Commercial Law

CHAPTER XII
Bills and Notes

FORMS OF NEGOTIABLE INSTRUMENTS.—It is essential to carry in mind the customary form of the negotiable instruments we have just mentioned. A promissory note is defined by the N. I. L. as follows: "A negotiable promissory note within the meaning of this act is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer."

SPECIMEN FORM OF PROMISSORY NOTE

A bill of exchange is defined by the N. I. L. as follows: "A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer."

A check is defined by N. I. L. as "a bill of exchange drawn on a bank payable on demand."

Other documents may be negotiable in form, such as the ordinary bearer corporation bonds, liberty bonds, certificates of stock, and bills of lading. The principles discussed in this chapter would apply, ordinarily, to these documents, and are discussed more in detail in the chapters devoted to them which we have already considered.

WHAT IS NEGOTIABILITY?—Negotiability has been defined as that quality whereby a bill, note, or check, passes freely from hand to hand like currency. In fact, all of these documents are substitutes for currency, and so far as is practicable, it is desirable that they should pass as freely as currency. Negotiability applies only to this branch of the law, while assignability applies to ordinary cases of contract law.

SPECIMEN FORM OF DRAFT

SPECIMEN FORM OF CHECK

ILLUSTRATIONS.—To illustrate the difference between the two: Jones worked for the Baltimore & Ohio Railroad Co. He presented his bill of $100 to the proper official, and a check was issued by the railroad payable to the order of Jones for that amount. Jones took the check, indorsed it, and with it paid his grocery bill. The grocery man deposited the check in his bank, and was notified shortly thereafter that payment had been stopped on the check by the Baltimore & Ohio. They claimed a fraud had been committed, that Jones was overpaid $50, and, therefore, they refused to honor the check. The grocery man, having taken this check in the usual course of business, is what we term a "holder in due course." The N.I.L. defines a holder in due course as:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That it is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."

A holder in due course, then, would be entitled to collect the full $100 from the Baltimore & Ohio. This check is governed by the law of negotiability with the result which we have just indicated. Now change the facts a trifle. Jones presented his bill to the same officer of the Baltimore & Ohio as before. The officer says that checks are made out regularly on the first of the month. It was the fifteenth, and Jones did not feel able to wait until the first of the next month. He went to a friend and told him of his claim against the Baltimore & Ohio, and said: "I will assign this claim to you for $95, and then you can present the assignment, which I will draw up and sign, to the Baltimore & Ohio on the first of the month, and get the $100." His friend agrees and advances the money. When he presents the written assignment to the proper officer on the first of the month, he is told that the railroad has discovered that Jones' claim was really good for only $50, and that is all they will pay. Although his assignment reads for $100, he can collect only $50. This illustration is governed by the law of assignability, which applies to practically all contracts, apart from commercial paper. Under the rules of assignability, a person can assign no better claim than he has, or, as is sometimes said, the assignee stands in the shoes of the assignor. Jones really had a claim of only $50 against the Baltimore & Ohio, although he claimed it was $100. He could assign no more than he really had. These two illustrations show the great difference in the result of the application of the two principles, negotiability and assignability.

THE FORMAL REQUIREMENTS OF NEGOTIABLE PAPER.—There are certain formalities which all negotiable paper must have. It must be in writing, and signed by the proper person. No form of writing is specified in the Act, and lead pencil, or even slate pencil, is as good as ink, except that in the two latter cases the ease with which these forms of writing may be altered makes them most undesirable for use. But there is no law requiring the use of ink.

MUST CONTAIN A PROMISE.—Every negotiable instrument must contain words of negotiability. These words are, "to order," "to bearer," "to holder" or their equivalent. "I promise to pay John Jones, $100," and signed "John Smith," is a promissory note, but not a negotiable promissory note, because it lacks the words to "order" or "bearer," and is a document which would, therefore, pass by the law of assignability rather than the law of negotiability. In taking negotiable paper, therefore, it is always important to see whether these words are present. If they are not, the holder will lose the peculiar advantage and rights which the holder in due course acquires by the law of negotiability. A promissory note must contain a promise and a bill of exchange must contain an unconditional order. An I.O.U. for $100 signed "John Jones" is not a promissory note, because there is no promise contained in such a document.

UNCONDITIONAL PROMISE.—All negotiable documents must be payable without reference to any contingency. A note reads: "I promise to pay to the order of John Jones $100 when I attain my twenty-second birthday" and is signed by John Jones, now twenty-one. That is not a good note because the person may not live to be twenty-two. Even if he lives to become twenty-two the note is still non-negotiable, for when it was made the contingency existed. A bill of exchange, regular in form, but adding the expression, "If the Republicans win the next congressional election," is not negotiable. The one exception, as it might appear at first sight, is a negotiable document reading: "I promise to pay to the order of William White six months after death," etc. Such a promise is not contingent. Death will arrive at some time, although it may be uncertain just when. In the other illustrations the republicans might not win the congressional election, and the person might not become twenty-two. Again, all commercial paper must be made payable in money. "I promise to pay to the order of John Jones $100 worth of tobacco," is not negotiable. "I promise to pay to the order of John Jones $100 and fifty pounds of tobacco" is not negotiable. In both cases, the medium of payment is something other than money.

INCEPTION OF THE INSTRUMENT AS AN OBLIGATION.—In our discussion of contracts, we made the statement that a legal intention to make a contract was necessary. The same is true in commercial paper. A man must intend legally to issue a negotiable instrument in order to be liable on one as maker or drawer. Thus, in the case of Walker v. Ebert, 29 Wis. 94, the defendant, a German, unable to read and write English, was induced by the payee to sign an instrument, in the form of a promissory note, relying on the false statement that it was a contract appointing the defendant agent to sell a patent right. It was held that the defendant was not liable. The instrument, though complete in form, was not the defendant's note and the plaintiff acquired nothing by his purchase of the paper.

ILLUSTRATION.—We must contrast this with another situation. Suppose I hand you a paper with a promissory note printed on it, complete in every detail except your signature. I ask you to sign it. You sign the paper, without reading it over or knowing what it is, and give it back to me. I then transfer it to a person who takes it for value, in good faith, etc., or who is, in other words, a holder in due course. The question is, are you liable on such a document? The answer is, "Of course, you are." You may say, "I did not intend to sign a promissory note." The law answers you by saying, "You were careless in signing something which you did not read over, and one is presumed to intend the consequences of his own careless acts." Our German was in a different situation. He was not careless. He could not read English and was obliged to rely upon someone to tell him what the document was, and, granting that he used due care in selecting a responsible person to explain to him the nature of the document, he had done all the law required. Had he been imposed upon, on several previous occasions, by the same person who told him what the document was, and in spite of that, had relied on him to explain this document, then, undoubtedly, the court would have held otherwise and he would have been liable on the ground that he must have intended the consequences of his negligent acts, he being deemed negligent when he trusts a person who had not only misrepresented things to him but had actually defrauded him several times.

DELIVERY.—A note found among the maker's papers, after his death, imposes no obligation either upon him or upon his estate. In other words, in addition to the intentional signing of the document, to complete its validity, there must also have been what we call delivery. This is a passing out of the possession of the maker or drawer, of the document, into the hands of some third party. Delivery may be made in three ways: (1) By intention; (2) By fraud; (3) By negligence.

A VALID DELIVERY NECESSARY.—I hand you my promissory note and you take it. That, of course, is an intentional delivery. You tell me that you have a fine watch which I decide to buy, and I give you my promissory note in payment. Afterwards, upon examining the watch, I find that it is worthless and entirely different from your description. You have secured the note from me in that case by fraud, or there is, as we say, a delivery procured by fraud. I am sitting on a bench in Central Park, and I take out of my pocket a completed promissory note and look at it and place it upon the bench. When I leave I forget it and it stays there until someone comes along and picks it up. That is a delivery by negligence. All these forms of delivery are valid, making the documents good, some in the hands of all parties, others in the hands of the holder in due course only. The N. I. L. is so clear upon this matter that reference must be made to sections 15 and 16. For this reason both of these sections are reproduced here in full:

Section 15. "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery."

Section 16. "Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved."

DISTINGUISHING FEATURES.—It is very important to distinguish between these two sections. Let us take for illustration the famous case of Baxendale v. Bennett, 3 Q.B.Div. 525. Here the defendant wrote his signature as acceptor on several printed blank forms of bills of exchange and left them in a drawer of his desk. The blanks were stolen, filled out, and negotiated to the plaintiff, an innocent purchaser. It was held that the plaintiff could not recover. The reason for this decision is that the document was incomplete and as the Act says: "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery." On the other hand, if I leave in my safe, checks which I have signed and made out in full and they are payable to bearer, although a thief breaks in and steals the checks from the safe, those documents will be valid in the hands of a holder in due course. The reason here is that although there has been no delivery, either by intention or by fraud or by negligence, nevertheless, the Negotiable Instruments Act has extended this theory of delivery, even further than the law went before the Act was passed, and says that when the document is in the hands of a holder in due course, a delivery is conclusively presumed.

CONSIDERATION.—Another essential in the inception of the instrument is consideration. We have already discussed this topic in the chapter on contracts. We made the statement at the beginning of this chapter that the law of negotiable paper came from the continent of Europe and was grudgingly received by the courts of England. The law of negotiable paper on the continent of Europe did not have any idea of consideration, and this is one reason why the law was reluctantly admitted to the English common law and explains the reason now why we have the doctrine of consideration in negotiable paper. It would not be safe for the student to accept all we have said in regard to consideration in the chapter on contracts and apply it to negotiable paper. The difference is at once apparent when you read Sections 24 and 28 of the Negotiable Instrument Act which read:

Section 24. "Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value."

Section 28. "Absence or failure of consideration is a matter of defence as against a person not a holder in due course."

So, we see, that in the general law of contracts, consideration is absolutely essential to a binding contract but in the law of negotiable paper, consideration is not absolutely essential except when you are dealing with the immediate parties. An illustration will explain this. I wish to make you a present on your next birthday which is January 12. To-day, September 15, I give you my promissory note due on your birthday for $50. This is to be my present to you. You take the note and then hold it until your birthday arrives and I do not pay it. Then you sue me on the note. You cannot recover anything because there was no consideration for the note and the absence of consideration is a perfectly good defence between you and me, whom the law calls the immediate parties. But, suppose, instead of doing this, you had kept the note about six weeks and then had taken it to your bank and asked them if they would discount the note for you and they had done so, taking it in absolutely good faith. They know me to be a responsible party, so they are willing to accept my promissory note. They knew you and they presumed that you had taken the note for a valuable consideration although, as a matter of fact, it was a gift to you. Under the circumstances, the bank is a holder in due course and when the note becomes due, if I do not pay, the bank will sue me and will collect from me because, as the Act says, "the failure of consideration is a matter of defence as against any person not a holder in due course." But the bank is a holder in due course.

ACCEPTANCE OF BILLS OF EXCHANGE.—The holder of a bill of exchange will take it, soon after receiving it, to the drawee, the person upon whom it is drawn, for his acceptance. The drawee will accept it by writing across the face of it "Accepted," signing his name and perhaps adding "Payable at the First National Bank." A form of bill of exchange, duly accepted, will be found elsewhere in this chapter. The Act provides that the acceptance must be in writing and signed, either on the document itself or on a separate piece of paper attached to the document. As soon as the drawee accepts the bill, he then becomes known, not as the drawee but as the acceptor and he is the party primarily liable on the bill, that is, he assumes responsibility for its payment. The holder has a right to demand an acceptance for the full amount of the bill and may refuse to take an acceptance for a less amount. It is not always possible for the drawee to know whether he has sufficient funds to justify an acceptance, and so the Act gives him twenty-four hours within which to make up his mind. During that time the holder is obliged to wait without taking any further action. Just as a conditional promise to pay money is not a good promissory note, just so a conditional acceptance is not looked upon as an acceptance which a party is obliged to take. There are, however, occasionally times when a person is willing to take a conditional acceptance. For example, I hold a bill of exchange for $1,000. There are three or four indorsers upon it and I take it to the drawee to have him accept. He will not accept for more than $500. Now I feel that the drawer and all of the indorsers are financially irresponsible and I would rather have the acceptance of the drawee for $500 than nothing. I am willing to take it. The question comes up as to the effect of this upon the other parties, the drawer and the indorsers. The Act covers that fully and it is important that it be kept in mind:

Section 142. "The holder may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder, or he will be deemed to have assented thereto."

NEGOTIATION.—If negotiable paper is a substitute for money, it follows that its most distinguishing characteristic is the fact that it may be transferred from one owner to another. This transfer is made in one of two ways. It may be by operation of law, or by act of the parties. By operation of law, we refer to such a case as where a person dies and his commercial paper then becomes the property of his administrator or executor. In other words, the law transfers the paper to the deceased person's legal representative. The other case, the transfer by the act of the parties is, of course, the ordinary case and the one we shall consider here. The sections in the Negotiable Instruments Act which discuss this matter are so clear that we can do no better than insert them in full at this time:

Section 30. "An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery."

Section 31. "The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement."

Section 32. "The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue."

NEGOTIATION BY INDORSEMENT.—Reference should be made to the several kinds of negotiation by indorsement. We have first the blank indorsement. There the person to whom the document is payable simply writes his name on the back in the same way as it appears on the front. That is, if John Jones is the payee, he writes his name across the back of the instrument "JOHN JONES." Next, there is the special indorsement. John Jones, in this case, is the payee and wishes to transfer the note to John Wanamaker. He writes across the back, "pay to the order of John Wanamaker" and signs his name, JOHN JONES. A restrictive indorsement is one where the further negotiation of the instrument is limited or restricted altogether. For example, the payee writes across the back "Pay to the order of John Jones only." That restricts the further negotiation of the instrument. Another form that is commonly used is in depositing checks in the bank in your own account; usually you indorse "for collection" and sign your name, or you indorse "for deposit only" and sign your name. This form of indorsement simply constitutes the bank your agent to make collection, but not for any other purpose except that the Act now authorizes a bank to begin suit to collect on a document indorsed in that way. Another form of indorsement, known as the qualified indorsement, is frequently used in the case where you wish to indorse without incurring the usual liability of the indorser. This is done by adding under your name the expression "without recourse." This does not mean, as is commonly supposed, that you are free from all liability as an indorser. We shall refer to this later.

THE HOLDER IN DUE COURSE.—As we have seen, the distinguishing feature of the law of commercial paper is negotiability as distinguished from assignability. The principles of negotiability are designed very largely for the protection of the person whom we call the holder in due course. It is essential then to bear in mind the condition under which a person becomes such. Section 52 of the Act defines a holder in due course as follows:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That the instrument is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Section 57 defines what the rights of this holder in due course are:

Section 57. "A holder in due course holds the instrument free from any defect of title of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon."

It is clear, then, that by this section, the Act means that the holder in due course takes free of personal defences, although he does not take free of absolute defences. It simply remains for us to consider briefly what is meant by a personal defence and what is meant by an absolute defence. We have already illustrated this in one of our cases where the note was a present. In this case, there was no consideration for the note. The boy to whom it was given could not recover, whereas when he transferred it to an innocent third party, a holder for value, he could recover. Thus we say, failure of consideration is a personal defence. Again, some person steals my check book, fills out a check, and forges my name. The check is then taken and finally gets into the hands of a person who is strictly a holder in due course. He could not recover on it, however, because forgery is a real defence. That is, no one can hold me liable on my forged check. The ordinary illustration of real or absolute defences are infancy, lunacy, illegality and sometimes fraud. Other defences are generally personal defences and do not affect the holder in due course. To put it another way, a real defence is good against the whole world; a personal defence is available only against such as are not holders in due course.

LIABILITY OF PARTIES.—The parties primarily liable on negotiable documents are, on a note, the maker; on a bill of exchange, the acceptor; and on a check, the drawer. The liability of these three parties is most concisely stated in Sections 60, 61, 62, as follows:

Section 60. "The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse."

Section 61. "The drawer by drawing the instrument admits the existence of the payee, and his then capacity to indorse; and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder."

Section 62. "The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: (1) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and, (2) The existence of the payee and his then capacity to indorse."

INDORSERS' LIABILITY.—We have not yet considered the question of the liability of persons who transfer negotiable documents. Indorsements may be made, as we have said, in two ways: either by indorsing the document, or if it is payable to bearer, by delivering it without indorsement. The liability of these two parties is stated in the Negotiable Instruments Act in Sections 65 and 66 in the following language:

Section 65. "Every person negotiating an instrument by delivery or by a qualified indorsement, warrants: (1) That the instrument is genuine and in all respects what it purports to be; (2) That he has a good title to it; (3) That all prior parties had capacity to contract; (4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision three of this section do not apply to persons negotiating public or corporation securities other than bills and notes."

Section 66. "Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (1) The matters and things mentioned in subdivision one, two and three of the next preceding section; and (2) That the instrument is at the time of his indorsement valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it."

QUALIFIED INDORSEMENT.—Section 65 speaks of delivery by qualified instrument. You will remember that we have already mentioned the indorsement in the form "without recourse." This is a qualified indorsement. The kind of liability a person incurs who indorses in that way is set forth in Section 65. This is important because the layman assumes that in indorsing "without recourse" one means to incur no liability as indorser. Such is not the case. Reread section 65, which covers the indorsement without recourse. There is liability for the things mentioned therein. Then in section 66, the last paragraph, you will notice that every indorser, who indorses without qualification "engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder." This does not mean that the indorser will always pay, but only if the necessary steps are taken. We shall consider what these necessary steps are when we take up the subject of "protest."

CHECKS.—A check is simply a bill of exchange drawn on a bank and payable on demand. Therefore, the general principles which we have been laying down, in regard to bills of exchange and other negotiable paper, apply to checks, although, of course, the check is a more recent development in the law of commercial paper than the other two forms, namely, the promissory note and the bill of exchange. Section 186 of the Act reads: "A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay."

HOLDER OF CHECK.—It is important to remember that the holder of a check has no right against the bank. Thus, if I hold John Rockefeller's check, drawn on the Institute National Bank, and I present it to the bank and the bank refuses to pay it for no reason at all, or for a purely arbitrary reason, I cannot sue the bank. The only thing I can do is to seek to get the money on the check from Mr. Rockefeller personally. This is because the drawing of a check is not the assignment of so much money to the payee named in the check. Of course, Mr. Rockefeller might sue his bank for failure to honor his check if it refuses to pay it to me for no valid reason. One further fact is important. When a holder of a check procures it to be certified by the bank, that releases all indorsers and also the drawer. And so, if I have a check drawn by Mr. Rockefeller and indorsed by six millionaires and I take that to the bank and have them certify it and then the bank fails, I have lost everything if the bank never pays anything to a depositor. By getting it certified I release Mr. Rockefeller and all of the indorsers.

THE MEANING OF PROTEST.—Protest is often used broadly to signify any dishonor of a negotiable instrument, but, of course, properly it means presentment by a notary, and his certification that an instrument has been presented for payment and has been dishonored. Protest is only necessary in regard to foreign bills. A foreign bill is one which is drawn in one State and payable in another. For this purpose the different States of the Union are foreign to each other. A bill drawn in New York payable in Boston is as much a foreign bill for this purpose as one drawn in England payable here.

WHAT MAY BE PROTESTED.—Though protest is not necessary for any other negotiable instrument except foreign bills of exchange, including foreign checks, it is convenient frequently to protest other negotiable instruments. The law provides that protest may be made of other negotiable instruments, and the certificate of protest is evidence in such cases, as well as in the case of foreign bills of exchange, of the facts which it states, namely, that the instrument has been duly presented and notice given. Statements in a certificate of protest, however, whether of foreign bills or of other instruments, are not conclusive evidence of the facts which they state. They are some evidence, but it may be shown by other evidence that the instrument was not presented, or was not presented at the time the certificate asserts, or that the notice was not given as therein asserted.

SUGGESTIONS FOR DRAWING NEGOTIABLE PAPER.—Very few suggestions are necessary in drawing checks. We almost always use the printed form. The only thing to be careful about is to draw lines through the blank spaces so that a check written for $70 may not have something else written before the word seventy, thereby raising the amount to, say, One thousand seventy, and the figures, because they are not near the dollar sign, correspondingly raised. The promissory note is frequently drawn by the parties without any printed form. In order to be negotiable, the note must bear the words "or order," or "bearer"; otherwise, it would not be negotiable, and would pass by the law of assignability without any of the advantages accruing to negotiable paper. The draft, or bill of exchange, is the document which the average layman is the least familiar with, and before drawing one, a printed form should be secured or a book on negotiable paper be consulted.

NEGOTIABILITY.—Care should be taken in the indorsement of any negotiable paper. The indorsement in blank, that is, simply writing your name upon the paper on the back, is the one commonly used, but is a dangerous one to use, if there is any possibility of the paper being lost or stolen. For example, A has a promissory note payable to his order, and he simply writes his name across the back and mails it to a person who has agreed to accept it in payment of a bill A owes him. The letter is lost, gets into the hands of X, who opens it and takes the note. Of course, the note is no good to X. X, however, takes the note to someone and persuades that person to discount the note for him. That person does it in good faith, believing X came by the note rightfully. The discounter is therefore a holder in due course, and he would be able to collect on the note. What A should have done, when he sent the note to his friend John Brown, was to have indorsed it specially, "Pay to the order of John Brown, A." Again, a person who is collecting some money for his friend receives a check payable to his order. He wants to turn the check over to his friend, and indorses it by a special indorsement. When the friend tries to collect on the check, it is returned "no funds." The friend now may hold the person responsible who indorsed the check, because an indorser guarantees the payment of the instrument if the proper steps be taken to fix his liability. Ordinarily, of course, we wish an indorser to assume this liability, but in this particular case there was no reason why this man should have indorsed the check in that way. He could have indorsed it, and added to his signature the words "without recourse," which would have relieved him from paying the instrument if the drawer did not pay it.

CHAPTER XIII
Torts and Crimes

TORT, CONTRACT, AND CRIME DISTINGUISHED.—We have already discussed contracts in detail. The fundamental idea of contracts is that the obligation of a contract is voluntarily assumed. Although it might be difficult, at least theoretically, I may take the position that I will not enter into any contractual relationship with anyone for a month. I could do this legally, if I were willing to put up with the annoyance which I would probably suffer. But suppose I take the position that I will assault Jones and I will not pay him any damages for the injuries occasioned by my assault. My position would be wholly untenable. The contract obligation is voluntarily assumed. The law imposes the obligations or duties which exist in torts, and I must observe those duties whether I wish to or not. Similarly, one must observe all of the criminal law of the jurisdiction where he is, whether he will or not. In fact, ignorance of the law is no excuse. A man may even commit a crime, although he did not know there was a law prohibiting the act. Again, in the definition of a tort, we shall find the expression, "breach of duty imposed by law." A man arrives home late at night. He finds a person suffering from exposure at his front door. The person asks to be taken in and lodged for the night, but the householder refuses to take him in, and the man contracts pneumonia from exposure. In this case the householder is not liable. There is no duty imposed by law to be your brother's keeper. There may be a moral obligation in the case just cited, but not a legal one.

JURISDICTION.—There is another way in which a criminal action is sometimes different from an action in contract or an action in tort. A suit on a contract may be brought in any court where jurisdiction over the parties may be secured. For example, A and B make a contract in New York. The contract is broken, and six months later, A and B are both in Galveston, Texas. Either party could sue the other in the Texas court on the broken contract. The same is true in regard to most tort actions. A slanders B in New York. A little later both are in San Francisco, California. B could sue A in a California court for slander. A criminal prosecution, however, must always be brought in the State where the crime is committed, and generally in that very county of the State. Hence, if A murders B in Kings County, New York, the trial could not, under any circumstances, be held in Essex County, New Jersey, for no New Jersey court would have jurisdiction over an offense committed in New York, because the wrong is done to the people of the State of New York, and not to the people of the State of New Jersey.

TORT DEFINED.—It has been stated by the Court of Appeals of New York that no satisfactory definition of a tort can be found. It is easier, perhaps, to explain to the layman the meaning of the term "tort" by simply enumerating such things as are torts. For example, assault and battery is a tort, and so are libel, slander, false imprisonment, malicious prosecution, fraud, deceit, and negligence. Bigelow's definition is perhaps least objectionable of all of the definitions. He defines a tort as a breach of duty imposed by municipal law, for which a suit of damages will lie. Every tort involves the violation of a duty owed to the individual. For example, A owes to B the duty not to attempt with force to harm his person, or to hit him, or to touch him intentionally, or recklessly. The violation of this duty to B, by A, constitutes the tort of assault and battery. Again, A owes to B the duty not to injure B's reputation, either by spoken word or by written word, so long as B has done nothing to forfeit this right to a good reputation. The violation of this duty, on the part of A, constitutes the tort of libel or slander. So, then, it is easy to see why libel, for example, is a tort. It is a breach of duty which the law imposes upon A for which B may sue and recover damages if he is injured. The same with assault and battery, and the various other torts.

CRIME DEFINED.—A tort, as we have indicated, is a breach of duty owed by A to B. A crime is also a breach of duty, but in this case, A is an individual citizen, and B is a sovereign State. C murders D. When C is prosecuted, the action will read, "The people of the State of New York against C." In other words, the crime is a wrong to the State, and so a crime has been defined as an act or omission which is forbidden by law, to which a punishment is annexed, and which a State prosecutes in its own name. Murder, manslaughter, arson and forgery are all crimes. We may correctly also add assault and battery, thus suggesting the fact that the same act may be both a crime and a tort, because the assault is a wrong against the individual and against the State. The individual will sue in a civil court, to recover pecuniary damages, in an ordinary suit of tort, while the State, for the same offense, through the district attorney's or prosecutor's office, will criminally proceed against the guilty party. We shall now consider briefly some of the more important torts and crimes.

ASSAULT AND BATTERY.—Assault is an attempt, real or apparent, to do injury to the person of another. Battery is a completed assault. It is not necessary that a person have the actual ability to carry out the threat to constitute an assault. For example, to point an unloaded revolver at a person is an assault. While the definition might convey the impression that force was necessary, this is not strictly true, because deception sometimes may be the equivalent of force. For example: Assault and battery is committed where a person administers a drug to someone under the belief that he is taking an entirely different kind of drug. Certain assaults, although technically such, are excusable or justifiable. Formerly a school teacher had the right of corporal punishment without being liable for assault and battery. By statute this right is generally taken away now. A parent, however, may inflict corporal punishment on his child without any civil liability. Courts generally assign as the reason for this, the fact that it would not be conducive to the welfare of the family to have children sue their parents, and the further fact that the child's rights are protected by giving him the right to have his parent arrested and punished criminally for an assault. While it was held formerly that a husband had the right to beat his wife, no modern court has upheld this view.

SELF-DEFENSE.—Another case where assault is justified is in the case of self-defense. It is common saying that a man's house is his castle, and the right of self-defense is founded on the right of self-preservation. So that it follows that a man may use force in protecting both himself and his property. A greater amount of force is ordinarily permitted in the protection of the person than of property. In using force, however, such force only as is reasonably necessary may be used. For example, a man attempts to take my watch from my pocket. I strike his arm to prevent it, and do so successfully. Thereafter, as soon as the man's back is turned, I jump on him and assault him, injuring him severely. I would be liable in this case because more force than is necessary for the protection of my property was used.

LIBEL AND SLANDER.—These two terms are frequently combined under the one term of defamation which is defined as a false imputation upon one's character or reputation. Slander is oral defamation, and libel is written defamation. The action of slander is very technical. Perhaps there is no better summary than that given by the United States Supreme Court in the case of Pollard v. Lyon, 91 U. S. 225, as to what statements are slanderous per se. "Slander," the court says, "may be divided into five classes, as follows: (1) Words falsely spoken of a person which impute to the party the commission of some criminal offense involving moral turpitude, for which the party, if the charge is true, may be indicted and punished. (2) Words falsely spoken of a person which impute that the party is infected with some contagious disease, where, if the charge is true, it would exclude the party from society; or (3) Defamatory words falsely spoken of a person, which impute to the party unfitness to perform the duties of an office or employment of profit, or the want of integrity in the discharge of the duties of such an office or employment. (4) Defamatory words falsely spoken of a party which prejudice such party in his or her profession or trade. (5) Defamatory words falsely spoken of a person, which, though not in themselves actionable, occasion the party special damage." A libel is any writing, picture, print or effigy which tends to hold one up to the contempt, scorn, ridicule, or disgrace of his fellow men. We see then, that many statements which would not be slanderous would be libelous.

PRINCIPLES COMMON TO BOTH LIBEL AND SLANDER.—Certain principles are common to both libel and slander. There must be a publication in either case. To say to a school teacher, in a room where he and the speaker are the only persons present, that he is a fool, would not be slanderous. There is no publication. To write a letter to a minister calling him a thief and a crook would not be libelous because there would be no publication. After he had opened the letter and read it, should he show it to any of his friends, he would have made the publication, and impliedly have consented to its publication. Whether to send statements like this on a postal card constitutes a publication or a libel is an open question, as also is the question whether the dictation of false statements to a person's stenographer constitutes publication to some third person.

PRIVILEGE.—Certain clearly slanderous or libelous statements may, nevertheless, not be actionable, because they are absolutely or qualifiedly privileged. Such is the case of any speech made by a member of Congress, or a member of the State Legislature on the floor of the legislative hall. Such statement, however, made from the stump during a political campaign, would not be privileged. The first is what we call an absolute privilege. There is a certain class of privilege which we speak of as qualified privilege. Newspapers, for example, are permitted to comment by way of criticism on any matters of current interest, provided a reasonable limit is not exceeded. It would not be permissible for a newspaper to pick out John Jones, a wholly retiring and inconspicuous citizen of a town, and make statements about him which hold him up to ridicule, because the public welfare does not call for such action. However, were John Jones running for public office, it would be proper for a newspaper to make comment upon his record, and such statements would have a qualified privilege, although subjecting him to ridicule. A member of the legislature on the floor of the legislature could make statements concerning the same John Jones and never be liable because of his absolute privilege. We must assume, that, with each case mentioned, the statement made is false, in order to have it constitute libel or slander. In other words, truth is a defense to an action for defamation. A person has no right to a false character, and to speak the truth about him does not, therefore, constitute a tort.

FRAUD OR DECEIT.—In order to establish the tort of fraud, it is necessary to prove the following five allegations: (1) that A makes a false statement of a material fact; (2) with knowledge of its falsity; (3) with the intent that it should be acted upon; (4) that the other party believed it to be true; and, (5) acted upon it to his damage. The absence of any one of these five elements will prevent the action of fraud from existing. The action of fraud is most important not only in torts, but also it plays a large part in the law of contracts, and the law of sales, as to both real property and personal property. A stock broker says to Mr. Jones: "My house is offering the best bargain in oil stocks which has been on the market for five years. Aetna Oil Mining Stock at $5 a share is the best buy on the curb to-day. There is no doubt the company will pay 10% in dividends in the first year." Green, relying on this representation, purchases 100 shares of the stock. The stock, thereafter, steadily declines, and never pays a dividend. Has he cause of action for fraud? Clearly not, because there has been no false statement of material fact. These statements about the future earning capacity are seller's talk, or the salesman is merely puffing his wares. Both these expressions are common in the reports and for a mere statement of opinion, no action of fraud lies. It must be a statement of fact. Supposing the same broker had said to his customer, "Aetna Oil Company has paid 10% dividends for the last ten years," and such statement afterwards was found by the purchaser to have been false. An action of fraud would lie, because the dividend record of a company is in the past, and it is not opinion, but fact. Again, suppose the statements to have been the same as in the second illustration, and that they were altogether false, but within three months, through a sudden change in conditions, the affairs of the company were greatly improved, the stock went up in value, and began to pay large dividends. Again, there would be no cause of action, because the fifth element, that of damage, would be lacking. Again, suppose the purchaser, after learning from the broker about the past dividend record, should say, "I will give you my answer to-morrow." Meanwhile, he looks up in a financial paper the dividend record and discovers the statements to be false. He then purchases the stock. Here he would have no cause of action, although he might be damaged, for the reason that by making his own investigation, he has clearly shown that he has not relied on the statement made by the broker, and the fourth element of the action of fraud is missing. In all of these situations, the court assumes that it is dealing with a person of ordinary intelligence, and it does not require the very highest degree of caution on the part of the person claiming to be defrauded, nor will it aid the defrauded person if he does not exercise an ordinary degree of care in safeguarding his rights and forming his judgment in the particular transaction. In laying down this rule, the court does not require that a person must make his own private investigation ordinarily, but he may rely upon the statement made to him. For example, in a Massachusetts case, a real estate broker, in selling a piece of property to a purchaser in a suburban town adjoining Boston, told him that forty trains per day stopped there. The statement was false, the purchaser could have easily inquired at the railroad ticket office, which was only a short distance from the real estate agent's office, but he did not do so. It was held that he could recover in an action of fraud. Were it not so, the courts would, in practice, be laying down the rule that one must assume everyone a liar. On the other hand, had this same purchaser been defrauded by the same real estate dealer a half-dozen times before, then he would not be acting as a reasonably careful man in relying on a statement of this kind. Under these circumstances, the ordinary prudent man would make his own investigation.

FALSE IMPRISONMENT.—A person under ordinary conditions, enjoys the full right of freedom of locomotion. The invasion of that right we call false imprisonment. It is immaterial how trivial the imprisonment may be, for merely locking a person in a room for five minutes as a joke would be enough to give rise to cause for action. The amount of damages which the jury might allow under the circumstances would, of course, be another matter. Many of the principles mentioned in assault and battery are applicable in this tort. Certain persons have a right to imprison other people, and it is not false imprisonment. The sheriff of the county, with a warrant for my arrest, may imprison me, and, of course, I have no action for false imprisonment. He is acting under regular process from the court. A man commits a serious crime in my presence. I lock him in a room until I can call an officer. This is not false imprisonment. The right of a private citizen to make an arrest and not be liable for false imprisonment is stated as follows in Section 183, of the New York Code of Criminal Procedure:

A private person may arrest another: (1) For a crime, committed or attempted in his presence; (2) When the person arrested has committed a felony, although not in his presence.

This is typical of the rule as it exists, with slight modifications, in most of the States. While mere words alone will not constitute an assault, it has been held that mere words will constitute false imprisonment. While a person may be justified in arresting someone else, yet, for the abuse of that privilege, the same as using greater force in self-defense than is necessary, the action of false imprisonment will lie. The man whom I arrest for committing a very serious crime in my presence, I lock in my house and keep there a month, feeding him on bread and water. I am guilty of false imprisonment because while I had a right to arrest him, it was my duty to turn him over to the proper authorities just as soon as possible. In a case, such as this, a month is, of course, an unreasonable time.

NEGLIGENCE.—To say that negligence is failure to use due care is a poor attempt at definition, but it is practically all that can be said. The common law maxim, "sic utere tuo ut alium non laedas" (so use your own as not to injure another), is at this basis of the law of negligence. At the outset, we must be careful to distinguish between "accident" and "negligence." I am walking on a street and slip on a banana skin, and in falling, knock down a passing pedestrian. This is an accident. With my office window overlooking the street, in a banana-eating contest, I eat fifteen bananas, and throw the skins out of the window on the sidewalk. The street is not well lighted. A passerby falls and is injured. This is negligence, and I would be liable.

CONTRIBUTORY NEGLIGENCE.—Negligence must be proved in order to entitle the injured party to recover. The court will not presume negligence merely because an injury takes place. Again, I repeatedly warn a motorman and conductor on a trolley car that I wish to get off at a certain station. Both parties forget the request, and the car goes by the station at the rate of fifteen miles an hour. I think I can get off safely, and attempt to do so. In doing so, I slip and break a leg. Although the two employees of the trolley company were negligent, for not attending to their business, I am guilty of contributory negligence in trying to get off a rapidly moving car, and cannot recover. Contributory negligence is a bar to recovery.

STANDARD OF CARE.—The standards of care to be applied in negligence vary from time to time. What would have been due care on the part of a railroad company fifty years ago, would probably, in few cases, be held to be due care to-day. This is so, because of the improvements which have been made in mechanical devices in the past fifty years. Again, in order to make a cause of action for negligence, there must be some causal relation between the negligent act and the injury. Granting that the man who slipped on the banana skin, which I threw from my office window, had sued me for damages because of his broken leg, it would not follow that I would be liable to the same man five years later, for the reason that an insurance company denied him a policy because of stiffness in the same broken leg, caused by the fall on the banana skin. The law looks not at the remote, but at the proximate, cause of the injury.

ILLUSTRATION.—The owner of lands owes a duty to persons coming upon that land, and the failure to perform that duty is negligence. Here, again, we have to consider who the person is. I enter Wanamaker's store to make a purchase. In going from the second to the third floor, I trip on a defective nosing on the stairway. This has been out of order for some time, and the floor walker was aware of that fact. I have a cause of action against Wanamaker's store for failure, on their part, to exercise due care in having the premises reasonably safe for the use of customers. Suppose, in making a purchase in that same store, in the basement, I see an open door leading into the engine room where the heat generator is located. Being interested in heating appliances, I go into the room, although there is a sign above the door "no admittance." I fall in an unguarded hole in the floor, which has been open for a long while, and the existence of this hole is known to the management. I cannot recover because I am a trespasser. I am in a place where I had no right to be, and, as to trespassers, the owner of property owes no duty, except to refrain from wilful attempts to injure such a person. I may not set a trap in my back yard to catch a trespasser, although I owe no duty to him to have the back yard safe for his use. A peculiar variation in this rule has been made by some States, in the so-called turn-tables cases. Railroads maintain turn-tables in their yards for the purpose of reversing locomotives and other cars. While children, coming upon the premises, are trespassers, nevertheless, many courts have held that such things are what might be called "attractive nuisances," and in such cases the owner of property is under special duty to use care even as to trespassers, to see that they are not injured. These are merely a few of the general principles of the law of negligence as applied by the courts.

CAPACITY OF PARTIES IN TORT ACTIONS.—We discussed the question of the capacity of parties in making a contract. There is not as much qualification upon a party's liability for tort as for contract. To-day, generally, a married woman is liable for her torts, the same as any one else. A corporation is liable for its torts committed by its agents or servants in the scope of their employment. An infant is held responsible for his torts. It is sometimes said that a person is liable for his torts from the cradle to the grave. This is not strictly true. If a baby two years old puts his finger in my eye, injuring it, he would clearly not be liable. But a person of tender years is liable for his torts, whenever he has sufficient intelligence to know what he is doing. Some courts place the age at seven years, while others consider each individual case and the degree of intelligence possessed by the infant.

THE CRIMINAL LAW.—A crime is a wrong which the State recognizes as injurious to the public welfare, and punishes in a criminal action in its own name. There are certain leading principles of the American system of criminal law which must be kept in mind.

(1) A man is presumed to be innocent until the contrary is shown, and a jury, to be justified in bringing in a verdict of guilty, must be satisfied beyond a reasonable doubt, of the guilt of the accused. The rule in civil cases is that the jury must find for the plaintiff or defendant by a preponderance of evidence. Thus, it is possible for a person to secure a verdict in a civil action for damages for assault and battery, while with the same evidence, a jury would not be justified, in a criminal action in convicting the defendant.

(2) In general, no person may be tried for a criminal offense, of any magnitude, until he has been indicted by a grand jury. The grand jury is generally twenty-four men, and hears the case against the prisoner only as presented by the prosecutor or district attorney. If the grand jury believes the evidence to be sufficient to warrant a trial before the petit jury, they bring in a true bill, and then the trial takes place before the petit jury of twelve men, in open court. The prisoner is entitled to counsel, at the State's expense, if he is not able to furnish his own.

(3) The prisoner may not twice be put in jeopardy for the same offense.

(4) A person may not be tried under an "ex post facto" law.

An "ex post facto" law is one which makes an act, which was innocent when committed, a crime. Such laws are unconstitutional. This term is never used in civil law, but the term "retroactive statute" expresses the same idea. Thus, a statute passed January 15, 1920, providing that all contracts made since January 1, 1919, must be witnessed by three witnesses, would be a "retroactive statute" and not valid.

CRIMINAL RESPONSIBILITY.—As a general rule, if a person, when a crime is committed, has sufficient mental capacity to understand the nature of the particular act constituting the crime, and the mental capacity to know whether it is right or wrong, he is liable criminally, whatever may be his capacity in other respects. As in contracts, or torts, there is a special rule in regard to infants. The English common law, which is pretty generally followed in this country, is that a child under the age of seven is conclusively presumed incapable of committing a crime. This is because of the fact that at common law, a criminal intent was necessary in all crimes, and an infant under seven was presumed not sufficiently advanced to be able to form a criminal intent. Between the ages of seven and fourteen, there is a presumption of incapacity to commit a crime, the presumption being very strong near seven, and rather weak near fourteen. Between the ages of fourteen and twenty-one, the presumption is that the infant is capable of committing a crime. As a general rule, one person is not liable for the crimes of another, unless he participated in them, directly or indirectly. A partner, therefore, is not liable, criminally, for the acts of his partners, merely because they are his partners. Neither is a principal or master liable for the criminal acts of his agent or servant, merely because the relationship is that of principal and agent or master and servant. We will consider briefly a few of the more important crimes.

HOMICIDE.—Homicide is the killing of a human being, and is divided into excusable, felonious, and justifiable homicide. The distinction between excusable and justifiable homicide is very slight and perhaps of little utility. Where either exists, a homicide takes place under such circumstances that the party cannot strictly be said to have committed the act wilfully and intentionally, or if he does commit it with full intention, under such circumstances of duty as to render the act performed not a felonious homicide. A felonious homicide is committed wilfully and under such circumstances as to render it punishable. Murder is the wilful killing of any person with malice aforethought. In some States, by legislative enactments, murder is divided into degrees, as murder in the first degree and murder in the second degree. The penalty for murder in the first degree is death, or in a State where capital punishment is abolished, life imprisonment. There are various other distinctions between these two forms of murder which must be ascertained from the statutes themselves.

MANSLAUGHTER.—Manslaughter is the unlawful killing of another without malice, either express or implied. Manslaughter is also frequently divided into different degrees, and the punishment varies accordingly. A reference to the State statutes is necessary, as in murder, to know what the local law is.

BURGLARY.—Burglary, as a common law offense, is the breaking and entering of a dwelling house of another, in the night time, with the intent to commit a felony therein, whether the felony be actually committed or not. But in most jurisdictions the offense has been extended by statute so as to include breaking and entries which were not burglary at common law. Unless changed by statute, it must be committed in the night time, and there must be both a breaking and an entering. Breaking a window, taking a pane of glass out, or bending the nails, is a breaking. Cutting a wire netting on a screen door is also a breaking. In such cases a screen door is not to be considered as a mere protection against flies and mosquitoes, but as a part of the building. As to whether opening a door or a window, already partly open, constitutes a breaking, the cases are in conflict. Without the intent to commit a felony, breaking and entering is a bare trespass, which would not be a crime. The felonious intent must exist at the time of the breaking and entering. Hence, if it can be proved satisfactorily to a jury, that a man broke into a house for a night's lodging only, he would not be guilty of burglary. As in homicide, reference must be made to the local statutes for the actual definition of burglary and its punishment in that jurisdiction.

FORGERY.—Forgery is the false making of an alteration of a writing to the prejudice of another man's right. Forgery may be committed of any writing, which, if changed, would operate as the foundation of another man's liability. Hence a check may be forged, an assignment of a legal claim, an indorsement on any negotiable document, an acceptance of a bill of exchange, a letter of recommendation, a railroad pass or railroad ticket. The penalty for forgery and various other acts of which it may consist, are so purely statutory as to make any further comment useless.

LARCENY.—Larceny is the felonious taking of the property of another, without his consent and against his will, with the intent to convert it to the use of the taker. The taking must be with criminal intent, but not necessarily for the sake of gain, although the property must be of some value, however slight. The taking must be against the consent of the owner, and if the consent is given, although obtained by fraud, the crime is not larceny. Larceny relates only to personal property. Hence the statement made falsely concerning A: "you are a thief. You stole my marle" (marle being a kind of earth), is not slander, because it is not a charge of a crime involving moral turpitude, as real property is not the subject of larceny. Larceny is generally divided into petty larceny and grand larceny, the difference between the two being generally the amount involved, which varies with the local legislation.

ROBBERY.—Robbery, at common law, is the taking, with intent to steal, of personal property in possession of another, from his person or in his presence, by violence or by putting him in fear. In a majority of jurisdictions, statutes have been enacted defining robbery substantially in accord with the common law. It is not necessary that the property taken should be the property of the person from whom it is taken. As in other crimes, there must be a criminal intent, and so where, in an indictment, the offense was charged as robbery, but as proved was, at most, an improper and rude act, and intended only as a joke, it was held that no robbery had been committed.