BANKING, LOANS, MONEY AND CREDITS
=153.Banks Defined and Classified.= A bank may be defined to be an
institution authorized to receive money for deposit, to make loans,
and to issue its promissory notes payable to bearer. A bank may have
any one, or all of the above enumerated powers. Some banks have powers
in addition to those above enumerated. In the absence of prohibiting
statute, any person may operate a private bank. The states generally
have statutes authorizing the creation and regulation of banks. At the
present time, most banks are incorporated companies.
As to the source of their existence, banks may be said to be _national_
and _state_. National banks are organized under United States statutes
regulating their creation and existence. National banks are discussed
more at length under a separate section. All banks other than national
are created under state laws, and are called state banks.
As to their nature, banks are generally divided into three kinds,
_banks of deposit_, _banks of circulation_ and _banks of discount_.
Banks authorized to receive money for safe keeping are banks of
deposit. Banks authorized to purchase commercial paper by charging
interest in advance are banks of discount. Banks authorized to issue
their own promissory notes payable to bearer, and actually issuing
such notes, are banks of circulation. A single bank may be a bank
of discount, of circulation, and of deposit, or it may be a bank of
discount, of circulation or of deposit. The ordinary savings bank is
a common example of a bank of deposit. A national bank issuing its
notes is a common example of a bank of circulation. A national bank
usually purchases notes for less than their face value, or makes loans
upon notes deducting its interest in advance, making it also a bank of
discount.
=154. Functions and Powers of Banks.= At the present time most banks
are incorporated companies. Their authority to exist is given them by
the state. Their powers are limited by the provisions of their charter.
This question is discussed at length in the section on _corporations_.
A bank cannot engage in business outside the provisions of its charter.
Incorporated banks are permitted to pass by-laws by which their
functions may the more readily be carried out, and by which the duties
of their agents are restricted or defined. Reasonable by-laws, if
brought to the notice of third persons, also well recognized customs
and usages, bind third persons in their dealing with banks. Ordinarily,
banks have the power to borrow money, but do not have the power to deal
in real estate. National banks have no power to loan money on real
estate, but they are permitted to take real estate mortgages to prevent
losses on loans already made. A bank may also purchase real estate
sufficient for the construction of a banking building. Banks have the
power to collect their own paper, and to act as agents for persons and
banks in collecting their paper. The ordinary functions and powers of
banks are discussed under separate sections.
=155. Deposits.= The primary function of a bank is to receive
money from third persons and to loan money to third persons. Money
received from third persons is money received on deposit. Banks
cannot be compelled to receive money for deposit from anyone. They
are permitted to exercise their discretion and reject such deposits
as they choose. The ordinary method of making deposits is by delivery
of currency consisting of gold, silver, copper, and nickel coin, bank
notes and checks to an agent of the bank. The agent authorized to
receive deposits is usually called the _receiving teller_. Deposits are
usually entered by the receiving teller in the customer's pass book. In
commercial banks, deposits are ordinarily withdrawn by check, without
presenting the pass book. Savings banks ordinarily do not permit their
customers to use checks, but require them to present their pass books
when drawing money. The amount withdrawn is entered in the pass book,
and the balance brought down. When money is deposited generally, the
bank has the right to mingle it with its own funds. It then becomes
the debtor of the depositor in the amount of the deposit. If a fund
is deposited with a bank for a special purpose, and the bank is so
notified, or if papers, such as securities, bonds and certificates of
stock are deposited for safe keeping only, they are known as _special
deposits_ and are not mingled with the general funds. Subject to
the reasonable rules of the bank, a general deposit is subject to
withdrawal at the will of the depositor.
=156. Checks.= A check is a written order upon a bank for the payment
of a specified sum of money payable upon demand. Commercial banks
generally do a checking business. Some banks, such as savings banks, do
not permit depositors to draw checks against their deposits. Savings
banks not doing a checking business, usually require their depositors
to present their pass books when drawing money. Even though written
orders are given to third persons, the pass book must be presented by
the third person to enable him to obtain the money on the order. In
case of banks which do a checking business, the depositor is permitted
to draw checks in any amount, payable to any person. The bank must
honor these checks so long as the maker's deposit is sufficient to
pay them, and the person presenting them is properly identified. Upon
payment of a check, the bank keeps it and deducts the amount from the
maker's deposit. These paid checks, or vouchers, are usually returned
by the bank to the customer, every thirty days, with a statement of his
account. The customer then examines these checks and compares them with
his books, and the bank's balance with his balance, for the purpose of
discovering errors.
A check is payable on demand and should be presented for payment within
a reasonable time after receipt. If the receiver lives in the same
place as the maker, the check should be presented during the business
hours of that day. If the receiver resides in a distant place, the
check should be presented as soon as possible under the circumstances.
As long as the bank has funds of the maker, it must honor his checks.
If the bank has some funds of the maker, but not sufficient to pay the
check presented, it should refuse to pay anything thereon. If the bank
refuses to honor a check when the maker has sufficient funds to meet
it, the bank is liable at the suit of the depositor, for any damages
suffered.
Receiving a check does not of itself extinguish the debt. The taker of
the check may present it for payment, and if payment is refused by the
bank, and the maker is notified promptly, the taker may sue the maker
on the check, or on the debt for which the check was given. Certified
checks are discussed under the section on _negotiable instruments_.
=157. Loans and Credits.= One of the primary functions of banks is to
make loans. Different kinds of banks are authorized to make different
kinds of loans. Savings banks generally are authorized to make loans on
real estate. National banks are not permitted to loan on real estate.
Banks ordinarily are permitted to discount notes. By discounting
promissory notes is meant purchasing them at a sum less than their face
value, partially, at least, on the credit of the seller. Banks are not
permitted to discount notes at usurious rates of interest. Banks are
restricted by their corporate charters as to the nature of the loans
they can make.
_Credit_ is the term applied to a present benefit obtained for an
agreement to do something in the future. A person's credit depends
largely upon his business reputation and assets. Companies called
mercantile agencies are organized for the sole purpose of furnishing
credit information. These companies publish books giving the trade
records and estimated assets of business men in the various cities and
towns of the different states. These books are sold to wholesalers,
or to anyone desiring credit information. Companies also employ men
to obtain and furnish special reports on people's assets and business
reputation. The bulk of business is done on credit. Compared with the
total amount of business transacted, a small amount is done for cash.
Credit is an important part of a business man's capital.
=158. Rights and Obligations of Banks in Case of Forged, Lost,
or Stolen Checks.= Forgery or material alteration of a negotiable
instrument renders it void. Banks are authorized by depositors drawing
checks to pay valid checks, but not forged ones. Ordinarily, a bank
must stand the loss if it pays a forged check. The only exception is
in case the depositor has so carelessly drawn the check that it can
be forged without the bank being able to discover the forgery by the
exercise of due care. Most jurisdictions also hold that a depositor
must examine his returned checks within a reasonable time after their
return by the bank. If a forgery is not reported within a reasonable
time after the return of the check by the bank, the check is presumed
to be genuine, and the depositor cannot thereafter complain. Where a
check is payable to bearer, or payable to order, and indorsed in blank
by the payee, making it payable to bearer, and is lost or stolen, an
innocent party purchasing it from the finder or thief gets good title
to it. Such paper circulates like money without further indorsement. A
bank in paying such a check to a _bona fide_ holder who takes it from
a thief or finder without notice of its having been lost or stolen, is
not liable to the maker for the loss.
[Illustration: DEPARTMENT OF RECORDS, AMERICAN SCHOOL OF
CORRESPONDENCE]
=159. National Banks.= The constitution of the United States does
not expressly give Congress the power to create national banks but
it gives Congress the power to collect taxes, duties and imports, to
borrow and coin money and to make all loans necessary to carry into
execution the powers expressly given. To carry into effect the powers
given relating to money, Congress is deemed to have the power to create
national banks. Congress has passed laws under which national banks may
be organized by associations consisting of not less than five natural
persons who are required to sign and file articles with the comptroller
of currency at Washington, D. C., which articles shall specify the name
of the proposed bank, its place of operation, its capital, the names
and residences of its shareholders, and the number of shares held by
each. National banks may be organized with a capital of not less than
twenty-five thousand dollars ($25,000.00) in cities whose population
does not exceed three thousand, and with a capital of not less than
fifty thousand dollars ($50,000.00) in places whose population does
not exceed six thousand inhabitants, and with a capital of one hundred
thousand dollars ($100,000.00) in places whose population does not
exceed fifty thousand inhabitants, and with a capital of not less
than two hundred and fifty thousand dollars ($250,000.00) in places
exceeding fifty thousand inhabitants.
Before commencing business, national banks are required to transfer and
deliver to the treasurer of the United States, United States registered
bonds, in amount not less than thirty thousand dollars ($30,000.00),
and not less than one third the paid-in capital stock. Upon making
such a deposit of bonds, the comptroller of currency is authorized to
issue to the bank, notes of the bank in different denominations, equal
to 90% of the market value of the bonds deposited. These are the only
circulating notes national banks are authorized to use. The comptroller
of currency is authorized to replace worn notes or returned notes,
proof of the destruction of which is furnished. National banks in the
seventeen largest cities of the United States are required to keep
on hand, money equal to 25% of their circulating notes and deposits.
National banks of all other places are required to keep on hand, money
equal to 15% of their circulating notes and deposits. National banks
are not permitted to make loans on real estate or on their own stock,
except to protect loans already made. In case of insolvency of a
national bank, the stockholders are liable in an amount equal to the
par value of their stock, in addition to their liability to pay the par
value of their stock subscriptions. The shareholders having legal title
to the stock at the time of insolvency of the bank are the ones liable
for the additional liability. National banks may charge the rate of
interest authorized by statute of the state where the bank is located.
If unlawful interest, called _usury_, is charged, the bank forfeits
the entire interest. If the usurious interest has been paid by the
borrower, double the amount of the usury may be recovered from the bank
by the borrower.
National banks are authorized to buy drafts and notes, to discount
commercial paper, to borrow and loan money, to deal in government
bonds, to loan money on collateral, but not to guarantee or indorse
commercial paper, except in the transaction of their legitimate
business. They are permitted to discount or purchase bills and notes,
but not to charge more than the legal rate of interest, even though the
paper is purchased. They may charge reasonable rates for exchange in
addition to interest.
=160. Savings Bank and Trust Companies.= All banks other than national
are organized under state laws, and are known as _state banks_.
The most common kinds of state banks are savings banks and trust
companies. Savings banks ordinarily receive money for safe keeping,
acknowledging receipt by entering deposits in a pass book which the
depositor presents upon making deposits, and upon withdrawal of funds.
Upon drawing funds, the amount is deducted from the balance shown in
the pass book and the balance brought down. Savings banks ordinarily
do not permit depositors to draw checks against their accounts. They
are required to present their pass books in person, or to give them
to an agent or payee designated in a written order to be presented
in withdrawing deposits. If pass books are lost, savings banks are
not obliged to pay deposits unless indemnified against loss by the
depositor. Savings banks are permitted to make loans on real estate.
Trust companies usually have all the power of savings banks with the
added power to act in trust capacities as trustees of estates and for
bond holders, as executors, etc. They usually do a checking business
for the accommodation of their depositors.
=161. Clearing Houses.= A clearing house is an association of banks of
a certain locality, usually of a city, organized for the convenience
of its members in making settlements with each other. As a matter of
practice, holders of checks do not personally present them for payment
at the banks on which they are drawn, but deposit them with the bank
with which they do business. These banks collect them from the banks
on which they are drawn. Each day, a city bank has deposited with it a
large number of checks drawn on other banks of the same city. It would
involve much labor to present these checks for payment on the banks
on which they are drawn, and secure currency or checks therefor. For
convenience, banks organize clearing houses for the purpose of making
daily exchanges, with each other, of checks. If _Bank A_ has deposited
with it $1,000.00 of checks on _Bank B_, and _Bank B_ has deposited
with it $1,100.00 of checks on _Bank A_, the agents of the two banks
meet at the clearing house, and exchange checks and _Bank A_ pays _Bank
B_ the difference between the total amount of checks exchanged, or
$100.00. If the membership of the association consists of twenty-five
banks, the principle is the same, the members exchange checks and
pay each other the difference in amount. Clearing houses have rules
by which members are required to return checks not properly drawn,
over-drafts, forged paper, etc. within a certain time to the paying
bank, or be precluded from raising objections to the clearing house
balance.
=162. Money.= Ordinarily the term, _money_, is used to designate any
medium accepted by a seller from a purchaser in the sale of property.
It is the thing that passes current among business men in their
dealings with each other. Bank notes, checks, gold and silver, nickel
and copper coin, as well as United States certificates, are money.
Money is sometimes used to designate legal tender. _Legal tender_ is
the medium of exchange which creditors are obliged by law to accept in
payment of debts. United States notes, except for duties and interest
on public debts, and gold certificates are legal tender. Gold coin
and silver dollars are legal tender. Subsidiary silver coin, or half
dollars, quarters and dimes, in amount not exceeding ten dollars
are legal tender. Nickels and pennies are legal tender in amount not
exceeding twenty-five cents. Silver certificates and national bank
notes are not legal tender.
=163. Discount.= _Discount_ is money paid in advance for the use of
money. It is interest paid in advance. One of the primary functions of
banks is to discount negotiable paper. The states generally have laws
fixing the legal and maximum rates of interest. If banks or individuals
charge interest in excess of these rules, they subject themselves to
the fixed penalties. In connection with usury laws, some confusion
has arisen as to what constitutes a purchase and what constitutes a
discount. A person is permitted to make contracts and make as large
a profit as possible, if no fraud is used. If the contract involves
the purchase of a negotiable instrument, as distinguished from a loan
of money, he may make as large a profit as he is able. If _X_ desires
to borrow $100.00 of _Y_ and _Y_ gives him the money and takes _X_'s
promissory note, _Y_ can deduct only the lawful rate of interest. If,
however, _X_ holds _Z's_ promissory note indorsed in blank, or payable
to bearer, _Y_ may purchase the note from _X_ for any price he is able,
and if he makes half the face value of it by the transaction, it is
regarded as a sale, and not as a loan. This transaction does not come
within the usury laws. A bank, however, by the weight of authority is
not permitted to make purchases of notes in this sense. The purchase
above described, if made by a bank, would be regarded as usurious.
Banks may purchase notes if so authorized by their charter, but may not
charge more than the lawful rate of interest as profit.
=164. Exchange.= _Exchange_ is the term applied to methods of
cancelling debts and credits between persons of different places. If
_X_, in Cleveland, owes _Y_, in New York, $100.00, and _Z_, in New
York, owes _X_, in Cleveland, $100.00, it is cheaper and safer for _X_
to send _Y_ an order on _Z_ for $100.00 than to send legal tender from
Cleveland to New York. This transaction is called _exchange_. If made
between persons of the same country, it is called _domestic_ exchange;
if between persons of different countries, it is called _foreign_
exchange. Banks of one city keep deposits in other cities for the
purpose of selling drafts thereon to customers.
=165. Interest.= _Interest_ is the money paid for the use of money.
Most states have statutes fixing the rate of interest in transactions
where no rate is specified, and fixing the highest rate that may be
agreed upon. The following are the rates of interest in the different
states:
States. Where no rate is Highest rate that may
agreed upon. be agreed upon.
Alabama 8% 8%
Alaska 8% 12%
Arizona 6% any rate
Arkansas 6% 10%
California 7% any rate
Colorado 8% any rate
Connecticut 6% 15%
Delaware 6% 6%
District of Columbia 6% 10%
Florida 8% 10%
Georgia 7% 8%
Idaho 7% 12%
Illinois 5% 7%
Indiana 6% 8%
Iowa 6% 8%
Kansas 6% 10%
Kentucky 6% 6%
Louisiana 5% 8%
Maine 6% any rate
Maryland 6% 6%
Massachusetts 6% any rate
Michigan 5% 7%
Minnesota 6% 10%
Mississippi 6% 10%
Missouri 6% 8%
Montana 8% any rate
Nebraska 7% 10%
Nevada 7% any rate
New Hampshire 6% 6%
New Jersey 6% 6%
New Mexico 6% 12%
New York 6% 6%
North Carolina 6% 6%
North Dakota 7% 12%
Ohio 6% 8%
Oklahoma 6% 10%
Oregon 6% 10%
Pennsylvania 6% any rate
Rhode Island 6% any rate
South Carolina 7% 8%
South Dakota 7% 12%
Tennessee 6% 6%
Texas 6% 10%
Utah 8% 12%
Vermont 6% 6%
Virginia 6% 6%
Washington 6% 12%
West Virginia 6% 6%
Wisconsin 6% 10%
Wyoming 8% 12%
=166. Usury.= _Usury_ is the term applied to interest charged in excess
of the rate allowed by law. The states differ in the rate fixed by
statute as the legal rate. The most common penalty fixed by statute of
the different states, is forfeiture of all interest.
INSURANCE
_167. Insurance Defined._ _Insurance_ is the name applied to a
contract, by the terms of which one party, in consideration of a
certain sum of money, agrees to protect another to a certain specified
degree against injuries or losses arising from certain perils. The
kinds of insurance are almost as numerous as the kinds of perils to
which persons or property may be subjected. The nature of insurance
contracts are such that legislatures of the states have the power to
define what classes of persons may engage in the insurance business.
Some states provide by statute that only incorporated companies
shall transact the business of writing insurance policies, and that
these companies shall be subject to stringent state supervision and
inspection. States have the right to stipulate upon what terms foreign
insurance companies shall have the right to transact business within
their borders, and may exclude them from transacting business if they
refuse to comply with such provisions. The United States Constitution
provides that interstate commerce shall be under the control of United
States Congress. The Supreme Court of the United States has decided
that insurance business is not interstate commerce. Therefore the
states may determine upon what terms insurance companies may transact
business within their territory. Unincorporated companies as well as
individuals may engage in the business of writing insurance, if it is
not provided otherwise by statute.
=168. Nature of Insurance Contract.= An insurance policy is a contract
requiring competent parties, mutuality, consideration and all the
elements necessary to make any kind of a contract. An insurance
contract is peculiar in that it binds the insurer to pay damages for
losses or injuries arising out of uncertain perils or hazards. It is
in the nature of a gambling transaction. A large number of persons
pool a portion of their assets, in order to pay losses of a certain
character likely to befall only a small portion of the persons entering
into the pool. For example, if ten thousand persons pay one dollar
each to establish a common fund to protect the members against losses
from fire, they do so under the belief and expectation that but few of
the number ever will sustain loss from the peril of fire. An insurance
contract is so closely akin to a gambling contract that persons are
not permitted to take insurance on property, or upon the lives of
persons, unless they have an individual interest, which they should
have a purpose or interest in protecting outside of a mere disposition
to wager. This interest is called _insurable interest_ and is discussed
under a separate section. It is true that many kinds of life insurance
policies protect against death, and that death is an event certain
to occur to the insured, but the real purpose of the policy is to
give protection against the uncertainty of the time of death. The
uncertainty of the thing sought to be protected against is as great in
life insurance as in any kind of insurance.
=169. Parties to Insurance Contracts.= Primarily there are only two
parties to an insurance contract, the party to be paid for the loss, in
case the event insured against occurs, who is called the _insured_, and
the party, who for a consideration agrees to pay an amount certain, or
to be determined upon the happening of the uncertain event. This party
is called the _insurer_ or _underwriter_. In many insurance contracts,
a third party is interested. For example, _A_ may insure his life in _B
Co._, for the benefit of his wife, _C_. _C_ may have nothing to do with
the contract except being named as beneficiary thereunder. She pays
nothing for this benefit. It is a contract made for her benefit. After
she has been made beneficiary, _A_ cannot change beneficiaries without
the consent of _C_. In case of _C's_ death, _A_ may voluntarily name
another beneficiary. If _A_ is indebted to _B_, and _B_, considering
_A_ insolvent, desires to secure the debt by taking out a policy of
insurance on _A's_ life in the _C_ company, he cannot take out such
a policy without the consent of _A_. While a third person may be
interested in an insurance contract, or his consent may be necessary
before the contract can be made, there are primarily only two parties
to the contract, the _insured_ and the _insurer_.
=170. Kinds of Insurance.= Probably the first kind of insurance
written was marine. The next kind was fire; this was followed by life
insurance, and this in turn, by the many varieties of modern insurance
covering almost all kinds of hazards imaginable. The following kinds
of insurance are in common use: marine, fire, life, accident, tornado,
graveyard, fraternal, fidelity, boiler, credit, guaranty title, plate
glass, mutual benefit, employer's liability, hail, hurricane and
health. No attempt is here made to discuss all the different kinds of
insurance. An endeavor is made to discuss some of the fundamental legal
principles connected with the most common kinds of insurance. These
principles apply to all kinds of insurance.
=171. Insurable Interest.= Courts refuse to recognize the validity
of insurance contracts, unless the party taking the insurance has a
pecuniary interest, present or reasonably expected, in the life or
property insured. Such an interest is known in law as an _insurable
interest_. Insurable interest cannot be exactly defined. It depends
upon the circumstances surrounding each particular case. Some things
have been decided by the courts to constitute an insurable interest.
Cases are continually arising, however, which present new features
which must be decided upon their merits. Insurable interest can only
be described, it cannot exactly be defined. It is sometimes said to be
a money or pecuniary interest possessed, or reasonably expected, by
the party entering into the insurance contract. A father may insure
the life of his child, of his wife, or his servant under contract for
a period of service. A party cannot, however, insure the life of a
person with whom he is in no way connected by close blood relationship,
or upon whom he does not depend for present or future support. Such
a contract is regarded as a mere wager, which a sound public policy
refuses to enforce, or even to recognize as valid. A person may insure
a growing crop, and the life of animals owned by him. A mortgagee,
mortgager or pledgee of property may insure the property. A creditor
may insure the life of his debtor; a person may insure his property
against robbery. In fact a person may insure the life of a person or
any property belonging to him or to another, the loss of which will
cause him a pecuniary loss.
In case of life insurance policies, if there is an insurable interest
at the time the insurance contract is made, the policy is valid, even
though the insurable interest afterwards ceases. Any relationship,
either by blood or marriage, close enough to make it of pecuniary
advantage to the party taking the insurance to have the insured
continue to live, is regarded sufficient to constitute an insurable
interest. It has been held that a brother has no insurable interest
in the life of his brother, nor a granddaughter in the life of her
grandfather, nor a son-in-law in the life of his mother-in-law. A
parent, however, has an insurable interest in the life of his child
or wife; or a granddaughter in the life of her grandfather if she
depends upon him for her support. A person may insure his own life or
property in favor of any one else. The question of insurable interest
arises only in case one endeavors to insure the life of another, or the
property of another in which one has only a slight interest.
=172. Forms of Insurance Contract.= The states generally provide by
statute, that to be enforceable, contracts to answer for the debt,
default or obligation of another, shall be in writing (See _Statute
of Frauds_, chapter on Contracts.) The courts have decided that an
insurance contract is not a contract to answer for the debt, default
or obligation of another, but a direct contract by which the insurance
company for a consideration agrees to pay its own debt in case of
loss on the part of the insured. Insurance contracts need not be in
writing. Oral contracts of insurance like other simple contracts are
binding upon the parties thereto. For example, _A_, representing an
insurance company, meets _B_, and agrees orally to insure _B's_ house
from twelve o'clock of a certain day, and accepts the premium for one
year's insurance. The house burns the evening of the day after the
insurance is to become effective. _A's_ insurance company is bound by
the oral contract of insurance. If _A_ is not permitted by his company
to make oral contracts of insurance, and _A_ so tells _B_, or if _B_
knows of this fact, the contract is not binding, since _A_ acts without
authority. If _A_ meets _B_ on Monday, and orally agrees to procure for
him a written policy of insurance on _B's_ house to take effect from
Monday noon, and _B's_ house burns Tuesday morning, _A_ having failed
to procure the written policy of insurance for _B_, the insurance
company is not liable to _B_ for the loss. _B_ had a contract with _A_
by the terms of which _A_ promised to procure a policy of insurance for
_B_. _A_ did not orally promise to insure the house for _B_. _B_ has
an action for damages against _A_, but not an action on a contract of
insurance against the company.
Insurance agents are often authorized to issue receipts, called
_binders_, to the effect that insurance has been contracted by a party
from a certain time. These binders constitute sufficient evidence to
enable the insured to enforce his contract of insurance. Agents are
sometimes authorized to enter a memorandum in their books of insurance,
called _entries_ in their binding books. These constitute sufficient
evidence of the formation of a contract between insurer and insured, to
enable the latter to enforce his contract in case of loss.
=173. Warranties and Representations in Insurance Contracts.= The term,
_warranty_ is commonly used in connection with contracts of sales of
personal property, where it is used to designate a collateral contract
connected with the principal contract in question. In connection with
insurance contracts, it means a statement or stipulation which, by
reference or express term, is itself made a part of the contract of
insurance. The principal distinction between a warranty in connection
with sale of personal property, and in connection with contracts of
insurance, is that in the former case, breach of warranty usually does
not discharge the contract, but simply gives rise to an action for
damages, while in case of contracts of insurance, breach of warranty
discharges the contract itself. Life insurance companies generally
require formal written application by which the applicant for insurance
is required to answer questions. These questions and answers are made
a part of the policy or contract of insurance, either by reference,
or by incorporation, and become warranties. If they are not true, the
policy may be avoided by reason thereof. To constitute a warranty, a
stipulation must be made a part of the insurance contract either by
direct reference, or by express incorporation therein. To constitute
a warranty, the contract of insurance must contain a stipulation that
the statement or assertion in question is a warranty. If a warranty
proves false, no matter if innocently made, the contract is discharged
thereby. Warranties are strictly construed. Much injustice has been
done by reason of warranties in insurance contracts.
Some states provide by statute, that neither the application for
insurance, nor the rules and regulations of the company shall be
considered as warranties unless expressly incorporated in the policy
as warranties. A distinction is made between representations and
warranties. A representation is a statement made as an inducement
to enter into a contract of insurance. It is regarded as one of the
preliminaries to the contract of insurance and not as a vital part
of the contract itself. If a representation proves not to be true
in some particular, the contract of insurance is not discharged by
reason thereof. To constitute a ground for avoiding a contract, a
representation must be false, fraudulent, and material to the contract.
It is sometimes said that a warranty is a stipulation in the contract
of insurance itself, and must be complied with whether true or not,
while a representation is usually given verbally, or in a separate
document, and need only be substantially complied with.
In case of doubt as to whether statements are representations or
warranties, courts incline toward treating them as representations.
Answers to questions were made in an application for insurance followed
by the statement, "The above are true and fair answers to the foregoing
questions in which there are no misrepresentations or suppression of
facts, and I acknowledge and agree that the above statement shall form
the basis of the agreement with the insurance company." The policy
of insurance did not state that these questions were incorporated as
warranties. In a suit on the policy, the court held the answers to be
representations and not warranties.
=174. Life, Term, and Tontine Policies.= _Life policy_ is the term
applied to a contract of insurance payable only at the death of the
insured. _Term_ or _endowment policy_ is the term applied to insurance
payable at the death of the insured, or at the expiration of a certain
term or period of years, if the insured survives such period. The
term, _tontine_ insurance, is the name applied to insurance paid out
of the proceeds of unpaid policies during a certain period or term.
If the insured survives the term, and pays the premium he benefits
by receiving a share of the proceeds received from the policies of
those members who do not survive the period, or who let their policies
lapse for other reasons. The term is taken from the name of the person
who devised the plan. It is sometimes called _cumulative dividend_
insurance. It is written in many different forms.
=175. Marine Insurance.= Contracts of insurance against injuries to a
ship or cargo at sea are called _marine_ insurance contracts. This is
the oldest form of insurance. In securing insurance of this character,
the insured impliedly warrants that the vessel is seaworthy. This is
the only kind of insurance in which there is an implied warranty. The
term _general average_ is used in connection with marine insurance.
If it becomes necessary to sacrifice a part of a cargo to save the
balance, the owners of part of the cargo saved, together with the
owners of the boat, must contribute _pro rata_ toward the loss of the
party whose goods are sacrificed. That is, all owners of cargo and boat
must stand the loss in proportion to their holdings. The one whose
goods are sacrificed is placed in no better or worse situation than the
others.
=176. Standard Policies.= Some states require by statute, that
insurance companies issue policies, the terms of which are fixed by
statute. This gives the insured the benefit of a uniform policy, the
terms of which are easily comprehended, and which are the same in all
cases. These statutory policies are known as standard policies.
=177. Suicide Clauses.= Contracts of insurance frequently contain the
stipulation that the contract shall be void if the insured suicides.
This stipulation is enforceable if it can be proven that the insured
suicided while sane. It is generally held to be unenforceable if the
insured suicided while insane. An insurance company may stipulate that
the contract shall be void if the insured suicides when either sane
or insane. Such a stipulation is enforceable. The ordinary insurance
contract, however, which contains any suicide clause provides against
suicide only, and does not contain any stipulation as to the sanity of
the insured at the time he commits the act. It is usually held that
the burden is upon the insurance company to prove that the insured
was sane at the time he committed suicide. If a policy contains no
suicide clause whatever, suicide will not avoid the policy unless it
is proven that the purpose of the suicide was to defraud the insurance
company. If it is proven that one takes out a policy of insurance with
the intent to commit suicide, the policy is not enforceable in case of
suicide.
=178. Fidelity and Casuality Insurance.= Contracts of insurance by
which the honesty and faithfulness of agents and employees are insured
are termed fidelity insurance contracts. _A_, a bank, employs _B_
as clerk. _A_ requires _B_ to furnish a bond, by the terms of which
the signers of the bond agree to pay _A_ for any losses arising from
_B's_ dishonesty or carelessness. This bond or contract is known as a
_fidelity insurance_ contract.
Insurance contracts providing against losses arising out of accidents
to property are termed _casualty insurance_. Losses by theft or
burglary, or from steam boiler explosions are common examples.
=179. Reinsurance.= One insurance company may insure its own liability
upon policies issued, by entering into separate contracts covering
the same risks with other insurance companies. For example, _A_, an
insurance company, insures _B's_ factory for $1,000.00. _A_ may in turn
insure its liability to _B_, by entering into a contract with _C_,
another insurance company, by the terms of which _C_ agrees to insure
_A_ against loss upon _A's_ contract with _B_. _A_ is not permitted
to bind _C_ by a greater responsibility than _A_ is bound to _B_. In
case _B's_ factory is burned, in the absence of express stipulation to
the contrary, _A_ may recover from _C_ regardless of whether he has
first paid _B_. Even though _A_ is insolvent and unable to pay _B_,
this is no defense to _C_ on his contract with _A_. _C_ must pay _A_
regardless of the insolvency of _A_. In case _B_ has a fire and _A_
settles with him for $500.00, _C_ is liable to _A_ for only $500.00.
That is _C's_ liability to _A_ is the same as _A's_ liability to _B_,
unless by the terms of the re-insurance, _C_ assumes only a portion of
_A's_ liability to _B_. In this event _C_ must pay _A_ the pro rata
share of _A's_ liability to _B_. _B_ in no event has any rights against
_C_. _B's_ contract is with _A_, and the fact that _A_ has entered into
a contract with _C_ involving the same subject matter, gives _B_ no
rights against _C_.
=180. Assignment of Insurance Policies.= By _assignment_, is meant a
sale or transfer of some intangible interest by one person to another
for a valuable consideration. In case of insurance contracts other than
life, no real assignment can be made. The person whose property is
insured is the one who really benefits by the contracts of insurance.
Before loss, an attempted assignment of the insurance policy amounts
merely to a designation of the person to whom the insurance is to
be paid. In case of loss, the original party insured still holds
the property insured or the insurable interest, and any breach of
the insurance contract on his part avoids the contract. A policy of
insurance cannot be assigned without the consent of the insurance
company. If an attempt is made to transfer an insurance policy other
than life, before loss, without the transfer of the property itself,
the transaction does not amount to an assignment, but amounts to a
contract between the seller and buyer, by which the latter is entitled
to receive the proceeds of the policy if any ever arises. So far as the
insurance company is concerned, acts of the seller after the attempted
assignment are as complete a defense as before. If the property
insured as well as the insurance policy is transferred to another,
with consent of the insurance company, this is not an assignment,
but amounts to a new contract between the insurance company and the
purchaser. After a loss has occurred, the right of the insured against
the insurance company amounts to a debt, which may be assigned the same
as an ordinary debt.
In case of life insurance, if a third party has been named as
beneficiary, he is supposed to have such an interest in the policy
that a change of beneficiary cannot be made nor can an assignment of
the policy be made without his consent. In case the proceeds of a life
insurance policy are payable to the insured himself, or to his estate,
the policy may be assigned at the will of the insured. If the policy
provides against assignment, it cannot be assigned. Otherwise, it may
be transferred as collateral security, or sold outright at the will of
the insured.
=181. Open and Valued Policies, and Other Insurance.= Policies or
contracts of insurance are said to be _valued_ or _open_, depending
upon whether the amount to be paid in case of loss is agreed upon in
advance. Life insurance policies are examples of valued policies. The
insurance company agrees to pay a certain fixed amount in case of death
of the insured, or at a certain time. Fire insurance policies usually
are open policies. The insurance company agrees to pay the amount the
insured loses by fire which destroys or injures certain specified
property. The fact that a limit is placed upon the liability of the
insurance company does not make the policy valued. If, however, the
insurance company agrees to pay a certain fixed amount in case of loss
by fire the policy is valued.
A person may take as much insurance upon his life as he pleases, so
long as he reveals the facts to the companies with whom he contracts.
In case of insuring property, the insurer is not permitted to recover
in excess of the value of the property, regardless of the amount of
insurance he carries. If an insurer takes out a policy of insurance
upon property already insured, he must not conceal this fact from the
subsequent insurer. The second policy will provide for payment, in case
of loss in excess of the first insurer's liability, but not in excess
of the value of the property. Or it will provide that in case of loss
each policy shall share the loss in the proportion that the amounts of
the policies bear to the loss.
SURETYSHIP
=182. Nature of Contracts to Answer for the Debt of Another.= In the
transaction of business, many contracts are made to answer for the debt
or obligation of another, as distinguished from the direct debt or
obligation of the person entering into the contract. These contracts
are made for the purpose of adding security to the original contract,
or for the purpose of enabling the original obligor to obtain credit.
The general term applied to contracts to answer for the debts of
another is _suretyship_. The arrangement by which one party agrees to
answer for the debt or obligation of another is a contract. This kind
of a contract requires all the elements of any contract. There must
be a meeting of the minds of the contracting parties, consideration,
etc. If _A_ purchases goods from _B_, agreeing to pay $100.00 for
them, _A's_ obligation to pay _B_ $100.00 is a primary one arising
out of a simple contract. If _A_ purchases goods from _B_ agreeing
to pay $100.00 therefor, and _C_, as a part of the same transaction,
makes a promise in writing to _B_, to pay the $100.00 if _A_ does not
pay, _C's_ obligation is one of suretyship. He is known in law as a
_guarantor_. His contract is to pay the debt of another. He has agreed
to pay _A's_ debt if _A_ fails to pay it. Any contract by which a
person agrees to answer for the debt or default of another, no matter
what its form may be, or by what technical name it may be known, is a
contract of suretyship.
=183. Kinds of Suretyship Contracts and Names of Parties Thereto.=
The term, _suretyship_, is the general or descriptive term applied to
all contracts by which one person agrees to answer for the debt or
obligation of another. It may be in the form of a contract of a surety,
a contract of a guarantor, or a contract of an indorser. There are
at least three parties to all suretyship contracts; the party whose
debt is secured, called the _principal_; the one to whom the debt is
owed, called the _creditor_; and the one promising to pay the debt
of another, called the _promisor_. For example, if _A_, orders one
thousand dollars' worth of merchandise from _B_, and, as a part of the
transaction, _C_ promises to pay the amount for _A_, when due, if _A_
fails to pay it, the transaction is one of suretyship in which _A_ is
_principal_, _B_, _creditor_, and _C_, _promisor_. A promisor may be a
surety, a guarantor, or an indorser of a negotiable instrument. Whether
a promisor is a surety, a guarantor, or an indorser depends upon the
particular kind of a contract made. In any event it is a promise to
pay the debt of another. But the conditions and terms of the agreement
may make it that of a _surety_, a _guarantor_ or an _indorser_. The
distinguishing features of the different kinds of promisors are
discussed under separate sections.
=184. Contract of a Surety.= A surety is one who unconditionally
promises to answer for the debt or obligation of another. For example,
_A_ gives the following promissory note to _B_:
Chicago, Ill., Jan. 2, 1908.
Thirty days after date I promise to pay to the order of _B_--Five
Hundred Dollars.
Signed--_A_.
Signed--_C_, Surety.
This note constitutes an obligation of suretyship in which _B_ is
creditor, _A_ is principal, and _C_ is surety. _C's_ obligation is the
same as that of _A_, his principal. By signing this note as surety, _C_
binds himself to pay the note when due. He does not bind himself to
pay on condition that _A_ does not, or cannot pay the note when due,
but binds himself to pay the note when due. His obligation is the same
as the obligation of _A_. His obligation is not conditioned upon _A's_
failure or inability to pay. When the note is due, _B_, the creditor,
may bring suit against _C_, the surety, disregarding the principal,
_A_. _B_ may bring suit against _C_, the surety, without making any
demand of payment of _A_, or without receiving _A's_ refusal to pay. If
the note is signed by _C_ as above, without using the word, _surety_
after his name, it may be shown by oral testimony that _C_ signed as
surety, if such is the fact. A surety may sign any kind of a contract
as surety for another. In this event, his obligation is to do the same
thing that his principal contracts to do. If the obligation of the
one signing as security is conditioned upon anything, it is not the
obligation of a surety, but that of a guarantor, no matter by what term
designated in the contract. It has been said by some writers that a
surety promises to pay the debt of another if the other does not, and
a guarantor promises to pay the debt of another if the other cannot.
This definition is not correct and is not supported by the cases.
This definition applies only to guarantors, since it is a conditional
promise to pay the debt or obligation of another. A surety's obligation
is absolute, and not conditional in any way upon the failure or
inability of the principal debtor to pay. In commercial practice,
the contract of a surety is infrequently used as compared with the
obligation of a guarantor.
[Illustration: A 40-FOOT WIDE MACHINE TOOL BAY IN THE CLAREMONT, N. H.,
FACTORIES OF THE SULLIVAN MACHINERY COMPANY]
=185. Contract of a Guarantor.= Anyone who agrees to answer for the
debt, default, or obligation of another upon condition that the other
does not or cannot pay the debt, or upon any condition whatever, is a
guarantor. For example, _A_ gives _B_ the following promissory note:
Cleveland, Ohio, Nov. 27, 1909.
Sixty days after date, I promise to pay _B_, or order, One Hundred
Dollars.
Signed--_A_.
The back of the note contains the following statement:
I guarantee the payment of this note when due.
Signed--_C_.
The contract of _C_ is that of a guarantor. If _A_ fails to pay the
note when due, and _B_ demands payment of _A_, and promptly notifies
_C_ of _A's_ failure to pay, _C_ is liable. Technically, _C_ need not
be notified, but it is good business practice to give him notice. _C's_
liability depends upon _A's_ failure to pay the note when due. _C's_
liability is a conditional one as distinguished from the liability of a
surety, which is absolute.
Contracts of guaranty are commonly used in commercial affairs. In
obtaining credit, contracts of guaranty are common. They may be used
apart from promissory notes or negotiable instruments. Any kind of
an obligation or contract of another may be guaranteed. A retail dry
goods merchant desires to purchase $2,000.00 worth of goods from _B_, a
wholesaler. _B_ does not know _A_, but knows _C_, a friend of _A_. _B_
offers to sell _A_ the goods on credit, on condition that _A_ furnish
him a letter of guaranty signed by _C_. _A_ furnishes _B_ the following
guaranty, signed by _C_:
Mr. B.,
New York City.
On condition that you sell _A_ an order of goods which he may select,
I hereby guarantee the payment of the amount thereof, not to exceed
$2,000.00 in amount.
Signed _C_.
By this contract, _C_ binds himself to pay _B_ the purchase price of
the goods, not exceeding $2,000.00, if _A_ fails to pay same.
Contracts of guaranty are of many kinds. They are frequently
given to secure contracts of personal service, for the construction of
buildings, for mercantile transactions, or in fact for any kind of
business transaction. They are contracts, and must contain all the
elements of a simple contract, such as consideration, mutuality,
competent parties, etc. If a contract of guaranty is given at the time
the original contract is made, and is a part of the same transaction,
the consideration which supports the original contract supports the
contract of guaranty. Otherwise, the contract of guaranty must be
supported by a separate consideration.
=186. Contract of an Indorser.= One form of suretyship obligation,
or obligations, to answer for the debt or default of another, is that
of an indorser to a negotiable instrument. The contract of an indorser
differs from that of a guarantor, and from that of a surety.
For example, _A_ gives the following promissory note to _B_:
Chicago, Ill., Jan. 4, 1909.
Ninety days after date I promise to pay to the order of _B_, one
thousand dollars.
Signed _A_.
_B_ indorses the note by writing his name across the back thereof,
and delivers it to _C_ for $985.00. The contract now existing between
_A_, _B_, and _C_, is one of suretyship, in which _A_ is principal,
_B_ creditor, and _C_ promisor. A promisor in suretyship may be either
a surety, a guarantor or an indorser. In this particular case the
obligation of _C_, the promisor, is that of an indorser. The principal
obligation of _C_ to _B_ is that if the note is presented for payment
to _A_ at maturity, and upon _A's_ failure to pay, due notice is
promptly given to _C_, _C_ will be responsible to _B_ for the amount
due on the note. An indorser is also liable upon certain implied
warranties in addition to his primary liability as above set forth. In
the language of the courts, the technical liability of an indorser is
as follows:
"I hereby agree by the acceptance by you of title of this paper, and
the value you confer upon me in exchange, to pay you, or any of your
successors in title, the amount of this instrument, providing you or
any of your successors in title present this note to the maker on
the date of maturity, and notify me without delay of his failure or
refusal to pay. And I warrant that all the parties had capacity and
authority to sign, and that the obligation is binding upon each of
them. And I will respond to the obligation created by these warranties
even though you do not demand payment of the maker at maturity, or
notify me of default."
An indorser is usually defined to be one who writes his name on a
negotiable instrument for the purpose of passing title. By so doing,
he agrees to answer for the debt of another. That is, he agrees
conditionally to pay the obligation of the maker of the instrument if
the maker does not, and if the indorser is promptly notified of the
failure of the maker to pay.
_Irregular indorser_ is the term applied to persons who sign negotiable
instruments outside the chain of title. For example, if _A_ is the
maker of a promissory note and _B_ is the payee, and _C_ places his
signature on the back of the note, _C_ is an irregular indorser. He
signs outside the chain of title. _B_ is the one who must first place
his signature on the back of the note to transfer title. The courts of
the different states have not been in harmony in fixing the liability
of an irregular indorser. Some make his liability that of a surety,
some that of a guarantor, and others that of an indorser. Many of
the states at the present time have statutes regulating the making
and transfer of negotiable instrument. The codes generally fix the
liability of an irregular indorser to be that of an indorser.
=187. Consideration to Contracts of Suretyship.= An agreement to answer
for the debt, default, or obligation of another, to be binding, must
constitute a contract. It must contain all the elements of a simple
contract, including a valuable consideration. A valuable consideration
may be defined to be anything of benefit to the one making the promise,
or anything of detriment to the one to whom the promise is made.
A promise made in return for a promise, usually termed "a promise
for a promise," is considered a valuable consideration as well as
something of value actually given to the one making the promise. A
consideration need not be adequate. It need not be commensurate with
the obligation entered into. In the absence of fraud, a consideration
of one dollar will support a contract for $10,000.00 as well as an
actual consideration of $10,000.00. In a suretyship contract, three
persons are concerned; the party owing the original debt, the one to
whom the debt is payable, and the one promising to answer for another's
debt. By reason of the third party to a suretyship contract, the
question of consideration is sometimes confusing. If the obligation of
the promisor, or the party agreeing to answer for the debt of another,
is made at the same time, and is a part of the same transaction as
the contract between the original debtor and his creditor, the
consideration supporting the contract between the original debtor and
the creditor supports the contract of the promisor. For example, if _A_
endeavors to purchase $100.00 worth of goods of _B_, and _B_ refuses to
make the sale unless _C_ signs a contract of guaranty for the value of
the goods, and _C_ signs such a contract of guaranty which is delivered
to _B_ before the goods are delivered, the consideration, namely the
receipt of $100.00 worth of goods delivered to _A_ which supports _A's_
promise to _B_, will support _C's_ promise to _B_ to pay the $100.00,
if _A_ fails to pay it. If the suretyship contract is entered into
after the original obligation is incurred, and independently of it,
there must be a separate and independent consideration to support it.
For example, if _A_ purchases $100.00 worth of goods from _B_, agreeing
to pay for them in thirty days, and after fifteen days have elapsed
after delivery of the goods, _B_, fearing _A_ is insolvent, asks him to
furnish a guaranty of _C_, _C_ must receive a valuable consideration
to support his contract of guaranty, separate and distinct from the
consideration which supports _A's_ obligation to _B_.
=188. Contract of Suretyship Must be in Writing.= About 1676, the
English Parliament passed a statute known as the Statute of Frauds.
Among other things this statute required contracts of suretyship to
be in writing to be enforceable. The statute was in part as follows,
"No action shall be brought whereby to charge the defendant upon any
special promise to answer for the debt, default or miscarriage of
another person unless the agreement upon which action shall be brought
or some memorandum or note thereof shall be in writing, signed by the
party to be charged therewith or some person thereunto by him lawfully
authorized."
The states of this country generally have re-enacted this statute. An
oral contract of suretyship is not void. The parties may voluntarily
carry it out if they choose. The law does not make it illegal. The law
simply says that it is not enforceable. If an action is brought by a
party on an oral contract of suretyship and the other party objects
for that reason, the court will not enforce the contract. To satisfy
the Statute of Frauds it is not necessary that the entire contract be
in writing, but the substance must be stated, and the writing must be
signed by the one promising to answer for the other's obligation.
A promise to pay one's own debt is not within the Statute of Frauds,
and need not be in writing to be enforceable. If a promise is made for
the primary purpose of benefiting the promisor, even though it takes
care of the debt of another, it is regarded as an original promise of
the promisor, and need not be in writing.
=189. General, Special, Limited and Continuing Guaranties.=
Guaranties may be directed to some particular person or firm, or may
be addressed to anyone who desires to accept them. An open guaranty,
or one addressed to anyone is called a _general_ guaranty. A guaranty
addressed to a particular person or firm is called _special_ guaranty.
In case of a special guaranty, only the person to whom it is addressed
can accept it. Anyone can accept a general guaranty. A letter of
guaranty addressed, "to whom it may concern," is a general guaranty,
while one addressed to "The _A. B._ Co.," is a special guaranty.
A guaranty limited as to time, either by specifying the date on which
it is to expire, or by specifying the number of transactions or the
transactions it is to embrace, is a _limited_ guaranty. If no limit of
time or of number of transactions is placed therein, it continues until
withdrawn by the guarantor. This is called a _continuing_ guaranty.
=190. Notice to Guarantors.= A guarantor may be entitled to two kinds
of notice. He may be entitled to notice of acceptance of the guaranty,
and he may be entitled to notice of default of his principal. The first
is called notice of acceptance of a guaranty, the second, notice of
default of a guaranty. If a person stipulates in his letter of guaranty
that he requires notice of acceptance of his guaranty, the creditor
must give him such notice to hold him. Without such stipulation he
is not, in most jurisdictions, entitled to notice. _A_ addresses the
following letter of credit to _B_:
Cleveland, O., Jan. 4, 1909.
Mr. B.
Give A credit at your store to the amount of $25.00. I will pay you if
he does not.
Signed--C.
The letter of guaranty does not require _B_ to notify _C_ of its
acceptance. In the Federal Courts, the rule requires notice of
acceptance of guaranties. It is sound business practice always to
notify a creditor of acceptance of a guaranty. If a letter of guaranty
contains a stipulation that the guarantor is to receive notice of
default of his principal, such notice must be given, or the guarantor
will be discharged to the amount of his damage resulting from failure
to receive this notice. In case of guaranties involving the payment of
a definite amount at a definite time, for example, in case of guaranty
of payment of a promissory note, no notice is necessary on the part of
the creditor to the guarantor of the failure of the principal to pay.
In other cases it may be stated as a general rule that notice should be
given the guarantor of default of his principal. It is safe business
policy for a creditor to give notice to a guarantor of default of
payment on the part of his principal.
=191. Defense of Payment.= Suretyship obligations are obligations to
answer for the debts or default of another. They may be in the form
of a contract of a surety, of a guarantor, or of an indorser. Certain
things constitute suretyship defenses. They apply equally to a surety,
a guarantor and an indorser. If a principal debtor pays or settles the
debt which another promises to pay, the promisor is thereby discharged.
Payment by a principal is a complete suretyship defense. For example,
_A_ owes _B_ $100.00. _C_ in writing promises to pay _A's_ debt when it
is due. _A_ pays _B_. _C_ is thereby discharged.
=193. Defense of Granting Extension of Time to Principal.= If a
creditor enters into a contract by which the principal is given an
extension of time, the promisor is released. This does not mean mere
delay in enforcing the collection of the principal debt, nor does it
mean leniency of a creditor with his debtor. If, however, a creditor
makes a contract based upon a valuable consideration, by which the
principal debtor is granted an extension of time within which to pay
his debt, the promisor is discharged. For example, if _A_ owes _B_
$1,000.00 on March 1st, and _C_ in writing promises _B_ to pay if _A_
does not, if _B_ does not collect from _A_ on March 1st, but lets
the debt run until March 15th or indefinitely, _C_ is not thereby
discharged. If, however, _B_ in consideration of _A's_ promise to pay
him interest at a certain rate after March 1st, extends the time until
April 1st, _C_ is discharged. To discharge the promisor, the agreement
with the principal to extend the time of payment must be based upon a
valuable consideration, and must be for a definite time.
=194. Defense of Fraud and Duress.= Fraud practiced by the creditor
upon the principal or upon the promisor is a defense to the promisor.
For example, if _A_ is indebted to _B_ and _C_ guarantees _A's_ debt,
and if _B_ procured the contract with _A_ by fraud, or procured the
guaranty from _C_, by fraud, _C_ can avoid the contract of guaranty by
reason of the fraud. If the fraud is practiced by the principal upon
the promisor, it is no defense to the promisor as against the creditor.
For example, if _C_ guarantees _A's_ debt to _B_ and the guaranty is
procured through the fraud of _A_ without _B's_ knowledge or consent,
the fraud will not avail _C_ as a defense to an action brought by _B_
upon the guaranty. The same is true of duress. For a fuller explanation
of fraud and duress see sections on _Fraud_ and _Duress_ under
_Contracts_.
=195. Surety Cannot Compel Creditor to Sue Principal.= Unless so
provided for by statute, a promisor to a suretyship contract cannot
compel a creditor to sue a principal when the debt secured is due, or
claim his discharge for failure on the part of the creditor to comply
with this request. A few states provide by statute that a promisor
may by notice compel a creditor to sue a principal upon a suretyship
obligation when due, or be discharged for his failure so to do.
=196. Surety Companies.= At the present time, corporations are
organized for the purpose of entering into suretyship obligations for
profit. Bonds of public officials as well as of private individuals,
judicial bonds given in appeal of cases at law from one court to a
higher court are commonly signed by surety companies. These companies,
for an agreed annual consideration called a _premium_, sign as surety
these bonds for responsible individuals. Sureties were once said to
be favorites of the law. This was for the reason that individual
sureties signed private, official or judicial bonds as a favor to the
principal, ordinarily without receiving any compensation therefore.
When a liability arose the surety escaped if possible, since it was
not his obligation, but another's which he was called upon to pay. The
courts favored him and technical defenses were recognized which were
not recognized as a defense by persons primarily liable. In the case
of surety companies, however, there is no reason for this favoritism,
since the surety engages in the contract for a consideration, and not
as a favor to anyone. The tendency of the courts is to hold surety
companies strictly to the terms of their contracts.
=197. Subrogation.= By _subrogation_ is meant the substitution of
the promisor for the creditor in case the promisor to a suretyship
obligation pays his principal's debt. For example, if _A_ signs a
guaranty by the terms of which he agrees to pay _B's_ debt to _C_, when
the debt is due if _B_ fails to pay it, and _A_ pays it, _A_ is placed
in _C's_ position and may collect the debt from _B_. Any securities
of _B_ that _C_ held for the debt now belong to _A_. If _C_ has a
judgment against _B_ for the debt, _A_ is subrogated to the judgment
and may himself enforce it.
=198. Indemnity.= The law implies a contract on the part of the
principal to a suretyship contract to pay the promisor when the latter
pays the suretyship obligation. For example, if _A_ guarantees _B's_
debt to _C_, as soon as _A_ is obliged to pay _C_, and does pay _C_,
_A_ may sue _B_ on an implied contract of indemnity for the amount he
has paid _C_.
=199. Contribution.= _Contribution_ is the term applied to the right
of one of two or more co-promisors to a suretyship obligation to secure
a _pro rata_ share from his co-promisors of the amount he is obliged
to pay the creditor on a suretyship contract. For example, if _A_,
_B_ and _C_ guarantee _D's_ debt of $150.00 to _E_, and when the debt
is due, _E_ sues _A_ and collects $150.00 from him, _A_ can sue _B_
and _C_ for $50.00 each. If _A_ pays _C_ only $50.00 he can collect
nothing from _B_ and _C_, since this is only his share of the debt. But
if _A_ settles the debt with _C_ for $50.00, he can recover one third
the amount from both _B_ and _C_. _A_ can pay the debt when it is due,
without waiting for suit if he so desires, and proceed to collect one
third the amount from both _B_ and _C_.
PERSONAL PROPERTY
=200. Personal Property in General.= Personal property is the term
applied to property other than real estate. It may be either tangible
or intangible. Personal property is sometimes divided into _chattels
real_ and _chattels personal_. Chattels real are interests in real
estate not amounting to ownership. Real estate mortgages and leases
are common examples of chattels real. Chattels personal embrace all
personal property other than chattels real. Every thing subject to
ownership not connected with the land is included in the classification
of chattels personal. Promissory notes, personal apparel, furniture,
tools and animals are common examples. Chattels personal are of a
tangible, or of an intangible nature. They are mere rights, or they are
things which may be handled and used. A promissory note, a contract,
or a mortgage is a right as distinguished from a thing in possession.
These rights are sometimes called _choses in action_, while tangible
articles of personal property, such as watches, chairs and horses are
called _choses in possession_. The law relating to personal property
is discussed at length under the sections on _Sales of Personal
Property_, _Pledges_, _Chattel Mortgages_, _Carriers_ and _Wills_.
=201. Acquisition of Title and Transfer of Personal Property.= Title
to personal property may be acquired in several ways, chief among them
being by contract, by possession, by gift, and by operation of law.
If _A_ purchases a carriage from _B_, the transaction is a sale of
personal property and _A_ is entitled to possession of the carriage
by reason of the contract. Title to the carriage is given to _A_ by
contract. Title to some kinds of property is acquired by possession.
Title to wild animals is acquired by possession. The same is true of
fish. Title to lost property, except as against the owner, is acquired
by possession. Title to property is also acquired by voluntary gift on
the part of the owner.