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Title: Commercial Law

Author: Richard D. Currier
Richard William Hill
Samuel Williston

Release date: March 2, 2013 [eBook #42241]
Most recently updated: October 23, 2024

Language: English

Other information and formats: www.gutenberg.org/ebooks/42241

Credits: E-text prepared by Juliet Sutherland, Jennifer Sahmoun,

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The Project Gutenberg eBook, Commercial Law, by Samuel Williston,
Richard D. Currier, and Richard W. Hill

E-text prepared by
Juliet Sutherland, Jennifer Sahmoun,
and the Online Distributed Proofreading Team
(http://www.pgdp.net)

COMMERCIAL LAW

American Institute of Banking
Section American Bankers Association
110 East 42 Street New York City

Copyright, 1921
by

American Institute of Banking

PREFACE
The Institute standard course of study in "Commercial Law" is not intended
to make lawyers, but simply to impart to bankers sufficient knowledge of
law to enable them to act in accordance with established legal principles,
and refer doubtful questions to a lawyer. It is not usurping the functions of a
lawyer for a banker to know his legal rights and responsibilities. The banker
who does not appreciate the importance of this knowledge, eventually
learns from experience, sad or otherwise, that he has neglected an important
part of the training necessary to carry on his business with safety and
confidence. This text-book is based on the splendid work, originally
prepared for the Institute, by Samuel Williston, Weld Professor of Law in
Harvard Law School. To this original matter, however, much new material
has been added, cases have been cited, and new chapters on Master and
Servant, Estates and Trusts, Bills and Notes, and Torts and Crimes added.
The work of preparing "Commercial Law" has been done jointly by Richard
D. Currier, President of the New Jersey Law School, and Richard W. Hill,
member of the New York Bar and Secretary of the American Institute of
Banking. The main purpose of this book is to teach bankers to recognize the
danger signals in law, when they appear, and thus be able to distinguish
between law and law suits.

INSTITUTE PLATFORM
Resolution adopted at the New Orleans Convention of the American
Institute of Banking, October 9, 1919:
"Ours is an educational association organized for the benefit of the banking
fraternity of the country and within our membership may be found on an
equal basis both employees and employers; and in full appreciation of the
opportunities which our country and its established institutions afford, and
especially in appreciation of the fact that the profession of banking affords
to its diligent and loyal members especial opportunities for promotion to
official and managerial positions, and that as a result of the establishment
and maintenance of the merit system in most banks a large number of
Institute members have through individual application achieved marked
professional success, we at all times and under all circumstances stand for
the merit system and for the paying of salaries according to the value of the
service rendered.
"We believe in the equitable cooperation of employees and employers and
are opposed to all attempts to limit individual initiative and curtail
production, and, insofar as our profession is concerned, are unalterably
opposed to any plan purporting to promote the material welfare of our
members, individually or collectively, on any other basis than that of
efficiency, loyalty and unadulterated Americanism."

CONTENTS
Chapter Page
Introduction 7
I. Contracts—Mutual Assent 24
II. Contracts—Consideration and Enforceability 57
III. Contracts—Performance and Termination 86
IV. Principal and Agent; Master and Servant 121
V. Partnerships 163
VI. Corporations 192
VII. Transfer of Stock 238
VIII. Personal Property 258
IX. Real Property 298
X. Estates and Trusts 321
XI. Carriers and Warehousemen 344
XII. Bills and Notes 378
XIII. Torts and Crimes 405
XIV. Miscellaneous 425

WHO IS A BANKER?
A successful banker is composed of about one-fifth accountant, two-
fifths lawyer, three-fifths political economist, and four-fifths
gentleman and scholar—total ten-fifths—double size. Any smaller
person may be a pawnbroker or a promoter, but not a banker.—George
E. Allen.

Commercial Law

INTRODUCTION
DEFINITION OF LAW.—The term "law" is used in many ways. We speak
of moral law, law of gravity, divine law, and the like. In each case we are
making proper use of the term, but in no instance are we using it as we shall
use it in this book. To illustrate: You find a beggar on your front porch when
entering your house late at night. Suppose he should ask you for food and
lodging for the night. Although there is no other house within five miles of
your home, you refuse to take him in, or do anything for him. As a result he
contracts pneumonia from exposure, because he is not able to proceed
further. You would, nevertheless, not be liable in the sense in which we are
using the term "law." But, you say, in an extreme case of this kind, it is
one's duty to act. We grant it, but to be accurate, you must preface your
proposition with the statement, "under the moral law" or "under divine law
it is one's duty to act in such a case." However much it is to be regretted that
moral or divine law sometimes does not harmonize with "law" as we shall
treat it, we must, nevertheless, recognize that fact. Law, as viewed by the
jurist, and this is the way we, as students, are to consider it, is defined by
Blackstone to be "A rule of civil conduct prescribed by the supreme power
in the State, commanding what is right, and prohibiting what is wrong."
Referring again to our illustration, is it not easy to see that it would be
impracticable in the present condition of society for the legislature of
California, for example, to pass a law which should, in that State, constitute
"a rule of civil conduct" commanding that every one "shall be his brother's
keeper" and for a violation thereof "shall be imprisoned for one year, or
fined one thousand dollars, or both." However much we recognize the
obligation of moral law, jurists and legislators cannot ignore the fact that
society is composed of ordinary human beings, still far from perfection.
Assuming, although perhaps it is doubtful, that it is within the power of the
legislature of California to pass such an act as has been suggested, there are
not courts enough in the whole United States to decide the cases which
would arise in New York City alone in attempting to apply the provisions of
such an act. On second thought, then, it is not such a startling proposition
for us to learn that "law" is not synonymous with the same term when used

in referring to natural law, moral law, and the like. Much has been written
on the essential nature of "law" as we shall use the term. The time-honored
definition of Blackstone, which we have quoted, is confessedly imperfect.
The last clause, "commanding what is RIGHT, and prohibiting what is
WRONG" has been much criticized, and Mr. Chitty has modified it to
"commanding what shall be done, and what shall not be done." Today, to
attempt to buy a bottle of light wine at a hotel does not seem to many of us
intrinsically WRONG, but legally, under existing laws, it is, and so perhaps
Mr. Chitty's modification of Blackstone's definition does bring out the
correct idea more clearly. For our purpose, these two definitions are
sufficient.
THE SYSTEMS OF LAW.—There are two chief systems of law in use
among civilized peoples today, the Roman or civil law, and, the English or
common law. The Roman, or civil law (Roman law is spoken of as civil
law, from the Latin "civilis," belonging to a citizen) as its name implies,
originated in Rome. As the city of Rome developed into the Roman Empire,
its law became that of the ancient world. It was finally codified by the
Roman Emperor Justinian, in the year 530 A.D., and was eventually
absorbed, from the twelfth to the eighteenth century, into the law of modern
Europe. It is the basis of the systems of law used in the countries of
continental Europe, Central and South America, and all French, Spanish,
Portuguese, and Dutch colonies or countries settled by those peoples.
COMMON LAW.—The common law had its roots in the customary law of
the Germanic peoples of western Europe, and was developed by the English
courts from the thirteenth to the nineteenth centuries. Like the Roman law,
it has spread all over the world wherever English-speaking peoples have
settled, and founded colonies. The common law now prevails in England,
Canada (except Quebec), India, except over Hindus and Mohammedans in
certain instances, and the principal British colonies, except those in South
Africa. The United States is largely an English settlement, hence the
common law prevails with us, except in the State of Louisiana, where the
influence of the French and Spanish settlements still remains and makes the
basis of the Louisiana law the Roman law, and in the Philippines and Porto
Rico, where the law was Roman when we took those possessions from
Spain in 1898.

THE SOURCE OF LAW.—Where does this rule of civil conduct we are to
study come from? At first blush, the superficial observer might suggest
some legislative hall where it is created by a legislative body, a perfect
product, to be imposed on men and women as the guide in their every act in
civil life. The slightest reference to historical jurisprudence will convince us
that this is not the true source of the law. Mr. Justice Holmes of the United
States Supreme Court, in his classic, "The Common Law," indicates the real
source of law when he observes: "The life of the law has not been logic; it
has been experience. The felt necessities of the time, the prevalent moral
and political theories, intuitions of public policy, avowed or unconscious,
even the prejudices which judges share with their fellow-men, have had a
good deal more to do than the syllogism in determining the rules by which
men should be governed. The law embodies the story of a nation's
development through many centuries, and it cannot be dealt with as if it
contained only the axioms and corollaries of a book of mathematics. In
order to know what it is, we must know what it has been, and what it tends
to become. We must alternately consult history and existing theories of
legislation. But the most difficult labor will be to understand the
combination of the two into new products at every stage. The substance of
the law at any given time pretty nearly corresponds, so far as it goes, with
what is then understood to be convenient; but its form and machinery, and
the degree to which it is able to work out desired results, depend very much
upon its past."
WHERE TO LOOK FOR LAW.—Knowing the source of law does not
necessarily tell us where to look for the law. Today, in the United States, we
have three primary sources to which the lawyer goes to seek the law on any
particular point. First, the Constitution of the United States and the
Constitution of the State in which he is to ascertain the law, including the
statutes which have been enacted by Congress and by the State legislature
under those constitutions. Second, the decisions of the courts, particularly
those of the United States courts and of the State where he wishes to learn
the law, and, if need be, the decisions of other States. Third, text-books and
treatises on the branch of law to be investigated.
ILLUSTRATION.—Let us suppose you wish to ascertain the law
concerning a question that comes up in your own daily life. Take two
problems. First: We will assume you keep a clothing store, and an infant,

twenty years old, purchases a suit of winter clothes. His income is $1000
per year. He already has two perfectly good winter suits. A week after
purchasing this suit, he returns it and demands his money back. You wish to
know whether you have to give it to him. If you should look in the
Constitution of the United States, or of the State of Vermont (assuming this
to be a Vermont contract), you would find nothing that would give you any
help in answering this question. If you should look through all of the acts of
Congress and the laws passed by the legislature of the State of Vermont,
you would find nothing to give you any help. If, however, you should look
in the decisions of the courts, both of the United States and of the State of
Vermont, you would find cases, probably many of them, covering this
particular situation, and you would find the rule to be laid down as law, that
an infant (and by an infant we mean anyone under twenty-one years) is not
liable on his contracts, except for necessities, and then only in a quasi-
contractual action for their reasonable value. Applying the law to the
problem, you would be obliged to admit the legality of the infant's claim,
and if you did not refund the money to him, he would be entitled to sue for
it in a court. Three winter suits are clearly not necessaries at one time for an
infant with an income no greater than $1000 per year. This is a
comparatively simple problem. Now let us take another case somewhat
more difficult. You live in New Jersey near the plant of an airplane
manufacturing company. Machines are constantly being tried out, and they
circle over your premises within four or five hundred feet from the ground.
You have several children who are using your back yard as a playground
and you are much alarmed, fearing that an airplane may fall in the yard and
kill or injure a child. You wish to ascertain your rights. You look in the
Constitution of the United States, and of the State of New Jersey. You will
find nothing in either about airplanes. You look in the acts of Congress and
the laws of the legislature of the State of New Jersey. You will find nothing
there to help you. You look in the decisions of the courts, both of the United
States and of the State of New Jersey. You will find nothing there. You look
in the text-books, and, except in the most recent, in all probability you will
find nothing there in regard to airplanes. You may search the recent legal
publications and you will find articles discussing in a purely theoretical way
this interesting topic. You study recent legislation and you will find stray
instances of attempts to deal with aerial matters. For example, Connecticut
has a statute on airplanes. In fact, your whole search will be most

interesting. All you will find, however, is not law in New Jersey, but is
simply theory, based on common law principles or statutes having no force
in New Jersey. Should you then conclude that you have no rights, that the
law cannot help you? Perhaps not. If you turn to treatises relating to the
ownership of land as developed in the English common law and as applied
by the courts in the United States, you will find that the word "land" is often
used as practically synonymous with realty or ground or soil, and you will
also find that it includes everything attached to the realty or growing on it.
As is commonly said, land has an indefinite extent upward as well as
downward, the old books using the Latin maxim: "Cuius est solum, eius est
usque ad coelum usque ad orcum." (To whomsoever the soil belongs, he
owns also to the sky and to the depths.)
There are three houses in a row on Smith Street, Nos. 1, 3 and 5. Mary
Jones lives in No. 1, and Sarah Green in No. 5. They are friends, and
accordingly arrange to stretch their clotheslines from their rear second-story
windows across the back yard of No. 3. Under common law principles, this
is a trespass upon No. 3. Should Mary Jones and Sarah Green continue to
do this for the required time, usually twenty years, they would acquire by
prescription a permanent right to stretch clotheslines over lot No. 3. When
the owner of lot No. 3 wished to erect a ten-story building covering all of
his lot, he would be seriously interfered with by the right acquired by his
two adjoining neighbors. He could have protected himself by proper action
in a court when the offense was first committed. Could not, therefore, the
court take this principle of the common law as to the ownership of land and
apply it to the airplane case? If the owner of lot No. 3 could prevent the
owners of lots Nos. 1 and 5 from stretching clotheslines across his land,
could you not prevent the airplane from crossing your land, although it is
five hundred feet above the surface of the soil? Twenty years' continuation
of that practice would interfere with your ability to build a Woolworth
building twenty-five years from now should you desire to do so. It is simply
taking an old principle of law recognized for centuries, and applying it to
new conditions. This is what we mean when we say that the principles of
common law are capable of indefinite expansion; that the common law is
always growing, or, as Mr. Justice Holmes puts it, it is the product of "the
felt necessities of the time." As soon, however, as you have secured an
injunction from the court preventing the airplane factory from practicing its

machines over your land, all of the other property owners in the
neighborhood of the factory decide to protect their rights, with the result
that no airplane can leave the factory through the air. Does this mean that
the airplane factory must move, and probably be subjected to the same
annoyances in its new location in a short time? We are coming to realize
that airplanes are necessities. When a necessity and a principle of law
cannot exist side by side, something must be done to remedy an intolerable
situation. The illustration here used presents what in the course of a few
years, undoubtedly, will become an intolerable situation, unless remedied in
some way. It has been suggested that we must modify our principles of the
ownership of land, and give airplanes the right of free passage over the land
of any person, when a certain distance in the air, far enough up to cause no
great amount of danger or annoyance. Such a change in the law would have
to be accomplished by the State legislature or by an act of Congress for
such territory as Congress has jurisdiction over. No doubt, legislation along
such lines may be expected soon. It will be simply a repetition of a situation
created by a leading case in New York in 1902.
In Roberson v. The Rochester Folding Box Company, 171 New York 538,
the suit was brought on behalf of a living person, a young lady, to restrain a
flour company from putting her likeness upon prints advertising its flour.
Mr. Justice Parker, writing the opinion of the court, held that there was no
principle of law which would authorize the court to issue an injunction
restraining this unauthorized use of a photograph. This created the
unfortunate situation in the State of New York of allowing anyone to make
use of another's photograph without that person's consent, for advertising or
other purposes. The court, in its opinion, admitted the unfortunateness of
the situation, observing that "The legislative body could very well interfere
and arbitrarily provide that no one should be permitted for his own selfish
purpose to use the picture or the name of another for advertising purposes
without his consent. In such event no embarrassment would result to the
general body of the law, for the rule would be applicable only to cases
provided for by statute. The courts however, being without authority to
legislate, are required to decide cases upon principle, and so are necessarily
embarrassed by precedents created by an extreme, and therefore
unjustifiable application of an old principle. The court below properly said
that: 'While it may be true that the fact that no precedent can be found to

sustain an action in any given case is cogent evidence that a principle does
not exist upon which the right may be based, it is not the rule that the want
of a precedent is a sufficient reason for turning the plaintiff out of court,'
provided (I think should be added)," Mr. Justice Parker continues, "there
can be found a clear and unequivocal principle of the common law, which
either directly or mediately governs it, or which, by analogy or parity of
reasoning, ought to govern it." Relief was denied the young lady. The
following session of the legislature corrected the evil by passing a law
making it a criminal offense to use another's photograph without that
person's consent. This has been a long illustration. It has served its purpose
best if it has left the very distinct impression that the law is a vital, living,
growing thing. True, its roots are in the dim past, but it lives, and moves,
and has its being in the problems of today. In no field of law is this more
true than in our subject, Commercial Law.
WHO KNOWS THE LAW.—The layman is frequently of the opinion that a
lawyer ought to be able to give him a definite answer as to just what the law
is in a given set of facts. Why is it not possible to go to the sources which
we have been discussing and from them ascertain definitely what the law is
in a given case? Frequently the lawyer can do this, but one should not lose
respect for the lawyer because he is not, in many cases, willing to give a
definite answer, but may frame his reply in an opinion beginning "It would
seem that the law in this case would be, etc.—" We have already suggested
some of the difficulties that in part answer the question we now ask. Let us
take one more illustration, a striking example from the United States
Supreme Court. Few would question the statement that that Court is the
highest type of judicial body in the world today. We are familiar with the
rent profiteering legislation enacted in the District of Columbia, New York
and at least five other States, as a result of the house shortage created by the
world war. The United States Supreme Court, in the cases of Block v. Hirsh,
254 U.S. 531 and Marcus Brown Holding Co. v. Feldman et al., 254 U.S.
539, held the New York and the District of Columbia rent profiteering laws
to be constitutional, but this decision is by a vote of five to four, and the
arguments advanced in the two opinions, one by Mr. Justice Holmes,
representing the majority of the court, and the other by Mr. Justice
McKenna, are striking examples of how strongly the ablest body of jurists
in the United States can differ on a legal question. Speaking for the majority

in Block v. Hirsh, Mr. Justice Holmes says: "The main point against the law
is that tenants are allowed to remain in possession at the same rent that they
have been paying, unless modified by the commission established by the
act, and that thus the use of the land and the right of the owner to do what
he will with his own and to make what contracts he pleases are cut down.
But if the public interest be established, the regulation of rates is one of the
first forms in which it is asserted, and the validity of such regulation has
been settled since Munn v. Illinois, 94 U.S. 113. It is said that a grain
elevator may go out of business, whereas here the use is fastened upon the
land. The power to go out of business, when it exists, is an illusory answer
to gas companies and waterworks, but we need not stop at that. The
regulation is put and justified only as a temporary measure. * * * A limit in
time, to tide over a passing trouble, well may justify a law that could not be
upheld as a permanent change." In the case of Marcus Brown Holding Co.
v. Feldman, involving a similar New York law, Mr. Justice Holmes says:
"The chief objections to these acts have been dealt with in Block v. Hirsh,
supra. In the present case more emphasis is laid upon the impairment of the
obligation of the contract of the lessees to surrender possession, and of the
new lease, which was to have gone into effect upon October 1, last year.
But contracts are made subject to this exercise of the power of the State
when otherwise justified, as we have held this to be." Mr. Justice McKenna,
in writing the dissenting opinion in Block v. Hirsh, supra, and with whom
the late Chief Justice White, and Justices Van Devanter and McReynolds
concurred, says: "If such exercise of government be legal, what exercise of
government is illegal? Houses are a necessary of life, but other things are as
necessary. May they, too, be taken from the direction of their owners and
disposed of by the Government? * * * An affirmative answer seems to be
the requirement of the decision. If the public interest may be concerned, as
in the statute under review, with the control of any form of property, it can
be concerned with the control of all forms of property. And, certainly, in the
first instance, the necessity or expediency of control must be a matter of
legislative judgment. * * * The facts are significant and suggest this
inquiry: Have conditions come not only to the District of Columbia,
embarrassing the Federal government, but to the world as well, that are not
amenable to passing palliatives, and that socialism, or some form of
socialism, is the only permanent corrective or accommodation? It is indeed
strange that this court, in effect, is called upon to make way for it, and

through an instrument of a constitution based on personal rights and the
purposeful encouragement of individual incentive and energy, to declare
legal a power exerted for their destruction. The inquiry occurs, have we
come to the realization of the observation that 'War, unless it be fought for
liberty, is the most deadly enemy of liberty.'"
In the Marcus Brown Holding Co. case, he again says for the same justices:
"We are not disposed to further enlarge upon the case, or attempt to
reconcile the explicit declaration of the Constitution against the power of
the state to impair the obligations of a contract, or, under any pretense, to
disregard the declaration. It is safer, saner, and more consonant with
constitutional pre-eminence and its purposes, to regard the declaration of
the Constitution as paramount, and not to weaken it by refined dialectics, or
bend it to some impulse of emergency because of some accident of
immediate overwhelming interest which appeals to the feelings and distorts
the judgment." No more striking illustration of the most decided differences
of opinion among nine of the ablest jurists in the world can be found. It is
no wonder then that a lawyer at times hesitates in giving an opinion as to
what the law may be.
THE FUNCTION OF THE COURT.—An infant bought a motorcycle on an
installment contract at the agreed price of $325. He made an initial payment
of $125, used the machine a month, damaged it to the amount of $156.25,
and then returned it in this condition and demanded the return of his $125.
These are the facts in the case of Petit v. Liston, 97 Oregon 464, a case
decided in the Supreme Court of Oregon. The case involves the right of an
infant to disaffirm a contract made by him, when purchasing an article
which is not a necessity. The Oregon court had never before been called on
to determine what the law in Oregon was as applied to such a situation.
According to the rule in New York, as laid down in Rice v. Butler, 160 N. Y.
578, the infant could not recover the $125, but according to the rule in Pyne
v. Wood, 145 Mass. 558, the infant would be entitled to his money. It thus
became the problem of the Oregon court to refer to the theories back of
these two decisions. After doing so, it approved of the New York view,
rather than the Massachusetts view. This case indicates the function of a
court. If a court, from the various sources of law which we have
enumerated, can find an exact precedent for the case before it, or can find a
general principle of law which can be applied, it renders a decision as to the

law, as the Oregon court did. If no law can be found nor any principles
which can be applied, the court is forced to deny the relief, as in the
Roberson case, 171 N. Y. 538, adding, perhaps, to its opinion, as it did in
that case, the suggestion that it is a matter Congress or a State legislature
might properly remedy.
THE COURT SYSTEM.—Knowing the function of a court, the student
should then have an outline of the court system of his own jurisdiction. We
can only sketch, in a book to be used generally throughout the United
States, the court systems. Each State has two sets of courts: the Federal and
the State courts. We have a Federal and a State Government; it follows that
there should be courts to interpret the laws of each of these two
Governments. Matters pertaining to the United States Constitution, or
matters affecting citizens of different States, are tried in the Federal courts.
The same is true of admiralty and bankruptcy. There is at least one United
States District Court in each State in the country, and Federal cases are
begun in these courts. If either party is dissatisfied with the decision, he
may appeal to the next higher court. The entire country is divided into nine
Circuit Courts of Appeal, to which appeals from United States District
Courts are taken. In case either party is dissatisfied with the decision in that
court, he may, in certain cases, appeal to the court of last resort, the United
States Supreme Court, presided over by a Chief Justice and eight Associate
Justices at Washington. Each State has its own system of courts. Usually
that system is more elaborate than that in the Federal Government. There is
in each State a court of last resort, which we would expect to find
designated the Supreme Court of New York, or whatever State it might be.
Frequently there is a misuse of terms, as, for example, the court of last
resort in New York is the Court of Appeals, and the Supreme Court is a
lower court. This is true in a number of States. In addition to the court of
last resort, there will be a court of general jurisdiction, frequently one of
these courts for each county of the State, and then courts for the trial of
smaller cases in the various cities and towns. The system of appeals is the
same as in the Federal courts, either party who is dissatisfied having a right
to appeal his case to the higher court. The question as to whether a
particular case must be brought in a Federal court or a State court is too
complicated to be taken up in detail. Sometimes the suit must be brought in
the Federal court, as, for example, a bankruptcy matter, or a matter

involving the United States Constitution, while in other cases, perhaps the
majority, the suit must be brought in a State court. In other cases a person
may have his option of either jurisdiction, as where a citizen of Texas
wishes to sue a citizen of Rhode Island, and the amount involved is over
$3000, then either the Federal or State courts of either State are open to the
parties.

CHAPTER I
Contracts—Mutual Assent
Commercial law is a general term used to cover the legal rules which relate
most directly to everyday commercial transactions. It is a term of no exact
boundary, but most commercial law is based in one way or another on the
law of contracts, which is one of the largest subjects in the law. Bills and
notes, for instance, are special forms of contracts. In order to understand
business law at all, therefore, it is necessary at the outset to have some
knowledge of the fundamental principles of the law of contracts.
DEFINITION OF CONTRACTS.—What is a contract? Simply a promise
or set of promises which the law enforces as binding. Any promise, if it is
binding, is a contract or part of a contract. So the law of contracts in their
formation resolves itself into this: What promises are binding? A man may
make all sorts of promises, but when has he a right legally to say "I have
changed my mind, I am not going to do what I said I would," and when will
he be liable in damages if he fails to do as he agreed?
CONTRACT TERMS EXPLAINED.—There are certain terms in contracts
which the student will find repeatedly mentioned and with which he should
be familiar at the outset. For example, contracts are spoken of as express
contracts, and implied contracts. By an express contract we mean a contract
the terms of which are fully set forth. Implied contracts are contracts the
terms of which are not fully stated by the parties. There is a mutual
agreement and promise, but the agreement and promise have not been
expressly put in words. If I say to a man, "I will buy your horse, Dobbin, for
$100" and he replies, "I will sell you the horse at that price," there is an
express contract. I step into a taxi and simply say to the driver, "Take me to
the Union Station." The driver says nothing, but takes me there. Here is an
implied contract. By my conduct I impliedly agree to pay him the legal rate
for the distance carried.
FORMAL AND INFORMAL CONTRACTS.—Contracts are sometimes
also divided into formal contracts, and simple or parol contracts. There are

three kinds of formal contracts recognized in our system of law: (1)
Promises under seal. (2) Contracts of record, such as judgments and
recognizances. (3) Negotiable instruments. Of the three, it may be most
difficult to understand why a judgment is included as a form of contract,
because a judgment is simply a judicial termination of a fact entered in the
office of the county clerk, and generally a lien on the real property owned
by the judgment debtor. The sole reason, apparently, for calling a judgment
a contract, is that an action of debt may be brought in a court of law upon
such a judgment. Sealed contracts and negotiable paper will be taken up in
a later chapter. Simple, or parol contracts, are those not embraced in the
three previous classifications which constitute the formal contracts. The
term parol is a little ambiguous, as it is sometimes used as opposed to a
written contract, meaning simply an oral one, and at other times it is used as
opposed to the three previous formal contracts.
UNILATERAL AND BILATERAL CONTRACTS.—Contracts are also
divided into unilateral and bilateral contracts. In a unilateral contract, the
contract imposes obligations on one party only. A promissory note is an
example of a unilateral contract. In a bilateral contract, obligation is
imposed on both parties. John and Mary become engaged to each other.
This is a bilateral contract, and either may sue the other for a breach. Most
important results flow from the distinction between unilateral and bilateral
contracts. This we shall consider later.
VOID, VOIDABLE AND UNENFORCEABLE CONTRACTS.—
Contracts are also divided into void, voidable and unenforceable contracts.
Strictly speaking, a void contract is no contract at all. Some statutes provide
that no action shall be brought on certain contracts, and declare them
absolutely void. A voidable contract is one which is good until the option of
avoiding it is availed of by the party who has the option. For example, an
infant with an income of $2000 a year contracts for the delivery of a
Packard automobile on June 1. The car, being a luxury, makes the contract
with the infant voidable on his part, and he may, before June 1, repudiate
the contract and not be liable in a suit for breach of contract, or he may, if
he choses, abide by the contract, take the car, and pay the purchase price
when it is delivered. An unenforceable contract is one which in itself is
perfectly good as a contract, but because of some rule of law cannot be
enforced. For example, A agrees, orally, with the owner of 1 Broadway, to

buy that property for $1,000,000. The terms of the contract are understood
by both parties. This contract is not enforceable, because, as we shall see
later, the Statute of Frauds requires every contract for the sale of real
property to be in writing.
CONTRACTS UNDER SEAL.—There are two ways of making promises
binding, and unless the promisor fulfils the requisites of one or the other of
these two ways his promise will not be binding. The first of these ways
relates to the form in which the promise is made; the second relates to the
substance of the transaction, irrespective of the form. The way to make a
promise binding by virtue of its form is to put it in writing and attach a seal
to the writing. It is often thought that written promises are binding in any
event, or that a promise that is not written is not binding in any event.
Neither of these propositions, however, is true. A promise is not binding
merely because it is in writing; it is necessary that something more shall be
done. Not only must it be written, but a seal must be attached in order to
make the promise binding by virtue of its form. Everyone is familiar with
the common ending in written contracts—"witness my hand and seal," that
is, my signature and seal.
WHAT IS A SEAL?—A seal may be—and was originally—made with
sealing wax stamped with a crest, initial or what not. This is still a sufficient
seal, but the common kind of seal is simply a wafer attached by mucilage to
the writing. Another kind of seal, in use by corporations and notaries
especially, consists simply of an impression made on paper without
attaching any foreign substance whatever. Any of these methods of sealing
a promise is good. In most States a written or printed scroll with the letters
"L. S." written or printed within, or the word "Seal" written or printed may
also be a seal if so intended. It may seem a ridiculous formality for the law
to attach importance to this lapping a wafer and attaching it to the end of a
writing. In a way it is ridiculous, but it is desirable to have some method by
which a promise may be made binding. One method, as an original
question, may be as good as another so long as it is an easy method, and
attaching a seal is an easy method, and one which makes it possible to make
a promise binding whenever you wish.
CHANGE BY STATUTE OF THE LAW AS TO SEALED CONTRACTS.
—There has been in this country a certain hostility to the law of sealed

instruments. It has been thought, with reason, that some of the rules
governing contracts under seal have by their technicality promoted
injustice. This has certainly been true of an old rule that contracts under seal
could not be altered or discharged by any agreement not itself under seal.
The rule, however, that a seal avoids the necessity of consideration is a
desirable rule, since it is important to have some means by which those who
so intend may make gratuitous promises binding. It would be better then to
abolish undesirable incidents of sealed contracts by statute rather than to
destroy totally the legal effect of a seal. However, in many States the
distinction between sealed and unsealed contracts is totally abolished. In a
number of other States the common-law rule has been changed by the
enactment of statutory provisions to the effect that sealed contracts shall be
presumed to have been made for a sufficient consideration, but this
presumption is only prima facie, and lack of consideration may be
affirmatively proved, even in the case of a sealed instrument. And under
such statutes unsealed contracts remain as at common law, i. e., the burden
of proving consideration rests upon the plaintiff who seeks to enforce such a
contract.
REQUISITES OF SIMPLE CONTRACTS.—Sealed contracts are
comparatively easy to understand. Simple contracts, which are promises
made binding by virtue of their substance rather than their form, though
called simple, are more difficult to understand, and more complex. They are
also much more common than sealed contracts. A simple contract is a
promise, or promises, to which the parties have assented, and for which a
price called consideration has been paid. One may promise as much as he
wishes, orally or in writing so long as he does not attach a seal to his
signature, and then say he does not care to keep his promise, unless he has
both been paid for the promise and there has been an assent by the promisor
and promisee to the terms of the transaction. Mutual assent and
consideration are, then, the requisites of simple contracts.
INTENT TO CONTRACT.—In the law of contracts, intention, as we
ordinarily understand that term, plays little part. In fact, the Supreme Court
of Connecticut, in the case of Davidson vs. Holden, 55 Conn. 103, said: "It
is of no legal significance that the defendants did not intend to be
individually liable, or that they did not know or believe that as a matter of
law they would be."

It is our overt acts that count in contracts. Or shall we put it this way: In the
eyes of the law overt acts manifest legal intention. A says to B: "I will sell
you my watch for $25, and you may have until 9 o'clock tomorrow morning
to decide." A meets B the next noon and says to him: "I am sorry you did
not take the watch. It was a bargain." B replies: "Here is the price, I will
take it. I intended to call you this morning but have been so busy I did not
have an opportunity to do so. I told my wife last night I was going to accept
your offer and I can produce five witnesses who were in the room and heard
me say so." It is, nevertheless, no contract, for, as has been said, quoting
from an old English case, "It is trite learning, that the thought of man is not
tryable, for the devil himself knows not the thought of man." Occasionally
there may be the overt act and still no contract, although the mere
formalities of contract may have taken place. The facts in the case of
McClurg v. Terry, 21 New Jersey Equity 225, were as follows: The plaintiff
was an infant nineteen years of age, and had returned late in the evening to
Jersey City, from an excursion, with the defendant and a number of young
friends, among whom was a justice of the peace, and all being in good
spirits, excited by the excursion, the plaintiff in jest challenged the
defendant to be married to her on the spot; he in the same spirit accepted the
challenge, and the justice, at their request, performed the ceremony, they
making the proper responses. The ceremony was in the usual and proper
form, the justice doubting whether it was in earnest or not. The defendant
escorted the plaintiff to her home, and left her there as usual on occasions of
such excursions; both acted and treated the matter as if no ceremony had
taken place. In deciding the case, the court said: "In this case the evidence is
clear that no marriage was intended by either party; that it was a mere jest
got up in the exuberance of spirits to amuse the company and themselves. If
this is so, there was no marriage." The overt act of the parties manifested no
legal intention to be married. Should we change the facts in the following
way, the court undoubtedly would have held a valid marriage: If, after the
parties had gone through the marriage ceremony, as recited, they went on a
two weeks' honeymoon, and on their return lived together as man and wife
for a month and then suddenly decided to call the marriage off, on the
ground that it was a joke and they did not intend the ceremony to be
binding, regardless of what they said as to the transaction, their overt acts
would be taken by the court as showing their real legal intention at the time
the ceremony was entered into. One more illustration: When leaving the

class tonight, there is a sudden downpour of rain, and the instructor
remarks: "I will give ten dollars for an umbrella." A student offers an
umbrella and claims the money. Here is an overt act, but a reasonable
person would not take the words used literally. Generally speaking,
agreements made jokingly and social agreements confer no contractual
rights.
OFFER AND ACCEPTANCE.—The usual way that mutual assent is
manifested is by an offer and an acceptance of the offer. Two persons are
not likely to express at the identical minute the same proposition. It is as a
practical matter, then, essential that one should make a proposition, and if a
contract is to be made, that the other should assent to it. An offer may be
made to one or more specified persons, or to anyone whomsoever who will
do what the offer requests, as in case of an offer of a reward. An offer is
itself a promise, but is a promise conditional on the payment of a
consideration or return for it either by some act or some promise from the
other party. According as the offer asks for an act or a promise it will fall
into one or the other of the two great divisions of simple contracts; one kind
is called unilateral (meaning one-sided), that is, a promise only on one side;
the other is bilateral, a promise on each side.
ILLUSTRATIONS.—Let us give illustrations of these contracts. We say to
John: "We will promise to give you, John, $100 if you will do a specified
piece of work." That is a proposal to make an exchange of the work for the
money in a sense, but more exactly it is an offer to exchange an agreement
to give the money in return for the work. We are not saying to John: "If you
will agree or promise to do that work we will promise to give you the
money." We are saying that we will give him the money if he actually does
the work. That offer requires the actual doing of the work before it is
binding. Until then the price requested for the promise has not been paid. It
is an offer of a unilateral contract. Again, when we say to a man: "If you
will spade up our garden we will pay you $2 a day," we are making an offer
for a unilateral contract. We are asking him to spade up the garden; not to
promise to spade it up, but to do it, and when he does it he can hold us
liable on our promise to pay him $2 a day. The promise will have become
binding because we have been given the payment that we asked for in our
promise. But if we say to a man: "If you will agree to work for us the next
month we will pay you $100," and the man says, "All right," then we have a

bilateral contract. We are asking him, as the price of our promise, not to
work but to agree to work, and he has promised to do so. To say "I accept"
is always sufficient acceptance in the case of a bilateral contract where a
promise is requested, but if I said to you, "I will give you $5 if you will
bring me a book here," it would not make a contract to say "I accept." I said
I would give you $5 if you brought the book here, and nothing but bringing
it here will form a contract. The offeree must always do what the offerer
asks him. If an offerer asks for a promise, any form of words indicating
assent would be sufficient, because they would mean, in effect: "I consent
to make the promise you specify in your offer." The form of wording in
simple contracts is immaterial. Any plain language is sufficient for an offer,
and as for acceptance, it does not matter whether the acceptor says "all
right," or "I accept your offer," or in what form he expresses his assent. The
question is, does he express assent? Now, the offerer is at liberty to name
any consideration in his offer that he sees fit. He can name, in other words,
whatever price for his promise he chooses to ask. If the person addressed
does not choose to pay that price, all he has to do is to reject the offer, but
he can bind the offerer only on the terms proposed. Therefore, if the offerer
asks for an act in return for his promise, that is, asks for an immediate
payment, or work, or the giving of property for his promise, no contract can
be made by the person addressed saying, "All right, I will do it;" that is not
giving the price the offerer asked. On the other hand, should the offerer ask
for a promise and not for an act, the acceptor must give the promise asked
for.
OPTION WITHOUT CONSIDERATION.—A common business
transaction that presents very well the principles governing the formation of
simple contracts is what is called an option. Suppose the owner of a mine
says: "I will sell you this mine for $50,000, and you may have thirty days to
decide whether you choose to accept the offer or not." Now, it does not
matter whether that statement is oral or in writing; it is merely an offer, and
not binding as the matter stands as far as we have stated. However, if it
were in writing and a seal attached (in a State where seals still have the
force which the common law gave them) it would be a binding promise to
sell the mine at that price at any time within thirty days. If there is no seal
attached, as long as the offer is unaccepted and unpaid for, it is not binding.
The man who makes it may say: "I withdraw my offer. It is true that I

promised to keep the offer open thirty days, but you did not pay me for that
promise and I am going to break the promise. I withdraw my offer." Any
offer for the formation of a simple contract, while unaccepted, may be
withdrawn. But, if before it was withdrawn and within the thirty days' limit,
the person to whom the option was given says, "Here is the $50,000 which
you said you would take for your mine," the offerer would then be bound,
and would have to perform his part of the contract.
OPTION WITH CONSIDERATION.—Let us change the character of the
option a little. Suppose in consideration of $1000 paid down the owner of a
mine promises to sell the mine for $50,000 at any time within thirty days.
Here the offer, or the contract—for it is now more than an offer—has been
paid for, and it is therefore binding. The person to whom the offer was made
paid $1000 for the promise, therefore the promisor is bound to keep it. It
was not an absolute promise to give the mine to the buyer, but it was a
promise to sell it to him for $50,000 if he chose to take it within thirty days;
that is a conditional promise. A conditional promise may be binding and
paid for just as well as an absolute promise.
INSURANCE POLICY.—Take the case of a fire insurance policy. That is a
conditional promise, a promise to pay indemnity for the destruction of a
house by fire. Therefore, the performance of the insurance company's
promise is conditional on the suffering by the insured of loss by fire. An
insurance policy is ordinarily a unilateral contract; the premium is the
consideration or price paid for the promise, and the promise is binding on
the insurance company from the time when the premium is thus paid. Of
course, the promise is only binding according to its terms. The insured has
bought a conditional promise, a promise to pay if the house burns down. He
gets that promise, but he will not become entitled to any money or any
damages unless the house burns down nor unless he complies with the other
conditions of his policy.
GUARANTEE.—Another kind of a promise worth referring to is a
guarantee. A question arises whether a business house will sell something to
a buyer on credit, and it decides it will not without a guarantee.
Accordingly, John agrees, in writing, that if the business house in question
will sell James a bill of goods, John will guarantee the payment of the price.
That means, if James does not pay for the goods, John will. That is a

unilateral contract in which the promise is conditional, and the
consideration for that promise is the selling of goods to James.
PRELIMINARY NEGOTIATIONS—ADVERTISEMENTS.—An offer is
sometimes difficult to distinguish from other things. Suppose the case of an
advertisement. A business house advertises that it will sell goods for a
certain price. Take the case of a bond list issued by a banking house. The
list states that the banking house will sell specified kinds of bonds at quoted
prices. John receives one of those lists, looks it over, sees something that
looks good to him, and goes into the banking house and says: "I will take
five of those bonds at the price named here." The banking house says: "We
have sold all the bonds of that kind that we had;" or it says, "The market has
changed on those bonds and there has been some advance in the price." Has
John a cause of action against the banking house? He has if that bond list
amounts to an offer—that is, if the list means that the banking house offers
to enter into a contract with anyone receiving the list. But it has been held
that that sort of advertisement does not prima facie amount to an offer,
although it might be put in such clear words of agreement to sell on the part
of the banking house that it would amount to an offer. Generally an
advertisement of this sort, or anything that can fairly be called an
advertisement of goods for sale, is held to mean simply that the advertiser
has these goods for sale and names a price he is putting upon them; he
invites customers to come in and deal with him in regard to them. It is an
invitation to come and make a trade rather than a direct offer of a trade.
ILLUSTRATION.—Again to illustrate: You are looking at a new model of
an automobile in a show-room window. You like it, enter the salesroom, and
say you will take the car, tendering the price. The manager tells you that it
is simply their demonstration car, that he will be glad to book your order for
a car of the same model, and can make delivery in a month. You are not
satisfied, and wish to sue, claiming that your tender of the price constituted
an acceptance of the dealer's offer. Your position would be unsound and
there would be no recovery in such a case. The placing of the demonstration
car in the window is simply an invitation to the public to come in and deal
with the seller. On the other hand, suppose you go into a second-hand
automobile salesroom. There are fifty cars of various makes and models on
the floor and each one is labeled with a different price. You pick out a 1918
Packard which is marked $1500. You tender the price to the salesman and

say you will take the car. He refuses to sell. In this case your tender is an
acceptance of his offer to sell. In the former instance, placing a price on the
demonstration car was not a statement to the public generally that that
particular car was for sale at that price, but in this case, where the cars are
all second-hand cars, the reasonable interpretation of placing the price on
the 1918 Packard is that that particular car is for sale. Quite likely, the
dealer did not have any other Packard car in stock and would have no way
of securing any of that model at that price.
ORAL AGREEMENT PRELIMINARY TO WRITTEN CONTRACT.—
Another case of the same nature that comes up not infrequently is this:
Parties talk over a business arrangement and then they say, "As this is an
important matter let us put it down in writing; let us have a written contract
containing what has been agreed upon." When it comes to drawing up the
contract, however, they cannot agree. One party then says, "Well, we made
a definite oral agreement any way; let us carry that out." The other replies,
"Why, no, all that was dependent on our making a written agreement." The
settlement of their dispute depends on how definite and absolute the oral
agreement was. It is possible to make an oral agreement binding, although
the parties do agree and do contemplate that it shall subsequently be
reduced to writing, but generally the inference is that the oral agreement
was merely a preliminary chaffering to fix the terms of the writing, and that
everything is tentative until the writing is made and signed.
AUCTION SALES.—Another state of affairs involving preliminary
invitations is presented by auction sales. The auctioneer puts goods up for
sale, a bid is made, the auctioneer gets no other bid, and then says, "I will
withdraw this from sale." Is the auctioneer liable? Has he made a contract to
sell that article to the highest bidder? When the transaction is analyzed, is
this what the auctioneer says in effect: "I offer to sell these goods to the
highest bidder?" If this is the correct interpretation, then when the highest
bidder says, in effect, "I agree to buy them," there would be a contract. On
the other hand, if what the auctioneer says is in effect like what the
advertiser says: "Here are some goods for sale, what do you bid,
gentlemen," then the auctioneer is not making an offer himself. He is
inviting offers from the people before him, and until he accepts one of those
offers from the bidders before him there would be no contract; and until
then the auctioneer could withdraw the goods. And that is the construction

put upon the auction sale—that the auctioneer is not making an offer, but is
simply inviting offers. Even if the auctioneer promises that he will accept
the highest offer, that is, that he will sell to the highest bidder, his promise
to accept the highest bid, not being paid for, would not be binding upon him
were it not for a statute in some States which, in the sale of goods, would
make an auctioneer bound to keep a promise to sell without reserve, that is,
to the highest bidder, if he made such a promise.
BIDS OR TENDERS.—Somewhat similar to the case of the auctioneer is
the case of tenders or bids for the construction of buildings, or for the sale
of goods to a city or to a corporation. There, too, the corporation or the city
is simply inviting offers. They do not say, "We offer to enter into a contract
with anyone who makes the lowest bid," but rather, "We are thinking of
entering into a contract, and we want to receive offers in regard to it." When
the offers are made by the bids or tenders, any or none of them may be
accepted, according as the receiver thinks best. It is sometimes required by
law that public corporations, like cities or counties, shall accept the bid of
the lowest responsible bidder, but, aside from such statutes, any or none of
the bids may be accepted.
IMPLIED CONTRACTS.—An offer and acceptance are ordinarily made
by words either spoken or written; but any method of communication which
would convey to a reasonable man a clear meaning will serve as well as
words. If A goes to his grocer and says "Send me a barrel of flour," he has
in terms made no promise to pay for the flour, but the natural meaning of
his words is that he agrees to pay. In this case A used words, though not
words of promise; but the same result might follow where no words at all
were used. Suppose A went into a shop where he was known, picked up an
article from the counter, held it up so the proprietor could see what he was
taking, and went out; this would be in legal effect a promise by A to pay for
the article. A contract, where the promises of the parties are to be inferred
not from express words of promise but from conduct or from language not
in terms promissory, is called an implied promise or contract, as distinct
from an express promise or contract, which is one where the undertaking is
in express language. This difference between express and implied contracts
relates merely to the mode of proving them. There is the same element of
mutual assent in both cases, and the legal effect of the two kinds of
obligations is identical. There is, however, another kind of obligation which

is frequently called an implied contract, but sometimes called a quasi-
contract, because it is not really a contract at all, though the obligation
imposed is similar. If a husband fails to support his wife, for instance, she
may bind him by purchases of goods necessary for her support. She may do
this even though he directly forbids the sales to her. There is obviously no
mutual assent in this case; the husband emphatically dissents and expresses
his dissent, but he is bound just as if he had contracted.
TERMINATION OF OFFER BY REVOCATION OR REJECTION.—
Since offers do not become binding until accepted according to their terms,
up to that time they may be terminated without liability. This may happen in
several ways. In the first place an offer may be revoked by the offerer. To
effect a revocation he must actually notify the other party of his change of
mind, before the latter has accepted. We have already stated that offers may
be rejected by the person to whom they are made. For instance, we say, "We
offer you one hundred shares of stock at a certain price, and you may have a
week to think it over." You say, "I do not care for that offer, I reject it." You
come around the next day and say, "On reflection I have concluded to
accept that offer." The acceptance is within the seven days which we
originally said might be used for reflection, but the offer has been
terminated by the rejection. There is no longer any offer open, and
consequently the acceptance amounts to nothing. A troublesome question in
regard to the revocation of an offer for a unilateral contract is this: Suppose
A offers B $5 for a book and B starts to get it but when he reaches the door,
then A refuses to take the book. The general disposition is to try to hold that
promise binding, and yet the difficulty is that the offeree has not fully done
what he was asked to do, and if he chose to turn back and take the book
away he could do so without liability. He could say, "I did not promise to
bring the book. I brought it part way, the walk was long and I am going to
take it back." If he is thus free to withdraw it seems impossible to deny that
the other party is equally free. Bilateral contracts are more desirable than
unilateral because in bilateral contracts the mutual promises bind the parties
before they begin to perform and both parties are therefore protected while
they are performing. In unilateral contracts, the contract is not completed
until the act requested is fully done. Until then, therefore, either party may
withdraw.

A COUNTER OFFER IS A REJECTION.—Another way in which offers
may be terminated is by a counter offer on the part of the person to whom
the offer was made. We say, "We will sell you stock for $100 a share, and
you may have a week to think it over." You say, "I will give you $99 a
share." We say, "No, we will not take it." You say, "Well, I will give you
$100." You are too late; you rejected our offer of sale at $100 by saying you
would give us $99. The minute you say you will give us $99, our offer is
rejected. Of course, when you make the counter offer of $99, if we say we
will accept your offer to buy, that would make a contract. Offers are
constantly rejected by counter offers by people who really intend to enter
into a contract. Suppose A says, "I will lease you my house a year for
$800." You say, "All right, I will take it if you paper the dining-room." That
rejects the offer. A new offer has been made by the person addressed, who
offers, if the dining-room is papered, to take the house at $800.
TERMINATION OF OFFER BY DEATH OR INSANITY.—An offer is
also terminated by the death or insanity of either party before acceptance.
After a contract has once been formed neither subsequent death nor insanity
terminates liability upon it unless the contract is of such a personal
character that only performance by the contractor in person will fulfil it.
ILLUSTRATION.—In Beach v. First Methodist Episcopal Church, 96 Ill.
177, a fund was being raised to build a new church, and a subscription
paper, as follows, was signed by Lorenzo Beach:

"Fairbury, Feb. 14, 1874.
"We, the undersigned, agree to pay the sum set opposite our respective
names, for the purpose of erecting a new M. E. church in this place,
said sums to be paid as follows: One-third to be paid when contract is
let, one-third when building is enclosed, one-third when building is
completed. Probable cost of said church from ten thousand dollars
($10,000) to twelve thousand dollars ($12,000)."

Mr. Beach attached and subscribed to that paper the following:

"Fairbury, 1874.

"Dr. Beach gives this subscription on the condition that the remainder
of eight thousand dollars is subscribed.
"Lorenzo Beach, $2000."

In April, 1875, Dr. Beach was adjudged insane by the county court. The
court held that the "subscription made by Dr. Beach was, in its nature, a
mere offer to pay that amount of money to the church upon the condition
therein expressed. There is nothing in the record tending to show that the
church, in this case, took any action upon the faith of this subscription, until
after Dr. Beach was adjudged insane, or that the church paid money or
incurred any liability. His insanity, by operation of law, was a revocation of
the offer." Suppose a letter for a winter's supply of coal is sent to your coal
dealer and is acknowledged by him, delivery to be made before October 1.
On September 15, the coal dealer dies, and his estate refuses to fulfill the
contract. In such a case, if you were compelled to buy coal at a higher price
from another dealer, you would have a cause of action against the estate for
the damage you suffer. The coal dealer's executor or administrator could
very easily carry out a contract of this character. On the other hand, suppose
you are running a series of lectures during the winter, and you have engaged
a noted lecturer to deliver six lectures. After he has delivered three, he dies.
In this case, death would terminate the contract, as this is clearly a contract
for personal services and the executor or administrator of the deceased
lecturer could not perform the contract for him, as could be done in the case
of the coal dealer.
TERMINATION OF OFFER BY LAPSE OF TIME.—An offer may be
terminated by delay on the part of the person addressed. An answer to an
offer must be sent in time, whether mail or telegraph is used, or whether the
parties are dealing face to face. An offer lapses if it is not accepted within
the time the offer specifies if any time is specified. If no time is specified,
then within a reasonable time. One may specify any length of time in his
offer, and it will remain open for that time provided it is not rejected or
revoked, and neither party dies or becomes insane, in the meantime. But
frequently offers contain no express limit of time; then it is a question of
what is a reasonable time, and reasonableness depends upon business
customs, the character of the transaction, the way the offer is
communicated, and similar circumstances. An offer on the floor of a stock

exchange will not last very long. A reasonable time for acceptance of such
an offer is immediately, and an offer sent by telegraph will not remain in
force long. The use of the telegraph indicates that the offerer deems haste of
importance. An offer sent by mail will last longer. An offer relating to
things which change in value rapidly will not remain open for so long a
time as an offer which relates to land, or something that does not change in
value rapidly.
ILLUSTRATION.—In the case of Loring v. the City of Boston, 7 Met.
(Mass.) 409, the facts were that on May 26, 1837, this advertisement was
published in the daily papers of Boston: "$500 reward. The above reward is
offered for the apprehension and conviction of any person who shall set fire
to any building within the limits of the city. May 26th, 1837. Samuel A.
Eliot, Mayor." In January, 1841, there was an extensive fire on Washington
Street, and Loring, after considerable effort, was able to secure the
apprehension and conviction of the criminal. He then sued to recover the
reward, which the city of Boston refused to pay. The ground of defense was
that the advertisement "offering the reward of $500 for the apprehension
and conviction of persons setting fire to buildings in the city, was issued
almost four years before the time at which the plaintiff arrested Marriott and
prosecuted him to conviction." The opinion of the court reads: "three years
and eight months is not a reasonable time within which, or rather to the
extent of which, the offer in question can be considered as a continuing
offer on the part of the city. In that length of time, the exigency under which
it was made having passed, it must be presumed to have been forgotten by
most of the officers and citizens of the community, and cannot be presumed
to have been before the public as an actuating motive to vigilance and
exertion on this subject; nor could it justly and reasonably have been so
understood by the plaintiff. We are, therefore, of the opinion that the offer
of the city had ceased before the plaintiff accepted and acted upon it as
such, and that consequently no contract existed upon which this action,
founded on an alleged express promise, can be maintained."
BOTH PARTIES MUST BE BOUND OR NEITHER.—Both parties to a
simple contract must in effect be bound, and until they are, there is no
contract. In a unilateral contract, before the promise becomes binding, the
promisee must have actually performed what he was requested to do, that
is, he must bind himself by actual performance before the offerer's promise

is binding on him. In a bilateral contract, where each party makes a
promise, neither promise can be binding unless and until the other one is.
So that in the case of the proposed agreement to lease, as the proposed
tenant might refuse to take the house if the dining-room was not papered,
the proposed landlord has a similar right; that is, since one is not bound, the
other is not.
CONTRACTS BY CORRESPONDENCE.—Contracts are often made by
correspondence, simple contracts especially. That raises rather an important
question as to how and when the contract is formed. Suppose a letter
containing an offer is addressed from Boston to a man in New York. A reply
is sent by him from New York accepting the offer. That reply goes astray. Is
there a contract? Yes. It creates a contract by correspondence for a letter to
be mailed by the acceptor provided the offerer imposes no conditions to the
contrary, and impliedly authorizes the use of the mails, as he does by
himself making an offer by mail. But suppose the offerer in his letter says,
"If I hear from you by next Wednesday I shall consider this a contract."
Then, unless the offerer receives an answer by the next Wednesday, there
will be no contract. It will make no difference that an answer has been
mailed, it must have been received; that is a condition of the offer. Suppose
an offer is made by word of mouth, and it is accepted by sending a letter.
Does the contract then become binding, irrespective of receipt of the letter?
No, unless in some way the offerer has authorized the use of the mails in
sending such an answer, and if the circumstances were such that the use of
the mails would be customary, that would amount to an implied
authorization. The use of the telegraph depends upon similar principles. If
an offer is sent by telegraph, an answer may be sent by telegraph, and an
acceptance started on its way will become binding although it is never
received. Similarly, one may authorize a telegraphic answer to a letter
containing an offer sent by mail, and if the use of the telegraph is
authorized, a contract will arise at the moment that the telegram is sent.
ILLUSTRATIONS.—In the case of an option, if the acceptance was made
by mail and lost in the mails, a binding contract would be formed if the use
of the mail was expressly or impliedly authorized, and similarly if the
option called for payment and a letter was mailed containing a draft or cash.
There is a right to send a check or draft by mail if the parties had been
dealing by mail. That authority would be implied. When parties are dealing

by mail and there is a bargain that a check shall be sent, the check becomes
the property of the person to whom it is sent as soon as it is mailed, and,
therefore, when the letter with the check is put in the mail it operates as a
payment on the option, and the loss of the draft is not the sender's loss, but
the other man's. A lost draft, however, can be replaced and must be
replaced. Authority to send actual cash by mail would not be so easily
implied, especially if the amount were large, because it is contrary to good
business custom; but if authority were given, the result would be the same
as in the case of a check. It would, however, be a proper business precaution
to register the letter if it contained cash. If the offerer, not having received
the letter of acceptance and thinking none had been sent, sells the property
to another person, though not morally blamable, he would get into trouble.
The second purchaser would get title to the property, supposing that the
property was actually transferred to him. The lost letter created a contract,
but it did not actually transfer title to the property, and, therefore, when the
purchaser actually got possession of the property he would become the
owner of it and could not be deprived of his title if he took it innocently. If,
however, the person to whom the property was transferred had notice of the
prior completion of a contract, he could not keep the property. In any event
the seller would be liable in damages for breach of the contract completed
by mailing the lost letter. Suppose an option is given by telephone to one
who, just before the option expires, tries to get a connection by phone to
accept and is unable to do so, and ten minutes after the time has expired a
connection is secured? There is no contract and he has no action. It is no
fault of the offerer that the acceptor was unable to accept in time, and,
generally speaking, one who wishes to accept an offer must at his peril keep
the means of acceptance open. It may be asked why does not the same
principle apply in regard to mail as to the telephone; that is, why does not
starting the acceptance by telephone complete the contract? Because there
is no authority to send communication by telephone to the offerer when the
acceptor has no telephone connection. When one sends an offer by mail the
reason that he is bound by an acceptance sent by mail is because he, in
effect, asks that an acceptance properly addressed to him be started on its
course. He takes his chance as to the rest, but an offerer by telephone does
not authorize a reply by talking into the telephone when there is no
connection.

MISTAKES IN THE USE OF LANGUAGE IN OFFER AND
ACCEPTANCE.—Another question which has to do with the express
mutual assent of parties relates to the meaning of language used. Suppose
an offerer says, "I will sell you a cargo of goods from the ship 'Peerless,'
due to arrive from India, at a certain price." The buyer assents. There are
two ships named "Peerless," and the buyer thinks one is meant, but the
seller thinks the other is meant. Is there a contract for the sale of the cargo
of "Peerless" No. 1, or a contract for the sale of the cargo of No. 2, or no
contract at all? The answer is, that language bears the meaning which a
reasonable person in the position of the person to whom the offer is made is
justified in attaching to it. If a reasonable person in his position would think
"Peerless" No. 1 was meant, then there is a contract for the cargo of No. 1.
If he was not justified in thinking that, and ought to have thought No. 2 was
meant, although in fact he did not think so, there was a contract for the
cargo of "Peerless" No. 2. If either meaning were as reasonable as the other,
then each party has a right to insist on his own meaning, and there would be
no contract. This principle often comes up in contracts made by telegraph,
where the words of the telegram are, by the mistake of the telegraph
company, changed. For instance, a telegram purports to be an offer to sell a
large quantity of laths at $1 a bundle. The terms as actually despatched by
the seller in making his offer fixed the price at $1.20. The telegraph
company dropped off the words "and twenty cents." A telegram is sent back
by the buyer, "I accept your telegraphic offer." Then trouble arises when
buyer and seller compare notes. Well, the offerer is bound. He selected the
telegraph as the means of communication, and he must take the
consequences of a misunderstanding, which arose from a mistake of the
agency which the offerer himself selected. The question may be asked:
Would there be any right of action against the telegraph company by the
offerer, the sender of the telegram? The answer is yes. The company has
broken the contract it impliedly made with the sender to use reasonable
diligence in despatching and delivering the message. But the trouble with
that action is that on telegraph blanks there is always this in substance: that
on unrepeated telegrams this company is liable for mistakes only to an
amount not exceeding twice the cost of the telegram; and it has been held in
many States that that limit on unrepeated telegrams is not unreasonable. The
sender of the telegram has agreed to the contract on the reverse side of the
telegraph blank, and he ought to have his message repeated if he desires to

hold the company liable in full damages if his message does not reach the
party addressed in absolutely correct form. In other States, however, this
limitation of liability is held to be against public policy and the company is
liable for the full damage suffered.
CONDITION IN OFFER REQUIRING RECEIPT OF ACCEPTANCE.—
An offerer, as has been said, may insert in his offer any condition he sees
fit. He may therefore insert a condition that an acceptance shall reach him,
not merely be despatched. The condition may specify the time within which
the acceptance must arrive in order to be effectual. It is a wise precaution in
all business offers of importance to insert such a condition in the offer. It
will not be sufficient to add to the offer such words as "subject to prompt
acceptance," for prompt acceptance would be given, within the meaning of
the law, by despatching the acceptance, not by the receipt of it. The
condition should be in such words as "subject to prompt receipt of your
acceptance," or "subject to receipt of your acceptance," by a stated day or
hour.
WHEN SILENCE GIVES CONSENT.—There is one way of manifesting
mutual assent, namely, by silence, of which a word should be said. There is
a proverb that "Silence gives consent." Is it so in law? Suppose a man goes
into an insurance broker's and tosses some policies down and says, "Renew
those policies, please." Nobody says anything and he leaves the policies
there and goes out. The next night his buildings burn down. Are they
insured? They are, in effect, if the insurance broker has contracted to renew
the policies; otherwise the buildings are not insured. Now on the bare facts,
as we have stated them, they are not insured; some other facts must always
exist to make silence amount to assent. If, for instance, on previous
occasions, the broker kept silence when such statements were made to him,
and nevertheless carried out the proposal, it is a fair inference that he means
by his silence this time what he meant the preceding time. Furthermore,
silence, when the offer is unknown, can never amount to assent. In the case
as we have put it, we did not say that the insurance broker even heard the
offer; if he did, then the question would depend on whether he had ever
done anything to justify the other person in believing that silence would
mean assent in such a dealing, or whether business customs justified the
assumption. The offerer cannot by his own act make the silence of the other
person amount to an acceptance. Suppose an offer of this sort: "We offer to

sell you 100 shares of stock at $50 a share, and unless we hear from you to
the contrary by next Wednesday we shall conclude that you have accepted
our offer." The offerer does not get any word before next Wednesday.
Nevertheless, there is no contract. The person addressed has a right to say,
"Confound his impudence, I am not going to waste a postage stamp on him,
but I don't accept his offer. He has no business to suppose that if he doesn't
hear from me to the contrary I assent." This sort of case is not infrequently
referred to: A magazine is sent through the mails on a subscription for a
year, the subscription runs out, the magazine is, nevertheless, still sent. Is
the person who receives it bound to pay another year's subscription? Here
you have a little more than silence; you have the receiver of the magazine
continuing to receive it. If he refused to receive it, undoubtedly there would
be no contract, but where a man takes property which is offered to him, he
is bound by the proposal which was made to him in regard to the property.
He ought to let the magazine alone if he doesn't want to pay for it. You may
say that the receiver does not know that the subscription has run out, and if
he did he would not take the magazine. But then he ought to know. He
made the subscription originally. The difficulty is merely in his own
forgetfulness, and he cannot rely on that.
ILLUSTRATION.—The leading case of Hobbs v. Massasoit Whip Co., 158
Mass. 194, is a good illustration. The plaintiff in this case had been in the
habit of sending eel skins to the defendant and had received pay from him
in due course. The skins in the shipment for payment of which suit was
brought, were alleged by the defendant to be short of the required length,
and in a condition unfit for use. They were kept by the defendant some
months, and were then destroyed, without notification to the plaintiff. The
latter sued for the price of the skins and the court held that the silence of the
defendant and failure to notify the plaintiff that it did not wish to have this
particular lot of skins, amounted to an acceptance. The court said: "In such
a condition of things, the plaintiff was warranted in sending the defendant
skins conforming to the requirements, and even if the offer was not such
that the contract was made as soon as the skins corresponding to its terms
were sent, sending them would impose on the defendant a duty to act at that
time; and silence on its part, coupled with a retention of the skins for an
unreasonable time, might be found by the jury to warrant the plaintiff in
assuming that they were accepted, and thus to amount to an acceptance."

CHAPTER II
Contracts—Consideration and Enforceability
CONSIDERATION MAY BE ANOTHER PROMISE OR AN ACT.—The
second great requisite in the formation of simple contracts is consideration.
A price must be paid for a promise in order to make it binding. The price
paid may be another promise, in which case the contract is bilateral, or the
price paid may be some act actually done or performed, in which case the
contract is unilateral.
ADEQUACY OF CONSIDERATION IMMATERIAL.—Not any act, or
the promise of any act, is sufficient consideration, as will be seen.
Nevertheless, in general the law does not attempt to gauge the adequacy of
the consideration; that is, parties may make such bargains as they wish as
far as the price is concerned. A may say that he will sell his horse, which is
worth $300, for $100, or for a promise to pay $100. That will be a perfectly
good contract, if accepted, in spite of the fact that the promised horse is
worth more than the promised price. Such difference in the value of the
promise and the value of the price may go to a great extreme. The horse
may be a thousand-dollar animal, and the price promised only $100, but
when you wish to push the case to an extreme you are likely to get into this
difficulty: Did the parties really mean to make a bargain? If what they were
doing was arranging for a gift of the horse and putting up some little alleged
consideration as a blind, that will not do; but any exchange the parties really
in good faith bargain for, with certain exceptions hereafter stated, is
sufficient.
A SMALLER SUM OF MONEY IS NOT SUFFICIENT
CONSIDERATION FOR THE PROMISE SIMULTANEOUSLY TO PAY
OR DISCHARGE A LARGER LIQUIDATED SUM.—This is the principal
exception, that in contracts or promises relating to a fixed sum of money,
the consideration cannot be the simultaneous payment or discharge of a
smaller sum of money on the other side. If A promises B $100, it will not be
good consideration for B to promise in exchange $50, or even $99.99,
payable at the same time and place. In other words, the law does require

adequacy in exchanges or agreements to exchange money. A owes B $100
and says to him, "I can't pay it all," or "I don't want to pay it all. Will you let
me off for $50?" B replies, "Yes, I will take $50." That agreement is not
binding, and even if the $50 is actually paid, B may afterwards come and
say, "You paid me only part of the debt you owed me. It is true I said I
would call the whole thing square, but there was no consideration sufficient
in law for my promise, since you paid me only part of what you were bound
to." This rule of common law, though generally well established, does not
exist or is much qualified in a few States, such as: Georgia, Maine,
Mississippi, New Hampshire, North Carolina, Virginia.
UNLIQUIDATED CLAIMS MAY BE DISCHARGED BY ANY AGREED
SUM.—The case cited in the preceding paragraph must be distinguished
from another. Suppose A owes B some money for services, the price of
which was never exactly fixed, but which B says are of the value of $100.
Then if B agrees to take $50 in satisfaction of his claim against A, B is
bound; the transaction is effectual. The difference is between what is called
a liquidated and an unliquidated claim.
DEFINITION OF LIQUIDATED CLAIM.—A liquidated claim is one of an
exact amount definitely fixed. Such a claim, as has been said, cannot be
satisfied by partial payment or promise of partial payment. But an
unliquidated or a disputed claim—a claim subject to a real bona fide
dispute, not merely a dispute trumped up for the purpose of disputing a
good claim—may be discharged by any payment on which the parties
agree. The law does not know how much the unliquidated claim is worth,
and will allow parties to bargain for the sale of the unliquidated claim, just
as it will let them bargain for the sale of a horse for which they may fix
such a price as they choose, and that price will not be revised.
EFFECT OF RELEASES AND RECEIPTS.—If, however, the original
claim were liquidated and undisputed, is there any sort of paper the debtor
could get from the creditor that would release him absolutely? A receipt in
full would not do it; a receipt in full is something to which business men
attach more virtue than it possesses. It is merely evidence of an agreement
to accept what has been received in full payment and proof may be given as
to just what consideration passed for the receipt in full. As we have seen,
such an agreement is not valid without consideration, and payment of part

of a debt admittedly due is not sufficient consideration. The really effective
instrument at common law is the release under seal. That will do the work
whether the debtor paid part of the debt or not, since a sealed instrument
needs no consideration. In jurisdictions where seals have been deprived of
their efficacy at common law an insuperable difficulty, however, exists. In a
few States—Alabama, Arkansas, Connecticut, Michigan, Mississippi, New
Hampshire, New York, North Dakota, South Dakota, Tennessee—a receipt
in full has been given the effect which the common law gave to a sealed
instrument.
OTHER ILLUSTRATIONS.—Suppose the agreement to settle a liquidated
claim were oral and suppose a witness heard the words. Such circumstances
would not make any difference. It is assumed in all that has been said that
the facts are proved. Suppose that neither party denied the facts. Let the
creditor admit that he did receive this $50 as a full payment and did give the
debtor a receipt in full. Still, he can say, "I propose to break my agreement
since it was not supported by sufficient consideration, and I shall collect the
balance." Another question is this: Suppose a man had a $100 bill and he
wanted some change very badly, and another man had $99. Could the
former take that for the $100 bill? He could. If a man wants a particular
kind of money, as gold, or silver, or quarters, the principles stated do not
apply; they apply only to dollars and cents as such.
PAST CONSIDERATION.—Strictly speaking, the term past consideration
is a misnomer; something which is given before a promise is made cannot
constitute a legal consideration. The courts have held that a warranty made
after a sale has been completed is invalid. It has also been held that a
guaranty after the obligation guaranteed has been entered into also is invalid
unless there be new consideration. Although this is the general rule, there
are several exceptions where a past consideration is recognized. Williston
gives these exceptions as follows, although the boundaries between the
groups are sometimes indefinite: "(1) Promises to pay a precedent debt; (2)
Promises in consideration of some act previously done by the promisee at
the request of the promisor; (3) Promises where past circumstances create a
moral obligation on the part of the promisor to perform his promise. Under
this head may be included cases of ratification and adoption of promises
previously made for sufficient consideration but invalid when made for lack
of authority or capacity."

PAYMENT OF PART OF A DEBT BY ONE WHO IS NOT THE
DEBTOR.—Suppose a little different case: A owes B $100 for a liquidated
claim. A's father says to B, "If you will let my son off, discharge him from
this claim, I will pay $60, not a cent more." B agrees, and the $60 is paid.
Now B never can get any more; the bargain is binding, and the reason is,
that although A was bound to pay the whole $100, and could not, by paying
B a part of the claim, give good consideration to B for his promise to cancel
the balance. A's father was not bound to pay a cent and he may bargain for
any exchange in return for a payment which he was not bound to make at
all. Therefore, he may bargain that the debt shall be discharged.
PERFORMANCE OR PROMISE OF PERFORMANCE OF A LEGAL
DUTY IS NOT SUFFICIENT CONSIDERATION.—In other words, the
thing which will not be good consideration, whether done or promised, is
the performance or partial performance of something which the man who
performs or promises is under a legal duty to do anyway. If he ought to do it
anyway, then it will not serve as a price for a new promise or agreement to
discharge it. Another illustration of that may be given: Suppose a contractor
agrees to build a house for $10,000; he gets sick of his job when he is about
half through, says that it is not possible for him to make any money at that
price and he is going to quit. "Well," the employer says, "if you will keep on
I will give you a couple of thousand dollars more." Accordingly the builder
keeps on. That won't do. The builder in keeping on building is doing no
more than he was previously bound to do. If he wants to have a binding
agreement for the extra $2,000 with his employer, he must secure a promise
under seal, for his own promise of performance will not support the promise
to pay.
FORBEARANCE AS CONSIDERATION.—Another kind of consideration
that is worth calling attention to is forbearance. A has a valid claim against
B. He says he is going to sue. B says if he won't sue, or won't sue for the
present, B will pay him an agreed sum. That is a good contract so long as it
is not open to the objection referred to a moment ago; that is, so long as A's
claim is not for a liquidated sum of money and B's promise is not merely a
promise to pay part of that liquidated sum. A may promise what B requests,
either to forbear temporarily or to forbear perpetually. Either will be good.
But suppose A has no valid claim against B, but B is reputed to be rather an
easy mark in the community and A is a person of little scruple; he

accordingly trumps up a claim against B with the hope of getting a
compromise. Is forbearance of that claim by A good consideration for B's
promise? It is not. A's claim must be a bona fide one in order to make
surrender of it or the forbearance to press it, either temporarily or
permanently, a good consideration for a promise of payment.
STATUTE OF LIMITATIONS.—Another case of a promise relating to a
subject of very frequent importance in commercial law, and law generally,
is a promise to pay a debt barred by the statute of limitations, and this
occasion requires a preliminary word in regard to that statute. This statute
prohibits the bringing of an action or a claim after the expiration of a certain
period. It is a different period for different sorts of claims. Action on a
judgment in most States may be begun within twenty years after such
judgment is rendered; so in some States may an action on a contract under
seal. On the other hand, ordinary contractual claims generally expire in six
years. Claims in tort, that is, for injury to person or property, last even a
shorter time, but the ordinary contractual statute of limitations is six years.
The statute begins to run against a promissory note, or other contract, not
from the time when it is made, but from the time when it is by its terms to
be performed. A note made now, payable the first of January next, will not
be barred until six years from the first of January, not six years from now;
and if it was made payable in ten years, as a mortgage note might well be,
the statute would not bar it for sixteen years.
PROMISE TO PAY BARRED DEBT.—It has been held, though the
reasons are not very easy to explain, that a new promise will revive a debt
so far as the statute of limitations is concerned. There need be no
consideration for such a promise other than the existence of the old
indebtedness; that is said to be a sufficient consideration, although, of
course, it can hardly be said to be given as a price for the new promise.
Take a promissory note payable January 1, 1905. If nothing happens, that is
barred on January 1, 1911, but if in 1911 or 1912 the maker says, in effect,
"I know I owe that old note. I have not paid is, but I will pay it," he will be
liable on that new promise, and the statute will begin to run again and run
for six years from the making of that new promise. It is not enough that the
debtor should admit that there was a liability; he must promise to pay it in
order to make himself liable. Suppose, instead of a new promise made after
the statute had run in 1911 or 1912, the maker had said before the maturity

of the note, we will say in the course of 1910, "Don't worry about that note,
I shall pay it," that also will start the statute running afresh. In other words,
the new promise may be made before the maturity of the note, or before the
statute has completely run as well as after the statute has completely run. In
either case the new promise will start a fresh liability and keep the note
alive for six years from the time the new promise was made. Of course, if
the new promise is made the day after maturity of the old obligation, the
total effect will be simply to extend the time of the statute one day, because
only one day of the six years had run at the time the new promise was
made, and counting six years from the date of the new promise gives only
one day more.
PART PAYMENT OF BARRED DEBTS.—Not only will a new promise in
express terms keep the statute of limitations from barring a claim, but any
part payment will have the same effect, unless at the time the part payment
is made some qualification is expressly stated. A debtor may say, "I will pay
you this part of my debt, but this is all," and incur no further liability; but a
part payment without such a qualification starts the statute running afresh as
to the balance of the debt. It is by these part payments that notes are
frequently kept alive for a long series of years. Interest payments are as
effectual for the purpose as payments on account of part of the principal. A
new six years begins to run from each payment of interest. The debtor may,
however, say, "I will pay you half this debt," or "I will pay you the debt in
installments of $10 a month." Such promises are binding according to their
terms, and do away with the statute of limitations to that extent, but they do
not enable the creditor to recover anything more than the debtor promises.
A question may be asked here which is frequently of importance regarding
an outlawed note with a payment of interest thereon by the maker. Would an
endorser who had waived demand and notice be liable for six years more?
Yes, if the payment was made before the statute had completely run in favor
of the endorser. Otherwise, no. And if the endorser had not waived demand
and notice, the statute could in no case be prolonged against him by any act
of the maker.
REVIVAL OF DEBTS DISCHARGED BY BANKRUPTCY OR
VOIDABLE FOR INFANCY.—A somewhat similar sort of revival of an
old obligation may occur where a debt is discharged in bankruptcy. If a
discharged bankrupt promises to pay his indebtedness or makes a payment

on account of it, it will revive his old obligation and he will be liable again.
And, similarly, though one whom the law calls an infant (that is, a minor
under the age of twenty-one) who incurs indebtedness prior to his majority,
can avoid liability (unless the indebtedness was incurred for what are called
necessaries, that is, food, clothing, shelter and things of that sort); yet if he
promises after he has become of age that he will pay these debts, from
which he might escape, thereafter he is liable.
CONTRACTS WHICH MUST BE IN WRITING.—There is, in some
contracts, one other requisite, besides those already mentioned, necessary to
make them enforceable, and that is a writing. It has already been said that
writing is not, as such, essential to the validity of contracts, but there are
exceptional kinds of contracts which the law has required to be in writing
for many years. This is by virtue of what is known as the "Statute of
Frauds." This was passed in England in the year 1676, and is known as
"Chapter 3, of the Statute of 29, Charles II." This statute was passed for the
purpose of preventing frauds and perjuries which were particularly
prevalent at the time it was enacted. It is doubtful as to how much good the
statute has accomplished. There is no question that in many cases it has
caused fraud and perjury rather than prevented it. The statute, however, as
passed in England, has been reenacted in practically every State in this
country with slight modifications, and it is, therefore, a part of contract law
to which attention must be given. Originally, the statute read as follows:
"No action shall be brought (1) whereby to charge any executor or
administrator upon any special promise to answer damages out of his own
estate; (2) or whereby to charge the defendant upon any special promise to
answer for the debt, default, or miscarriage of another person; (3) or to
charge any person upon any agreement made in consideration of marriage;
(4) or upon any contract or sale of lands, tenements, or hereditaments, or
any interest in or concerning them; (5) or upon any agreement that is not to
be performed within the space of one year from the making thereof; unless
the agreement upon which such action shall be brought, or some
memorandum or note thereof shall be in writing, and signed by the party to
be charged therewith or some person thereunto by him lawfully authorized."
A word of comment is necessary to explain the general import of these
various sections.

Section 1: An executor or administrator is appointed to settle a deceased
person's estate. He is not obliged to personally pay the debts of the deceased
person out of his own pocket, if the estate is not sufficient. His liability is
limited by the assets of the deceased, but if, in order to save the credit of the
deceased or for any other reason, he chooses to promise "to answer
damages out of his own estate" that promise must be in writing. This is the
situation referred to by this section.
Section 2: This is a very important class and leads us to call attention to the
distinction between a guaranty and a contract somewhat similar. Suppose A
writes to Jordan, Marsh Company: "Please sell B six good shirts and charge
the same to my account." That is not a guaranty. A is in that case a
purchaser just as much as if he ordered the shirts sent to himself. Nor is it
any more a guaranty if it was further agreed between A and B that B should
pay A for the shirts. On the other hand, if A should write to Jordan, Marsh
Company, "Let B have six shirts and if he doesn't pay, I will," then you
would have a guaranty. It is of the essence of a guaranty that there should
be a principal debtor and that the guarantor's liability should be only
secondary. A guaranty must be in writing. To put the matter in another way,
when there are three parties to a transaction like the above, the writing is
necessary. Where there are two parties, no writing is necessary. Where A
says to Jordan, Marsh Company, "Let B have six shirts, and if he doesn't
pay, I will," we have three parties: A, the guarantor; B, the principal debtor,
and Jordan, Marsh Company, the creditor. This must be in writing. Where A
says to Jordan, Marsh Company orally, "Give B six shirts and charge to my
account," we have simply two parties, A, the principal debtor, and Jordan,
Marsh Company, the creditor. Hence no writing is necessary. In connection
with this section, it must be kept in mind that some oral contracts which
would be good under this section may not be enforceable under another
section which we shall refer to later, because the amount involved is over a
specified sum.
Section 3: The agreement referred to by this section is not the contract or
promise to marry, but is for a marriage settlement such as a promise to
make a payment of money or a settlement of property in consideration of a
marriage actually taking place.

Section 4: Any contract for the sale of land, or any interest in or concerning
land, requires a writing in order to make it binding. The commonest kind of
contracts in regard to land are leases or contracts for leases. An oral lease
creates what is called a "tenancy at will," that is, the agreement, in so far as
it specifies a fixed term, is wholly invalid, but while the tenant occupies he
must pay at the agreed rate; but he has no right to stay in; he may be turned
out, even though he pays his rent promptly, on notice equal to the time
between rent days; and, similarly, he has a right to go out on giving the
same short notice.
Section 5: An agreement not to be performed within a year must be in
writing, and this provision of the statute has been the subject of rather an
odd construction by the courts. The words "not to be performed within a
year" have been construed to mean "which cannot possibly be performed
within a year." Suppose A hires B for a year from to-morrow and contrast
with that case a promise to hire B for B's life, or for the promisor's life.
Now the first of those bargains is within the statute and must be in writing,
but the second, although it seems for a much longer period, being for the
whole life of the promisor or promisee, is not within the statute. The man on
whose death the promise depends may die within a year, so there is a
possibility of performance within a year. A promise to employ B for all his
life, since that may possibly be done within a year, need not be put in
writing. But a promise to hire a man for a year from to-morrow cannot be
performed in a year. True, he may die within a year, and then the contract
cannot be enforced, but there will be no performance. What was agreed, by
the parties, was service for a year from to-morrow and that cannot possibly
be done earlier than a year from to-morrow.
SALE OF GOODS.—A contract for the sale of goods exceeding in value a
certain amount must also be in writing unless part or all of the goods have
been delivered or part or all of the price paid. The value of the goods which
brings a sale within this section of the Statute of Frauds varies in different
States, and local statutes, therefore, should be consulted to ascertain the law
in this connection.
Besides the kinds of contracts enumerated in the English statute and which
have generally been adopted in this country there are two or three other
classes of contracts which in a number of States are required by statute to

be in writing. Of this sort is a contract to make a will. That is not a very
common sort of contract, but sometimes a man promises in consideration of
certain services to make a will in another's favor. The possibility of fraud in
such cases is considerable. The testator is always dead before the question
comes up, and then if the alleged promisee were allowed to prove by oral
statements a contract to bequeath the testator's property on terms which the
promisee says were agreed upon between them, it would afford a chance to
produce the same effect as if oral wills were allowed. So a contract of a real
estate agent for commissions is in some States required to be in writing. A
contract with an agent empowering him to sell real estate, though not
regarded at common law as within the prohibition of the section of the
statute for the sale of an interest in land to be in writing, is by special
enactment in many States required to be in writing. A contract for a loan of
money reserving a rate of interest higher than that ordinarily allowed by law
is sometimes required to be in writing.
WHAT CONSTITUTES WRITING.—The writing being a matter of proof,
it is not essential that it be made at the time the contract is entered into. If
made at any time before an action upon the contract is begun, that is a
sufficient compliance with the statute. The writing, in order to be sufficient,
must show who the parties to the agreement are, if not by naming them, by
such a description as points to a specific person. Thus a letter addressed
simply "Sir," and signed by the party charged, but not containing the name
of the person addressed, is not sufficient. It is also required that all the terms
of the contract appear in the writing, such as the subject matter, price, terms
of credit or any express warranty, but, as often happens, they need not all be
expressed in one writing. Contracts are frequently made as the result of an
extended correspondence, and in such a case the various letters can be put
together and construed as one writing if they obviously refer to one another,
and thus all the terms appear in writing. The statutes in some States require
"subscription" of the signature, and in that case the signing must be at the
end; but where there is not such requirement a signing in the body of the
instrument is sufficient.
ALTERATION OF WRITTEN CONTRACT BY SPOKEN WORDS.—
Failure to understand and observe the rule restricting parol evidence to vary
written contracts leads to a great deal of trouble. The parol evidence rule is
this: Where parties have executed a written contract purporting to state the

terms of their agreement, the court will not receive evidence that they orally
agreed to something less or more or different, at or before the time when the
written agreement was executed. That written agreement is taken as
conclusive evidence of the contract made at that time. In trying to ascertain
what the writing means, however, the court will permit the surrounding
circumstances to be shown, and the meaning of technical or trade terms or
abbreviations may be proved. It may be shown also that the parties did not
intend the written agreement to be effective until some particular event
happened; but if the writing was executed as an expression of the intention
of the parties at that time, the only endeavor of the court will be to ascertain
the meaning of the written words and to enforce them as written. The
question of oral agreements made subsequent to the writing is not so
simple. We must here distinguish between (1) contracts of which the law
requires written evidence because they are within the Statute of Frauds, and
(2) contracts which the law does not require to be in writing, but which,
nevertheless, are written. Contracts of the latter sort may be rescinded,
added to or subtracted from by any subsequent agreement which conforms
to the requirements of the law governing mutual consent and consideration,
though of course it is very desirable, to avoid dispute, that any variation or
rescission of a written contract should itself be in writing. If, however, the
Statute of Frauds required the original contract to be in writing, though it
may orally be rescinded, it cannot be varied by oral agreement. To permit
such an oral agreement would in effect violate the Statute of Frauds by
permitting an agreement partly in writing but partly oral to be enforced.
Thus, if a written contract for the sale of goods (exceeding in value the
amount permitted to be contracted for orally) was made, and the parties
afterwards orally agreed to change the price, the time of delivery, or any
other terms of the contract, the subsequent oral agreement would be invalid.
THE LIMITS OF CONTRACTUAL RELATIONS.—As a general rule a
contract does not impose liabilities or confer rights on a person who is not a
party to it. It follows from the very nature of a contract that a person who is
not a party to it cannot be included in the rights or liabilities which it
creates, so that he will be entitled to sue or render himself liable to be sued
upon it. A contract is the result of a voluntary agreement entered into by the
parties. Therefore, any contractual rights or liabilities existing by virtue of
such voluntary agreement between Smith and Jones are no concern of

White and Black. They cannot be bound by any of the provisions of the
contract between Smith and Jones, nor can a breach of that contract give
them any rights. There are apparent exceptions to the rule we have just
mentioned. One is in the case of agency. Here one person represents another
in entering into a contract. A contract, however, made by an agent can bind
a principal only by force of a previous authority or a subsequent ratification,
so that really the contract which binds the principal is his own contract. The
other exception is where the rights and liabilities created by a contract may
pass to a person other than the original party to it, either by act of the parties
themselves or by operation of law. Such would be the case where Smith and
Jones have performed the terms of their contract except that Smith has not
paid the agreed amount to Jones. Jones assigns his right to collect this
amount to White. Such an assignment is permissible, as we will learn when
we consider that subject later on. Such is an assignment by act of the parties
themselves. Even this exception is limited, as the obligations incurred in
purely personal service contracts are not subject to assignment. Thus, if I
employ artist Greene to paint my portrait, he could not assign this contract
and compel me to accept a portrait painted by artist Brown.
THE RULE OF LAWRENCE v. FOX.—We shall now take up a very
generally recognized exception to the principle we have just discussed. The
question in its simplest form is this: If Smith and Jones make a contract for
the benefit of Greene, may Greene sue on that contract? From what we have
said in the preceding paragraph a negative answer might seem to be correct.
However, to-day, stated in general terms, and leaving out of the question the
limitations recognized in various jurisdictions, the very general rule is that a
third party (Greene in our illustration) may enforce a promise made for his
benefit, even though he is a stranger both to the contract and to the
consideration. In other words, it is held not to be necessary that any
consideration move from the third party. It is enough if there is a sufficient
consideration between the parties who make the agreement for the benefit
of the third party. So in the leading case of Lawrence v. Fox, 20 New York
268, where a debtor of the plaintiff had loaned money to the defendant and
the defendant had promised him to pay the plaintiff, although the plaintiff
was not a party to the contract, it was held that where a promise is "made to
one for the benefit of another, he for whose benefit it is made may bring an
action for its breach."

QUALIFICATION OF RULE.—We must call attention to one qualification
quite generally recognized. Under this rule, that a beneficiary may enforce a
contract, it is necessary that the contract must have been intended for the
benefit of a third person. It is not sufficient that the performance may just
happen to benefit a third person; it must have been intended for the benefit
of a more or less definite person. Thus, where a county board had entered
into a contract with a construction company which was building a bridge
for it and maintaining a temporary foot bridge during the operation, by the
terms of which contract the construction company assumed responsibility
for all injuries suffered by pedestrians using the temporary foot bridge, it
was held that a person who was injured because of the failure to light the
foot bridge properly, was not such a third person as might sue under the rule
of Lawrence v. Fox, on the contract made between the county board and the
construction company.
APPLICATION OF RULE.—The rule in Lawrence v. Fox has been applied
to contracts under seal in many jurisdictions, although there are some
decisions to the contrary. A common application of this doctrine is found in
the sale of real property with a mortgage upon it. The new purchaser as a
part of the purchase price makes an agreement whereby he assumes the
payment of the mortgagee. The question of whether the mortgagee, who is
really the third party for whose benefit the contract is made, may sue the
new owner, is generally answered in the affirmative.
CAPACITY OF PARTIES.—All persons are ordinarily presumed to be
capable of contracting, but the law imposes upon some—in varying
amounts and for their own protection—disabilities to make contracts which
may be enforced against them; and, upon some, for considerations of public
policy, disabilities to make enforceable contracts. These persons are (1)
Infants; (2) Insane persons; (3) Drunkards; (4) Married women—to a
limited extent; (5) Aliens; (6) Artificial persons or corporations.
WHO ARE INFANTS.—All persons under the age of twenty-one are
considered infants, except that in some States, by statute, women attain
their majority at eighteen. The law endeavors to protect those who have no
experience and judgment against the loss of their property because of their
inability to deal safely with others who might take an advantage of that fact.
It may well be that one who has nearly attained his majority is as able in

fact to protect his interests as one of full age, but the essence of the law is
that it is a rule of universal application, and the law cannot measure the
ability in each particular case. To do the greatest good for the greatest
number, therefore, it conclusively presumes that those under twenty-one
have not yet gained the ability to cope with others in the preservation of
their property.
CONTRACTS OF AN INFANT.—An infant's contracts are voidable; that
is, though they bind the other party to the bargain the infant himself may
avoid them. If he avoids them the adult with whom he contracted is entitled
to recover whatever he may have given the infant which still remains in the
latter's possession; but if the infant has spent or used, or for any reason no
longer has the consideration which the adult gave him, the infant may avoid
his own obligation if he has not already performed it, and if he has already
performed it he may reclaim what he has given. After he comes of age, but
not before, the infant may ratify his contracts and they then become binding
upon him. The retention after coming of age of property received by the
infant during his minority amounts to a ratification. There are a few
obligations of an infant which on grounds of public policy are binding upon
him. This is true of a contract to perform military service. The marriage of
an infant is binding though his engagement is not. It is frequently said that
his contract for necessaries is binding; strictly this is not true. The infant is
liable for necessaries, but his obligation does not depend upon his contract;
it is an obligation imposed by law—what has been called a quasi-contract.
The importance of this distinction is shown if the price agreed upon
exceeded the real value of the necessaries. If the contract were binding, the
infant would be bound to pay the agreed price, but in fact he is liable only
for the fair value. What is necessary for an infant depends upon his station
in life, upon whether he already has a sufficient supply of the necessary
article in question, and upon whether he is receiving proper support from a
parent or guardian. The privilege of an infant is generally held to exist even
though the party dealing with him not only reasonably believed the infant of
age, but had received actual representations from the infant to that effect.
INSANE PERSONS AND DRUNKARDS—The law affords protection to
insane persons and, to a less extent, to drunkards, for the same reason as in
the case of infants, namely, that those who are incapable of understanding
what they are doing and of comprehending the effect of their contracts upon

their property should be safeguarded against the designs of the more
capable. This protection is given them by declaring some of their contracts
void, and allowing them, or those legally representing them, to avoid all
others with the exception of a few. Also, as in the case of infants, this
privilege as to such contracts is for the insane person's protection only, and
the other party to the contract may not avoid it by pleading that it was made
with an incompetent person.
WHOM DOES THE LAW CONSIDER INSANE?—Modern science has
clearly established that a person may be insane on one subject, and yet
possess a clear understanding and be perfectly sound on another. If the
contract deals with a subject of which the person has a clear understanding,
he is not in need of protection and is given none. Those only are given the
protection who do not possess the mind to understand in a reasonable
manner the nature and effect of the act in which they engage.
BINDING OBLIGATIONS FOR NECESSARIES.—The insane must live
as well as the sane; consequently they are bound to pay for necessaries
furnished them but only the reasonable value, as has been explained in the
case of infants. The rules for determining what these necessaries may be are
the same as in the case of infants.
OTHER CONTRACTS.—It is often a difficult matter to know when a
person is insane, much more difficult than it is to determine a person's age.
One of the contracting parties may have acted in perfect good faith, being
ignorant of the other's unsoundness of mind and having no judicial
determination of insanity or other warning to put him on his guard. The
contract even may be reasonable in its terms, and it may have been so acted
upon that the parties to it cannot be restored to their original position. In
such a case, while the law should protect the incompetent, it would be clear
injustice to protect him to such an extent as to make the other party suffer
through no fault of his own. It has been quite generally determined in this
country, therefore, that where a person does not know of the other's insanity
and there has been no judicial determination of such insanity to notify the
world of it, and the contract is a fair one, and has been so acted upon that
the parties cannot be restored to their original position, it is binding upon
the lunatic as well as upon the other party.

VOID CONTRACTS.—In some States it is held, however, that all contracts
of an insane person are void. In such States the rule above stated would not
hold. The law of each State must be consulted to determine the law in the
particular State. In some States, notably New York and Massachusetts, an
insane person's deed of lands has been held to be void, without reference to
whether or not the other party entered into the contract in good faith without
notice, or that it has been so far acted upon that the parties cannot be
restored to their original position. As in the case of infants, an insane
person's power of attorney has been declared by high authority to be
absolutely void.
VOIDABLE CONTRACTS.—In most jurisdictions an insane person's
contracts are voidable by him or by his guardian, provided (1) that the other
person knew of his insanity at the time of making the contract, or (2) he had
been declared insane by some court, or (3) the parties can be restored to
their original position.
RATIFICATION AND AVOIDANCE.—When the insane person's reason
has been restored, if the contract is a voidable one, as explained in the
foregoing rules, though he may by acts or words avoid the contract he made
during his insanity, he may in like manner ratify it, or he may ratify it by
not avoiding it within a reasonable time after recovering his reason while
continuing to keep something capable of being returned, which he obtained
under the contract.
WHAT CONSTITUTES DRUNKENNESS.—It is not ordinary
drunkenness which excuses a man from his contracts, and enables him to
claim the protection given generally to incapable persons. The person must
have been utterly deprived of his reason and understanding, so that he could
not comprehend the nature or effect of the act in which he was engaged.
That he was so much under the influence of liquor that his judgment was
not as good as in his normal state does not excuse him.
MARRIED WOMEN.—It is practically impossible to state in brief form the
law upon the subject of married women's contracts. The difficulty arises
from the diverse changes made in the plain and clear rules of the common
law by statutes in the different States. The old law is wholly incompatible
with the enlightened view now held in regard to women, their family, social

and business standing, and the changes have been made to give them the
rights to which they are justly entitled. But, inasmuch as the statutes have
not been uniform in the different States, the law to-day is not wholly
uniform. The statutes and decisions in each State must be consulted to
determine the law on the subject as it is to-day. Through these changes the
law has become very complicated, and business men should obtain legal
advice before entering into important business dealings with married
women.
THE OLD RULE.—Upon her marriage a woman's existence became
merged in that of her husband, and the husband and wife were regarded for
many purposes as one person. What tangible personal property she had
became his immediately upon marriage, and he had the right to reduce her
bills, notes, bonds and other debts to his possession. Her real property she
retained the title to, subject to the right of the husband to have the use of it
during his life, if children were born of the marriage. He was bound to
supply her with necessaries, and so long as he did this her contracts for
things of even ordinary use were void; but if he failed to supply the
necessaries her contract for them would be valid. All her other contracts
were absolutely void—not voidable. Her position, then, was worse than an
infant's. She could have personal property of her own only if it was given to
someone else to hold the title and pay over the income to her, and even this
"separate estate," as it was called, could not be bound by her contracts.
CHANGES MADE BY STATUTE.—The law of married women's
contracts has been greatly changed by legislative enactments, to give
married women the rights which the more enlightened view of the present
time accords to them. The first changes aimed quite generally to give her
greater rights over her "separate estate," giving her power to make binding
contracts with reference to it, or to make binding contracts if she were
carrying on a trade or business of her own. But the earlier statutes
frequently did not give her power to contract with her husband, or to make
binding contracts if she had no separate estate, or was not carrying on a
separate business. Later enactments have largely corrected these defects,
but the old rule still stands except as it has been changed by statute, and,
therefore, the statutes of each State and the decisions interpreting them must
be consulted to determine accurately the law in each State. It may, however,
be said that generally a married woman may now contract except with her

husband, and except as surety for him. In many States she can even make
contracts of these excepted classes.
ALIENS.—An alien is one born out of the jurisdiction of the United States,
of a father not a citizen of this country, and who has not been naturalized. In
times of peace, aliens may hold property and make contracts and seek the
protection of our courts as freely as citizens. When war breaks out between
this country and another the making of contracts between citizens of the
two countries is prohibited. If such contracts are made during a state of war,
they are illegal and void, and the courts of this country will not lend their
aid to enforce them, either during the war or after its termination. Contracts
made before the war breaks out are good, but cannot be enforced, nor can
remedies for their breach be obtained, while the war is in progress. When
the war ceases, however, the courts will lend their aid to the enforcement of
such contracts.
CORPORATIONS.—A corporation may contract as freely as an individual
so long as its contracts are within the business powers and scope of the
business which its charter authorizes it to conduct. And even if a
corporation has made a contract outside of the scope of its business, and the
contract has been acted upon so that either party has had the benefit of the
contract, an action will lie in favor of the other for the benefits so conferred.
But a contract outside of the business which its charter permits the
corporation to engage in, and which is wholly executory, the courts will not
enforce. Such contracts are said to be ultra vires. Contracts with a
corporation may be in the same form as contracts between individuals, and
the corporation need use its seal only where an ordinary person is required
to use one. The officer or officers making the contract on behalf of a
corporation must, however, be authorized so to do either by the directors or
by the general powers attached to such officers. In law corporations are
deemed to be artificial persons subject in a general way to provisions
governing natural persons.

CHAPTER III
Contracts—Performance and Termination
PRIMARY RULE.-After a contract has been formed, it does not make
much difference whether it is under seal or whether it is a simple contract;
the rules governing the contract, subsequent to its formation, are very much
the same though there are a few distinctions. The primary rule running
through the law, governing obligations to perform contracts, is that if a man
has once formed a good contract he must do as he agreed, and if he fails
substantially (not merely slightly) to do so the other party may refuse to
perform on his part. If you remember that fundamental principle you cannot
generally go far wrong.
CONDITIONAL CONTRACTS—INSURANCE.-What one agrees to often
depends on the conditions which he includes as part of his promise. Take
the insurance policy previously alluded to. An insurance company promises
to pay $5,000, but it does not promise to pay in any event; the condition "if
the house burns down" is obviously a qualification of the promise. But there
are other conditions in the insurance policy. The insurance company says
that it will not be liable if gasoline is kept in the house beyond a small
quantity necessary for cleaning. That, too, is a condition of its promise to
pay $5,000; so that "if the house burns down," "if gasoline is not kept in the
house," "if the house is not unoccupied more than three months," and "if
mechanics are not allowed in possession of the property for more than a
certain length of time," are all conditions, and the company's main promise
need only be kept if the conditions are complied with. That is why an
insurance policy is not always quite as good as it seems—because there is a
large promise in large print; but there are a good many qualifications in
smaller print which are really part of the promise and must be taken into
account.
CONDITIONS IN BUILDING CONTRACTS.—Another kind of
conditional promise often occurs in building contracts. The employer agrees
to pay the builder or contractor on the production of an architect's
certificate. Now it doesn't do the builder any good to build that house unless

he gets the architect's certificate, for he has been promised pay only on
condition that he produce it. That is the promise between the parties. That is
the only promise.
WHEN PERFORMANCE OF CONDITIONS IS EXCUSED.—It is
obvious that these conditions in promises may be sometimes used to defeat
the ends of justice, and undoubtedly at times they are so used. A person who
draws a contract cleverly will put in a great many conditions qualifying his
own liability, and will try to make the promise on the other side as
unconditional as possible. The law cannot wholly do away with these
conditions, because in general, so long as parties do not make illegal
bargains, they have a right to make such bargains as suit themselves. The
court cannot make their agreement for them, but it is held that if a condition
will lead to a real forfeiture by an innocent promisee, the law will relieve
the promisee. Thus, in the architect's certificate case, if the house was
properly built and it was merely ill temper on the part of the architect that
caused him to withhold giving the certificate, the court would allow the
builder to recover, and even if the architect had some good reason for
refusing the certificate, the court would not allow the builder to be
permanently prevented from recovering anything on the contract, providing
the builder had substantially though not entirely performed his contract and
had acted in good faith. If, however, his default was wilful, if he had tried to
beat the specifications, and the architect had found him out and therefore
refused the certificate, the only thing the builder could do would be to go at
it again, tear out his faulty construction and build as he had agreed.
IN CONTRACTS OF EMPLOYMENT, WORK MUST BE PERFORMED
BEFORE PAYMENT IS DUE.—There are other matters which qualify the
obligation of a promisor to perform besides express conditions such as
those we have alluded to. Take this case: John promises to work for the A.
B. Company; the A. B. Company promises to employ him and to pay him a
salary of $1,000 a year. John comes to work the first day and works a while,
and then he says he would like his thousand dollars. The A. B. Company
says, "Well, you have got to do your work first." John says, "Why should I
work first and trust you for pay, rather than you pay first and trust me for
the work? I will keep on working, but I want the pay now." Of course, the
employer is right in refusing to pay until the work has been done, even
though the promise of the employer is not expressly qualified by the

statement that after the work has been done he will pay $1,000. It has been
dictated by custom, rather than by anything else, that where work is to be
performed on one side and money to be paid on the other, in the absence of
any statement in the contract to the contrary, the work must be done before
the pay is given. The result is this: that John must work anyway, his promise
to work being absolute; but the employer's promise to pay the money is, in
effect, conditional. It is subject to an implied condition, as it is called, that
John shall have done the work he agreed to do. The promise of the
employer is, in effect, "I will pay if you previously have done the work."
But John's promise is absolute: "I will work." He has to trust for the pay.
PERFORMANCE FIRST DUE UNDER A CONTRACT MUST BE
GIVEN BEFORE PERFORMANCE SUBSEQUENTLY DUE FROM THE
OTHER PARTY CAN BE DEMANDED.—And that case is an illustration
of a broader principle which may be stated in this way: where the
performance promised one party to a contract is to precede in time the
performance by the other side, the party who is to perform first is bound
absolutely to perform; whereas the party who is to perform subsequently
may refuse to perform unless and until the other party performs. In the
cases thus far alluded to, the promises of the two parties could not be
performed at the same time. You cannot work for a year and pay $1,000
simultaneously. One performance takes a whole year and the other
performance takes only a moment.
PERFORMANCES CONCURRENTLY DUE.—But frequently there arise
cases where both promises can take place at the same time. The commonest
illustration of that is a contract to buy and sell. You can pay the price and
hand over the goods simultaneously, and when a contract is of this
character, that is, where both performances can be rendered at the same
time, the rule is that in the absence of agreement to the contrary, they must
be performed simultaneously. John agrees to buy James' horse and pay $200
for it, and James agrees to sell the horse for $200; that is a bilateral contract
of purchase and sale. Now suppose neither party does anything, has each
party broken his promise? It might seem so, for John has not bought the
horse or paid for it as he agreed, nor has James sold the horse. But where
each party is bound to perform simultaneously with the other, if either
wants to acquire any rights under the contract he must do what is called
putting the other party in default, that is, he must offer to perform himself.

John, therefore, must go to James, offer $200 and demand the horse if he
wants to assert that James has broken his contract. And James, on the other
hand, if he wishes to enforce the contract, must go with the horse to John
and say, "Here is the horse which I will hand over to you on receiving
simultaneously the $200 which you promised me for it." The obligation of
the two promises when they can be performed simultaneously is called
concurrently conditional, that is, each party has a concurrent right to
performance by the other, and has a right to refuse performance until he
receives, concurrently with his own performance, performance by the other
party.
INSTALLMENT CONTRACTS.—Sometimes contracts are more
complicated than those which we have stated, such as contracts of service
and contracts to buy and sell. This, for instance, is a type of a very common
sort of contract in business: a leather manufacturer uses large quantities of
tanning extract in his tannery. He makes a contract for a regular supply, so
many barrels each week for a year, for which he agrees to pay a specified
price a barrel on delivery. For a time the extract promised him is sent just as
agreed. We will suppose, then, that perhaps the extract manufacturer is slow
in sending what he promised; there is a delay; perhaps the extract that is
furnished is not as good as it was or as the contract called for. What can the
leather manufacturer do about it? Of course, he can keep on with the
contract, taking what the extract manufacturer sends him, getting as much
performance as he can, and then sue for such damages as he may suffer
because of the failure to give what was promised completely. But he does
not always want to do that. Suppose it is necessary for his business that he
should get tanning extract and get it regularly. He does not want to wait and
take chances on the extract manufacturer's delays in delivery and
inferiorities in quality. He wants to make a contract with somebody else and
get out of his bargain with the first extract manufacturer altogether. May he
do so? No question in contracts comes up in business more often than that.
And the answer to the question is this: it depends on the materiality of the
breach, taking into consideration the terms of the contract and the extent of
the default. Is the breach so serious as to make it fair and just in a business
sense to call the contract wholly off; or will justice be better obtained by
making the injured party keep on with the contract and seek redress in
damages for any minor default?

BREACH IN CONTRACTS OF EMPLOYMENT.—The same thing comes
up very often in contracts of employment. Suppose an employer hires an
employee for a year, and in the course of the year the employee at some
time or other fails to fulfill his contractual duty as an employee. He is
negligent and in some respect fails to comply with his contract to render
good and efficient service. Can the employer discharge him? We must ask
how serious is the breach. A merely negligent breach of duty is not so
serious as one which is wilful. Or the breach might be on the other side of
the contract. Suppose the employer has promised to pay a certain sum each
month as salary during the year, and does not pay promptly. Has the
employee a right to say, "You pay my salary on the first day of the month as
you agreed, or I leave"? No, he does not have a right to speak so positively
as that. A single day's delay in the payment of one month's installment of
salary would not justify throwing up a year's contract. On the other hand, if
the delay ran along for any considerable time, it would justify the employee
in refusing to continue. You will see that this principle of materiality of the
breach on one side, as justifying a refusal to perform on the other, is rather
an indefinite one. It involves questions of degree. That is so in the nature of
the case. The indefiniteness of the rule, therefore, cannot very well be
helped.
ILLUSTRATIONS AND DISTINCTIONS.—A few concrete illustrations
may help to bring out the points under discussion. Suppose an agreement
for the sale of real estate, and, for instance, the buyer is unable to be on
hand the day the sale is to be completed, and the owner is present, and,
finding the buyer absent, immediately sells the land to another. Now is there
any action against the owner, or might he justly refuse to go on with the
contract because of the momentary breach of contract? No, he cannot refuse
to go on in the case of a contract of that sort to sell real estate, unless the
contract very expressly provided that the transaction must be carried
through at the specified time and place or not at all. The case would be
governed otherwise by the principle of materiality of the breach, to which
we have alluded. A brief delay would not be a sufficiently material breach
to justify the seller in refusing to go on, but a long delay, of course, would
be sufficient. In sales of personal property time is regarded by the law as
more important than in sales of land. In contracts to sell stocks varying
rapidly in value, time is a very important element. Suppose now that an

option for a piece of land was given by the owner. May he dispose of the
land to another a few minutes after the time specified in the option for the
acceptance of the offer? That is different from the case previously put. The
option is in effect an offer to make a sale, and the offer is by its terms to
expire, we will say, at 12 o'clock, noon, October 23. It will expire at that
time, and an acceptance a minute later will be too late. The difference is in
the terms of the promise made by the different parties. In the case put first,
there is an unqualified contract to buy and sell. In the case now put there is
a promise to sell only if the price is tendered or if acceptance is made prior
to 12 o'clock, noon, October 23. The terms of the option, assuming in its
favor that it was given for consideration or was under seal and therefore not
merely a revocable offer, were expressly conditional. The vital thing in
contracts is to be sure of the terms of your promise. The term option
indicates a right which exists up to a certain point; beyond that point there
is no right.
PROSPECTIVE INABILITY OF ONE PARTY EXCUSES THE OTHER.
—There is one other thing besides actual breach by his co-contractor, which
justifies one party to a contract in refusing to go on with the contract, and
that may be called prospective inability to perform on the part of the other
side.
INSOLVENCY OR BANKRUPTCY.—Let us give one or two illustrations
of that. You have entered into a contract to sell a merchant 100 barrels of
flour on thirty days' credit. The time has come for the delivery of the flour,
but the merchant is insolvent. He says to you, "I want you to deliver that
flour; the agreed day has come." You say, "But you cannot pay for the
flour." "Well," he replies, "it is not time to pay for it. You agreed to give me
thirty days' credit: perhaps I shall be able to pay all right then. I have not
broken my promise yet, and as long as I am not in default in my promise
you have no right to break yours." You have a right to refuse to deliver the
flour because, though the buyer has not yet broken his contract, the prospect
of his being able to keep it, in view of his insolvency, is so slight that his
prospective inability to perform in the future, when the time comes, excuses
you from going on now. Insolvency or bankruptcy of one party to a contract
will always excuse the other party from giving credit or going on with an
executory contract, unless concurrent performance is made by the insolvent
party or security given for future performance.

REPUDIATION.—Repudiation of a contract by one party is also a good
excuse. Repudiation means a wrongful assertion by one party to a contract
that he is not going to perform in the future what he agreed. After such
repudiation the other party may say, "I am not going to perform now what I
agreed to perform, since you have said you will not perform in the future
what you agreed. I shall not go ahead and trust you, even though I did by
the contract agree to give you credit, in view of the fact that you have now
repudiated your agreement by saying that you are not going to do what you
agreed." Repudiation may be indicated by acts as well as by words, and
often is indicated partly by words and partly by acts.
TRANSFER OF PROPERTY TO WHICH THE CONTRACT RELATES.
—Still another illustration of prospective inability arises where a contract
relates to specific property, as a certain piece of land, and before the time
for performance comes, the owner of the land, who had agreed to sell it we
will suppose, transfers it to somebody else or mortgages it. The man who
had agreed to buy that piece of land may withdraw from the contract. He
may say, "You might get the land back at the time you agreed to perform,
but I am not going to take any chances on that. I am off the bargain
altogether."
IMPORTANCE OF EXACT PROVISIONS IN CONTRACTS.—So much
for the rather difficult subject of the mutual duties of parties to a contract in
the performance of it. The best way to avoid doubt or uncertainty in such
matters is to provide very exactly in the contract what the rights of the
parties shall be in certain contingencies. The law always respects the
intention of the parties when it is manifested, and it is only when they have
said nothing about their intention that the rules which we have considered
become important.
FRAUD.—The next question in regard to contracts arises out of certain
grounds of defense that may come up and the most important of these is
fraud. Fraud is deception; it is inducing the other party to believe something
which is not true, and, by inducing him to believe that, influencing his
action. The ordinary way in which fraud is manifested is by
misrepresentations. A purchase or sale of stock or of goods may be induced
by fraud. A loan may be obtained from a bank by fraud, that is, by
misrepresentation of material facts which influence the other side to act.

MISSTATEMENTS OF OPINION ARE NOT FRAUDULENT.—Now
what kind of misrepresentation amounts to fraud? There must be
misrepresentation of a fact. Merely misrepresentation of opinion is
insufficient and what is opinion and what is fact has been the basis of a
good many lawsuits. John offers his horse to James for sale at $300. He
says that it is the best horse in town. Well, it is not the best horse in town by
a good deal, but that sort of statement cannot be the basis of an allegation of
fraud. That a thing is "good," or "the best in the market," or similar general
statements, all of which ought to be known to the hearer to be simply
expressions of opinion, are not statements of positive fact. Take these two
statements in regard to the horse. "He can trot very fast." That is a mere
statement of opinion. To some minds eight miles an hour is very fast; to
more enterprising persons fifteen miles an hour is necessary in order to
make travel seem fast. Those are matters of opinion. But a statement that
the horse can trot twelve miles an hour, or has trotted one mile in three
minutes on the track, are statements of fact, and if untrue are fraudulent. A
statement of value is a statement of opinion and cannot be the basis of
fraud. A statement that the horse is worth $300, or is worth twice as much
as the owner is asking for him, cannot be relied upon; but a statement that
$300 was paid for this horse, or was offered for him, is an assertion of fact,
and if untrue would be the basis of an allegation of fraud.
PROMISES ARE NOT FRAUDULENT BECAUSE BROKEN.—A
promise is not a statement of fact. A man may promise to do something and
fail to carry out the promise, and in consequence the person he was dealing
with may regret the bargain he entered into, but his only remedy is to sue
for damages for breach of the promise if it was part of a contract. He cannot
assert that merely because the promise was not kept the transaction was
fraudulent. But if a man makes a promise knowing when he makes it that he
cannot keep it, he is committing a fraud. The commonest illustration of this
is where a man buys goods on credit, having at the time an intention not to
pay for them, or well knowing that he cannot pay for them.
STATEMENTS MUST HAVE BEEN CALCULATED TO INDUCE
ACTION.—Generally speaking, the statement relied on as fraudulent must
have been made with the purpose of inducing action. For instance, suppose
John likes to tell large stories. He tells James things about his neighbor's
horse. John does not do this for any purpose except to brag about living

near a man who has such a splendid horse, but James suddenly takes the
notion he would like to have that horse and he goes and buys it. Now it was
not legal fraud on John's part to tell those lies about the horse, even though
they did induce James to go and buy it, unless John, as a reasonable man,
ought to have known that James was likely to buy the horse, as might have
been the case if James had been talking about buying him. Then it would be
fraud, and it would not make any difference in regard to its being fraudulent
that John had nothing to gain by telling these lies, that he was simply doing
it for the fun of the thing.
REMEDIES FOR FRAUD.—What remedy has the defrauded person? The
law gives him two remedies of which he may take his choice; he cannot
have both, but he can have either. One is to sue the fraudulent person for
such damages as have been suffered, and the other is to rescind the
transaction, to get back what has been given, or to refuse to go on with the
contract at all if it is still wholly executory.
DURESS AND UNDUE INFLUENCE.—There are certain defences
similar to fraud; duress, or undue influence, is one of them. However, this is
comparatively rare. It is compelling a person to do what he does not want to
do, making him agree to a bargain that he would not agree to accept under
compulsion, as by fear of personal violence or imprisonment; and a bargain
made under these circumstances can be rescinded or set aside. Merely
threatening to enforce your legal rights by suit against another is not duress,
though it may in fact induce him to agree to what he would not otherwise
have agreed; but to threaten criminal prosecution as a means of extorting
money or inducing an agreement is illegal and in many jurisdictions is itself
a crime.
MISTAKE OF FACT.—In certain cases, also, a mutual mistake of a vital
fact is ground for setting aside a contract, but these cases are not very
common. Mistakes generally do not prevent the enforcement of contracts.
Usually where there is a mistake, it is of a character for which one party or
the other is to blame. If the mistake arises out of deception it is fraud. If the
mistake arises simply because the mistaken party has failed to inform
himself of the facts, as he might have done, then it is no defence at all. But
if both parties were acting under the mutual assumption that some vital fact

was true in making a bargain, either one of them may avoid or rescind the
bargain when it appears they were both mistaken.
IMPOSSIBILITY.—Impossibility is sometimes a defence to the
performance of a contract. Perhaps the simplest illustration of this arises in
a contract for personal services of any kind. Illness or death of the person
who promises the services excuses performance. Death does not usually
terminate a contract or serve as a defence to it. If a man contracts to sell 100
bushels of grain and dies the next day his estate is liable on the contract just
as if he continued alive; but if he agreed to hire a man as an employee for a
year, his death or the employee's death within the year would terminate the
obligation of both. Unexpected difficulty is not impossibility. For instance,
take a building contract: the builder agrees to put up a building within a
certain time; he is prevented by strikes. Nevertheless, he is liable for not
doing as he agreed. He should have put a condition in his promise,
qualifying his agreement to build, that if strikes prevented, he would not be
liable. So, if the foundation gave way and the building tumbled down
before it was finished, the builder must put it up again. Also, if lightning
struck it, he must put it up again.
ILLEGAL CONTRACTS.—One other matter to be considered in
connection with contracts and defences to them is illegality. Some kinds of
illegal contracts are so obviously illegal that it is not necessary to say
anything about them. Anybody would know that they were illegal and that
they could not be enforced for that reason. A contract to steal or murder or
take part in any crime is a good example. But other kinds of illegal
contracts are not so obviously wicked as to make it clear that they are
unenforceable. It may be worth while to mention a few of these kinds of
illegality.
CONTRACTS IN RESTRAINT OF TRADE.—One class of contracts
which has become very important in late years in business is the contract in
restraint of trade, so called. The original contracts in restraint of trade were
contracts by which one man agreed that he would not thereafter exercise his
trade or profession, the object generally being that the promisee should be
freed from the competition of the man who had promised to refrain from
exercising his trade; and the law became settled a good many years ago that
if the promise was general not to exercise the trade or profession anywhere,

or at any time, it was illegal, but that if it was only for a reasonably limited
space of time it would not be illegal. That old law still exists, but there has
grown up further a much more important class of cases where contracts are
made to further an attempted monopoly, and one may say pretty broadly
that all such attempts are illegal. It does not matter how much business
reason there is for it; any attempt to combine in order to get a monopoly, or
in order to put up prices, is bad. Moreover, if the attempted restraint of trade
or monopoly concerns interstate commerce, the agreement is a Federal
crime under the Sherman law.
GAMBLING CONTRACTS.—Another kind of illegal contract is a
gambling contract. This seems obvious in agreements for the more extreme
kinds of gambling, but in certain business transactions where the matter
becomes important, the dividing line is not so clear; especially in dealings
on stock exchanges and exchanges for sales of staple products, such as
grain, cotton and coffee. The stock exchanges and other exchanges are
made the means of a great deal of speculation, which is virtually gambling.
Now, in what cases does the law regard these transactions as gambling and,
therefore unenforceable, and in what cases are they legal? The answer is, if
an actual delivery of the stock, or commodity bought, is contemplated, then
the transaction is not gambling in the legal sense; but if a settlement merely
of the differences in buying and selling prices is contemplated, as the only
performance of the bargain, then the transaction is gambling. The difference
is between a stock-exchange business and a bucket-shop business. If you
give an order to a stock-exchange house to buy stock, even though you put
up but a small margin and could put up but a small margin, and the stock-
exchange house knows you could put up but a small margin, nevertheless,
the stock-exchange house actually buys that stock, and it is delivered to it.
The stock-exchange house would then have a right to demand of you that
you pay for that stock in full and take delivery of it, and could sue you for
the price if you failed to comply with the demand. However, as a matter of
fact, it does not ordinarily do that. If it wants to get the price which you
promised to pay, and you fail on demand to take up the stock, it sells the
stock which it has been holding as security. The bucket-shop, on the other
hand, though it takes your order to buy, does not actually buy the stock; it
simply settles with you when you want to settle, or when it wants to settle,
because the margin is not sufficiently kept good, by calculating the

difference between the price at which the stock was supposedly bought and
the price at which it is supposedly sold, those prices being fixed by the
ruling market quotations at the time. It would be perfectly possible to make
a gambling transaction out of the stock-exchange transaction by a very
slight change. If a stock-exchange house should agree, for instance, that the
customer should not be compelled to take delivery of the stock, then that
added agreement would make the transaction between broker and customer
a gambling transaction, even though the broker actually bought the stock on
the exchange, and, as between himself and the other broker on the exchange
with whom he dealt, there was a perfectly valid sale of the stock. In some
jurisdictions, by statute, speculative contracts which are not gambling
contracts at common law are made illegal.
BREACH OF FIDUCIARY DUTIES.—Another very important class of
illegal transactions arises from breach of fiduciary duties. A fiduciary is
rather hard to define. He is somebody that owes a duty higher than a mere
contractual obligation, a duty involving something of trust and confidence.
A trustee is a fiduciary, so is an agent. A director or officer of a corporation
is a fiduciary, and any dealing in which a fiduciary violates his duty to the
person for whom he is fiduciary is illegal, and any agreement for such a
violation is an illegal contract. It is illegal for a trustee to bargain for any
advantage from his trust other than his regular compensation. It would be
illegal for a trustee to bargain with a bank to give the bank a trust account in
return for some personal advantage, as a loan to be made to the trustee
personally. It would be a breach of fiduciary duty for a corporation officer
and director to bargain for any personal advantage by virtue of his official
action.
KNOWLEDGE OF ANOTHER'S ILLEGAL PURPOSE.—The knowledge
of another's illegal purpose will not make the person who knows of it
himself guilty of illegality; but if one not only knows but in any way
promotes the illegal purpose of another, he will be considered a party to the
illegality. A may sell goods to B, knowing that B is going to use them
illegally, and A's sale will not be illegal; but if A does anything to help B in
using them illegally, or if the goods are of such a character that they can be
used only illegally, then A would be guilty of illegality himself.

MEANING OF ASSIGNMENTS.—Much of the difficulty regarding
assignment of contracts is due to different meanings which may be attached
to the word assignment. When property is assigned the assignee becomes
the owner in every sense, if the person from whom he took the assignment
had a valid title. This is not true of the assignment of contracts. By the
common law, contract rights or "choses in action," as they are termed in
law, were not assignable, the reason being that one who contracted with A,
cannot without his consent become bound to B.
POWER OF ATTORNEY TO COLLECT A CLAIM.—Though when a man
had a contract right he could not by common law make B in a complete
sense the owner of the claim, he could give B a power to collect the claim
as his, A's, agent, and authorize him to keep the proceeds when the claim
was collected. It long ago became established that when an owner of a
claim purported to make an assignment of a claim he thereby gave the
assignee the power to enforce the claim in his stead, and this power given
the assignee is irrevocable.
EFFECT OF ASSIGNMENT OF RIGHTS.—It may be supposed that the
effect of an assignment of a right, though the result may be worked out by
treating the assignee as an agent or attorney of the assignor, is the same as if
the assignee were fully substituted in the position of the assignor as owner
of the claim, but this is not quite true. Assuming that the claim is not
represented by negotiable paper, the legal owner of the claim is still the
assignor. This is shown by the fact that if the debtor pays the assignor in
ignorance of the assignment, the debt is discharged and the assignee can
only go against his assignor for the latter's fraudulent conduct in collecting
the claim after having assigned it. So, too, if the assignor makes a
subsequent assignment, this subsequent assignee also has a power of
attorney to collect the claim and keep the proceeds; so that if the second
assignee in good faith collects the claim in ignorance of the prior
assignment, he can keep what he has collected; nor is the debtor liable to
the first assignee who must as before seek redress from his assignor. It is,
therefore, always important for the assignee of a non-negotiable chose in
action to give immediate notice of his assignment to the debtor. If after such
notice the debtor should pay the assignor or a subsequent assignee, such
payment would not discharge the debtor, and the first assignee could collect
the claim from him.

NON-ASSIGNABLE RIGHTS.—Rights cannot be assigned which are
personal in their nature. The one who has contracted to paint a picture
cannot delegate the duty to another, no matter how skillful. One who has a
right to the personal services of an employee cannot assign that right to
another. A publisher who has a right to publish all books written by a certain
author cannot assign his right to another publisher.
ASSIGNMENT OF DUTIES.—The duties under a contract are not
assignable under any circumstances. That is, one who owes money or is
bound to any performance can not by any act of his own or by any act in
agreement with any other person except his creditor, divest himself of
liability and substitute the liability of another. This is sufficiently obvious
when attention is called to it; for otherwise debtors would find an easy
practical way of escaping from their debts by assigning the duty to pay to
irresponsible persons. But the principle is not always recognized. A person
who is subject to a duty, though he cannot escape liability, may delegate the
performance of his obligation provided the duty is of such a character that
performance by an agent will be substantially the same thing as
performance by the obligor himself. Thus if a contractor engages to build a
house, he may delegate the actual building to another, but he cannot escape
responsibility for the work. One who owes a mortgage may delegate the
payment of the mortgage to a purchaser of the land who assumes and agrees
to pay the debt. If the purchaser of the land actually pays, the debt is
discharged; but if he fails to do so, the mortgagee may sue the original
mortgagor and the latter will be obliged to bring another action against the
purchaser who promised to pay the debt and failed to do so. So where a
partnership is changed and a new firm formed, it is very common for the
new firm to assume the obligations of the old firm.
ORIGINAL DEBTOR NOT DISCHARGED UNLESS THERE IS A
NOVATION.—Though a creditor cannot be deprived of his right against his
original debtor without his consent, he may consent. If he does thus consent
to take in lieu of the obligation of his original debtor that of the person who
assumed the debt, what is called a novation is created. That frequently
happens where a new firm succeeds an old one. The new firm goes on
dealing with the old creditors, and they impliedly, if not expressly, assent to
taking the new firm instead of the old firm as a debtor. But in order to make
out a novation you have got to find as a fact that the creditor agreed to give

up his right against the old debtor. If the creditor does not assent to a
novation then the situation is that the creditor retains his claim against the
old debtor, but the person who has assumed the debt has contracted to pay
that debt. If he keeps his contract he will pay it and the debt will be
cancelled. If he does not keep his contract the creditor will sue the original
debtor and the original debtor will sue the man who assumed the debt.
ASSIGNMENT OF BILATERAL CONTRACTS.—In bilateral contracts
each party is under a duty to perform his promise, and also has a right to the
performance of the other party. If an attempt is made to assign such a
contract the effect is this: the assignor delegates to the assignee the duty of
performing the assignor's promise, but the assignor himself still remains
liable if his agent, the assignee, fails to carry out the duty. Further, the
assignor authorizes the assignee to receive the payment or performance due
from the other party to the contract and to keep it for himself.
WHAT AMOUNTS TO AN ASSIGNMENT.—No particular words are
necessary to constitute an assignment. Any words which show an intention
that another shall be the owner of a right are sufficient to constitute the
latter an assignee. Especially it should be observed that an order directed to
a debtor of the drawer ordering him to pay the debt to a named payee, is an
assignment of the debt when delivered to the payee. This case must be
sharply distinguished from a bill of exchange or check. A bill of exchange
or check is an order to pay a certain amount unconditionally, irrespective of
the existence of any particular fund. It is only an order to pay from a
particular fund, that is, an order which is conditional expressly or impliedly
on the existence of that fund, which constitutes an assignment.
PARTIAL ASSIGNMENT.—A creditor may not only assign his whole
claim to an assignee, but he may assign part of it. Such a partial assignment
authorizes the assignee to collect the portion of the claim assigned and keep
it for himself. But the debtor is not bound to pay the claim piecemeal; he
may insist on making but a single payment unless his contract with his
creditor provides otherwise. A bank in accepting a deposit contracts to pay
that deposit in such amounts as the depositor may indicate on the checks
drawn by him, but an ordinary debtor who owes $100 cannot be required to
pay in such amounts as his creditor may see fit to demand. For this reason a
few courts hold that even if the debtor has notice of a partial assignment, he

may pay the whole debt to the original creditor though that results in
defrauding the partial assignee. Most courts hold, however, that the debtor
when notified of the facts cannot do this, and if he objects to paying
fractional parts of his indebtedness he must pay the whole sum into court to
be distributed by it among the parties entitled. So, on a question of this
character, the local statute should be examined.
ASSIGNMENT OF FUTURE CLAIMS.—Assignments of future claims, as
well as of existing claims, may be made, but there are in many States some
special provisions of statute law in regard to assigning future wages. Such
assignments must often be recorded, and there are certain other special
statutory provisions in regard to them. The assignment of future debts is
also subject to this qualification: The law does not allow the assignment of
a future claim unless the contract or employment out of which the claim is
expected to arise has already been made or is already in existence.
DISCHARGE OF CONTRACTS.—Contracts are discharged in much the
same way as they are made. The simplest way of discharging a contract is
by performing it. When both parties do exactly what they agreed to do the
contract is discharged by performance. Where seals still retain their
common law effect, it may be discharged without performance by
agreement under seal that it shall be discharged, just as a contract may be
made by an agreement under seal. The agreement under seal to discharge a
contract is called a release. You may release any right that you have—a
right for money, a right to have work done or any right. Just as contracts
may be made either under seal or by an agreement with consideration, so
they may be discharged not only by a release under seal but by an
agreement for rescission of the contract. But this agreement must have
consideration.
ILLUSTRATIONS.—Suppose A has promised to build a house and B has
promised to pay $10,000 for it. Before anything has been done, A and B
agree to call that contract off. This is a valid agreement for rescission,
because each party agrees to give up something—one party to give up his
right to have the house built, the other party to give up the right to get
$10,000 pay. So an agreement between employer and employee that a
contract shall be terminated before the time originally agreed has sufficient
consideration—the employer gives up his right to the employee's services,

the employee gives up his right for future pay. But compare with these this
case: A owes B a thousand dollars; it is simply a debt. A and B agree to call
that square. That agreement is of no validity, for here only one party agrees
to give up anything. The creditor agrees to give up his thousand dollars, and
he does not get any promised amount in return for it. But that obligation,
that debt, could be satisfied if valid consideration were given for the
surrender of the claim; and anything agreed upon, as a horse, or ten shares
of stock, or anything else the parties agreed to, would be good consideration
for the agreement to surrender the claim, so long as one did not get into the
difficulty alluded to under the heading of consideration, of trying to
surrender a right to a larger liquidated sum in consideration of the payment
of a smaller sum of money.
SENDING A CHECK AS FULL PAYMENT.—It is very common for a
debtor in making payment by check of his debt to seek to make the check
operate as a receipt in full of all claims by the creditor against him. He may
do this by writing on the check itself that it is "in full of all demands" or "in
full payment" of a certain bill; or he may by a letter accompanying the
check state that the check is sent as full satisfaction. The acceptance by the
creditor of the check under either of these circumstances is an assent by him
to the proposition stated on the check or in the accompanying letter, that the
check is in full payment. Such an assent, however, does not necessarily
prove that the debtor is discharged; consideration as well as mutual assent is
essential to the validity of any agreement which is not under seal.
Accordingly if the debt was a liquidated and undisputed one, and the check
was for less than the amount due, the agreement of the creditor to take it in
full satisfaction is not supported by sufficient consideration under principles
previously considered. On the other hand, if the debt was an unliquidated
one, or there was an honest dispute in regard to the amount due, the
creditor's claim is fully satisfied.
RECEIPT IN FULL.—It may be said generally that though a receipt in full
is often thought by business men to be a discharge irrespective of
consideration, like a release, this is not true in most States. A receipt in full
is good evidence, if payment has been made in full, that it has been so
made; but where payment has not been made in full a receipt will not be
effectual without consideration, as a release under seal would be.

RENUNCIATION OF OBLIGATION ON NEGOTIABLE INSTRUMENT.
—There is one case where the law allows a party who has a right to
surrender it without consideration. This is by virtue of the Negotiable
Instruments Law, which provides that the holder of a note may discharge
any party to it by a written renunciation of his claim. No particular form of
words is necessary, but the renunciation must be in writing. No
consideration is necessary.
ALTERATION OF WRITTEN CONTRACTS.—The alteration of a written
contract in a material particular with fraudulent intent by a promisee in
effect discharges the contract so far as he is concerned. He cannot enforce it
either in its original form or its altered form, though the other party to the
contract may enforce it against him. If the alteration is not material, the
contract may be enforced even by the party who altered it whatever the
motive of the alteration may have been. If the alteration is material but not
fraudulently intended, that party is generally allowed to enforce the contract
in its original form. No alteration by a third person affects the rights of a
party to a contract. By material alteration is meant one which if given effect
would alter the legal obligations of the parties to the contract. The rule of
the Negotiable Instruments Law in regard to alteration of negotiable
instruments, it should be observed, is somewhat more severe than that
generally prevailing in regard to other contracts.
SUGGESTIONS FOR DRAFTING CONTRACTS.—While it is unwise to
attempt the drafting of any contract at all complicated, without the services
of an attorney, there are certain times when it may be necessary to act
suddenly, and a few fundamental facts should be kept in mind. If you are
called upon to draft a contract for two other people, the first requisite is to
obtain as full information as possible from both parties as to the plans they
have in mind. After obtaining this, the details should be arranged in writing,
gone over carefully by the draftsman, and submitted to the parties for their
approval. A most common mistake made by laymen is to fail to cover
contingencies which are more or less likely to happen. For example, what
effect would the death of either party have on the contract? This should be
provided for. The careful draftsman, whether he be a layman or a lawyer,
should draw contracts with the idea of making them so plain that litigation
will not result. Contracts should always be drawn in duplicate, so that each
party may have a copy, and it is well, if you are the draftsman, to keep a

copy for yourself. It is not necessary to appear before a notary public unless
you are dealing with a deed, or a similar formal document. If there is good
consideration for the contract, no seal is necessary, but under some statutes,
a sealed contract is good for a longer period of time, so that there is an
added advantage in having the contract under seal.
QUASI CONTRACTS.—The term quasi contract is one which has
appeared within the last thirty years. The law in this branch of contracts is
still in the process of development and the field of quasi contracts is still not
one of settled limits. For our purposes we confine ourselves to those
obligations arising from "unjust enrichment," that is, the receipt by one
person from another of a benefit, the retention of which is unjust. The term
"enrichment" has recently been criticized by one of the ablest writers on this
topic, as there are many cases where it is sufficient to show that the
defendant has received something which he desired, although the question
whether he is thereby enriched, is immaterial. In Vickery v. Ritchie, 202
Mass. 247, we find that where A renders services, and furnishes materials
and supplies for the erection of a building for B under a supposed contract
and the contract itself is invalid, B is under a supposed quasi contractual
obligation to pay A for the services he has rendered and the material he has
furnished, regardless of whether B's property is increased in value. We may
state the point to be emphasized in quasi contract is the fact that the
retention of the benefit received by the defendant would be unjust rather
than "enrichment."
DISTINGUISHING CHARACTERISTICS.—There are four characteristics
which distinguish quasi-contracts: 1. The obligations of quasi contracts are
imposed by law without reference to the assent of the obligor. 2. They are
imposed because of a special state of facts and in favor of a particular
person and do not rest upon one at all times and in favor of all persons. 3.
Although equitable in their origin they are enforced by a common law
court. 4. They require that the obligee shall be compensated for the benefit
which he has conferred upon the obligor and not for any loss suffered by the
obligee.
APPLICATION OF THE PRINCIPLE.—The following are the more
common illustrations of the application of the principles of quasi contracts.
Where there has been a mistake, and hence the minds of the parties never

really met, yet benefit has really been conferred; or, where the attempted
contract cannot be enforced as a contract, because it did not comply with
the statute, or was illegal, and yet one of the parties has received a benefit;
or, where a benefit has been conferred under compulsion or duress.
MISTAKE.—Where parties have attempted to make a contract and a
mistake of fact occurs, no contract results. The minds of the parties never
really meet. Yet if benefits have been conferred, justice requires that the
benefit should be returned, or compensation given, and this, in fact, is just
what the law seeks to do when there has been such a mistake that upon the
attempted contract itself no suit can be brought. The essentials of mistake,
and the way in which a mistake usually arises, are:
(1) It would not be a mistake if a party had paid money when he had any
reason to suppose it was not due. A recovery of money under such
circumstances cannot be allowed.
(2) The payment must have been induced by mistake in order to allow the
recovery. This rule prevents the recovery of money paid in settlement of a
disputed matter; but it must be assumed that it was to the party's interest to
make the payment. However, suppose that a compromise settlement has
been made in the belief that certain facts were different from what they
really were. Here the mistake would have induced the payment, and, hence,
in such a situation a recovery will be allowed.
(3) The fact regarding which a mistake has been made must also be a
material fact, and the fact must have been a part of the transaction itself, not
collateral to it in any way. A mistake as to the value of an article purchased,
for instance, is not a material fact.
(4) Ordinarily, money paid under mistake of law cannot be recovered,
although it is against conscience for the defendant to retain it. A mistake as
to the law of another State, however, is a mistake of fact, and money paid
under such a mistake can be recovered.
(5) Where the party who mistakenly parted with the money did so because
of his own negligence, and to allow a recovery would throw a loss on the
other party, he cannot recover what he parted with. One party cannot make

another suffer because of his own negligence. Where a party paid money
under mistake, and the payee was negligent, the party paying may recover.
(6) When parties suppose they have made a contract, and money has been
paid, or services rendered, under that supposed contract, but in fact there
was no valid contract at all, or there was a mutual mistake as to a term, this
money, or the value of the services, may be recovered.
(7) When money has been paid for the transfer of something by defendant,
whether recovery will be allowed in case it should turn out that the
defendant had no title, depends on the nature of transaction. If the defendant
made a warranty that he had title, a recovery may be had. If, however, the
defendant simply sold what he had, whether that was something or nothing,
a recovery cannot be allowed unless, as is the law in some States, a vendor
impliedly warrants his title by the fact of having possession.
(8) In the case of parties mistaking the existence of a subject matter of sale,
if the understanding was that A was purchasing an existing thing, then he
can recover the money paid if it should turn out that the thing was not in
existence. But if he bought simply a chance, he cannot recover.
BENEFITS CONFERRED UNDER COLOR OF CONTRACT.—Aside
from the cases of mistake, there are other grounds for allowing recovery
under the principle of quasi contract. A group of these is made up of cases
where there cannot be a recovery upon the contract itself, although the
parties have come together and agreed without any mistake or
misunderstanding, because of the absence of some essential necessary to
create an enforceable contract obligation; yet a benefit has been conferred
upon the one party who, but for the lack of that essential, would have been
liable in an action upon the contract itself. Such cases arise largely where
there has been a partial performance of an illegal contract, or of a contract
unenforceable because of non-compliance with the statute of frauds, or
where full performance is excused by impossibility. Some States also allow
recovery on the theory of benefits conferred, where, after partial
performance, a party defaults under circumstances not excusing default.
BENEFITS CONFERRED WITHOUT CONTRACT.—We next take up
that class of relations where there has been an absence of distinct offer and
acceptance, and yet a benefit has been conferred resulting in an unjust

enrichment of the other party. If A confers benefit on B, though at B's
request, it may be merely a gift. A cannot afterward change his mind and
recover for that, as if there had been a contract. A may have paid B's debt in
order to prevent a sale of his own property. He may then recover the amount
so paid. For example, A left his property with B to have some repairs made.
A third party recovered a judgment against B, and A's property was seized
on an execution. A paid the judgment in order to release his own property. It
was held that he might recover the money so paid from B, who should have
paid the judgment. Or A may have paid B's debt because he was surety for
B. He then may recover from B the amount so paid; or, if B had two
sureties, A and C, and A paid the whole or more than his share, he could
recover the share of such payment which C should have paid, on the
principle of contribution that equality is equity. But A must have actually
made the payment of more than his proportionate share.

CHAPTER IV
Principal and Agent; Master and Servant
THE IMPORTANCE OF AGENCY.—Now that we have finished our
discussion of the general principles of contract law, it remains for us to
apply these principles to the specific topics of commercial law. Of these, the
law of agency is one of the most important. It is perfectly obvious that a
man can be in only one locality at a given time. Under modern business
conditions he may wish to perform acts in different places at the same time.
When business men were first confronted with problems of this kind, the
principles of the law of agency began to develop. They resorted to the
simple expedient of having others represent them. If these representatives
were properly instructed in their duties and faithful in discharging them,
there was, of course, no reason why the will of the person who had
appointed them was not as fully accomplished as if he had performed the
act himself. The Latin maxim, "Qui facit per alium facit per se," that is, "He
who acts through another, acts himself," is the basis of the law of agency.
The growing importance of the law of agency is strikingly apparent in one
branch of modern business. Fifty years ago, the great majority of business
operations were conducted either by individuals or by partnerships. To-day,
especially in conducting large business enterprises, corporations have
replaced individuals and partnerships. Although (as we shall see later in the
chapter on corporations) in law a corporation is deemed a separate, legal
entity, distinct from the stockholders, in actual practice we know that there
is no such distinct physical being as a corporation. It follows, therefore, that
every act performed by a corporation must be performed through an agent.
With the enormous increase in the number of corporations in the last
twenty-five years, and that increase still continuing, we can see that the law
of agency is a most important branch of commercial law and very closely
connected with corporation law.
AGENCY DEFINED.—Merely for purposes of convenience, it may be best
to divide the whole subject of agency into three branches: Principal and
agent; master and servant; employer and independent contractor. The term

"agency," when used in the broad sense, indicates a relation which exists
where one person is employed to act for another. At the outset, we should
keep in mind the distinctions between the agent, the servant, and the
independent contractor. It is difficult to indicate these distinctions with
absolute certainty by definition. An illustration, however, will show clearly
what the difference is. I own an apartment house in New York, but as I am
not in the city, except infrequently, I employ the real estate firm of Smith &
Jones to manage the apartments and collect the rents. They are, of course,
my agents, to act in the premises. I own an automobile and I employ a
chauffeur to operate the car for me. He is my servant. I own a vacant lot in
New York and on it plan to erect an office building. I employ the Smith
Construction Company to erect the building. It is an independent contractor.
What is the rule, then, to determine the distinction between these three
persons? All three persons represent the principal, or the master, or the
employer, but the line of distinction lies here: An agent is employed to bring
the principal into new contractual obligations; a servant represents his
master in the performance of ministerial, or mechanical acts or services,
with no thought of bringing his master into new contractual relations with
third persons. A person who is employed to perform ministerial or
mechanical acts for another, as we have said, is a servant, but there are
cases where the master retains no control or right of control of the means or
methods by which such work is to be accomplished. In this latter case, the
person performing the work is not a servant, but is an independent
contractor.
HOW AGENCY MAY ARISE.—Although agency undoubtedly originated
from the relationship of master and servant, and that relationship from the
enforced service rendered by slaves to their master, to-day the law of
agency in the broad sense is a contractual relationship. The agent or servant
or independent contractor becomes such upon the express or implied
request of the principal. Although agency may exist, in so far as third
persons are concerned, without any formal contract between the principal
and the agent, yet, in the great majority of cases, there is an actual contract
between the parties to the relation. Compensation, although usually an
element in the contract, is not necessarily a requisite. For instance, I may be
liable for the negligent act of my son in running my automobile in
connection with my business, although he is acting without any

compensation. There are four methods by which the relationship of agency
arises: (1) By contract; (2) by ratification; (3) by estoppel; (4) by necessity.
WHO IS OR MAY BE AN AGENT.—The law of agency, as between
principal and agent, is simply an application of the general law of contracts,
but as between third parties and the principal, or agent, new questions arise.
The first question is, who is an agent and who is a principal? Any employer
is a principal and any employee is an agent. The employer is a principal
whether he employs the employee for a single act or whether he employs
him for a period of time. Besides the ordinary cases that you will think of
under the head of employer and employee, an officer of a corporation is an
agent, the corporation being the principal. The president of a corporation is
as much an agent as a clerk in the employ of the corporation. A partner is an
agent—of the firm. These different kinds of agents are distinguished chiefly
in the different scope of the authority which they possess.
DISABILITY.—In our discussion of contracts, we found that certain
persons were under disability so far as making contracts was concerned. We
mentioned the case of infants, married women, insane persons, and the like.
The same disabilities do not exist in the law of agency, so far as the agent is
concerned. Any person may act as an agent or servant. So infants, married
women, slaves, and even lunatics, may be agents or servants whose acts
will bind their principals. It has been held that even a dog may be an agent.
As to who may be a principal, the ordinary rules of contracts, as we have
discussed them, may be relied upon as giving the correct rule.
AGENCY BY CONTRACT.—Concerning agency which arises by contract,
little need be said. A contract of agency must possess all of the elements of
the ordinary contract, such as mutual assent, consideration, competent
parties, legality of object, and in some cases, a particular form. The general
principles of contract law as we have discussed them are applicable to this
method of forming the agency relationship.
POWERS OF ATTORNEY.—In connection with the formation of agency
by contract, special attention must be given to powers of attorney. A power
of attorney must oftentimes be given in order to convince third persons that
the agent really is an agent, with the powers which he claims to possess. A
power of attorney is nothing more than a written statement that a particular

person is the agent of another person, with the powers stated in the
document. A power of attorney may be very broad, giving the agent very
wide powers, or may be narrow, giving the agent or attorney power to do
only a specific thing. Now, many powers, so far as the law itself is
concerned, might just as well be oral as written, but you could not induce
third parties to deal with the agent and believe that he had authority unless
he showed as proof of it a power of attorney. That is why a power of
attorney is generally given; not that the law requires it, but that the agent
may have evidence of his agency which will satisfy third persons that he is
really the agent. A corporation would not transfer stock without a written
power presented to it; yet, if it chooses to run the risk, there would be
nothing illegal in doing so. But it does not choose, and an attempt to compel
it to transfer would be held unreasonable unless the authority of the person
claiming to be empowered to transfer the stock were in writing and shown
to it.
WITNESSED AND SEALED POWERS OF ATTORNEY.—A witness is
not necessary on a power of attorney. A witness on a power of attorney has
the same effect as on any other document where a witness is not absolutely
required, and that is this: if the signature of a document is called in question
and the signature is witnessed, the way which the law requires proof of the
signature is by calling the witness to testify, and no other evidence is
permissible until the witness is produced or his absence accounted for; that
is, some adequate reason given and proved for not producing the particular
man who witnessed the signature. For this very reason it is sometimes more
difficult to prove a signature which is witnessed than one which is not. A
signature which is not witnessed may be proved by anybody who has seen
the person sign, or who is familiar with his signature, and who can testify
that the signature in question is his. The object of a witness is to provide
certain evidence that a signature is genuine. The testimony of a witness may
be more convincing in case of a dispute than testimony of one who merely
recognizes the signer's handwriting. A witnessed power of attorney might
be, however, more difficult to prove if the power of attorney were contested
than if it was not witnessed, that is, if the witness could not be found. On
the other hand, if you had your witness within reach it would be easy to
prove the signature by him. The whole matter of witnesses to deeds and
other documents, where a witness is not absolutely required, may be thus

summarized: it is a good thing to have a witness if the witness is a reliable,
well-known person who can always or generally be reached. It is a bad
thing to have a witness who is a servant or a person whom you may lose
sight of after some time has elapsed. The question may also be asked: How
does a power of attorney, when given under seal, compare with one without
a seal? One is as good as the other, except that if it is desired that the
attorney or agent shall execute any instrument under seal, such as a deed of
real estate, the power must itself be under seal; but a power to do anything
which does not require the execution of a sealed instrument is just as good
without a seal as with one. This, however, is true; if the power contains an
agreement by the principal not to revoke the power, this agreement will not
be binding if there is neither seal nor consideration, but will be binding
without consideration if under seal, in a State where seals still have their
common-law effect. The principal will be able, it is true, even in such a
case, to revoke the power, but he will commit a breach of contract if he
does.
AGENCY BY RATIFICATION.—Where the assent of the principal to the
act of the agent is given after the act is performed, it is in the nature of a
ratification of the act, and is intended to clothe the act with the same
qualities as if there had been a previous authority or appointment. Suppose,
for example, A and B are acquaintances. Both are wealthy. A is a good
judge of horses and knows B likes good horses. A discovers what he
considers a good horse and buys it for B at a very low price. He tells B the
next day what he has done and B goes to get the horse and tenders the price,
but the dealer refuses to sell, as he has been offered a higher price. B has a
cause of action for breach of contract, for by ratifying A's act, he has made a
binding contract between himself and the dealer. Suppose in the same
illustration, A had selected two horses for B, but when B saw them he
decided to take only one of them. In that case, there would be no contract,
for it is fundamental that a ratification, to be effective, must be of the whole
contract, and not of a part. A ratification, once it is given, dates back to the
original transaction and is irrevocable.
FORMATION OF AGENCY BY ESTOPPEL.—An estoppel may be said to
arise where a person does some act which will preclude him from averring
anything to the contrary. So, if one holds out another as his agent, he is
estopped to repudiate the acts of such a person within the scope of his

ostensible authority. In the case of Bradish v. Belknap, 41 Vt. 172, the facts
were that for a long time prior to 1863, B was the agent of the defendants in
selling stoves. This fact was generally known and was well known to the
plaintiff. In 1863 B ceased to be the agent of the defendant, but continued to
sell stoves, which he purchased of the defendants. No public notice of the
termination of the agency was given, nor was the fact known to the
plaintiff. B continued to represent himself as agent of the defendants and
was in the habit of taking notes for stoves sold, payable to the defendants,
and this was known to the defendants. The plaintiff, believing B to be the
agent of the defendant, offered to buy a stove of him and pay him in pine
lumber. To this B assented and the lumber was accordingly furnished to B
and the defendants, together with other lumber which the plaintiff charged
up to the defendants. The defendants later attempted to escape liability for
the lumber furnished in excess of the value of the stove. The court, holding
them liable, said: "B during all this time was perfectly poor and
irresponsible, and this fact was known by both parties. B represented
himself as the agent of the defendants, and the conduct of the defendants
was such as to justify the plaintiff in regarding them as the principals; and
we can hardly conceive it possible under the circumstances that the
defendants did not understand that the plaintiff so regarded them. And to
allow them now to deny the agency and thus defeat the plaintiff's right to
recover for the balance of the lumber would be permitting them to
perpetrate a palpable fraud on the plaintiff."
ESTOPPEL DEFINED.—This term will occur several times in the different
topics of commercial law. An estoppel may be said to arise when a party by
conduct or language has caused another reasonably to believe in the
existence of a certain state of things and the other party acts on that belief,
the first party is precluded from denying the existence of that state of things
to any one who has justifiably relied on his language or conduct.
ILLUSTRATION.—There is a common saying in admiralty, that a seaman's
claim for wages is nailed to the last plank of the vessel. So if boatswain
John Silver is left unpaid by his vessel in London and he later finds the
vessel in New York, although its ownership has entirely changed
meanwhile, he may still file a libel for his wages and have the United States
Marshal for the Southern District of New York seize the vessel. Suppose
however you contemplate buying a vessel. You go on board with the present

owner and while all the members of the crew are lined up on the main deck,
you ask him in a voice loud enough to be heard by everybody whether there
are any unpaid wage claims. He replies that everything is paid to date. The
crew remain silent. You purchase the vessel and a few weeks later members
of this same crew seek to collect from the vessel a wage claim of one year's
standing. Their claims against the vessel or against you as owner are
unenforcable. In other words, they are estopped because of their conduct
when you purchased the vessel. If a person does not speak when he ought,
at times the law will not allow him to speak when he wishes. Boatswain
Silver had never done anything to preclude him from asserting his wage
claim. His, therefore, is not a case of estoppel.
AGENCY BY NECESSITY.—The authority of the agent may be enlarged
by some particular necessity or sudden emergency in which case it is the
duty of the agent to act, even though he cannot receive the advice or
directions of his principal. This method of creating the agency relationship
is one upon which the courts are not agreed, and there is great conflict in
the decisions. The case of Gwilliam v. Twist, (1895) 1 Q. B. 557, and 2 Q.
B. 84, is a good illustration of how close the line may be drawn. The facts
were that the driver of an omnibus belonging to defendants became
intoxicated while on duty and was taken from his seat by a policeman. A
man who happened to be standing near volunteered to drive the omnibus to
the defendant's yard, and the driver and conductor acquiesced, the former
warning him to drive carefully. The volunteer in negligently turning a
corner ran over and injured the plaintiff, who brought action for damages
against the defendants, owners of the omnibus. The trial court held, with
considerable hesitation, that the defendants were liable for the injury,
placing its decision upon the ground of agency by necessity; but the court of
appeal reversed the decision on the ground that the necessity did not
sufficiently appear, since the defendants might have been communicated
with, and left open the question whether, if there had been an actual
necessity, the defendants would have been liable.
RIGHT OF PRINCIPAL TO DILIGENT AND SKILLFUL SERVICE.—Let
us consider, first, the rights of the principal and agent as between one
another. The rights which the principal has against the agent are, first, a
right to have the employee render reasonably diligent and skillful service.
The amount of skill which the employer can fairly demand from his agent

depends on the character of the contract between the two and on the
circumstances justifying the principal in expecting a greater or less degree
of skill. When a man employs an expert accountant to act for him he has a
right to expect greater skill than if he were employing an ordinary
bookkeeper. It depends on the character of the work and of the man
employed. The amount of compensation paid to the employee may also
have a bearing on the amount of skill the employer has a right to expect.
RIGHT OF PRINCIPAL THAT AGENT SHALL NOT EXCEED HIS
AUTHORITY.—The second right that a principal has is to demand from his
agent that the agent shall act in obedience to instructions and only within
the limits of his authority. These limits may be fixed expressly in the
contract between principal and agent, or they may be left wholly to
implication from the nature of the employment. Perhaps more commonly
they are partly fixed by express agreement and partly fixed by natural
implications which arise from the nature of the employment.
RIGHT OF PRINCIPAL TO ACCOUNTING.—Thirdly, the principal has a
right in financial dealings with his agent, or in regard to financial dealings
of the agent with third persons, to demand an account from his agent. It is
not enough that the agent actually expend money intrusted to him correctly;
he must furnish a correct account of expenses and of collections.
RIGHT OF PRINCIPAL TO FIDELITY.—Finally, the agent is under a duty
of fidelity or loyalty to his principal. The principal is entitled to demand that
the agent, unless the contrary is agreed, shall make the employment or
agency his sole interest in regard to that particular thing. Of course, in many
agencies the agent is undertaking a great deal of outside business besides
the particular agency in question, and he has a right so to do so long as the
principal has not engaged his whole time, and so long as one agency does
not interfere with another. But that last is an important point. An agent who
undertakes one task for one principal which occupies only one-tenth of his
time cannot take another employment which is inconsistent with that. An
agent to sell a particular kind of goods for one principal, even though his
agency is not expected to take the agent's whole time, cannot undertake an
agency for a competing principal. The two things are inconsistent, and the
agent would be disloyal if he accepted.

SIDE COMPENSATION.—Then, again, the agent must not get what may
be called "side compensation" of any sort. His whole compensation as agent
must be what is due him directly from the principal under the agreement.
For instance, if a buyer for a department store gets paid a commission by a
firm from which he buys goods, that is a side commission which the buyer
as an agent has no right to take; and so strict is the law, that if an agent does
take any such extra compensation the principal has a right to recover it from
him. Of course, if the principal agrees to side compensation, it is all right
for the agent to take it; when the principal agrees to it, it ceases to be what
we have called side compensation and becomes part of the agent's direct
compensation to which he is entitled under his bargain with his principal.
ACTING AS AGENT FOR BOTH PARTIES.—One of the most common
difficulties that agents get into in regard to this requirement of fidelity, and
sometimes with entirely good faith, is undertaking to act as agent for both
parties. That cannot be done unless each party especially agrees that the
agent may act for the adverse party. An attorney-at-law cannot represent
two sides of a case. A real estate broker cannot represent buyer and seller,
and a stock broker cannot represent buyer and seller. Stock brokers have
one practice which perhaps may seem to infringe this rule. A customer
comes into a broker's office and says he wants to buy 100 shares of New
York Central. About the same time another customer comes in and says he
wants to sell 100 shares of New York Central. Now, must a broker go on the
exchange and make a purchase for one customer and then a sale for the
other, or may he, so to speak, negotiate through himself a sale for the
customer who wants to buy from the one who wants to sell? What he
frequently does, in fact, is this: He buys and sells from himself, but
publicly, giving other brokers the chance to buy or sell if they wish. The
broker, according to the rules of the New York Stock Exchange, cannot
execute this transaction secretly in his office, but must offer the securities in
question on the exchange, and the purchase and sale must be recorded on
the ticker. If the bidding and asking prices are more than an eighth apart, he
may offer the New York Central at a price midway between the bidding and
asking quotations and buy it himself and charge each customer a
commission, but he must actually make the offer or bid aloud on the floor.
The broker is technically acting for both parties, but he is not fixing the

price. He makes an open bid on the exchange, and it may be that would
save the transaction.
AGENT'S RIGHT TO COMPENSATION.—What are the rights of the
agent against the principal? They are two. First, a right to compensation;
that is, a right to the pay that has been agreed upon, or, if no pay was agreed
upon but it was understood that there should be some compensation, then a
right to reasonable compensation. It is perfectly possible to have an agency
without compensation. Frequently one man agrees to act for another
without pay, and an agent who is acting without compensation, so long as
he acts as agent, is bound to the same obligations to his principal as if he
were receiving compensation, only he can withdraw from his agency
whenever he sees fit since he is not paid for it. But unless circumstances
show that an agency was understood to be without compensation, it would
be implied that reasonable compensation was to be paid to the agent for his
services.
AGENT'S RIGHT TO REIMBURSEMENT.—The other right of the agent
is the right to reimbursement and indemnity. As the agent is acting for the
principal, the principal ought to pay all the bills of whatever kind incurred,
so long as the agent is acting rightfully within his authority, and the
principal is bound to pay all such bills. This obligation of the principal to
pay all the bills of the agency means not simply that he must pay actual
expenses, but that if liabilities of any kind arise by reason of third persons
suing the agent or holding him liable, if the action of the agent was within
his authority, the principal must indemnify against any loss.
PRINCIPAL BOUND TO THIRD PERSONS BY AUTHORIZED ACTS
OF AGENT.—Now let us turn from the rights of principal and agent as
between one another to the rights of third persons. When do third persons
get rights against the principal? In the first place, whenever the agent,
acting in accordance with his authority, enters into a transaction with a third
person on behalf of the principal, the principal is bound to the third person
to just the same extent as if he himself had entered into the transaction; but
it is not only in cases where express authority is given to the agent that this
principle applies.

IMPLIED AUTHORITY OF AGENT.—In many cases the authority given
an agent is not expressly stated. One has to rely on the general course of
business and on the nature of the employment to determine the extent of the
agent's authority. A third person deals with a cashier of a bank, or deals with
the paying teller, or he deals with the president; now whether the bank is
bound by that dealing depends on what is by general custom, or course of
business, the authority of a cashier or a paying teller or a president. If
cashiers or paying tellers or presidents generally have certain authority, then
it is a fair assumption that this particular officer has such authority.
AUTHORITY TO DO PARTICULAR ACTS.—An agent to sell has
generally no authority to make a sale on credit or to receive anything but
money; he cannot barter or exchange the property even in part, nor pledge
or dispose of the property to be sold in payment of his own debts. For the
sale of land an agent's authority ought always to be under seal, and the
provisions contained in this power of attorney will be strictly construed. In
a sale of personal property, an agent has implied authority to do whatever is
usual and necessary in such transactions. He may receive payment if he has
possession of the goods, but not otherwise, and warrant the quality, if such
goods are customarily sold with a warranty by agents. He cannot sell on
credit unless such is the custom, as in the case of commission merchants,
nor pledge or mortgage the goods. The agent may not buy on credit unless
so authorized, or it is the custom of the trade; but a principal's direction to
purchase, without supplying the agent with funds, will imply authority to
purchase on credit. The agent must purchase precisely as directed. An agent
to manage has an authority co-extensive in scope with the business, and
possesses the same power and authority as the principal, so far as
management goes, but the agent may not sell or dispose of a business, nor
mortgage the property used in carrying it on, nor engage in new and
different enterprises. Public agents, i. e., public officers, cannot involve
their principals, the municipal corporations whose officers they are, in
contract liabilities with third parties unless actually authorized to do the act
in question; and all persons dealing with them must inform themselves of
the scope of their legal powers.
APPARENT AUTHORITY OF AGENT.—But it is not only in cases where
the agent is expressly authorized, or authorized by such implication as we
have just alluded to, that the principal is bound. There is the further case

where the agent has apparent authority, although, as a matter of fact, he has
no authority. Take the case of a cashier certifying a check. We will suppose
that cashiers, generally, have authority to certify checks. With most cashiers
that would be what we have called an implied authority, as it arises from the
general nature of their positions though nothing was ever said about it by
the bank directors. But suppose in a particular bank it was a rule of the
bank, expressly stated and voted by the directors, that the cashier should not
have power to certify checks. Now, no one can say that his power here is
either express or implied; it is certainly not express, and any implication
that might otherwise arise from his position is negatived by the express vote
of the directors, and yet if that cashier should certify a check to any person
ignorant of this limitation on his authority the bank would be bound by the
certification because the cashier has apparent authority. He looks to the
world as if he had authority, and seems to the public like any other cashier.
Most of the difficult cases in agency, so far as liability of the principal to
third persons is concerned, relate to this matter of apparent authority.
ILLUSTRATIONS.—Compare the following case with the case of the
cashier above alluded to: A man who is giving some support financially to a
book dealer writes a note in which he says, "I authorize A B to buy a stock
of books not exceeding, at any one time, $5,000." The book dealer shows
that written authority to persons from whom he wishes to buy books. They
sell him books, and, unknown to the last person who thus sells him books,
he has just before bought a quantity which makes the total largely exceed
$5,000. Is the principal liable to the persons who last sold books to the
dealer? The answer is no. And what is the difference between that case and
the cashier case? In the book case the last seller saw the paper giving
authority to the book dealer to purchase. He had no reason to know that the
day before a large quantity of books had been purchased. He acted in entire
good faith and the deception was natural. Still, the employer, or the writer
of the letter, has done nothing here to make the last seller suppose that
$5,000 worth of books had not already been bought, nor does the course of
business justify the last seller in supposing they might not already have
been bought. It was a hard question for him to find out, but on the face of
the letter it was evident that any one who dealt with the bookseller might
have to determine this question or rely at his peril on the bookseller's word.
Here is another case: a town treasurer was authorized to borrow a certain

sum of money. He gets a certified copy of the vote and goes to one bank
and borrows the money, and goes to another bank with that same certified
copy of the vote and borrows the money over again. Is the town liable to the
second bank? No; on the face of the paper there was but one loan to the
town authorized, and any one who lends the money must at his peril find
out whether a loan has already been made. When we say, therefore, that a
principal is bound if his agent had apparent authority, we do not mean that
whenever a third person is deceived into the belief that the agent has
authority, the principal is bound. Quite to the contrary, the principal must
have in some way been the cause of that deception; he must have caused it
either by some express representations, or he must have caused it by putting
a man in a place where the general course of business would induce the
public to believe the agent had greater powers than he had.
GENERAL AND SPECIAL AGENTS.—It is much easier to find a case of
apparent authority, which will bind the principal, if the agent is a general
agent than if he is a special agent. A special agent is an agent authorized to
do one act, as this town treasurer was authorized to make one loan. The
cashier is a general agent, authorized to do any of the great variety of acts
which cashiers ordinarily do, and if the directors vote to take away one of
the normal powers of the cashier, they must make the limitation public or
the bank will be bound by the cashier's act.
UNDISCLOSED PRINCIPAL.—Not only may the third person hold the
principal liable in cases where the agent purports to act for the principal, but
also in cases where the agent does not disclose his principal at all and
purports to act as a principal himself, so long as it is true that the agent
really was acting in the principal's business. Suppose a selling agent for a
manufactory enters into a contract for the sale of goods produced in the
manufactory. The selling agent, we will further suppose, contracts—as
selling agents often do—in his own name; but he contracts in regard to the
sale of the product of the principal, the manufacturer, and on his behalf.
Now, assume that this contract of the sales agent was authorized; the third
person may sue the manufacturing company, though he did not know of the
existence of the manufactory at the time he entered into the contract, and
supposed he was contracting simply with the agent. As it is phrased in law,
an undisclosed principal is liable, and conversely, the undisclosed principal
may sue on this contract made by the sales agent.

RATIFICATION.—If an agent acts beyond his authority, the principal, if he
chooses, may ratify the acts of the agent. Occasionally in an emergency it
becomes necessary for an agent who has his principal's interest at heart to
take a chance and act beyond the authority given him. In such a case, if the
principal ratifies it, it is all right, both as far as the agent is concerned, and
as far as the third person is concerned; but, of course, the principal is under
no legal obligation to ratify.
RIGHTS OF PRINCIPAL AGAINST THIRD PERSONS.—Now, the right
of the principal against the third person is the converse of the right of the
third person against the principal, of which we have been speaking.
Generally when a transaction is of such a sort that the third person would
have a right of action against the principal, if the principal fails to do as he
agreed, the principal will have a right of action against the third person if
the latter breaks his agreement.
PRINCIPAL IS LIABLE FOR TORTS OF AGENT.—Not only is the
principal liable for the contracts of his agent, but he is also liable for any
tort which an agent may commit, so long as he is acting in the course of his
business. Of course, accident cases present the commonest type of that sort
of liability. A street railway is liable for the results of its motor-man's
neglect, so long as the motorman was running the car. If the motorman got
off the car on a frolic of his own, the street railway would not be liable for
anything he might do then. The same principle may be found in other cases
than accident cases. Suppose officers of a corporation wrongfully overissue
stock. If those officers were the officers authorized to issue stock, and,
therefore, were acting in the general course of their business, the
corporation would be liable for that tortious act in overissuing stock.
AUTHORITY MAY GENERALLY BE ORAL AS WELL AS WRITTEN.
—The authority given by a principal to an agent may in general be oral as
well as written; it is just as good. There are, however, a few exceptions to
that. In the first place, an authority given to an agent to execute an
instrument under seal must itself be not only written but under seal. An oral
or a written authority, if not under seal, given to an agent to convey land,
which must be conveyed by a sealed deed, would not enable the agent to
make a valid deed. Where the effect of seals is abolished this principle is of
course no longer applicable. Generally an agent orally authorized to make a

contract to buy or sell land may bind his principal by entering into such a
contract. The contract the agent enters into, must, because of the Statute of
Frauds, be in writing, and signed, but the agent's authority generally need
not be written. In some States, however, written authority is required by
statutes.
PROXIES.—A proxy is simply a written power of attorney to an agent,
authorizing him to vote for a stockholder, and there, too, a corporation
would be held justified in refusing to recognize any proxy that was not in
writing, or any agent who did not have a written proxy even though proxies
were not required to be in writing.
LIABILITY OF AGENT TO THIRD PERSONS.—How about the rights
and duties of the agent as against the outside world? The agent is liable to a
third person if he commits a tort. It does not make any difference that the
principal is also liable, the agent is liable too. The third person may sue
either the principal or agent as he prefers; he cannot get compensation for
his injury more than once, but he can get that either from the principal or
agent, whichever is more convenient. The third person may hold the agent
liable if the agent contracts for an undisclosed principal. In the case of the
sales agent referred to a moment ago, where the agent was really acting as
agent for a manufacturer but did not say so, the third person might sue the
manufacturer on the contract; but he might sue the agent, and if the agent
was held liable the agent would have to seek reimbursement from the
principal.
AGENT WARRANTS HIS AUTHORITY.—An agent is liable in one other
case to the third person with whom he deals. If the agent did not have
authority to do what he purported to do, the third person can sue him,
though the third person could not sue the principal in this case, since the
agent was exceeding his authority. An agent is said to warrant his authority
to third persons with whom he does business.
AGENT CANNOT DELEGATE AUTHORITY.—An important rule in
agency is that an agent cannot delegate his authority. If A is appointed to do
certain work, A must do it himself, and cannot empower B to do it if it
proves inconvenient to do it himself. There are three exceptions to this rule.
The first is that if he is given express permission to delegate his authority,

he may do so, and, of course, if the principal should ratify an unpermitted
delegation of authority, the ratification would here, as always, serve as well
as original authority. The second case is where the usage of business is such
that the principal must be presumed to have understood that there was to be
a delegation, or partial delegation, of authority, and in such a case, though
the principal has not expressly authorized delegation, he will be treated as if
he had authorized it by virtue of business usage. The third case where
delegation is authorized is in regard to what are called ministerial or
mechanical acts, that is, acts which involve no exercise of judgment or skill.
The principal is entitled to the agent's judgment and skill, but if there are
parts of the work that do not require skill and that, from their nature, any
ordinary clerical assistant can do, then such acts may be delegated.
TERMINATION OF AGENCY BY ACT OF PARTIES.—The parties may
have agreed in their contract that it should terminate at a certain time or on
the happening of a certain event. The arrival of that time or the happening
of the event would of course end the relation as between them. It would not
so operate as between principal and third parties, however, unless the third
parties were informed. So, performance of the purpose for which the
relation was created terminates the relation as between principal and agent.
The parties may make a subsequent agreement to terminate the relation, and
such an agreement would be good, the abandonment of the rights of each
party created by the original contract being a sufficient consideration for the
promise of each to surrender his own rights.
REVOCATION.—Except in the case of irrevocable agency noted below,
the principal may revoke at any time the agent's authority as to matters not
already executed. Any other rule would enslave the principal to his agent by
forcing him, at the agent's will, and against his own consent, into contracts
with third parties. But, while the principal has this right, the exercise of it
may subject him to liability to his agent. If the contract of employment is
for a definite time, and the principal, without cause, revokes the agent's
authority before that time arrives, the principal is liable to the agent for
breach of contract; if no time is fixed for the termination of the agency, it is
an agency at will, and the principal, with or without cause, may revoke at
any time without incurring liability to his agent. The acts which will amount
to a revocation by the principal are various. For instance, if an agent has
exclusive authority to represent the principal, the appointment of another

agent would amount to a revocation. As to making the revocation effective,
a revocation operates on the agent from the time he has notice of it. It is
effective as to third parties only when notice is given to those who have
dealt with the agent that the agent's authority is revoked. Without such
notice the principal does not escape liability to third persons by reason of
further acts on his agent's part. Where an agent is appointed in a particular
business, parties dealing with him in that business have a right to rely upon
the continuance of his authority until in some way informed of its
revocation. This notice must be actual to those who have dealt with the
agent, and general, as by publication in newspapers, where persons have not
before dealt with the agent.
RENUNCIATION.—The agent may renounce his employment at any time,
but if he contracted to serve for a certain time, and renounce before that
time arrives, he is liable to the principal for breach of contract, unless he
has ground for renunciation, such as the principal's breach of faith with him.
The sickness of the agent is a ground for renouncing the relation, even
though the sickness be caused by his own negligence or wrong. The
principal should inform third persons of the agent's renunciation if he would
fully protect himself against further acts of the agent.
TERMINATION OF AGENCY BY OPERATION OF LAW.—As in the
case of ordinary contracts, a contract of agency may be terminated by the
rules of law upon the happening of certain events. Thus, the destruction of
the subject-matter of the agency terminates the relation, if the parties
contemplated the continued existence of the subject-matter as the
foundation for what was to be done. A change in the law, as the enactment
of a statute declaring illegal agencies of a certain nature, that previously had
been legal, terminates the relation. So also certain changes affecting the
parties to the relation—i. e., the principal or the agent—effect a termination.
The death of the principal brings the relation to an end, and this is so
although the agent had no notice of it and subsequently dealt on behalf of
his principal with third persons; such contracts do not bind the principal's
estate. The death of the agent necessarily ends the relation. The occurrence
of the principal's insanity terminates the relation, and a judicial finding of
insanity is notice to all; but without notice of the insanity third persons who
deal with the agent in good faith are protected. The bankruptcy of the
principal terminates the relation as to all matters affected by the bankruptcy.

Impossibility to continue the relation brought about by restraint of law
terminates the relation.
IRREVOCABLE AGENCIES.—An agency to do an act touching a thing in
which the agent has an interest, or in which he is subject to an obligation,
cannot be terminated by act of the principal alone. The principal cannot
terminate the relation so as to leave the agent under obligations to third
persons, thereby shifting his obligations upon the agent; nor can he do so
when the agent has an interest in the subject-matter of the agency. It is
difficult to state concisely what will constitute such an interest that the
principal cannot terminate the relation, but it may be said to be some
ownership or right in the matter dealt with, such that the agent may deal
with it in his own name, and not a mere benefit to be obtained from the
performance of the contract of agency, as a commission to be realized from
sales. Possession of personal property with the right to sell, with authority
to apply the proceeds to a debt due from the principal to the agent, is
sometimes held to constitute an agency coupled with an interest such that
the principal may not revoke it; on the other hand, an interest arising from
commissions or the proceeds of a transaction, is not an interest which will
prevent revocation. The courts carefully examine agencies claimed to be
irrevocable because coupled with an interest, and are inclined to rule
against them.
MASTER AND SERVANT.—As we have said, the function of the servant
is to perform ministerial or mechanical acts for the master. The chief
subject-matter under the law of principal and agent is contracts, while the
chief subject-matter of the law of master and servant is tort. The servant, in
performing acts for his master, may, inadvertently or wilfully, cause injury
to a third person or to the property of a third person. The question arises:
What is the master's responsibility? We shall consider this from two
standpoints; the relationship of the master and servant, inter se (between
themselves), and the relationship of the master and servant as to the outside
world. For example: the driver of a delivery truck, operated by Lord &
Taylor, negligently runs over a pedestrian. The truck was going at the rate
of twenty-five miles an hour, although the instructions issued by Lord &
Taylor to all their servants is not to run cars more than fifteen miles per
hour in the congested parts of New York City. Is Lord & Taylor liable to the
pedestrian? This question involves the relationship of master and servant as

to outside parties. The same servant, while operating the delivery truck for
Lord & Taylor is run into, negligently, by a delivery truck operated by R. H.
Macy & Co. Is the master, Lord & Taylor, responsible to its servant for the
injury which he suffers as the result of the collision? This question involves
the relationship of master and servant inter se. We shall consider this latter
relationship first.
THE COMMON LAW GOVERNING THE RELATIONSHIP OF
MASTER AND SERVANT INTER SE.—What is the liability of the master
towards the servant if the servant is injured? We shall see in the chapter on
torts that a tort is defined to be a breach of duty imposed by law for which a
suit for damages may be maintained. Hence it follows that the master's
liability in tort flows from a breach of duty owed by him to his servant. If
there is no legal duty, correspondingly there is no legal liability. These legal
duties which the common law developed over a long period of years may be
summed up as follows: (1) To provide a reasonably safe place for the
servant to work. (2) To provide reasonably safe, suitable, and sufficient
tools and appliances with which the servant is to perform his work. (3) To
provide reasonably careful and competent fellow workmen and in sufficient
number for the work in hand. (4) To warn the servant of any unusual
dangers connected with the work. (5) Generally so to conduct the work as
not to expose the servant to dangers which could be avoided by the exercise
of reasonable diligence. From the servant's standpoint, it was said that he
assumed the ordinary risks inherent to the kind of business in which he was
employed. These rules of the common law were the outgrowth of conditions
surrounding the small shop and involving the use of simple or no
machinery. Under modern industrial conditions they have proved wholly
inadequate. We have been unduly conservative in recognizing this.
Strangely enough the Workmen's Compensation Acts, with which we are
now so familiar, had their origin in Germany in 1884. Nearly all the
countries of continental Europe recognized the situation about thirty years
ago, and England in 1897, and the United States within the last few years.
THE OBJECTION OF THE COMMON LAW THEORY.—Under the old
theory, if the master had observed the duties which we have mentioned, he
had performed his whole obligation to his own servant; thus, if two fellow
workmen were working on the twentieth story of a new steel skyscraper
being erected by the Institute Construction Co., and through the

carelessness of servant A, servant B was precipitated to the street and killed,
there would be no recovery on the part of the estate of the deceased servant,
although he may have left a wife and several children dependent wholly
upon him for support. Even admitting that the Institute Construction Co.
had exercised due care in selecting competent fellow servants for the
deceased to work with, and had, therefore, performed all of its obligations
on this score, nevertheless, it is better, from the standpoint of society, that
the wife and children of servant B should receive fair compensation rather
than be thrown upon the mercy of the public. The great object of the
Workmen's Compensation Act is to shift the burden of such economic waste
from the employer to the industry, in order that it may ultimately be borne
by the consumer as a part of the necessary cost of construction and
production. Thus we are asking the master to assume a greater financial
responsibility for injuries to his servant under this new theory than he has
assumed heretofore. This can be taken care of by the increased price he
charges for his work and this in turn will ultimately pass the added burden
to the community at large.
ILLUSTRATION.—Again, even if the servant did have a cause of action
against his master, because of the master's failure to observe the common
law requirements we have mentioned, nevertheless, the expense of litigation
and the interminable delays connected with it, amounting at times to two or
three years before the case was finally disposed of by the court of last
resort, all tended to make litigation for the servant all but impossible. He
would ordinarily have no money with which to begin this long litigation,
and would be obliged to retain the services of a lawyer, who would take the
case on a contingent fee basis, and often take from the workman, should the
decision finally be in his favor, a third, a half, or even a greater portion of
the amount that he recovers. Perhaps this was no greater compensation than
the lawyer was entitled to because of the labor involved and the prospect of
no pay if he lost the case, but regardless of this it was hard on the client.
The Supreme Court of Washington, in the case of Stertz v. The Industrial
Insurance Commission, 91 Wash. 588, has summed up the objections
against the whole system as follows: "Both had suffered under the old
system, the employers by heavy judgments of which half was opposing
lawyers' booty, the workmen through the old defenses or exhaustion in
wasteful litigation. Both wanted peace. The master in exchange for limited

liability was willing to pay on some claims in future where in the past there
had been no liability at all. The servant was willing not only to give up trial
by jury but to accept far less than he had often won in court, provided he
was sure to get the small sum without having to fight for it.... To win only
after litigation, to collect only after the employment of lawyers, to receive
the sum only after months or years of delay, was to the comparatively
indigent claimant little better than to get nothing. The workmen wanted a
system entirely new. It is but fair to admit that they had become impatient
with the courts of law. They knew, and both economists and progressive
jurists were pointing out, what is now generally conceded, that two
generations ought never to have suffered from the baleful judgments of
Abinger and Shaw."
WORKMEN'S COMPENSATION ACT.—To meet the objections we have
just mentioned, the workmen's compensation act principle was developed
on the continent of Europe. Practically all of continental Europe had placed
laws of this character on its statute books before the end of the nineteenth
century; in 1906 England passed similar legislation, and within the last few
years, we have adopted the same principles. With the exception of a few
Southern States, every State and territory of the United States has a
Workmen's Compensation Act. We cannot consider these acts in detail. The
principle underlying them is the same throughout the country. They are
designed to compensate servants for "accidents" "arising out of," and
"during the course of" their employment, and this, regardless of whether the
servant was at fault or not. The whole theory of the common law had been
that the master must be at fault in order that the servant may recover. The
new theory is that the community at large can better stand the loss suffered
by a servant than the individual servant. For example: a steel girder falls
upon a workman engaged in structural steel work, through no fault on his
part and also through no fault on the part of his employer. Under the
common law, he would have to stand the loss himself. Under the
Workmen's Compensation Act, such an event is an "accident"; it "arose out
of" and "in the course of" his employment. Therefore, he is entitled to a
fixed compensation, and he secures it almost immediately through a
workmen's compensation bureau, or whatever body the act of the particular
State creates for the purpose of settling such matters. This is a burden on the
employer, it is true; he was in no way to blame. Neither was the workman.

The employer may protect himself against the claims of his workmen by
insurance under a plan provided by the State law, or if the State law does
not provide for it, by arrangements with private companies the same as any
other accident insurance is obtained, and by figuring his cost upon the
particular job, he can charge as a part of his operating expense, the cost of
his insurance and include that in his charge for work. The loss suffered by
the individual workmen is then passed to the community at large. From an
economical and sociological standpoint, this situation is undoubtedly better
than that existing under the theory of the common law.
THE INTERPRETATION OF WORKMEN'S COMPENSATION ACTS.—
Although these acts are comparatively new in this country, there has been a
great amount of litigation, and it is not practical to enter into a discussion of
all the close questions which are raised in interpreting such acts. A vast
amount of the litigation has been concerned with the interpretation of the
three expressions, common to almost all the acts, "accident" "arising out of"
and "during the course of." While the courts have shown a broad-minded
spirit in interpreting these expressions, it is undoubtedly true that some
decisions will suggest further legislation in order to correct certain evils
which exist at the present time. For example, in defining the term
"accident," the leading English case said: "The expression 'accident' is used
in the public and ordinary sense of the word, as denoting an unlooked-for
event which is not expected or designed." And Judge Siebecker of
Wisconsin says "accidental" contemplates "an event not within one's
foresight and expectation, resulting in a mishap causing injury to the
employee," and Mr. Justice Pound of New York says that the statute
contemplates injuries "not expected or designed by the workman himself."
To illustrate: A window-dresser is decorating the window in Woolworth's.
He swallows a pin. This is an "accident" within the contemplation of the
act, and entitles him to recovery. Again, a workman is employed in a white-
lead factory. During his six months period of service in the factory, he
contracts tuberculosis. This is not an "accident" because you must be able to
put your finger upon a definite time when the unlooked-for event happened.
This leads us to the general statement that Workmen's Compensation Acts
in this country, as at present drawn, do not generally cover occupational
diseases. Separate legislation is undoubtedly desirable to extend the
principle in such cases, for if it is sound that the window-dresser in

Woolworth's should recover, it should be equally sound that the workman
who contracted tuberculosis should recover. Again, the other two
expressions "arising out of," and "during the course of" have caused much
litigation. Perhaps the most satisfactory statement about these expressions is
in the leading Massachusetts case, In re McNicol, 215 Mass. 497. Here the
court says: "The injury must both arise 'out of' and also be received 'in the
course of' the employment. Neither alone is enough. It is not easy * * * to
give a comprehensive definition of these words. * * * An injury is received
'in the course of' the employment when it comes while the workman is
doing the duty which he is employed to perform. It 'arises out of' the
employment, when there is * * * a causal connection between the
conditions under which the work is required to be performed and the
resulting injury. * * * If the injury can be seen * * * to have been
contemplated by a reasonable person familiar with the whole situation, * *
* then it arises 'out of' the employment. * * * The causative danger must be
peculiar to the work and not common to the neighborhood. * * * It need not
have been foreseen or expected, but after the event it must appear to have
had its origin in a risk connected with the employment, and to have flowed
from that source as a rational consequence." An illustration will show how
these phrases are applied. The janitor of a building is alone in the building.
An old enemy who has not seen him for years, learns his whereabouts,
comes into the building, shoots him in the leg, causing him to have it
amputated. Is the master liable? It is an "accident," and clearly it arose
"during the course of" employment, but did it arise "out of" his
employment? Manifestly not. The guilty party would have shot the man had
he met him in Central Park, or any other place. It was purely personal
vengeance on his part which caused the act. The night watchman in a bank
is shot by a robber at night in the bank, while on duty. May he recover from
his master? Clearly he can. It is an "accident." It arose "during the course
of" his employment, it arose "out of" his employment also, because the
robber would not have shot him were he not in the bank as a watchman,
standing between the robber and the accomplishment of his purpose, the
securing of money from the bank.
THE RELATIONSHIP OF MASTER AND SERVANT AS RELATING TO
OUTSIDE PARTIES.—If the relationship of master and servant exists, the
question arises, is the master responsible for the torts committed by his

servant, resulting in injury to third parties? It is, of course, essential that the
wrongdoer must be the defendant's servant. It does not follow that a
wrongdoer is the defendant's servant simply because of a certain
relationship, as that of parent and child, husband and wife, or employer and
employee. Within the last few years, a great number of automobile cases
have been decided by the courts, and they are commonly spoken of as the
"family automobile cases." To illustrate: I own a car which is used by the
various members of my family. My son, while running the car, for his own
pleasure, negligently runs over some one. Am I responsible? Granting the
relationship of parent and child, that would not constitute, per se (of itself),
the relationship of master and servant. The injured man would have to show
more than I have indicated in order to entitle him to recover for my son's
negligence. Were members of my family in the car, being taken out for a
ride by my son, I would be liable. Again, my wife, in discharging a servant,
assaults her. Should the mere fact of the relationship of husband and wife
make me liable on the theory of master and servant? Clearly not. Again, I
employ John Smith as my chauffeur. I never operate my car on Sunday.
John Smith, who lives in the town adjoining mine, is moving, and asks if he
may borrow my car over Sunday to assist in the moving operations. While
using the car for that purpose, he negligently runs over some one. Am I
liable? Clearly not, for, although the relationship of master and servant
exists between me and my servant at the time he did the injury, he was not
acting for me as a servant. What is the rule to be applied to answer such
questions?
THE SERVANT MUST BE ENGAGED IN HIS MASTER'S BUSINESS.
—It is clear from the foregoing that, in order to make the master liable, the
servant must be engaged in his master's business, and he must be acting
within the scope of his employment. The New York case of Rounds v. The
Delaware, etc., Railroad, 64 N. Y. 129, states the general rule: "For the acts
of the servant, within the general scope of his employment, while engaged
in his master's business, and done with a view to the furtherance of that
business and the master's interest, the master will be responsible whether
the act be done negligently, wantonly, or even wilfully." The Court of Errors
and Appeals of New Jersey recently said in Holler v. Sanford Ross, 68 N. J.
Law, 324: "The Supreme Court of Connecticut states the rule applicable to
this class of cases about as clearly as it can be done, when it says: 'For all

acts done by a servant in obedience to the express orders or direction of the
master, or in the execution of the master's business, within the scope of his
employment, and for acts in any sense warranted by the express or implied
authority conferred upon him, considering the nature of the service
required, the instructions given and the circumstances under which the act
is done, the master is responsible; for acts which are not within these
conditions, the servant alone is responsible.'"
LIABILITY OF A PUBLIC AGENCY FOR THE NEGLIGENT ACTS OF
ITS AGENTS.—It is an old saying that "the King can do no wrong." This
principle of the English common law we have applied in this country, and
the Federal Government cannot be sued unless it gives its consent. While
the Court of Claims has been established, Congress has generally provided
that suits may be brought against the Federal Government only in contract
actions, and not in tort actions, so that ordinarily, if a person is injured
through the negligence of an employee of the Federal Government, he may
not recover against that Government. Thus, my only remedy in case of an
injury, received through the negligent operation of an elevator in a post-
office building owned by the Government, would be the passing of special
legislation by Congress compensating me. I would have no right to sue the
United States for such injury. The same general principles are applied to the
State governments. In regard to cities, the rule may be generally stated to be
that a municipality is not liable for the negligence of its servants in those
departments operated by the municipality in its governmental activities, as
distinguished from its administrative activities, in which case it is liable.
Thus, a city is not responsible for the negligence of its policemen or its
firemen, although injury results from their negligence, these departments
being examples of governmental activities of a municipality, while the city
would be liable, generally, for the negligence of the employees of its water
department, this being an illustration of its administrative activities. It is
also generally held that public charities, such as hospitals, and the like, are
not liable for torts committed by their servants, provided they have used
reasonable care in the selection of their servants.
INDEPENDENT CONTRACTORS.—A distinction must be made between
one whom we call an independent contractor and a master. When A desires
a particular piece of work done, he has two options as to doing it. He may
either hire a workman to do it, retaining control of the workman, and telling

him how he shall do it, or he may let the work by contract, simply
stipulating that it shall be done in accordance with plans and specifications
which his architect has drawn up. He retains no control over the contractor
or over his method of work. His sole interest here is to have the piece of
work turned over to him in its completed state. In the first case, we call the
workman a servant; in the second case, he is an independent contractor. One
who employs an independent contractor is not liable for the negligent acts
of the contractor or his servants, except in a few special cases. In Berg v.
Parsons, 156 N. Y. 109, the majority of the court states: "There are certain
exceptional cases where a person employing a contractor is liable, which,
briefly stated, are: Where the employer personally interferes with the work,
and the acts performed by him occasion the injury; where the thing
contracted to be done is unlawful; where the acts performed create a public
nuisance; and where an employer is bound by a statute to do a thing
efficiently and an injury results from its inefficiency." A few, but not many
courts, add to this list one further fact, that the employer must use due care
in the selection of a competent independent contractor, otherwise he is
liable. This would seem eminently sound.

CHAPTER V
Partnership
RELATIONS ANALOGOUS TO PRINCIPAL AND AGENT.—There are a
few relations, in the law, which are analogous to that of principal and agent.
The one which we shall take up now is the relationship of a partner to a
partnership, and also to the outside world. We shall consider in a subsequent
chapter, the functions, duties and responsibilities of trustees, executors, and
administrators.
THE IMPORTANCE OF PARTNERSHIP LAW.—There is a very common
impression that partnership law is not as important now as formerly. This
undoubtedly is true, as more and more large business enterprises are being
conducted in the corporation form; but there is still a large amount of
business done in the partnership form. What is most important, however, is
the very informality of the type of business conducted under the partnership
arrangement. Whether, in a given case, a partnership exists, becomes a vital
question. Two friends, A and B, in an informal way, go into a business
venture. The enterprise fails and A and B owe many debts. A has some
property of his own; B has nothing. You are a creditor, but all your dealings
have been with B. One simple point will show you whether your claim is
worthless. If A and B were partners, you may hold A. If they were not
partners, your claim probably never will be worth anything to you. The
question, then, whether or not a certain relationship constitutes a
partnership is a most important one, in the field of commercial law.
PARTNERSHIP DEFINED.—We shall have occasion, in the chapters on
bills and notes, and personal property, to refer to the movement to codify
certain branches of the law. This movement was begun by the
Commissioners on Uniform Laws proposing the Uniform Negotiable
Instruments Act, which has now been adopted in all of the States except
Georgia. One of the most recent codifications is the Uniform Partnership
Act which has been adopted in a number of the States, and which will
undoubtedly follow the same course as the other acts drawn by the same
Commissioners. We shall make frequent reference to the Uniform

Partnership Act in this chapter. Although some of the writers on the law of
partnership state that no satisfactory definition of the term partnership can
be given, the Uniform Act defines it as follows: "A partnership is an
association of two or more persons to carry on as co-owners a business for
profit." It is undoubtedly true that even with this definition, a considerable
amount of further explanation will be necessary to determine with any
degree of certainty, just what is meant by partnership.
THE DIFFERENCE BETWEEN A PARTNERSHIP AND A
CORPORATION.—While we may be anticipating our chapter on
corporations, it is well, at the very outset, to understand the fundamental
differences between a partnership and a corporation. We may mention six
differences:
(1) When a partner dies, the partnership is automatically dissolved. If a
partner sells or transfers his interest in the business, this works a dissolution
of the firm. On the other hand, the situation is precisely the opposite in the
case of a corporation. The death of a shareholder has no effect upon the
corporation. In fact, if all of the shareholders of the United States Steel
Corporation should die at once, the corporation would still exist. So also the
transfer of stock from one owner to another has no effect upon the
corporation's existence. Many thousand shares are dealt with on the
exchange each day without the slightest effect upon any corporation.
(2) The doctrine of individual liability for the debts of a firm is a
fundamental characteristic of partnership law. Each member of the firm is
absolutely liable for all the debts of the firm. Thus, if the firm consists of A,
B, and C, and the firm goes into bankruptcy and owes $50,000, and B and C
are both individually worthless, and A has his own private fortune, A will be
obliged to pay all of the debts, although, according to the arrangements that
the partners made when forming the partnership, each was to share the
profits and losses equally. Theoretically, A has the right to contribution from
his fellow partners, and should they later acquire property, he will be able to
enforce this right in a court of equity. In a corporation, a shareholder is
liable only for the value of his share. If he subscribes to a share of stock, par
value $100, and has paid only $50 on his subscription, and the corporation
goes into bankruptcy, its receiver can compel him to pay the balance of his
subscription, $50, but that would be the extent of his loss. If I buy a share of

United States Steel Common, at $79, on the exchange, and the company
goes into bankruptcy, my loss will be only $79. I would not be obliged to
make up to the receiver the other twenty-one dollars. The only noteworthy
exception to this rule as to the liability of a stockholder is in the case of a
shareholder in a National bank, (this is true of some of the State banking
laws also), where a shareholder is liable to an extra assessment equal to the
par value of the stock he owns.
(3) In a partnership each member of the firm is a general agent for the
partnership, and his acts bind the firm. In the case of a corporation, a
shareholder, by virtue of the fact that he is a shareholder, has no power to
bind the corporation. The position of a shareholder is very similar to that of
a voter. The corporation is run by its board of directors. They are elected by
the shareholders just as we elect a governor or president. If we are
dissatisfied with the conduct of a governor or president, all we can do is to
vote him out of office at the next election, except in unusual cases where a
governor or president might be impeached. The same is true in the case of a
board of directors.
(4) A partnership may be created by a formal contract, or a simple contract,
in writing or by word of mouth; in fact it may be created in almost any way.
A corporation, in order to do business, must comply with the corporation
laws of the State in which it is incorporated. A regular formality must be
observed. A certificate of incorporation must be filed, generally with the
Secretary of State, and with the county clerk of the county in which the
corporation's principal place of business is located in the State.
(5) A partnership may do anything that is legal and which the members
decide to do. A corporation exists by virtue of a charter, granted by the
State. The sum total of the powers given in that charter gives the total of all
of the activities the corporation may undertake. Engagement in activities
not authorized in the charter may result in the forfeiture of the charter by
the State.
(6) In legal theory, a corporation is looked upon as a separate entity. Most
States require at least three persons to incorporate. A, B and C form a
corporation under the laws of the State of New York. There are then four
legal persons in existence: A, B, and C, and this separate person, or legal

entity, the Green Corporation, if that is the name given the company. In the
case of a partnership, the law does not, as a rule, consider the partnership as
an entity distinct and separate from the members who make up the firm. Of
course, the business man does, in a way, look upon the partnership as a
separate commercial entity. The very fact that the members of the firm are
all general agents for the firm, and that the members are individually liable
for all of the debts of the firm, shows that the law does not carry the entity
theory into practice in partnerships as it does in corporations.
DIFFERENT KINDS OF PARTNERSHIP.—What we have said applies to
the ordinary partnership. There are certain forms of partnership which we
can only mention. One of them is the limited partnership. Limited
partnerships are created under the law of the State in which the business is
to be conducted and in a general way, these limited partnerships are a
combination of the principles underlying ordinary partnerships and
corporations. The members may limit their liability to a certain amount, and
in that sense, the limited partnership is like a corporation. On the other
hand, the general principles of partnership, as we shall discuss them, apply
with almost equal force to the acts of a limited partnership. A person should
not undertake to give an opinion as to a legal problem relating to a limited
partnership until the law of the State in which the limited partnership is
organized has been consulted.
JOINT STOCK COMPANIES.—Occasionally we meet with organizations
—joint stock companies—which occupy a sort of "No-man's land" between
partnerships and corporations. The joint stock company issues shares of
stock the same as a corporation. These shares are listed on the stock
exchange, as for example, the Adams Express Company. The joint stock
company, however, carries with it the individual liability of the shareholders
for the debts of the company, which is technically a partnership attribute.
The New York Court of Appeals in People ex rel. Winchester v. Coleman,
133 N. Y. 279, has put it this way: "More or less, they crowd upon and
overlap each other, but without losing their identity, and so, while we
cannot say that a joint stock company is a corporation, we can say * * * that
the joint stock company is a partnership with some of the powers of a
corporation."

HOW TO DETERMINE WHETHER A PARTNERSHIP EXISTS.—In a
case, not tried in court, the facts were: A Gloucester cod-fishing vessel
made an unsuccessful fishing voyage. The sailors were to secure a certain
portion of the profits of the voyage as their wages. When the ship returned
to port, an attempt was made to collect bills incurred on the trip and to hold
the seamen liable along with the owners of the vessel, as partners. It was
contended that sharing in the profits made them partners. While this is true
generally, this particular custom, whereby a laborer receives a certain
portion of the profits of an undertaking as his wages, does not of itself
constitute him a partner with the person operating the vessel. This point has
been decided several times. Such questions as these arise and cause great
difficulty in determining whether a partnership exists. At times it is very
important, as in the case of the seamen, to know whether or not they can be
made to assume the obligations pertaining to the partnership relations.
While we cannot go into these relations in detail, the framers of the
Uniform Partnership Act have laid down, with the utmost care, the rules
which are to be used in determining whether a partnership exists or not.
But, you say, why cannot the parties avoid all this difficulty by making a
written agreement clearing up the entire matter? They could. It is the
simplest matter in the world. But the trouble comes because a partnership
arrangement is so easy to enter into, and requires so little formality, that it is
taken for granted that it will come out satisfactorily, and the precautions
which should be taken are sometimes forgotten. Hence, we have to have
rules of interpretation to help us when the parties themselves have not taken
the necessary precautions to make matters clear. These rules of
interpretation are very clearly and very definitely laid down in the Uniform
Partnership Act, in the following language:
(1) Except as provided by Section 16, persons who are not partners as to
each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint
property, common property, or part ownership does not of itself establish a
partnership, whether such co-owners do or do not share any profits made by
the use of the property.
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or

interest in any property from which the returns are derived.
(4) The receipt by a person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, but no such inference
shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,
(d) As interest on a loan, though the amount of payment vary with the
profits of the business,
(e) As the consideration for the sale of the good-will of a business or other
property by installments or otherwise.
Section 16.—(Partner by estoppel.)—(1) When a person by words spoken
or written or by conduct, represents himself, or consents to another
representing him to any one, as a partner in an existing partnership or with
one or more persons not actual partners, he is liable to any such person to
whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership, and if he
has made such representation or consented to its being made in a public
manner, he is liable to such person, whether the representation has or has
not been made or communicated to such person * * *.
FOR WHAT PURPOSES MAY A PARTNERSHIP BE CREATED.—A
partnership may be created to carry on any lawful business, and whatever
the individuals may do lawfully as such, two or more may do together in a
group as a partnership. Professional occupations may be carried on in the
partnership form advantageously. This is one case where a partnership has
an advantage over a corporation. A group of lawyers may form a
partnership and do business under a partnership name. But a group of
lawyers seldom or never form corporations to practice law. The reason for
this is that the corporation is a separate entity, and the corporation as such
cannot pass a bar examination and be admitted to the bar. In fact, in a few
States, there are statutes prohibiting a corporation from practicing law.

There is, therefore, very little advantage in creating a corporation which
cannot itself do the thing for which it was created.
ILLEGAL OBJECT.—A partnership which is formed to carry on any illegal
purpose is, of course, not recognized by law. Thus, if A, B, and C form a
partnership to engage in the gambling business and they elect C as treasurer
and have a successful business so that they have a large amount of money
on hand, A and B may not be able to reap the profits of the venture. C has
the money. The agreement was that all were to share equally, but C insists
on keeping it all. The law will allow him to do so, because it is beneath the
dignity of the court to order an accounting in a transaction where all parties
are equally guilty. The maxim is "in pari delicto, condicio defendentis
potior est", that is, where the parties are in equal fault, the position of the
defendant is the stronger. C, the guilty party, has the money; he is the
defendant, therefore, he keeps it.
WHO MAY BE PARTNERS.—At common law, a married woman was
incapable of becoming a member of a partnership because of her general
incapacity to enter a contract. Statutes removing the disability of married
women have been passed in practically all the States, and a married woman
is generally free to become a partner, except, and this is true in many States
still, husband and wife may not become partners. An infant may be a
member of a firm on the same general principles as applied to ordinary
infant's contracts. His entering the partnership agreement is not void, but
voidable. When he becomes of age, if he affirms the contract of partnership,
he will be liable the same as an adult. He has, however, the right to
disaffirm his partnership agreement within a reasonable time after
becoming of age, and if he does so, he will be absolved from all personal
liability for the debts of the firm. It is very generally held that a corporation
may not enter into a copartnership with another corporation or an
individual. The reason for this is a general rule of public policy that in a
partnership the corporation would be bound by the acts of persons who are
not its duly appointed agents and officers. There may be any number of
members in a firm, such matters being left to the choice and wisdom of
those operating the business.
DELECTUS PERSONARUM.—While the foregoing is true, one must not
reach the conclusion that an objectionable person may be forced into a firm.

I am a member of a firm of three persons. I decide to withdraw, and tell my
two fellow partners that I have transferred all my interest in the firm to John
Jones. He will take my place. My two fellow partners believe Jones to be a
crook, and do not wish to be in partnership with him. They would not be
obliged to accept him. In other words, the doctrine of delectus personarum,
or the choice of the person, is strictly applied in partnership, because a
partnership relation is a very confidential relationship. Ordinarily the
business cannot be conducted satisfactorily unless all of the partners have
the confidence of each other. It is for this reason, that we have the rule,
heretofore referred to, that the sale by a partner of his interest in the
business works a dissolution of the partnership. John Jones, who purchased
my rights in the firm, could not compel the other members to take him in,
but the firm would have to be wound up and he would simply be able to
recover what my share of the assets was. It is true that Section 27 of the Act
does read that a sale by a partner of his interest does not of itself work a
dissolution, but the doctrine of delectus personarum is fully preserved. That
section reads: (1) A conveyance by a partner of his interest in the
partnership does not of itself dissolve the partnership, nor, as against the
other partners in the absence of agreement, entitle the assignee, during the
continuance of the partnership, to interfere in the management or
administration of the partnership business or affairs, or to require any
information or account of partnership transactions, or to inspect the
partnership books; but it merely entitles the assignee to receive in
accordance with his contract the profits to which the assigning partner
would otherwise be entitled.
(2) In case of a dissolution of the partnership, the assignee is entitled to
receive his assignor's interest and may require an account from the date
only of the last account agreed to by all the partners.
ARTICLES OF PARTNERSHIP.—We have learned that parties need not
expressly declare themselves partners, or enter into an express contract, in
order to become partners. So the framing of written partnership articles—a
written contract of partnership—is not essential, though it is the ordinary
and advisable course. We may note here a few rules governing the use and
construction of such articles where they have been adopted. They should, of
course, provide for as many contingencies as can be foreseen, such as the
nature, name and place of business, when the relation is to commence and

when to terminate, what capital shall be contributed by each, what the share
of each in the profits and losses shall be, what the powers of the partners as
between themselves shall be, whether the business shall be continued after
the death of one or more of the partners and how it shall be wound up. But
the important thing to note is, that if provision be not made, the general law,
and particularly that part governing the powers and duties of partners to
each other and to third persons, applies. In other words, the partners may,
by their contract, determine what their rights as between themselves shall
be; but if they do not, the rules of law will determine them. Thus they may
determine that of two partners one shall have two-thirds and the other one-
third of the profits; in the absence of such a clause the law determines the
profits shall be divided equally. When articles have been once adopted they
can be changed only by the consent of all the partners; this consent need not
be formally expressed in words, but it may be implied from a long-
continued course of conduct. The law provides no means to force a partner
to live up to his contract except in a very few cases; the most it gives is a
right of action for the breach caused by his failure to do as agreed.
FIRM NAME.—The adoption of a firm name is not an essential to a
partnership, but is customary and advisable. The names of the partners may
be combined, or a single name used, or a fictitious name, or any name, so
long as the rights of other persons are not violated. In some States, notably
New York, the use of the name of a person not a partner is forbidden, as is
also the use of the expression "& Co.," unless a partner is represented by it.
Ordinarily, contracts may be made in the firm name and by one partner, but
contracts under seal should be made in the names of the partners "doing
business as," etc., and cannot be made by one partner without authority
from the others. Conveyances of real property should be made to or by the
individual partners "doing business as," etc., for the law does not generally
recognize the firm as a separate person or entity sufficiently to enable it as
such to take or give a conveyance. If the deed ran to "John Doe & Co.," the
title would be in John Doe only, though he would be said to hold it in trust
for the firm, for if the partnership name is given as the grantee, the title goes
only to those whose names appear, and if the partnership were doing
business under a fictitious name, the deed would convey to no one. Whether
land, the title to which is in the name of one partner, is held in trust by him
as partnership property, is a question of intention, and that question is

determined by asking with what money was the land bought, what use has it
been put to, has it been carried on the books of the firm, with what money
have the taxes, insurance, and other charges been paid, etc. If found to have
been treated as partnership property, the fact that the title is in one person
counts for little, as he will be said to hold it in trust for the firm; but the
careful business man will avoid trouble by having the property conveyed to
the firm in the manner indicated, if it is actually partnership property.
THE POWERS OF A PARTNER.—As a general agent, a partner has almost
unlimited authority to bind the firm. Because of this, we have here one
reason for not recommending the partnership form of doing business unless
all the members of the firm have the utmost confidence in each other. These
powers of the partners are so general that it is impossible for us to go into
them in any detail. They are summarized in the most compact form in the
Uniform Partnership Act. Sections 9 to 17 of that act are as follows:
9. (1) Every partner is an agent of the partnership for the purpose of its
business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual
way the business of the partnership of which he is a member, binds the
partnership, unless the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no such authority.
(2) An act of a partner, which is not apparently for the carrying on of the
business of the partnership in the usual way, does not bind the partnership
unless authorized by the other partners.
(3) Unless authorized by the other partners or unless they have abandoned
the business, one or more but less than all the partners have no authority to:

(a) Assign the partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership,
(b) Dispose of the good-will of the business,
(c) Do any other act which would make it impossible to carry on the
ordinary business of the partnership,
(d) Confess a judgment,

(e) Submit a partnership claim or liability to arbitration or reference.

(4) No act of a partner in contravention of a restriction on his authority shall
bind the partnership to persons having knowledge of the restriction.
10. (1) Where title to real property is in the partnership name, any partner
may convey title to such property by a conveyance executed in the
partnership name; but the partnership may recover such property unless the
partner's act binds the partnership under the provisions of paragraph (1) of
Section 9, or unless such property has been conveyed by the grantee, or a
person claiming through such grantee to a holder for value without
knowledge that the partner, in making the conveyance, has exceeded his
authority.
(2) Where title to real property is in the name of the partnership, a
conveyance executed by a partner, in his own name, passes the equitable
interest of the partnership, provided the act is one within the authority of the
partner under the provisions of paragraph (1) of Section 9.
(3) Where title to real property is in the name of one or more but not all the
partners, and the record does not disclose the right of the partnership, the
partners in whose name the title stands may convey title to such property,
but the partnership may recover such property if the partners' act does not
bind the partnership under the provisions of paragraph (1) of Section 9,
unless the purchaser or his assignee, is a holder for value, without
knowledge.
(4) Where the title to real property is in the name of one or more or all the
partners, or in a third person in trust for the partnership, a conveyance
executed by a partner in the partnership name, or in his own name, passes
the equitable interest of the partnership, provided the act is one within the
authority of the partner under the provisions of paragraph (1) of Section 9.
(5) Where the title to real property is in the names of all the partners, a
conveyance executed by all the partners passes all their rights in such
property.
11. An admission or representation made by any partner concerning
partnership affairs within the scope of his authority as conferred by this act

is evidence against the partnership.
12. Notice to any partner of any matter relating to partnership affairs, and
the knowledge of the partner acting in the particular matter, acquired while
a partner or then present to his mind, and the knowledge of any other
partner who reasonably could and should have communicated it to the
acting partner, operate as notice to or knowledge of the partnership, except
in the case of a fraud on the partnership committed by or with the consent
of that partner.
13. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership, or with the authority of
his co-partners, loss or injury is caused to any person, not being a partner in
the partnership, or any penalty is incurred, the partnership is liable therefor
to the same extent as the partner so acting or omitting to act.
14. The partnership is bound to make good the loss:

(a) Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and
(b) Where the partnership in the course of its business receives money
or property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership.

15. All partners are liable

(a) Jointly and severally for everything chargeable to the partnership
under Sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but
any partner may enter into a separate obligation to perform a
partnership contract.

16. (1) When a person, by words spoken or written or by conduct,
represents himself, or consents to another representing him to any one, as a
partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such person to whom such representation has
been made, who has, on the faith of such representation, given credit to the

actual or apparent partnership, and if he has made such representation or
consented to its being made in a public manner, he is liable to such person,
whether the representation has or has not been made or communicated to
such person so giving credit by or with the knowledge of the apparent
partner making the representation or consenting to its being made.

(a) When a partnership liability results, he is liable as though he were
an actual member of the partnership.
(b) When no partnership liability results, he is liable jointly with the
other persons, if any, so consenting to the contract or representation as
to incur liability, otherwise separately.

(2) When a person has been thus represented to be a partner in an existing
partnership, or with one or more persons not actual partners, he is an agent
of the persons consenting to such representation to bind them to the same
extent and in the same manner as though he were a partner in fact, with
respect to persons who rely upon the representation. Where all the members
of the existing partnership consent to the representation, a partnership act or
obligation results; but in all other cases it is the joint act or obligation of the
person acting and the person consenting to the representation.
17. A person admitted as a partner into an existing partnership is liable for
all the obligations of the partnership arising before his admission as though
he had been a partner when such obligations were incurred, except that this
liability shall be satisfied only out of partnership property.
POWERS OF A MAJORITY OF PARTNERS.—If partners disagree, then a
majority of them have power to decide what shall be done; but there are
limits even to the power of a majority. They can only carry on the business
of the firm, and any vote of the majority, or action of the majority, to change
the character of the business for which the firm was organized, or to make
any fundamental change in the original articles of the partnership, would be
invalid.
RELATION OF PARTNERS TO ONE ANOTHER.—The rules determining
the rights and duties of partners in relation to the partnership are concisely
but fully set forth in the Act as follows:

18. The rights and duties of the partners in relation to the partnership shall
be determined, subject to any agreement between them, by the following
rules:
(a) Each partner shall be repaid his contributions, whether by way of capital
or advances to the partnership property and share equally in the profits and
surplus remaining after all liabilities, including those to partners, are
satisfied; and must contribute towards the losses, whether of capital or
otherwise, sustained by the partnership according to his share in the profits.
(b) The partnership must indemnify every partner in respect of payment
made and personal liabilities reasonably incurred by him in the ordinary and
proper conduct of its business, or for the preservation of its business or
property.
(c) A partner who, in aid of the partnership, makes any payment or advance
beyond the amount of capital which he agreed to contribute, shall be paid
interest from the date of the payment or advance.
(d) A partner shall receive interest on the capital contributed by him only
from the date when repayment should be made.
(e) All partners have equal rights in the management and conduct of the
partnership business.
(f) No partner is entitled to remuneration for acting in the partnership
business, except that a surviving partner is entitled to reasonable
compensation for his services in winding up the partnership affairs.
(g) No person can become a member of a partnership without the consent of
all the partners.
(h) Any difference arising as to ordinary matters connected with the
partnership business may be decided by a majority of the partners; but no
act in contravention of any agreement between the partners may be done
rightly without the consent of all the partners.
19. The partnership books shall be kept, subject to any agreement between
the partners, at the principal place of business of the partnership, and every

partner shall at all times have access to and may inspect and copy any of
them.
20. Partners shall render on demand true and full information of all things
affecting the partnership to any partner or the legal representative of any
deceased partner or partner under legal disability.
21. (1) Every partner must account to the partnership for any benefit, and
hold as trustee for it any profits derived by him without the consent of the
other partners from any transaction connected with the formation, conduct,
or liquidation of the partnership or from any use by him of its property.
(2) This section applies also to the representatives of a deceased partner
engaged in the liquidation of the affairs of the partnership as the personal
representatives of the last surviving partner.
22. Any partner shall have the right to a formal account as to partnership
affairs:
(a) If he is wrongfully excluded from the partnership business or possession
of its property by his co-partners.
(b) If the right exists under the terms of any agreement.
(c) As provided by Section 21.
(d) Whenever other circumstances renders it just and reasonable.
TERMINATION OF THE PARTNERSHIP.—A partnership is terminated
either by act of the partners, or by law. Under the first heading, we may
mention such things as the partnership being terminated by the
accomplishment of the object for which the same was formed, or by the
termination of the time during which the partnership was to exist, or by
mutual consent of all parties concerned. Under the head of termination by
operation of law, we have such topics as the death of a partner, the insanity
of a partner, or the bankruptcy of a partner, and a dissolution by a court, as
for example, where it is absolutely certain, in the opinion of the court, that
the business cannot be successfully continued longer. In such a case,
although some of the partners may not wish to wind up the affairs of the
business, the court may order it done in the interest of all parties concerned.

OWNERSHIP OF FIRM PROPERTY AND CREDITORS' RIGHTS.—The
firm property is owned by all the partners jointly, but the interest of each
individual partner is not an interest in each piece of firm property, but a
right to have an accounting and to receive on the accounting such share of
the assets as belong to him when all debts due from him to the firm and all
liabilities to the outside world are settled. Consequently, a creditor of an
individual partner cannot seize or attach or levy on firm property, because
that firm property does not belong, nor does any part of it belong, to his
debtor. The creditor must file a bill in equity asking that the partner's share
be determined, and that on an accounting so much as is found due to the
debtor partner be applied to discharge that partner's indebtedness.
THE DIVISION OF ASSETS.—Upon final dissolution, the question of
division of assets comes up, and the Uniform Partnership Act gives us the
general rule as to how the firm's assets are divided. Section 40 of the Act
reads:
In settling accounts between the parties after dissolution, the following rules
shall be observed, subject to any agreement to the contrary:

(a) The assets of the partnership are:
I. The partnership property,
II. The contributions of the partners necessary for the payment of all
the liabilities specified in clause (b) of this paragraph.
(b) The liabilities of the partnership shall rank in order of payment, as
follows:
I. Those owing to creditors other than partners,
II. Those owing to partners other than for capital and profits,
III. Those owing to partners in respect of capital,
IV. Those owing to partners in respect of profits.
(c) The assets shall be applied in the order of their declaration in clause
(a) of this paragraph to the satisfaction of the liabilities.

(d) The partners shall contribute, as provided by Section 18 (a) the
amount necessary to satisfy the liabilities; but if any, but not all, of the
partners are insolvent, or, not being subject to process, refuse to
contribute, the other partners shall contribute their share of the
liabilities, and, in the relative proportions in which they share the
profits, the additional amount necessary to pay the liabilities.
(e) An assignee for the benefit of creditors or any person appointed by
the court shall have the right to enforce the contributions specified in
clause (d) of this paragraph.
(f) Any partner or his legal representative shall have the right to
enforce the contributions specified in clause (d) of this paragraph, to
the extent of the amount which he has paid in excess of his share of the
liability.
(g) The individual property of a deceased partner shall be liable for the
contributions specified in clause (d) of this paragraph.
(h) When partnership property and the individual properties of the
partners are in the possession of a court for distribution, partnership
creditors shall have priority on partnership property, and separate
creditors on individual property, saving the rights of lien or secured
creditors as heretofore.
(i) Where a partner has become bankrupt or his estate is insolvent, the
claims against his separate property shall rank in the following order:
I. Those owing to separate creditors,
II. Those owing to partnership creditors,
III. Those owing to partners by way of contribution.

LIQUIDATION OF PARTNERSHIP.—When a partnership is dissolved, it
is common for the business to require liquidation, and frequently one or
more of the partners are what are called liquidating partners. If a partnership
is dissolved by death, for instance, the surviving partners have a right to be
liquidating partners and liquidate the business. That means they may carry
on existing contracts; they may dispose of the stock on hand to the best

advantage. If this requires incidental purchases of new goods, they may be
made, but in general, new business cannot be undertaken. The function of a
liquidating partner is to satisfy existing contracts, reduce the property of the
firm to cash, and then distribute it to those who are entitled to receive it.
LIMITED PARTNERSHIP.—Statutes, as we have learned, in many States
permit the formation of limited partnerships, the object of which is to
enable one or more partners to avoid unlimited liability for debts. Partners
in a general partnership are each liable, individually, for the full amount of
the firm's indebtedness. If one partner is thus compelled to pay more than
his share, he may seek redress by demanding contribution from his fellow
partners, and if they are not solvent, he will not be able to secure
reimbursement. If there is one solvent partner, for instance, and two other
partners, both of whom become insolvent, the result will be that the first
partner will have to pay the debts of the firm and will have no redress
except such as he may be able to get from the insolvent estates of his two
partners. Now, in a limited partnership a limited partner does not stand to
lose any more than the amount of money he actually puts in the firm. In
order to create a limited partnership it is necessary to sign a certificate
prepared for the purpose and stating the facts, file it in the office of the
Secretary of State or other official, and also publish it so that the public may
be informed of the circumstances and credit may not be given by the world
at large to the firm on the assumption that the limited partner is a general
partner. He puts a specified amount of money in the firm and that money
may be reached by creditors of the firm, but they cannot hold him further
liable. A good definition of a limited partnership follows: A limited
partnership is one which consists of one or more persons called general
partners and also one or more persons called special partners. Every general
partner is an agent for the partnership in the transaction of its business and
has authority to do whatever is necessary to carry on such business in the
ordinary manner. Every general partner is liable to third persons, jointly and
severally, with his general co-partners for all of the obligations of the
partnership. A special partner may only advise as to the management of the
partnership and he is liable for the obligations of the partnership only to the
amount of capital invested by him therein.
SILENT PARTNERS.—A silent partner must not be confused with a
member of a limited partnership. A silent partner is a general partner who

takes no part in the active management of the business and frequently is a
secret partner. A member of a limited partnership can never be a secret
partner, since the terms of a limited partnership must be published. A
member of a limited partnership should take no part in the management of
the business, or he may render himself liable as a general partner. The
limited partnership law requires, moreover, that he must have exactly
complied with the law by making out, filing and publishing a certificate.
The statutes of the State should be consulted on this point and closely
adhered to.
LIMITED.—We often see also in print, so and so "Ltd." This does not mean
a limited partnership. The word "limited" is used in the name of an English
or Canadian company organized under the English or Canadian statutes, but
such companies are rather analogous to corporations than to limited
partnerships. The liability in such companies is limited altogether to the
assets in the company's hands. There are no general partners. The liability
of all stockholders is limited. The English and Canadian law requires that
the word Limited be added to the name, so that the public may not be
deceived into believing that the company is a partnership.

CHAPTER VI
Corporations
THE NATURE OF A CORPORATION.—The nature of a corporation is
perhaps best understood by an illustration. In the case of People's Pleasure
Park Co. v. Rohleder, 109 Va. 439, the facts were as follows: There was a
large tract of land divided up into a number of lots, and in each deed, when
a lot was sold, there was a covenant providing that title to the real property
should never vest in a person of African descent, or in a colored person.
Later, after the lots had been sold, several of them were conveyed to a
corporation composed exclusively of negroes. The corporation knew, when
it purchased the tract of land, of this restriction in the deed, and the land
was bought by it for the purpose of establishing an amusement park for
colored people. Suit was brought in a court of equity to compel the
cancellation of the deed to the corporation. Stated boldly, the decision of the
Virginia court amounts to an assertion that a corporation has no color. In
other words, the corporation is an entity separate and distinct from its
members, and so, although all the stockholders in this corporation were
colored, that did not make the corporation a colored person. Thus, if A, B,
and C, as incorporators, organize the X Corporation, although they are the
sole stockholders, there are four persons, A, B, C, and the X Corporation.
THE ENTITY THEORY.—It may be doubted if any court would carry the
entity theory to the extent that it would allow an individual who was the
owner of a piece of real estate, which he was not permitted by the deed to
sell to negroes, to deliberately go to a prospective negro purchaser and say:
"I cannot sell my property to you because of a restriction in the deed, but I
will pay the necessary expenses, if you, with two of your friends, will form
a corporation to take title to this property, in which corporation each of your
friends will own one share and you the balance, thus retaining control
yourself. I will then deed the property to the corporation and will thereby
get around the covenant in my deed preventing a transfer to negroes." We
must not allow the entity theory to work a manifest injustice, as was said in
Erickson v. Revere Elevator Co., 110 Minn. 443: "Where the corporate

form is used by individuals for the purpose of evading the law, or for the
perpetration of fraud, the courts will not permit the legal entity to be
interposed so as to defeat justice."
RESULTS OF THE ENTITY THEORY.—Flowing from the entity theory is
the result that the property of a corporation is owned by the corporation and
not by the individual members. Therefore, all conveyances of such property,
whether it is real property or personal property, must be made by the
corporation, and cannot be made by the members or shareholders as
individuals. It also follows that all suits against or by the corporation must
be brought against the corporation or by the corporation as an entity and not
against the individual members. Again, a corporation may take property
from one of its individual members, and it may make a contract with one of
them, and it may sue them and be sued by them.
KINDS OF CORPORATIONS.—Corporations are divided into public,
quasi-public, and private corporations. The private corporation is such as is
created for private enterprises, such as manufacturing, banking, and trading
corporations. Religious and eleemosynary corporations are also included in
this classification. The public corporation is such as is created for the
purposes of government, such as cities, towns, villages, and institutions
founded by the State, and managed by it for governmental purposes. Quasi-
public corporations are such as are engaged in a private business which is
affected with a public interest, such as railroads, both steam and electric,
gas companies, water companies, lighting companies, and the like. The
public, and generally the quasi-public, corporations possess the right of
eminent domain, that is, the right to take private property for public
purposes upon payment of just compensation to the owner. It is the private
corporation with which we are usually concerned in commercial law, and
this chapter will be devoted largely to a discussion of that class.
THE CREATION OF A CORPORATION.—A corporation must be created
by legislative authority. Formerly, a corporation was created by special act
of the legislature, but in recent years the growth in the number of
corporations, and also the political wire-pulling necessary to get an
incorporation bill through a legislature, have resulted in the almost
universal practice of having the legislature pass a general corporation act,
and then without further reference to the legislature, any group of persons,

of the requisite number, may become incorporated by complying with the
provisions of such an act. The formation of corporations under the laws of
most States is a simple process, requiring in general the preparation of an
official document sometimes termed the "certificate of incorporation" or the
"charter," which paper sets forth the facts which are required under the laws
of the State wherein the corporation is to be formed. These laws, while not
uniform, generally require a statement as to the name to be used by the
corporation, the names of the proposed directors and incorporators, a
statement of the general purposes or objects of the corporation, the location
of its principal office and place of business, how long it is to last, the
amount of its authorized capital, the par value of its stock, as well as a
statement in regard to any preferred stock which may be contemplated.
Other details are sometimes required under the various State laws. This
official document must generally be signed or executed by those persons
who are the incorporators of the corporation. As a rule, three or more
incorporators are required, although in some States five is the minimum.
This official document, after it has been duly executed, is usually to be filed
in the office of the Secretary of State, and usually also in that of the county
clerk of the county wherein its principal office is to be. This procedure,
however, is subject to some variations and the statutes of the State involved
must always be closely followed. As soon as the official document has been
properly filed and the other necessary steps taken the incorporators hold the
first meeting and effect an organization, after which time the corporation is
generally in a position to transact business, although in some States it is
provided in effect that corporations should not commence business until a
certain share of the capital has been paid into the corporation in cash.
CITIZENSHIP OF A CORPORATION.—Although a corporation is a
separate entity, entirely distinct and apart from its members, such separate
entity is not a citizen in the sense in which we use the term ordinarily. At a
general election a corporation has no right to vote. Again, Article 4 Section
2, of the United States Constitution, provides that "citizens of each State
shall be entitled to all of the privileges and immunities of citizens in the
several States." A corporation is not a citizen in this sense. Hence a State
may keep all insurance companies, incorporated outside of its area, from
doing business in that State by discriminating legislation against foreign
insurance corporations. Insurance is not looked upon as interstate

commerce, about which the individual States may not legislate, and as a
corporation is not a citizen within the meaning of Article 4, Section 2, such
insurance companies have no redress. In one sense, however, a corporation
is looked upon as a citizen. Where a suit is between citizens of different
States, and the amount involved is over the prescribed sum, either party
may bring the action in the Federal courts, if he so desires, instead of in the
State courts. In this sense, a corporation is to be regarded as if it were a
citizen of the State in which it is created. If I live in New York and the
American Tobacco Co. is incorporated in New Jersey, suit between us may
be brought in the Federal courts on the ground of diversity of citizenship on
the part of plaintiff and defendant.
POWERS OF CORPORATIONS.—A corporation is unable to do anything
beyond such powers as are granted it by law. As to the extent of the powers
possessed by a corporation, we may conveniently divide corporate powers
into those which are express and those which are implied. Express powers
may be considered as including those which are mentioned in the official
documents used or granted upon the beginning of the existence of the
corporation. These official documents are spoken of as "charters" or
"certificates of incorporation." Whatever term may be applied to them there
is generally in such documents a statement of the general purposes or
objects for which the corporation is formed; in other words, of the general
business in which it is to engage. There is also a statement of the general
powers of the corporation which is to engage in the business mentioned.
The powers so mentioned in such official documents may be termed, as we
have stated, express powers of the corporation. Needless to say, however, it
is not usual or possible to attempt to indicate in any such official documents
all the details of the operations of business. Therefore, it is necessary to
imply that in addition to such express powers the corporation has power to
do such acts as may be reasonably necessary or incidental to the carrying on
of the business mentioned. Powers so implied, without words, are termed
"implied powers." Therefore, the total powers of a corporation consist of
the express powers, namely, such as are named in the official documents
containing a statement of its purposes and the business in which it is to
engage, and the powers which would be reasonably implied under the rule
just mentioned, as necessary and incidental to the carrying out of the
express powers. Such implied powers do not give the corporation any

power to do acts which are not reasonably necessary and incidental in its
regular business. To allow validity to acts not so reasonably necessary and
incidental would be in reality allowing the corporation to engage in outside
business, which, under its charter, it has no power to engage in. As an
illustration of this let us assume that the X company was incorporated to
build, run and operate a railroad between two towns named A and B. The
official charter of the corporation may state further details of the
corporation's powers or it may not. But, if such details are not stated, the
corporation would, obviously, have as express powers, the power to build
the road and to operate it between the towns mentioned. It would also have
as implied powers the power to do any act reasonably necessary or
incidental to the operation of a railroad, such for example as the purchase of
rails, ties or other railroad supplies, the hiring of employees, erection of
stations and the power also to give negotiable paper in payment for such
supplies or the raising of money by mortgaging its property or otherwise
where necessary to carry on its business. In other words, the corporation
may be said to have as implied powers all the powers which an individual
would reasonably and usually exercise if he were operating the railroad.
However, the corporation would have no power, express or implied, to do
any act not reasonably necessary to the railroad business, such, for example,
as the purchase of a stock farm or the operation of a steamer line or a
grocery store, or the leasing of its line. If the corporation, then, should make
any contract with relation to engaging in these outside matters—the
corporation having no power to engage in them—a valid contract could not
arise and therefore the corporation could not be held liable thereon.
ULTRA VIRES ACTS.—Where a corporation attempts to do an act which
is clearly beyond its express or implied powers, such act is generally termed
an "ultra vires" act, and it may frequently consist in an attempted contract
by a corporation. Hence we must consider with some care contracts of
corporations which may be termed ultra vires. As the corporation lacks
power it is generally said that the contract does not arise and hence neither
the corporation nor the person with whom it attempted to contract would
theoretically be bound thereon. Yet, in many States, a special rule has been
adopted whereby a corporation may be held upon such contract in certain
cases even though it had no power to make it. This may be termed the
"doctrine of estoppel," and generally includes cases where the corporation

has assumed to make a contract which was ultra vires or beyond its powers
but which would appear to an outsider as incidental to the corporate
business and therefore as within its corporate powers. In such
circumstances, if the outsider with whom the corporation assumed to make
the contract does in fact rely reasonably upon the corporate power to make
it, having been deceived by appearances and having no warning that the
corporation actually lacked power, and having paid over money or delivered
goods or performed services or parted with other value under the contract,
he may generally enforce the contract against the corporation. In other
words, under such circumstances, the corporation is estopped or forbidden
to evade its obligation by asserting the point that it had no power to make
such contract. However, this is strictly limited to cases where the
corporation appeared to have the power to make the contract and where the
person dealing with it had no reason to suspect or doubt its power in that
regard, and where the person dealing with the corporation had parted with
some value of the kind mentioned, in his reliance that the contract was
within the corporate powers of and therefore binding upon the corporation.
Thus, where such person has done nothing toward carrying out his duty
under the contract he would have no claim or right to enforce the same as a
binding obligation of the corporation. Many courts also treat him somewhat
differently and take the attitude that an outsider who has dealt with the
corporation is entitled not to enforce the attempted contract, but is entitled
only to recover from the corporation the reasonable value of such goods or
service as it has voluntarily accepted from him.
DE FACTO AND DE JURE CORPORATIONS.—It sometimes happens
that a group of persons may attempt to organize a corporation and fail to
comply with all the provisions of the law in the State in which they attempt
to organize. The question arises then: What have we? Of course, we do not
have a full completed organization, which we would call a corporation de
jure (by right of law). We may have what is called a corporation de facto (in
fact). In order to constitute a corporation de facto, it is generally held that
the following requisites must exist: There must be a valid law which
authorizes the formation of such a corporation; a colorable attempt to
organize under the provision of such law; and an assumption of corporate
power, or, as is sometimes called, a user. If these facts exist, we then have a
corporation de facto, and persons dealing with such a corporation are

usually held to the same responsibilities as though it was an actual de jure
corporation. The State, ordinarily, is the only person which can question the
existence of such a body, and this is usually done in a suit by the attorney-
general. If the parties have not even complied with the requisites of a de
facto corporation, the authorities are divided as to what kind of an
organization it is, although, perhaps, the best decisions would hold the
parties liable as partners. They must have contemplated some kind of
liability and failing to create even a corporation de facto, a partnership
liability is all that is left, except individual liability, and that is apparently
just what they did not intend.
PROMOTERS.—A promoter is a very common person in the modern
industrial world. He is a person who brings about the organization of
corporations, gets the people together who are interested in the enterprise,
aids in procuring subscriptions, and takes general charge of all the matters
incident to the formation of the corporation. In other ways, he is governed
by the rules of agency and his position is that of a fiduciary. The majority of
the courts hold that there is no liability on the part of the corporation to pay
for his expenses and his services, in promoting the organization, unless the
corporation as an organization expressly promises to pay or otherwise
clearly recognizes the obligation. Because of the fiduciary relationship,
which a promoter occupies, he is not permitted to make any secret profits at
the expense of the corporation. If he secures property for $1,000,000, he
may not turn it over to the corporation for $1,500,000 and pocket the profit
himself. A corporation cannot be liable for the acts of a promoter before the
corporation came into existence. It may, however, after coming into
existence adopt the acts of the promoter and thereby render itself liable. If,
knowing the terms of an agreement made by a promoter, the corporation
takes advantage of the agreement or recognizes it, it thereby in effect itself
becomes a party to the agreement. Unless the terms of a promoter's
agreement expressly state the contrary, the promoter is personally liable
upon it as a contractor.
POWER OF THE STATE OVER A CORPORATION.—It must follow, that
if a State creates a corporation, then it should have certain control over it.
The United States Supreme Court has recognized the right of visitation as
residing in the State. Visitation is, in law, the act of a superior or
superintendent officer who visits a corporation to examine into its manner

of conducting business and its observance of the laws. The visitation of
National banks by the Comptroller of the Currency is a common example of
the exercise of this authority. One of the most famous cases in the United
States Supreme Court is the Dartmouth College case. In 1769, the King of
England granted a charter to twelve people under the name of "The Trustees
of Dartmouth College." They were authorized to conduct a college and they
founded Dartmouth College in Hanover, New Hampshire. In 1816, the
legislature in the State of New Hampshire undertook to amend the charter
in many ways, among other things, increasing the number of trustees to
twenty-one. A furious conflict ensued between the State and the trustees.
The State finally brought suit to recover the corporate seal and records
which were held by a Mr. Woodward, who held them under the amendatory
act to which we have referred. The case is known as Dartmouth College v.
Woodward, 4 Wheaton 518. The Dartmouth College trustees were
represented by Daniel Webster, and this is one of his famous cases before
the Supreme Court. He took the position that the charter granted by the
King of England and afterwards recognized by the State of New
Hampshire, was a contract between the State and the trustees. This being so,
it was protected by the provision in the United States Constitution which
provides that no State shall pass any law impairing the obligation of
contracts. The United States Supreme Court upheld this position. The act of
the legislature of New Hampshire was held invalid. We then found
ourselves in the position of having States creating corporations and then not
being able to control them. Whatever may be said in regard to the law as
laid down by the United States Supreme Court, this situation was
unfortunate. Shortly thereafter in the various State legislatures, a method to
meet the situation was devised, and this is what was done: When a general
corporation law is passed, the State inserts in it a clause to this effect: "The
State hereby reserves the right to alter, amend, or repeal the charter of any
corporation organized under this act." This, then, makes this clause a part of
the contract when a new corporation is organized. It knows that it is subject
to having its charter amended or repealed without its consent. The effects,
therefore, of the Dartmouth College decision have been practically nullified
by such clauses inserted in the various incorporation laws. Such
incorporation acts do not relate to corporations organized before such act
was passed. Under this method of procedure, the legislature today surely
has an efficacious method of controlling the corporations which it creates.

LIABILITY FOR TORTS AND CRIMES.—A corporation is ordinarily
liable, the same as an individual, for all torts committed by its agents in the
scope of their authority. A corporation may even be liable for acts which are
beyond its authority. For example, in the case of Hannon v. Siegel-Cooper
Co., 167 N. Y. 244, it was held that the department store of the Siegel-
Cooper Company, a corporation, was liable for mal-practice in dentistry.
The charter of the company did not give the company the right to practice
dentistry, but space in the store was rented to a dentist who conducted a
dental parlor. Because of his negligent treatment of a patient, the court held
that the corporation was liable for the negligent acts of its agent.
Corporations may also be held liable for such torts as involve a mental
element, like fraud and libel. A corporation may be criminally responsible
for failure to perform a duty imposed upon it by law, and in many States
there are statutes which make it a criminal offense for a corporation to do or
fail to do certain acts. It is generally held, however, that a corporation
cannot commit a crime which involves a mental operation, as for example,
murder. Murder involves a mental operation; it is "killing with malice
aforethought." Then again, it would be difficult to punish a corporation for
the crime of murder, because under our State constitutions, the punishment
for murder is either death or life imprisonment. Although a corporation is a
separate person, there is no way to kill it or imprison it for life. You surely
would not do so by inflicting this penalty on all the stockholders. It is
generally provided, then, by statute that such crimes that a corporation can
commit are to be punished either by a fine or by imprisonment of the
directors.
SHERMAN ANTI-TRUST ACT.—On July 2, 1890, the Sherman Anti-
Trust Act was passed by Congress. The first section of this act reads: "Every
contract, combination in the form of trust or otherwise, or conspiracy, in
restraint of trade or commerce among the several States, or with foreign
nations, is hereby declared to be illegal. Every person who shall make any
such contract, or engage in any such combination or conspiracy, shall be
deemed guilty of a misdemeanor, and, on conviction thereof, shall be
punished by a fine not exceeding $5,000, or by imprisonment not exceeding
one year, or by both said punishments, in the discretion of the court." The
second section of this act reads: "Every person who shall monopolize, or
attempt to monopolize, or combine or conspire with any other person or

persons to monopolize any part of the trade or commerce among the several
states, or with foreign nations, shall be deemed guilty of a misdemeanor,
and on conviction thereof shall be punished by a fine not exceeding $5,000,
or by imprisonment not exceeding one year, or by both said punishments, in
the discretion of the court."
It would be impossible, in a small amount of space, to call attention, except
in a general way, to the importance of this act and the difficulty of
understanding it, without carefully reading the various conflicting decisions
of the United States Supreme Court handed down since the passage of the
act. The act, being a Federal act, relates only to interstate commerce. That
kind of business, conducted by corporations, which is intrastate, if
controlled at all by similar legislation, would be by virtue of a State act.
Perhaps the most famous of the Sherman Anti-Trust Act cases decided by
the United States Supreme Court is that of the United States v. Standard Oil
Co., 221 U. S. 1, where the majority opinion was written by the late Chief
Justice White, and in which he enunciated the so-called "rule of reason"
which brings the interpretation of that act very much in harmony with the
rules of the common law in regard to illegal contracts and monopolies.
BY-LAWS.—A by-law is a permanent rule for the government of a
corporation and its officers. The purpose of a by-law is to regulate and
define the duties of the members of the corporation toward the corporation
and between themselves. The power to make the by-laws is vested in the
stockholders. There are certain qualifications which all by-laws must
possess. They must be reasonable and not inconsistent with law or any rule
of public policy. It would not be possible for a majority of the stockholders
at a regular stockholders' meeting to pass by-laws which would deliberately
deprive the minority stockholders of rights which belong to them. The by-
laws are, of course, always subject to the provisions of the charter of the
corporation, and if a corporation is authorized to operate a railroad, it could
not, by passing a by-law, to the effect that it was deemed wise to enter into
the steel manufacturing business, change the nature of the corporation in
that manner.
STOCKHOLDERS' MEETING.—In order that the acts of the majority of
stockholders shall be valid, they must be authorized at a regular
stockholders' meeting. This must be held in the principal office of the

company, and the notice required by the by-laws must be given to all of the
stockholders. After this is done, the majority of the stockholders may
transact business and bind the corporation. Of course, in a large corporation
with a hundred thousand shareholders, as is the case with some of our
bigger corporations like the United States Steel Corporation and the
Pennsylvania Railroad, very few of the stockholders actually attend the
meetings. The directors usually send out with the notice of the meeting, a
proxy, and the stockholders who are not able to be present send in their
proxy authorizing certain persons to vote for them. In this way, a majority
of the stockholders are present at the meeting, either in person or by proxy.
In certain cases stockholders may interfere with the action of directors in
connection with the general management of a corporation, or may even oust
the directors from their positions. These cases are extremely rare, since the
power of directors is supreme as to all corporate matters as to which the
statutes or by-laws do not provide for concurrence or other action by the
stockholders. Where proof is offered, however, of fraud, violation of law or
gross negligence of the directors whereby loss has been caused or is
threatened, stockholders may in some cases obtain the ousting of directors.
This sometimes results in placing a receiver in temporary charge of the
corporation or in the holding of a special election of new directors. No
complaint, however, will generally be entertained against directors merely
because their judgment does not agree with that of the stockholders even if
some action of the directors may not have resulted favorably to the
corporation, provided such action was taken honestly and with all due care
and regard to law. As an illustration, the directors of the X Company made a
certain contract on behalf of the corporation whereby it was agreed with Y
that property of the corporation should be transferred to the latter for much
less than its evident actual value. This operation would usually indicate
fraud on the part of the directors, or at least such gross negligence as would
in many cases justify stockholders in asking a legal inquiry into the action
of the directors, which would result, if sufficient facts were proved, in their
removal and an injunction against the performance of the contract.
However, if the value of the property were doubtful and the directors had
used all due care and effort to ascertain its true value and to obtain the best
available price, no complaint could usually be made although it should later
develop that a better price might have been obtained.

FOREIGN CORPORATIONS.—A foreign corporation is one which is
organized under the laws of some foreign country or some other State.
Foreign corporations are not necessarily confined to doing business in their
own State; they may enter other States. As for example, a company
organized in New Jersey may enter the State of New York and do business.
If, however, the New Jersey corporation comes to New York and makes a
regular practice of doing business, it must comply with the provisions of the
corporation law of New York, and secure a license to do business in New
York. It is not uncommon to enforce this provision in an indirect method by
providing that if a foreign corporation does not take out this license, it shall
not be allowed to sue in the courts of the State where it is doing business.
MANAGEMENT OF CORPORATIONS.—The management of any
corporation rests directly with the board of directors and they may be
considered as the agents of the corporation to direct its business affairs. The
directors, however, are subject in their action to any limitation upon their
power which may have been included in the charter or certificate of
incorporation or which may have been adopted in the by-laws. The directors
are also subject to any provisions in the statutes of the State, which
frequently provide that they shall not take certain important actions, such as
the mortgaging of corporate property, etc., without special procedure
involving a meeting and vote of the stockholders. Where, however, the
directors' authority is not limited by the statutes or the charter or by-laws,
they may be considered as having full power to manage the affairs of the
corporation. In connection with that power they may elect a president and
other corporate officers and may appoint any other agents or employees at
their discretion. They may also define the powers to be exercised by the
president and the other officers and employees. This would give them
power to limit the authority of the president or any other officer. However,
where a person deals with the president or any other officer of a corporation
in behalf of the corporation, he may usually rely reasonably upon the
president or other officer having similar power to that generally possessed
by such an officer, and in many cases the corporation would be held bound
by the acts of such officer even though he actually violated some limits
placed upon him by the directors. This may be illustrated by assuming that
the X Company was in the business of manufacturing furniture, and A, the
president thereof, had made a contract with B, an outsider, for the purchase

from the latter of certain wood to be used in the corporate business. As a
matter of fact, however, A, the president, had no power to make such
contract, since the directors had passed a resolution forbidding him to
purchase any raw materials without first having the proposed purchase
approved by the board of directors. Therefore, A, as a matter of fact, would
have no power to make the contract with B, on behalf of the corporation.
Yet, B had not in any way been warned of this limitation upon A's power,
and as the purchase of materials would be a usual one for the president or
executive head of such a corporation to make, B might reasonably assume
that A had power to make the contract. Therefore, B would be able to hold
the corporation to the contract under the principle of apparent authority,
considered in connection with the law of agency. Naturally, in turn, the
directors would have a claim against the president for any loss sustained, as
he had not only violated his duty but had also disobeyed and disregarded
explicit instructions. The by-laws of a corporation are generally adopted by
the stockholders and provide for all matters relating to the corporate
management which are not provided for in the charter or certificate of
incorporation. Such by-laws are binding upon all persons who know of
them, or reasonably should know of them, provided they are not in violation
of law and are reasonable. It is the general rule that meetings called to adopt
new by-laws or to alter previous by-laws should be announced in some
special way so that all interested parties may receive due notice and thus
have an opportunity to arrange to be present and vote on the matters to be
taken up at such meeting.
ELECTION OF DIRECTORS.—The directors of a corporation are elected
by the stockholders and the election generally takes place at the regular
annual meeting of stockholders of the corporation. Either the entire board of
directors is elected at that time for the ensuing year, or a portion of them. In
this connection it is provided by the statutes of many States that at least a
certain proportion of the total number of directors shall be elected annually.
The method of electing such directors at the annual meeting is usually
provided for by the statutes of the various States, but it is commonly the
rule that each stockholder shall have one vote for each share of stock owned
by him, although in some States they also allow what is termed "cumulative
voting." This method of voting generally allows each stockholder to have as
many votes as he owns shares of stock multiplied by the number of

directors to be elected at the meeting and he may cast all of his votes for
one or more of the candidates. In other words if five directors are to be
elected he may concentrate all his votes upon one or more of the candidates
and is not compelled to vote for each one. This cumulative voting is
authorized for the purpose of allowing the minority stockholders to
concentrate their votes upon one or two of the candidates and thus have
some representation upon the board of directors. As an illustration of this,
let us assume that the X Company had an authorized capital stock of
$100,000, composed of 1,000 shares at the par value of $100 per share, and
that all these 1,000 shares are issued and fully paid up. Let us further
assume that six individuals each own 100 shares of stock and act in unison,
thereby constituting a majority, the other 400 shares of stock being held by
the minority stockholders. Each stockholder would usually have one vote
for each share of stock owned by him, and therefore, if five directors were
to be elected under the usual method of voting, those individuals composing
the majority of the stockholders would succeed in casting a majority of
votes for each of the five directors. This would leave the minority without
representation upon the board. If, however, cumulative voting were used,
the minority having a total of 2,000 votes (400 multiplied by 5, the number
of directors to be elected) could concentrate 2,000 votes upon one or two of
their candidates and this would probably insure the election of such
candidates to the board, thus giving the minority representation. In the case
of a non-stock or membership corporation, each member has simply one
vote for directors or for other purposes. It may be noted that the directors
themselves, in their meetings, have also one vote each and this is entirely
independent of the amount of stock which they may own in the corporation.
It should also be noted that the directors in their meetings may not vote by
proxy, but sometimes the members of a membership corporation may vote
in this way. Voting by proxy is a usual practice in stock corporations. A
proxy is merely a power of attorney or agency given in writing by one
stockholder whereby he authorizes another person as his proxy to vote, at a
corporate meeting, his shares of stock in his place. A proxy should be in
writing and in a form in accordance with the statutes of the State involved,
and is often, but not necessarily, under seal. A stockholder who has given a
proxy may revoke it whenever he chooses and this would prevent the holder
of the proxy from voting on it. This would be entirely independent of
whether the person giving the proxy had by revoking it violated his contract

with the person to whom it was given. That contract would be only a private
matter between them.
VOTING TRUSTS.—The proxy principle is involved in what are termed
"voting trusts." These arrangements involve the placing by a number of
stockholders of their stock in the hands of certain persons, giving to the
latter the right to vote on the stock; in other words, it is a concentration of
the stock of a number of persons in the hands of one or a few persons. The
latter are termed "voting trustees." It is necessary to consult the statutes of
the various States with regard to the legality of such voting trusts, but they
are generally permitted, with the restriction, however, that the agreement
under which the stock is deposited with the voting trustee or trustees must
be in writing and that any stockholder may have the right to deposit his
stock with such trustee or trustees and become a party to the voting trust.
The statutes also frequently limit the time during which such a voting trust
may continue.
ISSUE OF STOCK.—The stock of a corporation is in theory issued for an
amount of money or property equal to the par value of the stock. In
practice, however, in many States there is no limitation on the valuation
which the promoters of a corporation may put upon the property or rights
which are transferred to the corporation. The stock is regarded as fully paid
in if property transferred to it is transferred as having the assumed value of
the corporation's capital, however little the property may actually be worth.
In other States, however, an official must approve the valuation put upon
property transferred as payment for stock, and in such States it may be
assumed that the assets of a corporation when it begins business represent at
least approximately the amount of its capital stock; even in such States,
however, there is no difficulty in promoting a corporation which shall have
a large capital though its property is of slight value. All that is necessary is
to incorporate under the laws of another State which allows greater
freedom. Corporations organized in one State are in general allowed to do
business in other States; so that a corporation which is intended to carry on
business in New York, may be incorporated in another State, where it is not
expected to do business.
PROCEDURE IN ISSUING BONDS.—It is sometimes difficult for the
investor fully to appreciate the vast amount of detail work involved in the

bringing out of a new bond issue. Before the investment banker underwrites
the issue, or makes his purchase from the corporation—before the bonds are
offered to the public—there is always a painstaking and minute
investigation of the new security from many different viewpoints, made by
and in behalf of the banker. The investor can never know from the banker's
printed circular, descriptive of the issue, the great amount of original work
which underlies it and of which it is a meager reflection. The circular is a
summary of the banker's investigation; it contains the salient features of the
issue and of the issuing corporation, reduced to terms that are intelligible to
the average layman. It is a statement of the principal facts which led the
banker to make an investigation of the business and upon which
investigation he bases his recommendation of the security offered by him to
his clients.
WHAT IS A BOND?—This can be explained best by comparing it with a
real estate bond and mortgage, the nature of which has already been
discussed. When money is loaned on real estate, the mortgagor, or the one
who borrows, executes two papers in favor of the mortgagee, or the lender.
The first is either a promissory note or a bond. The bond is a sealed writing
whereby the borrower binds himself, his heirs, administrators or executors,
or assigns, to pay the lender a given sum of money at a specified time,
together with interest. The second paper given as security for the note or
bond, is a mortgage, which conveys the title to the property to the lender,
with the provision, however, that if the borrower satisfies the conditions
imposed in the bond—that is, the payment of a certain sum of money at a
given time, together with interest as agreed—this conveyance (mortgage) is
to be held null and void.
WHAT IS A CORPORATION INDENTURE?—The indenture is a more
lengthy instrument than the bond, and, as will be noted, it is called an
"indenture" and not a "mortgage." The mortgage strictly is only that portion
of the indenture whereby the property is conveyed or deeded to the
mortgagee, with the provision that the deed so given is to be held null and
void in the event that the conditions named in the bond are faithfully carried
out. The indenture is broader than the mortgage; it contains provisions other
than those bearing directly on the mortgage. An indenture is a sealed
agreement between two or more parties and any number of provisions may
be inserted in it, in addition to the mortgage clauses, as may be deemed

necessary or desirable. It is always possible for the individual to obtain a
loan secured by a lien on his property, provided the security is good and
considered ample. If, however, his property was of so great value that he
desired to obtain a loan of several millions of dollars, he would find it
difficult, or even impossible, to find any one person willing to lend him so
large an amount. If, however, the borrower could find a number of persons
who could and would jointly contribute enough money to equal the amount
of the loan, he could divide this total amount into equal parts and each
lender could have such a proportionate interest as might be desired. This,
then, is the case with large corporations, which are legalized persons.
Owing to the fact that the holders of the bonds have only a fractional
interest in the loan and therefore in any property that may be pledged to
secure it, it is impossible to create separate mortgages in favor of the
individual bondholders on any particular part of the property. No portion of
the property can be specifically designated—the interests of the
bondholders are in common. For this reason and others, corporations are
obliged to create what is known as a Mortgage Deed of Trust—making the
mortgage to secure the many bonds in favor of some responsible individual
or trust company, who holds it on behalf of the various bondholders in
accordance with the definite terms of the trust, and who is therefore known
as the Trustee. The indenture of the corporation must in addition to covering
the mortgage, contain other related and necessary covenants, especially as
to the trust that must be created. As there are so many covenants or
provisions necessary in order to fully protect all interests concerned, the
corporation indenture becomes bulky, but its form in substance is not very
different from that of the bond and mortgage of the individual, which we
have already analyzed, and which for this reason it is well for us to keep in
mind as we follow the corporation indenture.
ANALYSIS OF INDENTURES.—The indenture, or agreement, must of
necessity be made between certain parties, the mortgagor or the corporation
and the mortgagee, in this case the Trustee who holds the security given in
trust for the various bondholders. It is, therefore, proper that we recite at the
very beginning of the indenture the parties in interest, giving their legal
residence, or as in the case of corporations the names of the States wherein
they are incorporated. It is quite essential that we know in what State a
corporation was incorporated, as its rights and privileges are determined by

the statutes of the State which created it and by the charter which has been
granted to it. What are our reasons for creating the indenture? The very first
premise is that the corporation is legally able to borrow money by law. If it
did not have this right we could proceed no further. To borrow money and
mortgage or pledge property as security therefor is a common law right of
corporations, but the amount which may be borrowed is sometimes limited
by State statutes. In the event that the corporation desired to borrow in
excess of the limitation, additional capital stock is sometimes authorized
thereby creating a larger basis for borrowing. If this premise is not
incorporated, its omission does not affect the status of the indenture, but it
is generally placed, as many other premises are, in the indenture, for the
sake of logic, and to show that the matter has been considered, and that the
fact is admitted by the parties to the indenture. The purpose for which the
bonds are to be issued is sometimes duly set forth, as for instance, to refund
certain maturing obligations, to construct a certain extension, to build new
terminals, etc. While the purpose may not always be mentioned in the
indenture, nevertheless it must accord with the charter of the corporation
and the laws of the State. The company cannot exceed the powers that have
been granted to it. We next want to know whether the authority to borrow
money and issue bonds therefor has been obtained in lawful manner.
Provisions covering the manner of securing this authority will be found in
the by-laws of the corporation, and the counsel must examine this matter
carefully in order to see whether all legal formalities have been strictly
observed and whether the resolutions are in proper order. There are certain
essential facts that must be stated in the bonds themselves and which are
elaborated in the covenants of the indenture. These facts are embodied in
the resolutions of the Board of Directors and of the stockholders and are,
therefore, incorporated in the premises of the indenture. These facts include
the total amount of bonds authorized, title, denomination, form, date of
issue and maturity, rate of interest and where payable. In order that there
may be uniformity in the wording and form of the bonds, so that no one
holder will perchance receive an undue advantage over any other
bondholder, the form of the bond, its coupons and trustee's certificate must
be duly set forth in the indenture.
LIMITATION OF POWERS OF DIRECTORS.—There are various matters
wherein directors of any corporation do not usually have power to act on

behalf of the corporation without special authorization. Such matters
include the amendment of the corporate charter (thereby changing the
purposes of the corporation), the change of the name of the corporation, the
increase or decrease of authorized capital stock, the sale of the total
corporate assets and franchise, the consolidation of the corporation where
permitted by statute, and the giving of mortgages upon the corporate
property. This last point is especially important since the validity of a
corporate mortgage as security for a loan of money depends upon whether
the mortgage was authorized and given in all respects pursuant to statute of
the State involved. As these corporate mortgages not only are given as
security for a single loan of money but also furnish security often for very
large amounts of bonds, the matter of the authority of the directors and the
validity of the mortgage becomes of great importance. Therefore the
statutes of the State involved must be followed closely as to the procedure
in connection with the giving of a mortgage. It may be stated, however,
with regard to this matter and the other special matters mentioned, the
statutes generally provide that some form of authorization should be
obtained from the stockholders, generally through their vote at a special
meeting called for that purpose, of which proper notification and
announcement have been given; that some form of certificate as to the
proceedings at such meeting be made and filed by the secretary and
treasurer or other designated officer of the corporation; that it should also be
filed in the office of the county clerk of the county involved and in the
office of the Secretary of State; and that some notification of the act in
question be also given to the directors as well as the stockholders. It is, of
course, impossible to take up the details as to such matters, the only safe
course to pursue being to follow with extreme care the statutes of the State
wherein such action is to be taken. From the foregoing, however, the
general purpose and effect of prevailing law may be seen.
DIVIDENDS ON STOCK.—Dividends on the stock of corporations are
declared by the directors, who have power to use their discretion as to the
amount to be disbursed in this way. The statutes are, however, very explicit
in prohibiting the declaration of any dividends except out of the surplus
profits of the business conducted by the corporation. With respect to
dividends properly declared, the declaration of the directors generally
provides that they shall be paid to all stockholders registered upon the

books of the company at a specified date in the future. Hence, if a
stockholder should sell or otherwise transfer his stock, after that date to
another person, the latter, while becoming the owner of the stock, would not
be entitled to the dividend when paid. It would be payable to the former
stockholder, although he might, pursuant to the agreement made with the
person to whom he sold the stock, turn over to the latter the amount of the
dividend.
CUMULATIVE DIVIDENDS.—It frequently happens that a corporation
does not earn any dividends in a particular year. The question arises, is the
holder of a 7% preferred stock in a position to demand that the dividend be
paid the following year. Suppose the corporation earns nothing in 1921 and
earns 14% in 1922. The holder of one share of a non-cumulative preferred
stock would receive the usual 7% dividend only in 1922. If the stock were
cumulative he would receive 14%. In other words the unearned dividends
accumulate and become a charge which the corporation must pay when
sufficient is earned in prosperous years before the holders of common stock
are entitled to receive any dividend. Usually the stock certificate and the
articles of incorporation specify whether stock is cumulative or non-
cumulative. If they do not, then reference to the law of the State where the
company is incorporated, is necessary to decide such a question.
LIABILITY OF OFFICERS AND DIRECTORS TO THE
CORPORATION.—Whether a corporation becomes liable by virtue of
action taken by its officers or directors depends upon principles of agency
applied to the law of corporations. These principles have already been
stated. Whether the directors or officers are themselves personally liable is
another matter. Conceivably they may be liable either to their employer (the
corporation) or to creditors of the corporation. They are not directly liable
to the shareholders as such. Any injury or wrong they may indirectly do to
shareholders is directly done to the corporation, the shareholders being
injured only because the corporation in which he is interested is injured.
Shareholders may, however, institute proceedings against directors or
officers if, as not infrequently happens, the corporation itself, being
controlled by the wrongdoers, fails to take proceedings. The shareholders in
such a case, however, demand redress for the corporation, not for
themselves; and whatever may be recovered, is recovered for the benefit of
the corporation. The duty of the directors and officers of the corporation is

analogous to the duty of any agent to his principal. That is, each officer or
director must exercise reasonable diligence in the performance of his work
and must observe fidelity to his principal. The application of these
principles to particular fact is not always easy, but the principles themselves
are plain. Especially the degree of care which directors are bound to use
presents a troublesome question of fact. In a small business it may be the
duty of a director to take active control of the policy of the company and
supervise with some minuteness each business operation. Such direction is
impossible where a great railroad or industrial corporation is concerned. In
such a case directors necessarily derive their information from subordinate
agents and cannot investigate facts for themselves. Directors are not liable
for mistakes of judgment if they use reasonable care; if, however, they
wilfully do an act which they know is not authorized by the charter or by-
laws of the corporation, they will be liable for the consequences. Directors
who are cognizant of wrongs committed by their co-directors and fail to
take available measures to prevent the wrongs, become liable themselves.
Directors may terminate their liability for future acts by resigning, but
resignation will not destroy liability for acts already done even though the
resulting damage does not happen until after resignation. The corporation
requires that a director or other officer shall not act on behalf of the
corporation in a matter in which he has a personal interest at variance with
that of the corporation. Should matters of this sort arise, as they often do,
the interested officer or director should not take part in the decision of the
question, and may render himself liable if he does so.
LIABILITY OF OFFICERS TO CREDITORS.—So long as a corporation
is solvent, creditors of the corporation have no reason or right to seek
redress from any one but the corporation itself. Creditors of an insolvent
corporation, however, may enjoin action by the company's officers which is
unauthorized or likely to prove detrimental to the assets of the corporation.
If the officers knowingly misapply the assets of an insolvent corporation
they are personally liable to the creditors for the injury caused thereby.
They are liable sometimes by statute, but also even apart from statute, for
false statements of the condition of the corporation in reliance upon which
credit is given the corporation. Like other agents, the officers of a
corporation impliedly warrant to persons with whom they deal their
authority to do the acts which they undertake; and if authority is lacking,

they are liable personally. The only qualification of this principle is that if
the facts from which authority, or lack of it, may be determined, are known
to the person dealing with them, they are not liable; that is, they do not
warrant the correctness of an inference of authority from known facts.
LIABILITY OF BANK OFFICERS.—The principles governing the
liability of bank directors and other officers of a bank are the same as those
which govern similar questions regarding other corporations. The bank
laws, however, impose certain duties and penalties which affect the
application of general principles. It may be worth while to enumerate
briefly some of the duties of different bank officers, a violation of which
renders them personally liable. As to directors it has been said that "It is not
necessary to show directly that the directors actually had their attention
called to the mismanagement of the affairs of the bank, or to the misconduct
of subordinate officers. It is sufficient to show that the evidence of the
management or misconduct were such that it must have been brought to
their knowledge unless they were grossly negligent or wilfully careless in
the discharge of their duties." They are liable for the consequences not only
of their own fraud but of their ultra vires acts. They are liable for approving
the discount of notes known to be worthless or of so doubtful value as to be
obviously unsafe. If guilty of negligence in failing to discover that such
paper was worthless they may also be liable. They are guilty of negligence
and may thereby render themselves liable if they wholly neglect to ascertain
the condition of the bank from its books, though a thorough examination of
the books of a bank, especially of one transacting a large business, cannot
be expected of every director; and the law would require no more than
would be demanded by the standard of reasonableness.
THE PRESIDENT.—The duties of the president, and consequently his
liabilities, must be determined by general law, the charter of the particular
institution, its by-laws, and by general business usage. Thus, if the usage
exists for the president to draw and sign checks in the absence of the
cashier, the president will have authority so to act. He has authority to
conduct the litigation of the bank; he may employ counsel. He may
generally indorse negotiable paper of the bank. On the other hand, he will
be personally liable if he permits improper loans or over-drafts; if he fails to
give proper instructions to inferior officers; if it is his duty to require a bond
from an inferior officer, and he fails to do so; and, generally, if he commits

a breach of duty to the corporation which causes damage. He has no power
to execute deeds of real estate without authority of the directors and,
generally, an instrument which must be executed under the seal of the bank
must be authorized by the board. The discount of negotiable paper also is a
duty of the directors.
THE CASHIER.—The Supreme Court of Maine has thus expressed the
functions of the cashier of a bank: "A cashier, it is well known, is allowed to
present himself to the public as habitually accustomed to make payment for
its bills or notes payable to other persons; to make payment for bills and
notes discounted by the directors; to receive payment for bills of exchange,
notes, and other debts due to the bank; to receive money on deposit and to
pay the same to the order of the depositors. He is presented as having the
custody of its books, bills of exchange, notes, and other evidences of debt
due to it, and, indeed, of all its movable property; as making entry in its
books and as keeping its accounts and a record of its proceedings. In many
banks these duties are performed in part by tellers, clerks, or assistants, but
generally, it is believed, under his superintendence, and he might at any
time assume the performance of them and perform them, if able to do so,
without such assistance. His true position appears to be that of a general
agent for the performance of his official and accustomed duties. While
acting within the scope of this authority he would bind the bank, although
he might violate his private instructions." He must exercise proper oversight
over subordinate officers; he must use reasonable care and skill. He may
become liable personally for failure to observe instructions as to a special
deposit; for the improper sale of stock held as security for a loan; for
improperly making loans, for failure to give essential information to the
directors; for failing to exercise proper oversight over inferior officers or
agents, as well as in the more obvious case where he has taken advantage of
his position to commit intentional fraud upon the bank.
BLUE SKY LAWS.—The term "blue sky" has become very familiar to the
corporation lawyer in the last few years. The so-called "blue sky"
legislation is a well meaning, if partly futile, attempt to meet an existing
evil in connection with the sale of corporate securities. We shall find later
that five elements are necessary to constitute the action of fraud or deceit:
(1) a false representation of a material fact; (2) made with knowledge of its
falsity; (3) with intent that it be acted upon; (4) that it be acted upon; (5)

damage follows. The courts have almost universally held that a mere
statement of opinion does not give rise to a cause of action for fraud,
whereas a mistatement of fact does. Hence if I state to you when selling you
100 shares of the Bonanza Gold Mining Corporation that the company has
never paid less than 20% in dividends during the last five years and you
purchase the stock relying on this misrepresentation of fact (the situation
actually being the company has never paid a dividend) you would have a
cause of action in deceit against me. If, however, I had simply said in
selling you the stock that the outlook for the company was the brightest in
its history, that the president had told me that dividends of 30% a year were
assured indefinitely and that this stock was by far the best bargain which
had been on the market in over a year, although I know when I made such
statements that there was little or nothing to substantiate them, nevertheless,
I would not be liable in deceit. My statements were merely matters of
opinion or what we call "seller's talk" or "puffing one's wares."
THE FINANCIAL PROSPECTUS.—If you will examine the average
financial prospectus of a new stock being offered for sale to the public, you
will find that when most of the high sounding terms and flattering
statements are analyzed carefully that they will fall in this second class of
non-actionable statements. There are few statements of fact but many
glowing statements in the nature of "seller's talk." We all know, however,
that enormous quantities of worthless stock are sold each year by this
method. When business conditions are good it sometimes seems as if the
wilder the scheme the easier it is to find a gullible public ready to purchase
such securities. To prevent the perpetration of such frauds on the public is
the object of the so-called "blue sky" legislation.
THE LAW ANALYZED.—The first "blue sky" law was passed in Kansas
in 1911. The evil sought to be remedied was so prevalent that the idea
spread rapidly and now similar legislation, of one type or another, has been
enacted in a majority of the States. Some of the acts are crude, some have
been held unconstitutional, and many are difficult of enforcement. Recently,
however, more care has been taken in drafting such legislation, and many of
the earlier laws will undoubtedly be amended to conform with this later
legislation. We may take the Illinois statute of 1919 as a good sample of a
drastic yet fairly workable Act. The law may be briefly considered from

three standpoints: (1) the persons affected; (2) the securities affected; (3) the
penalties provided for violation of its provisions.
AS TO THE PERSONS AFFECTED.—Generally any person offering any
securities, and any seller's agent or broker, the issuer, or any agent or
director of the issuer, or any owner or dealer, is covered by the Act. Illinois
fiscal corporations such as banks, trust companies, insurance companies,
building and loan associations and the like are practically exempt from the
provisions of the Illinois securities law.
THE ILLINOIS ACT.—The Illinois act covers the following securities:
Section 3. For the purposes of this Act securities are divided into four
classes as follows:
(1) Securities, the inherent qualities of which assure their sale and
disposition without the perpetration of fraud, which shall be known as
securities in Class "A";
(2) Securities, the inherent qualities of which, or in the nature of one or both
parties to the sale thereof, assure their sale and disposition without the
perpetration of fraud, which shall be known as securities in Class "B";
(3) Securities based on established income, which shall be known as
securities in Class "C";
(4) Securities based on prospective income, which shall be known as
securities in Class "D";
Section 4. Securities in Class "A" shall comprise securities:
(1) Issued by a government or governmental agency, or by anybody having
power of taxation of assessment;
(2) Issued by any National or State bank or trust company, building and
loan association of this State, or insurance company organized or under the
supervision of the Department of Trade and Commerce of this State;
(3) Issued by any corporation operating any public utility in any State
wherein there is or was at the time of issuance thereof in effect any law
regulating such utilities and the issue of securities by such corporation;

(4) Appearing in any list of securities dealt in on the New York, Chicago,
Boston, Baltimore, Philadelphia, Pittsburgh, Cleveland or Detroit Stock
Exchange, respectively, pursuant to official authorization by such
exchanges, respectively, and securities senior to any securities so appearing;
(5) Whereof current prices shall have been quoted from time to time for not
less than one year next preceding the offering for sale thereof, in tabulated
market reports published as news items, and not as advertising, in a daily
newspaper of general circulation, published in this or in an adjoining State,
including the State of Michigan, not including any trade paper or any paper
circulating chiefly among the members of any trade or profession;
(6) Issued by any corporation organized not for pecuniary profit or
organized exclusively for educational, benevolent, fraternal, charitable or
reformatory purposes;
(7) Being notes or bonds secured by mortgage lien upon real estate or
leasehold in any State or territory of the United States or in the Dominion of
Canada, when the mortgage is a first mortgage on real estate, and when in
case it is not a first mortgage lien or is on a leasehold, the mortgage and
notes or bonds secured thereby (not including interest notes or coupons)
shall each bear a legend in red characters not less than one-half inch in
height, indicating (1) that the mortgage is on a leasehold, if that be the case,
and (2) that the mortgage is a junior mortgage, if that be the case;
(8) Being a note secured by first mortgage upon tangible or physical
property, when such mortgage is assigned with such securities to the
purchaser;
(9) Evidencing indebtedness due under any contract made in pursuance to
the provisions of any statute of any State of the United States providing for
the acquisition of personal property under conditional sale contract;
(10) Being negotiable promissory notes given for full value and for the sole
purpose of evidencing or extending the time of payment of the price of
goods, wares or merchandise purchased by the issuer of such notes in the
ordinary course of business, and commercial paper or other evidence of
indebtedness running not more than twelve months from the date of issue;

(11) Being subscriptions for the capital stock under any license issued to
commissioners to incorporate a company under the laws of this State where
no commission or other remuneration paid for the sale or disposition of
such securities;
Securities in Class "A" and the sales thereof shall not be subject to the
provisions of this Act.
Section 5. Securities in Class "B" shall comprise securities:
(1) Sold by the owner for the owner's account exclusively when not made in
the course of continued and repeated transactions of a similar nature;
(2) Increased capital stock of a corporation sold or distributed by it among
its stockholders without the payment of any commission or expense to
solicitors, agents or brokers in connection with the distribution thereof;
(3) Sold by or to any bank, trust company, or insurance company or
association organized under any law of this State or of the United States, or
doing business in this State under the supervision of the Department of
Trade and Commerce; or of the auditor of Public Accounts; or by or to any
building and loan association organized and doing business under the laws
of this State, or any public sinking fund trustees; or to any corporation or
dealer or broker in securities;
(4) Sold or offered for sale at any judicial, executor's or administrator's sale,
or at any sale by a receiver or trustee in insolvency or bankruptcy, or at a
public sale or auction held at an advertised time and place;
Securities in Class "B," when disposed of by the persons and in the manner
provided by this section, shall not be subject to the provisions of this Act.
Section 6. Securities in Class "C" shall comprise the following:
Those issued by a person, corporation, firm, trust, partnership or association
owning a property, business or industry, which has been in continuous
operation not less than two years and which has shown net profits,
exclusive of all prior charges, as follows:
(1) In the case of interest-bearing securities not less than one and one-half
times the annual interest charge upon all outstanding interest-bearing

obligations;
(2) In the case of preferred stock not less than one and one-half times the
annual dividend on such preferred stock;
(3) In the case of common stock not less than 3% per annum upon such
common stock.
Section 7. Securities in Class "C" may be disposed of, sold or offered for
sale upon compliance with the following conditions, and not otherwise:
A statement shall be filed in the office of the Secretary of State:
(1) Describing the evidence of indebtedness, preferred stock or common
stock intended to be offered or sold;
(2) Stating the law under which and the time when the issuer was
organized;
(3) Giving a detailed statement of the assets and liabilities of such issuer
and income of profit and loss statement, and giving an analysis of surplus
account;
(4) Giving the names and addresses of its principal officers and of its
directors or trustees;
(5) Giving pertinent facts, data and information establishing that the
securities to be offered are securities in Class "C."
Such statement shall be verified by the oath of not less than two credible
persons having knowledge of the facts. Not less than twenty-five copies of
such statement, wholly printed or wholly typewritten, shall at the time of
filing the original statement be filed with the Secretary of State. The printed
or typewritten copies so filed shall bear at the top in bold faced type the
expression:
"Securities in Class 'C' under Illinois Securities Law," followed by the
expression, also in bold-faced type:
"This statement is prepared by parties interested in the sale of securities
herein mentioned. Neither the State of Illinois, nor any officer of the State,

assumes any responsibility for any statement contained herein nor
recommends any of the securities described below."
Section 8. All securities other than those falling within Class "A," "B" and
"C," respectively, shall be known as securities in Class "D."
Section 9 gives the requisites of the statement required to be filed with the
Secretary of State before securities of Class "D" may be sold. Such
statement is even more complete than that required in Section 7.
SALES AND CONTRACTS VOID.—Every sale or contract in violation of
the act is void, and the fines vary from not less than $100 to not more than
$25,000, and the imprisonment from six months to five years. Although
there is great need for a Federal incorporation act there is even greater need
for a Federal blue sky law. With different acts in the different States, the
Illinois act being simply an example, even the most careful business man
may unwittingly find himself in a position where he has violated one of
these laws with their severe penalties.

CHAPTER VII
Transfer of Stock
UNIFORM TRANSFER OF STOCK.—Turn now to an entirely different
matter, the transfer of stock. A stock certificate is one of the quasi-
negotiable instruments of commerce, at common law not fully negotiable
like bills and notes, but, nevertheless, having some of the attributes of
negotiability, especially in States where what is called the Uniform Transfer
of Stock Act has been enacted. This statute applies only to corporations of
those States which have passed the statute.
TWO METHODS OF TRANSFERRING STOCK.—Stock may be
transferred in two ways: first, by delivery of the certificate with the
indorsement upon it of the owner of the stock, indicating that he assigns or
authorizes the assignment of the stock, and second, by delivery of the
certificate, with a separate document of assignment attached stating that the
owner of the certificate assigns or authorizes the transfer of the stock. This
second method is not so completely good as the first, where the assignment
is on the certificate itself, because if for any reason the separate document
should become detached from the certificate, the transferee's right would
not be apparent, and therefore the Transfer of Stock Act provides that if a
purchaser should get possession of the stock certificate with an indorsement
upon it, he would take precedence over even a prior assignee who had a
separate paper assigning the certificate to him. Of course, after the transfer
is duly registered on the books of the company, then it makes no difference
whether that transfer was secured by means of a separate power or
assignment or by means of one written on the certificate itself.
EFFECT OF TRANSFER ON THE BOOKS OF THE COMPANY.—What
is the effect of transfer on the books of the company? Under the common
law, stock was originally transferable just like any intangible right, merely
by agreement of the parties, to which requirement was added, as a necessity
when stock certificates became common, the delivery of the certificate
itself. But it was convenient for the company to know who was owner of its
stock. It was inconvenient to have stockholders buy and sell without any

notice to the company, and therefore a common by-law was that stock
should be transferred only on the books of the company. The Uniform
Transfer of Stock Act goes back partially to the old rule, since the transfer
of the certificate with the indorsement or separate assignment is what
transfers the stock, not the transfer on the books of the company; but in
order that the corporation may not be inconvenienced it is provided that the
corporation shall have the right to pay dividends to any one registered on
the books of the company, such persons being the apparent owners, and that
only such persons have the right to vote. An analogous custom that shows
the importance of registration of stock transfers on the books of the
company is the registry of deeds in the transfer of real estate. It is the deed,
not the record of it, which creates a title, but an unrecorded deed may be
defeated by creditors or purchasers without notice, so that to protect himself
fully the owner of land is obliged to record his deed.
OWNERSHIP OF STOCK, INDIVIDUALLY, IN COMMON, JOINTLY
AND BY FIDUCIARIES.—Stock may be owned by a man individually, it
may be owned by several persons in common, or it may be owned by
several persons jointly, or it may be owned by a person in a fiduciary
capacity, as trustee, executor or guardian. What is the difference, may be
asked, between the case of ownership of stock by several persons in
common and ownership by several persons jointly. The common law drew
this distinction between joint right and rights merely held in common; that a
joint right survived to the survivors when one of them died, whereas a right
held in common passed, on the death of one of the owners, pro rata to the
personal representatives of the deceased. Therefore if A, B and C own stock
jointly, when C dies A and B are the owners. If A, B and C own the stock in
common, A, B and the executors of C would own it on the death of C.
Generally where several persons own a right now, they own it in common,
but there are two notable exceptions—the case of partnerships and the case
of trustees. Stock held in the name of A, B and C, when A, B and C are
either partners or trustees, will pass to A and B on the death of C. C's
executor will not have to join in the transfer.
DIFFICULTIES IN TRANSFER AFFECT PURCHASER AND ALSO
CORPORATION.—The difficulties in the transfer of stock may be looked
at (1) from the standpoint of a purchaser of the stock, including within the
name of purchaser one who lends money on the stock as well as one who

buys it, and (2) from the standpoint of the corporation whose duty it is to
transfer the stock on its books. Generally the difficulties which confront the
purchaser are the same which confront the corporation when it is asked to
transfer. If the purchaser should get a defective right when he bought, then
the corporation, if it should transfer, would generally get into trouble also.
LEGAL AND EQUITABLE DIFFICULTIES IN TRANSFERS.—The main
difficulties which arise may be divided into legal and equitable difficulties.
By legal difficulties are meant cases in which the purchaser will not get a
good legal title. By equitable difficulties, cases in which the purchaser will
get a good legal title but which will be subject to an equitable right in favor
of some other person. The person who has an equitable right cannot reclaim
the stock from one who is, or succeeds to the rights of, a bona fide
purchaser for value without notice.
LEGAL DIFFICULTIES—FORGED CERTIFICATE.—First, in regard to
legal difficulties. The certificate of stock may be forged. The purchaser of a
forged certificate of stock, of course, gets nothing in the way of stock. He
does get the right, however, to sue the person who sold him the stock on an
implied warranty of genuineness. Analogous to the situation of the
purchaser is the situation of the corporation if, on receiving a forged
certificate with a request for a transfer, it should transfer ownership on the
books, completing the transfer by issuing a new certificate; for any person
who took the new certificate, even though he was a bona fide purchaser for
value, would not get any stock in the corporation, if all authorized stock had
previously been issued. The corporation has no power to overissue stock; it
cannot emit any more even if it tries, and therefore the purchaser gets no
stock. He does, however, get a right against the corporation. The
corporation has issued what purports to be new stock to him, or if he is a
remote purchaser he has paid for stock in reliance on a certificate which the
corporation has issued. The corporation is estopped, as the legal phrase is,
to deny the validity of that certificate as against one who has thus relied on
its acts. The result is that the corporation is bound to pay to him value
equivalent to that of real stock, because the corporation has put out
something which seems to be good stock, and owing to the act of the
corporation the purchaser has been deceived.

FORGED ASSIGNMENTS.—A second legal difficulty arises where the
indorsement or assignment of the certificate is forged. Only the owner of
stock can sell it. Consequently, if anybody else attempts by forgery or
otherwise to make a transfer, the transfer will be ineffectual. The result will
be the same as though the whole certificate were forged. The purchaser
under the forged indorsement will get nothing. If the corporation relies on
the forged indorsement and issues a new certificate, it will, in the same way
as in the case of a new certificate issued for a wholly forged one, be liable
to a purchaser for value. It is, of course, of vital importance, therefore, to
make sure that indorsements are correct, and generally it is desirable to take
indorsed certificates only from reliable persons. If you take such a
certificate from a reliable person, even though there is no express guaranty
of signatures by a brokerage house or other third person, as there often is,
you will be practically safe because of the implied warranty of genuineness
by the seller which applies to the indorsement on certificates as well as to
cases of wholly forged certificates.
ASSIGNMENTS BY UNAUTHORIZED AGENT.—A third case is where
the indorsement is made by an agent, and the agent has no authority to act.
A corporation transferring stock should require, and a purchaser should
require, the clearest evidence of an agent's authority if the signature of the
transferor is made by an agent. It is not only necessary to be sure that the
agent's authority originally existed, but it is necessary to be sure that his
power has not been revoked, either by the death of the principal or by
express revocation during his life. A question that sometimes is
troublesome, in regard to the agent's authority to make such an indorsement,
arises where the terms of the power given the agent are general; where he is
authorized to do a very broad class of acts for the principal, but no specific
mention is made of the particular certificate which he seeks to transfer.
Such a power, if it certainly includes the transfer of that certificate, is
legally good, but a corporation would object to make a transfer under a
power which did not specifically mention the particular certificate, unless it
was absolutely certain from its terms that this certificate in question was
included.
LACK OF CAPACITY TO ASSIGN.—A fourth case is lack of capacity on
the part of the owner of the stock to make a transfer. This lack of capacity
may arise from a variety of causes, insanity or infancy, for instance. A

totally insane person is as incapable of transferring stock as of transferring
other property. An infant, that is, a minor, though not wholly without
capacity, if not under guardianship, becomes, presumably, wholly without
capacity to transfer stock if under guardianship. An elderly person under the
charge of a conservator would be incapacitated to transfer his property. An
infant who has had no guardian appointed, though he could make a transfer,
could also, by virtue of his infant's privilege, revoke that transfer, which,
therefore, would be too insecure either for a purchaser to take or for a
corporation to allow. If stock is owned by an infant, a purchaser or a
corporation should require that a guardian be appointed and that the transfer
be made by the guardian.
LACK OF DELIVERY—THEFT OF CERTIFICATE.—A fifth case is
where the signature on the back of the certificate of stock is genuine, but
where there has been no valid delivery by the owner. This is rather a
troublesome case to detect. In the case of full negotiable instruments, like
bills and notes, if the signature of an indorser is genuine, a purchaser for
value of the instrument will get title even though he purchases from a thief,
or though for any reason there was no intention on the part of the owner
who wrote his name on the back to make a transfer of the instrument. But
by the common law stock certificates were not negotiable to this extent.
This case occurred in a law office in Boston: the head of the firm rather
carelessly kept "street certificates" for stock (that is, certificates made out in
the name of the brokerage firm which was the former owner and indorsed in
blank), not having the certificates transferred to his own name. The stock
was not at the time dividend-paying, so that a transfer on the books seemed
unimportant. He put the certificates into the office safe to which the office
boy had access. This boy took the certificates and sold them through a
broker, and the loss was not discovered for several years. After it was
discovered the loss was traced by the numbers of the certificates, and action
was brought against the brokers who were unfortunate enough to have taken
the stock from the office clerk. Now, if the certificates had been negotiable
paper, the brokers would not have been liable, but under the law then
existing it seemed so probable that they were liable that they settled the case
by paying more than half the value of the stock. The only thing that could
have prevented their being liable was that, under the circumstances, the
contention was possible that the owner of the stock had been so negligent in

his dealing with the certificates as to preclude him from asserting any right.
Now the Transfer of Stock Act changes the law in this respect so far as
Massachusetts stock certificates are concerned. The act makes them fully
negotiable, but the common law would apparently still apply to certificates
of stock of corporations incorporated in other States. And similar principles
would be applicable in other States which have passed the same statute.
DEATH OF OWNER OF INDORSED CERTIFICATE.—A somewhat
similar case is this: suppose that after the owner of stock has written his
name on the back of it, he dies; that is a common enough case. Many men
have used their stock certificates to borrow money on, and therefore, after
paying the loan they have them in their possession with their signatures on
the back. They put those certificates back in their safe deposit boxes. Then
suppose the owner dies and an attempt is made to transfer the stock by
virtue of that signature written on the certificate. That is not a valid transfer
at common law. The certificate was owned only up to the time of his death
by the man whose name is on the face; on his death his executor becomes
the owner and the executor's signature is necessary to transfer the title, and
the signature of the man himself written before his death is not effective for
that purpose; and yet a purchaser may not be aware that that signature is
invalid; he may not know that the man who signed it is dead, and similarly
the corporation may allow the transfer to go through in ignorance that the
signer is dead. If the money which is the proceeds of the stock actually
reaches the executor of the estate, of course he could not object to the
validity of the transfer, and he could not object if he were in any way a
party to the transfer of the stock by means of the signature of the dead man;
but if the proceeds did not get to the hands of the executor and he was in no
way responsible for the transfer, he could assert that the transfer was invalid
and that that stock belonged to him. This, again, is changed by the uniform
law so far as applies to corporations in the States which have enacted that
law. To avoid misapprehension it should be said that if an indorsed
certificate has been delivered for value by the owner, during his lifetime, to
a purchaser or lender, the death of the indorser does not impair the validity
of the signature even at common law. The purchase of the stock or a loan
made on the stock gives the purchaser or lender a power which cannot be
revoked by death or otherwise.

BANKRUPTCY OF THE OWNER OF STOCK.—One other important
case, in which a genuine signature of one who was the owner cannot
transfer a good title, is the case of bankruptcy. The Federal bankruptcy law
provides absolutely that title to property which a bankrupt has at the time of
his bankruptcy shall be vested in his trustee. If, therefore, after A's
bankruptcy, A seeks to transfer stock which he had owned, and which was
in his own name, he cannot do so, for he is no longer the owner of the
stock, and he has no power to transfer it. Therefore, even a bona fide
purchaser from a bankrupt will get nothing.
ATTACHMENT OF STOCK.—A sixth difficulty in regard to transfer of
stock—attachment of the stock by a creditor of the registered owner—is
eliminated in States where the Uniform Transfer Act has been enacted. Such
attachments created considerable difficulty before the passage of the act.
Suppose this case: A is the owner on the books of the company of 100
shares of Boston & Albany stock. He knows a creditor is about to attach
that stock, and in order to get ahead of the creditor he sells the stock on the
exchange. If he makes the sale before the attachment, undoubtedly the sale
everywhere would prevail over the subsequent attachment; but suppose the
attachment preceded by a little while the sale of the stock. A still has the
certificate, and brokers and purchasers are accustomed to rely on the
certificate as evidence of ownership. They take the certificate and pay A
money for it; then when the purchaser goes to transfer the stock he finds
that an attachment has been put upon the books of the company. Where the
uniform law governs the case the only way to make an attachment of stock
effective is to seize the certificate itself. But in other States this difficulty
may still arise, of a purchaser being deceived by the certificate itself, and
paying money on the faith of it when there has been an attachment levied
by a creditor immediately before on the books of the company.
TRANSFERS BETWEEN HUSBAND AND WIFE.—One other matter of
transfer deserves attention, and that is a transfer between husband and wife,
or wife and husband. A married woman can contract in most States as fully
as a married man, but generally, though not universally, neither of them can
contract with the other or make a conveyance directly to the other. A
promissory note from wife to husband, or husband to wife, or any other
conveyance or transfer or contract was at common law and still is in many
States invalid. A husband can, however, appoint his wife his agent, and a

wife can appoint her husband her agent, and when such an agent acts, his
act will be legally that of the principal, just as in any other case of agency.
Accordingly, if a husband draws a check payable to his wife, though he
does not become liable as drawer to his wife, and could not be sued by her
if the check was not paid, the bank runs no risk in paying the check because
the husband has authorized the bank to make a payment to the wife.
Similarly, if a husband authorizes a corporation to transfer stock to his wife
it seems that the corporation is protected, having acted under the authority
of the owner, and that the wife would get a good title to the stock. This
question has, however, been somewhat disputed by lawyers. Therefore it is
very probable that a corporation would, as a matter of precaution, refuse to
run any risk by transferring directly from husband to wife or vice versa, but
would require that the transfer should be made through a third person in any
State where husband and wife cannot contract with one another. So much
for difficulties arising out of defects caused by the lack of legal title to the
stock.
STOCK HELD IN TRUST.—Now let us consider equitable defects. Such
defects chiefly arise where stock is held in trust. It would be the simplest
and pleasantest thing for a corporation if it could refuse to register stock in
trust at all, but it has been decided that it cannot do this, that it is bound, if
requested, to register stock in favor of a trustee and issue stock to trustees.
Now trustees hold under an appointment by the court. A trustee may cease
to be such at any time by removal of the court as well as by death. Suppose
stock in the name of D, trustee. If D has ceased to be trustee because he has
been removed from office, a transfer by him will not be valid. Accordingly,
it is essential for a corporation and for a purchaser to be certain, not simply
that D was trustee, but that D is trustee at the time he attempts to make the
transfer. We may suppose the case of a certificate which does not state that
there is a trust. Not infrequently trustees, to avoid complications, do not
specify in the certificate that they are trustees. If the corporation or if the
purchaser of that stock has no notice that D is really holding that stock in
trust, the corporation or the purchaser will have the same rights as if there
were no trust. But if either the corporation or the purchaser learns, from
extrinsic sources, that the stock is really held in trust, they will be bound to
make certain that the seller is still empowered to act as trustee, in the same

way as if the certificate specifically stated on its face that the stock was
owned by D in the capacity of trustee.
ONE HAVING NOTICE THAT STOCK IS HELD IN TRUST MUST
ASCERTAIN THE TERMS OF THE TRUST.—Even if the supposed
trustee is actually the trustee he may not have power to give a good title to
the stock. He has the legal title, undoubtedly, but if the certificate contains
notice that he holds the legal title as trustee, every one is bound at his peril
when purchasing the stock, and also the corporation is bound at its peril
before it allows the transfer of the stock, to make sure that the trustee is
authorized by the terms of his trust to transfer the stock.
A TRUSTEE HAS POWERS NECESSARY TO CARRY OUT TERMS OF
TRUST.—Generally when a transfer of stock is attempted by a trustee it
means that the trustee is selling the stock, though that is not necessarily the
case. A trust may be terminated; that is, a trust may be created for twenty
years, with directions to the trustee to transfer the trust property at the end
of twenty years to certain beneficiaries. A transfer by the trustee at the close
of the twenty years to the beneficiaries would not be a sale of the stock; it
would be a transfer for the purpose of carrying out the trust, and a trustee
always has implied power to make any transfer of stock that is necessary to
carry out the purpose of the trust.
A TRUSTEE HAS NO IMPLIED POWER TO SELL.—A trustee has no
implied power to sell. The general duty of a trustee is to keep the property
which is left to him in trust or conveyed to him in trust in its existing form,
and no power is implied to change the form to something else. Accordingly,
if no power to sell is in terms given in a trust created by deed or will, a
corporation will require, and a purchaser should require, the trustee to
obtain the authority of the probate court to make the sale. Carefully drawn
trusts generally contain a power for the trustee to sell if the purpose of the
trust is to produce an income-bearing fund for a long period of years. For
that purpose a change of investment is frequently desirable, and therefore
trustees are expressly given that power. But the corporation which has
issued a certificate to a trustee and a purchaser from the trustee must find
out at their peril whether such a power is given.

A TRUSTEE HAS NO IMPLIED POWER TO PLEDGE.—Another power,
and one which is not commonly given, is the power to borrow on stock, to
pledge it or use it for collateral security. Such a power is not implied and is
not commonly given in trust deeds or wills. Therefore, a bank or other
lender should not lend on certificates of stock which are made out to the
borrower as trustee, or made out to any one as trustee. Of course, it is
improper, even though the trust did give power to borrow, to allow the
trustee not only to borrow money on trust securities but to use the money
borrowed as part of his own assets; that is, to put it in his own general
account. It is his duty to keep trust money separate, and therefore if the
trustee has power to borrow he should keep the funds which he borrows
earmarked as trust property; but as has been said, he will rarely have power
given him expressly to borrow even for trust purposes.
A TRUSTEE CANNOT TRANSFER TO HIMSELF.—Suppose a trustee is
by a deed or will given power to sell and he asks the corporation to make a
transfer of the stock to himself. The corporation should not do it. He has
power to sell to any one else but himself. A fiduciary cannot make a bargain
with himself in regard to his trust property, and therefore he should not be
allowed to transfer the stock to himself.
A TRUSTEE CANNOT DELEGATE HIS POWER TO SELL.—A trustee
cannot delegate his powers, and therefore he cannot give a general power of
attorney to another, to sell trust stock or any trust property whenever it may
seem wise to the agent to do so. Even though the trustee has himself power
to sell, he must exercise his own discretion as to the occasion when it is
proper to sell.
PURCHASER FROM A TRUSTEE IS NOT BOUND TO SEE TO
APPLICATION OF PURCHASE MONEY.—Though the corporation and
though the purchaser from a trustee are bound to see, if they have notice of
the trust by the form of the certificate, that the trustee is not making an
unauthorized sale, neither the purchaser nor the corporation is bound to see
that the trustee does not make an improper application of the money
received from sale of trust stock. In the current legal phrase, neither the
purchaser nor the corporation is bound to see to the application of the trust
money; but if either the purchaser or the corporation had notice of a
proposed misapplication of the trust money to be received for the stock, it

would be improper to allow the transfer knowing that the proceeds would
be misapplied, and the corporation or the purchaser would be liable if the
transfer was carried out.
AN EXECUTOR HAS IMPLIED POWER TO SELL.—Stock held by a
guardian or by an executor is in many respects treated similarly to stock
held by a trustee. There is this difference, however, in the executor's
position, that as it is his duty to reduce the estate to cash he has in most, but
not all States, an implied power to sell; it does not have to be given to him
in the will. The will, however, may restrict an executor's right to sell certain
stock, and therefore even in the case of an executor it would be proper for a
corporation to make sure that the executor's power had not been restricted
by the will before allowing the transfer.
TRANSFER BY AN EXECUTOR TO A LEGATEE.—Generally the
executor will seek to reduce the property to cash and therefore seek to
transfer the stock in the estate to a purchaser, but he may try to transfer it
directly to a legatee. He may himself be a legatee and endeavor to transfer
to himself. Unless he is a residuary legatee or a legatee of the specific stock
in question it is as improper for him to transfer to himself as for a trustee to
transfer to himself. Even though the executor is a pecuniary legatee or is
entitled to payment for commissions, he would have no right to take stock
in lieu of such pecuniary legacy or commission, for he cannot make such a
bargain with himself though he might in regard to the legacy of another. If
the executor is a specific or residuary legatee the question of a right to
transfer to himself is the same as to transfer to any other legatee, and that
right is only subject to one qualification. Creditors of an estate have the first
right; legatees do not get their legacies paid unless creditors are taken care
of first. Creditors have a fixed period from the time when executors or
administrators give bonds within which to assert their claims. If they have
not asserted their claims in that period the claims are barred. After that time
has expired it is generally known whether the assets of the estate are
sufficient to pay legacies, and it is usually then proper to allow a transfer to
a legatee. Prior to that you run the risk—which may be in a particular case a
very small one or it may be a very large one—that the creditors of the estate
may exhaust the assets and the legatees not be entitled to anything.

LOST CERTIFICATES.—Occasionally a question arises in regard to a lost
certificate. The Uniform Law provides for this case in substantially the
same way as the common law would deal with it if there were no statute,
namely, the corporation may demand a bond to indemnify it before it issues
a new certificate. This bond is essential because should the old certificate
turn up and be transferred to a bona fide purchaser for value, the
corporation would be liable on the old certificate, and as it would also be
liable to a purchaser for value of the new certificate it is necessary that it
should have a bond to protect it.
INTERPLEADER OF SEVERAL CLAIMANTS FOR STOCK.—If there
are several claimants for stock, as sometimes happens, the corporation
should file a bill of interpleader, as it is called, against the several claimants,
asking the court to determine which one is rightfully entitled. An instance of
that kind would be where A asks a corporation to transfer stock to him,
presenting a certificate indorsed by B, but B notifies the corporation that he
has been defrauded out of that stock by A, and that he elects to rescind the
transfer to A and demands the certificate back. The corporation cannot
undertake to determine which of these parties is in the right; it must ask the
court to do so. Not infrequently the same situation arises in a bank where
money has been lent on stock, and notice is given to the bank not to return
that security to the borrower because he obtained it fraudulently or
otherwise has acted in violation of the rights of a third person in pledging it
to the bank. The bank, if it is a bona fide lender, is, of course, entitled to
hold the stock for its own security so far as it may be necessary to repay the
loan; but perhaps the bank can get the loan repaid out of other securities
unquestionably belonging to the borrower. In that event the bank should do
so and then ask the court who is entitled to the disputed stock.
EFFECT OF DELIVERING UNINDORSED CERTIFICATE.—In order to
transfer stock, as previously said, it is necessary that the stock should be
either indorsed or that on a separate paper an assignment or power to
transfer should be written. What is the effect of giving a certificate without
either of these formalities? It virtually protects the person who receives the
certificate, for though he has not title to the stock and cannot get title
without an indorsement, he has the certificate in his possession which
prevents any other person from getting title; and, furthermore, he has the
right to require an indorsement from the person whose indorsement is

needed, provided, of course, that the holder of the certificate took it from
the owner, who impliedly or expressly agreed that he should have title. If
somebody not an owner of a certificate delivered it without indorsement to
a bank, and borrowed money on it, the bank would not be protected. The
true owner could say, "That is mine," and take it away.

CHAPTER VIII
Personal Property
PROPERTY DEFINED.—Property in the strict legal sense, is the aggregate
of rights which one may lawfully exercise over particular things to the
exclusion of others. "If a man were alone in the world," says Kant, "he
could properly hold or acquire nothing as his own; because between
himself, as Person, and all other outward objects, as Things, there is no
relation. The relation is between him and other people, whom he excludes
from the thing." All things are not the subject of property, because, the sea,
the air, light, and similar things, cannot be appropriated.
ILLUSTRATION.—An illustration that gives us the idea of property will
make our definition clear. A takes his shoes to a cobbler to be repaired.
When he calls for them, he does not have the price for the work, and the
cobbler refuses to give them up. Both A and the cobbler have a property
right in the shoes. The right to absolute ownership is in A, that is his
property right. The temporary possession, however, is in the cobbler, and he
may hold the shoes under the lien for repairs indefinitely and until he
receives his compensation. The lien is his property right. When we use the
term property in its lowest form we mean by it the right of possession. In
our illustration, the cobbler's lien gives him the right of possession. When
we use the term in its highest form, we mean the right of exclusive
ownership; in our illustration, A's shoes after he has paid the repair bill and
secured the shoes again.
THE RIGHTS OF OWNERSHIP.—Exclusive ownership implies:
1. The right of exclusive possession for an indeterminate time.
2. The right of exclusive enjoyment for an indeterminate time.
3. The right of disposition.
4. The right of recovery if the thing be wrongfully taken or withheld.

But, you say, this is not the idea one ordinarily has of the term "property."
One speaks thus of his watch: "I own this watch. It is my property." The
answer is, property is a term with a double meaning. In the ordinary sense
"property" indicates the thing itself, rather than the rights attached to it.
Therefore it is that we have a law of personal property, and a law of real
property.
PERSONAL PROPERTY AND REAL PROPERTY DISTINGUISHED.—
Real property has been defined to be co-extensive with lands, tenements,
and hereditaments; to put it more simply, we may say that it consists of land
and anything that is permanently affixed to the land. Personal property
embraces all objects which are capable of ownership except land. One
fundamental difference between the two is that real property is generally
considered to be immovable, while such property as is movable is usually
termed personal property. It is important that the distinction between the
two forms of property be kept in mind because different results follow
where the property is held to be one or the other. For example, on the death
of the owner of real property, it passes to his heir or devisee, while in the
case of personal property, it goes to the personal representative, the
executor or the administrator, and through him to the legatee or distributee.
Again, in settling the estate of the deceased person, personal property is
always to be used first to pay the decedent's debts. The modes of
transferring personal property and real property differ. Real property is
transferred by deed. Personal property may be transferred without any
writing and even in the case of a transfer of personal property, by a bill of
sale, the requirements for recording it are generally quite different from
those relating to the recording of deeds. Again, the transfer of real property
is governed by the law of the place where the real property is situated,
whereas the transfer of personal property is governed by the law of the
domicile of the owner. Taxation is another subject where the distinction is
most important.
SALES OF PERSONAL PROPERTY.—The most important branch of the
law of personal property, in the field of commercial law, is that relating to
the sale of personal property. We shall confine the balance of this chapter to
a consideration of that subject. As we have a uniform Negotiable
Instruments Law, so we also have a Uniform Sales Act which has now been
adopted in many of the States. The Sales Act defines a sale and a contract to

sell as follows: (1) A contract to sell goods is a contract whereby the seller
agrees to transfer the property in goods to the buyer for a consideration
called the price. (2) A sale of goods is an agreement whereby the seller
transfers the property in goods to the buyer for a consideration called the
price. (3) A contract to sell or a sale may be absolute or conditional. (4)
There may be a contract to sell or a sale between one part owner and
another.
SALES AND CONTRACTS TO SELL.—Sales are to be distinguished
from contracts to sell. A sale is an actual transfer of property, whereas a
contract to sell is an agreement to make a sale in the future. Sales at a shop,
for instance, are made without any contract to sell, but orders for goods at a
distance, and agreements to ship them, frequently precede the actual sale of
the goods, which is made in pursuance of the prior contract to sell. The sale
of personal property is subject to different rules from the sale of real estate.
In the transfer of real estate, formalities of deed and seal are necessary,
which are not required in personal property, and the subjects must be
considered separately.
A SALE DISTINGUISHED FROM SIMILAR TRANSACTIONS.—At the
outset, a sale must be distinguished from several other similar transactions.
The law of sales is a branch of contract law, hence consideration is
necessary in a sale. A gift, on the other hand, which may result in the
transfer of personal property in practically the same manner as a sale, does
not require any consideration. Hence, an agreement to sell goods is
unenforceable if not supported by consideration. A promise to make a gift is
always unenforceable because the very idea of a gift negatives any idea of
consideration. A sale and a bailment must also be distinguished. A bailment
is the rightful holding of an article of personal property by one, for the
accomplishment of a certain purpose, with an obligation to return it after the
completion of that purpose. Where there is a sale, the entire property right
passes to the new buyer, and if the article is destroyed, providing title has
passed, the new buyer must pay the purchase price if he has not already
done so, although he gets nothing for it. In a bailment, the title does not
pass. The case of the cobbler repairing the shoes is an illustration of a
bailment. If, while the shoes are in his possession, his shop is burned,
through no fault of his, the owner of the shoes would stand the loss. If I
borrow a person's automobile, and while using it the car is struck by

lightning and totally destroyed, the loss falls on the owner because this also
is a bailment. On the other hand, had I bought the car and temporarily kept
it in the seller's garage, awaiting the completion of my own garage, and it is
burned while in his garage, the loss is mine. By such a transaction, I
become the owner when the sale is made, and the former owner becomes
the bailee.
FORMALITIES NECESSARY FOR THE COMPLETION OF A SALE.—
The Sales Act provides in section 3, subject to a few provisions, that "a
contract to sell or a sale may be made in writing (either with or without
seal), or by word of mouth, or partly in writing and partly by word of
mouth, or may be inferred from the conduct of the parties." The main
qualification of the right to make an oral sale or contract to sell is found in
the next section (Section 4) which is virtually a copy of a similar provision
in the English Statute of Frauds in regard to the sale of personal property.
Section 4 reads as follows:
"(1) A contract to sell or a sale of any goods or choses in action of the value
of five hundred dollars or upwards shall not be enforceable by action unless
the buyer shall accept part of the goods or choses in action so contracted to
be sold, and actually receive the same, or give something in earnest to bind
the contract, or in part payment, or unless some note or memorandum in
writing of the contract or sale be signed by the party to be charged or his
agent in that behalf.
"(2) The provisions of this section apply to every such contract or sale,
notwithstanding that the goods may be intended to be delivered at some
future time or may not at the time of such contract or sale be actually made,
procured, or provided, or fit or ready for delivery, or some act may be
requisite for the making or completing thereof, or rendering the same fit for
delivery; but if the goods are to be manufactured by the seller especially for
the buyer and are not suitable for sale to others in the ordinary course of the
seller's business, the provisions of this section shall not apply.
"(3) There is an acceptance of goods within the meaning of this section
when the buyer, either before or after delivery of the goods, expresses by
words or conduct his assent to becoming the owner of those specific
goods."

THE CAPACITY OF PARTIES.—The Sales Act provides in section 2 that
"capacity to buy and sell is regulated by the general law concerning
capacity to contract, and transfer and acquire property. Where necessaries
are sold and delivered to an infant, or to a person who by reason of mental
incapacity or drunkenness is incompetent to contract, he must pay a
reasonable price therefor. Necessaries in this section mean goods suitable to
the condition in life of such infant or other person, and to his actual
requirements at the time of delivery."
IMPORTANCE OF DISTINGUISHING SALE AND CONTRACT TO
SELL.—Why is it important to distinguish between a contract to sell and a
sale; what difference does it make whether title has passed or not? The
primary reason that it makes a difference is because as soon as the title has
been transferred from the seller to the buyer the seller is entitled to the
price. Prior to the transfer of title, if the buyer refused to take the goods, the
seller would be entitled only to damages, which would be the difference
between the value of the goods which the seller still retained and the price
which was promised. If the goods were worth as much or more than the
amount of the price promised, the seller would not be entitled to any
substantial damages. But after title has passed the buyer must pay the full
price, and the seller may recover it if the buyer refuses to accept delivery.
Another consequence flowing from the transfer of title is that the goods are
thereafter at the risk of the buyer. If they are destroyed by accident the
buyer must nevertheless pay the price, for the right to the price accrued
before the goods were destroyed, and when they were destroyed they were
at the buyer's risk. Bankruptcy is another circumstance which makes it
important to determine who holds title to the goods. If the buyer becomes
bankrupt, after title to the goods has passed to him, his trustee in bankruptcy
takes the goods for his creditors, but if he becomes bankrupt before title has
passed that would not be true. The bankruptcy of the seller would make a
similar difference.
WHEN TITLE IS PRESUMED TO PASS.—There are several
presumptions in the law as to when title will be presumed to pass if there
was no specific agreement between the parties as to when it should pass. If
they simply bargain for the goods without saying anything about the time
when the buyer is to become the owner, the first presumption is that title
passes as soon as the goods are specified and the parties are agreed on the

terms of the bargain, even though no part of the price has been paid and
though the goods have not been delivered. It is often assumed that delivery
is essential to transfer title to goods, but that is not so, though delivery is
strong evidence of intent to transfer title. If the parties have made their
bargain, and definitely agreed on the terms of the bargain, title passes even
though possession of the goods still remains in the hands of the seller. The
seller, however, has a lien for the price though he has parted with title. As
long as the goods are in his possession he may refuse to surrender until he is
paid the price, unless he agreed to sell on credit.
TITLE PASSES WHEN PARTIES AGREE.—It is only a presumption that,
where the terms of a bargain are fixed and the goods are specified, title
passes at once, for if the parties agree that title shall not pass at once it will
pass when and as they agree. Their intention in regard to the transfer of title
may not be stated in express terms, and it may be gathered only from the
acts or words of the parties. If something remains to be done to the goods
by the seller, to put them in a deliverable condition, that indicates an intent
that title shall not pass until they are in the condition agreed upon. If the
parties provide that the goods shall be stored at the expense of the seller, for
a time or at the risk of the seller, that indicates title is not intended to pass,
for if they are at the seller's expense and risk, presumably they are still his
goods. On the other hand, delivery of the goods indicates an intent to pass
title, although it is possible, if the parties so agree, that title does not pass
even though the goods are delivered. Again, payment of the price is
evidence tending to show an intent to pass title, for buyers do not ordinarily
pay the price in advance. It is not uncommon for credit to be given by the
seller, but it is uncommon for the buyer to pay first; but even that is not
impossible, and therefore, though payment of the price is evidence of an
intent to transfer title immediately, it is not conclusive evidence.
TRANSFER OF TITLE BY SUBSEQUENT APPROPRIATION.—
Suppose title does not pass immediately, which may be due to the fact that
the parties so agreed, or to the fact that the goods were not specified at the
time the bargain was made. That is a common case. A and B contract for the
sale of 100 cases of shoes to be made by A. At the time the parties make
their bargain the shoes have not yet been made, but the parties expect that
they will be made later, and appropriated to the bargain, as the legal phrase
is. Or title may not pass at the time the bargain is made, although the goods

are specified. The parties may have expressly agreed that title should not
pass; or though the goods are specified, something may remain to be done
to them by the seller to put them in a deliverable condition. Now, if title for
any of these reasons does not pass when the bargain is made, it may pass by
an express agreement of the parties, made later, that the buyer shall take
title and that the seller shall give title; or frequently it may pass by what is
called an appropriation of the goods by the seller to the buyer, without any
express later assent of the buyer, by virtue of an implied assent of the buyer
given in the original agreement that the seller should appropriate the goods.
What is meant will be understood by one or two illustrations.
APPROPRIATIONS BY DELIVERY TO A CARRIER.—Suppose A
contracts to sell and ship to the buyer 100 cases of shoes, and B contracts to
receive and pay for them. That shipment to the buyer is an appropriation of
the goods. The very 100 cases with which the seller intends to fulfill the
bargain are indicated by the delivery of them to the carrier, and the buyer,
since he agreed in the first place that they should be shipped, has assented
to the appropriation. Therefore, in such a case, as soon as the goods are
delivered to the carrier the presumption is that title passes to the buyer. This
is by far the commonest case of appropriation by the seller in accordance
with authority given by the buyer in his original agreement, and it is so
common that it deserves a little further treatment.
ILLUSTRATION.—This kind of appropriation can be very well illustrated
by the case of a supposed sale of tobacco to a minor. A, a minor, lives in an
outlying suburb of Boston where the sale of tobacco to a minor is not
permitted. He buys goods of S. S. Pierce Company in Boston and wants to
buy some cigars from them. He can buy cigars of them in Boston and send
them out to his home, but the title must pass to him in Boston. If the title
passes in the suburb it is an illegal sale by S. S. Pierce Company, and
consequently they do not want to make it. Of course the buyer can go and
get the goods and pay for them in Boston and send them himself to his
residence. But suppose he sends an order by mail; if S. S. Pierce Company
are willing to charge goods to him, giving him credit, they can send the
goods by express, because on their shipment of the goods the title will pass
and the buyer will become a debtor for the price of the goods in Boston; but
they must not send the goods by their own wagon, as their carrying the
goods themselves out to the buyer's residence leaves them in their

possession until delivery, and the delivery does not take place until the
goods are delivered from their wagon at his house. That would not do.
Whereas if the goods are delivered to a public carrier in Boston the carrier
would be the buyer's agent and title would pass in Boston.
THE SELLER MUST FOLLOW EXACTLY AUTHORITY GIVEN HIM.
—Suppose the buyer specified that the goods are to be shipped by a given
route, and the seller shipped them by a different route. Title would not pass
then because the buyer had not authorized the seller to appropriate them to
him, the buyer, in that way. It may be that the seller's way of sending them
was better than that originally assented to by the buyer, but the seller, if he
wishes to hold the buyer, as owner of the goods from the time of shipment,
must get his approval of that better way. Still more important than the
method of shipment is the character of the goods themselves. The seller
cannot, by putting any goods on the train, transfer title. He must put on the
train the very kind of goods which the buyer agreed to receive, and that will
mean not simply, in the case supposed, that the goods must be shoes, but
they must be merchantable shoes of the character and sizes which the buyer
agreed to take. The goods must be properly packed and all usual
precautions in regard to them taken. In so far as the original agreement
specified what was to be done, those things must be done. In so far as the
original agreement does not specify how the goods are to be shipped, or
what shall be done in regard to them, the seller has discretion to do anything
which is customary and proper for a careful business man.
SHIPMENT OF GOODS C. O. D.—There has been considerable litigation
in regard to the effect of shipping goods C. O. D. Suppose goods were
ordered and goods of the sort ordered were shipped in accordance with the
directions in the order, but were marked C. O. D. Those letters mean, as you
know, collect on delivery, and two possible explanations may be given of
their effect. One, that the seller retains not only control of, but also title to,
the goods until they are delivered and the price paid. According to that view
the carrier is made the seller's agent, to hold the title to the goods and
transfer it to the buyer when he pays for the goods. But the better view is
that the carrier merely retains a hold on the goods, a lien on behalf of the
seller, while title to the goods passes on shipment.

EFFECT OF THE FORM OF A BILL OF LADING.—One cannot speak of
title passing or being retained on shipment of goods without referring to
bills of lading, for the general rules which have been given must be
qualified by this statement, that by means of a bill of lading the title may be
at will retained or transferred (if the buyer has authorized a transfer). The
proper way to indicate a transfer of title when goods are shipped is to have
the buyer named as consignee in the bill of lading. A bill of lading is very
much like a promissory note; the carrier promises to deliver the goods to
somebody who is called the consignee, and who corresponds to the payee of
a note. There is this further feature in a bill of lading: the carrier
acknowledges receipt of the goods from the consignor, that is, the shipper,
and the carrier promises to deliver them.
ILLUSTRATIONS.—Now, when S. S. Pierce Company decide to ship
goods to a buyer, it may consign them to the buyer or it may consign them
to itself; that is, the same person may be consignor and consignee. That is
very common in business, in order that the shipper may retain title to the
goods until he receives payment. He takes the bill of lading in his own
name and then, generally, attaches a draft on the buyer of the goods, and
sends the bill of lading and the draft together through a bank. The bank
notifies the drawee of the draft, who is the man who has agreed to buy the
goods, that the bill of lading with the draft are at the bank, and that the
buyer may have the bill of lading when he pays the draft. The buyer pays
the draft and gets the bill of lading, and then for the first time does he
become the owner of the goods. On the other hand, if the shipper—S. S.
Pierce Company—had consigned the goods directly to the buyer, the buyer
would have become the owner of the goods on shipment, provided the
buyer had authorized that shipment. The seller cannot, however, by naming
a buyer consignee, make the buyer owner of any goods which he has not
agreed to receive. So much for appropriation of the goods to the buyer by
shipment. In another chapter fuller reference will be made to bills of lading
as documents of title and as bank securities. In this connection they are
referred to merely as indicating an intention to transfer or retain title as
between buyer and seller.
IMPORTANCE OF DELIVERY IN SALES OF GOODS.—Title to chattel
property, it has been said, may pass without delivery. This is true as
between the parties, but as against creditors and third persons delivery is

necessary. Suppose A sells a horse to B and does not deliver the horse, and
A afterwards sells the horse to C and does deliver the horse to C. B comes
around to C and says, "That is my horse. I paid A the full price." C may say,
"I bought him in good faith. I thought it was A's horse. I have got him and I
am going to keep him." C may keep him.
PLACE OF DELIVERY.—Certain contractual rights between the buyer and
seller are implied from the nature of the bargain of sale. A seller is under an
implied obligation not only to transfer title to the buyer, but to deliver
possession to him. Where must the seller deliver possession? If the contract
states the place, the terms of the contract decide that question. If the
contract does not expressly state where the place is to be, the place of the
seller's residence is the place where the seller is bound to deliver, unless the
goods are too heavy for easy transportation, and in that case the place of
delivery is the place where the goods are at the time of the bargain. That
may be the seller's place of business, and it may not.
DELIVERY AND PAYMENT ARE CONCURRENT CONDITIONS.—
Concurrently with the seller's duty to deliver possession, the buyer is under
a duty to pay the price, unless the contract provides for a period of credit.
The delivery and the payment of the price are, in the absence of contrary
agreement, concurrent conditions. The seller must offer to deliver if he
wants to get a right of action for the price, and the buyer must tender
payment if he wants a right of action for the goods. The tender of price and
delivery must be at the place where payment and delivery is due. It may be
asked, how is the seller to tender the goods at the place delivery is due if
that is the seller's place of business and the buyer does not appear? The
answer is, that it is in effect a tender for the seller to have the goods in the
place where they are to be delivered, he being ready and willing to deliver
them. If the buyer does not come there the buyer must, nevertheless, pay the
seller. By the seller's readiness to perform, at the place where performance
is due, and deliver, if the buyer with his money is at the place where
payment is due, there is in effect a tender.
RIGHT OF INSPECTION.—The buyer and seller have certain other
implied rights and duties. A right which the buyer always has, in the
absence of agreement to the contrary, is a right to inspect the goods, to see
that he is getting what he bargained for, before he accepts title and pays the

price. He may, however, waive this right of inspection; he may agree to pay
the price without seeing what he is getting, and in modern business this is
not uncommon. One sort of bargain frequently made contains this term:
"Cash against bill of lading." That means the buyer is to pay the price of the
goods on receiving the bill of lading. The bill of lading will usually reach
him before the goods, and, therefore, before he has a chance to inspect; and
by the terms of his bargain he has agreed to pay cash against the bill of
lading and he must do so. Of course, if the goods when received turn out
not to be what he bargained for, he has a right to sue for breach of contract
or recovery of the price paid. But in the first place, when the bill of lading
comes he has to assume that the goods are going to be right and pay for the
bill of lading. Another case where a right of inspection is waived is where
goods are sent C. O. D. You order goods to be sent in that way and the
expressman brings them. You say you want to open the package and see if
the goods are right. You will find the expressman will not let you. He will
say, "No, you must pay for the sealed package," and until you do so, you
will have no right to the possession of the goods. If the goods are not all
right you have redress by suing the seller, but you must pay your money
first.
WARRANTIES.—Another and most important right which the buyer has is
the enforcement of warranties. Warranties of a chattel may be either express
or implied. An express warranty is a promise or an obligation imposed by
the law because of a representation which the seller has made in regard to
the goods. The simplest form of warranty is where the seller says, "I
warrant this horse is sound," or, "I warrant this piano will stay in tune for a
year." These warranties are promises and are subject to the same rules as
other promises. They are contracts for consideration, the consideration for
the promise being in each case the purchase of the goods. But we have
warranties which are not based on promises, strictly so called, and yet are
express. A tries to sell a horse. He says the horse is perfectly sound, four
years old, broken to harness, and has trotted a mile in three minutes. Those
are in form representations rather than promises; they are assertions of fact,
and when A makes them it is possible he does not understand that he is
binding himself for the truth of his statements; and yet if they are made as
positive statements of fact, the seller is held to warrant the truth of those
statements.

REPRESENTATIONS OF FACT AND OF OPINION.—The great
distinction, between warranties by representation and statements in regard
to property which do not amount to express warranties, is that between
statements of opinion and statements of positive fact. If the buyer said, "I
believe the horse can trot a mile in three minutes any day," it is not a
warranty; even the statement, "The horse can trot a mile in three minutes"
would probably not be a warranty; but the statement, "The horse has trotted
a mile in three minutes," is a direct assertion of fact, and the element of
opinion does not occur, and therefore that would be a warranty. Statements
of value do not amount to warranties. Those are necessarily to some extent
matters of opinion. General statements of good quality do not, ordinarily,
amount to warranties. The courts, however, are getting stiffer and stiffer in
regard to these matters. It used to be the law that a seller could represent
nearly anything he chose in regard to his goods, and not be bound, so long
as he did not expressly say, "I warrant," or make a promise in terms in
regard to them. That was called the rule of "caveat emptor"—"let the buyer
beware"—but this rule is almost wiped out so far as representations of fact
are concerned. Now, the seller had better beware of what he says, for he
may find himself liable as a warrantor.
NO WARRANTIES IMPLIED IN SALES OF REAL ESTATE.—There are
certain warranties implied, although the buyer does not bargain for them
and although the seller makes no express representations regarding them. In
this respect sales of personal property differ entirely from sales of real
estate. In the case of real estate you get no warranty but what you bargain
for. If you get a deed without words of warranty, and it turns out that the
seller had no title, in the absence of fraud you have no redress; you cannot
get your money back though you have no title to the land.
WARRANTY OF TITLE IMPLIED IN SALES OF PERSONAL
PROPERTY.—In the case of personal property it is otherwise. The first
implied warranty that exists in the case of a sale of personalty, unless the
contrary is expressly agreed, is the implied warranty of title. The seller
impliedly warrants that he has title to the property and will transfer title to
the buyer. The only exception to this is where a sale is made by a person in
a representative capacity, as by a sheriff or an agent. In that case the person
making the sale does not impliedly warrant title. In the case of an agent,
however, if the agent was authorized to make the sale, the principal would

be liable as an implied warrantor of title; and if the agent was not
authorized to make the sale, the agent would be liable as warranting his
authority—not as warranting title to the goods, but warranting that he had a
right to bind his principal. Even in the case of a sale by an agent, therefore,
the purchaser gets substantial redress if the title turns out to be defective. It
is possible, of course, by express agreement, for a buyer to buy and a seller
to sell merely such title as the seller may have; but there must be an express
agreement, or very special circumstances, indicating that such was the
intention of the parties, in order to induce a court to give this construction to
a bargain.
IMPLIED WARRANTY OF QUALITY IN SALES BY DESCRIPTION.—
Not only are there implied warranties of title, but there are also implied
warranties in regard to the quality of goods. The fundamental principle at
the bottom of implied warranty of quality of goods is this: if the buyer
justifiably relies on the seller's skill or judgment to select proper goods, then
the seller is liable if he does not deliver proper goods. We may distinguish
in regard to implied warranties of quality, sales of specific goods—that is,
sales of a particular thing—and sales of goods by description. In the case of
sales by description there is always an implied warranty that the buyer shall
have not only goods which answer that description, but merchantable goods
which answer that description. Suppose a seller contracts to sell so many
hogsheads of Manila sugar. The law formerly was that the seller could
tender to the buyer, in fulfillment of that contract, the worst article that he
could find which bore the name of Manila sugar. The law at present is that
the seller must furnish to the buyer merchantable Manila sugar; that is,
Manila sugar of average and salable quality. It does not have to be the best,
but it must be ordinarily salable as merchantable Manila sugar.
IMPLIED WARRANTY IN SALES OF SPECIFIED GOODS.—Contrast
with that case a contract to sell a specific identified lot of Manila sugar
before the buyer and seller. Is the buyer bound to take without objection
that specific lot, whether or not it turns out to be merchantable? Or suppose
you go to a shop where they sell bicycles and buy a bicycle; you pick out a
specific bicycle, and it turns out that, owing to defects in manufacture, it is
not good for anything. It breaks down the first time you ride it. May the
seller say, "You looked at what we had in stock and this is the machine you
agreed to buy"? It is in this class of cases that the question of justifiable

reliance by the buyer on the seller's skill and judgment becomes important,
and in determining whether the buyer justifiably relied on the seller's skill
and judgment several things must be considered.
INSPECTION AS AFFECTING IMPLIED WARRANTY.—Was the defect
open to inspection and was there opportunity to inspect the goods? If there
was, there is less reason to suppose that the buyer was relying on the seller's
skill and judgment than if the defect was latent and not open to inspection.
IMPLIED WARRANTY WHERE THE SELLER IS A MANUFACTURER.
—What was the nature of the seller's business? Was he a manufacturer of
the goods in question? The strictest rules of implied warranty of quality are
applied against manufacturers, and this is, you will see, reasonable, because
the manufacturer ought to know about the goods and the buyer naturally
relies on the manufacturer, as knowing about the character of the goods, to
give goods of proper quality. Therefore, unless the buyer pretty clearly
assumes the risk himself of picking out what is satisfactory to himself, a
seller who is a manufacturer will be held to warrant the merchantable
quality of the goods which he makes and sells.
IMPLIED WARRANTY WHERE THE SELLER IS A DEALER.—The
next grade below a manufacturer is a dealer in that sort of goods. He cannot
have the same knowledge as a manufacturer, but still, a dealer in goods of a
particular kind is much more competent to judge of their quality than an
ordinary buyer and therefore a dealer also, unless there is special reason to
suppose the buyer did not rely on his own judgment, will be held to warrant
that the goods are merchantable.
IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
—Sometimes there is a warranty of still greater scope than a warranty of
merchantability; that is, a warranty of fitness for a particular purpose. A
buyer agrees to buy glue of a manufacturer. The buyer is, as the glue
manufacturer knows, a furniture manufacturer. The glue manufacturer sells
the buyer glue which is merchantable glue, but it not good furniture glue, as
furniture glue must be of unusual tenacity. The seller is liable here under an
implied warranty. He knew that furniture glue was wanted. He was a glue
manufacturer, and he ought to have understood that the buyer was looking
to him to furnish glue of a sort that would not only be salable as glue but

would fulfill the purpose which the buyer had in mind when he made the
purchase.
KNOWN, DESCRIBED AND DEFINITE ARTICLES.—On the other
hand, if the buyer orders what is called a known, described and definite
article, he takes upon himself the burden of determining whether the thing
which he buys will fulfill his purpose or not. For instance, a buyer in
Missouri ordered of a boiler manufacturer two boilers selected from the
catalogue of the boiler manufacturer, describing them by number. The
boilers were good boilers, under ordinary circumstances, but the amount of
mud in the Missouri River, on the banks of which the boilers were to be
used, was so great that they could not be successfully used there. The buyer
had no redress against the seller in that case. He had taken upon himself to
specify the particular kind of boilers he wanted; he got them and they were
merchantable boilers. The only trouble was that they were not fit for use in
the place where the buyer was intending to use them. If the buyer had
simply ordered boilers for a factory on the Missouri River, the result might
well have been the other way, for that would have put the duty on the seller
to furnish something that was suitable for that purpose.
RELIANCE ON THE SELLER IS THE ESSENTIAL ELEMENT.—The
great thing to remember throughout the whole subject is that the implied
warranty of quality depends on the justifiable reliance of the buyer on the
seller's skill. If the goods are not merchantable under circumstances where
the buyer does rely, he can recover from the seller, even though the seller
was not guilty of negligence. A warranty is not dependent on negligence of
the seller.
REMEDIES FOR BREACH OF WARRANTY.—One of the remedies,
allowed in many but not all States, for breach of warranty, is to return the
goods and demand the purchase money back; but that is only one remedy.
Another remedy, which is universally allowed, is to sue for whatever
damage the breach of warranty may have caused, and one or two cases will
show how serious these damages may be. A seller sells a pair of sheep to a
buyer with a warranty, express or implied, of their soundness. They have an
infectious disease, and when put with a large flock of the buyer's sheep they
infect the whole flock, and the damage is the loss of the whole flock.
Another actual case was based on an implied warranty of the quality of rags

sold to a paper manufacturer. The rags came from Turkey and were infected
with smallpox. They gave smallpox to the operatives in the buyer's mill,
and the mill had to be closed down, which caused great loss to the
manufacturer. All that loss can be recovered from the seller of the rags, even
though he was not negligent in bringing the result about.
ONLY ORIGINAL BUYER CAN RECOVER ON A WARRANTY.—
Nobody, however, can recover on a warranty except the original buyer. For
instance, the operatives who caught smallpox could not sue the seller unless
the seller was negligent. If he had been careless or negligent in disregarding
their safety, they could sue him in an action of tort, though they had no
contractual relation with him. And if the buyer resells the goods the
purchaser from him cannot sue on a warranty given to the original buyer.
EFFECT OF ACCEPTING DEFECTIVE GOODS.—Another matter that
has caused considerable litigation in regard to warranty and the obligation
of the seller in regard to the quality of goods, is the effect of acceptance by
the buyer of goods which are offered to him. Suppose a certain quantity of
Manila sugar is offered to one who has agreed to buy, and he takes from the
seller that quantity of sugar, but finds it is not of as good quality as it ought
to have been. The buyer subsequently objects, but the seller says, "You
should have objected to that at the outset and refused to take it. Your taking
it is an assent or acceptance of it as a fulfillment of the contract, and any
right you may have had is now gone." It is settled law that if the defect was
not observable with reasonable care, the buyer does not lose any right by
taking the goods, provided he gave prompt notice of the defect as soon as it
was discovered. Further, even though at the time of delivery the buyer
observed the defect or might have observed it, it is the law of most but by
no means all States, that taking the goods does not necessarily indicate
assent to receive them as full satisfaction of the seller's obligation. The
buyer may receive the defective goods as full satisfaction, but the mere fact
of taking them does not prove it. It is advisable, however, for the buyer as
soon as he sees the defect to protest against it. He may in most States safely
take the goods if he says in taking them, "These goods are defective and I
do not take them in full satisfaction;" or, if he does not discover the defect
immediately on taking the goods, he ought to give notice as soon as he does
discover that the goods are defective, and state that, though he proposes to
keep them, he does so subject to a claim for their defective quality.

SELLER'S RIGHTS WHERE BUYER FAILS TO ACCEPT GOODS.—
Now the seller has some rights, also, that should be referred to. In the first
place, if the buyer refuses to take title to the goods when they are tendered
to him, the seller has a right to recover damages. The amount of damages
will be the difference between the value of the goods which the seller still
retains, because the buyer will not take them, and the contract price which
was promised. If the goods are worth as much as the price promised for
them, the seller's damages will be only nominal, for he still has the goods
and may sell them to somebody else for as good a price as was stipulated in
the original bargain.
SELLER MAY RECOVER PRICE WHERE TITLE HAS PASSED.—If the
title to the goods has passed, the seller may sue for the price. This right to
the price is secured by a lien on the goods as long as the seller retains
possession of them. If the seller has parted with possession and with title, he
cannot get the goods back except in one narrow class of cases.
STOPPAGE IN TRANSIT.—If the goods are in the hands of a carrier, or
other intermediary between the seller and buyer, even though title passed on
delivery to the carrier, the seller may stop the goods in transit if the buyer
becomes insolvent before they are actually delivered to the buyer. The right
is exercised by notifying the carrier to hold the goods for the shipper since
the buyer has become insolvent. The right of lien and of stoppage in transit
is given the seller to enable him to secure the price, which is the thing of
interest to him in the contract.
LEGAL AND EQUITABLE TITLES.—A legal title is a full right of
ownership against everybody. The legal owner can take his goods wherever
he finds them. An equitable title is a right to have the benefit of the goods or
property, and, also, it frequently involves a right to have the legal title
transferred to the equitable owner, making him full legal owner. The
peculiar feature of an equitable title, however, is that it is good only against
the particular person who, as the phrase goes, is subject to the equity, and
also against any person who has acquired the property, either without giving
value or with knowledge of the equity. To put the matter conversely, an
equitable title is not good against a purchaser for value without notice, or, in
the language of the Negotiable Instruments Law, against a holder in due
course.

FRAUDULENT SALES.—This principle is important in other branches of
the law besides that governing negotiable instruments. The most common
case of equitable rights in sales arises in fraudulent sales. Where a sale is
induced by fraud of the buyer, he gets the legal title to the goods, but the
seller has an equitable title or right to get the goods back. Let us see how
this works out. The buyer procures goods by fraud and he sells them to A.
Now, the defrauded seller cannot get the goods back from A if A paid value
for them in good faith. If A did not pay value in good faith, then the
defrauded seller may get the goods from him or anybody who stands in the
same position. If the defrauded seller can reach the goods before they have
left the hands of the fraudulent person, he may replevy them or he may
seize them if that is possible. It is not worth while to go into the various
kinds of fraud that may be practiced in the sale of goods, but there is one
specific kind that comes up very commonly which is worth mentioning; that
is, buying goods with an intention not to pay for them. Generally, in order
to create a fraudulent sale, it is necessary that the fraudulent person shall
have made some misrepresentation in words, but here is a case where,
though it may be said there is a misrepresentation, it is not put in words. It
may be said there is a misrepresentation, for it is fair to say that every buyer
when he buys goods not only promises to pay but represents that his
intention is to pay for the goods, and perhaps that his financial condition is
not so hopeless as to make the expectation utterly impossible of fulfillment.
If the situation actually was that the buyer either had a positive intention not
to pay, or was so hopelessly insolvent that any reasonable person would
know he could not pay for the goods, the transaction is fraudulent; the seller
still retains an equity, and may reclaim the goods from the buyer who has
acquired a legal title or from any other person except a bona fide purchaser.
(A draft of a statute to punish the making or use of false statements to
obtain property or credit, jointly prepared by the General Counsel of the
American Bankers Association and Counsel for the National Association of
Credit Men, has been enacted in the form recommended, or with more or
less modification, in a majority of the States. This statute provides, in
substance, that "any person who shall knowingly make or cause to be made
any false statement in writing, with intent that it shall be relied upon,
respecting the financial condition, or means or ability to pay, of himself, or
any other person, for the purpose of procuring in any form whatsoever,
either the delivery of personal property, payment of cash, making of a loan,

extension of credit, etc., for the benefit of either himself or of such other
person, shall be guilty of a felony, and punishable, etc.") This question often
arises in bankruptcy: Suppose the buyer goes bankrupt and the goods come
into the hands of the buyer's trustee in bankruptcy. The trustee in
bankruptcy is in legal effect, in such a case, the same person as the
bankrupt; he is not a bona fide purchaser from him, and thus the seller may
reclaim the goods from the trustee in bankruptcy just as he might from the
bankrupt. In the case supposed the seller has been fraudulently induced to
part with his title and may reclaim it. A case may be supposed, however,
where the seller fraudulently retains his title, and here the buyer's creditors
may seize the goods as if the title were in the buyer. Thus it is a fraud to
make a conditional sale of goods to a person who intends, and who is
understood to intend, to sell the goods again. The reason why it is a fraud is
because it is inconsistent on the part of the wholesaler to say, "I retain title
to the goods until paid for, yet I give them to you, knowing that you are
going to put them in your stock of trade."
DESTRUCTION OF GOODS SOLD.—The question sometimes arises as
to the effect of the destruction of the goods sold or contracted to be sold.
The Sales Act in Sections 7 and 8 governs this:
Section 7. (1) Where the parties purport to sell specific goods, and the
goods without the knowledge of the seller have wholly perished at the time
when the agreement is made, the agreement is void.
(2) Where the parties purport to sell specific goods, and the goods without
the knowledge of the seller have perished in part or have wholly or in a
material part so deteriorated in quality as to be substantially changed in
character, the buyer may at his option treat the sale:
(a) As avoided, or
(b) As transferring the property in all of the existing goods or in so much
thereof as have not deteriorated, and as binding the buyer to pay the full
agreed price if the sale was indivisible, or to pay the agreed price for the
goods in which the property passes if the sale was divisible.
Sec. 8 (1) Where there is a contract to sell specific goods, and subsequently,
but before the risk passes to the buyer, without any fault on the part of the

seller or the buyer, the goods wholly perish, the contract is thereby avoided.
(2) Where there is a contract to sell specific goods, and subsequently, but
before the risk passes to the buyer, without any fault of the seller or the
buyer, part of the goods perish or the whole or a material part of the goods
so deteriorate in quality as to be substantially changed in character, the
buyer may, at his option treat the contract:
(a) As avoided, or
(b) As binding the seller to transfer the property in all of the existing goods
or in so much thereof as have not deteriorated, and as binding the buyer to
pay the full agreed price if the contract was indivisible, or to pay the agreed
price for so much of the goods as the seller, by the buyer's option, is bound
to transfer if the contract is divisible.
CONDITIONAL SALES.—Certain transactions in which personal property
is held as security, which are somewhat analogous to mortgages and which
are very common, may now be referred to. They may be classed thus:
Conditional sales, consignments, leases and chattel mortgages. A
conditional sale, as that term is commonly used, is a transfer of the
possession of personal property under an agreement to sell, the seller
expressly retaining the title. Here we have possession and title divided. If it
were not for the express agreement that title should remain in the seller, the
delivery of the goods to the buyer, with his agreement to pay for them,
would indicate a transfer of title to the buyer. The purpose of the seller in
making a conditional sale is to retain security for the price which the buyer
cannot pay all at once. Conditional sales are most common in regard to
furniture and machinery of various kinds. Creditors of the buyer naturally
suppose that the goods in his possession are his, and it is to avoid deception,
or possible deception, that most States require that the conditional sale be
recorded, so that creditors and everybody else may have notice that,
although the buyer seems to be owner of this property, he is not so in
reality. But, in Massachusetts, record is not required, and conditional sales,
other than those of household furniture, need not even be in writing. The
seller is secured by this sort of bargain in several ways. If the buyer does
not pay the price when it is due, the seller may take the goods back. They
are his goods and therefore he may reclaim them. Or the seller may

conclude that it is better to sue for the price, and may decide to let the buyer
keep the goods and himself collect a judgment for the price by levying on
any property the buyer may have, including that which was conditionally
bought. Even though the buyer has paid a large part of the price of the
goods, the seller may, nevertheless, reclaim the goods. The seller's course
will be dictated largely by how much of the price has been paid. If a large
part has been paid, the seller will very likely prefer to reclaim the goods
unless they are household furniture. Why, it may be asked, does a buyer
enter into a conditional sale, which is rather a poor bargain as far as he is
concerned? The reason, of course, is that he cannot pay cash and he wants
the use of the goods at once, and the conditional sale enables him to get
them. By statute, in some jurisdictions, the conditional buyer is protected
after he has paid a considerable portion of the price; either by extending the
time within which he may pay the balance due, or by requiring a sale of the
goods and the return to the buyer of any surplus.
CONSIGNMENT.—How does a consignment differ from a conditional
sale? When goods are sent or consigned it means that the person to whom
they are sent is agent for the person who sends them. The consignment is
like the conditional sale in this respect, that the person who has possession
of the goods has not the title. The consignment differs vitally from a
conditional sale in this respect, however, that the consignee is not a debtor
for the price. If the consignee sells the goods, then he, of course, must turn
over the price to the consignor less such commission as he takes, or if the
transaction was not on commission, then the consignee must pay to the
consignor the price it was bargained the consignor should receive. But until
the goods are resold they remain the consignor's and at his risk. If goods
conditionally sold are destroyed, the conditional buyer must, nevertheless,
pay for them. They are at his risk and he is an absolute debtor for the price;
but the consignee merely holds the goods as agent until a purchase takes
place.
LEASES OF CHATTELS.—Sometimes goods are leased. Here, again, we
have the same point of similarity, that the person who has possession of the
goods is not the owner. The lessee, like a consignee, is not a debtor for the
price; he is a debtor for rent, but he is not a debtor for the price of the
goods. Often leases contain an option to purchase, and a lease with an
option to purchase is used by piano dealers and others as an alternative

mode of dealing with customers unable to pay cash, instead of a conditional
sale; but it is not the same thing, for if a piano were destroyed without fault
of either party after it had been leased with an option to purchase, the loss
would be on the seller. If the option to pay had been exercised, of course,
the loss would be on the buyer.
CHATTEL MORTGAGES.—The goods are here owned originally by the
mortgagor, and they ordinarily remain in his possession after he has
transferred them by the mortgage. The fundamental principles governing
chattel mortgages are the same as those which govern mortgages of real
estate. Chattel mortgages must be in writing and recorded, or the mortgaged
property must be delivered to the mortgagee; otherwise they are invalid
against the creditors or trustee in bankruptcy of the mortgagor; that is, one
may mortgage his chattels, either by delivering them to the mortgagee or by
making a writing and having that recorded. Even without record or delivery
it is good between the parties, but it is not good in case of bankruptcy
against the trustee in bankruptcy of the mortgagor, nor is it good against
attaching creditors if there is no bankruptcy.
MORTGAGES OF FUTURE GOODS.—An agreement is sometimes made
to make a mortgage of goods which do not at the time exist, or are not at the
time defined. This is especially common in regard to a stock of goods. A
wants to borrow money on his stock of goods in his shop. His stock may be
worth $25,000 and A has not capital enough to get along without
mortgaging it. Of course, he can mortgage the existing stock of goods
without difficulty, but the trouble is he wants to keep on doing business, and
sell in regular course of business the mortgaged stock of goods. That, too,
would be easy enough if the mortgagee were willing to agree to it, but the
mortgagee is not willing to agree unless equal security is substituted for any
goods that are sold. What they would like to provide is that the mortgagor
shall have power to sell the existing goods if he chooses in the ordinary
course of business, provided he always keeps a stock of goods on hand
equal to that on hand at the time the mortgage was made, the idea being that
as one thing is released from the lien of the mortgage other things, of at
least equal value, shall replace it. It is not an unreasonable transaction, from
a business standpoint, but the law generally does not allow it validity except
to this extent. It is valid as between the parties so far as to give the
mortgagee a power at any time to take possession, and when he does take

possession the mortgage is valid as to the goods of which he takes
possession against creditors or anybody else. The mortgagee may thus take
possession right up to the time of the mortgagor's bankruptcy, or at any time
prior to actual seizure of the stock of goods on an attachment. This gives the
mortgagee some security if the mortgagor will be good enough to give the
mortgagee a hint when it is wise for the mortgagee to take possession,
because, as the mortgagee can take possession just before bankruptcy or
just before an attachment, the mortgagee will be protected. But, of course,
there is a chance that the mortgagee may not get the goods, and therefore
this form of security, in most States, is not now advised, although it has
been much attempted in the past. In some States, however, such a mortgage
gives a right against goods afterwards acquired, which is superior to that of
attaching creditors or of a trustee in bankruptcy, even though the mortgagee
does not take possession.
GIFTS.—A gift is the immediate voluntary transfer of personal property. To
make a valid gift, therefore, it must be voluntary, gratuitous, and absolute.
As has been explained, a gift is distinguished from a sale or a contract to
sell by the fact that it is gratuitous. Gifts are usually divided into two
classes: gifts "inter vivos" and gifts "causa mortis." There is no distinction
between these two kinds of gifts, so far as the necessity of the intent to
deliver title and delivery of the property are concerned, but the distinction
lies in the fact that in gifts "causa mortis," the change in title is defeasible
upon certain conditions. The ordinary gift "inter vivos," "between living
people" is irrevocable when completed. The gift "causa mortis," that is, one
made by a person in immediate apprehension of death, is always subject to
the condition that if the person recovers, the title to the property, which he
has given away, reverts to him. For A, who is in his last illness, to say to B,
who is sitting near his bedside, "I wish you to have my gold watch when I
am gone, but my brother is wearing it now in Europe" would not be a gift
"causa mortis." There is no delivery. It would not pass title, upon his death,
to his friend because in order to dispose of property after one is dead, a will
is necessary. Even between the parties gifts are invalid unless accompanied
by delivery, or made by deed under seal. The transaction without delivery or
deed is, in effect, a promise to give, and there being no consideration the
promisor may subsequently refuse to keep his promise. If a savings-bank
book, a bond, a stock certificate, a life-insurance policy, a note or check of a

third person (but not one made by the giver), or any chattel property is
delivered to the donee, the gift is binding and irrevocable; but otherwise the
donee gets absolutely nothing and the donor's executor is entitled to the
property attempted to be disposed of by gift, and must treat it as part of the
assets of the estate.
ILLUSTRATION.—A recent case in New Jersey shows clearly the effects
of the application of the rules just described. In Bailey v. Orange Memorial
Hospital, 102 Atl. 7, the facts were that the testatrix died about June 10,
1893, leaving a will, which had been duly probated, and under which the
complainants had qualified as executors. Among the papers, which the
executors found in the testatrix's safe deposit box after her death, was a
certificate made in her name for fifty shares of the capital stock of the
United N. J. Railroad and Canal Co., bearing the following indorsement,
"For value received I hereby assign and transfer unto the Orange Memorial
Hospital fifty shares of the capital stock represented by the within
certificate and do hereby irrevocably constitute and appoint ................
attorney to transfer the said stock on the books of the within named
corporation with full power of substitution in the premises.
Mary Campfield.

"Dated Oct. 28, 1911.

"Witnessed by James C. MacDonald."
In the same envelope containing this certificate the executors also found the
following letter in the handwriting of Mrs. Campfield: "To my executors:
The accompanying certificate of fifty shares of the United, etc. Co. is my
gift to the Orange Memorial Hospital for a bed to be called the 'Mahlon
Campfield Bed.' The stock has been retained since its date of transfer
because I desire to be benefited by the dividends thereon as long as I live.
Mary Campfield.

"Dated Oct. 28, 1911."
In this box Mrs. Campfield kept her bonds and mortgages, stock
certificates, and other valuable papers relating to her own property and to

the estate of her husband, of which she was executrix. There were two sets
of keys to the box, one of which was in Mrs. Campfield's possession, and
the other in the possession of one of her executors, who assisted her for
some time in the management of her affairs. Shortly before the indorsement
on the certificate was made, and the letter written, Mrs. Campfield
requested Mr. Everett, the executor, to take the stock certificate from her
box and deliver it to her attorney, stating that she would let her attorney
know in a few days what to do about it. A few days later the attorney
handed Mr. Everett an envelope containing the stock certificate, and told
him there was a letter with it. Mr. Everett saw the certificate but did not see
the letter, and he placed the envelope containing the certificate in the safe
deposit box. The attorney had sealed the envelope after showing him the
certificate. After Mr. Everett had told Mrs. Campfield what had been done,
she said, "Well, that is for the hospital and that settles it," and she added: "It
is in an envelope, as you probably saw, and addressed to my executors, and
they will find a letter inside telling them what to do with it." After this, Mrs.
Campfield continued to receive the dividends paid on these shares, and
there is some evidence to indicate that she had access to the safe deposit
box and examined its contents during the winter preceding her death. The
court, in its opinion, said: "I do not think there can be any doubt of Mrs.
Campfield's donative intention regarding these shares of stock, and it is
equally clear that she never consummated that intention to make the gift, by
the actual delivery of the stock to the hospital, or to any one as trustee for it;
and it also appears that she intended the gift should be effective only after
her death. She expressly retained the ownership and dominion over the
stock for the purpose, at least, of collecting and enjoying the dividends paid
thereon. * * * The gift of the stock not having been completed by delivery,
or by the relinquishment of control over the certificate representing it, the
stock must be declared to be an asset of the estate."

CHAPTER IX
Real Property
DISTINCTION BETWEEN THE LAW GOVERNING SALES OF REAL
AND PERSONAL PROPERTY.—The main distinction between the law
governing real and personal property is the increased formality necessary in
transactions governing real estate. Contracts for the sale of real estate must
be in writing and actual conveyances of an interest in land must not only be
in writing, but, except where seals have been abolished by statute, must be
executed under seal. In order to make the transaction valid against third
persons, record in the Registry of Deeds in the county where the land is
situated is also requisite. Unless a contract for the sale of real estate is
recorded, a subsequent conveyance to a purchaser, for value and without
notice, will destroy the right of the buyer under the first contract to get the
land, though he will still have an action for damages against the seller. So,
in many jurisdictions, creditors of the man contracting to sell may by
attaching the land as the seller's property satisfy their claims from it to the
detriment of the buyer's right. Therefore, an actual conveyance of real estate
must be recorded in order to protect the grantee. As a pre-requisite for
record it is generally required that contracts and deeds of real estate shall be
acknowledged before a notary public or other official authorized by law.
DUTIES OF BUYER AND SELLER UNDER CONTRACT TO CONVEY
REAL ESTATE.—The primary duty of the seller in a contract to convey
real estate is to transfer a good title. It is important for the buyer to
determine before the time for performance whether the seller's title is good
in order to determine whether he himself will accept the deed and pay the
price. Accordingly, the buyer has the title examined by search in the
Registry of Deeds. If the search discloses that the seller's title is defective
the buyer does not on that account necessarily have a right to rescind the
contract. The defect of title may be removed before the time of
performance, and if the nature of the defect is such that this is possible, the
buyer can only give notice of the defect and request its removal. If the title
of the seller is so defective that it cannot be cured, or if the seller manifests

by his conduct an intent to repudiate the contract, as by selling the land to
another, the buyer need not wait for the time for performance, but may at
once give notice that he rescinds the contract. Unless the seller has
expressly contracted to convey by warranty deed, his obligation is generally
satisfied by a quit claim deed. It is well, therefore, for a purchaser, when he
contracts to purchase a piece of real property, to insert in the contract a
clause to the effect that the seller agrees to convey by a sufficient warranty
deed. The seller is also bound not to commit waste on the premises between
the time of the contract and the time of performance. The rule in regard to
accidental injury is stated hereafter, but as to intentional or negligent injury
of the premises, the law is clear that such an injury is a breach of duty by
the seller. The buyer's duty is to pay the price according to the terms of the
contract. The obligations of the seller to convey, and of the buyer to buy, are
concurrent, unless the contract expressly provides the contrary; that is, the
buyer in order to acquire a right against the seller must tender payment, as
he demands a deed; and the seller in order to acquire a right against the
buyer must tender a proper deed when demanding payment. The obligation
of either party to tender may, however, be excused by circumstances
showing that tender would be useless. Thus, if the buyer is insolvent, the
seller need not tender a deed, and if the buyer has repudiated the contract or
committed waste to a material extent, or conveyed the premises to a third
person, the buyer need not tender payment, in order to acquire a right of
action. But if there is any doubt at all, the purchaser or the seller, as the case
may be, should make a tender, so as to preserve his legal rights.
DOWER AND CURTESY.—By the common law a wife on her marriage
acquired a right in her husband's land, which, though not vesting until his
death, encumbered the title immediately. On his death she became entitled
to a life estate in a one-third interest of all the lands of which he had been
possessed since the date of their marriage. Accordingly, where the common
law rule of dower still prevails, a husband cannot give an unencumbered
title to real estate unless his wife joins in the conveyance. Similarly a
husband was entitled at common law to a life interest in the lands of his
deceased wife if they had had a child born alive. This was called the estate
by curtesy. Its extent, it will be observed, is not the same as that of dower.
The husband's life interest extended to all the lands of the wife, but on the
other hand, it did not arise at all unless there was a child born alive;

whereas the wife's dower right arose immediately on marriage. The rules of
dower and curtesy have been changed by statute to a greater or less extent
in most States, but it is still almost universally important that a wife should
join in her husband's conveyance of real estate, and that a husband should
join in a wife's conveyance of her real estate.
DEFAULT IN PERFORMANCE.—The law regards more leniently a
default in time in carrying out contracts for the sale of real estate than it
does a similar default in the sale of personal property. In sales of personal
property, especially if it is of a character which rapidly fluctuates in value,
time is said to be "of the essence;" that is, the failure of either party to
perform at or about the agreed day is fatal to his rights to enforce the
contract; but in the case of real estate it is generally held that time is not of
the essence of the contract unless it is either expressly so provided in the
contract, or the circumstances of the case are such as to show that time was
a matter of vital importance.
DESTRUCTION OF PREMISES.—Where personal property, which the
owner has contracted to sell, is destroyed, the loss is the seller's provided
the title is still in him, and the buyer has committed no default; but in most
jurisdictions, if real estate is similarly destroyed, the buyer must
nevertheless pay the price. In the absence of special provisions in a contract
of sale, if a house on the premises sold has burned between the time of the
contract and the time for its performance, without fault of the seller, the
seller can compel the buyer to accept a deed of the land without the house
and pay the full price. This rule has been much criticized, and it is not
universally in force; for example, it is not the law of Massachusetts. In
some other States the loss will not fall upon the buyer unless possession of
the premises has been delivered to him under the contract, but in New York,
and probably a majority of the States, even though the seller still has
possession, as well as title, the risk of accidental loss rests upon the buyer.
Where risk of destruction of the premises is thrown on the buyer,
immediately after he has made a contract to purchase, it is of obvious
importance that he should immediately insure the premises. The insurance
of the seller, unless transferred to the buyer at that time with the company's
assent, will not protect the buyer. Insurance is a contract of personal
indemnity, and the seller's insurance only protects the seller's interest. The
result is that if the premises are destroyed, the insurance company will not

be obliged to pay the seller his insurance, since the seller, under the contract
of sale, can recover from the buyer; and even if the insurance were paid to
the seller, the buyer could not claim the benefit of it.
SPECIFIC PERFORMANCE.—In addition to the ordinary remedy for a
breach of contract, namely an action at law for damages, another remedy,
that of specific performance, is permitted in the case of contracts for the
sale of land; that is, the court will actually compel one who has contracted
to sell land to make a conveyance thereof on receiving the agreed price, and
will similarly compel one who has contracted to buy to pay the agreed price
on receiving a deed of the premises. Specific performance of such contracts
is granted on the theory that money damages are an inadequate remedy, and
that the nature of the situation is such that it is possible to compel the actual
performance of the contract. In contracts for the sale of personal property,
damages are generally considered adequate, but contracts for the sale of a
painting or a race-horse would be specifically enforced. Sometimes the
seller is unable fully to perform his agreed contract. He may not be able to
give a title free from encumbrances, or he may have committed waste on
the premises. In such a case, though the buyer need not carry out the
contract unless he wishes, he can if he chooses get a conveyance decreed to
him and an allowance deducted from the price commensurate to the injury
caused by the encumbrance or waste. Specific performance will be granted
not only against the seller, but if the seller in violation of his contract has
conveyed the land to a third person who had notice of the contract or who
did not give value in exchange for the land, the court will compel the
grantee of the premises to convey them to the person who had the original
contract to buy. If, however, one who has agreed to sell the premises
actually sells and conveys them to another who is a purchaser for value
without notice of the prior contract, such a purchaser gets an indefeasible
title, and the person having the prior contract to buy must resort, for his
only relief, to an action for damages against the seller. For this reason it is
important to record a contract to buy or sell. This record operates as notice
to all the world, and no purchaser subsequent to the record will have the
rights of a purchaser for value without notice.
VENDOR'S LIEN.—In some States a seller of land who has not been paid
the price is entitled to what is called a vendor's lien on the land. This
enables him to compel a sale of the property to satisfy his claim for the

purchase money unless the land has been conveyed, before proceedings are
brought to enforce the lien, to a purchaser for value without notice that the
original vendor is still unpaid. In many States, however, the seller has no
vendor's lien and must take a mortgage back for any unpaid portion of the
purchase price if he desires security for its payment.
DEFINITION OF MORTGAGE.—A mortgage is a transfer of property to a
creditor to secure a debt. Unless there is a debt there can be no mortgage,
and the original idea of a mortgage, still preserved in the forms of
conveyance in many States, is that the mortgagor or debtor transfers the title
to the mortgagee or creditor. In popular understanding the mortgagor owns
the mortgaged premises but the mortgagee will take or sell them if the debt
is in default. The theory of the common law, however, was that the
mortgagee became the owner of the premises as soon as the mortgage was
made, but that the mortgagor was entitled to re-acquire the ownership by
payment of the debt at maturity. Indeed, early mortgages were often made
by two separate instruments: (1) an absolute deed of conveyance to the
mortgagee, and (2) an instrument called a defeasance which provided that
on payment of the amount of the debt, on a given day, the property should
revest in the mortgagor.
MODERN AMERICAN MORTGAGES.—At the present day in many
jurisdictions a mortgage still remains, both in the form of the instrument
and in the legal conception of the rights of the parties fundamentally, the
same as under the early doctrines just outlined. In other jurisdictions, of
which New York may be taken as a typical State, the theory is no longer
that the mortgagee has title to the property, but that he has only a lien on it,
which he may enforce if the debt is not paid. The difference in actual results
under the two theories, however, is less than might be supposed. Where the
mortgagee is still regarded as having the title, his power to make use of that
title is limited so that he can only make use of it for the purpose of securing
payment of what is due him. On the other hand where the mortgagee is
regarded as having only a lien, the lien is a legal right against the real estate
which enables the creditor to enforce his claim against it in practically the
same way which he would do were he the owner of the real estate.
COVENANTS AND STIPULATIONS.—A mortgage of real estate
ordinarily contains the same covenants of warranty as a warranty deed of

real estate. Where a mortgage still has its common law effect of transferring
title to the mortgagee, it is essential that the mortgage should contain a
provision that until default the mortgagor shall be entitled to the possession
of the premises. Covenants in regard to the payment of taxes by the
mortgagor and the keeping of the premises insured for a certain amount, are
usual and important provisions. There is also commonly contained in a
mortgage a power of sale; that is an authority or agency given to the
mortgagee to sell the premises free of the mortgagor's right of redemption
in case default of payment is made, or in case such default continues for a
certain specified time. In all States printed forms of mortgages are
ordinarily used. These forms are prepared with care to suit the requirements
of local law; and if you are sure that the printed form is prepared and sold
for use in the State where the mortgaged land is situated, you may feel
satisfied that the terms of the instrument are suitable to protect the rights of
both parties.
EXECUTION AND RECORD OF MORTGAGE.—A mortgage of real
estate must everywhere be executed with the same formality that is
necessary for an ordinary deed of conveyance. Different forms are in use in
different States, and it is always desirable to use the form of mortgage
customary in the State where the land lies. It is important to ascertain
whether a seal is necessary in that State, and the instrument must ordinarily
be acknowledged before a notary public having a seal, or before a
commissioner of deeds for the State in which the land lies. There is in every
State a recording act by virtue of which unrecorded mortgages are made
invalid against subsequent purchasers and sometimes against attaching
creditors. Though an unrecorded mortgage is, as between the parties, as
effective as if recorded, it is of vital importance promptly to record every
mortgage in the Registry of Deeds in the county where the land lies.
SPECIAL CASES.—Where a mortgage is executed by an agent or by a
corporation, it is essential that the agent or corporate officer have authority
to act. In the case of a corporation it is necessary both that the corporation
have power to make the mortgage in question and also that the particular
officer or officers who attempt to exercise the power are authorized so to
do. The principles here involved, however, are not different from those
generally governing the acts of agents and corporations. The same may be
said in regard to mortgages by husband or wife, by a partnership, or by

trustees. In the case of mortgages executed by any such person it is
necessary to take special precautions. A mortgage by husband or wife
should generally be also executed by the other. A mortgage by a partnership
should be executed in the same form in which the title is held by the
partnership, and if the title is held by less than all the partners, it is desirable
that the other partners should express their assent to the transaction either in
the mortgage itself, or in a separate instrument executed with the same
formality.
INTEREST IN PROPERTY.—Any kind of interest in real estate may be
mortgaged and mortgages of property, not yet acquired by the mortgagor,
have generally been held to attach to the property when acquired by the
mortgagor, and then to give the mortgagee as full a right as if the mortgagor
had owned the premises at the time he purported to mortgage them.
OTHER PARTICULARS.—The description of land in a mortgage should
have the same exactness as is necessary in a deed. Unlike deeds, mortgages
ordinarily state their consideration and must of course state the
indebtedness which they are given to secure. A mortgage may be given to
secure a past debt if the mortgagor, when he makes the mortgage, is solvent.
If he is then insolvent, to give such a mortgage would be a preference,
which is an act of bankruptcy, and subject the mortgagor to possible
bankruptcy proceedings. If the mortgagee in such a case had reasonable
cause to believe that the mortgagor was insolvent, the mortgage could also
be set aside by a trustee in bankruptcy.
EQUITY OF REDEMPTION.—By the terms of the mortgage the
mortgagor's right is ordinarily made dependent on payment of the debt on a
fixed day, or of installments on fixed days. A day thus fixed in the mortgage
is sometimes called the "law day." According to the terms of the instrument
the only way in which the mortgagor can be revested with title to the
property is by complying with the express terms of the mortgage and
paying the debt on the law day. The result of this provision, if enforced,
would be that if the debt is not paid exactly when it is due, the mortgagee
remains the absolute owner of the mortgaged premises. Courts of equity,
however, long ago limited the mortgagee's right, holding that the real object
of the transaction is to secure a debt, and that if the mortgagee obtains his
debt and interest he ought to be satisfied. Accordingly if the mortgagor was

in default in the payment of the debt, he was allowed to redeem the property
by payment of the debt and interest until the time of tender. If the
mortgagee refused to accept his debt and interest, the mortgagor could bring
a suit in equity to redeem the property and the court would order the
reconveyance to him of the property on payment of the debt. Because of
this right on the part of the mortgagor, his interest in the property came to
be called an equity of redemption, and it is often so called at the present
day. The position taken by courts of equity, permitting redemption, might
work a hardship on the mortgagee because he could never feel sure of his
title to the property, however long the debt might remain unpaid. This
difficulty was met by allowing the mortgagee to bring a suit to foreclose the
debtor's right of redemption. We speak of foreclosing a mortgage, but,
strictly, it is the debtor's right to redeem which is foreclosed. When such a
suit of foreclosure was brought equity would fix a time within which the
debtor might redeem the premises by paying the debt and interest, and then
the decree provided that if the debtor failed to pay within the named period,
his right of redemption should be forever foreclosed. At the present time
there are in practically all jurisdictions statutory rules, in regard to the
foreclosure of mortgages, which we shall presently describe, but it is
important to remember the fundamental nature of the mortgage transaction,
and the original remedies of redemption and foreclosure.
A RECONVEYANCE IS NOT NECESSARY ON PAYMENT OF THE
MORTGAGE.—If a mortgage is regarded as a mere lien to secure a debt, it
is obvious that a payment of the debt discharges the lien, and the title
already vested in the mortgagor becomes free from any incumbrance. On
the theory of the common law, though the title passed to the mortgagee, it
was subject to a condition subsequent which would revest the title in the
mortgagor if payment of the debt was made at maturity. By mere operation
of law, therefore, payment of the mortgage when due revested title in the
mortgagor without reconveyance. After a default, however, a subsequent
payment is not strictly a performance of the condition upon which the
mortgaged deed provided that title should revest. Accordingly a
reconveyance was necessary in such a case at common law, but at the
present day it is generally not requisite even in case of payment after
default.

THE MORTGAGOR IS LIABLE AS A DEBTOR.—The mortgagor is
bound as a debtor ordinarily by a bond or promissory note in which he
expressly agrees to pay the amount of his debt. It is perfectly possible that
the debt secured by the mortgage should not be represented by such an
instrument, but should rest merely in oral agreement or should be contained
in a covenant in the mortgage deed itself, but it is usual and desirable to
have a separate obligation. The fact that the debtor has given the mortgage
does not in any way limit the rights of the mortgagee as an ordinary
creditor. He may sue on the mortgage debt when it is due, in the same
manner as if there were no mortgage. It is his option whether he will
foreclose the mortgage, as a means of collecting his claim, or whether he
will get judgment on the debt, and seek to collect that judgment in the same
way that an ordinary judgment creditor would. This rule is changed by
statute in California, and one or two other States, where by statute the
mortgagee is required to realize from the mortgaged property what he can
before seeking a personal judgment against the mortgagor. In many
jurisdictions the creditor may, in a single proceeding, obtain foreclosure of
the mortgagor's rights by sale of the property, and a personal judgment
against the mortgagor for any deficiency which the proceeds of the property
may leave. This is called a deficiency judgment.
RIGHTS OF MORTGAGOR AND MORTGAGEE IN MORTGAGED
LAND.—Even though the mortgagor is regarded by the law as having no
longer the legal title to the premises, but only an equity of redemption, his
interest is regarded as real estate and descends on his death according to the
laws governing real estate. The mortgagee's interest, on the other hand, is
regarded as personal property since the debt which the mortgagee is
intended to secure is personal property, and even a legal title to the real
estate held by the mortgagee is held merely for security, and is an incident
to the debt. So the mortgagor's interest in mortgaged property is subject to
be seized on execution by his creditors while the mortgagee's interest can
not be so seized. The mortgagee's creditors must reach his interest by means
appropriate to realize upon the debt, not upon the land. The mortgagor's
interest being regarded as real estate will give rise to the same estates of
dower in favor of the wife of the deceased mortgagor or curtesy in favor of
the husband of a deceased mortgagor, as are allowed by the law in the case
of real estate generally. The mortgagor may, while in possession, deal with

the property in any way in which an owner may, except that he will not be
permitted to imperil the mortgagee's security by any kind of waste. The
mortgagor may, subject to the mortgage, lease, sell or devise it. He may
collect the rents and profits and use them as his so long as he is in
possession. Where, however, the mortgagee is regarded as having the legal
title to the premises, he may eject the mortgagor at any time from
possession, even though the mortgage is not due, unless prohibited by
statute or by the express terms of the mortgage deed. In fact he usually is so
prohibited. Even when not so prohibited, it is not always well for a
mortgagee to take possession because, if he does so, he is bound to account
not only for all profits actually received from the premises, but also for all
that might have been received. He becomes liable for any waste of the
premises or any failure to deal with them in a reasonably prudent manner.
SALE BY MORTGAGEE OR MORTGAGOR OF REAL ESTATE.—
Either the mortgagee or the mortgagor may assign his interest. The
mortgagee in assigning his interest is in legal contemplation doing two
things: (1) assigning the debt; (2) assigning the title or lien which he holds
on the mortgagor's real estate as security for the debt. As to the assignment
of the debt, the matter is governed by the same principles as govern the
assignment of choses in action generally. That is, if the mortgaged debt is
represented by a negotiable instrument, the instrument may be negotiated to
the purchaser in the ordinary way, and with the ordinary effects of such
instruments. If the mortgaged debt is not represented by a negotiable
instrument, the assignment of the debt is an assignment of a chose in action.
Where the common law view of mortgage still prevails, that the mortgagee
has the legal title, he can only transfer it to an assignee by a deed executed
with the same formalities necessary for the transfers of real estate. As,
however, the law recognizes that it is the debt which is the essential feature
of the relation between mortgagor and mortgagee, and that the mortgaged
estate is held merely as security for a debt, a valid assignment of the debt is
held to make the assignee equitably entitled to the mortgaged property as
security. And, in effect, one who obtains the mortgage debt will secure the
benefit of the mortgaged property even though the local law regards a
mortgagee as having the legal title. Where the mortgagee is regarded as
having merely a lien, the assignment of the debt involves a transfer of the
lien.

INCIDENTS TO MORTGAGE.—If the mortgagor wishes to convey his
interest, he transfers the estate by deed exactly as if it were unmortgaged,
except that the conveyance is stated to be subject to a specified mortgage,
and it is sometimes added "which the grantee assumes and agrees to pay." It
is desirable for the seller that the grantee shall assume and agree to pay the
mortgage while it is desirable for the buyer that he shall buy the premises
merely subject to the mortgage without assuming it. The difference between
the two transactions is this: In either event the grantee receives the premises
burdened by a mortgage, the amount of which will be deducted from the
consideration paid as the agreed value of the premises. In either event, if the
debt is unpaid, the mortgagee will foreclose and the grantee will lose the
premises. In order to save the premises, the grantee will have to pay the
mortgage.
ASSUMPTION OF MORTGAGE.—The distinction is only seriously
important when the mortgaged premises are worth less than the amount of
the mortgage. In that event the mortgagee will be entitled to a deficiency
judgment against the mortgagor. The mortgagor was the original debtor and
cannot escape from his obligation to the mortgagee without the latter's
assent. If the mortgagor is forced to pay, he cannot recover the amount from
his grantee unless the latter assumed and agreed to pay the mortgage. If,
however, the grantee did make such assumption, he will ultimately have to
pay the deficiency. If the mortgagee, without foreclosing the property,
should sue the mortgagor directly on the debt, the latter would be compelled
to pay. Even if the sale to the mortgagor's grantee had been made merely
subject to the mortgage, the mortgagor on paying the debt would be
subrogated to the mortgage and would himself be enabled to foreclose the
property. But if the property failed to realize enough to reimburse him for
the payment of the debt, he would lose this deficiency unless the grantee
had assumed and agreed to pay the mortgage. Whether the mortgagee may
sue directly a grantee of mortgaged premises who has assumed and agreed
to pay the mortgage, is a question which has been much litigated; but it is
now held almost everywhere that the mortgagee may do so. Sometimes a
succession of grantees, each in turn on buying the premises, assumes and
agrees to pay a certain mortgage. The mortgagee, in such a case, is
generally allowed to recover from any one of these grantees so far as is
necessary to satisfy his claim; but the ultimate liability will rest upon the

last purchaser who has assumed the debt. As against a grantee who has not
assumed the debt, the mortgagee has no rights. He can deprive such a
purchaser of his land, so far as is necessary to collect the debt, but he cannot
hold him personally liable.
FORECLOSURE OF REAL ESTATE MORTGAGES.—According to the
original theory of the law, the mortgagee became the absolute owner of the
mortgaged premises by the failure of the mortgagor to pay the debt when
due, and by the foreclosure or termination of the mortgagor's right of
redemption. Foreclosure of this character is still possible in a few States,
but in most States it has been wholly abolished, and everywhere the
ordinary method of foreclosure is by sale of the mortgaged property.
Frequently the sale is made by virtue of an authority or power of sale given
in the mortgage itself, but sometimes it is made under authority of a decree
of court in foreclosure proceedings. Where a mortgage contains a power to
the mortgagee to sell on default of the mortgagor, he is acting not simply on
his own behalf but as agent for the mortgagor in transferring title to the
property. The proceeds will be applied first to the payment of the debt with
interest and the expenses of the sale. Any surplus will be held by the
mortgagee in trust for the mortgagor and must be paid over to the latter. The
situation is entirely analogous to that created by a collateral note where
stock or other personal property is transferred as collateral to secure a debt.
The statutes of all States contain regulations in regard to the foreclosure of
mortgages, which must be observed. They are aimed generally to protect
the mortgagor from forfeiture of his property to any greater extent than is
necessary to insure the payment of the mortgage debt. In any case of
foreclosure the local statute and practice must be consulted.
DEEDS OF TRUST.—In some States what are called deeds of trust have
been largely substituted for mortgages. The temptation to make such a
substitution is greatest in jurisdictions which refuse to recognize the
mortgagee as the legal owner of the premises. If the law denies the
mortgagee this recognition, he can, by insisting, as a condition of his loan,
that the premises shall be conveyed to a third person as trustee, achieve the
result that the mortgagor at least is no longer the legal owner of the
premises. Essentially the situation is the same under a deed of trust as under
a common law mortgage. In both cases the legal title is held merely to
secure the debt, and the court will secure to the debtor all the value of the

property which can be realized from its sale over and above the amount of
the debt. If the debt is paid of course the debtor is entitled to the return of
the security whether it is real estate or personalty, and whether held directly
by the creditor or by a third person as trustee.
THE TORRENS LAW.—The Torrens system of registration of land titles
received its name from Sir Robert Torrens who drew the first Torrens law
enacted in South Australia in 1858. The practice of searching titles has gone
through this development. In country districts the person purchasing real
estate frequently accepted the grantor's deed without any search of the title.
Of course, if there were judgments against the grantor, or other claims
against the real property, the purchaser or the grantee takes the property
subject to these claims. Ordinarily, however, the careful purchaser employs
a lawyer to make a search of the title before he accepts it and pays the
purchase price. In New York City to-day, and in some of the other large
cities of the country, most of the title searching has passed out of the hands
of the lawyers into the hands of the title companies. The title company
makes the search now, the same as the lawyer formerly did, with an added
advantage. Suppose I am to buy Blackacre, and employ attorney Blackstone
to search the title. He reports it as being free and clear. I take possession and
pay the purchase price. Six months later the wife of the grantor appears on
the scene. When the grantor conveyed, he stated in the deed that he was
single. The wife establishes the validity of her marriage, and her husband's,
my grantor's, death. She is, of course, entitled to dower. I am obliged to
make some kind of settlement with her, and there is no way, probably, by
which I can hold my lawyer for failing to find that the grantor was married,
when he made the search for me. If the title to my property had been
searched for me by a title company, it would have issued a title insurance
policy in my name which would have protected me, in this instance, and I
would have been reimbursed by the title company for the loss which I
sustained in having to pay the dower claim of my grantor's wife.
ECONOMY OF TITLE SEARCHES.—Economically, the title company is
a big step in advance of the former practice of having lawyers make a
search. The title company can do it much cheaper. If Blackacre was sold,
when lawyers alone were making searches, probably a different lawyer
would be employed at each sale, and he would make a search back to the
earliest deed. After a title company has made its search, the result is in its

records and the next time it is on the same piece of property, the search
would simply be what is called a continuation, which would carry the
search from the last time the company was on the title down to the present
time. This enables the title company to make its fee more reasonable than
the lawyer, and we can now secure a title company's search and insurance
policy frequently for less than formerly was paid to the lawyer for the
search alone.
ESCHEAT.—However, the policies issued by the title companies are not
absolutely satisfactory, and the next, and perhaps final, step is for the State
to come in and guarantee the title. This is perfectly logical. The ownership
of all land is in the State, theoretically, the same as under the English
common law. The King, in those days, owned all the land. This is more than
theory, even to-day. If a man dies, leaving no heirs and no will, his real
property escheats to the State, this being based simply on the theory that the
property goes back to its original owner, the State. If this is true, why
should not the State insure the title? This is the theory of the Torrens'
system.
EFFECT OF TORRENS LAW.—The first Torrens law, enacted in this
country, was in Illinois, and similar acts have been passed in a number of
the States, including New York. When such laws are on the statute books,
generally the business of a title company will be legislated out of existence.
For that reason, opposition to the passage of such laws has developed in
some States. Perhaps the next fifty years may see them generally adopted
throughout the country.

CHAPTER X
Estates and Trusts
ESTATES.—When a person who owns property dies, the first question
which arises is as to what becomes of his estate; who pays the bills, who
takes charge of his business affairs, and what are the rules as to the division
of his property. The first question a lawyer always asks is, "Did the
deceased die testate or intestate?" that is, did he leave a will or not. If he left
a will, probably he has named one or more executors in his will to settle his
estate, in which case such person or persons will take charge. If he has not
appointed an executor in his will, an oversight which rarely occurs, the
probate court will appoint an administrator. If, on the other hand, the man
died intestate, it will be absolutely necessary for the court to appoint an
administrator. The executor will settle up the estate according to the
directions contained in the will, but if no will was made, the administrator
will settle up the estate according to the rules of the probate court, under
which he is acting, and the property will be divided in accordance with the
statutes of the State or States having jurisdiction over the estate.
CHARACTER OF PROPERTY.—It is very essential to distinguish
carefully between the two kinds of property, real and personal, which the
deceased leaves. Real property, as we have explained, consists of land with
the buildings permanently attached to it, and all other property is personal
property, although it may relate to real property. Thus, a mortgage on land is
personal property, also the shares of stock in a corporation, although the
corporation may be organized to engage exclusively in the ownership of
real property, is personal property. Where a person dies leaving a will, his
real property goes directly to the persons to whom he leaves it in the will. In
the case where he dies intestate, his real property passes directly to his heirs
at law, who are designated by statute. In neither case is any formality
necessary, beyond the probate of the will, to vest the devisee of the testator
or the heirs at law of the intestate with the title to the real property. The
situation in regard to personal property is quite different. Where the
deceased died leaving a will, his executor immediately has title to all the

personal property. If he dies intestate, the administrator will take title as
soon as appointed. The personal property is used by the executor or
administrator to pay debts, and the real property, whether a man dies testate
or intestate, is never used to pay debts unless the personal property is
insufficient.
WILLS DEFINED.—The definition of Jarman is commonly used in
defining a will: "A will is the instrument by which a person makes a
disposition of his property to take effect after his decease, and which is, in
its own nature, ambulatory, and revocable during his life." This definition is
open to one criticism. It does not include oral wills which, as we shall see,
are sometimes legal. We shall also use other terms in this chapter which
must be defined. A testator is the man who makes the will, while the
testatrix is a woman making a will. A codicil is a supplement to a will, made
and executed with the same formality as the original will, and it becomes a
part of the original will, adding to it, or altering it, as the case may be. A
devisee is a person who takes real property under a will, while a legatee
takes personal property under a will, and the real property passing under the
will is called a devise, and the personal property a bequest. A legacy refers
to money passing under a will. This is why the ordinary will uses this
phrase: "I give, devise, and bequeath." It is not fatal, however, to make a
mistake of having the will read, "I hereby devise," referring to personal
property. It is more a mistake in the use of English, than a mistake in law to
make a wrong choice of these terms which we have just defined. A
holographic or olographic will is a will which is wholly written in the
testator's or testatrix's own hand. The statutes of a few States recognize
these wills as valid without the formal execution or attestation if they are
wholly written, signed, and sealed by the testator's own hand. A
nuncupative will is an oral will. While most wills must be in writing, in
many jurisdictions the oral wills made by sailors at sea, and soldiers in
actual service are recognized as valid without being reduced to writing and
without any specified number of witnesses. It is perfectly apparent why
these exceptions are made, because of the difficulty of securing the
materials with which to make a written will by these two classes of people.
Nuncupative wills are good only to dispose of personal property, unless a
special statute has been enacted which provides otherwise, but this is not
commonly done.

A WILL AND A GIFT CAUSA MORTIS DISTINGUISHED.—We have
already referred to gifts causa mortis which are gifts of personal property
made by the donor under apprehension of immediate death, coupled with
the delivery of the property. The gift is defeated by the recovery of the
donor. A gift causa mortis may be made orally, while, with the exception of
nuncupative wills, all wills must be in writing. A gift causa mortis must be
made under fear of pending death, whereas a will is ordinarily made with a
view of the fact of death but not of its immediate happening. Again,
delivery is necessary to make a gift causa mortis, whereas under a will
delivery never takes effect until after the person dies, and then the legatee's
title comes through the executor or administrator, and not directly from the
testator. Real property is not the subject of a gift causa mortis, whereas a
will may dispose of both real and personal property.
WHO MAY MAKE A WILL.—As a general rule, any person of sound
mind and of the age of twenty-one years may make a will. In some States, a
person eighteen years of age may make a will of personal property.
Formerly a married woman could not make a valid will excepting in a few
instances, but today, by statute, this common law disability has been either
wholly or largely removed. The statutes of the particular State in which the
married woman resides, or in which her property is situated should always
be consulted.
TESTAMENTARY CAPACITY.—Another qualification is that the testator
must have sufficient intellectual powers to enable him to be said to have "a
sound and disposing mind, memory, and understanding." The case of
Whitney v. Twombly, 136 Mass. 145, gives us as good a general statement
as there is concerning the nature of testamentary capacity: "A testator has a
sound mind for testamentary purposes, only when he can understand and
carry in mind, in a general way, the nature and situation of his property, and
his relations to the persons around him, to those who naturally have some
claim to his remembrance, and to those in whom, and the things in which,
he has been chiefly interested. He must understand the act which he is
doing, the disposition which he wishes to make of his property, and the
relation in which he stands to the objects of his bounty and to those who
ought to be in his mind on the occasion of making his will." The ability to
make a will is not necessarily gone because the testator is old, weak or ill,
even practically at the point of death. The physical condition is simply

significant in determining the mental condition, but of course a very weak
physical condition does not necessarily mean a weak intellectual condition.
Insane persons are not capable of making wills, but a person who is insane
may still have a "lucid interval" during which time he is sufficiently
restored to his normal condition to enable him to act with such reason as to
make a valid will, although he may, very soon, relapse into his former
insane condition. Ordinarily most peculiarities and eccentricities on the part
of the testator do not affect his ability to make a will; neither do peculiar
religious beliefs have any effect unless, in any of these cases, the person's
mind is so completely controlled as to prevent the exercise of rational
judgment in disposing of his property. His eccentricities must amount
almost, in such cases, to a form of insanity to have this effect.
HOW A WILL MUST BE EXECUTED.—There are four requirements for
the execution of a valid will:
(1) It must be in writing.
(2) It must be signed by the testator.
(3) The testator's signature must be made by the testator or the marking
acknowledged by him in the presence of the necessary number of witnesses.
(4) It must be declared by the testator to be his last will in the presence of
the necessary number of witnesses, who are present at the same time and
who subscribe their names as witnesses in the presence of the testator.
OTHER FORMALITIES.—No particular form of writing is necessary.
Probably typing is the most common form in use to-day. As a precaution,
lawyers sometimes have the testator sign at the bottom of each typewritten
page, where the will is of several pages, or the document is fastened
together with silk, the two ends of which are carried to the last page and
imbedded in a wax seal. The testator should sign the will himself unless he
is unable to, from lack of education or feebleness, in which case, the statute
generally makes provision for another form of signing. It is better practice
for the testator to sign the will in the presence of his witnesses,
acknowledge the signature, and then the testator should declare, in the
presence of his witnesses, that this is his last will and testament. In many

States, two witnesses are all that are necessary; a few States require three.
Careful practice generally calls for three.
ILLUSTRATION.—A testator lives in New York. He has two witnesses to
his will. His will is valid as far as his real property in that State is
concerned, but should it happen that he also owns real property in a State
where three witnesses are required, his will would not pass title to the real
property in that State and, as far as that State is concerned, he would die
intestate, and that real property would descend to his heirs in accordance
with the laws of that State, which would quite likely not be what the testator
intended to happen. By having three witnesses, his will is just as good in
New York, where only two are necessary and the presence of the third
witness makes the will good, and passes the real property situated in the
State where three are required. It is always best to have the witnesses add
their addresses to their signatures. This is not required by statute in many
States, but after a person's decease, it may help in locating the witnesses by
having addresses to which to refer. It is, of course, wise to use some care in
the selection of witnesses, although almost any person is competent. Adults,
of course, are preferable as witnesses, but an infant is a perfectly good
witness, but he should possess sufficient intelligence to be able to
appreciate the importance of the act he is witnessing. In view of the
formalities to be observed in the execution of a will, and the technical
niceties in the use of the proper word or phrase, often required to insure the
expression of the testator's exact intention, the drafting of a will should
never be left to a layman, but should always be entrusted to a lawyer.
THE FORM OF A WILL.—In our discussion it is well to keep in mind the
form of a will. A simple will reads as follows:
IN THE NAME OF GOD, AMEN:
I, John Jones, of the Borough of Manhattan, City and State of New York,
being of sound and disposing mind and understanding, do make, publish,
and declare this my last will and testament, as follows:
First. I direct that all of my just debts and my funeral expenses be paid as
soon after my death as conveniently may be.

Second. I give, devise and bequeath all the rest, residue and remainder of
my estate, whether real, personal, or mixed, of whatsoever kind, character
or description, and wheresoever situated, unto my wife, Emma Jones, for
and during the period of her natural life.
Third. Upon the death of my said wife Emma, I give, devise and bequeath
the said residue and remainder of my estate to my children, Alice Jones,
Sarah Jones, and George Jones, to them, their heirs, executors,
administrators and assigns forever, share and share alike, per stirpes and not
per capita.
Fourth. This will shall remain in full force and effect notwithstanding
children may hereafter be born to me.
Fifth. I nominate, constitute, and appoint my said wife Emma, and the
Institute Trust Company, executors of this my last will, giving to them full
power and authority to sell and convey any and all real estate, whereof I
may die seized, at such times and for such prices as they may consider for
the best interests of my estate.
Sixth. I hereby revoke any and all wills at any time by me heretofore made.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this first
day of July, 1921.
(Signed) JOHN JONES (L. S.).
Signed, sealed, published and declared by John Jones, the above-named
testator, as and for his Last Will and Testament, in the presence of us, and
each of us, and at the same time declared by him to us, and each of us, to be
his Last Will and Testament, and thereupon we, at his request, and in his
presence and in the presence of each other, have hereunto subscribed our
names as witnesses, this first day of July, 1921.
RALPH ROE, 3921 Broadway, New York, N. Y.
JOHN DOE, 65 Fifth Avenue, New York, N. Y.
JAMES SMITH, 130 Post Avenue, New York, N. Y.
REVOCATION.—A will may be revoked at any time at the pleasure of the
testator. The ordinary ways of accomplishing a revocation of a will are: (1)

The testator executes a later will, and in express terms says, "I hereby
revoke all former wills by me made." Even if such an expression is not put
in the second will, if its terms are wholly inconsistent with the former will,
this in itself, will act as a revocation. Again, a will may be revoked by
mutilation, as by being burned, torn, or otherwise mutilated by the testator
himself, or in his presence and by his direction. The mutilation of the will,
however, if not accompanied by an intent thereby to revoke it, is of no
effect. I think I am tearing up an old insurance policy, but because of poor
eye-sight, discover later that I have torn my will. This would not amount to
a revocation of the will. As has been said by a writer on the subject of wills,
"No amount of cancellation or destruction without the intent to revoke, and
no amount of intent without the actual destruction, will suffice to revoke a
will. Both the intent and the actual destruction or cancellation must
coexist."
Sometimes changes in the circumstances and conditions of the testator's life
will work a revocation. For example, at common law, the marriage of a
woman worked an absolute revocation of her will. This has now been
changed in most States by statute. In a great many States, however, today, if
a testator, having no children, should make his will, and after the execution
of the will, a child is born, the will is revoked in toto, when no provision for
such child is made in the will. However, as above stated, this rule is not
uniform in all States, and local statutes should therefore be consulted on this
point. Where a testator already has children, the birth of additional children
will not affect his will except, that such after-born children will inherit the
same as though he had left no will. These rules in regard to after-born
children apply only where the will does not make any mention of possible
issue, and for this reason it is well to insert the clause, in many jurisdictions,
providing that the will shall remain in full force and effect notwithstanding
the fact that children may thereafter be born to the testator.
PROBATE OF WILLS.—Every State has a probate court for the settlement
of decedents' estates. Such a court is variously named as the probate court,
the surrogate's court, and the like, according to the nomenclature adopted in
a particular State. Before an executor named in a will has any authority to
act, he must produce the will, and after the proper proceeding has been had,
the will is admitted to probate, and he may then qualify under it by giving
the necessary bond. If the deceased died intestate, the proper person will

apply to the probate court for the appointment of an administrator, and after
a hearing, the court will appoint the person entitled to receive letters of
administration. The administrator will then qualify, give the necessary bond,
and then proceed with the settling of the estate.
A testator may name anyone in his will as an executor. In the large cities, in
recent years, it is becoming quite common to name a trust company as
executor, because its facilities for handling estates render it more efficient
than the average individual. If, on the other hand, the testator is unwilling to
place the sole care of his estate in the hands of a trust company, he may
name two executors, a trust company and his wife, if he is a married man,
or a very close friend in whose judgment he has great confidence, and,
together, the two act as executors. The fees which the executors receive are
generally fixed by statute. If the deceased dies intestate, the letters of
administration are granted by the court in accordance with a definite statute.
While the law in the various States is not uniform, generally, the priority of
the right to administration is arranged by statute something like this:

(1) On the estate of a husband:
(a) To the widow, if there is any.
(b) If there is no widow, or if the widow renounces, then to the
children.
(c) If there are no children, then to the issue of deceased children.
(d) If no issue of deceased children, then to the nearest of kin.
(2) On the estate of a wife:
(a) To the husband, who has an absolute right. If the husband for any
reason does not desire to act as such administrator, he may select any
fit person to administer the estate.
(b) If there is no husband, then to the children.
(c) If no children, then to the issue of deceased children.
(d) If no issue of deceased children, then to the nearest of kin.

(3) On the estate of an unmarried child:
(a) To the father, who has an absolute right. If for any reason the father
does not wish to act, the court may select any fit person to administer
the estate.
(b) If there is no father, then to the mother and brothers and sisters,
whether of whole or half blood.
(c) If no mother or brothers or sisters, then to the nearest of kin in
equal degree.

PER STIRPES AND PER CAPITA.—Where the subject of a testamentary
disposition is directed to be "equally divided" or to be divided "share and
share alike," or where similar words are used which indicate an equal
division among a class of persons, the persons among whom the division is
to be made take per capita, unless a contrary intention is discoverable from
the will. Where the individuals of a class are specifically named, or are
designated by their relation to some ancestor living at the date of the will,
whether the testator or another, they take per capita, unless the context of
the will shows an intention that they should take per stirpes. But where the
gift is to an individual, or several named individuals, and to others as a
class, the latter take per stirpes; unless the testator uses language indicating
an intention that the members of the class shall share equally with the
named individuals. A gift to a class of persons or on their death to their
heirs or children will be distributed among such heirs or children per
stirpes; but a gift to one person and the children of other deceased persons
will be divided per capita, unless it appears from the context or
circumstances shown by extraneous evidence that the testator intended a
distribution per stirpes.
ILLUSTRATION.—A gift to children of testator, A. B. and C., or on their
death to their heirs or children will be distributed, in the event of the death
of C. before the testator, among heirs or children of C. per stirpes. (In other
words, they will divide the share of their father between them.) But a gift to
A. and to X. Y. and Z., the children of B. deceased, will be divided per
capita.

THE CONSTRUCTION OF WILLS.—It sometimes happens that wills are
not carefully drawn, and even if they are, their meaning is not always
perfectly clear. Ordinarily, any person who is interested in the meaning of a
clause of a will may bring a suit in the proper court asking for a
construction of the will. Of course, each case is governed more or less, by
its own facts, but there are certain general rules which the courts follow in
trying to arrive at the testator's intent. For example, a will is ordinarily
presumed to speak as of the time of the testator's death. Thus, reference in a
will, to the arrival of the testator's youngest child at the age of twenty-five
years, will apply to the youngest child at the time of the testator's death,
although such child is born after the execution of the will. Ordinarily, a
testator is presumed to have intended to dispose of all of his property, and if
a will can be so construed, this will be done, rather than to adopt a
construction which will make him testate as to part of his property and
intestate as to another part. If there are two irreconcilable parts, the latter
part is the one which prevails. Words are to be understood in their ordinary
meaning, unless there is something to clearly show contrary intent. If,
between two possible constructions, one of which would disclose a legal
purpose, and the other an illegal purpose, the court will adopt the former.
DOWER.—Under the rules of the common law, a wife was entitled, on the
death of her husband, to an estate for life in one-third of the lands of which
her husband was seized of an estate of inheritance at any time during the
marriage. This dower right still exists in most States, although it may differ
in some particulars. For example, in Connecticut, a dower right exists only
in the real property which the husband owns at the time of his death, and
not, as at common law, in all the real property of which he was seized
during the whole marriage. Therefore, reference to the statutes must be
made in each State, to know the exact rule in a particular jurisdiction.
Where the State adheres closely to the common law, this right, on the part
of the wife, is a right of which her husband cannot deprive her; if the
husband disposes of all his real property in his will to his friend, John
Jones, such disposition is not valid and the wife would still be allowed her
dower right by the probate court. It must also be borne in mind that dower
refers only to real property. Generally, a husband may dispose of his
personal property without any reference to his wife. Ordinarily, two things
are necessary to establish the right of dower: (1) A legal marriage, and (2)

seizin by the husband of an estate of inheritance in lands, or, in a layman's
terms, the absolute ownership of a piece of real estate.
CURTESY.—Curtesy is the common law right which a husband has in the
real property of his wife, and by it he is entitled to an estate for his life in all
lands of which his wife was seized during marriage. Needless to say,
women did not take part in law making when this law arose. To establish
this right, three things are necessary: The two already mentioned in dower,
and third, the birth alive of issue of the marriage. The right of curtesy does
not exist in this common law form in as many States as does the right of
dower. Where these two rights do exist, in their more or less modified form,
you have the explanation of the fact that when a married man sells real
property, his wife joins in the deed, or when a married woman sells real
property, her husband joins in the deed. The act of either in joining, releases
the dower or curtesy right and allows the purchaser to get a clear title.
CONFLICT OF LAWS.—We have already referred to this topic. It
frequently happens that a person dies owning real property located in a
number of States. It is almost certain that the laws covering real property
will vary in these different States. If he was a resident of Philadelphia, his
will will probably have been executed in accordance with the laws of
Pennsylvania. The question arises whether such a will is valid to convey
real property which he owns in New York, California, and Massachusetts.
Insofar as the will affects real property, the mode of execution and its
validity will be controlled by the law of the jurisdiction in which the real
property is situated. If, then, the will had two witnesses only, as required by
the Pennsylvania law, but three witnesses are required in one of the other
States named, he would die intestate as far as the real property in the other
State is concerned. Difficult questions sometimes arise in regard to gifts to
charities. Some States limit the amount which a charitable corporation may
receive as a gift under a will, and other States require that the gifts must be
executed within a certain time before the decedent's death. Where there is a
question of this character involved only a careful examination of the
decisions and statutes in the States concerned can furnish the basis for any
satisfactory answer. If there is personal property, the requisites of validity
and construction of a will are controlled by the law of the testator's
domicile. The question as to his domicile is sometimes quite difficult to
determine and may require a court action. We have had a number of

illustrations of that in connection with the inheritance tax laws, where the
officers of one State have sought to establish the domicile of a particularly
wealthy person, who has just died, within that State in order that they may
secure the inheritance tax for the State, which would of course, be much
larger if the person were adjudged a resident of that State than it would be if
he were held to be a non-resident.
CONTRACTS TO MAKE A WILL.—It sometimes happens that one
person may make a contract whereby he agrees to make a will in favor of
another person. A, 75 years old, and of the proper mental capacity to make a
will, makes a contract with Mary Jones, that, if she will live in his house
and act as housekeeper as long as he lives, he will make a will and in it give
her his house and $5000. He fails to make his will and dies suddenly at the
end of the year after the making of this contract. It is generally recognized
that contracts of this nature are valid. The general rules applicable to
contracts apply here. There must be consideration, the contract must be
certain in its terms, and as such contracts are not favored by the courts,
because they are open to many forms of fraud, they must be proved by clear
and convincing evidence, and the contract would have to be in writing
under the provisions of the Statute of Frauds. In the illustration suggested,
the further question arises, what is the remedy on the part of the
housekeeper for a breach of contract. Ordinarily there are two proceedings
open in such a case. The personal representative of the deceased might be
sued at law to recover damages for a breach of contract, or one might
proceed in equity to compel the parties who take the legal title to the house,
in consequence of the failure of the decedent to make his will as he
contracted to do, to convey the property which would have been conveyed
by the will, had the will been made in compliance with the contract.
TRUSTS DEFINED.—In Bouvier's Law Dictionary, trusts are defined as
obligations imposed, either expressly or by implication of law, whereby the
obligor is bound to deal with property, over which he has control, for the
benefit of certain persons of whom he may himself be one, and any one of
whom may enforce the obligation. A trust arises when property has been
conveyed to one person and accepted by him for the benefit of another. The
person who holds the property and the legal title is called the trustee, and
the person for whom it is held is termed the beneficiary or "cestui que
trust." Trusts are created for a great variety of purposes. It is very common

to create them by a will, the testator appointing a trustee to manage a trust
fund which he sets aside for the maintenance and support of a certain
person or a certain institution. A new device for creating a trust for the
carrying on of a business, seems to be growing in popularity. The practice
apparently began in Massachusetts with the creation of a trust for the
operation of an office building and similar undertakings. Under this
arrangement, a trust estate may have transferable shares, exemption of
shareholder's liability, and frequently enjoys peculiar advantages in taxation
matters. These organizations are sometimes spoken of as common law
corporations. They are so comparatively new that the closest care should be
exercised in operating a business under this form of organization. We shall
now consider the powers and duties of trustees and include with them
executors and administrators.
TRUSTEES, EXECUTORS, AND ADMINISTRATORS.—Trustees,
executors and administrators may be classed together because they are alike
in that they hold legal title to property which is held by them for the benefit
of other persons. They hold the legal title. A trustee is the owner of the
property, and any one who seeks a transfer of the legal title of the property
must get it from the trustee. Executors have exactly the same powers as
administrators, aside from powers that may be expressly given in the will.
The difference in name is simply because an executor is appointed by the
will of the testator, whereas an administrator is appointed by the court to
take charge of an estate for which no executor has been named in a
testator's will, or where the executor may have died or refused to act, or, the
most frequent case, where the deceased died intestate.
THEIR APPOINTMENT.—Were it not for statutes, a trustee or an executor
would become such simply because somebody had made him a trustee or an
executor without any appointment or assistance from the court. But in the
appointment of executors or trustees, under wills, the court is by statute
generally required to make an appointment to give validity to a nomination
or appointment in the testator's will. Administrators, of course, from their
very nature, have to be appointed by the court. A trust, however, may be
created between living persons without any appointment by the court, and
frequently is. A real estate trust may be created by simply conveying
property to trustees on the trust that they manage it and pay the income to
the beneficiaries, and a great variety of trusts are constantly created without

an appointment from the court. Wherever any question on a trust arises, or
wherever the appointment of a new trustee is necessary, however, the court
has jurisdiction, and any person interested in the trust can bring the matter
before the court. When a testator dies the person named as executor in the
will petitions for appointment, and unless there is some reason why he
should not be appointed he doubtless will be appointed. If there is no
executor, then the persons, or beneficiaries, interested in the estate, usually
agree on someone to administer the estate, and a petition is filed for his
appointment. The person who is next of kin, and competent to act, is
generally appointed in the absence of agreement. These officers remain in
office and retain their powers until their work is completed, unless they are
sooner removed, which they may be at any time for cause.
THEIR POWERS.—What powers do these persons have? Do they have
power to sell? We must first always look at the terms of the trust. If we are
dealing with a trustee under a will we look at the will to see what powers
the testator gave him. If we are looking at a question of a trust under a deed,
we look at the deed, and the right of an executor to sell real estate similarly
depends on whether any such power has been given him in the will. Aside
from express power given in the instrument, a trustee has no power to sell
either real or personal property unless the power is expressly given or
unless the nature of the trust is such as necessarily implies the power, and
courts are very slow in construing the existence of such power by
implication. An executor, on the other hand, since his duty is to reduce the
personal property of an estate to cash, and distribute it, has, in most States,
implied power to sell personal property. He has, however, no power to sell
real estate unless the will expressly gives such power. The court may
authorize him to sell real estate, and will authorize him, if it is necessary to
pay debts or legacies, but only in such cases unless a power is expressly
given. Trustees, executors and administrators have no power to pledge
property unless expressly given in the instrument under which they act.
They have power to make such contracts as are necessary to carry out their
trust, but only these, and even when they make such contracts they are
personally liable upon them, having, however, a right of reimbursement
from the estate which they represent. If they entered into an unauthorized
contract they would be liable upon it personally and have no right of
reimbursement.

THEIR DUTIES.—Their first duty is the care and custody of the property
in their charge. A trustee, whose duty is to hold property, is bound to keep it
invested so as to bring in an income, whereas an executor has no right to
invest funds of the estate, except under the direction of the court; if he does
so he will take the chance of loss, and the beneficiary can not only hold him
liable for loss but can also take the profit should the investment prove
profitable. The executor's duty is to reduce the property to cash and
distribute it to the proper parties. All these officers owe the same duty of
fidelity to their beneficiary that an agent owes to his principal. There is the
same duty to execute the trust personally and not delegate authority, except
in regard to ministerial or mechanical acts. There is the same duty to
account, and furthermore, the accounts of these officers, if they are
appointed by the court, must be filed in court. The trustee to carry out his
trust will ordinarily distribute the income to the persons entitled, but, of
course, trusts are of great variety, and not infrequently the object of a trust
is to accumulate the income. Whatever the terms of the trust are they must
be carried out. The duties of the executor and administrator are to distribute
the estate by paying creditors first and the surplus to legatees or the next of
kin legally entitled. They are allowed a fixed period, in many States two
years, to settle an estate.
One of the most essential duties of any fiduciary is to keep the property he
holds as a fiduciary separate and distinct from his own. This means that a
trustee or executor receiving current income must keep a separate bank
account as trustee or executor, and of course he should not draw checks on
that fund for personal debts.

CHAPTER XI
Carriers and Warehousemen
CARRIERS WHO ARE PUBLIC SERVICE COMPANIES.—Common
Carriers—that is, railroads, express companies, and other persons or
corporations who carry goods for hire and hold themselves out to the public
as engaged in the business of carrying goods for anybody for hire—are
engaged in a public service. A man who owns a tramp steamer and gets
cargoes as he can, is not engaged in a public service—he is not a common
carrier or public carrier; but a person who has a line of steamers, or even
one steamer, regularly engaged in plying between different places and
taking goods as offered for hire, is engaged in public service.
DUTIES OF ONE ENGAGED IN PUBLIC SERVICE.—Now, being
engaged in public service subjects a person or corporation who is so
engaged to some special duties. Such a person cannot make any bargain he
pleases with anybody he pleases, and refuse to make bargains with others,
as an ordinary person can. It is the duty of any one engaged in a public
service to give reasonable service to all who apply, without discrimination,
and for reasonable compensation. Of course, carriers are not the only
public-service corporations; electric light companies or gas companies or
water companies are other illustrations; but common carriers, and especially
railroads, are the most prominent public-service corporations.
RAILROAD COMMISSIONS.—Not only is there this common-law duty
to serve all without discrimination and at reasonable prices, but both the
States and the United States have established commissions to look after
railroads and other carriers to see that they properly perform their duties.
The Railroad or Public Service Commission in most States has a great
variety of powers for compelling railroads to give proper service. The chief
function of the Federal Interstate Commerce Commission originally, was in
regard to rates, but its powers have since been enlarged by legislation. The
Interstate Commerce Commission has the power concerning interstate
commerce to say whether rates and practices are reasonable. A carrier is
obliged to file with the Interstate Commerce Commission a schedule of its

rates, and regulations concerning rates, and is also required to post these
rates publicly in its stations. If anybody objects to the rates they must make
complaint before the Interstate Commerce Commission. That is the only
form of redress, and sometimes not an easy one for a person who is merely
interested in a single shipment, because the expense and delay of
proceedings before the Interstate Commerce Commission are such as to be
prohibitive, unless the complainant's financial interest in the matter is
considerable. It is common, therefore, for shippers' associations to take that
sort of question up rather than to leave it for individual shippers. Any
contract made by a carrier for either more or less than the scheduled rate is
illegal and void.
CARRIER'S COMMON-LAW LIABILITY FOR GOODS.—A carrier, at
common law, when he receives goods for transportation, is subject to a
degree of liability beyond that imposed on any other person. An ordinary
person who receives goods—a bailee, as he is called in law—is merely
liable for the consequences of his negligence. A carrier, however, while
goods are in course of transportation is liable, at common law, as an insurer
against all kinds of accidents except those caused by act of God or public
enemies. For instance, if goods were struck by lightning in transit that
would be an act of God, and the carrier would not be liable; but if goods
caught fire from any other cause, as from neglect of an outsider or the act of
an incendiary, the carrier would be liable. Carriers, of course, dislike that
and try to contract away their liability. They are allowed by law to do so,
except that they are not allowed to contract for exemption from the
consequences of their own negligence. It is largely this desire of carriers to
free themselves from the extreme liability which the common law imposes
on them, that induces them to give bills of lading. Bills of lading are often
required by law, but carriers are pleased to issue them, as they can in that
way contract to exempt themselves from this extreme liability, which lasts
while the goods are in transit and until the consignee has had a reasonable
time to remove them from the carrier's possession. If the consignee fails to
remove them with reasonable promptness the carrier then becomes liable,
merely as a warehouseman may, for its own neglect. The extreme liability
of the carrier does not extend to damage caused by delay. The carrier is
liable for delays in so far as they are caused by its own neglect, but

otherwise is not liable. A carrier need not deliver the goods unless freight is
paid, as it has a lien for freight charges.
THREEFOLD NATURE OF BILL OF LADING.—A bill of lading issued
by a carrier for goods has a threefold character. In the first place it is a
receipt. The importance of a receipt is as evidence of just what was shipped.
It is important to the shipper as proof that the carrier received goods, of
such a quantity and of such a description, in good order. It is important to
the carrier as proof of the same thing, to prevent the shipper from claiming
that he has shipped different kinds or quantities of goods from those
described in the bill of lading. The second aspect of a bill of lading is as a
contract. It is not only a receipt but a contract between the parties, the
shipper and the carrier. It is as a contract that the stipulations it contains for
limitation, of liability are important. Third, it is an order, when properly
indorsed and surrendered, for the delivery of the goods.
CARRIERS CAN DELIVER GOODS ONLY TO HOLDERS OF ORDER
BILLS OF LADING.—The thing that makes a bill of lading valuable, to
buy or lend money on, is the fact that the carrier will hold the goods behind
the bill of lading until the bill is itself presented and surrendered. If the
carrier were to deliver the goods upon demand to anybody other than the
holder of the bill of lading, it is obvious that there would not be much use in
holding the bill of lading. The carriers have made a great contest on this
question in the past. They have contended that they fulfill their duty if they
deliver the goods to the consignee originally named in the bill of lading,
whether that consignee continues to hold the documents or not. But that has
been decided against them so far as order bills are concerned (that is, bills,
which state that the goods are deliverable not simply to a consignee but to
the order of a consignee) and these order bills have printed on them the
provision that the bill itself must be surrendered before the goods will be
delivered.
CARRIERS MAY DELIVER TO CONSIGNEE OF STRAIGHT BILLS
OF LADING.—In a straight or flat bill, however (that is, one without the
word "order") the carrier's contention has been upheld and the carrier is
allowed to deliver the goods to the consignee, even though the consignee
does not present the bill of lading and for all the carrier knows is not the
owner of the bill of lading or of the goods.

BILLS OF LADING USED TO ENABLE SELLER TO RETAIN HOLD
ON GOODS.—The ways in which bills of lading may be used, and are
used, in the mercantile world, must be understood before the legal questions
which arise, concerning them, can be grasped. The primary and original
purpose of using bills of lading as symbols of the goods, was doubtless to
secure the seller in his hold on the goods until he received the price, and
that is still a vital purpose in the use of bills of lading. We have learned, in
the case of the sale of goods, that unless credit is given, the delivery of the
goods and the payment of the price are concurrent conditions. Now, when
the parties reside at a distance there is difficulty in working out these
concurrent conditions. If the seller ships the goods directly to the buyer, he
loses his hold on the goods, and if the buyer does not keep his agreement to
pay promptly, the seller will be unable to do anything about it. On the other
hand, of course, the buyer does not want to pay in advance. Now, by means
of bills of lading, the seller is enabled to keep his hold on the goods until he
receives the price, and the buyer is enabled to secure possession of the
goods as soon as he pays the price.
STRAIGHT BILLS TO BUYER GIVE THE SELLER NO HOLD ON
GOODS.—The bill of lading may be used in various ways. Suppose, first,
the seller when he ships the goods takes a straight bill to the buyer. That
will not give the seller any hold, for the carrier will be discharged if without
demanding the surrender of the bill of lading, he delivers to the consignee
named. So we may cross off that as a possible means of protecting the
seller.
STRAIGHT BILLS TO THE SELLER.—The second possibility is for the
seller to take a straight bill, naming himself as consignee as well as
consigner. If that is done the buyer cannot get the goods at once. Suppose
the bill of lading was sent forward, even that would not of itself enable the
buyer to get the goods, if the carrier wished to be technical, since in a
straight bill the goods are deliverable not to the holder of the bill, but to the
consignee named therein. There would have to be attached to the bill of
lading an order from the seller, who is named as consignee in the bill,
directing the railroad to deliver the goods to the buyer instead of to himself,
the consignee named in the bill. That would be a perfectly feasible matter,
but this method is not much used, and one reason why it is not much used is
because the seller frequently wants to do something else besides keep

control of the goods until the buyer pays for them. He oftentimes wants to
get money from a bank in the meantime.
USE OF BILLS OF LADING BY SELLER TO OBTAIN LOANS.—When
the seller is desirous of borrowing money from a bank, he takes the bill of
lading to the bank with a bill of exchange drawn on the buyer, and he asks
the bank at his home town to discount the bill of exchange, taking as
security the bill of lading. If his home bank does this, it then sends the draft,
with bill of lading attached, to its correspondent bank in the buyer's city,
where the draft is presented to the drawee, who is the buyer, and if the
buyer honors the draft then he is given the bill of lading. Now, banks would
not do this, ought not to do it (occasionally they have), with a straight bill,
even if the bill is drawn naming the seller as consignee, for the bank when it
discounts the bill of exchange and gets the bill of lading as security gets no
real hold on the goods. The railroad may deliver the goods to the consignee
—the seller—without ever seeing the bill of lading, and without the bank,
which holds the bill of lading, ever knowing anything about it; or the
railroad may deliver to the buyer or some third person on a written order
signed by the consignee. In other words, the railroad does not have to hold
the goods until the bill of lading, properly indorsed, is presented to it.
STRAIGHT BILLS OF LADING GIVE NO SECURITY TO BANK.—The
first and fundamental requirement, then, for any bank which may deal with
bills of lading is never to have anything to do with straight bills. They give
no security. A straight bill is readily distinguishable from an order bill on
railroads in most parts of the country, at least, because uniform bills of
lading are now in use, and the straight bill is always white and the order bill
is always yellow. In foreign bills a greater variety of forms are used, and
you may have to examine the terms of the bill before you can feel satisfied
that it is of a sort that will give security. The vital words in bills of lading,
as in negotiable paper, are the words, "order of" or "or order." If those are in
a bill of lading it is all right as far as this matter is concerned. Therefore the
third and fourth possible ways in which the seller may take the bill of lading
to secure himself are the only ones which will enable him to finance the
shipment at once.
BILLS OF LADING TO BUYER'S ORDER.—The third way which the
seller may act in order to fulfill his purpose is to take an order bill of lading

to the buyer's order. Although the bill of lading runs to the buyer's order,
and although, therefore, title to the goods will pass to the buyer on
shipment, the buyer cannot get the goods without that bill of lading.
Therefore, so long as the seller retains the bill of lading nobody can get the
goods from the carrier; and though the seller has parted with title to the
goods, since he made the bill of lading run to the buyer's order, still he has
retained control of them. Though it gives a security to the seller, and would
give security to the bank, if the bank discounted a bill of exchange drawn
on the buyer and took this bill of lading as security, it is not a desirable
method for this reason: though the buyer cannot get the goods without the
bill of lading, nobody else can get the goods without a lot of trouble, unless
he has not only the bill of lading but the buyer's indorsement upon it. The
bill of lading is drawn to the buyer's order, and if the buyer fails to pay and
repudiates his contract, the bank or the seller will have trouble in getting
back the goods. They will have to prove to the railroad that the buyer really
has made default and that he no longer has any real interest in the goods.
BILLS OF LADING TO THE SELLER'S ORDER.—Accordingly, it is the
fourth method which is in general use and which should be exclusively
used. The seller takes the bill of lading to his own order and indorses it in
blank; then he delivers it to his bank as security for a bill of exchange. If the
bill of exchange is paid by the drawee on presentment at his city, he is given
the bill of lading at once and he gets what he wants. On the other hand, if
the buyer does not pay the draft on presentment, then the bank can realize
on the security at once, if it wants to, because it has a bill of lading in its
hands indorsed by the consignee to whose order it was drawn. If the bank
proceeds against the seller as the drawer of the draft, when the latter pays
and takes up the bill of lading he can similarly realize on the security, or get
the goods back, because he will have a bill of lading in his possession
which runs to his own order.
BILLS OF LADING TO "ORDER NOTIFY."—A slight modification of
this form of bill of lading is made in order to let the buyer know when the
goods arrive. When goods arrive at their destination it is a customary
courtesy of railroads to notify the consignee; but if goods are consigned to
the seller's order, the man who is really trying to buy the goods gets no
notice, as his name does not appear on the bill of lading. To avoid that
difficulty there is generally put on bills of lading, taken out to the seller's