactly as if it were unmortgaged,
except that the conveyance is stated to be subject to a specified
mortgage, and it is sometimes added "which the grantee assumes and
agrees to pay." It is desirable for the seller that the grantee shall
assume and agree to pay the mortgage while it is desirable for the buyer
that he shall buy the premises merely subject to the mortgage without
assuming it. The difference between the two transactions is this: In
either event the grantee receives the premises burdened by a mortgage,
the amount of which will be deducted from the consideration paid as the
agreed value of the premises. In either event, if the debt is unpaid,
the mortgagee will foreclose and the grantee will lose the premises. In
order to save the premises, the grantee will have to pay the mortgage.
ASSUMPTION OF MORTGAGE.--The distinction is only seriously important
when the mortgaged premises are worth less than the amount of the
mortgage. In that event the mortgagee will be entitled to a deficiency
judgment against the mortgagor. The mortgagor was the original debtor
and cannot escape from his obligation to the mortgagee without the
latter's assent. If the mortgagor is forced to pay, he cannot recover
the amount from his grantee unless the latter assumed and agreed to pay
the mortgage. If, however, the grantee did make such assumption, he will
ultimately have to pay the deficiency. If the mortgagee, without
foreclosing the property, should sue the mortgagor directly on the debt,
the latter would be compelled to pay. Even if the sale to the
mortgagor's grantee had been made merely subject to the mortgage, the
mortgagor on paying the debt would be subrogated to the mortgage and
would himself be enabled to foreclose the property. But if the property
failed to realize enough to reimburse him for the payment of the debt,
he would lose this deficiency unless the grantee had assumed and agreed
to pay the mortgage. Whether the mortgagee may sue directly a grantee of
mortgaged premises who has assumed and agreed to pay the mortgage, is a
question which has been much litigated; but it is now held almost
everywhere that the mortgagee may do so. Sometimes a succession of
grantees, each in turn on buying the premises, assumes and agrees to pay
a certain mortgage. The mortgagee, in such a case, is generally allowed
to recover from any one of these grantees so far as is necessary to
satisfy his claim; but the ultimate liability will rest upon the last
purchaser who has assumed the debt. As against a grantee who has not
assumed the debt, the mortgagee has no rights. He can deprive such a
purchaser of his land, so far as is necessary to collect the debt, but
he cannot hold him personally liable.
FORECLOSURE OF REAL ESTATE MORTGAGES.--According to the original theory
of the law, the mortgagee became the absolute owner of the mortgaged
premises by the failure of the mortgagor to pay the debt when due, and
by the foreclosure or termination of the mortgagor's right of
redemption. Foreclosure of this character is still possible in a few
States, but in most States it has been wholly abolished, and everywhere
the ordinary method of foreclosure is by sale of the mortgaged property.
Frequently the sale is made by virtue of an authority or power of sale
given in the mortgage itself, but sometimes it is made under authority
of a decree of court in foreclosure proceedings. Where a mortgage
contains a power to the mortgagee to sell on default of the mortgagor,
he is acting not simply on his own behalf but as agent for the mortgagor
in transferring title to the property. The proceeds will be applied
first to the payment of the debt with interest and the expenses of the
sale. Any surplus will be held by the mortgagee in trust for the
mortgagor and must be paid over to the latter. The situation is entirely
analogous to that created by a collateral note where stock or other
personal property is transferred as collateral to secure a debt. The
statutes of all States contain regulations in regard to the foreclosure
of mortgages, which must be observed. They are aimed generally to
protect the mortgagor from forfeiture of his property to any greater
extent than is necessary to insure the payment of the mortgage debt. In
any case of foreclosure the local statute and practice must be
consulted.
DEEDS OF TRUST.--In some States what are called deeds of trust have been
largely substituted for mortgages. The temptation to make such a
substitution is greatest in jurisdictions which refuse to recognize the
mortgagee as the legal owner of the premises. If the law denies the
mortgagee this recognition, he can, by insisting, as a condition of his
loan, that the premises shall be conveyed to a third person as trustee,
achieve the result that the mortgagor at least is no longer the legal
owner of the premises. Essentially the situation is the same under a
deed of trust as under a common law mortgage. In both cases the legal
title is held merely to secure the debt, and the court will secure to
the debtor all the value of the property which can be realized from its
sale over and above the amount of the debt. If the debt is paid of
course the debtor is entitled to the return of the security whether it
is real estate or personalty, and whether held directly by the creditor
or by a third person as trustee.
THE TORRENS LAW.--The Torrens system of registration of land titles
received its name from Sir Robert Torrens who drew the first Torrens law
enacted in South Australia in 1858. The practice of searching titles has
gone through this development. In country districts the person
purchasing real estate frequently accepted the grantor's deed without
any search of the title. Of course, if there were judgments against the
grantor, or other claims against the real property, the purchaser or the
grantee takes the property subject to these claims. Ordinarily, however,
the careful purchaser employs a lawyer to make a search of the title
before he accepts it and pays the purchase price. In New York City
to-day, and in some of the other large cities of the country, most of
the title searching has passed out of the hands of the lawyers into the
hands of the title companies. The title company makes the search now,
the same as the lawyer formerly did, with an added advantage. Suppose I
am to buy Blackacre, and employ attorney Blackstone to search the title.
He reports it as being free and clear. I take possession and pay the
purchase price. Six months later the wife of the grantor appears on the
scene. When the grantor conveyed, he stated in the deed that he was
single. The wife establishes the validity of her marriage, and her
husband's, my grantor's, death. She is, of course, entitled to dower. I
am obliged to make some kind of settlement with her, and there is no
way, probably, by which I can hold my lawyer for failing to find that
the grantor was married, when he made the search for me. If the title to
my property had been searched for me by a title company, it would have
issued a title insurance policy in my name which would have protected
me, in this instance, and I would have been reimbursed by the title
company for the loss which I sustained in having to pay the dower claim
of my grantor's wife.
ECONOMY OF TITLE SEARCHES.--Economically, the title company is a big
step in advance of the former practice of having lawyers make a search.
The title company can do it much cheaper. If Blackacre was sold, when
lawyers alone were making searches, probably a different lawyer would be
employed at each sale, and he would make a search back to the earliest
deed. After a title company has made its search, the result is in its
records and the next time it is on the same piece of property, the
search would simply be what is called a continuation, which would carry
the search from the last time the company was on the title down to the
present time. This enables the title company to make its fee more
reasonable than the lawyer, and we can now secure a title company's
search and insurance policy frequently for less than formerly was paid
to the lawyer for the search alone.
ESCHEAT.--However, the policies issued by the title companies are not
absolutely satisfactory, and the next, and perhaps final, step is for
the State to come in and guarantee the title. This is perfectly logical.
The ownership of all land is in the State, theoretically, the same as
under the English common law. The King, in those days, owned all the
land. This is more than theory, even to-day. If a man dies, leaving no
heirs and no will, his real property escheats to the State, this being
based simply on the theory that the property goes back to its original
owner, the State. If this is true, why should not the State insure the
title? This is the theory of the Torrens' system.
EFFECT OF TORRENS LAW.--The first Torrens law, enacted in this country,
was in Illinois, and similar acts have been passed in a number of the
States, including New York. When such laws are on the statute books,
generally the business of a title company will be legislated out of
existence. For that reason, opposition to the passage of such laws has
developed in some States. Perhaps the next fifty years may see them
generally adopted throughout the country.
CHAPTER X
Estates and Trusts
ESTATES.--When a person who owns property dies, the first question which
arises is as to what becomes of his estate; who pays the bills, who
takes charge of his business affairs, and what are the rules as to the
division of his property. The first question a lawyer always asks is,
"Did the deceased die testate or intestate?" that is, did he leave a
will or not. If he left a will, probably he has named one or more
executors in his will to settle his estate, in which case such person or
persons will take charge. If he has not appointed an executor in his
will, an oversight which rarely occurs, the probate court will appoint
an administrator. If, on the other hand, the man died intestate, it will
be absolutely necessary for the court to appoint an administrator. The
executor will settle up the estate according to the directions contained
in the will, but if no will was made, the administrator will settle up
the estate according to the rules of the probate court, under which he
is acting, and the property will be divided in accordance with the
statutes of the State or States having jurisdiction over the estate.
CHARACTER OF PROPERTY.--It is very essential to distinguish carefully
between the two kinds of property, real and personal, which the deceased
leaves. Real property, as we have explained, consists of land with the
buildings permanently attached to it, and all other property is
personal property, although it may relate to real property. Thus, a
mortgage on land is personal property, also the shares of stock in a
corporation, although the corporation may be organized to engage
exclusively in the ownership of real property, is personal property.
Where a person dies leaving a will, his real property goes directly to
the persons to whom he leaves it in the will. In the case where he dies
intestate, his real property passes directly to his heirs at law, who
are designated by statute. In neither case is any formality necessary,
beyond the probate of the will, to vest the devisee of the testator or
the heirs at law of the intestate with the title to the real property.
The situation in regard to personal property is quite different. Where
the deceased died leaving a will, his executor immediately has title to
all the personal property. If he dies intestate, the administrator will
take title as soon as appointed. The personal property is used by the
executor or administrator to pay debts, and the real property, whether a
man dies testate or intestate, is never used to pay debts unless the
personal property is insufficient.
WILLS DEFINED.--The definition of Jarman is commonly used in defining a
will: "A will is the instrument by which a person makes a disposition of
his property to take effect after his decease, and which is, in its own
nature, ambulatory, and revocable during his life." This definition is
open to one criticism. It does not include oral wills which, as we shall
see, are sometimes legal. We shall also use other terms in this chapter
which must be defined. A testator is the man who makes the will, while
the testatrix is a woman making a will. A codicil is a supplement to a
will, made and executed with the same formality as the original will,
and it becomes a part of the original will, adding to it, or altering
it, as the case may be. A devisee is a person who takes real property
under a will, while a legatee takes personal property under a will, and
the real property passing under the will is called a devise, and the
personal property a bequest. A legacy refers to money passing under a
will. This is why the ordinary will uses this phrase: "I give, devise,
and bequeath." It is not fatal, however, to make a mistake of having the
will read, "I hereby devise," referring to personal property. It is more
a mistake in the use of English, than a mistake in law to make a wrong
choice of these terms which we have just defined. A holographic or
olographic will is a will which is wholly written in the testator's or
testatrix's own hand. The statutes of a few States recognize these wills
as valid without the formal execution or attestation if they are wholly
written, signed, and sealed by the testator's own hand. A nuncupative
will is an oral will. While most wills must be in writing, in many
jurisdictions the oral wills made by sailors at sea, and soldiers in
actual service are recognized as valid without being reduced to writing
and without any specified number of witnesses. It is perfectly apparent
why these exceptions are made, because of the difficulty of securing the
materials with which to make a written will by these two classes of
people. Nuncupative wills are good only to dispose of personal
property, unless a special statute has been enacted which provides
otherwise, but this is not commonly done.
A WILL AND A GIFT CAUSA MORTIS DISTINGUISHED.--We have already referred
to gifts causa mortis which are gifts of personal property made by the
donor under apprehension of immediate death, coupled with the delivery
of the property. The gift is defeated by the recovery of the donor. A
gift causa mortis may be made orally, while, with the exception of
nuncupative wills, all wills must be in writing. A gift causa mortis
must be made under fear of pending death, whereas a will is ordinarily
made with a view of the fact of death but not of its immediate
happening. Again, delivery is necessary to make a gift causa mortis,
whereas under a will delivery never takes effect until after the person
dies, and then the legatee's title comes through the executor or
administrator, and not directly from the testator. Real property is not
the subject of a gift causa mortis, whereas a will may dispose of both
real and personal property.
WHO MAY MAKE A WILL.--As a general rule, any person of sound mind and of
the age of twenty-one years may make a will. In some States, a person
eighteen years of age may make a will of personal property. Formerly a
married woman could not make a valid will excepting in a few instances,
but to-day, by statute, this common law disability has been either wholly
or largely removed. The statutes of the particular State in which the
married woman resides, or in which her property is situated should
always be consulted.
TESTAMENTARY CAPACITY.--Another qualification is that the testator must
have sufficient intellectual powers to enable him to be said to have "a
sound and disposing mind, memory, and understanding." The case of
Whitney v. Twombly, 136 Mass. 145, gives us as good a general statement
as there is concerning the nature of testamentary capacity: "A testator
has a sound mind for testamentary purposes, only when he can understand
and carry in mind, in a general way, the nature and situation of his
property, and his relations to the persons around him, to those who
naturally have some claim to his remembrance, and to those in whom, and
the things in which, he has been chiefly interested. He must understand
the act which he is doing, the disposition which he wishes to make of
his property, and the relation in which he stands to the objects of his
bounty and to those who ought to be in his mind on the occasion of
making his will." The ability to make a will is not necessarily gone
because the testator is old, weak or ill, even practically at the point
of death. The physical condition is simply significant in determining
the mental condition, but of course a very weak physical condition does
not necessarily mean a weak intellectual condition. Insane persons are
not capable of making wills, but a person who is insane may still have a
"lucid interval" during which time he is sufficiently restored to his
normal condition to enable him to act with such reason as to make a
valid will, although he may, very soon, relapse into his former insane
condition. Ordinarily most peculiarities and eccentricities on the part
of the testator do not affect his ability to make a will; neither do
peculiar religious beliefs have any effect unless, in any of these
cases, the person's mind is so completely controlled as to prevent the
exercise of rational judgment in disposing of his property. His
eccentricities must amount almost, in such cases, to a form of insanity
to have this effect.
HOW A WILL MUST BE EXECUTED.--There are four requirements for the
execution of a valid will:
(1) It must be in writing.
(2) It must be signed by the testator.
(3) The testator's signature must be made by the testator or the marking
acknowledged by him in the presence of the necessary number of
witnesses.
(4) It must be declared by the testator to be his last will in the
presence of the necessary number of witnesses, who are present at the
same time and who subscribe their names as witnesses in the presence of
the testator.
OTHER FORMALITIES.--No particular form of writing is necessary. Probably
typing is the most common form in use to-day. As a precaution, lawyers
sometimes have the testator sign at the bottom of each typewritten page,
where the will is of several pages, or the document is fastened together
with silk, the two ends of which are carried to the last page and
imbedded in a wax seal. The testator should sign the will himself
unless he is unable to, from lack of education or feebleness, in which
case, the statute generally makes provision for another form of signing.
It is better practice for the testator to sign the will in the presence
of his witnesses, acknowledge the signature, and then the testator
should declare, in the presence of his witnesses, that this is his last
will and testament. In many States, two witnesses are all that are
necessary; a few States require three. Careful practice generally calls
for three.
ILLUSTRATION.--A testator lives in New York. He has two witnesses to his
will. His will is valid as far as his real property in that State is
concerned, but should it happen that he also owns real property in a
State where three witnesses are required, his will would not pass title
to the real property in that State and, as far as that State is
concerned, he would die intestate, and that real property would descend
to his heirs in accordance with the laws of that State, which would
quite likely not be what the testator intended to happen. By having
three witnesses, his will is just as good in New York, where only two
are necessary and the presence of the third witness makes the will good,
and passes the real property situated in the State where three are
required. It is always best to have the witnesses add their addresses to
their signatures. This is not required by statute in many States, but
after a person's decease, it may help in locating the witnesses by
having addresses to which to refer. It is, of course, wise to use some
care in the selection of witnesses, although almost any person is
competent. Adults, of course, are preferable as witnesses, but an infant
is a perfectly good witness, but he should possess sufficient
intelligence to be able to appreciate the importance of the act he is
witnessing. In view of the formalities to be observed in the execution
of a will, and the technical niceties in the use of the proper word or
phrase, often required to insure the expression of the testator's exact
intention, the drafting of a will should never be left to a layman, but
should always be entrusted to a lawyer.
THE FORM OF A WILL.--In our discussion it is well to keep in mind the
form of a will. A simple will reads as follows:
IN THE NAME OF GOD, AMEN:
I, John Jones, of the Borough of Manhattan, City and State of New York,
being of sound and disposing mind and understanding, do make, publish,
and declare this my last will and testament, as follows:
First. I direct that all of my just debts and my funeral expenses be
paid as soon after my death as conveniently may be.
Second. I give, devise and bequeath all the rest, residue and remainder
of my estate, whether real, personal, or mixed, of whatsoever kind,
character or description, and wheresoever situated, unto my wife, Emma
Jones, for and during the period of her natural life.
Third. Upon the death of my said wife Emma, I give, devise and bequeath
the said residue and remainder of my estate to my children, Alice
Jones, Sarah Jones, and George Jones, to them, their heirs, executors,
administrators and assigns forever, share and share alike, per stirpes
and not per capita.
Fourth. This will shall remain in full force and effect notwithstanding
children may hereafter be born to me.
Fifth. I nominate, constitute, and appoint my said wife Emma, and the
Institute Trust Company, executors of this my last will, giving to them
full power and authority to sell and convey any and all real estate,
whereof I may die seized, at such times and for such prices as they may
consider for the best interests of my estate.
Sixth. I hereby revoke any and all wills at any time by me heretofore
made.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this first day
of July, 1921.
(Signed) JOHN JONES (L. S.).
Signed, sealed, published and declared by John Jones, the above-named
testator, as and for his Last Will and Testament, in the presence of us,
and each of us, and at the same time declared by him to us, and each of
us, to be his Last Will and Testament, and thereupon we, at his request,
and in his presence and in the presence of each other, have hereunto
subscribed our names as witnesses, this first day of July, 1921.
RALPH ROE, 3921 Broadway, New York, N. Y.
JOHN DOE, 65 Fifth Avenue, New York, N. Y.
JAMES SMITH, 130 Post Avenue, New York, N. Y.
REVOCATION.--A will may be revoked at any time at the pleasure of the
testator. The ordinary ways of accomplishing a revocation of a will are:
(1) The testator executes a later will, and in express terms says, "I
hereby revoke all former wills by me made." Even if such an expression
is not put in the second will, if its terms are wholly inconsistent with
the former will, this in itself, will act as a revocation. Again, a will
may be revoked by mutilation, as by being burned, torn, or otherwise
mutilated by the testator himself, or in his presence and by his
direction. The mutilation of the will, however, if not accompanied by an
intent thereby to revoke it, is of no effect. I think I am tearing up an
old insurance policy, but because of poor eye-sight, discover later that
I have torn my will. This would not amount to a revocation of the will.
As has been said by a writer on the subject of wills, "No amount of
cancellation or destruction without the intent to revoke, and no amount
of intent without the actual destruction, will suffice to revoke a will.
Both the intent and the actual destruction or cancellation must
coexist."
Sometimes changes in the circumstances and conditions of the testator's
life will work a revocation. For example, at common law, the marriage of
a woman worked an absolute revocation of her will. This has now been
changed in most States by statute. In a great many States, however,
to-day, if a testator, having no children, should make his will, and
after the execution of the will, a child is born, the will is revoked in
toto, when no provision for such child is made in the will. However, as
above stated, this rule is not uniform in all States, and local statutes
should therefore be consulted on this point. Where a testator already
has children, the birth of additional children will not affect his will
except, that such after-born children will inherit the same as though he
had left no will. These rules in regard to after-born children apply
only where the will does not make any mention of possible issue, and for
this reason it is well to insert the clause, in many jurisdictions,
providing that the will shall remain in full force and effect
notwithstanding the fact that children may thereafter be born to the
testator.
PROBATE OF WILLS.--Every State has a probate court for the settlement of
decedents' estates. Such a court is variously named as the probate
court, the surrogate's court, and the like, according to the
nomenclature adopted in a particular State. Before an executor named in
a will has any authority to act, he must produce the will, and after the
proper proceeding has been had, the will is admitted to probate, and he
may then qualify under it by giving the necessary bond. If the deceased
died intestate, the proper person will apply to the probate court for
the appointment of an administrator, and after a hearing, the court will
appoint the person entitled to receive letters of administration. The
administrator will then qualify, give the necessary bond, and then
proceed with the settling of the estate.
A testator may name anyone in his will as an executor. In the large
cities, in recent years, it is becoming quite common to name a trust
company as executor, because its facilities for handling estates render
it more efficient than the average individual. If, on the other hand,
the testator is unwilling to place the sole care of his estate in the
hands of a trust company, he may name two executors, a trust company and
his wife, if he is a married man, or a very close friend in whose
judgment he has great confidence, and, together, the two act as
executors. The fees which the executors receive are generally fixed by
statute. If the deceased dies intestate, the letters of administration
are granted by the court in accordance with a definite statute. While
the law in the various States is not uniform, generally, the priority of
the right to administration is arranged by statute something like this:
(1) On the estate of a husband:
(a) To the widow, if there is any.
(b) If there is no widow, or if the widow renounces, then to
the children.
(c) If there are no children, then to the issue of deceased
children.
(d) If no issue of deceased children, then to the nearest of
kin.
(2) On the estate of a wife:
(a) To the husband, who has an absolute right. If the husband
for any reason does not desire to act as such administrator, he
may select any fit person to administer the estate.
(b) If there is no husband, then to the children.
(c) If no children, then to the issue of deceased children.
(d) If no issue of deceased children, then to the nearest of
kin.
(3) On the estate of an unmarried child:
(a) To the father, who has an absolute right. If for any reason
the father does not wish to act, the court may select any fit
person to administer the estate.
(b) If there is no father, then to the mother and brothers and
sisters, whether of whole or half blood.
(c) If no mother or brothers or sisters, then to the nearest of
kin in equal degree.
PER STIRPES AND PER CAPITA.--Where the subject of a testamentary
disposition is directed to be "equally divided" or to be divided "share
and share alike," or where similar words are used which indicate an
equal division among a class of persons, the persons among whom the
division is to be made take per capita, unless a contrary intention is
discoverable from the will. Where the individuals of a class are
specifically named, or are designated by their relation to some ancestor
living at the date of the will, whether the testator or another, they
take per capita, unless the context of the will shows an intention that
they should take per stirpes. But where the gift is to an individual, or
several named individuals, and to others as a class, the latter take per
stirpes; unless the testator uses language indicating an intention that
the members of the class shall share equally with the named
individuals. A gift to a class of persons or on their death to their
heirs or children will be distributed among such heirs or children per
stirpes; but a gift to one person and the children of other deceased
persons will be divided per capita, unless it appears from the context
or circumstances shown by extraneous evidence that the testator intended
a distribution per stirpes.
ILLUSTRATION.--A gift to children of testator, A. B. and C., or on their
death to their heirs or children will be distributed, in the event of
the death of C. before the testator, among heirs or children of C. per
stirpes. (In other words, they will divide the share of their father
between them.) But a gift to A. and to X. Y. and Z., the children of B.
deceased, will be divided per capita.
THE CONSTRUCTION OF WILLS.--It sometimes happens that wills are not
carefully drawn, and even if they are, their meaning is not always
perfectly clear. Ordinarily, any person who is interested in the meaning
of a clause of a will may bring a suit in the proper court asking for a
construction of the will. Of course, each case is governed more or less,
by its own facts, but there are certain general rules which the courts
follow in trying to arrive at the testator's intent. For example, a will
is ordinarily presumed to speak as of the time of the testator's death.
Thus, reference in a will, to the arrival of the testator's youngest
child at the age of twenty-five years, will apply to the youngest child
at the time of the testator's death, although such child is born after
the execution of the will. Ordinarily, a testator is presumed to have
intended to dispose of all of his property, and if a will can be so
construed, this will be done, rather than to adopt a construction which
will make him testate as to part of his property and intestate as to
another part. If there are two irreconcilable parts, the latter part is
the one which prevails. Words are to be understood in their ordinary
meaning, unless there is something to clearly show contrary intent. If,
between two possible constructions, one of which would disclose a legal
purpose, and the other an illegal purpose, the court will adopt the
former.
DOWER.--Under the rules of the common law, a wife was entitled, on the
death of her husband, to an estate for life in one-third of the lands of
which her husband was seized of an estate of inheritance at any time
during the marriage. This dower right still exists in most States,
although it may differ in some particulars. For example, in Connecticut,
a dower right exists only in the real property which the husband owns at
the time of his death, and not, as at common law, in all the real
property of which he was seized during the whole marriage. Therefore,
reference to the statutes must be made in each State, to know the exact
rule in a particular jurisdiction. Where the State adheres closely to
the common law, this right, on the part of the wife, is a right of which
her husband cannot deprive her; if the husband disposes of all his real
property in his will to his friend, John Jones, such disposition is not
valid and the wife would still be allowed her dower right by the
probate court. It must also be borne in mind that dower refers only to
real property. Generally, a husband may dispose of his personal property
without any reference to his wife. Ordinarily, two things are necessary
to establish the right of dower: (1) A legal marriage, and (2) seizin by
the husband of an estate of inheritance in lands, or, in a layman's
terms, the absolute ownership of a piece of real estate.
CURTESY.--Curtesy is the common law right which a husband has in the
real property of his wife, and by it he is entitled to an estate for his
life in all lands of which his wife was seized during marriage. Needless
to say, women did not take part in law making when this law arose. To
establish this right, three things are necessary: The two already
mentioned in dower, and third, the birth alive of issue of the marriage.
The right of curtesy does not exist in this common law form in as many
States as does the right of dower. Where these two rights do exist, in
their more or less modified form, you have the explanation of the fact
that when a married man sells real property, his wife joins in the deed,
or when a married woman sells real property, her husband joins in the
deed. The act of either in joining, releases the dower or curtesy right
and allows the purchaser to get a clear title.
CONFLICT OF LAWS.--We have already referred to this topic. It frequently
happens that a person dies owning real property located in a number of
States. It is almost certain that the laws covering real property will
vary in these different States. If he was a resident of Philadelphia,
his will will probably have been executed in accordance with the laws of
Pennsylvania. The question arises whether such a will is valid to convey
real property which he owns in New York, California, and Massachusetts.
Insofar as the will affects real property, the mode of execution and its
validity will be controlled by the law of the jurisdiction in which the
real property is situated. If, then, the will had two witnesses only, as
required by the Pennsylvania law, but three witnesses are required in
one of the other States named, he would die intestate as far as the real
property in the other State is concerned. Difficult questions sometimes
arise in regard to gifts to charities. Some States limit the amount
which a charitable corporation may receive as a gift under a will, and
other States require that the gifts must be executed within a certain
time before the decedent's death. Where there is a question of this
character involved only a careful examination of the decisions and
statutes in the States concerned can furnish the basis for any
satisfactory answer. If there is personal property, the requisites of
validity and construction of a will are controlled by the law of the
testator's domicile. The question as to his domicile is sometimes quite
difficult to determine and may require a court action. We have had a
number of illustrations of that in connection with the inheritance tax
laws, where the officers of one State have sought to establish the
domicile of a particularly wealthy person, who has just died, within
that State in order that they may secure the inheritance tax for the
State, which would of course, be much larger if the person were adjudged
a resident of that State than it would be if he were held to be a
non-resident.
CONTRACTS TO MAKE A WILL.--It sometimes happens that one person may make
a contract whereby he agrees to make a will in favor of another person.
A, 75 years old, and of the proper mental capacity to make a will, makes
a contract with Mary Jones, that, if she will live in his house and act
as housekeeper as long as he lives, he will make a will and in it give
her his house and $5000. He fails to make his will and dies suddenly at
the end of the year after the making of this contract. It is generally
recognized that contracts of this nature are valid. The general rules
applicable to contracts apply here. There must be consideration, the
contract must be certain in its terms, and as such contracts are not
favored by the courts, because they are open to many forms of fraud,
they must be proved by clear and convincing evidence, and the contract
would have to be in writing under the provisions of the Statute of
Frauds. In the illustration suggested, the further question arises, what
is the remedy on the part of the housekeeper for a breach of contract.
Ordinarily there are two proceedings open in such a case. The personal
representative of the deceased might be sued at law to recover damages
for a breach of contract, or one might proceed in equity to compel the
parties who take the legal title to the house, in consequence of the
failure of the decedent to make his will as he contracted to do, to
convey the property which would have been conveyed by the will, had the
will been made in compliance with the contract.
TRUSTS DEFINED.--In Bouvier's Law Dictionary, trusts are defined as
obligations imposed, either expressly or by implication of law, whereby
the obligor is bound to deal with property, over which he has control,
for the benefit of certain persons of whom he may himself be one, and
any one of whom may enforce the obligation. A trust arises when property
has been conveyed to one person and accepted by him for the benefit of
another. The person who holds the property and the legal title is called
the trustee, and the person for whom it is held is termed the
beneficiary or "cestui que trust." Trusts are created for a great
variety of purposes. It is very common to create them by a will, the
testator appointing a trustee to manage a trust fund which he sets aside
for the maintenance and support of a certain person or a certain
institution. A new device for creating a trust for the carrying on of a
business, seems to be growing in popularity. The practice apparently
began in Massachusetts with the creation of a trust for the operation of
an office building and similar undertakings. Under this arrangement, a
trust estate may have transferable shares, exemption of shareholder's
liability, and frequently enjoys peculiar advantages in taxation
matters. These organizations are sometimes spoken of as common law
corporations. They are so comparatively new that the closest care
should be exercised in operating a business under this form of
organization. We shall now consider the powers and duties of trustees
and include with them executors and administrators.
TRUSTEES, EXECUTORS, AND ADMINISTRATORS.--Trustees, executors and
administrators may be classed together because they are alike in that
they hold legal title to property which is held by them for the benefit
of other persons. They hold the legal title. A trustee is the owner of
the property, and any one who seeks a transfer of the legal title of the
property must get it from the trustee. Executors have exactly the same
powers as administrators, aside from powers that may be expressly given
in the will. The difference in name is simply because an executor is
appointed by the will of the testator, whereas an administrator is
appointed by the court to take charge of an estate for which no executor
has been named in a testator's will, or where the executor may have died
or refused to act, or, the most frequent case, where the deceased died
intestate.
THEIR APPOINTMENT.--Were it not for statutes, a trustee or an executor
would become such simply because somebody had made him a trustee or an
executor without any appointment or assistance from the court. But in
the appointment of executors or trustees, under wills, the court is by
statute generally required to make an appointment to give validity to a
nomination or appointment in the testator's will. Administrators, of
course, from their very nature, have to be appointed by the court. A
trust, however, may be created between living persons without any
appointment by the court, and frequently is. A real estate trust may be
created by simply conveying property to trustees on the trust that they
manage it and pay the income to the beneficiaries, and a great variety
of trusts are constantly created without an appointment from the court.
Wherever any question on a trust arises, or wherever the appointment of
a new trustee is necessary, however, the court has jurisdiction, and any
person interested in the trust can bring the matter before the court.
When a testator dies the person named as executor in the will petitions
for appointment, and unless there is some reason why he should not be
appointed he doubtless will be appointed. If there is no executor, then
the persons, or beneficiaries, interested in the estate, usually agree
on someone to administer the estate, and a petition is filed for his
appointment. The person who is next of kin, and competent to act, is
generally appointed in the absence of agreement. These officers remain
in office and retain their powers until their work is completed, unless
they are sooner removed, which they may be at any time for cause.
THEIR POWERS.--What powers do these persons have? Do they have power to
sell? We must first always look at the terms of the trust. If we are
dealing with a trustee under a will we look at the will to see what
powers the testator gave him. If we are looking at a question of a trust
under a deed, we look at the deed, and the right of an executor to sell
real estate similarly depends on whether any such power has been given
him in the will. Aside from express power given in the instrument, a
trustee has no power to sell either real or personal property unless the
power is expressly given or unless the nature of the trust is such as
necessarily implies the power, and courts are very slow in construing
the existence of such power by implication. An executor, on the other
hand, since his duty is to reduce the personal property of an estate to
cash, and distribute it, has, in most States, implied power to sell
personal property. He has, however, no power to sell real estate unless
the will expressly gives such power. The court may authorize him to sell
real estate, and will authorize him, if it is necessary to pay debts or
legacies, but only in such cases unless a power is expressly given.
Trustees, executors and administrators have no power to pledge property
unless expressly given in the instrument under which they act. They have
power to make such contracts as are necessary to carry out their trust,
but only these, and even when they make such contracts they are
personally liable upon them, having, however, a right of reimbursement
from the estate which they represent. If they entered into an
unauthorized contract they would be liable upon it personally and have
no right of reimbursement.
THEIR DUTIES.--Their first duty is the care and custody of the property
in their charge. A trustee, whose duty is to hold property, is bound to
keep it invested so as to bring in an income, whereas an executor has
no right to invest funds of the estate, except under the direction of
the court; if he does so he will take the chance of loss, and the
beneficiary can not only hold him liable for loss but can also take the
profit should the investment prove profitable. The executor's duty is to
reduce the property to cash and distribute it to the proper parties. All
these officers owe the same duty of fidelity to their beneficiary that
an agent owes to his principal. There is the same duty to execute the
trust personally and not delegate authority, except in regard to
ministerial or mechanical acts. There is the same duty to account, and
furthermore, the accounts of these officers, if they are appointed by
the court, must be filed in court. The trustee to carry out his trust
will ordinarily distribute the income to the persons entitled, but, of
course, trusts are of great variety, and not infrequently the object of
a trust is to accumulate the income. Whatever the terms of the trust are
they must be carried out. The duties of the executor and administrator
are to distribute the estate by paying creditors first and the surplus
to legatees or the next of kin legally entitled. They are allowed a
fixed period, in many States two years, to settle an estate.
One of the most essential duties of any fiduciary is to keep the
property he holds as a fiduciary separate and distinct from his own.
This means that a trustee or executor receiving current income must keep
a separate bank account as trustee or executor, and of course he should
not draw checks on that fund for personal debts.
CHAPTER XI
Carriers and Warehousemen
CARRIERS WHO ARE PUBLIC SERVICE COMPANIES.--Common Carriers--that is,
railroads, express companies, and other persons or corporations who
carry goods for hire and hold themselves out to the public as engaged in
the business of carrying goods for anybody for hire--are engaged in a
public service. A man who owns a tramp steamer and gets cargoes as he
can, is not engaged in a public service--he is not a common carrier or
public carrier; but a person who has a line of steamers, or even one
steamer, regularly engaged in plying between different places and taking
goods as offered for hire, is engaged in public service.
DUTIES OF ONE ENGAGED IN PUBLIC SERVICE.--Now, being engaged in public
service subjects a person or corporation who is so engaged to some
special duties. Such a person cannot make any bargain he pleases with
anybody he pleases, and refuse to make bargains with others, as an
ordinary person can. It is the duty of any one engaged in a public
service to give reasonable service to all who apply, without
discrimination, and for reasonable compensation. Of course, carriers are
not the only public-service corporations; electric light companies or
gas companies or water companies are other illustrations; but common
carriers, and especially railroads, are the most prominent
public-service corporations.
RAILROAD COMMISSIONS.--Not only is there this common-law duty to serve
all without discrimination and at reasonable prices, but both the States
and the United States have established commissions to look after
railroads and other carriers to see that they properly perform their
duties. The Railroad or Public Service Commission in most States has a
great variety of powers for compelling railroads to give proper service.
The chief function of the Federal Interstate Commerce Commission
originally, was in regard to rates, but its powers have since been
enlarged by legislation. The Interstate Commerce Commission has the
power concerning interstate commerce to say whether rates and practices
are reasonable. A carrier is obliged to file with the Interstate
Commerce Commission a schedule of its rates, and regulations concerning
rates, and is also required to post these rates publicly in its
stations. If anybody objects to the rates they must make complaint
before the Interstate Commerce Commission. That is the only form of
redress, and sometimes not an easy one for a person who is merely
interested in a single shipment, because the expense and delay of
proceedings before the Interstate Commerce Commission are such as to be
prohibitive, unless the complainant's financial interest in the matter
is considerable. It is common, therefore, for shippers' associations to
take that sort of question up rather than to leave it for individual
shippers. Any contract made by a carrier for either more or less than
the scheduled rate is illegal and void.
CARRIER'S COMMON-LAW LIABILITY FOR GOODS.--A carrier, at common law,
when he receives goods for transportation, is subject to a degree of
liability beyond that imposed on any other person. An ordinary person
who receives goods--a bailee, as he is called in law--is merely liable
for the consequences of his negligence. A carrier, however, while goods
are in course of transportation is liable, at common law, as an insurer
against all kinds of accidents except those caused by act of God or
public enemies. For instance, if goods were struck by lightning in
transit that would be an act of God, and the carrier would not be
liable; but if goods caught fire from any other cause, as from neglect
of an outsider or the act of an incendiary, the carrier would be liable.
Carriers, of course, dislike that and try to contract away their
liability. They are allowed by law to do so, except that they are not
allowed to contract for exemption from the consequences of their own
negligence. It is largely this desire of carriers to free themselves
from the extreme liability which the common law imposes on them, that
induces them to give bills of lading. Bills of lading are often required
by law, but carriers are pleased to issue them, as they can in that way
contract to exempt themselves from this extreme liability, which lasts
while the goods are in transit and until the consignee has had a
reasonable time to remove them from the carrier's possession. If the
consignee fails to remove them with reasonable promptness the carrier
then becomes liable, merely as a warehouseman may, for its own neglect.
The extreme liability of the carrier does not extend to damage caused by
delay. The carrier is liable for delays in so far as they are caused by
its own neglect, but otherwise is not liable. A carrier need not deliver
the goods unless freight is paid, as it has a lien for freight charges.
THREEFOLD NATURE OF BILL OF LADING.--A bill of lading issued by a
carrier for goods has a threefold character. In the first place it is a
receipt. The importance of a receipt is as evidence of just what was
shipped. It is important to the shipper as proof that the carrier
received goods, of such a quantity and of such a description, in good
order. It is important to the carrier as proof of the same thing, to
prevent the shipper from claiming that he has shipped different kinds or
quantities of goods from those described in the bill of lading. The
second aspect of a bill of lading is as a contract. It is not only a
receipt but a contract between the parties, the shipper and the carrier.
It is as a contract that the stipulations it contains for limitation, of
liability are important. Third, it is an order, when properly indorsed
and surrendered, for the delivery of the goods.
CARRIERS CAN DELIVER GOODS ONLY TO HOLDERS OF ORDER BILLS OF
LADING.--The thing that makes a bill of lading valuable, to buy or lend
money on, is the fact that the carrier will hold the goods behind the
bill of lading until the bill is itself presented and surrendered. If
the carrier were to deliver the goods upon demand to anybody other than
the holder of the bill of lading, it is obvious that there would not be
much use in holding the bill of lading. The carriers have made a great
contest on this question in the past. They have contended that they
fulfill their duty if they deliver the goods to the consignee originally
named in the bill of lading, whether that consignee continues to hold
the documents or not. But that has been decided against them so far as
order bills are concerned (that is, bills, which state that the goods
are deliverable not simply to a consignee but to the order of a
consignee) and these order bills have printed on them the provision that
the bill itself must be surrendered before the goods will be delivered.
CARRIERS MAY DELIVER TO CONSIGNEE OF STRAIGHT BILLS OF LADING.--In a
straight or flat bill, however (that is, one without the word "order")
the carrier's contention has been upheld and the carrier is allowed to
deliver the goods to the consignee, even though the consignee does not
present the bill of lading and for all the carrier knows is not the
owner of the bill of lading or of the goods.
BILLS OF LADING USED TO ENABLE SELLER TO RETAIN HOLD ON GOODS.--The ways
in which bills of lading may be used, and are used, in the mercantile
world, must be understood before the legal questions which arise,
concerning them, can be grasped. The primary and original purpose of
using bills of lading as symbols of the goods, was doubtless to secure
the seller in his hold on the goods until he received the price, and
that is still a vital purpose in the use of bills of lading. We have
learned, in the case of the sale of goods, that unless credit is given,
the delivery of the goods and the payment of the price are concurrent
conditions. Now, when the parties reside at a distance there is
difficulty in working out these concurrent conditions. If the seller
ships the goods directly to the buyer, he loses his hold on the goods,
and if the buyer does not keep his agreement to pay promptly, the seller
will be unable to do anything about it. On the other hand, of course,
the buyer does not want to pay in advance. Now, by means of bills of
lading, the seller is enabled to keep his hold on the goods until he
receives the price, and the buyer is enabled to secure possession of the
goods as soon as he pays the price.
STRAIGHT BILLS TO BUYER GIVE THE SELLER NO HOLD ON GOODS.--The bill of
lading may be used in various ways. Suppose, first, the seller when he
ships the goods takes a straight bill to the buyer. That will not give
the seller any hold, for the carrier will be discharged if without
demanding the surrender of the bill of lading, he delivers to the
consignee named. So we may cross off that as a possible means of
protecting the seller.
STRAIGHT BILLS TO THE SELLER.--The second possibility is for the seller
to take a straight bill, naming himself as consignee as well as
consigner. If that is done the buyer cannot get the goods at once.
Suppose the bill of lading was sent forward, even that would not of
itself enable the buyer to get the goods, if the carrier wished to be
technical, since in a straight bill the goods are deliverable not to
the holder of the bill, but to the consignee named therein. There would
have to be attached to the bill of lading an order from the seller, who
is named as consignee in the bill, directing the railroad to deliver the
goods to the buyer instead of to himself, the consignee named in the
bill. That would be a perfectly feasible matter, but this method is not
much used, and one reason why it is not much used is because the seller
frequently wants to do something else besides keep control of the goods
until the buyer pays for them. He oftentimes wants to get money from a
bank in the meantime.
USE OF BILLS OF LADING BY SELLER TO OBTAIN LOANS.--When the seller is
desirous of borrowing money from a bank, he takes the bill of lading to
the bank with a bill of exchange drawn on the buyer, and he asks the
bank at his home town to discount the bill of exchange, taking as
security the bill of lading. If his home bank does this, it then sends
the draft, with bill of lading attached, to its correspondent bank in
the buyer's city, where the draft is presented to the drawee, who is the
buyer, and if the buyer honors the draft then he is given the bill of
lading. Now, banks would not do this, ought not to do it (occasionally
they have), with a straight bill, even if the bill is drawn naming the
seller as consignee, for the bank when it discounts the bill of exchange
and gets the bill of lading as security gets no real hold on the goods.
The railroad may deliver the goods to the consignee--the seller--without
ever seeing the bill of lading, and without the bank, which holds the
bill of lading, ever knowing anything about it; or the railroad may
deliver to the buyer or some third person on a written order signed by
the consignee. In other words, the railroad does not have to hold the
goods until the bill of lading, properly indorsed, is presented to it.
STRAIGHT BILLS OF LADING GIVE NO SECURITY TO BANK.--The first and
fundamental requirement, then, for any bank which may deal with bills of
lading is never to have anything to do with straight bills. They give no
security. A straight bill is readily distinguishable from an order bill
on railroads in most parts of the country, at least, because uniform
bills of lading are now in use, and the straight bill is always white
and the order bill is always yellow. In foreign bills a greater variety
of forms are used, and you may have to examine the terms of the bill
before you can feel satisfied that it is of a sort that will give
security. The vital words in bills of lading, as in negotiable paper,
are the words, "order of" or "or order." If those are in a bill of
lading it is all right as far as this matter is concerned. Therefore the
third and fourth possible ways in which the seller may take the bill of
lading to secure himself are the only ones which will enable him to
finance the shipment at once.
BILLS OF LADING TO BUYER'S ORDER.--The third way which the seller may
act in order to fulfill his purpose is to take an order bill of lading
to the buyer's order. Although the bill of lading runs to the buyer's
order, and although, therefore, title to the goods will pass to the
buyer on shipment, the buyer cannot get the goods without that bill of
lading. Therefore, so long as the seller retains the bill of lading
nobody can get the goods from the carrier; and though the seller has
parted with title to the goods, since he made the bill of lading run to
the buyer's order, still he has retained control of them. Though it
gives a security to the seller, and would give security to the bank, if
the bank discounted a bill of exchange drawn on the buyer and took this
bill of lading as security, it is not a desirable method for this
reason: though the buyer cannot get the goods without the bill of
lading, nobody else can get the goods without a lot of trouble, unless
he has not only the bill of lading but the buyer's indorsement upon it.
The bill of lading is drawn to the buyer's order, and if the buyer fails
to pay and repudiates his contract, the bank or the seller will have
trouble in getting back the goods. They will have to prove to the
railroad that the buyer really has made default and that he no longer
has any real interest in the goods.
BILLS OF LADING TO THE SELLER'S ORDER.--Accordingly, it is the fourth
method which is in general use and which should be exclusively used. The
seller takes the bill of lading to his own order and indorses it in
blank; then he delivers it to his bank as security for a bill of
exchange. If the bill of exchange is paid by the drawee on presentment
at his city, he is given the bill of lading at once and he gets what he
wants. On the other hand, if the buyer does not pay the draft on
presentment, then the bank can realize on the security at once, if it
wants to, because it has a bill of lading in its hands indorsed by the
consignee to whose order it was drawn. If the bank proceeds against the
seller as the drawer of the draft, when the latter pays and takes up the
bill of lading he can similarly realize on the security, or get the
goods back, because he will have a bill of lading in his possession
which runs to his own order.
BILLS OF LADING TO "ORDER NOTIFY."--A slight modification of this form
of bill of lading is made in order to let the buyer know when the goods
arrive. When goods arrive at their destination it is a customary
courtesy of railroads to notify the consignee; but if goods are
consigned to the seller's order, the man who is really trying to buy the
goods gets no notice, as his name does not appear on the bill of lading.
To avoid that difficulty there is generally put on bills of lading,
taken out to the seller's order when the goods are shipped in
fulfillment of some contract or order, the words, "Notify X Y," X Y
being the prospective buyer of the goods. Then when the goods arrive the
railroad notifies X Y; he learns the goods are there and makes his plans
accordingly. These bills of lading are often called "bills to order
notify." The person who is to be notified is sometimes incorrectly
called the consignee of the bill. The consignee is the person to whom
the goods are deliverable, not the person who is to be notified
necessarily; and where a bill is to the seller's order the goods are, by
the terms of the bill of lading, deliverable to the seller and he is the
consignee.
CROPS ARE MOVED BY USE OF BILLS OF LADING.--The various uses of bills of
lading by sellers in order to insure concurrent payment by the buyer,
and in order, with the aid of banks, to put themselves in funds while
the goods are in transit, is a very important function of bills of
lading. It is by such means the great crops of the country are moved,
especially the cotton crop, which is moved almost wholly in this manner.
The southern banks discount bills of exchange, which are customarily
secured by bills of lading. The New York banks rediscount these bills of
exchange and draw for a great part of the price of the cotton on English
bankers. This use by sellers of bills of lading, however, is not the
only mercantile use of bills of lading.
BILLS OF LADING TO BANKER'S ORDER.--Here is another method used,
especially common in foreign commerce. A merchant in Boston wants to buy
a cargo of goods from Europe, but he has not the money to do it. The
seller in Europe does not know him and will not give him credit, so the
merchant goes to bankers who have available foreign correspondents and
states his case, and if he is in good credit with the bankers they say,
"Order the goods from the man in Germany of whom you were planning to
order them, and tell him to make the bill of lading out to us, and draw
on us or on our correspondents in Berlin or London or Paris. On receipt
of those bills of lading naming us as consignee we will pay, or cause to
be paid, the bills of exchange attached thereto for the price." In this
way the goods are shipped directly to the banker. In the cases
mentioned before, the banker took an indorsed bill of lading, but in
this mode of dealing the banker is himself the consignee, and on the
faith of the consignment he pays the price of the goods. Then he
delivers the bill of lading, indorsed, to the buyer, his customer, on
the buyer's making a settlement or giving him security.
SURRENDER OF BILLS OF LADING FOR TRUST RECEIPTS.--There is one method of
doing business in this connection which causes some risk to the bankers
who engage in it. They frequently allow their customer, the buyer, to
take the bill of lading, indorsed, for the purpose of entering the goods
at the Custom House, or warehousing them, or even for the purpose of
selling the goods, so that the buyer will be in funds to enable him to
discharge his debt to the banker. The banker takes, when he does this,
from the buyer to whom he delivers the indorsed bill of lading, what are
called "trust receipts." These receipts state that the buyer has taken
these bills of lading, that he holds them as a trustee, that they really
belong to the banker, and that the buyer holds them simply for a special
purpose, such as to enter them at the Custom House or to resell them and
turn the proceeds over to the banker. If the buyer is honest, well and
good; but if he should be financially pressed and dispose of that bill
of lading, many courts, at least, would not protect the banker, but
would protect the bona fide purchaser. What the banker ought to do is to
stamp upon the bill of lading, if he delivers it to the buyer, that a
trust receipt has been issued for certain specified purposes. In that
case any purchaser of the bill of lading would have notice of the terms
of the trust.
CHANGE OF ROUTING.--An analogous problem also may be supposed. A bank
holds a draft for collection with bill of lading attached. It sometimes
allows the drawee to take possession of the bill of lading and change
the routing of the car. That is done because the buyer sometimes sells
the goods before he receives them, and to save additional freight bills,
he changes the routing on the original bills of lading. What risk does
the bank run if it allows him to have possession of the bill of lading
indorsed in blank? It runs the same risk as in case of trust receipts.
The fact that the purpose was to change the routing of the goods is
apparently immaterial. The change of destination does not do the bank
any actual harm, except that the goods will be sent elsewhere, and
perhaps to a point some distance from their original destination. The
great risk involved is in allowing a man to have possession of a
document which in effect is negotiable. If the bank does not get back
its bill of lading it is in a bad position. If it did get back its bill
of lading it would still have its security, only it would be subject to
this difficulty, that the goods instead of coming to a place where the
bank could conveniently get at them, have perhaps gone to a distant
city, where it would be more trouble. If, however, changing the routing
and the reselling involve a surrender of the old bill to the railroad
and the issuing of a new bill of lading not only on a new route but
with the purchaser from the consignee named as a new consignee, then the
bank has thrown away everything, unless it actually obtains possession
of the new bill, and even if it does it has only an inferior security.
ACCOMMODATION BILLS.--Let us now enumerate the risks which a purchaser
or a lender runs in dealing with bills of lading, even with order bills,
and consider how these risks can be obviated and how far they are
inherent in the nature of the business. The first risk is that the bill
may have no goods behind it, because it was originally issued without
any goods. It has been quite a common practice, at some points where
there is competition for freight, to accommodate customers by issuing a
bill of lading for goods before the goods were received. Suppose a
seller in Chicago deals with a man in Boston; what the seller normally
ought to do is to buy goods, and ship them, getting a bill of lading,
then take the bill of lading to a bank and get money on the faith of
that bill of lading. You will see that that method requires the seller
to have had money or credit in the first place, in order to buy those
goods to ship. It would be very much more convenient for him if he could
reverse the order and get the money from the bank first, then buy the
goods and then ship them; and the kindness of the railroad agent
frequently has enabled him to do that. The railroad agent, trusting to
the seller's word that he will ship goods to-morrow, issues a bill of
lading to him for the goods which the seller promises to ship. The
seller dashes around to the bank, gets money and then buys the goods
and ships them. He may carry on business in that way for a long time; no
trouble occurs, nobody knows anything about it until the seller either
goes bankrupt or becomes dishonest and fails to ship the goods after he
has got the bill of lading, and then somebody finds himself with a bill
of lading for which no goods have ever been received. Such bills have
been called "accommodation" bills of lading, issued by the railroad for
the accommodation of the shipper.
FICTITIOUS BILLS OF LADING.--In some cases the whole transaction is a
fraud. In the case we have thus far been supposing, the railroad agent
believed the seller was going to ship goods, and the seller intended to
do so, only he wanted the bill of lading first; but money is so easily
obtained, frequently, on bills of lading, that sometimes a shipper and a
railroad agent put their heads together and say, "Let's make a few bills
of lading," and as a pure fraud the agent writes bills of lading. These
may be called fictitious bills. They are not exactly forgeries, you will
see, since they are drawn by the regular agent of the railroad on the
regular railroad form. One who took such a bill as this, however, would
be protected if the carrier were liable. Railroads are generally, and
other carriers are generally, financially responsible, and therefore the
great question that interests the holder of such a bill is, are the
railroads liable in damages because no goods are behind the bill of
lading? It was held in an English case, seventy-five years ago, that in
such a case the carrier was not liable on the ground that the agent who
wrote the bill was acting beyond the scope of his authority in signing a
bill of lading when no goods had been received. That decision has been
much criticized, and justly criticized, because the carrier has put that
agent in a position to determine when bills of lading shall be issued
and when not. Of course, the agent ought to exercise his choice
properly, but if the carrier has given him the power it ought to be
responsible for the results. Nevertheless, in a majority of the States
of this country, and in the Supreme Court of the United States, the
English case has been followed; and the carrier would be liable neither
on an accommodation bill nor a fictitious bill where no goods were
shipped. There have been some attempts to change this rule by statutes,
and in some States there is a statute, the Uniform Bill of Lading Act,
so called, which provides among other things that the carrier shall be
liable in the case supposed; but the trouble is that bills of lading
dealt with in one State will not generally originate in that State. If a
fictitious bill was issued in Chicago, although the bill named as a
consignee a person in Boston, and was bought by a Boston bank, the
liability of the carrier on that bill of lading would be determined by
the law of Illinois. So, unless you have a satisfactory law where the
bill originates, you will not be protected. Fortunately, the same
statute has been passed in several States, and it is hoped that it will
be in more. This, then, is the first risk, and the only way of obviating
it is to have the law in satisfactory shape, passing a statute wherever
it is necessary, so as to make the carrier liable for the wrongful act
of its agent in issuing a bill of lading when no goods have been
received.
GOODS BEHIND BILL OF LADING INFERIOR IN KIND OR QUALITY.--The second
difficulty is somewhat analogous to the first. Suppose there are some
goods behind the bill of lading but they are not of the quantity,
quality or kind that the bill of lading specifies. This is a difficulty
that cannot very well be wholly obviated. We may suppose that the goods
originally were of defective quality and kind, or that they became so.
Suppose, first, that a number of barrels of sand are delivered to a
railroad and they are marked barrels of sugar, and the carrier issues a
bill of lading for so many barrels of sugar. Now, the purchaser of the
bill of lading finds, when he comes to realize on his security, that he
has got barrels of sand with a freight bill against them for more than
they are worth. What can he do? Of course, he has a right of action
against the fraudulent shipper, but perhaps the shipper has run away or
is irresponsible. Is the carrier liable here? The answer to this is, no.
In the first place, the bill of lading says, "Contents and condition of
contents unknown," so that the carrier has expressly guarded against
promising that the barrels really contained sugar. And even aside from
this clause, it has been held that the carrier is not liable for such a
concealed defect. If, however, it was apparent when the carrier received
the goods that they were not of the kind or quality named, then the
carrier would be liable if it issued a bill of lading without
specifying the difficulty. Thus, if the bill of lading called for 100
barrels of sugar and there were 95, the carrier would be liable for the
missing five. It has admitted it received 100, and has promised to
deliver 100; it must do so or be liable.
SHIPPER'S LOAD AND COUNT.--There is an exception to this last statement,
however, in regard to one class of bills which are very common in some
lines of trade; these are "shipper's load and count" bills. In many
cases railroads build spur tracks to factories and run empty cars up to
the factories, where the shipper loads the cars and himself writes out
the bill of lading. An enormous fraction of the business of the country,
consisting of the large shipments from factories, at any rate, is done
in this way. The railroad agent simply signs a bill of lading as it is
presented to him by the shipper who has made out the whole bill except
the signature, and has loaded the car, the railroad agent seeing nothing
of it. The railroad agent stamps across such a bill of lading,
"Shipper's load and count." That means, "The shipper loaded this car and
counted the contents. We are not responsible, therefore, for the loading
or the counting." The second great principle, in regard to lending money
on bills of lading, is never to touch a shipper's load and count bill
which obviously has not the responsibility of the carrier. You would
have to rely wholly on the honesty of the shipper. The railroads, seeing
that they are freed from liability on this form of bill, have sometimes,
in some parts of the country, thought it would be a good thing to stamp
every bill, "Shipper's load and count." That is an injury to the
shipper, because the banks do not like to take such bills of lading, and
yet not infrequently he cannot do much about it. In fruit shipments from
California that sort of thing has been very common.
DESTRUCTION OF GOODS IN TRANSIT.--So much for defects arising at the
time of shipment; but one may also have difficulties which arise after
the shipment. Suppose the goods are absolutely destroyed in transit by
any of a variety of causes. The owner of the bill of lading necessarily
loses his security, unless under the bill the carrier is responsible for
that particular kind of loss. But it may happen that the carrier is not
responsible for that particular kind of loss. One may protect himself
here, perhaps, by insurance of some kind. That would be the way to
obviate this sort of risk, but if complete protection against this kind
of risk is desired, the insurance ought to be not only against fire but
against destruction, or really against deterioration in any form. Of
course, goods which are likely to depreciate in transit are not as good
security as goods which are more durable. A cargo of bananas is not as
good security as a cargo of grain.
LACK OF TITLE IN SHIPPER.--A third risk, which any one who takes a bill
of lading runs, is lack of title to the goods in the shipper. Suppose
the shipper stole the goods and brought them to the carrier and demanded
and received an order bill of lading. That looks like as good a bill of
lading as any, and the goods may be all right, but the holder of the
bill of lading cannot keep the goods. They still belong to the original
owner from whom the shipper stole them.
SPENT BILLS.--A fourth risk is that the bill of lading may be a "spent
bill," as it is called. A spent bill is one where the goods have been
delivered by the carrier at destination, but the bill of lading has not
been taken up. A bill of lading is unlike a note in this respect--it has
no date of maturity. When you buy a promissory note you can guess
whether it has been dishonored or not, by whether the time for
performance has come or not; but if a bill of lading for a cargo of
goods is offered to you, you have no means of telling whether the cargo
arrived the day before or whether the goods have been removed. Of
course, the carrier ought to take up an order bill of lading when the
goods are delivered, and in the Uniform Bills of Lading Act that
requirement is made, and the carrier is made liable on the bill if it is
left outstanding and is purchased by a bona fide purchaser for value,
who supposes that the goods are still in transit. This trouble with
spent bills is not so likely to arise as a corresponding difficulty with
what may be called "partially spent bills." It is not uncommon for
partial delivery to be made and the bill of lading still left in the
hands of the holder. Commonly, when all the goods are delivered, the
bill of lading is taken up, but when part is delivered the carrier does
not feel justified, and indeed is not justified, in demanding the
surrender of the bill. What ought to be done, of course, is to indorse
on the bill of lading the fact that part of the goods has been
delivered, with a specification of the part. This also is required by
the bill of lading statute, and a carrier is made liable for failure to
indorse on a bill of lading the fact that part of the goods described
therein has been delivered.
LACK OF TITLE TO BILLS OF LADING.--A fifth risk, which one who buys or
lends money on bills of lading runs, is the chance that the person from
whom he takes a bill of lading may not have title to it. This risk is
the same that one runs in regard to negotiable paper. If an indorsement
is forged, or if for any reason the holder of a bill of lading--or for
that matter of a bill of exchange--cannot give a good title to it, one
who purchases from him will not get a good title.
MEANING OF NEGOTIABILITY.--The extent of this risk depends somewhat on
the degree of negotiability which is given to bills of lading, and
requires an understanding of what negotiability means. Ordinarily, one
who buys a contract right gets no better right than has the person from
whom he buys it. On the other hand, though one who buys chattel property
capable of delivery, like a horse or a book, does not get title if the
person who sold it to him had no legal title, yet a purchaser does get a
good title to such property if he buys, in good faith and for value,
from a person who has legal title though not an equitable title. You
will see this best by an illustration. If a fraudulent person has a
contract right assigned to him by fraud, and then sells the contract
right to a bona fide purchaser, the bona fide purchaser gets no greater
right than the fraudulent person has; in other words, he cannot collect
on the claim which he has obtained. On the other hand, if a fraudulent
person has assigned to him, by fraud, a horse or a book, the legal title
to which was in the assignor, he has acquired the legal title, and
though he is subject to an equity, as the phrase is, and the horse or
the book could be taken away from him by the defrauded person, if he
could act quickly enough, yet a purchaser for value, without notice of
fraud, will get an indefeasible legal and equitable title to the horse
or the book.
Negotiable paper--like bills of exchange and promissory notes--is
subject to the same rule as the horse or book, and is not subject to the
same rule as ordinary contract rights; that is, a purchaser in good
faith of an order bill of lading from a vendor having legal title
thereto, will get title to it and to the goods behind it, in spite of
the fact that the person from whom the bill of lading was bought had
obtained title by fraud, and could have had the bill of lading, or the
goods behind it, taken away from him by the person defrauded.
Another feature of negotiability is that the terms of the instrument, on
the face and back, are regarded as definitely showing the title. If the
instrument is made to A's order, A has power by indorsement to give a
good title, whatever may have been the reason the instrument was made
payable to A, and even though it was agreed by the original parties that
A should be merely an agent and have no title or right to transfer. If
the instrument is made out on its face to bearer, or is indorsed in
blank by the person to whom it is made out on the face, anyone acting in
good faith may treat the holder as the owner and acquire a good title
from him, though in fact the holder may not have had a good title. Under
the Uniform Bills of Lading Act, and under some other local statutes,
bills of lading running to order are given full negotiability, but in
many States they are only partially negotiable.
INDORSEMENT OF BILLS OF LADING.--Order bills of lading need, for their
negotiation, indorsement by the consignee, just as a promissory note
needs indorsement by the payee. But there is one difference between the
indorsement of a bill of lading, it may be said in passing, and the
indorsement of a promissory note. The indorser of a bill of lading
incurs no liability by his indorsement. His indorsement is simply a
transfer. If it turns out that the bill of lading is not honored by the
carrier, the holder of an indorsed bill of lading cannot come back on
the indorser in the way that the holder of a promissory note can come
back on the indorser if the maker fails to pay.
FORGED BILLS OF LADING.--One final risk in regard to bills of lading is
that the bill of lading may be forged or altered, and this has in
practice proved the most serious risk of all. There have been, in times
past, several sets of frauds created by forged bills of lading. One of
the largest is known as the Knight-Yancey frauds which originated in
Alabama. A cotton firm named Knight, Yancey & Co. forged a quantity of
bills of lading and obtained a very large amount of money from banks. A
circumstance that renders forgery easier in the case of bills of lading
than in the case of any other valuable document, such as a check or a
stock certificate, is the carelessness with which bills of lading have
been made out. It is really incredible, the carelessness with which this
has been done. Documents which represent a value of many thousands of
dollars are scribbled hastily, in pencil sometimes, on forms that are
accessible to anybody. The forgeries that have taken place have called
attention to this evil, and at the present time there is more care
exercised in making out order bills than was the case a few years ago;
but even to-day an order bill of lading is made out with no special
precautions against forgery. The forms can be obtained at any railroad
station, and it is simply a question of copying writing, no devices of
perforating or serial numbers or things of that sort being ordinarily
used.
DEVICES TO PREVENT FORGERY.--In order to meet this risk several devices
have been suggested. One which has been urged upon Congress is to pay
the railroads a special small fee for issuing order bills with the
precautions that a stock certificate is issued. The railroad would take
the blank from a numbered book and would punch and stamp it in such ways
and with such countersigning that it would be very difficult to forge.
That method has not found much favor with shippers because they dislike
the extra expense. They get their order bills of lading for nothing now,
and they want to continue to do so. Another project is to make some
sort of central clearing house to which shall be reported all order
bills of lading as they are issued, so that it will be known whether
there is outstanding a document corresponding to one that is offered to
a bank for security. This method is to some extent in use.
ALTERATION OF BILLS OF LADING.--Alteration of a genuine bill may be as
damaging as the out and out forgery of a new one. This case occurred in
Maryland some years ago: a man who had always been in good repute had a
line of credit at the bank, where he kept, as security, bills of lading.
He was allowed to change these as he wanted to, putting in sufficient
collateral always to cover what he took out. The railroad and steamboat
lines with which he did business neglected in some instances to take up
the bills of lading which he presented for shipments. They habitually
did not take up the straight bills, and that is not required by law, and
sometimes they did not take up the order bills. When this man got hard
pressed he took some old order bills, which he still had in his
possession, and changed the dates; then he took some straight bills
which he had in his possession and changed the date of those, and also
added the words "or order" to the name of himself as consignee. Then,
after indorsing those they looked good. He took those altered bills to
his bank and substituted them for genuine bills, and when the fraud was
found out the bank found itself with about $100,000 of altered bills of
lading. The carrier was held liable on the order bills, even though they
had been altered, because it should have taken them up, but on the
straight bills, which were a great part of the whole, the bank lost. Of
course, they were still legally straight bills, although the holder had
written "or order" on them. That fraud led to one protection being made
in the uniform bill of lading recommended by the Interstate Commerce
Commission. The uniform form of order bill has the words "order of"
printed in front of the blank for the consignee's name, so that a
straight bill cannot be made into an order bill by adding "or order."
Moreover, the difference in color, between order and straight bills now
gives a protection as to domestic bills; not as to foreign bills,
however. If a bill is altered fraudulently the bill is worth just as
much and just as little as it would have been worth if no alteration had
been made; that is, the alteration, not the bill itself, is void.
ATTACHMENT OF GOODS IN TRANSIT.--There is one other risk in regard to
bills of lading which no longer exists where the Uniform Bills of Lading
Act is in force, and that is seizure by attachment for the benefit of
some creditor. The bills of lading act provides that when there is an
order bill outstanding, against goods shipped by a carrier, there can be
neither attachment by a creditor nor stoppage in transit by the seller
if unpaid. Where the uniform statute has not been passed, the matter is
not so clear. Undoubtedly one who purchased for value or lent money on
an order bill would be protected against later attachments by creditors
of the former owner of the bill; but if creditors of the former owner
had attached the goods prior to the transfer of the bill, the
attachment would generally be held good, though the man purchasing or
lending money on the bill knew nothing of the attachment.
WAREHOUSE RECEIPTS ARE SIMILAR TO BILLS OF LADING.--To what has been
said in regard to bills of lading a few words in regard to warehouse
receipts may be added. Warehouse receipts are entirely similar in
character to bills of lading, and what has been said in regard to them
is, in general, applicable to warehouse receipts. There is a Uniform
Warehouse Receipts Act which is similar in its provisions to the Uniform
Bills of Lading Act, and the Warehouse Receipts Act has been enacted in
a majority of the States. Warehouse receipts may be, in form, order or
straight. They are simpler in form, ordinarily, than bills of lading,
because they do not have so many special stipulations and conditions,
but in other respects they are practically identical. The risks that one
who deals in them runs are the same in their nature as in the case of
bills of lading. There is one circumstance, however, in regard to
warehouse receipts that gives one a better chance to protect himself
than in bills of lading. Warehouse receipts are generally used as
collateral and for purchase and sale in the city where the goods are
stored. It is therefore possible to telephone to the warehouseman or
otherwise to assure oneself of the existence of the goods in a way that
is not possible under the bill of lading, where the goods are in
transit. The warehouse receipt, even less than a bill of lading, has a
day of maturity. A bill of lading, as we have seen, has no particular
day on which it is evident to a purchaser that it has finished its work,
and that is even more true in a warehouse receipt. The fact that a
warehouse receipt is pretty old does not necessarily show that the
document is not a perfectly good document and that the goods are not
there.
OPEN RECEIPTS.--There is one way of doing business with warehouse
receipts which is different from anything that takes place with bills of
lading, and which has been a subject of criticism, and which deserves
criticism; this is the practice of issuing what are called open
receipts. In an open receipt the warehouseman acknowledges he has
received a certain quantity of things of a certain sort, and will
redeliver that quantity of things of that sort; but not necessarily the
identical things that were deposited. It is contemplated that the
depositor shall have the right to substitute from time to time, for the
goods originally deposited, other goods of like kind and quantity; that
is, a receipt may be issued for 100 bales of burlap. The depositor who
deals in burlap wants to use some of the bales that are in storage. He
has pledged his warehouse receipt, which he originally received for the
100 bales of burlap, and he cannot surrender that, but he wants the
warehouseman to let him take out 25 bales of the old burlap and put in
25 bales of new, and that is sometimes allowed. It seems a very unsafe
practice. It is unsafe, for one who lends on warehouse receipts, to
allow the depositor and the warehouseman to agree between themselves as
to what shall be a sufficient substitution for goods which are the
bank's collateral. Moreover, it is unsafe for the warehouseman, because
if the holder of the warehouse receipt has not really consented to the
substitution, or unless the form of warehouse receipt clearly shows that
substitution is contemplated, the warehouseman would be liable to the
holder of the receipt if the substituted goods turn out to be inferior
to those which were originally deposited.
WAREHOUSEMAN IS A BAILEE FOR HIRE.--A warehouseman is a bailee for hire,
and a bailee for hire is liable for neglect if the goods are destroyed
or injured by his negligence. He is not an insurer. The ordinary bailee
for hire is not subject to the extraordinary liability to which a
carrier is subjected while goods are in transit.
SAFE DEPOSIT COMPANIES ARE BAILEES FOR HIRE.--There is one special kind
of bailee, in regard to whom it may be worth while to say a few words
particularly, and that is a safe deposit company. It has been questioned
whether a safe deposit company is properly a bailee of the goods in the
boxes to which the safe deposit company does not have access. It is
simply in control of the general premises, and, furthermore, the holder
of the boxes cannot have access to what is inside the boxes without the
assistance of the safe deposit company. There is, therefore, a sort of
joint possession. The safe deposit company and the depositor who hired
the box have together the full control of the goods, but neither one of
them alone has it. It has been suggested that the safe deposit company
is merely a sort of watchman; that it is guarding property of which it
is not in possession. But it is doing a little more than guarding, and
it is generally held to be a bailee for hire; that means it must take
reasonable care of the goods in its possession.
LIABILITY OF SAFE DEPOSIT COMPANIES FOR LOSS OF GOODS.--There are a
number of cases, not a great many, but still some, where safe deposit
companies have been sued for goods which were missing, or which the
depositor swore were missing, from his box. If the court or jury is
convinced that the goods have been lost from the box, the burden of
explanation as to how it happened would be upon the safe deposit
company. The safe deposit company is liable for the acts of its servants
and agents. Of course, then, carelessness in regard to duplicate keys of
any of the boxes might render a safe deposit company subject to suit if
loss occurs thereby.
LIABILITY OF DEPOSITED GOODS TO GARNISHMENT.--One of the most important
questions in regard to safe deposit companies is this: Are the goods in
the safes subject to legal process? Suppose a safe deposit company is
garnisheed (that is served with a trustee writ) in a suit against some
one who has a box; can the company answer that it has no funds or goods
of the defendant in its possession? Yes, it may; it cannot control the
goods and it may answer, no funds. One case, however, must be
distinguished, and that is where a bank or a safe deposit company has a
separate trunk or box of a depositor in its possession. If it has that
separate box, even though it is locked, and the bank has not the key,
the bank cannot answer no funds; it must answer that it has a box the
contents of which are unknown to it. A box, however, shut up in a safe
deposit vault, that is, one of the regular tin safes, cannot be reached
by the safe deposit company in the normal course of affairs, unless the
depositor unlocks his lock. That is the reason for distinguishing
between such a box and an ordinary box or trunk which is not itself
enclosed in something, to which the bank or safe deposit company does
not have access.
LIABILITY OF DEPOSITED GOODS TO ATTACHMENT.--Whether property in a safe
deposit company is liable on a writ of attachment in a suit against the
owner, is not so clear. It has been held in one case that it is so
liable, and that the officer has a right to go in and seize the goods.
This will not often be attempted, however, because the officer will not
know in what box the debtor might have goods, and the safe deposit
company will not tell him. The company is certainly under no obligation
to help the officer. The regular way for a creditor to get at the goods
of his debtor, concealed in the safe deposit box, is by first making the
debtor disclose on examination in court what property he has, and then
getting an order from the court that the debtor shall turn over what he
has disclosed. This he must do or be imprisoned until he does. There is
only one difficulty with this remedy, and that is that the debtor may
have an infirm memory--in other words, he may commit perjury; he may
have something in the box and not disclose the fact.
SEARCH FOR STOLEN PROPERTY.--If stolen property were sought, a search
warrant describing the property might be presented to the safe deposit
company, and it would have to permit the officer of the law to make the
search for the goods described, but only for goods described in the
search warrant. There is a case in New York where, on a search warrant
for certain articles, the officer of a safe deposit company allowed the
officer of the law to make a general examination of goods in its
possession, and to remove some bonds which were not specified in the
search warrant. The safe deposit company was held liable.
DEATH OF DEPOSITOR.--The question often arises: What is the situation on
the death of the owner or renter of a safe? It is the same as in the
case of the death of any bailor or depositor. The bailee must recognize
the title only of the person who is appointed by law as the successor in
interest to the deceased person. The safe deposit company has the right,
and should exercise it, to demand proofs and identifications of persons
who claim rights as representing deceased persons. Sometimes a dispute
arises between joint owners of a box. In that case the only safe course
for a safe deposit company would be to recognize the right of none until
it had been passed on by the court. What is called a bill of
interpleader, to determine which one has the right, should be filed in
court, unless the conflicting interests can agree or one of them gives a
bond to the company to insure its freedom from liability if it delivers
the goods to him.
SAFE DEPOSIT COMPANY HAS NO LIEN.--A safe deposit company has no lien on
the contents of a box for anything due to it. In that respect it is
different from an ordinary warehouseman and a carrier, who have a lien
on the goods in their possession for their charges. The reason is that a
safe deposit company is not in such possession of the contents of a box
as to give it a lien. If the renter of the box does not pay his bills,
however, the company has the right to open the box and remove its
contents, keeping them safe for the owner.
GIFT OF GOODS IN A SAFE DEPOSIT BOX.--It was held in a case, decided in
the State of Illinois, that the gift of the keys of a safe deposit box
amounted to a valid gift of property in the box when made with that
intention. In order to make a good gift there must be a valid delivery,
and it was held that the delivery of the keys amounted to a symbolic
delivery of the contents of the box.
RIGHT OF SAFE DEPOSIT COMPANY TO SUE FOR GOODS WRONGFULLY TAKEN.--If
goods are wrongfully removed from the box of a depositor, the safe
deposit company has a right to reclaim them like any bailee, for it is
the law that if goods are taken out of the hands of a carrier,
warehouseman or other bailee wrongfully, the bailee may reclaim the
goods from the wrongdoer, and bring an action at law for them, not as
owner, but because the bailee has the right of possession to them while
in his custody, and he may be liable if he lets them get into the hands
of any one other than the true owner.
LIABILITY OF SAFE DEPOSIT COMPANIES UNDER INHERITANCE TAX LAWS.--One
case in regard to the Illinois inheritance tax law indicates an
imposition of some burden on the safe deposit company. The company is
required to notify the Attorney-General ten days before it allows access
by the representative of a deceased person to his box, and under certain
circumstances the safe deposit company is required to retain, from the
contents of the box, a sufficient amount to pay the tax, and is made
liable if it fails to do so. This provision was held constitutional by
the Supreme Court of Illinois.
CHAPTER XII
Bills and Notes
HISTORY.--By the term "negotiable paper," we ordinarily mean promissory
notes, bills of exchange and checks. The law governing negotiable paper
originated among the customs of merchants on the continent of Europe. It
was gradually introduced into England, and its principles grudgingly
recognized by the common law judges. There is no branch of law where the
desirability of uniformity is greater, as these documents pass from hand
to hand like money, and travel from one State to another. Naturally, our
first serious attempt at uniform legislation was made in this branch of
law, and in the year 1896, the Commissioners for Uniform Laws prepared
and recommended for passage the Uniform Negotiable Instruments Law.
To-day, every State, except Georgia, has passed the Act, as well as the
District of Columbia, Alaska, Porto Rico and the Philippines. For
convenience in this chapter, we shall hereafter refer to this Negotiable
Instruments Act as the N. I. L.
FORMS OF NEGOTIABLE INSTRUMENTS.--It is essential to carry in mind the
customary form of the negotiable instruments we have just mentioned. A
promissory note is defined by the N. I. L. as follows: "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."
[Illustration: SPECIMEN FORM OF PROMISSORY NOTE]
A bill of exchange is defined by the N. I. L. as follows: "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 addressed to pay on demand or at a fixed or determinable future time
a sum certain in money to order or to bearer."
A check is defined by N. I. L. as "a bill of exchange drawn on a bank
payable on demand."
Other documents may be negotiable in form, such as the ordinary bearer
corporation bonds, liberty bonds, certificates of stock, and bills of
lading. The principles discussed in this chapter would apply,
ordinarily, to these documents, and are discussed more in detail in the
chapters devoted to them which we have already considered.
WHAT IS NEGOTIABILITY?--Negotiability has been defined as that quality
whereby a bill, note, or check, passes freely from hand to hand like
currency. In fact, all of these documents are substitutes for currency,
and so far as is practicable, it is desirable that they should pass as
freely as currency. Negotiability applies only to this branch of the
law, while assignability applies to ordinary cases of contract law.
[Illustration: SPECIMEN FORM OF DRAFT
Before the words "pay to" the time when the draft is due should be
inserted--as "at sight" or "30 days after date"]
[Illustration: SPECIMEN FORM OF CHECK]
ILLUSTRATIONS.--To illustrate the difference between the two: Jones
worked for the Baltimore & Ohio Railroad Co. He presented his bill of
$100 to the proper official, and a check was issued by the railroad
payable to the order of Jones for that amount. Jones took the check,
indorsed it, and with it paid his grocery bill. The grocery man
deposited the check in his bank, and was notified shortly thereafter
that payment had been stopped on the check by the Baltimore & Ohio. They
claimed a fraud had been committed, that Jones was overpaid $50, and,
therefore, they refused to honor the check. The grocery man, having
taken this check in the usual course of business, is what we term a
"holder in due course." The N.I.L. defines a holder in due course as:
Section 52. "A holder in due course is a holder who has taken the
instrument under the following conditions: (1) That it is complete and
regular upon its face; (2) That he became the holder of it before it was
overdue, and without notice that it had been previously dishonored, if
such was the fact; (3) That he took it in good faith and for value; (4)
That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it."
A holder in due course, then, would be entitled to collect the full $100
from the Baltimore & Ohio. This check is governed by the law of
negotiability with the result which we have just indicated. Now change
the facts a trifle. Jones presented his bill to the same officer of the
Baltimore & Ohio as before. The officer says that checks are made out
regularly on the first of the month. It was the fifteenth, and Jones did
not feel able to wait until the first of the next month. He went to a
friend and told him of his claim against the Baltimore & Ohio, and said:
"I will assign this claim to you for $95, and then you can present the
assignment, which I will draw up and sign, to the Baltimore & Ohio on
the first of the month, and get the $100." His friend agrees and
advances the money. When he presents the written assignment to the
proper officer on the first of the month, he is told that the railroad
has discovered that Jones' claim was really good for only $50, and that
is all they will pay. Although his assignment reads for $100, he can
collect only $50. This illustration is governed by the law of
assignability, which applies to practically all contracts, apart from
commercial paper. Under the rules of assignability, a person can assign
no better claim than he has, or, as is sometimes said, the assignee
stands in the shoes of the assignor. Jones really had a claim of only
$50 against the Baltimore & Ohio, although he claimed it was $100. He
could assign no more than he really had. These two illustrations show
the great difference in the result of the application of the two
principles, negotiability and assignability.
THE FORMAL REQUIREMENTS OF NEGOTIABLE PAPER.--There are certain
formalities which all negotiable paper must have. It must be in writing,
and signed by the proper person. No form of writing is specified in the
Act, and lead pencil, or even slate pencil, is as good as ink, except
that in the two latter cases the ease with which these forms of writing
may be altered makes them most undesirable for use. But there is no law
requiring the use of ink.
MUST CONTAIN A PROMISE.--Every negotiable instrument must contain words
of negotiability. These words are, "to order," "to bearer," "to holder"
or their equivalent. "I promise to pay John Jones, $100," and signed
"John Smith," is a promissory note, but not a negotiable promissory
note, because it lacks the words to "order" or "bearer," and is a
document which would, therefore, pass by the law of assignability rather
than the law of negotiability. In taking negotiable paper, therefore, it
is always important to see whether these words are present. If they are
not, the holder will lose the peculiar advantage and rights which the
holder in due course acquires by the law of negotiability. A promissory
note must contain a promise and a bill of exchange must contain an
unconditional order. An I.O.U. for $100 signed "John Jones" is not a
promissory note, because there is no promise contained in such a
document.
UNCONDITIONAL PROMISE.--All negotiable documents must be payable without
reference to any contingency. A note reads: "I promise to pay to the
order of John Jones $100 when I attain my twenty-second birthday" and is
signed by John Jones, now twenty-one. That is not a good note because
the person may not live to be twenty-two. Even if he lives to become
twenty-two the note is still non-negotiable, for when it was made the
contingency existed. A bill of exchange, regular in form, but adding the
expression, "If the Republicans win the next congressional election,"
is not negotiable. The one exception, as it might appear at first sight,
is a negotiable document reading: "I promise to pay to the order of
William White six months after death," etc. Such a promise is not
contingent. Death will arrive at some time, although it may be uncertain
just when. In the other illustrations the republicans might not win the
congressional election, and the person might not become twenty-two.
Again, all commercial paper must be made payable in money. "I promise to
pay to the order of John Jones $100 worth of tobacco," is not
negotiable. "I promise to pay to the order of John Jones $100 and fifty
pounds of tobacco" is not negotiable. In both cases, the medium of
payment is something other than money.
INCEPTION OF THE INSTRUMENT AS AN OBLIGATION.--In our discussion of
contracts, we made the statement that a legal intention to make a
contract was necessary. The same is true in commercial paper. A man must
intend legally to issue a negotiable instrument in order to be liable on
one as maker or drawer. Thus, in the case of Walker v. Ebert, 29 Wis.
94, the defendant, a German, unable to read and write English, was
induced by the payee to sign an instrument, in the form of a promissory
note, relying on the false statement that it was a contract appointing
the defendant agent to sell a patent right. It was held that the
defendant was not liable. The instrument, though complete in form, was
not the defendant's note and the plaintiff acquired nothing by his
purchase of the paper.
ILLUSTRATION.--We must contrast this with another situation. Suppose I
hand you a paper with a promissory note printed on it, complete in every
detail except your signature. I ask you to sign it. You sign the paper,
without reading it over or knowing what it is, and give it back to me. I
then transfer it to a person who takes it for value, in good faith,
etc., or who is, in other words, a holder in due course. The question
is, are you liable on such a document? The answer is, "Of course, you
are." You may say, "I did not intend to sign a promissory note." The law
answers you by saying, "You were careless in signing something which you
did not read over, and one is presumed to intend the consequences of his
own careless acts." Our German was in a different situation. He was not
careless. He could not read English and was obliged to rely upon someone
to tell him what the document was, and, granting that he used due care
in selecting a responsible person to explain to him the nature of the
document, he had done all the law required. Had he been imposed upon, on
several previous occasions, by the same person who told him what the
document was, and in spite of that, had relied on him to explain this
document, then, undoubtedly, the court would have held otherwise and he
would have been liable on the ground that he must have intended the
consequences of his negligent acts, he being deemed negligent when he
trusts a person who had not only misrepresented things to him but had
actually defrauded him several times.
DELIVERY.--A note found among the maker's papers, after his death,
imposes no obligation either upon him or upon his estate. In other
words, in addition to the intentional signing of the document, to
complete its validity, there must also have been what we call delivery.
This is a passing out of the possession of the maker or drawer, of the
document, into the hands of some third party. Delivery may be made in
three ways: (1) By intention; (2) By fraud; (3) By negligence.
A VALID DELIVERY NECESSARY.--I hand you my promissory note and you take
it. That, of course, is an intentional delivery. You tell me that you
have a fine watch which I decide to buy, and I give you my promissory
note in payment. Afterwards, upon examining the watch, I find that it is
worthless and entirely different from your description. You have secured
the note from me in that case by fraud, or there is, as we say, a
delivery procured by fraud. I am sitting on a bench in Central Park, and
I take out of my pocket a completed promissory note and look at it and
place it upon the bench. When I leave I forget it and it stays there
until someone comes along and picks it up. That is a delivery by
negligence. All these forms of delivery are valid, making the documents
good, some in the hands of all parties, others in the hands of the
holder in due course only. The N. I. L. is so clear upon this matter
that reference must be made to sections 15 and 16. For this reason both
of these sections are reproduced here in full:
Section 15. "Where an incomplete instrument has not been delivered it
will not, if completed and negotiated, without authority, be a valid
contract in the hands of any holder, as against any person whose
signature was placed thereon before delivery."
Section 16. "Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto. As between immediate parties, and as regards a remote
party other than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority of the party
making, drawing, accepting or indorsing, as the case may be; and in such
case the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the hands of
a holder in due course, a valid delivery thereof by all parties prior to
him so as to make them liable to him is conclusively presumed. And where
the instrument is no longer in the possession of a party whose signature
appears thereon, a valid and intentional delivery by him is presumed
until the contrary is proved."
DISTINGUISHING FEATURES.--It is very important to distinguish between
these two sections. Let us take for illustration the famous case of
Baxendale v. Bennett, 3 Q.B.Div. 525. Here the defendant wrote his
signature as acceptor on several printed blank forms of bills of
exchange and left them in a drawer of his desk. The blanks were stolen,
filled out, and negotiated to the plaintiff, an innocent purchaser. It
was held that the plaintiff could not recover. The reason for this
decision is that the document was incomplete and as the Act says: "Where
an incomplete instrument has not been delivered it will not, if
completed and negotiated, without authority, be a valid contract in the
hands of any holder, as against any person whose signature was placed
thereon before delivery." On the other hand, if I leave in my safe,
checks which I have signed and made out in full and they are payable to
bearer, although a thief breaks in and steals the checks from the safe,
those documents will be valid in the hands of a holder in due course.
The reason here is that although there has been no delivery, either by
intention or by fraud or by negligence, nevertheless, the Negotiable
Instruments Act has extended this theory of delivery, even further than
the law went before the Act was passed, and says that when the document
is in the hands of a holder in due course, a delivery is conclusively
presumed.
CONSIDERATION.--Another essential in the inception of the instrument is
consideration. We have already discussed this topic in the chapter on
contracts. We made the statement at the beginning of this chapter that
the law of negotiable paper came from the continent of Europe and was
grudgingly received by the courts of England. The law of negotiable
paper on the continent of Europe did not have any idea of consideration,
and this is one reason why the law was reluctantly admitted to the
English common law and explains the reason now why we have the doctrine
of consideration in negotiable paper. It would not be safe for the
student to accept all we have said in regard to consideration in the
chapter on contracts and apply it to negotiable paper. The difference is
at once apparent when you read Sections 24 and 28 of the Negotiable
Instrument Act which read:
Section 24. "Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto for value."
Section 28. "Absence or failure of consideration is a matter of defence
as against a person not a holder in due course."
So, we see, that in the general law of contracts, consideration is
absolutely essential to a binding contract but in the law of negotiable
paper, consideration is not absolutely essential except when you are
dealing with the immediate parties. An illustration will explain this. I
wish to make you a present on your next birthday which is January 12.
To-day, September 15, I give you my promissory note due on your birthday
for $50. This is to be my present to you. You take the note and then
hold it until your birthday arrives and I do not pay it. Then you sue me
on the note. You cannot recover anything because there was no
consideration for the note and the absence of consideration is a
perfectly good defence between you and me, whom the law calls the
immediate parties. But, suppose, instead of doing this, you had kept the
note about six weeks and then had taken it to your bank and asked them
if they would discount the note for you and they had done so, taking it
in absolutely good faith. They know me to be a responsible party, so
they are willing to accept my promissory note. They knew you and they
presumed that you had taken the note for a valuable consideration
although, as a matter of fact, it was a gift to you. Under the
circumstances, the bank is a holder in due course and when the note
becomes due, if I do not pay, the bank will sue me and will collect from
me because, as the Act says, "the failure of consideration is a matter
of defence as against any person not a holder in due course." But the
bank is a holder in due course.
ACCEPTANCE OF BILLS OF EXCHANGE.--The holder of a bill of exchange will
take it, soon after receiving it, to the drawee, the person upon whom it
is drawn, for his acceptance. The drawee will accept it by writing
across the face of it "Accepted," signing his name and perhaps adding
"Payable at the First National Bank." A form of bill of exchange, duly
accepted, will be found elsewhere in this chapter. The Act provides that
the acceptance must be in writing and signed, either on the document
itself or on a separate piece of paper attached to the document. As soon
as the drawee accepts the bill, he then becomes known, not as the drawee
but as the acceptor and he is the party primarily liable on the bill,
that is, he assumes responsibility for its payment. The holder has a
right to demand an acceptance for the full amount of the bill and may
refuse to take an acceptance for a less amount. It is not always
possible for the drawee to know whether he has sufficient funds to
justify an acceptance, and so the Act gives him twenty-four hours within
which to make up his mind. During that time the holder is obliged to
wait without taking any further action. Just as a conditional promise to
pay money is not a good promissory note, just so a conditional
acceptance is not looked upon as an acceptance which a party is obliged
to take. There are, however, occasionally times when a person is willing
to take a conditional acceptance. For example, I hold a bill of exchange
for $1,000. There are three or four indorsers upon it and I take it to
the drawee to have him accept. He will not accept for more than $500.
Now I feel that the drawer and all of the indorsers are financially
irresponsible and I would rather have the acceptance of the drawee for
$500 than nothing. I am willing to take it. The question comes up as to
the effect of this upon the other parties, the drawer and the indorsers.
The Act covers that fully and it is important that it be kept in mind:
Section 142. "The holder may refuse to take a qualified acceptance, and
if he does not obtain an unqualified acceptance, he may treat the bill
as dishonored by non-acceptance. Where a qualified acceptance is taken,
the drawer and indorsers are discharged from liability on the bill,
unless they have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto. When the drawer or
indorser receives notice of a qualified acceptance, he must, within a
reasonable time, express his dissent to the holder, or he will be deemed
to have assented thereto."
NEGOTIATION.--If negotiable paper is a substitute for money, it follows
that its most distinguishing characteristic is the fact that it may be
transferred from one owner to another. This transfer is made in one of
two ways. It may be by operation of law, or by act of the parties. By
operation of law, we refer to such a case as where a person dies and his
commercial paper then becomes the property of his administrator or
executor. In other words, the law transfers the paper to the deceased
person's legal representative. The other case, the transfer by the act
of the parties is, of course, the ordinary case and the one we shall
consider here. The sections in the Negotiable Instruments Act which
discuss this matter are so clear that we can do no better than insert
them in full at this time:
Section 30. "An instrument is negotiated when it is transferred from one
person to another in such a 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."