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Title: Cyclopedia of Commerce, Accountancy, Business
Administration, v. 03 (of 10)

Author: American School of Correspondence

Release date: August 3, 2014 [eBook #46489]
Most recently updated: October 24, 2024

Language: English

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*** START OF THE PROJECT GUTENBERG EBOOK CYCLOPEDIA
OF COMMERCE, ACCOUNTANCY, BUSINESS ADMINISTRATION, V.
03 (OF 10) ***

Cyclopedia
of

Commerce, Accountancy,
Business Administration

Volume 3

A General Reference Work on
ACCOUNTING, AUDITING, BOOKKEEPING, COMMERCIAL LAW,
BUSINESS
MANAGEMENT, ADMINISTRATIVE AND INDUSTRIAL
ORGANIZATION,
BANKING, ADVERTISING, SELLING, OFFICE AND FACTORY
RECORDS, COST KEEPING, SYSTEMATIZING, ETC.

Prepared by a Corps of
AUDITORS, ACCOUNTANTS, ATTORNEYS, AND SPECIALISTS IN
BUSINESS METHODS AND MANAGEMENT

Illustrated with Over Two Thousand Engravings

TEN VOLUMES

CHICAGO
AMERICAN TECHNICAL SOCIETY
1910

Copyright, 1909
BY
AMERICAN SCHOOL OF CORRESPONDENCE

Copyright, 1909
BY
AMERICAN TECHNICAL SOCIETY

Entered at Stationers' Hall, London
All Rights Reserved

Authors and Collaborators

JAMES BRAY GRIFFITH, Managing Editor
Head, Dept. of Commerce, Accountancy, and Business
Administration, American School of Correspondence.

ROBERT H. MONTGOMERY
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified
Public Accountants.
Editor of the American Edition of Dicksee's Auditing.
Formerly Lecturer on Auditing at the Evening School of Accounts
and Finance of the University of Pennsylvania, and the
School of Commerce, Accounts, and Finance of the New
York University.

ARTHUR LOWES DICKINSON, F. C. A., C. P. A.
Of the Firms of Jones, Caesar, Dickinson, Wilmot & Company,
Certified Public Accountants, and Price, Waterhouse &
Company, Chartered Accountants.

WILLIAM M. LYBRAND, C. P. A.
Of the Firm of Lybrand, Ross Bros. & Montgomery, Certified
Public Accountants.

F. H. MACPHERSON, C. A., C. P. A.
Of the Firm of F. H. Macpherson & Co., Certified Public
Accountants.

CHAS. A. SWEETLAND
Consulting Public Accountant.
Author of "Loose-Leaf Bookkeeping," and "Anti-Confusion
Business Methods."

E. C. LANDIS
Of the System Department, Burroughs Adding Machine
Company.

HARRIS C. TROW, S. B.
Editor-in-Chief, Textbook Department, American School of
Correspondence.

CECIL B. SMEETON, F. I. A.
Public Accountant and Auditor.
President, Incorporated Accountants' Society of Illinois.
Fellow, Institute of Accounts, New York.

JOHN A. CHAMBERLAIN, A. B., LL. B.
Of the Cleveland Bar.
Lecturer on Suretyship, Western Reserve Law School.
Author of "Principles of Business Law."

HUGH WRIGHT
Auditor, Westlake Construction Company.

GLENN M. HOBBS, Ph. D.
Secretary, American School of Correspondence.

JESSIE M. SHEPHERD, A. B.
Associate Editor, Textbook Department, American School of
Correspondence.

GEORGE C. RUSSELL
Systematizer.
Formerly Manager, System Department, Elliott-Fisher Company.

OSCAR E. PERRIGO, M. E.
Specialist in Industrial Organization.
Author of "Machine-Shop Economics and Systems," etc.

DARWIN S. HATCH, B. S.
Assistant Editor, Textbook Department, American School of
Correspondence.

CHAS. E. HATHAWAY
Cost Expert.
Chief Accountant, Fore River Shipbuilding Co.

CHAS. WILBUR LEIGH, B. S.
Associate Professor of Mathematics, Armour Institute of
Technology.

L. W. LEWIS
Advertising Manager, The McCaskey Register Co.

MARTIN W. RUSSELL
Registrar and Treasurer, American School of Correspondence.

HALBERT P. GILLETTE, C. E.
Managing Editor, Engineering-Contracting.
Author of "Handbook of Cost Data for Contractors and
Engineers."

R. T. MILLER, JR., A. M., LL. B.
President, American School of Correspondence.

WILLIAM SCHUTTE
Manager of Advertising, National Cash Register Co.

E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Author of "The Credit Man and His Work" and "Financial
Advertising."

RICHARD T. DANA
Consulting Engineer.
Chief Engineer, Construction Service Co.

P. H. BOGARDUS
Publicity Manager, American School of Correspondence.

WILLIAM G. NICHOLS
General Manufacturing Agent for the China Mfg. Co., The
Webster Mfg. Co., and the Pembroke Mills.
Author of "Cost Finding" and "Cotton Mills."

C. H. HUNTER
Advertising Manager, Elliott-Fisher Co.

FRANK C. MORSE
Filing Expert.
Secretary, Browne-Morse Co.

H. E. K'BERG
Expert on Loose-Leaf Systems.
Formerly Manager, Business Systems Department, Burroughs
Adding Machine Co.

EDWARD B. WAITE

Head, Instruction Department, American School of
Correspondence.

Authorities Consulted

The editors have freely consulted the standard technical and business
literature of America and Europe in the preparation of these volumes. They
desire to express their indebtedness, particularly, to the following eminent
authorities, whose well-known treatises should be in the library of everyone
interested in modern business methods.
Grateful acknowledgment is made also of the valuable service rendered
by the many manufacturers and specialists in office and factory methods,
whose coöperation has made it possible to include in these volumes suitable
illustrations of the latest equipment for office use; as well as those financial,
mercantile, and manufacturing concerns who have supplied illustrations of
offices, factories, shops, and buildings, typical of the commercial and
industrial life of America.

JOSEPH HARDCASTLE, C. P. A.
Formerly Professor of Principles and Practice of Accounts,
School of Commerce, Accounts, and Finance, New York
University.
Author of "Accounts of Executors and Testamentary Trustees."

HORACE LUCIAN ARNOLD
Specialist in Factory Organization and Accounting.
Author of "The Complete Cost Keeper," and "Factory Manager
and Accountant."

JOHN F. J. MULHALL, P. A.
Specialist in Corporation Accounts.

Author of "Quasi Public Corporation Accounting and
Management."

SHERWIN CODY
Advertising and Sales Specialist.
Author of "How to Do Business by Letter," and "Art of Writing
and Speaking the English Language."

FREDERICK TIPSON, C. P. A.
Author of "Theory of Accounts."

CHARLES BUXTON GOING
Managing Editor of The Engineering Magazine.
Associate in Mechanical Engineering, Columbia University.
Corresponding Member, Canadian Mining Institute.

F. E. WEBNER
Public Accountant.
Specialist in Factory Accounting.
Contributor to The Engineering Press.

AMOS K. FISKE
Associate Editor of the New York Journal of Commerce.
Author of "The Modern Bank."

JOSEPH FRENCH JOHNSON
Dean of the New York University School of Commerce,
Accounts, and Finance.
Editor, The Journal of Accountancy.
Author of "Money, Exchange, and Banking."

M. U. OVERLAND
Of the New York Bar.
Author of "Classified Corporation Laws of All the States."

THOMAS CONYNGTON
Of the New York Bar.
Author of "Corporate Management," "Corporate Organization,"
"The Modern Corporation," and "Partnership Relations."

THEOPHILUS PARSONS, LL. D.
Author of "The Laws of Business."

E. ST. ELMO LEWIS
Advertising Manager, Burroughs Adding Machine Company.
Formerly Manager of Publicity, National Cash Register Co.
Author of "The Credit Man and His Work," and "Financial
Advertising."

T. E. YOUNG, B. A., F. R. A. S.
Ex-President of the Institute of Actuaries.
Member of the Actuary Society of America.
Author of "Insurance."

LAWRENCE R. DICKSEE, F. C. A.
Professor of Accounting at the University of Birmingham.
Author of "Advanced Accounting," "Auditing," "Bookkeeping for
Company Secretary," etc.

FRANCIS W. PIXLEY
Author of "Auditors, Their Duties and Responsibilities," and
"Accountancy."

CHARLES U. CARPENTER
General Manager, The Herring-Hall-Marvin Safe Co.
Formerly General Manager, National Cash Register Co.
Author of "Profit Making Management."

C. E. KNOEPPEL

Specialist in Cost Analysis and Factory Betterment.
Author of "Systematic Foundry Operation and Foundry Costing,"
"Maximum Production through Organization and
Supervision," and other papers.

HARRINGTON EMERSON, M. A.
Consulting Engineer.
Director of Organization and Betterment Work on the Santa Fe
System.
Originator of the Emerson Efficiency System.
Author of "Efficiency as a Basis for Operation and Wages."

ELMER H. BEACH
Specialist in Accounting Methods.
Editor, Beach's Magazine of Business.
Founder of The Bookkeeper.
Editor of The American Business and Accounting Encyclopedia.

J. J. RAHILL, C. P. A.
Member, California Society of Public Accountants.
Author of "Corporation Accounting and Corporation Law."

FRANK BROOKER, C. P. A.
Ex-New York State Examiner of Certified Public Accountants.
Ex-President, American Association of Public Accountants.
Author of "American Accountants' Manual."

CLINTON E. WOODS, M. E.
Specialist in Industrial Organization.
Formerly Comptroller, Sears, Roebuck & Co.
Author of "Organizing a Factory," and "Woods' Reports."

CHARLES E. SPRAGUE, C. P. A.
President of the Union Dime Savings Bank, New York.

Author of "The Accountancy of Investment," "Extended Bond
Tables," and "Problems and Studies in the Accountancy of
Investment."

CHARLES WALDO HASKINS, C. P. A., L. H. M.
Author of "Business Education and Accountancy."

JOHN J. CRAWFORD
Author of "Bank Directors, Their Powers, Duties, and Liabilities."

DR. F. A. CLEVELAND
Of the Wharton School of Finance, University of Pennsylvania.
Author of "Funds and Their Uses."

THE SUPREME COURT BUILDING AT SPRINGFIELD, ILL.

Foreword

With the unprecedented increase in our commercial activities has come a
demand for better business methods. Methods which were adequate for the
business of a less active commercial era, have given way to systems and
labor-saving ideas in keeping with the financial and industrial progress of
the world.

Out of this progress has risen a new literature—the literature of business.
But with the rapid advancement in the science of business, its literature can
scarcely be said to have kept pace, at least, not to the same extent as in
other sciences and professions. Much excellent material dealing with
special phases of business activity has been prepared, but this is so scattered
that the student desiring to acquire a comprehensive business library has
found himself confronted by serious difficulties. He has been obliged, to a
great extent, to make his selections blindly, resulting in many duplications
of material without securing needed information on important phases of the
subject.

In the belief that a demand exists for a library which shall embrace the best
practice in all branches of business—from buying to selling, from simple
bookkeeping to the administration of the financial affairs of a great
corporation—these volumes have been prepared. Prepared primarily for use
as instruction books for the American School of Correspondence, the
material from which the Cyclopedia has been compiled embraces the latest
ideas with explanations of the most approved methods of modern business.

Editors and writers have been selected because of their familiarity with, and
experience in handling various subjects pertaining to Commerce,
Accountancy, and Business Administration. Writers with practical business

experience have received preference over those with theoretical training;
practicability has been considered of greater importance than literary
excellence.

In addition to covering the entire general field of business, this Cyclopedia
contains much specialized information not heretofore published in any
form. This specialization is particularly apparent in those sections which
treat of accounting and methods of management for Department Stores,
Contractors, Publishers and Printers, Insurance, and Real Estate. The value
of this information will be recognized by every student of business.

The principal value which is claimed for this Cyclopedia is as a reference
work, but, comprising as it does the material used by the School in its
correspondence courses, it is offered with the confident expectation that it
will prove of great value to the trained man who desires to become
conversant with phases of business practice with which he is unfamiliar,
and to those holding advanced clerical and managerial positions.

In conclusion, grateful acknowledgment is made to authors and
collaborators, to whose hearty coöperation the excellence of this work is
due.

Table of Contents

(For professional standing of authors, see list of Authors and Collaborators in front of volume.)

VOLUME III
Law of Contracts and Agency By John A. Chamberlain Page 11
Law in General—Contracts—Consideration—Revocation—Illegal Contracts—
Mistake—Assignments—Discharge of Contract—Warranty—Recision—
Remedies for Breach—Forms of Contracts—Appointment of Agents—Sub-
Agents—Factors—Brokers—Auctioneers—Real Estate Brokers

Law of Partnership and
Corporations By John A. Chamberlain Page 77
Creation of Partnership—Agreements—Rights and Liabilities—Change of
Membership—Survivorship—Dissolution—Powers of Corporations—Capital
Stock—Calls and Assessments—Watered Stock—Common and Preferred Stock
—Dividends—Officers and Agents

Law of Negotiable
Instruments, Banking, and
Insurance By John A. Chamberlain Page 112
Negotiability and Assignability—Law Merchant—Notes, Drafts, Bills of
Exchange, and Checks—Bonds—Indorsement—Forgery—Fraud and Duress—
Consideration—Defences—Dishonor and Protest—Functions and Powers of
Banks—Deposits—Loans and Credits—Discount—Exchange—Interest—
Insurance Contracts—Policies—Suretyship—Subrogation—Indemnity

Law of Sales, Mortgages, and
Carriers By John A. Chamberlain Page 179

Sale, Barter, and Bailment—When Title Passes—Effect of Fraud—Warranties—
Seller's Lien—Title to Property Bailed—Degree of Care Required—Pledges—
Collateral Securities—Redemption—Mortgages—Form of Mortgages—
Foreclosure—Title to Goods after Delivery—Stoppage in Transitu—Interstate
Commerce Act—Passengers—Baggage

Law of Real Property By John A. Chamberlain Page 236
Crops and Emblements—Party Walls—Fixtures—Fences—Private Ways and
Highways—Varieties of Estates—Waste—Deeds—Possession—Deeds and
Mortgages—Transfer of Mortgages and Mortgaged Premises—Satisfaction—
Redemption—Foreclosure—Parties to Trusts—Varieties of Trusts—Rights of
Tenant—Rent—Distress—Leases—Actions for Possession—Trade Marks

Law of Wills and Legal
Actions By John A. Chamberlain Page 287
Parties and Terms in Wills—Publication—Revocation and Alteration—
Advancement, Abatement, and Ademption—Form of Wills—Varieties of Courts
—Legal Actions and Their Enforcement

Index Page 311

THE BUILDING OF THE LAW SCHOOL OF THE UNIVERSITY OF
CHICAGO

COMMERCIAL LAW

PART I

LAW IN GENERAL

1. Rights. Men are endowed with certain individual rights. These rights
are principally of two classes, personal and property. Men have the right to
live in peace and quietude. In so far as it does not interfere with the same
privilege on the part of others they have the right to be unmolested in the
pursuit of happiness. They have the right to defend themselves against the
attacks of others, to satisfy bodily hunger and thirst, and to preserve their
bodies in health and strength.
Besides these personal rights, men have the right to acquire and keep
property. This right is also subject to the limitation of not interfering with
the same privilege on the part of others. Men have the right to acquire
property, both chattel and real. For the purpose of rendering their existence
and enjoyment secure, they have the right to keep the title and possession of
this property in themselves.
In primitive times, property rights were few. Personal rights were
recognized and enforced by might. As the requirements of civilized life
became more complex, property rights were needed and recognized. Rules
of conduct and rules for the holding and transfer of property were
recognized and enforced. Might ceased to be the principal method of
enforcing rights. Rules began to be recognized and enforced with regard to
persons and property. These rules are known as laws.

2. Law. Law may be defined to be a rule of human conduct. It may be
said to embrace all rules of human conduct recognized by courts of law.
Laws are necessary to enable men to enforce and enjoy their rights, both
personal and property. Customs of men become rules by which human
affairs are regulated. Men may disagree as to what their rights are, or as to
their exact scope or limitations. In this event, rules of conduct or laws must
determine their scope and limitations. Disputes among men arise about their
personal or property rights. The rules recognized by the courts in settling
these disputes are laws. These rules or laws relate both to persons and
property. A law which prohibits murder is a rule by which the state protects
the lives of its citizens; a law which prohibits theft is a rule for the
protection of property.
3. Sources of Law. Law is derived from the customs of the people and
from the written declarations or agreements of the people or their
representatives. The customs of the people, constituting a large part of our
law, are found principally in the decisions of courts. Each state of this
country prints and keeps a permanent record of at least the most important
decisions of its court of last resort. Many decisions of lower courts are
printed and preserved. Every law library of importance has the printed
reports of the supreme court of each state of this country; as well as the
reports of the higher courts of most of the countries where the English
language is spoken or officially recognized. The reports of the higher courts
of England, Ireland, Canada, Australia, and of many of the island
possessions of this country and of England, are found in most law libraries.
The second source of law is the written declaration of the people or their
representatives. These declarations consist of legislative acts, treaties and
constitutions. In this country, legislative acts may be either national or state.
Many statutes are nothing more than recognized customs enacted into
written laws. Other statutes are variations or restrictions of recognized
customs. National legislative acts are numbered consecutively, printed and
bound into volumes known as the Federal Statutes. Each state numbers its
statutes consecutively and prints and binds them into volumes known as the
State Statutes.
4. Divisions of the Law. There are two great divisions of the law,
written and unwritten. The greater portion of the law consists of the
customs of the people, as evidenced and preserved by the written decisions
of the courts. These customs, to be recognized as law, need not be found in

written decisions, but the most important ones have become embodied
therein. New customs are necessary and are recognized to meet new and
changing conditions. These new customs are continually adding to our
unwritten law. While this great portion of the law is called unwritten law,
the greater portion of it actually is in writing, and is preserved in permanent
form by our court reports, both national and state.
The second division of law is known as written law. It consists of
treaties, constitutions, and legislative acts. Treaties are international
compacts. Legislative acts are the laws passed by the people or their
representatives. In this country they consist of the laws passed by the
United States Congress, and by the representative bodies of each state.
Constitutions, in this country, consist of the State Constitutions and the
United States Constitution. In England the constitution is not written, but is
a part of the unwritten law of the land.
5. Classification of Law. A number of useful classifications of the law
are recognized. Any classification is more or less arbitrary, and no
classification has been recognized universally.
Law may be classified as public, administrative, and private. Public law
embraces the law of nations, called international law; the laws regulating
the enforcement and recognition of constitutional provisions, called
constitutional law; and the laws protecting citizens against the actions of
dangerous characters, called criminal laws.
The public as a unit is said to be interested in public law. Public laws
are recognized and enforced in theory, at least, for the benefit of the public
and not for any particular individual. For example, if a murder is
committed, the state through its officers prosecutes and punishes the
criminal on the theory that a wrong has been done the state. The heirs or
representatives of the person murdered can sue and recover money
compensation, called damages, from the murderer, but the state punishes
the criminal. This work does not treat of public law.
Administrative law, sometimes called Law of Procedure, embraces the
rules and regulations relating to the enforcement of personal and property
rights. The laws relating to courts, the method and manner of starting legal
actions, the trial of cases, and the rendering and enforcement of judgments
are common examples of Administrative Law. Private law embraces the
law of contracts and of torts.

Contracts consist of agreements of every nature. The great majority of
dealings of men are carried out by means of contracts. This is the most
important, as well as the most extensive subject known to the law.
Torts embrace all private wrongs not arising out of contracts. Any injury
inflicted by one person upon the person or property of another, which is not
a breach of contract, is a tort. Tort is the French word for private wrong. If
A carelessly drives his automobile into B's wagon, he commits a tort. If A
carelessly drives his horse over B's field, he commits a tort. If A wrongfully
strikes B, he commits a tort. Torts and crimes frequently over-lap. The same
act may constitute a tort and a crime. If A drives his automobile faster than
the laws of the state or city permit, and while so doing runs over and injures
B, he commits both a tort and a crime. He is liable to the state for
imprisonment or fine for the crime, and he is liable to B in money for
damages for the tort.
The same act may constitute a crime, a breach of contract, and a tort. If
A, engaged as a chauffeur to operate an automobile carefully and skillfully,
violates the speed law, and in so doing runs over and injures B, he commits
a crime and is liable to the state for punishment or fine. He is also liable in
damages to B for the tort committed, and is liable in damages to his
employer for breach of contract. This work has largely to do with the law of
contracts and torts.
The term Commercial Law, applied to this work, is a term used
arbitrarily to embrace the laws relating to commercial affairs. It has no
distinct place in the general classification of law.

CONTRACTS

6. Contract, Defined and Discussed. A contract has been defined to be
an agreement between two or more competent parties, enforceable in a
court of law, and based upon a sufficient consideration, to do or not to do a
particular thing.
The law relating to contracts is the most important, as well as the most
extensive, branch of commercial law. It touches, directly or indirectly, most
of the dealings of men. It is the legal basis of all business transactions.

In the daily routine of their life, most families make many contracts. By
reading the morning paper left at his door, a person impliedly agrees to pay
the publisher the customary price. By ordering the daily supply of groceries
by telephone, the housewife impliedly contracts to pay for their value, upon
delivery, or at the customary time of payment. By purchasing a number of
car tickets from the street car conductor, a person makes a contract. By
ordering a lunch, a person impliedly agrees to pay the customary price. In
the more important business transactions, formal contracts are written out
and signed. In these transactions the parties endeavor to define their duties
and obligations clearly and expressly, in order that they may understand
each other and in order that neither can dishonestly claim that the contract
contains a certain provision or condition. Contracts are legal or illegal, void
or voidable, depending upon their form and nature. An understanding of the
necessary elements of valid contract is the foundation, to the understanding
of commercial law.
7. Offer, Acceptance and Agreement. To constitute a transaction a
valid contract, there must be an offer on the one hand, and an acceptance on
the other. This necessitates at least two parties to every contract. One must
make a proposition, the other must accept it. The acceptance must be of the
exact terms of the offer, to constitute a legal acceptance. If the attempted
acceptance is not made in the precise terms of the offer, it constitutes a
counter offer, which, to constitute a contract must, in turn, be accepted by
the original offeror.
If A offers B one hundred dollars for B's horse, and B in turn agrees to
take one hundred dollars, the transaction constitutes a valid contract. If A
offers B one hundred dollars for B's horse, and B in turn offers to sell the
horse for one hundred and twenty dollars, the transaction does not
constitute a contract, for the reason that A's offer has not been accepted. B,
however, makes a counter offer, which if not assented to by A, constitutes
no contract. If, however, A agrees to accept B's offer to sell the horse for
one hundred and twenty dollars, this constitutes a valid contract, in which B
is the offeror and A the acceptor. These counter offers in response to offers
may go on indefinitely without constituting contracts. So long as the
response to the offer varies the terms of the offer, it constitutes a counter
offer, and not an acceptance. To constitute an acceptance, the exact terms of
the offer must be agreed to.

Courts lay down the principle that there must be a meeting of the minds
of the contracting parties, to constitute the transaction a valid contract. This
means that the offer must be accepted in its precise terms. The minds of the
contracting parties cannot meet, unless the acceptance is of the exact terms
of the offer. This principle is sometimes called mutuality. An acceptance
must be communicated to the offeror. A mere mental operation, or an
attempted acceptance, not communicated to the offeror, does not constitute
a legal acceptance.
The offer, or acceptance, may be in the form of an act as well as by
verbal or written communication. If a person orders a barrel of flour of his
grocer, the order constitutes the offer, and the delivery of the flour and the
receipt of same by the purchaser, constitutes the acceptance. The purchaser
is bound to pay the market price for the flour, regardless of the fact that the
price has not been mentioned.
An offer can be recalled at any time before acceptance. To recall an
offer, the offeror must communicate his intention so to do, to the acceptor
before acceptance. Agreements to hold offers open for a stipulated time are
recognized. These options are, in themselves contracts, and to be binding
must contain all the essential elements of a contract.
An offer which has been accepted constitutes an agreement. An
agreement, as the word suggests, means a meeting of the minds of two or
more parties. The word is frequently used as synonymous with contract, but
it is merely an element of a contract. While there must be an agreement in
every contract, an agreement of itself does not constitute a contract. There
may be an agreement between persons under legal age, but this agreement
does not constitute a contract.
Besides an agreement, or meeting of the minds, a contract must have
competent parties, a legal valuable consideration, and a lawful object. These
are often called the elements of a contract.
8. Parties to a Contract. A contract must have at least two competent
parties. Each party to a contract may consist of one or more persons.
To be competent to make a contract, a party must be of legal age. Legal
age is twenty-one years for males, and ordinarily, eighteen for females.
Legal age is fixed by statutes of the different states. These statutes differ
somewhat as to the legal age of females. Some fix it at twenty-one, others at
eighteen, and some even younger than eighteen, in case of marriage.

Intoxicated persons, insane persons and idiots are not competent to make
contracts. Artificial persons or corporations can make contracts within the
scope of the powers given them by the state.
A person who does not voluntarily consent to the terms of a contract is
not a party to it. Where fraud or duress is used in obtaining a party's consent
to a contract, the contract is at least voidable. It is not enforceable if the
defrauded party objects on that ground.
9. Consideration. Consideration may be good or valuable. Good
consideration consists of love and affection existing between near relations.
Good consideration is a sufficient consideration to support a deed given by
one relative to another. But this is the only kind of contract supported by a
good consideration.
Valuable consideration has been defined to consist of some right,
interest, profit or benefit, accruing to the promisor, or some forbearance,
detriment, loss or responsibility, given, suffered or undertaken by the party,
to whom the promise is given. In short it is a benefit to the promisor, or a
detriment to the promisee. All contracts, with the exception of sealed
instruments, must be supported by a valuable consideration. Sealed
instruments, except where abrogated by statute, import a consideration.
A promises to sell his watch to B for ten dollars. B accepts the offer by
offering to pay A ten dollars. There is a valuable consideration, consisting
of B's promise to pay A ten dollars.
A promises B two dollars if B will guard A's house for two hours. There
may be no actual benefit resulting to A, since it may have been unnecessary
to have the house guarded. But if B guards the house for two hours, A is
legally bound to pay him the contract price of two dollars. The valuable
consideration is the detriment or responsibility of B in guarding the house
for two hours.
Mutual promises constitute a valuable consideration. If A promises B
two dollars if B will work for him next Thursday, and B promises A to work
for him next Thursday, the contract is mutual, and is supported by a
valuable consideration. The consideration consists of the promise on the
part of each of the contracting parties.
A past consideration will not support a contract. By a past consideration,
is meant a benefit received in the past, for which no legal liability was
incurred or exists. A gives B, his son, five hundred dollars. One year later,

in consideration of the past gift, B promises to construct a dam for A. The
consideration is past and does not support the attempted contract.
A consideration, to be valuable and sufficient to support a contract, need
not be adequate. A mutual promise, no matter how slight or trivial, or the
payment of anything valuable to the promisor, is sufficient. Sometimes the
inadequacy of the consideration tends to prove fraud in the making of the
contract. When it is sought to avoid a contract on the ground of fraud, the
inadequacy of the consideration may be considered in connection with the
question of fraud. When fraud does not enter into the question, adequacy of
the consideration is not questioned.
A sells B one hundred acres of land. The deed recites a consideration of
one dollar. The deed of transfer is good and the smallness of the sum named
does not affect the contract.
A promise to do something which one is already legally bound to do
does not constitute a valuable consideration to a contract. A owes B one
hundred dollars upon a promissory note. The note is past due and A fails to
pay it. A promises to pay the note within ten days, on condition that B
promise to give A a barrel of apples. B agrees. A cannot compel B to deliver
the barrel of apples, nor has A any defense to the payment of the promissory
note, since his promise to pay the note was a promise to do something he
was already bound to do.
An illegal consideration does not support a contract. Any consideration
contrary to established law is illegal. A promising to pay B one thousand
dollars if B will burn C's barn is an example of illegal consideration.
10. Express and Implied Contracts. Some contracts expressly set forth
the exact terms and conditions to be performed by both the contracting
parties. For example, A makes a contract with B, by the terms of which, B is
to construct a house for A. The contract is carefully prepared in writing, B is
to receive five thousand dollars ($5,000.00) when the house is completed,
and the contract contains provisions as to the details of the work and
materials. Such a contract is called an express contract by reason of the
terms having been expressly agreed upon by the parties. A contract need not
be in writing to be express. The parties may enter into an express contract
orally as well. Few contracts are made, however, in which some things are
not implied. For example, in the contract for the building of a house it is
practically impossible, or at least, is impracticable, to set forth in exact

detail all the duties of the builder. For example, it would be unnecessary to
give the size of the nails and number or quantity of same to be used. The
contract impliedly requires the builders to use the proper size and quantity.
A contract, however, in which the parties endeavor to set forth the principal
things to be done, is known as an express contract.
An implied contract is one in which the parties do not expressly agree
upon some of the important terms. A, a contractor, orders of B one thousand
feet (1,000 ft.) of No. 1 white pine ship lap siding. The price is not
mentioned. B delivers the lumber and A by implication is obliged to pay B
the reasonable value thereof. The greater portion of business contracts are
implied. An implied contract should not be confused with uncertain
contracts. Uncertain contracts are void by reason of their uncertainty. A
offers B one thousand dollars for five acres of land. B accepts the offer. In
case the parties had no particular five acres of land in mind, the contract is
void by reason of this uncertainty. The parties' minds did not meet on the
question of what particular piece of land was to be transferred. In most
implied contracts the article to be delivered is a part of a large quantity, and
the particular part does not matter. Articles ordered from stock, such as
groceries, shingles, slate, cement and lumber are common examples of this
principal.
11. Unilateral and Bilateral, Executory and Executed Contracts.
The mutuality or meeting of the minds, constituting one of the essential
elements of the contract, may result from an express promise for a promise,
or from an act performed in response to a promise. A promises to sell his
automobile to B on the following day for five thousand dollars ($5,000.00).
B promises to pay A five thousand dollars ($5,000.00) the following day.
The mutuality consists of the mutual promises of A and B. Such contracts
are known in law as bilateral contracts.
A promises to pay B one thousand dollars ($1,000.00) if B will move his
house to the rear of A's lot. B, without promising to do so, moves the house.
This act on the part of B constitutes the acceptance of the contract and
completes the mutuality. Such contracts are known in law as unilateral
contracts.
A contract to be performed in the future is known as an executory
contract. A promises to pay B seventy-five dollars, if he will work on A's
farm during the month of August of the following year. B accepts A's offer

and promises to work for A as proposed. The contract is to be performed at
a subsequent date, and constitutes an executory contract.
An executed contract is one which is performed. A promises to sell his
bicycle to B for fifty dollars ($50.00); B pays the fifty dollars ($50.00) to A
and receives the bicycle. This contract is executed.
A contract may be executed as to one party and executory as to the
other. If A agrees to sell and deliver his team of horses to B for five hundred
dollars ($500.00) and B pays A five hundred dollars ($500.00) but A does
not deliver the team to B, the contract is executed as to B and executory as
to A.
12. Contracts of Infants. A person under legal age is known in law as
an infant. The legal age is fixed by statute in the different states. In most
states this age is twenty-one for males and eighteen for females. In some
states the legal age for females is under eighteen in case of marriage.
An infant's contracts are voidable. Voidable does not mean that the
contract is illegal. It is not contrary to law for an infant to make contracts.
He may lawfully make them. The law will not compel him to carry them
out. He may carry them out voluntarily if he chooses.
A competent party, contracting with an infant cannot avoid the contract
on the general ground of the infancy of the other party to the contract. The
infant, however, may avoid the contract by reason thereof.
An infant may ratify his contract after becoming of legal age. This
ratification is effected by the infant's accepting benefits under the contract
after attaining his majority. Ratification may also be effected by an infant
after he has reached his majority by promising to carry out the contract. To
have such a promise amount to a ratification the infant must make the
promise with knowledge that he may avoid the contract if he chooses.
An infant is liable on his contracts for necessaries. Necessaries is a
variable term, depending upon the social position of the infant. Those
articles essential to the health and sometimes to the comfort of the infant are
considered necessaries. Food and clothing are the most common examples.
A person selling an infant necessaries, cannot recover in excess of their
reasonable value regardless of the contract price, and cannot recover at all,
if the infant is already supplied. Most courts hold that a party selling
necessaries to an infant must determine at his peril that the infant is not

supplied. Articles which would be luxuries for one infant, might be
necessaries for an infant accustomed to wealth.
An infant is not entitled to his wages unless he has been emancipated.
The father or guardian is entitled to the wages. Emancipation may be by
written declaration to that effect, on the part of the father. It may also be
implied from the refusal or failure on the part of the father to treat the infant
as his child.
13. Novation and Contracts for the Benefit of Third Persons. If A
owes B one hundred dollars ($100.00) and B owes C one hundred dollars
($100.00), the three parties may agree that A may pay C one hundred
dollars ($100.00), discharging the indebtedness of both A and B. This
contract is valid in law, and is called novation.
Much of our common or unwritten law was taken from the common law
of England. The common law of England did not permit a third party, for
whose benefit a contract was made, to enforce the contract. For example, if
A and B enter into a contract by which A is to pay C some money, C cannot
enforce the contract. This kind of a contract is commonly known as a
contract for the benefit of a third person. With a few exceptions, the states
of this country refuse to follow the English doctrine. The general American
doctrine is that a third party may enforce a contract made for his benefit.
For example, A, a furniture dealer was indebted to B for a bill of goods; C
purchased A's business, and in a formal written contract, as part of the
consideration, agreed to pay B the amount of A's bill. After the transfer of
the business, A became insolvent and B, learning of the contract between A
and C, sued C thereon and was permitted to recover. The general American
doctrine will not permit two parties, making a contract for the benefit of a
third, to rescind or avoid the contract after the third party has been notified
of it, and has assented thereto. Of course, two parties cannot bind a third
party to perform any condition of a contract without his consent. This
would violate some of the fundamental principles of contracts. There would
be no consent, no meeting of the minds, and sometimes no consideration.
14. Contracts of Insane Persons, Idiots, and Drunkards. An insane
person, or one that does not understand the nature of the contract in
question, is not bound by his contracts. He may avoid them. Like an infant,
he may ratify them when he becomes sane, if he chooses. Statutes of all the
states provide for the determination of insanity by judicial decree. Such a

judicial determination is presumed to give notice to all. An idiot's contracts
are the same as an insane person's.
A drunkard can avoid a contract made while he was intoxicated, and if
the drunkenness amounts to insanity, it is regarded in law as such. Contracts
made by a drunkard when not drunk, or by a lunatic during a lucid interval
are valid and binding.
15. Contracts of Married Women. At common law, upon marriage, the
wife lost her legal identity in her husband. Her estate became his, her
personal property became his, and she could not thereafter enter into any
legal obligation. The statutes of the states generally at the present time
permit a married woman to contract as independently as a man, relative to
her separate estate. In some states there are a few limitations, such as
contracting directly with her husband or as surety for her husband.
16. Custom and Usage as Part of a Contract. Parties may enter into
any contracts they choose, so long as the terms are legal. If parties expressly
agree, either orally or verbally, on the precise terms of a contract, these
terms cannot be varied by usage or custom. Usage and custom may be used,
however, to explain the intent of the parties. Merchants and traders
recognize various trade customs, without which it would be impossible to
interpret their contracts. For example, A ordered five thousand barrels of
cement of B, at eighty-five cents a barrel, to be delivered in sacks F. O. B.
Mill. In a suit for the purchase price, the court permitted B to show that
there was a well-known custom in the cement trade to add to the invoices
forty cents per barrel for sacks, making the invoice selling price of the
cement and sacks one dollar and twenty-five cents ($1.25) per barrel.
To constitute a part of the contract, usage and custom must be of such a
general nature as to be considered within the contemplation of the parties.
17. Contracts in Writing. Parties may make contracts verbally, as well
as in writing. A contract is not illegal because it is verbal. It is good
business policy to make important contracts in writing. Their terms are
easily proven. There is not the temptation to attempt to vary the terms.
Parties cannot claim they did not understand each other. It may be laid
down as a general rule that oral contracts are as legal as written ones. By
the term, legal is meant that the law does not prohibit them. Parties may
lawfully make oral contracts, and carry them out if they choose. Some
contracts, however, are not enforceable at law unless in writing. These

contracts are legal. Parties may lawfully make them and voluntarily carry
them out, but they cannot invoke the aid of the law in enforcing their terms.
18. Statute of Frauds. The class of contracts, required by law to be in
writing in order that they be enforceable, is said to be within the Statute of
Frauds.
The Statute of Frauds originated in England in 1677. It was passed for
the purpose of preventing frauds and perjuries. It required that certain
important contracts must be made in writing, in order to be enforceable at
law. The purpose of the statute was to remove the temptation of fraud and
perjury in connection with the making and enforcing of certain contracts.
Two sections of the English statute apply especially to contracts; the fourth
and the seventeenth. The fourth section is as follows:
"No action shall be brought whereby to charge any executor or administrator, upon any
special promise to answer damages out of his own estate; or whereby to charge the
defendant upon any special promise, to answer for the debt, default, or miscarriage of
another person; or to charge any person upon any agreement made upon consideration of
marriage; or any contract or sale of lands, tenements or hereditaments, or any interest in or
concerning them; 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 other person thereunto by him lawfully authorized."

The seventeenth section of the English Statute of Frauds is as follows:
"No contract for the sale of any goods, wares, or merchandise for the price of ten
pounds sterling or upwards, shall be allowed to be good except the buyer shall accept part
of the goods so sold, and actually receive the same, or give something in earnest to bind the
bargain, or in part payment, or some note or memorandum in writing of the said bargain,
be made and signed by the parties to be charged by such contract or their agents thereunto
lawfully authorized."

The English Statute of Frauds has been enacted in substance in all the
states. Reduced to single propositions the statute provides:
1. That an executor or administrator shall not be bound by contract to
pay damages out of his own estate, unless the contract be in writing.
For example, A is executor of B's estate. C is a creditor of B. A orally
promises C to pay B's debt. This contract is not enforceable because not in
writing.
2. A party promising to answer for the debt, default or miscarriage of
another, shall not be bound unless the contract is in writing.

For example, if A owes B $100 and C promises B to pay A's debt, the
contract is not enforceable if not in writing. This clause of the statute is
discussed more at length in the chapter on suretyship.
3. A contract made in consideration of marriage is not enforceable
unless made in writing.
For example, A orally promised B that if he would marry her, she would
convey to him her farm. B married A, but could not enforce the contract. A
promise to marry is not within this section of the statute.
4. Any contract or sale of lands must be in writing to be enforceable.
For example, A orally promises B to sell his house and lot for ten
thousand dollars ($10,000.00). The contract is not enforceable. Most of the
states do not require that leases of less than a year's duration be in writing,
to be enforceable.
5. An agreement, not to be performed within the space of one year, must
be in writing to be enforceable.
For example, A orally promises to work for B as sales agent for three
years. This contract is not enforceable.
6. No contract for the sale of goods the price of which exceeds fifty
dollars ($50.00) shall be enforceable unless made in writing.
This provision of the English Statute has not been reënacted by all the
states. About half the states do not require that contracts for the sale of
personal property shall be in writing, regardless of the price involved. Some
of the states fix the price as high as two hundred dollars ($200.00) and
others, as low as thirty dollars ($30.00).
The details of the entire contract need not be in writing to satisfy the
provisions of the statute. A memorandum embodying the substance of the
agreement, showing the consideration, and signed by the party to be bound,
or by his authorized agent, is sufficient.
Contracts called specialties, have to be in writing, regardless of the
Statute of Frauds. The most common examples are bills and notes, drafts
and checks. These special contracts are made to circulate as money, and
must be reduced to writing to be enforceable. There can be no such thing as
an oral check, or draft, or promissory note. The oral contract for which they
are given may be enforced, if not within the provisions of the Statute of
Frauds.

19. Contracts by Correspondence and Telegraph. Parties need not
meet personally to enter into contracts. They may legally make them by
telegraph or by letter.
It is well settled by the courts that a party may make an offer by letter,
and that in so doing he impliedly gives the party addressed, the right to
accept by letter. In law, the contract is complete the moment the letter of
acceptance is mailed, regardless of its ever being received.
The offeror may stipulate in his offer by letter, that the contract shall not
be made until he is in receipt of a reply. In this event, the acceptor's letter
must actually be received by the offerer, before the contract is complete.
But if no such stipulation is made, the contract is complete when the letter
of acceptance is mailed.
If no time for acceptance is stipulated in the offerer's letter, the acceptor
has a reasonable time in which to accept. What is a reasonable time,
depends upon the nature of the transaction, and the circumstances
surrounding it. If the offeror stipulates in his letter that the offer must be
accepted by any stipulated time, the offer, of itself, lapses at the expiration
of that time. If A mails a letter to B, offering to sell one hundred bushels of
wheat for one hundred dollars ($100.00), and the following day B mails a
letter, properly addressed, postage prepaid, to A, accepting the offer, and the
letter is lost, the contract is complete and B may recover from A thereon.
If A, by letter offers to sell B one hundred bushels of wheat for one
hundred dollars ($100.00), the offer to remain open until Thursday, and B
mails his letter of acceptance Wednesday, and the letter is lost, the contract
is binding and A is liable thereon. If A by letter offers to sell B one hundred
bushels of wheat for one hundred dollars ($100.00), the offer to be accepted
upon receipt of B's reply, and B's reply is lost in the mails, there is no
contract.
20. Revocation. It is a well recognized principle of contracts that an
offer may be revoked, or withdrawn, at any time before acceptance. In case
of revocation by mail, however, the letter of revocation must be received by
the acceptor, before he has mailed his letter of acceptance. For example, A
mails B a letter offering to sell B one hundred bushels of wheat for one
hundred dollars ($100.00). B mails his letter of acceptance. By the next mail
B receives a letter of revocation. The contract is valid since the letter of
revocation was not received, until after the letter of acceptance was mailed.

The only offers that cannot be withdrawn at any time before acceptance,
are what are known in law as options. Options are contracts to keep an offer
open for a stipulated length of time. They require a consideration, an
agreement and all the elements of an ordinary contract. They are contracts.
A agrees by letter to sell B one hundred bushels of wheat, and to keep the
offer open three days. On the second day, and before B has mailed his
acceptance, B receives a letter from A, by which A withdraws his offer. B
cannot now accept A's offer, since there was no consideration for A's
promise to keep the offer open three days.
A writes B, offering to sell him one hundred bushels of wheat for one
hundred dollars ($100.00), and to keep the offer open for ten days. B writes
A that he will give him $2.00 if he will keep the offer open ten days. A
accepts the offer. On the sixth day B receives a letter from A revoking the
offer to sell, and on the following day B mails his letter of acceptance.
There is a valid contract in this case, since B had a contract with A based on
a valuable consideration to keep the offer open ten days.
Contracts by telegraph are analogous in principle to contracts by letter.
An offer by telegraph impliedly authorizes the receiver to accept by
telegraph and the offer is accepted when the reply message is deposited
with the operator. If lost, or not sent, the contract is not affected in the least.
21. Contracts under Seal. Formerly, at common law, contracts under
seal were frequent. At the present time few contracts are made under seal.
Originally a seal was an impression made in wax placed on a written
document. Sealed instruments differ from other written instruments in that
they import a consideration. At common law, no consideration need be
proven to a sealed instrument. Formerly, private seals were in common use.
Later, a scroll made with the pen or a line or any mark designated as a seal
was sufficient.
Private seals have been abolished by statute in many of the states, so
that their use is now limited. The modern tendency is not to use sealed
instruments, or when used, to regard them as different in no respect from
other contracts.
22. Sunday Contracts. All the states of this country have statutes
prohibiting the transaction of business on Sunday. These statutes are based
on "the Lord's Day Act" of England. The English statute provides that
persons shall not do or exercise any worldly labor, business or work of their

ordinary callings, upon the Lord's Day, or any part thereof, works of
necessity and charity only excepted.
While the statutes of the different states differ in details, they are based
upon the English statutes. Under the English statute, it is difficult to
determine in many cases what constitute "works of necessity and charity."
The duties of clergymen, physicians and of nurses clearly are covered. It is
sometimes stated that a person cannot make contracts, within the ordinary
scope of his customary business, on Sunday. This is true, if it does not relate
to charity or necessity. Deeds, notes and ordinary contracts, made and
delivered on Sunday are void. Subscriptions for church funds may legally
be made on Sunday.
23. Illegal Contracts. A contract prohibited by law, or made for the
purpose of doing something prohibited by law, is illegal, and void. If A
promises B one hundred dollars ($100.00) if B will poison C's horse, the
contract is contrary to law and illegal. If B poisons C's horse, he cannot
recover the one hundred dollars ($100.00) from A.
Contracts which are against public policy are illegal and void. Public
policy means the public welfare. Marriage brokerage contracts and
contracts in restraint of trade come within this provision. Lobbying
contracts, contracts to influence votes, and for railroad rebates are against
public policy and void.
24. Wagering or Gambling Contracts. In England, at common law,
wagering or gambling contracts were valid. Gambling contracts were
recognized as legal by some of the states at one time. At the present time,
by statute the states declare gambling contracts illegal and void.
A contract for the sale of goods, to be delivered in the future, even
though the seller does not have possession of the goods at the time the
contract of sale is made, but expects to purchase them from a third person,
is not regarded as a gambling contract, and is valid.
Contracts for the purchase of stocks or goods in which there is no
expectation to deliver, but simply an agreement to pay the difference in
price at a certain date according to the state of the market, are gambling
contracts, and void.
25. Fraud and Duress. Fraud may be said to be misrepresentation of a
material fact, known by the party making the misrepresentation to be false,

and made for the purpose of influencing the other party to the contract, and
acted upon by the other party to his detriment.
For example, A offers to sell B a horse for two hundred and fifty dollars
($250.00). He tells B the horse is sound, knowing that the horse has a
disease which renders him worthless. He makes the representation of
soundness for the purpose of inducing B to buy. B relies upon the
representation, purchases the horse, and afterwards discovers the worthless
condition of the horse. B can return the horse and recover the purchase
price. This is known as rescinding a contract on the ground of fraud.
A fraudulent contract is not void, but voidable. The defrauded party may
avoid the contract if he chooses, but the contract itself, is not without effect,
simply by reason of the fraud.
A mere failure to disclose facts or conditions, if not accompanied by
active measures to distract the defrauded party's attention from the thing to
be concealed, ordinarily does not amount to fraud.
If one party by means of threatened or actual violence compels another
to enter into a contract, or to part with something of value, the contract is
said to have been obtained by duress. Such contracts may be avoided by the
injured party, who may recover what he has lost.
A, a police officer, wrongfully arrests and imprisons B and releases him
only after B has signed a promissory note for one hundred dollars
($100.00). A cannot recover on the note.
A, who is superior in physical strength to B, by threats of personal
violence, compels B to admit that he is indebted to A for one hundred
dollars ($100.00), which B pays A. B may recover the money from A. The
contract is voidable on account of duress.
26. Mistake. One of the essential elements of a contract is that there
must be a meeting of the minds of the contracting parties. If there is a
mutual mistake on the part of the contracting parties, their minds do not
meet and no contract results. A offers to sell B his farm for five thousand
dollars ($5,000.00). A has two farms. A has one in mind, and B the other.
Their minds do not meet and there is no contract.
A mistake as to the legal effect of a contract does not avoid it. This is
known as a mistake of law.
A mistake on the part of one of the parties only, ordinarily does not
avoid the contract.

27. Impossible Contracts. Parties may enter into any kind of a contract
they choose, so long as the provisions and conditions are legal. As a general
rule, a party is liable in damages to the other party, for failure to observe
and carry out the terms of his contract. There is, however, a class of
contracts, known in law as impossible contracts. Many contracts are made
upon the assumption that the persons making the contract, or the particular
thing under consideration will continue to exist until the contract is
performed.
A agrees to paint a picture for B, for one thousand dollars ($1,000). A
fails in health or dies. A or his estate, is not responsible in damages to B,
since the contract contemplated A's remaining in health and life.
A agrees to make B a chair out of a particular piece of walnut lumber.
The lumber is destroyed by fire through no fault of A. A is not liable in
damages, since the parties contemplated the continued existence of the
lumber. If, however, A contracts to build B a walnut chair within ten days
for fifty dollars ($50.00) and his factory and walnut lumber are destroyed
by fire, A is answerable to B in damages, for failure to deliver the chair. He
has entered into a lawful contract, and has not excepted liability on account
of fire.
A contract for personal services is rendered of no effect by the failure of
health, or by death of the party, who is to perform the services. Where,
however, the contract provides for the doing of a certain specific thing, not
to be performed by a certain person, and not depending upon the continued
existence of a certain thing, the parties are bound to perform, regardless of
accident.
Floods, earthquakes or lightning do not excuse performance. These
accidents are known in law as Acts of God. (See Acts of God chapter on
Carriers.) Acts of God do not excuse performance unless expressly provided
against in the contract.
A law changed after the contract is made, making it unlawful to perform
the contract, excuses performance.
Strikes do not render it impossible to perform contracts, within
contemplation of the law. If a party desires to become exempt from
performance by reason of strikes, he must put such a provision in his
contract.

If the party to the contract, to whom the performance is due, renders
performance impossible for the other party, the latter is excused on the
ground of impossibility. For example, A contracts to do the wood finishing
on B's house within six months, B to construct the masonry work. B fails to
construct the masonry work; this exempts A from liability.
28. Conflict of Laws. The laws of different states differ in some
particulars. Where this difference affects the interpretation or enforcement
of a contract, the doctrine of conflict of law applies. If a contract is valid in
the state where made, it is usually valid everywhere. This rule is subject to
the limitation that a state will not enforce a contract clearly against the
policy of its own laws. If a contract is made in one state, to be performed in
another, the laws of the latter apply. Otherwise, the laws of the state where
the contract is made apply. The laws relating merely to the court procedure
or the method of enforcing a contract, belong to the state called upon to
enforce the contract, and, even though the laws of the state where the
contract was made differ, the former will apply.
The laws of New York permit an express company to limit its liability
for loss of goods to fifty dollars ($50.00), if so stipulated in the bill of
lading, in case no valuation is fixed by the shipper. The laws of Ohio do not
permit an express company to limit its liability in this way. A, in New York,
shipped goods valued at four hundred dollars ($400.00) to B, in Cleveland.
A placed no valuation on the goods and accepted a receipt limiting the
liability of the express company for loss of the goods, to fifty dollars
($50.00). The goods were lost. B sued the express company in Ohio for the
value of the goods. The court held that the law of Ohio held, since, by the
terms of the contract, the goods were to be delivered in Ohio.
29. Assignments of Contracts. By assignment of a contract, is meant
the transfer of one's property rights in the contract. One cannot assign his
duties under a contract. For example, A contracts with B to have the latter
build him a house, for five thousand dollars ($5,000.00). B cannot transfer
to another, the obligation on his part to construct the house. B, may,
however, transfer to another, his right to recover the money for the house. A
may also transfer to another, his right to have the house constructed.
Contracts for personal service such as the painting of a picture, or the
writing of a book, cannot be assigned. In such cases the personal work of a
particular person is contracted for and cannot be transferred.

An assignment of a contract is a contract for the sale of a property
benefit of a contract. The assignment must contain all the elements of a
simple contract. The assignor of a contract can transfer only such property
rights as he possesses. The other party to the contract retains any defense
against the assignee, which he had against the assignor. A agrees to build a
house for B, for five thousand dollars ($5,000.00), according to certain
plans. A constructs the house with variations, subjecting him to a reduction
in price of five hundred dollars ($500.00). A assigns his rights in the
contract to C and C can compel A to pay him only four thousand five
hundred dollars ($4,500.00). The defense of B against A is good against A's
assignee, C.
Upon assigning a contract, the assignor or assignee must notify the
other party to the contract, of the assignment, else payment to the assignor
will discharge the other party. For example, A owes B one hundred dollars
($100.00). B assigns the claim to C. C does not notify A of the assignment
and A pays B. B is insolvent and C cannot recover from him. C cannot
recover from A, since A has received no notice of the assignment.
The following is a recognized legal form of assignment.
For valuable consideration, I
hereby assign all my right,
title and interest in the
annexed (account, contract, or
whatever the instrument may be)
to________
________________
Signature of assignor.
Date________________

30. Joint and Several Liability in Contracts. If A makes a contract
with B, only two parties are bound by the contract and are liable for its
breach. If A and B contract with C and D, four parties are bound and are
liable. A and B may be liable as one party to C and D, or they may be liable
as two parties to C and D. If the contract shows by its terms that A and B
contract as a unit, and not as separate individuals, their contract is said to be
joint. If the terms of the contract show that A and B intend to contract as
individuals, as well as a unit, their contract is said to be joint and several. If
the terms of the contract show that A and B intend to contract as individuals
only, and not as a unit, their liability is said to be several.

The importance of this distinction is that in case of a joint obligation, all
the joint obligors must be joined when sued, else the case may be dismissed
if objection is made; while in case of a joint and several obligation, or of a
several obligation, individual obligors may be sued separately.
A promissory note reads, "We promise to pay" and is signed by A and B.
This is a joint obligation, and in a suit thereon A and B must be joined, or
the one sued may have the case dismissed, by reason thereof. If, however,
judgment is rendered against both, and they hold no joint property, the
creditor may enforce his judgment against either. This is known in law as,
liability in solido. A promissory note reads, "We or either of us jointly and
severally promise to pay," and is signed by A and B. A and B are severally,
as well as jointly liable, and may be sued separately.
Where two or more parties sign a contract, binding themselves to do one
thing of a series of things, the law presumes the obligation to be joint. If the
language used shows, that the parties singly, or individually bind
themselves to do the thing, or series of things in common, the contract is
several, as well as joint. A owes B three hundred dollars ($300.00) upon a
promissory note. C, D and E sign the following guaranty:
If A fails to pay the note when due, C individually promises to pay B
one hundred dollars ($100.00), D individually promises to pay B one
hundred dollars ($100.00), E individually promises to pay B one hundred
dollars ($100.00).
As to each other C, D and E, are severally liable. As to B,—C, D and E
respectively are jointly and severally liable, with A for one hundred dollars
($100.00) each.
31. Discharge of Contract by Performance and Tender. A contract is
terminated, when the parties thereto perform its provisions. The liability of
parties ceases by performance of the provisions of the contract. A promises
to construct a house for B, according to certain specifications, within a year.
B promises to pay A five thousand dollars ($5,000.00), upon completion of
the house according to contract. A, within a year, constructs the house
according to the plans and specifications. A's obligation is at an end. B's
obligation still requires him to pay A five thousand dollars ($5,000.00), and
he is liable to a suit for this amount until it is paid. When B pays A five
thousand dollars ($5,000.00), his obligation and the contract are terminated,
as to both parties.

Tender of payment is equivalent in law to payment. By tender is meant
an offer to pay in recognized legal money. A has an option for the purchase
of a house of B, for five thousand dollars ($5,000.00). B desires to have the
option lapse, having obtained a better offer. If A offers B legal tender before
the option expires, the contract is complete in law.
United States statutes stipulate what constitute legal tender. These
statutes provide that the following shall constitute legal tender:
1. Gold coin.
2. Silver dollars.
3. Subsidary silver coin up to ten dollars.
4. Nickels and pennies not exceeding twenty-five cents.
5. United States notes, except for duties on imports, and interest on
public debts.
Silver certificates, bank notes and private checks are not legal tender.
32. Discharge of Contract by Subsequent Agreement. Contracts may
be terminated by another contract, made after the contract in question has
been entered into. For example, A promises to construct, within one year, a
house according to certain plans, for B. B promises to pay A five thousand
dollars ($5,000.00), upon completion of the house. A completes the
excavation of the cellar and B fails in business, and desires not to have the
house constructed. He offers A five hundred dollars ($500.00), for the work
already done, and to release him from his obligation. A accepts B's
proposition. The original contract has been terminated by the subsequent
one.
33. Warranty and Remedies for Breach of Warranty. A warranty is a
contract collateral to the principal contract, by which a party to a contract
specifically covenants certain things. Warranties apply especially to sales of
personal property. (See warranty under Sales of Personal Property.) A
promises to build a house for B and warrants the paint to stand untarnished
and uncracked for one year. The covenant on A's part relating to the paint is
a warranty.
Breach of warranty ordinarily does not entitle the other party to rescind
the contract. That is, it does not permit him to refuse to carry out his part of
the contract, but entitles him to bring an action for damages, for its breach.

34. Recission and Discharge of Contracts by Breach. If a party fails
or refuses to carry out a provision of a contract, he is said to have
committed a breach of contract. When one party to a contract commits a
breach, the other party may accept the breach and sue for damages, or he
may refuse to accept the breach and wait until the time for complete
performance arrives, and then, if the other party has not performed, sue for
damages.
When a party to a contract commits a breach, and notifies the other
party of his refusal further to carry out the contract, the other party cannot
increase the defaulting party's damages by continuing performance
thereafter. For example, A contracts with B to have a fence finished and
erected around A's house. After B has half of the fence manufactured and
erected, A refuses to go on with the contract. B cannot increase the damages
by manufacturing and erecting the balance of the fence. The reason for this
is that it would not benefit B at all, but would merely injure A. B is entitled
to recover his profit for the entire job, when A breaks the contract. He could
recover no more by manufacturing and erecting the balance of the fence.
The law does not recognize trivial things. A party cannot claim breach
of contract for failure of the opposite party to a contract, to perform an
unimportant thing. The law recognizes substantial performance as actual
performance. This does not mean that a party cannot put such terms in a
contract as he chooses, but means that, in the absence of any provisions of
the contract to the contrary, a party is not presumed by law to contract for
trivial things. Time of performance is an illustration of this principle. A
contracts with B for the building of a house. B promises to complete it in
one year. If completed in one year and a day, there is a substantial
performance, unless the contract expressly shows that the precise day of
performance was regarded as important.
Where contracts provide for separate performances, a failure or refusal
to fulfil one performance will not always amount to a refusal or failure to
perform the balance. A agrees to ship B five thousand barrels of cement, in
car load lots of one hundred and fifty barrels each to be shipped each week.
B receives and refuses to pay for the first car. This may not amount to a
breach of the entire contract, so as to justify A in refusing to ship the
balance. The tendency of American courts, however, is to treat this as as
one contract; that is to treat the promises as dependent, and not
independent.

The acceptance by one party, of a breach of contract made by the other,
and the refusal on the part of the former further to carry out the contract, is
known in law as recission. To rescind a contract, a party must return what
he has received thereunder, called putting the other party in statu quo. He
must also accept the breach promptly. For example, A promises to sell B
three horses to be delivered one each day, upon the three following days. A
delivers one and fails to deliver the second. To rescind the contract, B must
return promptly to A the horse already delivered. He may then sue A for
damages suffered. If B does not promptly return the horse to A, he must
permit A to go on with the contract, waiving the delay, or pay for the horse
already delivered, less damages for A's breach of contract.
35. Discharge by Bankruptcy. By a United States' statute, certain
persons may become bankrupts and thereby be discharged from their
obligations. By the terms of this act, the bankrupt's property is turned over
to an officer, called a trustee in bankruptcy who disposes of it, and
distributes it pro rata among the bankrupt's creditors. Any person except a
corporation, who owes debts, may become a voluntary bankrupt.
The United States statute further provides that certain persons may be
declared bankrupts at the instance of their creditors. The United States
statute provides that:
"Any natural person, except a wage earner, or a person engaged chiefly in farming or
the tillage of the soil, any unincorporated company and any corporation engaged
principally in manufacturing, trading, printing, publishing, mining or mercantile pursuits,
owing debts to the amount of one thousand dollars ($1,000.00) or over, may be adjudged
an involuntary bankrupt, upon default, or on impartial trial and shall be subject to the
provisions and entitled to the benefits of this act. Private bankers, but not national banks or
banks incorporated under state or territorial laws may be adjudged involuntary bankrupts."

Any of the above enumerated parties may be made an involuntary
bankrupt at the instance of creditors if he has committed an act of
bankruptcy.
The bankruptcy statute defines an act of bankruptcy as follows:
"Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred
concealed or removed, or permitted to be concealed or removed, any part of his property
with intent to hinder, delay or defraud his creditors or any of them; (2) transferred, while
insolvent any portion of his property to one or more of his creditors with intent to prefer
such creditors over his other creditors; or (3) suffered or permitted, while insolvent, any
creditor to obtain a preference through legal proceedings and not having at least five days
before a sale or final disposition of any property affected by such preference vacated or

discharged such preference; or (4) made a general assignment for the benefit of his
creditors, or being insolvent, applied for a receiver or trustee for his property, or because of
insolvency a receiver or trustee has been put in charge of his property under the laws of a
state, of a territory, or of the United States; or (5) admitted in writing his inability to pay
his debts, and his willingness to be adjudged a bankrupt on that ground."

Bankruptcy discharges a bankrupt from his contracts.
36. Remedies for Breach of Contract. Originally, at common law,
there was no power given a party to a contract, to compel the other party
specifically to perform the provisions of the contract. For example, A
promises to pay B one thousand dollars ($1,000.00) for one thousand
bushels of wheat, to be delivered within ten days. B fails and refuses to
deliver the wheat. A could not at common law, and cannot under the present
rules of law, compel B to deliver the wheat. A's remedy is an action for
damages. A may go into the market at the time and place of delivery,
provided for in the contract, and purchase one thousand bushels of wheat of
the quality provided for in the contract, and collect as damages from B the
advance in price, if any, together with expenses connected therewith. If A is
obliged to pay one thousand five hundred dollars ($1,500.00) for the wheat,
which by the terms of the contract, he had purchased for one thousand
dollars ($1,000.00) from B, he may recover five hundred dollars ($500.00)
damages from B. If A succeeds in obtaining the wheat for nine hundred
dollars ($900.00), he can only recover nominal damages from B, commonly
five cents, for breach of contract. In case A obtains the wheat for nine
hundred dollars ($900.00), B cannot recover one hundred dollars ($100.00)
from A, since he has violated the contract, and cannot take advantage of his
own wrong.
Parties frequently fix the amount of damages for a possible breach at the
time the contract is made. This is known in law as liquidated damages. If
reasonably compensatory, the courts will recognize and enforce liquidated
damages; if clearly unreasonable they are regarded as penal, and the courts
will not enforce them. For example, A agrees to construct a rolling mill for
B, for fifty thousand dollars ($50,000.00), and to complete the structure
within one year, and to pay damages of two hundred dollars ($200.00) per
day, for each and every day consumed, in excess of a year in finishing the
structure. If this is a reasonable loss to B, for the failure to have the use of
the mill, the courts will enforce the provisions; otherwise they will remit the
excess over the fair value of B's loss.

37. Equity and Specific Performance. Originally, at common law in
England, the king and his subordinates heard suits. Certain specified actions
or remedies, only, were allowed. It was soon observed that many
complaints were made, and disputes arose, which did not come within the
scope of these common law actions. The king appointed a chancellor to
assist him. It was the duty of the chancellor to hear disputes, not within the
scope of the recognized common law action, and to determine and decide
these upon equitable principles. This court became known as the court of
chancery, or court of equity. A regular system of courts of chancery grew up
in England, with fixed rules of procedure and of recovery. This country has
Courts of Equity. In many states, the same judge sits as a court of law, and
of equity. Equity does not hear cases where there is a complete and
adequate remedy at law. Equity courts have a judge only, and no jury.
Courts of equity sometimes specifically enforce contracts in case there is no
adequate remedy at law. For example, A purchases a lot of B in a
particularly desirable locality. There is no other vacant lot near it. In case B,
refuses to carry out his contract, by conveying this lot to A, equity will
compel B to convey the lot to A. Here A has no adequate remedy at law.
Money damages will not enable him to procure what he contracted for.
Specific performance is rarely granted in case of sales of personal or
chattel property. There are a few exceptions. If A purchases "Maud S." from
B for ten thousand dollars ($10,000.00), "Maud S." being a two minute race
horse, purchased for breeding purposes, and B refuses to deliver her, a court
of equity might grant specific performance. Money damages might not
enable A to purchase a similar horse. The same principle applies in case of
purchases of rare works of art.
While a contract for personal services cannot be specifically enforced
by a court of equity, some relief may be granted by injunction. For example,
A, an actress, agrees to perform for one year for B and later refuses. While a
court manifestly cannot compel A to perform for B, it will by injunction
prevent her performing for others.
38. Forms of Contracts. The following is a form of simple contract.
Chicago, Ill., June 23, 1909.
Contract entered into this.... day of........ 1909, by and between A, the first party, and B,
the second party.
In consideration of the promises hereinafter made by the second party, the first party
agrees........ (here state first party agreement).

In consideration of the promises of the first party, the second party agrees........ (here
state agreement of second party).
Signed............. First Party.
Signed............. Second Party.

The following is a form of a formal contract.
Articles of agreement entered into in New York City this.......day of.... 190-by and
between A, hereinafter designated as the first party, and B, hereinafter designated as the
second party.
Whereas, the first party is a wholesale dry goods merchant having a place of business in
New York City, and is desirous of employing a traveling salesman, and whereas, the
second party is a traveling salesman having had ten years' experience in the dry goods
business, now, therefore in consideration of the promises hereinafter made by the second
party the first party agrees,
First. To pay the second party the sum of $2400 in installments of $200 payable
each month for a period of 12 months.
Second. To pay the second party's traveling expenses not to exceed $ 50.00 per week,
to be mailed weekly as ordered by second party.
Third. To furnish second party a full line of samples.
In consideration of the promises of the first party the second party agrees,
First. To devote his entire time and attention to the business of selling goods of the
first party.
Second. To furnish lists of customers called upon each day, said lists to be mailed to
said first party, New York address, each evening.
Third. To waive his right to any salary in excess of his traveling expenses if his
sales do not average $5000 per week.
In witness whereof the parties have affixed their names and seals in duplicate the day
and year above written.
.............First Party.
.............Second Party.

PRINCIPAL AND AGENT

39. In General. Agency is the term applied to the legal relation existing
between persons who transact business or perform duties through
representatives. Few duties are performed, and few business transactions
are completed solely through the personal efforts of the interested parties.
Most business dealings are completed in part, at least, by representatives or
agents. Much important business is transacted by corporations.
Corporations must act through agents. They have no identity apart from

officers and agents. Individuals, as well as the smaller business concerns,
perform many of their duties and make many of their contracts through
representatives or agents. The law relating to agency, next to the law of
contracts is probably the broadest as well as the most important branch of
commercial law. Its application is almost universal. A distinction is
sometimes drawn between representatives appointed to make contracts with
third persons, and representatives appointed to perform menial or
mechanical work, by calling the one class, agents, and the other servants.
There is little reason for any such distinction. The same rules of law apply
to both agents and servants. The principal distinction is in the nature of the
service, which need not be considered in discussing the general legal
principles.
The party appointing another to represent him in his relation to third
persons is called the principal. The person appointed to act as a
representative is called the agent. The legal relationship existing between
the principal and the agent, and the principal, agent and third person,
constitutes the law of agency. If a dry goods merchant, A, employs B, a
traveling salesman, to sell his goods, and B sells goods to C, A is the
principal, B the agent, and C, the third person contracting with A, through
A's agent B.
40. Who May be a Principal. A principal is one who appoints an agent.
A, employs B to deliver goods; A is principal and B agent. Any person,
natural or otherwise, competent to enter into a contract, may enter into a
contract through an agent. There is one possible exception to this rule. It is a
well recognized rule of law that an infant cannot appoint an agent. An infant
may enter into a contract which is not void at law, but which is merely
voidable. (See subject, "Infant" in Chapter on Contracts.) That is, an infant
may lawfully make and carry out a contract. The law does not prohibit it.
But the law will not compel an infant to carry out his contracts, except for
necessaries. When it comes to the appointment of an agent, however, the
law refuses to give an infant this power. By an infant is meant a person
under legal age.
Any person of legal capacity may appoint an agent. In other words, a
person may do through an agent the things he, himself, may do. An insane
person, an idiot or a drunken person cannot appoint an agent. A corporation
may do business through agents, limited only by its corporate capacity. A

partnership may do business through agents, limited only by the purposes
for which the partnership is formed.
41. Who May be an Agent. Any one, except a very young child and
persons whose interests are opposed to those of the principal, may act as
agent. A child may be employed to deliver goods, and thus make and
complete contracts for his principal. Persons of unsound mind may serve as
agents. Persons who cannot act as principal, through lack of capacity to
contract, may act as agent for others. For example, A, fourteen years old,
cannot be bound by a contract with B for the purchase of one hundred
bushels of wheat, but A may be employed as agent by C, a competent
person, to purchase of B one hundred bushels of wheat.
A person whose interests are opposed to those of his principal is
disqualified from acting as agent. That is, a person cannot be agent for both
parties to the same transaction. For example, if A is employed as traveling
salesman by B to sell goods, he cannot serve as agent for C in the purchase
of goods from B without the knowledge and consent of both B and C.
Artificial persons, such as partnerships and corporations, may act as
agents. It is usually held that children under seven years of age cannot act as
agents, by reason of tender age.
42. How Agents May be Appointed. Agents may be appointed by any
act of the principal which shows that it is the principal's will that the agent
shall act as the principal's representative.
Agents may be appointed by oral statement, by written document, by
conduct on the part of the principal, or by ratification of an unauthorized
act.
Most agencies are created by oral authority. Any word by which the will
of the principal is manifested is sufficient. A tells B to order a barrel of flour
from C. This constitutes B an agent for A. B's asking A if he shall order a
barrel of flour from C, to which A nods, constitutes B, A's agent. A writes to
B and requests him to order a carload of flour from C. This constitutes B,
A's agent. B, without any authority from A, orders a car load of flour from
C, which A accepts, and for which he promises to pay. This constitutes B,
A's agent by ratification.
Some few contracts of agency must be in writing. A employs B to act as
his salesman for a period of two years. As between A and B, the contract is
not enforceable, by reason of the Statute of Frauds (see Statute of Frauds,

chapter on Contracts). But as between A and third parties dealt with by B as
agent, A cannot refute the agency.
Some contracts which must be made in writing, such as land contracts
require the agent's authority to be in writing.
If a person knowingly permits another to act as his agent, he cannot
afterwards repudiate the agency. For example, A stands by and watches B
sell A's horse to C. Although B had no authority to make the sale, A, by his
conduct, cannot claim there was no agency.
An agent's assertion of agency does not of itself constitute an agency. If
A, without B's knowledge, claims to C to have authority to sell B's horse
and does attempt the sale, title to the horse does not pass to C, because A
had no authority to make the sale. A mere declaration of authority on the
part of the agent without the knowledge or consent of the principal does not
create an agency.
43. Purposes for Which an Agency May be Created. With the
exception of fulfilling contracts for personal services, a person may do,
through an agent, anything he may lawfully do by himself. For example, A
employs B, an artist of fame, to paint a picture. Manifestly B cannot employ
a student or another artist to paint the picture. A contracted for B's personal
skill and work, and cannot be made to accept the work of another. In the
majority of business transactions, however, the personal element does not
enter. The thing to be done, or the article to be furnished, is the feature of
most contracts. By whom the thing is done, or by whom the article is
furnished, does not matter. For example, A purchases one hundred bushels
of wheat from B. B delivers the wheat through his agent. Ordinarily A
cannot, nor does he wish to complain. A contracts with B to have B furnish
him an oak chair of given dimensions. B employs C to make and deliver the
chair. A cannot complain so long as the chair corresponds to the terms of the
contract.
A party cannot do through another what he himself cannot lawfully do.
For example, a party cannot employ an agent to purchase votes for him.
Neither can a person lawfully corrupt legislators by means of an agent, nor
lawfully commit a crime by means of an agent.
44. Ratification of Agency. Where a person assumes to act as an agent
for another without authority, or in performing an agency, exceeds his
authority, he does not bind the person for whom he assumes to act, unless

such person subsequently, with knowledge of the fact, consents to be bound
thereby. Such assent is known in law as ratification.
A person cannot ratify an act which he, himself, has no power to
perform. For example, A, pretending to act for B, offers C, a legislator, one
hundred dollars ($100.00) to vote against a certain measure. B cannot ratify
this act, since he himself cannot lawfully perform it. If however, A,
knowing that B desires a certain rare picture, finds it and orders it in B's
name, B may ratify the act by accepting and paying for the picture.

MAIN READING ROOM, U.S. CONGRESSIONAL LIBRARY,
WASHINGTON, D. C..
In Center of Central Circular Desk, is the Housing for the Book-Handling Machinery. Card
Catalogue in Foreground. View Facing Entrance. The Corinthian Order has been Used.

Much discussion has arisen as to the ability of a person to ratify a
forgery of a negotiable instrument. The courts differ on this question. It is,
however settled that in case of a forgery, if the alleged principal fails to
deny the signature when the paper is presented to him, or by remaining
silent, induces another to purchase it, or to injure his position by reason
thereof, the alleged principal is estopped from further denying the
authenticity of the signature, and may be compelled to pay the instrument.
For example, A forges B's name to a promissory note payable to C. C
presents the note to B for payment. B may refuse to pay the note by reason
of forgery. If, however, A forges B's name to a note, payable to C, and D
shows B the note, saying that he is about to purchase it if it is genuine, and
B remains silent and permits D to buy the note, B's silence amounts to a
ratification of the forgery and he must pay the note to D.
When an alleged principal's attention is called to the fact that an alleged
agent has assumed to act as his agent, he must choose between repudiating
the act and accepting it. This choice is known in law as the principal's right
of election.
45. Classification of Agents. Agents are usually classified as universal,
general or special. By universal agent is meant an agent empowered to
represent his principal in every capacity. A principal could have only one
universal agent. In business affairs, a universal agency is seldom, if ever,
found. It is useful, however, as a classification to show the different kinds
of agents, depending upon the degree of their authority.
A general agent is one authorized to perform all the duties of his
principal of a certain kind. A, an insurance company, appoints B its sole
agent to solicit insurance in the city of Boston. B is a general agent for the
purpose of soliciting insurance in the city of Boston. General agencies are
common in business practice.
A special agent is one authorized to act for his principal in a particular
matter or transaction. For example, A employs B, an attorney, to try a
certain law suit. B is a special agent.

In practice it is not always easy to determine whether an agent is a
general or a special one. A principal does not always limit his agent's
powers by actual authority conferred upon the agent. His intention and his
instructions to the agent may limit the latter's authority, but third persons
may rely upon the apparent authority of the agent, rather than the actual.
For example, A employs B as a traveling salesman to sell dry goods. He
instructs B not to sell any bills less than five hundred dollars ($500.00) in
amount. B sells C a bill amounting to four hundred dollars ($400.00), C
does not know of the limitation of B's authority. A is bound by B's sales to
C. C has the right to rely upon B's apparent authority. A has given B actual
authority to sell goods, and this authority carries with it the implied or
apparent authority to sell in any reasonable amounts.
Actual authority to do certain things carries with it the right to do those
things which impliedly, or from custom or usage apparently accompany the
authority conferred.
Third persons dealing with an agent must, on the other hand, ascertain
at their peril that an agent has the authority claimed. For example, if A,
without authority, claims to be agent for B, and sells an order of goods to C,
and collects from C a certain amount, when in fact he is not the agent of B,
C has no contract with B. A third person dealing with an agent must
ascertain at his peril, that the alleged agent has authority from his principal
to act as agent in a certain capacity. When this is ascertained, the third
person has a right to treat the agent as having the authority to do all the
things necessarily or customarily belonging to his agency.
46. Duties of Principal to Agent. The relation of a principal to his
agent arises out of a contract, express or implied. The contract may
expressly provide that the agent is to receive a specified sum for his
services. In this event, the principal is legally liable to pay this amount to
his agent. The principal may have a defense to his contract, the same as to
any contract. But if the agent has performed his contract of agency, he can
enforce payment therefor. For example, A employs B to sell furniture for a
compensation of one hundred dollars ($100.00) per month and expenses,
the contract to cover a period of twelve months. When B performs this
service, he may, by legal action, compel B to pay him one thousand two
hundred dollars ($1,200.00). If B fails to work for A as provided for by the
terms of the contract, and at the expiration of six months enters C's employ,
in most jurisdictions, he can recover nothing from A, since he has not

fulfilled his contract. In some jurisdictions, he may recover from A the
value of his services, less the damages A has suffered by reason of breach of
contract.
Many agencies are created without any express provision as to
compensation. In this event, a contract relation exists, as much as in the
former case. There is an implied contract that the agent shall receive a
reasonable compensation for his services. For example, A, a contractor,
requests B, a teamster, to haul stone for the construction of a bridge. B
works for A a week, nothing having been said as to compensation. B can
recover from A the reasonable and customary value of his services.
There is also a duty on the part of the principal to protect his agent
against unnecessary risks of injury. There is a duty on the part of a master to
protect his servant. An agent or servant assumes the risks which naturally
belong to the kind of work in which he is engaged. For example, A employs
B to work in a saw mill. B assumes the risks incident to the employment. If
a log accidentally rolls on him, A is not liable in damages, or if B carelessly
cuts his hand on the saw, A is not responsible. But if the boiler explodes
through carelessness of A, or if the saw flies to pieces on account of wear,
and injures B, A is liable.
It is said that a principal or master is obliged to furnish his agent or
servant with a reasonably safe place in which to work, and with reasonably
safe tools and instruments with which to work. If the principal negligently
fails to these things, and the servant is injured without negligence and
carelessness on his part, the principal is liable to him in damages for any
injuries.
47. Duties and Liabilities of Principal to Third Persons. When a
person employs another to act for him, he is liable to third persons for the
acts performed by the agent, so long as the agent acts within his authority. If
A appoints B his agent to purchase live stock, A must pay third persons for
the live stock purchased in his name by B. A person employing another to
act as his agent is responsible to third persons for acts performed by the
agent, which are within the apparent authority of the agent, as well as for
the acts which are within the actual authority. If A appoints B his agent to
purchase live stock and instructs him to purchase only hogs, but limits his
authority to pay over five cents per pound, and B purchases at five and a
half cents from C, who does not know of this limitation, A is bound by the

contract. In giving an agent authority to do certain things, the agency carries
with it the customary or implied authority to perform those acts incident to
the general character of the agency. Thus, authority to purchase usually
carries with it authority to fix the price. This is especially true of authority
to sell.
Notice to an agent is notice to a principal. If an agent is authorized to
sell goods, and in making a sale, is notified by the purchaser that the goods
are purchased conditionally, in the absence of any special instruction
limiting the power of the agent to sell conditionally, brought to the attention
of the purchaser, the principal will be bound by the condition.
A principal is liable to third persons for his agent's torts or wrongful
acts. If A directs his agent B to destroy C's property, A is liable to C for the
damage done. A principal is not only liable to third persons for the damages
done under his express direction by his agent, but he is also liable for the
acts carelessly done by the agent in the course of his employment. A street
car company employs B as motorman. B, carelessly and negligently, while
operating a car runs over C. A is liable for B's negligent act. A principal,
however, is not liable for the wrongful acts of his agent, performed outside
of his employment. A, a street car company, employs B as conductor; C,
standing on the street insults B. B stops his car, gets off and assaults and
injures C. A is not liable, since B did not commit the act complained of
while in the course of his employment, but went outside the course of his
employment and acted on his own behalf.
48. Duties and Liabilities of Agent to Principal. An agent must obey
the instructions of his principal. If he disobeys his instructions, he is liable
to his principal for losses sustained. For example, if A employs B to sell
flour at four dollars ($4.00) per barrel and B sells one hundred barrels at
three dollars and seventy-five cents ($3.75), he must respond in damages to
A for twenty-five cents a barrel. If, however, a discretion is given the agent,
and he makes a reasonable mistake in using his discretion, he is not liable.
If his instructions are not clear, and he carries out what he thinks are his
instructions, which prove not to be the desire or intention of his principal,
he is not liable.
An agent must account to his principal for money collected, and for
moneys or property coming into his possession by reason of his agency. If
he deposits money in his own name and it is lost through a bank failure, he

is responsible to his principal. If he carefully deposits it in the name of his
principal and the bank fails, he is not responsible.
An agent must act carefully in the performance of his principal's work,
or as it is usually said, he must not act carelessly or negligently. He must act
as a reasonably prudent man would act, under similar circumstances, or be
liable to his principal in damages.
An agent must be loyal to his principal's interests. He cannot act secretly
for another. He cannot act secretly as agent for both parties to a transaction.
If he makes profits in his agency dealings, he must account for them to his
principal. A employs B to sell Christmas novelties. B, shortly before
Christmas receives a large order from C, who offers B one hundred dollars
($100.00) in excess of the regular price, if the goods arrive the following
day. B succeeds in having the goods reach C the following day. B must
account for the extra one hundred dollars ($100.00) to A, his principal.
An agent must faithfully carry out his agency. He is responsible for
failure to act loyally. A employs B to sell butter. B obtains an offer from C, a
rival butter manufacturer, to commence work for him on commission two
weeks hence. B tells his customers not to purchase for two weeks, at which
time he can make them a better price. B is liable to A in damages for this act
of disloyalty. He has broken his contract.
An agent, who is employed to perform personal services, cannot
transfer his responsibility or agency to another.
One who agrees to act as agent for another without compensation,
cannot be forced to fulfil his agency. He is not liable in damages to his
principal for failure to act, but if he chooses to act without compensation, he
is liable if he acts with great negligence. If A requests B to drive his horse
home and B drives the horse and leaves him without tying him, and the
horse runs away and destroys the carriage and ruins himself, B is liable for
gross negligence.
49. Rights and Liabilities of Agent to Third Persons. An agent acting
within the scope of his authority, in making contracts with third persons,
binds his principal by the contract, but does not bind himself. A is
authorized by B to purchase a horse. A purchases a horse from C, notifying
C that he is purchasing as agent for B. C must look to B for the purchase
price, since A acted solely as agent and is not personally liable under the
contract.

If an agent, intending to act as agent, makes a contract in his own name,
without informing the third party with whom he is dealing, of the agency,
he binds himself. Under these circumstances, he usually binds his principal
also. This question is discussed more at length under the title "Undisclosed
Principal." If A is employed by B to purchase a horse, and A purchases a
horse from C for two hundred dollars ($200.00), without telling C of the
agency, the purchase price to be paid the following day, A binds himself
personally to pay C the two hundred dollars ($200.00) and C is not obliged
to look to B for payment.
If an agent, honestly believing he has authority to act as agent when he
has not, makes a contract as agent for his supposed principal, he binds
himself personally and not his principal. A writes to B, "Purchase for me C's
bay team, if same can be secured for two hundred and fifty dollars
($250.00), half payable in six months." B reads the letter and purchases the
team in the name of A for two hundred and fifty dollars cash ($250.00),
overlooking the condition in A's letter that half was to be paid in six
months. B binds himself to C and does not bind A.
When an agent falsely or fraudulently represents himself as agent, he
binds himself and not his alleged principal.
If an agent, honestly believing he has authority to act, does not have
such authority, but discloses all the facts connected with his authority, to the
third person with whom he is dealing, he is not personally bound. A, having
previously acted as agent for B, in purchasing onions by the crate, receives
the following wire from B, "Purchase one hundred crates, ship at once." A,
supposing this refers to the purchase of onions, shows the telegram to C,
and tells him that in the only other transaction in which he acted for B he
purchased onions, and that he supposes this wire refers to onions. He
purchases one hundred crates of onions from C, and later discovers that B
intended turnips, instead of onions. A is not bound personally. He has acted
honestly and revealed all the facts in his possession to C, who must act at
his risk as to A's actual authority.
50. Undisclosed Principal. A principal, whose agent deals with a third
person for his benefit, without disclosing the name of his principal, or
perhaps without disclosing the fact of agency, is said to be an undisclosed
principal. For example, A employs B to purchase one hundred crates of
oranges. B purchases the oranges from C for A in his own name, not telling

C that the purchase is made for A. In this case, A is an undisclosed
principal.
As a general rule an undisclosed principal, when discovered, is liable
upon the contract of his agent.
In case of an undisclosed principal, the agent is liable personally as well
as the undisclosed principal. If A instructs B to purchase for him five cars of
coal, and B purchases the coal of C in his own name, without disclosing the
fact of his agency, B is personally liable to C for the purchase price.
The undisclosed principal is not liable to a third party if the third party
with full knowledge of the agency, elects to hold the agent. If A employs B
to purchase goods for him, and B purchases the goods in his own name
from C, and C, before payment, learning that the goods were purchased for
A, elects to hold the agent B, by suing him for the purchase price, or by
doing or saying anything that shows his determination to hold the agent,
rather than the principal, he cannot thereafter hold A.
The undisclosed principal may enforce against third persons the contract
of his agent. If A employs B to purchase goods from C and B makes the
purchase in his own name for future delivery, A may compel C to deliver
the goods to him. This rule applies in all cases where the third party is not
injured by its application.
The liability of an undisclosed principal to third persons, upon contracts
made by an agent in the agent's name, is subject to the further exception,
that when the third party has led the undisclosed principal to believe that he
is looking to the agent alone for fulfillment of the contract, and relying
upon such conduct the undisclosed principal settles with the agent, he is no
longer liable to the third party. In this event the third person is said to be
estopped from the right to sue the undisclosed principal. This rule is based
upon equitable reasons. There can be no such thing as undisclosed principal
in case of a negotiable instrument. No one is liable on a negotiable
instrument, such as a note, draft, or check, except the maker, indorser,
drawer or acceptor.
51. Apparent Authority of Agent. While it is true that an agent must
have authority from his principal, before he can bind his principal in the
capacity of agent, and while it is equally true that third persons, in dealing
with agents, must determine at their peril that the agent has actually
received authority to act for his principal, a third party has the right to rely

upon the implied and customary powers accompanying an actual authority
conferred upon an agent. Few contracts are made express in all their terms.
Language is not susceptible of such nicety. In the express or implied
contracts used in creating agencies, many things are implied. A third person
dealing with an agent, is not limited by the actual authority conferred upon
the agent by his principal, if the character of the authority apparently
confers other customary or implied powers. Third persons are said to have
the right to rely upon the apparent rather than upon the actual authority of
the agent. This does not mean that an agent can create an agency and bind
his principal without having received any authority from his principal to act
as agent, but means that where an authority of a certain character has been
conferred upon an agent, third parties dealing with the agent, have a right to
rely upon the apparent or customary powers conferred, rather than upon any
secret or unexpected limitations upon such authority. For example, an agent
has authority to sell silk goods and to make exchanges in silk. This
authority is printed on the order sheets furnished the agent. The agent
exhibits these order sheets to the customer and exchanges are made. The
principal cannot claim that the agent had authority to exchange only goods
of the principal's manufacture. The authority conferred upon the agent to
make exchanges, apparently was to make exchanges of any silks. The
principal cannot complain if third parties rely upon the apparent authority.
52. Secret Instructions. So long as the agency is legal, a principal may
create an agency of as limited an extent, or of as broad a nature as he
desires. So long as the limitations which the principal places upon his
agent's authority are not of a nature to mislead third persons, the agent
cannot bind his principal by exceeding these limitations. But if a principal
confers an authority upon an agent which impliedly embraces a number of
powers, the principal cannot limit these powers by secret instructions. The
limitations upon an agent's apparent authority must be brought to the
attention of the third party. For example, A, a wholesale dry goods dealer,
may employ B, a salesman, to take written orders only. If B attempts to take
oral orders, the principal, A, will not be bound thereby. But if A gives B
authority to take written orders only, and secretly instructs B to take no
order less than fifty dollars ($50.00) in amount, or in excess of two
thousand dollars ($2,000.00), and B takes C's order for forty-five dollars
($45.00), C not knowing of this limitation, A is bound. If, however, A
instructs B to take only written orders, and in amounts ranging only from

fifty dollars ($50.00) to two thousand dollars ($2,000.00), and prints these
conditions plainly upon the order blank, C, in signing one of these order
blanks for forty-five dollars ($45.00), does not bind A. In this case, A has
placed the limitation of B's authority in C's possession.
53. Wrongful Acts of Agent. An agent is personally responsible for
wrongful acts committed. The fact that he acts in a representative capacity,
does not excuse him from committing wrongs, nor does it relieve him from
personal liability therefor. The principal, as well as the agent, is liable for
the wrong committed, if authorized. If A instructs his agent, B, to sell goods
by fraudulent representations and B, by means of said fraud, sells goods to
C, B personally, as well as A is liable to C, for the wrongful act. In the
language of the courts, an agent is liable to third parties for malfeasance,
but not for misfeasance. That is, an agent is liable to a third party for
wrongful acts done, but is not liable to third parties for mere failure to
observe the terms of his agency. In the latter case, he is liable to his
principal only.
54. Delegation of Authority and Subagents. Where personal judgment
and discretion are required of an agent, he cannot transfer his duties to
another, without the consent of his principal. A, a wholesale dry goods
merchant, employs B, an experienced traveling salesman, to sell goods. B,
by his contract, is bound to give his personal skill to A and cannot employ C
to act as salesman for him. A presumptively employs B to use his own skill
and judgment. B is not permitted to delegate his authority to another.
Where, however, mere mechanical or ministerial work is to be
performed the agent is permitted to employ others to assist him, or to
perform the work. For example, A employs B, an expressman, to carry his
trunk to the depot. B may employ a boy to assist him in performing the
work, or may employ another to perform the work. Usage and custom have
much to do in determining whether or not an agent is permitted to delegate
his authority. The performance of a mere ministerial duty may be delegated.
A employs B to act as stenographer in reporting the trial of a case. When it
comes to writing out the testimony, B may perform the task himself, or
delegate it to another.
When an agent employs a subordinate, or delegates his authority to
another on his own responsibility, the agent stands as principal for the sub-
agent, and the original principal is not responsible to third persons for the

acts of the sub-agent. If, however, the agent is authorized by the principal to
appoint a sub-agent, the agent is bound only to exercise care in the selection
of such sub-agent, and the original principal is liable to third persons for his
acts. The sub-agent is answerable to the principal, and not to the agent for
his acts. For example, A, a florist, employs B to deliver a box of flowers. B
employs C. The nature of the duty is such that B may delegate it. But if C is
negligent in the performance of the work, B is liable to A for the negligence,
for the reason that A did not expressly or impliedly direct B to employ
another.
A, in Chicago, deposits for collection, a check drawn on a New York
bank. A knows that it is the custom of bankers to employ other banks for the
purpose of making collections. If the Chicago bank uses due care in
selecting another bank to assist in making the collection, and this bank
makes the collection and fails before the Chicago bank receives the money,
A must stand the loss, and not the Chicago bank. A authorized the
employment of a sub-agent. There is some conflict of authority on the legal
question involved in the above example.
55. Agent's Authority to Collect. An agent authorized to solicit orders
is not thereby authorized to make collections on such orders. If, however,
the agent is entrusted with the goods, and delivers them at the time the sale
is made, he is authorized to receive payment therefor.
An agent authorized to sell, is not authorized to exchange or trade
goods. He is authorized to make sales for cash only. If he accepts checks, or
sells on credit, he is personally liable for losses. There is a tendency at
present to permit the agent to accept checks in payment. The custom of
making payment by check is so well recognized in many lines of business,
that in some transactions it impliedly gives an agent this authority. This was
not formerly the rule, and is still disputed by many courts.
56. Agent's Signature to Written Instruments. The proper method for
an agent to employ in signing a written instrument, as agent, is to describe
himself as agent for his principal in the body of the instrument, and then
sign his principal's name at the end thereof, by himself as agent. For
example, if A, is agent for B in making a contract of sale, the body of the
instrument should state that "B by A, his agent, agrees," and the signature
should be

(B..............)
(by A, his agent)
If the contract is merely signed "A, agent," the agent probably binds
himself only. This is especially true in case of sealed instruments, such as
deeds. In case of promissory notes, an agent who has authority to make
such instruments, may make them in the name of his principal without
using his own name at all. The more common form, however, is to sign the
principal's name, per the agent as agent, or to sign the agent's name as agent
for the principal, giving the principal's name. The mere signing of the
agent's name as agent is a mere description, and probably binds the agent
and not the principal. For example, if A is agent and B the principal, a
promissory note executed by the agent should be signed
(B..............)
(by A, his agent)
A simple contract should state in the the body of the instrument that A,
as agent for B, is making the contract, and the contract should be signed
(B..............)
(by A, his agent)
or A, agent for B. A promissory note or simple contract made and signed
in the name of the principal, the agent's name not appearing, is probably
binding, but it is not good business practice. The exact condition of affairs
should be shown, and the name of the agent, as well as that of the principal,
should appear in the document.
57. Authority of Agent to Warrant. As to whether or not an agent
authorized to sell personal property has implied authority to warrant its
quality, is not uniformly settled. If there is any rule on the question, it
probably is controlled by usage and custom. If there is a general well
known custom to warrant a particular article, the agent has implied
authority to warrant the quality of the article sold. If no such usage or
custom exists, or if the usage or custom is purely local and not general in its
application, the agent has no authority to warrant the quality of the goods
sold. It must be remembered that a principal is bound by the general
character of authority he confers upon his agent, by the agent's apparent
authority rather than by the actual authority, unless the latter is actually
brought to the notice of third parties. It has been held that an agent
authorized to sell a horse is authorized to warrant the soundness of the

horse, and that an agent authorized to sell reapers is authorized to warrant
their durability and fitness. It was held that a principal, who authorized an
agent to sell goods at a certain price, did not authorize the agent to warrant
to third persons that his principal would not sell to others at a less price.
58. Factors. A factor, usually called a commission man or consignee, is
an agent entrusted with possession of his principal's goods, and ordinarily
empowered to sell in his own name. Like any agent who has possession of
his principal's goods with power to sell, a factor has power to collect. He
differs from a broker in that he has possession of the goods of his principal,
and is authorized to sell in his own name, rather than in the name of his
principal.
In the absence of contrary custom or express direction, a factor may sell
on credit. A factor, until instructed otherwise, may use his discretion as to
the time and price of sales, and is entitled to deduct his commission based
upon custom in the absence of special contract.
A factor may sue the purchaser in his own name, for the purchase price.
The principal may sue in his own name also. Persons dealing with factors
may hold the principal responsible for the contracts and representations of
the factor, the same as any undisclosed principal. Factors are also personally
liable to third persons for their contracts.
A factor must account to his principal for money collected, less his
commission and expenses. He is not obliged to keep such money separate
from his own, but he must keep accurate account of same, and remit
promptly when it is due, according to custom or special contact.
59. Brokers. A broker differs primarily from a factor in that ordinarily
he does not have possession of the article dealt in, and acts in the name of
his principal rather than in his own name. There are many kinds of brokers
engaged in common business life. Some of these are insurance brokers,
pawnbrokers, bill and note brokers, and merchandise brokers. In the
absence or special authority, a broker does not have authority to collect.
60. Auctioneers. An auctioneer is a special kind of agent employed to
dispose of goods to the highest bidder at a public sale.
Some states provide by statute that auctioneers must be licensed, and
that they may charge only certain fees. Most licensed auctioneers are
required to give bond. In the absence of statutory regulations, any person
competent to perform the duties of an auctioneer may so act. An auctioneer

differs from an ordinary agent in that, in some respects, he is agent for both
seller and purchaser. He is agent for the seller in offering the goods for sale,
and in obtaining bids. When the highest bid is received, however, and the
hammer falls, he is deemed to be agent for the purchaser, with authority to
complete the sale in the purchaser's name. If the contract of sale is within
the Statute of Frauds and required to be in writing, the auctioneer has the
authority of the purchaser to sign his name to a memorandum of sale, either
by himself or through his clerk. The bidder is bound by this contract, made
in his presence at the time and place of the sale.
The owner may fix such reasonable terms as he chooses, and the
auctioneer must follow out the terms made by the owner. If an owner
advertises the terms of the sale, bidders are deemed to have notice of these
terms. These terms cannot be varied by the auctioneer. If, however, the
owner publishes no special terms of sale, the auctioneer has implied
authority to fix customary and reasonable terms. Bidders have the right to
rely on such terms and the principal is bound by them.
In the absence of special instructions to the contrary, an auctioneer must
sell for cash. He has possession of the goods, consequently has implied
authority to receive payment of the price. He has no implied authority to
warrant the goods. He cannot bid in his own interest. If bidders fraudulently
combine not to bid against each other, for the purpose of obtaining the
goods at a cheap price, no title passes to the highest bidder, by reason of the
fraud.
So long as the auctioneer acts within his authority and reveals the name
of his principal, he incurs no personal liability. But if he exceeds his
authority in making a sale he is liable in damages to his principal. If he does
not reveal the name of his principal to bidders, he is liable personally to
them.
An auctioneer is entitled to recover from his principal the amount of his
compensation, including disbursements and expenses incurred in the sale,
care and preservation of the property. He is said to have a lien on the goods
or proceeds of the sale, for his compensation. By this is meant that he has a
right to retain possession of the goods until his compensation is paid, or in
the case of sale, to deduct his charges from the proceeds of the sale.
When authorized to sell goods on credit, in case payments are not made
when due, the auctioneer may sue in his own name. He may also sue in his

own name for wrongful acts of third parties, whereby the goods are injured.
The principal also may bring this action in his own name. The principal is
liable for the acts of his auctioneer, committed within the actual or apparent
scope of the latter's authority.
61. Del Credere Agency. An agent authorized to sell is not permitted to
sell on credit, unless expressly so authorized or unless the custom or usage
of the particular kind of agency impliedly carries with it this power.
Some agents are, by their contracts of agency, authorized to sell on
credit, on condition that they guarantee to save their principals from losses
resulting therefrom. Such an agency is called a del credere commission, and
the agent is called a del credere agent. This term means that in
consideration of the agreed commission or salary paid the agent, the latter
agrees to pay to the principal, when due, the sums which third parties, who
buy the principal's goods from the agent, fail to pay.
This agreement to indemnify the principal against losses on credits
made by the agent, is regarded as an original promise on the part of the
agent, and not a promise to pay the debt of another. By reason of this
attitude on the part of the courts in interpreting this contract as an original
promise on the part of the del credere agent to pay his own debt, and not the
debt of another, the contract does not have to be in writing. (See Statute of
Frauds.) For example, A, a manufacturer of farm machinery, employs B as
agent to sell farm machinery on credit, on condition that B personally
guarantees the sales. B sells a mowing machine to C, to be paid for within
ninety days. C fails to make payment. A may sue and recover the amount of
the purchase price from B.
62. Real Estate Brokers. A real estate broker is one employed to make
contracts involving the sale or leasing of real property. The sale of lots, of
houses and lots, and farms are common examples.
A real estate broker is seldom authorized to do more than find a
purchaser or tenant, not being authorized to make the lease or contract of
sale. By reason of this limitation generally placed on a real estate broker's
authority, many disputes arise over real estate brokers' rights to
compensation. A principal may enter into any kind of contract he desires
with a real estate broker, and is liable when the broker has performed his
contract, and not before. The difficulty is in determining when the broker
has substantially performed his contract. If A hires B to procure a purchaser

for his house and lot, and agrees to pay him 2% of the selling price when he
obtains the signature of a financially responsible purchaser to a contract of
sale, B is not entitled to his commission until he obtains such a party's
signature to a contract. The fact that A has entered into this contract with B,
does not, in the absence of an express stipulation to the contrary, prevent A
from selling the property himself, or from employing as many other brokers
as he pleases to attempt to make the sale.
Most brokers, however, are employed on certain terms to obtain a
purchaser or tenant. If the agent succeeds in obtaining such a purchaser or
tenant, the principal must pay the broker the agreed compensation. The
owner cannot act unfairly by the broker. If the broker obtains a tenant or
purchaser by seeking him out, and by interesting him in the property, the
owner cannot avoid the payment of commission by discharging the broker
and completing the deal himself. In the absence of an express agreement to
give the broker a certain fixed time in which to make the sale or find a
tenant, the owner may discharge the agent at any time he sees fit, just as the
agent may cease his efforts at any time he chooses. The owner cannot
discharge the agent just as the latter is completing the sale, in order to take
advantage of the agent's efforts, without paying him the agreed
compensation. The agent, in this event is held substantially to have
performed his contract. Contracts with real estate brokers should be
carefully drawn, and should contain express stipulations as to the powers
and limitation of the broker's authority. The temptation is great on the part
of both parties to claim that the sale was, or was not made, through the
efforts of the broker. The contract of a real estate broker differs not at all
from any other contract. The conditions are such, however, that the
agreement is frequently indefinite, and it is difficult to determine when a
substantial performance has been made.
In the absence of any agreed compensation, the real estate broker is
entitled to receive the customary fees. In the absence of any custom
regulating the commission, he is entitled to receive a reasonable
compensation.
A real estate broker is not permitted to represent both parties, or to
receive compensation from both parties. If a broker is promised
compensation from the purchaser which he agrees to accept, without the
consent of the owner, he cannot receive compensation from either party.

63. Termination of Agency. If an agent performs the terms of his
agency, the agency is said to be terminated by performance. He ceases to be
agent, by reason of having performed his contract.
If an agent is employed to act as agent for a specified time, the lapse of
the stipulated time, of itself, terminates the agency.
An agency is a contract, express or implied, and it may be terminated at
any time by any act of the parties thereto showing such to be their intention.
There is one exception to this rule, and that is, that an agency coupled with
an interest cannot be terminated by an act of one of the parties. This
exception is discussed in a separate section.
Where an agency is terminated by failure or refusal of the principal, or
agent to carry out his terms of the contract, the defaulting party is liable in
damages to the other party. This does not prevent the termination of the
agency however.

A CORNER IN THE NEW YORK OFFICE OF THE H. W. JOHNS-
MANVILLE

Where an agency is terminated by the failure or refusal of either party to
observe the conditions of the contract of agency, the agency still subsists on
the part of third persons, who have dealt with the agent, and who have not
received notice of the termination. Upon revoking the agent's authority, the
principal must notify third persons, who have dealt with the agent, or who
have knowledge of the agency contract, and who would be likely to

continue to deal with him as agent. If the principal does not give third
parties such notice, he is still liable to them on contracts subsequently made
by the agent in the principal's name. For example, if A, a wholesale
druggist, employs B to sell goods for one year and C knows of the contract,
and at the expiration of six months, A discharges B for failure to give him
his exclusive time, A must notify C of B's discharge, else B can still bind A
by making contracts with C.
64. Revocation of Agency by Operation of Law. When one of the
parties to an agency contract dies, becomes insane or bankrupt, the agency
is said to terminate by operation of law. When the principal dies, the agency
terminates. Death of itself, constitutes notice to third persons of the
termination of the agency. This is true of all agencies except those coupled
with an interest, discussed in another section. If any agent and a third
person innocently make a contract in the name of the principal after the
death of the principal, and without notice of the principal's death, the
contract is not enforceable against the principal's estate. Death of the
principal revokes the agency. Death of the agent also revokes the agency.
Insanity of the agent, or of the principal terminates an agency not
coupled with an interest. It is regarded the same as death of one of the
parties.
An agency is terminated by the bankruptcy of either principal or agent.
Mere insolvency on the part of the principal or agent does not, of itself,
terminate the agency, but bankruptcy, voluntary or involuntary, terminates
it, and is of itself, notice to third persons. An innocent third person who has
parted with his money on a contract made with the agent after the agency
has been terminated by reason of insanity, or bankruptcy of the principal,
may not enforce his contract, but may recover his money. Injury or
disability of an agent, rendering it impossible for him to carry out the terms
of the agency, terminates the agency.
65. Agency Coupled with an Interest. An agency coupled with an
interest cannot be terminated by attempted revocation of the principal, nor
is it terminated by death, insanity or bankruptcy of the principal or agent.
If the agent has an interest in the subject of the agency outside his
interest in his compensation, he is said to have an agency coupled with an
interest. Such an agency is irrevocable. A pays B one thousand dollars
($1,000.00) for one eighth interest in a patent, and in consideration of this

purchase is given the agency to sell the patented article for a fixed
commission. This constitutes an agency coupled with an interest, and is not
revoked by an attempted revocation of the principal or by the principal's
death. A is indebted to B, his attorney, for one hundred dollars ($100.00). A
gives B a note for one hundred and fifty dollars ($150.00) to collect,
agreeing to pay him 10% of the amount collected, and to permit him to
deduct the one hundred dollars ($100.00) indebtedness. This constitutes an
agency coupled with an interest, and cannot be revoked by A.
To constitute an agency coupled with an interest, the interest must be
coupled with the subject matter of the agency, and not merely with the
compensation the agent is to receive. For example, if A sends his attorney,
B, a note to collect, agreeing to give B 25% of the amount collected, this
does not constitute an agency coupled with an interest, and may be revoked
at any time by A.

QUIZ QUESTIONS

LAW IN GENERAL

1. How many classes of rights are there?
2. Name them.
3. How did men derive these rights?
4. What limitations, if any, are there to rights?
5. Have property rights always been recognized?
6. A finds a watch in the street and, without making any attempt to find
the owner, keeps it. Is the right of possession in A?
7. In primitive times were personal or property rights more generally
recognized?
8. How were rights originally enforced?
9. How are rights enforced at present?
10. How did laws originate?
11. Define law.
12. What does law embrace?

13. What connection have laws with courts of justice?
14. What connection, if any, have customs to laws?
15. What is the purpose of law?
16. What class of laws is enforced for the benefit of the state?
17. A steals B's horse. B, by proper legal action, recovers possession of
the horse. Is the law enabling B to recover the horse a law for protection of
citizens, or for the protection of property?
18. What are the sources of law?
19. Do decisions of courts form any part of law? If so, what?
20. What are the New York State Reports?
21. What are the Philippine Island Reports?
22. Is the treaty existing between the United States and Japan, law? If so
what kind of law?
23. Define statutes. How are statutes enacted?
24. To what classification of law do statutes belong?
25. Is the English Constitution written or unwritten law?
26. Do customs and statutes bear any relation to each other?
27. How is the record of the state statutes kept?
28. What are the general divisions of law?
29. Is any part of the unwritten law written?
30. Is all unwritten law written?
31. Is any written law unwritten?
32. Is unwritten law stable?
33. How, if at all, can the written law of a state or country be changed?
34. Are treaties unwritten law? How, if at all, are the records of
Congress kept?
35. Give a general classification of law.
36. Is there a universally recognized classification of law?
37. Define administrative law and give an example.
38. Define public law and give an example.
39. Define private law. Classify private law.
40. Define constitutional law.

41. Define criminal law and give an example.
42. Can the heir or personal representative of a murdered man ever
recover money compensation for the murder?
43. If so, is it by means of private or public law?
44. Is a criminal tried and punished by private or by public law?
45. Define law of procedure and give an example.
46. What do contracts embrace?
47. What does the word tort mean?
48. Give an example of a tort.
49. Does the same act ever constitute a breach of contract, a tort, and a
crime?
50. Define commercial law.

CONTRACTS

1. Define contract.
2. Give an example of a business transaction which constitutes a
contract.
3. What is the purpose of putting important contracts in writing?
4. What is meant by offer?
5. Give an example of offer.
6. A coat marked $25 is placed by a merchant in a window. Does this
constitute an offer?
7. An advertisement is put in a paper advertising chairs for $7.00 each.
Does this constitute an offer?
8. What is an agreement?
9. Is an agreement a contract?
10. Give an example of an agreement.
11. What is meant by acceptance?
12. Give an example of a contract having no acceptance.
13. A offers to sell B his watch for $10.00. B offers A $8.00. Is there an
acceptance? Is there a contract in the above case?
14. What is a counter offer? Give an example of a counter offer.

15. What is meant by the term meeting of the minds?
16. Give an example of an acceptance not of the exact terms of the offer.
17. What is meant by mutuality?
18. Distinguish meeting of the minds and mutuality.
19. May there be an acceptance of a contract by an act? If the above
question is answered in the affirmative, give an example.
20. Must an acceptance be communicated to the offer?
21. A writes B, "I will sell you my horse for $150. If I do not hear from
you to the contrary by Thursday noon I will consider the horse yours." B
does not reply. After Thursday noon, to whom does the horse belong?
22. Define option. Give an example of an option.
23. Does an option require a consideration to render it valid?
24. What is an element of a contract?
25. Give the elements of a contract.
26. How many parties to every contract?
27. What is meant by legal age?
28. A, a male, sixteen years old, contracts with B, a female, eighteen
years old. Can B avoid the contract on the ground of the infancy of A?
29. Is fraud or duress a defense to a contract?
30. How many kinds of consideration are there?
31. Is a good consideration sufficient to support a contract?
32. Define valuable consideration.
33. Give an example of a contract which may be supported by a good
consideration.
34. What is meant by a sealed instrument?
35. Is something beneficial to the promisee a sufficient consideration to
a contract?
36. A promises B to pay him $100 if B will promise to work for him for
one month. B promises. Is there a consideration to this contract? If so, what
is it?
37. Define mutual promise.
38. Is a mutual promise a valuable consideration? Give an example of
mutual promise.

39. Define past consideration. Give an example of past consideration.
40. Does a past consideration support a contract?
41. What is meant by adequate consideration?
42. Does a consideration have to be adequate to support a contract?
43. May adequacy of consideration be considered in determining
whether or not fraud was used in procuring a contract?
44. Give an example of a promise to do something one is already bound
to do.
45. Is a promise to do something one is already bound to do a sufficient
consideration to support a contract?
46. Give an example of illegal consideration.
47. Does an illegal consideration support a contract?
48. Do all the terms of a contract have to be express?
49. Define express contract.
50. A housewife orders a sack of flour from her grocer by telephone.
The flour is delivered and accepted by her. Is this an implied contract?
51. Give an example of an express contract.
52. Do any contracts have every term expressly set forth?
53. Define implied contract.
54. Are uncertain contracts void or voidable? Give an example of an
uncertain contract.
55. Give the distinction between unilateral and bilateral contracts.
56. A promises to sell his dog to B if B will promise to pay him $5.00
the following day. B promises to pay A $5.00 the following day. Is this
contract unilateral or bilateral?
57. A promises to pay B $100 if B will dig a well for A. B digs the well.
Is the contract unilateral or bilateral?
58. Distinguish executory and executed contracts.
59. A promises to pay B $5,000 if B will deliver to him a deed of his
farm. B delivers the deed. Is the contract executed or executory?
60. Is the above contract executed as to A? Is it executory as to B?
61. Are infants bound by their contracts? Define infant.
62. Are infants' contracts void?

63. Distinguish void and voidable.
64. Can a competent party contracting with an infant avoid the contract
on the ground of infancy of the other party?
65. Can an infant ratify a contract after becoming of legal age?
66. Explain how, if at all, an infant may ratify his contracts.
67. Define the term necessaries.
68. A, an infant, has not sufficient clothing. B, a merchant, sells him a
coat worth $7.00, for $14.00. Can B recover anything from A? If so, how
much?
69. Is an infant entitled to receive his wages?
70. What is meant by emancipation of an infant? Is emancipation of an
infant ever implied?
71. What is meant by novation? Give an example of novation.
72. Are contracts made for the benefit of a third person enforceable by
such third person?
73. Are contracts of an insane person enforceable?
74. Are contracts of insane persons, intoxicated persons, and idiots void
or voidable?
75. A, while intoxicated, purchased a coat from B for $10.00. The
following day, when sober, A promises to pay for the coat. Can B enforce
the contract?
76. Can an insane person make a valid contract during a lucid interval?
77. Can married women enter into contracts?
78. Do custom and usage ever enter into a contract?
79. A purchases forty barrels of yellow grease from B, like sample
furnished. The grease arrives, ranging in color from white to black. B offers
to show a custom among grease dealers, known to A, that a composite
sample is used in selling grease. Can he show this custom as part of the
contract?
80. Are oral contracts ever valid? Why, if at all, do some contracts have
to be in writing?
81. What is meant by the statute of frauds?
82. When and where did this statute originate? What was the purpose of
this statute?

83. Does the statute serve any useful purpose at the present time?
84. Do the states of this country have a statute of frauds, or is it a part of
their unwritten law?
85. By the terms of the statute of frauds what contracts must be in
writing?
86. Are contracts covered by the Statute of Frauds illegal if not in
writing?
87. A orally promises B to work for him for two years for the
consideration of $2,000. Can either party enforce the contract?
88. What is meant by the term specialty? Are specialties included in the
Statute of Frauds?
89. Can you make an oral promissory note?
90. Can contracts be made by letter and telegraph?
91. A, by letter, offers B $1,000 for B's team of horses. B mails a letter
of acceptance which is lost in the mails. Is there a valid contract?
92. A, by letter, offers B $10 for a harness. By the following mail, A
writes revoking the offer. B receives the letter of revocation five minutes
after mailing his acceptance. Is the contract revoked?
93. A, by letter, offers B $1,000 for his racing horse and says, "I will
consider my offer accepted upon receipt of your reply." B's letter of
acceptance is lost in the mail. Is there a valid contract?
94. A wires B that he will pay him $100 per share for his Pennsylvania
Railroad stock. B hands his telegram of acceptance to the telegraph operator
who fails to send it. The following day A wires a revocation of his offer. Is
there a valid contract?
95. Does a revocation by wire or letter have to be received to be
effected?
96. Does an acceptance by wire or letter have to be received by the
offerer to constitute a valid acceptance?
97. In what respect do sealed instruments differ from ordinary
contracts?
98. At present what constitutes a seal?
99. At present is it the tendency of the law to favor sealed instruments?
100. Are Sunday contracts void or voidable?

101. What makes Sunday contracts unenforceable?
102. What was The Lord's Day Act of England?
103. What is meant by works of charity and necessity?
104. A makes and delivers a promissory note to B for $100 on Sunday.
Is the note enforceable?
105. What makes a contract illegal?
106. Are illegal contracts void or voidable? Give an example of an
illegal contract?
107. What is a gambling contract?
108. Are gambling contracts void?
109. Why are gambling contracts illegal?
110. Define fraud.
111. Is a false representation made during the formation of a contract
known by both parties to be false, a defense to the contract?
112. Give an example of a false misrepresentation which will serve to
avoid a contract?
113. Can there be duress without personal violence? Define duress.
114. Give an example of duress.
115. Do duress and fraud render a contract void or voidable?
116. Define mistake in connection with making a contract. Define
mistake of fact.
117. Define mistake of law.
118. Does mistake of one party to a contract avoid the contract?
119. Does mistake of law avoid a contract?
120. Does mutual mistake render a contract void or voidable?
121. What is meant by a contract impossible of performance? Give an
example of a contract impossible of performance.
122. A, on April 4, enters into a contract dated April 2, by which he
promises to deliver to B within twenty-four hours, five tons of coal. Is A
liable on this contract?
123. Do floods, earthquakes, or lightning preventing performance
excuse performance?

124. Is a party to a contract excused from performance by reason of a
strike?
125. May a party to a contract stipulate against strikes and Acts of God
in such a manner as to avoid liability therefor?
126. If a party to a contract renders performance impossible can he
force performance?
127. What is meant by conflict of law?
128. Does the law of the place where a contract is made, or the law of
the place where the contract is enforced, prevail?
129. If a contract is made in one place, to be performed in another, the
law of which place prevails in the interpretation of the contract?
130. What is meant by assignment of a contract?
131. A, a singer, contracts to sing at B's opera house for one week. Can
A assign her contract to C, another singer? Can B assign his contract to D?
132. What is meant by giving notice of assignment?
133. Is an assignment a contract?
134. What are the elements of a valid assignment?
135. Does an assignment require a consideration?
136. Write an assignment of a simple contract.
137. Define several liability.
138. Can a party be jointly and severally liable on the same contract?
139. If two parties are jointly liable on a contract can one of them be
sued thereon without the other?
140. If two parties are severally liable on the same contract, can both be
sued together thereon?
141. Define liability in solido. Give an example of liability in solido.
142. How may a contract be discharged by performance? Give an
example of a contract discharged by performance.
143. What is meant by tender? What constitutes legal tender?
144. Does United States statute or a state statute make certain money
legal tender?
145. What kinds of money constitute legal tender?

146. A owes B $5.00. He tenders him the amount in nickels. Is the
tender good?
147. A owes B $500.00. He tenders him a certified check for the
amount. Is the tender good?
148. Can a contract be discharged by a subsequent agreement?
149. A agrees to dig a well for B for $10.00. Before A starts work, B
changes his mind, and offers A $1.00 in settlement. Is the contract
discharged if A accepts the $1.00?
150. Define warranty.
151. Give an example of warranty to a contract. 152. Does breach of
warranty discharge the contract?
153. Does breach of warranty give rise to an action for damages?
154. Define rescission.
155. Give an example of rescission.
156. Define statu quo.
157. Define breach of contract.
158. Give an example of breach of contract.
159. In case of breach of contract must the other party wait until the
time for performing the entire contract elapses, or may he sue at once?
160. Define bankruptcy.
161. By what kind of law is bankruptcy regulated?
162. Does bankruptcy discharge a contract?
163. Define voluntary bankruptcy.
164. Who may become a voluntary bankrupt?
165. Define involuntary bankruptcy. Who may become an involuntary
bankrupt?
166. Define act of bankruptcy.
167. Enumerate acts of bankruptcy.
168. At common law could one party to a contract compel another to
perform it specifically? Under present law can a contract for sale of
personal property be enforced specifically?
169. What is the measure of damages for failure to deliver merchandise
under a contract of sale?

170. How did the court of equity originate?
171. Are juries used in courts of equity?
172. What classes of cases are tried in equity?
173. Does a court of equity have jurisdiction of a case where there is a
plain and adequate remedy at law?
174. With what kind of contracts is equity especially concerned?
175. Give an example of a contract which may be enforced specifically
by a court of equity.
176. Write a form for a simple contract between A and B for the sale of
a horse.

PRINCIPAL AND AGENT

1. What is meant by the term agency?
2. Give an example of a transaction completed by an agent.
3. Is there a limitation upon the kinds of business which may be
transacted by an agent?
4. Distinguish principal and agent from master and servant.
5. Define and give an example of principal.
6. Define and give an example of agent.
7. Define and give an example of agency.
8. Define infant.
9. Is a married woman seventeen years of age an infant?
10. May an infant be a principal?
11. Define and distinguish void and voidable contracts.
12. May an idiot, insane, or drunken person act as principal?
13. May a corporation or partnership transact business through agents?
14. May a child eight years of age act as agent?
15. In general, what persons may act as agents?
16. May a person act as agent who is not capable of acting for himself?
17. May a person whose interests are opposed to those of his principal
act as agent?

18. May corporations or partnerships serve as agents?
19. Must an agent's authority to act as agent be in writing?
20. May an agent be appointed or authorized to act by implied contract?
21. Define and give an example of implied contract.
22. What is meant by ratifying an act of an agent.
23. Give an example of a principal's ratification of an unauthorized act
of an agent.
24. Give an example of a contract of agency which must be in writing.
25. Why must some contracts be in writing?
26. What are the principal provisions of the Statute of Frauds?
27. Must contracts of agency authorizing an agent to complete a land
transfer be in writing?
28. Must a contract authorizing an agent to procure a purchaser for a
house and lot be in writing?
29. Can a third party rely upon the statements of an agent that he has
authority to act as agent?
30. May a person do through an agent anything which he may lawfully
do by himself?
31. A employs B to purchase votes for an act pending in a state
legislature. Is A or B, or both, guilty of a crime?
32. A employs B to paint a picture, and B employs C to paint the picture.
Must A accept the work of C?
33. What things are necessary to enable a person to ratify the acts of an
alleged agent?
34. May a forgery be ratified?
35. Give a classification of agents.
36. A is employed to deliver a package for B. What kind of an agent is
B?
37. Give an example of a universal agent.
38. Enumerate the duties a principal owes his agent.
39. A employs B to work in his garden. B works for ten days, no
compensation having been agreed upon. How much, if anything, can B
recover from A?

40. If an agent abandons his agency before the time of his agency
expires, can he recover anything for work performed? If so, how much?
41. What duty, if any, does a principal owe to his servant as to
furnishing a safe place in which to work?
42. What rules, if any, does a servant assume?
43. In general, what are the liabilities of a principal to third persons who
deal with an agent?
44. Is a principal liable to a third person who has dealt with an agent,
who acted within the apparent but not the actual scope of his authority?
45. Is a principal liable to third persons for lots committed by an agent
within the scope of the agent's authority?
46. Give an example of a lot or private wrong committed by an agent
while acting for his principal, for which the principal is not liable.
47. Enumerate, in general, the duties an agent owes his principal.
48. Is an agent liable to his principal for mistakes of judgment or
discretion?
49. Is an agent who acts without compensation ever liable to his
principal for negligence? If so, give an example.
50. Enumerate, in general, the liabilities of an agent to third persons
with whom he deals.
51. A, an agent for B, sells goods to C, in his own name. C afterwards
discovers that A is agent for B. Can C hold A?
52. If an agent procures a contract for his principal by means of fraud is
the agent liable personally on this contract?
53. If an agent, believing he has authority to act as an agent, where in
fact he does not, reveals all the facts of his agency to a third party with
whom he is dealing, is he liable personally to such third party if it turns out
that he acted without authority?
54. Define and give an example of undisclosed principal.
55. Is an undisclosed principal when discovered, liable for the acts of
his agent?
56. Is an agent of an undisclosed principal personally liable to third
persons for acts of agency after the undisclosed principal is discovered?
57. May there be an undisclosed principal to a negotiable instrument?

58. What is meant by apparent authority of an agent as distinguished
from actual authority?
59. Give an example of an agency where the apparent authority of the
agent conflicts with the actual authority.
60. If an agent appears to have authority to act for another, but in fact
never received any authority, can third persons rely upon his apparent
authority?
61. Do customary powers belonging to an agent come within the
meaning of apparent authority?
62. May a principal limit an agent's apparent authority by printing
limitations in the agent's order sheet and in making contracts with third
persons? If so, give an example.
63. Define and give an example of secret instructions.
64. Can a principal evade responsibility to third persons by secret
instructions given to an agent?
65. If a third party dealing with an agent knows of the secret
instructions, is he bound by them?
66. Define and give an example of sub-agent.
67. Is a sub-agent responsible to the agent?
68. Is an agent ever responsible for the acts of a sub-agent?
69. What matters, if any, may an agent delegate?
70. Define and give examples of mechanical and ministerial duties.
71. Distinguish an agency requiring personal skill, discretion, and
judgment, from one requiring the performance of ministerial or mechanical
duties.
72. When, if at all, is an agent authorized to collect?
73. Is an agent authorized to sell goods, always authorized to collect for
them?
74. Is an agent authorized to collect, authorized to take checks?
75. How should an agent authorized to sign a written instrument for his
principal, sign?
76. May an agent authorized to sign a promissory note for his principal,
sign his principal's name without his own?

77. An agent authorized to sign a written contract for his principal signs
his own name followed by the word, agent; e.g., "A, Agent." Is the principal
bound?
78. When, if at all, is an agent authorized to warrant the quality of
personal property sold?
79. Define warranty.
80. Give an example of an agent who is impliedly authorized to warrant.
81. Do usage and custom have anything to do with the agent's implied
authority to warrant?
82. Define factor, and give an example.
83. Do factors have possession of the goods?
84. Do factors have implied authority to collect?
85. Do factors have the right to sell goods in their own name?
86. Is a commission merchant a factor?
87. Define broker.
88. Distinguish broker and factor.
89. Give an example of broker.
90. Is a real estate agent a broker, or a factor?
91. In what respect, if any, does an auctioneer differ from an ordinary
agent?
92. What is meant by licensed auctioneers?
93. Are auctioneers' fees ever regulated by statute?
94. What is meant by auctioneer's lien?
95. When, if at all, may an auctioneer sell on credit?
96. May an auctioneer make his own terms of sale? Are all third persons
bound by the terms advertised?
97. Define and give an example of del credere agent.
98. Must a del credere agent receive a separate consideration for his
guaranty?
99. When is a real estate agent entitled to receive his commission?
100. Does the contract of a real estate broker differ from the contract of
any other agent?
101. How may an agency be terminated?

102. Give an example of an agency terminated by lapse of time, and of
one terminated by act of parties.
103. May all agencies be terminated at the will of the parties?
104. What is meant by notice to third persons of termination of an
agency, and when, if at all, is this notice necessary?
105. Explain termination of agency by operation of law.
106. In case of termination of agency by death of principal must third
parties be notified?
107. Does injury or liability of an agent ever terminate an agency? If so,
under what circumstances?
108. Define agency coupled with an interest.
109. Is an agency coupled with an interest revocable at the will of either
party?
110. A employs an agent at a salary of one hundred dollars per month,
promising him 1% commission in addition, on all orders taken in excess of
$1,000 per week. Is this an agency coupled with an interest?
111. Give an example of an agency coupled with an interest.

CHAMBER OF COMMERCE, CHICAGO, ILL.

COMMERCIAL LAW

PART II

PARTNERSHIP

66. In General. A party may trade and enter into contracts by himself,
or he may associate with himself others. A person is not obliged by law to
transact business solely by himself. He is permitted, for the purpose of
having labor, capital and skill joined in one enterprise, to combine with
others. Where a person joins with himself one or more persons for the
purpose of transacting business as a unit, the firm composed of the two or
more persons thus joined is called a partnership.
A partnership may be defined to be a contract between two or more
persons, by which their labor, skill or property is joined in an enterprise for
common profit, and in which each partner may act as principal. The
principal features of a partnership are, the right of each partner to act as
principal for the other partner, and the individual liability of each partner for
the acts of the partnership. A and B agree to combine their efforts in
operating a tea and coffee store. Each may bind the other by contract, made
within the scope of the business, and each is liable individually to pay the
debts incurred by the partnership.
67. How a Partnership is Created. A partnership is created by a
contract. This contract may be oral, express or implied. Many partnerships
are created by carefully drawn, written instruments, in which the rights and
duties of each party are set forth in detail; while others are made by oral
agreement. Any contract of importance should, for the purpose of having a

record of the exact understanding of the parties, be made in writing. As
between themselves, parties cannot be partners except such was their
intention. Sometimes, parties are considered partners as to third persons,
with whom they deal, and are liable as partners, where there is no intent to
form a partnership, and when none exists as between themselves. This
relationship, called partnership by estoppel, is based on equitable reasons
and is discussed more at length under a separate section. As between the
partners themselves, to constitute a partnership, there must be a contract to
that effect. This requires an assent on the part of all the parties, based upon
a valid consideration. Parties may enter into an agreement to enter into a
partnership at a future time. In this event, the partnership does not exist as
such until the time provided for in the contract arrives, and until the
conditions of the executory agreement have been complied with.
A partnership may be created for any lawful purpose. If the partnership
contract is procured through fraud or misrepresentation, it may be avoided
by reason thereof.
68. Who May be Partners. Any person competent to contract on his own
behalf may enter into a contract. (See "Competency of Parties," chapter on
Contracts.) An infant, or person under legal age, may enter into a
partnership contract the same as he may enter into any other contract. The
law does not prohibit it. But contracts by infants are voidable. They may be
renounced by the infant at his pleasure. For example, if A, of legal age,
enters into a partnership contract with B, seventeen years of age, B may
renounce his obligation to A at any time he pleases, before he has reached
legal age. A, however, cannot renounce his partnership contract on account
of the infancy of B. B may ratify his contract after becoming of legal age. If
B, after becoming of legal age, refuses to continue the partnership, and
refuses to carry out his partnership agreement, he is deemed in law to have
renounced his partnership, and is not liable for the obligation of the
partnership. If, however, after reaching legal age, B continues the
partnership relationship for an appreciable length of time, he is deemed in
law to have ratified the agreement, and is thereafter liable thereon. B may
not only renounce the partnership agreement as to his partner, A but also as
to third persons dealing with the partnership. A, however, is responsible
individually upon the partnership contracts with third persons, and cannot
take advantage of B's infancy. It is no defense for him.

Drunken persons, insane persons, and idiots cannot enter into
partnership agreements. A married woman could not enter into contracts at
common law, but by statute is now permitted to make contracts, with a few
minor limitations, such as acting as surety for her husband, or making
contracts with her husband.
69. Partnership Name. The members of a partnership may use any
name they desire, so long as the name does not interfere with the fixed
rights of others. The members of a partnership may use the name of one of
the partners, or the combined names of all, or of a part of the partners, or a
name separate and distinct from the names of any of the partners. For
example, if A, B, and C form a partnership, they may use as a partnership
name, "The A Co.," "The A, B, Co.," "The A, B, C Co.," "The X Co.," or any
fictitious name they may determine upon. Some states provide by statute,
that a partnership using a name not revealing the individual members of a
partnership, must, in order to sue in the partnership name, file with a county
official the names of the members composing the firm. Other states by
statute prohibit the use of fictitious names.
A partnership cannot be bound by any other name than its own. Where a
partnership has adopted a firm name, contracts made in the name of one of
the individual members do not bind the partnership. A partnership may
change its firm name. This may be done by agreement, express or implied.
If the members of a partnership do not expressly agree to change the name,
but a new name is used by one or more of the members, and the change is
acquiesced in by the other members, they are deemed in law to have agreed
to the new name. A partnership may use two firm names. This sometimes
occurs when a firm has branches. One name is used for one branch and
another for the second branch. In this event the partners are liable for
contracts made in either name.
70. Names Applied to Different Kinds of Partners. Depending upon
the nature of their relationship to the partnership, partners are said to be
secret, silent, ostensible, nominal, or dormant.
A secret partner is one who keeps the fact of his membership in the
partnership from the public. This does not enable him to escape liability as a
partner. He is in the position of an undisclosed principal. (See "Undisclosed
Principal," chapter on Agency.) So long as a secret partner keeps the fact of
his membership from the public, of course he will not be sued as a member.

But his liability exists in spite of this secret, and when discovered his
liability may be enforced.
A silent partner is one who takes no active part in the operation of the
partnership business. His name may be known as a partner, or not. He is not
necessarily a secret partner. He may be well known as a member of the
partnership, but if he takes no active part in the management, he is said to
be a silent partner. A silent partner is individually liable for the obligations
of the partnership, the same as any partner.
An ostensible partner is one who permits himself to be held out or
represented as a partner, when in fact he is not a partner. He is responsible
as a partner to third persons who deal with the firm, and to whom he has
been held out as a partner. For example, A and B trade as the Rodway Co.,
A in company with C, tries to buy goods of D. D knows C but does not
know A and B. A with C's consent, tells D that C is a member of the
Rodway Co. C is liable as an ostensible partner. More commonly the
ostensible partner permits his name to be used as a part of the partnership
name when in fact he is not a member of the partnership. If A and B form a
partnership and with C's consent use the name, "A B and C Co.," C is liable
on the partnership obligations, in spite of the fact that as between himself
and A and B, he is not a partner. If a partner is advertised to third parties as
such, without his knowledge or consent, he is an ostensible partner, but is
not liable as a partner.
A nominal partner is one who permits his name to be used as a member
of the partnership without being a member of the partnership. Ordinarily he
is paid something for the use of his name, but does not have a share in the
profits. A nominal partner is liable to third persons as a partner, but as to the
other partners, he does not have the rights or liabilities of a partner.
The term, dormant partner, is sometimes used synonymously with
secret partner. Technically, it means that the partner is both unknown and
silent. It combines the elements of a secret and a silent partner.
The terms, general and special partner, are commonly used. By general
partner, is meant the one who shares equally in the profits and losses of the
partnership transactions. The term, special partner, means that the partner,
as between the other partners, does not share equally in the profits, nor is he
responsible to the other partners for an equal share of the losses. As to third
persons, the terms general and special partners have no significance; for

example, if A, B and C enter into a partnership, A and B each to furnish two
fifths of the capital, and each to have two fifths of the profits, and C is to
furnish one fifth of the capital, and receive one fifth of the profits, A and B
are general partners and C is a special partner. As to third persons dealing
with the partnership A, B and C, each are individually liable.
71. Partnership Agreements as between Partners. In considering the
question as to whether a partnership exists, it must be regarded from two
points. First, is there a partnership as between partners; second, is there a
partnership as to third persons? A partnership may exist as between the
partners themselves. When a partnership exists between the partners
themselves, there can be no question about its existing as to third persons.
As between the partners themselves, a partnership cannot exist unless
there is a contract express or implied, by which they mutually agree or
consent to the partnership. If A and B agree, either orally or in writing, to
engage in a partnership enterprise, and do so engage in a joint business, a
partnership exists between them. If A trades alone as the "A Co." and,
desiring to obtain credit from B, tells B that C is a member of the A Co.,
even though C ratifies the unauthorized act of A, by stating to B that he is a
member of the A Co., this does not constitute him as a partner to A. As to B,
however, he is a partner and is liable as such. As to A, he is not a partner,
and is not entitled to a share in the profits. If the intent of the parties to form
a partnership, is clear, from their express agreement, or from an agreement
implied from their acts or conduct, a partnership, without question, exists
between them. Many business arrangements are made by which property,
skill, or labor is combined under peculiar arrangements, as to the division of
profits and losses, making it difficult to tell whether a partnership exists. It
is not essential that the word, "partnership," be used to have an agreement
constitute a partnership. If it is the intent of the parties thereto to create a
partnership, one exists regardless of the term used. An agreement to share
losses, or to share profits in an enterprise, is some evidence of a partnership,
but is not sufficient of itself to constitute a partnership. A and B may agree
each to furnish his own tools in drilling an oil well, and if a profit is made,
to divide the profits, and if a loss is sustained to bear the loss out of their
individual funds. These facts, do not show an intent to form a partnership,
and do not make A and B partners as to themselves. If, however, A and B
contribute one hundred dollars ($100.00) each to a partnership fund, and
combine the tools possessed by each toward a partnership fund, and agree

to share equally the profits and losses, the intention is clear that a
partnership is intended, and these facts constitute A and B partners.
72. Partnership as to Third Parties. Where a partnership exists as
between the partners themselves there is no question about its existing as to
third persons dealing with the partnership as such. A party cannot hold
himself out to the world as a partner, and by means of a private arrangement
with his apparent partners, evade liability as a partner. It is generally
conceded that a secret arrangement made between partners that one shall
not be liable as a partner, if made known to a third person dealing with the
partnership, will relieve the apparent partner from liability to such third
person. For example, if A and B are doing business as the "A B Co.," and A
lends his name to the company for a fixed consideration, B receives all the
profits and is liable for all the debts. If C deals with the "A B Co.," not
knowing of the private contract between A and B, A is liable individually
upon the contract. If, however, C at the time he deals with the "A B Co.," is
informed of the actual connection of A with the company, he cannot hold A
liable as a partner.
If a third person extends credit to one of the partners, knowing that the
purchase is for the benefit of the partnership, he can hold liable, only the
party to whom he extended credit. If, however, he sells to one of the
partners, not knowing that he is a partner of a firm, and the firm gets the
benefit of the purchase, the firm is liable for the debt.
A partnership, like a principal in agency, is liable for the torts or private
wrongs of the individual partners, committed in the course of the
partnership business. If A, a member of the A B Co. partnership, uses fraud
in purchasing goods, the A B Co., is liable for the fraud. If A, a member of
the A B Co., gas fitters, carelessly connect a gas burner, thereby causing an
explosion, and injury to C, the A B Co., is liable for the injury.
73. Powers and Property of a Partnership. A partnership has the
power to transact business in its firm name. Unless prohibited by statute, it
may sue and be sued in its firm name, regardless of the names of the
individual partners.
Each member of a partnership is regarded as an agent of all the other
members of the partnership, with authority to bind the partnership by any
contract made within the scope of the partnership business. A partner may
deal individually in matters outside the scope of the partnership business.

For example, A, B and C form a partnership for the purpose of buying,
selling and leasing real estate. A, B and C are authorized to act for each
other, in doing all the things reasonably connected with the transaction of
real estate business. If A orders groceries in the firm name, his partners may
deny and avoid the obligation, on the ground that is is not within the scope
of the partnership affairs. The grocer selling A groceries in the firm name
cannot claim that B and C authorized A to buy groceries. The purchase is
clearly outside the real estate business. If, however, A purchases a house
and lot in the firm name and uses it personally, the seller can hold the
partnership for the purchase price. A partnership is empowered to sign
notes, only when necessary to the transaction of the partnership business.
Partnerships may hold the title to personal property in the name of the firm.
This does not prevent the individual members from holding property
individually at the same time. As between the partners themselves, only that
personal property mutually agreed to belong to the partnership is
partnership funds. Even as to third persons dealing with the partnership, the
actual agreement of the individual members as to what is, and what is not
partnership funds governs, except in the case of fraud. A partnership cannot
represent that it owns certain property, or that certain purchases are made
for the partnership for the purpose of obtaining credit, and then claim that it
is owned by an individual member. Property purchased by partnership
funds, or improved with partnership funds, belongs to the partnership. Real
estate purchased with partnership funds is regarded as belonging to the
firm, even though title is held in the name of one of the partners. The
partner in whose name the property is held is said to be the legal owner, but
the partnership is the equitable owner. Firm creditors may subject it to pay
firm obligations.
74. Liability of Persons Held Out as Partners. If a person permits
himself to be held out as a partner, he will be bound as a partner, as to third
persons dealing with the partnership with this in view. It matters not that the
party held out as a partner is not a partner in fact. The real relation will
protect the apparent partner, as against the other partners, but not as against
third parties who deal with the firm, relying upon his being a partner. What
amounts to being held out as a partner is a question of fact, which must be
determined by the circumstances surrounding each particular case. If A,
without authority of B, tells C that B is his partner in the shoe business and
that they are trading as the "A B Co.," and C sells them an order of shoes,

without investigating whether B actually is a partner, B is not liable as a
partner for the obligation. The authority to hold a person out as a partner
must come from the partner so held out. It may come from his assent or his
neglect in denying the relationship when he learns that he is being
advertised as a partner. For example, suppose A borrows five hundred
dollars ($500.00) of B and promises to give B a one-half interest in his
grocery business, if B so desires, on condition that B spend his afternoons
working in the store, and B, not considering himself a partner, permits C to
tell third persons that he is a partner. As a result, B cannot deny partnership
liability as against third persons who consider him a partner in dealing with
the partnership.
75. Duties and Liabilities of Partners as to Each Other. The relation
of partners to each other is a contract relation. Each partner must carry out
the terms of the contract. Ordinarily, partnerships require the devotion of
the entire time and attention of each partner to the partnership business.
Partners are not permitted to engage in any business for themselves which
will interfere with the partnership business, or take their time and attention
away from the partnership business. Each partner owes that duty of fidelity
to the other members of the partnership. A partner as an individual may deal
with the firm, and may act as agent for others in dealing with the firm, if it
is with the consent and knowledge of the other partners. A partner cannot
sell his interest in the firm to another, and have the new partner take his
place as a member of the partnership, without the consent of the other
partners. In any event, the withdrawal of one partner and the substitution of
another dissolves the old partnership and establishes a new partnership. One
partner may assign or transfer his interest in a partnership but this dissolves
the partnership, and gives the purchaser the right to his seller's interest in
the funds of the partnership. It gives the purchaser no right to participate in
the management of the business.
If by the terms of a partnership agreement, the partnership is to subsist
for a specified length of time, and one partner withdraws or refuses to
continue, he is liable in damages to the other partners, for breach of
contract. If the partnership is organized without regard to any specified
duration, a partner may withdraw at will, and thus dissolve the partnership.
Partners must devote their entire time and attention to the business, unless
the partnership agreement provides otherwise. Each partner is entitled to an
equal share of the profits. If one partner deals unfairly with another, the

latter cannot bring an ordinary suit at law for recovery of the amount due
him, or for his damages, but he must bring a suit in equity, setting up the
facts, and must demand an accounting. The court will then determine the
rights of the partners. If a partnership is dissolved, and the partners
expressly agree that a certain sum is owing by one partner to another, the
latter may sue the former for this amount, in an ordinary action at law.
76. Liability of Partnership to Third Persons. A partnership is liable
as such, upon its contracts to third persons. This means that the obligation is
in the nature of a joint one against all the partners, and not a several one
against the individual partners. There is an individual liability of each
partner, called a liability of each partner in solido. This liability is discussed
in this section under the title, "Liability of Individual Members of a
Partnership." A third person, in commencing a suit against a partnership,
must sue all the partners, or be subject to the risk of having the case
dismissed at the objection of the one sued. All the property of a partnership
may be subjected to the payment of partnership obligations.
77. Liability of Individual Members of a Partnership for
Partnership Obligations. While a suit brought against one partner for a
partnership debt may be dismissed if objected to by the partner sued, if not
objected to, and judgment is taken, it may be enforced against the
individual assets of the partner sued. In this event, in most jurisdictions, the
other partners are discharged from liability. If the partnership is sued either
in the partnership name, or in the name of all the individual partners, the
individual members are still liable in solido for the debt. By in solido is
meant, liable for the whole. If one partner is compelled to pay all or more
than his proportion of a partnership debt, he may recover the excess of his
share, ratably from the other partners.
A member of a partnership may have partnership assets and individual
assets. A creditor of the partnership may satisfy his claim out of the firm
assets, or out of a partner's individual assets, except where there are
individual creditors. In the latter event, the partnership creditors cannot
subject individual partners assets to the disadvantage of the individual
creditors. On the other hand, individual creditors cannot subject a partner's
share in the partnership assets to the disadvantage of partnership creditors.
This means that in case of insolvency of either a partner or of the
partnership, firm creditors must first exhaust firm assets, and take the
balance of individual assets after individual creditors have been satisfied. It

means, further, that individual creditors must satisfy their debts out of
individual partner's assets, and can only subject the balance of firm assets
after firm creditors have been satisfied. If there are no partnership assets at
all, and no solvent partners, firm creditors are treated on the same basis as
individual creditors, and the individual assets of the partners are divided pro
rata among partnership and individual creditors alike.
78. Change of Membership. A partnership depends for its existence
upon the continuation of the same membership. If one partner withdraws,
the partnership is, by that act, dissolved. If a new member is admitted, the
partnership is dissolved and a new one created. A partner cannot escape his
liability as a partner by withdrawing from the partnership. By this act, he
terminates the partnership, and no further liabilities can be created against
him except as to those persons having no notice of his withdrawal; but he is
still liable for the old partnership debts. A substituted partner is not liable
for the debts incurred before he enters the firm, unless he expressly assumes
such debts. If he expressly assumes them, this does not relieve the outgoing
partner from liability, unless this is assented to by partnership creditors. If it
is borne in mind that a change in membership dissolves a partnership, and
any partnership that exists thereafter is separate and distinct from the old
one, and dates from the withdrawal of the retiring partner, or admission of
the new partner, the individual liability of the partners is easily determined.
For example, if A, B and C are partners in a dry goods business, and B
withdraws, B is still personally liable for the debts of the A B C Co. The
partnership ceases at the time of his withdrawal. If A sells his interest to D,
who becomes a member with the consent of B and C, A is still liable to
creditors who became creditors before A's withdrawal. D is not liable for
the debts incurred before his admission as a partner, unless he expressly so
agrees.
79. Death of a Partner. The death of a partner terminates the
partnership. The remaining partners may agree to continue the partnership,
which amounts to the formation of a new partnership. In case of death of
one partner, title to the partnership property is in the surviving partners.
They must collect the assets and may sue on firm obligations. They cannot,
as survivors, continue the business further than is necessary to wind up the
affairs of the partnership. They must first pay all firm obligations, and
distribute the proceeds among themselves and the representatives of the
deceased partner.

80. Survivorship. Survivorship is the term applied to the relation to the
partnership of the remaining partners, after a dissolution. The partners
remaining after a dissolution are known as survivors. The title to the
partnership property vests in the survivors, and they must collect the assets,
pay the liabilities and distribute the proceeds among themselves and the
representatives of the other partners. By statute, in some states, surviving
partners are permitted to purchase firm assets at a fair appraised valuation.
Surviving partners have the right to retain possession of the partnership
property, and to do those things necessary to wind up the affairs of the
partnership. They are not permitted to divide any firm assets among
themselves, until all firm debts are paid. If A, B and C are partners in the
grocery business, and C dies, the title to the property rests in A and B, who
have the authority to sue for the debts owing, and may be sued for the debts
owed by the firm. They have the right to draw checks on the firm checking
account, but no right to incur further obligations. In the absence of special
statute, they have no right to purchase the business for themselves, and if
they choose to continue it, they do so at their own individual risk, and must
account for all profits made.
81. Dissolution of Partnerships. A partnership may be dissolved by
lapse of time. If a partnership is entered into under an express agreement
that it is to subsist for a certain length of time, lapse of the stipulated period
works a dissolution. A partnership may be dissolved by mutual agreement
of the partners. A partnership may also be dissolved by any change of
membership, whether it be the withdrawal of a member, admission of a new
member, or death of a member. Bankruptcy of a member, or bankruptcy of
the partnership itself, works a dissolution. If one party violates his duties as
a partner, or if for any reason, the partnership ceases as a result of a decree
of court, there is a dissolution.
82. Notice of Dissolution. Persons who deal with a partnership through
one of the partners, or through an authorized agent, have the right to assume
that the partnership will continue to exist. If a partnership is dissolved by
lapse of time, by mutual agreement, or by withdrawal or entrance of another
partner, notice must be given of such change, to protect the members of the
former partnership against contracts of third persons, made subsequently to
the dissolution. Business people, who have had former dealings with the
partnership, must receive actual notice. These notices may be sent by mail,
or delivered orally, or in writing. A public announcement in a newspaper is

sufficient to protect former partners against contracts subsequently made by
persons who have not previously dealt with the firm. In case of dissolution
of a partnership by operation of law, such as by death of a member,
bankruptcy, or decree of court, no notice is necessary. The act which causes
the dissolution is deemed to be notice to everyone.
83. Distribution of Firm and Individual Assets after Dissolution. As
a general rule, firm creditors are entitled to firm assets. The balance goes to
individual partners. Individual creditors are entitled to individual assets.
The balance goes to firm creditors. If, however, the partnership is insolvent
as a firm, and there is no living solvent partner, in the distribution of firm
assets, firm creditors are treated the same as individual creditors. Firm real
estate may be subjected by firm creditors to the payment of their claims.
After firm creditors are satisfied, firm real estate is treated as the real estate
of the individual members, and descends to the heirs of the partners, and
does not pass as personal property to their personal representatives.
84. Limited Partnership. Most states by statute permit limited
partnerships to be formed. In general, a limited partnership differs from an
ordinary partnership in that some of the members, called special partners,
are not individually liable for the obligations of the partnership. The statutes
of the different states differ somewhat as to the purposes for which a limited
partnership may be formed. In general, however, a limited partnership may
be formed to carry on any business except banking and insurance. A limited
partnership must have at least one general partner who is individually liable
for the obligations of the partnership. The special partners contribute certain
fixed sums, which must be paid before the partnership starts business, and
beyond which the special partners are not liable. Generally, special partners
are not permitted to manage the business. A limited partnership is generally
required to file with a public officer a certificate showing its membership,
the purpose for which it is organized, the number of shares held by special
partners, the assets, the total capital, and the names of the general partners.
The purpose of a limited partnership is to enable persons to invest a certain
amount of capital in an enterprise without being individually responsible
beyond the amount actually invested. Limited partnerships are now largely
supplanted by corporations.
85. Form of Partnership Agreement.
Articles of agreement entered into at Chicago, Ill., this ... day of ... 1909, by and between
A, hereinafter designated as the first party, and B, hereinafter designated as the second

party, both of Chicago, Ill. Witnesseth that:
1. Said parties agree to enter into a partnership for the purpose of engaging in and
carrying on a general hardware business in the city of Chicago under the name of
Cook County Hardware Co.
2. The first party agrees to furnish his stock of goods, now located at his present
hardware store in Chicago, and said second party agrees to contribute $5,000.00 in
cash immediately upon the signing of the agreement, said stock of goods, and said
$5,000.00, to constitute the joint capital of the partnership.
3. Said parties agree to devote their entire time and attention to the interests of the
partnership business.
4. Said parties agree to share equally the losses and expenses of said partnership, and
at the expiration of each month, to divide equally the net profits reserving a fund
sufficient to keep the original capital intact.
5. Said parties agree that the partnership shall continue as long as the partners shall
mutually so desire. In the event of either party's desiring to withdraw, said parties
agree that each shall choose one arbitrator, the two thus chosen to select a third,
who shall appraise the assets of the firm, and divide them into parts, which
division shall be accepted as final by the parties hereto. And each party agrees to
accept the portion allotted to him by said arbitrators.
In witness whereof, the parties hereto have set their hands the day and year above
written.
Signed
A.......................
B.......................
Signed in the presence of
C.......................
D.......................

CORPORATIONS

86. Nature of a Corporation. A corporation has been defined to be "a
collection of many individuals into one body, under a specific denomination
having perpetual succession, under an artificial form and vested by the
policy of the law, with the capacity of acting in several respects as an
individual." In other words corporation is the name applied to an
association of persons authorized by law to create, by mutual contribution, a
common fund for the purpose of transacting business without rendering the
individual members personally liable for the debts of the association,
beyond a certain amount. The object is to permit persons to obtain the
advantage of large combinations of capital without involving, beyond
certain limits, the private property of the individuals composing it. A

corporation is an artificial person having an existence in many respects
separate and apart from the members composing it. While it can only
transact business by means of agents, the obligations created are the
obligations of the artificial person, the corporation. The common fund or
capital of the corporation, is the only property that can be subjected in
payment of the debts. The individual property of the members is not the
property of the corporation.

UNITED STATES PATENT OFFICE, WASHINGTON. D. C.

87. Corporations Distinguished from Partnerships. A partnership
may be created by mutual consent of the parties desiring to engage in that
joint enterprise. The only limitation is that the enterprise must be for a
lawful purpose. A person may form a partnership for the transaction of any
kind of business which he may transact as an individual. A corporation, on
the other hand, must have permission from the government to transact
business. This permission is called its franchise. Corporations cannot be
formed for every purpose. That is, individuals are permitted to engage in
lines of business denied to corporations. A corporation is an artificial
person, regarded in law as distinct from the individuals composing it. A
partnership is not distinct from the individuals composing it, and the
individual members are personally liable for the debts of the partnership. A
corporation has a continuous existence; it continues to live regardless of
death of some of its members, or regardless of a change of membership. A
partnership ceases to exist upon the death of a member, or by a change of
membership. A corporation's members do not have the right, as such, to act

as agents of the corporation for the purpose of transacting business. The
agents of the corporation are appointed in a manner prescribed by law, and
by the rules of the corporation. In a partnership, each member is the
recognized and authorized agent of the partnership. Each member may bind
the partnership by any contract made within the scope of the partnership
business. For example, if A and B form a partnership for the purpose of
selling real estate, either A or B by reason of the partnership agreement, is
authorized to sell real estate in the name of the firm. If A, B, C, D, and E are
stockholders in the X Co. neither A, B, C, D or E is entitled, by reason of his
being a stockholder, to make contracts for the corporation. A board of
directors must be elected by the stockholders, who in turn elect officers, and
appoint agents authorized to transact the business of the corporation.
88. Powers of a Corporation. Corporations are not permitted, as such,
to transact business of every kind. A corporation is an artificial being
created by law. It can exist only for those purposes enumerated by law.
Corporations, as such, have well recognized, or distinguished, powers or
characteristics. The ordinary powers of a corporation are as follows:
First— The power of perpetual succession.
Second The right to sue and be sued, and to receive and grant in their corporate
— name.
Third— The right to purchase and hold real estate and personal property.
Fourth— The right to have a common seal.
Fifth— The right to make by-laws.

It was long ago decided that a franchise given by the government to a
corporation, cannot be revoked or changed by the government, unless such
a reservation is made by the government at the time the franchise is granted.
At present, such reservations are made in granting most franchises, either
by express reservation in the franchise itself, by general statutory provision,
or by constitutional limitations.
89. Creation of Corporations. A corporation cannot be organized
merely by agreement of the members. It must obtain permission of the
government, state or national, to operate as a corporation, before it can
lawfully exercise any corporate rights.
Originally, the right to become a corporation was granted by express
permission of the king. The franchise, or right granted, was called the
corporate charter. In this country, charters originally were granted by special

legislative grants. While the United States Constitution does not expressly
provide for the formation of national corporations, Congress is deemed to
have the right to create them for the purpose of carrying out the express
functions of the government, expressly granted by the United States
Constitution. For example, the Constitution expressly grants the United
States Congress the power to coin money and regulate the value thereof,
and to levy and collect taxes. It is given no express power to organize
national banks, but under the provisions giving it power to make laws to
carry into execution all of the powers expressly granted, it is held to have
the power to provide for the organization of national banks.
Most corporations are organized under state laws. Originally, charters
were granted by special acts of the state legislatures. These charters were
decided to be contracts between the state and the corporation, which could
not be changed or revoked at the desire of the legislature. At the present
time, most states have general permissive statutes, under which
corporations may be organized. These statutes generally reserve the right to
the state, to revoke or change the charter at the will of the legislature. Many
states have constitutional provisions limiting the power of the legislature to
grant irrevocable charters. The statutes of the different states vary somewhat
as to the things required of persons desiring to organize a corporation, but
the primary requirements are similar. In general, the following are the
statutory requirements of the states for the organization of a corporation.
The persons desiring to organize a corporation, not less than three (some
states require more), a majority of whom are citizens of the state, must sign
a paper, called the articles of corporation, which contains the name of the
proposed corporation, the place where it is to be located, the purpose for
which it is to be formed, and the place where its principal business is to be
transacted, the amount of its capital stock, and the number of shares into
which it is to be divided. The articles of incorporation are sent to a
designated state officer, usually the Secretary of State. Upon the filing of
the articles of incorporation with the proper state officers, the incorporators
may open the books of the company, for stock subscriptions. The time and
place of opening the books is announced, usually by thirty days advertising
in a newspaper. A portion of the stock, usually ten percent, must be paid at
the time the subscription is made. When the required portion of the
authorized capital stock is subscribed, by advertising notice, the
stockholders may meet and elect a board of directors. The board usually

consists of from five to fifteen directors. The directors are required to take
an oath of office. Some of the governing rules of the corporation, usually
called by-laws or regulations, are enacted by the stockholders. Some
regulations may be enacted by the board of directors. The board of directors
may elect the officers provided for by the regulations, and then proceed to
transact the business of the corporation. Corporations not for profit may be
organized. Such corporations are organized in the same manner as
corporations for profit, except that there is no capital stock, and the
directors are usually called trustees. Church and fraternal organizations are
common examples of corporations not for profit.
90. Names of Corporations. A corporation must of necessity have a
name by which it may be designated, and under which it can transact
business. The statutes of the different states generally provide that the
incorporators must designate the name which the corporation is to use. One
corporation is not permitted to use a name already appropriated by another
corporation. A corporation has no right to use a name other than the one
given it by its charter. A corporation may prevent by injunction another
organization from using a name which interferes with its corporate name.
This is subject to the limitations that a corporation is not permitted to
appropriate a name descriptive of an article or place. For example, a storage
company was incorporated under the name of the "Fireproof Storage Co."
An individual with a fireproof building adopted the trade name "The Allen
Fireproof Storage Co." The former company was not permitted to enjoin the
latter from using the word Fireproof, in the name of his company, since the
word, fireproof, is descriptive of the kind of building used in the business,
and cannot be appropriated by any one company or person. The states
generally, by statute, provide a means by which a corporation may change
its name.
91. Kinds of Corporations. Corporations are usually classified as
public and private. Public corporations include those corporations organized
for the purpose of exercising public functions, and for carrying out
government purposes. An incorporated city or village is a common
example.
A private corporation is one organized for the private benefit of its
members. Private corporations are either corporations for profit or
corporations not for profit. Corporations for profit have a capital stock, and
are organized for the financial benefit of the members. Ordinary trading or

manufacturing corporations are examples. Corporations not for profit have
no capital stock, and are organized for charitable or social purposes. Clubs,
educational institutions, and churches are common examples.
Corporations organized for private gain, and which serve some public
purpose, are sometimes classified as quasi-public corporations. Express
companies and telegraph and railway companies are common examples of
the class. These companies are strictly private corporations.
92. When Corporate Existence Commences. The states generally
provide by statute, for the organization of corporations. At present,
corporations seldom are created by special grant of the legislatures. Most
states, by constitutional provisions, limit the power of the legislatures to
create corporations by special act. Persons desiring to organize a
corporation, must comply with the general laws regulating their formation.
As was pointed out in the section on creation of corporations, several steps
must be taken to complete the organization of a corporation. The question
often arises as to when the legal existence of a corporation commences. It is
quite generally held that a corporation's legal existence dates from the filing
of the articles of incorporation with the designated state office. After that
time the corporation cannot deny its legal existence. Neither can third
persons dealing with the corporation deny the legal existence of the
corporation. If the corporation fails to fulfil the remaining statutory
provisions relating to the completion of the corporation, the state, through
its officers, may revoke the corporation's right to continue as a corporation.
A corporation does not have the right to transact business, until its
organization is completed. It may have a legal existence before that time.
93. Estoppel from Denying Corporate Existence. An association of
persons pretending, innocently or otherwise, to be a corporation, not having
complied with the legal requirements for creating a corporation, is not
permitted to deny its corporate existence, for the purpose of avoiding its
obligations. Such an association is liable as a corporation for its obligations,
and if there is no corporate property, the members of the association are
liable personally.
On the other hand, persons who deal with an association of persons
which claims either by name, or by express statement, to be a corporation,
cannot evade their liability to the association on the ground that the
corporation has not been legally organized.

As between the corporation and the state, which alone can give it power
to exist as a corporation, no valid corporation exists until all the legal
requirements are complied with. The state, through its proper officers, may
deny corporate right to any association of persons who have not fully
complied with the statutes regulating the creation of corporations. To create
a corporation by estoppel, there must be an organization assuming to act as
a corporation. If A trades in his own name, a person dealing with him
cannot claim that A is a corporation by estoppel. But if A trades as "The
Cook County Lumber Co.," and enters into a contract with B in the name of
The Cook County Lumber Co., and signs his name as president of the
company, he cannot deny its corporate existence. If B purchases material of
The Cook County Lumber Co., he cannot refuse to pay for it on the ground
that The Cook County Lumber Co., is not a legally incorporated company.
94. Corporate Charter a Contract. Originally in this country, the right
to exist as a corporation was granted by special act of the legislature. It was
early decided that this grant by a legislature could not be revoked or
changed by subsequent act of the legislature. It was regarded as a contract.
By reason of the fact that corporate charters are contracts, giving
corporations the right to a continuous existence under the terms of the
original grant, many states now have constitutional provisions, limiting the
right of legislatures to grant irrevocable charters. Those states having no
such constitutional limitations, have a provision in their statutes authorizing
the creation of corporations, and providing that all corporate charters or
franchises be revocable or changeable at the will of the legislature. At the
present time in most, if not all of the states, a corporation cannot obtain an
irrevocable charter. Their charters are granted with the reservation, or upon
the condition, that the terms may be changed or revoked at any time.
95. De Facto Corporations. In connection with corporations, the terms
de facto and de jure are often used. By de jure corporation is meant a
corporation that has a perfectly legal existence; one that has complied with
all the laws relating to its creation; one that cannot have its right to exist as
a corporation denied by the state under whose laws it was created, on the
ground that it has not complied with all the laws relating to its creation. By
de facto corporation is meant a corporation that has performed some of the
functions of a corporation without having complied with all the legal
requirements relating to its incorporation. To constitute a corporation de
facto, it is usually conceded that there must have been laws under which the

pretended corporation might lawfully have been organized, followed by
some kind of an attempt to organize under these laws, and by a use of
corporate functions. As between the corporation and the state, the state may
stop the corporation from exercising corporate functions. As between the
corporation and third persons dealing with it as such, in the absence of
fraud, corporate existence of a de facto corporation cannot be denied.
96. Promoters. Persons who undertake the organization of corporations
are called promoters. The promoter of a corporation need not be one of the
incorporators, but he is the active man who engineers the enterprise. He is
the one who interests capital, who induces persons to take the required
amount of stock, who assembles the parties desiring or induced to organize
the corporation. In short, he is the one who manages the organizing and
starting of the corporation. Oftimes much work must be done, many
contracts made, and liabilities incurred before a corporation has any legal
existence. Just what connection the promoter has with the corporation,
whether he may bind the future corporation, or make it liable for his acts of
necessity, or by adoption, is often a close question. It must be borne in mind
that before a corporation has a legal existence, it can incur no obligations as
a corporation. Before a corporation's legal existence commences it can have
no authorized agents. If A, knowing where valuable undeveloped stone
quarries are located, obtains options on the lands, interests men of means to
promise to take stock in a future organization, performs all the preliminary
work to the creation of a corporation, organized for the purpose of
purchasing and operating said lands, and incurs debts in connection
therewith in the name of the proposed company, the corporation, when
completed, cannot be compelled to pay such obligations. It did not incur
them. It had no power to incur them since its legal existence did not
commence until a subsequent time. The obligation belongs to the promoter,
or to those persons, if any, who authorized him to incur the debts. If,
however, recurring to the former example, "The Cuyahoga Stone Co.," is
organized by A to develop and operate such stone lands, and after the
organization is completed with full knowledge of the obligations of A, it, as
a corporation, agrees to pay said obligations, and to purchase A's options on
the lands for a specified amount, the obligations now become the
obligations of the corporation. The corporation may be sued thereon, and its
property subjected. This is called the adoption of a promoter's obligation by
a corporation.

A corporation is liable on its express, as well as on its implied contracts,
and if it accepts valuable services of a promoter after it becomes a
corporation, it is liable on an implied contract to pay for the same. Services
rendered by a promoter for a future corporation do not render a corporation
liable therefor, unless adopted by the corporation after its legal existence
commences. The states generally provide by statute, the time when a
corporation's existence commences. These statutes vary somewhat, but in
general provide that the corporation's existence commences when the
proper articles of incorporation are filed with the Secretary of State.
97. Reorganization of Corporations. The right to exist as a
corporation is a special privilege which cannot be sold or transferred to
another. Any property acquired by a corporation may be mortgaged, sold or
transferred at the will of the corporation. The right to exist as a corporation,
however, is a special privilege granted by the state, and cannot be
transferred. Any association of persons desiring to exercise the rights and
privileges of a corporation must obtain such rights from the state. They
cannot purchase such a right from an existing corporation. Many of the
states provide by statute for the organization of a corporation by those
persons purchasing the property of public service corporations at a
foreclosure sale. A common example is in case of a foreclosure of a
mortgage on a railway. Statutes of some states provide that the purchasers
of such property at foreclosure sale may, and shall organize a corporation
which shall carry out the purposes of the original corporation.
Where a corporation is organized and purchases the assets of the former
corporation, the new corporation is not liable for the obligations of the old.
Sometimes the new corporation takes over the assets of the old corporation,
and expressly assumes the obligations of the old. In this event, the new
corporation is liable for its predecessor's debts. If the new corporation, in
purchasing the assets of the old, uses unfair or fraudulent methods, the
transfer will be set aside at the instance of creditors of the old corporation,
or the new corporation will be deemed liable for the debts of the old
corporation. In carrying out reorganization schemes, a transfer of assets
must be fair and bonâ fide, or the sale will either be set aside as fraudulent,
or the new organization will be deemed a continuation of the old, and liable
for its debts.
98. Consolidation of Corporations. The right to exist as a corporation
does not carry with it the right to combine or consolidate with other

corporations. Where two or more corporations combine or consolidate, the
resulting corporation is distinct from the combining corporations. The right
to consolidate, like the right to exist as a corporation, is a special privilege
granted by the state. Consent must be obtained from the state before a valid
consolidation can be made. Most states provide by statute for the
consolidation of certain corporations under certain prescribed conditions.
Before a valid consolidation can be effected, the provisions of these statutes
must be complied with. Some states require the payment of a consolidation
tax. Others require that parallel and competing railroads cannot consolidate.
Unless the charter of the corporation permits of consolidation without
the consent of all the shareholders, and unless the shareholders have by
valid resolution given the directors the right to consolidate, a consolidation
cannot be made over the objection of any shareholder. An attempted
consolidation under these circumstances may be enjoined by a dissenting
stockholder, or if the consolidation is made over his objection the resulting
consolidated company is liable in damages to him.
When a consolidation has been legally made, the consolidated company
is liable for the debts, and is entitled to the assets of the component
corporations.
99. Meetings and Elections of Corporations. A corporation transacts
its business through a board of managers. The shareholders or members of
the corporation do not transact the business of the corporation directly, but
through the governing board. In case of a corporation having a capital
stock, this governing board is called the board of directors. In case the
corporation has no capital stock, such as a church or charitable
organization, the governing board is called the board of trustees. The
charter, or statute under which corporations are formed, usually provides for
annual meetings for the election of officers. If the corporation has no fixed
place of meeting, notice must be given each stockholder of the place of
such meeting. A corporation has no power to hold its meetings outside the
state of its organization. It may employ agents to represent the corporation
outside the state of its creation, but it should hold its corporate meetings
within the state. If the time of holding the election of officers is fixed by
statute, or by a regulation or by-laws of the corporation, the meeting should
be held at that time. If for any reason a corporate election cannot, or is not
held at the time designated, the old directors hold over until the new board
is regularly elected.

100. Voting at Corporate Meetings, Quorum and Proxy. Each
shareholder or stockholder of a corporation is entitled to vote at the
corporate meeting for the election of officers. Usually the vote is by shares.
Each shareholder is entitled to one vote for each share he holds. Some
states, by statute, limit the right of a single shareholder to a certain number
of votes. When this limitation is fixed, it usually limits the shareholders to
one vote regardless of the number of shares held. Such a limitation, where
found, is for the protection of small shareholders. Corporations keep books
in which are kept the names of the shareholders. Only the persons whose
names appear upon the corporation's book as shareholders are entitled to
vote.
Some states provide by statute for what is known as cumulative voting.
Instead of voting the number of shares he owns for each director, by
cumulative voting a stockholder is entitled to vote for one director the
number of shares he owns, multiplied by the number of directors to be
elected. This is sometimes called ticket voting. For example, three directors
are to be elected, and a shareholder holds ten shares. He may have ten votes
for each director, or thirty votes for one director. This is for the protection
of the small shareholder.
By quorum is meant the number of votes required to constitute an
election. Sometimes a quorum is based upon a majority of the number of
shareholders present. In the absence of statute or corporate regulations to
the contrary, this rule applies. Statutes of some states provide that a two
thirds majority of the shares of the corporation shall constitute a quorum.
Most states provide by statute for voting by proxy. This entitles one
shareholder to give another written authority to vote his shares at a
corporate meeting. This right does not exist in the absence of statute. A
proxy may be revoked at the will of the shareholder giving it.
101. Stockholders of a Corporation. The membership of a corporation
is made up of the stockholders or shareholders. A corporation for profit is
authorized by its charter to have a certain capitalization, or the
capitalization is the total amount of the shares authorized to be issued. The
charter usually requires that a certain percentage of shares subscribed be
paid in before the corporation is authorized to elect directors. The charter
usually provides that at least ten per cent of the capitalization be subscribed,
and at least ten per cent of the amount subscribed be paid in, before

directors can be elected. A stockholder is liable to the corporation on his
subscription and, in the absence of any additional liability fixed by the
charter, is not liable for the debts of the corporation for any amount in
addition. Formerly some of the states provided by statute for double
liability of stockholders. In case of insolvency of the corporation,
stockholders could be required to contribute an amount equal to their
subscription in addition to paying their subscription in full. Stockholders'
double liability has been abolished by most states. At present a stockholder
can be compelled to pay the full amount of his stock subscription, and no
more.
Stockholders of national banks, corporations organized under United
States laws, are liable for double the amount of their stock. Those persons
are regarded as stockholders who appear as such on the books of the
company. A person may become a stockholder by purchasing stock from the
corporation, or by purchasing it from another stockholder. Any person
legally competent to contract may become a stockholder.
102. Certificate of Stock. Written certificates are usually furnished
shareholders, by corporations, as evidence of membership. These
certificates are made transferable, in order that they may be indorsed by a
shareholder, and made payable to a purchaser. When so indorsed, the
purchaser is entitled to have the shares transferred on the books of the
company, showing that he is a shareholder in the company. A certificate of
stock does not of itself constitute ownership. It is merely evidence of
ownership. A person may be a stockholder in a corporation by making a
valid subscription, and by paying for the same, regardless of having
received a certificate of stock. The following is a common form of stock
certificate:
The Consolidated Tack Co.
Cleveland, Ohio.
Incorporated under the laws of the state of Ohio.
No. 99 No. of shares -15-
Capital stock $1,000,000.00
This certifies that John Smith is the owner of fifteen shares of $100 each of the
capital stock of The Consolidated Tack Co., transferable only on the books of the
company, in person or by attorney, upon surrender of this certificate properly
indorsed. In witness whereof said corporation has caused this certificate to be
signed by its duly authorized officers, and to be sealed with the seal of the

corporation.
At Cleveland, Ohio, this 1st day of October, A. D. 1909.
Jack Brown, Tom Jenkins,
Treasurer. President.
Corporate
Seal.

Blank for transfer, on back of certificate.
For value received................ hereby sell, assign and transfer unto.............,............ shares of
the capital stock represented by the within certificate, and do hereby irrevocably
constitute and appoint.............. to transfer the said stock on the books of the within
named corporation.
Dated................190..
_______________________
In the presence of
___________________

103. Directors of a Corporation. The managing officers of a
corporation are called directors. They are the representatives elected by the
stockholders, or members of the corporation, to transact the business of the
corporation. While in the absence of statutory regulations a director need
not be a stockholder, practically all states require directors to be
stockholders.
Directors are authorized to act as agents for the corporation in the
management of the corporation's business. Their authority is limited not
only by the charter of the corporation, but by the regulations, and by-laws
of the corporation as well. The directors of a corporation are not authorized
by virtue of their office to dispose of the entire assets of the corporation,
neither can they transfer their right to act as directors to others. They have
the right to purchase property, to sell and mortgage assets of the corporation
within the limits prescribed by the charter, regulations and by-laws of the
corporation.
The directors of a corporation must act as a board. They are not
permitted to act by proxy. The majority of the entire number of directors
constitutes a quorum for the purpose of doing business. They may employ
agents to make and carry out contracts, and perform ministerial acts of the
corporation, but cannot delegate their discretionary powers as directors.
Unless provided otherwise by statute, directors must hold their meetings
within the state under whose laws the corporation is created. Notice of the

meeting giving the place, time and purpose must be given to all the
directors before a valid meeting can be held. Directors, like agents, cannot
act for their own private interests if opposed to those of their corporation.
Directors who privately profit to the disadvantage of the corporation are
liable in damages for such acts to the corporation. It is generally conceded
that a director may contract with his corporation, if no fraud is used, and if a
quorum of directors without him consents. Directors are liable to the
corporation for their dishonesty or negligence.
104. By-Laws, Rules and Regulations of a Corporation. The by-laws
of a corporation are the rules and regulations by which the corporation is
governed. Sometimes a distinction is drawn between the term by-law, and
the term regulation. For example, the statutes of some states provide that
the stockholders may pass regulations for the government of the corporation
relating to the time, place and manner of holding corporate meetings, the
number of stockholders that shall constitute a quorum, the time and manner
of electing directors, the duties and compensation of officers, and the
qualification of officers; while the directors have the power to pass by-laws
relating to the government of the corporation, not inconsistent with the
charter of the corporation and the regulations. This distinction between
regulations and by-laws does not seem to be generally recognized. The
entire government of the corporation is generally included in the term by-
laws. If the charter does not provide otherwise, the by-laws shall be passed
by the stockholders rather than by the board of directors.
A resolution is not a by-law. By resolution is meant the recorded and
legally passed determination of a corporation to perform some particular
thing or item of business. A vote of a board of directors to make certain bids
on certain contracts is an example of a resolution. By-laws must not be
contrary to the corporation's charter, or to general law. They are not
presumed to be known by third persons, but if third persons dealing with a
corporation have actual knowledge of them, they are bound by notice of
their provisions.
105. Capital Stock of Corporations. The capitalization of a
corporation is the aggregate amount of stock it is authorized by its charter to
issue. If a corporation is authorized to issue one hundred thousand dollars
($100,000.00) of stock, it is said to be capitalized at one hundred thousand
dollars ($100,000.00). This does not mean that the corporation has property
worth one hundred thousand dollars ($100,000.00). A corporation is usually

authorized to elect directors after one tenth of its stock has been subscribed,
and after one tenth of the amount subscribed is paid in. Thus, a corporation
capitalized at one hundred thousand dollars ($100,000.00), may elect
directors and start business with only one thousand dollars ($1,000.00)
actually paid in. The term, capital stock of a corporation, is used in many
different ways. It is commonly used to designate the capitalization.
Sometimes it is used to designate the amount actually subscribed. Strictly, it
probably means the money actually paid in on subscriptions. A
corporation's assets may be far in excess of its capitalization, or far below
its capitalization. It may have property worth five hundred thousand dollars
($500,000.00) and be capitalized at one hundred thousand dollars
($100,000.00) more or less, or it may be capitalized at one hundred
thousand dollars ($100,000.00) and have no assets.
106. Payment of Shares of Stock. It may be stated as a general rule
that a corporation has no authority to dispose of its stock for less than par
value. If a corporation is solvent, ordinarily no objection is raised, but if the
corporation becomes insolvent, creditors may complain, and force, by
proper legal action, the shareholders to pay the difference between the face
value of their stock and the amount actually paid.
In the absence of a statute requiring stock subscriptions to be paid in
cash, there is nothing to prevent a corporation from accepting property at a
fair valuation in payment of stock. The rule is usually stated to be, that
shares of stock must be paid for in money or in money's worth. Shares of
stock may be paid for in bonâ fide services. The rule by which purchasers
of stock are compelled to pay the full par value either in money or money's
worth applies only to those who purchase direct from the company, or who
purchase from stockholders with notice that the shares have not been fully
paid for. If the certificates of stock state that they are fully paid for and the
purchaser has no notice otherwise, or if the purchaser does not know that
the stock has not been paid for in full, he cannot be made to suffer for the
act of the corporation in unlawfully issuing the stock.
107. Calls and Assessments. An assessment may be defined to be a
levy by a corporation upon a shareholder for an unpaid portion of his stock
subscription; a call is a notice to a shareholder of an assessment. Ordinarily,
assessments may be made by call, at the direction of the directors, until the
entire par value of subscriptions are paid in full. Stock cannot be assessed

beyond its par value, unless so provided for by the corporate charter, or
unless the subscriber so contracts.
108. Watered Stock. In case property or services are accepted in
payment for stock at an inflated valuation, or if stock is issued as fully paid
up when it is not, the stock is said to be watered. For example, if A, a
promoter of a corporation, turns over options to the company, actually
worth one thousand dollars ($1,000.00), and receives stock in payment, the
par value of which is five thousand dollars ($5,000.00), the stock is said to
be watered, and the four thousand dollars ($4,000.00) excess valuation is
said to represent the amount of water in the stock.
109. Increasing or Decreasing Capitalization. A corporation has no
power, by reason of being a corporation, to increase or decrease its
capitalization. The states generally provide by statute for the increasing or
decreasing of the capitalization. The corporation must comply with these
statutes, before its capitalization can be changed. In case the capitalization
is increased, the purchasers of such stock are subjected to pay the full face
value at the instance of creditors, the same as purchasers of an original
issue. That is, if a corporation is unable to pay its debts, one who has
purchased direct from the company, shares of stock upon an increased
capitalization, at a price below par, may be compelled by creditors to pay
the difference between what he has actually paid and the par value. In case
of an increase of capitalization, the present stockholders, in the absence of
express statutory regulations to the contrary, are entitled to receive the
increased shares in proportion to their holdings. This is usually called a
stock dividend.
110. Common and Preferred Stock. Stock of a corporation may be of
two kinds, common and preferred. When stock is issued by a corporation
without any agreement to pay certain dividends out of the profits, or to
repay the original stock investments if the corporation ceases doing
business, in preference to other stock, it is called common stock.
Corporations are sometimes authorized by their charters to issue what is
called preferred stock. That is, the corporation pledges to pay a certain
percent of its profits, as dividends to the preferred stockholders, before
paying anything to common stockholders. If the corporation ceases doing
business, preferred stockholders are first paid the amount of their
subscriptions, and if any balance remains, it is paid to common
stockholders. In the absence of statutory authority, probably an existing

corporation has the right to issue preferred stock by the unanimous consent
of all the common stockholders. This is commonly done for the purpose of
raising additional funds.
111. Dividends. Dividends is the term applied to the money distributed
to shareholders, out of the profits of a corporation. The directors are usually
empowered to declare dividends. A stockholder cannot compel the
corporation to pay him a percentage of the profits until a dividend has been
declared. After a dividend has been declared, it is regarded as a debt of the
corporation in favor of the shareholder. When a dividend has been declared
at the discretion of the board of directors, the preferred stockholders must
first be paid the amount of their preference, and the balance must be
distributed equally between the common stockholders. No partiality can be
shown stockholders. They must be treated alike. Dividends can be declared
only out of the profits, except when a corporation ceases doing business, in
which event the property of the corporation, after paying liabilities, is
distributed as dividends.
112. Certificates of Stock not Negotiable Instruments. A certificate of
stock is merely evidence that the holder is a member of the corporation. A
person may be a member of a corporation, and be entitled to the rights of a
stockholder, without having a certificate of stock. Certificates are
convenient as evidence of membership. Transfers of stock are usually made
by filling in a blank on the back of the certificate for that purpose, by which
the owner declares the transfer to the purchaser, and designates the
purchaser, or someone, his attorney to present the certificate to the
corporation, to have the transfer registered on the books of the company. It
is the usual custom to surrender certificates to the purchaser. A corporation
has a right to rely upon its books, and if a person wrongfully or fraudulently
attempts to transfer a certificate of stock which he does not own, or has no
right to transfer, the purchaser takes no better title than the seller had. In this
particular, certificates of stock are not negotiable instruments. Negotiable
instruments are good for value in the hands of innocent purchasers, who
purchase before the instrument is due. As between the parties themselves, a
transfer of a certificate of stock is good, but as to the corporation or
creditors of the seller, the transfer is not effectual until recorded on the
books of the corporation.

A CORNER IN THE SALES DEPARTMENT OF THE MICHIGAN
STOVE COMPANY, DETROIT, MICH.

113. Individual Liability of Stockholders for Debts of a
Corporation. A corporation is an artificial person having an existence in
law, separate and apart from that of its members. Its profits cannot be
divided until the managing agents of the corporation so decree. Its property
does not belong to the members, but to the corporation itself. At one time
some states provided by statute for double liability of stockholders. In case
a corporation was unable to pay its debts, creditors could compel
stockholders to pay to the corporation an amount equal to the par value of
their stock, after paying the full face or par value of their stock. Statutes
providing for double liability have quite generally been abrogated. At the
present time, except in the case of national banks, corporations organized
under United States law, few states provide for double liability of
stockholders. If A has subscribed for ten shares of stock, the par value of
each share being one hundred dollars ($100.00), and pays one-half the
amount of his subscription to the company, in case of insolvency of the
corporation, creditors can force A to pay the balance of his stock
subscription, or five hundred dollars ($500.00). Even though not insolvent,
the corporation can collect the balance of five hundred dollars ($500.00)
from A by call and assessment, and can enforce collection by suit. A's
subscription is a contract between himself, and the corporation. Unlike
partners, stockholders are not personally responsible for the debts of the
corporation of which they are members. In dealing with partnerships, a

person may rely upon the personal financial worth of the individual
members of the partnership. The property of the individual members may
be subjected to pay the debts of the partnership. But in case of a party
dealing with a corporation, he cannot rely upon the personal worth or
responsibility of the members of the corporation, since the members
individually are not liable for the corporation's debts. The corporation is
separate and distinct from its members, and when the assets of the
corporation are exhausted, the property of the individual members is not
liable.
114. Officers and Agents of a Corporation. A corporation is an
artificial person which must necessarily conduct its affairs through agents.
The managing board of a corporation having a capital stock is usually
called the board of directors. The managing board of a corporation having
no capital stock is usually called the board of trustees. These managing
boards are elected by the members of the corporation. In case the
corporation is one organized for profit, the members are called stockholders
or shareholders. The directors or managing board, of a corporation may
delegate the performance of what are called ministerial duties. They may
appoint officers and agents to assist them in the performance of their duties
of a certain character. The officers of a corporation elected by the directors
usually consist of a president, vice-president, secretary and treasurer. If a
corporation's business transactions are limited, practically the only duty of
the president is to preside at the meeting of the board of directors. If the
affairs of the corporation are many and complicated, the president is usually
intrusted with many duties. The board of directors meets at stated times,
authorizes and passes on certain important matters, but the duty of carrying
them into execution, and of performing the routine work, falls on the
president. In a corporation of large affairs, the president may pay current
bills, make purchases, give notes, if necessary, make sales and give and take
mortgages on property. He is often given authority to act as general
manager for the corporation. In this event, he may perform all the duties
connected with the general operation of the business. The vice-president has
authority to perform the duties of the president during his absence or
disability. It is the duty of the secretary to keep the records of the
corporation. It is the duty of the treasurer to take care of the funds of the
corporation. The officers of a corporation are liable to the corporation for
breach of trust. They are personally liable to third persons when they

exceed their authority. A corporation, through its properly appointed
officers, as well as through its board of directors, may appoint subordinate
agents to perform work for the corporation. The corporation is responsible
for the acts of its agent, performed within the real or apparent scope of the
agent's authority.
115. Execution of Contracts and Negotiable Instruments by a
Corporation. A corporation can act only through its agents. The agents
authorized to act for a corporation are the board of directors, the officers
appointed by the board, or the officers. A corporation, as one of its powers,
has the right to use a common seal. While a corporation commonly uses its
seal in signing written instruments of importance, for the purpose of
showing authority of its agents to enter into such contracts, a corporation
need not use its seal except in those cases when it is necessary that a natural
person use a seal. A corporation usually authorizes its officers to make
contracts. A president and secretary, acting together, have the right to make
contracts for their corporation, by reason of the general authority conferred
upon them by the board of directors. The proper signature of a corporation
to a written document is the name of the corporation, followed by the
signature of the president as its president, and by the signature of the
secretary as its secretary. For example, if the India Rubber Company is to
sign a contract, the proper signature is:
The India Rubber Co.,
By John Smith, its President.
By John Jones, its Secretary.

When the signature must be acknowledged before an officer authorized
to administer oaths, before it will be received for record, as in the case of a
deed, the officer authorized to sign the name of the corporation to the deed
may make the acknowledgment.
Negotiable instruments, such as promissory notes, drafts and checks,
should be signed with the corporate name by the proper officer, as its
officer. It is held, however, that by custom, a cashier of a bank may make
and indorse negotiable paper in his own name, merely adding the
designation cashier to his signature, and by this means make the paper that
of the corporation, and not incur any personal liability therefor. This is an
exception to the general rule. Where a person signs as agent, he should sign
the name of his principal, by himself, as agent. If he signs his own name,

followed by the word, agent, or president, or whatever his office may be, he
binds himself personally, and not his principal.
116. Ultra Vires Acts. A corporation by its charter is granted certain
privileges. It has a right to act within the terms of its charter, but no right to
go beyond the terms of its charter. If it performs acts beyond the terms of its
charter these acts are said to be ultra vires. This does not mean that all the
acts which may be performed by a corporation must expressly be
enumerated in its charter. Corporations are created for certain purposes.
They are permitted to perform all the acts necessary, and incidental to the
purpose of their organization. The general laws under which a corporation
is created are a part of its charter. A corporation organized to do a general
banking business has no authority to sign bonds as surety for persons or
corporations. Attempts to perform such acts of suretyship are beyond their
power, and are ultra vires. Ultra vires acts are unlawful, and a single
stockholder may prevent, by legal action, the officers of a corporation from
completing an ultra vires contract. Third persons are deemed to have notice
of the limitation of the powers of a corporation. They are not permitted to
act in such a manner as to benefit by ultra vires acts, and then escape
liability on the ground that the obligation is ultra vires. If an ultra vires
contract is wholly executory on both sides, neither party can enforce it, if
the other party complains by reason thereof. But one cannot accept benefits
thereunder, and refuse to carry out the contract on his part. He is said to be
estopped from so doing. The doctrine laid down by the last statement is
disputed in some jurisdictions.
117. Rights and Liabilities of a Foreign Corporation. Corporations
have no rights, as such, outside of the jurisdiction of the power creating
them. A corporation organized under the laws of one state may be excluded
from performing any of its corporate functions in another state. States may
permit foreign corporations to exercise their function within their borders, if
they so desire. But states cannot be compelled to recognize the corporate
rights of foreign corporations. While the United States constitution provides
that citizens of each state shall be entitled to all the privileges and
immunities of citizens of the several states, a corporation is not a citizen
within the meaning of this provision. The United States Government may
employ or organize corporations to carry out its purposes. Such
corporations cannot be denied the right to exercise their functions by any
state. For example, the United States Constitution gives Congress the right

to regulate commerce with foreign nations, among the several states, and
with the Indian tribes. A corporation engaged in interstate commerce cannot
be excluded by any state, in the exercise of this function. Outside these
governmental agencies, each state has the right to exclude a foreign
corporation from exercising any of its corporate functions within their
jurisdictions. The states generally provide by statute that foreign
corporations may transact business within their territory by filing with the
Secretary of State a statement of their capitalization, the amount actually
paid in, the nature of their business, and the names of their officers. Then,
by paying a certain tax, they are permitted to maintain an office and transact
business within the state thus granting them the privilege. The statutes of
the various states regulating foreign corporations commonly use the term,
"doing business." They prohibit foreign corporations from doing business
within their borders unless they comply with their statutes. The term, "doing
business," has been held to mean the maintaining an office or place of
business, or manufacturing plant within a state, and does not prohibit a
foreign corporation from selling goods by traveling salesmen, or from
making or suing on contracts.
118. Liability of a Corporation for its Torts and Crimes. A
corporation, as well as an individual, may commit torts and crimes. If an
agent, acting within the scope of his employment, defrauds another, the
corporation is liable in damages for his act. If, however, an officer or agent
goes outside his employment, and commits a wrong, it is his own act, and
he, personally, and not the corporation, is liable. A corporation, as well as
an individual, may commit a crime for which it may be punished. It must,
of course, commit the crime through its officers and agents. If a corporation
is guilty of criminal negligence in failing to keep its works in repair, and
persons are injured thereby, it is subject to indictment and punishment. If a
corporation obstructs navigation or breaks the Sabbath, it is subject to
criminal action. The usual punishment for the crime of a corporation is the
payment of a fine, but the officers of a corporation may be imprisoned as
well.
119. Dissolution of Corporations. A corporation continues to exist
indefinitely, unless the period of its existence is limited by its charter, unless
its charter is revoked by the power that granted it, or unless it voluntarily or
by a decree of court ceases business. A corporation may forfeit its right to
continue as a corporation, if it abuses its privileges, if it assumes to have

powers and rights which it does not have, or if it fails to exercise its
corporate functions. The latter is called nonruser. Most states provide by
statute that corporations shall not commence business until a certain portion
of its capital has been raised. If the corporation violates this provision or
any provision of the statutes regulating the completion of its organization,
its franchise may be revoked by the state. Most states provide by statute, a
means by which a corporation may wind up its affairs. After paying its
liabilities the balance of its assets may be divided ratably among its
stockholders.

NEGOTIABLE INSTRUMENTS

120. In General. By negotiable instruments are meant those written
instruments intended to circulate as money, which by their form and nature
are transferred by delivery or by indorsement and delivery. The most
common negotiable instruments are promissory notes, drafts and checks.
Negotiable instruments are much more commonly and extensively used
than money in the transaction of business. Their function is to take the place
of money. Their use arose out of the scarcity of currency and facilitates the
transaction of business. Their form and nature make them more desirable
and practical in many respects than money itself. Negotiable instruments
may readily be traced. They may be drawn in any denomination to meet any
emergency. They may be indorsed in such a manner that only the person
intended by the maker to receive payment can receive payment thereon.
Money, on the other hand, has no particular identity. After payment it
cannot be traced, nor can mistakes in amount be corrected. If lost, payment
thereon cannot be stopped. If found or stolen, its possessor may receive the
benefit of it without question. Negotiable instruments were devised to meet
a broad and pressing demand. Usage and custom have given them
characteristics to meet this demand.
121. Negotiability. Negotiability is the power of a written instrument to
circulate as money. To be negotiable, an instrument must contain language
of negotiability. The common phrases of negotiability are Pay to the order
of, or Pay to bearer. Any draft, promissory note, check, or bill of exchange
containing the words, pay to the order of, or pay to bearer are known as
negotiable instruments. If a negotiable instrument is made payable to

bearer, it is transferable by delivery. The holder of it may pass it like money
and the taker is entitled to receive payment of it when it is due. A negotiable
instrument payable to the order of a designated person is payable upon the
indorsement and delivery of the person to whose order it is made payable.
For example, if a check is made payable to the order of John Smith, and
John Smith desires to transfer it to John Jones, he writes his name, John
Smith, on the back of the check, and delivers the check to John Jones. By
this act, John Jones becomes the owner of the check, and may in turn
transfer it, or cash it by presenting it to the bank on which it is drawn. If a
check is made payable to John Smith or bearer, and if John Smith desires to
transfer it to John Jones, he merely hands John Jones the check. No
indorsement is necessary.
122. Negotiability Distinguished from Assignability. An ordinary
contract or obligation not requiring personal services or discretion may be
transferred by oral or written contract of assignment. For example, if B
purchases a barrel of flour from A, his grocer, to be paid for in thirty days, A
may assign his claim against B to C. This may be accomplished by a verbal
agreement to that effect between A and C, or A may give C a written
statement to the effect that he has transferred his claim against B to C.
When B is notified of this assignment, he is obliged to pay C the money. If
for any reason the flour was not accepted by B, or if B has a claim against
A, C can recover from B only the amount B owes A. If B owes A nothing, on
account of the flour being of poor quality, and not accepted for that reason,
or if B has a claim for an equal amount against A, B can set up this defense
against C's claim, and C can recover from B only the amount that A could
have recovered against B. In other words, in case of an assignment, all
defenses that were good against the assignor are good against the assignee.
In case of negotiable instruments, however, the transferee who takes the
instrument before maturity for value, and without notice of any defenses,
has the right to recover the full face value from the maker, regardless of
defenses the maker may have against the original payee. In case of
assignment, notice must be given the debtor to make the title good in the
purchaser. In case of negotiability, no notice to the debtor is necessary.
A negotiable instrument may be assigned. A common example is the
delivery for value, of an instrument payable to order without indorsement.
The purchaser takes only the rights of a seller.

123. Law Merchant. The law relating to negotiable instruments is said
to be based upon the Law Merchant. By the Law Merchant, is meant the
rules and customs of merchants relating to bills and notes. At an early time,
various rules were recognized by the merchants trading between different
countries. Drafts or bills of exchange were given and passed current as
money, without notice to the debtor of the transfer. As early as the year
1200, these customs of merchants were recognized in England. At first, they
were recognized only in connection with foreign bills of exchange. By
foreign bills of exchange are meant bills made or drawn by persons of one
country to be paid or accepted by persons of another state or country.
Originally, the rules were recognized by merchants only. The courts of
England recognized and enforced these rules in actions brought on foreign
bills of exchange. Gradually, these rules were recognized and enforced by
all the merchants of England. They were applied to inland bills as well as to
foreign. Some statutes were passed, notably one making the rules of the
Law Merchant apply to promissory notes. This statute compelled the
general recognition of the Law Merchant. Gradually these rules were
applied to all negotiable instruments by whomever used. The customs
which started between merchants of foreign countries were held applicable
to all persons, and became the recognized law relating to negotiable
instruments. This country adopted these rules, together with the greater part
of the common law of England. At the present time, most of the states have
negotiable instrument codes. These codes, for the most part, are statutory
enactments of the well recognized rules of common law.
The advantage of the codes, however, is to settle disputed points by
express statutory enactment. The code must be interpreted by the well
settled and recognized principles of the common law. The difference
between the contract formed by negotiable instruments and ordinary
contracts is based upon the Law Merchant. These customs are as well
recognized, and are as much a part of the law as they were when originally
used by the merchants of the old world six or seven hundred years ago.
124. Promissory Notes. One of the most common forms of negotiable
instruments is that of the promissory note. A common form of promissory
note is shown in Fig. 1.
A promissory note is not necessarily a negotiable instrument. It depends
upon whether it contains words of negotiability. If the note contains the
words, or order, or, or bearer, or words of similar import, it is a negotiable

instrument Otherwise it is not. To constitute an instrument a promissory
note, it must contain certain elements. It must be signed by the party
making or giving it, but it is not necessary that the signature be in any
particular place. Any mark or designation intended as a signature, or by
which the maker can be identified, regardless of its position on the paper, is
a sufficient signature. The proper and usual method of signing negotiable
instruments is at the end thereof.

Fig. 1. Promissory Note.

A promissory note must contain an unconditional promise to pay a
definite sum of money, at a certain time. If the promise to pay is
conditional, the instrument does not constitute a negotiable instrument. The
following instrument was sued upon:
Stratham, March, 28, 1846.
Due to order of Sophia Gordon, widow, ten thousand dollars to be paid as wanted for her
support. If no part is wanted it is not to be paid.
Stephen Scanmore.

Since this was not an unconditional promise to pay, the court held it not
to be a promissory note.
The time of payment of a promissory note must be certain, the amount
to be paid must be specified, and the instrument must be payable in money.
If the instrument is to be paid in anything other than money, it is not a
negotiable instrument. An instrument must be delivered, before it has a
legal existence as a promissory note. The essentials of a promissory note are
also essentials of any negotiable instrument. A promissory note need not be
dated, nor need it state that it is given for a consideration. By its nature it

imports a consideration. The party signing the note is called the maker, the
party to whom it is made payable is called the payee. If the payee transfers
it by indorsement, he is called the indorser, and the person to whom he
transfers it is called the indorsee.

Fig. 2. Sight Draft.

125. Drafts and Bills of Exchange. The term, draft, is commonly used
to designate an order from one bank or banks on another, as well as orders
on third persons. Orders drawn by one person on another, payable to a third
person, are known technically as bills of exchange. At present, the terms,
draft, and bills of exchange are generally used interchangeably. A draft or a
bill of exchange is a written order drawn by one person on another, payable
to a third person, to the order of a third person, to the drawer himself or his
order, or to bearer.

Fig. 3. Sixty-Day Draft, Accepted.

A common form of draft is shown in Fig. 2.
Bills of exchange or drafts are frequently made payable at a time
considerably in the future. Fig. 3 is a form of sixty-day draft. This draft is

presented to the drawee, J. H. Gotrochs, and if he accepts, he writes,
accepted, followed by his name, across the draft. His name written on a
draft is sufficient acceptance.
The party drawing a bill of exchange is called the drawer, the party to
whom it is made payable is called, the drawee before acceptance, and the
acceptor after acceptance. The drawee may accept by signing the
instrument, by stating his acceptance on a separate piece of paper, by oral
acceptance, or even by conduct making apparent his intention to accept.
After acceptance of a draft or bill of exchange, the acceptor is liable to pay
the bill according to its terms. He is in the position of a maker of a
promissory note.

Fig. 4. Certified Check.

126. Checks. A check is an order drawn on a bank or banker. It differs
in some respects from an ordinary bill of exchange. It does not have to be
presented for acceptance. It is presented for payment. It presupposes funds
of the drawer in the hands of the bank or banker on which it is drawn. It is
payable at any time after the date fixed for maturity. It need not be
presented at maturity. The maker may recover damages for failure to
present promptly if he is damaged thereby. For example, if A gives B his
check on the X bank, and between the date for payment of the check and the
time of presentment for payment by B, the bank fails, A may recover as
damages from B, the amount of his loss by reason of B's failure to present
the check promptly. No days of grace are allowed in the payment of checks.
In this particular, they differ from ordinary bills of exchange.
127. Certification of Checks. By certification of a check is meant a
written acknowledgment on checks by an officer or authorized agent of the

bank that the check will be paid when presented. In Fig. 4 is shown a
common form of certification.
The words accepted or certified, written on a check by an authorized
officer or agent of a bank constitute a certification. If the holder of a check
has it certified he elects to hold the bank, and thereby releases the maker
and prior indorsers. If the maker procures the certification he is still liable
thereon. When a check is certified, the bank charges it to the account of the
maker, and it then becomes a debt of the bank, regardless of whether or not
the maker has funds in the bank with which to meet it. This is the reason
that a maker and prior indorsers of a check are released from liability
thereon when a holder has it certified. By this act, the holder elects to rely
upon the bank, rather than upon maker or indorsers.
128. Bonds. Bonds may be defined to be the promissory notes of
corporations, private or governmental. They are made under the seal of the
corporation issuing them. At common law, a seal destroyed the negotiability
of an instrument. At the present time this is not true of bonds. Private
corporations often secure their bonds by a mortgage on their entire property.
This is accomplished by means of a mortgage called a trust deed. The
mortgage is given to a trust company, or an individual, to be held for the
common benefit of all the bond holders. It is not practicable to give each
bond holder a mortgage. This would be inconvenient, and some bond
holders could obtain preference over others. But one trust deed, covering all
the assets held by a trustee for the benefit of all the bond holders,
accomplishes the purpose.
Registered bonds are registered on the books of the corporation issuing
them, and in case of transfer the transfer is noted on the books of the
company. Other bonds contain coupons, or small promissory notes for
certain amounts representing the installments of interest payable at certain
times. These coupons may be cut from the bond and sold as promissory
notes, or they may be cut at maturity and returned for payment.

No. 1. $1000.00
United States of America,
State of Ohio.
Know all men by these presents that the village of X, in the county of Cuyahoga and
state of Ohio, acknowledges itself to owe, and for value received hereby promises to
pay to bearer, the sum of $1000.00 in lawful money of the United States of America,

on the second day of January, 1920, together with interest thereon at the rate of 5% per
annum payable semi-annually on the second day of July, and second day of January of
each year, as evidenced by the coupons hereto attached, until the principal sum is paid.
Both principal and interest are payable at the City Trust Co., Cleveland, Ohio, on the
presentation and surrender of this bond, and the coupons hereto attached as they
respectively mature.
This bond is issued for the purpose of improving a street of the village of X, from
the C. B. Railway to Rocky River by constructing and laying water mains with all
necessary connections thereon, under and by authority of Sections 1536-281, and Sec.
2835 of the revised statutes of Ohio, and under and in accordance with resolutions of
the council of the village of X, Ohio, adopted Nov. 4, 1908, and Dec. 2, 1908.
It is hereby certified that all proceedings relating to this bond have been in strict
compliance with said laws, statutes and resolutions, and all other statutes and laws
relating thereto, and that the faith, credit, and revenues, and all real and personal
property in the village of X, Ohio are hereby pledged for the payment of principal and
interest hereof at maturity.
This bond is one of a series of bonds of like date and effect, but of different amounts
and maturities amounting in the aggregate to $3700.00.
In witness whereof, the village of X has caused this bond to be signed by the mayor
and clerk of said village, and the corporate seal of said village to be hereunto affixed,
and the facsimile signature of the mayor and clerk of said village to be affixed to the
attached coupon this second day of January, 1909.
D. B. X._______________________
Mayor.
[SEAL.]
X. Y. Z._______________________
Clerk.
Form of Municipal Coupon Bond.

On the second day of July, 1909, the On the second day of January, 1910,
village of X promises to pay the bearer at the village of X promises to pay the
the City Trust Co., Cleveland, Ohio, bearer at the City Trust Co., Cleveland,
twenty-five dollars, being 6 months' Ohio, twenty-five dollars, being 6
interest on its bond. months' interest on its bond.

No. 1 dated Jan. 2, 1909. No. 1 dated Jan. 2, 1909.
D. B. X.______________ D. B. X.______________
Mayor. Mayor.
X. Y. Z.______________ X. Y. Z.______________
Clerk. Clerk.

On the second day of July, 1910, the On the second day of January, 1911,
village of X promises to pay the bearer at the village of X promises to pay the
the City Trust Co., Cleveland, Ohio, bearer at the City Trust Co., Cleveland,
twenty-five dollars, being 6 months' Ohio, twenty-five dollars, being 6

interest on its bond. months' interest on its bond.

No. 1 dated Jan. 2, 1909. No. 1 dated Jan. 2, 1909.
D. B. X.______________ D. B. X.______________
Mayor. Mayor.
X. Y. Z.______________ X. Y. Z.______________
Clerk. Clerk.

Interest Coupons Attached to Municipal Bond.

Similar coupons follow for payment at intervals of 6 months until
maturity of bond in 1920.
129. Collateral and Judgment Notes. Banks frequently require
borrowers to sign collateral notes. These instruments are promissory notes,
with an added agreement to the effect that certain collateral security is given
the payee by the maker as security for the note. Such security is usually
certificates of stock, bonds, other promissory notes, or chattel property. The
collateral note contains a stipulation that upon default, the payee may sell
the collateral. The following is a common form of collateral note used by
banks:
$5,000.00 Cleveland, Ohio, Dec. 26, 1908.
Six months after date, I promise to pay to the order of the Fictitious Bank at its banking
rooms in Cleveland, Ohio, the sum of Five thousand dollars for value received, with
interest at the rate of 6% per annum. I have deposited with said bank as collateral security
for the payment of this note the following property; 20 shares of stock of the Columbia
Sewing Machine Co., par value $100.00 each, 2 diamond rings, 1 warehouse receipt of the
City Storage Co., covering household furniture valued at $3,000.00. The value of this
property is now $5,600.00. It is agreed that the payee, or his assigns, may have the right to
call for additional security at any time it considers this collateral security insufficient, and
on failure of the maker of this note to furnish additional security to satisfy the holder of this
note, the note may be deemed payable at once at the holder's option. The holder shall also
have power to accept substitutes for this collateral. Should the maker violate any of the
conditions of this note, or fail to pay it when due, the holder shall have the power to sell the
collateral or any substitute given therefore, at private or public sale, at any time without
notice to anyone, and after deducting all legal expenses connected with the sale, and after
paying the note, shall return the balance to the maker.
(Signed)
John Smith.

A judgment note contains a provision that upon default of payment, any
attorney at law may appear in court and take judgment thereon by
presenting the note, without observing the formalities of an ordinary suit at

law. This kind of a note is also called a cognovit note. The following is a
common form of judgment note:
$100.00 Boston, Dec. 8, 1909.
One year after date, I promise to pay to the order of John Jones the sum of one hundred
dollars with interest at 6%, and I hereby authorize any attorney at law in the United States
to appear before any Justice of the Peace, or in any court of record, after this note is due,
and waive the service of summons, and confess judgment against me in favor of the holder
of this note for the amount which shall then be due and unpaid thereon, together with
interest and costs.
(Signed)
Thos. Thomas.

130. Certificates of Deposit. It is customary for banks to issue
customer's receipts showing that a deposit of a certain amount has been
made by the customer, which will be held for payment of the receipt upon
presentation. These receipts ordinarily are made payable to the customer's
order, and circulate like money. They are, in effect, the promissory notes of
the bank issuing them. They differ from promissory notes in that banks
require a special deposit of its customers before issuing them. Banks issuing
such receipts are supposed to hold these deposits as a special fund with
which to pay the certificate when presented. The following is a common
form of certificate of deposit:
—THE PEOPLES BANK OF CHICAGO—
We hereby certify that John Jones has deposited $1,000.00 in this bank, for which this
certificate is issued, and which will be paid to the order of John Jones in current funds of
this bank when presented.
The Peoples Bank of Chicago,

June 23, 1909. By A. Z. Marshall, Cashier.

The payee of this certificate of deposit may indorse and transfer it. The
holder may collect the amount by presenting the certificate to the bank.
131. Requisites of Negotiable Instruments. Certain elements are
recognized, by long usage, as being necessary to constitute an instrument a
valid negotiable instrument. The instrument must contain words of
negotiability, such as or bearer, or order, or words of similar meaning. The
instrument must contain a specific promise to pay a certain sum of money at
a definite time. The instrument must designate an ascertainable person to
whom, or to whose order the money is payable. The instrument must be

signed and delivered. It is not necessary that a consideration be stated in the
instrument, although in a suit between the original parties, failure of
consideration is a defense. For example, if A gives B his promissory note
for one hundred dollars ($100.00) payable to B's order, and A received no
benefit for giving the note, if B sues A thereon, A may plead that he
received no consideration for the note. This would be a complete defense to
A. If, however, C purchased the note from B before it was due, paying value
for same, and having no notice of its being given without consideration, A
could be compelled to pay it to C or his successors. It is not necessary that a
negotiable instrument be dated. It is proper, however, and good business
policy to date all negotiable instruments. The signature need not be at the
bottom of the instrument. This, however, is the proper place for the
signature.
I. O. U. $500.00
(Signed) John Jones, is not a promissory note. It is
not a promise to pay at a definite time or to a definite person. It is a mere
acknowledgment of indebtedness.
132. Parties to Negotiable Instruments. By usage and custom, parties
to negotiable instruments are given certain well recognized names. The
name of the party to whom a promissory note is made payable is always
called the payee. When the payee transfers a negotiable instrument by
indorsement, he is called the indorser, and the party to whom he indorses
the note is called the indorsee. Indorsers and indorsees are designated as
first, second, third, etc., indorsers or indorsees according to their position on
the instrument.
The maker of a draft is called the drawer. The one to whom it is given is
called the payee. The one on whom it is drawn is called the drawee. After
acceptance, the drawee is called the acceptor. The rights and liabilities of
these parties are discussed under separate sections.
133. Rights and Liabilities of a Drawee. The term, draft, is sometimes
used to designate orders made by one bank on another. For example, A in
Cleveland, purchased of his Cleveland bank a New York draft, or an order
by the Cleveland bank on a New York bank, payable to the order of A.
Technically, orders on persons are bills of exchange, but the term draft, has
come to be applied both to orders of one bank on another and to orders of
one person on another. In this work the term, draft is applied to both kinds

of orders. A drawer is a person who makes a draft on another. It is usually
payable to the order of a third person. It may be made payable to the bearer
or to the order of the drawer, himself. A drawer enters into a conditional
contract. By becoming a drawer, he agrees to pay the bill of exchange or
draft, if the payee presents it without delay, and in case of non-payment, or
non-acceptance, if notice is promptly given him of this fact. In case the
draft is a foreign one, that is, made payable or to be accepted, in a different
state or country from which it is drawn, it must be protested by the payee to
enable him to hold the drawer. A draft is protested by being presented by a
notary public, who, by formal written instrument, declares the refusal of the
drawee to accept. Protest is discussed more at length under a separate
section. In case these conditions are complied with, and the drawee does not
accept the bill or pay the bill after acceptance, the payee may hold the
drawer. After the formalities above enumerated are observed by the payee
or holders of a draft, if the draft is dishonored, that is, not accepted, or paid
by the drawee, the payee may sue the drawer, whose liability is similar to
that of the maker of a promissory note.
134. Rights and Liabilities of Acceptor. The person to whom a draft is
directed is called the drawee or acceptor. When a draft is presented to the
drawee, he may accept it by writing accepted thereon, or he may accept by
writing his consent in a separate instrument, such as a letter, or by sending a
telegram, or he may accept orally or by his conduct. After a drawee has
accepted a draft, he is bound by its terms. He must pay the amount
mentioned in the draft. After acceptance, his liability is similar to that of the
maker of a promissory note. Sometimes an acceptor does not accept in the
exact terms of the draft. He may change the time or place of payment, or
attach conditions to the bill or draft. This amounts to a refusal on his part to
accept the bill, which will entitle the payee to refuse the qualified
acceptance and by giving proper notice to the drawer hold the drawer by
reason of non-acceptance by the drawee. If, however, the payee chooses to
accept the qualified acceptance of the drawee, he may do so, but by this act
he releases the drawer and all prior indorsers from liability thereon.
135. Rights and Liabilities of Maker. Maker is the term applied to the
person who originally makes and signs a promissory note. By this act, he
agrees to pay at maturity, to the original payee, or to whomever the note has
been indorsed or properly transferred, the amount named in the note. The
maker of a note is liable absolutely and unconditionally. While it is

customary for the holder of a note to present it to the maker at maturity for
payment, this is not necessary unless a place of payment is stipulated in the
note. The holder may commence suit against the maker at maturity without
presenting the note for payment. If the note contains indorsements, the note
must be presented to the maker, and if payment is refused, to enable the
holder to hold the indorsers liable, notice of the fact must be given the
indorsers. If the note is payable at a particular place, as for example, a bank,
the holder must present the note at the bank at maturity, or not be able to
collect interest thereafter, if the maker proves that he had funds there
sufficient to pay the note at maturity. If the maker has been damaged other
than by loss of interest, by failure to present a note at a bank when made
payable, he may collect damages therefor from the holder.
136. Blank Indorsement. A negotiable instrument, if payable to bearer,
may be transferred by delivery. If payable to the order of the payee, it may
be transferred by indorsement and delivery. By indorsement is meant the
writing the name of the payee upon the back of the negotiable instrument.
Indorsement may be made in various forms, depending upon the purpose
for which made, and the kind of liability the indorser is willing to
undertake, or the kind or degree of liability which he wishes to avoid. The
most common kind of indorsement consists of the payee's writing his name
only on the back of the instrument. A negotiable instrument with blank
indorsement is shown in Fig. 5.

Fig. 5. Promissory Note with Blank Indorsement.

If X. X. Crumby desires to transfer the note to anyone, he signs his
name on the back thereof, as indicated in the illustration. This is called a
blank indorsement, and makes the note payable to bearer. The note now
passes as currency without further indorsement. Subsequent holders may
indorse the note if they so desire, or are so required. If the back of a
negotiable instrument becomes filled with indorsements, a paper may be
attached to carry further indorsements. Such a paper is called an allonge.
137. Indorsement in Full. A holder of a negotiable instrument, not
desiring to make it payable to bearer, may indorse it by making it payable to
some particular person or to the order of some particular person, followed
by his signature. This does not destroy the negotiability of the instrument,
but prevents anyone but the person to whom it is indorsed, or such person's
indorsees, from securing payment of the instrument. This is not true if the
instrument is payable to bearer, or if it has been indorsed in blank. Such
instruments are payable to bearer, and circulate as money without requiring
further indorsement. If subsequently indorsed in full, only those subsequent
holders can hold the indorser in full, who can trace their title through him.

Fig. 6 is an
indorsement in
full of X. X.
Crumby. By this
indorsement,
only John Jones,
the person to
whom he
indorses, may
obtain payment
of the note. If
John Jones
indorses the note
in blank, that is,
signs his name
to it, the note
becomes
payable to
bearer, and
passes like
money, without
Fig. 6. One Form of further Fig. 7. Another Form of
Indorsement in Full. indorsements. Indorsement in Full.

Fig. 8. Indorsement without Recourse.

By the indorsement, Fig. 7 which is also an indorsement in full, X. X.
Crumby becomes liable as indorser to John Jones only, and not to anyone to
whom John Jones may indorse the paper. X. X. Crumby's indorsement does
not contain the words "or order." The face of the note, however, contains the
words "or order," which makes the note negotiable. X. X. Crumby's
indorsement to John Jones, although not containing words of negotiability,
does not destroy the negotiability of the note. John Jones may indorse the
note in blank, or in full. The only effect of X. X. Crumby's omitting words
of negotiability from his indorsement is to limit his primary liability as an
indorser to John Jones.
138. Indorsement without Recourse. Frequently, the holder of a
negotiable instrument is unwilling to assume any primary liability by
transferring a negotiable instrument which he possesses. He may desire to
transfer the right he has in the instrument, without becoming liable thereon.
He may do this by indorsing it without recourse.

Fig. 9. Indorsement for Collection and for Deposit.

By either of the indorsements, (Fig. 8) the one in blank, or the one in
full, Jos. Rundy, transfers his interest in the note to John Jones, and does not
become liable thereon as an indorser. It is not quite accurate to say that an
indorser without recourse has no liability as an indorser. He impliedly
warrants the signatures preceding his own to be genuine, and that the
parties making them had legal capacity to sign. The implied liabilities of an
indorser are discussed under a separate section.

Fig. 10. Promissory Note with Anomalous Indorser.

139. Indorsement for Collection or Deposit. A holder of a negotiable
instrument may transfer it for the purpose of collection, thereby making the
transferee his agent, for the purpose of carrying out his will, and thereby
destroying the negotiability of the instrument. This prevents another from
taking the note free from the claim of the original indorser.
Either of the indorsements in Fig. 9 destroys the further negotiability of
the note. The indorsers are authorized to collect the note for Arthur Hinde.
They are not authorized to transfer the note, except for the purpose of
collecting it for Arthur Hinde.
140. Anomalous Indorser. Sometimes, a party writes his name upon
the back of a negotiable instrument outside the chain of title. That is, he
writes his name thereon, before the payee indorses it. This is for the purpose
of adding security to the note.
In this case, Fig. 10, John Arthur signs the note outside the chain of title.
He places his name thereon for the purpose of adding security thereto. He is
liable on his indorsement to the payee, A. Aldrich, and to the indorsees of
A. Aldrich. In some jurisdictions he is liable as a guarantor, in some as a

surety, but in most as an ordinary indorser. The liability of a surety and
guarantor is discussed in the section on Suretyship.
141. Liability of an Indorser. By placing his name on the back of a
negotiable instrument for the purpose of passing title, a person becomes
liable on an implied contract. If his indorsement is in blank, or payable to
the order of the indorsee, he is liable to any innocent purchaser for the
value, without notice. If made payable to a particular person, he is liable
only to that person. The implied liability of an indorser has been said to be
as follows: "I hereby agree by the acceptance by you of title to this paper,
and the value you confer upon me in exchange, to pay you, or any of your
successors in title, the amount of this instrument, providing you, or any of
your successors in title, present this note to the maker on the date of
maturity, and notify me without delay of his refusal to pay. And I warrant
that all the parties had proper capacity and authority to sign, and that the
obligation is binding upon each of them. And I will respond to the
obligations created by these warranties, even though you do not demand
payment of the maker at maturity or notify me of default."
142. Forgery and Alteration of Negotiable Instruments. An act by
which a negotiable instrument is materially and fraudulently changed and
passed or attempted to be passed, is a forgery. The act may consist of
fraudulently writing another's name on a negotiable instrument, or changing
a name already on a negotiable instrument, or changing the figures, date,
rate of interest, or in fact any act of counterfeiting or materially altering a
negotiable instrument. Forgery makes the instrument void. The forger, or
those who purchase from him, obtain no rights against the party wronged.
As to the party whose name or whose instrument is forged, the instrument is
void. For example, A has B's valid note for one hundred dollars ($100.00)
and changes the note by erasing one hundred dollars ($100.00) and
substituting five hundred dollars ($500.00) and sells the note to C. C can
recover nothing from B. A, by indorsing the note to C, warrants the
genuineness of the note and is liable on his indorsement to C. Neither A nor
C can recover even one hundred dollars ($100.00) from B. The instrument
has been rendered void by the forgery, and courts will recognize no liability
of B thereon.
A negotiable instrument altered in any material respect is void. If
fraudulently made, it is regarded as a forgery. If innocently made, the
instrument is still void, but the wronged person is liable for the original

consideration. If A gives B his promissory note for one hundred dollars
($100.00) with interest at 6%, and B carelessly, but not fraudulently, writes
8% thereon instead of 6%, B cannot recover on the note at all. But he can
recover from A one hundred dollars ($100.00) with interest at 6% on the
debt for which the note was given. Any alteration of a negotiable instrument
which changes the liability of the parties thereto, amounts to a material
alteration. Changes in the rate of interest, the name of an indorser, the date,
the place, time or manner of payment is a material alteration and renders the
instrument void. If the alteration is made by a stranger, a person not a party
to the instrument, it does not constitute a material alteration. The instrument
may be restored to its proper form and recovery be had thereon.
143. Fraud and Duress. Fraud has been defined to be "a false
representation of a material fact, made with knowledge of its falsity or in
reckless disregard whether it be true or false, with the intention that it
should be relied upon by the complaining party, and actually inducing him
to rely and act upon it." Fraud is a defense to a party to a negotiable
instrument as against the person inducing it, but not as against subsequent
innocent purchasers. A offers to sell B a diamond ring for five hundred
dollars ($500.00) assuring him that the diamond is genuine. Relying upon
this false statement of A, B takes the ring and gives A his promissory note
for five hundred dollars ($500.00) payable to A's order. The ring proves to
be paste. A cannot recover on the note from B. If, however, before it is due,
A sells the note to C, who pays value for it without notice of the fraud, C
can force B to pay the note.
Duress is actual or threatened violence sufficient under the
circumstances to compel a person to act against his wishes. In connection
with negotiable instruments, duress is treated as the same kind of a defense
as fraud. It is a complete defense as against the guilty party, but is not
available as against an innocent purchaser.
144. Lost or Stolen Negotiable Instruments. The primary function of
negotiable instruments is to circulate like money. If a negotiable instrument
is indorsed in blank, or made payable to bearer, it may circulate without
further indorsement. If such a negotiable instrument is lost or stolen, and
purchased before maturity by an innocent party, the maker is liable thereon.
For example, if A makes a promissory note payable to bearer, and it is
stolen by B from A's possession, and sold for value to C, an innocent party,
C may collect the note from A. If A makes a promissory note payable to the

order of B, and B indorses it in blank, that is, writes his name only, on the
back thereof, and it is stolen from B's possession by C and sold by C to D,
who purchases it innocently and for value, D may collect the note from A.
This is the principal distinction between negotiable instruments and
ordinary contracts. If the thief changes the instrument in any material way,
or is obliged to forge someone's name to pass it, this constitutes a forgery
and no recovery can be had thereon.
145. Real and Personal Defenses to Negotiable Instruments.
Defenses to negotiable instruments are usually classified as real and
personal. If they are good only against a particular person, they are said to
be personal. If they are good as against everyone, they are said to be real. If
the instrument is forged, given by an infant, a person under legal age, is
illegal—for example given for a gambling contract made illegal by statute
—or has been materially altered, it is void, regardless of who holds it. These
defenses are called real defenses. If the instrument is lost or stolen, and
purchased by an innocent party, if given by reason of duress or fraud, or if
there is no consideration, the defense is good only as against the guilty
party. These defenses are called personal defenses.
146. Consideration. A consideration is usually defined to be something
beneficial to the party making a promise, or something detrimental to the
party to whom a promise is made. Every ordinary contract must be
supported by a consideration. Negotiable instruments differ from ordinary
contracts in that they are made to circulate like money. In order that they
may circulate like money the maker is not permitted in some instances, to
assert that the instrument lacks consideration. As between the immediate
parties to a negotiable instrument, there must be a consideration. The maker
may successfully defend against an action based thereon for this reason. If,
however, the instrument has passed before due, to an innocent purchaser for
value, the maker cannot refuse payment on the ground of no consideration.
In case of a negotiable instrument, consideration is presumed.
Consideration need not be stated in the instrument. It amounts to a defense,
only as between immediate parties. If A gives B his promissory note
payable to B's order, with the understanding that B is not to use the note, but
is to show it to C, his grocer, for the purpose of obtaining credit, and B
endeavors to collect the note from A, A may successfully defend on the
ground of no consideration. If, however, B sells the note to D before it is

due, and for value, D, not knowing there is no consideration, can collect the
note from A.
147. Presentment and Acceptance of Drafts. Drafts payable at sight,
or after sight, must be presented to the drawee for acceptance. This is for
the reason that the time of payment of such drafts is uncertain. If a draft of
which presentment is necessary, is not presented for acceptance, the drawer
and indorsers are discharged. Presentment for acceptance must be made to
the acceptor within a reasonable time after receipt by the payee or indorsee.
What consitutes reasonable time for presentment depends upon the
circumstances connected with each particular case. Presentment for
acceptance is made by exhibiting the bill for acceptance to the person upon
whom is it drawn. Presentment for acceptance may be made by the payee,
or his indorsee, and may be made to the drawee, his authorized agent or
legal representative. Presentment may be made either at the person's place
of business, or at his residence. If made at his place of business, it must be
made during business hours. It cannot lawfully be made after noon on
Saturdays, nor can it be made on Sundays or legal holidays. Acceptance
may be indicated by writing accepted or words to that effect on the bill, by
a separate writing to that effect, or by oral agreement of the drawee. If the
bill contains a stipulation not requiring acceptance, this is called waiver of
acceptance, and the bill need not be presented for acceptance. If acceptance
is refused, or not made for any reason, anyone may accept the bill. This is
called acceptance for honor, or acceptance supra protest. The liability of an
acceptor for honor is that if the bill is presented to the drawee at maturity
for payment and refused, and notice thereof given the acceptor for honor,
the latter will pay it.
A bill or draft payable at a definite time or date need not be presented
for acceptance. For example, if a bill is drawn payable December 23, 1909,
it need not be presented for acceptance. The time of payment is certain, and
if presented for payment on December 23, and dishonored, notice of non-
payment to the drawer and prior indorsers is sufficient to enable the payee
to hold them liable. If, however, the bill is payable at sight, or three days
after sight, or any time after sight, it must be presented for acceptance to fix
the date of maturity, If a bill is not paid by the acceptor after acceptance,
notice must be given the drawer and prior indorsers by the holder, to enable
him to hold the drawer and prior indorsers liable. This is sufficient in case
of an inland bill. In case of a foreign bill, one drawn on a person, or made

payable to a person in another state or country from the drawee, formal
protest must be made in case of non-payment or non-acceptance. Protest is
a formal act of a notary public. This is explained under a separate section.
148. Time of Payment and Days of Grace. A negotiable instrument is
payable at the time mentioned in the instrument. If a negotiable instrument
is payable a stipulated time after date, and the instrument bears no date, its
date is the time it was delivered. The term month, is held to mean calendar
month, and not a certain number of days. If a note is dated February 6th,
and is payable thirty days after date, it matures March 6th. When a
negotiable instrument is payable a specified number of days after date, the
time is counted by excluding the day on which the instrument is given, and
including the final day stipulated. Negotiable instruments may be made
payable on demand of the payee or holder. Such paper is payable at the
option of the holder. It is sometimes called paper payable on call.
Negotiable instruments may be made payable on or before a certain day.
These instruments are valid negotiable instruments. They really mature at
the day fixed in the instrument, but may be paid at any time after delivery at
the option of the payee or holder. According to the Law Merchant, three
days were allowed the party liable on a bill or note to make payment, in
addition to the time fixed for payment. These were called days of grace. In
the majority of the states, days of grace have been abolished by statute.
When not abolished by statute, days of grace are still allowed.
149. Innocent Purchaser for Value Without Notice. The feature that
distinguishes negotiable instruments from ordinary contracts is that
negotiable instruments may be transferred in such a manner that the
transferee receives the instrument free from certain defenses which are
good against the transferror. For example, one who purchases another's
rights under an ordinary contract takes the exact position of the transferror.
Any defenses good against the seller are good against the purchaser.
However, a purchaser for value before maturity of negotiable instrument,
who has no notice of any defenses to the instrument, takes it free from all
but real defenses. Real defenses are infancy of the maker, forgery, material
alteration, and illegality. But such a defense as fraud, want of
consideration, duress, or any except a real defense is not available against
an innocent purchaser for value without notice. An innocent purchaser for
value without notice, of a negotiable instrument, is also called a bonâ fide
holder, or a holder in due course. A person who purchases a negotiable

instrument showing defects or defenses on its face, cannot claim to be a
bonâ fide holder. A person who purchases negotiable instruments after
maturity, takes them subject to all defenses good against the seller. Such a
purchaser is not a bonâ fide holder.
150. Presentment for Payment of Negotiable Instruments. So far as
the maker or acceptor of negotiable instruments is concerned, in the
absence of a place for payment stipulated in the instrument, a negotiable
instrument does not have to be presented for payment. As a matter of
practice, however, negotiable instruments are presented to the maker and
acceptor at their places of business or at their residences for payment at
maturity. In order to hold indorsers, however, a negotiable instrument must
be presented to the maker or acceptor at maturity, and, in case of failure to
pay, notice must be given indorsers, else they are relieved from liability.
When a place for payment is specified in a negotiable instrument,
presentment at that place is sufficient. When no place of payment is
designated in the instrument, presentment to the maker or acceptor
personally, wherever he may be found, or at his residence or place of
business is sufficient.
151. Notice of Dishonor and Protest. When a negotiable instrument
has been presented to a maker or acceptor for payment, and payment has
been refused, the holder should notify the drawer, if the instrument is a bill
of exchange or draft, and the indorsers, no matter what the form of the
negotiable instrument, of the fact of dishonor. If such notice is not given,
the acceptor or indorsers are discharged from liability. This notice should be
given by the holder of the paper, or his agent, within a reasonable length of
time after dishonor. The notice may be given by a verbal notification, by the
delivery of written message, or by mailing notice to the residence or place
of business of the indorsers or drawer. Everyone whom a holder desires to
hold liable, must be notified in case of dishonor. If a drawer of a bill or an
indorser of a note waives notice of dishonor by so stipulating in the
instrument, notice as to them is unnecessary. In case of an inland bill, mere
notice in writing mailed to their usual address, or actual notice is sufficient.
By inland bill is meant one made payable, or to be accepted in the same
state or country where drawn. In case of a foreign bill of exchange, or one
made payable, or to be accepted, in a state or country other than where
made or drawn, notice of dishonor must be by protest. This is true of notice
to the drawer for failure of a drawee to accept, as well as for failure of an

acceptor to pay. Protest is a formal declaration of a notary public, an officer
recognized by all countries as authorized to administer oaths. Technically,
only bills of exchange need be protested. By practice, however, promissory
notes and checks are protested as well.
152. Certificate of Protest. The following is a common form of protest:
State of Ohiobr
SS
Cuyahoga Co.
I, John Arthur, a notary public, having been duly appointed and sworn, and residing at
Cleveland, Cuyahoga Co., Ohio, do certify that on the 10th day of December 1909, I
presented the annexed promissory note for payment at the City Trust Co., where same
is made payable, and that I did this at the request of the State Trust Co., and that
payment was refused. I further certify that I did protest, and I do now publicly protest
against the maker, indorsers, and all others concerned, for all costs and damages
connected with the failure to pay this instrument. I certify that I am not interested in
any way in this instrument. I further certify that I have this day deposited in the Post
Office at Cleveland, Ohio, notices of this protest, signed by me as notary public, and
addressed to the following persons. (Names and addresses of persons connected with
the instrument.) In testimony whereof I have hereto affixed my signature and seal of
my office, this 10th day of Dec., 1909.
John Arthur,
Notary Public.
Notary
Seal.

QUIZ QUESTIONS

PARTNERSHIPS
1. May a party do business under a name other than his own?
2. If a party uses a trade name does this constitute a partnership?
3. Define partnership, and give an example of an agreement constituting
a partnership.
4. How many persons may engage in a single partnership enterprise?
5. Give the principal features of the partnership relation.
6. How is a partnership created?
7. May partnerships be created by oral agreement? If so, give an
example of an oral partnership agreement.

8. Must any kind of partnership agreement be in writing? If so, give an
example.
9. What is meant by partnership by estoppel?
10. Give an example of an executory partnership agreement.
11. What classes of persons may legally become partners?
12. May an infant become a partner?
13. A, aged twenty-two years, enters into a partnership with B, aged
seventeen. May A avoid a contract of the partnership made with C, a third
person, on account of the infancy of B?
14. Give an example of an infant ratifying a partnership agreement.
15. Can drunken or insane persons enter into partnerships?
16. What names are partners entitled to take as partnership names?
17. Can a partnership take the name of another partnership? If not, why
not?
18. Can a partnership take a name which does not suggest the name of
any of the partners interested?
19. Can a partnership ever have more than one name? If so, under what
circumstances?
20. Give, and define the names applied to different kinds of partners.
21. Distinguish silent partners and secret partners.
22. May a partnership exist as between the partners, and not exist as to
third persons trading with the partnership?
23. May a partnership exist as to third persons dealing with an apparent
partnership, while none exists between the apparent partners themselves? If
so, give an example.
24. State what constitutes a partnership as to third persons dealing with
a partnership.
25. What are the powers of a partnership?
26. Of what may the property of a partnership consist?
27. May a partnership make and own promissory notes?
28. What constitutes holding a person out as a partner?
29. What is the liability of a person held out as a partner?

30. Can a person be liable as a partner who is held out as a partner
without his knowledge or consent?
31. What are the duties of partners to each other?
32. Can one partner sue his partner at law?
33. If one partner dishonestly takes possession of partnership assets,
how may his partner get legal relief?
34. What is meant by joint liability of partners?
35. What is meant by liability in solido?
36. What is partnership liability to third persons?
37. Is the individual property of members of the partnership liable to be
subjected to the payment of partnership claims?
38. When, if at all, can the property of individual partners be subjected
to the payment of judgments against the partnership before the property of
the partnership has been exhausted?
39. What is the individual liability of the members of a partnership for
the partnership debts?
40. What effect, if any, does change of membership have upon a
partnership?
41. Does the addition of a new member dissolve a partnership?
42. Does withdrawal of a member discharge a partnership?
43. What effect, if any, does death of a partner have upon a partnership?
44. Define survivorship.
45. What are the rights and duties of survivors of a partnership?
46. In what ways may a partnership be dissolved?
47. In what cases must notice of dissolution of partnership be given?
48. How, and to whom must notice of dissolution of partnership be
given?
49. Upon dissolution of a partnership what part of the firm assets
belongs to firm creditors, and what part of individual assets belongs to
individual creditors?
50. In case a partnership is insolvent, and there is no living solvent
partner, what rights have firm creditors in the assets of the individual
partners as compared with individual creditors?

51. Define and describe limited partnership.
52. What is the principal distinction between limited and general
partnership?
53. Define special partner as used in connection with limited
partnerships.

OFFICE BUILDING OF THE CHICAGO EDISON COMPANY,
CHICAGO. ILL.
Shepley, Rutan & Coolidge, Architects, Chicago. Two Lower Stories of Pink Milford Granite,

Polished; Upper Stories of the Same Granite, with Ten-Cut Surface. Built in 1899, Note the
Decorative Feature of the Lighting in Lower and Upper Portion of Building.

CORPORATIONS
1. Define corporation.
2. May an association of persons create a corporation by agreement?
3. Is a corporation a natural person?
4. How were corporations originally created?
5. How are corporations created at the present time?
6. Distinguish the creation of a corporation and the creation of a
partnership.
7. For what purpose may a corporation be created?
8. What is the franchise of a corporation?
9. Is a partnership distinct from the members composing it?
10. Is a corporation dissolved by a change of membership?
11. When does a partnership cease to exist?
12. Are the members of a corporation agents of the corporation?
13. Who are the authorized agents of a partnership?
14. What are the powers of a corporation?
15. Enumerate the ordinary powers of a corporation.
16. Is the charter of a corporation a contract?
17. May a charter of a corporation be revoked at the will of the
legislature that granted it?
18. How are corporations created?
19. What is meant by a corporation's charter?
20. What kinds of corporations, if any, may be organized under United
States laws?
21. By what authority are national banks organized?
22. Under what provisions are most corporations organized?
23. Under what conditions may corporate charters be revoked?
24. State briefly the necessary steps in organizing a corporation.
25. Must a corporation have a corporate name?

26. May a corporation change its name?
27. May two corporations use the same name?
28. May a corporation appropriate a name descriptive of an article
manufactured?
29. Give an example of a name a corporation is not permitted to
appropriate.
30. Classify corporations.
31. Define and distinguish private corporations and public
corporations.
32. Give an example of a public corporation; a private corporation.
33. Is a street railway company a private or public corporation?
34. When does a corporation's existence commence?
35. What determines when a corporation's existence commences?
36. Define estoppel.
37. Give an example of a corporation estoppel from denying its
corporate existence.
38. Are third persons ever estopped from denying a corporation's legal
existence? If so, give an example.
39. Is a corporation's charter a contract?
40. If a corporation's charter is a contract, who are the contracting
parties?
41. At the present time can a corporation obtain an irrevocable charter?
42. Define de facto corporation.
43. Define de jure corporation.
44. Can a de facto corporation avoid its liabilities on the ground of
incomplete organization?
45. Who can object to a de facto corporation being incompletely
organized?
46. What is necessary to create a de facto corporation?
47. Define promoter.
48. Is a promoter personally liable for the obligations made by himself
in connection with organizing a corporation?

49. Is a corporation responsible for the obligations created by its
promoter?
50. How, if at all, may a corporation adopt the obligations of its
promoters?
51. May a corporation be reorganized by consent of its members?
52. Is a reorganized corporation a new corporation, or a continuation of
the old corporation?
53. Is a reorganized corporation ever liable for the obligations of the old
corporation?
54. May a reorganized corporation ever escape the obligations of the old
corporation?
55. How, if at all, may corporations consolidate?
56. Is a consolidated corporation distinct from the corporation from
which it is formed?
57. May corporations consolidate by consent of the members of each?
58. Is a consolidated corporation liable for the debts of its component
corporations?
59. What is the governing board of a corporation for profit called?
60. How are directors elected?
61. How, and under what circumstances and conditions may corporate
meetings be held?
62. Who are entitled to vote at corporate meetings?
63. May a member of a corporation ever have more than one vote?
64. What is meant by cumulative voting?
65. What is meant by ticket voting?
66. Define quorum.
67. What constitutes a quorum?
68. Must a member of a corporation be present to have his shares of
stock voted?
69. How, if at all, may a shareholder vote by proxy?
70. Who are members of a corporation?
71. Is a stockholder personally liable for the debts of the corporation?
72. What is the liability of a shareholder in a national bank?

73. What is meant by stockholder's double liability?
74. How may a person become a stockholder in a corporation?
75. What is a certificate of stock?
76. May a person become a stockholder without having a certificate of
stock?
77. May a person hold a certificate of stock and not be a stockholder?
78. Must directors of a corporation be stockholders?
79. How, if at all, is the authority of the board of directors limited?
80. What are the principal duties of directors?
81. May a board of directors dispose of the entire assets of the
corporation?
82. May directors act for their own private interests in dealing with the
corporation?
83. May a director ever contract with the corporation?
84. Define by-laws, rules, and regulations.
85. Distinguish by-laws and resolutions.
86. Define capitalization.
87. Distinguish capitalization from assets of a corporation.
88. Define capital stock.
89. May a corporation sell its shares for less than par?
90. Distinguish par value and face value of stock.
91. If a corporation sells a shareholder stock at 5% of its par value, and
the corporation is solvent, who, if any one, may object?
92. Must shares be paid for in money?
93. If a person purchases shares from a stockholder at less than par, not
knowing that the shares have not been paid for in full, is he liable to the
corporation for the balance of their par value?
94. Define call and assessment.
95. May an assessment be made before a call?
96. May an assessment be made on stock paid for at par?
97. Define and give an example of watered stock.
98. Upon what authority may the capital stock of a corporation be
increased or decreased?

99. What is a stock dividend?
100. How many kinds of stock are there?
101. Define preferred stock, and distinguish it from common stock.
102. Do preferred stockholders have any advantage over common
stockholders when the affairs of the corporation are wound up, and its
assets distributed?
103. How may dividends be paid?
104. May a stockholder force the corporation to pay a dividend?
105. When, if at all, are dividends debts of the corporation?
106. Are certificates of stock negotiable instruments?
107. Distinguish certificates of stock from regular negotiable
instruments.
108. How are transfers of stock made by the corporation?
109. What, if any, is the individual liability of a stockholder for the
debts of the company?
110. What ownership, if any, does a stockholder have in the property of
the corporation?
111. Can a corporation transact business without the aid of officers and
agents?
112. How are the officers of a corporation appointed?
113. What are the usual officers of a corporation?
114. What are the duties of the president of a corporation?
115. May the officers of a corporation ever act without the express
authority of the board of directors?
116. What is the proper corporate signature to a contract?
117. What is the proper corporate signature to a negotiable instrument?
118. Can a corporation legally sign a contract without using its seal?
119. Define ultra vires.
120. Give an example of an ultra vires act.
121. Are third persons deemed to have notice of the powers and
limitations of a corporation.
122. Does a corporation have any rights outside the state of its creator?

123. What kind of corporations, if any, are authorized by the United
States Constitution to transact business in any state?
124. What are the general provisions of the states regulating foreign
corporations?
125. Explain the meaning of the term doing business as applied to
foreign corporations.
126. Is a corporation liable for its torts and crimes.
127. How, if at all, can a corporation be punished?
128. What is meant by dissolution of a corporation?
129. How can a corporation be dissolved?
130. Can a corporation be dissolved by consent of its members?

NEGOTIABLE INSTRUMENTS
1. Name some of the most common forms of negotiable instruments.
2. What is a negotiable instrument?
3. What advantages do negotiable instruments have over money for
commercial uses?
4. Define negotiability.
5. Are all promissory notes negotiable instruments?
6. What words are necessary to make an instrument negotiable?
7. May an instrument be negotiable without containing the words or
order, or or bearer?
8. What kind of negotiable instrument, if any, can be transferred without
indorsement?
9. Define assignment.
10. Can negotiable instruments be assigned?
11. Distinguish assignability from negotiability.
12. What is meant by the law merchant?
13. How do we happen to recognize the rules of the law merchant?
14. When was the law merchant first recognized in England?
15. To what classes of negotiable instruments were the rules of the law
merchant originally applied?

16. To what classes of negotiable instruments are the rules of the law
merchant now applied?
17. Define promissory note.
18. Name the parties to a promissory note.
19. Give the essential features of a promissory note.
20. Must a promissory note be dated?
21. Distinguish drafts and bills of exchange.
22. Give the names of the parties to a bill of exchange.
23. How is a bill of exchange accepted?
24. What is a check?
25. How does a check differ from a bill of exchange?
26. Are days of grace allowed in the payment of checks?
27. What is certification of a check?
28. What effect does certification of a check by the payee have upon the
maker?
29. Are bonds negotiable instruments?
30. What are registered bonds?
31. What are coupon bonds?
32. What are trust deeds?
33. What are collateral notes?
34. Are collateral notes negotiable?
35. By whom are collateral notes commonly used?
36. What is a cognovit note?
37. How does a cognovit note differ from an ordinary note?
38. Define certificate of deposit.
39. How does a certificate of deposit differ from a check?
40. Is a bank liable upon its certificates of deposit?
41. Give the requisites of a negotiable instrument.
42. Does every negotiable instrument require a payee?
43. May a negotiable instrument be signed by mark?
44. Is an "I. O. U." a negotiable instrument?
45. Name the necessary parties to a negotiable instrument.

46. How does a second indorser differ from a first indorser?
47. What is the liability of a drawer of a bill of exchange?
48. Distinguish foreign bills of exchange and inland bills of exchange.
49. What kinds of bills of exchange must be protested?
50. Distinguish between drawee and acceptor.
51. What is the liability of an acceptor?
52. How may a bill of exchange be accepted?
53. What is a qualified acceptance?
54. In case of a qualified acceptance, if the acceptor fails to pay the
draft at maturity is the drawer liable?
55. What is the liability of a maker of a promissory note?
56. If a note is made payable at a bank, and is not presented at the bank
at maturity, is the maker discharged?
57. Define indorsement.
58. Define blank indorsement.
59. What is the difference as to transferability between a note payable to
bearer and one indorsed in blank?
60. Define allonge.
61. Define indorsement in full.
62. Distinguish between the liability of one who indorses in blank and
one who indorses in full.
63. If a note indorsed in blank, is subsequently indorsed in full, can it be
transferred by delivery without the indorsement of the indorsee in full?
64. Define and explain indorsement without recourse.
65. What is the liability, if any, of an indorser in full?
66. Does an indorsement for collection destroy the negotiability of a
note?
67. What is the purpose of an indorsement for collection?
68. Give an example of an anomalous indorser.
69. What is the difference between an anomalous indorser and an
indorser outside the chain of title.
70. In most jurisdictions what is the liability of an anomalous indorser?
71. In general, what is the liability of an indorser?

72. Define indorser.
73. What are the warranties of an indorser?
74. Are the warranties of an indorser express or implied?
75. Define forgery.
76. Does forgery render a negotiable instrument void or voidable?
77. Distinguish between forgery and material alteration.
78. If a note is materially altered by a stranger is it void?
79. Define fraud.
80. Distinguish fraud and duress.
81. Are fraud and duress good defenses as against a bonâ fide holder.
82. If a forged note is lost or stolen can it be collected?
83. If a note procured through fraud is lost or stolen can it be collected
by an innocent holder?
84. Define real defense to a negotiable instrument.
85. What is meant by personal defense?
86. Enumerate the real defenses to a negotiable instrument.
87. Enumerate the personal defenses to a negotiable instrument.
88. Define consideration.
89. Must consideration be stated in a negotiable instrument?
90. What kind of drafts must be presented for acceptance?
91. How are drafts presented for acceptance?
92. What must a holder do if a draft is dishonored?
93. Define protest.
94. When must negotiable instruments be paid?
95. What are days of grace?
96. Do most jurisdictions recognize days of grace at the present time?
97. Define innocent purchaser for value without notice.
98. Define bonâ fide holder.
99. Define holder in due course.
100. Distinguish bonâ fide holder and assignee of a negotiable
instrument.

101. Can a person be a bonâ fide holder of a note who purchases it after
it is due?
102. For what purpose must a negotiable instrument be presented for
payment?
103. Can indorsers of a negotiable instrument be held if the note is not
presented for payment?
104. How is a negotiable instrument presented for payment?
105. Explain notice of dishonor.
106. What is the necessity of giving notice of dishonor?
107. How is notice of dishonor given?
108. What is a certificate of protest?

OFFICE OF PRESIDENT, AMERICAN SCHOOL OF
CORRESPONDENCE, CHICAGO, ILL.

COMMERCIAL LAW

PART III

BANKING, LOANS, MONEY AND CREDITS

153. Banks Defined and Classified. A bank may be defined to be an
institution authorized to receive money for deposit, to make loans, and to
issue its promissory notes payable to bearer. A bank may have any one, or all
of the above enumerated powers. Some banks have powers in addition to
those above enumerated. In the absence of prohibiting statute, any person
may operate a private bank. The states generally have statutes authorizing
the creation and regulation of banks. At the present time, most banks are
incorporated companies.
As to the source of their existence, banks may be said to be national and
state. National banks are organized under United States statutes regulating
their creation and existence. National banks are discussed more at length
under a separate section. All banks other than national are created under state
laws, and are called state banks.
As to their nature, banks are generally divided into three kinds, banks of
deposit, banks of circulation and banks of discount. Banks authorized to
receive money for safe keeping are banks of deposit. Banks authorized to
purchase commercial paper by charging interest in advance are banks of
discount. Banks authorized to issue their own promissory notes payable to
bearer, and actually issuing such notes, are banks of circulation. A single
bank may be a bank of discount, of circulation, and of deposit, or it may be a
bank of discount, of circulation or of deposit. The ordinary savings bank is a
common example of a bank of deposit. A national bank issuing its notes is a

common example of a bank of circulation. A national bank usually purchases
notes for less than their face value, or makes loans upon notes deducting its
interest in advance, making it also a bank of discount.
154. Functions and Powers of Banks. At the present time most banks
are incorporated companies. Their authority to exist is given them by the
state. Their powers are limited by the provisions of their charter. This
question is discussed at length in the section on corporations. A bank cannot
engage in business outside the provisions of its charter. Incorporated banks
are permitted to pass by-laws by which their functions may the more readily
be carried out, and by which the duties of their agents are restricted or
defined. Reasonable by-laws, if brought to the notice of third persons, also
well recognized customs and usages, bind third persons in their dealing with
banks. Ordinarily, banks have the power to borrow money, but do not have
the power to deal in real estate. National banks have no power to loan money
on real estate, but they are permitted to take real estate mortgages to prevent
losses on loans already made. A bank may also purchase real estate sufficient
for the construction of a banking building. Banks have the power to collect
their own paper, and to act as agents for persons and banks in collecting their
paper. The ordinary functions and powers of banks are discussed under
separate sections.
155. Deposits. The primary function of a bank is to receive money from
third persons and to loan money to third persons. Money received from third
persons is money received on deposit. Banks cannot be compelled to receive
money for deposit from anyone. They are permitted to exercise their
discretion and reject such deposits as they choose. The ordinary method of
making deposits is by delivery of currency consisting of gold, silver, copper,
and nickel coin, bank notes and checks to an agent of the bank. The agent
authorized to receive deposits is usually called the receiving teller. Deposits
are usually entered by the receiving teller in the customer's pass book. In
commercial banks, deposits are ordinarily withdrawn by check, without
presenting the pass book. Savings banks ordinarily do not permit their
customers to use checks, but require them to present their pass books when
drawing money. The amount withdrawn is entered in the pass book, and the
balance brought down. When money is deposited generally, the bank has the
right to mingle it with its own funds. It then becomes the debtor of the
depositor in the amount of the deposit. If a fund is deposited with a bank for
a special purpose, and the bank is so notified, or if papers, such as securities,

bonds and certificates of stock are deposited for safe keeping only, they are
known as special deposits and are not mingled with the general funds.
Subject to the reasonable rules of the bank, a general deposit is subject to
withdrawal at the will of the depositor.
156. Checks. A check is a written order upon a bank for the payment of a
specified sum of money payable upon demand. Commercial banks generally
do a checking business. Some banks, such as savings banks, do not permit
depositors to draw checks against their deposits. Savings banks not doing a
checking business, usually require their depositors to present their pass
books when drawing money. Even though written orders are given to third
persons, the pass book must be presented by the third person to enable him
to obtain the money on the order. In case of banks which do a checking
business, the depositor is permitted to draw checks in any amount, payable
to any person. The bank must honor these checks so long as the maker's
deposit is sufficient to pay them, and the person presenting them is properly
identified. Upon payment of a check, the bank keeps it and deducts the
amount from the maker's deposit. These paid checks, or vouchers, are
usually returned by the bank to the customer, every thirty days, with a
statement of his account. The customer then examines these checks and
compares them with his books, and the bank's balance with his balance, for
the purpose of discovering errors.
A check is payable on demand and should be presented for payment
within a reasonable time after receipt. If the receiver lives in the same place
as the maker, the check should be presented during the business hours of that
day. If the receiver resides in a distant place, the check should be presented
as soon as possible under the circumstances. As long as the bank has funds
of the maker, it must honor his checks. If the bank has some funds of the
maker, but not sufficient to pay the check presented, it should refuse to pay
anything thereon. If the bank refuses to honor a check when the maker has
sufficient funds to meet it, the bank is liable at the suit of the depositor, for
any damages suffered.
Receiving a check does not of itself extinguish the debt. The taker of the
check may present it for payment, and if payment is refused by the bank, and
the maker is notified promptly, the taker may sue the maker on the check, or
on the debt for which the check was given. Certified checks are discussed
under the section on negotiable instruments.

157. Loans and Credits. One of the primary functions of banks is to
make loans. Different kinds of banks are authorized to make different kinds
of loans. Savings banks generally are authorized to make loans on real
estate. National banks are not permitted to loan on real estate. Banks
ordinarily are permitted to discount notes. By discounting promissory notes
is meant purchasing them at a sum less than their face value, partially, at
least, on the credit of the seller. Banks are not permitted to discount notes at
usurious rates of interest. Banks are restricted by their corporate charters as
to the nature of the loans they can make.
Credit is the term applied to a present benefit obtained for an agreement
to do something in the future. A person's credit depends largely upon his
business reputation and assets. Companies called mercantile agencies are
organized for the sole purpose of furnishing credit information. These
companies publish books giving the trade records and estimated assets of
business men in the various cities and towns of the different states. These
books are sold to wholesalers, or to anyone desiring credit information.
Companies also employ men to obtain and furnish special reports on
people's assets and business reputation. The bulk of business is done on
credit. Compared with the total amount of business transacted, a small
amount is done for cash. Credit is an important part of a business man's
capital.
158. Rights and Obligations of Banks in Case of Forged, Lost, or
Stolen Checks. Forgery or material alteration of a negotiable instrument
renders it void. Banks are authorized by depositors drawing checks to pay
valid checks, but not forged ones. Ordinarily, a bank must stand the loss if it
pays a forged check. The only exception is in case the depositor has so
carelessly drawn the check that it can be forged without the bank being able
to discover the forgery by the exercise of due care. Most jurisdictions also
hold that a depositor must examine his returned checks within a reasonable
time after their return by the bank. If a forgery is not reported within a
reasonable time after the return of the check by the bank, the check is
presumed to be genuine, and the depositor cannot thereafter complain.
Where a check is payable to bearer, or payable to order, and indorsed in
blank by the payee, making it payable to bearer, and is lost or stolen, an
innocent party purchasing it from the finder or thief gets good title to it.
Such paper circulates like money without further indorsement. A bank in
paying such a check to a bona fide holder who takes it from a thief or finder

without notice of its having been lost or stolen, is not liable to the maker for
the loss.

DEPARTMENT OF RECORDS, AMERICAN SCHOOL OF
CORRESPONDENCE

159. National Banks. The constitution of the United States does not
expressly give Congress the power to create national banks but it gives
Congress the power to collect taxes, duties and imports, to borrow and coin
money and to make all loans necessary to carry into execution the powers
expressly given. To carry into effect the powers given relating to money,
Congress is deemed to have the power to create national banks. Congress
has passed laws under which national banks may be organized by
associations consisting of not less than five natural persons who are required
to sign and file articles with the comptroller of currency at Washington, D.
C., which articles shall specify the name of the proposed bank, its place of
operation, its capital, the names and residences of its shareholders, and the
number of shares held by each. National banks may be organized with a
capital of not less than twenty-five thousand dollars ($25,000.00) in cities
whose population does not exceed three thousand, and with a capital of not
less than fifty thousand dollars ($50,000.00) in places whose population does
not exceed six thousand inhabitants, and with a capital of one hundred
thousand dollars ($100,000.00) in places whose population does not exceed
fifty thousand inhabitants, and with a capital of not less than two hundred

and fifty thousand dollars ($250,000.00) in places exceeding fifty thousand
inhabitants.
Before commencing business, national banks are required to transfer and
deliver to the treasurer of the United States, United States registered bonds,
in amount not less than thirty thousand dollars ($30,000.00), and not less
than one third the paid-in capital stock. Upon making such a deposit of
bonds, the comptroller of currency is authorized to issue to the bank, notes
of the bank in different denominations, equal to 90% of the market value of
the bonds deposited. These are the only circulating notes national banks are
authorized to use. The comptroller of currency is authorized to replace worn
notes or returned notes, proof of the destruction of which is furnished.
National banks in the seventeen largest cities of the United States are
required to keep on hand, money equal to 25% of their circulating notes and
deposits. National banks of all other places are required to keep on hand,
money equal to 15% of their circulating notes and deposits. National banks
are not permitted to make loans on real estate or on their own stock, except
to protect loans already made. In case of insolvency of a national bank, the
stockholders are liable in an amount equal to the par value of their stock, in
addition to their liability to pay the par value of their stock subscriptions.
The shareholders having legal title to the stock at the time of insolvency of
the bank are the ones liable for the additional liability. National banks may
charge the rate of interest authorized by statute of the state where the bank is
located. If unlawful interest, called usury, is charged, the bank forfeits the
entire interest. If the usurious interest has been paid by the borrower, double
the amount of the usury may be recovered from the bank by the borrower.
National banks are authorized to buy drafts and notes, to discount
commercial paper, to borrow and loan money, to deal in government bonds,
to loan money on collateral, but not to guarantee or indorse commercial
paper, except in the transaction of their legitimate business. They are
permitted to discount or purchase bills and notes, but not to charge more
than the legal rate of interest, even though the paper is purchased. They may
charge reasonable rates for exchange in addition to interest.
160. Savings Bank and Trust Companies. All banks other than national
are organized under state laws, and are known as state banks. The most
common kinds of state banks are savings banks and trust companies. Savings
banks ordinarily receive money for safe keeping, acknowledging receipt by
entering deposits in a pass book which the depositor presents upon making

deposits, and upon withdrawal of funds. Upon drawing funds, the amount is
deducted from the balance shown in the pass book and the balance brought
down. Savings banks ordinarily do not permit depositors to draw checks
against their accounts. They are required to present their pass books in
person, or to give them to an agent or payee designated in a written order to
be presented in withdrawing deposits. If pass books are lost, savings banks
are not obliged to pay deposits unless indemnified against loss by the
depositor. Savings banks are permitted to make loans on real estate.
Trust companies usually have all the power of savings banks with the
added power to act in trust capacities as trustees of estates and for bond
holders, as executors, etc. They usually do a checking business for the
accommodation of their depositors.
161. Clearing Houses. A clearing house is an association of banks of a
certain locality, usually of a city, organized for the convenience of its
members in making settlements with each other. As a matter of practice,
holders of checks do not personally present them for payment at the banks
on which they are drawn, but deposit them with the bank with which they do
business. These banks collect them from the banks on which they are drawn.
Each day, a city bank has deposited with it a large number of checks drawn
on other banks of the same city. It would involve much labor to present these
checks for payment on the banks on which they are drawn, and secure
currency or checks therefor. For convenience, banks organize clearing
houses for the purpose of making daily exchanges, with each other, of
checks. If Bank A has deposited with it $1,000.00 of checks on Bank B, and
Bank B has deposited with it $1,100.00 of checks on Bank A, the agents of
the two banks meet at the clearing house, and exchange checks and Bank A
pays Bank B the difference between the total amount of checks exchanged,
or $100.00. If the membership of the association consists of twenty-five
banks, the principle is the same, the members exchange checks and pay each
other the difference in amount. Clearing houses have rules by which
members are required to return checks not properly drawn, over-drafts,
forged paper, etc. within a certain time to the paying bank, or be precluded
from raising objections to the clearing house balance.
162. Money. Ordinarily the term, money, is used to designate any
medium accepted by a seller from a purchaser in the sale of property. It is the
thing that passes current among business men in their dealings with each
other. Bank notes, checks, gold and silver, nickel and copper coin, as well as

United States certificates, are money. Money is sometimes used to designate
legal tender. Legal tender is the medium of exchange which creditors are
obliged by law to accept in payment of debts. United States notes, except for
duties and interest on public debts, and gold certificates are legal tender.
Gold coin and silver dollars are legal tender. Subsidiary silver coin, or half
dollars, quarters and dimes, in amount not exceeding ten dollars are legal
tender. Nickels and pennies are legal tender in amount not exceeding twenty-
five cents. Silver certificates and national bank notes are not legal tender.
163. Discount. Discount is money paid in advance for the use of money.
It is interest paid in advance. One of the primary functions of banks is to
discount negotiable paper. The states generally have laws fixing the legal
and maximum rates of interest. If banks or individuals charge interest in
excess of these rules, they subject themselves to the fixed penalties. In
connection with usury laws, some confusion has arisen as to what constitutes
a purchase and what constitutes a discount. A person is permitted to make
contracts and make as large a profit as possible, if no fraud is used. If the
contract involves the purchase of a negotiable instrument, as distinguished
from a loan of money, he may make as large a profit as he is able. If X
desires to borrow $100.00 of Y and Y gives him the money and takes X's
promissory note, Y can deduct only the lawful rate of interest. If, however, X
holds Z's promissory note indorsed in blank, or payable to bearer, Y may
purchase the note from X for any price he is able, and if he makes half the
face value of it by the transaction, it is regarded as a sale, and not as a loan.
This transaction does not come within the usury laws. A bank, however, by
the weight of authority is not permitted to make purchases of notes in this
sense. The purchase above described, if made by a bank, would be regarded
as usurious. Banks may purchase notes if so authorized by their charter, but
may not charge more than the lawful rate of interest as profit.
164. Exchange. Exchange is the term applied to methods of cancelling
debts and credits between persons of different places. If X, in Cleveland,
owes Y, in New York, $100.00, and Z, in New York, owes X, in Cleveland,
$100.00, it is cheaper and safer for X to send Y an order on Z for $100.00
than to send legal tender from Cleveland to New York. This transaction is
called exchange. If made between persons of the same country, it is called
domestic exchange; if between persons of different countries, it is called
foreign exchange. Banks of one city keep deposits in other cities for the
purpose of selling drafts thereon to customers.

165. Interest. Interest is the money paid for the use of money. Most
states have statutes fixing the rate of interest in transactions where no rate is
specified, and fixing the highest rate that may be agreed upon. The following
are the rates of interest in the different states:
States. Where no rate is Highest rate that may
agreed upon. be agreed upon.
Alabama 8% 8%
Alaska 8% 12%
Arizona 6% any rate
Arkansas 6% 10%
California 7% any rate
Colorado 8% any rate
Connecticut 6% 15%
Delaware 6% 6%
District of Columbia 6% 10%
Florida 8% 10%
Georgia 7% 8%
Idaho 7% 12%
Illinois 5% 7%
Indiana 6% 8%
Iowa 6% 8%
Kansas 6% 10%
Kentucky 6% 6%
Louisiana 5% 8%
Maine 6% any rate
Maryland 6% 6%
Massachusetts 6% any rate
Michigan 5% 7%
Minnesota 6% 10%
Mississippi 6% 10%
Missouri 6% 8%
Montana 8% any rate
Nebraska 7% 10%
Nevada 7% any rate
New Hampshire 6% 6%
New Jersey 6% 6%
New Mexico 6% 12%
New York 6% 6%
North Carolina 6% 6%

North Dakota 7% 12%
Ohio 6% 8%
Oklahoma 6% 10%
Oregon 6% 10%
Pennsylvania 6% any rate
Rhode Island 6% any rate
South Carolina 7% 8%
South Dakota 7% 12%
Tennessee 6% 6%
Texas 6% 10%
Utah 8% 12%
Vermont 6% 6%
Virginia 6% 6%
Washington 6% 12%
West Virginia 6% 6%
Wisconsin 6% 10%
Wyoming 8% 12%

166. Usury. Usury is the term applied to interest charged in excess of the
rate allowed by law. The states differ in the rate fixed by statute as the legal
rate. The most common penalty fixed by statute of the different states, is
forfeiture of all interest.

INSURANCE

167. Insurance Defined. Insurance is the name applied to a contract, by
the terms of which one party, in consideration of a certain sum of money,
agrees to protect another to a certain specified degree against injuries or
losses arising from certain perils. The kinds of insurance are almost as
numerous as the kinds of perils to which persons or property may be
subjected. The nature of insurance contracts are such that legislatures of the
states have the power to define what classes of persons may engage in the
insurance business. Some states provide by statute that only incorporated
companies shall transact the business of writing insurance policies, and that
these companies shall be subject to stringent state supervision and
inspection. States have the right to stipulate upon what terms foreign
insurance companies shall have the right to transact business within their

borders, and may exclude them from transacting business if they refuse to
comply with such provisions. The United States Constitution provides that
interstate commerce shall be under the control of United States Congress.
The Supreme Court of the United States has decided that insurance business
is not interstate commerce. Therefore the states may determine upon what
terms insurance companies may transact business within their territory.
Unincorporated companies as well as individuals may engage in the business
of writing insurance, if it is not provided otherwise by statute.
168. Nature of Insurance Contract. An insurance policy is a contract
requiring competent parties, mutuality, consideration and all the elements
necessary to make any kind of a contract. An insurance contract is peculiar
in that it binds the insurer to pay damages for losses or injuries arising out of
uncertain perils or hazards. It is in the nature of a gambling transaction. A
large number of persons pool a portion of their assets, in order to pay losses
of a certain character likely to befall only a small portion of the persons
entering into the pool. For example, if ten thousand persons pay one dollar
each to establish a common fund to protect the members against losses from
fire, they do so under the belief and expectation that but few of the number
ever will sustain loss from the peril of fire. An insurance contract is so
closely akin to a gambling contract that persons are not permitted to take
insurance on property, or upon the lives of persons, unless they have an
individual interest, which they should have a purpose or interest in
protecting outside of a mere disposition to wager. This interest is called
insurable interest and is discussed under a separate section. It is true that
many kinds of life insurance policies protect against death, and that death is
an event certain to occur to the insured, but the real purpose of the policy is
to give protection against the uncertainty of the time of death. The
uncertainty of the thing sought to be protected against is as great in life
insurance as in any kind of insurance.
169. Parties to Insurance Contracts. Primarily there are only two
parties to an insurance contract, the party to be paid for the loss, in case the
event insured against occurs, who is called the insured, and the party, who
for a consideration agrees to pay an amount certain, or to be determined
upon the happening of the uncertain event. This party is called the insurer or
underwriter. In many insurance contracts, a third party is interested. For
example, A may insure his life in B Co., for the benefit of his wife, C. C may
have nothing to do with the contract except being named as beneficiary

thereunder. She pays nothing for this benefit. It is a contract made for her
benefit. After she has been made beneficiary, A cannot change beneficiaries
without the consent of C. In case of C's death, A may voluntarily name
another beneficiary. If A is indebted to B, and B, considering A insolvent,
desires to secure the debt by taking out a policy of insurance on A's life in
the C company, he cannot take out such a policy without the consent of A.
While a third person may be interested in an insurance contract, or his
consent may be necessary before the contract can be made, there are
primarily only two parties to the contract, the insured and the insurer.
170. Kinds of Insurance. Probably the first kind of insurance written
was marine. The next kind was fire; this was followed by life insurance, and
this in turn, by the many varieties of modern insurance covering almost all
kinds of hazards imaginable. The following kinds of insurance are in
common use: marine, fire, life, accident, tornado, graveyard, fraternal,
fidelity, boiler, credit, guaranty title, plate glass, mutual benefit, employer's
liability, hail, hurricane and health. No attempt is here made to discuss all the
different kinds of insurance. An endeavor is made to discuss some of the
fundamental legal principles connected with the most common kinds of
insurance. These principles apply to all kinds of insurance.
171. Insurable Interest. Courts refuse to recognize the validity of
insurance contracts, unless the party taking the insurance has a pecuniary
interest, present or reasonably expected, in the life or property insured. Such
an interest is known in law as an insurable interest. Insurable interest cannot
be exactly defined. It depends upon the circumstances surrounding each
particular case. Some things have been decided by the courts to constitute an
insurable interest. Cases are continually arising, however, which present new
features which must be decided upon their merits. Insurable interest can only
be described, it cannot exactly be defined. It is sometimes said to be a money
or pecuniary interest possessed, or reasonably expected, by the party
entering into the insurance contract. A father may insure the life of his child,
of his wife, or his servant under contract for a period of service. A party
cannot, however, insure the life of a person with whom he is in no way
connected by close blood relationship, or upon whom he does not depend for
present or future support. Such a contract is regarded as a mere wager, which
a sound public policy refuses to enforce, or even to recognize as valid. A
person may insure a growing crop, and the life of animals owned by him. A
mortgagee, mortgager or pledgee of property may insure the property. A

creditor may insure the life of his debtor; a person may insure his property
against robbery. In fact a person may insure the life of a person or any
property belonging to him or to another, the loss of which will cause him a
pecuniary loss.
In case of life insurance policies, if there is an insurable interest at the
time the insurance contract is made, the policy is valid, even though the
insurable interest afterwards ceases. Any relationship, either by blood or
marriage, close enough to make it of pecuniary advantage to the party taking
the insurance to have the insured continue to live, is regarded sufficient to
constitute an insurable interest. It has been held that a brother has no
insurable interest in the life of his brother, nor a granddaughter in the life of
her grandfather, nor a son-in-law in the life of his mother-in-law. A parent,
however, has an insurable interest in the life of his child or wife; or a
granddaughter in the life of her grandfather if she depends upon him for her
support. A person may insure his own life or property in favor of any one
else. The question of insurable interest arises only in case one endeavors to
insure the life of another, or the property of another in which one has only a
slight interest.
172. Forms of Insurance Contract. The states generally provide by
statute, that to be enforceable, contracts to answer for the debt, default or
obligation of another, shall be in writing (See Statute of Frauds, chapter on
Contracts.) The courts have decided that an insurance contract is not a
contract to answer for the debt, default or obligation of another, but a direct
contract by which the insurance company for a consideration agrees to pay
its own debt in case of loss on the part of the insured. Insurance contracts
need not be in writing. Oral contracts of insurance like other simple
contracts are binding upon the parties thereto. For example, A, representing
an insurance company, meets B, and agrees orally to insure B's house from
twelve o'clock of a certain day, and accepts the premium for one year's
insurance. The house burns the evening of the day after the insurance is to
become effective. A's insurance company is bound by the oral contract of
insurance. If A is not permitted by his company to make oral contracts of
insurance, and A so tells B, or if B knows of this fact, the contract is not
binding, since A acts without authority. If A meets B on Monday, and orally
agrees to procure for him a written policy of insurance on B's house to take
effect from Monday noon, and B's house burns Tuesday morning, A having
failed to procure the written policy of insurance for B, the insurance

company is not liable to B for the loss. B had a contract with A by the terms
of which A promised to procure a policy of insurance for B. A did not orally
promise to insure the house for B. B has an action for damages against A, but
not an action on a contract of insurance against the company.
Insurance agents are often authorized to issue receipts, called binders, to
the effect that insurance has been contracted by a party from a certain time.
These binders constitute sufficient evidence to enable the insured to enforce
his contract of insurance. Agents are sometimes authorized to enter a
memorandum in their books of insurance, called entries in their binding
books. These constitute sufficient evidence of the formation of a contract
between insurer and insured, to enable the latter to enforce his contract in
case of loss.
173. Warranties and Representations in Insurance Contracts. The
term, warranty is commonly used in connection with contracts of sales of
personal property, where it is used to designate a collateral contract
connected with the principal contract in question. In connection with
insurance contracts, it means a statement or stipulation which, by reference
or express term, is itself made a part of the contract of insurance. The
principal distinction between a warranty in connection with sale of personal
property, and in connection with contracts of insurance, is that in the former
case, breach of warranty usually does not discharge the contract, but simply
gives rise to an action for damages, while in case of contracts of insurance,
breach of warranty discharges the contract itself. Life insurance companies
generally require formal written application by which the applicant for
insurance is required to answer questions. These questions and answers are
made a part of the policy or contract of insurance, either by reference, or by
incorporation, and become warranties. If they are not true, the policy may be
avoided by reason thereof. To constitute a warranty, a stipulation must be
made a part of the insurance contract either by direct reference, or by express
incorporation therein. To constitute a warranty, the contract of insurance
must contain a stipulation that the statement or assertion in question is a
warranty. If a warranty proves false, no matter if innocently made, the
contract is discharged thereby. Warranties are strictly construed. Much
injustice has been done by reason of warranties in insurance contracts.
Some states provide by statute, that neither the application for insurance,
nor the rules and regulations of the company shall be considered as
warranties unless expressly incorporated in the policy as warranties. A

distinction is made between representations and warranties. A representation
is a statement made as an inducement to enter into a contract of insurance. It
is regarded as one of the preliminaries to the contract of insurance and not as
a vital part of the contract itself. If a representation proves not to be true in
some particular, the contract of insurance is not discharged by reason
thereof. To constitute a ground for avoiding a contract, a representation must
be false, fraudulent, and material to the contract. It is sometimes said that a
warranty is a stipulation in the contract of insurance itself, and must be
complied with whether true or not, while a representation is usually given
verbally, or in a separate document, and need only be substantially complied
with.
In case of doubt as to whether statements are representations or
warranties, courts incline toward treating them as representations. Answers
to questions were made in an application for insurance followed by the
statement, "The above are true and fair answers to the foregoing questions in
which there are no misrepresentations or suppression of facts, and I
acknowledge and agree that the above statement shall form the basis of the
agreement with the insurance company." The policy of insurance did not
state that these questions were incorporated as warranties. In a suit on the
policy, the court held the answers to be representations and not warranties.
174. Life, Term, and Tontine Policies. Life policy is the term applied to
a contract of insurance payable only at the death of the insured. Term or
endowment policy is the term applied to insurance payable at the death of the
insured, or at the expiration of a certain term or period of years, if the
insured survives such period. The term, tontine insurance, is the name
applied to insurance paid out of the proceeds of unpaid policies during a
certain period or term. If the insured survives the term, and pays the
premium he benefits by receiving a share of the proceeds received from the
policies of those members who do not survive the period, or who let their
policies lapse for other reasons. The term is taken from the name of the
person who devised the plan. It is sometimes called cumulative dividend
insurance. It is written in many different forms.
175. Marine Insurance. Contracts of insurance against injuries to a ship
or cargo at sea are called marine insurance contracts. This is the oldest form
of insurance. In securing insurance of this character, the insured impliedly
warrants that the vessel is seaworthy. This is the only kind of insurance in
which there is an implied warranty. The term general average is used in

connection with marine insurance. If it becomes necessary to sacrifice a part
of a cargo to save the balance, the owners of part of the cargo saved, together
with the owners of the boat, must contribute pro rata toward the loss of the
party whose goods are sacrificed. That is, all owners of cargo and boat must
stand the loss in proportion to their holdings. The one whose goods are
sacrificed is placed in no better or worse situation than the others.
176. Standard Policies. Some states require by statute, that insurance
companies issue policies, the terms of which are fixed by statute. This gives
the insured the benefit of a uniform policy, the terms of which are easily
comprehended, and which are the same in all cases. These statutory policies
are known as standard policies.
177. Suicide Clauses. Contracts of insurance frequently contain the
stipulation that the contract shall be void if the insured suicides. This
stipulation is enforceable if it can be proven that the insured suicided while
sane. It is generally held to be unenforceable if the insured suicided while
insane. An insurance company may stipulate that the contract shall be void if
the insured suicides when either sane or insane. Such a stipulation is
enforceable. The ordinary insurance contract, however, which contains any
suicide clause provides against suicide only, and does not contain any
stipulation as to the sanity of the insured at the time he commits the act. It is
usually held that the burden is upon the insurance company to prove that the
insured was sane at the time he committed suicide. If a policy contains no
suicide clause whatever, suicide will not avoid the policy unless it is proven
that the purpose of the suicide was to defraud the insurance company. If it is
proven that one takes out a policy of insurance with the intent to commit
suicide, the policy is not enforceable in case of suicide.
178. Fidelity and Casuality Insurance. Contracts of insurance by
which the honesty and faithfulness of agents and employees are insured are
termed fidelity insurance contracts. A, a bank, employs B as clerk. A requires
B to furnish a bond, by the terms of which the signers of the bond agree to
pay A for any losses arising from B's dishonesty or carelessness. This bond
or contract is known as a fidelity insurance contract.
Insurance contracts providing against losses arising out of accidents to
property are termed casualty insurance. Losses by theft or burglary, or from
steam boiler explosions are common examples.
179. Reinsurance. One insurance company may insure its own liability
upon policies issued, by entering into separate contracts covering the same

risks with other insurance companies. For example, A, an insurance
company, insures B's factory for $1,000.00. A may in turn insure its liability
to B, by entering into a contract with C, another insurance company, by the
terms of which C agrees to insure A against loss upon A's contract with B. A
is not permitted to bind C by a greater responsibility than A is bound to B. In
case B's factory is burned, in the absence of express stipulation to the
contrary, A may recover from C regardless of whether he has first paid B.
Even though A is insolvent and unable to pay B, this is no defense to C on
his contract with A. C must pay A regardless of the insolvency of A. In case
B has a fire and A settles with him for $500.00, C is liable to A for only
$500.00. That is C's liability to A is the same as A's liability to B, unless by
the terms of the re-insurance, C assumes only a portion of A's liability to B.
In this event C must pay A the pro rata share of A's liability to B. B in no
event has any rights against C. B's contract is with A, and the fact that A has
entered into a contract with C involving the same subject matter, gives B no
rights against C.
180. Assignment of Insurance Policies. By assignment, is meant a sale
or transfer of some intangible interest by one person to another for a
valuable consideration. In case of insurance contracts other than life, no real
assignment can be made. The person whose property is insured is the one
who really benefits by the contracts of insurance. Before loss, an attempted
assignment of the insurance policy amounts merely to a designation of the
person to whom the insurance is to be paid. In case of loss, the original party
insured still holds the property insured or the insurable interest, and any
breach of the insurance contract on his part avoids the contract. A policy of
insurance cannot be assigned without the consent of the insurance company.
If an attempt is made to transfer an insurance policy other than life, before
loss, without the transfer of the property itself, the transaction does not
amount to an assignment, but amounts to a contract between the seller and
buyer, by which the latter is entitled to receive the proceeds of the policy if
any ever arises. So far as the insurance company is concerned, acts of the
seller after the attempted assignment are as complete a defense as before. If
the property insured as well as the insurance policy is transferred to another,
with consent of the insurance company, this is not an assignment, but
amounts to a new contract between the insurance company and the
purchaser. After a loss has occurred, the right of the insured against the

insurance company amounts to a debt, which may be assigned the same as
an ordinary debt.
In case of life insurance, if a third party has been named as beneficiary,
he is supposed to have such an interest in the policy that a change of
beneficiary cannot be made nor can an assignment of the policy be made
without his consent. In case the proceeds of a life insurance policy are
payable to the insured himself, or to his estate, the policy may be assigned at
the will of the insured. If the policy provides against assignment, it cannot be
assigned. Otherwise, it may be transferred as collateral security, or sold
outright at the will of the insured.
181. Open and Valued Policies, and Other Insurance. Policies or
contracts of insurance are said to be valued or open, depending upon
whether the amount to be paid in case of loss is agreed upon in advance. Life
insurance policies are examples of valued policies. The insurance company
agrees to pay a certain fixed amount in case of death of the insured, or at a
certain time. Fire insurance policies usually are open policies. The insurance
company agrees to pay the amount the insured loses by fire which destroys
or injures certain specified property. The fact that a limit is placed upon the
liability of the insurance company does not make the policy valued. If,
however, the insurance company agrees to pay a certain fixed amount in case
of loss by fire the policy is valued.
A person may take as much insurance upon his life as he pleases, so long
as he reveals the facts to the companies with whom he contracts. In case of
insuring property, the insurer is not permitted to recover in excess of the
value of the property, regardless of the amount of insurance he carries. If an
insurer takes out a policy of insurance upon property already insured, he
must not conceal this fact from the subsequent insurer. The second policy
will provide for payment, in case of loss in excess of the first insurer's
liability, but not in excess of the value of the property. Or it will provide that
in case of loss each policy shall share the loss in the proportion that the
amounts of the policies bear to the loss.
SURETYSHIP
182. Nature of Contracts to Answer for the Debt of Another. In the
transaction of business, many contracts are made to answer for the debt or
obligation of another, as distinguished from the direct debt or obligation of
the person entering into the contract. These contracts are made for the
purpose of adding security to the original contract, or for the purpose of

enabling the original obligor to obtain credit. The general term applied to
contracts to answer for the debts of another is suretyship. The arrangement
by which one party agrees to answer for the debt or obligation of another is a
contract. This kind of a contract requires all the elements of any contract.
There must be a meeting of the minds of the contracting parties,
consideration, etc. If A purchases goods from B, agreeing to pay $100.00 for
them, A's obligation to pay B $100.00 is a primary one arising out of a
simple contract. If A purchases goods from B agreeing to pay $100.00
therefor, and C, as a part of the same transaction, makes a promise in writing
to B, to pay the $100.00 if A does not pay, C's obligation is one of
suretyship. He is known in law as a guarantor. His contract is to pay the
debt of another. He has agreed to pay A's debt if A fails to pay it. Any
contract by which a person agrees to answer for the debt or default of
another, no matter what its form may be, or by what technical name it may
be known, is a contract of suretyship.
183. Kinds of Suretyship Contracts and Names of Parties Thereto.
The term, suretyship, is the general or descriptive term applied to all
contracts by which one person agrees to answer for the debt or obligation of
another. It may be in the form of a contract of a surety, a contract of a
guarantor, or a contract of an indorser. There are at least three parties to all
suretyship contracts; the party whose debt is secured, called the principal;
the one to whom the debt is owed, called the creditor; and the one promising
to pay the debt of another, called the promisor. For example, if A, orders one
thousand dollars' worth of merchandise from B, and, as a part of the
transaction, C promises to pay the amount for A, when due, if A fails to pay
it, the transaction is one of suretyship in which A is principal, B, creditor,
and C, promisor. A promisor may be a surety, a guarantor, or an indorser of a
negotiable instrument. Whether a promisor is a surety, a guarantor, or an
indorser depends upon the particular kind of a contract made. In any event it
is a promise to pay the debt of another. But the conditions and terms of the
agreement may make it that of a surety, a guarantor or an indorser. The
distinguishing features of the different kinds of promisors are discussed
under separate sections.
184. Contract of a Surety. A surety is one who unconditionally
promises to answer for the debt or obligation of another. For example, A
gives the following promissory note to B:
Chicago, Ill., Jan. 2, 1908.

Thirty days after date I promise to pay to the order of B—Five Hundred Dollars.
Signed—A.
Signed—C, Surety.

This note constitutes an obligation of suretyship in which B is creditor, A
is principal, and C is surety. C's obligation is the same as that of A, his
principal. By signing this note as surety, C binds himself to pay the note
when due. He does not bind himself to pay on condition that A does not, or
cannot pay the note when due, but binds himself to pay the note when due.
His obligation is the same as the obligation of A. His obligation is not
conditioned upon A's failure or inability to pay. When the note is due, B, the
creditor, may bring suit against C, the surety, disregarding the principal, A. B
may bring suit against C, the surety, without making any demand of payment
of A, or without receiving A's refusal to pay. If the note is signed by C as
above, without using the word, surety after his name, it may be shown by
oral testimony that C signed as surety, if such is the fact. A surety may sign
any kind of a contract as surety for another. In this event, his obligation is to
do the same thing that his principal contracts to do. If the obligation of the
one signing as security is conditioned upon anything, it is not the obligation
of a surety, but that of a guarantor, no matter by what term designated in the
contract. It has been said by some writers that a surety promises to pay the
debt of another if the other does not, and a guarantor promises to pay the
debt of another if the other cannot. This definition is not correct and is not
supported by the cases. This definition applies only to guarantors, since it is
a conditional promise to pay the debt or obligation of another. A surety's
obligation is absolute, and not conditional in any way upon the failure or
inability of the principal debtor to pay. In commercial practice, the contract
of a surety is infrequently used as compared with the obligation of a
guarantor.

A 40-FOOT WIDE MACHINE TOOL BAY IN THE CLAREMONT, N.
H., FACTORIES OF THE SULLIVAN MACHINERY COMPANY

185. Contract of a Guarantor. Anyone who agrees to answer for the
debt, default, or obligation of another upon condition that the other does not
or cannot pay the debt, or upon any condition whatever, is a guarantor. For
example, A gives B the following promissory note:
Cleveland, Ohio, Nov. 27, 1909.
Sixty days after date, I promise to pay B, or order, One Hundred Dollars.
Signed—A.

The back of the note contains the following statement:
I guarantee the payment of this note when due.
Signed—C.

The contract of C is that of a guarantor. If A fails to pay the note when
due, and B demands payment of A, and promptly notifies C of A's failure to
pay, C is liable. Technically, C need not be notified, but it is good business
practice to give him notice. C's liability depends upon A's failure to pay the
note when due. C's liability is a conditional one as distinguished from the
liability of a surety, which is absolute.
Contracts of guaranty are commonly used in commercial affairs. In
obtaining credit, contracts of guaranty are common. They may be used apart
from promissory notes or negotiable instruments. Any kind of an obligation
or contract of another may be guaranteed. A retail dry goods merchant

desires to purchase $2,000.00 worth of goods from B, a wholesaler. B does
not know A, but knows C, a friend of A. B offers to sell A the goods on
credit, on condition that A furnish him a letter of guaranty signed by C. A
furnishes B the following guaranty, signed by C:
Mr. B.,
New York City.
On condition that you sell A an order of goods which he may select, I hereby guarantee
the payment of the amount thereof, not to exceed $2,000.00 in amount.
Signed C.

By this contract, C binds himself to pay B the purchase price of the
goods, not exceeding $2,000.00, if A fails to pay same.
Contracts of guaranty are of many kinds. They are frequently given to
secure contracts of personal service, for the construction of buildings, for
mercantile transactions, or in fact for any kind of business transaction. They
are contracts, and must contain all the elements of a simple contract, such as
consideration, mutuality, competent parties, etc. If a contract of guaranty is
given at the time the original contract is made, and is a part of the same
transaction, the consideration which supports the original contract supports
the contract of guaranty. Otherwise, the contract of guaranty must be
supported by a separate consideration.
186. Contract of an Indorser. One form of suretyship obligation, or
obligations, to answer for the debt or default of another, is that of an indorser
to a negotiable instrument. The contract of an indorser differs from that of a
guarantor, and from that of a surety. For example, A gives the following
promissory note to B:
Chicago, Ill., Jan. 4, 1909.
Ninety days after date I promise to pay to the order of B, one thousand dollars.
Signed A.

B indorses the note by writing his name across the back thereof, and
delivers it to C for $985.00. The contract now existing between A, B, and C,
is one of suretyship, in which A is principal, B creditor, and C promisor. A
promisor in suretyship may be either a surety, a guarantor or an indorser. In
this particular case the obligation of C, the promisor, is that of an indorser.
The principal obligation of C to B is that if the note is presented for payment
to A at maturity, and upon A's failure to pay, due notice is promptly given to
C, C will be responsible to B for the amount due on the note. An indorser is

also liable upon certain implied warranties in addition to his primary liability
as above set forth. In the language of the courts, the technical liability of an
indorser is as follows:
"I hereby agree by the acceptance by you of title of this paper, and the value you confer
upon me in exchange, to pay you, or any of your successors in title, the amount of this
instrument, providing you or any of your successors in title present this note to the maker on
the date of maturity, and notify me without delay of his failure or refusal to pay. And I
warrant that all the parties had capacity and authority to sign, and that the obligation is
binding upon each of them. And I will respond to the obligation created by these warranties
even though you do not demand payment of the maker at maturity, or notify me of default."

An indorser is usually defined to be one who writes his name on a
negotiable instrument for the purpose of passing title. By so doing, he agrees
to answer for the debt of another. That is, he agrees conditionally to pay the
obligation of the maker of the instrument if the maker does not, and if the
indorser is promptly notified of the failure of the maker to pay.
Irregular indorser is the term applied to persons who sign negotiable
instruments outside the chain of title. For example, if A is the maker of a
promissory note and B is the payee, and C places his signature on the back of
the note, C is an irregular indorser. He signs outside the chain of title. B is
the one who must first place his signature on the back of the note to transfer
title. The courts of the different states have not been in harmony in fixing the
liability of an irregular indorser. Some make his liability that of a surety,
some that of a guarantor, and others that of an indorser. Many of the states at
the present time have statutes regulating the making and transfer of
negotiable instrument. The codes generally fix the liability of an irregular
indorser to be that of an indorser.
187. Consideration to Contracts of Suretyship. An agreement to
answer for the debt, default, or obligation of another, to be binding, must
constitute a contract. It must contain all the elements of a simple contract,
including a valuable consideration. A valuable consideration may be defined
to be anything of benefit to the one making the promise, or anything of
detriment to the one to whom the promise is made. A promise made in return
for a promise, usually termed "a promise for a promise," is considered a
valuable consideration as well as something of value actually given to the
one making the promise. A consideration need not be adequate. It need not
be commensurate with the obligation entered into. In the absence of fraud, a
consideration of one dollar will support a contract for $10,000.00 as well as

an actual consideration of $10,000.00. In a suretyship contract, three persons
are concerned; the party owing the original debt, the one to whom the debt is
payable, and the one promising to answer for another's debt. By reason of
the third party to a suretyship contract, the question of consideration is
sometimes confusing. If the obligation of the promisor, or the party agreeing
to answer for the debt of another, is made at the same time, and is a part of
the same transaction as the contract between the original debtor and his
creditor, the consideration supporting the contract between the original
debtor and the creditor supports the contract of the promisor. For example, if
A endeavors to purchase $100.00 worth of goods of B, and B refuses to make
the sale unless C signs a contract of guaranty for the value of the goods, and
C signs such a contract of guaranty which is delivered to B before the goods
are delivered, the consideration, namely the receipt of $100.00 worth of
goods delivered to A which supports A's promise to B, will support C's
promise to B to pay the $100.00, if A fails to pay it. If the suretyship contract
is entered into after the original obligation is incurred, and independently of
it, there must be a separate and independent consideration to support it. For
example, if A purchases $100.00 worth of goods from B, agreeing to pay for
them in thirty days, and after fifteen days have elapsed after delivery of the
goods, B, fearing A is insolvent, asks him to furnish a guaranty of C, C must
receive a valuable consideration to support his contract of guaranty, separate
and distinct from the consideration which supports A's obligation to B.
188. Contract of Suretyship Must be in Writing. About 1676, the
English Parliament passed a statute known as the Statute of Frauds. Among
other things this statute required contracts of suretyship to be in writing to be
enforceable. The statute was in part as follows, "No action shall be brought
whereby to charge the defendant upon any special promise to answer for the
debt, default or miscarriage of another person unless the agreement upon
which action shall be brought or some memorandum or note thereof shall be
in writing, signed by the party to be charged therewith or some person
thereunto by him lawfully authorized."
The states of this country generally have re-enacted this statute. An oral
contract of suretyship is not void. The parties may voluntarily carry it out if
they choose. The law does not make it illegal. The law simply says that it is
not enforceable. If an action is brought by a party on an oral contract of
suretyship and the other party objects for that reason, the court will not
enforce the contract. To satisfy the Statute of Frauds it is not necessary that

the entire contract be in writing, but the substance must be stated, and the
writing must be signed by the one promising to answer for the other's
obligation.
A promise to pay one's own debt is not within the Statute of Frauds, and
need not be in writing to be enforceable. If a promise is made for the primary
purpose of benefiting the promisor, even though it takes care of the debt of
another, it is regarded as an original promise of the promisor, and need not
be in writing.
189. General, Special, Limited and Continuing Guaranties.
Guaranties may be directed to some particular person or firm, or may be
addressed to anyone who desires to accept them. An open guaranty, or one
addressed to anyone is called a general guaranty. A guaranty addressed to a
particular person or firm is called special guaranty. In case of a special
guaranty, only the person to whom it is addressed can accept it. Anyone can
accept a general guaranty. A letter of guaranty addressed, "to whom it may
concern," is a general guaranty, while one addressed to "The A. B. Co.," is a
special guaranty.
A guaranty limited as to time, either by specifying the date on which it is
to expire, or by specifying the number of transactions or the transactions it is
to embrace, is a limited guaranty. If no limit of time or of number of
transactions is placed therein, it continues until withdrawn by the guarantor.
This is called a continuing guaranty.
190. Notice to Guarantors. A guarantor may be entitled to two kinds of
notice. He may be entitled to notice of acceptance of the guaranty, and he
may be entitled to notice of default of his principal. The first is called notice
of acceptance of a guaranty, the second, notice of default of a guaranty. If a
person stipulates in his letter of guaranty that he requires notice of
acceptance of his guaranty, the creditor must give him such notice to hold
him. Without such stipulation he is not, in most jurisdictions, entitled to
notice. A addresses the following letter of credit to B:
Cleveland, O., Jan. 4, 1909.
Mr. B.
Give A credit at your store to the amount of $25.00. I will pay you if he does not.
Signed—C.

The letter of guaranty does not require B to notify C of its acceptance. In
the Federal Courts, the rule requires notice of acceptance of guaranties. It is

sound business practice always to notify a creditor of acceptance of a
guaranty. If a letter of guaranty contains a stipulation that the guarantor is to
receive notice of default of his principal, such notice must be given, or the
guarantor will be discharged to the amount of his damage resulting from
failure to receive this notice. In case of guaranties involving the payment of
a definite amount at a definite time, for example, in case of guaranty of
payment of a promissory note, no notice is necessary on the part of the
creditor to the guarantor of the failure of the principal to pay. In other cases
it may be stated as a general rule that notice should be given the guarantor of
default of his principal. It is safe business policy for a creditor to give notice
to a guarantor of default of payment on the part of his principal.
191. Defense of Payment. Suretyship obligations are obligations to
answer for the debts or default of another. They may be in the form of a
contract of a surety, of a guarantor, or of an indorser. Certain things
constitute suretyship defenses. They apply equally to a surety, a guarantor
and an indorser. If a principal debtor pays or settles the debt which another
promises to pay, the promisor is thereby discharged. Payment by a principal
is a complete suretyship defense. For example, A owes B $100.00. C in
writing promises to pay A's debt when it is due. A pays B. C is thereby
discharged.
193. Defense of Granting Extension of Time to Principal. If a creditor
enters into a contract by which the principal is given an extension of time,
the promisor is released. This does not mean mere delay in enforcing the
collection of the principal debt, nor does it mean leniency of a creditor with
his debtor. If, however, a creditor makes a contract based upon a valuable
consideration, by which the principal debtor is granted an extension of time
within which to pay his debt, the promisor is discharged. For example, if A
owes B $1,000.00 on March 1st, and C in writing promises B to pay if A
does not, if B does not collect from A on March 1st, but lets the debt run
until March 15th or indefinitely, C is not thereby discharged. If, however, B
in consideration of A's promise to pay him interest at a certain rate after
March 1st, extends the time until April 1st, C is discharged. To discharge the
promisor, the agreement with the principal to extend the time of payment
must be based upon a valuable consideration, and must be for a definite
time.
194. Defense of Fraud and Duress. Fraud practiced by the creditor
upon the principal or upon the promisor is a defense to the promisor. For

example, if A is indebted to B and C guarantees A's debt, and if B procured
the contract with A by fraud, or procured the guaranty from C, by fraud, C
can avoid the contract of guaranty by reason of the fraud. If the fraud is
practiced by the principal upon the promisor, it is no defense to the promisor
as against the creditor. For example, if C guarantees A's debt to B and the
guaranty is procured through the fraud of A without B's knowledge or
consent, the fraud will not avail C as a defense to an action brought by B
upon the guaranty. The same is true of duress. For a fuller explanation of
fraud and duress see sections on Fraud and Duress under Contracts.
195. Surety Cannot Compel Creditor to Sue Principal. Unless so
provided for by statute, a promisor to a suretyship contract cannot compel a
creditor to sue a principal when the debt secured is due, or claim his
discharge for failure on the part of the creditor to comply with this request. A
few states provide by statute that a promisor may by notice compel a creditor
to sue a principal upon a suretyship obligation when due, or be discharged
for his failure so to do.
196. Surety Companies. At the present time, corporations are organized
for the purpose of entering into suretyship obligations for profit. Bonds of
public officials as well as of private individuals, judicial bonds given in
appeal of cases at law from one court to a higher court are commonly signed
by surety companies. These companies, for an agreed annual consideration
called a premium, sign as surety these bonds for responsible individuals.
Sureties were once said to be favorites of the law. This was for the reason
that individual sureties signed private, official or judicial bonds as a favor to
the principal, ordinarily without receiving any compensation therefore.
When a liability arose the surety escaped if possible, since it was not his
obligation, but another's which he was called upon to pay. The courts
favored him and technical defenses were recognized which were not
recognized as a defense by persons primarily liable. In the case of surety
companies, however, there is no reason for this favoritism, since the surety
engages in the contract for a consideration, and not as a favor to anyone. The
tendency of the courts is to hold surety companies strictly to the terms of
their contracts.
197. Subrogation. By subrogation is meant the substitution of the
promisor for the creditor in case the promisor to a suretyship obligation pays
his principal's debt. For example, if A signs a guaranty by the terms of which
he agrees to pay B's debt to C, when the debt is due if B fails to pay it, and A

pays it, A is placed in C's position and may collect the debt from B. Any
securities of B that C held for the debt now belong to A. If C has a judgment
against B for the debt, A is subrogated to the judgment and may himself
enforce it.
198. Indemnity. The law implies a contract on the part of the principal
to a suretyship contract to pay the promisor when the latter pays the
suretyship obligation. For example, if A guarantees B's debt to C, as soon as
A is obliged to pay C, and does pay C, A may sue B on an implied contract of
indemnity for the amount he has paid C.
199. Contribution. Contribution is the term applied to the right of one
of two or more co-promisors to a suretyship obligation to secure a pro rata
share from his co-promisors of the amount he is obliged to pay the creditor
on a suretyship contract. For example, if A, B and C guarantee D's debt of
$150.00 to E, and when the debt is due, E sues A and collects $150.00 from
him, A can sue B and C for $50.00 each. If A pays C only $50.00 he can
collect nothing from B and C, since this is only his share of the debt. But if A
settles the debt with C for $50.00, he can recover one third the amount from
both B and C. A can pay the debt when it is due, without waiting for suit if
he so desires, and proceed to collect one third the amount from both B and
C.

PERSONAL PROPERTY

200. Personal Property in General. Personal property is the term
applied to property other than real estate. It may be either tangible or
intangible. Personal property is sometimes divided into chattels real and
chattels personal. Chattels real are interests in real estate not amounting to
ownership. Real estate mortgages and leases are common examples of
chattels real. Chattels personal embrace all personal property other than
chattels real. Every thing subject to ownership not connected with the land is
included in the classification of chattels personal. Promissory notes, personal
apparel, furniture, tools and animals are common examples. Chattels
personal are of a tangible, or of an intangible nature. They are mere rights, or
they are things which may be handled and used. A promissory note, a
contract, or a mortgage is a right as distinguished from a thing in possession.
These rights are sometimes called choses in action, while tangible articles of

personal property, such as watches, chairs and horses are called choses in
possession. The law relating to personal property is discussed at length under
the sections on Sales of Personal Property, Pledges, Chattel Mortgages,
Carriers and Wills.
201. Acquisition of Title and Transfer of Personal Property. Title to
personal property may be acquired in several ways, chief among them being
by contract, by possession, by gift, and by operation of law. If A purchases a
carriage from B, the transaction is a sale of personal property and A is
entitled to possession of the carriage by reason of the contract. Title to the
carriage is given to A by contract. Title to some kinds of property is acquired
by possession. Title to wild animals is acquired by possession. The same is
true of fish. Title to lost property, except as against the owner, is acquired by
possession. Title to property is also acquired by voluntary gift on the part of
the owner.
If A dies possessed of articles of personal property, the property passes to
his personal representative to be turned into money to pay A's debt, or to be
distributed in the form of money, or without being sold, to A's descendant
designated by law. This is known as acquiring personal property by
succession, or by operation of law. Personal property may also be transferred
in specie by will.

SALES

202. Sale Defined. A transfer of title of personal property is termed a
sale. By title is meant ownership. Mere possession of personal property does
not constitute ownership, neither does right to possession constitute
ownership. One may lease personal property, and by means of the lease have
the right to possession, while the title or ownership is in another. One may
find or borrow personal property, obtaining possession while the title or
ownership remains in another. The transfer of the title or ownership of
personal property as distinguished from the transfer of mere possession or
the right of possession, constitutes the subject of Sales. A sale may be
defined to be a contract by which the title to personal property is transferred
for a consideration in money, or money's worth. This transfer of title to
personal property may be entirely independent of the transfer of possession.

One may make a sale of personal property by which the purchaser takes the
title while the possession remains in the seller, or in some third person.
When, and under what circumstances the title passes is an important
question. A sale of personal property ordinarily gives the purchaser the right
to immediate possession of the property. The time the title actually passes to
the purchaser does not depend upon the time the property is delivered to the
purchaser, but upon the intention of the parties to the contract of sale. A sale
is a contract requiring all the elements of a simple contract. There must be a
meeting of the minds of the contracting parties, a valuable consideration,
competency of parties, etc. (See Elements of a Contract, chapter on
Contracts.)
203. Sale Distinguished from a Contract to Sell. A sale is a contract by
which the title passes to the purchaser at the time the sale is made. A contract
to sell is a contract by which the title passes to the purchaser at a future time.
A sale is a present transfer of title or ownership to personal property. A
contract to sell is an agreement to pass the title or ownership to personal
property to another at a future time. The practical distinction is in
determining upon whom the loss falls in case the goods are destroyed or
injured by fire, or other accident. In case of a sale, title or ownership passes
to the purchaser, even though possession remains in the seller. If the goods
are lost by fire, without fault of the seller, the purchaser bears the loss. In
case of a contract to sell, the title or ownership does not pass to the purchaser
until the time for fulfilling the contract has arrived, and until the conditions
of the contract are fulfilled. If the goods are lost before the contract is carried
out, the loss falls on the seller. For example, A, a farmer, sells ten barrels of
apples to B. B examines the apples, selects the ten barrels, pays A the
stipulated price, and says he will call for them the following day. Before B
calls, the apples are destroyed by fire, without fault of A. B must stand the
loss. The title or ownership passed to him when the sale was made. If B calls
on A and enters into a contract by the terms of which A agrees to deliver at
B's residence ten barrels of apples the following day, at an agreed price, and
the apples are destroyed by fire before A delivers them, the loss falls on A.
This is a contract to make a sale, not a sale. Title to the apples does not pass
to B until they are delivered by A, according to the terms of the agreement.
Parties may agree that title may pass at a certain time, or upon the
performance of a certain condition. In this event, title does not pass until the
time mentioned arrives, or the condition is fulfilled. In the majority of sales

of personal property, the parties do not set forth the terms and conditions
fully. In the absence of an express agreement or custom to the contrary,
parties are presumed to intend the title or ownership to pass to the purchaser
at the time the sale is made.
204. Sale Distinguished from Barter. A sale is an agreement to transfer
the title of personal property for a consideration in money, or for something
measured by a money standard. An agreement to exchange goods, or an
exchange of goods, is a barter, and not a sale. The distinction is technical,
but serves some useful purposes. If A, for a consideration of $200.00,
purchases a car of cabbage from B in Nashville, to be delivered in
Cleveland, June 20th, and the car does not arrive, A may go into the nearest
market, and purchase a car of cabbage of the same quality, and collect the
difference between the market price and contract price from B. If A is
obliged to pay $250.00 for the cabbages, he can collect $50.00 from B. If, on
the other hand, A agrees to give B a horse for a car of cabbages, no price
having been fixed on the horse or on the cabbages, and B fails, and refuses to
carry out the contract, A must sue B on the contract, and collect as damages
such amounts as he is able to show he lost by reason of B's failure to carry
out the contract.
Salesmen are commonly employed to sell goods. This means to sell for
money, and unless they are expressly authorized to barter or exchange
goods, attempted exchanges are without authority, and do not bind their
principal.
205. Conditional Sales. The term, conditional sale, has come to have a
technical meaning. Articles of merchandise, such as sewing machines, cream
separators and cash registers are commonly sold under a special contract, by
which possession is given the purchaser, and the title by express agreement
remains in the seller until the entire purchase price is paid. The purpose of
this form of contract is to obtain security for the purchase price of the article
sold. In the absence of statutory regulations, if the purchaser does not pay
the purchase price at the agreed time, the seller may take possession of the
property. It is the custom of sellers using this form of contract to require the
purchaser to sign a contract stipulating that the purchase price be represented
by promissory notes of the purchaser, payable in installments, and that the
title is to remain in the seller until the entire purchase price is paid. If the
purchaser defaults in any one of his installments, by the terms of the contract
all the remaining installments at once become due. This form of contract

worked many hardships. Purchasers were required to make a substantial
payment in advance. If they succeeded in paying practically all the
installments, but defaulted in one, the seller could take possession of the
property, causing the purchaser to lose all he had paid. This form of contract
proved so unconscionable in some of its workings that the legislatures of
most states have passed statutes requiring conditional sale contracts to be
filed with a public official to be enforceable, and do not permit the seller to
take possession of property without repaying the purchaser the amount
already paid less the actual damage the property has sustained. This damage
usually cannot exceed 50% of the original selling price of the property.
206. Sale Distinguished from a Bailment. Possession of personal
property is frequently given another, for the purpose of having work
performed on it, to be used by another, to secure a debt, or to be protected or
preserved without transfer of title. Such a transaction is called a bailment. It
is discussed more at length under a separate chapter. A bailment does not
constitute a sale, in that there is no transfer of title, or ownership of the
personal property, possession of which is given to another. For example, A
hires the use of a horse and carriage from B, a liveryman, for two days. A
secures possession of the horse and carriage. He has the right to retain
possession of them for two days, and has the right to use them for the
purpose hired. He cannot sell them, however, nor can he do anything
inconsistent with B's ownership. This transaction is a bailment.
207. What May Be the Subject of a Sale. Any article of personal
property having a present existence may be sold. It matters not, whether it is
a chose in possession, or chose in action. By chose in possession is meant a
tangible piece of personal property as distinguished from a mere right. A
horse, plow, chair or desk is an example of a chose in possession. A
promissory note, a contract or mortgage is an example of chose in action.
Either may be the subject of a sale. The distinction between a sale or present
transfer of title to personal property, and a contract to make a sale, must be
borne in mind. If A sells his horse to B for $100.00, in the absence of any
agreement as to delivery the title to the horse passes to B as soon as the
contract is made. This transaction is a sale. If A promises to sell his horse to
B the second of next month, if B will agree to pay him $100.00 when the
horse is delivered the second of next month, and B so agrees, the contract is
not a sale, but a contract to make a sale. Articles of personal property, to be
made or manufactured, are not the subject of a sale.

Business men commonly make contracts to sell goods in the future
which they do not have in stock, but expect to manufacture, or purchase
elsewhere. Such contracts are not sales. The title to the goods does not, and
cannot pass to the purchaser when the contract is made. They are mere
agreements to make sales in the future. They are treated the same as ordinary
contracts, not as present sales. If the goods are destroyed before they are
completely manufactured, the seller stands the loss, since the title has not
passed from him. If a person agrees to sell in the future goods to be
manufactured, and fails to deliver the goods specified in the contract, the
buyer has the usual remedy. He may purchase the goods in the market
nearest the place of delivery at the time of delivery, and sue the seller for the
difference between the contract price and the market price. The buyer is not
obliged actually to purchase the goods to enable him to bring suit against the
seller. He may bring a suit against the seller for the difference between the
price he contracted to pay for the goods and the market price at the time and
place of delivery. Crops to be grown are not the subject of present sale.
Crops planted, but not matured, may be sold. Title to the crops at the present
stage of their existence passes to the buyer.
208. Statute of Frauds, or Contracts of Sale Which Must Be in
Writing. One section of the English Statute of Frauds applied to sales. This
statute was passed in England about 1676. The seventeenth section, which
applies to sales of personal property, is as follows:
And be it further enacted by aforesaid authority, that from and after the four and
twentieth day of June, no contract for the sale of any goods, wares or merchandise for the
price of ten pounds sterling, or upwards, shall be allowed to be good except the buyer shall
accept part of the goods so sold, and actually receive the same, or give something in earnest
to bind the bargain, or in part payment, or that some note or memorandum in writing of said
bargain be made, and signed by the parties to be charged by such contract, or their agent
thereunto lawfully authorized.

The states, generally, have a statute modelled after this section of the
English statute, and providing that contracts for the sale of personal property,
the price of which exceeds fifty dollars, shall not be enforceable unless a
memorandum of the contract be made and signed, except there be a delivery
of at least a part of the property, or except something be paid by the
purchaser to bind the bargain. Some of the states have no statute of frauds
containing a provision relating to the price of the goods. In many of the
states, the valuation fixed by statute exceeds fifty dollars. Where the statute
exists, contracts which are not in writing are not void. They are merely

voidable. The parties may voluntarily carry them out if they so choose. The
law does not prohibit them, but if one party refuses to recognize the contract,
the other party cannot enforce it by an action at law. A portion of the fourth
section of the English Statute of Frauds provides that contracts, by their
terms not to be performed within one year from the time of the making
thereof, must be in writing to be enforceable. The states, generally, have a
similar statutory provision. This statute applies to sale of personalty as well
as to real estate. If the contract can be performed within one year, it is not
within the provisions of the statute.
209. Delivery of Personal Property Sold. In the absence of any express
agreement to the contrary, there is an implied agreement, on the part of the
seller, to deliver personal property sold, when the purchaser pays the price.
By delivery is meant placing the personal property at the disposal of the
purchaser. It must be borne in mind that in a contract of sale of personal
property, title or ownership passes to the purchaser at the time the sale is
made, even though possession remains in the seller. This gives the seller the
right to obtain possession of the goods upon paying the price. If the goods
are destroyed without fault of the seller after the sale, and before delivery,
the loss falls on the buyer. If A offers to sell B his wagon for $100.00, and B
accepts, nothing being said about delivery, the title to the wagon passes at
once to B. If it is destroyed without fault of A, the loss falls on B, even
though B has not paid the price or received possession of the wagon. B is
entitled to possession of the wagon when he pays A $100.00. A is not obliged
to give B possession of the wagon, even though B is the owner of it, until he
receives the price, $100.00.
In the above example there is no stipulation about delivery. The parties
make a sale, agreeing upon the price and thing to be sold, nothing being said
about the delivery. The law in such cases impliedly requires the seller to
deliver when the price is paid, and not until then. In many contracts,
however, the time, place, and manner of delivery are stipulated in the
contract. Sometimes usage and custom supply these things when the parties
do not expressly so stipulate. When a time, place, or manner of delivery by
the seller is stipulated in a contract, either by express agreement, or by usage
and custom, title to the property usually does not pass to the buyer until the
time has elapsed, and until the seller has delivered according to the manner
stipulated, or has tendered delivery.

A stipulation in a contract of sale that the seller shall deliver at a
particular time or place, or in a particular manner is deemed to show an
intention on the part of the parties that title shall not pass until the seller has
so delivered. If the seller refuses to accept the goods or pay the price, an
offer to deliver by the seller is equivalent to a delivery. The seller, on the
other hand, is not obliged to give up possession of the goods until he
receives the agreed price. If the seller agrees to give the buyer credit, this
rule is not applicable. If no time of delivery is mentioned, delivery must be
made within a reasonable time, depending upon the circumstances connected
with the particular contract. When delivery is to be made in installments,
failure to pay for one installment ordinarily entitles the seller to refuse to
deliver the balance, or if the seller refuses, or fails to deliver the first
installment, the buyer may refuse to accept subsequent installments. The
buyer is not obliged to accept anything except the article ordered. If more or
less is tendered him, he is not bound to accept. If he accepts more or less, he
is bound to pay the reasonable value of the same. If no place of delivery is
mentioned, the presumption is that delivery is to be made at the place where
the property is located at the time the sale is made.
The mere fact that delivery is to be made in the future does not prevent
title from passing at the time the sale is made. There must be something in
addition to the fact of future delivery to delay the passing of the title until the
time of delivery. If A purchases an automobile from B, making the selection,
delivery to be made the following Thursday, title passes at once to A. If the
automobile is destroyed by fire, or injured without B's fault, the loss falls on
A. If, however, B is to do anything with the property, or is himself to make
delivery, this shows an intention on the part of the parties that title is not to
pass until delivery is made.
210. When Title Passes. The question of when title to personal property,
the subject of a sale, passes to the purchaser is important in determining
upon whom the loss falls, if the property is destroyed, stolen, lost or levied
upon by judgment of attaching creditors. Title or ownership to property sold
does not depend upon possession. Personal property may be sold, and title or
ownership may pass to the purchaser, while the seller still has possession, as
well as the right to possession. The general rule is that title or ownership of
personal property sold passes to the purchaser at the time the parties to the
sale intend it to pass. If their intention is expressed, it governs, and the
question is settled. In the great majority of sales, however, the parties do not

expressly determine when title shall pass and this must be presumed from
the circumstances.
For example, if A offers B $20.00 for a certain harness which is selected,
and A accepts the offer, nothing being said about the delivery or payment, or
when title or ownership shall pass to A, the law presumes it to be the
intention of the parties that title shall pass when B accepts A's offer—and
from that time, the harness belongs to A. B, however, has the right to retain
possession of the harness until A pays him the purchase price of $20.00.
When A offers B the $20.00 at the place where the harness was located when
the sale was made, B must give A possession. B is not obliged to deliver at
any other place. If, however, A offers B $20.00 for B's harness, which is
determined upon and selected, B to deliver same at A's place of business the
following evening, this shows an intention on the part of the parties that the
title is not to pass to A until B delivers the property to A the following
evening. A tender or offer by B to deliver the property to A the following
evening, passes title and places the property at A's risk. If, however, delivery
is to be made merely in the future, not requiring the seller to take the
property to any particular place, the fact that delivery is to be made in the
future does not prevent title passing to the purchaser at once.
If A purchases B's harness for $20.00, the harness having been selected,
delivery to be made in five days, title passes at once to A.

COOK COUNTY BUILDING, CHICAGO, ILL.
Holabird & Roche, Architects, Chicago, Ill.

Building Completed in 1907. Cost, $5,000,000. Length, 380 ft.; Width, 160 ft.; Height, 204 ft.
Eleven Stories, with Sub-Basement Connecting with Tunnel System and Electric Railroad
Service Underlying Business Portions of City. Walls, Gray Vermont Granite; Spandrel Sections,
Green Terra-Cotta. The Corinthian Columns on the Exterior are 94 ft. Long and 9 ft. in
Diameter. General Interior Plan is that of Letter E. Building Contains its Own Electric-Light
and Steam-Heating Plants. City Hall, Shown at Left, is Practically a Duplicate of the Old County
Building Replaced by this New Structure, and will Itself be Replaced by a Similar Building.
Photographed June, 1907, 17 Months after Excavation was Started.

A is obliged to offer B $20.00 at the expiration of five days, and B must
give possession to A. If the article sold is to be prepared for delivery, or any
work is to be performed on it by the seller before delivery, title does not pass
until this work has been completed. If the goods are to be weighed or

measured to determine the quantity or price, title does not pass to the
purchaser until this has been done. Probably, if the goods are determined
upon, and the entire mass is sold and delivered to the seller who is to weigh
or measure it to determine the quantity only, the title passes upon delivery.
If the contract, sale provides that goods are to be delivered to a carrier,
delivery to the carrier passes title to the purchaser. Delivery to the carrier
must be made so as to protect the interests and rights of the purchaser. The
goods must be properly packed, and the proper kind of a bill of lading taken.
If goods are sold upon approval, or upon trial, they must be approved or
tried before title passes.
If a portion of goods in mass or bulk is sold and the mass or bulk
contains different qualities, the portion purchased must be separated and
selected before the title passes. If a portion of goods in bulk is purchased, the
bulk being of the same quality, separation of the portion sold is sufficient to
pass title. Some courts even hold that separation is not necessary to pass
title, if the bulk is of the same quality. Title to goods to be manufactured
does not pass until the goods are manufactured and tendered.
211. When Payment of Price Must Be Made. Parties to a contract of
sale may expressly agree upon a time of payment of the article sold. In this
event, the time agreed upon prevails. In the absence of an agreed time of
payment, the law presumes that payment is to be made at the time and place
of delivery. The seller may retain possession of goods sold, until he receives
payment of the agreed price, even though title has passed to the purchaser. If
the sale is made on credit, the purchaser cannot be required to pay until the
time for which he was to be given credit has expired. In the absence of an
agreed time for payment, payment must be made at the time of delivery of
the goods.
If the seller reserves any control over the goods, title remains in him. For
example, if he is to ship the goods to another, and if he takes the bill of
lading in his own name instead of the name of the purchaser, title remains in
the seller.
212. Effect of Fraud Upon a Contract of Sale. Fraud has been defined
by a prominent author to be "A false representation of facts, made with a
knowledge of its falsehood, or recklessly, without belief in its truth, with the
intention that it should be acted upon by the complaining party, and actually
inducing him to act upon it." If a party innocently makes a representation,

even though it proves to be false, the representation is not fraudulent unless
the party making the representation should have known, or could easily have
discovered, its falsity.
If A endeavors to buy goods from B, and tells B that he is worth
$5,000.00, when in fact he is worth nothing, and B relying upon A's
statement, sells the goods to A, B is entitled to rescind the contract by reason
of the fraud. He may sue and recover the price of the goods, or he may
retake the goods from the buyer. (See Rescission under chapter on
Contracts.) If the goods have been sold to a third party who purchases for
value and without notice of the fraud, the original seller cannot take the
goods from him. A sale procured through fraud is voidable, and not void.
The seller may avoid the sale if he chooses. That is, title vests in the
purchaser subject to being retaken by the seller, if he chooses, when he
discovers the fraud. If a third person innocently purchases the goods before
the original seller rescinds the contract, the last purchaser's title cannot be
disturbed. The seller may permit the purchaser to keep the goods, and bring
an action for damages based upon deceit.
One kind of a sale frequently induced by fraud is void, absolutely, and
not voidable. If a person fraudulently induces another to believe that the
purchaser is someone else, and purchases goods under this representation, no
title passes from the seller, and he may recover the goods from an innocent
purchaser.
213. Rule of Caveat Emptor, or Let the Purchaser Beware. One who
purchases chattel property from anyone except the grower or manufacturer
of the article in question, which is inspected by the purchaser, or may be
inspected by the purchaser, purchases at his own risk. If the article turns out
to be of poor quality or worthless, in the absence of fraud or warranty, the
purchaser has no redress. This rule is called the rule of Caveat Emptor, (let
the purchaser beware). Its purpose is to decrease litigation, and make men
rely upon their own judgment. If a purchaser is unwilling to rely upon his
own judgment, he must exact a warranty from the seller. In the absence of
warranty or fraud, the purchaser must abide by the result of his purchase. If
the article purchased has defects apparent to anyone upon inspection, the
purchaser cannot complain. He should have seen the defects. If the defects
are not apparent upon inspection, he must bear the loss. He should have
required the seller to warrant the goods against latent defects, if he was
unwilling to purchase on his own judgment. In all sales by an owner,

however, title to the goods is impliedly warranted, and in case of sale of
goods grown or manufactured by the seller, there is an implied warranty
against latent defects. In all other sales, the purchaser buys at his own risk,
and has no redress against the seller unless the latter warrants the goods.
Warranties are discussed in the following section.
214. Express Warranty. Contracts of sale often contain collateral
agreements called warranties. Warranties are either express or implied. An
express warranty is an agreement in addition to the ordinary agreement to
transfer a certain chattel for a consideration in money or money's worth, by
which the seller agrees that the thing sold is of a certain quality, or is in a
certain condition. An express warranty is not an essential part of a contract
of sale. That is, a sale containing no collateral promise to the effect that
certain conditions or terms of the contract are warranted, may be made. If
the contract of sale does not expressly state that the seller warrants certain
terms or conditions, or does not contain words of similar meaning, the
contract of sale is without express warranty. An express warranty, by express
agreement, adds something to the contract of sale. This additional
agreement, called an express warranty, enables the purchaser to recover
damages from the seller for failure of the warranty, when he might not be
able to have any redress if the sale were made without warranty. Express
warranties may be made orally, or in writing.
If the seller, in making the sale expressly states that he warrants certain
terms of the contract, or uses language which means that he intends to
warrant certain terms of the contract, there is an express warranty. A sells a
wagon to B and warrants that it will carry 6,000 lbs. of stone. If it fails to
carry this amount, B can recover from A on this warranty. If A had sold the
wagon to B without this stipulation, and it had failed to carry 6,000 lbs. of
stone, B would have no redress.
A seller is permitted to express his opinion relative to the quality of the
article which is the subject of the sale without making a warranty. This is
called "trade talk," or "puffing." A seller is permitted to express his own
opinion relative to the quality of goods he is endeavoring to sell, without
having his words amount to a warranty, but if he makes positive assertions,
his words will be construed as a warranty. Such expressions as, This is first
class, and This is equal to any on the market, are usually regarded as "trade
talk" and not as warranties.

215. Implied Warranties. Some contracts of sale carry with them
implied warranties. These warranties are common to all sales of the
particular class in question. Implied warranties cannot be said to be in
addition to the contract of sale, but are impliedly a part of the contract. The
most common implied warranties are warranties of title, warranties of
wholesomeness in sale of food, warranties in sales by sample, warranties of
merchantability, and warranties of fitness of goods to be used for a particular
purpose.
216. Implied Warranty of Title. In every sale, in the absence of an
express stipulation to the contrary, there is an implied warranty of title. This
means that the ownership is in the seller, and that he has the right to sell the
property, and that it is free from incumbrances. This, of course, does not
prevent the seller from disposing of just what interest he has in the property
if he expressly so contracts. For example, if A negotiates the sale of a horse
to B, and tells B that he has purchased the horse a few days previously from
C, and does not know whether there are any incumbrances on the horse, but
will sell what interest he has, and if B purchases on these representations, he
cannot sue A on an implied warranty of title if it subsequently develops that
D has a mortgage on the horse. If, however, A offers to sell B a horse, saying
nothing about the matter of title, and B purchases the horse, and later is
obliged to yield possession to C, who holds a mortgage, B may recover the
purchase price of the horse from A upon an implied warranty.
Formerly, a distinction was drawn between sales of property in the
possession of the seller, and of property in the possession of some third
person, making the seller not liable upon an implied warranty in the latter
case. At present, however, the tendency of the courts is to make the seller
liable upon an implied warranty, regardless of whether the property is in his
possession, or in the possession of a third person at the time the sale is made.
When a person sells chattel property, not as owner, but in an official
capacity, or as an agent, there is no implied warranty of title. Common
examples of this principle are sales by a pledgee, mortgagee, sheriff,
guardian, administrator, assignee, or trustee in bankruptcy.
217. Implied Warranty of Wholesomeness in Sales of Food. In the
sale of articles to be used for food, there is an implied warranty that the
article sold is wholesome and fit for the purpose which it is sold. This rule is
based upon the principle of public policy, that it is the duty of the state to
protect life and health. A, a grocer, sold canned tomatoes to B, for use in B's

family. The tomatoes contained poisonous adulteration. A was held liable in
damages to B, for breach of implied warranty of wholesomeness of the
article sold for food. Some jurisdictions hold that this rule does not apply in
sales of food, where the article is not sold to a consumer. That is, if the
article is sold by a wholesaler to a jobber, or to a retailer, the warranty does
not apply, but where it is sold by anyone to a consumer, it does apply.
218. Implied Warranty in Sales by Sample. When goods are not
inspected by the buyer, but a sample is furnished him, from which he
purchases, there is an implied warranty that the goods sold correspond with
the sample. The fact that a sample of goods is exhibited by the seller and
examined by a purchaser does not necessarily mean that a resulting sale is
one by sample. The sample exhibited may not be claimed by the seller to
represent in every respect the article to be furnished, or the purchaser may
not desire to purchase according to the sample. To constitute a sale by
sample, a sample must be exhibited by the seller upon a representation that it
is a sample of the goods to be sold. If exhibited for any other purpose, the
resulting sale will not be a sale by sample. The purchaser must make the
purchase relying upon the sample, and with the understanding that the goods
are to correspond with the sample. If the goods are present at the time the
sale is made, and the purchaser inspects them, or has the opportunity to
inspect them, in the absence of fraud, he cannot claim that the sale is by
sample.
219. Implied Warranty of Merchantability. Where goods which have
not been inspected or selected by the purchaser are ordered to be delivered in
the future, there is an implied warranty that they are of average quality. This
is called an implied warranty of merchantability. A ordered a "Buckeye"
mowing machine of B, to be delivered the following week. B delivered a
machine which would not cut grass. B was held liable to A upon an implied
warranty of merchantability. If A had inspected the machine, and made the
purchase upon his own selection, in the absence of fraud on the part of B, A
would have no redress. But, in case the article is purchased without
opportunity for inspection, to be manufactured or delivered in the future,
there is an implied warranty that the article is an average one of its kind.
220. Implied Warranty of Fitness of Goods for the Purpose for
Which They are to Be Used. When a purchaser makes known to a seller the
purpose for which the article is to be used, and the seller is himself the
manufacturer or grower of the article, there is an implied warranty that the

article is fit for the purpose for which it is to be used. This applies only to
articles to be manufactured or delivered in the future, and not to articles
inspected and selected by the purchaser. If A goes to B, a manufacturer, and
tells him he desires to have manufactured an instrument to hold liquid soap
suitable for the use of workingmen in shops, and B agrees to manufacture
and sell such an article, there is an implied warranty on B's part that the
soap-holders will be suitable for the purpose for which they are to be used.
If, however, A furnishes B plans for the manufacture of a liquid soap-holder,
and orders a quantity, there is no implied warranty on B's part that the
articles will be fit for the purpose intended. A in this case relied upon his
own judgment. B's contract is fulfilled when he furnishes the article
according to A's plans. The work must, of course, be done in a workmanlike
manner, free from defects of material and workmanship. This implied
warranty of fitness of an article for the purpose for which it is to be used,
applies only where the purchaser reveals the purpose of the article to the
grower or manufacturer who agrees to furnish such an article. It does not
apply to articles furnished according to furnished plans, or to articles
selected by the purchaser.
221. Remedies for Breach of Warranty. In case of breach of warranty,
the purchaser may bring a suit for damages against the seller, or he may
promptly return the goods, and recover the purchase price. The latter remedy
is called rescission. In case of breach of an express warranty, in most
jurisdictions the remedy is the same as for breach of implied warranty. In
some states, however, the seller is not permitted to return the goods and sue
for the purchase price, but is restricted to an action for damages.
222. Seller's Lien, Delivery to Carriers, and Stoppage in Transitu. In
case of sales for cash, the seller has the right to retain possession of the
goods until he receives payment of the purchase price. If the goods are sold
on credit, or if the seller agrees to deliver at a certain place, the seller must
comply with his contract. But if the purchaser becomes insolvent before the
goods are delivered, the seller may retain possession until paid. He is not
obliged to deliver goods on credit, even though such is his contract, if the
purchaser subsequently becomes insolvent. The right of a seller to retain
possession of goods until the purchase price is paid is called the seller's lien.
This lien is lost by the seller's delivery of the goods to the purchaser. If the
possession is obtained by fraud on the part of the purchaser, it is regarded as

no possession, and the seller may still enforce his lien by retaking possession
of the property.
Where goods are ordered by a person in one town from a person in
another town, necessitating delivery by a carrier, in the absence of express
stipulation to the contrary, title to the goods passes to the vendee upon
delivery of same by the vendor to the carrier. If A, in Cleveland, orders a car
of pine lumber from B, in Milwaukee, for $1,500.00, title to the lumber
passes to A when B delivers the lumber to the transportation company in
Milwaukee. If A orders the lumber delivered F. O. B. Cleveland, title does
not pass to A until the lumber reaches Cleveland. If A orders the lumber,
agreeing to pay $1,500.00 for the same, "freight allowed" to Cleveland, title
passes to A when B delivers the lumber to the transportation company in
Milwaukee, even though B must allow A to deduct the freight from the
purchase price of $1,500.00. This question is important in determining upon
whom the loss falls in case of damage of the goods while in the hands of the
transportation company. The one who has the title at the time the loss occurs
must stand the loss. Such party may recover from the transportation
company. This question is discussed in the chapter on Carriers.
While a seller loses his lien by delivery of possession of the goods to the
purchaser, if the goods are delivered to a carrier and the purchaser becomes
insolvent before the carrier delivers the goods to him the seller may stop
delivery of the goods, and retake possession even though title has passed to
the purchaser. The seller's lien in this event revives. By insolvency is meant
inability to pay one's debts. The right of a seller to stop a carrier from
delivering goods to a vendee, in case of insolvency of the latter, is called
stoppage in transitu. This question is also discussed in the chapter on
Carriers.
A seller may enforce his lien by keeping the goods, and suing the
purchaser for damages, or by selling the goods at private or public sale, with
notice to the purchaser of the time and place of sale, and then by suing the
original purchaser for the difference between the amount he receives for the
goods on resale, and the amount the original purchaser agreed to pay. The
seller may, of course, hold the goods and demand the original purchase price
of the purchaser, and not yield possession until he receives the purchase
price.
223. Remedies of Seller. The seller's lien described in the previous
section is one of the remedies of a seller. If the purchaser refuses to accept

the goods, the seller may keep or resell the goods, and if he receives less
than the original purchaser agreed to pay, he may recover the difference as
damages from the original purchaser. For example, A agreed to manufacture
and deliver a specially constructed cash register for B for $500.00. When it
was completed, B refused to accept same. A sold it for $200.00, the fair
market price, and recovered from B, $300.00 as damages for B's breach of
contract. If the purchaser accepts the goods and fails to pay for them when
due, the seller may sue and recover the entire purchase price, together with
damages and expenses which are necessarily connected therewith.
224. Remedies of Purchaser. Where title has not passed to the
purchaser, if the seller refuses or fails to deliver goods according to the
contract of sale, the purchaser may go into the market at the time and place
of delivery and purchase goods, and if obliged to pay more than the original
contract price, he may recover the excess from the seller. For example,
suppose A purchases five hundred pounds of lard of B for $60.00, B agreeing
to deliver the lard October 30th, at Chicago. If B fails to deliver the lard in
Chicago, October 30th, A may purchase lard of the same quality in Chicago,
and if he is obliged to pay $90.00 for the same, he may recover $30.00
damages from B. If there is no market at the place of delivery mentioned in
the contract, the purchaser may purchase at the nearest market. If the
purchaser makes the purchase for a particular purpose, which he makes
known to the seller at the time the sale is made, and he is specially damaged
by reason of the failure of the seller to keep his contract, special damages
may be recovered for losses arising by reason of the special circumstances.
If title to the goods has passed to the purchaser, in case the seller refuses to
deliver them, the purchaser may bring an action of replevin to recover their
possession. Replevin is a possessory action. (See chapter on Courts and
Legal Remedies.)

QUIZ QUESTIONS

BANKING, LOANS, MONEY, AND CREDITS
1. Define a bank.
2. Classify banks.

3. How are national banks created?
4. What are state banks?
5. Define and distinguish banks of discount, banks of cirrculation, and
banks of deposit.
6. Are most banks incorporated companies?
7. What are the powers of an incorporated bank?
8. Do banks have the power to deal in real estate?
9. Do banks have the power to collect commercial paper?
10. What are bank deposits?
11. Is a bank required to receive deposits from any one who tenders
them?
12. What name is applied to the person authorized to receive bank
deposits?
13. Do savings banks permit their customers to draw their deposits by
check?
14. Distinguish general and special deposits.
15. Define check.
16. What kinds of banks do a checking business?
17. By what process may a depositor withdraw money from a savings
bank?
18. Define a paid voucher.
19. When do banks return checks to their customers?
20. When are checks payable?
21. What should a customer do with paid checks when they are received
from his bank?
22. When must checks be presented for payment?
23. Is a bank required to pay the checks of its depositors?
24. If a bank refuses to pay a check what, if anything, must the holder do
to hold the maker liable?
25. Are national banks permitted to make loans on real estate?
26. Are savings banks permitted to make loans on real estate?
27. Define credit.
28. By what means is credit information furnished?

29. Distinguish credit and capital.
30. Are forged negotiable instruments void or voidable?
31. Is a bank liable for paying forged checks, or must the depositor
whose signature is forged stand the loss?
32. If a forgery is not reported by a depositor until six months after it was
committed, who must stand the loss?
33. Is a bank liable if it pays a bona fide holder a check payable to
bearer?
34. Under what laws are national banks created?
35. Does the United States Constitution expressly provide for the
creation of national banks?
36. What United States officer has supervision over national banks?
37. Are national banks furnished with circulating notes? If so, in what
amounts?
38. In case of the bank's insolvency, what is the liability of national bank
stockholders?
39. What rate of interest can national banks charge?
40. Can national banks buy and sell bonds?
41. What penalty is imposed upon national banks for usury?
42. Define and distinguish savings banks and trust companies.
43. Are clearing houses banks? What are the functions of clearing
houses?
44. In what two ways is the term money used?
45. What is legal tender?
46. Are silver certificates legal tender?
47. Define discount.
48. Distinguish discount and purchase of negotiable paper.
49. Are banks permitted to purchase negotiable paper at a profit in excess
of legal rates of interest?
50. Are individuals and business concerns permitted to purchase
negotiable paper at a profit in excess of legal rates of interest.
51. Define exchange.
52. Distinguish foreign and domestic exchange.

53. Define interest.
54. Define and give an example of usury.
55. What is the usual penalty for usury?

INSURANCE
1. Define insurance.
2. Are insurance companies controlled by the legislatures of the states?
3. May an individual or a partnership enter into insurance contracts?
4. Is insurance business interstate commerce if transacted between
citizens of different states?
5. May one state exclude insurance companies of another state from
transacting business within its territory?
6. Does an insurance contract require all the elements of an ordinary
contract?
7. In what way does an insurance contract differ from an ordinary
contract?
8. How many parties are there to an insurance contract?
9. Define underwriters.
10. Define beneficiary.
11. Name the principal kinds of insurance written at the present time.
12. Define and give an example of insurable interest.
13. Must an insurance contract be in writing to be binding?
14. Are insurance contracts within the Statute of Frauds?
15. Define binder.
16. Define warranty as used in an insurance contract.
17. Distinguish warranty as used in insurance contracts from warranty as
used in contracts of sale.
18. Define representation as used in connection with insurance contracts.
19. Distinguish warranty and representations.
20. Does breach of warranty avoid a contract of insurance?
21. Does breach of representation discharge an insurance contract?
22. Define life policy.

23. Define term policy.
24. Define tontine policy.
25. Define marine insurance.
26. What implied warranty enters into a policy for marine insurance?
27. Define general average.
28. Define standard policy.
29. If a policy of insurance contains no stipulation relative to suicide, and
the insured takes the policy intending to commit suicide, and does commit
suicide, is the policy enforceable?
30. If an insurance policy contains a suicide clause, and the insured
commits suicide while insane, is the policy enforceable?
31. May an insurance company stipulate against suicide in such a manner
as to avoid the policy if the insured suicides when insane?
32. Define and distinguish fidelity and casualty insurance.
33. What is re-insurance?
34. Is a company writing a policy of re-insurance liable to the party
originally insured?
35. May a company re-insure at greater risk than it itself has insured? 36.
Can a fire insurance policy be assigned before a loss has occurred?
37. Can a fire insurance policy be assigned after a loss has occurred?
38. Can a life insurance policy be assigned at any time?
39. Define and distinguish open and valued policies.
40. Define other insurance.
41. What limit, if any, is placed upon the amount of life insurance a
person may take?
42. May a person insure personal property for more than its actual value?
43. If a person insures his house in three different companies for two-
thirds of its value in each company, in case of loss how much an he recover,
if anything, on each policy?

SURETYSHIP
1. Define suretyship.
2. Is a suretyship obligation a contract?

3. What contracts is the term suretyship used to designate?
4. How many parties are there to a suretyship contract?
5. Define principal.
6. Give an example of a suretyship contract.
7. Define promisor.
8. Define creditor to a suretyship contract.
9. Give the different technical names that may be applied to a promisor
of a suretyship contract depending upon the nature of the liability.
10. Define surety.
11. Give an example of a contract of a surety.
12. Is the liability of a surety conditional upon that of his principal.
13. Define guarantor.
14. A promises a creditor of B to pay B's debt if B does not. Is A's
contract that of a surety or of a guarantor?
15. In commercial practice what form of suretyship contract is most
frequently used, that of a surety or of a guarantor?
16. Define indorser.
17. Is an indorser's contract found outside of negotiable instruments?
18. Is an indorser bound by any implied contract?
19. What are the warranties of an indorser?
20. Is consideration a necessary element of a contract of suretyship?
21. If a suretyship contract is part of the transaction which it secures
must it be supported by a separate consideration?
22. Must any contracts of suretyship be in writing?
23. Is an oral contract of suretyship illegal?
24. What is meant by the Statute of Frauds as applied to suretyship
contracts?
25. Define general guaranty.
26. Define limited guaranty.
27. Define special guaranty.
28. Define continuing guaranty.
29. What kinds of notice may a guarantor be entitled to?

30. When, if at all, is a guarantor entitled to notice of default of his
principal?
31. When, if at all, is a guarantor entitled to notice of acceptance of his
guaranty by a creditor?
32. If A is surety for B upon B's debt to C of $100.00 and B settles his
debt with C for $50.00, can C hold A for the balance?
33. If A guarantees B's debt to C of $100.00 due one year and with
interest at 6%, and B without A's consent reduces the interest to 5%, is A
thereby discharged?
34. If A guarantees B's debt to C of $100.00 payable in one year, and C
without A's consent extends the time of payment six months upon B's
agreement to pay 6% interest, is A thereby discharged?
35. Is fraud practiced by the principal upon the promisor to a suretyship
contract, a defense to the promisor in an action brought by the creditor?
36. In the absence of special statute can a promisor to a suretyship
contract compel by notice a creditor to sue a principal?
37. Are surety companies favorites of the law?
38. Define subrogation.
39. Give an example of subrogation.
40. Define indemnity as applied to a suretyship contract.
41. A guarantees B's debt to C of $100.00 upon a promissory note. B
defaults and A pays the debt. A then sues B for $100.00 upon the promissory
note. Is this an example of indemnity or subrogation? May A sue B for
$100.00 independently of the promissory note?
42. Define contribution.
43. A, B, and C guarantee B's debt to E of $300.00. D sues A and collects
$100.00. Can A sue B and C for $33.33 each?

PERSONAL PROPERTY
1. Define personal property.
2. Classify personal property.
3. Distinguish chattels real from chattels personal.
4. Define and give an example of chose in action.
5. Define and give an example of chose in possession.

6. How may title to personal property be acquired?
7. May a person obtain title to personal property by finding it?
8. How can personal property be transferred?
9. Upon death of the owner, to whom does title to personal property
pass?

SALES
1. Distinguish ownership and possession of personal property.
2. May title and possession of personal property be in different places?
3. Define sale.
4. How does a sale differ from a contract to sell?
5. A promises to deliver a car of coal to B the following month in
consideration of B's promise to pay A $300.00 upon delivery of the coal. Is
the transaction a sale or a contract to sell?
6. In a contract to sell, if the property is destroyed by fire before the
property is delivered, who stands the loss?
7. Distinguish barter from sale.
8. A agrees to deliver to B one hundred bushels of apples for twenty tons
of coal at $5.00 per ton. Is the transaction a sale or a barter?
9. Define conditional sale.
10. At the present time is a vendor of a conditional sale contract
permitted to take possession of the property after 90% of the purchase price
has been paid.
11. A leaves his automobile at B's shop for repairs. Is this transaction a
sale?
12. Distinguish sale from bailment.
13. What kinds of personal property may be the subject of a sale?
14. May personal property to be manufactured be the subject of a present
sale?
15. What is meant by the Statute of Frauds as applied to sales?
16. What contracts of sales must be in writing?
17. When must personal property sold be delivered?

18. In the absence of any express agreement as to delivery, when and by
whom must personal property be delivered?
19. If a sale is made in which delivery is to be made in the future may
title pass to the purchaser at once?
20. When does title pass to the purchaser in a sale of personal property?
21. Does the fact that delivery is to be made in the future, of itself,
prevent title passing to the purchaser at the time the sale is made?
22. A sells a desk to B for $10.00, agreeing to revarnish the desk and
deliver same to B the following Saturday. When does title to the desk pass to
B?
23. What, if anything, does intention of the parties have to do with the
passing of title to the purchaser?
24. In the absence of an express agreement when must the purchase price
be paid?
25. Is the seller permitted to retain possession of the property sold until
he receives the purchase price?
26. B, by means of fraud, purchases a bicycle from A. B sells it to C, who
does not know of the fraud. Can A recover the bicycle from C?
27. A purchases a bicycle from B telling B that he is C. B knows C by
reputation and thinks that he is selling to C. A sells the bicycle to D. Can B
obtain possession of the bicycle from D?
28. Define Caveat Emptor.
29. Does the rule of Caveat Emptor apply if the seller expressly warrants
the goods sold?
30. Define express warranty.
31. A sells a horse to B assuring B that the horse is perfectly sound. The
horse has blemishes. Does A warrant the horse?
32. Define implied warranty.
33. Enumerate the most common implied warranties.
34. Does an implied warranty of title accompany every sale?
35. A purchases an automobile at a sheriff's sale. The automobile is
mortgaged. May the mortgagee take the auto from A? If so, can A recover on
an implied warranty from the sheriff?
36. What is meant by implied warranty of wholesomeness of food?

37. Does this warranty extend to any purchaser?
38. Give an example of an implied warranty in a sale by sample.
39. Does the implied warranty of merchantability apply when the goods
are selected and inspected by the purchaser?
40. Give an example of a sale in which there is an implied warranty of
fitness for the purpose for which the goods are to be used.
41. Does this implied warranty exist if the goods are constructed and
furnished according to a model furnished by the buyer?
42. Define rescission of a contract.
43. May a contract of sale be rescinded for breach of warranty?
44. Generally, what is a purchaser's remedy for breach of warranty?
45. Define lien.
46. Give an example of seller's lien.
47. Define stoppage in transitu.
48. A, in Cleveland, orders goods of B in Chicago. B delivers the goods
to the Adams Express Company, addressed to A. The goods are lost in a
railway wreck. Who must bear the loss, A or B?
49. A sells a carriage to B. B refuses to pay for the same. If A has not
delivered the carriage to B may he sue B for damages?
50. A purchases a carriage from B. A tenders the price, but B refuses to
deliver the carriage. May A obtain possession of the carriage by legal action?
51. May A sue B for damages for refusing to deliver the carriage?

A CORNER IN THE NEW YORK EXECUTIVE OFFICE OF THE
WESTERN ELECTRIC COMPANY
Occupying a Part of One Floor of the Marshall Field Building

COMMERCIAL LAW

PART IV

BAILMENTS

225. Bailment Defined. A bailment has been defined to be "A delivery
of goods for the execution of a special object, beneficial to the bailor, the
bailee or both, upon a contract express or implied, to carry out this object,
and dispose of the property in conformity with the purpose of the trust." It is
the giving possession of personal property to another for the purpose of
having the property cared for, improved or used, with the understanding that
when the purpose of the delivery is fulfilled, the property shall be returned to
the bailor or disposed of according to his directions.
A bailment differs from a sale in that the title to the property remains in
the bailor, and possession is given the bailee, while in a sale, the title or
ownership of the property is transferred to the purchaser, while possession
may remain in the seller. Bailment is a broad subject covering many
transactions. Loans, pledges, and deliveries of property of every nature, in
which mere possession is given another without transfer of title are included.
If A leaves his watch with B, a jeweler, for repairs, the transaction is a
bailment. If A delivers property to B, a transportation company, to be
conveyed to C, the transaction is a bailment. If A loans his knife to B, the
transaction is a bailment.
226. Parties to a Bailment Contract. There are two parties to a
bailment contract. The one who gives possession of chattel property to
another, reserving title to himself, is called the bailor, and the one who
receives possession of the property under these conditions is called the

bailee. A bailment is a contract. Parties to a bailment must be competent to
contract. (See Competency of Parties, chapter on Contracts.) Parties under
legal age may avoid contracts of bailment. If A, fifteen years of age, hires a
horse from B, a liveryman, for one hour for $2.00, B cannot compel A to
carry out his contract if A objects on the ground of infancy. But if A injures
the horse he is liable in damages to B. An infant is liable for his torts, but not
for his contracts.
227. Classification of Bailments. Bailments are usually divided into
three classes; bailments for the sole benefit of the bailor, bailments for the
sole benefit of the bailee, and bailments for the benefit of both the bailor and
bailee. A common example of a bailment for the sole benefit of the bailor is
a delivery of property to the bailee, to be kept by the bailee gratuitously for
the accommodation of the bailor, or delivery of property to the bailee to have
work performed on it, without compensation to the bailee. Examples of
bailments for the sole benefit of the bailee are loans to the bailee without
compensation to the bailor. Bailments for the mutual benefit of bailor and
bailee include deliveries of property to carriers, pledges, renting property, or
hiring the bailee to perform work on the property bailed, or hiring the bailee
to care for the property.
228. Elements of a Contract of Bailment. It is sometimes said that a
bailment for the sole benefit of the bailor is not a contract by reason of there
being no consideration. A consideration may consist of any benefit to the
party making a promise, or any detriment to the one to whom the promise is
made. The giving up of the property bailed to the bailee is considered a
detriment to the bailor, even though the bailee receives no benefit. For a
transaction to constitute a bailment, there must be a delivery of the property
bailed to the bailee, and an acceptance by him of the property. This delivery
may be actual or constructive, as by delivery of a warehouse receipt, or a bill
of lading. The delivery must be sufficient to enable the bailee to secure the
possession of the goods, and to control the possession during the period to
be covered by the bailment, to the exclusion of the bailor. The property must
be in existence to be bailed. A contract of bailment need not be express; it
may be implied as well—a thief or a finder of property is a bailee for the true
owner.
229. Title to Property Bailed. The title to property bailed does not pass
to the bailee. Mere possession passes to the bailee. It is not necessary that the
bailor have title to the property to bail it. If he has right of possession he

may, under certain circumstances, bail it. A may rent a livery stable,
including horses and carriages, of B, for three years, with the understanding
that he will operate the business in the usual way. A does not have title to the
horses and carriages, but he may hire them to C, or to anyone he chooses.
This transaction with C constitutes a bailment, in which the bailor does not
have title to the property bailed. He has, however, sufficient right of
possession to enter into a bailment contract. The principal distinction
between a bailment and a sale of personal property is that, in the latter case,
title passes to the purchaser regardless of change of possession of the
property, while in the case of a bailment, possession of the property must
pass to the bailee, while title is not disturbed.
230. Bailments for the Sole Benefit of the Bailor. Where personal
property is deposited with another for safe keeping, or for the purpose of
having work performed on it, without compensation to the bailee, the
transaction is called a bailment for the sole benefit of the bailor. The liability
of a bailor for the loss or injury of property intrusted to his care, depends
upon the nature of the property itself, and upon whether the bailee receives
compensation for his services. Three degrees of care and negligence,
respectively, are recognized in bailments; slight, ordinary and great care, and
gross, ordinary and slight negligence. What constitutes ordinary care or
negligence is determined by considering what a man of ordinary prudence
would do under the circumstances in question. Any case of negligence above
or below this standard constitutes great care or gross negligence. If A, in
going to lunch, leaves his umbrella in B's office, and the umbrella is stolen,
B is not liable to A, if he exercised slight care. If A, a lawyer, is obliged to go
to police court to try a criminal case, and leaves his diamond pin with B, a
brother attorney, B is obliged to exercise only slight care, as in the case of
the umbrella, and is liable only for gross negligence. But slight care means a
much greater degree of care in case of the diamond pin than in the case of
the umbrella. In case of a bailment for the sole benefit of the bailor, the
bailee is obliged to exercise only slight care, and is liable only for gross
negligence. He receives no compensation for the service, and for this reason
is not obliged to exercise a great degree of care. Property cared for
gratuitously for the accommodation of the bailor, or to be carried to some
place, or to have something done to it gratuitously, constitutes this class of
bailments.

231. Bailments for Sole Benefit of Bailee. Property loaned to a bailee
for the latter's accommodation constitutes a bailment for the sole benefit of
the bailee. A borrows B's horse to drive to Y. A pays B nothing for the use of
the horse. A must exercise great care in the use of the horse, and is liable to
B for slight negligence. It is no defense, in case the horse is injured while in
A's possession, that A acted as an ordinarily prudent man would act under the
circumstances. He must act as an ordinarily prudent man would act when
exercising great care. If, from the circumstances connected with the injury to
the horse, it is determined that an ordinarily prudent man would have been
guilty of slight negligence in the method of handling the horse or causing the
injury, A is liable to B for the injury to the horse.
A court said on this point, "A bailee who is a borrower must use
extraordinary care to protect the property loaned to him, and is responsible
for the slightest neglect. He must exercise all the care and diligence that
most careful persons exercise in the transaction of their own affairs."
If the bailee uses the property for any purpose other than that for which it
was bailed, or if he exceeds the authority of the bailor in the use of the
property, he is liable for injuries resulting. For example, A borrowed B's
oxen to plow up a hedge. A used the oxen to draw a load of stone. A stone
rolled off the cart and injured one of the oxen. A was held liable for the
injury.
232. Bailments for Benefit of Both Bailor and Bailee. The majority of
bailments are for the benefit of both bailor and bailee. This class of
bailments includes the hiring of personal property. A rents B's automobile for
three hours, at three dollars an hour. This is an example of this class of
bailments. This class also includes pledges or pawns of goods. If A pledges
ten shares of stock in a corporation to his bank for a loan, this transaction
constitutes this form of bailment. This also includes the hiring of a bailee to
carry goods from one place to another. The most common example of this
class of bailments is that of common carriers. For example, A employs B, an
express company, to carry a package of jewelry from Cleveland to Chicago.
The bailment is for the mutual benefit of both A and B. Any case in which
one party employs another to carry goods from one place to another for
compensation is included in this class of bailments, and is discussed more at
length in the chapter on Common Carriers.
Hiring a person to care for personal property for compensation is
included in the class of mutual benefit bailments. A traveling salesman

leaving his trunk and satchel with a hotel-keeper is a common example.
Where one person hires another to perform work or services on the thing
bailed, the transaction constitutes a mutual benefit bailment. For example, if
A leaves his overcoat with B, his tailor, to be cleaned and pressed, the
transaction constitutes this form of bailment. In mutual benefit bailments the
bailee has the right to use the property bailed only for the purposes of the
bailment. If A rents B's automobile, he is entitled to use it during the period
covered by the contract. If he rents it for a particular designated trip, he
cannot use it for any other trip. In a mutual benefit bailment, when the bailee
hires out the use of a chattel, there is an implied contract on his part that the
chattel is fit for the purpose for which it is to be used, and that it may safely
be used for such purposes. A rents B's naphtha launch for the purpose of
taking a lake ride. B has carelessly supplied the wrong fuel. An explosion
results, injuring A. B is liable for the injury. In mutual benefit bailments, the
bailee is obliged to exercise ordinary care, and is liable for ordinary
negligence.
The bailee must act as an ordinarily prudent man would act under the
same conditions in protecting and caring for the property. A rents a
typewriter of B. If the typewriter breaks or gets out of order during ordinary
usage, B must stand the loss. If the parties to a bailment of this class
specifically contract as to who shall bear the loss in case of accident, or as to
the degree of care which shall be exercised, these express stipulations
prevail.
233. Warehousemen and Storage Companies. A person who keeps a
place for the storage of goods for a compensation is a warehouseman or
storage-keeper. In a few states, public warehouses are provided for by
statute. In these states, the statutes define the duties and liabilities of
warehousemen. These public warehousemen are generally required to take
all goods offered for storage, no matter who the owner may be, if the goods
are in condition to be stored and if the storage charges are tendered.
Most warehouses operate their business as private enterprises. A few
states provide by statute for public warehouses. Private warehousemen may
select their customers. They are not required to accept goods for storage if
they do not so desire. The government provides warehouses for the storage
of goods upon which customs or duties are to be paid. These warehouses are
private enterprises authorized by the government to act as government
warehouses. The government requires a bond of these warehousemen for the

protection of itself, but the government is in no way responsible for the
warehouseman's treatment of the goods, or for breaches of contracts between
the warehousemen and their customers.
Warehousemen commonly issue receipts for goods stored with them.
These warehouse receipts ordinarily are made payable to the customer's
order, and may be negotiated. They are not generally recognized as
negotiable instruments. A few states have statutes making them negotiable
instruments, but outside these jurisdictions, warehouse receipts are merely
evidences of ownership of the property. The purchaser takes the same right
to the property which the original bailor had, with the additional right to sue
the transferor if the title proves defective.
A warehouseman has a lien on the property for his charges. The
warehouseman or storage-keeper must exercise ordinary care in the
protection of the property. The bailor must reveal to the bailee the character
of the goods stored. If the goods are of a dangerous character and injury
results, the bailor is responsible to the bailee for damages, if he has failed to
reveal the dangerous character of the goods.
234. Degree of Care Required of Bailee. A bailee of property is
required to exercise a certain degree of care in the use, preservation and
protection of the property placed in his possession, and is liable for a certain
degree of negligence. The amount of care a bailee is obliged to exercise, and
the amount of negligence for which he is liable, depends upon the kind of
property bailed, and whether the bailment is for the sole benefit of the bailor,
the bailee, or for the mutual benefit of both the bailor and the bailee. If the
property bailed is of great value, or so delicate that it is easily lost, destroyed
or injured, a greater degree of care is required on the part of the bailee than if
the property is of little value, or is of such a nature that it is not easily
damaged, lost or destroyed.
If A, with B's permission, stores his wagon in B's barn, and the wagon is
stolen, B is not liable unless he was grossly negligent. He was not paid for
the bailment, and was obliged to exercise only slight care in the protection of
the wagon. If, however, A leaves his watch with B while he attends a ball
game, and the watch is stolen, B must have exercised greater care than in the
case of the wagon by reason of the value and nature of the property bailed.
Otherwise, he will be liable. In this case as well as in the case of the wagon,
B received no compensation for the bailment, and is obliged to exercise only
slight care in the protection of the property bailed, and is liable only for

gross negligence. What constitutes slight care and gross negligence differs
materially in the case of the wagon and in the case of the watch.
In connection with bailments, care is said to have three degrees, great,
ordinary and slight. Negligence is also said to have three degrees, gross,
ordinary and slight. Ordinary care or negligence is the standard for testing
each case. After ordinary care or negligence is determined, slight or great
care, and slight or gross negligence is determined by ascertaining whether
the care or negligence is above or below ordinary. Any care greater than
ordinary is great care; any care less than ordinary is slight care. Any
negligence greater than ordinary is gross negligence. Any negligence less
than ordinary is slight negligence. If a person takes such precautions in the
use, preservation, and protection of the property as an ordinarily prudent
person would take of his own property under similar circumstances, he is
said to exercise ordinary care. The degree of care required of a bailee
depends upon the kind of a bailment in question, as well as upon the kinds of
property bailed.
If the bailment is for the sole benefit of the bailor, the bailee receiving no
compensation for his inconvenience and work, he is required to exercise
only slight care, and is liable only for gross negligence. If the bailment is for
the sole benefit of the bailee, the bailor receiving no compensation for his
inconvenience and the loss of the use of his property, the bailee is required to
exercise great care in the use and preservation of the property, and is liable
for slight negligence. In case of mutual benefit bailments, the bailee is
obliged to exercise ordinary care in the use and protection of the property,
and is liable for ordinary negligence. Two classes of mutual benefit bailees,
innkeepers and common carriers, do not come within the above rule. These
are known as exceptional mutual benefit bailments, and are discussed under
separate chapters.
235. Rights of Bailee as Against Bailor. A bailee has the right to keep
the property, to use it according to the terms of the contract of bailment, and
to defend this right even against the bailor himself. While the title to the
property in question remains in the bailor, the right of possession during the
period covered by the contract of bailment is in the bailee. He may retain
possession of the property for the purpose of the bailment. A bailee is
entitled to use the property bailed, and is restricted only by the limitations of
the contract. If the bailee uses this property in a way not authorized by the
contract of bailment, he is liable in damages to the bailee.

Where a mutual benefit bailment requires the bailee to use skill in
connection with the property bailed, the bailor must exercise a degree of
skill ordinarily used by persons who perform similar work. If the bailee fails
to use this degree of skill, he is liable in damages to the bailor. For example,
if A leaves his horse with B, a blacksmith, to be shod, and B attempts the
work, but performs it so unskillfully, or carelessly that the horse is injured or
lamed thereby, B is liable to A for the damage caused.
236. Rights of Bailee as Against Third Persons. A bailee has the right
to keep the property bailed as against third persons who endeavor to interfere
with his possession. The bailee is not permitted to dispute the title of the
bailor for his own benefit. If, however, the property is taken away from the
bailee by action at law, by one whose title is superior to that of the bailor, the
bailee is relieved from liability to the bailor. In this event, the one who has
the paramount title coupled with the right of immediate possession, may take
the property from the bailee. If the bailee yields possession to one whose
right of possession and title are inferior to the bailor's, the bailee is
answerable to the bailor for any losses sustained. The bailee cannot confer
good title upon anyone to whom he attempts to sell the property bailed, even
though the purchaser buys without notice of the bailment. Anyone who
injures the property while it is in the possession of the bailee is responsible
either to the bailor or bailee for the damages.
237. Lien of Bailee. A bailee who has performed work on the article
bailed, for which he is to be paid a consideration, is said to have a lien for
the value of the work performed, or materials furnished. By a lien is meant
the right of the bailee to retain possession until the value of his labor or
material has been received. At common law, a livery stable keeper had no
lien upon horses fed and cared for. By statute in most states, livery stable
keepers now have a lien upon horses left with them. If a bailee is employed
to perform work or labor upon personal property, and the property is
destroyed without fault of the bailee after part of the work has been
performed, the bailee may recover for the amount of work performed and
materials furnished, unless the contract of bailment is to the effect that the
entire job is to be completed before any payment is made.
A bailee loses his lien by parting with possession of the property. At
common law, a bailee could not sell the property to enforce his lien. By
statute in most states, the bailee is permitted to sell the property, by giving

notice of the time and place of sale to the bailor, or by foreclosing his lien by
a legal action.

PLEDGES

238. Pledge Defined. A pledge is one form of a mutual benefit bailment.
It is a deposit of personal property by a debtor with a creditor as security for
a debt, the title to the property remaining in the debtor until the property is
disposed of by the creditor in accordance with the express or implied
agreement of pledge. A pledge differs from a chattel mortgage in that
possession of personal property is given a creditor for the purpose of
securing a debt, the title remaining in the debtor. In case of a chattel
mortgage, the title to the personal property passes to the mortgagee, who is
the creditor, subject to revesting in the mortgagor, who is the debtor, in case
of payment of the mortgage debt. In a chattel mortgage, possession of the
property generally remains in the debtor.
A owes B $100.00. He gives B possession of a diamond ring as security
for the debt. If A does not pay the $100.00 when due, B may retain
possession of the ring until he receives $100.00 from A, or he may sell the
ring at public sale, advising A of the time and place of sale. If the ring sells
for more than $100.00, B must pay A the excess of $100.00.
Pledges form an important part of present day business. Pledges of
bonds, stocks and negotiable paper are common in transactions with banks.
Banks commonly make loans, taking a promissory note secured by a pledge
of stocks, bonds, negotiable instruments, or other personal property. Their
loans are commonly called loans on collateral or loans on collateral
security.
239. Parties to a Pledge. A pledge of chattel property is a contract
express or implied. The party giving the property as security to his creditors
is called the pledgor, the party receiving the property is called the pledgee.
Like any contract, it requires competent parties. (See Competency of Parties,
chapter on Contracts.) A person mentally insufficient, intoxicated, or an
infant, is not competent to make a contract. An infant's contracts of pledge,
like any of its contracts are voidable, but not void. The infant may carry out
the contract if he chooses. An infant's contracts are not illegal. They cannot
be enforced against an infant, however, if he objects by reason of infancy. A

competent party, contracting with an infant, cannot void his contract on the
ground of infancy of the other contracting party. Most contracts of pledge
are implied. If A owes B $10.00 and gives B his watch as security, B
impliedly has the right to retain possession of the watch until A pays him
$10.00. B also has the right after A fails to pay him the $10.00 when due, to
sell the watch at public auction, and apply as much of the proceeds as is
necessary to the payment of his debt. In most pledges of importance where
securities are pledged, the contract of pledge is reduced to writing, and a
stipulation is made giving the pledgee the right to sell the property at public
or private sale without notice to the pledger, and permitting the pledgee
himself to be a purchaser at the sale. No matter what the contract of pledge
provides, the sale should be public, notice of which should be advertised,
and notice of the time and place should be given the pledgor.
240. Personal Property Which May Be Pledged. Any kind of personal
property which is the subject of transfer may be pledged. This includes
personal property having a tangible existence, as well as that which is
intangible. That is, choses in action as well as choses in possession may be
pledged. A promissory note, a certificate of stock, or a bond which is an
evidence of something tangible or the right to obtain something tangible, is
the subject of a pledge, as well as furniture, jewelry and other tangible
personal property. Property which has no active or potential existence is not
the subject of a pledge. A person cannot pledge a horse which he expects to
purchase, or a crop which he expects to grow on the land of another. A
person may, however, pledge a growing crop.
241. The Debt Secured. A pledge or delivery of personal property is for
the purpose of securing a debt owing the pledgee. The existence of a debt is
one of the essential elements to a valid pledge. A delivery of personal
property to another in the absence of a debt may constitute a bailment for the
sole benefit of the bailor, the bailee, or for the mutual benefit of both parties.
To constitute a pledge, however, there must be a debt owing the pledgee, and
the property must be delivered to him, and accepted by him as security for
the debt. The debt must be legal, and must be supported by a sufficient
consideration to support the contract of pledge.
A won $50.00 at cards from B. B gave A his watch as security for the
debt. B was permitted to recover possession of his watch from A by legal
action, since the gambling transaction was illegal. B did not legally owe A
$50.00. An illegal debt cannot support a contract of pledge. If, for any

reason, the debt is not owing or is not valid, it will not support a contract of
pledge.
242. Title to Property Pledged. The legal title or ownership of personal
property pledged remains in the debtor or pledgor. A right of possession is
given the pledgee. This is sometimes called a special property. A pledge
differs from a sale in that, in a sale, the title or ownership of the personal
property passes to the purchaser, while the possession may remain in the
seller. In a pledge, however, the possession passes to the pledgee or creditor,
while the title remains in the pledgor or debtor. A pledge differs from a
chattel mortgage in that, in the latter, the title passes to the creditor or
mortgagee, subject to revesting in the mortgagee or debtor, upon the latter's
paying the mortgage debt.
There is probably one exception to the rule that title to property pledged
does not pass to the pledgee, and that is in case of negotiable instruments. A
negotiable instrument endorsed in blank, or made payable to bearer passes
like currency by delivery. A pledge of such paper passes title to the pledgee.
A pledge of negotiable paper not endorsed in blank, or not payable to bearer
should be made by proper endorsement. In this event title passes to the
pledgee. The title is revested in the pledgor by proper indorsement, or by
delivery, if the instrument is transferable by delivery, when the debt secured
is paid. A pledgee of negotiable paper, who takes it before it is due without
notice of defenses, is an innocent purchaser for value without notice, and as
such, is entitled to the rights of an innocent purchaser for value without
notice. (See Innocent Purchaser for Value Without Notice, chapter on
Negotiable Instruments.)
243. Collateral Securities. Loans by banks are frequently made on
collateral securities. This means that the borrower gives a bank a promissory
note for the amount, and pledges personal property to secure the note. The
contract of pledge may be by separate written instrument, or it may be made
a part of the note itself. Where made a part of the note, the note is called a
collateral note. (See Collateral Note, chapter on Negotiable Instruments.)
Any kind of property which is the subject of a pledge may be used as
collateral security. Stocks, bonds, and even commercial paper are commonly
used. Jewelry, bills of lading, and warehouse receipts are not infrequently
used in this kind of a pledge. Collateral security given as security for a
promissory note or other negotiable instrument is a pledge. The rules
governing ordinary pledges govern this kind of pledge as well. The only

practical distinction between a collateral loan and an ordinary loan is that, in
a collateral loan, the debt is evidenced by a negotiable instrument which is
secured by a pledge of personal property.
244. Rights and Duties of Pledgor and Pledgee. A pledgor has the right
to have his pledged property returned to him upon payment of the debt
secured by the pledge. He also has the right to have the property carefully
preserved and cared for while in the possession of the pledgee. The pledgee
is entitled to retain possession of the property pledged until the debt owing
him is paid. He may re-pledge the property if he so desires. If the pledged
property is negotiable paper, the pledgee must collect the paper as it falls
due, and observe all the requirements necessary to preserve the rights of the
pledgor. If the property pledged is tangible personal property, the pledgee
must use the care of an ordinarily prudent man in the preservation and
protection of it. He is not permitted to use property which may be injured by
use, and should not use the property except to the extent that it is necessary
for its preservation. If the pledgee sells or transfers the debt secured, the
purchaser is entitled to the benefit of the pledge. That is, if A owes B
$500.00 and pledges five shares of stock to B as security for the debt, and B
sells the debt to C, C is entitled to the benefits of the pledged certificates of
stock. If B gives C possession of the stock, C may retain the same until he
receives the $500.00 from A. If B does not turn over the shares of stock to C,
C may bring an action to compel the transfer of possession to him.
245. Disposal of Property by Pledgee After Default. If the pledgor fails
to pay the debt secured when due, the pledgee has the right to enforce his
pledge. In the absence of any special agreement, the law impliedly gives the
pledgee the right to sell the property at public sale, and apply as much of the
proceeds of the pledged property as is necessary to the payment of his debt.
This sale must be public. The pledgee must first notify the pledgor that he is
in default of payment, and of his intention to sell the property, giving the
time and place of the proposed sale. The pledgee cannot be a purchaser at
the sale, unless so permitted by express stipulation in the contract of pledge.
Many contracts of pledge are in writing, by the terms of which the pledgor
waives notice of default and of time and place of sale, and permits the
pledgee to sell at private sale, and to become a purchaser at the sale. When a
pledgee is given the right to purchase by the contract of pledge, he cannot
make a valid purchase without advertising the property, and without exerting

himself reasonably to obtain the greatest amount possible for the pledged
property at the sale.
In selling pledged property, notice of default should be given the debtor.
He should also be notified of the time and place of sale. The sale should be
advertised publicly, and should be public. The pledgee cannot himself
purchase the property unless the contract of pledge expressly so provides.
Even in this event, the sale will not be held valid unless it is public and fair
in every way to the interests of the pledgor. A pledgee is permitted in some
states to sell according to certain statutory methods provided. A pledgee may
sell by foreclosing his lien in equity. This means by filing a written request
in a court of equity to sell the property. In this event, the sale is conducted by
order of court.
246. Redemption. A pledgor has the right to obtain possession of the
property pledged, by paying the debt secured at any time before actual sale
of the property. A pledgor sometimes agrees by the contract of pledge, to
waive the right to redeem the property after default of payment of the debt
secured. Courts will not enforce such a provision of the agreement against
him. The pledgor is permitted to redeem the property by paying or tendering
the amount of the debt at any time before sale of the pledged property. If the
pledgor is in default of payment, however, and agrees by separate
agreement, made subsequently to the contract of pledge, that the pledgee
may keep the property pledged in satisfaction of the debt, he is bound by this
agreement.

MORTGAGES OF PERSONAL PROPERTY

247. Mortgages of Personal Property Defined. By mortgage of
personal property, is meant the transfer of title to personal property by a
debtor to a creditor; the possession of the property usually remaining in the
debtor, and the transfer being made for the purpose of giving the creditor
security for the debt, the debtor having the right to secure a return of title to
the property by paying the debt within a stipulated time. It is a conditional
sale. It is not absolutely necessary that possession of property which is the
subject of a chattel mortgage, remain in the debtor. Possession may be given
the creditor with the understanding that possession and title are to revest in
the debtor when the latter pays the debt secured. As a matter of business

practice, however, possession of personal property which is the subject of a
chattel mortgage, remains in the debtor, the creditor taking the title as
security for the debt, with the right to secure possession or sell the property
in case the debtor fails to pay the debt secured when due. When possession
of personal property is given a creditor as security for a debt, the transaction
is usually in the form of a pledge. In a pledge, title remains in the debtor, but
possession is given the creditor. The distinguishing features of a sale,
bailment or pledge, and a mortgage of personal property are important. In a
sale of personal property title passes to the purchaser, while possession
usually remains in the seller until the purchase price is paid. In a pledge,
which is a form of a bailment, title remains in the bailor, and possession only
is given the bailee or creditor. In case of a chattel mortgage, possession
remains in the debtor, while title passes to the creditor subject to revesting in
the debtor upon payment of the debt secured. The debtor, or person giving
the mortgage, is called the mortgagor, the creditor, or person receiving the
mortgage, is called mortgagee.

IN THE PRIVATE OFFICE OF THE GENERAL MANAGER OF THE
S. OBERMAYER CO., CINCINNATI, OHIO

248. What Kinds of Personal Property May Be Mortgaged. The rule
is usually stated as follows: Any interest in personal property which may be
the subject of a present sale may be mortgaged. Any tangible personal
property such as furniture, horses, cattle and clothing, as well as intangible
personal property, such as promissory notes, contracts, and shares of stock
may be mortgaged. It is not necessary that the mortgagor have absolute,
unencumbered title to the property to give a mortgage. An owner may give
several mortgages on the same property. He may mortgage his interest as
long as any remains. If A owns a stock of goods worth $10,000, he may give
successive mortgages to different creditors to whom he is indebted. He must
practice no fraud, however. He must make each mortgage subject to the prior
ones, and must reveal the facts to the creditor taking the mortgage. But he is
permitted to mortgage his remaining interest.
249. A Mortgage of Personal Property as Security for a Debt. A
mortgage of personal property is a contract, and must be supported by a
consideration. Mortgages are usually given to secure loans of money. They
may, however, be given to secure any kind of obligation. A mortgage of
personal property may be given to secure advances of money to be made in
the future, as well as present or past advances or obligations. It is usually
held that a past indebtedness is sufficient consideration to support a
mortgage, as to all persons, except one who may have been defrauded out of
the property mortgaged.
250. Form of Mortgages of Personal Property. To constitute a
transaction a chattel mortgage, there must be an agreement by which title to
personal property is transferred to a creditor upon condition that it is to
revest in the debtor upon the latter paying a certain sum of money, or
fulfilling an obligation, within a certain time. As between the mortgagor and
mortgagee themselves, an oral chattel mortgage is binding, unless within the
provisions of the Statute of Frauds. (See Statute of Frauds, chapter on
Sales.) Most states provide that contracts for the sale of personal property
involving more than $50.00 must be in writing to be enforceable. This
provision applies to chattel mortgages. If possession of the mortgaged
personal property is given the mortgagee under an oral mortgage, the
transaction is binding, not only between the parties thereto, but as to third
persons as well. Most states provide by statute that as against third persons
who purchase the property, or as against creditors of the mortgagor, the
chattel mortgage must be in writing, and be recorded or filed with a public

official, in case possession of the mortgaged property is left with the
mortgagor. This question is discussed more at length in the following
section.
251. Filing and Recording Mortgages of Personal Property. Most
states have statutes providing that chattel mortgages must be filed or
recorded with a designated public official to be effective as against creditors,
subsequent purchasers or mortgagees. This requires that the mortgage be in
writing, and be deposited or recorded according to the provisions of the
statute with the designated public official. For example, if A orally
mortgages his horse to B to secure a loan of $40.00, the mortgage may be
binding between A and B, but if C, a creditor of A, secures a judgment
against A and levies on the horse, his levy is superior to B's mortgage. If A
sells the horse to D, who has no notice of the mortgage to B, D's rights to the
horse are superior to B's. If A gives a mortgage in writing to E, who records
his mortgage according to statute, his rights to the horse are superior to B's.
The statutes of the different states require these mortgages to be refiled at
stated intervals. Most states require them to be refiled each year. Some
require them to be refiled only every three years.
252. Rights of Mortgagor in Property Mortgaged. A mortgage of
personal property ordinarily contains a stipulation that the mortgagor shall
retain possession until after default of payment of the mortgage debt. Some
states have statutory provisions giving the mortgagor the right of possession
of the mortgaged property before default of payment of the mortgage debt. It
is the custom at the present time to give the mortgagor possession of the
property before default. If a mortgagor having possession of the property has
it stored on his own behalf, and the warehouseman acquires a lien on the
goods for his charges, his lien is inferior to the mortgage. The same is true if
a mechanic acquires a lien for repairs upon the property.
A mortgagor may mortgage his interest in the personal property by
giving a second mortgage. The second mortgagee takes the mortgagor's right
to have the property revest in him upon payment of the debt secured by the
first mortgage. A mortgagor may sell his interest in the property, subject to
the interest of the mortgagee. If the mortgage stipulates that a mortgagor
cannot sell his interest, this stipulation is binding. A mortgagor has the right
to pay the debt secured, and by this means to have the title to the property
revest in him.

253. Rights and Liabilities of Mortgagee. A mortgagee of personal
property has a conditional title to the property. If the mortgagor does not pay
the debt secured, according to the terms of the mortgage the mortgagee has
the right to seize the property or at least to subject it to the satisfaction of his
debt. The mortgagee has the right to sell the debt secured by the mortgage.
In the absence of an express stipulation to the contrary, a transfer by a
mortgagee of the debt secured by the mortgage, transfers the mortgage. An
assignment of a chattel mortgage apart from the debt secured, passes no
interest to the transferee. A mortgagee has the right to seize the property
upon default of payment of the debt secured, if the mortgage contains a
stipulation to that effect. The mortgagee has the right to foreclose his lien.
By this is meant that he has the right to file a petition in a court of equity
asking that the property be sold, and that his claim be paid from the proceeds
first, and that the mortgagor's right to pay the debt and secure a return of the
property be cut off. This is discussed under the section on foreclosure.
254. Mortgagor's Right of Redemption. In law, a mortgage is regarded
as a security for a debt, rather than as a transfer of property. By a chattel
mortgage, a transfer of title to personal property is made by a debtor to a
creditor as security for a debt. The debtor has the right, however, to secure a
return of the title to the property by paying the mortgage indebtedness
according to the terms of the mortgage. When the debtor fails to pay the debt
when it is due, absolute title to the property vests in the mortgagee or
creditor. The law, however, permits the debtor or mortgagor to pay the debt
at any time before actual sale of the property by the mortgagee, together with
interest and expenses, and thus secure the title to the mortgaged property.
This is known as the mortgagor's equity of redemption.
Legal title is vested absolutely in the mortgagee upon failure of the
mortgagor to pay the mortgage debt when due. The mortgagor, however, is
permitted to pay the debt with expenses at any time before sale of the
property, and by this means to secure a return of the title to the property. This
makes a mortgage of personal property in effect a security for a debt, rather
than a transfer of title. The purpose of the law is to give the creditor or
mortgagee the right to secure the payment of his debt out of the mortgaged
property, and nothing more. Most states have statutes providing a method by
which a mortgagor may obtain his equity of redemption. Where there are no
statutes, this right must be enforced by a petition in a court of equity.

255. Mortgagee's Right of Foreclosure. Equity permits the mortgagor
to recover the mortgaged property by filing a petition in a court of equity,
even after he has defaulted in paying the mortgage debt, by tendering the
amount due, together with interest and expenses. This right of the mortgagor
may be cut off by an equitable right enforced on the part of the creditor or
mortgagee. This right is called the mortgagee's right of foreclosure. When
the debtor or mortgagor is in default, the creditor or mortgagee is permitted
to file a petition in a court of equity, setting forth the fact, and asking the
court to order the property to be sold, the expenses to be paid, the mortgage
debt to be satisfied, and the balance of the proceeds of the sale to be paid to
the debtor or mortgagor. After this proceeding has been resorted to and
completed, the debtor cannot enforce his equity of redemption.
The common method afforded a mortgagee of foreclosing a mortgagor's
equity of redemption is by the petition in equity above described. Many of
the states have provided statutory methods which may be followed. Some
mortgages by express stipulation give the creditor or mortgagee the right to
seize the property and sell same upon default of the debtor to pay. This takes
the place of an equitable foreclosure. When a mortgage contains a power of
sale stipulation, the mortgagee may seize the property when the mortgagor
defaults, and sell the same at public sale. The excess recovered over the
mortgage debt and expenses, must be paid the mortgagor. If possession of
the property cannot be obtained peaceably, the mortgagee must bring an
action in replevin, by which possession is obtained by an officer of the court.
In some jurisdictions, a mortgagee is permitted to seize and sell mortgaged
property upon default of the debtor, even though the mortgage contains no
power of sale stipulation. The sale must be bona fide and public, or it can be
set aside at the instance of the defrauded mortgagor.

CARRIERS

256. Carriers Defined. Carrier is the term applied to individuals or
companies engaged generally or specially in carrying goods or passengers
from place to place. The business of carriers has grown rapidly with the
development of this country. The business of steamboat, railway, express,
and electric package companies forms an important part of present day
affairs. Carriers are usually classified as common or private. Both common