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Full text of "The elements of business law : with illustrative examples and problems"

ELEMENTS OF 
BUSINESS LAW 

HUFFCUT 



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http://www.archive.org/details/cu31924052854670 



THE ELEMENTS OF 

BUSINESS LAW 



WITH ILLUSTRATIVE 
EXAMPLES AND PROBLEMS 



BY 

ERNEST W. HUFFCUT 

REVISED BY 

GEORGE GLEASON BOGERT 

PROFESSOR OF LAW IN THE CORNELL UNIVERSITY COLLEGE OF LAW 



GINN AND COMPANY 

BOSTON ■ NEW YORK • CHICAGO • LONDON 
ATLANTA • DALLAS ■ COLUMBUS • SAN FRANCISCO 



COPYRIGHT, 1905, BY 
ERNEST W. HUFFCUT 



COPYRIGHT, 1917, BY 
LILLIAN HUFFCUT 



ALL RIGHTS RESERVED 
5I7.3 



Cde laHienauni 3Btt«< 

GINN AND COMPANY • PRO- 
PRIETORS • BOSTON • U.S.A. 




PREFATORY NOTE 



An effort has been made in this book to state as concisely 
and clearly as possible the leading and fundamental principles 
of business law, and in place of extended abstract explanations 
of them to substitute simple concrete examples showing them 
in their actual application to business transactions. In order 
that the conclusions drawn in these examples may be verified 
and not rest upon mere conjecture, the examples have for the 
most part been taken from cases decided in the courts. At the 
end of each chapter are given a number of concrete problems 
without the conclusions, intended to afford an exercise in the 
application of the principles drawn from the text and the exam- 
ples. These also have been taken mainly from the decided 
cases. The drill in the examples and problems should be con- 
stant and thorough, and will be found far more interesting and 
instructive and far better calculated to develop intelligent think- 
ing and reasoning than the memorizing and repeating of abstract 
dogmatic statements. 

The arrangement of the book has kept in view a logical anal- 
ysis and unfolding of the subject. But if for any reason it 
should be thought desirable to deal with negotiable instruments 
earlier in the course, it would do equally well to interchange 
Parts II and III, giving the latter first. 

Should the book prove too extended for the time allotted, 
Parts V and VI may be omitted, although it would be well to 
cover, if possible, the chapter on partnership. The last three 
chapters do not fall clearly within the scope of business law, and 
for this reason, and because it has been the object not unduly 
to extend them, the examples and problems have been for the 
most part omitted and numerous facsimiles of formal documents 
substituted. While these chapters deal with somewhat technical 
matters, the subjects involved are of great importance to all who 
have property interests. 



iv PREFATORY NOTE 

The glossary of legal terms should be constantly referred to, 
in order that the nomenclature of the law may be correctly 
understood. While the glossary has been made as complete as 
practicable, it would be well to supplement it by a good law 
dictionary, in which more extended definitions and explanations 
may be found. 

The work is based necessarily upon the common law.' While 
the nature of statutory changes has been indicated, the precise 
provisions of statutes are rarely given, because these vary so 
widely in the different states that such a course would prove 
misleading. The difficulties of an accurate statement of the 
statutory law in a book of this size are in fact insurmount- 
able. Should the teacher be fortunate enough to secure the 
cooperation of a local attorney, some progress in this direction 
might be made. 

It will be found in setting examinations that concrete prob- 
lems are better calculated to disclose the practical value of the 
student's work than questions calling mainly for definitions, 
rules, or abstract statements. E w H 

Cornell University College of Law 
July 3, 1905 



PREFACE TO SECOND EDITION 

During the eleven years which have elapsed since the first 
edition of this book was published there have occurred many 
changes in American law which render desirable a revision. 
Numerous alterations in the seventeenth section of the Statute 
of Frauds; the increasing importance of the antitrust legislation; 
several amendments to the federal bankruptcy law ; the adoption 
by many states of the various uniform laws, notably the Uniform 
Sales Act, Uniform Warehouse Receipts Law, Uniform Bills 
of Lading Act, and Uniform Stock Transfer Act ; the recent 
amendments to the Interstate Commerce Act regarding carriers ; 
the approval by the Interstate Commerce Commission of a new 
form of bill of lading ; the passage of the Federal Reserve Act ; 
changes in the rates of interest, especially in the Western states ; 
the almost complete abolition of days of grace ; the rapid spread 
of the Negotiable Instruments Law ; the revolution in the law of 
master and servant caused by the Employers' Liability and Work- 
men's Compensation acts ; and the increase in the popularity of 
the Torrens system of land registration — all have necessitated 
changes in the text. Many other minor alterations in the interest 
of accuracy and completeness have been occasioned by the growth 
of the law. 

It would be difficult to improve upon the admirable lucidity 
and compactness of Dean Huff'cut's style. Hence the new mat- 
ter introduced relates largely to substance and not to diction. 

I desire to add that it is a particular satisfaction to be 
accorded the privilege, by this revision of the work of the 
late Dean Huffcut, of paying a meed of gratitude to a teacher 
for whom I entertained a warm personal regard, and whose 
legal exposition, in classroom or in printed text, was distin- 
guished by remarkable analytical power and by singular clarity 

and accuracy of expression. 

GEORGE G. BOGERT 
Cornell University College of Law 
Ithaca, New York 



SECTION 



CONTENTS 



CHAPTER I. PRELIMINARY TOPICS 
Business Law and Cognate Subjects 



PAGE 



1. Business . . i 

2. Law . . ... .1 

3. Business law 2 

4. Divisions of the law . . 2 

5. Property . 4 

6. Legal obligations ... . 4 

7. Courts . . . . . . ... ... 6 

8. Procedure . 8 

9. Scope of this work . . . o 



PART I. THE PRINCIPLES OF CONTRACT 
CHAPTER II. FORMATION OF CONTRACTS 

10. Definition of contract .... . . 11 

11. Essentials of enforceable contract ... . .... 12 

I. Agreement 

1 2. Contracts begin in agreement 12 

13. Classes of agreements . . .... 13 

14. Agreements originate in some form of offer and acceptance . . 13 

II. Competent Parties 

15. Infants . .... 17 

r6. Insane persons . . 18 

1 7. Married women 19 

III. Consideration 

18. Necessity of consideration 19 

19. The consideration need not equal the promise in value ... 20 

20. A past consideration will not support a promise 21 

21. The consideration must be legal 22 



viii CONTENTS 

IV. Form : Writing ; Seal 



SECTION 



PAGE 



22. Statute of Frauds ... 23 

23. Contracts under seal 25 

V. Legality of Object 

24. Contracts made illegal by statute . .27 

25. Wagering contracts . . . . 28 

26. Contracts illegal at common law 3° 

27. Effect of illegality upon contracts in which it exists . . -3^ 

VI. Reality of Consent 

28. Mistake . . .... . -33 

29. Fraud and misrepresentation ... . ... -35 

30. Duress ... ... 36 

31. Undue influence • • 37 

CHAPTER III. OPERATION AND DISCHARGE OF CONTRACTS 

I. Liabilities and Rights of Third Parties 

32. Liability of third parties . .... . 45 

33. Rights of third parties . . . 46 

II. Assignment of Contracts 

34. Assignment by act of the parties 46 

35. Negotiability of certain contracts ... . 47 

36. Assignment by operation of law , .... 48 

III. Discharge of Contracts 

37. Discharge by agreement, including performance . . . -49 

38. Discharge by impossibility of performance .... -Si 

39. Discharge by breach .... • • • S3 

40. Remedies for breach of contract ... . . . . . 54 

IV. Discharge in Bankruptcy 

41 . Insolvency laws not discharging debtor .... . 56 

42. Bankruptcy laws discharging debtor . ■ 56 

43. The state insolvency laws 57 

44. National Bankruptcy Law of 1 898 57 



CONTENTS ix 

PART II. PARTICULAR CONTRACTS CONCERNING 

GOODS 

CHAPTER IV. SALES OF GOODS 



I. The Contract 



SECTION 



PAGE 



45. Definition and analysis .... .61 

46. Statute of Frauds 66 

II. The Title 

47. When does title pass ? 69 

48. Specific or ascertained goods 70 

49. Unascertained goods .72 

50. Who has the risk.? 74 

III. Performance 

51. Duties of the seller .... . • • 75 

52. Duties of the buyer .... 75 

IV. Warranties 

53. Definition and classification . . 76 

54. Express warranties ... . . . . 76 

55. Implied warranties . . 77 

56. The rule of caveat emptor . . . ... .... 79 

57. Remedies for breach of warranty 80 

V. Remedies 

58. Rights of unpaid seller against the goods 81 

59. Rights of unpaid seller by way of action for breach of contract' . . 83 

60. Remedies of the buyer 84 

CHAPTER V. BAILMENT OF GOODS 

61. Definition and distinctions . ... ... . .90 

62. Classification of bailments . . . ... . . 91 

I. Bailments solely for Benefit of One Party 

63. Bailments for sole benefit of bailor 93 

64. Bailments for bailee's sole benefit .... 95 



X CONTENTS 

II. Mutual-Benefit Bailments 

SECTION PAGE 

65. Pledge or pawn ... 97 

66. Bailee hires an article of bailor . . -99 

67. Bailor engages bailee to keep, repair, or transport an article . loi 

III. Special Cases of Bailment for Keeping or Transportation 

68. Innkeepers .... . . . .... .104 

69. Common carriers of goods ... ... .... 107 

IV. Cases not Strictly of Bailment 

70. Public carriers of passengers and baggage .... ... 116 

7 1 . Telegraph and telephone companies . ..118 

CHAPTER VI. INSURANCE CONTRACTS 

72. Nature and kinds of insurance . . . .... 122 

73. Kinds of policies . 123 

74. Definitions . . ... . . 123 

75. Characteristics . . . . . . . .125 

76. The insured must have an insurable interest ... ... 127 

77. The contract of insurance is one requiring the highest good faith . 128 

78. Warranties . . . .129 

79. Statutory or standard policies .... -131 

80. Marine insurance . . . . . 132 

PART III. PARTICULAR CONTRACTS CONCERNING 
CREDITS 

CHAPTER VII. CREDITS AND LOANS 

81. Capital and credit ; money and exchange ; payment . . . 135 

82. Interest and usury ... . . . 140 

83. Banks . . . . . . . .142 

84. Bank deposits .... 1^4 

85. Loans and discount ; security . . 143 

CHAPTER VIII. THE CONTRACT OF GUARANTY 

86. Guaranty defined .... ... . . 149 

87. A guaranty must be in writing .150 

■88. Consideration . . 150 

89. Notice of acceptance by guarantee .151 



CONTENTS xi 

SECTION PAGE 

90. Notice to guarantor of the default of the principal . . ..151 

91. What will discharge the guarantor 152 

92. Guarantor's liability . . ... 155 

93. Guarantor's remedies . • '55 



CHAPTER IX. NEGOTIABLE INSTRUMENTS 

I. Nature and Characteristics 

94. Kinds of negotiable instruments . ... 159 

95. Characteristics of negotiable instruments ... . . 161 

96. Definitions . . .... . 163 

97. Negotiable Instruments Law . . . . . . ... 1 70 

II. Form 

98. What a negotiable instrument must contain 170 

99. What a negotiable instrument must not contain . . ' . 172 

100. Nonessentials . . . . . . I73 

loi. Effect of blanks ... . . . . 174 

102. Delivery .... ....... 174 

III. Negotiation 

103. Negotiation; indorsement; delivery . . 175 

104. Holder in due course . . • • • i77 

105. Rights of holder in due course .... . . -179 

IV. Maker's and Acceptor's Contract 

1 06. Maker's contract on a promissory note . . . 181 

107. Acceptor's contract on a bill of exchange . . . 181 

108. Presentment of bill of exchange for acceptance . . .185 

V. Drawer's and Indorser's Contract 

109. Drawer's contract on a bill of exchange .... . . 186 

lio. Indorser's contract on a bill or note .... . ... 186 

111. Presentment for payment . . • • . . 1 88 

112. Notice of dishonor • '9' 

113. Protest '94 

1x4. Checks ... . '98 

115. Position of indorser after liability is fixed I99 



xil CONTENTS 

PART IV. AGENCY: THE CONDUCT OF BUSINESS 
THROUGH REPRESENTATIVES 

CHAPTER X. PRINCIPAL AND AGENT 

SECTION PAGE 

1 1 6. Agency: its divisions and problems . . 205 

I. Appointment of Agents 

117. Who may appoint agents 207 

118. Who may be an agent . ... . . .... 208 

119. Form of appointment . . 210 

120. Ratification . . . . 210 

121. Agency by necessity .... ... 212 

122. Termination of agency . . ... . . 212 

123. Irrevocable agencies .... ... 213 

11. Obligations of Principal and Agent to Each Other 

124. Obligations of principal to agent . ... 213 

125. Obligations of agent to principal .... 214 

III. Liability of Principal to Third Parties 

126. General Rules ... . . ... . 217 

127. Agent's apparent authority ... . . . . 217 

128. Agents following customary calling . . .219 

1 29. Undisclosed principal .... .... 220 

130. Frauds by agent . . . 222 

IV. Liability of Agent to Third Parties 

131. Where agent alone is liable ...... ... . . 222 

1 32. Where both principal and agent are bound .... . . 223 

CHAPTER XI. MASTER AND SERVANT 

I. Injuries to Third Persons 

133. Negligent torts by servants .. ... 227 

134. Willful torts by servants . . . . . 227 

II. Injuries to Servants 

135. Injury to one servant by another 228 

136. The master's nonassignable duties ... . . 229 

137. Employers' liability acts . 229 

138. Workmen's compensation and insurance acts . . . 230 



CONTENTS 



xill 



PART V. BUSINESS ASSOCIATIONS 

CHAPTER XII. PARTNERSHIPS AND JOINT-STOCK 
COMPANIES 

SECTION PAGE 

139. Forms of conducting business .... 235 



140. 
141. 
142. 

I43. 
144. 
145. 



I. Partnerships 

What constitutes a partnership . ... 

Rights and duties of partners as to each other 

Powers of partners 

Liabilities of partners 

Rights and remedies of creditors . . 
Dissolution 



II. Joint-Stock Companies 

146. How distinguished from ordinary partnerships . 

147. How like ordinary partnerships 



CHAPTER XIII. CORPORATIONS 



148. 
149. 
ISO. 
151. 
152. 
153- 
154- 
I5S- 
156. 

IS7- 



Definition and classification . 
How a corporation is formed 

Members 

Directors 

Officers and agents . . 
Powers of a corporation 
Stockholders' rights 
Liability of stockholders 
Reports of corporations 
Receivers of corporations 



158. Dissolution of corporations . . 

PART VI. PROPERTY IN LAND AND MOVABLES 

CHAPTER XIV. REAL PROPERTY 

I. Estates in Real Property 



236 
238 

239 
240 
241 
242 



243 
244 



248 
248 
250 
252 
253 
2S4 
2SS 
257 
257 
258 
258 



1 59. Meaning of the term " property " . • 

160. Estates in land ; duration 

161. Future estates in land: reversions and remainders 

162. Estates held jointly or in common 

163. Equitable estates : trusts 



261 
264 
267 
268 
269 



XIV 



CONTENTS 



II. Land: its Constituents, Growths, and Fixtures 

SECTION ' PAGE 

164. Extent of ownership : soil, air, minerals, waters . . • 270 

165. Vegetable products .... .... 270 

166. Fixtures 27' 



III. Relative Rights of Adjoining Owners 

167. Fences: cattle trespass . . , . 

168. Air and waters ; support of land . . . . . . 

169. Easements . . 

IV. Transfer of Interests in Lands 

1 70. Contract of sale . ... 

171. Conveyances . ... 

172. Wills . ... . ..... 

173. Descent to heirs . . ... 

1 74. Adverse possession 

V. Mortgages and Liens 

175. Mortgages of real property . . . 

176. Liens on real property . . . . . . 

VI. Landlord and Tenant 

1 77. The lease and its covenants .... . . 

1 78. Defects, repairs, and waste . . ... 

1 79. Assignment and subletting .... 

1 80. Rent and remedies for nonpayment . . ... 

181. Termination of lease . ... . . 

CHAPTER XV. PERSONAL PROPERTY 
I. Classification : Kinds and Estates 
1 82. . Classification . . . . 

183. Property in animals . . . . 

184. Trademarks ; good will ; names 

185. Estates in personal property . . 



II. Acquisition and Transfer 

186. Acquisition by occupancy and by finding lost property 

187. Accession and confusion . 

188. Transfer by gift .... 
1 8g. Other modes of transfer . . 

GLOSSARY 

INDEX 



273 
273 
274 



274 
276 
277 
280 
282 



282 
283 

288 
290 
291 
291 
292 



294 
294 

295 
296 



297 
298 
300 
302 

305 
313 



THE ELEMENTS OF 
BUSINESS LAW 

CHAPTER I 

PRELIMINARY TOPICS 

Business Law and Cognate Subjects 

1. Business. Business concerns itself with property, credit,' 
and services, and with contracts pertaining to these things. 

The term " business " embraces every kind of industrial activity 
by which men acquire, manufacture, or otherwise produce prop- 
erty ; by which they sell or transfer it ; by which they store, 
transport, or insure it ; by which they borrow , or lend money 
and give or secure credit ; by which they combine with others 
to these ends ; and by which they furnish or obtain services in 
these and similar enterprises. This is by no means an exhaus- 
tive list of commercial operations, but it indicates the variety 
and extent of those human activities that pass under the name 
of business. 

2. Law. The term " law " includes all those rules by which 
courts are controlled in the administration of justice. The same 
rules must also govern men in their relations to each other, 
because if they be violated, the courts will either give repara- 
tion to the injured party or refuse to aid the one who has 
violated them. 

Rules of law are of two kinds : first, those that have been 
worked out by the courts themselves in deciding actual cases 
brought before them by litigants ; and, second, those enacted 
by the legislatures. The first are known as the common law, 
and the second as statute law. The common law is sometimes 
called the unwritten law, and statute law is sometimes called the 
written law. 



2 PRELIMINARY TOPICS [Ch. I 

1 . Common law. The common law is therefore the law declared 
by judges in the decision of cases. It rests primarily upon custom, 
because in deciding cases the judges seek to give effect to the 
prevailing customs of the people in their relations and dealings 
with each other. But when a point of law is once decided, sub- 
sequent judges in the same jurisdiction follow it as a precedent, 
and the point is said to be decisively settled. This is known as 
the doctrine of stare decisis, — the doctrine that courts must 
stand by decided cases, uphold precedents, and maintain former 
adjudications. With the lapse of time, therefore, the greater 
number of the ordinary questions that may arise have been thus 
settled and the common law established. The rules must be 
sought in the printed reports of the decisions of the courts. 

2. Statute law. Statute law consists of the enactments of 
legislatures. These may be for the purpose of changing some 
rule established by the courts when, for example, the develop- 
ment of society makes the continuance of the old rule inexpe- 
dient, or for the purpose of codifying into a brief statute the 
rules scattered through hundreds or even thousands of volumes 
of reported cases. The whole law of negotiable instruments has 
been thus codified in England and in many of our American 
states (see sect. 97 post). 

For the law of any state, therefore, one must consult the statutes of that 
state and the reports of its courts. In some states the reports are very numer- 
ous. For example, there are in New York upwards of one thousand volumes, 
in Massachusetts more than two hundred volumes, and in all the states 
combined, over ten thousand volumes. A statute or decision is not binding 
except in the state where enacted or rendered. Hence it follows that the law 
may be one way in Massachusetts and just the opposite in New York. As we 
have the federal Congress and courts, and forty-eight state legislatures and 
courts, not to mention territories and dependencies, it will be seen that the 
American law may present many diverse enactments or decisions upon the 
same question. This is what makes it very difficult in this country to present 
a statement of the law which is correct for every jurisdiction. 

3. Business law. Business law is that portion of the general 
law which governs business transactions. While the term is fre- 
quently used as if it denoted a distinct body of law susceptible 
of accurate definition, it^is in reality a term of vague meaning. 
One engaged in business transactions may be confronted widi 



§4] DIVISIONS OF THE LAW 3 

legal questions involving almost any topic of the law, and hence 
might need advice from an expert or might in simple cases be 
able to solve the difficulty for himself. The most that any law 
'book for business men can well undertake to do is to present 
the elementary principles governing the ordinary business trans- 
actions, leaving for lawryers the more intricate or technical prob- 
lems. The chief aim of such a book should be to inform the 
business man how to keep out of difficulties, rather than to enable 
him to extricate himself after he is once involved. 

• Business law is, therefore, merely such a selection from the 
general body of the law, and especially the law of contract, as 
a particular author may think it profitable for a business man 
to know. 

4. Divisions of the law. The law may be divided into two 
great branches, public law and private law. 

1. Public law. Public law includes those topics with which 
the state, that is, the public as a whole, is especially concerned : 
namely, (a) international law, or the law governing the relations 
of one nation to other nations ; (^) constitutional law, or the 
fundamental law governing a nation or state in its relations to 
its citizens ; (c) criminal law, or the law by which the public 
protects itself against crimes and offenses prejudicial to its 
well-being ; and {d) administrative law, or the law under which 
governmental affairs are carried on, as tax laws, highway laws, 
and the like. 

2. Private law. Private law includes those topics with which 
individuals are particularly concerned in their private relations. 
These are very numerous but may be roughly grouped under 
three main heads: namely, (a) the law of property, including 
acquisition, ownership, possession, security, alienation, descent, 
and the like ; (b) the law of obligation, including contracts, torts, 
trusts, and the like; and {c) the law of procedure, or the law 
by which cases are brought into courts and conducted to trial 
and judgment. 

The topics treated under the head of business law are those in- 
volving either the law of property or the law of obligation. The 
acquisition and disposition of property, the making and perform- 
ing of contracts, constitute the major part of a business enterprise. 



4 PRELIMINARY TOPICS [Ch. 1 

5. Property. Property consists in the ownership of material 
objects, or the ownership of some right in or to a material object, 
or the ownership of some right against a person, or the owner- 
ship of some immaterial right to be exercised to the exclusion of 
others. Material objects are either immovable, like land, or mov- 
able, like coin, cattle, or merchandise. One may own and pos- 
sess these things, or he may own a right in them, as when he 
has a right to cross another's lands or a right to sell another's 
goods pledged to him for a debt. Immaterial property may con- 
sist in a right granted by statute or usage to the exclusion of 
others, as a right to a patent or to a trade-mark ; or it may 
consist of a right against a person, as a right to compel him 
to pay a promissory note or to pay dama§;es for a trespass to 
property. 

The law regards property as either real property or personal 
property. 

1. Real property. Real property consists of any estate or inter- 
est in lands, except a leasehold estate for years or a mortgage or 
lien. There are two such estates : an estate of inheritance, or, as 
it is often called, an estate in fee, which is an estate that descends 
to the owner's heirs ; and an estate for life which terminates at 
the death of the owner or of some other designated person (see 
sect. i6o post). 

2. Personal property. All other property is personal property. 
This includes (i) chattels real, that is, leasehold interests in 
lands ; (2) chattels personal, that is, all other kinds of property, 
consisting of the following classes : (a) corporeal movable objects; 
{b) incorporeal rights or privileges, like patents, copyrights, trade- 
marks, and good will in a business ; {c) rights of action against 
persons, called choses in action (choses is the French for "" things "). 

The kinds of property with which business is chiefly con- 
cerned are corporeal movable objects and choses in action. 
The former are goods, wares, and merchandise; the latter are 
negotiable instruments, stocks and bonds, mortgages and liens, 
and debts in general. 

6. Legal obligations. Legal obligations are those which the 
law enforces. They arise either by agreement or by the policy 
of the law, independent of an agreement. 



§6] LEGAL OBLIGATIONS 5 

1. Contract. An agreement enforceable at law we call a con- 
tract, and the failure or refusal to carry out the agreement we 
call a breach of contract. 

Example I. A agrees with B that A shall sell and B shall buy A's bicycle 
for $30. This is a contract; If either party refuses to carry out his part of it, 
the other has a case at law for damages. 

Contracts have to do with a great variety of interests, and 
many special kinds of contracts may be enumerated, such as 
contracts of sale, contracts of bailment, contracts of carriage, 
contracts of insurance, contracts of partnership, contracts of 
guaranty, contracts for the loan of money, and the Hke. 

2. Tort. The obligations fixed by private law independent 
of agreement have no specific names, but the breach of any 
of these obligations is called a tort, which is simply the French 
word for " wrong." Many of these torts have specific names. 

Examples: 2. A strikes B in anger. A has committed the tort called 
assault and battery. 

3. C goes without permission on D's land. C has committed the tort 
called trespass. 

4. E speaks false and malicious words derogatory to F's character. E has 
committed the tort called slander. If E writes the words, the tort is called libel. 

5. G drives so carelessly in the street as to run into and injure H's carriage. 
G has committed the tort known as negligence. 

In each of the above cases the wrongdoer was under an 
obligation fixed by the law not to infringe the personal security 
or property rights of another to his damage, and' to use due 
care for the safety of others and their property. The violation 
of this obligation constitutes the tort. 

Where, in the formation of a contract, one party knowingly 
makes a false representation to the other, a tort is committed. 
Where, after a contract is made, a stranger to it induces one 
of the parties to break it, a tort is also committed. 

Examples ; 6. A wishes to sell sheep to B. He tells B that they are sound 
and healthy. He knows they are diseased. B buys the sheep and afterwards 
discovers that they are diseased, {a) There is a contract between A and B. 
{b) There is a tort, known as deceit, committed by A. 

7. A agrees to work for B. X, knowing this, induces A to break the contract. 
X has committed a tort which has no very specific name. It is called " inducing 
breach of contract," or, in this form of contract, " enticing away a servant." 



6 PRELIMINARY TOPICS [Ch. I 

3. Quasi-contracts. In certain cases where there is no true 
contractual agreement, the law, by reason of some act or situa- 
tion of a party, imposes an obligation upon him and gives a 
remedy against him, as if, in fact, his obligation did arise from 
agreement. In order to prevent unjust enrichment and to give 
an efficient remedy, the law indulges in such cases the fiction 
that a promise was made, and permits an action in the form of 
an action on contract. These cases are called quasi-contracts, 
because the form of remedy is like that irl the case of a true 
contract. 

Examples : 8. A steals B's money. B may recover the money in a con- 
tract action, there being by fiction of law an implied promise to repay it. 

9. C by mistake pays D more than he owes. C may recover the excess in 
a contract action. The law implies a promise by D to return the overpayment. 

10. E is a lunatic, known to be one, and incapable of making a contract. 
F furnishes E with necessary food. F may recover the reasonable value of 
the food in a contract action. The law creates the promise of the lunatic to 
pay for necessaries. 

4. Trusts. A trust is an obligation of one who has the legal 
title to property to account for it to one who has the beneficial 
or equitable interest. Trusts are not recognized or enforced by 
the courts known as the law courts, but by the courts known 
as the equity or chancery courts. These courts are explained 
in the next section. Law courts recognize only legal titles and 
interests, but equity courts recognize equitable titles and interests. 

Example 1 1 . B conveys or wills his farm in trust to C to receive the rents 
and income and pay the same over to D. This is a trust. D"s rights are not 
recognized by the law courts, but the equity courts recognize and enforce D's 
rights and compel C to account to D for the rents and income. 

The so-called " trusts " referred to in current economic discussions are not 
now trusts in the above sense, but are simply monopolistic combinations. 
Originally stockholders in various corporations placed their shares in trust 
with a committee, and the total profits of all the corporations were divided 
among the various stockholders pro rata, thus constituting a real trust But 
it is now the custom to unite all the corporations into one corporation, in 
order to eliminate competition. This does not create a true trust, but the old 
name continues to be used to describe the new monopolistic device. 

7. Courts. The courts of a particular state may consist of 
law courts and equity courts, although in modern times these 



§ 7] COURTS 7 

are often combined. The United States has also an admiralty 
court, or rather a court with admiralty jurisdiction. 

1. Law courts. Law courts are organized tribunals for the 
trial of cases and the hearing of appeals. Each state has trial 
courts and at least one court to which appeals may be taken. 
Trial courts consist of a judge and a jury, with attendant officers. 
Appellate courts consist of a bench of judges without a jury. 

The trial courts are generally the following : 

a. A court of , general jurisdiction is one before which most 
cases may be brought. This is usually called a circuit court, 
because the judges go on circuit from place to place to hold 
trials. 

h. Courts of limited, or local, jurisdiction are for the trial of 
smaller cases ; such are county courts, city courts, and courts 
held by justices of the peace. 

c. Courts for the administration of the estates of deceased 
persons are called the surrogate's court, probate court, orphans' 
court, etc. 

The appellate courts are those to which appeals are taken 
from the trial courts. Most states call the appellate courts the 
Supreme. Court. In New York, however, the highest appellate 
court is called the Court of Appeals, and the trial court of 
general jurisdiction is called the Supreme Court. Owing to the 
large amount of appellate work, some states have an intermedi- 
ate appellate court. In New York this is called the Appellate 
Division of the Supreme Court. 

In the federal jurisdiction the trial court is the District Court ; 
the intermediate appellate court is the Circuit Court of Appeals, 
and the highest appellate court is the Supreme Court. 

2. Equity courts. Side by side with the common-law courts 
there grew up in England a separate court known as the equity 
court or the chancery court. This court consisted of a judge 
without a jury, and was intended to give relief in hard cases 
where, by the somewhat rigid rules of the common-law courts, 
none could be had. A body of rules or doctrines evolved by 
this court is known as equity. Equity consists, therefore, of 
the rules and doctrines by which equity courts are controlled 
in the administration of justice. 



8 PRELIMINARY TOPICS [Ch. I 

In a few of our states such separate equity courts still exist, 
but generally the powers of a common-law court and of an 
equity court have been combined in one court which administers 
both law and equity. In such case the court of general jurisdic- 
tion is both a common-law and an equity court. If one wished 
to sue for breach of contract or for an accounting for a trust, he 
would go before the same court : in the contract case the judge 
with a jury would administer law rules ; in the trust case the judge 
without a jury would administer equity rules. 

3. Admiralty courts. Admiralty courts administer still a dif- 
ferent law, known as the admiralty law or law of the sea. They 
have to do with vessels and their cargoes and crews upon public 
navigable waters. There is no separate court of admiralty in the 
United States ; the District Courts of the United States have 
admiralty jurisdiction and administer admiralty law. State courts 
have no admiralty jurisdiction. An admiralty court consists of a 
judge without a jury. The judge is the trier of the facts as well 
as the administrator of the law. 

8. Procedure. A case is brought before a court by pleadings. 
The plaintiff makes a complaint or declaration, setting out his cause 
of action, and a summons to appear and answer this is served 
upon the defendant. The latter makes an answer to the complaint. 
Upon these documents, or others which may be allowed, the issue 
is framed, that is, the question in dispute is made clear. 

At a time appointed the parties go before the court with their 
attorneys and witnesses and give evidence to sustain their con- 
tentions. The jury is instructed by the judge as to the law of 
the case, and renders its verdict upon the facts proved and the 
instructions received. The court enters a judgment in accordance 
with this verdict. 

The defeated party may appeal from this judgment. His at- 
torney prepares a transcript of the evidence, and with this, upon 
notice to his adversary, goes before an appellate court of judges 
and asks to have the judgment reversed. Argument by both 
parties is heard by the appellate court. If the court finds a sub- 
stantial error in the rulings or instructions of the trial judge, or 
finds the verdict unsupported by the evidence, it may reverse the 
judgment and order a new trial. Otherwise it affirms the judgment. 



§9] SCOPE OF THIS WORK 9 

If a new trial is ordered, the same procedure is repeated, except 
that no new pleadings are necessary. 

When a final judgment is entered, the successful party is en- 
titled, besides any judgment for a fixed sum, to such costs as may 
be allowed by law. If the judgment is not paid, he may issue an 
execution against the property of his adversary, and the sheriff 
may levy on the property and sell it to satisfy the judgment. In 
every state a certain amount of property is exempt from levy and 
sale upon judgments. These exemption laws are intended to secure 
to debtors certain household necessities, tools of a trade, and often 
a homestead. 

9. Scope of this work. A business man has to deal mainly with 
property and contracts. He can hardly carry on business without 
dealing directly or indirectly with some species of property, and very 
often the purchase and sale of property is the chief part of his 
business. He cannot carry on business at all without making con- 
tracts, — often scores or hundreds of contracts in a single day. 
Accordingly these two topics of the law are those with which the 
business man should be especially familiar. He needs to know 
what constitutes a binding contract, what obligations arise upon 
its completion, and what steps are necessary to its legal perform- 
ance. While he can hardly hope to know technically about torts, 
he ought, if an employer of workmen, to know what obligations 
he undertakes as concerns their safety, and what liabilities he 
incurs by failing to use due care to have the instrumentalities of 
his business in a safe condition. It will be the object of this work 
to state some of the more important legal rules connected with 
these subjects. 

We shall first consider the formation of contracts, that is, what 
constitutes a binding and enforceable agreement. This will be 
followed by a discussion of the operation of contracts (that is, the 
rights arising from them) and the discharge of contracts (that is, 
how they are ended and the rights under them terminated). 

These general principles will be followed by a discussion of the 
particular contracts concerning personal property (namely, the sale, 
bailment, carriage, and insurance of goods) and the particular con- 
tracts concerning credit (that is, contracts creating debts, contracts 
guaranty, and contracts contained in commercial paper). 



lO PRELIMINARY TOPICS [Ch. I 

Agency, the means by which one makes contracts through an 
employee, follows the discussion of contracts and their special 
forms. Here also is an excursus upon the subject of master 
and servant. 

Business associations, such as partnerships and corporations, 
are next discussed. 

Finally, there is a concise treatment of the subject of property, 
real and personal, in order to bring together some topics not 
treated under the head of contract. 

REVIEW QUESTIONS 

Section 1. With what is business concerned? What is included in the 
term " business " ? Enumerate all the different kinds of business conducted on 
a specified block of a business street in your city or village. 

2. Define law; common law; statute law. Who declares the common law ? 
Where is it found } What is it based upon ? What is the force of precedents .? 
What are the two objects of statute law? Why is the law more difficult to 
state in America than in England? 

3. Explain " business law." From what branch of the law is it mainly 
taken ? 

4. Name two main divisions of the law. What does public law include? 
What does private law include ? 

5. What is property ? What objects and rights constitute property ? What 
is real property? Is an estate for years real property? Is a mortgage? What 
two kinds of personal property? What three kinds of personal chattels? 
With what two kinds of property is business chiefly concerned ? 

6. What are legal obligations? How do they arise? Distinguish between 
contract obligation and tort obligation. Illustrate. Name and illustrate some 
torts. Explain and illustrate quasi-contracts. Explain and illustrate trusts. 
Explain the meaning of the term " trust " in economic discussions. 

7. What is a court? a trial court? an appellate court? Describe three 
kinds of trial courts. Name the federal courts. What are equity courts ? Do 
they have a jury? What is equity? .What are admiralty courts? \Miat cases 
do they hear ? What is the United States admiralty court ? 

8. Describe the steps in bringing a case before a court and to trial and 
judgment. Explain the process of an appeal. How is a judgment enforced? 
What are exemptions? 



PART I. THE PRINCIPLES OF 
CONTRACT 

CHAPTER II 

FORMATION OF CONTRACTS 

10. Definition of contract. A contract is an agreement between 
two or more persons for the breach of which a court of law will 
give damages. There are many agreements for the breaking of 
which no damages can be had, either because the agreement con- 
templates no legal relations or because it ends in a legal relation 
that is enforceable only in a court of equity. 

Examples : i. B agrees to sell a watch to C for $25, and C agrees to pay 
B $25 for the watch. This is a contract. If B refuses to deliver the watch 
C has an action at law against B for damages. If C refuses to take the watch 
and pay the $25, B has an action at law against C for damages. 

2. D and E mutually agree that they will meet each other at a designated 
place and go to a football game together. This is not a contract. It contem- 
plates social, not legal, relations. 

3. F agrees with G to take G's property and invest it, receive the income, 
pay the income to G during his life, and divide the principal among G's chil- 
dren after G's death. This creates a trust. If F failed to pay over the income, 
G's remedy would be by suit in equity for an accounting, not at law for 
damages. Since the agreement is not enforceable at law, it is not a contract. 

The agreement may give one party the right to demand that 
the other do something (affirmative contract), or it may give one 
party the right to demand that the other forbear- from doing 
something (negative contract), or the same agreement may give 
both rights. 

Example 4. B sells his dry-goods business to C for $5000, and agrees not 
to engage in that business again in the same city. C acquires two rights: first, 
the right to have B transfer to him the. business; and, second, the right to have 
B forbear to enter into competition with him. For the breach of either of 



12 FORMATION OF CONTRACTS [Ch. II 

these terms C has an action at law for damages. (For the breach of the sec- 
ond he might also secure an injunction in equity, because the damages he 
would suffer from B's competition are so uncertain that the legal remedy is 
deemed inadequate ; but since he may have damages at law, the agreement is 
a contract. Equity courts sometimes specifically enforce contracts.) 

The persons making the agreement may be two or more, but 
they are so divided as to constitute two groups of persons. 

Example 5. B sells his horse to C and D. C and D resell the horse to 
E, F, and G. In the first contract B is on one side and C and D joindy on 
the other. In the second contract C and D are on one side and E, F, and G 
on the other. 

In some cases three parties make among them three contracts, 
which constitute what is called a novation. 

Exainple 6. A owes B $100. B owes C $100. The three meet and agree 
that A shall pay C. B's claim on A is extinguished. B's obligation to C is 
extinguished. A new obligation from A to C is created. Thus there are, in 
effect, three contracts. 

11. Essentials of enforceable contract. In order that a con- 
tract shall be enforceable, that is, one for the nonperformance of 
which the law will give damages, the following elements must be 
present: (i) an agreement, (2) by competent parties, (3) upon 
sufficient consideration, (4) in some cases evidenced in a particu- 
lar form, (5) for a legal object, and (6) made without mistake, 
fraud, undue influence, or duress. 

I. Agreement 

12. Contracts begin in agreement. All true contracts begin 
with an agreement. By agreement is meant the meeting of the 
minds of the contracting parties in a common assent to the same 
definite conclusion. But the state of the mind of a party must 
be judged by what he says and does. He cannot definitely agree 
to a thing and afterwards escape upon the plea that he misspoke 
himself or did an act manifesting agreement which he did not 
intend to do. 

Examples .• I . B leads out a colt and says to C, " I will sell you this colt 
for $40." C answers, " I will take him at that price." B discovers he has led 
out a colt he did not intend to sell. B is bound. 



§§ 13, 14] AGREEMENT 1 3 

2. B writes, "I will sell you 10,000 bushels of wheat at 80 cents a bushel." 
C, in honest reliance upon the offer, replies, " I will accept your offer." B 
asserts he intended to write, and thought he had written, " 1,000 bushels." 
B is bound to deliver 10,000 bushels or pay damages for nondelivery. 

Agreements must be definite enough to enable a court to ascer- 
tain and enforce the terms. Indefinite and uncertain agreements 
are unenforceable, because the court will not make or complete 
contracts for parties. 

Examples: 3. "I will sell you one hundred acres of land for $1000.'' 
" I accept." This is too uncertain, because no definite one hundred acres 
are indicated. 

4. " I will sell you one hundred bushels of potatoes for $60." " I accept." 
This is definite enough, because no particular one hundred bushels need be 
specified. 

5. " I will give as much for your horse as A says he is worth." " I 
accept." This is definite enough, because a way of ascertaining the price 
has been agreed upon. 

6. " Send me one hundred bushels of potatoes." The potatoes are delivered. 
This is enough. The market price is understood. 

13. Classes of agreements. Agreements leading to legal obliga- 
tions serve three purposes ; namely, to create rights, to transfer 
rights, and to extinguish rights. An agreement which creates a 
right is called a contract. An agreement which transfers a right 
is called an assignment. An agreement which extinguishes a 
right is called a release or discharge. All are in fact contracts. 

Examples: I. A and B agree that A shall sell and deliver his horse to 
B for $100, which B agrees to pay sixty days after such delivery. This is a 
contract. When A delivers the horse, he has performed his part and has a 
right against B to demand the $100 in sixty days. 

2. A agrees with C to transfer to C this right against B in exchange for 
a cow. When done this is an assignment by A to C of A's right against B 
to the $100. 

3. C, who now owns the right against B, agrees with B to accept and does 
accept a buggy as the equivalent of the $100. C thereby discharges the right 
against B. 

14. Agreements originate in some form of offer and acceptance. 

An offer is an expression by one person of his willingness to 
become a party to an agreement in accordance with terms ex- 
pressed or indicated. Acceptance is the expression by the person 
to whom the offer was made of his willingness to do or forbear 
from doing what the offeror requires. 



14 FORMATION OF CONTRACTS [Ch. II 

The offer may be of a promise or of an act. The acceptance 
may be the giving of a promise or the doing of an act. No- 
words need be used. We may have a contract in which there 
is a promise for a promise, that is, an outstanding promise on 
each side ; this is called a bilateral executory contract. Or we 
may have a contract in which there is a promise outstanding 
on one side and the act performed on the other; this is called 
a unilateral executory contract. When both parties have fully 
performed the contract, it is said to be an executed contract. 
When a promise is put into words, it is said to be an express 
promise ; when it is inferred from acts or conduct, it is called 
an implied promise. 

Examples : i. Promise for promise : " I will work for you for one month 
for $30." " Agreed." There is an outstanding promise on each side before 
any act is done. 

2. Promise for act: " I will pay you $10 if you find and return my lost 
watch." The offeree finds and returns the watch. The contract is then com- 
plete. There is an outstanding promise on one side. 

3. Act for promise : A newspaper is sent regularly to a person who takes 
and reads it as often as it reaches him. The offer is in the sending of the 
paper. The promise to pay for it is implied from the receiving and using it. 

There are certain rules governing offer and acceptance that 
are often applied in order to determine whether an agreement 
has been reached. These will be briefly enumerated. 

1. The offer must be communicated to the offeree. This, as we 
have seen, may be by oral or written words or by acts and con- 
duct. However expressed, the offer must actually reach the offeree 
or there can be no acceptance by him. The offer may be made 
to all the world but must be accepted by some definite person. 

Example 4. B publishes in a newspaper an offer of $10 reward for the 
return of his lost watch. C returns the watch, not knowing that such a reward 
has been offered. Afterwards C learns of the offer and claims the reward. He 
cannot compel B to pay it, because the act was not done relying upon the offer 
or with knowledge of it. (But some states allow a recovery upon no very well- 
defined principle.) 

2. The acceptance must be cither cominniiicated or else actively 
manifested in a manner contemplated by the terms of the offer. 
Mental determination to accept is not enough ; the mental intent 
must be unequivocally indicated. If the offeror has stated how it 



§ 14] AGREEMENT 



15 



shall be indicated, the offeree may do what is required without 
actually communicating with the offeror ; but stipulating that 
silence shall be deemed an acceptance will not make it so, since 
the offeror cannot impose on the offeree the obligation to speak. 
Speech or action is necessary. When an offer is sent by mail, 
it is implied that the offeree may indicate assent by mailing an 
acceptance ; and the contract is complete when the letter is 
mailed, although it may never be received. 

Examples: 5. B writes C: "I will give you $ioo for your horse. If 
within ten days I do not hear from you to the contrary, I shall consider that 
you accept." No answer is returned to B. There is no contract, even though 
C has mentally determined to accept. Mere silence does not give consent. If 
B had specified some act that C was to do to indicate assent, the doing of the 
act with the intent to accept would be enough. 

6. D advertises that if anyone buys and uses his medical remedy as 
directed and afterwards contracts any disease caused by taking cold, he will 
pay to such person % 1 00. E buys and uses the medicine as directed and after- 
wards contracts a cold and disease caused by the cold. D is held liable to pay 
E the $100. E's acceptance of D's offer is manifested by buying and using 
the medicine as directed, with knowledge of the offer. It is not necessary for 
E to communicate his acceptance to D. 

7. F posts a letter to G, offering to sell his horse to G for $1 50. G receives 
the letter on Monday, and on Tuesday posts a letter directed to F, accepting 
the offer. The letter is lost in the mails and never reaches F, who on Friday 
sells his horse to H. F is liable to G in damages for breach of contract, for 
the contract was completed by acceptance as soon as G posted his reply. If F 
wishes to guard against this, he should say in his letter, " Upon receiving your 
acceptance the sale will be closed," or use some similar phrase especially 
requiring that the acceptance should be actually received. By using the mails 
the offeror impliedly invites the offeree to use the mails, with the result indi- 
cated. If F's offer were personal, there would ordinarily be no implied invita- 
tion to use the mails for an acceptance ; but there might be an invitation either 
expressed or gathered from circumstances, as, if G lives at a distance and is 
told by F to go home, think it over, and let him know, G may use the mails, 
and his acceptance is complete when the letter containing it is duly posted. 

3. The acceptance must be absolute and accord with the terms 
of the offer. If the offeree qualifies his acceptance in any way, it 
is not an acceptance but merely a counter offer to be accepted or 
rejected by the original offeror. A qualified acceptance amounts 
to a rejection of the offer, which cannot thereafter be accepted 
so as to bind the offeror. 



1 6 FORMATION OF CONTRACTS [Ch. II 

Example 8. B offers his horse to C for $150. C replies, " I will take the 
horse at 1125." B refuses. C then says, " I will take him at $150." B refuses 
this. C sues B for breach of contract. C will fail. C's acceptance at $125 was 
a rejection of the offer at $1 50, and the offer was at an end. 

4. An ojfer may be varied or revoked before acceptaiice. An 
unaccepted offer creates no legal rights. The offeror may vary 
or revoke it at any time before the offeree accepts it. If, how- 
ever, the offeree has paid a consideration for the option to accept 
or reject, or if, in some states, the offer is under seal, the offer 
is in the form of a contract and cannot be varied or revoked. 
An acceptance of the offer concludes the contract and it is then 
irrevocable. But there must in fact be an offer. Merely sending 
out a circular of prices, or advertising prices in a newspaper, is 
not an offer, but merely an invitation to deal with the advertiser. 

Examples: 9. B offers C his horse for $150 and gives C twenty-four 
hours in which to accept. In an hour B withdraws his offer ; but C, an hour 
later, accepts. There is no contract. There was no consideration for B's 
promise to give C twenty-four hours to accept, and B may revoke his offer 
before C actually accepts. 

10. D gives E an option to take 1000 bushels of wheat on September i, 
at 90 cents a bushel, for which option E pays D $40. D withdraws the option 
before September i, but on that day E accepts and demands the wheat. D is 
liable to E for refusal to deliver. The offer is irrevocable. 

5. The offeree must have notice of the revocatiofi. An offeree 
may accept within the time fixed, or, if none be fixed, within a 
reasonable time, unless he has notice before his acceptance that 
the offer is revoked. It seems that the notice need not neces- 
sarily come from the offeror, it being sufficient that the offeree 
actually learns from any source that the offer is revoked. 

Examples: 11. B writes C, "I will sell you my horse for Si 50." The 
next day B writes C, " I withdraw the offer." The following day, and before 
receiving the letter containing the withdrawal, C posts an acceptance. The 
contract is complete, since C had no notice of the witlidrawal before acceptance, 
and acceptance is complete when the letter is mailed. Revocation is not 
complete until received. 

12. D offers E his horse at $150 and gives E two days to gccept. The 
next day D sells the horse to X, who tells E the horse is his (X's). E then 
accepts. There is no contract. E knew when he accepted that the offer had 
been revoked by a sale to .X. 



§15] PARTIES 17 

6. An offer may lapse without express revocation. If a time is 
fixed, the expiration of the time revokes the offer. If no time 
is fixed, the offer lapses after the expiration of a reasonable time ; 
what is a reasonable time must depend upon the circumstances of 
the case. An offer lapses by the death of either party. 

Examples : 13. On June i B offers C $50 for a cow. C accepts the offer 
on August I. This is not a reasonable time where the parties live near each 
other. Even a week might be too long. 

14. D writes E, " I will sell you my farm for $3000." Before E posts his 
acceptance D dies. The offer is revoked by D's death. But if E posts his 
acceptance before D's death the contract is binding upon D's estate. 

II. Competent Parties 

15. Infants. An infant is a person under the age of twenty- 
one. In many states women become of age at eighteen, and in 
some they are of age at eighteen, or even younger, if married. 

A person attains his majority on the day preceding his twenty- 
first birthday, that is, on the last day of his twenty-first year. 
If the twenty-first anniversary of one's birthday is November 8, 
he can vote or make binding contracts on November 7. 

Contracts made during infancy are voidable ^ at the infant's 
option, exercised either during his infancy or after he attains his 
majority, subject to these exceptions : (a) contracts for necessaries 
are binding ; (b) contracts made during infancy but ratified after 
attaining majority are binding. But an infant's contracts are bind- 
ing upon the adult with whom they are made ; the infant alone 
can repudiate them at his election. 

(a) Necessaries include not merely the things necessary to sus- 
tain life, but also such additional articles as are suitable to the infant's 
station in life and to his circumstances when they are purchased. 
In addition to food, lodging, clothing, medical attendance, and 
schooling, such articles as horses, watches, and jewelry have been 
held to be necessaries under particular circumstances ; but the 
courts are not disposed to go beyond the normal list of necessaries. 
Even as to those the person who furnishes them cannot recover 

^ It is often said that an infant's appointment of an agent is void, — that is, 
absolutely of no effect, — but this is so doubtful that the statement is not made 
in the text (see sect. W] post]. 



1 8 FORMATION OF CONTRACTS [Ch. II 

if the infant was already adequately supplied. If one can recover 
against an infant for necessaries, he can recover only the reason- 
able value, not what the infant may have agreed to pay. 

{b) Ratification takes place when, upon attaining his majority, 
the infant promises to pay or does an act which is a clear recog- 
nition of his liability. Some states require a ratification to be in 
writing, but this is not generally so. 

Examples: I. B, an infant, agrees to work for C for a year at $12 a 
month. He works a month and then quits. C has no action against B for 
breach of contract. B may recover against C for the labor performed. 

2. Same contract. At the end of a month C discharges B without cause. 
B has an action against C for breach of contract. The adult is bound but the 
infant is not. 

3. D, an infant, purchases jewelry of E. E cannot recover the price from 
D, although if D pleads his infancy as a defense to the action, the tide to the 
jewelry will revest in E. It is immaterial that E thought D was an adult It 
is immaterial that D represented that he was of age, although D might in such 
a case be liable in tort for deceit. 

4. D purchases clothing for himself of E. D is liable, provided E can 
show that D was not adequately supplied according to his station in life. But 
although D promised to pay $50 for the clothing, E can recover only its actual 
value up to $50. 

5. E, an infant, purchases jewelry, not necessaries, of F. After attaining 
his majority E promises to pay for the jewelry. E is now liable upon the 
theory of ratification. 

6. G, an infant, purchases a horse of H and pays for it. G may return the 
horse during infancy or within a reasonable time after attaining his majority 
and recover the money. This is disaffirmance, the opposite of ratification. 

7. Same purchase. The horse dies. G may recover his money from H. 
When an infant disaffirms, the adult may recover what he parted with, if the 
infant still has it ; but if it is lost or destroyed, the adult is nevertheless bound 
to return to the infant whatever he received from him. 

16. Insane persons. If one contracts with an insane person, 
knowing him to be insane, the contract is voidable by the lunatic. 
If one contracts with a person who is insane and who has been 
judicially declared to be so by some competent judge or other 
officer,! the contract is probably voidable by the lunatic. If one 

^ Statutes provide methods by which persons suspected of insanity may be 
brought before a court and the matter judicially determined. A judgment of 
insanity is constructive notice to all the world of the fact of insanity. The insane 
person's property is then under the control of a guardian or committee ajjpointed 
by the court. 



1 17, 18] CONSIDERATION 



19 



contracts in good faith with a person not known to be insane 
but who is so in fact, the contract may be upheld if it is so far 
executed that to avoid it would damage the innocent party ; if, 
however, it can be avoided and the innocent party be put in statu 
quo, the lunatic may avoid it even in this case. 

An insane person is, like an infant, liable for necessaries. If 
he afterwards recovers his reason, he may ratify contracts made 
while insane. 

Idiots' contracts stand substantially upon the same footing as 
the contracts of insane persons. 

An intoxicated person, if so much intoxicated as to be unable 
to understand and appreciate the nature of his acts, may avoid a 
contract made while in such a condition. 

17. Married women. At common law married women were 
incapable of making any binding contracts. Neither the married 
woman nor the other party to the contract was bound ; the con- 
tract was absolutely void. She could bind her husband, not herself, 
upon a contract for necessaries. 

This common-law disability has been largely removed by stat- 
utes. These vary in the different states, but in general a married 
woman may now contract as fully as an unmarried woman, except 
that a married woman cannot, in some states, contract with her 
husband or as surety for her husband. These statutes are too 
numerous to be considered further. 

III. Consideration 

18. Necessity of consideration. Save in the case of sealed 
contracts (and now in many states even as to these), every 
promise contained in a contract must rest upon a consideration 
in order to be enforceable. A contract not under seal is called 
a simple contract. A sealed contract is sometimes called a 
deed or a specialty ; if for the payment of money, it is often 
called a bond. 

Consideration consists in some legal detriment suffered by the 
promisee's relying upon the promise, and there is usually some 
corresponding benefit to the promisor. Unless such consideration 
can be shown by the promisee, he cannot enforce the promise 



20 FORMATION OF CONTRACTS [Ch. II 

against the promisor. Hence gratuitous promises are unenforce- 
able. A mere moral obligation to do a thing is not a consideration 
for a promise to do it. 

In negotiable instruments the law presumes consideration, but 
the promisor may show that none in fact exists. 

At common law sealed instruments require no consideration. 
Many states by statute now provide that in sealed instruments 
there must be a consideration, but make the seal presumptive 
evidence that there is one, leaving the promisor to show, if he 
can, that there was none. In other states the distinction between 
sealed and unsealed instruments has been abolished. 

Examples .■ i . A father makes and presents to his son a negotiable promis- 
sory note as a gift. The son cannot enforce it if the father sets up want of 
consideration as a defense. 

2. The son negotiates the note before maturity to X, who pays the son for 
it in good faith. X may enforce it against the father because X has suffered 
a legal detriment in parting with his money, relying upon the father's promise 
(see sect. 104/1?^/). 

3. A father says to his son, " I will give you $500 if you refrain from smok- 
ing until you are twenty-one." The son refrains. He may enforce the promise. 
He has suffered a legal detriment in doing what he was not legally bound to do. 

4. B promises C that he will repair C's watch free of charge. He after- 
wards refuses to do so. C has no remedy. There is no consideration for 
B's promise. 

5. Same promise. B undertakes the repairs and does them so badly as 
to ruin the watch. B is liable to C for gross negligence. C suffers a legal 
detriment in parting with his watch. 

19. The consideration need not equal the promise in value. 

The law allows persons to affix their own value to acts or for- 
bearances. If the promisee does or forbears anything he is not 
bound to do or forbear, there is sufficient consideration. But if 
the promisee does or forbears something he is already bound to 
do or forbear, there is no consideration. The problem in many 
cases is whether the promisee has done or forborne what he was 
not under a legal obligation to do or forbear. Such cases will be 
considered in concrete examples. 

Examples: i. John Doe promises Richard Roe that if Roe will name 
his child after John Doe, the latter will pay Roe (or the child) Si 000. Roe 
names the child after Doe. He may recover the $1000. He has done what 
he was not legally bound to do. 



i 20] CONSIDERATION 



21 



2. B agrees to pay C $200 for a buggy worth but $50. C agrees to deliver 
the buggy to B for $200. C may recover the $200. C makes a promise which 
he is not bound to malce, and which B may enforce against him, and this is a 
consideration for B's promise. 

3. F has a horse belonging to E which he wrongfully refuses to deliver 
up. E promises F $50 if he will deliver it, and F does deliver it. F cannot 
recover the $50. He has merely done what he was legally bound to do. 

4 {Successive promises). G contracts to dig a well for H for $60. When 
down a few feet, G strikes rock and refuses to go on. H promises G an 
extra $25 if he will finish the well, (a) Some courts say G cannot recover 
the extra $25 because he merely did what he was already bound to do. 
{b) Some courts say G was not bound to go on because he had an option to 
stop and pay damages for the breach of contract, and that G therefore 
did what he could not be legally compelled to do. (c) Some courts say that 
the old contract was by agreement rescinded and a new one for $85 was 
made. This case illustrates how conflicts of judicial decisions grow up where, 
as in our country, we have so many courts independent of each other. 

5 {Payment of smaller sum). K owes L $100. L says, " If you will pay 
me $60, I will release the other $40." K pays the $60. L may also recover 
the other $40. The payment of a smaller sum in satisfaction of a larger is 
not a sufficient consideration to support a promise to release the balance, 
because K is already legally bound to pay the |6o. But if, by agreement, K 
also gives L a jackknife, he has done what he was not legally bound to do, 
and the $40 claim is discharged. 

6 {Composition with creditors). M owes various creditors. A, B, C, and 
others. M agrees to pay each 60 per cent of his claim, provided he and all 
others will release M from the balance ; they all agree to do this. M pays each 
60 per cent. A afterwards sues M for the remaining 40 per cent of his claim. 
A cannot recover. This is called a composition with creditors. The reasons 
given for upholding it are not consistent, but it is often said to be an exception 
based upon the policy of encouraging such compositions and upon the policy 
of forbidding one creditor to recover more when by a kind of mutukl arrange- 
ment all have consented to take the same percentage. 

7 {Mutual subscriptions). The X church is raising money for a new bell. 
A, B, and C subscribe each the siim set opposite his name. May these 
promises be enforced ? Is there any consideration for them ? (a) Some courts 
say there is none unless the X church has acted upon the promises by pur- 
chasing a bell or contracting for one. {b) Other courts think the promises 
mutually support each other, and that B subscribes in consideration of A's 
subscription, etc. {c) Other courts think the X church, by accepting the 
promises, agrees to execute the plan, and that this promise is the considera- 
tion for the promises of the subscribers. Here, again, we have a conflict of 
authority upon a difficult question of law. 

20. A past consideration will not support a promise. A past 
consideration is one performed or finished by B without request 



22 FORMATION OF CONTRACTS [Ch. II 

and before any promise is given by C. If C should afterwards 
promise something to B by way of compensation or reward for 
the benefit conferred by B's act, this promise would rest upon a 
past consideration and would be unenforceable. 

Examples : I. B without C's knowledge or request moves a' stack of hay 
standing on C's farm, in order to save it from a spreading fire. When C 
learns of this, he promises to pay B for his time and trouble. This promise 
is unenforceable because it rests upon a past consideration. 

2. D finds a lost article and returns it to C, the owner. C promises to pay 
D a certain sum by way of reward. D cannot recover upon this promise ; it 
rests upon a past consideration. 

To .this rule there are certain apparent exceptions. 

a. If there is a request by C that B move the stack or that D 
search for the lost article, the law implies a promise to pay for 
the service ; and when C expressly promises to pay, he is merely 
confirming the implied promise, and his expressed promise is 
substituted for the implied one and is enforceable. 

b. If there is some legal bar to enforcing a contract against C, 
which he may set up or not, he may under certain circumstances, 
by a subsequent promise, render himself liable on such a contract 
notwithstanding the bar. Such legal bars are infancy, the Statute 
of Limitations, discharge in bankruptcy, and the like. 

Examples : 3. B, an infant, purchases jewels of C. When B arrives at 
his majority he promises to pay for them. B is liable to C. Some say B's 
promise rests upon the past consideration, that is, the delivery of the jewels, 
and that C suffers no detriment from relying upon the new promise. Others 
treat B's promise merely as a waiver of his plea of infancy, and thus escape 
the difSculties of consideration. 

4. D owes E a debt which is barred by the Statute of Limitations, that is, 
a statute providing that an action for debt or breach of contract must be 
begun within a certain time (usually six years). If E sues D, the latter may 
plead the statute and escape. But after the' debt is barred, D promises to pay 
it. D is now liable. The case is practically the same as that of the infant. 

5. F owes G a sum of money. Without any new consideration, F gives G 
a chattel mortage or other security. The chattel mortgage is enforceable. The 
antecedent debt, although a past consideration, is sufficient to support it. 

21. The consideration must be legal. Illegal contracts will be 
dealt with later. It is enough to say here that if A's promise 
rests upon a counter promise or an act of B's which is illegal, 
then A's promise cannot be enforced. Thus, A promises to pay B 



§ 22] FORM 



23 



a sum of money if B will purloin a document from C. B purloins 
the document. He cannot recover the sum promised, because his 
act constituting the consideration is illegal. So also promises to 
pay money lost in gambling are unenforceable because all gambling 
or wagering contracts are illegal. 



IV. Form : Writing ; Seal 

22. Statute of Frauds. The Statute of Frauds (so called be- 
cause it was intended to prevent fraud and perjury in the proving 
of contracts before the courts) was enacted by the English Parlia- 
ment in 1676 and has been substantially reenacted, in whole or in 
part, by most of the American states. Two sections of this statute, 
the fourth and the seventeenth, are those that deal particularly 
with contracts. 

I. Fourth section. The fourth section provides in substance 
that in order to be enforceable the following contracts, or some 
note or memorandum of them, shall be in writing and signed by 
the party to be charged (that is, the one against whom it is sought 
to enforce the contract) or by his authorized agent : 

a. the promise of an executor or administrator to pay out 
of his own estate that which is due from the estate he is 
administering ; 

b. the promise to answer for the debt, default, or miscarriage 
of another — that is, to be surety that another will pay his debts 
or discharge any of his legal obligations (see Chapter VIII) ; 

c. the promise to do anything, as transfer property, in con- 
sideration of marriage, that is, where the marriage is the con- 
sideration for such promise ; 

d. any contract or sale of lands, or any interest in or concern- 
ing lands (though in the United States generally leases for less 
than one year are excepted) ; 

e. any contract which by its terms is not to be performed 
within the space of one year from the time of the making thereof ; 
but if it may be fully performed within one year, it does not 
require a writing. 

It must be observed that this requirement is in addition to 
all other requirements. All contracts require a true agreement, 



24 FORMATION OF CONTRACTS [Ch. II 

competent parties, and consideration. These contracts require all 
those things and also a writing duly signed. Most contracts 
may be proved by parol evidence ; these contracts may be proved 
only by a writing. The writing may be a mere memorandum 
stating the chief points in the agreement, or it may even con- 
sist of a series of letters so connected as to make together a 
complete memorandum. Careful persons will make a full memo- 
randum, being particular to name the parties, the subject matter, 
the consideration, the terms and conditions, and to have this 
memorandum signed by both parties to the contract. If the 
writing fails to state any essential term, it is unenforceable, for 
that term would have to be proved by parol evidence, and the 
statute forbids this. 

In many states additional contracts requiring a writing are 
enumerated, as, for example, a promise to pay a debt discharged 
in bankruptcy, a promise to pay a debt barred by the Statute of 
Limitations, a promise after arriving at majority to pay a debt 
contracted during infancy, the acceptance of a bill of exchange, 
a fire-insurance policy, a limited partnership, a common-law mar- 
riage, and many others. Whether a particular contract must be in 
writing in a given state can be ascertained only after a careful 
examination of the statutes of that state. 

2. Seventeenth section. The seventeenth section of the Statute 
of Frauds provides that a contract for the sale of goods, wares, and 
merchandise (that is, any personal property) of the value of ten 
pounds or upwards shall be unenforceable unless the buyer accepts 
part of the goods so sold and actually receives the same, or gives 
something in earnest to bind the bargain or in part payment, or 
there be a note or memorandum in writing signed by the party 
to be charged or by his authorized agent. 

It will be observed that a contract to sell land can be evidenced 
in only one way, namely, by a writing, while a contract to sell 
goods of the value of 1^50 or more may be evidenced in any one 
of three ways : namely, by the acceptance and receipt of the 
goods or a part of them, by a part payment of the price or pay- 
ment of earnest money, and by a writing. States differ as to 
the value below which no special form is required. Some fix it as 
low as ^30, and one as high as $2500. Several states do not 



§23] FORM 25 

have this portion of the statute at all.i In these states a contract 
to sell goods, no matter of what value, may be proved by parol 
although there has been neither delivery nor payment. It is gen- 
erally thought that the statute as to the sale of goods has out- 
lived its usefulness and should be everywhere repealed as an 
unnecessary restraint upon commerce. 

It is difficult at times to say whether a sale is of real property 
or of personalty. The sale of standing trees to be cut by the 
buyer is generally held to be a sale of realty ; but if the seller is 
to cut them, the contract contemplates that they shall be personal 
property when delivered to the buyer. Growing annual crops, 
known as emblements, are considered personalty, while fruits, 
grass, and other perennials are held to be in the same class as 
trees. By the Uniform Sales Act (see sect. 45 post) a contract for 
the sale of articles attached to or forming a part of land, by which 
such articles are to be severed from the land at any time, is con- 
sidered a contract for the sale of personal property. 

23. Contracts under seal. Any contract may be made in writ- 
ing, under seal. Conveyances of land must be by deed, that is, 
under seal ; but in New York, although the question is in dispute, 
a seal seems no longer necessary. Statutes may require other con- 
tracts or conveyances to be sealed, but the modern tendency is 
to decrease rather than to magnify the importance of the seal. 
An unsealed contract is called a simple contract. 

A seal at common law was an impression on wax or other 
adhesive substance, affixed to the document to be sealed. In the 

'■) 

1 It is not found in Alabama, Delaware, Kansas, Kentucky, Louisiana, New- 
Mexico, North Carolina, TeBneesee, Texas, Virginia, and West Virginia. 

In the following states the sum is fixed at J30 : Arkansas, Maine, and Missouri. 

In New Hampshire it is fixed at JS33 ; in Vermont, at J40. 

In the following states it is fixed at $50 : Colorado, District of Columbia, 
Georgia, Indiana, Maryland, Midtiy, Minnesota, Mississippi, Nebraska, New 
York, North Dakota i Oklahoma, Oregon, South Carolina, South Dakota, Wash- 
ington, Wisconsin, and Wyoming. 

In Connecticut, Hawaii, and Michigan it is fixed at |ioo. 

In California, MahOj Montana, Nevada, and -»*»**■ the amount is $200. 

In Alaska, Arizona, Illinois, Massachusetts, New Jersey, Pennsylvania, and 
Rhode Island the sum is $<fio. J'/^ . -^/D - ktiH^ . ' -(- -i '• - " 
■^ In Ohio the sum is fixed at JS2500. 

In the following states a contract for the sale of goods of any value, however 
small, must conform to the Statute of Frauds : Florida, Iowa. 



26 FORMATION OF CONTRACTS [Ch. II 

Middle Ages, when few persons could write, each important per- 
son had his own seal, or signet, which took the place of his signa- 
ture. In modern times a mere scroll with the pen is declared by 
statute, in most states, to be a sufficient seal. The commonest 
form is to write the word "seal" after the name and make a 
rough circular scroll around it with the pen. 

While very few contracts must bear a seal, any contract may 
bear one. If a contract is sealed, it has certain characteristics 
which it would not have if it were unsealed. Chief among these 
are the following : 

1. At common law the contract under seal does not require 
any consideration. For example, a father promises under seal to 
pay his son one thousand dollars, this being merely a gift with- 
out consideration. Such an instrument is called a bond and is 
enforceable. Were such promise made in an unsealed instru- 
ment, the son could not enforce it for want of consideration. 
Were it made in a negotiable promissory note, the son could not 
enforce it ; but if he negotiated it to another person who paid 
value and had no notice of the absence of consideration, the 
transferee could enforce it. 

By statute in many states the common-law rule upon this point has been 
changed and the seal is made merely presumptive evidence of consideration ; 
that is, it dispenses with the necessity of the proving of consideration by the 
one who seeks to recover upon the instrument, but it leaves the defendant 
free to prove that there was no consideration and thus to defeat the instru- 
ment. Even this statutory provision has not, however, succeeded eversnvhere 
in depriving the seal of its importance as a substitute for consideration. Some 
courts have held that if the seal is used expressly to give validity to a gratui- 
tous promise, it will be effective for that purpose notwithstanding the statute ; 
but if it is used in a contract where a consideration was intended but has 
failed, the defendant, notwithstanding the seal, may prove that there is no con- 
sideration, and thus defeat the contract. Under this holding, a bond to give 
money without consideration would be good, Avhile a bond to pay money for 
services to be rendered would not be enforceable in case the consideration 
failed, that is, if the services were not rendered. 

In some states a sealed contract is by statute put upon precisely the same 
basis as an unsealed contract ; that is, seals are practically abolished. 

2. Only the parties to a sealed instrument may sue or be sued 
upon it. In an action upon an unsealed contract it may be shown 



§ 24] LEGALITY 27 

that a party named is in fact an agent for a party unnamed, and 
the latter may sue or be sued upon such unsealed contract. 

3. A right of action upon a sealed contract is not usually 
barred by the Statute of Limitations as soon as an action upon 
a simple contract. The period allowed upon a sealed contract 
varies in the different states from ten to twenty years, while the 
period allowed upon a simple contract is usually not more than 
six years. 

Examples: i. "I promise to pay John H. Blackheath one thousand 
dollars on February 10, 1906. William Blackheath." This is a simple 
contract to pay money ; if made as a gift, no one can enforce it. 

2. " I promise to pay to John H. Blackheath, or order, one thousand 
dollars on February 10, 1906. William Blackheath." This is a negoti- 
able promissory note. If made as a gift, John cannot enforce it ; but he could 
negotiate it to another person who might enforce it. 

3. " Know all men by these presents : That I, William Blackheath, am 
held and firmly bound unto John H. Blackheath in the sum of one thousand 
dollars to be paid to the said John H. Blackheath, his executors, administra- 
tors, or assigns, on February i o, 1 906 ; to which payment I bind myself, my 
executors and administrators by these presents. 

" Witness my hand and seal this tenth day of February, one thousand nine 
hundred and five. 

William Blackheath. [Seal] " 

This is- a bond. Although made as a gift, John may enforce it at common 
law. 

V. Legality of Object 

24. Contracts made illegal by statute. The statutes may 
declare a contract to be illegal, may prohibit it, or may simply 
penalize it. It is a question of construction whether prohibited 
and penalized contracts are illegal. 

1. Certain contracts are declared by statute to be illegal. Such 
are contracts for gambling or wagering, contracts for usury, in 
some states contracts for work, labor, or any unnecessary act 
to be performed on Sunday, and in some states any contract 
made on Sunday, even though performance is to be made on 
a secular day. 

2. Certain acts are prohibited by statute. A contract to 
perform a prohibited act, or involving such an act, would be 
an illegal contract. 



28 FORMATION OF CONTRACTS [Ch. II 

Example i. The statute prohibits prize fighting. A contract to engage 
in a prize fight is illegal. Again, the statute prohibits any person from 
engaging in the practice of medicine without first obtaining a license. An 
unlicensed physician cannot recover compensation for professional services. 
A teacher cannot recover for his services in a public school unless he is 
duly licensed. 

3. Certain acts are penalized by statute but are not in terms 
prohibited. In such cases it is a question of construction whether 
a contract to do the act is illegal. 

Examples : 2. The statute provides that anyone who sells a lot in a plat 
in any city without first recording the plat in the appropriate public office 
shall pay a penalty of $50 for each offense. A sells B a lot in an unrecorded 
plat. B afterwards refuses to take the lot and pay the purchase price. Is the 
contract of sale of this lot an illegal contract? It has been held not, because 
the court thought it was not the object of the statute to prohibit such sales, 
but merely to make it so expensive to deal in lots in unrecorded plats that 
landowners would be induced to record the plats. 

3. The statute fixes a penalty for the sale of adulterated foods. B sells to 
C a quantity of adulterated foods. C is not bound. He may refuse to take 
the goods and pay the price, on the ground that B's contract is illegal. The 
intent of the statute is to prevent the sale of adulterated goods. 

25. Wagering contracts. A wagering contract is an agreement 
to give money or property upon the determination or ascertain- 
ment of an uncertain event. The consideration for such promise 
may be either a like promise or something given outright. 

Examples: i. A and B contract that if A's horse wins a race with B's 
horse, B shall pay A $100 ; but if B's horse wins, A shall pay B Si 00. 

2. A promises to pay B f 100 in case B's horse vnns, provided B pay A 
in hand $20. If B's horse wins, A would pay B Sioo and would be 580 out 
of pocket; if B's horse loses, A has his $20 and B is that much out of 
pocket. 

3. A, B, and C each pay an entrance fee as a condition of competing 
for a purse or prize at a horse-racing contest. This is not a wager unless the 
competitors are the sole contributors to the purse and thus practically bet each 
against the others, or unless this form is adopted as a subterfuge to conceal 
a wager. 

It seems that by the common law of England wagering con- 
tracts were not illegal. Judges later regretted that the law was 
not otherwise, and became very astute in finding reasons for hold- 
ing particular wagers illegal, as, for example, that a wager on the 



§ 25] LEGALITY 29 

life of Napoleon was illegal because it gave one wagerer an inter- 
est in keeping the king's enemy alive and the other an interest in 
compassing his death by means other than lawful warfare. But 
even with such refinements as these the courts felt bound to en- 
force many wagers. In New York wagers were held to be legal. 
In Massachusetts, however, the courts refused to follow the Eng- 
lish rule and held them to be illegal. Now, by statute, they are 
generally declared to be illegal in all jurisdictions. 

Wa£-ers on the rise and fall of prices. The form of this wager 
is that one party sells another grain or stock for future delivery 
at a specified price ; but in fact neither party intends an actual 
delivery, and both intend to settle on the delivery day the differ- 
ence between the contract price and the market price in money. 
It is equivalent to betting that the market price on a certain day 
will be so much. Often these take the form of " options " as well 
as " futures " ; that is, A sells B the option to call for wheat on a 
certain day at a certain price, or A sells B the option to deliver 
wheat on that day at a certain price, or A may sell B the option 
to call at one price or deliver at another ; the first is termed a 
"call," the second a "put," and the third a "spread" or a 
" straddle." Whenever the intent is merely to settle the gain or 
loss in money, and there is no intent to deliver or receive the 
article itself, the transaction is a gambling contract and illegal. 

Examples : 4. " I have sold John Doe 100 shares of stock in the XY 
Co. at 85 per cent, payable and deliverable at seller's option in 30 days. 
Richard Roe." This may be a valid contract giving the seller the right to 
deliver the stock at any time vyithin 30 days at $85 a share (par value $ioo); 
or it may be intended that on any day when that stock is worth say $80 a share, 
the transaction shall be closed by the buyer paying the seller $s°°- The trans- 
action must be closed at the end of 30 days if not closed earlier. 

5. " For value received the bearer may call on me -for 10,000 bushels of 
wheat at 70 cents a bushel on Sept. i, 1905. Richard Roe." This is a 
" call." The buyer on September i will " call " for the wheat if it is more 
than 70 cents a bushel, but not if it is less. If it is more, he makes the excess, 
less what he paid for the option ; if it is less, he loses what he paid for the 
option. When the differences are intended to be settled in money this is a 
gambling contract, but it is perfectly valid if actual delivery is intended. 

6. " For value received the bearer may deliver to me 10,000 bushels of 
wheat at 70 cents a bushel on Sept. i, 190 j. Richard Roe." This is a 
"put." If wheat is 60 cents a bushel on September i, the seller will "put" 



30 FORMATION OF CONTRACTS [Ch. II 

it on Roe, who must pay lo cents a bushel to the seller. The latter thereby 
makes $1000, less what he paid for the option. If it is more than 70 cents a 
bushel, the seller will not " put " it, and he loses what he paid for the option. 
But this contract is valid if actual delivery is intended. , 

7. " For value received the bearer may call on me for 10,000 bushels of 
wheat at 80 cents a bushel any time in 60 days from date ; or the bearer may 
at his option deliver the same to me at 75 cents a bushel. Richard Roe." 
This is a " spread." If the call and put prices were the same, it would be a 
" straddle." If actual delivery is intended (as it rarely is), this would be a 
valid contract; but if it is intended to settle gains or losses in money, it is 
a gambling contract. 

Insurance. Insurance was at one time a favorite wagering con- 
tract. Thus, persons not at all interested in a ship or its cargo 
would take out insurance upon it, in order that if it was lost they 
might recover the amount named in their policies. Very often 
insurance was taken upon lives in which the policyholder had no 
interest. This is in general made illegal by statute. In order that 
an insurance policy may be legal, the one insured must have some 
insurable interest in the property or the life covered by the policy. 
Even in such cases the insurance contract is a kind of wagering 
contract, but it is one permitted by the policy of the law. 

26. Contracts illegal at common law. The common law has 
indicated a very considerable number of instances in which it wiU 
regard contracts as illegal because contrary to public policy. Only 
a few of them can be enumerated. 

1 . Contracts to commit crimes or civil wrongs (torts) are illegal. 
Thus, a contract to commit an assault would be illegal for both 
reasons, since an assault is both a crime and a tort. 

2. Contracts to do acts which injure the public service or inter- 
fere with the administration of justice are illegal. A contract to 
obtain a public office or vote for another for office, to influence 
legislative action by lobbying, to quiet competition for public con- 
tracts, to stifle the prosecution for a public offense, to cany on 
a suit as an attorney at the expense of the attorney and share 
the proceeds (champerty), to suborn witnesses, and the like, are 
all illegal. 

3. Contracts which affect the freedom or security of marriage 
are illegal. Such is a contract to procure a collusive divorce ; and 
such is a marriage-brokerage contract, that is, a contract by A to 



§ 26] LEGALITY 



31 



procure or bring about a marriage between B and C for a con- 
sideration paid or to be paid by either B or C to A. 

4. Contracts in restraint of trade may be legal or illegal, accord- 
ing as the restraint is reasonable or unreasonable. Such a contract 
is reasonable when it is reasonably necessary to protect the prom- 
isee and not injurious to the interests of the public. Beyond this 
point it is unreasonable and illegal. 

The great increase in trusts and monopolies within recent years 
has caused the federal legislature and many state legislatures to 
enact laws on the subject of restraint of trade. Congress in 1887 
passed the Interstate Commerce Act to provide for the regulation 
of interstate transportation ; in 1 890 it passed the Sherman Anti- 
Trust Act to regulate interstate commerce, aside from transportation 
and banking, and by that act made contracts in restraint of inter- 
state trade illegal and persons creating a monopoly in interstate 
trade guilty of a misdemeanor; in 19 14 it passed the Clayton 
Act, which specifies certain acts which shall be deemed to be un- 
reasonably in restraint of trade and illegal, and it also passed the 
Federal Trade Commission Act, which constitutes the Federal 
Trade Commission the regulator of interstate commerce, with 
power to inquire into acts in restraint of trade and to issue orders 
which are subject to review by the courts. Various state acts also 
provide against contracts which tend to monopoly or restraint of 
trade within the several states. 

Examples : i. A buys B's retail shoe store in the city of Ithaca, and B 
agrees not to engage again in the shoe trade in Ithaca. This is reasonably nec- 
essary to protect A against B's competition, and is held to be not so injurious 
to the public as to render it against public policy. If B agrees not to engage 
in the retail shoe trade in the state of New York, this would be obviously a 
greater restraint than is reasonably necessary and would be illegal. If he agrees 
not to engage in the retail shoe trade in the county in which Ithaca is situated, 
this might be reasonable or unreasonable, according to circumstances. Some 
states hold any restraint which includes the whole of the state to be unreason- 
able, but this is contrary to modern tendencies. 

2. The maker of guns and heavy ordnance of which governments were the 
chief purchasers sold his business and agreed that for twenty-five years he 
would not engage in a like business anywhere in the world. It was held by 
the English court that this restraint was reasonably necessary to protect the 
purchaser, since a manufactory of such guns anywhere in the world would be 
a cortipetitor. 



32 FORMATION OF CONTRACTS [Ch. II 

3. If the business is one carried on under a public franchise (as a franchise 
to lay gas pipes in public streets), or if it is impressed with a public trust or in- 
terest (as the business of a common carrier who must serve all members of the 
public on equal terms), the courts may hold even a local restraint unreasonable, 
not as to the promisee but as to the public whom the parties are bound to serve. 

4. Agreements to combine for the purpose of lessening competition, limit- 
ing the output, regulating prices, dividing the territory in which business shall 
be done, and the like, are illegal because detrimental to the public welfare. 

27. Effect of illegality upon contracts in which it exists. In 
determining the effect of illegality upon a contract in which it ex- 
ists, it is necessary to determine whether the contract is divisible 
or indivisible, and if divisible, whether the legal may be separated 
from the illegal portion. 

1. If a contract is indivisible, that is, if it has one indivisible 
promise or act on one side and one on the other, the whole con- 
tract must fail if one of these is illegal. 

Example i . A agreed to work for B for a specified sum per month, and to 
take charge of B's barroom and bar. It was illegal to maintain a bar for the 
sale of intoxicating liquors. A performed various services including the sale of 
liquors at the bar. A cannot recover the agreed price for his services because 
A's promise to perform the services is an indivisible one and is tainted with 
illegality. He cannot recover for the legal services, that is, those not connected 
with the sale of liquors, because the promise of B is not apportioned but en- 
tire, and the promises and acts of A are also entire. The whole contract must 
therefore be regarded as illegal and unenforceable. 

2. If the contract is divisible, that is, if there are two or more 
promises on one side and a separate consideration for each on the 
other side, and if the legal may be separated from the illegal, the 
legal portion may be enforced unless the illegal part is so immoral 
or criminal that the court thinks it best to give the parties no relief. 

Example 2. A sells his retail business to B for $i 0,000, and in considera- 
tion of $1000 more A agrees not to engage in a similar business again any- 
where in the state. The second agreement is illegal as an unnecessary restraint 
of trade, but it rests upon a separate consideration and can therefore be sepa- 
rated from the legal part, and the latter may be enforced. 

3. Ordinarily the law gives no relief to either party to an illegal 
contract, either by enforcing the contract or by allowing a party to 
it to recover anything paid or advanced under it. But it may aid 
a party to get back what he has paid, provided he is, as compared 



§28] REALITY OF CONSENT 33 

with the other party, innocent of an illegal intent, or provided his 
recovery of the money would prevent the illegal transaction from 
being carried out. Statutes often provide that money paid on a 
gambling contract may be recovered. 

Examples : 3. A marriage broker induces an ignorant immigrant to pay 
him money to secure her a husband. The court thinks tlie parties are not in 
equal guilt, since the woman is ignorant and is played upon by the superior 
ability of the broker, and permits her to recover the money. 

4. A pays B a sum of money to commit an assault on C. To allow A to 
recover this before the assault is committed would remove the inducement for 
B to commit the assault. Such recovery is not out of consideration for A but 
out of consideration for C and the public peace. 

VI. Reality of Consent 

Agreement consists in the meeting of the minds of the parties. 
But if one mind or both give consent by mistake, or if one is 
misled by misrepresentation or fraud, or if one is compelled by 
duress or undue influence, there may be no true agreement. In 
such cases the contract may be avoided by the party misled. We 
have then to consider the effect of mistake, fraud, duress, and 
undue influence. 

28. Mistake. Mistake about some material fact connected with 
the contract may be mutual, that is, common to both parties, or 
unilateral, that is, made by one party alone, (i) The fact about 
which a mutual mistake occurs may be as to the subject matter 
of the contract, namely, («) its existence, (p) its identity, or (c) its 
quality. (2) Unilateral mistake may be (a) unknown to the other 
party, (b) known to the other party, (c) as to the identity of a 
party, or (d) as to the nature of the transaction itself. 

(i) («) Mutual mistake as to the existence of the subject matter 
of the contract really prevents a contract from being formed at all. 

Examples: i. A sells B a horse. Unknown to either party the horse 
died before the contract was made. There is no contract, because there is 
no subject matter upon which the minds of the parties could meet. 

2. A cargo is at sea. The owner sells it subject to the risk of its being 
already lost. The buyer is bound although the cargo was lost when the con- 
tract was made, because the buyer assumes the risk. There is no mistake, be- 
cause that risk is a part of the subject matter of the contract. If the owner 
knew it was lost, the contract can be avoided for fraudulent concealment. 



34 FORMATION OF CONTRACTS [Ch. II 

(b) Mutual mistake as to the identity of the subject matter 
enables either party to avoid the contract. 

Example 3. A says, " I have purchased X's horse, Billy, and will sell him 
to you for $250." B replies, " I will take him at that price." X had two 
horses named Billy. A knew only the one he bought and B knew only of 
the other. There is no binding contract. The minds have not met upon the 
same subject matter. 

(c) Mutual mistake as to the quality of an article will not ordi- 
narily affect the validity of a contract. 

Example 4. A finds a stone which appears to be a jewel of some kind, and 
thinks it is a topaz. B, equally uncertain as to its quality or value, buys it for 
a small sum. It turns out to be anuncut diamond of great value. The contract 
is binding. Neither party knew the true nature of the stone, and each had an 
equal opportunity to ascertain. 

(2) (a) Unilateral mistake unknown to the other party is not 
ordinarily a ground for avoiding a contract. 

Example 5. A sells the stone (as above), believing it to be a topaz. 
B knows it is a diamond but is ignorant of A's belief. The contract is 
binding. A alone is mistaken and B has neither induced A's mistake nor 
taken fraudulent advantage of it. 

(3) Unilateral mistake known to the other party and taken 
advantage of by him may enable the mistaken party to avoid 
the contract. But this doctrine has rather narrow limits. If the 
opportunity of knowledge is equally open to both parties, one 
is not bound to reveal to the other what he has by superior 
diligence discovered. 

Examples : 6. A buys of B the negotiable paper of X. A believes X to 
be solvent. B has just learned of X's insolvency and knows that A has not 
yet learned of it or had a reasonable opportunity to learn of it. A may avoid 
the contract. B's fraudulent concealment is fatal. 

7. A sells his land to B. There is a valuable mine in it. A does not know 
this. B does know, it and knows that A is ignorant of it. The contract is 
binding. B is not bound to disclose what A has had an equal opportunity to 
discover, but B must not by any word or artifice mislead A. 

8. A sells cotton to B, the price being dependent upon whether the war 
between the United States and Great Britain is ended. A asks B whether there 
is any news of peace. B, knowing that peace has been declared, says there is 
no news. He thereby confirms A's mistake and A may avoid the contract. 



§29] REALITY OF CONSENT 



35 



(c) Unilateral mistake as to the identity of the other party 
will avoid a contract. 

Example 9. A has been accustomed to deal with B. Unknown to A, 
B has sold his business to C. A sends an order for goods to B. C gets the 
order and ships the goods. A is not bound. He has a right to select whom 
he will deal with, and is not obliged to have another person than B introduced 
into the contract. 

(d) Unilateral mistake as to the nature of the contract may 
avoid it. 

Examples : 10. A is induced by a trick of B to sign a negotiable note, 
thinking he is signing a contract to sell goods for B. A is not bound. 

II. As above. B indorses the note to C, who pays value for it in igno- 
rance of B's fraud. A is not liable to C unless C shows that A's negligence 
in signing the note is so great as to make it just that he should suffer rather 
than C. When the rights of an innocent third party are in question, A may 
be estopped to set up the mistake and the fraud. Whether A's negligence 
is so great as to work such an estoppel is a question of fact. 

29. Fraud and misrepresentation. Fraud consists in a false 
representation of fact, made with knowledge of its falsity (or 
with reckless disregard of its truth or falsity), with the inten- 
tion that it should be acted upon by another, and actually 
inducing that other to act upon it to his damage. Fraud by 
one party enables the other party to a contract to rescind it. 
Fraud is also a tort, and is called deceit in the law of torts. 

Example I. A seller of a horse represents him to be sound and healthy 
when, known to the seller and unknown to the buyer, he has the glanders. 
The buyer acts upon the representation, buys the horse, and afterwards dis- 
covers that it is diseased. The buyer may either {a) rescind the contract, that 
is, return the horse and recover the purchase money, or (b) keep the horse 
and recover damages in an action in tort for deceit. 

If in the above case the seller actually believes the horse to 
be sound when he makes the statement, there is no fraud but 
merely innocent misrepresentation. In such case there can be 
no action for deceit, since in order to base an action for deceit 
it is necessary either to show that the seller knew that what he 
said was false or to show that he knew that he did not know 
whether it was true or false, that is, made the statement without 
any belief and in reckless disregard of its truth or falsity. At 



36 FORMATION OF CONTRACTS [Ch. II 

common law a contract would not be set aside for innocent mis- 
representation, and this is probably the generally accepted rule, 
although the equity courts often set contracts aside upon this 
ground. 

Misrepresentations of fact may take the form of warranties, 
in which case they become collateral contract promises, and 
an action lies for the breach of them (see sect. 53 post). 
Representations may become a part of the main contract, and 
then if they are false the contract is broken and an action lies 
for its breach. Whether a representation merely induces one 
to make a contract, or becomes a warranty, or becomes a term 
of the contract itself, is a matter of construction too difficult 
to be treated here. 

Example 2. The seller of a horse says, " I warrant him to be sound and 
healthy." Unknown to either party, the horse has the glanders. The buyer 
has an action in contract against the seller for a breach of warranty. If the 
seller knew the horse had the glanders, the buyer could, at his election, sue 
for breach of warranty, or sue in tort for deceit, or rescind the contract and 
recover the purchase money. 

If the misrepresentation is as to a matter of opinion rather 
than of fact, there is no actionable fraud, because the injured 
party has no right to rely upon it. 

Example 3. The seller of a horse says, " This horse is the fastest animal 
in the county." No sensible buyer would attach any importance to such a 
" puff " by a seller. 

In some cases where the defect is not discoverable upon 
examination, and is a fatal one, the seller may be under a duty 
to disclose it to the buyer. The general rule, however, is caveat 
emptor, "let the buyer beware." But in no case must the seller 
resort to " artful concealment " to cover up a defect. 

Example 4. B sells C a mahogany log too large to be easily rolled over, 
and conceals a defect by rolling the defective part next the ground. This is 
artful concealment for which the buyer may rescind. 

30. Duress. Duress consists in actual or threatened violence 
or imprisonment whereby the will of a contracting party is 
coerced. Such threatened violence or imprisonment may be 
directed against oneself or against a member of one's family. 



§31] PRACTICAL SUGGESTIONS 37 

Whatever threat overcomes the will of the contracting party 
and compels him to do what he otherwise would not do may 
in general be regarded as duress. 

Example. A's son has been in B's employment and is charged with 
embezzlement. B threatens to have the son arrested and prosecuted unless 
A pays or secures to B the sum alleged 'to have been taken. A gives B his 
note for the amount. This note may be avoided upon the ground that it 
was given under duress, that is, under the fear occasioned by B's threat to 
imprison A's son. 

31. Undue influence. Undue influence consists in an uncon- 
scientious use of power over the will of another, whereby that 
other is induced to make contracts or gifts which he otherwise 
would not make. It is a subtle form of duress whereby a per- 
son of superior intellect and will dominates one of inferior 
capacity or experience. 

Example. A stepfather manages the property of his infant stepchildren. 
As each one becomes of age the stepfather buys the property or interest, takes 
a conveyance, and pays an inadequate consideration. The conveyances so 
obtained may be set aside, since the influence of the parent or guardian is 
presumed to continue for some time after the child or ward reaches his majority, 
and the contract is made under such undue influence as is unfair. 

In some cases, as parent and child, or attorney and client, 
the law presumes that the parent or attorney exercised undue 
influence. In other cases the burden is upon one who seeks 
to set aside a transaction to show that undue influence was in 
fact exerted. 

How TO MAKE A CONTRACT 

The object in drawing up a contract should be to embody the exact 
agreement of the parties in such a manner that no future misunderstandings 
as to its terms shall arise. There is a rule of law that when a contract is reduced 
to writing, the terms of the written instrument cannot be contradicted or varied 
by parol evidence. While there are some exceptions to this rule, not necessary 
to be mentioned here, the rule is very general in its application and should be 
borne in mind when the contract is written and executed. A very good way 
is for each party to put in one-two-three order the promises he is ready to make, 
and for the other party to see whether these are the promises he is willing to 
accept. When these bilateral promises are embodied in the written instrument, 
the whole should be carefully considered again in order to make sure that each 
party has given and exacted just what he intends. It is very unwise to leave 
anything to an outside parol agreement. 



38 FORMATION OF CONTRACTS [Ch. II 

A general form of a contract is here given. The particulars may be varied 
according to the actual agreement. 

" This Agreement, made in duplicate this fifth day of April, one thousand 
nine hundred and five, by and between Alfred Black, of the city of Ithaca, 
in the state of New York, of the first part, and WilUam Coles, of the same 
city and state, of the second part, ' 

" WITNESSETH, that the said party of the first part, for and in considera- 
tion of the agreement hereinafter contained, to be performed by the party of 
the second part, agrees to and with said party to construct and finish in a good, 
substantial, and workmanlike manner on the lot belonging to the party of the 
second part, and known as No. 1 5 in Prospect Street in the city of Ithaca, N. Y., 
one frame building in accordance with the plans and specifications hereto an- 
nexed, of good, substantial materials, on or before the fifteenth day of November 
next. And the party of the second part, in consideration thereof, agrees to pay to 
the said party of the first part for the same the sum of five thousand dollars, 
lawful money of the United States, as follows : the sum of one thousand dollars 
when the foundations are completed ; the sum of one thousand dollars when 
the frame or superstructure is inclosed ; the sum of one thousand dollars when 
the structure is plastered ; and the balance of two thousand dollars when the 
building is fully completed according to the plans and specifications. 

" And the party of the first part further agrees that in case of his failure 
to complete the work by the date fixed he will pay to the party of the second 
part as liquidated damages, and not as a penalty, ten dollars for each and 
every day the full completion of his contract is delayed beyond that date. 

" In Witness Whereof, the parties to these presents have hereunto 
set their hands the day and year first above mentioned. 

Alfred Black 
WiLLiA.M Coles " 

If the signatures are to be witnessed, add at the left " Signed in the 
presence of," and have the witness write his name beneath this phrase. If 
there is a witness, he must be produced in court in order to prove the sig- 
natures, or his absence must be satisfactorily accounted for. If there is no 
witness, then other evidence, as the testimony of the other party, the proof 
of handwriting, etc., may be resorted to in order to prove the signature in 
question. If a seal is used, the final clause should read, " In witness whereof, 
the parties to these presents have hereunto set their hands and seals the day 
and year first above written " (see sect. 23 ante as to the effect of a seal). 

If the signature of a party is to be affixed by his agent, the form should 
be "John Doe, by Andrew Bright, his agent." The use of the word "by" 
is very important. The signature "John Doe, Andrew Bright, Agent," might 
make Bright a party (see sect. 1 3 1 post). 

If someone (A. B.) is to guaranty the performance by the party of the first 
part above, and if the guaranty is given at the time the contract is made, 
there may be written below the signatures the following: 



§31] REVIEW QUESTIONS AND PROBLEMS 39 

" In consideration of the agreement above made by the party of the second 
part, I do hereby guaranty to the said party that the above-named Alfred 
Blaclc will well and faithfully perform everything by the foregoing agreement 
on his part to be performed, at the times and in the manner above provided. 

A. B." 

If the guaranty is made subsequent to the contract to be guarantied, it 
will require a new consideration, and this should be expressed in the written 
guaranty — for example, " In consideration of one dollar to me paid by William 
Coles, the receipt whereof is hereby acknowledged, I do hereby guaranty, etc." 
(see sect. a> post). 

A simpler form of contract would be as follows : 

"A. B. and C. D. do hereby mutually agree as follows: A. B. to [siate 
what A. S . promises']; C. D. to [state what C. D. promises]. ' . tj 

Ithaca, N.Y., Jan. 5, 1905. C. D." 

But the more formal phraseology is safer to use in order to make clear 
that the promises are mutually dependent and indivisible (see sect, iq post). 

A contract may be assigned in the following form : 

" For value received, I hereby assign to E. F. the within contract. 

Ithaca, N.Y., June 7, 1905. A. B." 

REVIEW QUESTIOKS AND PROBLEMS 

Section 10. Define contract. Distinguish agreement from contract. 
Illustrate. Distinguish affirmative and negative contracts. How many parties 
to a contract ? What is a novation ^ Illustrate. 

Problem i. B in a spirit of frolic and banter offers C $300 for a watch 
worth $15. C in the same spirit accepts, takes B's check for $300 on a bank 
in which he has no deposit, and delivers the watch to B. C presents the 
check, and, when it is dishonored, brings an action against B for the $300. 
B sets up the above facts and offers to return the watch. Should C recover 
the $300 against B ? 

11. Name the essentials of an enforceable contract. 

12. What is the meaning of agreement.'' How is it determined when an 
agreement has been reached .' Why must its terms be definite ? 

Problem 3. B offers to sell his horse to C for $165. C understands B to say 
$65, and replies, " I '11 give fifty-five." B understands that C means " one fifty- 
five," having dropped the " one," as is not unusual among traders. B replies, 
" Sixty-five is the price." C then says, " I '11 take him." Is there a contract.? 

Problem J. B agrees to give his niece C 100 acres of land if she will live 
with him until her marriage and act as his housekeeper. C accepts and performs 
her part of the agreement. B refuses to convey to her any land. C sues for 
breach of the contract. Is there an enforceable contract? Has C any remedy? 



40 FORMATION OF CONTRACTS [Ch. II 

Problem 4. B hires C and agrees to pay him "good wages," but after- 
wards refuses to give him any work. C sues for damages for breach of 
contract. Result 1 

13. Name three classes of agreements. Illustrate. Point out the different 
classes in sect. 10, Ex. 6. 

14. How do agreements originate ? Define offer. Define acceptance. What 
forms do offer and acceptance take? Explain bilateral executory contract; 
unilateral executory contract; executed contract. Define express promise; 
implied promise. 

1. Must the offer be communicated? To whom? When is the offer of a 
reward pubhshed in a newspaper communicated? When one purchases a 
railway ticket,, who makes the offer? 

Problem j. C is on a train and B's agent comes through to take orders 
for the delivery of baggage. C gives the agent a check for his trunk and 
receives a receipt containing a notice that B will not be liable in case of loss 
to an amount exceeding $100. C does not read the receipt or know of its 
contents. The baggage is lost. Is C limited to a recovery of Si 00? 

2. How may the acceptance be communicated? Are words necessary? 
Must it actually reach the offeror? Is mental acceptance sufficient? When 
an offer is made by mail, when is the acceptance complete? 

Problem 6. B asked C for an estimate of the cost of fitting up an office. 
C made the estimate (not an offer). B then wrote C saying that if C would 
do the work within two weeks, he might begin at once. No answer was 
received. The next day B countermanded the order. Meanwhile C purchased 
material and began to work upon it at his shop. C now sues B for breach 
of contract. Was there a completed contract? 

Problem 7. C has supplied B with eelskins used in his business. He has 
sent them without a specific order, and B has kept them and paid for them. 
C sends B a quantity on April 2. B keeps them for some months unpacked. 
They are then destroyed by fire. Is B liable to C for the price ? 

3. What is the effect of a qualified acceptance? Illustrate. 

Problem 8. B offers C 2000 tons of iron rails at so much per ton. C tele- 
graphs, " Send me 1200 tons iron rails as per offer." B telegraphs a refusal to 
fill the order. C then telegraphs, " Send me 2000 tons iron rails as per offer." 
B again refuses to fill the order. C then sues B for breach of contract. Result ? 

4. What control has the offeror over the offer before acceptance? Same 
question (a) when offer is made under seal and (b) when offeree pays to have 
time to accept? 

Problem g. C is offering goods at auction. B bids $100 for the lot, but 
retracts the bid before the hammer falls. C refuses to accept the recall of the 
bid and knocks down the goods to B, who refuses to take them. C sues B. 
Is there a contract? 



REVIEW QUESTIONS AND PROBLEMS 41 

Problem 10. B sent a letter to C saying : " We are able to oifer salt at 
85 cents a barrel. Shall be pleased to receive orders." C at once ordered 
2000 barrels at that price. B refused to fill the order, as salt had gone up 
in price. C sues B for breach of contract. Result? 

5. Suppose the offeree accepts after the offeror 'has revoked but before 
the offeree knows of the revocation? 

6. How does an offer lapse ? What is the effect, upon an unaccepted offer, 
of the death of the offeror or of the offeree ? 

15. Who is an infant? When is he of age? Which of his contracts are 
binding during infancy? Which are binding after he is of age? What are 
necessaries? What is ratification? 

Problem 11. On August 10, at 8 a.m., B bought of C a bicycle for $50. 
B's twenty-first birthday was on August ii, and it was proved that he was 
born at 10 P.M. of that day. C sues B for the agreed price. B seeks to 
disaffirm the contract and pleads that it was made during infancy. Result? 

Problem 12. B, a student of eighteen years, engaged a room of C for 
forty weeks, at $2 a week, payable weekly. At the end of ten weeks he 
left the room, and C was unable to secure another lodger. C sues B for jf8o. 
B pleads infancy. How much may C recover ? 

Problem ij. B, while an infant, bought jewelry (not necessary) of C. After 
B became of age he acknowledged the debt and said he would pay it as soon 
as he had the means. Is B liable to C ? 

Problem 14. B, an infant, buys a horse of C. After B is twenty-one he 
sells the horse to X. C sues B for the price of the horse. Can B succeed ? 

Problem ij. C, an infant, sells B a horse. Before C is twenty-one he 
brings an action to recover the horse from B. Will such an action lie during 
C's minority ? 

16. What contracts of an insane person are voidable ? What are binding ? 
Same questions as to idiots ; intoxicated persons. 

17. What was the common-law rule as to married women's contracts? 
What is a void contract ? (Are an infant's contracts void .'') How do statutes 
change the common law as to married women's contracts ? 

18. What contracts require a consideration? What instruments have 
presumptive consideration? What is the effect of a seal at common law? 

Problem 16. C voluntarily supplied necessary articles to B's father, who 
was old and poor. B afterwards promised C to pay for them. C now sues B 
on that promise. Is B liable ? 

19. Must the consideration equal the promise in value? What is a 
valuable consideration? What is not? 

Problem 77. B says to C, " If you will take a trip abroad, I will pay your 
expenses.'' C takes the trip, and now sues B for the expense incurred. 
Is B liable? 



42 FORMATION OF CONTRACTS [Ch. II 

Problem z8. B writes to C, " If you will extend the time which A has to 
pay you his debt, I will become surety for A's payment." C extends the time 
and takes from A a new note on three months' time. A does not pay. C sues 
B. Should C succeed.? 

Problem ig. B and C were in dispute about a claim made by C upon B 
for an injury to goods which B was carrying for C. B finally agreed to give 
and C to take one half the amount C first claimed. C sues on B's promise. 
B answers that there was no consideration for his promise because he (B) was 
not liable at all to C for the injury to the goods. 

Problem 20. C was a constable in A. B offered a reward of $roo for the 
arrest of X for a specified crime. C, knowing of the reward, arrested X in A, 
and now brings an action for the reward. What objection.'' 

20. What is meant by a past consideration ? Distinguish from an executed 
consideration. Illustrate. Effect of previous request? What is meant by 
waiving a legal bar to an action on a contract? 

Problem 21. B says to C, " If you will look up certain of my debtors, I 
will pay you what is right." C does so. B then promises to pay C Sioo. 
How much may C recover? 

21. What is meant by an illegal consideration ? Illustrate. 

22. What is the Statute of Frauds? Object? When first enacted? What 
sections deal with contracts? State the provisions of the fourth section. Of 
what may the memorandum consist? What must it contain? State the pro- 
visions of the seventeenth section. In what three ways may this section be 
satisfied? Is the seventeenth section in force in your state? If so, what 
contracts for personalty are within the statute? 

Problem 22. A memorandum of sale made by an auctioneer read as 
follows : 

"Oct. 9, 1866. This day sold B's house and land on Bartlett Street in 
Lewiston; was struck down to C for $1200, one third down. 

D. E., Auctioneer " 

C sues B, alleging that he (C) was to pay one third down, one third in one 
year, and one third in two years, and that B refused to carry out the contract. 
B pleads the Statute of Frauds. Is this a good defense ? 

Problem 23. B sells C by parol two standing trees for $ i o. Afterwards B 
refuses to allow C to cut the trees. C sues B for breach of contract. B pleads 
the Statute of Frauds. Result? 

Problem 24. B. Ry. and C agree orally that if C will grade and lay a side- 
track, or switch, the Ry. will maintain the switch for C's benefit for shipping 
purposes as long as C may need it. C does his part. The B. Ry. refuses to 
perform its part. C brings an action for damages. The Ry. pleads the 
Statute of Frauds. Which provision? Result? 



REVIEW QUESTIONS AND PROBLEMS 43 

23. What is a seal? What is a sealed contract? What is the effect of a 
seal ? What statutory changes in the effect of a seal ? 

24. What contracts are usually declared by statute to be illegal ? What is 
the effect of prohibiting an act ? What is the effect of affixing a penalty to the 
doing of an act? 

Problem 2^. A statute prohibits any work, labor, or business on Sunday. 
C agrees with B to procure advertisements to be published in B's Sunday 
newspaper. Is this contract illegal? 

Problem 26. Under a similar statute B makes and delivers a promissory 
note to C on Sunday. May C enforce the note ? 

25. Define wagering contracts. Were they illegal at common law? Explain 
wagers on the rise and fall of the market. In what sense are insurance contracts 
wagering contracts ? 

Problem. 2"/. C, a broker, sues B, a customer, for moneys paid and 
expended by C in certain stock transactions. It was understood between C 
and B that the purchases and sales made by C for B should not result in an 
actual transfer of stocks, but that in each case the contract should be adjusted 
by the payment of money by B in case the transaction proved to be a losing 
one, or to B in case it was a winning one. C paid out for B more than he 
took in for him. Can C recover this amount? 

26. Enumerate and illustrate contracts illegal at common law. What is a 
contract in restraint of trade ? Are all such contracts illegal ? What is the test ? 

Problem 28. B had a claim against the United States. C agreed with B 
to secure an act of Congress appropriating money for the payment of the 
claim, and B agreed to pay C 25 % of whatever sum Congress might appro- 
priate. C secured an appropriation in favor of B for 1 12,000. B refuses to 
pay C, who then brings an action against him for $3000. Result? 

Problem 2g. C charges B with embezzlement. Upon C's agreeing not to 
prosecute B criminally, the latter gives C a promissory note for the amount. 
Is B liable upon the note? 

27. What is an indivisible contract? What is the effect if any portion of it 
is illegal? What is a divisible contract? What is the effect if one part is 
illegal? If a party pays money upon an illegal contract, can he recover it? 

Problem jo. C deposited $500 with B as a wager on a foot race, knowing 
it was to be a " bogus " race, and intending to cheat someone. Before the 
race was run, C became suspicious that he would be cheated and demanded 
back his money. B refused to give it back, and finally paid it to A, the 
pretended winner of the race. C sues B for the amount. Result? 

28. What is meant by reality of consent? What will prevent reality of 
consent? Distinguish between mutual and unilateral mistake. Name the 
classes of mutual mistake. Explain and illustrate each. Which will avoid a 
contract? When will unilateral mistakes avoid a contract? 



44 FORMATION OF CONTRACTS [Ch. II 

Problem ji. Contract of sale of a lot of land on Prospect Street in 
Waltham. In an action against the buyer for the price, he sets up that the 
land now tendered him is on another Prospect Street than the one he had in 
mind, and understood that the seller had in mind, when the contract was 
made. Is this a good defense? 

Problem 32. C. Ry. prepares a rate sheet and by mistake prints the fare 
from A to D as $21.25 when it should be $36.70. B discovers the mistake 
and takes advantage of it by at once purchasing of a local agent a large 
number of tickets at the printed price. C. Ry. seeks to enjoin B from dis- 
posing of these tickets and to compel him to return them and receive back 
his money. Result.? 

29. Define fraud and its effect upon the contract. Distinguish innocent 
misrepresentation. Is this a tort.' Will it avoid a contract? When does a 
representation become a warranty? What is the effect of a representation of 
opinion ? What is fraudulent concealment ? 

Problem j_j. B had engaged S to teach school in District A in case she 
secured a certificate by a certain time. C applied for the same school, and on 
being informed of the contract with S, stated to B that there would be no 
examination for teachers in time for the opening of school. B then engaged 
C. Later S appeared with the necessary certificate, and B refused to allow C 
to teach. C sues B for breach of contract, (i) In case C knew there would 
be an examination, can he recover ? (2) In case C believed there would not be 
an examination, can he recover ? 

Problem 34. C sold B cattle, knowing and concealing the fact that they 
had Texas fever, a disease not discoverable by examination. The cattle died, 
and C sues for the price. Should he win the suit? 

30. Define duress. Need it be against the contracting party ? 

31. What is undue influence? Distinguish from duress. When is it 
presumed ? 

Draw a contract by which you agree to work for John Doe as clerk in 
his store for one year, with a vacation of two weeks, for $10 a week payable 
weekly during the entire year, and are to have at cost price such goods, not 
exceeding $100 in the aggregate, as you may choose to select from his stock. 

Draw a contract by which Richard Roe guaranties the faithful performance 
of your part of the above contract. 

Draw an assignment of your right to the goods. 



CHAPTER III 

OPERATION AND DISCHARGE OF CONTRACTS 

I. Liabilities and Rights of Third Parties 

32. Liability of third parties. »The problem here is twofold : 
first, whether anyone can be made liable upon a contract who 
is not a party to it ; and, second, whether one may be liable for 
interfering with the formation or performance of contracts. 

1. Contracts bind only the parties to them. A person cannot 
be made liable upon a contract to which he was not a party, for 
agreement lies at the basis of all true contracts. But an undis- 
closed principal may be liable on a contract made by his agent, 
although by its terms it is a contract between the agent and the 
other party ; this is an exception to the general rule, and is 
treated later (see sect. 129). 

Examples : l. A contracts with B. In fact, A is acting for an undisclosed 
principal P. When B learns this, he may hold P liable on the contract. 

2. But if A, as above, exceeds the authority P gave him, B cannot hold P. 
It is really P's consent that A may make the contract that renders P liable. 

2. Third persons may render themselves liable in tort by 
interfering with contracts, by inducing one party to a contract to 
commit a breach of it, or by using unlawful means to prevent a 
person from making a contract. A boycott is brought about by 
inducing persons not to deal with the one boycotted. If force or 
fraud is used, the boycott becomes unlawful. 

Examples: 3. A engages B to sing at his theater for the season. X 
induces B to break this contract and sing at X's theater. X is liable to A for 
the damages caused by B's breach of contract. 

4. A is negotiating with B to sing at his theater. X falsely tells B that A 
is insolvent and cannot pay the salary. B refuses to contract. X is liable in 
tort to A for inducing B, by false representations, not to enter into a contract 
with A. 

5. Strikers threaten to assault workmen who are seeking their places, and 
thus prevent the employer from getting new workmen. The strikers are liable 

45 



46 OPERATION OF CONTRACTS [Ch. Ill 

to the employer for preventing him by unlawful means (threats of violence) 
from making contracts with those who otherwise would apply. The strikers 
may also be enjoined from using unlawful means for this purpose. If the 
strikers also keep customers away by such means, there is an unlawful boy- 
cott of the employer's business. 

33. Rights of third parties. In most of the United States, 
but not in England, if a contract is made by A with B for the 
direct benefit of C, the latter may recover upon it, although A 
furnished the consideration and the promise of B was made to 
A. This is especially so whenever A owes C some duty which 
he is seeking to discharge by giving C the benefit of B's promise. 
So also an undisclosed principal may sue upon a contract made 
by his agent in his behalf. 

Examples .• i . A lends B money and B promises A to repay it to C, to 
whom A owes money. C may maintain an action against B upon the promise 
made for his benefit. 

2. An incoming partner promises an outgoing partner to assume and pay 
the latter's obligations to the partnership creditors. The creditors may sue the 
incoming partner upon the promise made for their benefit. 

3. A father agrees to name his child after B, in consideration of B's promise 
to pay the child $1000 when he is twenty-one. The father names the child 
after B. When the child is twenty-one he may compel B to pay him the 
money so promised. 

4. A contracts with B, but is secretly acting for P, an undisclosed principal. 
P may hold B upon the contract. 

II. Assignment of Contracts 

34. Assignment by act of the parties. A bilateral contract 
creates both liabilities and rights. The problem is whether either 
the liabilities or the rights may be assigned by a party to the 
contract to some other person. 

I . Assignment of liabilities. A party to a contract cannot as- 
sign or transfer his liabilities under it. The other party has a right 
to look to the person with whom he has contracted. If the duties 
are not for purely personal service or do not involve personal confi- 
dence, one can assign his rights and delegate the performance of his 
duties, but will remain liable if they are not properly performed. 

Example i. A let a carriage to B at a yearly rental for five years, and 
agreed to keep it in repair and to paint it every year. A sold his business to C 



§35] ASSIGNMENT 47 

and notified B that C would be answerable for future repairs. B refused to 
accept C and returned the carriage. B is right. He is not bound to look to 
anybody except A for the repairs. But nevertheless A could delegate to C the 
doing of the necessary work, remaining himself personally liable for any negli- 
gence or nonperformance. If the work is artistic work, the performance of it 
cannot be delegated ; the other party has a right to the artistic skill of the 
person with whom he contracted. 

2. Assignment of rights. The rights one acquires under a 
contract may be assigned if they relate to money or property, 
but one cannot assign a right to some personal service. At com- 
mon law the assignee must sue in the name of the assignor, but 
statutes now generally give the assignee the right to sue in his 
own name. The assignee is subject to whatever defenses might 
have been set up against his assignor ; he gets the assignor's 
rights, and no more. 

Examples : 2. A contracts to give B JSioo for B's horse. A assigns the 
contract to C. Upon tender of the f 100 C is entitled to the horse. So also B 
could assign the right to receive the money. 

3. A contracts to give B his note for $100 for B's horse. A assigns the 
contract to C. B is not bound to take C's note, nor is he bound .to deliver the 
horse to C unless the latter tenders A's note. 

4. C agrees to work for D in D's store for $30 a month. D sells the store 
to E and assigns to him the contract with C for services. C is not obliged to 
work for E under the contract. 

5. F assigns to H a contract with G by which G agreed to deliver 100 
bushels of oats in exchange for F's horse. H sues G for breach in refusing 
to deliver the oats after receiving the horse. G sets up that F fraudulentiy 
represented the horse to be sound and claims an offset in damages. H is 
subject to this defense precisely as F would have been. 

35. Negotiability of certain contracts. Contracts contained in 
written instruments that are negotiable, such as bills of exchange, 
promissory notes, and checks, may be transferred by negotiation 
from hand to hand so that each new holder may recover upon 
them. Moreover, the transferee, if a holder for value and without 
notice, is not subject to the personal defenses which might have 
been set up against the transferor. This incident of negotiability 
is a peculiar attribute of these instruments and will be more fully 
discussed under the head of Negotiable Paper. 

The distinction between assignability and negotiability may be 
thus illustrated. 



48 OPERATION OF CONTRACTS [Ch. Ill 

1. "On demand I promise to deliver to John Doe loo bushels of wheat at 
eighty cents a bushel. Richard Roe." 

Indorsed: " For value received, I hereby assign this contract to J. S. 
Dale. John Doe." 

2. " On demand I promise to pay to the order of John Doe one hundred 
dollars, value received. Richard Roe." 

Indorsed: "Pay to J. S. Dale. John Doe." 

The first instrument is a common-law contract. It is assigned 
by the promisee, John Doe, to J. S. Dale. The assignee. Dale, 
may maintain an action against the promisor, Richard Roe, in 
case the latter refuses to deliver the wheat upon tender of the 
price. At common law Dale would have to sue in the name of 
the assignor. Doe, and he would be subject to whatever defenses 
might have been set up had Doe brought the action himself, as, 
for example, that there was mistake or fraud in the contract. 
He may now generally, under statutory provisions, sue in his own 
name, but he is still subject to the same defenses. 

The second instrument is a negotiable promissory note. It is 
indorsed by the promisee, John Doe, to J. S. Dale. The indorsee, 
Dale, may maintain an action in his own name against the maker, 
Richard Roe, in case the latter fails to pay at maturity; and if 
he gave value and had no notice of any defense, like mistake or 
fraud, he will not be subject to such defense even though Doe 
would have been subject to it if he had retained the note and 
brought the action. 

The rules of negotiability came into the law from the custom 
of merchants, and are peculiar to a class of instruments known 
as negotiable paper. 

36. Assignment by operation of law. Where a contracting 
party dies, most contracts which he might have assigned during 
his life pass to his executor or administrator, who may sue or 
be sued upon them. Contracts for personal services do not survive 
the death of either party, and contracts requiring long-continued 
operations or conduct of business by an administrator will not be 
deemed to survive. 

So where a person becomes a bankrupt, his right to enforce 
contract obligations passes to his trustee in bankruptcy ; but the 
trustee would not be bound to enter upon performance inconsistent 
with the purpose of winding up the bankrupt's affairs. 



§37] BY AGREEMENT 



49 



At common law a husband, upon marrying, became entitled to 
all his wife's personal property and could enforce her claims 
growing out of contract. Conversely, he became liable for her 
antenuptial debts. But these common-law rules have been al- 
most everywhere swept away by statutes giving married women 
the control of their own property and making them liable for 
their own contracts. 



III. Discharge of Contracts 

37. Discharge by agreement, including performance. An agree- 
ment to discharge a contract may be made by the parties to it 
after it is created, or the agreement as to a method of discharge 
may be contained in the contract itself. 

1. Waiver or rescission. When a bilateral contract has been 
concluded and is a binding agreement, the parties to it, by a new 
agreement, may contract to discharge it. The consideration is 
the mutual release of A by B and of B by A from any further 
liability under it. If the contract has been performed by A but 
not by B, A may release B, but there must be some consideration 
for the release or it must be under seal ; but in those states 
where the seal has no legal effect there must be consideration 
for the release. 

Exatnfiles : i. A agrees to sell and B to buy A's book for $i. A and B 
then mutually agree to release each other. A's promise to release B is the 
consideration for B's promise to release A, and vice versa. 

2. A has delivered the book to B, and B now owes A $r. A promises B 
not to claim the dollar, that is, releases B from liability. The promise is not 
enforceable; there is no consideration for it. B gives A fifty cents and A 
releases B from the balance. Still there is no consideration ; a smaller sum is 
not consideration for a. larger. B gives A a ten-cent pencil in consideration 
of A's promise to release him ; the promise is enforceable and B is no longer 
liable to A. A gives B a release under seal ; it is enforceable and B is released. 
A release under seal might be as follows : " For value received, I hereby release 
and discharge B.B. from all claims for the unpaid portion of the purchase 
price of X book. Witness my hand and seal this seventh day of February, 
1905. A.A. [seal]." 

2. Substituted contract. The parties may by agreement sub- 
stitute a new contract for an existing one. 



so DISCHARGE OF CONTRACTS [Ch. Ill 

Example 3. A agrees to dig a well for B for $50. A complains that he 
will lose money, owing to the presence of rock which had not been contem- 
plated. It is agreed that A shall dig the well and that B shall pay him $75. 
This may be treated as a substituted contract and thus escape the difficulties 
mentioned in sect. 19, Ex. 4, ante. 

3. Provisions for discharge. The contract itself may contain 
certain provisions looking to a discharge under specified contin- 
gencies, as, for example, an agreement that either party may ter- 
minate it upon thirty days' notice. Insurance contracts or policies 
provide for a discharge in case of increase of risk, as in case the 
property remains vacant and unoccupied for more than ten days, 
and the like. 

4. Discharge by performance. If in accordance with the terms 
of the contract either party performs what he has promised to 
perform, he is discharged. If both perform, the contract is dis- 
charged, or executed. Tender is an attempted performance ; if it 
is accepted, it discharges the one making it ; if it is refused, it 
discharges him unless his contract is for the payment of money, 
in which case he is still liable on his debt but may plead the 
tender against a claim for interest or the costs of an action. A 
tender of money, to be technically good, must be of the exact 
amount due and in legal-tender money. 

Legal-tender money in payment of private debts consists of any gold coin, 
silver dollars, United States notes (greenbacks), and United States Treasury 
notes, to any amount ; fractional silver coins to the amount of ten dollars ; 
nickel and copper coins to the amount of twenty-five cents. Gold and silver 
certificates and national bank notes are not legal-tender money, but are ordi- 
narily received in payment of debts without objection. 

A tender of a check or note of a debtor need not be accepted in place of 
money. If it is accepted, it is (in most states) regarded as merely a conditional 
payment unless otherwise expressly stipulated. If the check or note is not 
paid, the creditor can either sue upon it or, by returning it, sue upon the 
original claim for which it was given. But if the creditor takes the note of 
some third person, which is the property of the debtor, it is regarded pre- 
sumptively as payment, just as if he had taken a horse or other corporeal 
chattel owned by the debtor. 

Before a party to a contract can be said to have performed, he 
must have fully and exactly done what he promised. But in con- 
tracts for building or executing work with many specifications and 



§38] BY IMPOSSIBILITY 51 

details a deviation that is slight and not willful may be overlooked 
on the doctrine of substantial performance. The contractor, while 
he may recover upon such substantial performance, must deduct 
from his recovery the amount the other party is damaged by the 
deviation. A deviation which is more than slight or trivial, or 
which is willful, will defeat a recovery because it is not regarded 
as performance, and the contractor is not therefore discharged 
from his obligation. 

Example 4. A agrees to build a house for B for $11,700. He has fully 
completed it according to specifications, except that there are some slight 
defects in the plastering. This is substantial performance, and A may recover 
the contract price less an offset for the defect, which was in this case held to 
be $200. But if the deviation was willful or excessive, A could not recover. 
One court says : " It may be harsh doctrine to hold that a man who has built 
a house shall have no pay for it, but the fault is with the one who voluntarily 
violates his contract." 

If one agrees to perform to the satisfaction of another, and the 
matter is one of personal taste, he cannot recover until the other 
is satisfied. But if it is a matter which is not one of mere personal 
taste, and the work would be lost if it were not accepted, the 
other must be satisfied when he ought reasonably to be satisfied. 

Examples : 5. A agrees to paint the picture of B's wife to B's satisfaction. 
B is not pleased with it. He is not obliged to take it. A has not performed 
his contract. 

6. A agrees to put in boilers in B's factory to B's satisfaction. A puts in 
the boilers. B is not satisfied. But if a reasonable man would say B should 
be satisfied, A has fulfilled his contract and B is liable. 

38. Discharge by impossibility of performance. A contract is 
not created if an impossibility exists at the time it is made. In 
only the excepted cases will subsequent impossibility discharge 
a contract. 

I . Prior impossibility. If a physical or legal impossibility exists 
when the contract is supposed to be made, there is no contract, 
because the promise to do an impossible act is not a real con- 
sideration for the counter promise or act; for example, if the 
subject matter does not exist when the contract is supposed to be 
made, the contract is ineffective, because there is no subject matter 
upon which it can operate. 



52 DISCHARGE OF CONTRACTS [Ch. Ill 

2. Subsequent impossibility. If an unforeseen difficulty arises 
subsequent to the formation of the contract, it will not, save in 
the cases enumerated, discharge the contract. 

Example I. A agrees to sell and deliver to B a quantity of beans to be 
raised by A. A's crop is destroyed by frost. A is liable for a breach of con- 
tract, since, although he cannot deliver beans from his own land, he can procure 
them elsewhere, and there is not, therefore, a real impossibility. If, however, 
it had been specified that A was to deliver the beans grown in a particular 
field, and the crop in that field had been destroyed, there would have been an 
impossibility due to the destruction of the subject matter. 

The following cases of impossibility arising subsequent to the 
formation of the contract will discharge the contract. 

a. Legal impossibility. If the impossibility is created by 
a change in the laws, or by an act of law, the promisor is 
discharged. 

Examples : 2. A leases a wooden building to B and agrees, in case it 
burns, to rebuild it. It burns and B demands that it be rebuilt. A defends 
upon the ground that, since the contract was made, the city by ordinance has 
forbidden the erection of wooden buildings. The defense is good. A is not 
obliged to build except in wood, and the law prevents him from building in 
that material. 

3. A agrees to work for B for three months. At the end of a month A is 
arrested and imprisoned. His contract is discharged, since the law by restrain- 
ing him has made it impossible for him to perform. 

b. Destruction of the subject matter of the contract. Where 
the existence of a specific thing is essential to performance, the 
contract is discharged if the thing is destroyed through no fault 
of the parties. 

Examples : 4. A agrees to let B occupy a hall for public entertainments. 
Before the time for occupation arrives, the hall is destroyed by fire. The con- 
tract is discharged. 

5. A sells B a buggy and agrees to repaint it and deliver it in thirty days. 
Before the work is finished, the buggy is destroyed by fire. The contract is 
discharged. Neither party has any action against the other. (If the buggy 
had been in a deliverable condition, the title would have passed to B at once, 
and he would have been obliged to pay the agreed price, although he had left 
the buggy in A's hands. This is more fully explained under the head of Sales.) 

6. When work is to be done by A upon an article belonging to B, the 
destruction of the article discharges the contract, but A may recover for the 
work performed upon it before its destruction. 



§39] BY BREACH 53 

7. One may contract against loss or destruction. For example, A hires a 
boat and contracts that in case of loss he shall pay a specified sum. The boat 
is lost in a storm without A's fault. A is bound to pay as agreed. 

c. Death or disability in the case of contract for personal serv- 
ices. If the contract is for personal services, the death or in- 
capacity of the one who is to perform such services will discharge 
the contract. 

Examples : 8. A musician contracts to play at a theater. Owing to illness 
he is unable to do so. The theater manager sues for damages for breach. 
He cannot recover. The illness and consequent incapacity of the musician 
discharge the contract. 

9. An unforeseen peril, as the prevalence of a dangerous contagious 
disease, may operate to discharge a contract for personal services within the 
infected district. 

10. The death of a master or of a servant discharges the contract as 
between the survivor and the executor or administrator of the deceased 
person. 

39. Discharge by breach. A contract may be indivisible or 
divisible, and the promises may be mutually dependent or may 
be independent. 

1. Where the promises on each side are mutually dependent 
and the contract is an indivisible one, a breach of performance 
by one party will discharge the other from performance and will 
give that other an action for damages against the one in default. 
A positive assertion by one party, prior to the time fixed for per- 
formance, that he will not perform, is an anticipatory breach and 
in some states gives the other party an immediate right of action. 
If one party tells the other to stop performance, the latter cannot 
by going on add to the damages for the breach. 

Example i. A agrees to sell a horse to B for $100. A refuses to deliver 
the horse and receive the purchase price. B is discharged from any further 
obligation ; he is not bound to receive the horse in case A should afterwards 
tender it, or to pay anything to A; and he may maintain an action for 
damages against A for the refusal to deliver when performance was due. 

2. If, however, the contract is a divisible one, or the transac- 
tion is made up really of a series of contracts, then the breach of 
one part will not discharge the other parts. The difficulty in these 
cases is in determining whether a contract is divisible or indivisible. 



54 DISCHARGE BY BREACH ' [Ch. Ill 

Example 2. A contracts to sell B 1200 tons of coal in twelve monthly 
installments of 100 tons. The English court held this to be a divisible con- 
tract, and that a breach in performance as to one installment would not dis- 
charge the contract as to the remaining installments. The Supreme Court of 
the United States held such a contract to be an indivisible one for the full 
amount specified, and that a breach as to any installment would discharge the 
entire contract. Generally in the United States such contracts are regarded 
as indivisible. 

3. Sometimes promises are not mutually dependent, and in 
such a case a failure of performance on one side may not dis- 
charge a promise on the other. 

Example 3. A agrees to pay a certain rent for B's house, and B agrees to 
allow A to occupy the house for one year and to give A the option to renew the 
lease for a second year. A falls in arrears upon his rent and B refuses to renew 
the lease. It is held that the covenant to renew is independent of the promise 
to pay the rent, and therefore B is not discharged from the promise to renew 
because of A's breach of the promise to pay. These cases are not very com- 
mon, and the construction is so technical as to be chiefly the business of lawyers. 

4. A warranty is a subsidiary promise attached commonly to a 
contract of sale. The breach of the warranty gives the buyer, under 
the Sales Act, the option of bringing an action for damages or 
of rescinding the contract. 

Exa7nple 4. A sells B a horse and innocently warrants it to be sound. 
After B has taken the horse, he discovers that it is unsound, and attempts to 
compel A to take it back and repay the purchase money. Some courts hold 
that this cannot be done and that B's only remedy is an action for damages 
for the breach of the warranty ; but in the Sales Act states and some other 
states B is allowed to rescind (see sect, t,"] post). 

40. Remedies for breach of contract. A breach of contract may 
be of a vital or a nonvital term. Whether a given term is vital or 
nonvital is a question of fact for the construction of the court. 
A vital term is one of such importance that it goes to the life of 
the contract. In case a vital term in a contract is broken by one 
party to it, these results follow : 

1. The other party is exonerated from further performance on 
his part ; 

2. He has an action for breach of the contract, in which he 
may recover as damages the contract price of whatever he has 
delivered or done, and also for any loss sustained by being pre- 
vented from completing the contract ; or, 



§40] REMEDIES FOR BREACH 55 

3. By treating the contract as entirely abandoned, he may, 
if he chooses, recover the value of whatever he may have him- 
self already performed ; that is, he may proceed upon an implied 
promise to pay a reasonable price or compensation. 

Examples : i. A sells 10,000 feet of lumber to B at $20 a thousand feet. 
A delivers 4000 feet, when B refuses to receive the remainder. A is not 
bound to deliver or tender any more. A may sue for breach of contract and 
recover $80 (the contract price of that delivered) //^.y the profit he would have 
made upon the remaining 6000 feet, which, assuming that the lumber cost A $ 1 5 
a thousand and is now worth in the market only $ 1 5 a thousand, would be $30. 

2. Or, if A chooses to disregard the express contract, he may sue as upon 
an implied contract and recover the market value of the lumber actually deliv- 
ered. Assuming that this is $2 5 a thousand, A could recover jf 1 00 ; but he could 
not recover for any loss of profits upon the portion undelivered. In case A 
has contracted to sell this lumber to B at too low a price, this alternative 
would be preferable. 

3. A buys a quantity of turnip seed of B, who represents the seed to be 
from a particular variety of turnips suitable for early market. A plants the 
seed, and the turnips raised from them are of a late variety, fit only for cattle. 
A may recover as damages the difference between the market value of the 
crop he raised and that of the crop he might have raised had the seed been 
as represented. 

If the breach is of a nonvital term, the other party is not 
exonerated, but merely has a right of action for such damages 
as he has sustained by reason of the breach of the particular 
nonvital term. 

In certain classes of cases, where damages would be an inade- 
quate remedy, the injured party may obtain from an equity court 
an order that the other party specifically perform his promise. 
Contracts for the conveyance of land are thus specifically enforced, 
and contracts for the transfer of chattels may be specifically en- 
forced if the chattel is one, like a patented article, which cannot 
be procured elsewhere than of the vendor. 

Actions for the breach of contracts must be brought within the 
time fixed by the Statute of Limitations. In case of simple con- 
tracts this is usually from three to six years, and in the case of 
sealed contracts, from ten to twenty years. The statutes differ 
somewhat in the different states. When more than the prescribed 
time has elapsed since the breach, the contract or right of action 
upon it is said to be "outlawed," that is, barred by the statute. 



S6 DISCHARGE OF CONTRACTS [Ch. Ill 

But a debt may be revived by a new promise to pay it after it is 
barred by the Statute of Limitations, although nearly all the states 
now require such a promise to be in writing. A part payment 
after the debt is barred will also revive the whole claim. 



IV. Discharge in Bankruptcy 

41. Insolvency laws not discharging debtor. At common law 
debtors could be imprisoned for debt, and such imprisonment 
might be of indefinite duration. It was not until 1759 that Parlia- 
ment passed a general and comprehensive act for their relief. 
This act provided that prisoners in custody for debts under ^100 
(afterwards extended to ;£200) might secure their release by mak- 
ing an assignment of all their property, with some trifling excep- 
tions, for the benefit of their creditors ; the debtor, however, was 
not discharged from civil liability for the unpaid portion of his 
debts. This was the origin of insolvency laws under which, after 
the abolition of imprisonment for debt, insolvent debtors continued 
to make assignments for the benefit of creditors in order that all 
might share pro rata in the available assets. These laws were 
extended in England and in some of our states so as to enable 
creditors to compel an insolvent to make an assignment of his 
property for their benefit and to give the debtor a discharge 
from further liability. When they reach this point, they are 
indistinguishable from bankruptcy laws. 

42. Bankruptcy laws discharging debtor. Bankruptcy laws are 
older than insolvency laws, but were originally applied only to 
traders or persons in mercantile pursuits. They were framed to 
enable creditors to compel a bankrupt trader to turn over his 
property for their benefit. They were extended for the benefit of 
the trader, so that, upon turning over all his property for the pay- 
ment of his debts, the bankrupt became discharged from further 
liability and could begin business again free from the burden of 
former debts. They were further extended so as to apply to all 
persons, whether traders or not, and to enable a debtor to go into 
voluntary bankruptcy and secure a discharge. 

Thus, by an extension of insolvency laws so as to discharge a 
debtor from his debts as well as from imprisonment, and by an 



§§43,44] BY BANKRUPTCY 57 

extension of the bankruptcy laws to include all debtors, the two 
classes of laws became practically alike. 

43. The state insolvency laws. Our American states have 
passed laws which sometimes resemble insolvency laws and some- 
times resemble bankruptcy laws. The main distinction to be 
observed is whether, upon assigning all his property for the bene- 
fit of his creditors, the debtor is discharged from further liability 
for his debts then existing. If so, the law, whatever it may be 
called, is practically a bankruptcy law ; if not, it is practically an 
insolvency law. 

Any state law which is in effect a bankruptcy law is now sus- 
pended by the National Bankruptcy Law, which went into effect 
July I, 1898 (see next section). 

Any state law which merely governs the voluntary assignment 
of property for the benefit of creditors, and is to that extent an 
insolvency law, is not suspended ; but a voluntary assignment for 
the benefit of creditors is an act of bankruptcy, and the creditors 
may bring the assigning debtor under the National Bankruptcy 
Law if they choose. 

44. National Bankruptcy Law of 1898. The Constitution of 
the United States confers upon Congress the power " to establish 
uniform laws on the subject of bankruptcies throughout the United 
States." If Congress does not pass such laws, the states are free 
to do so. But if Congress does pass such laws, the state bank- 
ruptcy laws cease to operate while such national statutes are in 
force. National bankruptcy laws have been in operation from 
1800 to 1803, from 1841 to 1843, from 1867 to 1878, and since 
July I, 1898. The state laws are therefore now suspended, but 
would revive if the federal statute were repealed. If a person is 
discharged in bankruptcy from his debts, he may revive any of 
them by an express promise to pay them. Such promise requires 
no new consideration ; it simply waives the bar raised by the 
discharge in bankruptcy. 

The United States Bankruptcy Law provides that " acts of bankruptcy by 
a person shall consist of his having (i) conveyed, transferred, concealed, or 
removed, or permitted to be concealed or removed, any part of his property 
with intent to hinder, delay, or defraud his creditors, or any of them ; or (2) 
transferred, while insolvent, any portion of his property to one or more of 



58 DISCHARGE OF CONTRACTS [Ch. Ill 

his creditors with intent to prefer such creditors over his other creditors ; or 
(3) suffered or permitted, while insolvent, any creditor to obtain a preference 
through legal proceedings, and not having at least five days before a sale or 
final disposition of any property affected by such preference vacated or dis- 
charged such preference ; or (4) made a general assignment for the benefit of 
his creditors, or being insolvent, applied for a receiver or trustee for his 
property or because of insolvency a receiver or trustee has been put in charge 
of his property under the law of a state, of a territory, or of the United States ; 
or (5) admitted in writing his inability to pay his debts and his willingness to 
be adjudged a bankrupt on that ground." 

It further provides that "a person shall be deemed insolvent . . . whenever 
the aggregate of his property, exclusive of any property which he may have 
conveyed, transferred, concealed, or removed, or permitted to be concealed 
or removed, with intent to defraud, hinder, or delay his creditors, shall not, at 
a fair valuation, be sufficient in amount to pay his debts." 

It further provides that [a) any person, except a municipal, railroad, insur- 
ance, or banking corporation, shall be entitled to the benefits of this act as a 
voluntary bankrupt ; (b) any natural person, except a wage earner (earning not 
more than $1500 a year) or a person engaged chiefly in farming or the tillage 
of the soil, any unincorporated company, and any moneyed, business, or com- 
mercial corporation, except a municipal, railroad, insurance or banking cor- 
poration, owing debts to the amount of $1000 or over, may be adjudged an 
involuntary bankrupt ; (c) a partnership, during the continuation of the partner- 
ship business, or after its dissolution, and before a final settlement thereof, 
may be adjudged a bankrupt. 

It further provides for the discharge of the bankrupt unless he has been 
guilty of fraud or concealment. The discharge releases him from all debts, 
except taxes, liabilities for obtaining property by false pretenses or false repre- 
sentations, willful and malicious injuries, alimony, support of wife or child, 
seduction, criminal conversation, debts not scheduled in time for proof and 
allowance, or debts created by fraud, embezzlement, misappropriation, or 
defalcation while acting as an oflScer or in any fiduciary capacity. 

The claims provable against a bankrupt include judgments, open accounts 
and contracts, and instruments in writing, whether yet payable or not, such 
as promissory notes. Claims that must be enforced in tort actions are not 
provable unless already reduced to judgment, in which case the judgment is 
provable. 

REVIEW QUESTIONS AND PROBLEMS 

Section 32. Who are liable on contracts? What exception to this rule 
is there ? How may a third person render himself liable by interfering with a 
contract 1 What is a boycott .? 

33. May a third person (X) sue upon a contract made by A and B ? Under 
what circumstances ? May a person not named in the contract between A and 
B sue upon it? When? 



REVIEW QUESTIONS AND PROBLEMS 59 

Problem i. B engages A to make an abstract of B's title to real property. 
A negligently fails to note on the abstract a recorded mortgage which is a lien 
on the lands. B wishes to borrow money of X upon mortgage, and gives him 
the abstract which shows the land clear of encumbrances. X loans the money 
and takes a mortgage. He then discovers the prior mortgage. The land is 
insufficient in value to pay both mortgages, and X suffers loss. He sues A for 
damages. Can he recover? 

34. Why can a person not assign his liabilities.? What rights under a 
contract can one assign.? What rights can he not assign.? What does the 
assignee get? 

Problem 2. B contracted to sell to X 10,000 tons of ore at the rate of 
50 tons a day, to become the property of X when delivered. After delivery 
the ore was to be sampled and assayed and the price fixed by the daily market 
quotation. X assigned the contract to C. B refused to deliver to C, who sues 
B for damages. Is B liable? 

Problem 3. B contracted to make certain articles for X, to be used by him 
in his business and to be paid for when delivered. X sold his business to C 
and assigned this contract to C. B refused to supply the articles to C, who 
sues B for damages. Is B liable ? 

Problem 4. B contracts to sing at X's theater. X sells the theater to C 
and assigns B's contract to C. B refuses to sing, and C sues B for. breach 
of contract. Is B liable? 

35. Distinguish assignability from negotiability. To what contracts does 
the latter apply? 

36. What effect does the death of a party have upon a contract? What 
contract obligations do not survive death? What is the effect of the bank- 
ruptcy of a party to a contract? At common law what was the effect of 
marriage upon a woman's contracts? How is this changed by statutes? 

37. How may parties discharge their contracts by agreement ? Does a bilat- 
eral contract need a new consideration for mutual discharge ? Does a unilateral 
contract ? Give an exarpple of substituted contract and of a contract containing 
provisions for a discharge. What is discharge by performance ? What is the 
effect of tender of performance ? What is legal-tender money ? What is the effect 
of taking a debtor's check? What is the doctrine of substantial performance? 
What is the effect of promising to perform to the satisfaction of another ? 

Problem j. C sold B a horse on condition that B might use it and, if he 
did not like it, might return it. B used the horse so badly that it was injured. 
B then offered to return it, but C refused to receive it and sued for the price. 
Can he recover ? 

38. Effect of impossibility existing when contract is made? existing and 
not known? arising subsequently? What three exceptions to the general rule 
are there ? Explain and illustrate each. 



6o DISCHARGE OF CONTRACTS ICh. Ill 

Problem 6. B agreed to sell and deliver to C 607 particular bales of cotton 
marked and identified. B delivered 460 bales, when the remaining 147 bales 
were destroyed by fire without fault of either party. C sues B for breach of 
contract in not delivering the 147 bales. Is B liable? 

Problem 7. B engages C as a farm servant. B dies. B's executor refuses 
to retain C on the farm. C sues the executor for breach of B's contract. May 
he recover? 

39. When will breach by one party discharge the other? What is an 
anticipatory breach, and what is its effect? When will breach by one not 
discharge the other? What are divisible contracts? What are independent 
promises? Effect of breach of warranty? 

Problem 8. B bought a quantity of iron of C in January, 1880, to be de- 
livered and paid for on July 15, 1880. On June 12, 1880, B notified C that 
he would not receive or pay for the iron. C sold the iron elsewhere and sued 
B at once for damages without waiting until July 15. May he recover? 

Problem g. B engaged C to clean and repair certain pictures at a specified 
price for each. After C had begun work, B countermanded the order, but C per- 
sisted in finishing the work and sued B for the full contract price. Can he recover? 

Problem 10. B buys C's farm for $3000 on these terms : $500 down ; 
$1000 in three months; $1500 in six months; the deed to be delivered to 
C at the end of six months, {a) C sues for the f 1000 at the end of three 
months, (p) C sues for the $1500 at the end of six months. In each case 
B defends on the ground that C has not delivered the deed. Result? 

40. If A breaks his contract with B, state B's rights and remedies. What 
is specific performance and by what court granted? What is the Statute of 
Limitations ? How may a debt barred by that statute be revived ? 

Problem 11. B sells C 10,000 bushels of potatoes at 50 cents a bushel, 
to be delivered in quantities of 500 bushels. B delivers 2000 bushels, when 
C refuses to receive any more. Assume potatoes to be worth at the time of 
breach 60 cents a bushel ; how much may B recover of C in case he sues C 
for breach of the contract? How much may he recover if he disregards the 
express contract and sues for the value of the potatoes actually delivered ? 

Problem t2. If in the above problem the market price of potatoes at the 
time C commits the breach is 40 cents a bushel, what will be the most advan- 
tageous remedy for B to pursue? 

41. What was the object of the first insolvency laws? How extended? 

42. What were bankruptcy laws and for whose benefit were they enacted? 
How extended? 

43. What is now the distinction between insolvency laws and bankruptcy 
laws? Are bankruptcy laws in force by state legislation? Are insolvency laws? 

44. When have national bankruptcy laws been in force ? How long has the 
present one been in force? Give some of its provisions. 



PART II. PARTICULAR CONTRACTS 
CONCERNING GOODS 

CHAPTER IV 

SALES OF GOODS 

I. The Contract 

45, Definition and analysis. The sale of goods is now regulated 
in Alaska, Arizona, Connecticut, Illinois, Maryland, Massachusetts, 
Michigan, Nevada, New Jersey, New York, Ohio, Pennsylvania, 
Rhode Island, and Wisconsin by the Uniform Sales Act. This 
statute was prepared by the Conference of Commissioners on Uni- 
form State Laws. It sets forth the rights and duties of seller and 
buyer in contracts relating to the sale of goods, and, while changing 
the law in some states in some respects, it in the main embodies 
the previously existing common-law views. A contract of sale is a 
contract whereby the seller transfers or agrees to transfer the prop- 
erty in goods to the buyer for a money consideration called the price. 
Where the result of the contract is to transfer the title to the goods 
to the buyer, there is strictly a sale ; but where the title is to be trans- 
ferred at some later time, there is only an agreement to sell. The 
agreement to sell becomes a sale when the title is in fact transferred. 

Examples : l. " I will sell you my horse for $ioo." " I accept." This is 
a sale. The title passes at once. If the horse dies, the loss falls on the buyer, 
even though the horse had not yet been delivered. 

2. " I will sell you my colt for $ioo when he is a year old." " I accept." 
This is an agreement to sell. The title remains with the seller until the colt is a 
year old. It then passes to the buyer and the agreement to sell becomes a sale. 

3. The colt dies before he is a year old, without fault of either party. The 
contract is discharged. 

I. It is a contract. This implies all the elements heretofore 
discussed, namely, agreement, competent parties, sufficient con- 
sideration, in some cases a particular form, legality, and real 
assent. These need not be again discussed at this point, but 

61 



62 SALES OF GOODS [Ch. IV 

the nature of the consideration (money) and the form (Statute 
of Frauds) will call for notice under another head. It is also 
important to ' note that where necessaries are sold to an infant, 
or minor, or to a person under mental incapacity, as a lunatic, 
he must pay a reasonable price therefor. What are necessaries 
depends upon the social and financial condition of the infant or 
lunatic, and upon his actual needs at the time of the sale (see 
sects. 15 and \Q ante). 

2. Whereby the seller transfers or agrees to transfer. If the 
seller transfers the property in the goods, the sale is said to 
be executed ; the seller's title is divested ; the buyer's title is 
vested. If the seller merely agrees to transfer the property 
in the goods, the sale is said to be executory ; the seller's title 
is not disturbed ; the buyer has only a right of action under 
the conti'act, and he has not any title in the goods. It is one 
of the important questions in the law of sales as to when the 
title passes, that is, whether the sale is executed or executory. 
This will be discussed hereafter. It should be observed that 
the contract may be executory while the sale is executed ; that 
is, the agreement to pass title is executed while the rest of the 
agreements are executory. 

Examples : 4. " I will sell you my horse for $100 and deliver him to you 
to-morrow at your farm, you to pay the money at that time." " I accept" 
This is an executed sale, that is, the title passes at once to the buyer; but 
it is still an executory contract, that is, each party has still something to do 
in the way of performance. 

5. If the seller and the buyer agree as above, but the seller also agrees 
to shoe the horse before delivery, the tide does not pass until the horse is 
shod. This is an executory sale and an executory contract. 

3. Property in the goods. By the term " goods " is meant, gen- 
erally, every kind of personal property, except money and choses 
in action. Examples of goods are corporeal movable property, 
like a horse or a bushel of wheat ; incorporeal property, like a 
patent right or a trade-mark. By property is meant the owner- 
ship of the goods or the general title to the goods. In order to 
pass this property to the buyer, it is necessary that the seller 
should have it, for the general rule in sales is that "a buyer 
acquires no better title to goods than the seller had." Three 
important exceptions to this rule may be noted. 



§«] THE CONTRACT 63 

a. In the negotiation of negotiable instruments the transferor may 
give a better title than he has himself. This is not technically a sale. 

b. By the Factors Acts it is provided that a factor or com- 
mission merchant who is intrusted by the owner with goods or 
documents of title representing goods, under conditions indicating 
apparent authority to sell, may sell or otherwise dispose of them 
and give good title as if he were the true owner of the goods 
or documents or had authority from the true owner. 

c. If the buyer leaves the seller in possession of the goods, 
or of the documents of title to the goods, and the seller resells 
and delivers them to another innocent purchaser, many courts 
hold that the latter may retain them as against the first buyer, 
since the first buyer has made it possible for the seller to com- 
mit the fraud. So, if the true owner invests another person 
with the indicia of ownership, and the latter sells to an inno- 
cent purchaser for value, the true owner will be estopped to 
set up his title against the innocent purchaser. 

But if one sells and delivers goods to another, retaining title 
in himself as security for the purchase money, and the buyer 
resells them to an innocent purchaser for value, the latter gets 
at common law no title against the first seller, who retained the 
title. This has led to such hardship upon innocent purchasers 
that statutes now generally provide that such conditional sales 
shall be void as against innocent purchasers from the vendee, 
unless they are in writing and recorded in some public office. 
The retention of title is merely a form of security, like a chattel 
mortgage, and chattel mortgages are not valid against innocent 
purchasers of the mortgaged chattels unless duly recorded. 

When the seller has been induced by fraud of the buyer to 
sell his goods and part, with the possession, he may rescind the 
contract and recover the goods. But if, before he does so, the 
buyer resells them to an innocent purchaser for value, the latter 
gets a title good against the first seller. 

Who is " a purchaser in good faith and for value " .' First, one 
who purchases without notice of his vendor's defective title, or of 
facts which should put him upon inquiry concerning the title ; and, 
second, one who also pays a valuable consideration. A promise 
to pay is not sufficient, since, if the true owner recovers the 



64 SALES OF GOODS [Ch. IV 

goods, this purchaser will never be obliged to pay his vendor. 
On the question of whether taking the goods in payment of an 
antecedent debt owing him from his vendor makes the buyer a 
purchaser for value, the courts differ. Some hold it does not, 
because if the buyer has to give up the goods the debt is restored 
and he is in no worse position than he was before ; others hold 
that it does, because the buyer has been " lulled into security " and 
may thereby lose the debt which he otherwise would have col- 
lected. There is the same difference of opinion where the buyer 
takes the goods from his vendor as collateral security (pledge) for 
a preexisting debt. It is generally held that an attaching creditor 
or an assignee in bankruptcy is not a purchaser for value. 

Examples : 6. B sells his horse to C, -and C allows B to retain possession. 
B then sells and delivers the horse to D, who does not know of the previous 
sale. D may retain the horse as against C, for the latter by leaving B in 
possession made it possible to commit the fraud, and C must suffer the loss 
rather than D. 

7. B owns a wagon. He rents it to C, who paints on it, " C, Piano Mover," 
and uses it in his business. C sells the wagon to D, who believes C to be the 
owner. B cannot reclaim it from D. He has invested C with the indicia of 
ownership. But if B had merely rented the wagon without authorizing C to 
put 4iis name on it, the purchaser would have obtained no title as against B. 

8. B sells and delivers a piano to C, but by the contract retains tide until 
it is fully paid for. C sells it to D for value, D supposing C to be the owner. 
B brings an action to recover it from D. B will recover unless some statute 
changes the rule of the common law (in a very few states the holding is for 
D without the aid of statute); but D gets whatever rights C had, and, by 
paying what the latter still owes, may acquire title, unless C has already by 
default forfeited his rights. 

9. B sells and delivers buggies to C, a retail dealer in buggies, but 
retains title in the buggies and provides that the proceeds of sales by C 
shall belong to B so far as necessary to pay B. C sells his whole business 
and stock to D, including these buggies, and B brings an action against 
D to recover them. It is held that B cannot recover, because he has 
aiithorized C to sell. There are two inconsistent provisions, — that B shall 
have tide, and that C shall sell and give good tide. The latter must prevail 
as to an innocent purchaser from C. 

10. B sells goods to C, who gives B in payment a bill of exchange accepted 
by X. It turns out that the bill is fictitious, no such person as X being in 
existence. C resells and delivers the goods to D, and B then seeks to recover 
the goods from D. He cannot do so. B has a right to rescind the contract 
with C for fraud and recover the goods while in C's hands ; but he cannot 
recover them from D, who has purchased in good faith from C. 



Bill of Sale 

B.no\» all 0im h^ tljese ^^resents. 

That ^! .?.^°?!?.r.4.A*??f.l^?.\. .9.?. *???.. .°?'.1'?..9.?..-^.9°H?°''*' Niagara County, New York, 

' . of the first part, for and in consideration of the sum 

of.?^.?.? Dollars {$}:°:°°.rrr), lawful money of the United States, 

to ???. in hand paid, at or before the ensealing and delivery of these 

presents by..f?.^.^P.^..??H?J.??f.".. .?.?..?'.*'.?.. ?.!^'?.9..P.?-.?'.'r?..'.: rrrr r-. — TrrrrrrrrTTTTTTr 

of the second part, the receipt whereof is hereby acknowledged, Aave bar- 
gained and sold, and by these presents do grant and convey unto the said 

part y of the second part, .*?A?. executors, administrators and assigns, 

the twelfth edition of Kent's ||Coim6ntarie^^ 

0. W. Holmes, Jr. 

Co l^abC anU to j^OllI the same unto the said party of the second part, 

his executors, administrators and assigns forever. And ?. 

ifo covenant to and with the saidparty of the second part that.rTTr.?..^'?..rTTr.the 
owner and ha ve the right to sell and transfer the said property, and will defend 
the same against any person or persons whomsoever claiming the same. 

'^n Witm^^ Wf[ttZO(,-rr-J-rrrAave hereunto set.-rr-.??..-7-T. 
hand and seal the:T7rT7..^?.9.?.'?.4.-TTTTTT.day ofTrTTTT.!4?;y.rTTTT7.in the year One thou- 
sand nine hundred and .s..i.?.t.?.?.'? 

f n ^K^mce of f^mk-o/bcL (Zt^n^^ ^^\ 

[i-s.] 

;§)tate of I^EW gotfi, 

County of ^y.^^^T.h ^ss. 

City of ?;9.9.'f.'??.r.* , 

On this aecond j^y of .^.^^ in the year One thousand nine 

hundred and-S.^xteen .before me, the subscriber, personally appeared 

Richard Atkins to me personally known to be the same 

person described in and who executed the foregoing instrument, and he 

acknowledged to me that he executed the same. 



r NOTARY'S^ 
I SEAL / 



Notarjsr Putlio for Niagara County, New 
65 



66 SALES OF GOODS [Ch. IV 

II. B is induced by fraud to sell goods to C, who then transfers them to 
D in payment of a prior debt owing by C to D. B rescinds the contract with 
C and seeks to recover the goods from D. In New York B may recover, as 
it is held that D is not a purchaser for value. In England and under the Uni- 
form Sales Act generally D is held to be a purchaser for value and B cannot 
recover the goods. 

4. For a money consideration called the price. A sale differs 
from a barter in that in a sale the consideration must be in money, 
while in a barter it may be other goods, labor, or the like. It is 
not necessary that the price should be fixed by the contract. It is 
enough if it is ascertainable, and it may be ascertained by the ordi- 
nary market price or left to some third person to fix or determine. 

5. Bill of sale. A bill of sale is a formal document, corre- 
sponding to a deed of real property, whereby the seller transfers 
to the buyer the title to specified goods and (usually) warrants 
the title. It is used in sales of any considerable amount, but may 
be used in any sale. 

46. Statute of Frauds. The seventeenth section of the Statute 
of Frauds provides that contracts for the sale of goods of the value 
of £,10 ($>^o) or more must be evidenced either (i) by the ac- 
ceptance and receipt of the goods or part of them, or (2) by the 
payment of some part of the purchase price, or (3) by some note 
or memorandum in writing signed by the party to be charged or 
by his lawful agent (see sect. 22 ante). 

1 . What are goods f The English statute uses the phrase 
'" goods, wares, or merchandise." Under this it was held that the 
sale of choses in action (that is, shares of stock, contract claims, 
etc.) need not comply with the statute, since they were not "goods, 
wares, or merchandise." The holding in the United States has 
been generally to the contrary. In many states the statute now 
expressly names " choses in action," and in many the term " per- 
sonal property " is substituted. 

2. Distinction between contract of sale and contract for work 
and labor. It is sometimes difficult to tell whether a contract is 
one of sale or one for work and labor. If the former, it must 
satisfy the statute ; if the latter, it is not within the statute at all. 

Example i. A goes to B's carriage factory and orders B to make a car- 
riage according to a certain description, for which A agrees to pay $250. 
When it is finished, A refuses to take it, and pleads the Statute of Frauds. Is 



§46] THE CONTRACT 67 

this a contract of sale? If so, B cannot recover against A, because there has 
been no receipt of goods, no part payment, and no note or memorandum in 
writing. Or is it a contract for work and labor ? If so, B may recover against 
A because such a contract is not mentioned in the Statute of Frauds, and is 
therefore good however made or evidenced. There are two different rules that 
have been applied to solve this problem, {a) The English rule is that if the 
contract results in the transfer of title to a chattel, it is a sale. Under this rule 
the contract specified is a sale and the statute is a good defense, {b) The 
general American rule and the rule under the Uniform Sales Act is that if 
the article is such as the vendor, in the ordinary course of his business, manu- 
factures for the general market, the contract is one of sale ; but if it is made 
to a special order for a special purchaser, and not for the general market, the 
contract is for work and labor. Under this rule the contract specified would 
be for work and labor, and the statute would not be a defense. 

The English rule looks to the time of performance. The Massachusetts, or 
American, rule looks to the nature of the contract itself. 

3 . Distinction between personalty and realty. It is also some- 
times difficult to tell whether articles attached to lands or build- 
ings are personal property or real property ; for example, crops, 
trees, ice, fixtures, etc. In general, crops raised annually by labor 
are treated as personalty, while trees, perennial crops, and the 
like are treated as interests in land. Mineral products generally 
are realty, but ice has been held to be personalty. Under the 
Uniform Sales Act a sale of anything attached to or forming a 
part of land, which is to be severed from the land at any time, 
is a sale of goods. If the article sold is treated as realty, then, 
whatever its value there must be a writing. If it is treated as 
personalty, there need be no formality unless it is of the value of 
$50, and then a writing may be dispensed with if there is part 
acceptance and receipt or part payment (see sects. 165, \66 post). 

Examples : 2. B sold C by parol a growing crop of five acres of turnips 
for I25, no present payment. B gathered the turnips when ripe and C 
claimed them. B pleads the Statute of Frauds. The statute does not apply. 
The turnips while growing, as well as when gathered, are personalty, and not 
an interest in lands. They are an annual crop, known to the law as fructus 
industriales. .fi^ 

3. B sold a growing crop of hay to C by parol for $3^5, with no payment 
down. B gathered the hay. C claims it. B pleads the Statute of Frauds. 
Under the Uniform Sales Act the contract is one for the sale of goods, since 
the hay is to be severed under the contract, and, as there is no part payment, 
acceptance and receipt, or memorandum, the Statute of Frauds is a defense. 



68 SALES OF GOODS [Ch. IV 

4. Acceptmice and receipt. One way of satisfying the Statute 
of Frauds is by an acceptance and receipt of the goods or a part 
of them. Both acceptance and receipt are necessary to satisfy 
the statute, although not necessary to pass title.^ Acceptance is 
signifying that the goods are in conformity with the contract. 
Receipt is taking the goods actually or constructively into the 
custody of the buyer. 

Examples : 4. B buys a quantity of wheat of C, who takes a load to B's 
warehouse, where it is inspected by B and accepted. B afterwards refuses to 
take the rest, and when sued, pleads the statute. His acceptance and receipt 
of one load satisfies the statute, and C may prove the contract for the whole. 

5. Acceptance may take place without receipt. Thus, B inspects the wheat 
in C's granary and expresses his assent to becoming the owner. If this wheat 
be then delivered to a common carrier, as a railway company, for transporta- 
tion to B by his direction, there is both acceptance and receipt, because the 
carrier is regarded as agent of the buyer to receive, although not to accept. 

5 . Part payment. If one, instead of accepting and receiving 
the goods, pays any part of the purchase money, this also satisfies 
the statute, and he is bound by the contract. Generally payment 
at any time is sufficient. 

6. The note or memorandum. There need not be a full and 
detailed written contract. It is enough if it contain the names of 
the parties, the subject matter of the sale, and the agreed price. 
It may be printed or written, and may be in pencil. It is best 
that both parties should sign it, for it is uncertain which may 
seek to avoid the performance. But it is enough that the one 
who is sought to be charged has signed. 

Example 6. B buys of C 20,000 feet of lumber at Sio a thousand feet. 
B signs the memorandum, but C does not. C may maintain an action against 
B in case he refuses to take the lumber, but B could not maintain an action 
against C in case he refused to deliver it. If both had signed, then each could 
have enforced the contract against the other. 

An authorized agent may sign for either party. An auctioneer 
is the agent of both buyer and seller for the purpose of making 
the memorandum. The note or memorandum may be contained 
in two or more papers or letters constituting a connected series. 
It may be made at any time, and need not be made at the time 
the contract is formed. 

' Upon the requirements for passing title, see sects. 47-49. 



§47] THE TITLE 69 

Form of Contract of Sale 

This Agreement, made this fifth day of September, 1916, between 
John Doe, of Ithaca, N.Y., and Richard Roe, of the same place, 

WITNESSETH, that the said John Doe, in consideration of the agreement 
hereinafter contained, to be performed by the said Richard Roe, agrees to sell 
and deliver to the said Richard Roe, at the farm of the said John Doe, five 
hundred bushels of potatoes of good marketable quality, on the twentieth day 
of October, igi6. And the said Richard Roe, in consideration thereof, agrees 
to pay to the said John Doe the sum of sixty cents a bushel for the said 
potatoes, immediately upon the completion of the delivery thereof. 

In Witness Whereof, the said parties have affixed hereto their respective 

signatures the day and year first above written. 

John Doe 

Richard Roe 

A much simpler form would satisfy the Statute of Frauds, which requires 
only a note or memorandum. For example : 

John Doe has sold to Richard Roe five hundred bushels of potatoes at 

sixty cents a bushel, to be delivered Oct. 20, 191 6. 

John Doe 

Ithaca, N.Y., Sept. 5, 191 6. Richard Roe 

If only Doe signed, he would be bound but Roe would not, and vice versa. 

II. The Title 

47. When does title pass? It is important to ascertain the 
time when title passes from the seller to the buyer. From that 
moment the risk of loss is on the buyer; he is also entitled to 
any gain or increase. In case of his death his executor or admin- 
istrator is entitled to the goods ; during his life his creditors may 
attach the goods. He alone has the full power to sell them and 
give a good title to the buyer ; he may maintain actions of re- 
plevin or trover in case of conversion or unlawful detainer by the 
seller or any other person. On the other hand, the seller, in case 
title passes to the buyer, may maintain an action for the price of 
the goods ; whereas, if title has not passed, the seller's action 
would be for damages for breach of the contract to receive and 
pay for the goods. 

In determining the question as to when title passes, it is nec- 
essary to classify goods into (i) specific or ascertained goods, 
that is, goods upon which the minds of the parties meet, and 



^0 SALES OF GOODS [Ch. IV 

(2) nonspecific or unascertained goods, that is, goods described but 
not actually chosen or specifically indicated. 

Example, (i) B purchases all the wheat in C's granary; these goods are 
specific. (2) B purchases of C one thousand bushels of wheat (no particular 
wheat indicated); these goods are unascertained. Title to the wheat in the 
granary would ordinarily pass to B as soon as the contract is made, because de- 
livery is not necessary to pass tide, while title to the one thousand bushels would 
not pass until the goods are ascertained and appropriated by mutual consent 

48. Specific or ascertained goods. The general and particular 
rules for determining when title passes in the sale of specific 
goods are as follows : 

1. General rule. Where there is a contract for the sale of 
specific or ascertained goods, the property in the goods is trans- 
ferred to the buyer at such time as the parties to the contract in- 
tend it to be transferred. It thus appears that the intention of 
the parties is the controlling test. If this is expressed, there can 
be no doubt ; but it is not ordinarily expressed, and the law has 
therefore certain rules for ascertaining it. In fixing these rules 
the law looks to the terms of the contract, the conduct of the 
parties, and all the circumstances of the case. 

2. Particular rules. Unless a different intent appears, the fol- 
lowing rules are applied for the purpose of determining the time 
at which the title to the goods passes to the buyer. 

Rule i. Where there is an unconditional contract for the 
sale of specific goods in a deliverable state, the title to the goods 
passes to the buyer .when the contract is made, even though pay- 
ment or delivery, or both, may be postponed to a future time. 

Example i. B purchases C's carriage for $100, and it is agreed that the 
carriage shall be delivered and the price paid one week later. The next day 
the carriage burns up. B must pay the price, because the carriage is his under 
this rule, as much so as if it had actually been delivered to him and he had 
paid for it. (A very few states hold that a sale for cash is conditional, and 
that the title does not pass until the price is paid or payment waived. But the 
better holding is that the title passes and the seller may retain possession 
until the price is paid.) 

Rule 2. Where there is a contract for the sale of specific 
goods, and the seller is bound to do something to the goods for 
the purpose of putting them into a deliverable state, the property 
does not pass until such thing be done. 



148] THE TITLE 



71 



Examiile 2. B purchases C's carriage, and C agrees to have the carriage 
painted and to deliver it one week later. The next day, and before the carriage 
is painted, it burns up. B is not bound to pay the price. The loss falls upon 
C, because the title does not pass from him to B until the carriage is painted. 
The loss falls upon him who has the title. After the carriage is painted, the 
title passes to B even before delivery. In England he must have notice that 
it is completed, but not in the United States. 

Rule 3. Where there is a contract for the sale of goods in a 
deliverable state, but the seller is bound to weigh, measure, test, 
or do some other act or thing with reference to the goods for the 
purpose of ascertaining the price, under the prevailing rule the 
title passes, notwithstanding that such act or thing is not done. 

Example 3. B purchases all the wheat in C's granary at 80 cents a bushel, 
and C agrees to measure the wheat in order to ascertain the sum B is to pay. 
The tide passes to B on the making of the contract, notwithstanding that C 
has not measured the wheat. Should it be destroyed in the meantime, the 
loss would be (£'s and not S's. 

Rule 4. Where goods are sold and delivered to the buyer 
with an option to return them, the title passes to the buyer subject 
to be revested in the seller by a return within the time specified, 
or, if no time be specified, within a reasonable time. This is a 
case of a sale upon condition subsequent, that is, a right to return 
or resell to the original seller. It differs from the next case in 
that the condition there is a condition precedent. 

Example 4. B purchases C's mowing machine, with the agreement that 
if it does not suit him, C will take it back at the price B paid or agreed to pay. 
This is a purchase by B and a contract to give B an option to resell to C. 
The tide is in B until he exercises this option. 

Rule 5. Where goods are delivered to the buyer "on ap- 
proval," the title remains in the seller until the buyer signifies his 
approval. Such approval may be signified expressly or impliedly. 
If the buyer retains the goods beyond the time fixed, or, if no 
time be fixed, beyond a reasonable time, he will be regarded as 
having signified his approval, and title will then vest in him. The 
sale of the goods by him would be an approval. It is a matter of 
construction having regard to all the terms of the contract whether 
the transaction is "on sale or return " or ''on approval." 

Example 5. B takes C's mowing machine " on three days' trial and 
approval." The title is in C until the three days have elapsed. 



72 SALES OF GOODS [Ch. IV 

Rule 6. Where there is a sale of goods in a deliverable con- 
dition, the seller may by the terms of the contract reserve the 
title in himself until the price is paid. This right may be reserved 
notwithstanding actual delivery to the buyer. 

Examples : 6. B sells C household goods, retaining title until the goods are 
paid for. Title, as security at least, is still in B. It is generally held that after 
C has possession the risk as to loss falls upon him, since B's title is in the 
nature of a security for payment only. It is also the law in many states that 
in order to protect himself against an innocent purchaser of the same goods 
from C, the seller must file the written contract in some public office. 

7- D sells goods to C to be shipped. D, in shipping the goods, takes the 
bill of lading (freight receipt) in his own name or deliverable to his own order. 
Title, as security at least, is still in D. It is often held that title for all other 
purposes passes to C, and that D merely retains possession or control as 
security for payment. Such would be the case if title passed to C at the time 
of the sale. But if the sale was executory, then D's conduct showed an intent 
that title should not pass until some future time. 

8. F sells goods to G, takes the bill of lading in G's name, attaches it to a 
bill of exchange (draft) drawn upon G for the price, and forwards the draft 
and bill of lading. G is bound to accept or pay the draft, or return the bill of 
lading. If he retains the bill of lading without accepting the draft, he acquires 
no added right in the goods thereby ; but since he is intrusted by F with the 
bill of lading, he could, by a sale to an innocent purchaser, confer a good title 
as against F. The safe course is to forward the bill of lading and draft to a 
third party, as a bank, with instructions to deliver the bill of lading to G only 
in case he accepts or pays the draft. 

49. Unascertained goods. The following rules govern the courts 
in determining at what time the title in unascertained goods passes 
to the buyer under a contract of sale. 

Rule i. Where there is a contract for the sale of described 
but unascertained goods, no property in the goods is transferred 
to the buyer until the described goods are ascertained and appro- 
priated to the contract with the consent of both parties. 

Exceptions : (a) There may be a contract of sale of an undivided share of 
specific goods, in which case the buyer becomes a tenant in common with the 
seller or owner of the remaining undivided portion. For example, B purchases 
one half the wheat in C's granary. Title to an undivided half of the wheat 
passes at once to B. (i) There may be a sale of a definite measure to be taken 
out of a definite mass of indefinite measure. This case differs from the first 
in that the sale is not of an aliquot portion, as one half, but of a definite 
weight or measure out of a specific mass of unknown weight or measure, as 



§49] THE TITLE 



73 



6000 bushels of wheat out of all the wheat in a bin, the total in the bin being 
unknown. The buyer becomes owner of that undivided portion represented by 
the ratio of 6000 to the total ; if the total be 9000, then the buyer may take 
title to an undivided two thirds from the time of the making of the contract. 
Two remarks are to be made upon this exception. First, it applies only to 
what are called fungible goods, that is, goods like wheat, coal, and the like, 
which do not have to be dealt with in specie but by weight or measure, and 
not to goods having individual characteristics, like horses. Second, even as to 
fungible goods the exception has not been everywhere accepted, many juris- 
dictions insisting that title cannot pass in such cases until the 6000 bushels 
have been separated from the mass. 

Rule 2. Where there is a contract for the sale of unascer- 
tained goods by description, and goods of that description and in 
a deliverable state are unconditionally appropriated to the contract, 
either by the seller with the assent of the buyer or by the buyer 
with the assent of the seller, the property in the goods passes to 
the buyer at the time of such appropriation. Such assent may be 
expressed or implied and may be given either before or after the 
appropriation is made. The appropriation must be final and un- 
conditional. If the seller may substitute other goods, it is not final. 

Examples .■ i . B orders of C 6000 bushels of wheat of a specific descrip- 
tion, the same to be measured into a freight car on the siding at C's warehouse. 
C measures 6000 bushels of the specified description into the car. The title 
passes to B as soon as the appropriation is thus completed. 

2. B buys goods of C from sample. C sets aside in his store goods cor- 
responding with the sample, and marks them with B's name. The goods are 
burned and C sues B for the price. If the appropriation was made by C with 
B's consent, the title passed and B is liable. But if the appropriation was not 
final, — if B had not consented to this form of appropriation, — the title was 
still in C, and B is not liable. This involves questions of fact to be determined 
in each case. 

Rule 3. An unconditional delivery of the goods to a carrier, 
as directed by the buyer, or as warranted by custom and usage, 
is always deemed a sufificient appropriation to transfer the title 
to the buyer ; but a delivery by which a bill of lading is made to 
the order of the seller, or is retained by the seller, or is attached 
to a bill of exchange drawn upon the buyer, may not pass title. 
This is explained in Rule 6, sect. 48. 

Example 3. B orders of C 6000 bushels of wheat of a specified description. 
C delivers to a railway carrier 6000 bushels of wheat of this description billed 



74 SALES OF GOODS [Ch. IV 

to B, and sends B the bill of lading. The title passes to B as soon as the 
delivery to the carrier is complete. ■ But if the bill of lading reads " deliverable 
to the order of C," the title will not pass, because C has thus reserved it in 
himself. Moreover, if the contract requires the seller to deliver the goods 
to the buyer at a particular place, the property will not pass until the goods 
have reached the place agreed upon. Thus, B orders of C the wheat as above, 
" to be delivered free of charge at my warehouse in the city of X." The title 
does not pass until the wheat is in the specified warehouse. 

Rule 4. If goods are shipped to the buyer C.O.D. (cash on 
deHvery), under the Uniform Sales Act and prevaiHng American 
rule title passes to the buyer at the time of delivery to the carrier. 
The seller is deemed to reserve by the C.O.D. clause only the 
right to possession until payment. 

50. Who has the risk? Unless otherwise agreed, the goods 
remain at the seller's risk until the title passes to the buyer. As 
soon as the title passes to the buyer the goods are at the buyer's 
risk, whether he actually has possession or not. Risk follows 
title is the rule that prevails unless the parties stipulate to the 
contrary. In determining who has the title the rules given above 
are to be applied in the absence of an express stipulation. 

Exception. If the seller delivers the goods to the buyer, but by the terms 
of the sale retains title as security for the purchase price, the goods are at the 
risk of the buyer. For example, B purchases household goods of C upon in- 
stallment payments, and it is agreed that the title to the goods shall remain in 
C until they are actually paid for. B has the goods in his house, where they 
are accidentally destroyed by fire. B must pay for the goods ; the risk is with 
him, although for security the title is with C. It is the same as if title had 
passed to B and he had then given C a chattel mortgage on the goods as 
security. 

He who has title also has the right to any gain or increase 
derived from the article. He who bears the risk and burden is 
also entitled to the benefits. 

Example. C purchases B's flock of sheep and leaves them in B's posses- 
sion, delivery and payment to be later. B shears the wool. C sues B for its 
value. C may recover. The title passed to him and the wool is his. So if 
lambs are born of these sheep, they belong to C. On the other hand, if any of 
the sheep die, the loss falls on C. 



§§51,52] PERFORMANCE 75 

III. Performance 

51. Duties of the seller. The duties of the seller in perform- 
ance of his contract may be briefly enumerated as follows : 

1. It is the duty of the seller to deliver the goods in accord- 
ance with the terms of the contract. Whether he is to send them 
or the buyer is to call for them will depend upon the contract. 
If nothing appears in this respect, the place of delivery is ordi- 
narily the seller's place of business or residence or the place 
where the goods are at the time of the sale. If no time is fixed, 
a reasonable time is understood. 

2. It is the duty of the seller to deliver the quantity specified. 
If he delivers less, the buyer may reject them ; if he delivers 
more, the buyer may take what he contracted for and reject the 
rest, or he may reject the whole. The buyer is not bound to accept 
delivery in installments, unless he has agreed to do so. 

3. It is the duty of the seller to deliver the quality specified. 
The buyer must be allowed a reasonable opportunity to inspect 
the goods, if he did not inspect them when he purchased them ; 
and he is not deemed to have accepted them until he has had 
such opportunity of examining them in order to see if they con- 
form to the contract. He is deemed to have accepted them when 
he intimates that fact to the seller, or exercises ownership over 
them, or retains them without dissent after the lapse of a reasonable 
time. If the buyer rightfully rejects the goods, he is not bound to 
return them to the seller, but must permit the seller to take them. 

4. It is the duty of the seller to confer upon the buyer a good 
title to the goods. 

5. It is the duty of the seller to make good all representations 
and warranties expressed or implied in the contract of sale. This 
is more fully explained under Warranties post. 

52. Duties of the buyer. The duties of the buyer, after a 
contract of sale and purchase is made, are as follows : 

I. It is the duty of the buyer to accept the goods. If he 
refuses to do so, the seller may sue for the price if title has 
passed to the buyer, or if, although the title has not passed, the 
goods are not readily resaleable ; or the seller may sue for 
damages for failure to accept. 



76 SALES OF GOODS [Ch. IV 

2. It is the duty of the buyer to pay for the goods. Unless 
otherwise agreed, deUvery of the goods and payment of the price 
are concurrent conditions. If the price is agreed upon, that must 
be paid. If no price is agreed upon, a reasonable price, namely, 
the market price, is understood. 

IV. Warranties 

53. Definition and classification. A warranty is a contract of 
indemnity made by a seller of goods in favor of the buyer, to 
protect the latter against the failure of one or more terms of the 
contract of sale. 

A warranty may be either express or implied. 

An express warranty is a promise or affirmation by the seller 
of a material fact concerning the goods which has a natural 
tendency to induce the buyer to purchase them. 

An implied warranty is one which arises from the acts and 
conduct of the parties, or from custom or usage, or by operation 
of law. 

Examples .• i . B buys goods of C, who assures B (that is, warrants) that 
they have fast colors. This is an express warranty. It is not necessary to use 
the word " warrant " or " warranty." If the colors run, there is a breach 
of the warranty. 

2. It turns out that C did not own the goods. There is a breach of the 
implied warranty of title which accompanies every sale of personal property. 

3. D orders of E a quantity of goods by sample. There is an implied 
warranty that the goods when received shall correspond with the sample. 

54. Express warranties. The express warranty is gathered 
from the terms of the contract. If the contract be in writing 
and unambiguous, the construction is for the court. If the con- 
tract be by parol, the construction, unless too clear for any dif- 
ference of opinion, is for the jury. If the contract is in writing, 
an oral express warranty cannot, save in very exceptional cases, 
be added to it. If the seller first makes statements amounting 
to warranties, and then declares he will not warrant, there is no 
warranty. But his unexpressed intention not to warrant will not 
avail him if he uses apt words. It is not his intention, but the 
impression reasonably produced upon the mind of the buyer by 
his words or conduct, that is the test. 



§ 55] WARRANTIES 7; 

The presence of an express warranty will not exclude an implied 
warranty unless the express warranty be inconsistent with it. 

General warranties of "soundness"' and the like will not ordi- 
narily cover specific defects obvious to the buyer, but they will 
cover defects about which a buyer expresses doubt after an ex- 
amination. A particular warranty will cover a particular defect if 
intended to do so, although the defect may be patent. 

Expressions of opinion or " puffs " do not amount to warranties. 

Examples : i. B in selling a horse says, " This horse is sound." There is 
visible a large bunch upon the horse's leg. The warranty does not cover this 
defect, although it does cover other .defects not obvious. 

2. A buyer in looking at sheep thinks he has discovered foot rot. The 
seller assures him that he is mistaken and warrants the sheep to be sound. 
The general warranty covers foot rot. 

3. " These sheep will sheer from six to ten pounds of wool a head, and 
you can pay for the sheep from the wool in two years " is a mere statement 
of opinion, or " puff," and the buyer should not rely upon it. So also the 
statement " This is an A No. I bond." 

55. Implied warranties. The following are the principal implied 
warranties that are attached to a contract of sale. 

1. Warranty of title. There is an implied warranty by the 
seller that he has a right to sell the goods, that the buyer shall 
have and enjoy quiet possession of them, and that they shall be 
free from any charge or encumbrance in favor of any third 
person — or, in other words, a warranty of title. If this warranty 
is broken and the buyer deprived of the goods, he may recover 
the purchase price paid, with interest. 

Exceptions. This does not attach, however, to a sale made by a sheriff or 
other person who sells under authority of law, nor, in general, to a sale in 
which the seller undertakes to transfer only such property as he or the person 
he represents may have in the goods ; as, for example, a sale by an assignee 
in bankruptcy, an administrator or executor, a trustee, or a mortgagee under a 
power of sale. But it does attach to the ordinary sales in the business world. 

2. Sale by description, (a) In the sale of goods by description 
there is an implied warranty that the goods shall correspond 
with the description, {b) If the goods are bought by description 
from a seller who deals in goods of that description, there is an 
implied warranty that the goods shall be of merchantable quality. 



78 SALES OF GOODS [Ch. IV 

Examples: I. B orders of C "early strap-leaf red-top turnip seed" for 
raising turnips for market. C furnishes seed, which B plants. The crop is 
late and fit only for cattle. No inspection of the seed by B could reveal that 
they did not correspond with the description. B has an action against C 
for breach of the implied warranty that the seed should correspond with the 
description. It is immaterial that C believed that the seed were of the kind 
ordered. B may recover as damages the difference between the market value 
of the crop raised and the market value of the one he would have raised had 
the seed he ordered been furnished. 

2. B orders ice of C, to be shipped from Maine to Boston. There is an 
implied warranty that the ice shall be of merchantable quality ; but if B has 
examined the ice before shipment, there is no implied warranty as to any 
defect which such examination ought to have revealed. 

3. Sale by sample. In a sale by sample there is an implied 
warranty {a) that the bulk shall correspond with the sample in 
quality, and (b) that the goods shall be free from any defect ren- 
dering them unmerchantable which would not be apparent on 
reasonable examination of the sample. 

Example 3. B ordered of C certain " corkscrew worsted coatings," to 
correspond in weight and quality with samples supplied B. The cloth when 
made up into coats gave way at the seams, owing to some defect in the manu- 
facture. The bulk corresponded with the sample, so there was no breach of 
that warranty ; but it was unfit for the purpose to which such material is ordi- 
narily put, and this was a breach of the warranty of merchantability. B could 
not reasonably discover this defect from the sample, nor indeed from the bulk, 
until the cloth was actually made up into garments. 

The buyer must be given a reasonable opportunity to compare 
the bulk with the sample, and in sales by description he must 
have reasonable opportunity for inspection. 

There may be in the same sale an implied warranty as to 
description and also as to sample. Such was the case in the 
example last given. The goods were to be " corkscrew worsted 
coatings " and were also to correspond with the sample. 

4. Fitness for partiadar ptirpose. Where the buyer makes 
known to the seller the particular purpose for which such goods 
are required, relying upon the seller's skill or judgment, there 
is an implied warranty that the goods shall be reasonably fit for 
such purpose. 

Examples : 4. B orders of C, a carriage maker and repairer, a new pole 
for his carriage. The pole brealts, owing to a defect, and the carriage is 



§ 56] WARRANTIES 79 

damaged. C is liable to B for the damages. There is a breach of the imphed 
warranty that the pole shall be reasonably fit for the purpose. 

5. B orders of C, a manufacturer of cloths, a quantity of "indigo blue 
cloth." B is a woolen merchant, but is not known to C to be a tailor. B 
makes the cloth up into liveries, and the cloth soon shows defects. There was 
no implied warranty that the cloth was fit for that purpose, because the pur- 
pose was unknown to the seller. There might be a breach of the implied 
warranty of merchantability, but this would depend upon other circumstances. 
Had the order been " indigo blue cloth suitable for liveries," there would have 
been an implied warranty of fitness. 

6 (Exception). A sale of a specified article under its patent or other trade 
name does not carry an implied warranty for any particular purpose. An order 
for "your Challenge auger outfit for boring wells " is fully complied with when 
the " Challenge auger outfit " is furnished. The contract assumes that the 
buyer knows what are the character and capacities of this article. 

5 . Sale of provisions. The above rules apply to the sale of 
provisions under the Uniform Sales Act ; but in some jurisdic- 
tions there is a special implied w^arranty in the sale of provisions 
for human consumption, namely, that they are wholesome and fit 
for food. This is put on the ground of the preservation of health 
and life, and is applied even where the buyer sees and inspects 
the article before purchasing. Most courts recognizing this war- 
ranty at all limit it to the case where the buyer intends to consume 
the article and the seller knows this fact ; but some extend it 
even to the case of a sale by a wholesaler to a retailer who intends 
to resell the article. In no case is the doctrine applied to the 
sale of food for animals. 

Example 7. A sells meat to B, a retailer, who resells it to C for domestic 
use. Under the Uniform Sales Act both A and B would be liable on an 
implied warranty of fitness for use as food. Some courts hold that there is an 
implied warranty of wholesomeness by B but not by A. If either A or B 
knew the meat was unwholesome, he would be Uable in deceit for fraudulent 
concealment. 

56. The rule of caveat emptor. The general rule in the law 
of sales is that of caveat emptor, " let the buyer beware." This 
is supposed to have the effect of making men self-reliant and 
cautious, and of decreasing litigation. 

The exceptions to the rule are those enumerated under the 
head of implied warranties. In those cases the seller assumes 
the risk instead of the buyer, and without any express stipulation. 



8o SALES OF GOODS [Ch. IV 

In all other cases, if the buyer does not wish to assume the 
risk, he should exact an express warranty. In the sale of specific 
chattels examined by the buyer there is usually no implied war- 
ranty except as to title ; but if the character of the article cannot 
be ascertained by examination (as in the case of seeds), there is 
an implied warranty that the article shall possess the necessary 
characteristics of such articles. 

57. Remedies for breach of warranty. In discussing the reme- 
dies for breach of warranty it is necessary to distinguish between 
express warranties and implied warranties. 

1. Express warranties. In some American states a buyer to 
whom title has passed cannot rescind the sale for breach of an 
express warranty. He is confined to an action for damages for 
the breach. Under the Uniform Sales Act and in some other 
states he may either rescind the sale, that is, return the goods 
and recover the price, or he may keep the goods and sue for the 
breach of the warranty. The reason given for denying the right 
is that the contract of warranty is collateral to the main contract 
of sale, and its breach should not affect that contract. If, however, 
the warranty is fraudulent, that is, if the seller knew it was false, 
the contract may be afterwards rescinded for the fraud. 

If the title has not passed to the buyer, he may refuse to 
receive the goods upon discovering a breach of the express 
warranty. 

Examples .■ i . B sells and delivers timber to C and innocently warrants it 
to be sound. C discovers that the timber is unsound, offers to return it, and 
demands back the purchase money. He then sues for the purchase money. In 
some states he will fail ; he can recover only the difference in value between the 
timber as warranted and as it was in fact. Under the Uniform Sales Act he will 
succeed, upon returning the timber, in recovering the whole purchase money. 

2. B makes the warranty, knowing that the timber is unsound. This is 
fraud, and C may rescind and recover the whole purchase price. 

3. E sells F a buggy which he innocently warrants to be new and sound, 
and agrees to repaint the wheels. F discovers the buggy to be an old one 
and unsound. F may refuse to receive it, because the title has not yet passed 
to him. 

2. Implied warranties. Under the Uniform Sales Act the 
remedies for breach of an implied warrant)' are the same as those 
for breach of an express warranty. In England and a few 



§58] REMEDIES 8 1 

American states the term " condition " is used to indicate an 
obligation regarding the goods which is not collateral to the con- 
tract of sale but is a vital part of the contract. This obligation 
is also sometimes called an implied warranty in these jurisdictions. 
For breach of a condition in England and these few American 
states the buyer may at his election either {a) rescind the sale 
and recover the price or {b) receive and keep the goods and sue 
for damages for the breach or, in case the price is unpaid, set up 
these damages to diminish the price. In order to rescind, the 
buyer must act promptly or within a reasonable time. If the seller 
refuses to receive the goods upon a rescission, the buyer may 
hold them as bailee for the seller. 

Examples : 4. B orders goods of C by description. When the goods 
arrive, B discovers that they do not answer the description. He may reject 
them or he may take them and sue for damages if he has paid the price, or 
deduct the damages from the price if it is yet unpaid. 

5. (a) B orders of C a machine for a particular purpose. B sets it up and 
finds it unfit for the purpose. B may reject it if he acts with promptness after 
such test, or he may Iceep it and sue for damages for breach of the implied 
warranty, (b) So if B orders a chemical, he may use enough of it to determine 
whether it answers the description ; and if it does not, he may reject the 
remainder without being required to pay for what he has reasonably used in 
the test, (c) But if he can determine the quality without using any, he 
waives his right to reject the bulk by consuming any portion of it. 

6. The damages recoverable upon a breach are all the losses directly and 
naturally resulting from it. B orders from the maker, C, a refrigerator suit- 
able for keeping dressed poultry. The refrigerator furnished by C is not suit- 
able for the purpose, and the poultry spoil. B's damages include the difference 
between the value of the refrigerator ordered and the one delivered, and also 
the loss incurred by the spoiling of the contents. See also the case of the sale 
of the turnip seed, p. 83 ante. 

V. Remedies 

58. Rights of unpaid seller against the goods. Although the 
title to the goods may have passed to the buyer, the unpaid seller 
is entitled to the following rights : 

I. If the seller is still in possession of the goods, he has a 
lien on them, or a right to retain them until the price is paid, 
unless he has sold on credit and the term of credit has not 
expired. 



82 SALES OF GOODS [Ch. IV 

2. If the seller has shipped the goods and he afterwards 
learns of the insolvency of the buyer, he has the right to stop 
the goods in transitu before they reach the buyer, and thus 
regain possession of them. 

3. If the seller has a lien or has stopped the goods in tran- 
situ, as above, (a) he may resell the goods in case the buyer 
delays an unreasonable time to pay for them, or at once if the 
goods are perishable, and if they sell for less than the buyer 
agreed to pay may recover from him as damages the difference ; 
or (b) he may rescind the sale and transfer of title, and may 
resume the title himself in case the buyer delays an unreasonable 
time to pay the price, and may also recover from the buyer as 
damages any loss occasioned by the buyer's default. 

Seller s lien. The seller's lien exists when he has sold for 
cash down ; or when, having sold on credit, the term of credit 
has expired before delivery ; or when, having sold on credit, the 
buyer becomes insolvent before delivery. He loses his lien by 
delivery to the buyer or his agent, or by delivery to a carrier with- 
out reserving in the bill of lading the right to possession, or by a 
waiver of the lien. He cannot hold the goods for any claim except 
the purchase price, nor after valid tender of the purchase price. 

Stoppage in transitu. Goods are in transit after delivery to a 
carrier and before delivery to the buyer, and may be stopped by 
the unpaid seller in case the buyer becomes insolvent. The transit 
ends, however, if the carrier consents, after the arrival of the 
goods at their destination, to hold them for the bu^-er, or if the 
carrier wrongfully refuses to deliver them to the buyer upon 
demand. The unpaid seller exercises his right of stoppage in 
transitu by giving reasonable notice to the carrier.^ It is then 
the duty of the carrier to redeliver the goods to the seller, and the 
duty of the seller to pay the transportation charges. But if the 
carrier has issued a negotiable bill of lading, this must be sur- 
rendered or a sufficient bond be given to protect the carrier from 

^ To the X.Y. Railroad Co. : Circumstances liaving arisen which give to me 
the right of stoppage in imnsitii, I hereby direct you to hold, subject to my 
orders, the goods delivered to you on Dec. 31, 1916, at Ithaca, N.Y., and con- 
signed to John Doe, Buffalo, N.Y., and not to deliver the same to the consignee. 
Ithaca, N.Y., Jan. 5, 1917. Rich.\rd Roe 



§59] REMEDIES 83 

any claim arising under it. If, however, such negotiable docu- 
ment of title has actually been transferred by way of sale to an 
innocent purchaser for value while the goods are in the hands 
of the carrier, and before the seller's right has been exercised, 
his right of stoppage in transitu is ended. But a sale of the 
goods by the buyer, where there is no such documentary title, 
will not defeat the seller's right. 

Resale. The seller's right of resale is exercised as agent by 
operation of law for the buyer. The purchaser at the resale gets 
a title good against the original buyer. Notice of the intention 
to resell need not necessarily be given to the buyer, but it is 
always safer to give it. Notice of the actual time and place of 
the resale need never be given. ' 

Rescission. Notice of rescission of the contract and retransfer 
of title to the seller, or some overt act showing an intention to 
rescind (as, for example, the consumption of the goods by the 
seller) is essential. 

Examples : i. B sold lumber to C and took C's note for thirty days. The 
lumber remained in B's possession. C sold the lumber to D. When D came 
for it, B refused to deliver it, because C had become insolvent. B has asserted 
a valid right. Although a sale on credit waives a lien, the lien revives if the 
buyer becomes insolvent. D got no better right than his vendor C had. 

2. B sold tobacco to C, who, unknown to B, was then insolvent. B con- 
signed the tobacco to C and sent C a bill of lading. C failed and transferred 
the bill of lading to D, his assignee in bankruptcy. B then stopped the goods 
in the carrier's hands. D claims them. In this case B will get the goods. An 
assignee in bankruptcy is not a purchaser for value, as he parts with nothing. 
But if C or D had sold and delivered the bill of lading to E before B stopped 
the goods, B's right would have been gone. 

3. B sold C a diamond for cash. C would not pay cash on delivery and 
B retained the diamond. Afterwards B sold it to D for $40 less than C had 
agreed to give. B may recover this $40 of C, provided he sold in good faith 
according to usage and for the highest price obtainable. 

4. In the above case B sold the diamond for $30 more than C had agreed 
to give. C claims this $30. (a) If B sold as agent of C, he should account to 
C for the profits, (b) If B rescinded the contract, the diamond became his and 
he is entitled to the enhanced price ; but of course he has now suffered no 
damage for which he can sue C. 

59. Rights of unpaid seller by way of action for breach of con- 
tract. The unpaid seller has the following remedies against the 
delinquent buyer: 



84 SALES OF GOODS [Ch. IV 

1. Action for the price. If the property in the goods has passed 
to the buyer, the seller may maintain an action for the price ; so 
also if by the terms of the contract the price is to be paid before 
the property in the goods passes to the buyer. If the goods are 
not readily resalable at a reasonable price, the seller, upon tender 
of them and refusal of the buyer to accept them, may hold them 
as bailee of the buyer and may maintain an action for the price. 

2. Action for damages for nonacceptance. If the buyer unrea- 
sonably refuses to accept the goods, the seller may maintain an 
action against him for damages for nonacceptance. The measure 
of damages is the loss to the seller. If there is an available 
market, the loss is the difference between the contract price and 
the market price. 

Examples .• I. C sells B a wagon for $50, delivery and payment to be one 
week later. Title passes to B. If he refuses to take the wagon, C may sue 
and recover the price. Moreover, if B refuses to take the wagon, C may, 
according to some authorities, charge him for the storage and care of it. 

2. C agrees to build a wagon for B according to a certain plan and descrip- 
tion. When it is completed according to the contract, C tenders it to B and 
the latter refuses it. (a) According to a few authorities C's only remedy is 
damages for breach of contract, since no title has passed to B and the wagon 
is still C's. (p) But under the Uniform Sales Act C may tender the wagon to 
B ; title will then pass, and C may sue for the price. 

60. Remedies of the buyer. The buyer may be the owner of 
the goods or the title may not have passed. His remedies wUl 
be more numerous in the former case than in the latter. 

1 . Remedies as owner. If the property in the goods has passed 
to the buyer, and the seller wrongfully refuses to deliver the goods, 
the buyer may treat the seller as having converted them. This 
allows the buyer to replevin the goods, thus actually getting pos- 
session of them, or to sue in tort for conversion, thus getting 
their value in money. 

2. Action for damages for breach of contract. If the property 
in the goods has not passed to the buyer, and the seller wrong- 
fully refuses to deliver the goods, the buyer may maintain an 
action for damages for nondelivery. The measure of damages is 
the loss resulting naturally to the buyer. If there is a market, 
the measure is ordinarily the difference between the contract price 
and the market price at the time delivery was due ; these are 



§60] REVIEW QUESTIONS AND PROBLEMS 85 

called general damages. Damages may be increased by knowledge 
communicated to the seller, at the time the contract is made, of 
the use to which the buyer intends to put the goods ; these are 
called special damages. 

Examples: i. B purchases of C 1000 bushels of wheat at 80 cents a 
bushel, to be delivered September i. C refuses to deliver on that date, and 
wheat is then 90 cents a bushel in the same market. B's damages are 10 cents 
per bushel, or $100. 

2. B orders of C a shaft to replace a broken one in his mill, and notifies 
C that the mill must be idle until the shaft is delivered. C agrees to deliver 
it by a certain date, and fails to do so. B may recover as special damages the 
loss resulting from the idleness of the mill while he is with due diligence pro- 
curing another shaft after C's failure to deliver at the appointed time. Without 
such notice to the seller, B's damages would be merely the difference between 
the price he agreed to pay C for the shaft and the price he is obliged reason- 
ably to pay for one elsewhere. 

3. B bought goods of C, to be delivered January 15, informing C that he 
wished to put his salesmen on the road on that date with the goods. C delayed 
delivery and in consequence B's salesmen were idle for two weeks. B may 
recover the loss of profits on resales due to the delay of C. So if B, to C's 
knowledge, had resold the goods to D, to be delivered January 20, and had to 
pay damages to D for nondelivery, he could recoup these damages from C. 
But these results ensue only when C has express notice of the use to which B 
intends to put the goods and the contract is made in contemplation of that. 

3. Action for breach of warranty. This has already been dis- 
cussed (see sect. 57 ante). 

REVIEW QUESTIONS AND PROBLEMS 

Section 45. Deiine contract of sale ; executed sale ; executory sale. What 
are goods? In what cases may a buyer get better title than the seller had.? 
When not? Who is a purchaser in good faith and for value? Is an ante- 
cedent debt value ? Distinguish sale and barter. How may the price be fixed ? 
What is a bill of sale ? Draw a bill of sale of a pair of horses, buggy, harness, 
whip, lap robe, for $350. 

Problem i. B, in the name of C, orders goods of D, who supplies them 
supposing he is dealing with C. After B gets the goods he sells them to E, 
who has no knowledge of B's trick. D then brings an action to recover the 
goods from E. Result? 

Problem 2. B is induced by fraud to sell and transfer goods to C, whose 
creditors then seize the goods. B seeks to recover the goods from the 
creditors. Can he do so? 



86 SALES OF GOODS [Ch. IV 

Problem j. In the above case C pledges the goods to a creditor as 
security for a preexisting debt. Can B recover them? 

46. What is the seventeenth section of the Statute of Frauds? What 
are " goods, wares, and merchandise " ? Are choses in action goods ? How 
can ■ you tell whether a contract is for the sale of goods or for work and 
labor? State the different tests. Is grass realty or personalty? What differ- 
ence does it make? What constitutes acceptance and receipt? What is part 
payment? What should the note or memorandum contain? When may it 
be made? Write a contract of sale. 

Problem 4.. C agreed orally to make for B a set of artificial teeth for 
$75, and B agreed to pay C that sum. When the teeth were finished, B 
refused to take them. C sues for the price. B pleads the Statute of Frauds. 
Result? 

Problem ^. B orally agrees to cut and deliver to C, for the price of $15, 
certain trees standing on B's land. B refuses to perform, and when sued sets 
up the Statute of Frauds. Is B in the right? 

Problem, 6. B examined barrel hoops at C's factory and agreed orally 
to purchase a quantity for $200. B told C to deliver them at the steamer 
Curlew for transportation. C delivered them at the steamer. The Curlew 
was lost at sea with her cargo. C sues B for the price. B sets up the 
Statute of Frauds. Were the goods " accepted and received " by B ? 

Problem y. B bought a carriage of C for $350, but it remained in C's 
possession and there was no payment and no memorandum. Some changes 
were ordered, after which B inspected the carriage and approved it. Later 
B hired a team of horses and drove out in the carriage, but returned it to 
C's warehouse. He then refused to take and pay for it. C sues B, who 
pleads the Statute of Frauds. Result? 

Problem 8. B goes into a store and buys on credit dress goods and 
trimmings amounting to $ 1 24. Among the purchases is a spool of thread at 
five cents. B takes the spool of thread home. Later she refuses to take the 
goods and pleads the Statute of Frauds. Result? 

Problem g. B and C made an oral contract for the sale and purchase of 
goods of the value of $2500, and each deposited $200 in the hands of X, 
to be forfeited by the party who should refuse to perform the contract. 
B refused to perform. C sues B for breach, and B pleads the Statute of 
Frauds. C replies that there was part payment. Result? 

47. Why is it important to determine when title passes? What are specific 
goods ? What are unascertained goods ? Illustrate. 

48. State the general rule as to when title passes in the sale of specific 
goods. State the six particular rules. Illustrate each. 

Problem 10. C sold to B lumber which the parties culled out and agreed 
upon. C agreed to deliver it at the cars. There was a written memorandum. 



REVIEW QUESTIONS AND PROBLEMS 87 

While still in C's yard the lumber burned. C sues B for the price. Did the 
title pass to B so as to make the loss his ? 

Problem 11. Sale of 119 specific bales of cotton at 31^ cents a pound, 
payable cash on delivery, the cotton to be weighed and sampled before 
delivery. Seventy bales are weighed and sampled, but not delivered, when 
the whole 119 bales are destroyed by fire. Is the buyer liable for the 
119 bales? Is he liable for the 70 bales? 

Problem 12. X sells B 238 bags of coffee, marked and designated, but 
X agrees to weigh the bags in order to ascertain the total price, the sale 
being by the pound. Has title passed to B? 

49. State the rules to determine when title passes in the sale of unascer- 
tained goods. What are fungible goods ? When is an appropriation final ? 

Problem ij. B purchased of C 200 bushels of corn out of a lot of 400 
to 500 bushels in C's crib. It was to be left until it hardened, and then 
C was to measure and deliver it. C's creditors levied on the whole lot. 
C then delivered 200 bushels to B, and the creditors seek to recover the corn 
fromB. Result? 

Problem 14. In the above case the crib burns and all the corn is 
destroyed. Must C pay B for the 200 bushels? 

Problem 75. Assume, in Problems 13 and 14, that C has agreed to deliver 
the corn and that B sues for breach of this promise. May he recover? 

Problem. 16. C orders by mail a barrel of shellac of B, who selects a 
barrel answering the description and ships it to C by the X. Ry. as directed. 
It is lost in transit. May B maintain an action against the X. Ry. for its loss ? 

Problem, ly. In the above case B took the bill of lading in his own name 
and retained it. Can B sue the X. Ry. for the loss? 

50. Where is the risk of loss after a contract of sale? Where is the 
right to gain or increase ? Do these rules apply to a sale and delivery when 
the seller retains title as security for payment ? 

51. State the duties of the seller. Where is delivery to be made? If the 
buyer orders 50 barrels of apples and the seller delivers 48 barrels, must the 
buyer take them? How is it if the seller delivers 55 barrels? If the seller 
delivers 50 barrels, what right has the buyer? 

52. State the duties of the buyer. 

53. Define warranty ; express warranty ; implied warranty. 

54. Does an express warranty arise without words? Who determines 
whether there is an express warranty ? What is the test ? What is a " puff " ? 

Problem 18. B sold a horse to C. During the negotiations B represented 
the horse to be sound. It was unsound. C s,ues B for breach of warranty. 
B objects that he did not "warrant" the horse. Result? 

55. State the implied warranties and when they occur. When is a 
warranty of title not implied? When is there a warranty that goods are 



88 SALES OF GOODS [Ch. IV 

merchantable ? Is there a warranty of fitness for the purpose in a sale by a 
retailer? Is there any special implied warranty in the sale of provisions? 

Problem ig. B stole a horse and had him sold at auction. C bought 
at the auction and then resold the horse to D. The true owner traced it 
and recovered it from D, who now sues C for breach of warranty of title. 
Result? 

Problem 20. B sold C 1 84 bales of hemp, and C at the time of the 
sale inspected it before purchasing by opening several bales. Most of it 
later turned out to be bad. C sues B for breach of implied warranty. 
Result ? 

Problem 21. C ordered of B " Calcutta linseed." It came mixed with rape 
and mustard seed. All linseed has some such seeds mixed with it ; this had 
more than the usual quantity. C contends that the contract is not satisfied 
by offering this article, — that it does not answer the description. How 
would you hold? 

Problem 22. B bought of C a carload of cedar posts, to be shipped by C 
to B. When they arrived, B's servants unloaded a part of them, and, dis- 
covering they were not of good quality, so informed B. The latter then 
inspected them and, because they were not of good quality, replaced 
them in the car, and refused the whole lot. C sues B for the price. Is 
B liable? 

Problem 2^. C bought of B by sample " 102 bales second quality Ceard. 
scrap rubber as per sample." When the bales arrived, they were found not 
to be second quality, but inferior, though they were like the sample. Is C 
bound to keep the rubber and pay for it without offsetting the damages for 
breach of warranty ? 

Problem 24. a. A manufacturer sells B powder for blasting. It is of 
poor quality and unfit for the purpose. Is there a breach of warranty? 

b. A dealer who purchased of the manufacturer sold C some of the 
same powder for the same purpose. Is the dealer liable to C for breach of 
warranty ? 

56. What is meant by the rule of caveat emptor'i ^\'hat are the excep- 
tions to the rule? If A sells B a horse without express warranty, is there 
any implied warranty? If A sells B seeds? 

57. Can the buyer rescind the contract for a breach of an express war- 
ranty if tide has passed? for breach of an implied warranty? If goods are 
ordered by description and they do not answer the description, may the 
buyer take them and sue for breach of implied warranty ? 

58. State all the rights of an unpaid seller against the goods. \\'hat is 
the seller's lien? How is it lost? What is the right of stoppage in transitu'^. 
When may it be exercised? How is it lost? Explain the exercise of the 
right of resale ; of rescission. 



REVIEW QUESTIONS AND PROBLEMS 89 

Problem 2J. B sells C a horse, payment and delivery to be one week 
later. At the time fixed C does not take or pay for the horse. Explain all 
the remedies to which B may resort against the property itself. 

Problem 26. B sells C a horse on credit, delivery to be one week later 
and payment one month later. What are B's rights against the property? 

59. State the seller's rights against the buyer. How does he measure 
his damages for a breach? 

60. State the remedies of the buyer (a) where the title has passed and 
(b) where it has not passed. What are general and what special damages? 
When may special damages be recovered? 



CHAPTER V 

BAILMENT OF GOODS 

61. Definition and distinctions. A bailment ^ of goods is a 
transfer of the possession without a transfer of the general 
ownership, upon a contract, expressed or implied, that after 
the purpose of the transfer shall have been accomplished the 
property shall be redelivered to the bailor or to some person 
designated by him. 

The person making the delivery is called the bailor. The 
person to whom it is made is called the bailee. 

Such a transfer of possession usually occurs by delivery from 
the bailor to the bailee. It may take place, however, without 
such delivery. 

Examples. If one finds an article and takes it into his custody, he is a 
bailee for the unknown owner, although there has been no delivery, and is 
under an obligation created by the law to return it to the true owner upon 
demand. So if one steals or converts property belonging to another, he is 
a bailee, and the law creates for him a promise to return it to the owner. So 
also an officer who seizes goods under a legal process is a bailee of the goods. 
In all these cases there is a transfer of possession without delivery, but in all 
of them the bailee is bound to deliver up the property either upon demand or 
when the purpose for which he has taken it is accomplished. 

The duty of the bailee is usually fixed by his own promise, and is therefore 
the result of contract. But in the cases last given there is no promise and no 
real contract. The law treats these cases upon the fiction that there is a promise ; 
that is, the law creates the promise and requires the bailee to return the goods 
or pay damages for withholding them. 

The consideration for the bailee's promise is the detriment 
suffered by the bailor in parting with his property. Sometimes 
the bailor furnishes some other consideration, as when he pays 
or promises to pay the bailee for caring for the property or 
doing work upon it. But in the case of a gratuitous bailee 
(one who cares for the property without compensation) the 

1 " Bailment " is from the French bailler, " to deliver." 
90 



( 62] CLASSIFICATION 



91 



only consideration is the parting with the property by the 
bailor. This is an act which the owner is not legally bound to 
do, and is therefore a sufficient consideration. 

Bailment applies only to personal property. This may be 
corporeal, as a horse, or incorporeal, as a document of title. 

The bailor need not be the true owner of the property. One 
may hire a horse and put him in a livery stable ; in such a 
case there are two bailments, — by the owner to the hirer, and 
by the hirer to the livery-stable keeper. One who finds a jewel 
may deliver it to a jeweler to be tested ; in such a case the 
finder is bailor and the jeweler is bailee, and the finder may 
recover the jewel, or its value, if the jeweler refuses to sur- 
render it. The bailee cannot dispute his bailor's title. 

Distinctions. A bailment must be distinguished from a sale or barter. 

A bailment differs from a sale in this : in a sale there is a transfer of the 
general ownership or title, while in a bailment there is the transfer of posses- 
sion for a particular purpose, the general ownership or title remaining in 
the bailor. 

A bailment differs from a barter for the same reason. Further, in a bail- 
ment the identical thing is to be returned, though sometimes in an altered 
form, while in a barter some other thing is to be returned. If one delivers 
grain to be ground into meal and the meal returned, this is a bailment ; but 
if one takes his grain to a mill and receives therefor meal already ground, 
this is a barter, or sale. If one " lends " his neighbor a bag of oats to feed 
the neighbor's horse, this is a barter, because the same oats are not to be 
returned, but a like quantity of oats ; this is technically called a niutuum. 

Sometimes there is a bailment with an option to purchase, as where there 
is a " sale on approval " (see page 76 ajtte). In such case the transaction becomes 
a sale when the bailee signifies his approval. 

Sometimes there is a bailment with permission to mix the goods with 
others of a like kind, as where grain is placed in an elevator with the grain 
belonging to other bailors. The owners become owners in common of the 
mass, according to their respective shares. If there is no such permission, 
express or implied, the bailee must keep the bailor's goods separate from 
his own or others'. 

62. Classification of bailments. Bailments fall into two classes, 
and each has subdivisions. The two classes are (A) bailments 
solely for the benefit of one party, and (B) bailments for the 
mutual benefit of both parties. 

A. Bailments solely for the benefit of one party, or gratuitous 
bailments, are divided into two classes. 



92 BAILMENT [Ch. V 

1 . Bailments for the sole benefit of the bailor are called either 
a deposit (or, in the Roman law, depositum) or a mandate (or, 
in the Roman law, mandatum). These are bailments in which 
the bailee without compensation is to keep the property of the 
bailor for him (deposit), or to do something to or about the 
property for the bailor's benefit (mandate). 

Examples. C undertakes without reward to keep D's jewels. C without 
reward undertakes to repair D's watch. C without reward undertakes to 
carry D's grist to mill. The first case is a deposit. The others are mandates. 

2. A bailment for the sole benefit of the bailee is called a 
commodatum, that is, a gratuitous loan. This is a bailment in 
which the bailor without compensation allows the bailee to use 
his property. 

Examples. D loans C a jewel to wear, or D loans C his horse to drive, 
without compensation. 

B. Mutual-benefit bailments may be divided into three classes, 
with two additional special instances. 

1. The delivery of a chattel as security for a debt This is 
called a pawn or pledge, or giving of collateral security (in the 
Roman law, pigniis). 

Examples. D borrows money of C and delivers his watch to C as security. 
D borrows money of a bank and delivers bonds or shares of stock as collateral 
security. 

2. The delivery of a chattel to the bailee to be used by liim 
and such use paid for. This is like the second case given above, 
except that the bailee is to compensate the bailor. It is called 
a hiring, or, in the Roman nomenclature, locatio rei (the hired 
use of a thing). 

Examples. D loans a jewel to C to wear, or D loans his horse to C to 
drive, in each case for a stipulated price. 

3. The delivery of a chattel to the bailee to keep safely, or 
to do work upon, for a compensation. This is like the first case 
given above, except that the bailee is to be paid instead of act- 
ing gratuitously. This is called a hiring (of services) or, in the 
Roman nomenclature, locatio opcris (hired services about a thing). 
There are three special instances of this : (a) hired custody of 



§63] FOR BENEFIT OF ONE PARTY 93 

a thing (locatio custodiae) ; {b) hired services upon a thing 
(locatio operis faciendi) ; (c) hired carrying of a thing {locatio 
opens mercium. vekendarum). 

Exainples. C undertakes for a price to keep D's jewels safely. C for a 
price undertakes to repair D's watch. C for a price undertakes to carry D's 
grain to mill. 

The following special cases of delivery for safe-keeping or for 
transportation fall under mutual-benefit bailments but call for 
separate treatment. 

1. Innkeepers. The intrusting of goods to the protection of an 
innkeeper by a guest at the inn gives rise to peculiar liabilities. 

2. Common carriers. The delivery of goods by a shipper to a 
common carrier for transportation gives rise to peculiar liabilities. 

The following special cases do not fall strictly under bailment 
but may be treated here for convenience. 

1. Public carriers of passengers and baggage. 

2. Telegraph and telephone companies. 

The classification of bailments may be summarized as follows : 

Classification of Bailments 



A. Gratuitous. 


B. Mutual-benefit. 


I. Gratuitous services. 


I . Pledge, or pawn. 


u. Deposit. 


2. Hired use of a thing. 


b. Mandate. 


3. Hired services about a thing. 


2. Gratuitous loans. 


a. Custody of a thing (with special 




case of innkeepers). 




b. Work upon a thing. 




c. Transportation of a thing (with 




special case of common carriers). 



I. Bailments solely for Benefit of One Party 

63. Bailments for sole benefit of bailor. These bailments lay on 
the bailee the lightest duties, since he derives no benefit from them. 

I. How created. This bailment may be created by contract, as 
where, upon the bailee's promise to care for the article gratuitously, 
the bailor delivers it to the bailee. Some writers do not regard 
this strictly as contract, because the only consideration for the 



94 BAILMENT [Ch. V 

promise is the parting with possession by the promisee. It is, 
however, convenient to treat the relation as the result of contract. 

This bailment may also be created by a voluntary undertaking 
of the bailee without any action on the part of the bailor, as, 
for example, where one finds lost property and takes it into his 
possession. 

It may also be created without a voluntary undertaking of the 
bailee, as where goods are cast by a flood or other force of nature 
upon the lands of the bailee. 

2. Bailors obligations. As these are gratuitous bailments, the 
bailor is not bound to compensate the bailee for his services in 
the care of the property or for any work done upon it ; but if 
the bailee has not by agreement undertaken to bear unusual ex- 
penses, the bailor must indemnify him for such actual disburse- 
ments. The voluntary bailor is also bound to warn the bailee 
of any danger of which the former is aware, if such danger in- 
creases the ordinary risk of the bailment and is not apparent to 
the bailee. 

Examples : i. C undertakes without compensation to keep and feed D's 
dog. C is obliged to pay a dog tax. D must reimburse C. 

2. C undertakes without compensation to take and care for D's dog. 
Known to D but unknown to C the dog is vicious. C is bitten by the dog. 
D is liable to C for the injury. But D would not be liable if he did not know 
of the vicious propensities of his dog or if he warned C of them. 

3. Duties of bailee. The bailee is not bound to undertake the 
bailment even after he has promised to do so. This is because 
there is no consideration for his promise, since the bailor has 
promised him nothing in return. But if the bailee does undertake 
the bailment by receiving the goods, he then comes under certain 
obligations to the bailor. 

a. The bailee must not by gross negligence injure, destroy, 
or lose the goods. It is said that since the bailee is acting gra- 
tuitously, he is bound to use only slight care toward the subject 
of the bailment and is liable only for gross negligence. What- 
ever this may mean, — and it is a matter difficult to define accu- 
rately, — it is clear that less care is exacted of the gratuitous 
bailee than of any other. The amount of care must, however, 
vary in proportion to the risk. 



§64] FOR BENEFIT OF ONE PARTY 95 

Example 3. More care would be required in the keeping of a diamond 
than in the keeping of a plow ; more skill and care would be required in the 
repairing of a watch than in the repairing of an umbrella. The court instructs 
the jury that the gratuitous bailee is required to use only slight care and is 
liable only for gross negligence, that this is the care that persons of less than 
ordinary prudence, but still of prudence, exercise under like circumstances, 
and that whether the bailee exercised this care in the case in litigation is a 
question of fact for the jury to determine. 

b. The bailee must not use the article except so far as its use 
is reasonable or necessary for its proper care. The bailee might 
drive a horse to keep it in health, or milk a cow ; but he could 
not use the horse for plowing his own field, or wear a diamond 
intrusted to him. 

c. The bailee must redeliver the article at the termination of 
the bailment, together with any increase or profit derived from it. 
If it has been lost, the bailee is liable only if the loss was due 
to his gross negligence. 

Examples : 4. B undertakes gratuitously to keep C's furs. He keeps them 
so negligently that the moths injure them. B is not liable unless this is found 
to be gross negligence. 

5. B wears the furs and loses them. B is liable. He had no right to use 
the furs, and in doing so assumed the entire risk of their safety. 

6. B undertakes gratuitously to keep C's jewels. B locks them up in his 
desk. Burglars break open the desk and steal the jewels. B is not liable unless 
he was grossly negligent, which could hardly be the case under these facts. 

7. B leaves the jewels in an unlocked drawer and they are stolen. This 
might be gross negligence. 

4, Termination of bailment. The bailment is terminated when- 
ever either party elects to terminate it. This is perhaps subject 
to the qualification that if the bailee has entered upon some 
work to be done upon the article, he is bound to finish it. The 
death of either party terminates the bailment. So also does the 
insanity of either. 

64. Bailments for bailee's sole benefit. These bailments lay 
on the bailee the heaviest duties, since he alone benefits from 
them. 

I. How created. This form of bailment arises only by con- 
tract, because it requires the assent of the bailor to lend and the 
assent of the bailee to borrow. A promise to lend is not binding, 



96 BAILMENT [Ch. V 

because there is no consideration for it; but after the loan is 
made, the contract is complete. The absence of compensation to 
the bailor characterizes this class of bailments. 

2. Obligations of bailor. The sole obligation of the bailor is 
to warn the borrower of any defect, known to him and not known 
or obvious to the bailee, which renders the article dangerous. If 
he does not, and the bailee is injured in consequence of such 
defect, the bailor is liable to him for the injury. 

Exainph i. B lends his horse to C to drive. Known to B but unknown 
to C, the horse is a runaway. If B does not warn C of this, and the horse 
runs away and injures C, B is Uable. 

3. Duties of the bailee. The obligations of the bailee may be 
fixed by the contract itself. Where they are not specified, the 
following will be implied. 

a. The bailee must exercise great care in keeping or using 
the article, and is liable for slight negligence. The bailment 
being for the bailee's sole benefit, the law exacts of him greater 
care than in the case of any other bailee. He is not liable for 
inevitable accident but only for such injuries as by the exercise 
of great diligence he could have prevented. In the presence 
of any danger he ought to prefer the safety of the borrowed 
article to the safety of his own property. In this respect this 
bailment is at the opposite extreme from the one for the bailor's 
sole benefit. 

Examph 2. C loans B his watch. B loses it. If this was due to a want 
of great care (more than one ordinarily takes of his own property), B is Uable 
to C. This is a question for the jury under proper instructions. 

b. The bailee may, of course, use the article, but he must not 
lend it to others unless it is understood that he may do so, and 
must use it in accordance with the contract or understanding. 
Any material deviation may cast upon him the liability of insuring 
the safety of the article or may render him liable in tort for its 
conversion. 

Examples : 3. C borrows D's horse to drive, to A, and drives instead to B 
in another direction. The horse dies without C's fault. C must pay for the 
horse. He has technically converted it and is absolutely liable. If the horse 
had died without C's fault while he was driving to A, he would not have been 
liable. 



§65] FOR MUTUAL BENEFIT 



97 



4. C borrows D's horse to drive and permits E to drive it. C is absolutely 
liable for any injury to the horse while in E's hands. But it may be implied 
that another is to use the article. If C takes D's horse in order to try him 
before buying, C may permit a competent horseman to make the test. 

c. The bailee must redeliver the article with its increase or 
profits. He cannot deny his bailor's title ; that is, he cannot hold 
the article under a claim that it is his or another person's, but 
must return it and resort to an action to establish his claim. 

Examples: 5. C borrows D's bonds to pledge in order to raise money. 
C must return the bonds and also any income accruing during the loan. 

6. C borrows D's team and refuses to return it, alleging that it belongs to 
his wife, a sister of D. This is not a good defense. C must return the team, 
and the wife can then bring an action to recover it. C cannot thus dispute his 
bailor's title. 

4. Termination of bailment. A bailment in the nature of a 
loan may be terminated at the will of the borrower. Whether, if 
it be for a definite time, the lender may recall it before the time 
has elapsed is a doubtful question. Any violation of the borrower's 
duty toward the article justifies the lender in recalling it. The 
death of the borrower, or his insanity, terminates the bailment. 
The death or insanity of the lender may not, possibly, terminate 
a loan for a definite period if that period has not yet elapsed. 

II. Mutual-Benefit Bailments 

65. Pledge or pawn. This is a mutual-benefit bailment intended 
as a species of security ; and when it is a bank transaction with 
stocks, bonds, or other like instruments pledged, it is called 
collateral security. 

I. IIoiv created. A pledge or pawn is a bailment of a chattel 
as security for a debt or other legal obligation, and is usually ac- 
companied by a power in the bailee to sell the article in case of 
default. When a transaction is on a larger scale, the bailment is 
often called the giving of collateral security, as where one borrows 
money at a bank and deposits bonds as security for the loan. 
These transactions by way of pledge can arise only by contract. 
The statutes generally regulate somewhat strictly the business of 
pawnbrokers, and prescribe the rate of interest they may lawfully 



98 BAILMENT [Ch. V 

charge for loans secured by pledge. Delivery to the pledgee is 
essential to the creation of a pledge. The delivery of documents 
of title, like warehouse receipts or bills of lading, constitutes a 
pledge of the property they represent. Stock certificates should 
be accompanied by a power to transfer the title upon the books 
of the corporation that issued them. 

2. Rights and obligations of pledgor. A pledgor of property 
impliedly warrants that he has good title to it and is liable to the 
pledgee for a breach of this warranty if the pledgee is damaged 
thereby. He has a right to assign to another his interest in the 
pledged article, that is, the difference between its value and the 
sum for which it is pledged. He has a right to redeem the pledge 
by payment of the debt which it secures. No agreement of the 
parties can make the pledge irredeemable, because this is regarded 
by the law as oppressive to the debtor, who usually gives a pledge 
under the stress of necessity. 

3. Rights and duties of pledgee. The pledgee has a right to 
assign his interest in the pledge. He has no right to use the 
pledged article except so far as its use is necessary to its proper 
care. Any profits derived from it the pledgee holds to apply toward 
the debt ; but if that is otherwise paid, he must account for them 
to the pledgor. He is to be reimbursed for any expenses neces- 
sarily incurred in caring for the article pledged. He must use 
ordinary care in keeping and preserving the property, and is liable 
for ordinary negligence. This case lies midway iri this respect 
between the bailment for the bailor's sole benefit and that for the 
bailee's sole benefit. He must redeliver the property when the 
pledge is redeemed by the pledgor. 

After the debt is due and unpaid, the pledgee may sell the 
property to pay the debt, and must pay to the pledgor any sur- 
plus above the debt, interest, and expenses of sale. If there is no 
provision in the contract permitting a private sale, the sale must 
be at public auction after due notice to the pledgor ; but it is often 
held that stocks and bonds may, after due notice, be sold on the 
floor of the stock exchange. The pledgee cannot purchase at his 
own sale. In the absence of an express provision in the contract 
prescribing the mode of sale, and especially where notice cannot 
be given to the pledgor, or where there are conflicting claims, it 



!66] FOR MUTUAL BENEFIT 



99 



is safer for the pledgee to secure a judicial sale under a decree 
of a court of equity. In some states the statute provides for the 
manner of sale of pledged property. 

4. Termination of pledge. A pledge is terminated when the 
property is redelivered to the pledgor, or when by tender or pay- 
ment of the debt the pledgor is entitled to have it redelivered. 
A refusal to redeliver the property when the pledgor is entitled 
to it renders the pledgee Hable in tort for conversion. 

Examples : i. A pledges a jewel to B as security for a loan. B leaves the 
jewel at night in a show case. Burglars enter and take it. B is liable to A 
for the loss if it is found that B did not use due or ordinary care for the safe- 
keeping of the jewel. Due care might require B to put the jewel in a safe. 

2. B wears the jewel and it is lost. B is liable to A, for he assumed the 
risk in wearing the jewel. 

3. A pledged securities to a bank for the payment of a particular loan. 
A paid the loan and demanded the securities. The bank refused to deliver 
them and claimed to hold them for another unsecured loan. A brought an 
action against the bank for conversion of the securities and recovered. The 
bank could hold the securities for the particular loan, but for no other. 

4. The bank received dividends on the securities. These belong to A after 
he pays the loan, or they may be deducted from the loan and payment made 
of the balance. 

5. A received dividends on the securities. He holds them in trust for the 
bank until the loan is paid. 

6. A pledgee upon default sold the pledge under authority given by 
the pledgor and purchased at his own sale. The sale may be avoided at the 
election of the pledgor. 

Pawnbrokers. In New York pawnbrokers may take 3 per cent a month 
for the first six months and 2 per cent a month thereafter upon loans not ex- 
ceeding $100, and 2 per cent a month for the first six months and i per cent 
a month thereafter upon loans exceeding $100. They cannot sell pawns until 
one year after possession thereof, and the sale must be at public auction and 
conducted by a licensed auctioneer. Notice of the sale must be published for 
at least six days in two daily newspapers. Any surplus on the sale shall be 
turned over to the pledgor. In Massachusetts the mayor and aldermen or 
other licensing board of a city may fix the rate of interest, and articles may be 
sold at public auction after four months. 

66. Bailee hires an article of bailor. This is also a mutual- 
benefit bailment, since both parties derive a benefit from it. 

I. How created. This bailment arises only by contract. The 
bailor agrees to deliver to the bailee an article to be used by the 
latter, who in turn agrees to pay the bailor a compensation for 



lOO BAILMENT [Ch. V 

such use. If the bailor refuses to deliver or the bailee to receive, 
there is a breach of contract for which damages may be recovered. 
When a delivery is actually made and accepted, the bailment begins. 

2. Rights and liabilities of bailor. The bailor warrants his title 
and warrants that the bailee shall not be disturbed in his posses- 
sion by one maintaining a superior title. He must warn the bailee 
of any defects, known to him and not observable by the bailee, 
which render the article dangerous for the purpose for which it 
is hired. So also the bailor must use due care to discover and 
remedy defects. 

Example i . B lets to C a horse and carriage, and the carriage breaks down 
and injures C from a defect which, by the use of due care, B might have 
discovered. B is liable to C. 

3. Rights and duties of bailee. The rights and duties of the 
bailee may be fixed in part by the contract. In the absence of 
contract provisions the following general rules would govern. 

a. The bailee must exercise ordinary care in the keeping and 
use of the article, and is liable for ordinary negligence. Ordinary 
care is that which the average prudent man exercises under like 
circumstances in the conduct of his own affairs. The bailee is 
not liable for inevitable accident nor for any willful act of a third 
person. He is liable only for negligence ; that is, the want of 
that ordinary care on his part which naturally and probably results 
in injuring the article. 

b. The bailee acquires the right to the exclusive use of the 
article during the time specified. He may maintain an action for 
any disturbance of his lawful possession and is said to have a 
special property in the goods. He must use the, article with due 
care and only for the purpose or in the manner agreed upon. If 
he hires a horse to drive to A, he must not dri\e elsewhere or 
beyond A. An intentional material variation from the terms of 
the contract may amount to a conversion and render the bailee 
absolutely liable for the safe return of the chattel. 

Examples : 2. A hires B's horse to drive to X. He does drive to X, but 
by a very circuitous and unusual route. This may be a technical conversion 
and render A liable for any injury to the horse while so converted. 

3. A overdrives the horse and injures it. He is liable to B for want of care 
in using the horse. 



i67] FOR MUTUAL BENEfI 




c. The bailee is liable to third persons fai< 
to them from his use of the article, in the same^waT^^'tf^t were 
his own. The bailor is not liable unless perhaps for some in- 
herent vice in the article, of which he did not warn the bailee. 
Third persons injuring the article are liable to either the bailor 
or the bailee, as their damage may appear. 

Examples : 4. A hires B's horse. A drives so negligently that he injures 
C. A is liable to C. B is not liable to C. 

5. X drives into the horse and injures it. X is liable to A to the extent that 
the injury renders the horse less valuable to A, and to B for any permanent 
injury to the horse. 

d. The bailee is bound to compensate the bailor. If the price 
is not fixed by agreement, a reasonable price is understood. If 
the chattel is destroyed without fault of either party before the 
term of the bailment is completed, the contract is discharged, 
but the bailor may recover the reasonable value of such use as 
the bailee has had up to that time. 

e. The bailee must redeliver the chattel at the termination of 
the bailment, and must pay any damages done to it by his negli- 
gence. If the bailee converts the chattel and the bailor recovers 
its full value, the absolute title vests in the bailee upon such 
payment to the bailor. 

Example 6. A hires B's wagon for two days. At the end of two days B 
demands it and A refuses to return it. (a) B may replevin it ; that is, get it by 
legal process, {b) B may sue in tort for conversion and get a judgment for 
the full value of the wagon. When A pays this judgment (not before), the tide 
to the wagon vests in A. 

67. Bailor engages bailee to keep, repair, or transport an 
article. In these bailments there is always a contract under 
which the bailee is to perform some services upon the chattel 
for a compensation. 

I. Different bailments under this head. These bailments are 
of various kinds and for various purposes. There are three dis- 
tinct types : {a) where the bailee for compensation is to take care 
of the goods for the bailor, as a warehouseman stores and cares 
for the goods of his customer, or an innkeeper those of his guest ; 
(5) where the bailee for compensation is to do some work upon 
the article, as a jeweler repairs a watch or a miller grinds grain ; 



102 BAILMENT [Ch. V 

{c) where the bailee is to carry or transport goods for the bailor 
for a compensation, as railways carry freight or postal authorities 
carry letters. 

The cases of innkeepers and common carriers present peculiar 
features and will be treated separately. 

2. Liabilities of bailor. In addition to the liabilities of bailors 
in other relations, the bailor in this class is under a duty to com- 
pensate the bailee. That the bailee receives a compensation is 
the distinctive characteristic of these bailments. The compensa- 
tion may be slight, but if there is any it serves to take the case 
out of the class of gratuitous bailments. Thus, if B agrees to 
take and care for C's horse upon consideration that he may use 
it, B is a bailee for hire and is not a mere depositary ; he receives 
the use of the horse as compensation. 

Usually the compensation is fixed by the contract or it is 
understood that it shall be the reasonable value of the bailee's 
services. When the bailee has fully performed, he is entitled to his 
compensation, even though, before the article is returned to the 
bailor, it should be destroyed, provided the destruction is due to 
no fault of the bailee. If the article is destroyed without his fault 
after he has partly performed but before his contract is completed, 
he is entitled to compensation for labor or material furnished up to 
the time of the destruction of the article. If the bailee abandons 
the work without justification, many courts forbid him to recover 
any compensation, but some permit a recovery for the services 
less the damages to the bailor arising from the breach. So, if 
the bailee does the work unskillfully, but it is of some value, he 
may recover its value less the damages to the bailor. 

Examples .■ i . E runs a store. He permits packages to be left there to be 
taken by a local expressman. A package for C is left there to be taken by the 
expressman, and when called for cannot be found. C sues B, who contends 
he was a gratuitous bailee and liable only for gross negligence. The judge 
tells the jury that B is not a bailee for hire unless he is to receive some certain 
benefit, — that an uncertain, contingent benefit in drawing custom to his store 
is not enough. On appeal the court held this was error. The nature and 
amount of compensation are immaterial. The law will not inquire whether it 
is adequate, nor in such a case whether it is certain. It is enough that B de- 
rives some compensation. (But note that in tliis case C is under no obligation 
to pay B anything.) 



§67] FOR MUTUAL BENEFIT 



103 



2. C agrees to work as bailee on B's chattel. After beginning the work, 
but before completing it, he stops and refuses to go on. Can he recover any- 
thing ? Many courts say he cannot, because he has committed a breach. Some 
allow him to recover the reasonable value of his services, less the damages to 
the bailor from delay in the completion of the work. 

3. Rights and liabilities of bailee. These are often regulated, 
at least in part, by contract. Where the contract is silent, the 
following rules apply. 

a. The bailee is bound to exercise ordinaiy care and diligence 
and is liable for ordinary negligence, but the standard of liability 
is different in the case of innkeepers and common carriers. If 
the bailee undertakes to perform work requiring skill, as in the 
case of a watch repairer, he is bound to possess and exercise 
the skill ordinarily possessed by those engaged in the occupation. 

b. The bailee has a temporary, special property in the chattel, 
and may protect this by insurance and by appropriate action 
against third persons who interfere with his possession. 

c. The bailee has a lien upon the chattel for his reasonable 
charges for storage or for services. The only bailees in this 
class who were excepted at common law were agistors who pastured 
cattle, and livery-stable keepers who cared for them, but statutes 
have generally extended the lien in favor of these bailees, as well 
as in favor of garage keepers. At common law the lien was 
merely possessory and was accompanied by no power to sell, but 
the power of sale to enforce the lien is now quite generally con- 
ferred by statute. 

Warehousemen. A warehouseman is one who receives and stores goods 
for compensation. The warehouseman usually gives a "warehouse receipt" 
for goods received by him. These receipts may be transferred by indorsement 
so as to give the indorsee a right, upon presenting the receipt, to claim the 
goods. Grain stored in warehouses is transferred by merely indorsing and 
transferring the warehouse receipts. Usually such grain is mixed with like 
grain of other bailors, and the receipt entitles the owner to the specified num- 
ber of bushels from the common mass. In the absence of contract or custom 
the bailee has no right to confuse the bailor's goods with those of others, and 
if he does so and loss ensues, he must make good the loss. If he confuses a 
bailor's goods with his own, he will suffer whatever loss or inconvenience 
arises, even to the extent of losing his own goods altogether. If the goods are 
injured or lost, it is incumbent upon the warehouseman to account for the in- 
jury. If he pleads a fire or theft or the like, the bailor must then show that 



I04 BAILMENT [Ch. V 

the fire or theft was due to the negligence of the warehouseman. The rights 
and duties of warehousemen and the transfer of warehouse receipts are now 
regulated by the Uniform Warehouse Receipts Act in thirty-three jurisdictions : 
namely, Alabama, Alaska, California, Colorado, Connecticut, Delaware, District 
of Columbia, Illinois, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michi- 
gan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New 
York, Ohio, Oregon, Pennsylvania, Philippine Islands, Rhode Island, South 
Dakota, Tennessee, Utah, Vermont, Virginia, Washington, and Wisconsin. 
This act is in the main a statement of the generally prevailing common law. 
United States bonded warehouses are regulated by statute (United States 
Compiled Statutes of 1913, §§ 5638-5694). They are for the convenience of 
importers or others required to pay duties or excise taxes, and goods are kept 
in them in bond until such taxes are paid. 

Wharfingers. Wharfingers are those who maintain wharves for the pur- 
pose of receiving goods and keeping them for compensation. They are a 
special kind of warehousemen. 

Safe-deposit companies . If one rents a safe-deposit box in a bank or in 
the vaults of a safe-deposit company, is the bank, or the company, a bailee of 
the articles stored in the box? Probably not, in the ordinary sense of that 
term. The company never has possession of the contents of the box. The 
one who hires the box puts the articles in it, locks it, and keeps the key. 
The company, for added security, has another key, without the use of which 
the box cannot again be opened. Neither key alone vdll open the box ; both 
must be used. The situation is like bailment, but does not fully correspond to it. 
The company is liable for breach of contract in permitting any unauthorized 
person to open the box, and is bound to use due diligence to guard the box 
and its contents. While the courts sometimes speak of these transactions as 
bailments, there is a material difference between them and ordinary bailments 
in that there is no actual delivery of the goods to the company. 

Banks. When money is deposited in a bank, the relation is that of debtor 
and creditor, not that of bailor and bailee. One may, however, make a 
deposit as bailor. Such would be the case where one deposits a bag of gold, 
the same identical money to be returned to him. 



in. Special Cases of Bailment for Keeping or 
Transportation 

68. Innkeepers. The relation of an innkeeper to his guests, 
and particularly toward the goods of his guests, is peculiar and 
is the result of a state of society now largely outgrown. 

I. Who are innkeepers. An innkeeper or hotel keeper is one 
who holds himself out to the public as ready to entertain trav- 
elers or transients as guests for a compensation, furnishing food 



§68] INNKEEPERS 105 

and lodging or lodging alone. A restaurant is not an inn, be- 
cause it furnishes only food. A lodging house is not an inn, 
because the keeper is not bound to entertain any who apply, and 
makes a special contract with each. An innkeeper, as to some 
of his permanent guests, may be rather a lodging-house keeper 
or a boarding-house keeper than strictly an innkeeper. A steamer 
providing lodging and food for passengers has been treated as to 
those so entertained as a floating inn, but there is strong authority 
to the contrary. A sleeping car, on the other hand, is held not 
to be an inn. These distinctions are very nice and not always 
satisfactory. 

2. Who are guests. A guest at an inn or hotel is a transient 
who receives accommodations therein under a contract, express or 
implied, with the proprietor. One who lives regularly or perma- 
nently at a hotel is not a guest in the legal sense of the term ; 
but one may engage accommodations for a definite period, longer 
or shorter, without ceasing to be a guest, provided he is still a 
wayfarer or transient and not a resident. The transient may be 
a traveler or one who resides in the place where the inn is 
located. The taking of lodgings is not necessary to make the 
patron a guest. A traveler who resorts to an inn for food or 
drink may be a guest. He may even become a guest of the inn- 
keeper at the railway station and there put his baggage in charge 
of the hotel porter. 

Examples: I. B's family reside in X, but B lives in Y and visits X 
only occasionally. The family engage permanent accommodations at a hotel. 
B visits them there and remains at the hotel for a month. B's watch and 
his wife's jewels are stolen. B is a guest and the innkeeper is liable to him 
for the loss of the watch. His wife is not a guest and cannot recover for 
her jewelry. 

2. B goes to a hotel, and registers, but does not take a room. He goes 
to the dining room, leaving his hand bag in the custody of a porter. It is 
stolen. The innkeeper is liable. The taking of a room, however, is a quite 
decisive test. 

3. Rights and liabilities of an innkeeper. These differ in 
several particulars from those of other bailees. 

a. An innkeeper is bound to receive all fit and orderly guests 
if he has accommodations for them. His refusal to do so may 
render him liable to an action for damages, or to a criminal 



io6 BAILMENT [Ch. V 

prosecution, or both. Ordinary bailees may choose with whom 
they will deal, but an innkeeper is following a public calling and 
must serve all members of the public alike. The innkeeper must 
receive the baggage of the traveler also. 

b. At common law an innkeeper is absolutely liable for the 
loss of his guest's goods in the inn, unless such loss was due to 
an act of God, to an act of the public enemy, or to the fault of 
the guest. He is thus practically an insurer of the safety of the 
goods, — and especially against theft, — a liability which does not 
attach to bailees generally. This rule originated in early times 
when robbers infested the routes of travel, and was intended to 
protect the guest from collusion between them and the inn- 
keepers. Modern statutes have to some extent relieved the inn- 
keeper from this high degree of liability by providing that if he 
posts notices that he has a safe in which valuables may be de- 
posited, he shall not be liable for those retained by the guest. 
Whether "valuables " includes reasonable pocket money has been 
differently decided, but in New York it is held that all money 
is included, and that if a guest retains any money he does so at 
his own risk. On the other hand, in New York it is held that 
a watch is not an ornament and that the innkeeper is an insurer 
of its safety, even though it is not deposited in the safe. 

While the common-law rule of liability stated above is the one quite gener- 
ally adopted, it has not gone without dispute. Indeed, three different rules 
have been applied; (i) the strict rule given above, that the innkeeper is an 
insurer, with the exceptions noted ; (2) that the innkeeper may excuse himself 
by showing inevitable accident or irresistible force, though not amounting to 
an act of God or the public enemy, as fire or robbery ; (3) that the innkeeper 
may excuse himself by showing that he was free from negligence. Many 
statutes have expressly relieved the innkeeper of liability for loss not due to 
his negligence. (For the meaning of " act of God " see sect. 69, p. 108, post.) 

The innkeeper is also bound to use due care to protect guests from assaults 
or insults, and especially those proceeding from the servants of the inn. 

c. The innkeeper has a lien upon the baggage of his guest 
for the amount of the guest's bill. At common law he had no 
power to sell the goods in order to enforce the lien, but such 
power is now generally conferred b)- statute. 

4. Innkeeper as ordinary bailee. An innkeeper is an ordinary 
bailee of goods brought to the inn by a guest for show or sale, 



§69] COMMON CARRIERS OF GOODS 107 

of the goods of boarders, and of goods held by him under a Ken. 
He may be a gratuitous bailee of goods left by one not a guest, 
or left for an unreasonable time by one who has ceased to be 
a guest. 

69. Common carriers of goods. No other bailee for mutual 
benefit undertakes so high a degree of liability as a common 
carrier of goods, although by special contract the carrier now 
usually avoids the extreme liability fixed by the common law. 

1. Wko are common- carriers. A common carrier is one who, 
in the exercise of a public calling, undertakes to transport for a 
compensation the property of any person who may apply. A 
private carrier is one who so transports goods under special con- 
tract, without being engaged in the business as a public employ- 
ment. A common carrier holds himself out as ready to serve all 
persons indifferently to the extent of his ability. In this respect 
he is like the innkeeper. Railways, steamboats, canal boats, 
express companies, stages, and the like, so far as they carry 
goods, are common carriers. 

2. Liabilities. Two things distinguish the liabilities of com- 
mon carriers from those of private carriers and most other 
bailees : first, they are liable for wrongfully refusing to receive 
and transport goods ; second, they are insurers of goods against 
all loss or damage, except such as may be occasioned by the act 
of God, or of the public enemy, or of public authority, or of the 
shipper himself, or which may be due to the inherent nature or 
infirmity of the goods. 

First. The duty to carry for all indifferently arises from the 
public or quasi-public nature of the calling. A refusal to carry 
up to the limit of his facilities may render a common carrier 
liable in damages, or he may be compelled by the courts to per- 
form the duty specifically. Dangerous goods, or goods other than 
those which the carrier professes to carry, may be lawfully re- 
fused. Carriers, like railways, which enjoy special franchises (as 
rights of way or the power to condemn lands for a right of way) 
may be compelled to supply reasonably sufficient facilities and 
to carry the goods which the community requires to have carried, 
but carriers not enjoying such special privileges cannot be com- 
pelled to supply greater facilities than they choose. The duty to 



lo8 BAILMENT [Ch. V 

carry for all indifferently implies the duty not to discriminate 
between customers by giving any preference to the goods of one 
over those of another, or by charging one shipper more than a 
reasonable rate while carrying for another at a reasonable rate. 
Aside from statute there is diversity of opinion as to whether a 
carrier may carry for one at less than a reasonable rate, provided 
he carried for others at a reasonable rate. There exist in most 
states statutes governing the rates to be charged by common 
carriers for transportation beginning and ending within a state, 
and the Federal Congress has enacted a similar statute, known 
as the Interstate Commerce Act, providing a method for regu- 
lating the rates to be charged for transportation from one state 
to another. 

Second. The liability for loss or damage is very great. In the 
absence of contract to the contrary, or of statutory modification, 
a common carrier is liable absolutely for all loss or damage to the 
goods in his hands as common carrier, except as follows : 

a. The carrier is not liable for loss occasioned by an act of 
God ; that is, by some force of nature beyond the control of man 
and unconnected with any culpable human agency. Lightning, 
extraordinary floods, cyclones, and the like are regarded as acts 
of God. Fire, unless occasioned by lightning, is not. Accident is 
not, unless it be what is termed inevitable accident. Even if the 
loss is due to an act of God, the carrier may be hable if the loss 
is related approximately to some negligence of his. 

Exatnples : I. The carrier negligently delays goods at X, where there 
is known to be danger of a flood. Even if the goods are destroyed by an 
extraordinary flood, the negligence in delaying them there may render the 
carrier liable. 

2. A steam boiler explodes without any known cause and injures a 
shipper's goods. The carrier is liable. 

3. Lightning sets fire to a freight car and destroys its contents. The carrier 
is not liable. 

4. A fire breaks out from causes unknown and destroys freight. The 
carrier is liable. 

b. The carrier is not liable for loss or damage occasioned by 
the public enemy ; that is, by an org-anized military force making 
war upon the country of the carrier or by pirates on the high 
seas. Mobs, rioters, strikers, and the like are not regarded as 



§69] COMMON CARRIERS OF GOODS 109 

public enemies within this exception. The carrier is liable for 
loss by theft. If he negligently exposes the goods to the risk of 
destruction by the public enemy, when he could take a safer 
route, he will be liable for the loss. 

c. The carrier is not liable for losses due to the fault of the 
shipper. 

Examples : i . The shipper improperly packs breakable goods, as china, 
and they are injured in transit. The carrier is not liable. 

2. The shipper conceals money in a box of ordinary freight and it is lost. 
The carrier is not liable for the loss of the money, because he is entitled to 
be advised of the value of the goods in order that he may take necessary 
precautions. 

d. The carrier is not liable for any loss or damage due to the 
intervention of some lawful public authority, as where goods are 
taken from him by health officers or by seizure under legal process. 

e. The carrier is not liable for loss or damage due to the 
inherent nature or infirmity of the goods. 

Example. The carrier is not liable for the decay of fruit unless he has 
negligently delayed it in transit. He is not liable for the death of stock due 
to disease or fright, unless such death can be proximately traced to some 
negligence of his. 

In any case the carrier is liable for his own negligence to the 
same extent as any bailee for hire. He is liable for deviations or 
delays resulting in loss if due to his negligence. 

3. Modifications of liability by contract or statute. A com- 
mon carrier may, unless forbidden by statute to do so, contract 
with the shipper to limit his liability to that of an ordinary bailee ; 
that is, he may contract against liability as an insurer. The rule 
that he should insure the safety of the goods was intended to 
protect the shipper against collusion between the carrier and 
highwaymen or other robbers. The reason for the rule has prac- 
tically disappeared, and therefore the courts uphold contracts 
which abrogate the rule so far as they are reasonable or not 
contrary to public policy. 

Carriers have also sought to contract against their own negli- 
gence or that of their employees ; that is, against the liability fixed 
for an ordinary bailee. This most courts have refused to permit 
them to do, upon the ground that it is contrary to public policy. 



no BAILMENT [Ch. V 

England and New York permit it, although even there the shipper 
is entitled, upon the payment of a higher rate, to have his goods 
carried without such a limited-liability contract. 

In some jurisdictions statutes modify the common-law liability 
of carriers in some particulars ; for example, by exempting the 
carrier from loss or damage by fire not due to the negligence 
of the carrier. 

By sect. 20 of the Interstate Commerce Act a carrier engaged 
in interstate commerce is liable to the shipper for the full dam- 
age done to the goods, notwithstanding any limitation of liability or 
limitation of the amount of recovery or representation or agreement 
as to value in the receipt or bill of lading. 

Contracts sometimes limit the amount of liability to a sum fixed by the 
shipper as the value of his goods. These are generally upheld on the ground 
that if the value is greater than that fixed, the carrier is entitled to greater 
compensation for the added risk. 

Contracts also often require claims for loss or damage to be presented within 
a stated time ; and if the time allowed is reasonable, these are also upheld. 

The consideration of these contracts is usually that the carrier will transport 
the goods at a lower rate than that charged where his liability is that fixed by 
the common law. (For the contract usually made see the uniform bill of lading 
conditions, post.) 

A mere notice not brought to the attention of the shipper cannot operate 
to limit the carrier's liability. But a notice in a bill of lading, express receipt, 
and the like is presumed to be assented to by the shipper who receives it, if it 
is delivered to him before the goods are beyond recall. This rule does not 
apply to a local baggage carrier who gives a receipt for baggage, because cus- 
tom has not made such receipts evidence of a contract. In the case of the 
ordinary railway ticket it must be shown that the person receiving the token 
or ticket actually saw or knew of the notice when he took the receipt or pur- 
chased the ticket, or had notice that there was soj/ie limitation in the ticket or 
accepted the ticket with notice that it was a special contract. 

4. When liability ends. Liability as carrier ends when the 
goods are delivered to the consignee, or when after notice the 
consignee leaves the goods an unreasonable time in the hands of 
the carrier. In the latter case the carrier ceases to be liable as 
carrier and becomes liable as warehouseman. In many states a 
railway carrier becomes merely a warehouseman, without notice to 
the consignee, when the goods arrix-e at their destination and are 
unloaded into the railway freight house ; in other states the change 



§69] COMMON CARRIERS OF GOODS ill 

of position occurs after the goods have been in the freight house 
a reasonable time ; and in still other states, including New York, 
it is further required that notice of arrival shall have been given 
to the consignee or a reasonable effort made to give such notice. 

Liability also ends when a carrier, having received goods to 
be transported over its own ^nd connecting lines, has delivered 
the goods to a connecting carrier, unless the first carrier has 
contracted to transport the goods to their final destination. 

By sect. 20 of the Interstate Commerce Act,^ where several car- 
riers are engaged in transporting goods from one state to another 
or from the United States to a foreign country, the initial carrier 
is liable for all loss or damage on through shipments, even though 
such loss or damage may have been caused by acts of the second 
or later carriers. The initial carrier may, of course, recover from 
the carrier actually responsible for the loss or damage any sums 
which the initial carrier has been obliged to pay under this statute. 

By merely accepting goods billed to a point beyond its own line, a carrier 
does not, in the absence of statute, contract to be liable after the goods leave 
its hands ; there must be something in the contract to that effect. This is the 
general American doctrine, but in England and a few of our states it is held 
that a railway accepting goods billed beyond its line impliedly undertakes to 
deliver them at their final destination and is therefore liable for loss occurring 
upon a connecting line. If the first carrier takes prepayment for the whole 
transit, or in the bill of lading agrees " to forward," or uses like expressions 
indicative of an agreement to deliver at the final destination, a contract for the 
whole transportation may be implied. If the first carrier is not made liable by 
its contract, the shipper must recover against the carrier that causes the loss 
or damage ; but goods found damaged in the hands of a railway company are 
presumed to have been damaged by that company. 

5. Delivery. The carrier must deliver the goods to the con- 
signee or a connecting carrier or pay damages for nondelivery, 
unless {a) they are claimed by one whose title is superior, as by 
a true owner whose goods have been converted, or {b) the con- 
signor has exercised the right of stoppage in transitu (see p. 82 
ante), or (c) they have been lost from a cause for which the car- 
rier is not liable. If the carrier delivers to the wrong person, he 
is liable for conversion. The carrier must use due diligence to 
notify the consignee of the arrival of the goods. 

1 See sect. 26 ante. 



112 BAILMENT [Ch. V 

6. Bills of lading, etc. A bill of lading is the written receipt, 
by a carrier, for goods delivered to the carrier for transportation, 
and an agreement to transport and deliver them to a person named 
therein or to his order. It is signed by an agent of the owner 
of the vessel, railroad, or other transportation agency. 

The rules regarding the issuance and transfer of bills of lad- 
ing, and the rights and duties of carriers and shippers thereunder, 
are now set forth in fourteen states in the Uniform Bills of Lad- 
ing Act. These states are California, Connecticut, Illinois, Iowa, 
Louisiana, Maryland, Massachusetts, Michigan, New Jersey, New 
York, Ohio, Pennsylvania, Rhode Island, and Vermont. By Act 
of Aug. 29, 19 1 6, Congress passed a Bills of Lading Act prac- 
tically identical with the Uniform Bills of Lading Act. The 
federal statute, of course, governs only bills of lading used in 
interstate commerce and commerce between the United States 
and a foreign nation or the dependencies of the United States. 

A charter party is a contract of affreightment in writing, by 
which the owner of a vessel lets the whole or a part of her to a 
person for the transportation of goods for a particular voyage, in 
consideration of the payment of freight charges. A charter party 
may leave the possession and control of the vessel with the owner, 
or may transfer the possession and control to the freighter. 

With the growth of commerce and the increase of carriers it 
has been found advantageous to have a uniform bill of lading. 
The Interstate Commerce Commission has approved a standard 
form of a bill of lading which is now generally in use.^ Shippers, 
when once familiar with it, need not scrutinize each one in order 
to ascertain whether it contains some new term. Like the stand- 
ard fire-insurance policy, it brings uniformity into an everyday 
transaction and contract. 

A shipping order is also used as a part of the uniform bill-of- 
lading forms. This is an order signed by the shipper and ad- 
dressed to the carrier, directing him to receive and cany the 
goods. It contains the same conditions as the bill of lading. 

There are also in use a uniform export bill of lading and a 
uniform live-stock bill of lading. 

1 The Interstate Commerce Commission now has under consideration the 
approval of a revised standard form of bill of lading. 



Unllom em il UJUi-Smairt Firm ol Slr.IgM Bill ol lidli>t aptra.il I.) Ik, iDhnlili C««in.r« C««in.lBl.n by Crd<r ««. 7S7 .1 lui.. 27, 1 BM. 

The Delaware, Lackawanna & Western Railroad Company 



STRAIGHT BILL OF LADING-ORIGINAL-NOT NEGOTIABLE 



Shipper's Mn. 7^ k O 
Agent's He. ■3/'/ -3 



iat_ 



l^.-H-. 



ibject to the dissificatiooa and laiiBB ia effect on tbe date qt issue ol this Original Hill of Lading, 



y;rvv^-<2^ 



mi<^ 

,. ^'lie pTopeny described below, in ipparent Eood order, except as noted 

(contents and condition dr contents of packages unknown), marked, consigned and destined as indicated below, which said Company 
agrees to carry to its usual place of delivery at said destination, if on its road, otherwise to deliver to another carrier on the route to 
said, destination. It is mutually agreed, as to each carrier of all or any of said property over all or any portion of said route to 
destination, and as to each piny at any time interested in all or any of said property, that every service to be performed hereunder 
jhall be subject to all the conditions, whether printed or written, herein cootained (including conditions on back hereof), and which 
are agreed to by the shipper, and accepted for himself and his assigns. 

The Rate of Freight from Jftta^ca^-^ ^^ 



u 


U 


t\>-t,tp 









-is in cents per 


100 Lbs 


. 


IFSDoelal 
Pm 


tFSp«iJ 


IF lime. I.I 


IFUIGlMi 


iF2dCIiit 


IFRuttZS 


IFIXCI... 


IF Hull IS 


IF Bul* ZS 


IF 4lh Cta*» 


IF Stfa Clwi 


IFGUiClw. 


PCT 






10 
























StatBO f ^- V' Cotinfynf Sj C-&^_^a^ 



Route,. 


Car Initial 




Car 


do. 


PACKAQES 


DESCRIPTION OF ARTICLES AND SPECIAL MARKS 


WEIGHT 

(Subleet to Corrwtlaii) 


OR RalE 


c'o^lSST. 


If charges are to be 


■^ 


Kjl^j^ \^^A^LyC<f 


l^o 






here. "To be Prepaid." 




i 




























































of the charts on the 












hereon. 




























Per 




































Charses advanted: 






















« 















kJ ■. rt. %Crt-^C-< Shippei 



■jt/^iA, ^^^wv-J^ 



(Thl.BUqr LuljjiBl.tiilierciiAlbrtbii.MFperuilmnlor Uig uitI..- luc'^i 



The words " not negotiable " are printed on tlae face of each uniform bill of lading 
for the protection of carriers under certain state laws. They are sometimes 
omitted where they interfere with the obtaining by the shipper of advances 
upon the bill of lading. 



113 



114 



BAILMENT 



[Ch. V 



Conditions 



Sec. 1. The carrier or party in pos- 
session of any of the property herein 
described shall be liable for any loss 
thereof or damage thereto, except as 
hereinafter provided. 

No carrier or party in possession of 
any of the property herein described 
shall be liable for any loss thereof or 
damage thereto or delay caused by the 
act of God, the public enemy, quaran- 
tine, the authority of law, or the act or 
default of the shipper or owner, or for 
differences in the weights of grain, seed, 
or other commodities caused by natural 
shrinkage or discrepancies in elevator 
weights. For loss, damage, or delay 
caused by fire occurring after forty- 
eight hours {exclusive of legal holidays) 
after notice of the arrival of the prop- 
erty at destination or at port of export 
(if intended for export) has been duly 
sent or given, the carrier's liability shall 
be that of warehouseman only. Except 
in case of negligence of the carrier or 
party in possession (and the burden to 
prove freedom from such negligence 
shall be on the carrier or party in pos- 
session), the carrier or party in posses- 
sion shall not be liable for loss, damage, 
or delay occurring while the property 
is stopped and held in transit upon re- 
quest of the shipper, owner, or party 
entitled to make such request; or re- 
sulting from a defect or vice in the 
property or from riots or strikes. When 
in accordance with general custom, on 
account of the nature of the property, 
or when at the request of the shipper 
the property is transported in open cars, 
the carrier or party in possession (ex- 
cept in case of loss or damage by fire, 
in which case the liability shall be the 
same as though the property had been 
carried in closed cars) shall be liable 



only for negligence, and the burden to 
prove freedom from such negligence 
shall be on the carrier or party in pos- 
session. 

Sec. 2. In issuing this bill of lading 
this company agrees to transport only 
over its own line, and except as other- 
wise provided by law acts only as agent 
with respect to the portion of the route 
beyond its own line. 

No carrier shall be liable for loss, 
damage, or injury not occurring on its 
own road or its portion of the through 
route, nor after said property has been 
delivered to the next carrier, except as 
such liability is or may be imposed by 
law, but nothing contained in this bill 
of lading shall be deemed to exempt 
the initial carrier from any such liability 
so imposed. 

Sec. 3. No carrier is bound to trans- 
port said property by any particular train 
or vessel or in time for any particular 
market or otherwise than with reason- 
able dispatch, unless by specific agree- 
ment indorsed hereon. Every carrier 
shall have the right in case of physical 
necessity to forward said propertj^ by 
any railroad or route between the point 
of shipment and the point of destina- 
tion ; but if such diversion shall be from 
a rail to a water route the liability of the 
carrier shall be the same as though the 
entire carriage were by rail. 

The amount of any loss or damage 
for which any carrier is liable shall be 
computed on the basis of the value of 
the property (being the bona fide in- 
voice price, if any, to the consignee, 
including the freight charges, if pre- 
paid) at the place and time of shipment 
under this bill of lading, unless a lower 
value has been represented in writing 
by the shipper or has been agreed upon 



§69] 



COMMON CARRIERS OF GOODS 



"5 



or is determined by the classification or 
tariffs upon which the rate is based, in 
any of which events such lower value 
shall be the maximum amount to govern 
such computation, whether or not such 
loss or damage occurs from negligence. 

Claims for loss, damage, or delay must 
be made in writing to the carrier at the 
point of delivery or at the point of origin 
within four months after delivery of the 
property, or in case of failure to make 
delivery, then within four months after a 
reasonable time for delivery has elapsed. 
Unless claims are so made the carrier 
shall not be liable. 

Any carrier or party liable on account 
of loss of or damage to any of said 
property shall have the full benefit of 
any insurance that may have been 
effected upon or on account of said 
property, so far as this shall not avoid 
the policies or contracts of insurance. 

Sec. 4. All property shall be subject 
to necessary cooperage and baling at 
owner's cost. Each carrier over whose 
route cotton is to be transported here- 
under shall have the privilege, at its 
own cost and risk, of compressing the 
same for greater convenience in hand- 
ling or forwarding, and shall not be held 
responsible for deviation or unavoidable 
delays in procuring such compression. 
Grain in bulk consigned to a point where 
there is a railroad public, or licensed 
elevator, may (unless otherwise ex- 
pressly noted herein, and then if it is 
not promptly unloaded) be there de- 
livered and placed with other grain of 
the same kind and grade without re- 
spect to ownership, and if so delivered 
shall be subject to a lien for elevator 
charges in addition to all other charges 
hereunder. 

Sec. 5. Property not removed by the 
party entitled to receive it within forty- 
eight hours (exclusive of legal holidays) 



after notice of its arrival has been duly 
sent or given may be kept in car, depot, 
or place of dehvery of the carrier, 
or warehouse, subject to a reasonable 
charge for storage and to carrier's re- 
sponsibility as warehouseman only, or 
may be, at the option of the carrier, 
removed to and stored in a public or 
licensed warehouse at the cost of the 
owner and there held at the owner's 
risk and without liability on the part 
of the carrier, and subject to a lien 
for all freight and other lawful charges, 
including a reasonable charge for 
storage. 

The carrier may make a reasonable 
charge for the detention of any vessel 
or car, or for the use of tracks after the 
car has been held forty-eight hours (ex- 
clusive of legal holidays), for loading or 
unloading, and may add such charge to 
all other charges hereunder and hold 
such property subject to a lien therefor. 
Nothing in this section shall be con- 
strued as lessening the time allowed 
by law or as setting aside any local 
rule affecting car service or storage. 

Property destined to or taken from 
a station, wharf, or landing at which 
there is no regularly appointed agent 
shall be entirely at risk of owner after 
unloaded from cars or vessels or until 
loaded into cars or vessels, and when 
received from or delivered on private 
or other sidings, wharves, or landings 
shall be at owner's risk until the cars 
are attached to and after they are de- 
tached from trains. 

Sec. 6. No carrier will carry or be 
liable in any way for any documents, 
specie, or for any articles of extraordi- 
nary value not specifically rated in the 
published classification or tariffs, un- 
less a special agreement to do so and 
a stipulated value of the articles are 
indorsed hereon. 



Ii6 



BAILMENT 



[Ch. V 



Sec. 7. Every party, whether prin- 
cipal or agent, shipping explosive or 
dangerous goods, without previous full 
written disclosure to the carrier of their 
nature, shall be liable for all loss or 
damage caused thereby, and such goods 
may be warehoused at owner's risk and 
expense or destroyed without compen- 
sation. 

Sec. 8. The owner or consignee shall 
pay the freight, and all other lawful 
charges accruing on said property, and, 
if required, shall pay the same before 
delivery. If upon inspection it is ascer- 
tained that the articles shipped are not 
those described in this bill of lading, 
the freight charges must be paid upon 
the articles actually shipped. 

Sec. 9. Except in case of diversion 
from rail to water route, which is pro- 
vided for in section 3 hereof, if all or 
any part of said property is carried by 
water over any part of said route, such 
water carriage shall be performed sub- 
ject to the liabilities, limitations, and 
exemptions provided by statute and to 
the conditions contained in this bill of 
lading not inconsistent with such stat- 
utes or this section, and subject also to 
the condition that no carrier or party in 
possession shall be liable for any loss 
or damage resulting from the perils of 
the lakes, sea or other waters ; or from 
explosion, bursting of boilers, breakage 
of shafts or any latent defect in hull. 



machinery, or appurtenances ; or from 
collision, stranding, or other accidents 
of navigation, or from prolongation of 
the voyage. And any vessel carrying 
any or all of the property herein de- 
scribed shall have the liberty to call 
at intermediate ports, to tow and be 
towed and assist vessels in distress, and 
to deviate for the purpose of saving life 
or property. 

The terra " water carriage " in this 
section shall not be construed as 
including lighterage across rivers or 
in lake or other harbors, and the 
liability for such lighterage shall be 
governed by the other sections of this 
instrument. 

If the property is being carried under 
a tariff which provides that any carrier 
or carriers party thereto shall be liable 
for loss from perils of the sea, then as 
to such carrier or carriers the provi- 
sions of this section shall be modified 
in accordance with the provisions of 
the tariff, which shall be treated as in- 
corporated into the conditions of this 
bill of lading. 

Sec. 10. Any alteration, addition or 
erasure in this bill of lading which shall 
be made without an indorsement thereof 
hereon, signed by the agent of the car- 
rier issuing this bill of lading, shall be 
without effect, and this bill of lading 
shall be enforceable according to its 
original tenor. 



IV. Cases not strictly of Bailjiext 

70. Public carriers of passengers and baggage. Public carriers 
of passengers are those who in the exercise of a public calling 
hold themselves out as ready to carry all passengers who apply. 
They are not, of course, bailees of the persons whom they carry, al- 
though they are bailees of a passenger's baggage delivered into their 
custody. Proprietors of railways, street railways, stagecoaches, 
steamers, ferries, omnibuses, and the like are public carriers. 



§70] CARRIERS OF PASSENGERS 117 

1 . Passengers. Passengers are those persons carried by a pub- 
lic carrier with his consent, except persons in his service. Persons 
carried gratuitously, as well as persons who pay their fare, are 
included. It is the duty of a public carrier, up to the limit of 
reasonable accommodations, to carry all who are orderly and 
who pay the reasonable charge. 

2. Liability of public carrier of passengers. A public carrier 
does not insure the safety of passengers as he does the safety of 
goods, but he is bound tp use the utmost skill, diligence, and 
caution, so far as human foresight may go, and is liable for slight 
negligence in this regard. He is liable also for any willful injury 
inflicted by one of his servants, and is bound to use reasonable 
care to protect the passenger from violence at the hands of other 
passengers. He may eject a passenger for refusal to pay fare or 
for disorderly conduct, using only as much force as is necessary 
for that purpose. 

Whether a carrier may limit his liability to a passenger by con- 
tract, and especially the liability for the negligence of servants, 
is a disputed question. He may in England and in New York 
and some other states, but the United States Supreme Court and 
the courts of most states regard such contracts as against public 
policy, although the United States Supreme Court permits a 
carrier to limit its liability to a passenger carried gratuitously. 

3. Baggage. A carrier is bound to transport a reasonable 
amount of baggage for each passenger. Baggage includes such 
articles of necessity or convenience as a passenger may carry for 
his personal use, but not articles carried as merchandise. For all 
baggage that is delivered into the custody of the carrier he is 
liable as insurer, unless the liability is limited by lawful contract. 
In this respect the liability is the same as that of the carrier of 
goods. There are therefore usually but three questions that arise 
in the case of the loss of baggage : (i) Were the articles lost 
really the baggage of the passenger } (2) Was the baggage actu- 
ally delivered into the custody of the carrier or did the passenger 
retain custody of it } (3) Was there any lawful contract limiting 
the liability of the carrier ">. 

Examples: i. A traveler going to the woods for recreation carried in 
his trunk guns and fishing tackle and tennis rackets. The trunk was lost by 



Il8 BAILMENT [Ch. V 

the carrier. Under the circumstances these articles were held to be properly 



2. A commercial traveler .carried in a trunk samples of the goods he was 
selling. These were held not to be baggage. 

3. A traveler carried in his trunk presents for friends. These were held 
not to be baggage. 

4. A traveler carried a hand bag into the car and left it in his seat while 
he went to the smoking car, and it was stolen. The baggage was not in the 
custody of the carrier, and the latter was not liable for the loss. 

71. Telegraph and telephone compajiies. These are not com- 
mon carriers. A few jurisdictions have held them to be common 
carriers, but the greater number treat them as companies render- 
ing a public service and bound to serve all persons alike and for 
uniform reasonable compensation. They do not insure the safety 
and accuracy of messages, but are bound to use reasonable care 
and are liable for ordinary negligence. They may become insurers 
by contract for added compensation. 

Whether they may by contract stipulate against their own negli- 
gence is a disputed question. It is generally held that they may, 
but some courts regard such contracts as against public poUcy. 
Where such contracts are upheld, the telegraph companies 
refuse to become liable for errors in transmission unless the 
sender has the message repeated and pays an added compen- 
sation therefor. 

Either the sender or the addressee of the message may sue in 
tort for damages arising from the negligence of the company, but 
only the sender can sue for breach of contract, because he alone 
has made a contract — unless, indeed, the sender was actually the 
agent of the addressee and made the contract in his behalf. 

It is generally made a penal offense for telegraph companies 
or any of their employees to divulge the contents of telegrams to 
anyone except the addressee. 

REVIEW QUESTIONS AND PROBLEMS 

Section 61. Define bailment; bailor; bailee. Is a finder of lost property 
a bailee? How is his duty fixed? What is the consideration for a bailee's 
promise ? Can one who does not own property bail it to another ? Distinguish 
bailment from sale; from barter; from a mutuum. May a bailee mix the 
goods with other like goods? 



REVIEW QUESTIONS AND PROBLEMS 119 

62. State the two classes of bailments. State the subclasses of each. What 
is a deposit ? What is a mandate ? What is a commodatum t What is a pawn ? 
What is a hiring ? State three general and two special cases of hired services 
about a thing. State two cases not strictly bailment but treated thereunder. 

63. How is a bailment for bailor's sole benefit created? Is it a contract.? 
Must the bailor know of it? Must the bailee consent to it? What are the 
bailor's obligations? What are the bailee's duties? How much care must he 
use? Can he use the article? Is he liable if the article is lost? When is this 
bailment terminated ? 

Problem i. A bank undertook gratuitously to keep in its vaults a locked 
chest of C's containing $50,000 in gold. The bank cashier stole it, together 
with money belonging to the bank, and absconded. Is the bank liable to C ? 

Problem 2. In the above case the directors learned that the cashier was 
engaged in heavy stock speculations, but took no steps to investigate his 
conduct. Result? 

64. How is a bailment for the bailee's sole benefit created? Is a promise 
to lend enforceable, and why? What is the bailor's duty? What are the 
duties of the bailee? How much care must he use? May he lend the article 
to others? May he use it for a purpose not agreed upon? May the bailee 
deliver the article to a claimant other than the bailor ? How is this bailment 
terminated ? 

65. Define a pledge. How is it created? What is essential? What war- 
ranty does the pledgor make? Can he sell the pledged article? Can the 
pledge be made irredeemable? What are the duties of the pledgee? What 
care must he use? What are the pledgee's rights? How may he sell the 
pledge? Can he purchase? When is the pledge terminated? What claim 
does the pledge secure ? Who are pawnbrokers ? May they charge more than 
the usual rate of interest ? 

Problem 3. B owed a bank $5000. He then borrowed of the bank $10,000 
and pledged 300 shares of stock as security for the loan. B then became in- 
solvent and all his property was transferred to a trustee for the benefit of his 
creditors. The bank sold the stock for $13,500, paid the loan of f 10,000, 
and applied the surplus $3500 on the prior indebtedness. The trustee sues 
the bank for this $3500. Which is entitied to it? 

66. How is a bailment by hiring a thing created? Is a promise by the 
bailor to hire it to the bailee enforceable? What does the bailor warrant? 
What is his duty as to defects? What are the rights of the bailee? What 
are his duties? How much care must he use? If a third person injures the 
article, is the bailee liable? Is he liable to third persons, and when? Are 
they liable to him ? Are they liable to the bailor ? Who is liable in case the 
article is accidentally destroyed ? If the bailee uses the article otherwise than 
he agreed, what is the result ? 



I20 BAILMENT [Ch. V 

Problem 4. C hires a horse and carriage of X. B negligently runs into 
and injures the carriage to the extent of $20. C sues B for this damage. 
May he recover? 

Problem j. As above. The horse falls sick while C is on a journey. 
C leaves him with D for care and treatment. D sues X for the expense. 
Result ? 

67. What are the classes of bailments of the hiring of services about a 
thing ? What are the duties of the bailor ? How is compensation fixed ? May 
the bailee recover if he abandons the work midway { May he recover if, after 
he has finished the work, the article is destroyed ? What are the duties of the 
bailee? How much care must he exercise? What is the bailee's lien? Who 
is a warehouseman? May he mix goods? Who are wharfingers? Is a safe 
deposit a warehouse? Does money deposited in a bank create a bailment? 

P?-oblem 6. C deposited his goods in B's warehouse. They were stolen. 
C sues B. C contends it is for B to show that he used due care. B contends 
it is for C to show that B was negligent. Which is right? 

68. Who are innkeepers? Is a steamship an inn? Is a sleeping car? 
Who are guests? Must an innkeeper receive all guests who apply? What 
are his liabilities as to a guest's goods? State three holdings on this. "What 
do statutes provide? What is the innkeeper's lien? When is an innkeeper 
an ordinary bailee ? 

Problem 7. C drove to an inn and had his horse placed in the stable con- 
nected with it. The horse was kicked by the horse of another traveler and its 
leg broken. C sues the landlord of the inn. The landlord offers to prove he 
was not negligent. Would such proof release him from liability ? 

Problem 8. An inn is accidentally burned and a guest's clothes, jewelry, 
etc. are destroyed. Is the innkeeper liable? 

Problem g. While C was in a sleeping-car berth, and while asleep, he was 
robbed of his money and watch. Is the sleeping-car company liable to him 
for this loss ? 

69. Who are common carriers? What two things distinguish a common 
carrier from a private carrier? What goods must a common carrier accept? 
May he give special rates ? What statutes govern rates ? How can a common 
carrier escape liability for loss of goods ? What is an act of God ? Who is a 
public enemy ? When is the shipper at fault ? What are inherent infirmities 
in the goods ? May a shipper contract against loss by above causes ? May he 
contract against loss due to his own negligence or that of his servants ? When 
does his liability as common cai'rier end ? What is the hability of a railway 
when goods reach their destination and are placed in the freight house? 
When goods go over several railways, which is liable for damage to them? 
When is a common carrier excused for nondelivery? What is a bill of lading? 
What is a charter party ? 



REVIEW QUESTIONS AND PROBLEMS 121 

Problem 10. B owned a sloop which he used for his own business. On 
two occasions he carried goods for C. On the second occasion the sloop was 
driven ashore (not by an act of God or by the negligence of B) and the goods 
were injured. Is B liable to C? 

Problem 11. B owns a vessel running regularly between two ports and 
carrying passengers and freight. C ships goods on the vessel. It is destroyed 
by fire while at sea. Is B liable to C for the loss of the goods ? 

Problem 12. In the above case the vessel is captured by a war vessel of 
another nation with which B's nation is at war, and the goods are confiscated. 
Is B liable to C ? 

Problem /j. C shipped plate glass from New York City to Marion, N.C. 
The glass went over four different railroads. At Marion it was found to be 
broken. C sues the B. Railway, which delivered the glass at Marion. The 
bill of lading provided that " no carrier shall be liable for loss or damage not 
occurring on its own road," and only for loss by negligence. When the B. 
Railway received the box, there was no sign of breakage, nor was there any 
when it reached Marion, until the box was opened. The B. Railway contends 
that it is not liable unless C shows that the breakage occurred on its road. 
C contends that the B. Railway must show that it was not negligent. Which 
is right? 

70. Who are public carriers? Who are passengers? What is the liability 
of a public carrier for safety of passengers, and what for safety of baggage ? 
What is baggage ? May the carrier limit liability for its loss ? 

Problem 14. C, a passenger, brought action against the B. Railway for 
loss of baggage. The trunk contained very valuable dress laces worth 1 1 0,000. 
C was a wealthy foreigner traveling in this country, and the laces were a part 
of her wearing apparel. Is the Railway liable for these laces ? 

71. Are telegraph and telephone companies common carriers? What is 
their liability ? May they contract against their negligence ? May the addressee 
of a message sue for negligence ? How ? 



CHAPTER VI 

INSURANCE CONTRACTS 

72. Nature and kinds of insurance. Insurance is a system for 
distributing the losses of a few persons among a large class of 
persons similarly situated. This is accomplished by raising a 
general fund through small contributions by many persons, each 
contributor being entitled to indemnity out of the fund in case 
a loss falls upon him. If looo persons, having in the aggregate 
property valued at ^5,000,000, pay annually into a common fund 
I per cent upon this valuation, a fund of ^50,000 will be raised, 
out of which losses by fire falling upon any of these persons could 
be paid. If these 1000 persons live in widely separated parts of 
the country, it is unlikely that many of them will suffer losses 
by fire in the same year. 

Almost every conceivable risk may now be insured. The main 
heads of insurance are marine insurance, fire insurance, and life 
insurance, but there are companies which insure against tornadoes, 
steam-boiler explosions, breakage of plate glass, defects in titles, 
defaults or embezzlements by agents, injuries to employees, 
injuries to oneself, and numerous other hazards. 

Marine insurance — that is, insurance against the risk of the 
loss of vessels and cargoes at sea — is probably the oldest form 
of insurance and has been traced back to the twelfth or thir- 
teenth century. Fire insurance came into prominence after the 
great London fire of 1666. Life insurance began practically in 
the eighteenth century. 

In marine and fire insurance the properties insured are classi- 
fied according to the risk, and the premium is higher or lower as 
the risk is greater or less. In life insurance only those persons 
who are regarded as good risks are insured, and the premiums 
are graded according to the age of the insured. Statistics have 
been accumulated upon which average results may be predicted 
and the premiums based. 



§§ 73, 74] POLICIES — DEFIXITIONS 1 23 

73. Kinds of policies. The policies, or contracts of insurance, 
issued by insurance companies are of various kinds, but it is 
necessary to distinguish the valued and the open policy. 

The valued policy is one that fixes the amount to be paid in 
case of loss. These policies are always used in life insvuance, 
and are very generally used in the insurance of ships, though 
not of cargoes. In case of the death of the insured or the loss 
of the ship the sum specified is paid. 

The open policy is one in which the amount to be paid in case 
of loss, not exceeding a certain sum, is left to be fixed after the 
loss occurs. These policies are generally used in fire insurance. 

Life-insiirance policies are either the life policy, payable only at 
the death of the insured, or the endowment policy, payable when 
the insured reaches a certain age or upon his death at any prior 
date. There is also a term policy for a fixed number of years, 
payable only if the insured dies within that time. 

74. Definitions. Insurance is a contract whereby for a stipu- 
lated consideration one part}' agrees to compensate or indemnify 
the other for loss on a specified subject by specified perils. 

The insurer is the one agreeing to indemnify ; he is some- 
times called the underwriter. The insured is the one to whom 
the promise runs. The premium is the agreed consideration. 
The policy is the \\Titten contract. The risk, or peril, is the 
event insured against. The insurable interest is the subject, 
right, or interest to be protected; it is such an interest as 
will entitle the person possessing it to obtain a lawful contract 
of insurance (see sect, j^i post). 

Life ijisurance is a contract to pay a designated or determi- 
nable person a certain sum, or an annuity, in the event of the 
death of the person whose life is insured. Endowment life 
insurance is a contract to pay a certain sum or annuity to the 
person whose life is insured if he lives a certain length of time, 
or to a designated person if he dies before this time. There are 
various forms of the tontine, or dividend, system. An endow- 
ment policy is a form of investment by the insured as well as 
an insurance proper. 

Accident insurance is a contract to indemnify the insured 
against personal injury resulting from accident, and usually 



124 INSURANCE CONTRACTS [Ch. vi 

includes a contract to pay a specified sum to his estate or to a 
designated person in case of death resulting from accident. 

Workmen s compensation insurance is a contract to indemnify 
an employer against loss suffered from having to pay to an em- 
ployee a sum due because of injuries sustained by the employee 
in the course of his employment. 

Marine insurance is a contract to indemnify the insured 

against loss to property (ships and cargo) arising from the 

perils of the sea during a certain voyage or a certain period of 

time. It may be issued to cover risks arising on any navigable 

'waters, whether sea or inland. 

Fire insurance is a contract to indemnify the insured against 
loss of property or damages to it by fire. 

Casualty insurance is a contract to indemnify the insured 
against damage to property arising from accidents, such as 
boiler explosions, floods, tornadoes, hail, failure of crops, break- 
age of plate glass, death of cattle, burglary, etc. 

Guaranty and fidelity insurance is a contract to indemnify the 
insured against loss arising from fraud or dishonesty of agents 
(fidelity insurance) ; the negligence of employees resulting in 
damage to other employees for which the employer is obliged 
to pay (employers' liability insurance) ; the injury to passengers 
for which the carrier is obliged to pay damages (carriers' lia- 
bility insurance) ; the insolvency or dishonesty of debtors (credit 
insurance) ; the failure of tenants to pay rent or the loss of rents 
incident to fires or other injury to premises (rent insurance) ; the 
defect or failure of title to real property (title insurance) ; or the 
interruption to business by strikes among employees (strike 
insurance). 

Reinsurance is a contract whereby the reinsurer agrees to 
assume the risk, in whole or in part, which \\'as undertaken by 
the original insurer. If the reinsurance policy binds the rein- 
surer to pay the insured, the latter may maintain an action 
against the reinsurer upon the theory of a promise made to one 
person for the benefit of another person (see sect. 33 ante) ; but 
in the absence of such a clause the insured can look to the origi- 
nal insurer alone, and the original insurer will look to the rein- 
surer for indemnity. It often happens that an insurer takes a 



■§75] CHARACTERISTICS 125 

very large risk and thinks it prudent to divide it by reinsuring 
some portion of it in another company. The reinsurance is a 
kind of guaranty insurance. 

75. Characteristics. There are these main characteristics in 
the insurance contract. 

1 . The contract is aleatory ; that is, depending upon an uncer- 
tain event. It is a wagering contract. If one insures property 
or a life in which he has no insurable interest, the contract is 
called a wager and is illegal. If he has an insurable interest, 
the contract is valid, although it is still in the nature of a wager. 

2. The contract is one of indemnity ; that is, to make good 
against loss in the event that loss occurs. In the open policy 
the amount of the loss is to be ascertained after it occurs. In 
the valued policy the parties agree in advance upon the value 
of the subject matter of the contract ; if it is then destroyed, 
the loss is taken to be that so fixed by the parties. In life- 
insurance policies the sum is always fixed, subject to a possible 
increment by way of dividends. 

There is one important difference between an open fire policy and an open 
marine policy. If, in an open fire policy for 1 10,000 upon property worth 
$20,000, property worth $5000 is destroyed, the insured recovers its full 
value. In an open marine policy he would recover only that proportion of 
the amount insured ($10,000) which the loss ($5000) bears to the true 
value of the property insured ($20,000); namely, one fourth, or $2500. In 
order to be fully protected in a marine risk, the insured must insure to the 
full value and, of course, pay a larger premium. 

Another incident of the indemnity feature is that if the property insured 
be destroyed by the negligent act of a third person, so that the owner 
might maintain an action against the wrongdoer for the damage, the insurer, 
upon paying the loss to the insured, is subrogated (that is, substituted) to 
the rights of the insured in such action. Were it otherwise, the insured would 
recover his loss twice over. This does not apply, however, to life insurance 
where the insured is killed by the wrongful or negligent act of another. 

If the insured has two fire policies in different companies upon the same 
property, the companies contribute ratably to indemnify for any loss. If one 
pays the whole loss, it may secure a ratable contribution from the other. 

3. 'The contract indemnifies even against the carelessness 
or negligence of the insured. This is highly important, because 
if the insurer could defend after loss upon the ground that the 
insured, by his negligence, contributed to the disaster, the policy 



126 INSURANCE CONTRACTS [Ch. VI 

would not be nearly so valuable a security against serious pecu- 
niary losses. It does not indemnify against willful destruction by 
the insured, except that suicide will not, by the weight of author- 
ity, defeat a life-insurance policy unless the insured can be shown 
to have taken out the policy with the intent to commit suicide. 
There are also many terms and some warranties in insurance 
contracts, the breach of which may prevent the insured from 
recovering ; for example, in accident policies, that the insured 
shall not voluntarily expose himself to unnecessary risks, or in 
fire policies, that the insured shall use reasonable care and means 
to save property after a fire begins. 

The case of suicide has caused the courts much perplexity. The federal 
courts and some state courts refuse to allow the estate of the deceased to 
recover where the insured committed suicide when sane, regarding it as 
against public policy. Some states allow a third person named as benefi- 
ciary to recover where they do not allow the estate of the deceased to 
recover. All courts allow a recovery in any case where the insured com- 
mitted suicide while insane, unless the policy expressly excepts that risk; 
but the exception of the risk of " death by suicide " covers only suicide 
while sane ; in order to exempt the insurer the policy should read " death 
by suicide whether sane or insane excepted." One or two states have by 
statue forbidden insurance companies to insert such a clause. 

In case the insured is executed by the law for a capital offense the insurer 
will not be liable on the policy, even though that risk is not expressly excepted. 

Many life-insurance policies now contain a clause declaring the policy 
to be incontestable after a certain period (say two or three years after it 
is issued). In such case it is generally held that the insurer can contest 
the policy only for a lack of any insurable interest or for actual fraud in 
procuring it. 

4. The insured must have an insurable interest (see sect. jG). 

5. The contract requires the highest good faith on the part of 
the insured (see sect. "jj). 

6. The contract contains warranties, the breach of which may 
avoid the policy (see sect. 78). 

7. The statutes often prescribe the form of policy which must 
be issued (see sect. 79). Insurance contracts may be oral. Stat- 
utes prescribing a form of policy do not prevent oral contracts, but 
subject an oral contract to the provisions of the statutory policy. 
It is usual in large insurance offices to issue to the insured tem- 
porarily a "binding slip," which is a brief memorandum of the 



§76] INSURABLE INTEREST 127 

insurance contract and gives protection pending the delivery of 
the formal insurance policy. 

76. The insured must have an insurable interest. In order 
that a policy may be valid it is necessary that the one taking it 
out shall have an insurable interest in the property or the life 
upon which the policy is issued. 

1. Insurable interest in property. An insurable interest in 
property is an interest in property, or a liability in respect of 
property, of such a nature that the loss of the property might 
cause a pecuniary injury to the one possessing such interest or 
under such liability. 

Example. A pledgee has such an interest in the pledge that its destruction 
would or might result in a pecuniary loss to him ; so also, of course, has the 
pledgor. Both the mortgagor and the mortgagee of property have an insurable 
interest. A stockholder has an insurable interest in the property of the cor- 
poration. A farmer has an insurable interest in crops to be raised in the future 
upon his land. A mere expectancy, like that of an heir who expects to inherit 
his ancestor's property, does not create an insurable interest. If one insures 
his property and afterwards sells it, the policy does not pass to the new owner 
without an assignment with the consent of the insurer. 

2. Insurable interest in a life. This is very difficult to define. 
Any reasonable expectation of pecuniary benefit from the con- 
tinued life of another creates an insurable interest in that life. 
If one depends upon another for support or education, in whole 
or in part, he has an insurable interest in that other's life. Thus, 
a wife has an insurable interest in the life of her husband. If one 
is entitled to the services of another, he has an insurable interest 
in that other's life. Thus, a husband has an insurable interest in 
the life of his wife, and a father has an insurable interest in the 
life of his minor children. If one has a pecuniary claim upon 
another, he may insure that other's life. Thus, a creditor has an 
insurable interest in the life of his debtor. Mere relationship by 
blood or marriage does not of itself create an insurable interest. 
One brother has no insurable interest in the life of another 
brother merely because of the relationship ; he might have if he 
were dependent upon the brother. One may value his interest 
in his own life, or in the life of one upon whom he depends, or 
to whose services by virtue of family relationship he is entitled, 



1 28 INSURANCE CONTRACTS [Ch. VI 

at any sum agreed upon ; but a creditor cannot insure tiie life of 
his debtor for a sum greatly in excess of the debt. It seems to 
be necessary that the person whose life is insured by another 
should consent to the insurance, but this matter is in some doubt. 
There are grounds of public policy which might require the con- 
sent of a person to have insurance taken out upon his life. 

The insurable interest in property must continue throughout 
the term of the policy, or at least exist at the time of the loss. 
It is enough in life insurance that it exist at the time the policy 
is taken out. So also in life insurance the policy may be assigned 
to one who has no insurable interest, if it was taken out in good 
faith by one who had an insurable interest ; and the insured may 
make his policy payable to anyone if he takes it out himself. 
Where a policy designates the beneficiary, the right under the 
policy becomes vested in such beneficiary and cannot be disturbed 
without his consent, except in mutual-benefit insurance — such, for 
example, as that provided by fraternal orders. Should the bene- 
ficiary die, however, before the insured, a new beneficiary may 
be named. 

77. The contract of insurance is one requiring the highest good 
faith. In ordinary contracts a party is not bound to disclose what 
he knows about the subject matter of the contract ; it is for the 
other party to discover whatever he may deem important. So long 
as there is no misrepresentation the contract is valid and bind- 
ing, notwithstanding the fact that one party knew and did not 
disclose certain material defects ; but insurance contracts stand 
upon a peculiar basis in this respect. 

1. Concealment. The insured is bound to disclose to the in- 
surer every material fact known to him which affects the risk. 
But this rule is qualified in the United States, except as to marine 
insurance, by requiring that bad faith be shown in order to avoid 
a policy because of concealment. 

Examples: i. An attempt has been made to burn B's property. B becomes 
alarmed and effects insurance without disclosing this fact. The policy may be 
avoided by the insurer upon the ground of B's concealment. 

2. B effects insurance upon his house, omitting to state that it is within a 
few feet of a fireworks manufactory. This concealment as to the risk is fatal 
to the validity of the policy. 



i 78] WARRANTIES 



129 



The rule is very strict in marine insurance and extends to inno- 
cent nondisclosure due to forgetfulness or inadvertence, but in 
fire and life insurance it now probably extends in this country 
only to intentional concealment of some material fact, amounting 
to bad faith. Where the insurer asks a series of questions in an 
application blank, a truthful answer to these questions is all that 
is generally required ; but even in this case the insured cannot 
intentionally conceal a highly material fact, as that an attempt has 
been made to set fire to the property. 

2. Representations. Representations are statements as to ma- 
terial, existing facts, made by the insured, usually to give informa- 
tion concerning the risk, and inducing the insurer to issue a 
policy, but which do not become terms in the contract itself. A 
material false representation, however innocently made, will avoid 
the policy ; there is an implied condition that a policy shall be en- 
forceable only if the representations which induced the insurer to 
issue it are true. But a representation as to future conduct, that 
is, a promissory representation, is not technically a representation, 
because not made as to an existing fact. It is of no effect unless 
it is made a term in the policy. So representations as to opinion 
or belief are not material ; no one should rely upon them. 

Examples : 3. B insures C's warehouse. C by mistake states that there is 
already $200,000 of insurance on the building; there was in fact but $30,000. 
This is material, since with $200,000 of insurance B's ratable portion in case 
of loss would be less than if there were but $30,000. If the building burns, 
C can recover nothing from B. It makes no difference that C believed his 
statement to be true. 

4. C orally states to B that if B insures his building he (C) will cease using 
a certain fireplace in it. The building burns. B seeks to avoid the policy by 
showing that C continued to use the fireplace. This is a promissory statement 
and it will not avoid the policy. If B wants the benefit of a promise, he must 
incorporate it into the written contract. 

78. Warranties. Unless there be a waiver of it, or an estoppel 
to set it up, the breach of a warranty in an insurance contract 
will avoid the policy. 

I . Warranties explained. A warranty is a statement or promise 
which is included in the policy itself, or in a separate paper in- 
corporated into the policy by reference, and which is made an 
essential part of the contract. Its falsity or nonfulfillment will 



1 30 INSURANCE CONTRACTS [Ch. VI 

avoid the policy. A representation is merely an inducement to 
the making of the contract. A warranty is a part of the contract 
itself. Representations must be shown to be material, and it is 
enough that they are substantially complied with. Warranties are 
material because inserted in the contract, and they must be strictly 
and literally complied with. They may be either afifirmative of an 
existing fact or promissory. Note that " warranty " has one mean- 
ing in insurance contracts and another in contracts of sale (see 
sects. 53, 54, 57 ante). In the latter the buyer may, under the 
Uniform Sales Act, treat the warranty as collateral or as vital, 
while in the former it is always a vital term in the main contract. 
If a warranty in a sale is broken, the buyer may elect between 
an action for damages and rescission : but if a warranty in insur- 
ance is broken, it discharges the contract ; no action for damages 
for its breach results. 

Examples: i. B represents that his vessel has twelve guns and twenty 
men. She has substantially this number and the policy is good. 

2. B warrants that his vessel has twelve guns and twenty men. She has 
substantially this number, but the policy is avoided because there is a breach 
of the warranty in not having precisely the armament and force warranted. 

3. B represents that ashes are taken out of his factory in iron hods. They 
are taken out in copper hods. The representation is substantially true and the 
policy is binding. But if B warrants that the ashes are taken out in iron hods, 
there is a breach of the warranty and the policy is avoided. (So stringent is 
this rule that the courts incline to hold statements to be representations when 
possible, and some states have statutes to relieve against forfeitures for tech- 
nical breaches of warranty.) 

4. B, in answer to the printed questions which are made by reference a 
part of the policy, states that he is thirty years old. He is in fact thirty-five. 
The policy is not binding on the insurance company. This is a warranty. 

5. B states as a warranty that the building insured is used "for winding 
and coloring yarn." He afterwards uses the building for another purpose. 
There_ is no breach of warranty. He did not warrant that the building would 
continue to be used for the purpose it was used for when the policy was 
taken out. 

These rules as to warranties are so strict and work so many 
hardships that statutes in many states provide in substance that 
warranties shall not avoid an insurance policy unless they are in 
fact material. This makes warranties more like representations. 

In general, courts will, if possible, construe an insurance policy 



§79] STANDARD POLICIES 1 31 

so as to save the just rights of the insured against forfeiture for a 
merely technical breach that does not in fact injure the insurer. 

2. Waiver and estoppel. The doctrines of waiver and estoppel 
are frequently invoked to prevent the insur* from taking advan- 
tage of a misrepresentation or breach of warranty by the insured. 
Waiver is the voluntary relinquishment of a known right. Estop- 
pel is a bar raised by the law to prevent one party from denying 
that he has relinquished a right when by his conduct, though 
unintentionally, he has led the other party reasonably to rely 
upon the conclusion that he has relinquished it. 

Examples : 6. A policy provides that it shall be forfeited if the insured 
increases the risk. The insured increases the risk by using the property for 
manufacturing puposes. The insurer with knowledge of the facts tells the 
insured that the forfeiture is waived ; this is binding. Again with knowledge 
of the facts the insurer accepts the premium ; this estops the insurer from 
denying that he has waived the forfeiture. 

7. The policy provides that if the building insured is on leased ground, the 
policy shall be forfeited. Although this is a warranty that the building is not 
on leased ground, still if the insured informed the insurer, when the application 
was made, that the building wa^ on leased ground, the insurer is estopped to 
set up a forfeiture.^ 

Whether a particular agent has authority to waive a stipulation 
in the policy is often a question of great nicety. Whether a re- 
striction upon an agent's authority contained in the policy itself 
will operate as notice to the insured of such restricted authority 
is a question upon which the decisions are inharmonious. The 
weight of authority is that the agent who issues the policy may 
make a contemporaneous waiver, although he might not have 
authority to make a subsequent one. 

79. Statutory or standard policies. In order to avoid the diffi- 
cult questions and the uncertainties raised by the widely differing 
forms of fire-insurance policies, many states have passed statutes 
requiring the insurance companies to issue a uniform standard 
policy prescribed by the statute itself. The leading form is the 

1 Massachusetts and New Jersey hold that there is no waiver or estoppel in such 
a case, because they refuse to permit a written stipulation to be varied by parol evi- 
dence oi prior or contemporaneous oral communications, though it might be varied 
by stcbsequent communications. It is the theory that all prior and contemporaneous 
communications are merged in the written contract. This is the doctrine held by 
the United States Supreme .Court also. 



132 INSURANCE CONTRACTS [Ch. VI 

New York standard policy. Copies of this may be obtained of any 
fire-insurance agent, and it should be carefully read by all who 
carry fire insurance, in order that there may be no inadvertent 
violation of the terms by the insured. Massachusetts has a 
standard policy which differs in some important particulars from 
that of New York. 

For example, the New York form provides that the policy shall be void if 
the building insured becomes vacant or unoccupied and so remains for ten 
days, while the Massachusetts form allows thirty days. Many clauses found in 
the New York form are absent from the Massachusetts form. For example, 
the New York form provides that the policy shall be void " if the interest 
of the insured be other than unconditional and sole ownership," or " if the 
building be on ground not owned by the insured in fee simple," or "if per- 
sonal property be or become encumbered by a chattel mortgage," while the 
Massachusetts policy is silent as to all of these conditions. 

80. Marine insurance. In the insurance of a ship or cargo 
against risks at sea there are always three implied warranties : 
namely, that the ship is seaworthy, that there shall be no vol- 
untary deviation from a specified route, and that the adventure 
shall be for a legal purpose. 

General average is a contribution made by the various owners 
of a ship and cargo toward a loss sustained by one owner whose 
property has been voluntarily sacrificed for the common safety, 
as where, in a storm, goods are cast overboard to lighten the 
ship. But the one whose goods are thrown over loses his pro 
rata share of the goods also. Throwing property over for such 
a purpose is called jettison. General average is a rule of the 
admiralty courts based upon the usages of maritime commerce. 

Example. B's property, valued at $4800, is cast overboard in order to save 
the ship and the rest of the cargo. The ship is valued at $50,000; it earns 
$2000 on the goods saved and loses $200 on the goods jettisoned; the rest of 
the cargo is C's and is valued at $43,000. 

Loss : $4800 + $200 = $5000. 

Contributors: $4800 -f $200 -f $52,000 -(- $43,000 = $100,000. 

Percentage loss for each, 5 per cent. 

B gets $4800 - $240 = $4560, of which the ship pays $2600 - $igo 
= $2410, and C pays $2150. 

This is a rule in admiralty only. If B's building is torn down to stay the 
spread of fire, he recovers no contribution from property thus saved. 



§80] REVIEW QUESTIONS AND PROBLEMS 133 

A marine insurer is bound to make good to the owners of 
property saved the contribution they pay to one whose property 
was sacrificed. So also the marine insurer is bound to pay in 
full the loss of the one whose goods were sacrificed, and is 
then subrogated to his rights of contribution against those whose 
property was saved. 

If the policy on a vessel or goods is merely a fire policy and not 
a marine policy, the rule of general average has no application. 

REVIEW QUESTIONS AND PROBLEMS 

Section 72. Explain the system and object of insurance. How did it 
originate.? How are premiums fixed? 

73. Distinguisfi between valued and open policies. Distinguish life, 
endowment, and term policies. 

74. Define insurance ; insurer; insured; premium; policy; risk; insurable 
interest. What is life insurance? What is accident insurance? marine insur- 
ance? fire insurance? casualty insurance? guaranty or fidelity insurance and 
its kinds? What is reinsurance? May the party originally insured recover 
against the reinsurer? 

75. Name the characteristics of the insurance contract. Is it a wagering 
contract ? Is it an indemnity contract, and why ? How much may be recovered ? 
How much in an open marine policy? If one has two policies, how is the loss 
adjusted ? What is subrogation ? May one recover insurance on his building 
burned by his own negligence ? If the insured commits suicide, may his estate 
recover on the policy ? May an insurance contract be by parol ? 

76. What is an insurable interest in property ? Illustrate. What is an 
insurable interest in a life ? Illustrate. When and for how long must the 
insurable interest exist? 

■ Problem, i. C owned a patent and leased the exclusive use of it to B. C 
then insured the property used by B in order to protect the claim for royalties 
for the use of the patent. B's property burned. The insurance company 
claims C had no insurable interest in B's property. Result? 

Problem 2. C is a stockholder in a corporation. He insures the corporate 
property, which afterward burns. Had he an insurable interest ? 

Problem j. An uncle insured his nephew's life. Upon the nephew's death 
the insurance company resisted payment of the policy upon the ground that 
the uncle had no insurable interest in the nephew's life. Result? 

77. In what important respect do insurance contracts differ from ordi- 
nary contracts ? What is the duty of the insured as to disclosures ? How has 
the rule been modified? What are representations? What are promissory 
representations? What is the effect of innocent misrepresentations? 



134 INSURANCE CONTRACTS [Ch. VI 

Problem 4. C's building is threatened from a neighboring fire. He at 
once secures insurance on it, concealing the danger. Is the policy binding 
on the insurance company? 

Problem j. C secured insurance on the life of X. No information con- 
cerning X's habits was asked or given, but other questions were asked and 
truthfully answered. X was to C's knowledge very intemperate. Is the policy 
binding on the insurance company ? 

Problem 6. C secures insurance on a vacant building and states orally 
that it will be occupied. It is not occupied, and it burns. Is the insurance 
company liable.' 

78. What is a warranty.'' How does it differ from warranty in a con- 
tract of sale? How must it be fulfilled? Distinguish it from representation. 

What is a waiver ? What is an estoppel ? What is the effect of a breach 
of representation or of warranty ? 

Problem 7. C in the written application for insurance on his building 
(which becomes a part of the policy) states that " there is a watchman 
nights." The fire occurred on Sunday morning before daylight when there 
was no watchman. C tries to show a custom not to keep watchmen after 
twelve o'clock Saturday night. Should he be permitted to do so? Is the 
warranty broken? 

Problem. 8. C represents his building as " occupied as a dwelling house." 
[a) It is in fact vacant. Is the insurance valid? {b) It is occupied when 
insured, but afterwards becomes vacant. Two days later it bums. May C 
recover the insurance? 

79. What is the standard policy? Must it be used? How are its terms 
fixed? 

80. What three implied warranties in marine insurance? What is general 
average? What is jettison? 

Problem g. (a) B's cargo is worth $29,000 ; the freight to be paid on it 
is fiooo. B's goods are thrown overboard to save a ship in a storm. The 
ship and the rest of the cargo are saved. The ship is worth $50,000 and 
earns on the voyage $2000 net freight (not including that on B's goods). 
C's goods are worth $33,000 and D's are worth $35,000. Figure the general 
average and how much B will receive and how much he will lose; how 
much the ship will receive and how much it will lose, {b) In case B's goods 
are fully insured and the insurance is paid him, what are the rights of the 
insurance company? 



PART III. PARTICULAR CONTRACTS 
CONCERNING CREDITS 

CHAPTER VII 

CREDITS AND LOANS 

81. Capital and credit; money and exchange; payment. In 

the conduct of a business it is necessary to consider the subjects 
of capital, credit, money, exchange, and the mode and effect of 
payments. 

I. Capital. In any business enterprise capital is the total 
amount, measured in money, that is invested in the business. 
This capital sum is divided into that which goes to provide a 
business plant, equipment, stock,, etc. and that which remains in 
available cash after these are installed. The latter is the working 
capital, for the equipment and stock must be kept intact or, if 
. stock is sold, as in merchandising, it must be replaced in order 
that the business may go on. The working capital should be 
sufficient to enable the business to be carried on when collections 
are slow or when debtors become insolvent. Some of it may be in- 
vested in live interest-bearing securities, which in case of need can 
be quickly sold or used as collateral security for temporary loans. 

An individual, partnership, or corporation starts a manufacturing business. 
The plant and equipment cost $100,000. The annual manufactured product 
amounts to $1,500,000. It costs $600,000 for raw material and $800,000 for 
labor, repairs, insurance, and other expenses, leaving an annual profit of 
$100,000. How much working capital should there be over and above the 
plant and equipment.? This will depend upon the readiness of sales and col- 
lections, and upon other considerations. But if the manufacturer wishes to be 
able to carry on his business for three months with practically no income, he 
must have one quarter of his total annual cost of operation ; namely, $350,000. 
There would then be invested $450,000, with an annual profit of about 
$100,000, or say on the average 20 per cent. 

13s 



136 CREDITS AND LOANS [Ch. VII 

2. Credit. Credit consists in the ability to secure some present 
benefit under an agreement that the return therefor shall be post- 
poned to some future day, — as the ability to borrow money or 
obtain goods or services to be paid for thereafter. It is the result 
of the favorable opinion of the mercantile community or of the 
particular lender or seller as to the solvency^ honesty, and busi- 
ness capacity of the borrower or buyer. Commercial agencies 
publish periodical estimates of the ability of business concerns to 
meet credit obligations, and these are largely used by those who 
are requested to extend such credit. The two principal agencies 
in this country are Bradstreet's and Dun's. In addition to these 
two agencies there are a number of trade agencies which specialize 
in the particular trades they serve. Every business man needs 
credit, and his rating in these publications is of great importance 
to him. If he gives false information in order to secure credit, he 
may be liable in deceit to anyone injured thereby. If false in- 
formation is given in the publications, injurious to his credit, he 
may have an action against the agency for damages. Should the 
agency through negligence give false information to the subscribers 
about the credit of a person rated, and if one of the subscribers, 
by extending credit on the strength thereof, should suffer a loss, 
the agency might be liable to the subscriber. 

Good credit is of the first importance to a business man. • 
Whether he wishes to borrow money or to purchase goods on 
deferred payments, he must have the reputation of possessing the 
ability and inclination to meet promptly his pecuniary obligations. 
Often he must give security, which may take the form of a pledge 
of things of value, like bonds, or of a mortgage on property, or 
of a guaranty by some third person. If one borrows money at a 
bank, he may be required to have his note indorsed by one or 
more persons, who are known as accommodation indorsers. 

Aside from the credit system above mentioned, there is a system of using 
credit temporarily in place of money for present payments. This is by issuing 
checks. Including these, the larger part of the business of the country is done 
on credit, and money is, after all, only an auxiliary to it. Enormous trans- 
actions take place without the actual transfer of a dollar in cash. Every day 
the New York clearing house meets to strike the balance among the banks 
belonging to it. If bank A presents checks which it has received against banks 
B, C, and D to the amount of #1,125,382, and if all the banks combined 



§81] CAPITAL, CREDIT, AND MONEY 137 

present checks which they have received against bank A to the amount 
of $1,315,460, then bank A owes the clearing house $190,078. If bank B 
presents checks against banks A, C, and D to the amount of $1,847,625, 
and they present checks against it to the amount of $1,620,347, then the 
clearing house owes bank B $227,278. In this way the balances are struck 
and the clearing house receives the cash from the debtor banks and pays it 
out to the creditor banks, being at the close of the transaction not a penny 
richer or poorer. But while there is an average of about $200,000,000 of 
checks thus passed through the clearing house daily, only about 5 per cent 
of cash balances is paid in and paid out. Thus 95 per cent of the business is 
done by a system of check credits. 

Even banks themselves sometimes need credit in order to meet their obli- 
gations. Upon depositing with the clearing house its bills receivable or other 
securities, a bank may obtain clearing-house certificates to 75 per cent of the par 
value of the securities, and these certificates will be received by the clearing house 
in payment of balances. In times of panic these clearing-house certificates may 
enable a bank to avoid a suspension of payments. The certificate simply states 

that ■ Bank has deposited securities, and the certificates, each for $5000, 

based thereon will be received in payment for balances at the clearing house. 

3. Money. Money has two meanings. In the general sense 
it means whatever has currency as money in payment of debts ; 
this is called currency or current funds. In a more restricted 
sense it means whatever is legal tender in the payment of debts, 
that is, money which a creditor must receive ; this is called 
legal-tender money. 

There are eleven different kinds of current money in circulation 
in the United States. 

1. Gold coin, now coined in denominations of $2.50, $5, $10, and $20, 
called respectively quarter eagles, half eagles, eagles, and double eagles. An ■ 
eagle weighs 258 grains, of which -^^ is gold and ^L alloy. The others weigh 
proportionally. These coins are full legal-tender money to any amount. 

2. Standard silver dollars. A silver dollar weighs 412^ grains, of which J^ 
is silver and Jy alloy. These are full legal tender to any amount, unless 
otherwise expressly stipulated in the contract. 

3. Subsidiary silver, namely, half dollars (192.9 grains), quarter dollars 
(96.45 grains), and dimes (38.58 grains), all fL silver and J^ alloy. These are 
legal tender for amounts not exceeding $10 in any one payment. 

4. Nickel coin, namely, the five-cent piece, weighing 77.16 grains, of which 
jV^ is copper and j^J- nickel. This is legal tender for amounts not exceeding 
25 cents in any one payment. 

5. Bronze coin, namely, the one-cent piece, weighing 48 grains, of which 
yW is copper and ^^^ tin and zinc. This is legal tender for amounts not 
exceeding 25 cents in any one payment. 



138 CREDITS AND LOANS [Ch. VII 

6. United States notes (" greenbacks "). These are full legal tender except 
for duties on imports and interest on the public debt. 

7. Treasury notes of Act of 1890. These are full legal tender except when 
otherwise expressly stipulated in the contract. 

8. Gold certificates, issued against gold and bullion deposited in the 
United States Treasury. These are not legal tender, but are receivable for 
all public dues. 

9. Silver certificates, issued against silver dollars deposited in the Treasury. 
These have practically taken the place of the silver dollars for general circu- 
lation. They are not legal tender, but are receivable for public dues. 

10. National bank notes, issued by national banks against United States 
bonds deposited in the United States Treasury. These are not legal tender, 
but are receivable for all public dues except duties on imports, and one 
national bank is bound to receive the notes of other national banks. 

11. Federal reserve bank notes, issued against commercial paper, against 
which there is required a 40 per cent gold reserve. These notes are obligations 
of the United States and are receivable by all national and member banks and 
federal reserve banks and for all taxes, customs, and other public dues. 

Of course, gold certificates and silver certificates do not increase the volume 
of money. They simply represent so much coined money (or gold bullion), 
which is held for their redemption, and they circulate instead of the less 
convenient coin. They are a kind of warehouse receipt for money. 

4. Exchange. Exchange is an operation by which debts may 
be paid at distant points, through a transfer of credits ; it always 
requires three patties and two payments. A claim or credit which 
one living in New York has against a debtor in London may be used 
to pay a debt one owes in London, or it may be sold to another 
debtor in New York and used by him to pay his creditor in 
London. A bank in New York may keep a credit with a bank 
in London, and so be able to sell to New York debtors its checks 
on the London bank, with which the New York debtors may pay 
their London creditors. It is of course far cheaper and safer to 
send to London an order on a London merchant or a London 
bank than to send gold coin. 

Example. B in New York sells to C in London cotton to the amount of 
^600, and draws a bill of exchange (order for money) on C payable to B's 
order sixty days after sight for that amount, (a) B may sell this bill to a 
banker or bill broker in New York. If D in New York owes E in London 
;£6oo, D may buy this bill of the broker and send it to E, who presents 
it in London to C and gets his money, (b) B may discount the bill at his 
bank in New York. The bank may send it and other like bills to its corre- 
spondent bank in London and thus get a credit there. D may purchase of 



i 81] EXCHANGE 



139 



the New York bank its bill of exchange on the London bank and send this to 
E, who presents it at the London bank and gets his money. 

Domestic exchange is that between different parts of the same 
country. It is sold by banks, express companies, telegraph com- 
panies, and even by the government in the form of post-office 
money orders. 

Foreign exchange is between a city in one country and a city 
in another country. It is of two kinds : {a) bankers' bills, that 
is, bills of exchange or checks drawn by one bank on another; 
{b) commercial bills, that is, bills of exchange drawn by one mer- 
chant (creditor) upon another merchant (debtor). The latter may 
be drawn against a shipment of goods and be accompanied by 
the bill of lading, in which case they are called "documentary" ; 
or they may be without accompanying documents of title, in which 
case they are called "clean bills." 

Foreign exchange is reckoned, but is not always expressed, in 
the money of the country on which the bill is drawn. The rate 
of exchange is the expression of the value of the money of one 
country, recorded in the terms of the money of another country. 
In this country the rate is usually expressed in the terms of our 
money, with the exception of the French rate. Thus, the rate 
for English exchange is ^4.8666 (for a pound sterling) ; for Ger- 
man, ^.95 (for four marks) ; for Dutch, ^.40 (for a guilder). But 
the French rate is expressed in the terms of French money, as, 
for example, 5.15, meaning that this number of francs will be 
exchanged for one dollar.^ There may be, however, a slight pre- 
mium or a slight discount equal approximately to the actual cost 
of shipping gold, which is about f of i per cent on the amount 
shipped. As this is scarcely 2 cents on ^4.8666, the premium or 
discount will rarely be more than 2'^ cents. 

To the natural rate fixed by the par of exchange, with pre- 
mium or discount, is added the commercial rate, depending on 
the abundance or scarcity of commercial bills and the price fixed 
for accommodating a person in New York with a bill of exchange 
on London or any other foreign city. 

^ The United States Treasury will, on application, send an official table of 
values of foreign coins. 



I40 CREDITS AND LOANS [Ch. VII 

5. Payment. Payment is the discharge of a debt in money or 
its equivalent. It is the duty of the debtor to seek out his creditor 
and tender payment at the proper time. It is not the duty of the 
creditor to give a receipt unless the statute so provides, but it is 
customary to do so. The tender, to be legally and technically cor- 
rect, must be of the exact amount in legal-tender money. If the 
creditor refuses a lawful tender, his refusal has the effect of stop- 
ping interest upon the debt, and, if the tender be kept good, of 
preventing costs in case he resorts to legal process to collect 
the debt. 

If the debtor owes the creditor different debts, he may direct 
that a payment be applied toward the extinguishment of any one 
of them he may select. If the debtor makes no application, the 
law will apply the payment in the manner deemed most equitable 
and just to both parties. 

A receipt, when given, is strong but not conclusive evidence 
that the sum named in it has been paid. It may be impeached 
for mistake or fraud. 

As stated above, the larger part of the payments in the com- 
mercial world are now made by the use of checks or bUls of 
exchange, while money, save in the case of small transactions, 
is used mainly to settle balances at the clearing house or between 
foreign cities. 

82. Interest and usury. Interest is the compensation allowed 
by law or fixed by the parties for the use or forbearance or 
detention of money. 

Legal interest is the rate of interest allowed by law. Parties 
may agree for less than this, but not for more unless a higher 
rate by special agreement is permitted by statute. If they agree 
for interest with no rate specified, the legal rate will be under- 
stood. In many states a legal rate is fixed for cases where there 
is no specific agreement, and a maximum rate for cases where 
there is an agreement. These statutes often provide that an agree- 
ment for a rate higher than the legal rate but within the maximum 
rate shall be in writing. ^ 

Usury is unlawful interest ; that is, an agreement for interest 
greater than that allowed by law. Such a contract is illegal, but 

1 See Interest Table at end of this chapter. 



§82] INTEREST AND USURY 141 

the effect of such illegahty varies in different jurisdictions. In 
some the lender cannot recover any interest at all ; in some he 
can recover neither principal nor interest; in some he forfeits 
only an excess above the specified rate. 

In England, Massachusetts, and some other jurisdictions no 
maximum rate of interest is specified by statute, and parties may 
contract freely concerning the rate, except that an unconscion- 
able rate might be evidence of oppression or undue influence. 
In most American states the rate is fixed by statute, ranging 
from 6 per cent to 12 per cent, and any agreement for interest 
above that rate would be usurious and illegal ; but some of these 
states allow corporations to contract to pay any rate of interest 
agreed upon, and some allow banks to make large call loans upon 
negotiable security at any rate agreed upon. The object of fixing 
the maximum rate is to avoid oppression of borrowers, and it 
is thought that corporations and dealers upon stock exchanges 
(who secure call loans) are not likely to be subject to such oppres- 
sion and should be left free to contract for any rate they may 
think the loan worth to them. Special rates, higher than ordinary 
rates, are also usually allowed to be charged by pawnbrokers. 

Up to the time a debt becomes due and payable there is no 
interest allowed upon it unless the parties have provided for 
interest. 

A sale of goods for $500 upon sixty days' credit would carry no interest 
during the sixty days unless it was provided that the credit should be " with 
interest." So a negotiable promissory note carries no interest until maturity 
unless interest is specified in the note. All debts bear interest after they are 
due and payable, such interest being regarded as a measure of damages for the 
wrongful detention of the money. 

Compound interest is not favored in the law and will be 
allowed only when the interest due has by some new agreement 
been incorporated, with the principal or where expressly contracted 
for in the original agreement. 

Example. B agrees to pay C $ 1 000 three years from date, with interest at 
6 per cent per annum, payable annually. B pays no interest and the three years 
have elapsed. C may recover the principal with simple interest ; namely, $1 180 
(plus also interest from maturity to the date of the judgment). After judgment 
C is allowed interest on the total judgment debt at the legal rate. 



142 CREDITS AND LOANS [Ch. VII 

83. Banks. Banks are financial institutions which receive money 
on deposit, loan money, sometimes issue money, deal in commer- 
cial paper, and facilitate exchange. Commercial banking consists 
essentially of the exchange of {a) credit for money and {b) credit 
for credit. A customer delivers his money to the bank and re- 
ceives in exchange the bank's credit. The legal title to the money 
is in the bank. The depositor has a right to demand back an 
equivalent sum, but not the specific money deposited. He has 
received the bank's credit for his cash. If a customer discounts 
his note or bills receivable at a bank, he is exchanging his credit, 
payable at some future time, for the bank's credit, payable on 
demand. There are several kinds of banks in this country. 

National banks are chartered by the United States government 
with power to issue national bank notes upon depositing as security 
therefor United States bonds. They are banks of deposit, dis- 
count, and loans, doing a general banking business. They may 
charge the rate of interest which the state where they are located 
has fixed for its own state banks. The penalty for usury is the 
recovery by the borrower of twice the amount of interest paid. 
National banks may be organized by not less than five persons. 
In any place having less than 3000 inhabitants they must have a 
capital stock of not less than $25,000 ; in a place of from 3000 to 
6000, not less than $50,000 ; in a place of from 6000 to 50,000, 
not less than $100,000 ; in a place of over 50,000, not less than 
$200,000. On September 2, 191 5, there were 7613 national 
banks, with an aggregate capital of $1,068,863,507.70. On the 
same date the outstanding national bank notes amounted to 
$718,496,591.50. 

State banks are chartered by the state in which they are located, 
and, like national banks, are usually banks of deposit, discount, 
and loans. Owing to a national tax of 10 per cent on all bank 
notes issued by state banks, none of them can profitably issue 
such notes. 

Trust companies are chartered by states and are given many 
of the powers of banks of deposit, and are also authorized to act 
as fiscal agents, trustees, executors, administrators, etc. When a 
corporation wishes to issue bonds secured by mortgage, it usually 
selects a trust company as trustee for the bondholders. They 



§83] BANKS 143 

often serve as agents or trustees in the organization or reorganiza- 
tion of corporations. Trust companies have increased greatly dur- 
ing the past few years, and now in New York City outnumber 
the national banks. Their powers are so large as compared with 
national or state banks that capitalists find it more profitable to 
invest in them than in the older and more conservative institutions. 
They are also much less restricted as to investments and security 
for loans. 

Savings banks are, as the name implies, depositories for 
savings and not ordinary banks of deposit for live accounts. 
They pay interest on deposits and loan money on mortgages or 
other permitted securities at a higher rate. They are organized 
under state laws. 

Private bankers are persons who carry on a banking business 
without forming a corporation. They may unite with banking 
proper a variety of other enterprises, and some of the largest 
financial operations are conducted through private bankers who 
promote or finance them. They often combine with a banking 
business that of stock or bond brokers. 

By act of December 23, 191 3, the federal reserve banking 
system was established. This act provides for the creation of 
not less than eight nor more than twelve federal reserve dis- 
tricts, in each of which there shall be located a federal reserve 
bank. All national banks within the district are required to, and 
other banks may, become members of the federal reserve bank. 
Each federal reserve bank is required to have a capital of at 
least ^4,000,000, which is subscribed by the member banks. 
Each federal reserve bank is entitled to rediscount paper of the 
member banks and thus to relieve such banks in time of finan- 
cial strain ; to receive deposits from any of its member banks or 
from the United States ; and to issue federal reserve bank notes 
to the member banks in exchange for commercial paper. The 
federal reserve system has as two of its primary objects the 
creation of a more elastic currency and the establishment of a 
more effective supervision of banking. 

If a bank receives deposits subject to check, it usually allows 
no interest ; but savings banks, trust companies, and sometimes 
private bankers receive deposits not subject to check and allow 



144 CREDITS AND LOANS [Ch. VII 

interest, while national banks and state banks generally do 
not. A bank of deposit makes its profits on loans. Even if it 
pays interest, it loans at a higher rate than it pays. Loans of 
banks of deposit are made on indorsed commercial paper or on 
collateral security. National banks are forbidden to loan on 
real-estate security, but savings banks and trust companies 
loan on such security. 

84. Bank deposits. When money is deposited in a bank, the 
depositor becomes the creditor of the bank to the amount of 
his deposit. In ordinary banks of deposit there is an implied 
understanding that the depositor may draw checks upon his 
deposits in favor of third persons, and that the bank will honor 
them. There is no such understanding in the case of ordinary 
debtors, and the debtor is not bound to honor any order upon 
him unless it be for the full amount of his debt In savings 
banks and in the case of interest-bearing deposits in other 
banks it is usually provided that some notice shall be given of 
an intention to withdraw any portion of the deposit, and that 
the deposit book shall be presented with the check or order. 
Ordinary deposits do not bear interest. 

When money is deposited in a bank subject to check, the 
depositor usually receives a bank book in which each deposit 
is entered. This constitutes the evidence of his credits. When 
a check is paid, the bank keeps it and this constitutes the evi- 
dence of its credits as against its depositor. The book and 
vouchers (paid checks) are then returned to the depositor, who 
should at once examine each check in order to ascertain that 
it is genuine, and should verify the account. If a forged or 
raised check has been paid, the loss falls upon the bank as 
between the bank and the depositor, but unreasonable delay 
in examining the checks after they are returned to him, or in 
notifying the bank of any irregularity, may estop the depositor 
from asserting his rights in this respect. 

A depositor may have a note made by him payable at his 
bank. In that case, when the note falls due it is equivalent to 
an order upon the bank to pay it, and it is paid like a check 
and the note is included as a voucher when the account is 
written up. A depositor may, however, direct a bank not to 



§85] LOANS AND DISCOUNT 145 

pay from his deposit a note or check which he has made pay- 
able there. In this event the bank is bound to refuse payment 
unless it is itself the owner of the note, in which case, as credi- 
tor to that amount, it may offset the note against what it owes 
to the depositor. 

Where one does not wish to draw checks against a deposit, 
he may take a " certificate of deposit " from the bank. This 
is in the form of a receipt stating that "A. B. has deposited in 
this bank five hundred dollars payable to his order upon return of 
his certificate," and is signed by the cashier. If certificates are 
for a definite period, as three months, they are often made with 
interest. They are practically the promissory note of the bank. 

85. Loans and discount ; security. If one wishes to borrow 
money for temporary use in his business, he usually applies at 
his bank for a loan. Assuming that he wishes to borrow ^1000, 
he would make his promissory note for that amount (with or 
without security), payable at a specified time after date, and the 
bank would discount it and place the amount, less the discount, 
to his credit. 

Discount is the price paid for the present use of money or 
credit in change for the promise of future payment. In other 
words, it is the taking of interest in advance upon a loan ; it is 
incidental to banking, and bank discount is not usury, although 
the lender may thereby secure slightly more than the legal rate. 
It is technically discounting one's own commercial paper in order 
to raise money. 

Discount is also used in the sense of purchasing for their present 
worth, or for less, notes made by one person and owned by another. 

Examples. B wishes to raise money. He owns a note made by C ; he 
sells this note to D. If he sells it for its present worth, there could be no 
question in any event of the validity of the transaction. But if he sells it 
for less than its present worth, the buyer will make a profit greater than the 
legal rate of interest. This, however, is not essentially usurious, any more 
than to buy a horse and make a profit upon it. If B does not indorse the 
note so as to become liable upon it himself, the sale may be for any price 
agreed upon. If B does indorse it, most courts still hold that the sale (if 
not a mere cover for usury) may be for any price agreed upon, although 
some courts hold this to be usurious if the buyer makes thereby more than 
the legal rate of interest. 



146 



CREDITS AND LOANS 



[Ch. VII 



Interest Table 

The following table shows the ordinary legal rate of interest and the 
maximum rate by special agreement in each state and territory. The special 
agreement must in most states be in writing. 



State, etc. 


Legal 
Rate 


Maximum 
Rate 


State, etc. 


Legal 
Rate 


Maximum 
Rate 


Alabama . . . • 
Alaska ... 


8 
8 


8 
12 


Montana . 
Nebraska . 


8 

7 


12 
10 


Arizona 
Arkansas . . 
California 
Colorado . 
Connecticut 
Delaware . . . 


6 
6 

7 
8 
6 
6 


10 
10 

Any rate 

Any rate 

12 

6 


Nevada 

New Hampshire 
New Jersey . 
New Mexico . 
New York 
North Carolina . 


7 
6 
6 
6 
6 
6 


12 

6 
6 
12 
6 
6 


District of Columbia 


6 


10 


North Dakota . 


6 


TO 


Florida 


8 


10 


Ohio . . . 


6 


8 


Georgia . . 
Hawaii . 
Idaho . 
Illinois . 


7 
8 

7 
5 


8 
12 
12 

7 


Oklahoma . 
Oregon 
Pennsylvania 
Rhode Island 


6 
6 
6 
6 


10 

10 

6 

Any rate 


Indiana . 


6 


8 


South Carolina 


7 


8 


Iowa . . . • 


6 


8 


South Dakota 


7 


12 


Kansas . . . 


6 


10 


Tennessee 


6 


6 


Kentucky . . 
Louisiana . . 


6 

5 


6 
8 


Texas 
Utah 


6 

8 


10 
12 


Maine . . . 


6 


Any rate 


Vermont . 


6 


6 


Maryland 
Massachusetts 
Michigan 
Minnesota 


6 
6 

5 
6 


6 
Any rate 

7 
10 


Virginia . 
Washington . 
West Virginia 
Wisconsin . . 


6 
6 
6 
6 


6 

12 

6 

10 


Mississippi 
Missouri . 


6 
6 


8 
8 


Wyoming . 


8 


12 



In no case may a bank discount or purchase notes at a greater discount 
than the legal rate of interest. This limitation upon banks has created a 
class of dealers known as bill brokers, or popularly as " note shavers," who pur- 
chase such instruments at an agreed price for themselves or for other persons. 

If in borrowing money one has to give security, this may be 
done by getting another person to indorse or guaranty his note, 
or by depositing collateral in the form of a pledge, or by giving 
a mortgage upon property. When there is an accommodation 



§85] REVIEW QUESTIONS AND PROBLEMS 147 

indorser, the note is usually made payable to him, indorsed by 
him, and discounted at the bank by the accommodated party. If 
.it is not paid by the maker when it is due, the indorser is noti- 
fied and he is then liable to pay it. If the note is guarantied, 
it is made payable to the bank, and the guaranty is written 
upon the back and signed by the guarantor. Upon nonpayment 
by the maker, the guarantor is liable without notice. Pledge 
of collateral security has already been treated (see sect. 65 ante). 
A mortgage is in form a conveyance of property upon condition 
that if a specified sum be paid to the mortgagee at a specified 
date, the mortgage shall be void and of no further effect. 



REVIEW QUESTIONS AND PROBLEMS 

Section 81. What is capital ? What is working capital ? What is credit? 
How is it estimated ? How are checks used for credit purposes ? Explain the 
methods of a clearing house. What is a clearing-house certificate? What is 
money ? What is currency ? What is legal tender ? State the kinds of United 
States money. Which are legal tender and to what amount? What is ex- 
change ? What two kinds of foreign exchange ? What sends foreign exchange 
above par or below par ? What is the natural limit of such fluctuation ? What 
determines the commercial price of exchange? What is payment? What is 
the effect of refusing it ? How is it applied if there are different debts ? Must 
the creditor give a receipt ? What is its effect ? 

Problem i. B owes C $32. B tenders C silver in payment as follows: 
15 silver dollars, 20 half dollars, 25 quarter dollars, 7 dimes, i nickel. C re- 
fuses to accept this, alleging it is not legal tender. C then sues B, and to avoid 
costs and interest B pleads the prior tender. Result ? 

Problem 3. B owes C a debt of I25 contracted in 1898, and one of $36 
contracted in 1901. B in 1903 pays C $25 and directs C to credit it on the 
debt of $36. C credits it on the debt of %?■$. In 1905, after the debt of $25 
is outlawed, C sues B for $36. B pleads payment of $25. How much may 
C recover ? 

Problem j. In the above case B makes no request as to application of 
payment. How will it be applied? 

82. What is interest? What is usury? What is the effect of usury upon a 
contract ? What is the legal rate and the maximum rate of interest in your state? 
What debts carry interest ? What is compound interest ? When is it allowed ? 

Problem 4. B bought goods of C to the amount of $215 on three months' 
credit, which expired July 7. On September 3, C brought suit in New York 
against B for this debt. On November 10 a judgment was entered for C. 



148 CREDITS AND LOANS [Ch. VII 

On January i i this judgment was paid, (a) Assuming that the disbursements 
and costs allowed C by the court amounted to $24.25, how much should the 
judgment be entered for? (6) How much would be paid to discharge it on 
January 15? 

Problem 5. B borrows of C in New York J! 100 for one year, and gives his 
promissory note for that amount with 6 per cent "interest. In addition B pays 
C a bonus of $5 ; that is, C really pays over to B on the loan only $95. C 
sues B on this note. B pleads usury. Result? 

Problem 6. In the above case B is a corporation. Result? 

83. What is a bank? Name and describe the different kinds of banks. 
How much capital must a national bank have in your city or village ? Is there 
a state bank there ? a savings bank ? a trust company ? a private banker ? 
What advantages have trust companies over state or national banks? What 
is the federal reserve system ? What are live accounts ? What banks take 
deposits and allow interest? 

84. What is the relation of a bank to a depositor? Who loses the money 
paid by a bank upon a forged check ? If one has a note due and payable at ^ 
bank, explain what is done on the due date. What is a certificate of deposit? 

85. Explain the process of borrowing money at a bank. What is discount? 
How great may it be? What is purchasing a note? For what price may a 
bank purchase a note made by X and owned by A ? For what price may an 
individual purchase it? In what forms may one give security for a loan? 
What is a mortgage? 



CHAPTER VIII 

THE CONTRACT OF GUARANTY 

86. Guaranty defined. A guaranty i is a promise to be answer- 
able for another's debt, default, or obligation. It is a contract 
collateral to the main contract of the principal party. 

Example. B purchases goods of C on credit ; D gives C a guaranty that 
B will pay for them, or, in case B does not, that D will. 

The guarantor is he who gives the guaranty. The guarantee 
is he to whom the guaranty is given ; that is, the creditor. The 
principal is he whose debt is guarantied ; that is, the debtor. The 
word "surety" is sometimes used interchangeably for "guarantor." 
But strictly a surety is one who is bound with the principal upon 
the original contract and in the same terms, while a guarantor 
is bound upon a collateral contract to make good in case the 
principal fails. 

"We, A. B. as principal and C. D. as surety, hereby agree, etc." would be 
a case of suretyship; while "I, A. B., hereby agree, etc.," followed by the 
indorsement, " I hereby guaranty ^ the performance or payment of the within 
contract. C. D.," would be a case of guaranty. 

An indorsement of a negotiable instrument is a special form of guaranty, 
the indorser promising that he will be answerable for the amount of the note 
in case the holder makes due presentment to the maker, gives due notice of 
dishonor to the indorser, and, in case of a foreign bill of exchange, makes due 
protest. This is considered under the head of Negotiable Instruments. 

A guaranty of payment differs from a guaranty of collection. 
In the first case the guarantor agrees to pay if the principal does 
not ; in the second he agrees to pay if the debt cannot be collected 
of the principal. 

1 This is the same word as " warranty," having preserved the Norman- French 
g, which has been converted into the English w in " warranty," as the French 
Guillaume becomes " William '' in English. A warranty is a guaranty of the title or 
quality of goods. A guaranty is a warranty of credit, solvency, etc. (see Guaranty 
Insurance, sect. 74 ante). 

^ The verb is either " guaranty " or " guarantee." Sometimes one, sometimes 
the other, is used. The noun also is written in both forms. 

149 



1 50 GUARANTY [Ch. VIII 

A continuing guaranty is an agreement to be responsible for 
moneys, goods, or services to be furnished the principal from 
time to time in the future. 

87. A guaranty must be in writing. Under the Statute of 
Frauds (see sect. 22 ante) a promise to answer for the debt, de- 
fault, or miscarriage of another must be in writing and signed by 
the party to be charged. Hence a guaranty of another's debt or 
promise must comply with this provision. 

If the contract is strictly one of indemnity, namely, a promise 
to save another harmless from the results of some transaction 
into which the promisor induces him to enter, it is to be distin- 
guished from a guaranty and need not be in writing. In such 
a case there are but the two parties. 

Examples .• i . B promises C, an officer, that if the latter will attach D's goods, 
he will guaranty him against loss or damage. This is an indemnity and not a 
guaranty, and need not be in writing. There are really but two parties here. 

2. Sometimes it is very difficult to say whether a contract is one of guaranty 
or of indemnity. B promises C that if the latter will go upon D's bail bond, he 
(B) will make good any loss C may suffer. In England and in many American 
states this is treated as a contract of indemnity, while in other states it is 
treated as a contract of guaranty. 

3. Again, the promise may be an original instead of a collateral one, in 
which case it is not a guaranty and need not be in writing. " If you will let 
B have these goods, I will pay for them." The promisor is primarily and not 
collaterally liable. Had he said, " I vidll pay for them if B does not," it would 
have been a guaranty. 

4. Again, the promise may be to pay the debt out of funds put into the 
hands of the promisor for that purpose. D has moneys of C put into his 
hands to pay for goods sold to C by B. D promises B to pay. This is not 
within the Statute of Frauds. It is really a case of a trust. 

In all doubtful cases it is safer to have the promise put into 
writing and signed. In some states it is necessary, also, that 
the writing should express the consideration upon which the 
guarantor's promise is based. 

88. Consideration. When the contract of guaranty is made at 
the same time as the contract which it guaranties, the considera- 
tion which supports the principal's promise will also support the 
guarantor's. 

When the contract of guaranty is made subsequent to the main 
contract, a new consideration is required to support it. 



§§ 89, 90] NOTICE OF DEFAULT 1 5 1 

Examples : 1. " If you let B have these goods, I will guaranty pay- 
ment for them. C." The delivery of the goods supports B's promise and 
also C's. 

2. B owes A for goods already sold and delivered. C writes A, " I will guar- 
anty B's debt to you." There must be some new consideration for this or the 
promise will be unenforceable. Such a consideration might be that A should 
bind himself to give B an extended time in which to pay. 

89. Notice of acceptance by guarantee. Whether the creditor 
(guarantee) must notify the guarantor that he accepts the guar- 
anty has been a very much discussed question. It is not neces- 
sary, of course, in the case of a contemporaneous guaranty ; that 
is, a guaranty made at the same time as the main contract. The 
difficulty arises in a case of a guaranty as to future advances. 

ExaTuple. C writes A, " I will guaranty payment of all goods you may let 
B have during the next year." Must A notify C that he accepts the guaranty, 
or will the delivery of goods to B constitute an acceptance ? Generally in this 
country it is held that notice must be given in such a case, because the guar- 
antor is entitled to know that his offer of guaranty has been accepted. In 
England and in some of our states no notice is necessary, the acceptance con- 
sisting in the doing of the act specified ; that is, letting B have the goods. In 
view of this conflict it would always be safer to notify the guarantor that the 
guaranty has been accepted. 

90. Notice to guarantor of the default of the principal. Whether 
the guarantee must notify the guarantor that the principal has 
defaulted in the payment or other obligation covered by the guar- 
anty is also a disputed question. Some states require no notice, 
while others require notice but do not agree as to the cases in 
which it must be given. 

In states requiring notice these different holdings are found : 

1. That the guarantor is always discharged for want of such 
notice if he is damaged thereby. 

2. (a) That the guarantor is discharged for want of such notice 
if the amount for which he is bound is an indefinite one ; but 
{b) that he is not discharged for want of notice if the amount for 
which he is bound is definite. 

In view of this conflict and the nicety of the distinctions, it is 
safer for the creditor to notify the guarantor, upon default of the ' 
debtor, of the fact of such default and that the creditor looks to 
the guarantor for payment. 



152 . GUARANTY [Ch. VIII 

There is also much conflict as to the conditions under which the 
guarantee is bound to disclose to the guarantor at the time of mak- 
ing the guaranty any fact known to the guarantee concerning the 
honesty, fidelity, or solvency of the principal. In some cases a 
guarantor has been relieved of liability because the guarantee con- 
cealed such knowledge, but the cases are by no means clear as 
to what constitutes fraudulent concealment. 

Examples .• i . X has been state treasurer, and, known to the state officers 
who are required to take and approve his bond, he has been guilty of defalca- 
tion. They take a bond from B and others as sureties for the fidelity of the 
treasurer, concealing this knowledge. This is fraudulent concealment and B 
and the other sureties are not liable. The same result would be reached if an 
employer, knowing of the dishonesty of his clerk, afterwards took a fidelity 
bond to assure his honesty, concealing the prior dishonesty. 

2. X is known to C to be financially weak or insolvent. C takes an obliga- 
tion from X with B as guarantor, concealing this fact. B is not relieved. This 
is not fraudulent concealment. So it has been held not to be fraudulent to con- 
ceal the fact that the principal has been gambling or is already indebted to 
the guarantee. If, however, the guarantor asks the guarantee about such 
matters, he must answer fully and fairly if he answers at all. 

91. What will discharge the guarantor. A guarantor may be 
discharged from his liability, and it remains to consider what will 
operate to work such a discharge. 

1 . Discharge of the principal. If the principal is voluntarily 
discharged or released, the guarantor is also discharged, unless he 
consents to such release. But he is not discharged by an involun- 
tary release, as a release in bankruptcy by force of law. 

A covenant by the creditor not to sue the debtor, coupled with 
a reservation of the rights against the guarantor, is held in Eng- 
land and in some of our states not to discharge the guarantor; 
and an agreement for release with such reservation is construed 
to be a covenant not to sue. But this exception is not recognized 
in some of our states. 

Examples .■ i . B guaranties X's debt to C, who discharges X from liability, 
giving him a release under seal. B is also discharged. 

2. In the above example, X becomes embarrassed and creditors agree to 
take 6o cents on the dollar and release X. C receives his 6o per cent. X is 
released. So is B. 

3. In Example I, X goes into bankruptcy and is discharged by payment 
of 60 per cent. X is released but B is not. C may recover the additional 
40 per cent from B. 



§91] DISCHARGE OF GUARANTOR 153 

2. Alteration of contract. If the creditor has altered the terms 
of the contract with the debtor without the consent of the guarantor, 
the latter is discharged. 

Examples : 4. C guaranties payment for a specified engine, to be sold by 
B to A. Afterwards A decides to talce a different engine at a different price. 
C is discharged. 

5. C guaranties payment of a note from B to A, due on September 11. 
B and A by mutual consent change the note to read October 11. C is dis- 
charged. His contract is destroyed by an alteration made without his consent. 
It would be the same if the date were changed to August 11. 

3. Extension of time to debtor. If the creditor definitely ex- 
tends the time of payment to the debtor without the consent of 
the guarantor, the latter is discharged. 

Example 6. C has guarantied to B the payment of a debt due from A on 
April I . B, in consideration that A will give him a note, extends the time to 
June I. C is discharged. 

7 {Exception). There is an exception to this rule in the case where the 
creditor, while extending the time to the debtor, expressly reserves his right 
against the guarantor. This is because the rights of the guarantor against his 
principal are not impaired, since the latter impliedly agrees that the guarantor 
may at once pay the debt to the creditor and proceed against the principal 
for indemnity. 

A mere forbearance to sue, or an unenforceable promise to forbear, is not 
an extension of time to the debtor. 

4. Surrender of securities by creditor. If the creditor sur- 
renders to the debtor securities held for the enforcement of the 
debt, the guarantor is discharged to the extent he may be injured 
thereby. 

5. Failure of creditor to proceed against debtor after notice. 
In New York and some other states, if the guarantor directs the 
creditor to proceed against the debtor, and the creditor fails to do 
so, the guarantor is discharged if the debtor afterwards becomes 
insolvent. This is also a statutory rule in some states ; but gener- 
ally it is not in force, and it does not apply, even in New York, 
to an indorser of a negotiable instrument. 

6. Revocation by guarantor. If the consideration for a guaranty 
consists of an act to be done in the future by the guarantee, a 
notice of revocation before the act is done will be effectual and 
will relieve the guarantor. If the consideration consists of a series 



1 54 GUARANTY [Ch. VIII 

of acts to be done by the guarantee, notice of revocation will be 
effectual as to those not yet done, but will be ineffectual as to 
those already done. 

Example 8. B writes to X, " If you let C have goods for his store during 
the coming year, I will guarantee payment." On January lo X lets C have 
goods to the value of $150, and on February 5 to the value of $175. On 
March i B notifies X that he will no longer be liable for goods sold to C. On 
March 15 X lets C have $250 worth of goods. B is liable as guarantor for 
$325, but not for the $250. 

7. Death of guarantor. The death of the guarantor has the 
same effect as an express revocation, though some states require 
that the guarantee shall have actual notice of the death in order 
that it may operate as a revocation. 

Example 9. In Example 8, suppose B died on March i. In many states 
this would operate to revoke the guaranty as to any advances made thereafter. 
In other states it would operate only from the time X had notice of it In any 
event B's estate would be liable for the advances made before his death. 

Surety. In the case of a surety, as distinguished from a guarantor, some 
special results of revocation or death must be noted : 

a. It is a technical rule of the law (when not modified by statute) that where 
an obligation is joint, the death of one joint obligor extinguishes the liability 
as to him, and the survivor alone is liable. If A as principal and B as surety 
jointly promise to pay C, the death of B relieves his estate. But if the promise 
is joint and several (" We, A as principal and B as surety, jointly and severally 
promise to pay C $100 "), the death of one party does not relieve his estate. 
This technical rule has now been very generally changed by statute so that the 
death of a joint obligor does not extinguish the claim as to his estate. Under 
the above rule the death of a joint surety would of course revoke liability as 
to future advances. 

b. \i the suretyship is joint and several, the death of the surety does not revoke 
the suretyship, as does the death of a guarantor. A guaranty is collateral, but 
a suretyship is a part of the original contract itself and stands or falls with it. 

t. (i) In the case of an indemnity bond for an indefinite period the surety 
may at any time give notice of revocation, leaving the employer whose em- 
ployee's fidelity was assured a reasonable time to get other sureties. (2) But 
in the case of indemnity bonds for a definite period the surety cannot with- 
draw unless the employee or officer has defaulted so that he may be removed, 
or unless the surety has reserved in the bond the right to withdraw upon due 
notice. (3) The death of a surety on a joint and several bond does not termi- 
nate the liability of his estate even as to a breach by the principal occurring 
after the death of the surety. 

An indemnity is in some respects like a suretyship and in some respects 
like a guaranty. 



§§92,93] ■ LIABILITY OF GUARANTOR 155 

8. Retention of principal after knowledge of his dishonesty. 
If the guaranty be against the dishonesty or defalcation of the 
principal, the guarantor will be discharged if the guarantee, 
after knowledge of the principal's dishonesty, continues him in 
his service. 

9. Main contract nonenforceable against principal. If the main 
contract is illegal, and so not enforceable against the principal, the 
collateral contract of guaranty is also nonenforceable. This rule 
has been applied to usurious contracts. So also, if the main con- 
tract was procured from the principal by fraud and cannot for 
that reason be enforced, the guaranty of it is also unenforceable 
if the principal has avoided the main contract on the ground of 
fraud. The same has been held of contracts procured by duress, 
but some cases have escaped this rule where the guarantor 
signed with knowledge of the duress. Failure of consideration, 
which renders the main contract nonenforceable, also relieves 
the guarantor. But the fact that the principal is an infant, 
or of unsound mind, or a married woman, and so may escape 
liability, will not release the guarantor. These are defenses 
personal to the principal, and the guarantor cannot avail himself 
of them. 

92. Guarantor's liability. The guarantor's liability is fixed by 
the terms of the contract. This may stipulate for a definite sum 
or for such sum as the debtor is liable for. The guarantor may 
be compelled to pay without resorting to the principal debtor, un- 
less, indeed, he has merely guarantied the collection of a debt, 
in which case the creditor must first exhaust his remedies against 
the debtor. 

Examples: I. "I hereby guaranty the within note. C." The holder of 
the note may proceed against C without first proceeding against the maker of 
the note. 

2. " I hereby guaranty the collection of the within note. C." The holder 
must first exhaust his remedies against the maker before proceeding against C. 

93. Guarantor's remedies. A guarantor who has paid his prin- 
cipal's debt or obligation is entitled to the following remedies. 

I. Indemnity against principal. The guarantor may recover 
from his principal all money properly paid on account of the 
guaranty, together with any costs reasonably incurred in defending 



156 GUARANTY [Ch. VIII 

the creditor's claim. In order to safeguard himself the guar- 
antor should notify the principal of an intended payment, in order 
that the principal may interpose to the creditor's claim any 
defense he thinks fit. 

2. Subrogation to rights of creditor. The guarantor is entitled 
to be §ubrogated to all collateral securities held by the creditor 
for the payment of the debt. 

Example i. B borrows money of A and gives as security certain bonds 
in pledge and also the guaranty of C. C pays the debt to A. C is entitled to 
the bonds in pledge as security for his claim against B. 

3. Contribution from coguarantors . If two or more persons 
are joint guarantors for the principal, and one of them pays the 
entire debt, he is entitled to a pro rata contribution from his 
co-guarantors. If one be insolvent or out of the jurisdiction the 
others may be compelled to contribute ratably. 

Example 2. C, D, and E are coguarantors for a debt of gi200 owed to 
B by A. C pays the entire debt. He is entitled to recover at law S400 each 
from D and E. If E be insolvent and unable to pay, then C may recover in 
equity $600 from D. 

Forms of Guaranty 

A general guaranty, or " letter of guaranty," of future advances 
may be as follows : 

I hereby guaranty to any person advancing money (or selling goods, or 

whatever the act may be) to \^Principal\ not exceeding dollars, the 

payment therefor at the expiration of the credit which shall be given. 

(Date) l^\^viiXMx€)\Gnarantor's Name'\ 

(Address) 



A special guaranty of future advances may be as follows : 

To \_Guarantee or Creditor'\ 

I will be responsible for goods (specify a particular kind if desired) sold 
by you to [Piiiicipal'] to an amount not exceeding in value an aggregate 
of dollars. 

(Date) (Signature) [Guarantor's Name'] 

(Address) 



§93] REVIEW QUESTIONS AND PROBLEMS 157 

A guaranty of contemporaneous credit may be as follows, and 
would usually be attached to another contract : 

In consideration of the agreement of {^Principal^ above set forth, I hereby 
guaranty to the said {Creditor) that the above-named {^Principall will well and 
faithfully perform everything by the foregoing agreement on his part to be 
performed at the times and in the manner above provided. 

(Date) Signature [Guarantor'] 

A guaranty of a past credit should state a new consideration. 

In consideration of one dollar to me in hand paid, the receipt whereof is 
hereby acknowledged, I hereby guaranty, etc. ; or, 

In consideration of the extension of time given by {Creditor-Guarantee] 
to {Debtor-Principal] upon the above agreement, I hereby guaranty, etc. ; 
or, 

In consideration of the discontinuance of proceedings by {Creditor-Guar- 
antee] instituted by him against {Debtor-Principal] I hereby guaranty, etc. 

REVIEW QUESTIONS AND PROBLEMS 

Section 86. Define guaranty ; guarantor ; guarantee ; principal. Distin- 
guish a surety from a guarantor ; an indorser from a guarantor ; guaranty of 
payment from guaranty of collection. What is a continuing guaranty 1 

87. How must a guaranty be evidenced.? Does this extend to an indemnity 
contract? Distinguish an indemnity contract. 

Problem i. X buys goods of C. B says, " If you let X have the goods, 
I will pay you if he does not." X does not pay. C sues B. Result? 

88. Does a guaranty require a consideration? What constitutes the con- 
sideration in a contemporaneous guaranty ? in a subsequent guaranty ? 

Problem 2. X buys goods of C, payable in thirty days. At the end of 
the thirty days B writes C, " If you will give X thirty days more, I will be 
answerable for his paying the claim.'' C takes X's note for thirty days more. 
It is not paid. C sues B. Result ? 

Problem j>. In the above case C does not take a note, but simply refrains 
from suing X for thirty days. Result ? 

89. Is it necessary to communicate to the guarantor an acceptance of the 
guaranty? When? 

90. Is it necessary to give the guarantor notice of the default of the prin- 
cipal? If so, under what circumstances? Is the guarantee bound to inform 
the guarantor of facts known to him affecting the risk ? Illustrate. 

91. What will discharge a guarantor ? Will bankruptcy of principal ? Will 
covenant not to sue principal? Will release of principal reserving rights against 



IS8 GUARANTY [Ch. VIII 

guarantor? Illustrate alteration of contract. What is an extension of time to 
the debtor? Effect of surrendering securities by creditor? Is creditor bound 
to proceed against debtor if requested by guarantor? When may a guaranty 
be revoked? What is the effect of the death of a guarantor? of a surety? 
Difference between joint promises and joint and several promises ? What are 
the rights of a surety on an indemnity bond ? When -will inability to enforce 
the main contract discharge the guarantor and when not? 

Problem 4. B guaranties X's debt to C. Afterwards C gives X a release 
and then sues B on the guaranty. Result ? 

Problem j. In the above case C releases B and then sues X. Result ? 

Problem 6. B guaranties X's debt to C. Afterwards C gives X " a release 
in full of said claim, reserving, however, all rights in respect thereto against 
B." C sues B on the guaranty. Result? 

Problem 7. B guaranties X's debt to C. Afterwards C gives X a valid and 
enforceable extension of time. When this time expires X does not pay and 
C sues B. Result ? 

92. May the guarantee proceed against the guarantor without first pro- 
ceeding against the principal? Illustrate. 

Problem 8. X gives C a promissory note. B writes and signs on the back 
of the note, " I hereby guaranty the collection of the within note." X does 
not pay the note. C sues B. Result ? 

93. What are the guarantor's remedies against the principal? What is his 
right of subrogation ? of contribution ? 

Problem g. X gives C a promissory note secured by a mortgage on X's 
property. B guaranties the payment. After maturity C sues and recovers from 
B. What are B's rights against X ? 

Problem 10. X owes C, and B, D, and E guaranty the debt. C recovers 
from B. What are B's rights? 



CHAPTER IX 

NEGOTIABLE INSTRUMENTS 

I. Nature and Characteristics 

94. Kinds of negotiable instruments. Negotiable instruments 
are written contract obligations which can be transferred from 
hand to hand like money. They are instruments of trade or of 
credit; that is, they are a substitute for money or an evidence 
of a postponed debt. They may be issued by private persons, 
or by banks, or by the government. 

Examples: i. If B buys a bill of goods of C he may (a) pay money, 
which may be either coin, promises of the government to pay or promises 
of a national bank to pay ; (b) give a check on his bank ; (c) give his prom- 
issory note; {d) accept a bill of exchange drawn on him by the seller; 
(«) transfer D's check, promissory note, or bill of exchange drawn or payable 
to his (B's) order or to bearer; or (/) draw and deliver a bill of exchange on 
E (who owes B), payable to C's order. In any case, as above, B has given 
C a negotiable instrument, except where he pays coin. But even coined 
money is in fact a negotiable chattel, for, whatever title or want of title there 
may have been in B, the taker of it for value gets a good title. 

2. If any instrument given above is payable on demand, it is essentially 
an instrument of trade taking the place of money ; but if it is payable at 
some future day, it becomes essentially an instrument of credit, because B 
secures a postponement of the payment of his debt, that is, secures a term of 
credit from C. But even an instrument payable on demand is also one of 
credit, because until actually presented for payment it is taken on the credit 
of the one issuing it. 

The principal kinds of negotiable instruments are as follows : 

a. Bills of exchange, foreign and inland. These are orders 
by one person to another to pay money to a third person or 
someone named by him, or to bearer (sect. 96). 

b. Promissory notes, including notes and certificates of de- 
posits by banks. These are promises by one person to pay money 
to another or someone named by him, or to bearer (sect. 96). 

159 



i6o NEGOTIABLE INSTRUMENTS [Ch. IX 

c. Checks, or orders by depositors on their banks to pay 
money to a third person or someone named by him, or to 
bearer (sect. 96). 

d. Bonds, or promises in a special form by corporations, 
cities, or governments to pay money to a person, or to a person 
named by him, or to bearer (sect. 96). 

The instrument first used was the foreign bill of exchange, 
by which merchants in one country were enabled to pay debts in 
another country without the risk of sending money across seas. 
The Florentines or the Venetians introduced these instruments 
into England as early as the thirteenth century. The inland 
bill was later introduced to serve the same purpose between 
different parts of the same country. In this country an inland 
bill is one drawn and payable within the same state. A bill 
drawn in New York and payable in Chicago would be by our 
law a foreign bill. 

Example 3. B in New York wishes to pay a debt to C in London. 
(a) If B has a debtor, D, in London, he may draw a bill of exchange on D 
payable to C or order and send it to C, who can present it to D and obtain 
payment, {b) B may buy in New York a bill of exchange drawn by F in 
New York on his debtor, E, in London, payable say to G's order. G sells and 
indorses it to B, and B indorses it to C and sends it to C, who presents it to 
E and obtains payment, (c) B may buy at a New York bank a bill of exchange 
drawn by that bank on a London bank, payable to C or his order ; B sends it 
to C, who presents it at the London bank and receives payment. By these 
methods payments are made between New York and London, or vice versa, 
without transferring money. In the end some big banking concern in one 
place may export gold to the other place to settle balances. 

A check is a special kind of bill of exchange, being a bill 
drawn by a depositor on his bank, payable on demand. A bill 
of exchange drawn by one bank on another is often called 
a draft. It is simply a check and is more properly called a 
cashier's check. 

Promissory notes were once held by the English courts not 
to be negotiable instruments, but Parliament in 1704 passed 
an act providing that they should be negotiable the same as 
bills of exchange, and such is the law in this country. When 
these are issued by banks, we call them bank notes. A certifi- 
cate of deposit is another form of promissory note issued by a 



s95] NATURE AND CHARACTERISTICS i6i 

bank to one who deposits money and takes the note of the bank 
for it: Corporations and governments issue long-time promises- 
to-pay in the form of bonds, which in the case of private corpo- 
rations are usually secured by a mortgage on the corporate 
property. 

Bills of lading at common law and warehouse receipts by statute are 
given a quasi-negotiable character, but these do not fall within the generally 
accepted category of negotiable instruments. By the Federal Bills of Lading 
Act and by the Uniform Bills of Lading Act order and bearer bills of lading 
are rendered fully negotiable. By the Uniform Warehouse Receipts Law and 
the Uniform Sales Act, warehouse receipts and other documents of title run- 
ning to order or bearer are given a limited negotiability but are not negotiable 
in the hands of a thief or finder. Stock certificates have also a quasi-negotiable 
standing. The first two are promises to deliver goods, and the last is an 
evidence of an interest in a business enterprise, while negotiable instruments 
have to do with unconditional promises or orders to pay money. The above 
instruments resemble negotiable instruments mainly in that they are trans- 
ferred from hand to hand by indorsement, but they are not, like negotiable 
instruments, a kind of substitute for money. They are paper evidences of 
some property right. 

95. Characteristics of negotiable instruments. There are three 
characteristics that serve to distinguish negotiable instruments 
from ordinary contracts. 

1. Presumptive consideration. If a contract is in the form of 
a negotiable instrument, it has a presumption of consideration, 
whereas in an ordinary contract one who brings an action upon 
it must prove that the promise he is seeking to enforce rests 
upon a consideration. 

Example i . (a) " On April I next, I promise to pay to the order of 
A. B. one hundred dollars. C. D." {b) " On April I next, I promise to 
deliver to the order of A. B. one hundred bushels of wheat. C. D." In the 
first example A. B. in an action against C. D. need not prove any considera- 
tion ; it is for C. D. to prove that there was none, if he can do so. In the 
second example A. B. in an action against C. D. must prove the consideration 
for the promise to deliver the wheat, and if he fails to do so he will be 
defeated in his action. 

2. Bays of grace. Unless abolished by statute, three days of 
■ grace beyond the time fixed are allowed for the payment of 

negotiable instruments, whereas, in ordinary contracts no days 
of grace are allowed. In the examples given above, A. B. could 



1 62 NEGOTIABLE INSTRUMENTS [Ch. IX 

not demand payment of the money until April 4, while he 
could demand delivery of the wheat on April i. Days of grace 
have been very generally abolished by statute. They were 
established when means of communication between distant 
places were uncertain and slow ; with the introduction of steam 
the need for them has disappeared.^ 

3. Negotiability. Negotiability is the important characteristic 
of these instruments. As we have seen (sect. 35), ordinary con- 
tracts are often assignable, but the assignee cannot sue in his 
own name except by force of statute, and when he sues he is 
subject to all the defenses that might have been set up against 
his assignor. Bills, notes, and checks, however, are negotiable, 
not merely assignable. Negotiability carries with it the following 
results : (a) the transferee gets a legal title and can sue in his 
own name ; {b) if the transferee is a holder for value and without 
notice of defenses and obtains title before maturity of the instru- 
ment, he is free from the defenses that might have been set up 
against his transferor, except those that operate to destroy the con- 
tract altogether. He is not subject to the personal defenses of 
fraud, duress, want of consideration, want of title in the transferor, 
and the like, but is subject to the absolute defenses of forgery, 
alteration, infancy of maker, that the statute declares the in- 
strument void (as it does a gambling contract), etc. It is this 
element of negotiability that makes it necessary to treat these 
contracts separately. 

Example 2. (a) In Example i, given above, assume that A. B. indorses 
and delivers the note to E. F. on March 15, and that E. F. sues the maker 
C. D. If E. F. paid value and had no notice of any defect in A. B.'s title, 
C. D. cannot defend on the ground that A. B. procured the note by fraud or 
without consideration ; but the defense that C. D.'s name is forged, or that the 
note has been altered, would be a good defense, {b) In Example i assume 
that A. B. indorses and delivers to E. F. the promise to deliver the wheat, and 
that E. F. pays value and has no notice of any defect. If E. F. sues C. D., 
any defense that would be good against A. B. is still good against E. F. This 
is an assignment, and an assignee stands in his assignor's shoes. 

' Days of grace are still allowed in Mississippi, Texas, and Wyoming. In 
Massachusetts and North Carolina days of grace are allowed only on bills 
payable on sight, while in Alaska they are allowed only on paper payable at 
a future day. 



i96] 



NATURE AND CHARACTERISTICS 



163 



96. Definitions. The various negotiable instruments are named 
and defined) as follows : 

I . Bill of exchange. A bill of exchange is an unconditional 
order in writing addressed by one person to another, signed by 
the person giving it (called the drawer), requiring the person to 
whom it is addressed (called the drawee) to pay on demand 
or at a fixed or determinable future time a sum certain in 
money to the order of a designated person (called the payee) 
or to bearer. 

The person upon whom the bill is drawn, that is, the drawee, 
may be asked to signify his assent to honor the bill, and if he 
does so he becomes an acceptor. This assent is usually signified 
by writing his name with the word "" Accepted " across the face 
of the bill. When a bank so signifies its assent to honor a check, 
the check is said to be " certified." 

If not payable to order or bearer, the bill would be non- 
negotiable. 



Bill of Exchange with Acceptance 




^^^ ^^a-zr^hh3cA^ P/ ^d/ 







:^— 



The above bill was accepted November 23, 191 2. It was due ninety days 
from sight, and hence became due ninety days from November 23, or on 
February 21, 191 3. It could be transferred by an indorsement on the back 
by Everett, Moore & Co., the payees. 

A foreign bill of exchange is. often drawn in a set of two or 
three duplicate parts, each part numbered and referring to the 
others. The parts are used to avoid the chance of loss in the 
mails or to save time in securing an acceptance. 



1 64 



NEGOTIABLE INSTRUMENTS 



[Ch. IX 



If there were three parts, the first would read, " second and third of same 
tenor and date, unpaid," and the second would read, " first and third of same 
tenor and date, unpaid," and the third would read, "first and second of 
same tenor and date, unpaid." 

a. Suppose Sherwood & Co. buy the above exchange in New York in 
order to pay a debt to James & Co. in Calcutta, India. Were it payable at 
sight or at a fixed future time, they would indorse each part to James & Co. 
and send one part by one steamer and another by a second steamer in order 
to avoid danger of loss or delay. In such case two parts would be enough. 



Bills in a Set 




THE BATTERY PARK NATIONAL BANK 





Q 

O CO 
w ~ 



THE BATTERY PARK NATIONAL BANK 




b. As it is payable after sight, if it is all sent to Calcutta and from there to 
London, it would be weeks before any part could be presented for acceptance, 
and it would then run ninety days after such presentation. But if one part is 
sent direct to London for acceptance, the final due date will be hastened and 
the present worth of the bill increased. Therefore one part is sent to London 
indorsed, " At the disposal of the second or third, duly indorsed." The second 



§96] NATURE AND CHARACTERISTICS 165 

and third will then be indorsed to James & Co. and sent to Calcutta by different 
mails, with the information that the first has gone direct to London for accept- 
ance. James & Co. in Calcutta can then deal with the bill, assuming it would 
be accepted about December i and would become due ninety days thereafter. 
They will send parts two and three to London in time to have them there 
when the bill becomes due, or they will sell them in Calcutta and the buyer 
will send them to London. 

The drawee should accept but one part ; for if he accepts two, each might 
be indorsed to a different holder, and the acceptor would be liable on each. 
A holder should not indorse parts to different persons, or he will be twice liable. 
When the bill is paid, the acceptor should take up the part he has accepted. 

2. Promissory note. A promissory note is an unconditional 
promise in writing made by one person (called the maker) and 
signed by him, engaging to pay on demand or at a fixed or 
determinable future time a sum certain in money to the order 
of another person (called the payee) or to bearer. 

If not payable to order or bearer, the note would be non- 
negotiable. 

Promissory Note 




M THE BATTERY PARK NATIONAL BANK °2»iE™sS 







It is not necessary to state the place where the note is payable, but this 
is usually done in commercial paper in- order to facilitate presentment for 
payment. This note may be indorsed on the back by Robert H. Moore & Co. 
The words " with interest " may be written in after the words " value 
received " if the note is to draw interest. The above note may be discounted, 
say at the bank where payable ; that is, the payee may indorse and sell it to 
the bank for its present worth. How much is $2500, payable in three months, 
worth in New York where interest is 6 per cent? 

3. Certificate of deposit. A certificate of deposit is in effect a 
promissory note given by a bank to a depositor, acknowledging 



1 66 



NEGOTIABLE INSTRUMENTS 



[Ch. IX 



the receipt of the deposit and promising to pay it to the order of 
the depositor. It may be made payable on demand, or it may be 
made payable at a fixed future time with interest. If one has a 
special fund which he wishes to put into a bank but against which 
he does not wish to draw checks, he ordinarily takes a certificate 
of deposit. 

Certificate of Deposit 



THE BATTERY PARK NATIONAL BANK. 



ii^ 



o 

E 



2+ STATE STREET 





^. -^(irrTiiA-^y/ 



W ^yq/^^ 




NOT SUBJECT TO CHECK 



.^ 



..^^z^T /^/>}^^3y^^ 



4. Check. A check is a bill of exchange drawn on a bank and 
payable on demand. If payable at a future time, it would be an 
ordinary bill of exchange. When one deposits money in a bank, 
he receives a bank book with the amount he has deposited 



Check 



THE BATTERY PARK NATIONAL BANK 

24- STATE STRb 




191 ^ No. "^^^ 

7^ 



tL 



J^fU. ^..t.i^^^^^^/nJ^rr^^SA'i^T^^ ^ 



^^^yy^^^Ttr 



entered in it. He can then draw checks against this deposit. If 
a payee wishes to be sure that the check is good, he can present 
the check to the drawee bank for certification or ask the drawer to 
have it certified. When certified, the bank becomes liable to the 



§96] 



NATURE AND CHARACTERISTICS 



167 



payee, and it charges the certified check against the depositor's 
account as a check which it has actually paid. 



Certified Check 




rATIONALBANK 






i (^^^^y X^uJvTT 



The words " Accepted," " Certified," " Good " are all used to signify 
that the bank has honored the check. 

S. Bank draft or check. A bank's check, often called a draft, 
is a check drawn by one bank upon another bank and payable on 
demand. If payable at a future time, it is a bill of exchange but 
not a check. One bank often keeps deposits in another bank in 
order to be able to furnish these bank drafts or bills. A country 

Bank Draft or Check 




<^.Q^ 



^f^@?®r^t,§^t^ing 



S%. /yj-g> 







■^MS^ 



^■..^ f. ^..^ 






MErRGPOLriAN TltCST Co. 
OF THE cnY OF NEW YORK. 



J^. ^. /gl2fcl 



bank will need to be able to furnish New York exchange, and 
even a New, York bank, if not a member of the New York Clear- 
ing House, will need to be able to furnish drafts or checks upon 
a New York bank that is a member of the clearing house. So 
a large bank may keep accounts with a London bank in order to 
issue its checks or bills on London and furnish London exchange. 



Bond of Corporation 



[i^ 




>^1>^IRST MORTGAGE B0ND^>1;/^ 



o~-< 




(CJ)C Jfim i^atjen ^atec Company, a corporation duly organized ^&^ 
and existing under the laws of the State of Pennsylvania, for value ~~ 
received hereby promises to pay to The Safe Deposit Company of Pittsburgh, 
County of Allegheny, in the State of Pennsylvania, or bearer, the sum of 

eJ^^lFive IHundred ©ollars-";^ 

lawful mone'^ of the United States of America, on the first day of October in 
the year nineteen hundred and thirty-five, together with interest on said 
sum from the date hereof at the rate of six per centum per annum, payable 
semiannually on the first days of October and April in each year at the office 
of The Safe Deposit Company of Pittsburgh, in the State of Pennsylvania, 
on presentation of the coupons hereto attached as they severally become due. 

^\)\^bav3sis one of a series of thirty bonds, numbered consecutively from one 
to thirty, both numbers inclusive, each of the denomination of five hundred 
dollars, all being of like tenor and date, and all secured by first mortgage 
upon the water works of said The New Haven Water Company, in and near 
the Borough of New Haven, in Fayette County, Pennsylvania, together 
with lands, machinery, pipes, properties, rights, privileges andfranchises 
now held and owned or hereafter to be acquired by it, and all its tolls, in- 
come, rents, issues and profits, executed by said The New Haven Water 
Company to The Safe Deposit Company of Pittsburgh, of the County of 
Allegheny, in the State of Pennsylvania, Trustee, and dated the first day 
of October, ipi^, and duly acknowledged according to law and recorded in 
'.he proper records in the Recorder's Office in Fayette Countf, in the State 
of Pennsylvania. This bond shall not become obligatory until authenticated 
by the execution by said trustee of the certificate hereto attached. 

3In (SCfjStimsnp BSjiKcnf, the said The New Haven Water Company has 
caused this instrument to be sealed with its Corporate Seal, and to be signed 
by its President and Secretary and the coupons hereto attached to be signed 
by its Treasurer, at New Haven aforesaid this first day of October, igij. 

The New Haven Water Company, 




1 68 



§96] 



NATURE AND CHARACTERISTICS 



169 



These drafts or banker's checks are usually drawn without being counter- 
signed by the president or other official, but some banks require this out of 
extra caution. Drafts may be drawn a given number of days after sight or 
after date. 

In the example of a bill in sets, given above, we have a banker's bill of 
exchange. It is drawn by a New York bank on a London bank and is payable 
ninety days after sight, that is, ninety days after it is first presented at the 
London bank. This is called London exchange ; it is ii 
bill of exchange drawn on a bank in London. 

6. Bonds. A negotiable bond is 
in effect a promissory note under 
seal issued by a corporation, gov- 
ernment, or governmental political 
division like a city or county. At 
common law a negotiable instru- 
ment could not be under seal ; 
if an instrument otherwise ne- 
gotiable was duly sealed, 
it thereby ceased to be 
negotiable. But by 
custom recognized 
by courts these 
instruments 
issued by 




Coupons 



corporations and governments under the corporate or govern- 
mental seal came to be regarded as negotiable. But not all bonds 
are negotiable. Bonds are either coupon bonds or registered 
bonds. The latter are bonds payable to a specified person whose 
name is registered in the books of the corporation or government, 
and they are transferable only by registering the name of the 
transferee. Coupon bonds are bonds payable to a person, or 
order, or bearer, and have attached to them coupon notes for each 



I/O NEGOTIABLE INSTRUMENTS [Ch. IX 

installment of interest as it falls due. These coupons are cut off 
and presented for payment of interest, or they may be severed 
before maturity and negotiated like a promissory note. The nego- 
tiable bond is usually a coupon bond payable to bearer. A bond 
is a quite formal instrument containing not only the negotiable 
promise but also specifications concerning the particular issue of 
bonds of which it is one, and the mortgage security therefor. 
Since a mortgage cannot well be made to each bondholder, it is 
made to a trustee or trustees for the benefit of bondholders. The 
bond is signed by the proper officials and usually bears the cor- 
porate or governmental seal. But these instruments are some- 
times issued without a seal, and although, when so issued, they 
are not technically, bonds, they are nevertheless classed as bonds. 

97. Negotiable Instruments Law. The law of negotiable in- 
struments has been codified and a uniform act passed in all the 
states and territories except frve.^ This Negotiable Instruments 
Law will be followed in this chapter. It supersedes the common, 
or unwritten, law of negotiable instruments. 

This law is based upon a similar codification in England 
known as the Bills of Exchange Act. This English act is also 
in force in most of the English colonies. 

II. Form 

98. What a negotiable instrument must contain. An instru- 
ment, to be negotiable (and not merely a common-law contract), 
must conform to the following requirements. 

1. It must be in writing and signed by the maker, or drawer. 
A writing includes print, and the writing may be in pencil. 

Examples: I. One may sign in a trade or assumed name. Even the 
indorsement by figures i, 2, 8 has been held sufficient. 

2. Only the person who signs is hable. The signature " A. B., agent," or 
" C. D., treasurer," binds only A. B. or C. D., and not his principal, for these 
are mere terms of description. The signature should be " X. Y., by A. B., agent," 
or " X. Y. Co., by A. B., treasurer." By tlie custom of banks the signature 
" E. F., cashier," binds the bank whose name appears on the instrument. 

3. A forged signature does not bind the one whose name is forged. No 
rights can be acquired by any holder under a forged signature. 

^ The act is not adopted in ealifornia, Georgia, Maine, Porto Rico, and Texas. 



§98] FORM 171 

2. It must contain an unconditional promise or order to pay 
a sum certain in money. A promissory note contains a promise. 
A bill of exchange, or check, contains an order. The point is 
that these must be unconditional. 

Examples: 4. " I O U twenty dollars" is not a promise but a mere 
acknowledgment. So also, " Due you twenty dollars." 

5. " Be so kind as to let the bearer have twenty dollars " may, perhaps, be 
too civil to be regarded as an order. 

6. " I promise to pay to order of A. B. twenty dollars out of proceeds of 
Blackacre farm " is conditional and therefore nonnegotiable. There may not 
be proceeds from that farm sufficient to pay. 

7. " Pay to order of A. B. twenty dollars and charge to account of Black- 
acre farm " is unconditional, because it merely indicates the fund from which 
reimbursement is to be made. 

8. " Pay to the order of A. B. all the proceeds of Blackacre farm " is non- 
negotiable because the sum is uncertain. But the law permits payment " with 
exchange " or with " costs of collection or attorney's fees in case not paid at 
maturity,'' although these may render the sum uncertain. It also allows pay- 
ment by installments, with a provision that upon default in the payment of 
any installment the whole sum shall become due. 

9. "Deliver to order of A. B. 100 bushels of wheat" is nonnegotiable 
because not payable in money. 

10. The instrument may specify a particular kind of money, as gold coin, 
silver dollars, greenbacks, or a foreign money, as Mexican silver dollars. 
There has been much conflict as to whether instruments payable in " current 
funds " are negotiable, since current funds may include the promissory notes 
of banks (that is, bank notes), which are themselves merely negotiable instru- 
ments. If payable in any kind of legal-tender money, there could be no ques- 
tion ; but current funds include more than legal-tender money, and coyrts 
have differed as to whether that phrase is the equivalent of money. 

3. It must be payable on demand or at a fixed or determinable 
future time. 

Examples: 11. "On demand, pay, etc.," "At sight, pay, etc." are pay- 
able on demand. So also if no time for payment is expressed, the instrument 
is payable on demand. Such .instruments are due at once and become overdue 
after the expiration of a reasonable time. 

. 12. "Thirty days after date," "On or before Jan. i, 1916," "Within 
one year after my death," — these are all fixed or determinable dates. " When 
A. B. is twenty-one " is not, because A. B. may never reach that age. " Thirty 
days after sight, etc." is determinable. 



4. It must be payable to order or to bearer. 



i;2 NEGOTIABLE INSTRUMENTS [Ch. IX 

Examples : 13. "I promise to pay A. B. twenty dollars " is nonnegotiable. 

14. "I promise to pay A, B. or order twenty dollars " is negotiable when 
indorsed by A. B. 

15. "I promise to pay the bearer twenty dollars" is negotiable without 
any indorsement. 

16. "I promise to pay cash twenty dollars " is payable to bearer. 

17. If the payee is known by the maker to be a fictitious person, the 
instrument is payable to bearer. 

18. When an instrument payable to the order of A. B. is indorsed in blank 
by A. B., it is then payable to bearer. An indorsement is in blank when A. B. 
simply writes his name upon the back of the instrument. 

19. An instrument may be made payable to the order of the maker, or 
drawer, or drawee, or two or more persons jointly. 

5. If the instrument is a bill of exchange, it must name or 
otherwise indicate the drawee with reasonable certainty. 

Examples: 20. "To , Mobile, Alabama," is not a bill, because the 

drawee is neither named nor indicated. 

21. "To the owner of the steamer Dorrance" is sufficient, because the 
drawee is indicated, though not named. 

99. What a negotiable instrument must not contain. The rule 
and the exceptions upon this point may be stated as follows : 

1. Rule. Subject to the exceptions enumerated below, a nego- 
tiable instrument must not contain a promise or an order to do 
any act in addition to the payment of money. 

Examples : i. " I promise to pay to the order of A. B. fifty dollars and 
also deliver to his order 100 bushels of wheat " is nonnegotiable. 

• 2. " Pay to A. B. or order fifty dollars and also deliver to him my horse 
Billy B." is nonnegotiable. 

2. Exceptions. The exceptions to this rule are given below : 

a. The instrument may give the holder an election to require 
something to be done in lieu of the payment of money. In such 
case the maker promises the payment of money and has no elec- 
tion to do anything else. The holder may require the payment of 
the money, but he may if he chooses take something in place of it. 

Example 3. " I promise to pay to the order of A. B. fifty dollars, or at his 
election deliver to him 100 bushels of wheat" is negotiable. 

b. The instrument may authorize the sale of collateral securities 
in case of nonpayment at maturity. The note given to a bank 



i 100] FORM 



173 



that lends money on collateral security usually contains a provision 
for the sale of the securities in case of default in payment. 

c. The instrument may authorize the confession of judgment 
upon nonpayment at maturity. Judgment notes are not used in 
some states, but where they are in use the Negotiable Instruments 
Law regards them as negotiable. 

d. The instrument may waive the benefit of any law intended 
for the advantage or protection of the maker unless such waiver 
is forbidden by the statute creating the exemption. In some 
states it is allowable to insert a clause waiving the benefits of 
homestead and exemption laws. 

100. Nonessentials. There are certain things which may or 
may not appear in i negotiable instrument, and their presence 
or absence will not affect its negotiability. 

1. Statement of consideration. A negotiable instrument need 
not state that any value was given. It is usual to insert the words 
"for value received," but this is not necessary to its validity, and 
the instrument has a presumptive consideration without the use of 
these or equivalent wordS. In some states there are special stat- 
utes requiring that the consideration shall be stated in negotiable 
instruments given for patent rights, and these statutes must be 
observed. An instrument is not rendered nonnegotiable merely 
because it states the consideration, as, for instance, if it reads, 
" In payment for one horse I promise to pay, etc." 

2. Date. A negotiable instrument need not be dated. If it is 
issued undated, the true date, which is the date when issued, may 
be inserted by any holder. The insertion of a wrong date binds 
prior parties in favor of a holder who afterwards takes the instru- 
ment for value and without notice of the error. It is always best 
to date a negotiable instrument, in order to avoid difficulties. 

3. Place. A negotiable instrument need not state the place 
where it is drawn or the place where it is payable. It is, of 
course, best to insert the place and the date, but these are not 
essentials. 

4. Effect of seal. A sealed instrument is generally nonnego- 
tiable, but the seal of a corporation or municipality is regarded as 
part of the signature and does not affect the negotiability of com- 
mercial paper or negotiable bonds. The Negotiable Instruments 



174 NEGOTIABLE INSTRUMENTS [Ch. IX 

Law extends this doctrine to private seals, but this is probably 
limited to the case where there is merely a signature followed by 
a seal, and might not extend to a case where there is a full recital 
of the seal, as where the instrument reads, "In witness whereof, 
I have hereto affixed my hand and seal." Negotiable bonds are 
usually sealed. 

101. Effect of blanks. If an instrument is issued with blanks, 
a person who takes it has notice that it is to be filled up, and is 
put upon inquiry as to how it is to be filled. Any holder may fill 
the blanks in accordance with the authority given ; if he fills them 
in excess of that authority, he cannot recover upon the instrument. 
But if he fills them in excess of the authority and then transfers 
the completed instrument to a holder for value and without notice, 
the prior parties are liable to such holder. It is better that one 
who puts out an incomplete instrument should suffer loss than 
that the innocent purchaser should suffer it. A space which the 
writing does not completely fill, as the space for the amount, is 
not a blank if something is written in it. 

Examples : i. A. B. indorses C. D.'s note with the amount left blank, and 
authorizes C. D. to fill it up for an amount necessary to renew another note 
then due; this amount is in fact $240. C. D. fills up the note for Si 000 and 
discounts it at a bank which knows nothing of these facts. A. B. is liable to 
the bank as indorser for $1000. 

2. A. B. draws and delivers to C. D. a check with the amount left blank, 
and authorizes C. D. to write in an amount not exceeding $ioo. C. D. writes 
in 8500 and the bank pays the check. A. B. must suffer the loss. 

3. A. B. draws and delivers to C. D. a check for $2 upon a printed form 

thus: "Two Dollars." C. D. writes in the word 

" hundred " and changes the figures to correspond : " Two hundred 

Dollars." The bank pays C. D. $200. This is alteration, not filling a blank. 
The loss is that of the bank, although some states say that A. B. may be 
estopped to set up the alteration if he has by his negligent manner of drawing 
the check " invited " alterations. The general rule is that the alteration destroys 
the instrument, but the Negotiable Instruments Law allows a holder in due 
course to recover upon it for the original amount, and under this law the bank 
could charge A. B.'s account with $2. 

102. Delivery. Ordinarily a negotiable instrument must be 
delivered in order to be valid. As between immediate parties, 
such as maker and payee, indorser and indorsee, this rule is abso- 
lute ; but as between a prior party, as maker, and a remote 



§103] NEGOTIATION 175 

purchaser for value without notice, a vahd deUvery by the maker 
to the payee is conclusively presumed if the instrument was 
completed by the maker, but not if it was incomplete. 

Examples: i. A. B. makes a promissory note payable to the order of 
C. D. and leaves it on his desk. C. D. takes possession of it without A. B.'s 
consent. C. D. cannot recover against A. B., because there was no delivery. 

2. In the above case C. D. indorses the note and transfers it to E. F., who 
is a holder in due course. E. F. may recover against A. B. The case would 
be the same if A. B. locked the instrument in his desk or safe and C. D. broke 
in and took it. It is especially dangerous to keep undelivered completed 
instruments payable to bearer, because any thief, by getting possession of 
such an instrument, could give good title to it. 

3. If in the above case the instrument was incomplete in some respect, and 
it was stolen, completed by filling blanks, and negotiated, the maker would 
not be liable. 

III. Negotiation 

103. Negotiation ; indorsement ; delivery. Negotiation may be 
by indorsement and delivery,, or by delivery alone, according as 
the instrument does or does not require an indorsement. 

1. Negotiation. An instrument is negotiated when it is trans- 
ferred from one person to another in such manner as to constitute 
the transferee the holder thereof. If payable to bearer, or if the 
last indorsement is in blank, it may be negotiated by delivery, 
the same as money. If payable to order, it is negotiated by the 
indorsement of the holder, followed by delivery. An indorsement 
without the words "to the order of" is not restrictive. If the 
body of the instrument is in terms to make it negotiable, this 
negotiability cannot be taken away by the mere failure to repeat 
the words of negotiability. Indorsements are written on the back of 
the instrument. If that is filled, another strip, called an " allonge," 
is attached, and the indorsements are continued upon that. 

2. Indorsement. Indorsements may be either special or in 
blank, and may be unqualified or qualified or restrictive. 

a. A special indorsement specifies the indorsee, as " Pay to 
E. F. A. B." This could not again be negotiated without E. F.'s 
indorsement. 

b. A blank indorsement specifies no indorsee. The indorser 
simply writes his name on the back of the instrument, and it then 



176 NEGOTIABLE INSTRUMENTS [Ch. IX 

becomes payable to bearer. Any holder may, however, convert 
this into a special indorsement by writing " Pay to (his name) " 
over the blank indorsement. 

c. An unqualified or unrestricted indorsement places no restric- 
tion upon the further negotiation of the instrument or upon the 
indorser's liability. The indorsements given above are unqualified 
and unrestricted. 

d. A qualified indorsement simply passes title without render- 
ing the indorser liable upon the paper. The form used for this 
purpose is "without recourse," written above the indorser's name. 
This does not impair the negotiability of the paper ; it simply 
exempts this indorser from liability upon it. 

e. A restrictive indorsement constitutes the indorsee an agent 
of the indorser, usually for the collection of the paper. The form 
commonly used is " Pay to E. F. for collection. A. B." Other 
forms are : " Pay to E. F. only. A. B." ; " Pay to the X Bank 
for deposit only." This indorsement is notice that A. B. owns the 
paper, and practically prohibits further negotiation except for collec- 
tion purposes. The indorsee may receive payment or may transfer 
to another person who is to receive payment, but there cannot sub- 
sequently be a holder in due course free from the claims of A. B. 

The indorser may waive presentment, notice, and protest by so 
specifying above his indorsement. The phrase "waiving protest" 
is ordinarily used for this purpose. This waives the conditions in 
his contract (see sect. no). 

A transfer without indorsement of paper payable to order is a 
mere assignment and not a negotiation. The transferee is entitled, 
however, to have the indorsement of the transferor, and negotia- 
tion takes effect from the time he secures it. 

The last transferee or indorsee is the holder. He may be a 
" holder in due course " or " not a holder in due course," and 
his rights may depend upon his position in this respect. 

Examples of Indorsements 

[Refer to the promissory note on page 165.] 

Blank indorsement : Robert H. Moore & Co. 

Special indorsement ; Pay to order of John Spearing. 

Robert H. Moore & Co. 



§104J NEGOTIATION i;; 

Qualified indorsement : Without recourse. 

Robert H. Moore & Co. 
or 
Pay to John Spearing, without recourse. 
Robert H. Moore & Co. 

Restrictive indorsement : Pay to John Spearing for collection. 

Robert H. Moore & Co. 

Waiving conditions : Waiving protest. 

Robert H. Moore & Co. 
or 
Pay to John Spearing, waiving pi'otest. 
Robert H. Moore & Co. 

The indorsee may indorse to another and he to another, and so on. 

Successive indorsements : Pay to John Spearing. 

Robert H. Moore & Co. 

Pay to Ralph Lear. 

John Spearing. 

Pay to Goldberg & Morton. 
Ralph Lear. 

104. Holder in due course. A holder in due course is a holder 
who takes completed and regular paper before maturity in good 
faith and for value and without notice of any defects or defenses. 
He is often called a '" bona fide holder for value without notice." 
The phrase "' holder in due course " is used in the Negotiable 
Instruments Law. In order to be a holder in due course a trans- 
feree must take the instrument under the following conditions. 

a. The instrument must be complete and regular upon its face. 
Any blank, any erasure, any irregularity, indicates that the 

paper is not issued in the usual course of business, is not in con- 
formity with business usage, and the holder is put upon inquiry 
by this fact. As to what appears upon the face of the paper, 
the rule is caveat emptor (let the buyer beware). 

b. The instrument must not be overdue. 

When the instrument is payable at a fixed time, its due date is 
certain. A transfer on the day of maturity is before the instru- 
ment is overdue. 

When an instrument is payable on demand, it is due a reason- 
able time after its issue. What is a reasonable time is a question 



178 NEGOTIABLE INSTRUMENTS [Ch. IX 

of fact to be determined by the nature of the instrument, the 
usages of trade, and the facts of the particular case. No case 
shows that more than three months can be allowed, and some 
cases have held three months to be too long; some states 
by statute specify what is to be regarded as a reasonable time in 
the case of paper payable on demand. A promissory note payable 
on demand is due without regard to intermediate negotiations, but 
a bill of exchange payable on demand, if negotiated at reason- 
able intervals, is due within a reasonable time after the last 
negotiation. 

c. The holder must take the instrument in good faith and for 
value. 

Bad faith may be gathered from circumstances, as where an 
instrument to which the maker has a good personal defense is 
transferred for a sum so out of proportion to its face value as 
to raise a suspicion of collusion. Such grossly inadequate con- 
sideration may be evidence of bad faith and is to be considered 
in deciding that question of fact. If an officer of a corporation, 
authorized to draw checks of the corporation, wrongfully makes 
a check to himself, a bank receiving this check is charged with 
notice of the wrongdoing because of the suspicious character of 
the transaction. Taking a note with an actual suspicion that there 
is some defect in the transferor's title is taking in bad faith even 
if full value be given. 

Value is any consideration sufficient to support a common-law 
contract. If the holder suffers any detriment in taking the instru- 
ment, he has furnished value. The disputed question has been 
whether the taking by C of a negotiable instrument made by A, 
and owned by B, as collateral security for an antecedent debt due 
from B to C constitutes C a holder in due course. New York 
and some other states have held that it does not, while the United 
States Supreme Court and the courts of many states have held 
that it does. The Negotiable Instruments Law sought to adopt the 
rule that it does, but the language used was held by a New York 
court ineffective for this purpose. It is argued that C suffers no 
very real detriment in taking the instrument" merely as security 
for an antecedent debt. If C took it as security for a contem- 
poraneous debt, or in payment of a past debt, or as security for 



§105] NEGOTIATION 179 

a binding extension of time upon the old debt, there would clearly 
be a detriment to C sufficient to constitute value. 

Example i. "New York City, Jan. 5, 191 6. Three months after date I 
promise to pay to the order of B one hundred dollars, value received. A." On 
February 10 B indorses and delivers the above instrument to C as collateral 
security for a prior debt which he owed to C. When the note is due, C sues A 
upon it and A sets up that B procured it by fraud. If C is a holder for value (and 
without notice of the fraud), this defense is not good against him ; otherwise 
it is good. Is he a holder for value ? In New York and in several other states 
it is held that he is not, while in the federal courts and in many states it is 
held that he is. But if on February i o C took the note in payment of a past 
debt, or as security for a debt then contracted, he would undoubtedly be a 
holder for value. 

d. The holder must not at the time of the negotiation to him 
have notice of any infirmity in the instrument or defect in the 
title of his transferor. 

Notice in the law of negotiable instruments means actual knowl- 
edge or knowledge of such facts as to constitute bad faith. It is 
the state of the holder's mind that is important. Negligence, even 
gross negligence, is not notice, although it may be evidence of bad 
faith. The question is not. Would an ordinarily prudent man in 
like circumstances have had notice or have had a suspicion of some 
defect } but. Did this holder have notice or have a suspicion } 

The title of the transferor is defective when he obtains the 
instrument or any signature thereto by fraud, duress, or other 
unlawful means, or for an illegal consideration, or negotiates it 
in breach of faith or under circumstances amounting to fraud. 

e. A holder who derives title through a holder in due course is 
himself a holder in due course, even though he does not comply 
with the above requirements. 

Example 2. B procures from C a negotiable instrument by fraud. B nego- 
tiates it to D, who is a holder in due course. D negotiates it to E, who has 
knowledge of the fraud (but is not a party to it). E is a holder in due course 
with all the rights of D. This rule protects D, the holder in due course, who 
otherwise might have the instrument locked up in his hands after knowledge 
of the fraud became general. But if D negotiated it back to B, the latter 
would not be a holder in due course, because he was a party to the fraud. 

105. Rights of holder in due course. The following rules 
govern the rights of a holder in due course. 



i8o NEGOTIABLE INSTRUMENTS [Ch. IX 

a. The holder in due course holds the instrument free from all 
personal defenses, and may enforce payment for the full amount 
against all parties liable upon it; but he does not hold it free 
from the absolute defenses. 

(i) Personal defenses are fraud, duress, illegality not made 
an absolute defense by statute, want of consideration, release of 
maker or other party, want of title in the transferor, etc. 

Examples : i. B purloins a negotiable instrument payable to bearer and 
negotiates it to C, a holder in due course. C may recover upon it and may 
hold it even against the true owner. It is in the latter respect on the same 
basis as stolen money. 

2. B induces A by a false representation to buy a horse, and A gives B his 
promissory note for $ioo. B negotiates the note to C, a holder in due course. 
C may recover the full amount. A cannot set up B's fraud against C. 

3. B gets A to make a promissory note without any consideration whatever. 
B negotiates it to C, a holder for value. C may recover from A upon it. 

4. A anticipates the due date of his note and pays B in full, leaving the 
note in B's hands. Before it is due B negotiates it to C, a holder in due 
course. A must pay it again to C. 

(2) Absolute defenses are forgery, alteration, infancy, illegality 
when made an absolute defense by statute, want of execution and 
delivery as and for a negotiable instrument, etc. 

Examples .• 5. A gives to B a negotiable instrument for a gambling debt. 
B negotiates it to C, a holder in due course. C cannot recover upon it in 
those states which by statute have made instruments given for gambling debts 
void. (The Negotiable Instruments Law has sought to change the rule as to 
such absolute defenses as statutory illegality in gambling, usury, etc., and some 
courts have given effect to it as substantially repealing the statutes making 
such instruments void ; but at present it is unsafe to say that this will be the 
general result.) 

6. A is asked by B to sign a lease. By a trick B substitutes a negotiable 
promissory note, which A signs, thinking it is the lease. B negotiates the note 
to C, a holder in due course. C cannot recover upon it unless he shows that 
A was so negligent as to work an estoppel. The defense is absolute unless A 
is estopped by his own negligence to set it up against an innocent holder. 
There was no execution and delivery as and for a negotiable note. 

7. A gives to B a note for %\o. B alters it to read $100 and negotiates 
it to C, a holder in due course. C cannot recover upon it. Alteration is an 
absolute defense. (The Negotiable Instruments Law has now provided that 
C may recover upon it according to its original tenor, namely, to the extent 
of $10.) 



§§106,107] MAKER'S AND ACCEPTOR'S CONTRACT i8i 

b. Every holder is deemed presumptively to be a holder in due 
course. But when fraud, duress, illegality, or defective title has 
been proved by way of defense, the holder must then show by 
proof that he gave value, and must show the circumstances under 
which he took the instrument. 

Example 8. C, the holder, brings an action against A, the maker. C proves 
A's signature, introduces the note in evidence, and rests his case. This is all 
the proof necessary, as there is presumption of consideration and presumption 
that C is a holder in due course. But if A now proves that the note was 
obtained by B by fraud or for an illegal consideration, then C must prove the 
value he gave and establish good faith and want of notice by proving the 
circumstances under which he took the note. 

IV. Maker s and Acceptor's Contract 

106. Maker's contract on a promissory note. The maker of a 
promissory note contracts that he will pay it absolutely. No step 
is necessary to fix the maker's liability. The holder need not for 
this purpose seek the maker or present the note to him. If it 
is not paid at maturity, the holder may at once bring an action 
against the maker and recover from him. 

Presentment to the maker at maturity is necessary to fix the 
liability of an indorser but not to fix the liability of the maker 
himself. 

107. Acceptor's contract on a bill of exchange. An acceptor's 
contract is absolute. It may be upon the bill or in a separate 
instrument. Only the drawee can accept. 

I. The contract. When the drawee of a bill of exchange ac- 
cepts it by writing his name, usually with the word "" Accepted," 
across the face of the bill, he thereby undertakes that he will 
pay the bill according to the terms of his acceptance. He also 
admits that the drawer's signature is genuine and cannot afterwards 
dispute that point. An acceptance may be general or qualified. 

a. If the acceptance is general and unqualified, the acceptor 
agrees to pay according to the tenor of the bill ; that is, he assents 
fully to the order of the drawee. He is then liable like the maker 
of a promissory note. 

b. If the acceptance is qualified, the acceptor changes the tenor 
of the bill, that is, does not assent fully to the order of the drawer. 



1 82 NEGOTIABLE INSTRUMENTS [Ch. IX 

An acceptance is qualified if it makes payment depend upon 
any condition, or is for only a part of the amount specified, or 
changes the time of payment, or positively changes the place of 
payment. Changing the place of payment does not necessarily 
qualify the acceptance so long as the new place is not made the 
exclusive place of payment. "An acceptance to pay at a partic- 
ular place is a general acceptance unless it expressly states that 
the bill is to be paid there only and not elsewhere." The holder 
may refuse to take a qualified acceptance and may protest the bill 
for nonacceptance. If he does take it, he releases the drawer and 
prior indorsers, unless they also assent to it or after due notice of 
it fail to dissent. 

E.a,npies: * 

I500 New York, Feb. 27, 191 5 

Thirty days after sight pay to the order of Foster McKinnon five hundred 
dollars, and charge to the account of 

Albert Howard 
To John Drury, 
Chicago 

1. "Accepted, March 7. John Drury." This is a general acceptance. 
The date of acceptance should be added to fix the due date, since the bill is 
payable not thirty days after date, but thirty days after sight. It is due thirty 
days from March 7, namely, on April 6. 

2. "Accepted, March 7, 1915, payable at the Franklin National Bank. 
John Drury." This is still a general acceptance, although it specifies a place 
of payment and to that extent qualifies the bill. Custom has permitted this. 

3. "Accepted, March 7, 1915; payable at the Franklin National Bank 
only. John Drury." This is qualified. It positively changes the place of 
payment, which by the tenor of the bill would be at the drawee's place of 
business. 

4. "Accepted, March 7, 191 5, when in funds. John Drury." This is 
qualified. There is a condition which may never be fulfilled. 

S- "Accepted, March 7, 1915, for $350. John Drury." This is qualified. 
It changes the amount. 

6. "Accepted, March 7, 1915, payable April 16, 1915. John Drury." 
This is qualified. It changes the time of payment from thirty days after sight 
to forty days after sight. 

If the holder takes acceptance 3, 4, 5, or 6, he releases the drawer from 
liability unless, after due notice of the kind of acceptance, the drawer fails 
within a reasonable time to dissent. If the holder will not take these accept- 
ances, he must protest the bill and give the drawer due notice of dishonor. 




ItLE Battery Park ^atioisal Bank 

or- NEW VORK 

No. 7y^7 AMniiMT ^/^?»g£- EXPIBES //> JZ**.^ . /f/£ 





















urni^^^^^^e^ 



^-^.z^.,^^^ ^ ^^ C^ e<-^( J 



AT LEAST TWO Blt-LS OF LADING MUST BE ISSUED - OF WHICH, ONE IS TO BE FORWARDED 
DIRECT TO THE BATTERY PARK NATIONAL BANK OF NEW YORK BY THE VESSEL CARRYING THE GOODS. 
OR BY THE FIRST DIRECT MAIL THEREAFTER; THE OTHER BILL OF LADING tS TO ACCOMPANY THE DRAFT. 



183 



1 84 NEGOTIABLE INSTRUMENTS [Ch. ix 

2. Acceptance by separate writing. Letter of credit. The 
holder is entitled to have the drawee accept upon the bill itself, 
and may treat the bill as dishonored if he refuses to do so. But 
an acceptance on a separate sheet of paper is perfectly valid and 
binds the acceptor in favor of the holder and all who afterwards 
take the bill on the strength of such acceptance. Moreover, there 
may be a promise in writing to accept a bill or bills thereafter to 
be drawn, and this binds the acceptor in favor of all who take the 
bill or bills for value upon the faith of such a written promise. 
A letter of credit issued to travelers in order to eriable them to 
obtain money in foreign cities is merely a banker's written promise 
to accept bills drawn upon him up to a certain amount. 

Example. B, who is going abroad, buys of a New York banker a letter 
of credit for £,'2.00. The letter names B, often describes him, contains his 
signature, and says to foreign bankers that the New York bank will accept 
bills drawn upon it by B up to ^200 if each bill refers to the New York 
bank's " letter of credit No. — ." Each draft so cashed by a foreign bank is 
entered upon the letter of. credit, so that the balance undrawn is always a 
simple matter of computation. The foreign banker compares B's signature on 
the draft with the signature on the letter, and satisfies himself in all reasonable 
ways that the person drawing the bill is the person named in the letter. He 
then discounts the bill and forwards it to New York (or it may be, by arrange- 
ment specified in the bill, to London), and the New York banker is bound to 
pay it, because he has promised in advance to do so. It is customary for New 
York banks to agree that these bills shall be payable at some London bank, 
since London is the great financial clearing house for the whole world. 

3. Who may accept. No one but the drawee named in the bill 
can accept it. But there are two exceptions to this rule, {a) A bill 
may refer to a secondary person to whom resort shall be had in 
case the bill is dishonored by the first drawee. Such a person is 
called a "referee in case of need." The usual form is to write below 
the drawee's name, " In case of need apply to G. H." It is in the 
option of the holder to resort to the secondary person, (p) When 
the bill has been dishonored by the drawee, any person can accept 
it for the honor of the drawer or a prior indorser. This acceptance 
is called ""acceptance snpra protest for honor." Such acceptor be- 
comes liable to the holder upon condition that the bill be again 
presented to the drawee at maturity for payment, and if not paid, 
that it be protested and due notice given to the acceptor for honor. 



§108] ^ MAKER'S AND ACCEPTOR'S CONTRACT 185 

108. Presentment of bill of exchange for acceptance. Present- 
ment for acceptance is for the purpose of ascertaining whether 
the drawee intends to pay the bill when it is due. Presentment 
may be necessary or it may be optional with the holder. 

1. Whe7t necessary. When a bill is payable after sight, it must 
be presented for acceptance in order to fix its maturity. A failure 
so to present it within a reasonable time after it is issued, or after 
its last negotiation, would discharge the drawer and the indorsers. 
A bill payable at a day certain need not be presented for accept- 
ance ; it is enough to present it for payment when that day arrives. 
Such a bill may, however, be presented for acceptance before its 
maturity, if the holder wishes to do so. The drawee is allowed 
twenty-four hours to decide whether to accept ; if he refuses to 
return the bill thereafter, he is deemed to have accepted. 

2. How and when. Presentment to the drawee for acceptance 
must be by or on behalf of the holder at a reasonable hour of a 
business day. Presentment cannot be on holidays ; if Saturday is 
not otherwise a holiday, presentment for acceptance (but not for 
payment) may be made before twelve o'clock noon of that day. 
Presentment of a bill naming two or more drawees must be 
made to all, unless they are partners, when presentment to one is 
sufficient. Presentment is excused if the drawee is dead or has 
absconded, or if after the exercise of reasonable diligence he 
cannot be found. 

3. Refusal to accept. If the drawee refuses to accept the bill, 
or if presentment is excused, the bill is said to be dishonored. 
In such case the holder must give due notice of the fact to the 
drawer and indorsers, in order to hold them liable on the instru- 
ment ; if he fails to do so, they are discharged. If the bill is a 
foreign bill, the holder must also have it protested, that is, pre- 
sented by a notary public and certified by him as duly presented 
and dishonored. 

4. Effect of acceptance. If the drawee accepts the bill, the 
holder retains it until maturity or negotiates it, and then he or 
the new holder presents it again for payment. If it is not then 
paid, the bill is dishonored and must be protested and due notice 
given to the drawer and indorsers. A failure to take these steps 
discharges the drawer and prior indorsers. 



1 86 NEGOTIABLE INSTRUMENTS [Ch. IX 

V. Drawer's and Indorser's Contract 

109. Drawer's contract on a bill of exchange. The drawer's 
contract is conditional. He undertakes that he will pay the bill 
on these conditions : {a) that it be duly presented to the drawee 
for acceptance or payment, as the case may be ; {b) if it be dis- 
honored, that due notice of that fact be given to him ; (c) if a 
foreign bill be dishonored, that it be also duly protested. 

These conditions are strict, and in order to hold a drawer 
they must be strictly complied with unless a recognized excuse 
be shown for not doing so. The steps necessary to fulfill these 
conditions are treated in sects. iii-i\^ post. 

110. Indorser's contract on a bill or note. The indorser's con- 
tract is both a contract of assurance of payment and a contract 
of warranty. One who negotiates without indorsement also 
gives certain implied warranties. 

1. Contract to pay. An indorser by an unqualified indorse- 
ment contracts that he will pay the bill or note upon these con- 
ditions : (a) that it be duly presented to the acceptor or maker 
for payment or, if necessary, to the drawee for acceptance ; 
(b) if it be dishonored, that he be given due notice of that fact ; 
{c) if it be a foreign bill, that it be duly protested. A qualified 
indorser (" without recourse ") does not undertake any contract 
to pay, but he does undertake a contract of warranty. 

2. Contract of warranty. The indorser in transferring nego- 
tiable paper also impliedly warrants {a) that the instrument is 
genuine and in all respects what it purports to be ; {b) that he 
has good title to it ; (c) that all prior parties had capacity to 
contract ; {d) that the instrument at the time of his indorsement 
is valid and subsisting. An indorser by qualified indorsement, or 
a transferor by delivery alone, impliedly makes the same or sub- 
stantially the same warranties. The sale of a negotiable instru- 
ment is in some respects like the sale of a chattel and has 
warranties accompanying the sale. 

Examples : i . B by delivery without any indorsement sells to C a note 
of A payable to bearer. Unknown to either party, A's name is forged. C may 
maintain an action against B for breach of the implied warranty of genuine- 
ness. The same result would follow if B had indorsed " without recourse " or 



§U0] DRAWER'S AND INDORSER'S CONTRACT 187 

had made an unqualified indorsement. In the latter case, however, he would 
have been sued upon his contract to pay. 

2. In the above case, instead of forgery, A pleads infancy and escapes 
liability. B is liable to C for breach of the warranty that prior parties had 
capacity to contract. So also if A pleads that the note was given for a 
gambling debt and thus escapes liability, B is liable for breach of the war- 
ranty that it is valid. The Negotiable Instruments Law, however, makes a 
seller by delivery or by qualified indorsement liable in such case only if he 
knows the instrument is invalid. 

3. Order of indorsers liability. If there are several indorsers 
upon a negotiable instrument, they are, as among themselves, 
presumptively liable in the order in which they indorse ; but it 
may be shown by proof that they agreed otherwise. 

Examples : 3. A note made by X payable to A is indorsed A, B, C, D, 
and is in the hands of E. E presents the note at maturity to X, who refuses 
payment, and E notifies each indorser. E may sue any one of them. Sup- 
pose he recovers from C. C may then recover from either A or B, but not 
from D, because, had D paid, he could have recovered from the prior indorsers, 
of whom C is one. If C recovers from B, B may then recover from A. The 
only recourse of A is against X, the maker. 

4. If A, B, C, and D are shown by proof to have agreed to become joint 
indorsers, then, if C paid E, C could recover one fourth of the payment against 
A, B, and D respectively. 

4. Irregular indorser. An irregular indorser is one who 
indorses before the payee, and generally to lend his credit to 
the maker, although it may be to lend his credit to the payee. 
If an instrument is made by X payable to the order of A. B., 
we expect to see A. B.'s indorsement first in the list ; if we find 
E. F.'s first, we call E. F. an irregular indorser. Under the 
Negotiable Instruments Law the rule is that if E. F. indorses 
in blank before delivery to A. B., he is liable to A. B. as 
indorser ; but if he indorses to accommodate A. B., he is not 
liable to A. B., although he is liable to subsequent holders. Some 
states hold E. F. a comaker, and some hold him a guarantor 
for the maker ; but the prevailing rule is that stated. 

5. Accommodation indorser. An accommodation indorser is 
one who indorses in order to lend his credit to another party 
to the instrument. The simplest case is where CD. wishes to 
borrow money at a bank and asks A. B. to lend his credit. In 
such case C. D. makes a promissory note payable to A. B.'s 



1 88 NEGOTIABLE INSTRUMENTS [Ch. IX 

order, A. B. indorses it in blank, and C. D. discounts it at the 
bank. Had A. B. been the ordinary payee, he would have owned 
the note and discounted it himself. Suppose A. B. had owned 
it, but the bank would not discount it on A. B.'s and C. D.'s 
credit. A. B. asks E. F. to lend his credit. A. B. indorses the 
note in blank, E. F. then indorses it in blank, and A. B. dis- 
counts. E. F. is the accommodation indorser for A. B., the 
payee. If E. F.'s signature appears before that of A. B., he is 
called an '" irregular indorser." 

6. Guarantor. A guarantor is one who writes a guaranty 
upon the back of a negotiable instrument, instead of an ordi- 
nary indorsement. His contract is to pay if the maker or other 
prior party does not, without any condition as to presentment 
or notice. There has been some question whether such a guar- 
anty is negotiable, that is, whether it will pass to new holders 
upon the negotiation of the paper. It is generally held not to 
be negotiable ; but when a negotiable instrument with a general 
guaranty written upon it is negotiated, there is also an implied 
assignment of the guaranty to the new holder. 

Example 5. X makes a negotiable note payable to the order of A. B., 
who writes upon the back, " For value received, I hereby guaranty the pay- 
ment of the within note. A. B.," and delivers the note to C. D. The latter 
indorses it, " Pay to E. F. C. D.," and delivers it to E. F. At maturity 
E. F. presents it to X, who refuses payment. No notice is given to A. B. 
Some jurisdictions hold that the guaranty passed by implied assignment 
with the negotiation of the note to E. F., and E. F. may recover upon it 
as assignee of C. D., and no notice to A. B. is necessary. Other jurisdictions 
hold that the guaranty was to C. D. and did not pass to E. F. upon negotia- 
tion. The better way for C. D. is to take an indorsement by A. B. and avoid 
these questions. If C. D. wishes to escape the risks of presentment and 
notice, he should have A. B. indorse " waiving protest." 

111. Presentment for payment. The first condition in the 
drawer's and the indorser's contract is that there shall be due 
presentment upon the maker or acceptor for payment. Unless 
this condition is met, the drawer or indorser will be discharged 
from all liability except in case he waives the condition or 
some allowable excuse be shown for not fulfilling it. We have 
therefore to consider how and when presentment is to be made 
in order to fulfill this condition. 



§111] DRAWER'S AND INDORSER'S CONTRACT 189 

1 . Time of presentment. If the instrument is payable at a 
fixed time, presentment must be made on the day fixed. 1 If 
this falls on Sunday or a holiday the instrument is payable 
on the next succeeding business day. If the due day falls on 
Saturday the Negotiable Instruments Law provides that the 
instrument is to be presented the next Monday, unless that is 
a holiday. 

If the instrument is payable on demand, presentment must 
be made within a reasonable time after its issue or, in case of 
bills (not checks), a reasonable time after the last negotiation. 
Demand instruments may be presented on Saturday up to 
twelve o'clock noon, unless it happens to be wholly a holiday. 

Presentment must be at a reasonable hour on a business day. 
This ordinarily means business hours, but presentment at a 
residence at a later hour may be justified by circumstances. 

In computing time a month is a calendar month. Thus, a note dated 
January 30, due one month from date, is due February 28 or, in leap year, 
February 29. If dated February 28 and due in one month, it would be due 
on March 28. In computing days the actual time is taken. A note dated 
October 13 and due in ninety days is due January 11. If the due date so fixed 
is a holiday, the next business day is taken as the due date. The day of the 
date is excluded in both cases. A note dated January i and due one month 
from date is not due January 31, but February i. A note dated January i and 
due thirty days from date is due January 31, not January 30. 

2. Place of presentment. Where a place of payment is speci- 
fied in the instrument, presentment must be at that place. Where 
no place is specified, the place of business of the maker or accep- 
tor is understood or, failing that, his residence. If neither can 
be found, then presentment may be made to the maker or the 
acceptor wherever he may be, or at his last-known place of busi- 
ness or residence. 

Example i. A note is made " payable at the X Bank.'' Presentment must 
be made at the bank. Presentment at the maker's place of business would be 
ineffective. The note is equivalent to an order by the maker to the bank 
to pay the same and charge against his deposit. If the note is deposited in 
the bank by the holder and is there on the day of maturity, presentment 
is complete. 

1 If days of grace are allowed, three days must be added before the present- 
ment can be made. We shall assume that days of grace are abolished. 



igo NEGOTIABLE INSTRUMENTS [Ch. ix 

3. Mode of presentment. The instrument must be exhibited 
to the maker or acceptor (or drawee) and payment demanded ; if 
it is paid, it must be delivered up. If it is secured by collateral, 
this also must be delivered up. 

4. To whom presented. Presentment of a note is made to 
the maker or, if he is absent from the place or inaccessible, 
to any person found in charge of his place of business. Pre- 
sentment of a bill is made to the drawee for acceptance or 
to the acceptor for payment in the same way. If the maker 
or acceptor is dead, presentment may be made to his personal 
representative (executor or administrator). If an instrument is 
made by partners, presentment to one is sufficient ; but if 
made by joint parties who are not partners, presentment must 
be to all of them before the instrument can be deemed to be 
dishonored. 

5. Ex cits e for delay. If circumstances beyond the control of the 
holder cause a delay in presentment beyond the day of maturity, 
this delay will be excused if presentment is made with reasonable 
diligence after the cause of delay ceases to operate. 

Example 2. H in New York holds a note on M payable in Chicago. He 
forwards it by mail in due season to his agent in Chicago. The mail train is 
wrecked and the mail is delayed until the day of maturity is past. The note 
arrives in Chicago two days after maturity and is promptly presented. The 
presentment is sufficient, as the delay is excused. 

6. Presentment dispensed with. If after due diligence the 
holder cannot make any presentment upon the maker or acceptor, 
presentment is dispensed with. Such would be the case if the 
maker could not be found in any place of business or residence. 
Due diligence requires that the holder make proper inquiries 
as to the residence of the maker. 

7. Waiver of presentment. The indorser may waive present- 
ment. This is often done by writing above his indorsement the 
words "' waiving presentment " or " waiving protest." But the 
waiver may be oral and may be made at any time. A promise 
to pay after he is discharged for nonpresentment, if made with 
knowledge of the fact, will constitute a waiver. 

8. Effect of dishonor. If the instrument, after presentment to 
the maker or acceptor (or drawee), is dishonored by nonpayment 



§112] DRAWER'S AND INDORSER'S CONTRACT 191 

(or nonacceptance), the first condition in the drawer's or indorser's 
contract has been fulfilled. It then remains for the holder to take 
the next step and give due notice of the fact and, in case of a 
foreign bill, have due protest made. 

9. Payment for honor. Where a bill has been protested for non- 
payment, any person may intervene and pay it supra protest for 
the honor of any person liable thereon. This must be attested by 
a notarial act of honor founded upon the declaration of the payer 
as to his intention to pay the bill for the honor of the person 
specified. The payer then pays the holder and takes the bill. All 
parties subsequent to the one for whose honor he paid are dis- 
charged, but that person and all prior persons are liable to the 
payer for honor. 

112. Notice of dishonor. The second condition in the drawer's 
or indorser's contract is that due notice shall be given him that 
the primary party has dishonored the instrument by refusing to 
pay it, or it may be, in the case of a bill, by refusing to accept it. 
Failure to give such notice will discharge the drawer or indorser 
unless he has waived notice or unless some allowable excuse is 
shown for not giving it. We must therefore consider what con- 
stitutes due notice. 

I. By whom given. The holder may give the notice, or his 
agent may give it, or a notary employed by him may give it. 
A notary is employed to present the instrument whenever it is 
intended to protest it, and the notary may give the required 
notice also. 

In addition, any party who, by getting notice, is himself liable 
to the holder may give notice to a prior party who would be 
liable to him. 

Example I. X is the maker, A, B, C, D are indorsers, and H is holder, 
of a note. H presents the note to X, who refuses payment. H gives notice 
of dishonor to C ; C gives notice of dishonor to B ; and B gives notice to A. 
The liability of A, B, and C is fixed. But C could not give notice to D, be- 
cause, if C paid H, C could not recover from D. The notice by each indorser 
to his prior indorser inures to the benefit of the holder, who could sue A or 
B or C as he might choose. Of course H might have given notice to all four 
had he wished. The holder may choose which of the indorsers he will give 
notice to ; each indorser so notified should make sure that his prior indorsers 
have also been notified or should notify them himself. 



192 NEGOTIABLE INSTRUMENTS [Ch. ix 

2. Form. The notice may be written or oral. It is sufficient 
if it identifies the instrument and indicates that it has been dis- 
honored by nonacceptance or nonpayment. The notice may be 
deUvered personally or it may be sent by mail. When notice of 
dishonor is in due time properly addressed and stamped and 
deposited in the post office or regular letter box, the sender is 
deemed to have given due notice, notwithstanding any miscarriage 
in the mails. 

3. Time allowed. If the person giving and the person receiv- 
ing the notice reside in the same place, personal notice must be 
given at a reasonable hour of the day of dishonor or of the day 
following, and a notice by mail must be deposited in the post 
office in time to reach the addressee in the usual course not later 
than the day following. 

If the person giving and the person receiving the notice reside 
in different places, the notice should be deposited in the post 
office in time to go out by a mail not later than the day follow- 
ing the day of dishonor or, if there be no mail at a convenient 
hour of that day, by the next mail thereafter. Notice in this case 
might also be personal, but it must be so given as to reach the 
drawer or indorser as soon as if sent by mail. 

Where the holder gives notice to an indorser, the indorser has, 
after receipt of such notice, the same time for giving notice to a 
prior indorser. 

Example 2. The holder, H, resides in New York ; the third indorser, C, 
resides in Chicago; the second indorser, B, in San Francisco; the first indorser, 
A, in New Yorlc. H on April i presents the note and it is dishonored; on 
April 2 H mails notice to C which is received by him in Chicago on April 4 : 
on April 5 C mails notice to B which is received by him in San Francisco 
on April 9; on April 10 B mails notice to A which is received by him in 
New York on April 16. Each nodce is duly given, and the liability of all 
indorsers is fixed. If H had notified A, the notice would have been received 
by A on April 2. 

4. Place. If the drawer or indorser has added an address to 
his signature, notice of dishonor must be sent to that address. If 
he has not added an address, then notice must be sent either 
to the post office where he is accustomed to receive his letters or 
to the post office nearest to his place of residence. If he lives in 
one place and has a place of business in another, notice may be 



§112J DRA\^'ER'S AND INDORSER'S COKTRACT 193 

sent to either place. If he is sojourning in another place, notice 
may be sent to that place. If notice is actually received within 
the time allowed, it will be good, though it may have been sent 
to the wrong place. 

Examples : 3. The indorser lives in Bostoa but is a senator and sojourn- 
ing at Washington. Notice may be sent either to Boston or to Washington. 
A mere temporary, indefinite visit may not amount to sojourning. 

4. The indorser lives in Montclair, New Jersey, and has a place of busi- 
ness in New York City. Notice may be sent to either place. 

5. The indorser has a city residence in New York City and a summer resi- 
dence at Stockbridge, Massachusetts. Notice should ordinarily be sent to New 
York City, but may be sent to Stockbridge if the indorser is sojourning there. 

5. Waiver of notice. Notice may be waived by drawer or in- 
dorser. It may be waived orally or in writing, and either before 
or after the time for it has arrived. The usual method is to write 
"" Waiving notice " or " Waiving protest " above the indorsement. 
The phrase " Waiving protest " is construed to cover all steps, — 
presentment, notice, and protest, — but "Waiving notice" does not 
dispense with presentment or protest. The indorsement ""\^'aiving 
protest " makes the indorser essentially a guarantor. 

6. When notice is excused. Notice is excused when, after the 
exercise of due diligence, it cannot be given or when, in the case 
of notice by mail, it does not reach the addressee. Due diligence 
requires that suitable inquiries should be made to ascertain the 
indorser's address. Merely looking in a directory is not enough. 
Notice need not be given to a drawer who has no right to expect 
that the drawee would accept or pay the bill, as where he draws 
upon one who has no funds of his and has made no agreement, 
expressed or implied, to honor his bills. Notice need not be 
given to an indorser for whose accommodation the instrument 
was made or accepted. 

Exa7nple 6. A promissory note is made by X payable to the order of B 
and is indorsed by B and discounted by B. X signed the note as accommo- 
dation to B merely, that is, loaned B his credit to raise money. In such a case 
B is not entitled to notice of nonpayment, because it is B's duty to provide for 
payment, and not X's. 

7. Effect of failure to give notice. If a bill is presented for 
acceptance, and acceptance is refused, a failure to give the drawer 



194 NEGOTIABLE INSTRUMENTS [Ch. ix 

and indorsers (if any) notice of this fact will discharge the drawer and 
indorsers as to this holder. The bill, however, is not yet due, and 
it is therefore possible for the holder to negotiate it to a holder in 
due course who does not know that it has been dishonored ; as to 
such a holder the drawer and indorsers are not discharged. 

If a bill or note is presented for payment and is dishonored, 
the failure to give notice will discharge the drawer or indorsers as 
to this holder and all subsequent holders, because as the bill or note 
is now due there can be no negotiation to a holder in due course, 
unless, indeed, it be at a later hour on the same day of maturity. 

If a bill has been dishonored by nonacceptance and due notice 
given, and it is afterwards presented for payment and dishonored, 
no further notice need be given, unless the bill was in the mean- 
time accepted. 

If a bill has been dishonored by nonacceptance and no notice 
given, and it is afterwards negotiated to a holder in due course, 
the latter must present it for acceptance or payment and upon 
dishonor give due notice. 

113. Protest. Protest is a solemn declaration by a notary in 
behalf of the holder against any loss to be sustained by the holder 
in consequence of the nonacceptance or nonpayment of a bill 
or note. The word " protest " signifies " to testify before," and a 
protest is therefore testimony before or in the presence of the 
notary that the instrument has been presented, demand for accept- 
ance or payment made, such demand refused, and the instrument 
dishonored, followed by a formal declaration, or "" protest," that 
any loss arising therefrom shall be borne by the drawer or in- 
dorsers and not by the holder. In practice, the notary must him- 
self make the presentment and demand, in order that he may have 
this evidence of dishonor ; he cannot, unless statutes so provide, 
take the word of the holder or any other person as to these facts, 
or protest an instrument on hearsay evidence. In case a notary 
cannot be found to make such protest, it may be made by any 
respectable citizen of the place where the dishonor occurs, in the 
presence of two or more credible witnesses. 

Protest must be made in the case of foreign bills of exchange, 
for in such cases the notary's certificate is the only admissible 
evidence of presentment, demand, and dishonor. Protest may 



§113] DRAWER'S AND INDORSER'S CONTRACT 195 

be made in the case of other negotiable instruments, and the 
notary's certificate used as evidence, but protest is not necessary, 
and the fact of dishonor may be proved by the oral evidence of the 
person making presentment and demand. It is now usual to protest 
all negotiable instruments, particularly those payable at a bank. In 
most banks some clerk is a notary, and if at the close of business 
hours his examination of the books shows that the maker of an 
instrument has not funds there to pay it, he protests the instrument. 

Certificate of Protest 



XDlntteb States of Hmerfca, 

) 08. 

State of Hew Jfforfi ) 

BE IT KNOWN, Thatontke. A'^-rfi, day of Q^\A „ 

in the year of our Lord, One Thousand Nine hundred . .■^irM^SS^^^.-.z.....^ _ , at the request of 

VilStTHa.tionalBankotlthacSiiN.'V., /,£EN/AM/NL.yO/fNSON,A'olary Public duly Com- 
missioned and Sworn, dwelling in the City of ITHACA, County of Tompkins, and State aforesaid, did 

present the original. _..1fl,*te. of %-trw»ILL, TU^l-tco^^vv/ for 

fe?<r-jK**?r^Nf4T,.,,.r-^ — r: : : : rC:~. ~.. -. . : Dollars, . 

hereunto annexed, at the xtv^^it IxAA- UWv \j^Xk^A/0<iy . _ where the same is payable, 

and demanded .... ~^CiAK'y^^>'^JtnJC , which was refused. 

WHERBUPON, /, the said Notary, at the request aforesaid, did protest, and by these presents 

do publicly and solemnly protest, as viell against the Maker and Endorser of the said ....^ys^^^r^. 

™-H„. ,™.„ as against all others Tvhom it doth or may concern, for exchange or re- 
exchange, and all costs, charges, damages and interest, already.ineurred, and to be incurred for want of 
_^fclA*fTV^J?'V,^- of the same. 

And I, -the said Notary, do hereby certify, that on the same day and year above written, due 
notices of the foregoing Protest were put into the Post Office at Ithaca, postage paid, or served as 
folltnos : 
Notice .. Ol4*f^»^ (AHWX<»/».^x».eryy dircclrf _..»^*^AA><l^, '^\- - 



d. .„ 'kh^o.Jk MitMTK/ do .. 7 aea^v^/ M-., "(S^IA %-^. 

do ..-!hiA«u ?/y<>y:>vcv« ^ . do _ cj ^44m^ ^,, 3i^-«-m^, Xi.y.. 

Each of the above named places being the rejiuted place of residence of the person to whom the 
notice was directed. 

IN WITNESS WHEREOF, / have hereunto subscribed my name and 
aj^ixed my Seal of Office. 



)7Wt«^»^( ____C&S<vvL,,..vC VoW/aox/.. 



Notary Public. 



196 NEGOTIABLE INSTRUMENTS [Ch. ix 

The notary also usually gives the necessary notice of dishonor 
to the drawer or indorsers, but this may be done by the holder or 
by any other agent of his. If the notary gives such notices, he 
may include a statement to that effect in his certificate. Practice 
in that respect varies. If the statement that notices have been 
duly given is not included in the certificate, that fact would have 
to be proved at a trial by the oral evidence of the notary or other 
person who gave them. 

When protest has been made, the notary prepares a certificate 
under his hand and seal setting forth (a) the time and place of 
presentment ; (i?) the fact that presentment was made and the 
manner thereof ; (c) the demand made and the answer given, or 
the fact that the drawee, acceptor, or maker could not be found ; 
(d) the cause or reason for protesting the instrument. This certifi- 
cate is annexed to the instrument protested, or to a copy thereof, 
and is handed to the holder of the instrument as his evidence of 
presentment, demand, and dishonor. It may also, of course, contain 
evidence that notices were duly sent to the drawer or indorsers. 

Protested Promissory Note 



^^^ 



5^- 



4Z-tt>^. -ST /.9/i 






/FIRST NA.TIO] 



^FIRST NATIONAL BANK. ITHACA. N.Y: 




The protest must be at the place where the instrument is dis- 
honored and on the day of the dishonor. But it is not essential 
that the certificate should be made on that day. Protest itself 
may be sufficiently indicated by a "noting" on the bill or note 
in very brief form, thus : " Payment demanded and refused, 
27 April, 1915. B. L. J. Fees 75 (^." This means that on that 
date the notary whose initials are written made due presentment 
and demand, that the instrument was dishonored and protested, 



§113] DRAWER'S AND INDORSER'S CONTRACT 197 

and that the notary's charges are 75 cents. The notary may at 
any subsequent date "extend" the protest by making out his 
formal certificate. 

The costs of protest are added to the amount to be paid by any 
party hable on the instrument. These fees are fixed by statute 
and include so much for protest and so much for each notice of 
dishonor. There is also added interest from the time the instru- 
ment was due until the drawer or prior party pays it to the holder. 

Notice of Dishonor 



Ithaoa, N. Y. (Xh^.:..^'1. 1915^ 

SIR- 
TAKE .NIOTICE, that a .lM>ter. 

.yy^ygud^. hy..!^^L!o:}ycJ^.*7)/i^^ 

For $:5j!rP..'=^ _ 

Dat.d.Aft<^..^7,../.J/5- 

Payable ::i*^^4^U...?*V<»*^*^. atter date, 

at !M*<L..,yA;^?*V!... National Bank, of Ithaca, 

and endorsed by you, was this day Protested for non-pa3'ment 
and that the holders look to you for the payment thereof, payment 
having been demanded and refused. 

Yours respectfully, 

)W(yyA^^, )l^, \^ 

^ ^ Notary Public. 

To.^^lwf^S'^l^ 



198 NEGOTIABLE INSTRUMENTS [Ch. IX 

In case of a foreign bill the holder may recover the cost of 
reexchange. This is measured by the sum for which a sight draft 
must be drawn on the drawer of the dishonored bill, in order to 
realize immediately the amount of the dishonored bill plus the 
cost of protest. 

Example. D in London draws a bill for $1000 on E in New York, and 
it is transferred to H in New York, who presents it for payment. It is dis- 
honored and the protest fees amount to $1.25. It is obvious that D now owes 
H on that day $1001.25. H may draw a sight draft on D for such a sum as 
at the ruling rate of exchange between New York and London will realize in 
New York $1001.25. The difference between that sura (say $1081.35, Ameri- 
can money) and the sum realized ($1001.25) is the cost of reexchange which 
must be borne by D. 

In the United States the matter of reexchange has been simpli- 
fied by statutes which fix a definite percentage on a foreign bill 
to be recovered in lieu of reexchange. This varies in different 
states, but the amount is from 10 per cent upward. 

114. Checks. The contract of the drawer of a check is different 
from that of the drawer of an ordinary bill of exchange so far as 
concerns presentment and acceptance. 

I. Presentment. A check must be presented for payment 
within a reasonable time after its issue, or the drawer will be dis- 
charged from liability thereon to the extent of the loss caused by 
the delay. If he is not damaged at all, he will not be discharged, 
no matter how long the delay. 

Example. B draws a check for $ 1 00 and delivers it to C, who keeps it six 
months. In the meantime the bank fails. When it failed, B had more than 
$100 on deposit. The bank pays 40 per cent to depositors. C may recover 
from B $40 on the check, but not the other $60, because B is damaged to 
that extent by C's delay. Had this been a bill of exchange payable on demand, 
B would have been discharged altogether by C's unreasonable delay. 

A reasonable time for the presentment of a check is much 
shorter than that for the presentment of a bill and cannot be 
prolonged by negotiation. If the holder and the bank are in the 
same place, the check should be presented before the close of 
banking hours on the next business day following the day of its 
issue. If the holder resides in a different place, the check should 
be started, not later than the day following its delivery, by a 



§115] DRAWER'S AND INDORSER'S CONTRACT 199 

reasonably direct route to the place where the bank is located. 
The sending of checks by indirect routes through various corre- 
spondent banks has been held in some states to constitute 
unreasonable delay in presentment. 

2. Certification. If the holder of a check procures it to be 
certified, the drawer and indorsers (if any) are discharged from 
further liability. This is because when a holder takes the check 
to the bank to be certified he is entitled to the money and elects 
to take the promise of the bank in place of it. But if the drawer 
procures it to be certified before delivery to the payee, the latter 
takes the check with the same effect as an accepted bill of ex- 
change. When a check is certified the bank immediately charges 
up the check to the depositor's account so as to preserve a fund 
from which to pay the check. 

3. Rights of holder of check. A holder of an uncertified check 
has, ordinarily, no rights against the bank upon which it is drawn, 
even though the drawer has funds enough there to pay it. The 
promise of a bank to honor the checks of a depositor runs to the 
depositor only, and the payee of the check cannot sue the bank, 
any more than the payee of a bill of exchange can sue the drawee 
before acceptance. The sole right of the payee is to present the 
check promptly and, in case it is dishonored, give the drawer due 
notice, and thereafter sue the drawer. 

4. Rights of drawer against bank. If a bank wrongfully dis- 
honors a depositor's check, the depositor has an action against the 
bank for the injury to his credit. If he is a business man the 
damage to credit is presumed to follow such dishonor, and he may 
recover a substantial sum in the discretion of the jury. 

115. Position of indorser after liability is fixed. After the 
necessary steps have been taken to fix an indorser's liability (or 
without such steps if he has waived them), the indorser's posi- 
tion is essentially that of a guarantor. His rights and remedies 
are those already discussed under the head of Guaranty (see 
sects. 91-93 ante). 

If an indorser pays an instrument upon which he is liable, he is 
entitled to the possession of the instrument and may proceed upon 
it against all prior parties. He may strike out his own and all sub- 
sequent indorsements, and again transfer the paper if he wishes. 



200 NEGOTIABLE INSTRUMENTS [Ch. IX 

REVIEW QUESTIONS AND PROBLEMS 

Section 94. In what sense is a negotiable instrument an instrument of 
credit ? In what sense an instrument of trade ? Illustrate methods of payment. 
What are the principal kinds of negotiable instruments ? Explain the use of 
a bill of exchange. Distinguish inland and foreign bills. Is a check a bill of 
exchange ? Name different kinds of promissory notes. Are bills of lading and 
warehouse receipts negotiable ? 

95. What are the three characteristics of negotiable instruments.? Explain 
each. Are there three days of grace in your state ? What distinguishes nego- 
tiation from assignment? Illustrate. 

96. Define bill of exchange. Name the parties in a bill of exchange. 
What is acceptance? How is a bill transferred? What is a bill in a set? 
What two different purposes does a bill in a set serve? Define promissory 
note. What is the effect of stating a place of payment? Is it necessary? 
Explain discount. What is a certificate of deposit ? What is a check ? What 
is a certified check ? What is a cashier's check and what is it used for ? What 
is a cashier's bill of exchange ? What is a bond ? When is it negotiable ? 
What is a coupon bond? 

97. What is the Negotiable Instruments Law? Where is it in force? 
What is its effect? 

98. State the five essentials of a negotiable instrument. How should a 
negotiable instrument be signed by A. B. if he is agent for C. D. and if he 
is treasurer of the X Y corporation? 

Problem i. A promissory note is signed " A. B., President ; C. D., Treas- 
urer." It reads, " We promise to pay, etc." Across the end is printed, 
" X Y Co.'' The note has been transferred to a holder in due course, who 
sues A. B. and C. D. personally. They set up that it is the note of the X Y 
Co. Result? 

Problem 2. " I, A. B., promise to pay to the order of C. D. one hundred 
dollars on July i." Action is brought against A. B. upon a promissory note. 
Result? 

Problem j. A check on a savings bank reads : " X Y Savings Bank. Pay 
to A. B. or order one hundred dollars and charge to my account, No. 25. C. D." 
Underneath is printed, " The bank book of the depositor must accompany this 
order." Is this negotiable ? 

Problem 4. " I promise to pay to the order of A. B. one hundred dollars 
and also one half the net profits of the sale of our crop of bats. C. D." Is 
this negotiable? 

Problem j. " I promise to pay to the order of A. B. one hundred dollars on 
July I, with interest at 6 per cent, or 10 per cent if not paid at maturity, and 
with costs of collection if not paid at maturity. C. D." Is this negotiable? 



REVIEW QUESTIONS AND PROBLEMS 20i 

Problem 6. " I promise to pay to the order of A. B. one thousand dollars 
within one year after he is married. C. D." Is this negotiable ? 

Problem y. " I promise to pay to the order of A. B. five hundred dollars 
ninety days after the dissolution of the partnership between him and me. CD." 
Is this negotiable ? 

Problem 8. B's clerk made out checks to fictitious persons and B signed 
them, thinking they were for persons who had dealings with his concern. The 
clerk indorsed the fictitious names, obtained the money, and absconded. The 
bank charged the checks to B's account. B claims they should not be charged 
to him and that the bank should stand the loss. Which is right ? 

99. What must a negotiable instrument not contain? State the exceptions 
to this rule. 

Problem g. " I promise to pay to A. B. or order one hundred dollars, or 
at my election deliver to him one share of stock in the X Y Co. C. D." Is 
this negotiable? 

100. Need a negotiable instrument state the consideration ? Why? What 
is the effect of issuing a negotiable instrument undated ? without a place of 
issue or payment ? What is the effect of adding a seal ? 

101. When a note is issued with blanks, state what may be done as to filling 
them. How if it is issued without a blank but with a partly filled space ? 

Problem lo. A note made by X and indorsed by A is issued June lo, 
but without any date expressed, and is payable "one month after date." It 
is transferred to B, who inserts the date June i and transfers it to C. It is 
presented July i, and on dishonor due notice is given to A and B. Are 
they liable ? 

102. Is delivery necessary? When is it conclusively presumed? When 
not ? Illustrate. 

Problem ii. C. D. writes his name on a blank piece of paper to verify his 
signature. A. B. writes above the signature a promissory note for fifty dollars 
payable to his order, indorses it, and transfers it to E. F., who is a bona fide 
holder for value. Is C. D. liable to E. F. ? 

103. What is negotiation? How is it accomplished? What is a blank in- 
dorsement? a special indorsement? an unqualified indorsement? a qualified 
indorsement? a restrictive indorsement? an indorsement waiving conditions? 
When is a transfer a mere assignment ? Who is the holder ? 

Problem J2. A note is payable to the order of A. B., who transfers it to 
E. F. without any indorsement. What is the position of E. F. ? 

Problem ij. A note payable to A. B. or order is indorsed, " Pay to E. F. 
for collection. A. B." E. F. then indorses it, " Pay to G. H. E. F." G. H. 
collects the money from the maker. Whose money is it ? 

Problem 14. A note payable to the order of A. B. is indorsed, " Without 
recourse. A. B." and transferred to E. F. The maker is insolvent, and 



202 NEGOTIABLE INSTRUMENTS [Ch. ix 

after due presentment to the maker and notice to A. B., E. F. sues A. B. 
Result ? 

104. Who is a holder in due course? State essentials. When is an instru- 
ment payable on demand overdue ? What is bad faith ? What is value ? When 
is an antecedent debt value ? What is notice of defenses or defects ? State a 
case where a holder with notice is a holder in due course. 

Problem 75. A note payable to order of A. B. on demand is transferred 
by him to E. F. six months after it was first issued. E. F. sues the maker, 
who sets up failure of consideration, a defense good against A. B. Is it good 
against E. F. "i 

105. What defenses are not good against a holder in due course? What 
are good? Illustrate. What presumption in favor of a holder? How is it 
overcome, and what then must the holder show ? 

Problejn 16. C. D. in New York gives A. B. a note payable to his order 
for $roo upon A. B.'s false representation that he has worked two months for 
C. D. upon the latter's Kansas farm. In fact A. B. has never worked for C. D. 
at all. A. B. at once indorses the note for value to E. F., who does not know 
the above facts. Is C. D. liable to E. F. on the note? 

Problem ly. C. D. borrows $100 of A. B., gives him a negotiable note for 
$100 at 6 per cent interest and also a bonus of $5. A. B. before maturity 
transfers the note to E. F. for value and without notice. Is C. D. liable to 
E. F. on the note? 

106. State the maker's contract. Is it absolute or conditional ? When is 
presentment to the maker at maturity necessary ? When not ? 

Problem 18. A note is payable " on demand at the X Bank." Is it neces- 
sary to present it at the X Bank before bringing an action against the maker? 

107. What is the acceptor's contract? What does he admit? What is a 
general acceptance ? What is a qualified acceptance ? Must the holder take it ? 
Result of taking it ? Effect of specifying a place of payment ? Effect of accept- 
ance on separate paper ? Must the holder take such acceptance ? What is a 
letter of credit ? Who may accept bills ? State exceptions. 

Problem ig. " To C. D. : Pay to order of A. B. one hundred dollars ten 
days after sight. E. F." A. B. indorses to G. H., who presents it to C. D. The 
latter writes, " Accepted, April 4, 1915. C. D." G. H. sues C. D. The latter 
sets up that A. B. forged E. F.'s signature. Is this a good defense against 
G. H., who is a holder in due course? 

Problem 20. The drawee accepts a bill as follows : " Payable when in funds. 
C. D." The holder presents it for payment at maturity and the acceptor 
refuses to pay. Due notice is given the drawer. Is the acceptor liable to the 
holder? Is the drawer? 

108. In what cases must a bill be presented for acceptance? When is it 
optional? Effect if drawee keeps and refuses to return the bill? On what days 



REVIEW QUESTIONS AND PROBLEMS 203 

may presentment for acceptance be made? When is it excused? If drawee 
refused to accept, what should the holder do ? What results if he does not take 
these steps ? What results if the bill is accepted ? 

Problem 21. A bill payable ten days after sight is issued January 8, 191 4, 
is indorsed to A February 6, and is presented to the drawee for acceptance 
August 5. The drawee refuses to accept. A protests the bill and duly notifies 
the drawer. Is the drawer liable to A ? 

109. What is the drawer's contract? State the conditions. Effect of failure 
to fulfill them ? 

110. What is an indorser's contract as to payment? What warranties does 
he make ? What is the order of the indorsers' liability ? Who is an irregular 
indorser? What is his contract? Who is an accommodation indorser? Illus- 
trate. Who is a guarantor ? Is the guaranty negotiable ? 

111. When is a presentment for payment made? How is time computed? 
What if the due date falls on a holiday? on Saturday? When is an instru- 
ment payable on demand due ? At what place must presentment for payment 
be made ? State the mode of presentment. To whom is presentment made ? 
What will excuse delay in presentment? When is it excused altogether? What 
is waiver ? If the instrument is dishonored, what is the effect ? What is pay- 
ment for honor ? 

Problem 22. A note falls due on Saturday. The holder presents it to the 
maker on that day. It is not paid. The holder duly notifies the indorser. Is 
the indorser now liable to the holder ? 

Problem 2j. A note is payable at " 114 South Main Street, St. Louis." 
It is presented at another place of business of the maker in St. Louis, and 
on dishonor due notice is given to the indorser. Is the indorser's liability 
fixed? 

112. By whom must notice of dishonor be given? Illustrate. What should 
the notice contain ? Must it be written ? If written, how may it be delivered ? 
Within what time must it be given when the holder and the indorser live in 
the same place? when they live in different places? If an indorser receives 
notice, what may he do? To what place should notice be sent? What is 
waiver? When is notice excused? What is due diligence? What is the 
effect of failure to give due notice ? Suppose a bill dishonored for nonaccept- 
ance and no notice to drawer or prior indorser, are the drawer and indorser 
absolutely discharged? 

Problem 24. A note made by X is indorsed by A, B, C, and D, and is in 
the hands of E. E presents it to X and it is dishonored. E gives due notice 
to D, who then gives due notice to B, and the latter to A and C. Who are 
liable to E ? 

113. What is protest? By whom made? When is protest necessary? 
When allowable? What is the evidence of it? How must the certificate be 



204 NEGOTIABLE INSTRUMENTS [Ch. IX 

made and what must it contain? What is noting? May the notary give 
notice? Who pays the cost of protest? What is reexchange? 

Problem 2j. 

New York, Jan. 5, 191 6 

Two months after date pay to the order of A.B. one hundred dollars. 
To C. D., Chicago. E. F. 




P. R. now holds the bill at maturity (March 5, Sunday) for the owner, N. O. 
{a) State exactly what P. R. should do as to presentment, {b) In case C. D. 
refuses to pay, state what P. R. should do in order fully to protect all the 
rights of N. O. 

114. When should a check be presented? What is the result of delay? 
How should a check be sent by mail for collection ? What is the effect if the 
holder has a check certified ? if the drawer has it certified ? May the holder 
of an uncertified check sue the bank? If a bank wrongfully dishonors a 
check, has the drawer any remedy? 

Problem 26. A check drawn by B on a Bristol (Vermont) bank and pay- 
able to A's order is mailed to A at Trumansburg, New York, and received 
there August g. It is sent the same day to an Ithaca (New York) bank for 
collection. On August 10 the Ithaca bank mails it to its correspondent bank 
in New York City, where it is received on the eleventh. On the twelfth the 
New York bank mails it to its correspondent in Burlington, Vermont. The 
thirteenth is Sunday. The Burlington bank receives it on the fourteenth, and 
sends it at once to Bristol, but the Bristol bank had already suspended on 
the fourteenth. If sent direct, the check would have reached Bristol in 
twenty-four hours after it was mailed at Trumansburg or Ithaca. A sues B 
on the check. Is B liable for the whole amount? 

115. When all the steps have been taken to fix an indorser's liability, what 
right has the holder against him ? What are the indorser's rights if he pays ? 



PART IV. AGENCY: THE CONDUCT 

OF BUSINESS THROUGH 

REPRESENTATIVES 

CHAPTER X 

PRINCIPAL AND AGENT 

116. Agency : its divisions and problems. Agency is a term 
signifying the legal relations established when one man is author- 
ized to represent and act for another and does so represent 
and act for another. Most of the things that a man may do in 
person he may do through a representative. An individual often 
does, and a corporation necessarily must, employ persons to trans- 
act affairs and perform services essential to the proper conduct 
of a business. A single concern often has hundreds and even 
thousands of such employees. In an era of large business enter- 
prises like the present the subject of agency is one of the most 
important in the whole range of business law. 

The acts which a representative may perform for his employer 
fall into two classes: (i) the making of contracts for the em- 
ployer ; (2) the doing of operative or mechanical acts in the serv- 
ice of the employer. In order to mark the distinction the subject 
is divided into two corresponding heads — the law of principal 
and agent and the law of master and servant. In the first there 
are three persons involved, namely, the principal, the agent, and 
the third party with whom the agent brings the principal into 
contractual relations. In the second there are normally but two 
persons involved, namely, the master and the servant ; but if in 
performing the assigned service the servant causes some injury 
to a third person, then three persons become involved. 

In either class the relation itself is generally created by con- 
tract. The employer engages to pay an agreed compensation, and 
the employee engages to perform agreed services ; but an employee 

205 



206 PRINCIPAL AND AGENT [Ch. X 

(agent or servant) may act gratuitously. So far as third parties 
are concerned, tiie important question is whether the agent or 
servant was authorized to act, not whether he was promised com- 
pensation for doing so. If the agent or servant was not authorized, 
the principal or master would not be liable for what was done 
unless the act was subsequently ratified. Prior authorization or 
subsequent ratification is therefore the basis of a principal's or 
master's liability. The main problem of agency is to discover 
when and under what circumstances a man is liable for the acts 
of another who represents him or assumes to represent him. 

The problem is not an easy one. If an employer were liable 
only for the specific acts which he expressly authorizes or ratifies, 
there would be little difficulty. But the law may hold a principal 
liable for a specific contract which he never authorized, or which 
he even forbade, upon the ground that he held his agent out to 
the world as authorized to make such contracts ; in other words, 
it estops him from denying that an agent had the authority which 
he led others reasonably to suppose that such agent possessed. 
And it may hold a master liable for a specific act of a servant 
which was unauthorized or forbidden, upon the ground that the 
act was performed in the course of the business intrusted to the 
servant and in the furtherance of it. 

Examples .• i . P authorizes A to travel and sell goods for him as his agent, 
but forbids A to hire a horse on credit, furnishing A with funds for the pur- 
pose. A hires a horse on the credit of P while traveling about P's business. 
P is liable. The general power conferred to travel and sell goods carries with 
it, as to third persons, the incidental power to contract for the means necessary 
to this end. This cannot be limited by secret instructions to the agent. 

2. P intrusts A with goods to sell, but forbids A to receive the payment. 
The buyer pays A, who absconds with the money. P cannot recover again 
from the buyer. An agent having possession of goods with power to sell them 
has implied authority to receive payment. But if the agent has not possession 
of the goods which he sells, he has no implied authority to receive payment. 

3. M tells S, his servant, to drive a load of goods to the railway station. 
S drives negligently and injures C. M is liable because S was about M's 
business. 

4. As above. C is blocking the road. S becomes angry and drives his 
wagon into and injures C's wagon. If S does this to further M's business, 
that is, to get the goods sooner to the station, M is liable. If S does it solely 
to vent his own spite, M is not liable. This is a question for the jury. 



§117] APPOINTMENT OF AGENTS 207 

I. Appointment of Agents 

117. Who may appoint agents. Generally speaking, a person 
competent to make any contract is competent to appoint an agent 
by contract or ratification. 

1. Infants. An infant's contracts are usually voidable at the 
election of the infant ; they are not absolutely void. It is some- 
times said, however, that his appointment of an agent is abso- 
lutely void ; but this rule is now generally confined to one form 
of appointment, namely, by a formal sealed document known as 
a power of attorney. The decided tendency of the courts is to 
hold the appointment of agents by infants, in any other form, to 
be voidable at the infant's election, like his other contracts. Thus 
ah agency to sell the infant's horse would be voidable, while a 
power of attorney to sell and convey his lands would by most 
states, but not by all, be held void and of no effect. There seems 
to be no sound reason for such a distinction. 

2. Insane persons. An insane person's contracts are voidable 
by him or his guardian if he has been judicially declared to be in- 
sane or if the other party to the contract knew him to be insane. 
In other cases the contract is binding if it has been so far executed 
that the other party to it cannot be put in statu quo. Perhaps a 
deed by an insane person is absolutely void. 

3. Married women. At common law a married woman could 
make no contracts in person, and could not therefore appoint an 
agent. But under the modern married women's acts a married 
woman may generally contract as freely as an unmarried woman, 
and so far as she may make contracts in person she may appoint 
agents to make them for her. 

4. Corporations. Corporations can act only through agents. 
The directors are the chief agents, and they may appoint such 
additional agents as are authorized by the charter or as are 
necessary to carry out the objects authorized by the charter (see 
sect. 151 post). 

5. Unincorporated associations. Unincorporated associations, 
such as clubs and other societies, are not legal entities like 
corporations: If they appoint agents, the members individually 
and collectively are the principals so far as they authorized the 



2o8 PRINCIPAL AND AGENT [Ch. X 

appointment. Such authority may be gathered from the constitution 
and by-laws to which each member assents, or may be found in 
a specific vote of a meeting at which members were actually 
present. If the constitution provides that a majority vote shall 
bind all members, assent to the constitution is assent to any action 
thus taken under it. An agent or committee of a club may be 
personally liable when the other members are not. 

Example. A college class voted to publish an annual and elected A busi- 
ness manager. A contracted with C for the printing. All the members of the 
class were present at the meeting except G. All are liable to C except G. If 
H had been present and had voted against the publication, the question whether 
he was also liable would be determined by a finding as to whether H acquiesced 
in the decision of the majority. 

6. Partnerships. In a partnership each member is both prin- 
cipal and agent. Each is liable as principal for the acts of the 
other partners within the scope of the partnership business, and 
each, by acting as agent for the partnership, may bind them. 
One of the implied powers of a partner is to appoint necessary 
agents. If rightfully appointed, an agent may by his acts bind 
the partnership. 

7. Subagency. A principal, P, may empower an agent. A, to 
employ a subagent. If under such authority A appoints B as 
subagent, B becomes agent of P. If there is no authority to 
appoint a subagent, the agent must act personally in all matters 
involving judgment, skill, or discretion, but may delegate merely 
ministerial or mechanical duties to another. In such a case the 
subordinate is the agent not of the principal but of the agent, and 
the latter is liable to the principal for any default of the subagent. 

118. Who may be an agent. Any person may be an agent and 
be vested with authority to bind his principal. An infant, a mar- 
ried woman, and probably a lunatic may be the instrumentality for 
bringing the principal into contractual relations with third parties. 
If the principal chooses and empowers an agent, he must be 
responsible for the results. 

A principal may appoint joint agents. Ordinarily joint agents 
must act jointly ; but if a partnership is acting as agent, one partner 
may act alone ; and if a corporation is acting as agent, a majority 
of the directors may decide for all. 



Power of Attorney 

lino\jD all JHen t^ tfjZQt presents* 

That ■'■ Thomas Martin, of the city of Elmira, county of ChBmung, and 

state of New York ^ 

have made, constituted and appointed, and by ^l)tSt T^Xtetnt6 do make, con- 
stitute and appoint..?(?.l.t?.r.. .?.':?.?.?.■. .°f...^!^e.saia city. ^y^ 

true and lawful attorney for ?.9 and in .°y. name, place and 

stead to e^'^nt, bargain, and sell all such lands, tenements and heredita^ 
menta whatsoever, situated In the state of New York, whereof I now am, 
by any ways or means howsoever, entitled to or Interested in, either in 
severalty or Jointly, or in common with any other person or pereons, or 
any part, share, or proportion thereof, and all such right, title, inter* 
est, claim and demand, both In law and in equity, as I may have in the 
same, for such eum and price and on such terms as to him shall seem 

meet, . ^ — . 

giving and granting unto ?.y. said attorney full power and authority 

to do and perform all and every act or thing whatsoever requisite and necessary 
to be done in and about the premises, as fully to all intents and purposes 
as \ might or could do if personally present, with full power of sub- 
stitution and revocation, hereby ratifying and confirming all that Pjy 

said attorney or ^\f. substitute shall lawfully do or cause to be done 

by virtue thereof. 

S^n WitWt^^ W^etttA^rrrrrrr-^rrrr-ha^^ hereunto setrTT-:.'!'?:.-TTTT-7. 
hand and seal ih^rrrrrD-lV^.TTTTTrrMy ofrTTTTr.J^nV.^.ry.vrrTTT.One thousand 
nine hundred and.^.J.?.*.^.^.?.-. 



foAyi'&i' T/0~it&,<yyv 



..[L.S.] 



;S)tate of l^ew gorft, 

County of Oh?."?!??.?. 

City of .....?.?-!?J.r.?-. 



On this.TTTTrrT.f.i.^t^^.TTTTTTT.day of.TTTTTT.i'.fO.^^r.y rTTTTT in the year One thousand 

nine hundred and..?.^?^?'.9.°.'? before me, the subscriber, personally 

appeared .TfiP.?.^^.^^?! ?:?.?. to me personally known to be 

the same person described in and who executed the foregoing instrument, and 
he acknowledged to me that he executed the same. 



J" NOTARY ' S "1 
1 SEAL / 



Notary Public for Chemung Count_y_,__New York. 
209 



210 PRINCIPAL AND AGENT [Ch. X 

119. Form of appointment. Generally an agent may be ap- 
pointed by parol. To this there are two exceptions. 

1. The Statute of Frauds in a few states requires that where 
a contract between P and C must be in writing and signed by P 
or his agent, the latter's authority to sign shall also be in writing. 
This is not generally found in the statute. As between the prin- 
cipal and agent, a contract of agency not to be performed within 
one year must be in writing ; but if an agent acted under a parol 
contract, the principal would, as to third persons, be bound by 
the agent's acts. 

2. Where the contract between the principal and a third per- 
son is required to be under seal (as a conveyance of lands), the 
authority of the agent to execute the contract must also be under 
seal. Such a formal authorization is commonly called a power 
of attorney. A power of attorney may be used in any case. 

120. Ratification. Ratification consists in assenting to an act 
done in one's name or on one's behalf either by a person who had 
no authority to represent one at all or by a person who, having 
some authority, exceeded it. When such unauthorized act comes 
to the attention of him in whose name or on whose behalf it was 
ostensibly done, he has an election to repudiate it or to adopt it. 
If he elects to adopt it, this constitutes ratification, and he is in 
precisely the same situation as if he had originally authorized it. 

Example I. A, knowing his friend P is on the lookout for a rare book, 
and seeing one at a bookshop, buys the book in P's name and upon P's credit. 
When P learns of this he tells the bookseller to send him the book, but 
later, before receiving it, countermands the order. P has ratified and cannot 
afterwards withdraw his assent. P's contract dates from the time of the sale 
to A, not from the time of ratification. 

I . Essentials of ratification. The essentials 6f ratification are 
given below. 

a. The contract must have been made in the name of and 
in behalf of an existing and ascertainable person. If one con- 
tracts in the name of a corporation not yet formed, the corpo- 
ration, when formed, cannot strictly ratify, although its assent may 
amount to the acceptance of an offer. So if A, intending to act 
without authority for P, makes a contract in his own name, P 
cannot ratify. 



§120] APPOINTMENT OF AGENTS 211 

b. The one in whose name the contract was made must assent 
to it. Such assent may be imphed, for example, by accepting bene- 
fits under the contract. Silence alone, where there is no duty to 
speak, is not sufficient evidence of assent ; but where, for example, 
an agent who has some authority exceeds his authority, his prin- 
cipal's silence after full knowledge of the facts may amount to 
assent. The assent must be as to the whole act; the principal 
cannot ratify a part and disaffirm a part. If he takes the benefit, 
he must bear the burdens. 

Example 2. A without any authority sold and delivered to C a load of 
coal belonging to P. In delivering the coal he negligently broke C's window. 
P sent C a bill for the coal. P thereby ratified A's acts and became hable to 
C for damages for the broken window. 

c. The principal must be competent. If he could have 
appointed an agent, he can ratify with the same results as if 
he had previously authorized (see sect, wj ante). 

d. If the principal must adopt a particular form in order to 
appoint, he must follow the same form in order to ratify (see 
sect. 119 ante). 

2. Ratification of forgery. If A forges P's name to an instru- 
ment, as a promissory note, can P ratify the act .? Upon this 
the cases differ. Some hold that P may ratify, because he could 
have authorized ; others hold that P cannot ratify, because A does 
not in fact assume to act for P in a forgery, and that P's only 
motive in ratifying would be to conceal the crime of A. But all 
cases agree that P may be estopped to deny the validity of the 
signature where, after P acknowledges such validity, the instru- 
ment is taken by an innocent holder for value relying upon such 
acknowledgment. 

3. Legal effect of ratification. Ratification relates back to the 
time of the formation of the contract or the doing of the act, 
and the principal and the third person are in the same position 
as if the ageiit had in fact had full authority at that time. 

4. Effect of nonratification. If the principal refuses to ratify, 
the agent is liable to the third party in damages for a breach 
of his implied warranty of authority. Every agent who makes 
a contract in the name of another warrants that he has authority 
from that other to make it. 



212 PRINCIPAL AND AGENT [Ch. X 

121. Agency by necessity. A wife has implied authority given 
her by the law to pledge her husband's credit for necessaries. 
This exists independent of the will of the husband. But the one 
furnishing the goods has the burden of showing that they were 
in fact necessaries and that they were not otherwise provided. 

An infant child has not, in England and in some of our states, 
any similar authority to pledge his father's credit for neces- 
saries, but some states give him such implied authority. This 
is therefore a disputed question. 

In some cases an unpaid vendor in possession of the goods 
has implied authority to sell them for the vendee and charge 
the vendee the difference between the contract price and the 
amount received upon the resale (see sect. 58 ante). 

122. Termination of agency. An agency may be terminated 
in various ways, some of which are as follows : 

1 . By the parties. The principal and the agent may agree to 
terminate their relation, or (subject to the exception noted in the 
next section) the principal may dismiss the agent, or the agent 
may quit the employment. If either principal or agent wrong- 
fully terminates an agency which was created by bilateral con- 
tract, he is liable to the other party tor breach of contract. If 
the principal terminates it, he should notify third persons with 
whom the agent has been accustomed to deal, or he may, as to 
them, be estopped to deny the agency if the agent makes further 
contracts with them. If the agent or servant wrongfully quits the 
employment before the contract term has expired, he cannot in most 
states recover any compensation for what he has already done ; but 
a few states allow him to recover the value of such services, less 
the damages the principal or master has suffered from the breach. 

2. Death. Subject to the exception noted in the next section, 
the death of either party terminates the agency. If, after the 
death of the principal, the agent, though ignorant of such death, 
makes a contract with a third party, also ignorant of such death, 
the contract binds no one. The dissolution of a corporation has 
the same effect as the death of an individual. 

%. Illness of agent. The illness of an agent may create an 
impossibility of performance, which will terminate the agency. 
The illness of the principal would ordinarih' have no effect 



§§123,124] APPOINTMENT OF AGENTS 213 

4. Insanity. The insanity of either party would terminate 
the agency. But if the principal becomes insane, a person who 
deals with the agent in ignorance of such insanity, and before 
the principal has been judicially declared to be insane, woiild 
be protected. 

5. Impossibility. If the subject matter of the agency is 
destroyed, the agency would of necessity be terminated. If the 
agent is arrested and imprisoned, this, like illness or insanity, 
renders further performance by him impossible. If two agents 
are authorized to do the same act and one accomplishes it, the 
agency of the other is terminated. 

123. Irrevocable agencies. The above rules are subject to the 
exception that if an agency be "a power coupled with an 
interest," the agency is irrevocable. An agent has a power 
coupled with an interest when to his authority to act for his 
principal is added an interest in the subject matter of the agency 
itself, as distinguished from an interest in the compensation he 
is to receive for his services. 

Examples .■ i . P pledges goods to A for a debt and gives A power to 
sell the goods upon default. P cannot revoke this power nor will it be revoked 
by P's death or insanity. A has an interest in the subject matter to secure 
his debt. 

2. P sends goods to A, a commission merchant, to sell for him and 
requests A to make an advance of a specified sum. A does so. P cannot 
revoke this agency, nor will the law revoke it. A has an interest in it beyond 
the interest of acting as agent, because he is to reimburse himself to the 
extent of the advance from the proceeds of the sale. But the interest in the 
compensation alone does not constitute a power coupled with an interest. 

II. Obligations of Principal and Agent to Each Other 

124. Obligations of principal to agent. The obligations of the 
principal to the agent may be briefly enumerated under the heads 
of compensation, reimbursement, and indemnity. 

I. Duty to compensate agent. The principal must pay to the 
agent the agreed compensation, if any, or a reasonable com- 
pensation where none has been agreed upon. If the principal 
ratifies an unauthorized act, the same result follows. If the 
principal wrongfully revokes the authority created by a bilateral 



214 PRINCIPAL AND AGENT [Ch. X 

contract of agency, the agent may sue for the breach. His 
damages are presumptively the entire stipulated compensation, 
but the principal may show what the agent might have earned 
in a similar occupation during the unexpired term, and thus reduce 
the damages. An agent would not be justified in remaining idle 
after his discharge if he could by reasonable diligence secure 
other and similar employment. If the agency is revoked by 
impossibility, the agent may recover the reasonable value of the 
services actually performed. If the agent renounces his contract 
of employment, he can recover no compensation in most states ; 
but some permit him to recover the reasonable value less the 
damages sustained by the principal from the breach. An agent 
cannot recover compensation for illegal services, as lobbying, 
betting, and the like. 

2. Duty to reimburse agent. The principal must reimburse the 
agent for all expenses necessarily incurred by him in the discharge 
of the agency, unless the agent's compensation is intended to 
cover these expenses. 

3. Indemnity. If an agent is compelled to pay damages be- 
cause of his innocently following his employer's instructions, he 
is entitled to be indemnified. 

Example. P directs A to sell certain goods. A does sell them. C after- 
wards claims the goods were his and sues A for conversion and recovers from 
A their full value. P must indemnify A. But if A had known the goods did 
not belong to P, he could not recover indemnity. 

125. Obligations of agent to principal. An agent owes to his 
principal the duties of obedience, prudence, skill, and good faith, 
and is also bound to render accounts. He cannot delegate his 
duties. 

1. Obedience. The agent must follow his instructions faith- 
fully. If he does not, and loss ensues, he must make it good. 

Example i. P sends to A goods to be sold for cash. A sells them to C 
and takes C's check. The check is dishonored and C absconds. A is liable 
to P for the loss. 

2. Prudence and skill. An agent is bound to possess and to 
exercise the prudence, skill, and diligence necessary to the proper 
conduct of the business intrusted to him. 



§125] MUTUAL OBLIGATIONS 215 

Examples : 2. P sends A money to loan upon security. A loans it upon 
worthless securities which a pradent investor would not take. A is liable to 
P for the loss. 

3. P authorizes A to effect insurance on P's property. A takes a policy 
in a company which prudent men believe to be of doubtful solvency. Loss 
ensues. A must make it good. 

3. Good faith. The relation is a fiduciary one. The agent is 
bound to act with entire good faith toward his principal. He 
cannot act for both his principal and a third party. He cannot 
buy his principal's property, or sell his own to his principal, 
without the latter's full knowledge. 

Examples : 4. P directs A to buy a horse. X directs A to sell a horse. 
A sells X's horse to P. Neither P nor X is bound. A cannot act for both 
parties unless each knows that his agent is also acting for the other. A can 
recover no compensation. 

5. P directs A to buy a horse. A sells P his own horse. When P discovers 
this, he may rescind the contract. A cannot be both buyer and seller. 

6. A works for P in the manufacture of a secret compound. Afterwards 
A begins to manufacture the same compound. P may enjoin A from doing 
so. An agent or servant cannot disclose, or use for his own advantage, trade 
secrets learned while in the employment of another. 

4. Accounting. The agent must keep and render accounts. 
He must keep his principal's money or goods separate fronf his 
own ; if he mixes them and any loss results, the agent must 
bear it. He can make no secret profits out of his principal's 
business. He cannot, by the weight of authority, even keep moneys 
obtained for the principal in an illegal transaction. 

Examples : J. An agent deposits his principal's money in a bank in his 
own name. The bank fails. The agent must bear the loss. Had he deposited 
in his principal's name (P, by A, agent), the loss would have fallen on the 
principal if the agent acted prudently in selecting the bank. 

8. P directs A to purchase coal. The trade price is $5 a ton. X agrees that 
if the agent will purchase of him he will return to the agent 50 cents on each 
ton. A buys of X and P pays X at the rate of $5 a ton. X gives A 50 cents 
on each ton. P may compel A to account to him for this money. 

5. Nondelegation of duties. An agent cannot delegate to 
another the exercise of any discretion or judgment unless his 
principal has authorized him to do so. He may delegate the 
performance of merely mechanical duties, like the writing of 



2i6 PRINCIPAL AND AGENT [Ch. X 

contracts or other documents, but of course he is hable for the 
result. If he delegates discretionary duties without authority, 
he is liable for any loss. If he has authority to select sub- 
agents, he is liable only if he fails to exercise due care in 
selecting them. 

Examples : 9. P directs A to sell goods. A engages B to sell them and 
turns therp over to B. A is liable in tort for conversion of the goods in 
delivering them to B to sell. 

10. P deposits a check in the X bank in New York for collection. The 
check is drawn upon a bank in Chicago, and the X bank sends it to the Y 
bank in Chicago for collection. The Y bank negligently fails to present it in 
due time, and loss ensues to P. Is the X bank liable to P ? Upon this courts 
differ. Some say P impliedly authorizes the X bank to employ « subagent, and 
if the X bank uses due care in selecting the Y bank, it is not liable ; other 
courts say P contracts with the X bank alone and assumes no responsibility 
for the acts of those whom the X bank engages to assist in the collection. 
The real question is, Had the X bank authority from P to appoint a sub- 
agent for P? 

6. Del credere agent. A del credere agent undertakes to 
guaranty the principal against loss from credits given by the 
agent to third persons in the course of the agency. In the 
United States it is generally held that the agent is liable pri- 
marily and not as a mere guarantor, and that therefore his 
promise need not be in writing. This agency is pretty close to 
a sale by the principal to the agent and resale by the agent 
to third persons, but it differs in that the title to the goods 
remains in the principal until they are sold to third persons. 

7. Gratuitous agent. If an agent promises to act gratuitously, 
the promise is unenforceable ; but if he does act, he is bound 
to act with care and prudence. It is generally said that he is 
bound to use slight care and is liable only for gross negligence. 
The true standard is the care that reasonable men give under 
like circumstances. For example, bank directors serve gratui- 
tously ; a particular board is not bound to use as much care and 
vigilance as an individual banker gives to his own business, 
but must exercise the care which is ordinarily and reasonably 
given by such boards, as that is fixed by usage and experience 
(see sect. 63 ante). 



§§126,127] LIABILITY OF PRINCIPAL 217 

III. Liability of Principal to Third Parties 

126. General Rules. The principal is liable upon all contracts 
made by his agent within the scope of the actual authority given 
to the agent. 

The principal is also liable upon all contracts made by the 
agent within the scope of the apparent or ostensible authority 
conferred upon the agent. 

The principal is not liable upon contracts made by his agent 
beyond the scope of the actual or ostensible authority unless he 
ratifies such contracts. 

Examples .• i . P authorizes A to sell goods, but at not less than market price 
and to responsible parties only. A sells to X. P seeks to escape the contract 
on the ground that X is not a responsible party and that A has sold X the 
goods at less than the market price. P is bound by the sale. His instruc- 
tions to his agent, not communicated to X, could not limit the ostensible 
authority of the agent. Of course A is liable to P for any loss occasioned by 
his disobedience of instructions. 

2. P authorizes A to sell goods. A barters P's goods for X's horse and 
buggy. P is not bound. An authority to sell is not in any sense an authority 
to barter. 

3. P authorizes A to buy goods on credit. A buys goods of X for P 
and gives X a promissory note signed " P, by A, agent." P is not bound. An 
authority to buy on credit is not an ostensible authority to make negptiable 
paper. (Problem-: What is X's remedy upon this note.'' See sect. 120, par. 4.) 

127. Agent's apparent authority. Apparent authority is that 
authority which may reasonably be inferred from the circumstances 
of the agency. In determining whether an agent has apparent 
authority to do a particular act the following circumstances may 
be considered. 

I. Powers actually conferred. The powers actually conferred 
may be the limit of powers real and ostensible. This is particu- 
larly the case where the authority is contained in a formal power 
of attorney. Such an instrument is construed strictly, and the 
third person is bound to examine it in order to determine the 
extent of the agent's authority. A power of attorney to sell 
lands in New York would confer no authority to sell lands in 
Massachusetts (see page 209). If the power is conferred in an 
instrument not under seal, or orally, the construction is more 



2l8 PRINCIPAL AND AGENT [Ch. X 

liberal ; but in such a case the third person cannot claim to rely 
upon an apparent authority if he knows the exact terms of the 
actual authority. 

2. Powers incidental to those conferred. With every actual 
authority goes the implied authority to use the means reasonably 
necessary to carry out the actual authority. An authority to sell 
and convey real property carries with it the power to make a 
deed containing the usual covenants of warranty and to receive 
the purchase money upon delivery of the deed. The authority to 
travel at the principal's expense in order to sell goods carries 
with it the power to hire a horse or use other reasonable means 
of travel. 

3. Powers annexed by custom. The incidental powers may be 
enlarged by custom or usage. Some agents, like factors, brokers, 
and auctioneers, follow a customary calling, and naturally many 
usages of the calling have grown up. One who employs such an 
agent is supposed to do so with knowledge of established usages, 
and must be held to clothe the agent with all the authority 
customarily exercised by agents in that calling. 

4. Powers inferred from the conduct of the principal. Over 
and above the actual, incidental, and customary powers of an 
agent, there may be apparent powers gathered from the conduct 
of the principal. If a principal by his conduct leads third persons 
reasonably to infer that he has given his agent certain powers, and 
they act upon this appearance of authority, the principal will be 
estopped to deny that his agent did possess those powers. If, 
after an agent has made a mortgage investment for his principal, 
the principal permits the agent to retain the bond and mortgage, 
he will be estopped to deny that the agent had authority to receive 
the interest or installments due upon the securities. 

5. General and special agents. A general agent is one author- 
ized to act for his principal in all matters pertaining to a particular 
business. A special agent is one (other than an agent following a 
customary calling) who is authorized to act for his principal in a 
single specific transaction. A principal impliedly confers larger 
powers upon a general agent than upon a special one. A third 
person should know that an agent engaged to do one special act 
is likely to have special instructions, and should inquire into the 



§128] LIABILITY OF PRINCIPAL 219 

extent of the authority. In such a case the actual authority is 
less likely to be enlarged by any of the considerations above 
enumerated ; but even in such a case private instructions not 
communicated to the third person may not avail the principal. 

Examples .■ I . P puts his grocery store in charge of A, as general manager, 
to buy and sell goods and transact the necessary business. A exchanges sugar 
for eggs. This is within his implied powers. 

2. P authorizes A as a special agent to sell a barrel of sugar. A exchanges 
the sugar for eggs. This is not within his implied powers. 

128. Agents following customary calling. Some forms of 
agency are so well established and have been so long practiced 
that they have gathered a considerable body of customs in 
conformity with which such agencies are conducted. A few of 
these will be briefly considered. 

1 . Factors. Factors or commission merchants are agents whose 
regular business it is to receive consignments of goods and sell 
them for a commission or percentage. The principal is bound by 
the customs of the calling. These customs have been adopted in 
order to protect innocent purchasers who are unable to know 
whose goods the factor is selling or what instructions the owner 
may have given. The factor may sell at any price, for cash or 
credit, may warrant the goods if such goods are customarily sold 
with a warranty, and may take negotiable instruments in a sale on 
credit. He cannot baiter the goods. At common law he cannot 
pledge them for his own debt, but under the Factors Acts an 
innocent pledgee is protected. The factor has a general lien upon 
tlie goods of his principal in his hands, or upon their proceeds 
for all sums due him from the principal for advances made or 
obligations incurred in connection with the relationship. 

2. Brokers. Brokers are agents whose regular business it is 
to make contracts without having possession of the goods, or to 
negotiate for the purchase of property, or for loans, or for insur- 
ance, and the like. A merchandise broker who sells goods has 
less apparent authority than a factor, because he has not posses- 
sion of the goods. He cannot receive payment ; he cannot usu- 
ally warrant the goods ; custom may permit a sale on credit, 
but the custom in this respect is not so broad as in the case 
of factors. 



220 PRINCIPAL AND AGENT [Ch. X 

3. Auctioneers. Auctioneers are agents whose business it is to 
sell property publicly to the highest bidder. Until the fall of the 
hammer he is the agent of the seller ; after that he is also agent 
of the buyer so as to enable him to make the note or memoran- 
dum required by the Statute of Frauds. He must sell for cash, 
and not, unless specially authorized, on credit or for other goods 
or for negotiable paper. He may receive payment. He cannot 
warrant unless specially authorized, nor can he rescind the sale 
when once made. 

4. Attorneys at law. An attorney at law is an agent whose 
business it is, as a duly qualified officer of the court, to represent 
his principal in the conduct of litigation or other legal proceed- 
ings. He has implied authority to control the proceedings, but 
he cannot compromise or release his client's claim or give up 
any substantial right of his client unless specially authorized. 
He may receive payment in full and give a release. He is 
bound to the highest good faith toward his client, and is liable 
to the client for the negligent management of the affairs intrusted 
to him. 

5. Bank cashiers. A bank cashier is the chief executive offi- 
cer of a bank. Tellers and other subordinate officers are under 
his control. He has power to draw checks or drafts upon the 
funds of the bank deposited with other banking or trust com- 
panies ; to indorse and transfer for collection, discount, or sale 
the negotiable paper or other securities owned by the bank ; to 
certify checks drawn upon the bank by depositors ; to collect 
moneys due the bank ; to borrow money and to loan money. 

129. Undisclosed principal. An agent, in making a contract, 
may do so in his own name without disclosing to the third party 
that he is in fact acting for a principal. Factors usually make 
contracts in this way. In such cases the agent is always liable, 
but the principal may be also. Conversely, the principal may 
enforce such a contract against the third party. 

I. General nde. Subject to some exceptions, an undisclosed 
principal is liable to third parties with whom an authorized agent 
has dealt within the scope of the agency, in the same way and 
to the same extent as a disclosed principal, although the third 
person supposed he was dealing with the agent as principal. 



§129] LIABILITY OF PRINCIPAL 221 

The rule works both ways. An undisclosed principal may 
claim the benefits of a contract made by his agent in the course 
of the agency. 

Examples .■ i . A business is conducted in the name of A, who buys goods 
of X. Later X discovers that P owns the business. X may recover the price 
of the goods from P. 

2. A business is conducted in the name of A, who sells goods to X. The 
owner, P, may recover the price of the goods from X. 

2. Exceptio7is. To these rules there are some exceptions, and 
a few of them may be noted. 

a. If the principal or the third party has in good faith settled 
his account with the agent, he is no longer liable. 

Examples : 3. If A conducts P's business in his own name and buys goods 
of X, and A and P have an accounting which includes this item, X cannot 
afterwards sue P. 

4. If under like circumstances A sells goods to X, and X has paid A or 
otherwise settled with him, P cannot afterwards sue X. 

d. In contracts under seal only the parties named in the con- 
tract can sue or be sued, and hence an undisclosed principal could 
neither sue nor be sued upon such a contract. 

Example. 5. A sealed instrument is signed " A. B., C. D., E. F., Trustees 
of the X Church." The church is not liable. The instrument should be signed 
" The X Church, by A. B., C. D., E. F., Trustees." Had this been a simple 
contract (not under seal), the church could have been sued upon it. 

c. In negotiable instruments, only the party named as maker, 
drawer, or indorser can be sued. Hence, if an agent signs such 
an instrument in his own name, he alone is liable upon it. So 
also only the payee can sue ; but this part of the rule is not 
important, since the payee, by indorsing the instrument, could 
confer upon the undisclosed principal or any other person the 
right to sue. 

Example 6. A buys goods for P without disclosing P, and gives a promis- 
sory note to X's order, signed " A, agent." X cannot sue P upon this. The 
word " agent " has no more effect than if A had signed " A, shoemaker," or 
' A, Republican." These are mere words of description. A alone is liable. 
Had this been a nonnegotiable instrument, P could have been sued upon it. 

d. If, after discovering the principal, the third party unequiv- 
ocally elects to hold the agent, he cannot afterwards proceed 



222 PRINCIPAL AND AGENT [Ch. X 

against the principal. The third person has an option to hold 
the agent to the contract made in the agent's name, or to dis- 
regard the agent and proceed against the principal. But he 
cannot do both. He must elect, and his election, once made, is 
binding upon him. 

130. Frauds by agent. If in the course of an authorized nego- 
tiation for the principal an agent makes unauthorized false repre- 
sentations, amounting to fraud or deceit, concerning the subject 
matter of a contract, the principal is liable in the same way as if 
he had made them personally (see sect. 29 ante). 

If the agent commits a fraud for his own benefit and not for 
his principal's, but by means of instrumentalities intrusted to him 
by his principal, the latter may be liable. 

Examples .• i . A stock transfer agent of a corporation fraudulently issues 
stock certificates and sells them for his own benefit. In many American states 
the corporation is held liable. 

2. An agent, authorized by a railway company to receive goods and issue 
bills of lading, fraudulently issues bills of lading for wheat where no wheat is 
received, and sells the bills of lading to innocent buyers. In New York and 
many other states the railway is liable, but England and some of our states 
hold otherwise. 

3. A is both telegraph operator and express agent at M. He telegraphs X 
in the name of X's agent, requesting the transmission of money by express. 
X sends the money by express. The agent takes it and absconds. The 
telegraph company is liable to X. 

IV. Liability of Agent to Third Parties 

131. Where agent alone is liable. If an agent exceeds his 
authority so that his principal is not bound, the agent is liable to 
the third party for the breach of his warranty of authority. He is 
not liable on the contract itself when that was made in the prin- 
cipal's name. The agent is liable for any fraud, deceit, or other 
tort committed by him while about the principal's business. 

If an agent contracts for a fictitious principal, he is liable upon 
the contract himself. 

If an agent signs a sealed instrument or a negotiable instru- 
ment in his own name, or in his name with merely descriptive 
matter after it, he alone is liable unless the body of the instrument 
shows by its recitals that it is the principal's promise. 



§ 132] REVIEW QUESTIONS AND PROBLEMS 223 

Example. " We, as trustees of the X Church, promise to pay to the order 
of G. H. one hundred dollars. A. B., C. D., E. F., Trustees of the X Church." 
This binds the X Church. But if it had read, " We promise to pay, etc.," and 
had been signed in the sam.e way, the church would not have been liable 
(see sect. 129, par. 2, 6, ante). 

132. Where both principal and agent are bound. In a contract 
made by an agent for an undisclosed principal both are bound ; 
that is, the third party may elect to hold either. Even a written 
contract (other than a sealed or negotiable one) signed by the 
agent alone may be shown by parol evidence to be in fact the 
contract of an undisclosed principal. This has already been 
sufficiently considered. 

REVIEW QXJESTIOWS AND PROBLEMS 

Section 116. What is the meaning of agency? Into what two branches 
does the subject fall? Explain each. How is the relation created? What is 
the problem as to third persons ? Why is it difficult ? Why is or is not the 
principal or master liable in each example given ? 

117. Mayan infant appoint an agent? Is the appointment voidable? Is 
it void? Same questions as to an insane person? a married woman? If one 
contracts in behalf of an unincorporated club, who is bound? Is a member 
bound who votes against the making of the contract ? May one partner bind 
another by appointing an agent ? May an agent, by appointing a subagent, 
bind his principal ? 

Problem i. An infant P authorizes an agent A by power of attorney to sell 
and convey P's real property. A sells and conveys P's property. When P 
comes of age, can he ratify this sale and conveyance, or, in order to make it 
valid, must he then execute a new conveyance ? What of an infant's authority 
to an agent to sell a horse ? to buy one ? 

Problem 2. P when sane authorizes A to buy goods for him. P becomes 
insane, and A afterwards purchases of X, who does not know of P's insanity. 
Is P bound ? 

118. Who may be an agent? How must joint agents act ? Exception? 

119. When must^an agent's appointment be in writing? When must it be 
under seal ? Draw a power of attorney to collect debts and give receipts for 
the same. 

120. What is ratification ? What are the essentials ? If in Example i A 
had bought the book in his own name, could P ratify ? Is silence ratification ? 
Can one ratify a forgery of his name to an instrument? How can one be 
estopped in such a case? If one ratifies, from what time does the contract 
obligation date ? If one refuses to ratify, what are the third psurty's rights ? 



224 PRINCIPAL AM) AGENT [Ch. X 

Problem ^. A is the promoter of an intended corporation. He makes a 
contract for it. \\'hen it is duly chartered, the corporation ratifies the contract 
Is it liable for a subsequent breach of the contract? 

Problem ^. A without authority makes a contract in his own name, but 
intending it for the benefit of P. When P hears of it, he ratifies it. Is P bound ? 

Problem j. A without authority' conveyed P's land to X. P received the 
purchase money. X claims this was a ratification. Is it so? 

121. What is a wife's implied authority as agent? an infant child's? an 
unpaid vendor's? 

122. How may an agency be terminated by act of the parties? If a prin- 
cipal terminates it, what are the rights of the agent? of third parties? If the 
agent terminates it before the contract expires, what may he recover for ser\-- 
ices already rendered? What is the effect of the death of either party? of 
illness ? Effect of impossibility ? 

Problem 6. P authorized A to sell his lands. Later he also authorized B to 
sell them. On September g A sold them to X. On September i o B sold them 
to Y. P conveyed to X, and Y sues P for breach of contract Result? 

Problem y. P authorizes A to receive payments of X. P dies. X pays A, 
neither knowing of P's death. Is the payment binding upon P's estate? 

123. What is an irrevocable agency? \\'hat is a power coupled with an 
interest ? Illustrate. 

Problem S. P borrowed $2000 of A and gave the latter a power to collect 
certain rents and pay himself from the proceeds. P died. Was the agencv to 
collect the rents terminated ? Suppose a tenant had paid rent to A after P's 
death ? 

124. What are the obligations of the principal to the agent? ^\'hat are an 
agent's damages when the principal wrongfully revokes the agency ? \\Tien an 
agency is revoked by impossibility or by the death of the principal, how much 
may an agent recover ? \\'hat is reimbursement ? What is indemnit\- ? 

Problem g. A agrees to work for P for a year at 520 a month. At the end 
of four months A quits the employment without cause. How much may A 
recover of P ? 

Problem 10. In a similar case P discharges A without cause at the end of 
four months. How much may A recover? 

125. What are the agent's duties? Illustrate each. If an agent acts for 
his principal and also for a third person, what is the result ? If an agent makes 
a secret profit, what is the result? May an agent delegate his duties? Explain 
and illustrate. What is a del credere agency? How does it differ from a sale? 
What are the obligations of a gratuitous agent? 

Problem 11. P directs A to pay taxes on P's land. A neglects to do so. 
The lands are sold for taxes. A bids them in and takes a tax deed. Is it good 
against P? 



REVIEW QUESTIONS AND PROBLEMS 225 

Problem 12. A sold for P certain prize packages which it was illegal to 
sell, and received the money for them. P sues A for the money. A sets up 
the illegality. Result ? 

Problem 7j. P authorizes A to accept biUs of exchange drawn on P. When 
a bill comes in, A decides to accept it and tells B, a clerk, to write the accept- 
ance. B writes, "Accepted, P, by B." Is P bound.' How would it be if A 
had told B to exercise his judgment and accept bills, and B had accepted this ? 

126. State the rules as to a principal's liability to third persons for the acts 
of his agent. Illustrate. 

127. How is an agent's apparent authority determined? \Vhat is actual 
authority and how determined? What are incidental powers? Illustrate. 
What are customary powers? What are powers arising from the conduct 
of the principal? Illustrate. \\'hat is the distinction between general and 
special agents? Illustrate. 

Problem 14.. P gives A general authority to sell goods. A sells them to X 
and warrants them. Is P bound by the warranty ? 

Problem zj. P directs A to loan money and take a note and mortgage. 
A does so. The note and mortgage remain in A's hands. The borrower 
pays A. Is P bound by this payment? 

Problem 16. P authorizes A to make collections. X gives A a check pay- 
able to the order of P. A indorses the check in P's name, obtains the money, 
and absconds. Does the loss fall upon P or the bank ? 

128. Define factor. Explain his powers. Define broker. Distinguish from 
factor. Define auctioneer. Whose agent is he? Define attorney at law and 
state some of his powers. State the powers of a bank cashier. 

Problem 77. A broker is authorized by P to sell goods and sells them to X. 
P delivers the goods to X. The, broker then collects the price from X and 
absconds. P sues X for the price. Can he recover? 

Problem 18. P authorized an auctioneer to sell his farm for S500 cash 
down, balance of the price bid in thirty days. These terms were pubUcly stated 
at the time of the auction. The auctioneer sold to X for S3°°°i and took X's 
check for the S500. X had no funds in bank to meet the check, but two days 
later deposited funds and the check was paid to the auctioneer. Meanwhile 
P had learned of the transaction and repudiated the sale. X now sues P 
for breach of contract. Result? 

129. What is an undisclosed principal? State the general rule as to the 
liabiUty of an undisclosed principal. State the general rule as to his rights. 
State the exceptions and illustrate each. 

Problem ig. P owns a hotel. He conducts it in the name of A, and it 
is supposed that A is the proprietor. X sells cigars on credit to A for the 
hotel. P has forbidden A to buy cigars on credit. Is P liable to X for the 
cigars ? 



226 PRINCIPAL AND AGENT [Ch. X 

Problem 20. In the above case P, after learning that A bought on credit, 
settled with the agent, paying him in full for the cost of the cigars. Can X 
then recover of P ? 

Problem 21. In the above case (Problem 19) X, after learning that P is 
the true principal, sues A and obtains a judgment against him. This remains 
unsatisfied, and he then sues P. Can he maintain this action ? 

Problem 22. In the above case (Problem 19) X warranted the cigars. 
They turned out to be inferior to the warranty. Can P recover against X for 
breach of the warranty ? 

Problem 2j. In the above case (Problem 22) the agent, before X knows 
that P is the true principal, settles with X for the breach of warranty. Can 
P now sue X? 

130. Is the principal liable for the frauds of the agent committed for the 
principal's benefit? for the agent's benefit? Illustrate. 

Problem 24.. P authorizes A to sell his land. A sells to X and fraudulently 
represents the land to be well timbered and well watered. When X discovers 
the fraud he sues P, who has received the purchase money without knowing 
of his agent's fraud. Is P liable to X in this action for deceit? 

131. How is an agent liable to the third person upon an unauthorized 
contract? How is he liable if he deals in the name of a fictitious principal? 
How is he liable if he signs in his own name a sealed or negotiable instrument? 

Problem. 55. P authorizes A to issue insurance. A without authority repre- 
sents to X that he may keep petroleum upon the insured premises. X's prem- 
ises burn. P successfully defends an action upon the policy because X kept 
petroleum. X sues A for breach of his warranty of authority to make such 
representation. Result ? 

132. Who are liable on an authorized written or oral contract made by an 
agent in his own name ? 



CHAPTER XI 

MASTER AND SERVANT 

I. Injuries to Third Persons 

133. Negligent torts by servants. If in the conduct of his 
master's business a servant negligently injures a third person 
(other than a fellow servant), the master is liable to the injured 
person ; the servant is of course also liable, because everyone 
is liable for his own torts. But if the injury is due to some 
contributing negligence of the third person, he cannot recover 
from either the master or the servant. 

Examples .■ i . A railway engineer negligently runs over X at a railway 
crossing. The railway company is liable to X. The engineer is also liable. 

2. A workman negligently allows a brick to fall from a building into the 
street. It strikes and injures X. The employer of the negligent workman is 
liable to X. The workman also is liable. 

3. A servant at a hotel negligently spills soup upon a guest's dress. The 
hotel keeper is liable for the damage. The servant also is liable. 

4. X negligently fails to look and listen at a railway crossing. The engineer 
negligently fails to sound a signal. X is struck and injured by the locomotive. 
He cannot recover, because of his contributory neghgence. 

134. Willful torts by servants. A master is liable for willful 
torts committed by his servant in the course of the employment 
and in the supposed furtherance thereof. If the servant is acting 
for the master and supposes, however mistakenly, that his act 
will further the master's interests, the master is liable. 

Examples: I. X's vehicle obstructs the M. Street Railway Company's 
track. S is motorman on one of its cars. S orders X to get off the track. 
There is a dispute and S purposely drives his car against X's vehicle and 
damages it. The Railway Company is liable if S did this in order to get a 
clear track and make his schedule time. S also is liable for his own tort. 

2. S sells tickets for the M. Elevated Railway. X buys a ticket and lays 
down a bill. S gives X the change and then mistakenly thinks the bill is 
counterfeit and has X arrested. The Railway Company is liable for false im- 
prisonment if S did this in order to get good money for the ticket ; but if S 

227 



228 MASTER AND SERVANT [Ch. XI 

did it to serve the public and punish a supposed criminal, the Railway 
Company is not liable. In either case S is personally liable. 

A public carrier of passengers is liable for any willful injury 
done to a passenger by one of its employees, whether done in 
the supposed discharge of a duty or out of personal malice. The 
carrier owes a very high duty to passengers. 

Example 3. A street-car conductor sees one of his enemies on the street car 
and assaults him to pay off an old grudge. The street-car company is liable. 
The conductor is of course personally liable. 



II. Injuries to Servants 

135. Injury to one servant by another. The master is not 
liable to one servant for an injury occasioned by the negligence 
of a fellow servant. He is liable for an injury occasioned by the 
negligence of a vice principal. 

A vice principal is one who is charged by the- master with 
the performance of any of these duties : {a) providing a safe 
place to work ; (5) providing safe tools ; (c) providing a suffi- 
cient number of competent servants ; (d) providing suitable 
rules and regulations to govern the service ; [e) providing 
inspection and repair of instrumentalities ; (/) providing special 
warning of any extraordinary danger. If one charged with per- 
forming any of these duties is negligent in the performance 
thereof, and an employee is injured in consequence of such 
negligence, the master is liable. The master does not insure 
safety in these respects ; he insures that due care will be taken. 

A fellow servant is one who performs operative acts. If in 
operating machinery or in any similar act one fellow servant 
injures another, the master is not liable. It is said that a servant, 
in entering the employment, assumes the risk as to the negligence 
of his fellow servants. 

Examples : i. S and T are both employed by M. S is told to repair a 
machine and does so negligently. The machine breaks down while T is 
operating it, and injures T. M. is liable to T. In repairing the machine S 
was a vice principal. 

2. Owing to the negligence of S in operating a machine T is injured. M is 
not liable to T. In operating the machine S is a fellow servant of T. 



§§ 136, 137] INJURIES TO SERVANTS 229 

3. Owing to the negligence of a railway engineer a train is derailed and 
a brakeman injured. The railway company is not liable to the brakeman. An 
engineer is a fellow servant of a brakeman ; so also is a conductor ; so also 
is a switchman. But a train dispatcher is a vice principal. 

In Ohio and some other states a superior officer, like a con- 
ductor or a manager or a foreman, is always a vice principal, 
even if he performs operative acts ; but the general rule is that 
it is the nature of the act and not the rank of the actor that 
is decisive. Employers' liability acts exist in several states, 
enlarging the liability of the master to one servant for the neg- 
ligence of a coservant. 

136. The master's nonassignable duties. The duty to use care 
to furnish safe machinery, safe tools, proper inspection, and the 
like, as specified in sect. 135, is called a nonassignable duty, 
because, no matter who is delegated to perform it, the master 
remains liable to his servants for any negligence in that regard. 

This rule is qualified by the further rule that if a servant, with 
full knowledge of some defect, remains in the employment, he 
assumes the risk as to the defect and cannot recover from the 
master if he is injured in consequence of it. 

Example i. S is told to operate a machine. He knows it is defective. He 
operates it and is injured because of this defect. He cannot recover. 

But if the master promises to repair the defect, the servant 
may remain a reasonable time without assuming the risk. 

Example 2. As above. S objects to the machine because it is defective. 
The master promises to repair it. The next day S is injured. The master 
is liable to S. 

In any case a servant cannot recover if his injury is due to 
his own contributory negligence. 

Example 3. S, after the master's promise to repair, operates the machine. 
He is injured by his own negligence in the manner of operating it. He cannot 
recover. 

137. Employers' liability acts. Statutes called employers' 
liability acts have been enacted in many jurisdictions. These 
laws materially change the common-law rules laid down above 
(sects. 135-136). The Federal Employers' Liability Act provides 



230 MASTER AND SERVANT [Ch. XI 

that all common carriers by railroad which are engaged in inter- 
state commerce shall be liable to employees for injuries sustained 
in the course of their employment which are due to the negli- 
gence of other employees of the railroad or which are caused 
by defects in engines, cars, track, or other equipment. This is 
an abolition of the fellow-servant rule. The statute also abolishes 
the rule that contributory negligence bars recovery and adopts the 
rule of comparative negligence. If both employer and employee 
have been negligent, the employee will not be wholly barred from 
recovery, but his recovery will be reduced by the jury according 
to the relative importance of his negligence. The rule of assump- 
tion of risk is also partially abolished by this act, and the carrier 
is prohibited from exempting itself from liability for its negligence. 

In at least thirty states employers' liability acts have been 
enacted, limiting or abolishing the fellow-servant rule, the rule 
of contributory negligence, and the assumption-of-risk rule. Their 
variations are numerous, and it is impossible to give them in detail 
here. Some apply only to railroads and their employees, while 
others are concerned with all employers and employees. 

138. Workmen's compensation and insurance acts. Within 
the past ten years many legislatures have enacted workmen's 
compensation and insurance laws for the purpose of providing 
financial relief to workmen injured in the course of their employ- 
ment, regardless of the cause of the injury, unless it were in- 
tentionally self-inflicted or in some cases due to gross negligence 
or intoxication. The theory of these acts is that losses due to 
injuries suffered by workmen in the ordinary course of their 
employment ought to be borne by the industry, and ultimately 
by the consuming public, rather than by the workmen. 

The compensation acts are of two classes, elective and com- 
pulsory. In fourteen states and two territories ^ the elective system 
is in force as to all classes of employment covered by the acts. 
In ten states^ the laws are elective as to private employers, but 

1 Alaska, Colorado, Connecticut, Illinois, Kansas, Kentucky, Massachusetts, 
Minnesota, Nebraska, New Hampshire, Oregon, Porto Rico, Rhode Island, 
Texas, Vermont, and West Virginia. 

^ Indiana, Iowa, Louisiana, Maine, Michigan, Montana, Nevada, New Jersey, 
I'ennsylvania, and Wisconsin. 



§138] INJURIES TO SERVANTS 231 

compulsory as to public employers, as, for example, the state, 
counties, and municipalities. In eight states and one territory,^ 
and under the federal act, it is compulsory for all employers to 
abide by the provisions of the statutes. 

In some states these acts apply to all industries, in some to 
extra-hazardous employments only, while in others all occupations 
except domestic and farm labor are included. 

Under the elective system neither employer nor employee is 
bound to come under the act and accept its liabilities and bene- 
fits, but both must elect to do so before the act will apply. In 
many states election to come within the act is presumed in the 
absence of written notice to the contrary. Under the compulsory 
system, on the other hand, the employer must accept the com- 
pensation law, although the employee is allowed to sue as at 
common law in some cases, as in New York when the employer 
fails to secure payment of compensation under the act. 

Under the elective system the defenses of assumed risk and 
contributory negligence, and the fellow-servant rule, are generally 
abolished, and suits for damages outside the act are not allowed 
after the workman has elected to come under the act. 

Generally, under all the compensation statutes, waivers of the 
provisions of the acts are prohibited and the employer is required 
to give proof of solvency or to insure against the risks. The em- 
ployee is not eligible for compensation unless his disability con- 
tinues for a period of some appreciable length, the time ranging 
from six days to three weeks. The amount which the employee 
is entitled to obtain for any given injury is fixed by these 
statutes. These sums vary greatly, but are usually a certain 
proportion of the employee's weekly salary for a given period. 
Thus, in New York, if the employee is killed, the employer 
is required to pay reasonable funeral expenses, not exceeding 
^100, and to the widow 30 per cent of the deceased's wages 
until the death or remarriage of the widow, and 10 per cent 
additional for each child under eighteen years, the total weekly 
payments, however, not to exceed two thirds of the weekly 
wages of the deceased. 

1 Arizona, California, Hawaii, Maryland, New York, Ohio, Oklahoma, Wash- 
ington, and Wyoming. 



232 MASTER AND SERVANT [Ch. XI 

Disputes under the acts are sometimes settled by the courts, 
but more often by an industrial commission having charge of the 
enforcement of the statutes. 

The states having the workmen's compensation statutes are 
divided into two classes with respect to the question of securing 
to the workmen the payments due them under the acts. In 
twenty-five states and two territories ^ the employer must either 
secure the payment of the compensation by insurance or furnish 
evidence of his financial responsibility. In seven states and one 
territory^ the employer is not compelled to insure or make other 
provision for securing the payments, but he may do so if he desires. 

The methods of insurance are various. In sixteen states and 
one territory there are insurance funds operated wholly or in 
part by the state. In four states and one territory^ the employer 
is compelled to insure in a fund administered wholly by the 
state. In nine states* a state-operated insurance company is 
maintained in competition with private insurance companies. In 
three states ^ insurance is compulsory on the part of the employer 
either in a private company or in an insurance fund operated by 
the state and the employers in combination. In sixteen states and 
two territories s there are no insurance funds operated in whole 
or in part by the state, and the employer, if he insures his risk 
under the workmen's compensation acts, either voluntarily or 
compulsorily, must do so in a private insurance company. 

1 Colorado, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, 
Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New 
York, Ohio, Oklahoma, Oregon, Pennsylvania, Porto Rico, Rhode Island, Texas, 
Vermont, Washington, West Virginia, Wisconsin, and Wyoming. 

^ Alaska, Arizona, California, Kansas, Louisiana, Minnesota, Nebraska, and 
New Jersey. 

" Nevada, Oregon, Porto Rico, Washington, and Wyoming. 

^ California, Colorado, Maryland, Michigan, Montana, New York, Ohio, Penn- 
sylvania, and West Virginia. 

^ Kentucky, Massachusetts, and Texas. 

8 Alaska, Arizona, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Loui- 
siana, Maine, Minnesota, Nebraska, New Hampshire, New Jersey, Oklahoma, 
Rhode Island, Vermont, and Wisconsin. 



REVIEW QUESTIONS AND PROBLEMS 233 

REVIEW QUESTIONS AND PROBLEMS 

Section 133. When is a master liable for negligent injuries by his 
servant to a third person? What will bar the action? 

134. When is a master liable for willful injuries inflicted by his servant 
upon a third person? What is the rule as to public carriers? 

Problem I. B, a boy of twelve, steals a ride on a freight train. The brake- 
man discovers him and pushes him off while the train is in motion, and the 
boy is injured. Is the railway company liable ? 

Problem 2. B is employed to repair electric lights in X's building. While 
he is on a stepladder X's janitor, who is sweeping the room, pushes the ladder 
intentionally and B falls and is injured. Is X liable ? 

135. Who is a vice principal? Who is a fellow servant? Is a superior 
officer a vice principal? What is the usual test as to the master's liability 
to one employee for a negligent injury by another employee? What is the 
purpose of employers' liability acts? 

Problem 3. Owing to the negligence of a switchman a train is derailed 
and the engineer injured. Is the railway company liable to its engineer for 
the negligence of its switchman? 

Problem 4. B was a laborer in X's factory. C was superintendent of 
the factory. B was lifting a flywheel of an engine off from its center, when 
C negligently turned on the steam and started the wheel, injuring B. Is X 
liable to B ? 

Problem j. A workman in the X Railway Company's repair shops negli- 
gently repairs a locomotive boiler. When it is used it explodes and injures an 
engineer. Is the railway company liable ? 

136. What are the master's nonassignable duties ? How may the risk as 
to these be shifted to the employee ? What is the effect of a promise to repair 
a defect ? What is the effect of contributory negligence ? 

Problem 6. B was X's domestic servant, and X agreed to furnish board 
and lodging. The roof over B's room leaked. X promised to repair the roof. 
B stayed and owing to the leak took cold and was ill. Is X liable to B ? 

137. What are the employers' liability acts? Is one in force in your state? 
How do they change the common-law rules regarding the master's liability 
to his servant for injuries? 

138. What are the workmen's compensation laws? Is one in force in 
your state ? When is such a law elective ? When compulsory ? What are the 
rights of a workman under such a law when he is injured ? Are all industries 
included within these laws ? May an employee obtain damages in the courts 
in addition to what he secures under the compensation laws? What are the 
compulsory and elective insurance systems provided by some statutes ? 



PART V. BUSINESS ASSOCIATIONS 
CHAPTER XII 

PARTNERSHIPS AND JOINT-STOCK COMPANIES 

139. Forms of conducting business. Business may be con- 
ducted by a sole trader, or by a partnership, or by a joint-stock 
company, or by a corporation. 

A sole proprietor or trader is one who conducts his business 
in person or through agents, without admitting anyone else to 
share in the profits. He alone owns the property embarked in 
the business ; he alone has a decisive voice in the management 
of the business ; and he alone is liable for debts and entitled 
to credits. He may, of course, have agents to whom he intrusts 
many important matters, but they are his employees and are 
responsible to him alone. 

It is the combination of persons in business that calls for 
special consideration. 

1. Partnerships. In order to increase capital and make it pos- 
sible to do a larger business, two or more persons may combine 
and do business together as one firm. A partnership involves 
a high degree of confidence in the ability, fidelity, and integrity 
of one's partners, without relieving one of personal liability to 
third persons for contract obligations and torts. The partnership 
has three important characteristics : («) the death or retirement 
of one partner dissolves the firm ; {b) each partner is an agent 
for the firm ; (c) each partner is individually liable for the debts 
of the firm. 

2. Joint-stock companies. The joint-stock company is a large 
partnership in which the interests are represented by shares of 
stock, as in a corporation. It differs from a partnership in that 
the death or retirement of a shareholder does not dissolve the com- 
pany and in that a shareholder is not an agent of the company 

23s 



236 PARTNERSHIPS [C». XII 

unless duly elected or appointed as such. It is like a partner- 
ship in that each member is individually liable for the debts 
of the company. 

3. Corporations. A corporation is a distinct legal entity inde- 
pendent of its stockholders. Partnerships and joint-stock com- 
panies are formed by the agreement of the members and require 
no statutory authorization. A corporation is the creature of 
statute and is by statute given a legal being and invested with 
legal powers as a separate entity. Title to property vests in it, 
not in its members ; it acts through its agents as a legal person ; 
it is liable for its debts and torts, and no liability (unless expressly 
fixed by statute) rests upon its members. The last feature is 
highly important. Persons may invest money in a corporation 
without becoming individually liable for the debts of the corpora- 
tion, while in a partnership or joint-stock company each partner 
or shareholder is individually liable. 

Statutes, of course, may and often do modify these results. Thus we have 
full-liability corporations authorized in some states, while wc also have limited 
partnerships in some. In the full-liability corporation each shareholder is 
individually liable, while in the limited partnership a limited partner is not in- 
dividually liable beyond a specified amount. In some corporations the statutes 
make shareholders individually liable to a limited amount, but the type is as 
stated above. 

I. Partnerships 

140. What constitutes a partnership. A partnership may be 
general or limited, and partners may be real or ostensible, active 
or dormant. 

I. General partnerships. A general partnership is a voluntar}' 
association of two or more persons under an agreement to 
carry on in common, as if they were one person or an entity, 
a business or occupation, and to share as common owners the 
profits of the enterprise. A partnership agreement need not be in 
writing. It usually is in writing, however, and the document is 
called the Articles of Partnership (sec page 244 post). 

The mere sharing of profits is not a conclusive test of the 
existence of a partnership, although it is strong evidence of it ; 
an agreement to share both profits and losses is still stronger 
evidence. It is often difficult to decide whether or not a particular 



§140] WHAT COXSTITUTES 



^n 



agreement constitutes a partnership. In general it may be said 
that there must be a community of interest and control in carry- 
ing on a business by which each is usually agent for the others 
and under which there is a division of profits. This is a highly 
technical subject, and it is impossible to treat it here in detail. 

Two persons may be partners as to third persons while by force 
of the agreement between themselves they are not partners as to 
each other. We are now chiefly concerned with the problem 
whether they are partners as to third persons. 

Examples: i. A and B agree to carry packages, etc. for hire. A is to 
furnish horse and cart and to give his services. A is to receive a fixed sum. 
They are to divide the expenses and to share the profits over and above 
A's fixed salary. This is a partnership. They are carrying on a business 
in common, with a view to profits. One may in such case be paid specially 
for services. 

2. An owner of a farm lets it on shares imder an agreement to take one 
half the products of the farm as rent. This is not a partnership, but a lease, 
with an uncertain and contingent rental. 

3. A manufacturer engages an agent to sell goods, agreeing to give him 
one third of the net profits on any sales made by him. This is not a partner- 
ship, but an agency. The agent does not carry on, in common with the 
manufacturer, the business of making and vending the goods. 

4. M furnishes capital to start a retail store. N puts in his services in 
managing the business. They agree to share the profits. This is a partner- 
ship. They carry on a business in common, with a ^•iew to profits. 

5. M and X each put in services to carry on in common a law business, 
with a view to profits which they are to share. This is a partnership. 

2. Ostensible partner. If a man holds himself out as a partner 
or permits others to hold him out as a partner, when in fact he is 
not, he becomes liable as partner to third persons who deal mth 
the supposed firm relying upon this appearance of partnership. 

Examples : 6. ;\I and N dissolve partnership. M allows his name to 
remain over the door of the estabhshment and upon the letterheads iKed in 
the business. X sells goods to the supposed firm, beheving AI to be still a 
partner. X may hold M hable for the price of the goods. M is estopped by 
his conduct to deny that he is a partner. He should give notice to former 
customers of his withdrawal from the partnership. 

7. W introduced Y to X as the moneyed partner. Y was not a partner, 
but he did not deny W's statement X trusted to this representation and 
suffered loss. Y is Uable. He is estopped to deny that he was a partner. " If 
a man won't speak when he should, he shan't when he would." 



238 PARTNERSHIPS [Ch. XII 

3. Dormant partner. A dormant partner is one who is un- 
Itnown as a partner. He occupies much the same position as 
an undisclosed principal. He is liable on the firm contracts when ■ 
discovered, and he is entitled as a partner to the benefit of them. 

4. Limited partnerships. These exist only by force of statute. 
They are partnerships in which one or more of the partners are 
not liable for partnership debts beyond the sum each has con- 
tributed to the capital. Such partnerships must have at least one 
general partner whose liability is unlimited. The general partners 
manage the business, sharing the profits with the limited partners. 
The statutes prescribe how such a partnership may be formed, 
and the statutes must be strictly followed ; any violation of them 
will render the concern a general partnership. The theory is that 
it is a general partnership except so far as the statute, duly com- 
plied with, renders it a limited partnership. These partnerships 
have never been authprized in England. 

5. Who may be a partner. Any person who can make con- 
tracts may become a party to a partnership contract. By modem . 
statutes married women may make contracts and hence may 
become partners, although some states do not permit a married 
woman to become a partner with her husband. Infants may 
become partners, but the contract is voidable at the will of the 
infant. So far, however, as an infant has actually put his property 
into a partnership, he cannot withdraw it to the prejudice of credi- 
tors. A corporation cannot become a partner unless permitted to 
do so by its charter. 

141 . Rights and duties of partners as to each other. Each part- 
ner is bound to exercise toward his associates in the partnership 
the highest good faith. He can make no secret profits. 

Examples .• I . A and B are partners in a grocery. A is individually a 
dealer in sugar. A without B's knowledge sells sugar to the firm at a profit. 
A must share this profit with B. 

2. A, B, and C as partners are lessees of a store. When the lease expires 
A renews it in his own name. A is held a trustee of this lease for the benefit 
of the partnership. 

Each partner is bound, unless otherwise stipulated, to use due 
diligence in the conduct of the business, and can claim no com- 
pensation except his share of the profits. But if one partner 



§142] POWERS OF PARTNERS 239 

willfully neglects the business and throws all the labor upon 
another, the active partner may be allowed compensation, at the 
discretion of a court, upon a final accounting. 

Each partner may claim the right to take part in the business, 
and each is entitled to have the business conducted according to 
the terms of the agreement. No change can be made in the 
nature of the business, and no new partner can be admitted, with- 
out the consent of each ; but as to incidental matters a majority 
may rule. 

If the partnership is for a definite period, a withdrawal of one 
partner before the expiration of the period, without the consent 
of the others, is a breach of contract for which they may recover 
damages. If the partnership is at will, a partner may retire at 
any time. One partner cannot be expelled by the others. -If a 
partner sells his interest, the buyer gets only the seller's share 
of such interest as remains after the firm creditors are paid and 
the partnership is wound up. 

Each partner is entitled to an accounting of profits. No action 
at law can ordinarily be maintained by one partner against the 
others, but an accounting in equity may be had. If one has paid 
more than his share of expenses, he is entitled to contribution 
from the others. 

142. Powers of partners. Each partner is an agent for the 
others in the conduct of firm business, and the partnership is 
bound by any contract made by a partner within the scope of his 
authority. So extensive are the powers of each partner that one 
ought not to form a partnership with another unless he has the 
utmost confidence in that other's integrity and judgment. The 
following are some of the powers possessed by a partner in a 
trading partnership. 

1 . To sell or mortgage any personal property belonging to the 
firm, and even to dispose of the entire stock at one sale ; but 
not to sell real property, because the conveyance must be by all 
the partners or by one authorized by power of attorney from 
the others ; and not to transfer firm property in payment of his 
individual debt. 

2. To purchase any goods dealt in by the firm or usually 
employed in such a business, but not other or different goods; 



240 PARTNERSHIPS [Ch. XII 

a grocery partnership would not carry any implied power to 
purchase shoes. 

3. To receive payment of debts due the firm and give receipts. 

4. To make, accept, and indorse negotiable instruments in the 
name of a trading firm, that is, a firm that buys or sells ; but in 
a nontrading partnership, as a law firm, a hotel firm, or a mining 
firm, a partner does not possess this implied power. 

5. To borrow money on the credit of a trading firm and give 
security by pledge or mortgage upon the firm property, but not 
in the case of a nontrading firm. 

6. To engage agents and servants for the conduct of the 
business. 

The following are some of the powers which a partner may not 
exercise without the consent of his copartners. 

1. To bind the firm by deed. 

2. To bind the firm by a guaranty of his own or another's debt. 

3. To bind the firm by a submission to arbitration or by a 
confession of judgment. 

4. To assign the entire firm property to pay the firm debts un- 
less the other partners are inaccessible and the matter is urgent. 

After the dissolution of a firm some powers remain in each 
partner for the purpose of winding up its affairs. A partner 
may still sell property and receive and pay debts. He cannot 
make new contracts or issue negotiable instruments, although he 
may indorse an instrument "" without recourse " in order to sell 
or collect it. 

143. Liabilities of partners. The obligations of a partnership 
are the joint obligations of its members ; that is, the action to 
enforce it is brought against all jointly. But although the creditor 
brings an action for his debt against all the members of the part- 
nership jointly, and judgment is entered against them jointly, he 
may satisfy his judgment out of the individual property of one 
partner, and is not bound to levy upon the joint-partnership 
property. If creditors do exhaust the partnership property, they 
may then go against the individual property of the partners to 
make up any deficiency. A partner who thus satisfies a firm 
debt out of his property is entitled to contribution from his 
fellow partners. 



§144] RIGHTS OF CREDITORS 241 

An outgoing partner remains liable to creditors for debts con- 
tracted while he was a partner, unless they release him. An incom- 
ing partner is not liable for debts contracted before he became a 
member of the firm, unless he assumes and agrees to pay them. 

Partners are liable for torts committed by a copartner or a serv- 
ant in the course of the firm business. Such liability is joint and 
several ; that is, the action may be against all jointly or against 
one or against several. 

144. Rights and remedies of creditors. A partner may be liable 
to creditors of the firm of which he is a member and also liable 
to individual creditors ; he has partnership property and also 
separate property. The problem arises as to the rights of the 
two classes of creditors in the two classes of property. 

1. Firm creditors. Firm creditors have a right to have the 
partnership property applied first to the payment of the partner- 
ship debts. An individual creditor of a partner cannot attach the 
partner's interest in the partnership to the prejudice of the part- 
nership creditors. After the firm creditors are paid, the separate 
creditors of a partner are entitled to any surplus belonging to him. 

Examples .■ i . A and B, partners in a grocery, purchase flour of X, and 
A purchases a watch of Y. Y obtains judgment against A for the watch, and 
levies upon A's interest in the partnership. X afterwards obtains judgment 
against A and B for the flour, and levies upon the partnership property. Y's 
attachment is not good as against X's. Y can obtain any interest remaining 
in A after X's judgment is satisfied. 

2. In payment for the watch, A turns over to Y a horse and wagon belong- 
ing to the firm. If Y knew this was firm property, he cannot hold it against 
firm creditors. If he took it believing it to be A's, the courts differ as to 
whether the firm creditors can recover A's interest in it. 

2. Separate creditors. The weight of authority is in favor of 
the converse of this rule, namely, that the separate creditors of 
a partner are entitled to be paid first out of his separate estate. 
After the separate creditors are paid, the partnership creditors 
are entitled to the surplus. 

Examples: 3. A and B, partners, are insolvent. They owe X #15,000. 
The partnership property is valued at $10,000. A's separate property is valued 
at $6000, and he owes Y $4000. B has no separate property. Y will be paid 
in full out of A's separate property. X will get the $10,000 of joint property 
and the surplus of $2000 from A's separate estate. 



242 PARTNERSHIPS LCh. XII 

4. As above. A and B owe X $7000. A owes Y $14,000. X will be paid 
in full. Y will get the $5ooo from A's separate estate and A's portion of the 
surplus of $3000 from the joint property after X is paid in full. 

These rules are thus stated : The joint estate is applied to 
the payment of joint debts, and the separate estate to the pay- 
ment of separate debts, any surplus from either estate being 
carried over to the other if necessary. But this applies only 
when there are partnership assets. If there are no partner- 
ship assets, the firm creditors share equally with the individual 
creditors. 

145. Dissolution. A partnership may be dissolved in conse- 
quence of the happening of any of the following events : 

1 . By the withdrawal of a partner. If the term is indefinite, a 
partner may withdraw at will. If the partnership is for a definite 
period, the withdrawal of a partner before the expiration of the 
period subjects him to an action for damages, but the partnership 
is dissolved. 

2. The alienation of a partner's interest works a dissolution, 
but the remaining partner may form a new partnership wth the 
purchaser. 

3. The bankruptcy of a partner works a dissolution unless 
otherwise agreed. 

4. The bankruptcy of a firm works a dissolution. 

5. The death of a partner works a dissolution unless other- 
wise agreed. Title to partnership property remains in the surviv- 
ing partners for the purpose of winding up the partnership. They 
must first pay the firm debts and then distribute the remainder, 
accounting to the estate of the deceased partner for his share. 
They alone sue or are sued upon firm accounts. But if the firm 
assets are insufficient to pay the firm debts, recourse may be had 
against the estate of the deceased partner as well as against the 
estates of the survivors. 

6. If the partners are subjects and residents of different 
countries, and their respective countries declare war against each 
other, this works a dissolution of the partnership. 

7. A court may decree a dissolution for the misconduct or 
insanity of a partner or upon a showing that the business is carried 
on at a loss. 



§146] JOINT-STOCK COMPANIES 243 

Upon a dissolution there should be notice to third persons, in 
order that each partner may be protected against further contracts 
made in the firm name. Special notice should be given to those 
accustomed to deal with the firm, and general notice, by publica- 
tion in a newspaper, to the public at large. Existing creditors 
must be paid before the firm assets are divided. 

Surviving partners have power to wind up the affairs of a 
partnership after dissolution. The representatives of a deceased 
partner, or an assignee of a bankrupt partner, cannot interfere 
except to protect the rights of the deceased or bankrupt partner. 

The property may be sold if necessary. The good will is a 
property that should be sold if it has pecuniary value ; the pur- 
chaser acquires the right to carry on the business under the old 
name, with himself named as successor to that business. 

Upon the dissolution of a partnership, if there is a loss, it must 
be paid first out of profits, next out of capital, and lastly, if neces- 
sary, by the partners individually in the proportion in which they 
were entitled to share profits. If there is a gain, the assets should 
be used first in paying the debts and liabilities of the firm to per- 
sons who are not partners therein ; secondly, in paying to each 
partner what is due to him from the firm for advances as dis- 
tinguished from capital ; thirdly, in paying to each partner ratably 
what is due from the firm to him in respect of capital ; fourthly, 
the ultimate residue should be divided among the partners in the 
proportion in which profits are divided. 

II. Joint-Stock Companies 

146. How distinguished from ordinary partnerships. Joint- 
stock companies are large partnerships in which the capital is 
divided into shares and each partnei''s interest is represented 
by his ownership of these shares. Such partnerships are legal 
at common law, but they have very generally been regulated by 
statutes. 

These companies differ from ordinary partnerships in the 
following respects : 

I. They are not dissolved by the same causes. The shares are 
transferable. If a shareholder dies, his shares pass to his estate ; 



244 PARTNERSHIPS [Ch. xil 

if he becomes bankrupt, his shares pass to his assignee ; if he 
sells his shares, the transferee succeeds to his rights. There 
may be the withdrawal of partners and the introduction of new 
partners without a dissolution of the company. 

2. The shareholders do not all participate in the management, 
but elect directors or other officers who conduct the business. 
Members who are not officers have no authority to bind the 
company. The articles of association usually regulate this. 

147. How like ordinary partnersliips. Joint-stock companies 
are like ordinary partnerships in the following respects : 

1 . Each member is personally liable for the debts and contracts 
of the company. If he sells his shares he remains liable for 
debts contracted while he owned them. 

2. Unless otherwise provided by statute, all the members must 
join in an action by the company, and as many as the creditor 
wishes to hold must be joined in an action against the company. 
By statute in New York and some other states, such a joint-stock 
company may sue or be sued in the name of its president, 
treasurer, or other designated officer representing all the members. 

Partnership Agreement 

Articles of Agreement, made the first day of May, one thousand nine 
hundred and thirteen, between George Rice, of the city of Albany, county of 
Albany, state of New York, and Alfred Post, of the same place, 

WITNESSETH, as foUows : 

I. The said parties above named have agreed to become partners in busi- 
ness, and by these presents do agree to be partners together under and by the 
name or firm of Rice and Post, at the said city of Albany, in the dry goods 
business, buying and selling all sorts of goods, wares, and merchandise to the 
said business belonging. The partnership to commence on the first day of 
June, 1913, and to continue ten years. 

II. To that end and purpose the said George Rice has contributed the sum 
of five thousand dollars ($5000) in cash, and the said Alfred Post has con- 
tributed the lease of the store at no Main Street, in the said city of Albany, 
to be occupied by them, and the stock of goods and good will of the business 
there heretofore carried on by him, which are together estimated and valued 
by the parties at the like sum of five thousand dollars (J 5000), the capital stock 
so formed to be used and employed in common between them, for the support 
and management of the said business, to their mutual benefit and advantage. 

III. At all times during the continuance of their partnership they and each 
of them will give their attendance, and to the utmost of their skill and power 



§147] PARTNERSHIP AGREEMENT 245 

exert themselves for their joint interest, profit, benefit, and advantage, and 
truly buy, sell, and merchandise with their joint stock, and the increase thereof, 
in the business aforesaid. And they shall and will at all times during the said 
partnership bear, pay, and discharge equally between them all rents and other 
expenses that may be reqtaired for the support and management of the said 
business ; and all gains, profit, and increase that shall come, grow, or arise 
from or by means of their said business shall be divided equally between them 
on the first day of June, September, December, and March, in each year during 
the continuance of said partnership ; and all loss that shall happen to their 
said business by ill commodities, bad debts, or otherwise, shall be borne and 
paid between them equally. 

IV. And at the end or sooner termination of their partnership the said 
partners, each to the other, shall and will make a true, just, and final account 
of all things relating to their said business, and in all things truly adjust 
the same ; and all the stock, as well as the gains and increase thereof, which 
shall appear to be remaining, either in money, goods, wares, fixtures, debts, 
or otherwise., shall be divided between them. 

In Witness Whereof, the parties hereto have hereunto interchangeably 
set their hands, the day and year first above written. 

In the presence of ^'=0'^'''^ R'^^' 

Warren Jones. ^^'^'^ Post. 

State of New York"! 

r SS. 

County of Albany J 

On this first day of May, one thousand nine hundred and thirteen, before 
me, the subscriber, personally appeared George Rice and Alfred Post, to me 
personally known to be the same persons described in and who executed 
the foregoing instrument, and they severally acknowledged to me that they 
executed the same. Andrew Johnson, 

Notary Public for Albany County^ Neiv York 



REVIEW QUESTIONS AND PROBLEMS 

Section 139. What is the object of forming a partnership? What are its 
chief characteristics? Distinguish a joint-stock company from a partnership. 
What is the advantage of forming a corporation ? 

140. Define partnership. How would you determine whether or not a 
particular agreement constitutes a partnership ? What is an ostensible partner ? 
a dormant partner ? What are limited partnerships ? Who may be a partner ? 

Problem l. D loaned a firm (B and C) $2000 to be used in the busi- 
ness, upon an agreement that he was to have one third of the profits. 
X sold goods to the firm. X sues D as a partner along with B and C. Is D 
Uable to X? 

Problem 2. In the above case D is to receive 6 per cent interest in any 
case, and 15 per cent of the profits in addition. Is D liable as partner? 



246 PARTNERSHIPS [Ch, XII 

Problem j>. J. H. has carried on business in his own name, and X has dealt 
with him. He sells out to A and B, who continue the business under the name 
J. H. & Co. They order goods of X in that name and X supplies them. X does 
not know that J. H. has gone out of the business. J. H. knows the business is 
carried on under the name of J. H. & Co. Is J. H. liable to X? 

Problem 4. D is a dormant partner in the firm of B and C. X does not 
know this. He sells goods to B and C. D afterwards withdraws. X then sells 
more goods to B and C. (a) Is D liable on the first sale ? (b) Is he liable on 
the second ? 

141. State the duties of a partner toward his fellow partners. State his 
rights. Can one partner claim extra compensation ? Can one partner withdraw ? 
Can one sue the other at law ? 

Problem j. A, B, and C agree to enter into partnership, and A is intrusted 
with the purchase of a horse. He buys one for $200, but charges it to the 
firm at $300. In an action for an accounting, B and C seek to recover from 
A $100 as firm money. Result? 

Problem 6. A and B are partners, and each is to give his services to the 
firm business. A becomes ill, and all the work devolves upon B. May B 
claim compensation for this extra labor? 

Problem 7. In the above case A neglects the business willfully and refuses 
to perform any services. B is compelled to manage the whole business alone. 
May B claim extra compensation ? 

142. What are a partner's powers? Can he sell real property, and why? 
Can he make negotiable instruments? Can he borrow money? Can he 
exercise any powers after the dissolution of the firm? 

Problem 8. A and B are partners and owe C $650. A gives C a mort- 
gage in the firm name on the personal property of the firm to secure this 
debt. Is this binding on B or on the firm A and B? 

Problem g. A gave the above mortgage to secure his individual debt. Does 
this bind B ? 

Problem 10. B and C are partners in the conducting of a theater. B bor- 
rows money for the business and gives a promissory note in the firm name. 
Is C bound? 

143. State the liabilities of a partner. How is an action brought on a 
debt against a firm? How is a judgment satisfied? What is contribution? Is 
an incoming partner liable for debts contracted before he became a member 
of a firm? How may an action for tort be brought against a firm? 

144. State the rule as to the relative rights of creditors of the partnership 
and creditors of a partner. 

Problem 11. A, B, and C are equal partners. The partnership property is 
worth $10,000. A has $5000 individually, B S4000, and C no assets. The 
partnership debts amount to $12,000. A's debts amount to ?3000, B's to 



REVIEW QUESTIONS AND PROBLEMS 247 

$6000, and C's to $2000. Adjust these sums among the firm and individual 
creditors. 

Problem 12. Same problem if firm debts were only $8000. 

145. How is a partnership dissolved? What should be done after disso- 
lution? What interest have the representatives of a deceased partner in a 
partnership of which the deceased was a member? What is done with a surplus 
after firm debts are paid ? 

146. How do joint-stock companies differ from partnerships? 

147. How do they resemble partnerships? 



CHAPTER XIII 

CORPORATIONS 

148. Definition and classification. A corporation is an artificial 
entity created by statute law and endowed with many of the legal 
capacities of individuals, as the power to take, hold, and convey 
property, make contracts, sue and be sued, and the like. 

It is a legal entity distinct from its members, individually or 
collectively. It may, for example, sue a member or be sued by 
a member. It may sue any person without joining its members, 
and may be sued by any person without joining its members. 
The title to property vests in it and not in its members. Were 
all the members to unite in one deed, they could not convey the 
property of the corporation. It is, within its charter powers, 
regarded for all purposes as an artificial person — a distinct 
member of the business community. 

Public corporations are political entities created for govern- 
mental purposes, as counties, cities, and the like. 

Private corporations are created for the promotion of some 
interest in which their members are concerned. These fall into 
two main classes : stock corporations, which are for private 
pecuniary gain, and membership, or nonstock, corporations, 
which are for a variety of purposes, as clubs, charitable societies, 
educational institutions, and the like. 

Stock, or business, corporations are those with which we are 
concerned. They are intended to enable a number of persons 
to- unite their capital in one entei-prise, with two important 
results : first, the power to transfer their shares to other holders 
without affecting the business ; and, second, an exemption from 
any personal liability for the debts, contracts, or torts of the 
corporation. A partnership accomplishes neither of these results. 
A. joint-stock company accomplishes the first but not the second. 

149. How a corporation is formed. A corporation is created by 
legislative grant. Some are created by a special statute which 

248 



§149] HOW FORMED 249 

names the corporation and defines its powers, but state con- 
stitutions very generally prohibit the legislatures from chartering 
private business corporations by special act. Business corpora- 
tions are now usually created under a general statute which per- 
mits a number of persons to form a corporation by executing and 
filing with some designated public official articles of association or 
incorporation. The certificate contains the name of the corpora- 
tion, its object, the amount of capital stock, the number of shares 
into which the capital stock is divided, the place where its prin- 
cipal business office is to be located, the duration of the corpora- 
tion, the number of its directors, with the names and addresses of 
those who are to serve at the outset, and in some states the names 
and addresses of the subscribers to the stock, with the amount sub- 
scribed. Often the statute requires that a. specified number of the 
incorporators shall be citizens of the United States, and a specified 
number citizens of the state under whose statute the certificate is 
filed. Some statutes require that the name of an officer or agent 
upon whom legal process may be served shall also be specified. 

The statute under which a certificate is made and the certifi- 
cate itself together constitute the charter of the corporation and 
define and limit its powers. 

Example of New York Certificate 

We, the undersigned, all being persons of full age, and at least two thirds 
citizens of the United States, and at least one of us a resident of the state 
of New York, desiring to form a stock corporation, pursuant to the provisions 
of the Business Corporation Law of the state of New York, do hereby make, 
sign, acknowledge, and file this certificate for that purpose, as follows : 

First. The name of the proposed corporation is The Cayuga Manufac- 
turing Company. 

Second. The purposes for which it is to be formed are to manufacture, 
sell and trade in agricultural implements and machinery. 

Third. The amount of capital stock is one hundred thousand dollars. 

Fourth. The number of shares of which the capital stock shall consist is 
one thousand, and the amount of capital with which said corporation will 
begin business is twenty thousand dollars. 

Fifth. The principal business office is to be located in the city of Ithaca, 
in the county of Tompkins, state of New York. 

Sixth. Its duration shall be fifty years. 

Seventh. The number of its directors is to be five. 



2SO CORPORATIONS [Ch. XIII 

Eighth. The names and post-office addresses of the directors for the first 
year are as follows : 

[Here insert five names and addresses.] 

Ninth. The names and post-office addresses of the subscribers, and a 
statement of the number of shares of stock which each member agrees to 
take in the corporation, are as follows : 

[Here insert names, addresses, and amounts subscribed.] 

In Witness Whereof, we have signed, acknowledged, and filed this 
certificate in duplicate. 

Dated this loth day of January, 191 6. 

John Doe 

Richard Roe 

Henry Fenn 

John S. Dale 

^ ,^^ „ , , Wm. Blackheath 

State of New York 1 

r ss. 
County of Tompkins J 

On the loth day of January, 1916, before me personally appeared John 
Doe, Richard Roe, Henry Fenn, John S. Dale, and Wm. Blackheath, to me 
personally known to be the persons described in and who made and signed 
the foregoing certificate, and severally duly acknowledged to me that they 
had made, signed, and executed the same for the purposes therein set forth. 

George Redbank, Xotary Public. 

[This is filed and recorded in the office of the Secretary' of State, and a certified copy or 
duplicate original is filed and recorded in the office of the clerk of Tompkins County. Fees 
are required for filing and recording. An organization tax must also be paid to the State 
Treasurer.] 

150. Members. The members of a business corporation are 
those who hold its stocks ; they are called stockholders or share- 
holders. The relation of stockholders to a corporation and to 
each other is contractual. At the outset individuals subscribe 
for shares of stock, that is, contract to take them when issued, 
and thereby agree to associate themselves as stockholders accord- 
ing to the provisions of the charter and the terms of the sub- 
scription. They also agree to pay for the stock when issued or 
when payment may be called for. \\'hen a stockholder has fully 
paid for his stock, he is under no further liability unless the stock 
is by statute or contract made subject to assessments. 

When a stock certificate has been issued, the owner may trans- 
fer it and the transferee becomes a stockholder. The so-called 



§150] MEMBERS 251 

Uniform Stock Transfer Act, now in force in eleven jurisdictions/ 
governs the method oi stock transfer and the rights of transferor 
and transferee. According to this act the transfer is completed 



F'j/(M ny S'locK Cektipicate 



jjo ,g No. of shares, 10 

Par value of each, ^lOO 

The Cayuga Manufacturing Company 

STbfS le to tEttifp that John Doe is the owner of ten shares of the 
capital stock of the Cayuga Manufacturing Comi-any, transferable only 
on the books of the company by the holder thereof, in person or by attorney, 
upon thf: Hurrendi;r of this certificate properly indorsed. 

3^11 WitMBS W^tttai, the said Company has caused its corporate seal 
to be affixed hereto and thbj certificate to be signed by its presi- 



Seal 



dent and treasurer. 



Ithaca, New York, Jan. 24, 1916 

Hrnry Fenn, President 
Wm. Blackheath, Treasurer 



FouM OF Tka.vsi'Ick o.s' Back, of Stock Cicktii'ICAte 



For value received, I hereby sell, assign, and transfer, unto 

, shares of the within- 
mentioned stock, and do hereby constitute and appoint 

my true and lawful attorney 

to transfer the same on the books of the company. 

Witness my hand and seal, thin day of , 

'9 

Witness : 

(Seal) 



by indorsement of the certificate in blank or to a specified person 
or by the execution and delivery of a separate instrument assign- 
ing the certificate or giving a power to assign it, coupled with a 

' Alaska, Louisiana, Maryland, Ma.ssachusetts, Michigan, New Jersey, New 
York, Ohio, I'cnnsylvania, Rhode Island, and Wisconsin. 



252 CORPORATIONS [Ch. XIII 

delivery of the certificate. The registration of the new holder's 
name on the books of the corporation is not necessary to the 
complete transfer of the stock under this act. It is usual to in- 
dorse on the certificate of stock a power of attorney to the new 
holder to make the transfer. When a certificate is so indorsed 
with the name of the transferee left blank, the certificate may 
pass from hand to hand until some holder chooses to insert his 
name and have the transfer made to him upon the books. Stock 
certificates do not generally have the characteristics of negoti- 
able paper, but under the Uniform Stock Transfer Act they 
have been given a limited negotiability. Infants and others not 
competent to contract may become transferees and holders of 
stock in a corporation. 

A stock certificate is the written evidence issued by the cor- 
poration that the person named in it is registered on the books 
of the company as the owner of a specified number of its shares 
of capital stock, each of a certain par value. 

151. Directors. In a corporation the members (stockholders) 
are not, as such, agents of the corporation. They have the power, 
however, to elect the directors, who are the ultimate managers 
of the business and who appoint the necessary active agents 
and officers. 

Directors are elected by a majority vote of the stockholders, 
each stockholder usually having one vote for each share of stock 
he owns. It follows that if one person, or a group of persons 
acting together, owns a majority of the stock, he, or they, can 
elect all the directors. To avoid this, some statutes provide for 
cumulative voting. For example, if three directors are to be 
elected, a stockholder with ten shares may cast ten votes for each 
of three or may concentrate thirty votes upon one. If there are 
looo shares of stock, and the majority acting together own 740, 
and the minority 260, the latter, by casting triple votes for one 
candidate, would give him 780 votes, or more than the majority 
casting single votes for each of three could muster. Thus the 
minority would elect one director and the majority two. The 
registered stockholder is usually the only one entitled to \'0te. It 
is commonly provided that a stockholder may vote by proxy, that 
is, authorize another to vote for him. 



§152] OFFICERS AND AGENTS 253 

The powers of the directors are very extensive and are fixed by 
the charter of the corporation. The directors are, when convened 
as a board, the embodiment of all corporate powers except those 
which must be exercised by the stockholders. They could not 
change the nature or the purposes of the corporation, increase 
or decrease its capital stock, dissolve it, or consolidate it with 
another corporation ; these powers are vested in the stockholders ; 
but in the management of the corporation within the limits of 
the charter powers the directors are supreme. 

Directors are bound to exercise reasonable care in the conduct 
of the corporate business, and may become liable to the corpora- 
tion for losses resulting from their negligence. Directors also 
stand in a fiduciary relation to the stockholders, and cannot secure 
to themselves any advantage at the expense of stockholders. 

Statutes often require directors to file annual reports with 
some public officer, and fix a penalty for failure to do so or for 
the filing of a false report. 

152. Officers and agents. The officers of a corporation are 
appointed by the directors in conformity with the by-laws. Agents, 
other than officers, are sometimes appointed by the directors and 
sometimes by an officer. The general law of agency governs the 
ostensible powers of such officers and agents, except that third 
persons are supposed to know the provisions of the charter as to 
the powers of the corporation itself, and perhaps the provisions 
of the by-laws as to the powers of the officers. Officers and agents 
are entitled to compensation, but directors are not unless it is 
especially voted by the shareholders. 

The powers of the officers are usually fixed by the by-laws of 
the corporation. When the by-laws do not fix the powers, they 
may be prescribed by the directors. 

The president is always a member of the board of directors, 
and usually presides as its chairman. He is ordinarily empowered 
to execute contracts, deeds, and other documents, either by gen- 
eral or by special vote of the directors, and is the chief officer, 
in whom is vested the largest measure of authority. 

The vice president acts when the president is absent, or, in 
large corporations, he has some special department of the busi- 
ness confided to him. In large corporations there are often 



2S4 CORPORATIONS [Ch. XIII 

several vice presidents, known as first vice president, second 
vice president, etc. 

The secretary keeps the records of the meetings of the directors 
and stockholders. He is also usually the custodian of the seal 
of the corporation and attaches it to documents requiring a seal ; 
he may also attest the signature of the president to contracts, 
deeds, etc., although this is more commonly done by the treasurer. 
He has charge of the transfer of the stock certificates on the 
books of the corporation, and may be designated as an assistant 
to the treasurer. 

The treasurer is the fiscal agent of the corporation. He has 
charge of its funds, its bank account, its securities and general 
assets. The books are kept under his supervision. He usually 
countersigns the obligations issued by the corporation in the form 
of contracts, checks, notes, etc., indorses for deposit or collection 
the checks payable to it, and in general handles its money and 
negotiable paper. 

The general manager is the chief assistant of the president, 
and the officer with whom persons having business with the 
corporation generally deal. He usually appoints the subordinate 
agents and servants, makes contracts for ordinary supplies and the 
sale of products, and conducts the routine business affairs of the con- 
cern. In the case of unusual contracts it is always best to ascertain 
from the president whether the general manager has authority. 

As there are some contracts which even the president cannot 
make without special authority of the directors, such as the issuing 
of bonds and notes for borrowing money, the sale of corporate 
assets and franchises, and the like, it is necessar}' in cases of 
doubt to make sure that the act is duly authorized. It is not 
uncommon for a corporation to repudiate a contract upon the 
ground that the officer making it exceeded his authority. 

153. Powers of a corporation. A corporation as such may be 
said to possess at the least these necessary powers and qualities : 

1 . To have a corporate name, as an individual has a name ; 
but, once adopted, the name of a corporation can be changed 
only as prescribed by law. 

2. To have a corporate seal. 

3. To sue and be sued in its corporate name. 



§154] POWERS 255 

4. To appoint such officers and agents as its business may require. 

5. To make by-laws for the management of its business, the 
transfer of its stock, the calling of meetings, etc. 

6. To acquire and dispose of such property (in its corporate name 
or under its corporate seal) as may be necessary to its corporate 
existence or purposes. The amount of real estate it may hold is 
often limited by law. In the absence of such express restriction, 
it may hold only what is reasonably necessary. It could not, 
unless expressly authorized, engage in real-estate speculations. 

7. To make such contracts as are reasonably necessary to carry 
out the purposes for which it is organized. This includes the 
power to borrow money, give security, and issue negotiable paper, 
as well as to make the ordinary contracts of sale, agency, etc. 
But a corporation cannot, unless expressly authorized, enter into 
a partnership with other corporations or with individuals ; nor can 
it enter into a so-called trust in order to create a monopoly or 
eliminate competition. 

8. In general, a corporation may engage in such business as 
its charter contemplates, and in no other. A partnership may 
engage in almost any lawful business, but a corporation has no 
powers except those expressly conferred or those reasonably inci- 
dent to those expressly conferred. A corporation authorized to 
manufacture and sell machinery cannot engage in the banking 
business or the transportation business. Such acts in excess of 
powers granted are said to be ultra vires. It has been held that 
a railroad company could not run a steamboat beyond its terminus, 
though it might run one as a ferry to connect its lines. So a 
steamboat company could not run a railroad, though it might run 
a short line as a "" carry " between two navigable points. Certain 
powers are regarded as incidental to the express powers, but these 
do not extend beyond the necessities of the corporate business, 
and are not to be so broadly construed as to lead the corporation 
into unauthorized enterprises. 

154. Stockholders' rights. Each stockholder has these rights 
as against the corporation : 

I . To have issued to him a certificate of stock representing his 
interest and, if he is a transferee, to have the transfer entered 
on the books of the company. 



256 CORPORATIONS [Ch. XIII 

2. To vote at stockholders' meetings. By the generally pre- 
vailing rule each stockholder has as many votes as he has shares 
of stock. He may exercise his right personally or by proxy. The 
stockholder of record (that is, the one whose name appears on 
the books of the corporation) is entitled to vote even though he 
has transferred the stock. 

3. To inspect the books of the company when a demand to 
do so is made in good faith and for a proper purpose. 

4. To participate in dividends when the same have been 
declared. The profits of the corporate enterprise are from time 
to time divided among the stockholders in the form of dividends, 
each stockholder getting a per cent upon the face value of his 
stock. If dividends are about equal to the interest upon normal 
safe investments, the stock remains at or near par ; that is, a gioo 
share of stock sells for ^100. If the dividends are large, the 
stock goes above par ; if small or uncertain, the stock goes below 
par. If no dividends are paid, the stock may become valueless 
except for voting purposes and to enable holders to control the 
corporation. 

Profits are what remains after deducting running expenses, 
improvements, accrued debts, interest on bonds, a fair reserve 
for depreciation in buildings, machinery, or other equipment, 
and, perhaps, a sinking fund for the payment of the bonds. 

Directors have a large discretion in the matter of declaring 
dividends, and may add profits to capital instead of distributing 
them, so long as they act in good faith. 

Preferred stock is that upon which it is agreed to pay a fixed 
rate, practically an interest rate, before any dividends shall be 
declared upon the common (nonpreferred) stock. 

Bonds are promises to pay a principal sum with interest, and 
are usually secured by mortgage upon the corporate property. 
Bondholders are simply creditors. A coupon bond is one to 
which separate interest coupons are attached for each annual 
or semiannual interest payment (see p. 169 ante). 

5. A stockholder, in behalf of himself and other stockholders, 
may invoke the aid of a court to restrain the officers from com- 
mitting a breach of trust, or the corporation itself from engaging 
in ultra vires acts, that is, acts beyond the scope of the charter 



§§155,156] STOCKHOLDERS' LIABILITIES 257 

powers. While the majority rule, they must rule within the limits 
of the charter powers ; and if they exceed these, or if their acts 
are fraudulent, the minority may obtain an injunction. 

155. Liability of stockholders. Stockholders are liable to the 
corporation for any unpaid portion of their subscriptions. This 
liability is enforced by an action at law, like any action to collect 
a debt. 

Stockholders are not liable to creditors of the corporation 
unless the statute or charter provides for some personal liability ; 
but creditors may compel original stockholders, if they have paid 
to the corporation less than par value for the stock issued to 
them, to pay the balance if the creditors have been led to believe 
that stockholders were paying in to the capital stock the full par 
value. It is a kind of fraud on creditors for a corporation to 
advertise a capital stock of say $100,000 fully paid in, when in 
fact it issued the stock at forty cents on the dollar and the capi- 
tal stock is therefore only ^40,000. So also most courts hold 
that if the capital stock is fully paid in, but a part of it is there- 
after returned to stockholders under the guise of dividends, 
the creditors may compel the stockholders to refund it so far 
as necessary to pay the debts of the corporation. 

If the statute makes stockholders personally liable for the debts 
of the corporation, or liable to an amount specified (for example, 
to an amount equal to the face value of their shares of stock), 
a creditor who has a judgment against the corporation which he 
cannot satisfy out of its property may proceed against stock- 
holders who were such when his debt was contracted or, as in 
some jurisdictions, when his action was begun. 

156. Reports of corporations. The statutes generally provide 
that a stock corporation shall make an annual report of its affairs 
and file the same in some public office where any person may 
inspect it. This is in order that persons who may wish to do 
business with the corporation may ascertain whether it is in a 
sound and solvent condition. The report usually contains a state- 
ment as to the amount of capital stock, the amount actually 
issued, the amount of the debts, and the amount of the assets. 
The statutes quite generally make directors personally liable for 
debts in case they fail to file such a report, and also for debts 



258 CORPORATIONS [Ch. XIII 

contracted upon the faith of the report filed in case it is false in 
any material particular, and sometimes for damages suffered by 
persons purchasing stock upon the faith of such false report. 

157. Receivers of corporations. When a corporation becomes 
insolvent, the court may, upon the petition of the directors, bond- 
holders, or general creditors, appoint a receiver of the property 
and assets of the corporation. A receiver may also be appointed 
upon the petition of a stockholder, if the directors are wasting or 
misapplying the funds or property. A receiver is an officer of 
the court and, as such, takes entire charge of all the property and 
business pending a dissolution or reorganization of the corporation. 
The property until final decree is therefore in the custody of the 
court appointing the receiver. 

A receiver's certificate is an obligation issued by a receiver 
under authority of the court for the purpose of raising money to 
carry on the business of the corporation during the term of the 
receivership. It takes precedence over all other obligations of 
the corporation, even its first-mortgage bonds. 

158. Dissolution of corporations. A corporation is dissolved 
by the expiration of the time for which it was chartered. 

A corporation may be dissolved by the decree of a court for 
various causes, among which may be mentioned insolvency, non- 
use of franchises, abuse of charter powers, violation of law, and 
other fraudulent or illegal acts. The directors or stockholders may 
also apply for permission to surrender the charter whenever they 
deem such a course beneficial to the interests of the stockholders. 

Upon dissolution, after all debts and claims are paid, the re- 
maining assets are divided among the stockholders in proportion 
to their holdings. 



REVIEW QUESTIONS 

Section 148. Define a corporation. What is meant by saying it is 
a legal entity? What are public corporations.? What are private corpora- 
tions? What two main classes of private corporations? Object of a stock 
corporation ? 

149. How is a corporation created? Explain what constitutes the 
charter where a corporation is formed under a general act. Draw articles 
of association to incorporate a stock company to quarry and sell stone. 



REVIEW QUESTIONS 259 

150. Who are members of a stock corporation? How does membership 
change? What is a stock certificate? How is it transferred ? 

151. Who are the directors? How are they chosen? What is cumulative 
voting, and what is its object ? What are the powers of the directors ? What 
is their duty ? 

152. How are corporate officers and agents appointed? Which officers 
are entitled to compensation? How are the powers of officers fixed? Define 
the powers of each. In a corporation what is the ultimate authority as to 
contracts ? 

153. Enumerate the powers of a corporation. How much real estate may 
it hold? May it become a partner? What business may it conduct? What 
are ultra z/ires acts? 

154. What are the rights of stockholders? How many votes does each 
stockholder have? What are dividends? How fixed? What are profits? 
What is preferred stock? What are bonds? When may a stockholder seek 
the aid of a court to protect his interests ? 

155. When is a stockholder liable to the corporation? When is he liable 
to creditors of the corporation in the absence of statutory liability? What is 
statutory liability ? 

156. What reports of corporations are required ? What do they contain ? 
Where are they filed ? What is the effect if they are not filed or are false ? 

157. Who is a receiver ? Whose agent is he? What are receiver's certifi- 
cates ? Are they more or less valuable than bonds ? 

158. How may a corporation be dissolved? After dissolution, what is 
done with the assets? 



PART VI. PROPERTY IN LAND AND 
MOVABLES 

CHAPTER XIV 

REAL PROPERTY 

I. Estates in Real Property 

159. Meaning of the term "property." Property may be re- 
garded as an object or as a right or estate in or to an object. 
It may be corporeal or incorporeal, and it is classified as real 
and personal. 

1. Property as an object. The word "property" is used con- 
cretely to designate an object or thing (lands or chattels) in which 
one may have a proprietary right ; it is used abstractly to designate 
the right, interest, or estate one has in such an object or thing. 
Property in the legal sense is the right, often but not always 
exclusive, to possess, enjoy, and dispose of lands and chattels. 

As an object of ownership, property falls into two classes : 
(a) immovables, or land and things so annexed thereto or con- 
nected therewith as to be regarded as a part of the land ; ip) mov- 
ables, or things not so annexed to land as to be considered a 
part thereof. The first class is popularly called real property, 
and the second personal property ; but in the view of the law 
not all interests in land are real-property interests. It becomes 
necessary, therefore, to classify the interests which one may have 
in land into real estate, or real property, and personal estate, or 
personal property. 

2. Property as an estate. Real estate, or real property, consists 
of the estate in land, knpwn as a freehold estate because it was 
that by which the freemen held lands under the old feudal sys- 
tem. This estate is either an estate of inheritance, which descends 
to one's heirs, or a life estate, which terminates with the life of 

261 



262 REAL PROPERTY [Ch. XIV 

the possessor of it or the life of some other designated person. 
All other estates in land are personal property and are known as 
estates less than a freehold ; they consist of estates for a deter- 
minate time, as a leasehold estate for a definite period of years. 
Mortgages and liens on land are also personal estate. 

Real property, then, includes all estates in land except lease- 
holds and liens. 

Personal property includes leasehold estates in land, liens upon 
land, and. all interests in movables. 

The terms " real property " and " personal property " are derived not from 
the nature of the object owned but from the forms of action used by one who 
had been deprived of possession. If one could recover the thing itself, he 
used a. " real action " ; if he could recover only the money value of the thing, 
he used a " personal action." Hence it came to be said that a thing which 
could be recovered specifically was a " thing real," or " real property," while a 
thing which could not be so recovered, but only damages for its withholding, 
was a " thing personal," or " personal property." This serves to explain why 
all interests in land are not real property. These forms of action have disap- 
peared, but the names remain to puzzle the student. 

3. Corporeal and incorporeal property. Property may be corpo- 
real or incorporeal. Corporeal property is tangible and material; 
incorporeal property is intangible and ideal. 

Corporeal real property consists of land and its fixtures ; incor- 
poreal real property consists of certain permanent rights of enjoy- 
ment or profit in another's land, as a right of way over it. 

Corporeal personal property consists of physical movable arti- 
cles ; incorporeal personal property consists of rights granted by 
government, as a patent right or copyright, and of rights of action 
against another (known as choses in action), as a right to a debt 
or to damages for a breach of contract, etc. Stock, bonds, nego- 
tiable instruments, and the like are incorporeal personal property. 

4. Lands, tenements, and hereditaments. Real property is 
often described as " lands, tenements, and hereditaments." These 
terms call for definition. 

a. Land comprehends the soil and those things annexed to it either by 
nature or by man, such as waters, trees, ores, houses, fences, etc. The land, 
in contemplation of law, extends downward to the center of the earth and up- 
ward to the highest heavens. Thus, one owning ten acres of land would have 
his possession defined by a pyramid with its apex at the center of the earth 



§159] KINDS OF PROPERTY 263 

and with its sides passing through his boundaries indefinitely into space. 
Anyone breaking into this p3n:amid, or " close," at any point is said to be 
a trespasser. 

b. The term " tenements " is broader than the term " land," and includes not 
only lands but also whatever else could be held under feudal tenure, such as 
easements in lands. If B owns tract X and C owns tract Y, C may acquire for 
the benefit of tract Y a right of way over tract X. C therefore owns lands 
(tract Y) and tenements (right of way over tract X). The modem use of the 
term " tenement " to describe a building rented to tenants is to be distinguished 
from this technical meaning. 

c. The word " hereditaments " is the broadest of aU, and includes whatever 
may be inherited by an heir from an ancestor. It includes not only lands and 
tenements but also heirlooms, such as an historic powderhom, family jewels, 
etc. Heirlooms, while common in England, are not known to our law, and 
therefore hereditaments and tenements are substantially equivalent terms in 
the United States. Corporeal hereditaments, or tenements, are things material, 
such as lands, houses, etc. ; incorporeal hereditaments, or tenements, are intan- 
gible rights arising out of material things, such as the right to collect rent out 
of lands, the right to exercise the franchise to maintain a toU bridge or a ferry, 
or the right to take ore out of another's land. 

5. Practical differences between real and personal property. 
These practical differences once existed, and unless modified by 
statute still exist, between real and personal property. 

a. On the death of an owner leaving no will, real property 
goes to his heirs, while personal property goes to the adminis- 
trator to pay debts and then to be distributed among the next of 
kin. The next of kin who take personalty are often different 
from the heirs who take realty, but modem statutes tend to make 
the two classes identical. So also statutes often give the realty 
as well as the personalty into the hands of the administrator. 

b. The right of a wife to an estate of dower, or of a husband 
to an estate by the curtesy, exists in realty but not in personalty. 

c. In general, more formality is necessary to transfer realty, 
as a deed, while personalty may be transferred merely by delivery. 

d. The law of the place where realty is situated governs rights 
in it, while rights in personalty are governed by the law of the 
place of domicile of its owner. 

e. In general, the law as to realty is technical, derived from 
feudal times, while the law as to personalty is more liberal and 
modem. 



264 REAL PROPERTY [Ch. XIV 

The logical distinction is between movables and immovables. This dis- 
tinction exists in the nature of things, but the historical distinction based 
upon estates in lands is fundamental in the English and American law. 

160. Estates in land ; duration. An estate is the interest which 
one has in real property. As land is permanent and is not con- 
sumed or diminished in the ordinary use of it, there may be dif- 
ferent estates in the same parcel of land, one succeeding another 
in possession and enjoyment. One person may own an estate 
and have possession and enjoyment, while another also owns an 
estate but his possession and enjoyment are postponed until the 
termination of the first estate. 

Estates in land are first of all divided into (i) freehold estates and 
(2) estates less than freehold. The first we have seen are real estate, 
while the second are personal estate and are often called chattels real. 

I . Freehold estates. A freehold estate is one which is to endure 
for a period not fixed or ascertained, that is, either forever or for 
a life. Freehold estates are therefore of two kinds : (a) estates of 
inheritance, also called estates in fee ; (b) life estates, either for 
the life of the owner or for the life of some other person. 

a. Estates of inheritance, or estates in fee, are of two classes : 
first, estates in fee simple, which descend to one's heirs generally, 
collateral heirs as well as lineal heirs ; second, estates in fee tail, 
which descend only to one's heirs in the direct line and may be 
limited to particular heirs, as male heirs, the eldest male heir, etc. 
Estates in fee tail have been abolished or modified in many of our 
states. The estate in fee simple is the usual estate of inheritance 
in this country. In order to create it in a deed, the conve}'ance at 
common law, and still where not changed by statute, must run to 
the grantee and his heirs, as " to A. B. and his heirs." If it runs 
"to A. B.," or even "to A. B. and his children," or "to A. B. 
forever," it would give A. B. only a life estate. This technical 
rule has been quite generally changed by statutes which provide 
that a deed " to A. B." shall carry a fee simple unless a contrary 
intention appears. In a will the use of the word " heirs " is not 
necessary to carry a fee, if it appears to be the intent of the testator 
to devise a fee. 

b. Life estates are of two classes : first, conventional life es- 
tites, or those created by deed or will ; second, legal life estates. 



§ 160] ESTATES 265 

or those created by law. A life estate of the first class may be for 
the life of the tenant or for the life of another person {pur autre 
vie). A life estate of the second class may be an estate of dower 
or an estate by the curtesy. An estate of dower is the estate which 
a surviving wife has during the rest of her life in one third of the 
lands and tenements of which her husband was seised in fee dur- 
ing the marriage, and which she has not released by joining with 
him in a deed of conveyance or otherwise. Dower has been abol- 
ished in some states, and the widow is often given an absolute 
share instead of a life estate in a third. An estate by the curtesy 
is the estate which a surviving husband has during the rest of his 
life in all the lands and tenements of which the wife was seised 
in fee during the marriage, provided there was a child of the 
marriage born alive and capable of inheriting, although the child 
may have died before the mother. The husband may release this 
right by joining with the wife in a conveyance. Curtesy has been 
abolished or modified by statute in many states. 

A homestead estate is a creation of statute, and consists in the right to 
enjoy, free from liability for debts, a certain specified quantity of land occupied 
as a residence. It is not strictly an estate, but a right of exemption attached 
to an estate. It extends generally to the head of a family, that is, one who is 
under a legal or moral duty to support those living with him. The amount of 
land so exempted differs in different states, and in the same state more is 
allowed in the country than in a city. Some states fix it by area, some by 
value, and some by both. It is usually provided that a husband cannot transfer 
a homestead estate without his wife's consent. In many states on the death of 
a husband the widow succeeds to the homestead right, or, if there is no widow, 
the minor children. These statutes vary so widely that it would be impossible 
to consider them here in detail. 

2. Estates less than a freehold. These estates are also called 
leasehold estates and chattels real, and are for a fixed or deter- 
minable period of time. They are of four classes : {a) estates 
for years, {b) tenancies at will, {c) tenancies from year to year, 
{d) tenancies by sufferance. 

(a) An estate for years is an estate limited for a certain definite 
time, as an estate for one month, or for one year, or for ten years, 
or for one hundred years. It is usually created by a lease, and 
hence is often called a leasehold. What remains in the owner 
is called a reversion, because possession reverts to him upon the 



266 



REAL PROPERTY 



[Ch. XIV 



termination of the lease. Leaseholds are considered under the 
subject of Landlord and Tenant (see sect. 177 post). 

{b) A tenancy at will is a tenancy which may be terminated at 
the will of either the lessor or the lessee. These are not favored 
in the law, and wherever possible a tenancy is construed as from 
year to year instead of at will. Some statutes require a previous 
notice in order to terminate the tenancy. 

(c) A tenancy from year to year is a tenancy for one week, 
month, quarter, or year certain, continuing for a successive simi- 
lar period unless due notice be given to terminate it at the end 
of the first or any subsequent period. In case of a tenancy for a 
year continued into a second year, notice of an intent of either 
party to terminate it is required. The statutes fix this ; in some 
states it is six months, in others three months, etc. In case of 
a tenancy from quarter to quarter, month to month, or week to 
week the notice must usually equal the period in length, being 
a quarter, a month, or a week respectively. 

{d) A tenancy by sufferance is a tenancy which arises when a 
tenant remains in possession at the end of his term without the 
landlord's consent, as where he has had notice to quit. If the 
landlord consents to the holding over, the tenancy becomes one 
from year to year. If he does not consent, he may by proper 
proceedings have the tenant removed from the land. Most states 
now have statutes forbidding a forcible entry by the landlord. 

The above estates may be thus outlined : 



Freehold 
estates 



Estates 
in 
land 



Estates less than 
a freehold, or 
leaseholds 



In fee 
(inheritance) 



For life 

' For years 
At will 

From year to year 
By sufferance 



f Fee simple 
I Fee tail 



Conventional 

For one's own life 

For the life of another 
(/«r autre vie) 
Legal 

Dower 

Curtesy 

Homestead 



§ 161] ESTATES 267 

161. Future estates in land : reversions and remainders. When 
an estate for life or for years is created, there is an estate in 
residue to commence in possession when the life estate or estate 
for years ends. Such an estate is either a reversion or a remainder. 

1. Reversions. A reversion is the residue left in the grantor 
or his heirs after the granting of the lesser estate. It commences 
in enjoyment only when the lesser estate is ended. Meanwhile it 
can be freely disposed of and other lesser estates may be carved 
out of it. 

Examples .• i . R leases land to T for ten years. R has a reversion in the 
land to commence in possession when T's leasehold expires. 

2. R afterwards grants L a life estate in the land. R now has a reversion to 
commence in possession when both T's and L's estates are at an end. L's 
estate for life is subject to T's leasehold, and can commence in possession 
only when T's estate is ended. Should L die before T's tenancy expires, the 
life estate would be of no value. 

3. R may sell his reversion, and the grantee will get the same rights as R 
had. So also L and T may sell their estates. 

2. Remainders. A remainder is an estate granted to take 
effect in possession at the termination of another estate created 
by the same instrument. The other estate must be less than a 
fee simple, for nothing remains to be granted after a fee simple. 
A remainder is vested if the person who is to have it is in being 
and ascertained ; it is contingent if the person is not in being or 
is uncertain, but it becomes vested when such person is ascer- 
tained. A vested remainder may be transferred, and if not trans- 
ferred it will pass to the heir of the remainderman upon the 
death of the latter. 

Examples : 4. X grants by deed a life estate to L and a remainder in fee 
to R. R has a vested remainder, and may sell or otherwise dispose of it. 

5. X grants by deed a life estate to L, with a remainder for life to M and the 
remainder in fee to R. Here M has a remainder for life after L's death, and R a 
remainder in fee to be enjoyed in possession after the death of both L and M. 

6. X grants a hfe estate to L, with the remainder in fee to L's eldest son. 
L has no son. The remainder is contingent. If a son be born to L, the 
remainder is then vested in the son. 

7. X grants a life estate to L, with the remainder to L's eldest son living 
at L's death. The remainder is contingent and cannot become vested until L's 
death, and then only if there be a son of L living at the time. Should there 
be none, the estate would revert to X or his heirs. 



268 REAL PROPERTY [Ch. XIV 

A grant to L for life, with a remainder in fee " to his heirs," was construed 
at common law to give a fee to L. This is known as the " rule in Shelley's 
case." This technical rule has been abolished by statute in many states, but 
as it remains in some, it is undesirable to use that phrase to describe the 
remaindermen. 

162. Estates held jointly or in common. Any estate in land 
may be owned by one person in severalty or by two or more con- 
currently. The two principal concurrent estates are known as a 
joint tenancy and a tenancy in common. 

Joint tenancy. When two or more persons were granted an 
estate together by the same instrument, the common law con- 
strued the estate to be one in joint tenancy unless the language 
showed some different intent. The characteristic of the estate 
was that if one. of the persons died, the survivors took his share 
to the exclusion of his heirs or devisees. Many statutes now 
provide that such an estate shall be a tenancy in common. 

ExaTnple. X by will devised his farm to his three sons, A, B, and C. This 
was a joint tenancy. If A died, B and C owned the farm. If B then died, C 
owned it in severalty. But if A conveyed his interest to D, the joint tenancy 
was destroyed and it became a tenancy in common by B, C, and D. (A devise 
or grant to A, B, and C would now in many states be held to create a tenancy 
in common.) 

Tenancy in cominon. When two or more persons hold un- 
divided interests in land under separate instruments, or under 
an instrument which shows an intent that each shall hold his 
interest as a separate or individual one, there is a tenancy in 
common ; and statutes now generally provide that all convey- 
ances or devises to two or more shall be deemed to be tenancies 
in common unless expressed to be joint tenancies, and that 
heirs shall take as tenants in common. The characteristic is 
that on the death of a tenant in common his share goes to 
his heirs or devisees. The tenancy may be ended by a partition 
of the estate. 

Example. X devises his farm to A, B, and C as tenants in common. Each 
owns an undivided one third. On the death of one his part will go to his 
heirs. They may partition the farm so that each will get a definite portion of 
it in severalty. Should A purchase B's and C's portions, A would own the 
whole farm in severalty. 



§ 163] ESTATES 269 

Partnership real estate. As a partnership is not a legal entity, it cannot 
take title to real estate, and a conveyance to the partnership would be in- 
effective for want of a grantee. The title is conveyed to the partners individ- 
ually, and they become tenants in common, but hold the property subject to 
partnership debts and to the final accounting among themselves. Upon the 
death of a partner, title to his share in the realty goes to his heirs, but they 
hold it practically in trust for the partnership business until that is wound up. 

Tenancy by entireties. When an instrument conveys lands to two persons 
who are husband and wife, they take an estate by the entireties. The charac- 
teristic is that whichever survives gets the whole estate, and this result cannot 
be defeated by a prior conveyance by the deceased party. This estate has 
been somewhat modified by statute. 

Coinmunity property. In Arizona, California, Idaho, Louisiana, Nevada, 
New Mexico, Texas, and Washington whatever is acquired by the labor or 
efforts of either a husband or his wife after the marriage belongs one half to 
each. This does not include property owned at the time of the marriage, or 
property received by way of gift, devise, or descent. This idea came through 
the civil (modern Roman) law at a time when the Spanish or the French 
owned the territory from which these states were carved. 

163. Equitable estates : trusts. It is also possible to divide 
the estates in land so that one person has the recognized estate 
and title in a law court and another person in an equity court, 
and thus create what are known as trusts. A trust is the obliga- 
tion, enforced in an equity court against the holder of the legal 
title to property (the trustee), to account to another person (the 
beneficiary) for the income and profits of the property. 

Example i. X devises lands to T to receive the rents and income and 
pay the same to B during B's life, and then to convey to C. T has the legal 
tide in fee simple. B has an equitable life estate and C has an equitable fee in 
remainder. No one could disturb T's title in a law court ; but in an equity 
court B and C may compel him to perform the trust. When B dies, there 
must be a conveyance to C, who will then have the legal title. 

A charitable trust is one created for the benefit of the public 
or of an indefinite number of persons constituting a class of the 
public. Such trusts are enforced by a public officer, usually the 
attorney-general of a state. 

Example 2. X conveys land or other property to T (and his successors, to 
be named by the court), to receive the rents and profits and apply the same 
to the relief of the poor of the city of A, or to the maintenance of a school, 
or to maintain a public park, etc. 



270 REAL PROPERTY [Ch. XIV 

II. Land : its Constituents, Growths, and Fixtures 

X64. Extent of ownership : soil, air, minerals, waters. When 
one owns land he controls the space above and below it. If limbs 
of trees project into the air above his land, he may cut them off 
to the boundary line. If roots grow into his soil from an adjoin- 
ing estate, he may cut them off. He owns all the minerals in the 
land, including mineral oils and gases, subject only to any reserved 
right in the state. In England all gold and silver mines belonged 
at common law to the king, but in this country such rights are 
in the landowner. Congress has provided by legislation for the 
establishment of mining claims in public lands. 

A lode, or vein (a line of metal embedded in quartz or rock), may be located 
to the extent of I 500 feet in the direction in which it runs, and 300 feet on 
each side. A placer (ground containing mineral in earth, sand, or gravel in a 
loose state) may be located by one person or association of persons to the ex- 
tent of 1 60 acres. The locator of a claim must do work or make improvements 
thereon at least to the extent of $100 in each year, or he forfeits his claim. 

The owner of land has a right to use a reasonable quantity of 
the water flowing over his land in a stream, although he cannot 
unreasonably divert the waters to the damage of a lower owner. 
If he owns the lands, he owns the ice formed over them. Lands 
under navigable waters generally belong to the state. This is 
almost invariably true as to tide waters, but states differ as to the 
ownership of the lands under navigable streams. In the case of 
lakes, the larger ones generally belong to the state, while smaller 
ones belong to private persons. If one owns the fee under 
waters, he has the exclusive right to fish in such waters. 

165. Vegetable products. Vegetable products are divided into 
two classes. 

I. Fructus naturales. Vegetable products that are not the 
result of annual labor and fertilizing are classed as perennials, 
or fructus naturales. Such are trees, bushes, and grasses. Some 
perennials, as hops, have been excluded, because the crop is 
dependent upon annual cultivation. Fruit upon trees and 
bushes has usually been included, although often the result of 
annual cultivation. Fructus naturales are regarded as a part 
of the realty. 



§166] LAND AND FIXTURES 271 

2. Fructus industriales. Vegetable products that are the result 
of annual labor and fertilization are classed z& fructus industriales. 
Such are grains, vegetables, and other annual crops. These are 
regarded as 'personalty and not as a part of the realty. If one has 
an estate of uncertain duration, and it is terminated before the 
crops he has planted have ripened, he or his representatives may 
enter and cultivate and gather the crops. This is called the right 
to emblements. But if his tenancy is for a definite period, he 
cannot enter after the tenancy expires. If the owner of a fee dies 
while crops are ripening, they go to his executor and not to his 
heir. Growing crops are personalty, and hence a sale of them 
falls within the seventeenth section of the Statute of Frauds. A 
sale of growing perennials to be severed under the contract of sale 
is regarded as a sale of goods under the Uniform Sales Act. 

3. Border trees. A tree growing on the boundary Hne between 
the lands of different owners is owned by them as tenants in com- 
mon. Neither can lawfully move or destroy it as a whole ; but 
one may cut the branches on his side if he does not injure the 
trunk. If the trunk is wholly on one side of the boundary, the 
tree belongs to that landowner ; the other landowner may cut off 
the overhanging branches but cannot appropriate them or the 
fruit on them. 

166. Fixtures. A fixture is an article which, originally personal 
property, has by annexation to land come to be regarded as realty. 
It is often a nice and difficult question whether or not the article so 
annexed has become a fixture and so has ceased to be personalty. 

This question often arises between a vendor and a vendee of lands ; between 
a mortgagor and a mortgagee of lands ; between the heir or devisee of a land- 
holder and his executor ; between the reversioner, or remainderman, and the 
tenant for years or the executor of a tenant for life ; between the mortgagee 
of the owner's lands and the mortgagee of his personalty ; between the land- 
owner and a judgment creditor who levies on the article as personalty, etc. 
The question usually is, however, whether one who is taking possession of 
the land may hold the article as a part of the realty or whether the one who 
is quitting the land, or his representatives, may sever the article and take it 
as personalty. 

While the matter is a complicated and tangled one, the fol- 
lowing rules will serve as a fairly reliable guide through the 
labyrinth. 



2/2 REAL PROPERTY [Ch. XIV 

1. In order to be in any event classed as a fixture, the article 
must be physically annexed to the land or to some structure or 
thing itself physically annexed. 

Exceptions, {a) If the article is an essential part of an annexed article, it 
may be a fixture, although itself a movable, as an adjunct or part of a machine, 
or the keys to a house, (b) If the article is of great weight and is kept in 
place by gravity without actual physical attachment, it may be a fixture, as a 
building, or a machine, or a colossal statue, {c) If the article has been fitted 
and appropriated to a purpose which, when carried out, would make it a fixture, 
it may be constructively a fixture, as fence rails laid along a line for a fence 
begun but not yet finished. 

2. If the article is so annexed that to remove it would materi- 
ally injure what remains, or destroy the article itself, it must be 
regarded as a fixture and irremovable. 

Example I. Water and gas pipes built into a house are so annexed that 
they cannot be removed without tearing out floors or partitions. But if simply 
attached to walls or floors by hooks, they might be removed under 3, below. 

3. If the article may be removed without injury to the free- 
hold or destruction of the article itself, then the question whether 
it is or is not regarded as a fixture often depends upon the 
relatioh of the one who annexed it to the land. 

a. If the annexer is the owner in fee of the land, and the arti- 
cle is calculated to improve the land, then the article becomes 
a fixture. If the owner sells or mortgages the land, the fixture 
goes with it. If the owner dies, the fixture goes to the heir or 
devisee and not to the executor. Of course the owner, while 
he is owner, may sever the article and make it again person- 
alty, or he may by express stipulation reserve it from a sale or 
mortgage, or he may by will direct it to be severed and treated 
as personalty. 

Example 2. Buildings, fences, machinery attached to a structure, furnaces 
and steam-heating apparatus, bars and counters in business structures, book- 
cases attached to the walls, paintings on canvas cemented to the walls, heavy 
stone statues, and the like have all been held to be fixtures. But gas fixtures, 
such as chandeliers, have been held to be removable furniture. 

b. If the annexer is a tenant of the land, and the annexation 
was for purposes of trade or domestic convenience, the article 
may be removed by the tenant at the expiration of the term. 



§§ 167, 168] RELATIVE RIGHTS 273 

The law favors the tenant in adapting the land and structures 
to the use to which he wishes to put them during the tenancy, 
and permits him to remove annexations if he can do so without 
too serious an injury to what remains. He must exercise this 
right before he surrenders possession. If he renews his lease, 
he should in the new lease expressly reserve the right to remove 
articles annexed under the former lease or, according to some 
authorities, he abandons them as fixtures. 

Example 3. Buildings not let into the soil, engines, boilers, and other 
machinery of trade, counters, cases of shelving, and other store furniture, chairs 
fastened to the floor of a theater, gas fixtures, and the like have all been held 
to be removable by a tenant. The limit would be fixed when the removal would 
do a serious injury to the building belonging to the landlord, and upon this 
test many of the above articles have been held to be fixtures even as between 
landlord and tenant. Moreover, courts differ sometimes even upon substantially 
the same facts. 

III. Relative Rights of Adjoining Owners 

167. Fences : cattle trespass. At common law the owner of 
cattle is bound to fence them in or otherwise restrain them. 
The owner of crops is not bound to fence against trespassing 
cattle. Statutes have in many states changed or modified these 
rules, and in some the matter is left to local authorities to regu- 
late. Very generally, however, statutes have imposed upon rail- 
roads the duty of fencing their property so as to avoid injury to 
trespassing cattle. 

In many states there are statutes compelling adjoining owners 
to maintain a partition fence at their joint expense. 

168. Air and waters ; support of land. One owner is not per- 
mitted to pollute the air over a neighbor's land by' smoke, dust, or 
odors in a manner unreasonably to disturb the neighbor's enjoy- 
ment of his property. Neither can he unreasonably disturb it by 
noises or vibrations. These acts constitute a nuisance for which 
damages may be recovered or an injunction issued. 

One owner cannot pollute waters flowing from his land to that of 
a neighbor, nor unreasonably divert the waters or appropriate them. 

One owner cannot remove the lateral support of a neighbor's 
land by digging so near the boundary as to cause the neighbor's 



274 REAL PROPERTY [Ch. XIV 

land to cave in. This does not extend to the support of buildings 
but only of the land in the natural condition. But one excavating 
may be liable for negligence or for want of notice if another's 
building is injured thereby. 

169. Easements. An easement is a right by one person to do or 
to compel another to refrain from doing some act on that other's 
land. It may be acquired by grant or, in some cases, by prescrip- 
tion, that is, by the adverse use of the right for a specified period, 
usually twenty years. 

One cannot by prescription acquire a right to have light and 
air come to his land from his neighbor's land, but he may by 
grant. Thus, A buys land of B, and the latter agrees not to 
build nearer the line than twenty feet. This gives A an easement 
to that extent in the light and air from B's land. 

One may by prescription or by grant acquire a right of way 
over another's land. If one sells to another land not adjoining a 
highway, there is a "way of necessity" over the seller's remaining 
land in order to reach the highway. 

One may acquire a right to use a party wall, or to drain water, 
or to take water, or to compel another to maintain a partition 
fence, and the like. All these are easements. 

A highway over one's land is an easement for the benefit of 
the public generally, who acquire thereby a right to pass to and 
fro. Of course the public may, and sometimes does, own the fee 
also. But if the fee remains in a private individual, he may use 
it for any purpose not inconsistent with the right of the public. 
He is entitled to the vegetable growth, and he may forbid others 
to cut trees or grass, or pasture cattle, or hunt or fish there. 

IV. Transfer of Interests in Lands 

170. Contract of sale. A contract to sell lands or any interest 
in lands must be in writing and be signed by the party to be 
charged (see sect. 22). While the writing may be an informal 
instrument (a memorandum), it is usual to have a somewhat 
formal one setting out the terms of the agreement in full. It 
should be signed by both parties in order that both may 
be held. 



Land Contract 

3lrtirie|S of ^JWCment, Made this.TTTTTT-..'}Ant.hrTTTTT-.day ofrTTT.JVn?.^ 
in the year One thousand nine hundred and.?.i?^.t.?.?.nTTrr: 

^ettoettt .?.'^)'y^r.'^..Baicer 



of the city of Binghaniton, Co of Broome, State of New York,. 



and .?.^.AP.?.?...?.°PJ^j-'''3 . 



:.of the first part, 



?.?..*?'.?.. .'??-.^,y..°f..??f.'!?.9.'?.^?.!...99!^P.*?f,.?.f.*'"°"<i^ea, State of New York, 

of the second part, in the manner following : The said parties have and hereby 
do mutually covenant and agree as follows : The part y of the first part to sell, 
and the party of the second part to purchase, 3111 tl)at SCtatt Ot J)ar«I 

Ot LanU, situate in the .?>.?■.?. of P.j.?.gh?-?t.q!;'. County of 

Br.e.gg.^ and State of New York, briefly described as follows: 

Beginning at a point one hun feet east of the northeasterly 

corner of Ashland Avenue and Sui^ Street, on the northerly line of 
Summer Street, and rM northerly and parallel with Ashland 

*.Y.?n^?...9'??...'?H?.'?.r?.?..?'.'}!^..?^'^*y (15°! feet; thence easterly and parallel 
with Summer Street forty (40) feet; thence southerly and parallel with 
Ashland Avenue one hm feet; thence westerly along 

the northerly line of Summer Street to the place of beginning, _^^_^^ 



for the sum of ■.?'.y.?Ay?...^.'?°.?.?.^n!i. Dollars 

(^.^.?.'.P9.9.t.99.TT7r:), which sum the said party of the second part hereby agree a 

to pay to t\ie^ party of the first part as follows :....s.i.?...th?.V.?.^P.?...'?°?-.l.^':?. 

/J?. ^9P9^95?A. .?.?...*.?'.?.. .??.r.?.*..?.f?..?.?...'TH'';?.!..?-'l^' ..?-.'}.4. .?*''. thousand dollars 

($6,000.00) on the first day of January, 1917 

Said part y of the second part also agree s to pay ALL taxes and assessments 
which shall be taxed or assessed upon said premises from the date hereof until 
the said sum shall be fully paid as aforesaid. 

And the said part y of the first part, on receiving such payment 

at the time and in the manner above 



mentioned, shall, at ??.^?. own proper cost and expense, execute and 

deliver to the said part y of the second part, or to ?^?.? .assigns, a 

warranty deed, for the conveying and assuring to him, or them, the f ee _ _ 
simple of the said premises. __^_^^_^^».^^.^^— — — — ^^— ^^^^.^_^— ^^.^ 

It is agreed that the part y of the second part shall have possession of said 
premises from and after.th?..^ Ar.?t..day pf juiy. me. ^ 

And it is agreed that the stipulations aforesaid are to apply to and bind the 
heirs, executors, administrators and assigns of the respective parties. 

jTll ^^itnf JB?^ ^^I)0tCOf, The said parties have hereunto set theit 
hands and seals the day and year 'first above written. 

fn ^rejfenee of §(iW.Md'....§.^^.... 

SEAL Jf 

[Acknowledgment by both parties (see p. 245). The eontract is good without aa acknowledg- 
ment, but could not be recorded.] 




2/6 REAL PROPERTY [Ch. XIV 

The legal title does not pass at the time of making the con- 
tract, as it does in the case of the sale of personal property ; but 
equity for many purposes regards the title as having passed to the 
vendee from the time the contract is made, although payment 
and delivery of the deed are postponed. As equity regards the 
vendee as the true owner, it will compel the vendor to execute the 
conveyance by what is known as specific performance of contract. 

Equity regards the land as already a part of the vendee's realty, so that if 
he dies, his heir can compel his executor to pay for it out of the personalty, 
and the deed from the vendor will be made to the heir ; it regards the unpaid 
purchase price as a part of the vendor's personalty, and the money, when paid, 
will go to the vendor's executor in case the vendor has died. 

Since equity regards the land as that of the vendee, he must bear the loss if 
buildings burn, and cannot escape paying the purchase price on that account; 
but at law the risk will follow the legal title, and the loss from destruction of 
buildings will fall on the vendor. 

171. Conveyances. Conveyances of interests in lands other 
than leases are by deed. Of these there are two kinds : quit- 
claim deeds and warranty deeds. 

A quitclaim deed conveys whatever title the grantor may have, 
and throws upon the grantee the risk as to whether there is a 
good or a bad title or no title at all. 

A warranty deed conveys the title of the grantor, and he cove- 
nants, or warrants, {a) that the grantor is seised of the lands and 
has the right to convey them ; {b) that they are unencumbered (un- 
less otherwise stated) ; {c) that the grantee shall have quiet enjoy- 
ment, that is, shall not be evicted by any superior title ; [d) that 
the grantor will warrant and defend him in this ; {e) that the 
grantor will execute any further instrument necessary to perfect 
the grantee's title. 

Many states provide by statute for a short form of deed which 
shall be deemed to carry with it all these warranties. 

A deed must be signed by the grantor and, unless otherwise 
provided by statute, must be sealed ; in some states it must also 
be witnessed. In order to be recorded it must be acknowledged 
before a notary or other authorized official. Recording is neces- 
sary in order to prevent a subsequent sale to an innocent pur- 
chaser. The deed must be delivered to the grantee ; usually this 



§ 172] TRANSFERS 



277 



is a manual delivery, but less than this has been held to be suffi- 
cient where the intention was clear. A defivery in escrow is a 
delivery to a third person upon condition that the deed shall not 
take effect until some condition is fulfilled. An agent duly author- 
ized by power of attorney may execute and deliver a deed for his 
principal (see sect. 119). 

If a deed is made by a married man, it is usual to have his 
wife join in it ; otherwise, should she survive him, she could claim 
her right of dower in the property conveyed. If a deed is made 
by a married woman, her husband should join in it in order to bar 
his possible estate by the curtesy. But in many states by statute 
the wife is given power to destroy the husband's curtesy by her 
conveyance, and no joinder by the husband is necessary to free 
the property from the incident of curtesy. If property is owned 
jointly, the owners may convey by joining in one deed. 

A deed consists of the following parts : (a) the premises, con- 
taining the names of the parties, sometimes the date (though this 
may be at the end), a statement of the consideration and of its 
payment, the words of conveyance, and the description of the 
land ; (d) the habendum, or statement of the estate granted, be- 
ginning often, but not always, with the words " To have and to 
hold " ; (c) any reservation that is to be made ; (d) the covenants, 
or warranties ; (e) the conclusion, containing the statement that 
the grantor has signed and sealed, together with his signature 
and seal and the signatures of the witnesses, if any ; (/) the 
acknowledgment before a notary of the due execution of the 
instrument. 

172. Wills. Property may be transferred by will. In order that 
a will shall be valid it must be signed (in some states subscribed) 
by the testator, and his signature attested by two or more witnesses. 
In some states the testator must actually sign in the presence of 
the witnesses, and they in his presence and in the presence of 
each other. In many states one who is named as a beneficiary 
in the will and also signs it as a witness cannot take the devise 
or bequest ; hence it is important that the witnesses should not 
be interested in the will. 

As a will does not take effect until the death of a testator, 
a devise or bequest lapses if the donee dies before the testator, 



Warranty Deed 

'4:f)is gntienture. 

Made the ; tkT.?^. day of ^P.T.y} in the year One thousand 

nine hundred and..°.^??.^P°" 

'ScttaJCen Charles Lewis , unmarrlea. of the City of Syra^^ 

of Onondaga, and State of New York, 

— of the first part, and 



Salter Cooke, of No. 310 Mill St. In said City of Syracuse. 



■ of the second part, 

^itnf BBrtp, That the said Jiari y of the first part, in consideration of the sum of 

six thousand dollars -_^^^^^^^^^^^^^^^^^^^^^^^^^^^^^._..^ 
(iS.?.!.9.9P.-.9.9.TTT-), lawful money of the United States, paid by the /■arty of the 
second part, do es hereby grant and release unto the said/ar/y of the second 
part, .^A?. heirs and assigns forever, 

an tl)at QTratt or |)artel of lanB, situate in the .9At.y of 

■ Syracuae County of 9}}°n^.^S^ and State 

of New York situate, __lying and being in the tenth ward of the City of 
Syracuse, and known as lot numbered three hundred and thirty (330) on a 
"Map of Land in the city of Syracuse lying between Tenth and Twentieth 
Streets" and filed in the County Clerk's office of Onondaga County on 
the tenth day of June, 1899, bounded and described as follows, viz.: 
Commencing on the northwesterly corner of First Avenue and Thirteenth 
Street and running thence northerly along the westerly side of First 
Avenue forty-three (43) feet, thence westerly and parallel with Thir- 
teenth Street eighty (80) feet, thence southerly and parallel with First 
Avenue forty-three (43) feet to the northerly side of Thirteenth Street, 
and thence easterly along the northerly Bide of Thirteenth Street eighty 

!.°.9.\..f.°.°^..t."..*.'!'°..r.\°.".°..?.T..^°.lf.'."."1.".? 

SCojJtpCr with the appurtenances, and all the estate and rights of the said party 
of the first part in and to said premises. SCo ^abc aiXlI tO j^Oll) the above granted 

premises unto the said party of the second part, ^\?. heirs and 

assigns forever. 

^XCO the said..p.^.*.r.-':?.?..?i'?.^A.^.'...P.'^.'?.*.y..°?..^.'?.?...^i'"s* r""*. 
doBB covenant with the said part y of the second part as follows : 

278 



iFicjSt. — That the party of the first part ?.? seised of the said 

premises in fee simple, and ha a good right to convey the same. 

;|>econ&. — That the party of the second part shall quietly enjoy the said 
premises. 

^bicb. — That the said premises are free from incumbrances. 
JFouttb. — ^That the/a?-/y of the first part will execute or procure any further 
necessary assurance of the title of said premises. 

jfiftj). — That the said. .9.'?.^.^ ?■.?.?. .?;?.y.i f. •. . .?.*.■".*?. .P.f.. .^h?...t.\r.?. ^. ??:T. t; 
will forever warrant the title to said premises. 

^^n WitXit^^ ■S^i)0reOf, The said part y of the first part ha a here- 
unto s&tr7rr.y}?:?.rrrr.hand and seal the day and year first above written; 

fn ^re^ence of /n / o r ■ 



;l)tatt of Bew gotfi, 

County of °P.9.'?.'i^Sa 

City of ?.y.r.^.°.?.?.? 



On this r^.r?.'? day of ^P.r.^.^ in the year One thousand 

nine hundred and...^.^.?.^.^?.?. .before me, the subscriber, personally 

appeared P.t'.^.':.^?.?. .?;?.?.i ?. 

to me personally known to be the same person described in and who executed 

the foregoing instrument, and he acknowledged to me that 

he executed the same. 



r NOTARY ' S ~1 
I SEAL / 



Notary Public for Onondaga County, New York. 



[A quitclaim deed would read like the above except that it would say " does hereby 
remise, release and forever quitclaim unto the said party," and would omit the warranties. 
A deed may be a gift, that is, the grantee may pay nothing. In such case it is usual to 
say "in consideration of one dollar to me in hand paid, and other good and sufficient 
consideration."] 

279 



28o REAL PROPERTY [Ch. XIV 

unless, as in some states, the statute provides who shall take in 
that event. In case a devise of land lapses by the death of the 
devisee, it will go to the testator's heirs, unless there be a residuary 

devise ("all the rest of my property to ") ; in this case, 

in most states it will pass to the person named in the residuary 
clause, but in some it will even then go to the heir. 

At common law the marriage of a woman after making her 
will revokes the will ; but this has to some extent been changed 
by statutes. The marriage of a man after he makes his will, fol- 
lowed by the birth of a child, revokes his will ; but this also has 
in some states been modified or regulated by statute. If a child 
is born after the will of a married man or woman is made, and 
there is no provision in the will for such after-born child, most 
states provide that the child shall take what would have descended 
to him had the parent died. without a will. 

In most states a person may not make a valid will of real prop- 
erty until he is twenty-one. This is also frequently true of a 
will of personalty, but some states permit a will of personalty at 
eighteen. A person of unsound mind cannot make a valid wUl. 
The law of wills is so much a matter of statute that local legis- 
lation must be consulted, in order that the necessary formalities 
may be observed and the intention of the testator consummated. 
It is not prudent for a person to make his will without good 
legal advice. 

173. Descent to heirs. If an owner of real property dies with- 
out a will, the real estate (that is, any estate of inheritance) goes 
to the persons designated by law as his heirs, subject to the estate 
of dower or curtesy in a surviving wife or husband. The statutes 
provide who shall be deemed heirs. They are usually the follow- 
ing : first, children and the children of a deceased child, the latter 
taking among them the share which their parent would have 
taken had he lived ; second, if there be no lineal descendant, 
the father ; third, if there be none of the above, the mother, 
brothers, and sisters, and the descendants of deceased brothers 
and sisters ; fourth, failing these, collateral relatives, beginning 
with the uncles and aunts and their descendants. There are 
many variations in the statutes, and only a general notion of 
them can be given here. 



Will 

/, James Brown, of the City of Ithaca in the County of Tompkins and State 
of New York, being of sound mind and memory, do make, publish and declare 
this my last Will and Testament, in manner following, that is to say : 

First. — / direct that all my just debts and funeral txpenses be paid. 

Second. — / give and bequeath to my son, William Brown, five thousand 
dollars (^J, 000. 00). 

Third. — / give and bequeath to the Home Orphan Asylum of New Tork 
city three thousand dollars (^$3,000.00). 

Fourth. — I give, devise and bequeath to my daughter, Mary Brown, my 
farm in the town of Dryden, county of Tompkins, state of New Tork, known 
as-" Oakdale," for and during the term of her natural life, and after her 
death to her lawful issue her surviving. 

Fifth. — / give, devise and bequeath to my wife, Elizabeth Brown, all 
the rest, residue and remainder of my estate, both real and personal, in lieu of 
her right of dower. 

Lastly, I hereby appoint Henry Wilson executor of this my last Will and 
Testament : hereby revoking all former wills by me made. 

In Witness Whereof, I have hereunto subscribed my name the tenth day of 
June, in the year of our Lord one thousand nine hundred and sixteen. 

ja/yyb£^ Bvow-n. 

We whose names are hereto subscribed do certify that on the loth day of 
June, igi6, James Brown, the testator, subscribed his name to this instrument 
in our presence and in the presence of each of us, and at the same time, in our 
presence and hearing, declared the same to be his last Will and Testament, 
and requested us, and each of us, to sign our names thereto as witnesses to the 
execution thereof, which we hereby do in the presence of the testator and of 
each other, on the said date, and write opposite our names our respective tlaces 
of residence. 

Se<y\M£, h-cMMxia/yyv residing at JtAa,e/^, cAs/w- Zicvik,. 

^AoaLc^ (Fd/UKiA-do' residing at :^tfuMA^, c4e/w- TJcyiA,. 



281 



282 REAL PROPERTY [Ch. XIV 

If an owner of personal property, including leasehold estates 
in land, dies without a will, the property goes to his adminis- 
trator to pay debts, and is then distributed among the persons 
designated by statute as next of kin. These statutes are much 
like those defining heirs, except that a widow is usually given a 
considerable portion of the personalty absolutely, say one third 
if there be children, and one half, or often more, if there be no 
children or grandchildren. 

174, Adverse possession. One may lose and another gain title 
to real property by adverse possession. This is an open, actual, 
exclusive, and continuous possession hostile to the true owner for 
a period of time, usually twenty years, which by statute bars the 
right of the true owner to bring an action to recover the posses- 
sion. Residing on the land, cultivating it, or fencing it may be 
enough to show adverse possession. A tenant or other person 
holding under the owner could not get adverse possession. 

V. Mortgages and Liens 

175. Mortgages of real property. A mortgage is in form a 
conveyance of the title to lands, with a defeasance clause stating 
that in case the mortgagor pays to the mortgagee a certain sum 
to secure which the mortgage is given, the conveyance shall be 
null and of no effect. It is a form of giving security for a debt 
by creating a lien on land, and is executed, acknowledged, and 
recorded like a deed. If it is not recorded, a subsequent mort- 
gage, taken without notice of the first and duly recorded, would 
take precedence, or one purchasing the land without knowledge 
of the mortgage would get the land free from the lien. 

The debt to secure which the mortgage is given is usually evi- 
denced by a note or bond. The debt and the mortgage which 
secures it may be assigned. The assignment is formally executed 
and also recorded. 

When the mortgage is paid, a formal discharge or satisfaction is 
executed by the mortgagee or his assignee, and is also recorded. 

If the mortgage is not paid when due, the mortgagee or assignee 
may foreclose it and sell the land to pay the debt, interest, and 
costs, any residue above this going to the mortgagor. The 



§176] MORTGAGES AND LIENS 283 

mortgage may give a power of sale without requiring the mort- 
gagee to resort to a judicial proceeding for foreclosure. If the 
land does not sell for enough to pay the debt, a judgment may be 
had against the mortgagor for the deficiency in case he has also 
given a note or bond or has undertaken a personal liability. 

176. Liens on real property. In some states an unpaid vendor 
of land has a lien on the land for the unpaid purchase money, 
and a contract vendee of land who has paid part of the purchase 
price has a lien on the land to the extent of his payment. 

In many states one who makes improvements on lands, believ- 
ing, them to be his, and who is afterwards ejected by one having 
a better title, is allowed a lien on the lands for the betterments. 

Statutes often provide for a lien in favor of unpaid mechanics 
who have performed labor upon buildings, or in favor of those 
who have furnished material for them. 

A judgment against a person, rendered in a federal court, is a 
lien on all the lands of the judgment debtor situated in the state 
in which it is rendered. A judgment in a state court is a lien on 
the lands of the judgment debtor situated in any county of that 
state in which such judgment is docketed. 

In most states taxes on a particular piece of land constitute a 
lien on the land until paid. 

Before purchasing land one should have all the records care- 
fully searched in order to ascertain whether the vendor's title is 
good and whether any liens are recorded against the property. 
An abstract of title is usually furnished by the vendor, showing all 
instruments of record affecting the title ; this should be examined 
by the vendee's attorney, and his certificate that it discloses a 
good title should be attached. 

The so-called Torrens system of registering titles to land is in 
force in thirteen states.^ Under this system one desiring to have 
his title registered applies to a designated court. The title is 
examined by an official examiner of titles. All persons claiming 
to have any interest in the property are given notice of the pro- 
ceeding. The court gives a judgment in which it adjudges who 

1 California, Colorado, Illinois, Massachusetts, Minnesota, Mississippi, Nebraska, 
New York, North Carolina, Ohio, Oregon, Virginia, and Washington, and also 
Hawaii and the Philippine Islands. 



Mortgage 



Ci)is f ntienture» 



Made the flf.V^ .day of °?.^.9^.^y. in the year One thousand 

nine hundred and^Purts^.^.TTTTTTTTr-T 

^ettoetn 7^°?f?:?..:?.°7;9S.?. : 

of the City of Rochester, County of Monroe, and State of N 

fiar/ y of the first part, and 9^?.r.?.?..^?:1:9^ 

of the same place, .Jiari y of the second part. 

Wttttene, the said 7.^.™?:?..EP.r'.?.K^ 

•?.?.. justly indebted to the 



said far/ y of the second part in the sum of °>.?^..'!'.'?P.y.?5.'??. Dollars 

{$^.:9.9P.:?.9..-rrr.), lawful money of the United States, secured to be paid by 

?^i?... certain bond or obligation, bearing even date herewith, conditioned for 

the payment of the said sum of..?.J.?..J^.t'°H°f.?.'? Dollars 

/* 6,000.00 -—) on the first day of Novemter, nineteen hundred and 
sixteen, and the interest thereon,__to be _computed__f rora_ this date at the 
rate of five per centum per annum, and to be paid semiannually on the 
fifth days of April and October in each and every year^ vhole^ 

of said principal sum be fully paid, with the privilegeto the party of 
the first part, his executor, administrator or assigns, on any day when 
interest is payable, to pay off the principal of said mortgage in sums 
of one thousand dollars or "■"'•° 

JQDto tUe ^TnUEntttW Witnteeet}), That the said part y of the first part, 
for the better securing the payment of the said sum of money mentioned in the 
condition of the said bond or obligation, with interest thereon, and also for and 
in consideration of one dollar paid by the said Jiar/ y of the second part, the 
receipt whereof is hereby acknowledged, do es hereby grant and release unto 
ihs fart y of the second part, and to... •?.'?... heirs (or successors) and assigns 
forever, ———————————— ——^^ 

ail tl)at SCract or JJartel of ianK, situate in the P.^.ty of 

P.?.°.'?P.?.!.°.': County of M?.?.*:.".?. and State 

of New York .. ^.9™.?.?."?. .?.■?.•?. .?.?.?.9.rJ.^.?.'?..f.?...^?.^.^.°7??.;..X*?.:.".. ^®?,''.n.9.i,'?8. .?•.*.* 

point in the northerly line of Forest Avenue three hundred and twenty-___ 
three (323) feet easterly of North Street; run- _ 

ning thence easterly along said line of Forest Avenue three hundred and_ 
seventy (370) feet; thence northerly two hundred and fifty-two (252) 
feet; thence westsrly and parallel with Forest Avenue three hundred and. 

B even ty (.3 70 ) fee t ; theno e sou ther ly two hundred and f i f ty- two ( 252 ) 

feet to the place of beginning. 



ttUOSetOet with the appurtenances, and all the estate and rights of the 
part y of the first part in and to said oremises. 

284 



^a ^abe anll to pott the above granted premises unto the said pari y of 
the second part, .'?.^?.. heirs and assigns forever. 

|)tOi)ilea aitoapS, That if the said par/ y of the first part,. .^1.?.. heirs, 
executors or administrators, shall pay unto the said pari y of the second part, 
??.^.?.. .executors, administrators or assigns, the said sum of money mentioned 
in the condition of the said bond or obligation, and the interest thereon, at 
the time and in the manner mentioned in the said condition, then these presents, 
and the estate hereby granted, shall cease, determine and be void. 

WtiS the said part y of the first part covenant a with the part y of the sec- 
ond part as follows : 

That the part y of the first part will pay the indebtedness as hereinbefore 
provided, and if default be made in the payment of any part thereof, the pari y 
of the second part shall have power to sell the premises herein described, accord- 
ing to law. 

'^W WitWt^^ ^fjCrCOf, The said part y of the first part ha s here- 
unto set. ??^?.. hand and seal the day and year first above written. 

f n ^tc^ence of ...c^j4?.?^??:^....oP^'?^6m /^ 



5>tatE of J^ew gotfi, 
County of .M.°P.r.9.e 

^'■^7. of s°°'?^.^*.?.r 

On this l}.^^^ day of °9.1^.9?;P.r. in the year One 

thousand nine hundred an^.^.g^.r^-g.^P before me, the subscriber, 

personally appeared J^°'?.^^..?°^PS.?. to me personally 

known to be the same person described in and who executed the foregoing 

instrument, and he acknowledged to me that he executed 

the same. 



r NOTARY'S ~l 
I SEAL J 



Notary Public for Monroe County, New York. 



[If Thomas Powers were a married man, it would be unsafe for Hatch to take the mort- 
gage unless the wife of Powers joined in it, because a foreclosure of Powers' interest would 
not affect the right of the wife to dower in case she survived her husband.] 



28s 



Assignment of Mortgage 

€1)130? '^n^ttUmtnt, Made this.-^.fi.f.th.,:::7..dayof.TTTr..APrll....TTTri9 16. 
'iScttOCCR Gso"".?* Hatch, of the City of HocheBter, County 

State of New York, of the first part, and 

Albert Jones, of the City of Ithaqa, County of Tompkins 

J^g.y.XPf-'y.^ of the second part, 

^itnt^^Ctfy, That the party of the first part, for a good and valuable 

consideration to ^.^!° in hand paid by the said party of the second 

part, ha s sold, assigned, transferred and conveyed, and do ea hereby sell, 
assign, transfer and convey to the party of the second part a certain mortgage 

bearing date the.TTTTr.?A.'!t.''..TTTTTday oir7T77r.9.'r^?.P.?.':.:.-rrTrrr.ig 14, made by 
,^^__^^_^ Thomaa Powers tp George Hatch, said party of t^ 

fl^^!i..V.^y.P..- to secure the payment of the sum of .?.A?..?'^'.°'j.°.^?.'? ' 

Dollars {$.^.:f!9.9.:9?..r7rr), and interest thereon from the date thereof,.- 



r.recorded in the Clerk's office of M.qP.r.°°.: 



County, State of New York, in Liber.TTT7..4?.?..T7T7.of Mortgages, at page rTTr.?-.f .?■.•. tt77 
on the.-7rTTT.fi.f.th:TTTTT:day ofrr—-.°P^°^.B.r:.r-:rrr.ign. at T-T-7.t»9..TTTTT7. o'clock 
P. ,M., together with the bond accompanying said mortgage and therein referred 
to, and all sums of money due and to grow due thereon. And the part y of the 

first part hereby covenant b that there is..?"?? due 

on said bond and mortgage the sum of..f?.V.r..t.h.9H?a.n.a..a.9.1.1:.ar.?...(.»4:.-.9.99.:.9.9.'..-. 

'^W. ^itnejfjSf ^fjCtCOf, The said party of the first part ha a bete- 
unto set J fiJ-.P. Aand and seal the day and year first above written. 

^^^^aP....Ji,citMA'^ 



^tate of j^Etti gotfi, 

County of «?.?.r.99 : 

"^^.^ of ^9.9?^99.*.9r. 

On this .^>. ^y^ day of AP.r.^.^ in the year One thousand 

nine hundred and. . .9.^??.*9.9.? before me, the subscriber, personally 

appeared .9.99r.g.9..^?.^9!^ to me personally known to 

be the same person described in and who executed the foregoing instrument, 
and he acknowledged to me that he executed the same. 



r NOTARY'S ■! SaA-^ & ^-a 

\ SEAL J 



'■ei4d^ 



Notary Public for Uonroe County, New York. 
286 



Discharge of Mortgage 



B t at e of New Yo rk 
County of TompkinB 
City of Ithaca 



I, Albert Jones, 
of New York, 



of the City of Ithaca, County of Tompkins, and State 



2D0 i^ttthp CCCtifp, That a certain Indenture of Mortgage, bearing date 

the .f^O.h day of. P.9.^°?;er. in the year One thousand 

nine hundred and.f.o.Hr.teen made and executed by. T???.i?.as.. Power.?....?.?. 

the first part, to George Hatch, of the second part. 



and recorded in the office of the Clerk of the County 

:.M°^r°g- State of New York, in Uher.r-r77Tr.i^?..r77777-r.ot 



ofTTTTTr 

Mortgages, page.T:T7r..l.^.l....TT:T7.0n the.TTTT7.f.i.?.t.h..TTTT7.day 0f.TTTTTTTT.9.?.*.°.*.?.r.-..T7rTTTT 

jQ 14, a^^ two, o'clock P' M. which said mortgage was duly assigned 

to me by the said George Hatch, the mortgagee above named, by assignment 



dated the fifth day of April, 1916, and recorded in the Clerk's 


office 


of Monroe County, State of New York, in Liber 460 of Mortgages, 


at page 


210, on the fifth day nf April. Ifllfi. at four n'clnrk, P.M . 



is, together with the 

bond secured thereby, fully paid, satisfied and discharged. 



Dated the .t.?.".th day of 

January lo 17^ 



iState of Ifteto gorfe, 

County of .T.o»P.V.i?}?. 



/ «SEAL'» 



City oi .Ithaca 



On this ^.?!}.^h day of J^-.^M^.r.y. in the year One thpusand 

nine hundred and..?.?X?."^.?.^" before me, the subscriber, personally 

appeared .A.^???.r.1'..f.°?.°?. to me personally known to be 

the same person described in and who executed the foregoing instrument, 
and he acknowledged to me that he executed the same. 



("NOTARY'S ~l 
1 SEAL J 



Notary Public for Tompkins Oounty, New York. 
287 



288 REAL PROPERTY [Ch. XIV 

are the owners of the property and the nature of the interest of 
each. An official registrar of titles then issues a certificate of 
the validity of the title as adjudged by the court. All subse- 
quent transfers of the property are noted on this certificate. The 
title as thus registered is perfect, and subsequent dealers with the 
property need not search back of such registration. 

VI. Landlord and Tenant 

177. The lease and its covenants. Estates for years have already 
been explained (see sect. i6o ante). The relation of landlord and 
tenant, or lessor and lessee, is created by a lease, which conveys an 
estate for years to the tenant and leaves a reversion in the land- 
lord. By the Statute of Frauds all leases for more than a speci- 
fied number of years must be in writing ; in many states the 
specification is three years, but in some it is one year. A lease 
need not, however, be under seal. 

The estate in the lessee is not created until he enters under 
the lease (that is, he could not bring an action as owner of an 
estate), although he has, of course, his contract right against the 
lessor for a refusal to allow him to take possession, and is him- 
self liable as for rent if he refuses to enter. When he enters he 
has thereafter the exclusive right to possession during the life 
of the lease, and may maintain an action against anyone who in- 
jures the property. If the wrongdoer also injures the reversion, 
the landlord may have his action as well. 

A lease is in form a conveyance of lands for a term of )'ears 
or at will, in consideration of a return of rent or other recom- 
pense. The person conveying is called the lessor, and the person 
receiving the conveyance is called the lessee. The words of 
conveyance are usually "grant," "demise," "lease," "let," but 
any words expressive of an intention to transfer possession are 
sufficient. 

Any express covenant upon which the parties agree may be 
inserted in a lease. Those almost alwa)s present are the lessee's 
covenant to pay rent, a covenant that one party or the other will 
pay taxes and assessments, and the lessee's covenant to surrender 
the premises in good condition at the end of the term. Other 



Lease 

^ iLease 

Made and executed ^ettoeen J.°'?.';..P.^.°h?:r.?.° of 

the P^.^y of Batayla. New York, of the 

first part, and g?.?.ry.ff.9???.°?. of the P.V^y 

of Mf'A^y^.^.; New York, of the second part, 

this f.^y.?.P. day of . -^PrA?; in the year One 

thousand nine hundred and..^.'-.f.1'.?.°!^.- 

J n <(tOnj6iIO0trdttOn of the rents and covenants hereinafter expressed, the 
said party of the first part Aas ^eitliSCtl atlS LeaBCll, and does hereby demise 

and lease to the said pari y of the second part 

the following premises, viz. : 

a dwelling house situated on the east side of Park Street, between Allen 

Street and North Street, and k^^ 

!^.°r.^.; with the privileges 

and appurtenances, for and during the term of P.P.?..y?.?'.r from 

the.TrTTT7..?J.r.?.*.rrTTTT.day of ^?L\?:. \ 19 15, which term will 

end °" ^^^ thirtysfirst day of March, 1916. ^^^^^^^^^^— . And the said 
/lari y of the second part covenant a that he will pay to the party of the first 

part for the use of said premises, the ?.?.?.thly rent of 

forty Dollars ($'^°.-°°r7Tr), to be paid.!??.n.tl?.ly..in... 

advance. 

%\iSi i[pt0tail)ell, said part y of the second part shall fail to pay said rent, or 

any part thereof, when it becomes due 

it is agreed that said party of the first part may sue for the same, or reenter said 
premises, or resort to any legal remedy. 

The _^ar^ y of the f.}y.?.\ part agrees to pay all 

taxes to be assessed on said premises during said term..?.^.'??.?.^...*?^?..??:*?.^ 

tax. _— _;.^— — — — — 

The part y of the second part covenant 3 that at the expiration of said 
term he will surrender up said premises to the party of the first part in as 
good condition as now, necessary wear and damage by the elements excepted. 

^^ttnC|G>^ the hands and seals of the said parties the day and year first above 
written. 



jofuru 



/{b'Vbvif ^ci@£shcyrb 




290 REAL PROPERTY [Ch. XIV 

express covenants may be that the lessor will repair buildings or 
renew the lease, or that the lessee will repair, or not assign or 
sublet, and the like. Words not plainly expressive of a covenant 
may be construed to indicate an intention to make one. 

The implied covenants are that the lessor has the right to 
make the lease and that the lessee shall have quiet enjoyment of 
the premises. These covenants mean that the lessee shall not 
be disturbed by the lessor or anyone claiming superior title ; the 
lessor does not warrant the lessee against the acts of trespassers 
or other wrongdoers. 

178. Defects, repairs, and waste. The law is not very favor- 
able to the lessee as regards defects, repairs, or the cutting of 
timber or the working of mines. He has but a temporary inter- 
est and must use the property so as not to decrease the value of 
the reversion. 

1. Defects. Except so far as there are express covenants in 
the lease to the contrary, the lessee takes the premises in the 
condition in which they are when the lease is executed. There 
is no implied covenant that they are in good condition or fit for 
occupation. 

There are two exceptions to this rule, {a) The lessor is liable if, known to 
him, the premises contain some concealed and dangerous defect which the 
tenant could not observe and which works him an injury, as, if the concealed 
portions of a building be dangerously defective or if the building has been in- 
fected with the germs of some dangerous disease, {b) In England and in some 
states it is held that in the lease of a furnished house for a short period there 
is an implied covenant or condition that it shall be habitable. 

2. Repairs. The tenant is bound, unless otherwise stipulated, 
to make repairs to an extent necessary to return the premises 
in substantially the same condition as when he received them, 
ordinary wear and tear excepted. To this end he is entitled to 
estovers, that is, to take from the premises timber needed for 
repairs. The common law compelled him to restore buildings 
destroyed by accident or fire, but in many states this harsh rule 
has been changed. 

3. Waste. The tenant cannot commit waste ; that is, he cannot 
cut trees (except for estovers for repairs and for fuel), tear down 
buildings, open mines, take clay or sand, or otherwise substantially 



§§ 179, 180] LANDLORD AND TENANT 291 

injure the freehold. .He may work mines already opened, unless 
restrained by his lease. A tenant committing waste is liable in 
treble damages, and in some states forfeits his lease. He may also 
be enjoined by an equity court from continuing to commit waste. 
4. Title. The tenant cannot deny his landlord's title while in 
possession under the lease. It would be a fraud on the landlord 
for a tenant to get possession under a lease and then set up an 
adverse claim to the premises. 

179. Assignment and subletting. The tenant may, unless he 
has contracted not to do so, either assign his whole interest or 
sublet the premises. 

1. Assignment. Unless restrained by the lease, the tenant may 
assign his estate. If he assigns it, he ceases to have any estate, 
although he remains liable upon his covenant to pay the rent 
and other covenants, unless the landlord releases him from such 
covenants. The law may work an assignment by the sale of the 
tenant's estate for debt or by his death. As an estate for years 
is personalty, it passes to the executor of the deceased tenant 
and not to his heir. 

2. Subletting. Unles* restrained by the lease, the tenant may 
sublet the premises or any part of them. A grant of the lessee's 
whole interest is an assignment; a grant of a part of his inter- 
est is a sublease. If he has an estate for ten years and grants one 
for eight, or if he grants a part of the premises, this constitutes 
a sublease. It has been held that granting a part of the prem- 
ises for the whole unexpired term is an assignment as to that 
part, but the authorities do not agree as to this. A sublessee is 
the tenant of the first lessee, not of the landlord. But neither 
an assignee nor a sublessee, while in possession, can deny the 
landlord's title. 

180. Rent and remedies for nonpayment. The rent reserved 
by the landlord who owns a fee is itself real property until due and 
payable, when it becomes personalty. Hence all rents due at the 
death of the owner go to the executor, while rents not accrued 
go to the heir. 

The remedies of the landlord when the tenant fails to pay the 
rent are (a) an action in debt or covenant to recover the amount 
due ; (b) reentry on the premises if such right is reserved in the 



292 REAL PROPERTY [Ch. XIV 

lease or is given by statute ; {c) in some states a lien on the crops 
grown on the leased premises ; and {d) in some states the right 
of distress, that is, the right to seize the chattels of the tenant 
which are on the premises and sell them to satisfy the rent. 

Many states forbid by statute the landlord to take forcible 
possession of the premises in case the tenant is delinquent, 
and nearly all states provide a summary judicial proceeding for 
the eviction of a tenant who is in arrears. 

181. Termination of lease. A lease is terminated as follows : 

1 . When the time fixed in it expires (as to tenants at will and 
from year to year, see sect. i6o) ; 

2. When surrendered by voluntary act of the tenant, acquiesced 
in by the landlord ; 

3. When there is a breach of the tenant's covenant, which, 
by the terms of the lease, gives the landlord a right to terminate 
the tenant's estate and the landlord enforces the forfeiture ; 

4. When the landlord's title is extinguished, as when a life 
tenant who lets the premises dies, or when the landlord is dis- 
possessed of title by an adverse claimant ; 

5. By statute in some states when the buildings on the prem- 
ises are destroyed without the tenant's fault ; but at common law 
the destruction of the premises will not terminate the lease except 
where the tenant has hired only a part of the building. 

REVIEW QUESTIONS 

Section 159. How is property classified when considered as an object? 
What two main classes in the law? What is real estate? What is personal 
estate? What is corporeal real property and what incorporeal real property? 
What is corporeal personal property and what incorporeal personal property ? 
Define land ; tenements ; hereditaments. What practical differences exist 
between realty and personalty? 

160. How are estates in land divided? What is a freehold estate? What 
two classes? Defineeach. How is each divided ? Define dower ; curtesy ; home- 
stead estate. What four classes of estates less than a freehold ? Define each. 

161. What is a future estate ? What is a reversion ? What is a remainder? 
Illustrate. 

162. What is a joint tenancy and how is it created? What is a tenancy in 
common? Characteristics of each? How is realty held by a partnership? 
What is a tenancy by the entireties? What is community property? 



REVIEW QUESTIONS 293 

163. What is a private trust ? How enforced ? What is a charitable trust ? 
How enforced ? Illustrate. 

164. What is included in the term " land " ? What may one do with over- 
hanging branches? Explain the ownership of waters. 

165. What two classes of vegetable products? Which is realty? Which 
personalty ? Who owns a border tree ? 

166. What is a fixture ? State the rules to determine whether an article is 
a fixture. What is meant by physical annexation ? When is an annexed article 
clearly a fixture ? When is it doubtful ? What difference does it make who 
annexes the article? What may a tenant remove? 

167. What }s the common law as to cattle trespass? What do statutes 
provide as to fences? 

168. What is a nuisance? What is lateral support? 

169. What is an easement? How may it be acquired? How in the case 
of light and air? How in the case of a right of way? What is a way of 
necessity? Explain rights in highways. 

170. How must a contract to sell land be made? When does title pass? 
How does equity regard this ? Illustrate. 

171. How are conveyances of land made? What is a quitclaim deed? 
What is a warranty deed? What are the warranties? How must a deed be 
executed? Is delivery necessary? What is an escrow? What are the parts 
of a deed? 

172. How must a will be executed ? Explain who should not be witnesses, 
and why. If a devisee dies before the testator, what becomes of the devise? 
What effect has subsequent marriage on a will ? Who may make a will ? 

173. If one dies without a will, to whom does his realty go ? his personalty? 

174. Explain title by adverse possession. 

175. What is a mortgage? How is it executed? Why should it be re- 
corded ? What is an assignment ? What is a discharge ? What is foreclosure ? 

176. What other liens besides mortgages may be created upon lands? 
When is a judgment a lien? What is an abstract of tide? 

177. How is an estate for years created? When does it begin? What 
is the form of a lease? What express covenants may it contain? What 
covenants are implied? 

178. Who takes the risk as to defects in the premises ? Exceptions? Who 
must make repairs ? What are estovers ? What is waste ? What is the penalty 
for waste ? Why can the tenant not deny the landlord's title ? 

179. What is the effect of an assignment of a lease? When will it occur? 
How does a sublease differ from an assignment ? 

180. Is rent realty or personalty ? What are the landlord's remedies 
against a tenant for rent? Is forcible entry allowed? 

181. How is a lease terminated ? 



CHAPTER XV 

PERSONAL PROPERTY 

I. Classification : Kinds and Estates 

182. Classification. Personal property consists of the following : 

1 . Chattels real, that is, leasehold interests in land. These have 
already been considered. 

2. Chattels personal, including all property except property in 
land. Chattels personal are further divided into : 

a. Choses in possession, or corporeal personal property, of 
which one may take physical possession and control, like coin, 
cattle, books, etc. 

b. Choses in action, or incorporeal personal property, that is, a 
legal right regarded as an object, as a right to sue for and recover 
a debt, a right to share in the profits of a corporation, the right to 
a patent, copyright, or trademark. Such a right may be evidenced 
by a chose in possession, as where a debt is evidenced by a promis- 
sory note, an interest in a corporation by a share of stock, or a 
monopoly to make and vend an article by letters patent. In such 
case the paper on which these evidences are inscribed is a chose 
in possession, but the right is incorporeal or "" in action." 

Personal property may become real property by being annexed to 
land as a fixture. This has already been discussed. Real property 
may become personal by being severed from the land, as when 
a tree is felled, or minerals are dug, or buildings are pulled down. 
Some things growing upon land or attached to it are personalty, 
as growing crops, or articles annexed but not fixtures. A few 
movable articles are realty, as the keys to a house, the title deeds 
to land, or separable parts of a machine fixture. 

Of the various kinds of personal property only a few can be 
considered here. 

183. Property in animals. Animals are either domesticated 
or wild. In the former the owner has absolute property. In the 

294 



§ 184] CLASSIFICATION 295 

latter one may have a qualified property, and this may ripen into 
an absolute property. 

1. The owner of the land upon which there are wild animals has 
the exclusive right to hunt, capture, and kill them while they are 
there. Any person coming on his land for such a purpose without 
his permission is a trespasser ; if such trespasser kills an animal 
there, it belongs to the landowner, according to the better view. 

2. One who captures a wild animal and keeps it in captivity 
has the exclusive right to it while it is in his possession. If it 
acquires the habit of returning after wandering at large, it is still 
his ; but if it regains its natural liberty and remains at large, it 
is no longer his, but belongs to anyone who captures or kills it. 
A mere temporary escape, however, may not amount to regaining 
its natural liberty, as where a canary escapes into the street, or 
where an animal escapes from a menagerie. 

3. One who rightfully kills a wild animal has the exclusive 
property in it. 

4. One who keeps a wild animal of a dangerous or mischievous 
disposition does so at his peril. If it injures another, he is liable. 

5. One who keeps domestic animals is liable if they escape and 
trespass upon another's land. But he is not liable for injuries due 
to their vicious disposition unless he knows of such vicious propen- 
sity in the particular animal doing the injury. Wild animals and 
vicious domestic animals, known to be such, one keeps at his peril. 

184. Trademarks ; good will ; names. These are incorporeal 
property rights which call for special mention. 

I. Trademarks. A trademark is a name, symbol, or other 
device put upon goods by a manufacturer or dealer in order to 
distinguish them from like goods of other persons. It is a kind 
of commercial seal or signature. 

If the name or device is invented or fanciful, the user of it gets 
a property right in it ; but if it is a word of common use, he 
cannot get an exclusive property right in it, although he might 
prevent another from using it in the same connection for the pur- 
pose of deceiving the public. Words which merely describe the 
article, however, cannot become in any sense exclusive trademarks ; 
nor can geographical names, because others in the same place have 
an equal right to the name of the place of manufacture. 



296 PERSONAL PROPERTY [Ch. XV 

Examples. Excelsior Stoves, Hoosier Drills, Electro-Silicon Powder, Con- 
gress Water, Champion Flour, 303 Pens, and the like are good trademarks. 
Lackawanna coal is not, as against another miner in the same locality, nor 
Worcestershire sauce, nor Philadelphia cement. But if one makes tobacco at 
Durham and calls it " Durham tobacco," he may prevent another person mak- 
ing tobacco elsewhere from using the same name. So if one changes but a 
single letter, the legend may be deceptive though a different word is used, as 
where A has used the words " Royal Pens " and B puts out a product called 
" Loyal Pens." 

2. Goodwill. The good will of a business is the good opinion 
of customers concerning the business and the probability that 
they will continue to patronize it. It is a valuable asset and may 
be sold with a business. Usually its sale is evidenced by the right 
to use the old name, perhaps with that of the successor added. 
The seller, if he has included good will in the sale with the right 
to use his name, cannot set up a rival business under the same 
name. If there is no sale of the right to use his name, he may 
set up a rival business under the name but cannot represent him- 
self as carrying on the old business or as the successor of it. 

3. Names. A man may choose his own name, although he 
usually bears his father's surname and the Christian name given 
him at his birth. In order to avoid the loss of evidence as to 
identity, statutes provide for a record of change of name if one 
chooses to avail himself of it, but one may nevertheless acquire 
a new name by usage. The law disregards all middle names ; it 
is legally sufficient to use the first Christian name and the sur- 
name. So the word "junior" or "senior" is merely descriptive 
and no part of the name. A man cannot prevent another from 
using his name unless the other uses it for fraudulent purposes. 
And one may even be enjoined from so using his own pame in 
trade as to work a fraud, as where, after A. B. has sold a certain 
kind of gun as "A. B.'s gun," another person of the same name 
puts a gun on the market stamped "A. B.'s gun." 

185. Estates in personal property. Personal property, like real 
property, may be owned by two or more persons as joint tenants, 
tenants in common, partners, and in communit)' (see sect. 162 ante). 

There may be a life interest or estate in personal property with 
a remainder or reversion in another. If the property is corporeal, 
the life tenant may possess and use it ; but if it is in the nature 



§ 186] ACQUISITION AND TRANSFER 297 

of money or security, the executor usually invests it and pays the 
income to the tenant for life. If the property is such as is con- 
sumed in the use, it must be intended that the remainderman 
shall have only what may be left at the life tenant's death. 
There may also be a trust of personal property (see sect. 163 ante). 



II. Acquisition and Transfer 

186. Acquisition by occupancy and by finding lost property. 

The title to personal property may be acquired by taking posses- 
sion of what no one owns or by taking possession of what some 
one has lost but never reclaims. 

1 . Occupancy. Personal property may be acquired by occupancy, 
that is, by taking into one's possession what previously belonged 
to no one or what has been abandoned by a previous owner. The 
taking of wild animals, the taking of fish, and the taking of sea- 
weed on one's own property or on property common to all are 
examples of the first method. Raising a sunken vessel abandoned 
by the owner would be an example of the second. 

2. Lost property. Lost property calls for special consideration. 
The general rule as to the title of the finder is that if one finds 
and appropriates lost property, he has a title good against all but 
the true owner. 

The law distinguishes, however, between lost property and mis- 
laid property. If one finds a pocketbook on the floor of a store, it 
is lost property and belongs to the finder unless the true owner 
reclaims it. But if he finds a pocketbook on the counter of a store, 
it is mislaid or left property and belongs to the owner of the store 
as bailee for the true owner, instead of to the finder. Should the 
true owner never reclaim it, the storekeeper retains it. 

Treasure-trove is money, coin, or bullion hidden or concealed 
in the earth or other secret place. In England it belongs to the 
crown if no true owner claims it. In this country it is generally 
treated as lost property and belongs to the finder as against the 
owner of the lands where it is discovered. 

Statutes often regulate the rights of finders of lost property, 
and generally require the finder to advertise the property found. 
In case the true owner does not reclaim it, some statutes provide 



298 PERSONAL PROPERTY [Ch. XV 

that the property or its proceeds shall, in whole or in part, go to 
some public fund. The rights of finders of estrays (lost cattle) 
are particularly governed by statute. 

If the finder knows who the owner is, or if the property dis- 
closes to whom it belongs, the finder is guilty of larceny in keep- 
ing the property as his own. But in order that this rule shall 
apply, the finder must know these facts at the time of the finding, 
and then form the felonious intent. 

Examples: I. X bought an old safe and delivered it to A to repair. A 
found in the space between the outer wall and the lining a sum of money. 
A may retain the money as against X. 

2. A customer in a shop laid his pocketbook on a table and went away and 
forgot it. Another customer found it there. The shopkeeper is entitled to it 
as against the finder. 

3. A was working for X in the latter's paper mill, and in picking over rags 
and paper found a number of bank bills. A is entitled to them as against X. 

4. A conductor on a railway train finds a pocketbook in the train. It 
belongs to the conductor as against the railway company. 

5. A and B, while working for X in removing an old building, discovered a 
rusty tin can containing a large sum of money. Who hid it there is unknown. 
The money belongs to A and B as against X. 

187. Accession and confusion. Title by accession arises from 
the following circumstances : the natural increase from land and 
animals ; the uniting of the property or labor of one with the 
property of another ; the confusion of the goods of one with the 
goods of another. 

1. Natural increase. It is, of course, too plain for argument 
that if one owns land he owns its increase, whether produced by 
nature or by industry. So, too, if one owns animals he owns 
their young, the rule being that the offspring go with the dam, 
or mother. 

2. Accession of chattels, (a) If the chattel of one is, without 
his consent, united with the land of another so as to become a 
fixture, the chattel becomes realty and belongs to the owner of 
the land ; the owner of the chattel has only an action for dam- 
ages for conversion. This is because the land is regarded as the 
principal thing and the chattel as an accessory. 

((5) A similar rule applies when the chattel of one is insepara- 
bly united with the chattel of another : the whole belongs to the 



§187] ACQUISITION AND TRANSFER 299 

owner of the principal chattel, while the owner of the accessory 
chattel has only an action for conversion. Should the chattels be 
of approximately similar kind and value, the owners would become 
owners in common of the new product. A thing may be acces- 
sory, however, which is of greater value than the principal chattel, 
if the latter gives its name and character to the whole, as where 
materials of greater value than an old wagon are used to repair 
and renovate it. So, too, things of inferior value may by their 
owner be united by his labor or skill with things of greater 
value so as to create a practically new thing which will belong 
to him, as where with a smaller quantity of his wool, united 
with a greater quantity of another's wool, he weaves cloth, or 
with a smaller quantity of his material, united with a larger 
quantity of another's, he makes a ship, or furniture, or gold or 
silver ornaments. 

(c) If a workman makes a new product by putting labor upon 
another's chattel so that there is a complete change of identity, 
the product belongs to the workman. If there is not a com- 
plete change of identity, the chattel will belong to him if the 
labor innocently bestowed is the principal item in the value of 
the new product, but will belong to the owner of the chattel 
if the latter is the principal item in the value of the new 
product. This last rule is qualified where the workman knows 
the material is not his, many courts holding that in such case 
he must lose his labor, although it may be more valuable than 
the chattel. 

Examples .• I . B uses some links belonging to C in making a chain most 
of which was made from his own links. The chain is wholly B's. Had the 
links of C about equaled those of B in number, the two would have been 
owners in common. 

2. B takes $8 worth of canvas belonging to him and $40 worth belonging 
to C, adds $10 worth of labor, and makes a sail. The sail belongs to C. 

3. B by mistake cuts wood on C's land. The wood as it was while grow- 
ing was worth about $3 a cord. B's labor in cutting it is worth about $2 
a cord. The wood belongs to C. 

4. B by mistake takes C's trees, worth about $25, and makes them into 
hoops worth about $700. The hoops belong to B. A small excess of value of 
the labor would not be enough to deprive C of his property, but if the excess 
is great, the labor becomes clearly the principal thing and the material the 
accessory thing. 



300 PERSONAL PROPERTY [Ch. XV 

5. As above. B knows the trees belong to C, and puts the labor upon 
them. C may claim the hoops. B loses his labor because of his own conscious 
wrong in converting C's property. 

6. In Example j, B sells the hoops to X, an innocent purchaser. C may 
reclaim them. Since B had no title, he could give none. 

3. Confusion of goods. If the goods of one are so confused 
with the Uke goods of another that they cannot be distinguished 
and separated, the title to the mass will depend {a) upon the inno- 
cence or willfulness of the owner who caused the confusion, and 
(5), if willful, upon the possibility of clearly proving how much of 
his product is in the mixture, (a) If the confusion is innocent, 
each will be entitled to his aliquot portion of the mass as that 
may be reasonably established. The same rule applies where the 
confusion is by consent, as where wheat of several owners is min- 
gled in a warehouse, (b) If the confusion is willful, the one caus- 
ing it can claim his share only if he can clearly and decisively 
prove how much of each was mingled ; failing in this, he forfeits 
the whole mass to the innocent party. 

188. Transfer by gift. A gift is a transfer of property by the 
owner without consideration. A gift inter vivos is a gift to take 
effect at once by transfer of absolute possession to the donee, and 
is irrevocable. A gift causa mortis is a gift made, by one in peril 
of imminent death, by transfer to the donee, but upon condition 
that if the donor survives the peril, he may revoke the gift and 
reclaim the property. 

In a gift inter vivos, delivery is the essential requisite, coupled, 
of course, with the intent to transfer as a gift. An intent to give 
is not enough. A promise to give is not effective, because there is 
no consideration for the promise. There must be actual delivery, 
so as to put the subject matter of the gift out of the control of 
the donor. If the article is one that may be delivered by manual 
transfer, that form should be followed. But if it is bulky, or in 
the hands of a third person, a symbolic delivery will do, as the 
delivery of a key to the place where the article is kept, or the 
transfer of a warehouse receipt ; but the delivery of the donor's 
own check (order) on a bank is not effective as a gift unless, 
before the death of the donor, the donee actually obtains the 
money. If the donee is already in possession, no new delivery 



§188] ACQUISITION AND TRANSFER 301 

is necessary ; it is enough to show clearly the words of the gift. 
So a deed of gift duly delivered will take the place of the delivery 
of the subject matter itself. If one wishes to forgive a debt, he 
should give the debtor a release under seal ; but a receipt in full 
duly delivered and the balancing of the account on the books of 
the donor have been held sufficient. 

In a gift causa mortis delivery is also necessary. The peculi- 
arity of this gift is that it must be made in contemplation of im- 
minent death (not merely of human mortality), and that it is to 
become absolute only in case the donor dies, of the illness or peril 
then existing, without having revoked the gift. If he recovers or 
escapes the peril, he may reclaim the gift, and he may before his 
death revoke it. One in his last illness may make an absolute gift 
inter vivos or a conditional gift causa mortis, and it is a question 
of fact whether he intended to make the one or the other. A gift 
causa m-ortis bears considerable resemblance to a legacy in a will, 
differing mainly in this, that the article is delivered to the donee 
before the death of the donor, and no writing is necessary. 

Examples .• i . A father places in an envelope certain articles and securities, 
indorses it, " The inclosed are for my son John," signs his name, and puts the 
envelope and its contents into his safe, where they are found after his death. 
This is not a valid gift. There has been no delivery. 

2. A father gave to X a bag of coin, saying the contents were for his daughter. 
This was a valid gift. The delivery may be to a third person for the donee. 

3. A father loaned his son a horse and buggy. After the son had posses- 
sion, the father said, " I give you that horse and buggy.'' This was a valid gift. 
There need not be a new delivery at the time of the gift. 

4. A father in contemplation of immediate death gave to his son his (the 
father's) promissory note for $1000, and to his daughter his (the father's) 
check on a bank for $1000. The first gift is invalid ; it is a mere promise to pay 
or to give. The second gift is valid if the check is cashed before the father's 
death, but the death of the father revokes the authority of the bank to pay it. 

5. A father gives and delivers to his son the promissory note of X, and to 
his daughter the check of Y. These are valid gifts. If the instruments are 
payable to the father's order, he should indorse them, but his failure to do so 
will not, it seems, render the gift invalid, although the courts are not entirely 
in harmony upon that point. 

6. A donor in his last illness told the nurse that his pocketbook was under 
the pillow, and that she was to take it and give it to his son. After his death 
the nurse took it and gave it to the son. This was not a valid gift, because 
there was no delivery in the lifetime of the donor. 



302 PERSONAL PROPERTY [Ch. XV 

7. The donor has money deposited in a savings bank. He delivers the 
savings-bank book to the donee as a gift. Most courts hold this sufficient to 
constitute a valid gift. It would not be sufficient in the case of an ordinary 
deposit in a bank of deposit ; in such case there must be a due and formal 
assignment of the claim against the bank. 

8. If B, with the intent to make a gift to C, deposits money in a savings 
bank in the name of C, and takes the savings-bank book in C's name, there is 
a valid gift. But intent must be established ; it may be that the deposit was 
made in this way because B had already deposited in his own name all that 
the rules of the bank permitted. The delivery of the book to C would be quite 
decisive of intent, but this is not essential if intent otherwise appears, as from 
a declaration that he has made the gift. 

9. One may make a gift in the form of a trust either (a) by declaring that 
he holds a sum of money in trust for C or {b) by transferring the sum to T to 
hold in trust for C. In the first case there is an " equitable gift " without any 
delivery and by a mere declaration. 

189. Other modes of transfer. Other modes of transfer are by 
sale, will, distribution when the owner dies intestate, seizure and 
sale for debt, mortgage, and at common law by marriage. Only 
a word need be added as to these. 

A chattel mortgage is the transfer of the title to personal prop- 
erty as security for a debt, upon condition that if the debt is duly 
paid, the mortgage and transfer shall be null and void. It is gen- 
erally provided that in order to be valid against subsequent pur- 
chasers or mortgagees in good faith, the chattel mortgage must 
be duly recorded, and some states require it to be renewed annu- 
ally in order to remain valid. Unless otherwise stipulated, the 
mortgagee is entitled to possession, but it is usual to leave the 
mortgagor in possession until default or until the mortgagee feels 
insecure. When possession is taken after default, the mortgagee 
becomes the owner of the goods at law, but equity gives the 
mortgagor a right to redeem them. To cut off this right the mort- 
gagee forecloses it by a sale of the goods either under a judicial 
proceeding or, if the mortgage gives him a power of sale, without 
such proceeding. Most states have statutes regulating foreclosures. 

At common law a husband was entitled to all the personal 
property owned by the wife at the time of the marriage. Most 
states have changed this mle by providing that a married woman 
shall continue to own and control all her property the same as 
an unmarried woman. 



REVIEW QUESTIONS 303 

REVIEW QUESTIONS 

Section 182. Of what does personal property consist? What are choses 
in action? When does personal property become realty? When does real 
property become personalty ? What property attached to land is personalty ? 

183. What right has a landholder in wild animals on his land? What 
sort of property has one in a captured animal ? How is it lost ? If one kills a 
wild animal, whose is it? For what damage done by his domestic animals is 
one liable ? by wild animals kept in captivity ? 

184. What is a trademark? When is it property? If not property, has 
anyone a right to use it ? What is good will ? What property has one in his 
name ? What is the name recognized by the law as sufficient ? 

185. What estates in personal property? 

186. What is title by occupancy? Who owns lost and found property? 
What is mislaid property ? What is treasure-trove ? Who owns it ? When is 
a finder of lost property guilty of larceny ? 

187. What is title by accession? If the chattels of different owners are 
annexed, who owns the article so made ? If one puts labor on another's chattel 
and increases its value, who owns it ? Distinguish and illustrate. If one inno- 
cently mixes his goods with those of others, who owns the mass? If one 
willfully mixes them, who owns the mass? 

188. What is a gift inter vivas'^. What is a gift causa -inortist Explain 
the essentials of each. How can one make a gift of a debt to his debtor ? Is 
a gift revocable ? Can one make a gift of his own promissory note or check, 
and why ? When is a gift of a savings-bank deposit good ? Can one make a 
gift inter vivos without delivery ? 

189. What other modes of transfer of personalty? What is a chattel mort- 
gage? Why should it be recorded? Who is entitled to possession of the 
mortgaged chattels? After default where is the title? What is the equity of 
redemption and how is it disposed of ? What effect has marriage on the tide 
to personalty ? 



GLOSSARY 

[Terms fully defined in the text are not included in this Glossary. For such terms the 
Index should be consulted.] 



Abstract of title. An outline history of 
the title to land, consisting of a synop- 
sis, or summary, of all conveyances, 
mortgages, liens, and charges affect- 
ing the parcel of land in question. 

Acceptance, {a) The assent of the of- 
feree to the proposal of the offeror, 
thus concluding a contract ; (i) the 
act by which the drawee of a bill of 
exchange assents to the request of 
the drawer to pay it and makes him- 
self liable to pay it. 

Acceptor. The person who accepts a 
bill of exchange. 

Acceptor supra protest. The person 
who, after it is protested, accepts a 
bill of exchange for the honor of the 
drawer or an indorser. 

Accession, (a) That which is united to, . 
or produced by, property ; (i) the right 
to all that one's property produces or 
that is united to one's property. 

Accommodation paper. A bill or note 
to which the accommodating party 
puts his name as indorser, maker, or 
drawer without consideration, in order 
to lend his credit to another. 

Acknowledgment, (a) In conveyancing, 
the act by which one who has exe- 
cuted a deed or other instrument 
goes before a notary public or other 
authorized officer and declares or 
acknowledges that he did execute the 
same ; {i) the certificate of the officer 

, ' to that effect. 

Act of God. Inevitable accident beyond 
human foresight or control. See Vis 
major. 



Act of honor. The instrument drawn 
up by a notary certifying that a bill 
has been protested and that a person 
named has accepted or paid it for the 
honor of the drawer or an indorser. 

Action. The proceeding in a. court for 
the enforcement of a right ; also called 
a suit. 

Administrator. A person appointed by 
the court to administer the estate of 
a deceased person who has not by will 
named an executor. The feminine 
form of this word is "'administratrix.'' 

Admiralty, (a) The system of law gov- 
erning maritime causes ; (V) the court 
administering this law. 

Adult. One of full legal age, usually 
twenty-one years. 

Adverse possession. A possession of 
real property adverse to the right or 
title of another. If continued for a 
specified period, usually twenty years, 
it cuts off the right of the other to 
reclaim the property. 

Affidavit. A written declaration under 
oath. 

Agistor. One who pastures cattle for 
another. 

Aleatory (Latin alea, a die, or chance). 
Depending upon an uncertain event. 

Alienate. To convey; to transfer the 
title to property. 

Allonge. The strip of paper attached 
to a bill or note to receive further 
indorsements after the back of the 

' instrument is filled. 

Alteration. A change in the terms of 
a written instrument. 



30s 



3o6 



GLOSSARY 



Ambiguity. Doubtfulness, or double- 
ness, of meaning. 

Ancestor. One from whom a person has 
descended in a direct line. Sometimes 
used in the broader sense of one from 
whom a person has inherited lands. 

Annuity. A yearly sum stipulated to 
be paid to a person. 

Answer, {a) In pleading, the matter set 
up by way of defense to an action; 
(i) a formal written statement con- 
taining the defense to an action. 

Ante (Latin) before. Used in referring 
to a preceding part of a book. 

Appeal. The removal of a cause from 
an inferior to a superior court in 
order to have the action of the lower 
court reviewed. 

Articles. A contractual document con- 
taining the terms of an agreement. 

Assets, {a) Property of a deceased 
person or a bankrupt available for 
payment of debts ; {i) the aggregate 
available property of a merchant. 

Assignment. The transfer of rights or 
interests. 

Attachment. A process by which prop- 
erty is seized pending a suit. 

Bankrupt. A person who under the 
bankruptcy laws is liable to have his 
property seized and distributed among 
his creditors. 

Beneficiary, {a) A person entitled to 
the income or enjoyment of property 
the title to which is held by another 
as trustee; {!>) the person to whom 
a life-insurance policy is payable. 

Bequeath. To give personal property 
by will to another. 

Bequest. A legacy or gift of personal 
property by will. 

Bilateral. In contract, signifying an 
agreement executory on both sides. 

Bona fides (Latin) good faith. Bona 
Jide, in good faith. 



Bond. A sealed obligation to pay 
money. A bond and mortgage cdn- 
sists of a bond with a mortgage to 
secure its payment. 

Bought note and sold note. A bought 
note is given to the seller and a sold 
note is given to the buyer by a broker 
who acts as agent between the parties. 
These are memoranda of the contract. 

Boycott (from the name of one Boy- 
cott, who was agent for an estate in 
Ireland), (a) A combination to cease 
dealing with a person ; (b) a conspir- 
acy to induce others to cease dealing 
with a person. 

Breach. The violation or nonfulfill- 
ment of an obligation. 

By-laws. Regulations or rules adopted 
by a corporation for its own govern- 
ment. 

Cargo. Goods and merchandise put on 
board a ship to be carried from one 
port to another. 

Case. A statement of facts upon which 
an action in a court is based. 

Caveat emptor (Latin). Let the buyer 
beware. 

Caveat venditor (Latin). Let the seller 
beware. 

Champerty. A bargain by which an 
attorney agrees to carry on a suit at 
his own risk and cost in considera- 
tion that he shall receive in case of 
success a part of the proceeds of 
the suit. 

Chancery, (a) A court of equity; (b) the 
system of jurisprudence administered 
in a court of equity. 

Charter, (a) A legislative act, together 
with proceedings taken thereunder, 
by which a corporation is created; 
{b) to hire or lease a vessel. 

Charter party. The contract by which 
a vessel or some principal part there- 
of is let for a voyage. 



GLOSSARY 



307 



Chattel. An article of personal prop- 
erty. A more comprehensive phrase 
than " goods," since it includes chat- 
tels real. 

Chattel real. A chattel interest in 
land, as a leasehold. 

Chose. A thing ; any article of property. 
A chose in action is a right of ac- 
tion to recover a debt, demand, or 
thing. 

Civil action. An action to establish a 
private right, as distinguished from a 
criminal action. 

Civil law. The Roman law as distin- 
guished from the English law. 

Code. A legislative enactment intended 
to embody the law on a particular 
topic or, as in some states, on all 
topics. 

Collateral, (a) In the law of descent, in 
a side line, not direct or lineal; (5) in 
commercial law, a security additional 
to the personal obligation. 

Commercial paper. Bills, notes, and 
checks given in the course of com- 
mercial transactions. It does not in- 
clude accommodation paper. 

Common law. (a) The law of Eng- 
land, as distinguished from the civil 
law ; (i) that part of the law of Eng- 
land developed by the common-law 
courts. 

Complaint. The name of the pleading 
by the plaintiff in an action at law. 
Sometimes called a declaration. 

Composition. An agreement between 
an insolvent debtor and his creditors 
whereby the latter agree to take less 
than the whole of their claims. 

Compromise. An agreement to settle 
a dispute made in view of the un- 
certainty of legal rights. 

Conversion. An unauthorized assump- 
tion and exercise of ownership over 
goods belonging to another. It is a 
tort. 



Conveyance. An instrument in writing 
under seal, by which any estate in real 
property is created, aliened, mort- 
gaged, or encumbered. 

Copyright. An exclusive right granted 
by the government to multiply and 
sell a literary or artistic production. 

Corporeal. Having an objective, mate- 
rial existence. 

Costs. An allowance made to a success- 
ful party to a suit, to compensate 
for his expenses in conducting it. 

Covenant. A promise contained in a 
sealed instrument. 

Custom. In law, a usage so well estab- 
lished as to be regarded as having 
the force of law. 

Damages. A pecuniary compensation 
recovered in a court for some in- 
jury or loss sustained through the 
wrongful act or omission of an- 
other. 

Deceit. A fraudulent representation or 
device by which a person is misled 
to his damage. 

Declaration. The pleading in which n 
plaintiff states his cause of action. 
See Complaint. 

Decree. The name given to the judg- 
ment of a court of equity. 

Deed. A sealed instrument containing 
a contract or conveyance. 

Defendant. The person against whom 
an action is begun. 

Del credere (Italian) of trust or credit. 
Applied to an agent who guaranties 
that purchasers will pay for goods of 
the principal sold to them. 

Descent. In real property, the title 
given by force of law upon the death 
of an owner. 

Devise. A gift of real property con- 
tained in a will. The devisee is the 
one to whom it is given ; the devisor 
is the one who gives it. 



308 



GLOSSARY 



Earnest. A sum paid to bind a bargain. 

Easement. A riglit in the owner of one 
parcel of land, as owner, to a use in 
the land of another. 

Emblements. Annual products of the 
soil raised by labor and industry. 

Encumbrance. A claim, lien, or liability 
attached to property, as a mortgage, 
judgment, etc. 

Equity. The system of jurisprudence 
administered in the equity courts. 
See Chancery. 

Equity of redemption. The period 
allowed by equity for a mortgagor, 
pledgor, etc. to reclaim his property 
by paying the debt secured by it. 

Escrow. A deed delivered to a third 
person to be held until the happen- 
ing of some contingency, and then 
delivered to the grantee. 

Estate. The interest one has in prop- 
erty. Sometimes used broadly to in- 
clude all of one's possessions. 

Estoppel. A bar raised by the law to 
preclude a man from setting up cer- 
tain facts because of some prior 
admission or conduct. The verb is 
" to estop." 

Estovers. The right of a tenant to take 
wood necessary for fuel, fences, and 
repairs is called a right to estovers. 

Executor. A person appointed by the 
maker of a will (the testator) to carry 
out its provisions. The feminine form 
of the word is " executrix." 



are cut off and only particular heirs 
are designated. 

Fiduciary, (a) As a noun, a person in 
a relation of trust or confidence; 
(f) as an adjective, signifying a rela- 
tion of trust or confidence. 

Forcible detainer. Keeping possession 
of lands by force. 

Forcible entry. Taking possession of 
lands by force. 

Foreclosure. A proceeding for extin- 
guishing the right of a mortgagor or 
pledgor to redeem the property given 
as security for a debt. 

Forgery. Fraudulently making or alter- 
ing a writing which purports to create 
or modify a legal right against an- 
other. 

Franchise. A special privilege con- 
ferred by law upon an individual or 
a corporation, which does not belong 
to persons of common right. 

Fraud. Some willful act or device cal- 
culated to influence or mislead a 
person to his prejudice. 

Fructus industriales (Latin). Fruits of 
industry ; products of land raised by 
labor. 

Fructus naturales (Latin). Fruits of 
nature ; natural products of land. 

Fungible. Capable of being estimated 
or replaced by weight, measure, or 
number without reference to the 
particular characteristics of each 
unit. 



Fee (same as feud or fief). Originally 

land held of a superior lord in 

consideration of military service. 

Now an estate of inheritance in 

lands. 
Fee simple. An absolute, unqualified 

fee ; the largest estate -one can have 

in lands. 
Fee tail (from French (m'Ue, a cutting). 

A fee from which the general heirs 



Good consideration. A consideration 
based on family relationship or love 
and affection. A valuable considera- 
tion is one based on the surrender of 
something having a legal value. 

Goods. Articles of personal property. 
Usually applied to inanimate mov- 
ables. " Chattel " is a broader term. 

Grant. A term signifying a transfer by 
deed of an interest in real property. 



GLOSSARY 



309 



Heir. The person to whom by law the 
title to real estate descends upon the 
death of his ancestor. 

In statu quo (Latin). In the condition in 
which (one was before). 

In transitu (Latin). In transit. 

Incorporeal. Without body or material 
substance. 

Indemnify. To save harmless ; to se- 
cure against loss or damage. 

Indenture. Formerly a deed in two 
copies with cut or serrated edges so 
that one would fit into the other. Now 
any deed by which two or more parties 
enter into reciprocal obligations. 

Indorse. Literally, write on the back of. 

Injunction. A writ issued by a court 
of equity, forbidding or commanding 
something. 

Insolvency. Inability to pay debts in 
due course. 

Inter vivos (Latin). Between the living. 

Intestate. Without a will or testament. 

Joint and several. An obligation by 
two or more which may be enforced 
against all jointly or each individually. 

Judgment. The decision of a common- 
law court in an action before it ; the 
final determination of the rights of 
the parties. 

L.S. Abbreviation for Ucus sigilli (place 

of the seal). 
Law. The rules by which courts are 

controlled in the administration of 

justice. 
Legacy. A gift of personal property by 

will and testament. 
Levy. A seizure of property to satisfy 

a judgment. 
License. A permit to do an act which 

would otherwise be illegal, as to enter 

another's lands, but not creating an 

easement. 



Lien. A charge imposed upon property 
by which it is made security for a 
debt or other obligation. 

Liquidated damages. Agreed or as- 
certained damages, not uncertain 
damages. 

Majority. Full legal age ; usually 
twenty-one years. 

Minority. Under legal age ; infancy. 

Municipal law. The law of a partic- 
ular country as distinguished from 
international law. 

Negligence. A failure to use the care 
that a reasonably prudent man would 
use under like circumstances. 

Next of kin. Those relatives who share 
by law in the personal property of a 
deceased person. 

Nominal ' damages. A trifling sum 
awarded to vindicate a legal right 
where no substantial damages have 
been suffered. 

Notary public. A public officer author- 
ized to certify or attest documents, 
take acknowledgments of deeds, etc. 

Nuisance. A wrongful act which dis- 
turbs another in the enjoyment of 
real property or of a public highway. 

Obligation. A legal duty to do or not 
to do a certain thing. An obligor is 
one who has undertaken an obliga- 
tion. An obligee is one entitled to 
the performance of an obligation. 

Orphans' court. The name given to 
the probate court in a few states. 

Ownership. The right to possess and use 
property to the exclusion of others. 

Parol. A wordor speech; that which 
is expressed orally, not in writing. 

Patent. An exclusive right granted by 
the government to make, use, and 
vend an article. 



3IO 



GLOSSARY 



Per procuration (abbreviated "perpro."). 
By proxy. Used in England to indi- 
cate an agent that is acting under a 
special or limited authority. 

Personal representative. An execu- 
tor or administrator of a deceased 
person. The " real representative " 
is the heir of the deceased person. 

Plaintiff. The person who brings an 
action in a court. 

Pleadings. The written allegations as 
to claims and defenses in an action 
in a court. 

Post (Latin) after. Used in referring to 
a subsequent portion of a book. 

Prescription. Title by adverse posses- 
sion. The law indulges the fiction 
that there was a prior writing which 
is now lost. 

Probate. To prove, as to probate, or 
' prove, a will. A probate court is 
one in which wills are proved. 

Proof. The establishment of a fact by 
evidence. 

Pur (sometimes per) autre vie (French). 
For another's life. 

Quantum meruit (Latin). As much as 
he deserved. Refers to an action 
■ for the reasonable value of serv- 
ices. 

Quantum valebant (Latin). As much 
as they were worth. Refers to an 
action for the reasonable value of 
goods sold and delivered. 

^aas! (Latin). Like; corresponding to. 

Ratification. The confirmation of a 
previous contract or act which is not 
binding. 

Receiver. A person appointed by a 
court to take possession and control 
of property pending litigation and 
some final decree of the court. 

Recording acts. Statutes providing for 
the recording of deeds, mortgages. 



etc. in some public office, and pro- 
viding that the record shall be con- 
structive notice to all subsequent 
purchasers or encumbrancers. 

Redemption. The act by which a mort- 
gagor, pledgor, etc. reclaims the title 
and possession of the property by 
paying the debt so secured. 

Release. The giving up of a claim, by 
the person entitled, to the person 
against whom it exists. 

Replevin. An action to recover posses- 
sion of goods. 

Rescission. The canceling, or annul- 
ling, of a contract or deed. 

Residuary devisee. The person who 
under a will takes all the lands of 
the testator not specifically devised. 

Residuary legatee. The person who 
under a will takes all the personal 
property of the testator not specifi- 
cally bequeathed. 

SS. An abbreviation used after the 
statement of the venue (state and 
county) and supposed to be a con- 
traction of scilicet {scire licet')-, mean- 
ing "as one may leam," or "to wit," 
or " namely." 

Seised. The technical term describing 
the possession of a fee in lands. This 
is the verb. The noun is " seisin." 

Seisin. Under the feudal system the 
completion of the formalities by which 
one was given possession of a fee in 
lands. Now the possession of a fee. 

Set-off. A counter claim or cross de- 
mand which a defendant sets up 
against the claim of the plaintiff. 

Simple, (fi) In real-property law, ab- 
solute, unconditional, as fee simple; 
(If) in contract law, unsealed. 

Specialty. A contract under seal. 

Specific performance. A decree by an 
equity court that a party shall actu- 
ally perform his contract promise 



GLOSSARY 



3" 



instead of paying damages for the 
breach. 

Status. Legal position or condition. 

Statute. An act of the legislature. 

Statute of Limitations. A statute fix- 
ing a time within which, actions must 
be brought. 

Stock, (a) The total capital put into a 
corporate enterprise ; (i) the interest 
of each stockholder in the corporation. 

Subrogation. The substitution of one 
person in the place of another with 
respect to rights, claims, or securities. 
The verb is "to subrogate." 

Subscribe. To write under; to write 
the name under the contract. To 
sign is to write the name at any place, 
not necessarily underneath. 

Successor. One who succeeds another. 
Used to describe those who constitute 
a corporation after the retirement of 
preceding corporators. 

Suit. A proceeding in a court. It is 
not uncommon to call a proceeding 
in a law court an action, and one in 
an equity court a suit; but this is not 
a necessary distinction. 

Supra protest. Over protest. Used in 
the sense of " after protest." 

Surrogate. Literally, one who is sub- 
stituted for another. By present 
usage the judicial officer who presides 
over a probate court for the admin- 
istration of the estates of deceased 
persons. 



Testator. One who makes a will. Th.e 
feminine is " testatrix." 

Title, (a) The right to property; {d) the 
evidence of the right to property. 

Tort. A wrongful act, other than a 
mere breach of contract,, for which a 
common-law court will give damages. 

Transcript. An official copy of a court 
record, as a transcript, or certified 
copy, of a judgment. 

Treasure-trove. Treasure found. (Trovi, 
Old French for "found.") Gold or 
silver or money found hidden in a 
secret place. 

Trespass (Old French trespasser, to pass 
over or beyond). To invade another's 
right of security of person or of prop- 
erty. Commonly, to enter another's 
lands wrongfully. 

Trover (Old French trover, to find). An 
action for the recovery of damages 
for the conversion of goods, based 
originally on a fiction that the de- 
fendant had found the goods and 
refused to return them to the right- 
ful owner. 

Trustee. A person appointed to exe- 
cute a trust. 

Ultra vires (Latin). Beyond the power. 
Applied to acts of corporations be- 
yond the charter powers. 

Unilateral. One-sided. Applied to con- 
tracts where only one promise is still 
unperformed. 



Tenant. Broadly, one who holds land ; 
specifically, one who holds land for 
life or for years ; popularly, one who 
holds land for years of a landlord or 
lessor. 

Testament. That which is witnessed. 
The word is employed as a synonym 
for "will." Formerly it meant a will 
of personalty, but now it is used inter- 
changeably with the term "will." 



Vendor. The seller. Usually applied 
to the seller of real property. 

Venue, {a) Locality ; place. {l>) The 
heading of legal documents showing 
the state and county. 

Verdict. The decision of a jury upon 
matters submitted to it. 

Vis major (Latin). Superior force. In- 
cludes more than an act of God, as 
the act of a public enemy. 



312 



GLOSSARY 



Void. Null ; of no effect. This is the 
correct meaning, but the term is some- 
times used in the sense of " voidable." 

Voidable. Capable of being rendered 
void, usually at the election of one 
party to a contract. 

Waiver. The surrender of some right 
or privilege which the law gives. 

Waste. The name given to any act of 
a tenant whereby the value of the 



reversion is diminished, as the cut- 
ting of trees. 

Will. A written instrument executed 
as the statute directs, by which a 
person makes a disposition of his 
property to take effect after his 
death. 

Witness, (a) One who gives evidence 
in a court ; (6) one who sees a docu- 
ment executed and signs his name to 
it as evidence thereof. 



INDEX 



[Numbers refer to pages] 



Abstract of title, 283 
Acceptance, of bill, 163, 181-185 

for honor, 184 

of offer, 13-17 

and receipt, 68 
Accession, 298-300 
Accident insurance, 123 
Accommodation indorser, 187 
Accounting, by agent, 215 

by partner, 239 
Act of God, 106, 108 
Action. See Remedies 
Administrative law, 3, 48 
Admiralty court, 8 
Adverse possession, 282 
Agency, 205-226 

by necessity, 212 
Agent, 38, 68, 131 

appointment of, 207-213 

authority of, 217-220 

of a corporation, 2 53 

liability to third parties, 222-223 

obligations to principal, 214-216 
Agreement in contract, 12-16 
Air, 273 

Alteration of contract, 153, 180 
Animals, 294 
Answer, 8 

Antecedent debt as value, 64 
Appointment of agents, 207-213 
Assault and battery, 5, 30 
Assignment, of contract, 46-49 

of lease, 291 

of mortgage, 282, 286 
Attorney at law, 220 
Auctioneers, 220 
Authority, of agent, 217-222 

of corporate ofScers, 253 

of partner, 236-238 



Baggage, 117 

Bailee's duties, 94, 95, 96-97, 98-99, 

loo-ioi, 103 
Bailment, 90-118 

carriers of passengers, 116-118 

common carriers, 107-116 

gratuitous, 93-95 

innkeepers, 104-107 

mutual-benefit, 97-104 

telegraph companies, 118 
Bailor's duties, 94, 96, 98, 100, 102 
Bank deposits, 144-145 
Bankruptcy, 48, 56-58, 242 
Banks, 104, 142-144 
Barter, 66, 91 
Bilateral contract, 14 
Bill, of exchange, 163 

of lading, 112 

of sale, 65, 66 
Bills in a set, 163 
Blanks in bill or note, 174 
Bona fide holder for value, 63, 177 
Bond, 19, 26, 27, 169, 256 
Boycott, 45 
Breach, of contract, 53-56, 83-84 

of warranty, 80 
Brokers, 219 
Business, I 
Business law, 2 
Buyer's duties, 75 

Call, 29 
Capital, 135 

Carriers, of goods, 107-116 
of passengers, 116, 228 
Cashier, 220 
Cashier's check, 167 
Casualty insurance, 124 
Cattle trespass, 273 



313 



314 



INDEX 



Caveat emptor, 36, 79, 177 
Certificate, of deposit, 145, 165 

of incorporation, 249 

of protest, 195 
Certified checlis, igg 
Champerty, 30 
Chancery court, 7 
Charter of a corporation, 249 
Charter party, 112 
Chattel, personal, 4, 294 

real, 4, 198, 199, 294 
Chattel mortgage, 302 
Checks, 50, 136, 144, 166 
Chose in action, 4, 62, 66, 294 
Clayton Act, 31 
Clearing house, 136 
Clearing-house certificates, 137 
Clubs, 207 
C.O.D. sales, 74 
Codification, 2 
Collateral security, 97, 172 
Commercial agencies, 136 
Comvtodaitim, 92 
Common carriers, 107-116 
Common law, 2 
Communication, of acceptance, 14 

of offer, 14 

of revocation, 16 
Community property, 269 
Compensation, in agency, 213 

in bailment, loi, 102 

in corporations, 253 

in partnership, 239 
Complaint, 8 

Composition with creditors, 21 
Compound interest, 141 
Concealment, 36, 128 
Conditional sales, 63 
Confusion of goods, 91, 300 
Consent, reality of, 33-37 
Consideration, 19-23, 26, 63-66, go, 

150, 161, 173 
Constitutional law, 3 
Contracts, 5, 11-59 

of bailment, go-ii8 

of carriers, 109-112 

negotiable, 159-199 



Contracts of guaranty, 149-157 

of insurance, 122-134 

of sale, 61-89 

to sell lands, 274, 275 
Contribution, 125, 132, 156 
Conveyances of lands, 276 
Corporations, 207, 236, 248-259 
Corporeal property, 4, 262 
Coupons, 169 
Courts, 6, 7 

admiralty, 8 

equity, 7 

law, 7 
Covenants, 276, 288 
Credit, 136 
Creditors, of a corporation, 257 

of partnership, 241-242 
Criminal law, 3, 27 
Crops, 25, 67, 271 
Cumulative voting, 253 
Currency, 137 
Current funds, 137 
Curtesy, estate of, 265 
Custom, 2, 48, 218 

Damages, 54, 81, 84 

Date of bill or note, 173 

Days of grace, 161 

Death, 17, 48, 53, 97, 154, 212, 242, 

263 
Deceit, 5, 35 
Deed, 19, 276, 278 
Defenses to negotiable instruments, 

179-181 
Del credere agent, 216 
Delegation by agent, 215 
Delivery, by carrier, 1 1 1 

of deed, 276 

of negotiable instrument, 174 

by seller, 75 
Demand bills or notes, 177, 189 
Deposit {tiepositiim), 92 
Deposits in banks, 104, 144 
Description, sale by, 70, 77 
Directors of a corporation, 253 
Discharge, of contract, 13, 49-58 

of guarantor, 152-155 



INDEX 



315 



Discharge, of mortgage, 282, 287 

Discount, 145 

Dissolution, of corporation, 258 

of partnership, 242 
Distress, 292 
Dividends, 256 
Divisible contracts, 32, 53 
Dormant partner, 238 
Dower, 265 
Draft, 167 

Drawee of bill, 163, 172, 184 
Drawer of bill, 163, 186 
Duress, 36 

Earnest money, 24 
Easements, 274 
Emblements, 271 
Employers' liability acts, 229 
Equitable estates, 269 
Equity courts, 7 
Escrow, 277 
Estates, 4, 261, 264-269, 296 

of inheritance, 264 

for years, 265, 288 
Estoppel, 131, 218 
Exchange, 138 
Executed contract, 14 
Executed sale, 62 
Execution, 9 
Executory contract, 14 
Executory sale, 62 
Express contract, 14 
Express wartanty, 76 



Factor, 219 

Factors Acts, 63 

Federal reserve bank notes, 138 

Federal reserve banking system, 

143 
Federal Trade Commission, 31 
Federal Uniform Bills of Lading Act, 

112 
Fee-simple estates, 264 
Fee-tail estates, 264 
Fellow servant, 228 
Fences, 273 



Fidelity insurance, 124 
Finder of lost property, 91, 297 
Fire insurance, 124 
Fitness, warranty of, 78 
Fixtures, 271-273 
Foreclosure, 98, 282 
Foreign exchange, 138 
Forgery, 180, 211 
Forms of documents : 

Acceptances of bill, 182 

Assignment, of contract, 39 
of mortgage, 286 

Bill, of exchange, 163 
of lading, 113 
of sale, 65 

Bills in a set, 164 

Bond, 27, 168 

Bond coupons, 169 

Cashier's check, 167 

Certificate, of deposit, 166 
of incorporation, 249 
of protest, 195 

Certified check, 167 

Check, 166 

Contract, 37-39 

Contract of sale, 69 

Discharge of mortgage, 287 

Guaranty, 156 

Indorsements, 176 

Land contract, 275 

Lease, 289 

Letter of credit, 183 

Mortgage, 284 

Notice of dishonor, 197 

Partnership agreement, 244 

Power of attorney, 209 

Promissory note, 165 

Protested note, 196 

Puts and calls, 29 

Stock certificate, 251 

Transfer of stock certificate, 251 

Warranty deed, 278 

Will, 281 
Fraud, 35, 63, 180, 222 
Frauds, Statute of, 23-25, 66-68 
Freehold estates, 264 
Fructus industrialism 271 



3i6 



INDEX 



Fructus naiurales, 270 
Fungible goods, 72 
Futures, 29 

Gambling contracts, 28, 33 
Garage keepers, 103 
General agent, 218 
General average, 132 
General manager, 254 
General partnership, 236 
Gift, 300 

causa Tnortis^ 301 

inter vivos, 300 
Good faith, 128, 178, 215, 238 
Good will, 243, 296 
Goods, 62, 66 
Grace, days of, i6r 
Gratuitous agent, 216 
Gratuitous bailment, 93-95 
Gratuitous promise, 19 
Guaranty, 38, 149-157, 188 
Guaranty insurance, 124 
Guests of an innkeeper, 105 

Habendum, 277 

Heir, 280 

Hereditaments, 263 

Hiring in bailment, 92, 99-104 

Holder in due course, 177-181 

Homestead estate, 265 

Illegality, 22, 27-33, '55 
Implied contract, 14 
Implied warranties, 77-79 
Impossibility of performance, 51-53, 

213 
Incorporeal property, 4, 262 
Indefinite agreements, 13 
Indemnity, 125, 150, 155, 214 
Indivisible contracts, 32, 53 
Indorsement, 175-177 
Indorser's contract, 186-188 
Infants, 17, 155, 207, 238 
Initial carrier, 1 1 1 
Injunction, 11, 45 
Innkeepers, 104-107 



Insanity, 18, 207, 213, 242 

Insolvency, 56, 57 

Insurable interest, 127 

Insurance, 30, 122-133, 232 

Interest, 140-141, 146 

International law, 3 

Interstate Commerce Act, 31, 108, no, 

III 
Intoxication, 19 
Irregular indorser, 187 
Irrevocable agency, 213 

Joint agents, 208 

Joint obligations of partners, 240 

Joint and several obligations, 240 

Joint tenancy, 268 

Joint-stock companies, 235, 243 

Judgment, 8, 283 

Land, 262, 270 

Landlord and tenant, 288-292 

Lateral support of land, 273 

Law, 1-3 

Lease, 288-292 

Legal-tender money, 50, 137, 138 

Letter of credit, 184 

Levy, 9 

Libel, 5 

Lien, bailee's, 103 

Liens, factor's, 219 

garage keeper's 103 

on property, 283 

seller's, 82 
Life estates, 264 
Life insurance, 123 
Limitation of liability, 1 10 
Limited partnerships, 238 
Loans, 145 

Lobbying contracts, 30 
Lost property, 90, 297 

Mail, notice of dishonor by, 192, 193 

offer by, 14 
Maker's contract, 181 
Mandate (mandatum), 92 
Marine insurance, 124, 132 



INDEX 



317 



Married women, 19, 49, 207, 238, 280, 

302 
Master and servant, 228-232 
Memorandum of sale, 68 
Minerals, 270 
Misrepresentation, 35 
Mistake, 33 
Money, 137 
Moral obligation, 20 
Mortgage, 147, 282, 302 
Mutuum, 92 

Names, 296 

National banks, 142 

Necessaries, 17, 18, 212 

Negligence, 5, 94, 96, 98, 100, 103, 104, 

106, 117, 118, 125, 216, 227-232 
Negotiability, 47, 162, 170-173 
Negotiable instruments, 159-199, 221 
Negotiable Instruments Law, 170 
Negotiation, 175 
Next of kin, 282 
Nonvital term, 54, 55 
Notary, 194-196 

Notice, of defect in bill or note, 179 
of dishonor, 191-194, 197 
by guarantee, 151 
Noting of protest, 196 
Novation, 12 

Obligation, 5 
Occupancy, title by, 297 
Offer and acceptance, 13-17 
Officers of a corporation, 253 
Open policy, 123, 125 
Opinion, 36, 77 
Option contracts, 16, 29 
Orphans' court, 7 
Ostensible partner, 237 
Overdue bills or notes, 177 

Part payment, 68 
Partnership agreement, 244 
Partnership real estate, 269 
Partnerships, 208, 235-243 
Passengers, 117, 228 
Past consideration, 21 



Pawn. See Pledge 
Pawnbrokers, 99 
Payment, 68, 76, 140 

for honor, 191 

of smaller sum, 2i 
Performance of contract, 50, 75 
Personal property, 294-302 
Pledge, 97-99 
Policy, of insurance, 123 

open, 123 

valued, 123 
Power of attorney, 209, 217, 252 
Power coupled with an interest, 213 
Powers, of an agent, 217-222 

of a corporation, 254 

of a partner, 239-240 
Preferred stock, 256 
Presentment for acceptance, 185 
Presentment of bill or note for pay- 
ment, 188-191 
Price, 66, 84 
Principal, and agent, 205-223 

and third party, 217-223 
Probate court, 7 
Procedure in courts, 3, 8, 9 
Promissory note, 165 
Property, 4 

in goods, 62 

in lands, 261-292 

in personalty, 294-302 
Protest, 194-198 
Provisions, sale of, 79 
Public enemy, 108 
Purchaser in due course, 63, 177 
Puts and calls, 29 

Qualified acceptance of bill of ex- 
change, i8i 
of offer, 15 
Qualified indorsement, 175 
Quasi-contracts, 6 
Quitclaim deed, 276 

Ratification, 18, 210-211 
Real property, 4, 67, 261-292 
Receipt, 140 
Receiver, 258 



3i'8 



INDEX 



Receiver's certificate, 258 
Reexchange, 198 
Referee in case of need, 184 
Reinsurance, 124 
Release, 13, 49 
Remainder, estate of, 267 
Remedies, for breach of contract, 54, 
83-85 

for breach of contract of sale, 
81-85 

for breach of warranty, 80 

of corporate creditors, 257 
; of firm creditors, 241-242 

of landlord, 291 
Rent, 291 

Repairs under a lease, 290 
Report of corporation, 257 
Representations in insurance, 129 
.Resale, 82-83 
Rescission, 49, 83 
Restraint of trade, 31 
Restrictive indorsement, 176 
Reversion, estate of, 267 
Revocation, of agency, 212 

by guarantor, 153 

of offer, 16 
Reward, offer of, 14, 22 
Risk by servant, 229 
Risk of loss of goods, 74 

Safe-deposit company, 104 

Sales of goods, 61-85 

Sample, sale by, 78 

Savings banks, 143 

Seal, 25, 173, 210 

Sealed instrument, 20, 25, 221. See 

Deed 
Security for loans, 146 
Seller's duties, 75 
Seller's lien, 82 
Servant, 227-232 
Sherman Anti-Trust Act, 31 
Simple contract, 19 
Slander, 5 
Special agent, 218 
Specialty, 19 
Specific goods, 70-72 



Specific performance of contracts, 12, 

55 
Standard fire-insurance policy, 131 
Siare decisis^ 2 
State banks, 142 
Statute law, 2 
Statute of Frauds, 23-25, 66-69, 15°, 

210, 288 
Statute of Limitations, 22, 24, 27, 55 
Stock certificate, 251 
Stock corporations, 248 
Stockholders, 25c, 255, 257 
.^Stoppage in transitu, 82 
Subagent, 208, 215 
Subletting by tenant, 291 
Subrogation, 125, 133, 156 
Subscriptions, 21 
Substantial performance, 50 
Substituted contract, 49 
Suicide, 126 
Surety, 149, 154 
Surrogate's court, 7 

Telegraph companies, 118 
Telephone companies, 118 
Tenancy, in common, 268 

by entireties, 269 

joint, 268 

by sufferance, 266 

at will, 266 

from year to year, 266 
Tender, 50, 140 
Tenements, 263 
Third party, in agency, 217-223 

to contract, 45-46 
Title, to goods, 62-66, 69-74 

to lands, 276, 291 

warranty of, 77 
Title insurance, 124 
Torrens system, 283 
Tort, 5, 45, 227-232 
Trademarks, 295 
Treasure-trove, 297 
Trees, 25, 270 
Trespass, 5, 273 
Trust, 6, II, 269, 302 
Trust companies, 142 



INDEX 



319 



Ultra vires acts, 255, 256 
Unascertainfed goods, 72-74 
Undisclosed principal, 220-222 
Undue influence, 37 
Uniform Bills of Lading Act, 112, 

161 
Uniform Sales Act, 25, 54, 61, 66, 67, 

74, 79, 80, 161, 271 
Uniform Stock Transfer Act, 250 
Uniform Warehouse Receipts Law, 

104, i6i 
Unilateral contract, 14 
Usury, 140 

Value, 20, 63, 178 
Valued policy, 123, 125 
Vegetable products, 270 
Verdict, 8 
Vice principal, 228 
Vital term, 54 



Void contracts, 17, 18, 207. See Illegal 

contracts 
Voidable contracts, 17, 18, 207 

Wagering contracts, 28, 125 
Waiver, 49, 131, 173, 176, 190, 193 
Warehouseman, 103, 104 
Warranty, 36, 54 

of authority, 222 

of goods, 76-81 

in insurance, 129 

in lease, 288 

in sale of bill or note, 186 

of title, 77 
Warranty deed, 276, 278 
Waste, ago 
Waters, 270, 273 
Wharfinger, 104 
Will, 277, 281 

Workmen's Compensation, 124, 230 
Writing, See Statute of Frauds