sideration, and at maturity A refused to pay it on
the ground that B owed him a similar amount. He
could counterclaim and in this way avoid payment ;
but if B should transfer the note to a holder for value,
A could not set up a counterclaim as a reason why he
should not pay the transferee who holds the note at
maturity. If A sells a horse to B by means of a
fraudulent statement concerning the quality of the
horse, and receives a note from B in payment, B
could refuse to pay the note if A held it until matu-
rity, on the ground that it had been secured by fraud.
If A should transfer the note to a holder for value,
such holder for value could enforce the note against
B, as the defense of fraud in such cases is a personal
one and does not affect the rights of a holder for value.

If A, an infant, gives a note to B, B could not en-
force the note at maturity, as infancy is an absolute
defense. The same defense would be good against



FORM AND DELIVERY 159

any one who might come into possession of the in-
strument. The same would be true in the case of
forgery, or a material alteration in an instrument by
a party to it.

LESSON XLIII
FORM AND DELIVERY

81. FORM.

82. DELIVERY.

81. Form. It is not necessary that negotiable
instruments be written in any particular form. It is
only required that the instrument be in writing and
definite as to the names of the parties, amount, time
and place of payment, and it must be in a form im-
porting negotiability.

The writing may be done with any instrument
and upon any material without affecting its validity
or negotiability. All negotiable paper should be
written in ink, to insure permanency and prevent
alteration.

The promise to pay must be an unconditional one.
If the promise is qualified in any way, the instrument
will be valid as a contract, but not as a negotiable
instrument, as the characteristic of negotiability will
be destroyed.

The amount which is promised must be definite and
must be payable in legal-tender money of the place
where the promise is made. A written promise to



160 NEGOTIABLE INSTRUMENTS

pay a certain amount in grain at the market price at
the time of payment would not be a negotiable in-
strument, as the amount would be uncertain. It
would be possible to determine the proper amount at
the time when payment could be demanded, but this
is not sufficient to satisfy the requirement as to cer-
tainty. The instrument must contain within itself
all the necessary data for determining the amount, or
must expressly state the amount that is to be paid.

The time of payment must be definitely stated or
must be ascertainable from facts contained in the
instrument. An instrument made payable at the
death of a certain person, or upon the happening of
any event which is sure to occur, may be a negotiable
instrument, even though the day and date are not
expressly stated. The time is sufficiently certain
when the instrument is payable on demand, as the
exact day of payment is optional with the holder, and
is not, therefore, contingent upon the happening of
some event which is beyond his control. When no
time is stated in the instrument, it is held under the
Negotiable Instrument Law to be payableon demand.
When no date appears in the instrument, it is also
held that the actual date of delivery is to be deemed
the date of the instrument. Any holder will have
the right to insert the proper date. If, under these
conditions, an incorrect date is inserted, the promisor
will be required to allow that date to stand if a holder
for value acquires the instrument.

The place of payment should be definite and when



FORM AND DELIVERY 161

possible should be stated in the instrument. It is
held that when no place of payment is mentioned, the
place of business, or, in the absence of any place of
business, the last-known residence of the maker or
acceptor, will be the proper place to present the in-
strument.

The promise must be made to a certain person, his
order, or to bearer. To fulfill this requirement, it is
not necessary that the person be designated by name,
but merely that a description be given by which the
proper person to receive payment may be ascertained
at the maturity of the instrument. For example,
an instrument made payable to the treasurer of the
General Electric Co. would be deemed payable to a
definite person. Whoever happened to hold the
office of treasurer of that company would be entitled
to collect it. When no person is mentioned, it is
held in many jurisdictions that the instrument is
payable to bearer. Any person into whose hands the
instrument comes lawfully has the right to insert his
name as the payee.

Words of negotiability, such as order or bearer,
must appear, to make the instrument negotiable.
If these words, or similar words, are omitted, the in-
strument is valid as a contract, but is not negotiable
paper.

82. Delivery. Delivery by the maker or acceptor
is essential to fix his responsibility. If, however, the
completed instrument gets into the hands of the
payee, no delivery will not be a good defense against



1 62 NEGOTIABLE INSTRUMENTS

a holder for value. Such a defense would be good
only against the person wrongfully taking possession
of the instrument. Even in cases where much care
has been exercised by the promisor in such an in-
strument, and in spite of such care the person desig-
nated as payee secures possession of the instrument,
the promisor will be liable to a holder for value. It
is proper that, where one of two innocent persons
must suffer a loss, the one primarily responsible for
the loss should be the one to stand it. A promisor
who completes an instrument is running the risk
that it will get into the possession of the party named
in it and be used contrary to his intention. A par-
tially completed instrument that is completed by
one into whose hands it falls is sometimes held to
be without validity, if it is apparent that the in-
strument was not prepared by the person whose
name appears on it as maker or acceptor. If negli-
gence is proved, such maker or acceptor will be liable.

LESSON XLIV
PROMISSORY NOTES

83. KINDS.

84. PARTIES.

85. CONTRACTS OF THE PARTIES.

83. Kinds. - There are three kinds of promissory
notes : several, joint, joint and several.

The several note is one that has but one maker.



PROMISSORY NOTES 163

The joint note is one that is made by two or more
makers who assume joint responsibility on the note.
In such notes it must be apparent that the liability
was intended to be joint and not several. If a note,
signed by two or more parties, reads, " I promise to
pay," it is apparent that the liability was intended to
be several. That is, each party assumed full re-
sponsibility on the instrument. The proper wording
in joint notes is, "We promise to pay," or, "We
jointly promise to pay." All makers in a joint note
must be sued together, as they have a joint liability,
and if one is released, the others are also released.

A joint and several note is one in which there are two
or more makers who individually and collectively
assume the responsibility for the payment of the
note. As stated in the preceding paragraph, when
two or more parties sign an instrument which reads,
;< I promise to pay," the liability of the makers is
several. The proper wording for such a note is,
' We jointly and severally promise to pay." In a
joint and several note the holder may proceed against
all as individuals, or any one or more of the makers.

84. Parties. - - The parties to a promissory note
are the maker and the payee. The maker is the one
who promises to pay and the payee is the one to
whom such promise is made. The payee may trans-
fer the instrument by indorsement, as we shall learn
in a subsequent section, and in such cases, he be-
comes an indorser, and the one to whom he transfers
the instrument becomes the indorsee.



164 NEGOTIABLE INSTRUMENTS

85. Contracts of the Parties. As has been
stated, the maker is absolutely liable on the instru-
ment, and his contract is to pay the instrument when
it is due, in accordance with its terms, and the con-
tract of the payee is to accept the instrument as
conditional payment of the obligation which the
maker owes him. It is generally held that if the
maker fails to pay the instrument at maturity, the
payee may disregard the note entirely and proceed
to bring an action on the original debt, or he may
bring an action on the note which has been dis-
honored.

The contract of the indorser will be discussed in a
later lesson.

LESSON XLV
BILLS OF EXCHANGE

86. KINDS.

87. PARTIES AND THEIR CONTRACTS.

86. Kinds. Bills of exchange or drafts are
classified in several ways. They may be divided into
two classes with reference to place. These two
kinds are .called foreign and inland. A foreign bill
of exchange is one that is made payable outside of
the state in which it is drawn. An inland bill of ex-
change is one that is payable in the same state in
which it is drawn.

Drafts are also classified as bank drafts and per-



BILLS OF EXCHANGE 165

sonal drafts. A bank draft is drawn by one bank
on another bank, in favor of a third party. It is
usually payable at sight and its chief use is to make
remittances from one place to another. Bank drafts
may be purchased at any bank, and may be drawn on
banks in New York, Chicago, Boston, or any other
money center, according to the location of the draw-
ing bank and the party to whom the draft is to be
sent. A personal draft is one drawn by one person
or firm on another person or firm. The personal
draft is also divided into two classes, tzvo-party and
three-party drafts. A two-party draft is one in which
the drawer orders the drawee to pay a certain sum of
money to the drawer's order. This draft is used for
collection purposes. A in Rochester owes B in Al-
bany $100. B draws a draft on A in favor of him-
self for the amount of the debt and deposits it in an
Albany bank for collection. The Albany bank for-
wards it to Rochester and collects it through its
correspondent bank there.

A three-party draft is one in which one person or
firm draws on a second person or firm, in favor of a
third person or firm. This form of draft is rapidly
going out of use. It was used to adjust debts be-
tween parties who lived in distant places, when con-
veniences for remitting money were not very numer-
ous. A in Rochester owes B in Chicago a certain
sum of money and C in Chicago owes A a like amount.
A draws a draft on C in favor of B and remits it to
B to present to C for payment. When C pays the



1 66 NEGOTIABLE INSTRUMENTS

draft, he cancels his indebtedness to A and also A's
indebtedness to B, without the transmission of any
money through the mails.

Drafts are also classified as to time. They may
be either time or sight drafts. A time draft is one
that is made payable at a stated time in the future,
either after date or after sight. When a draft is
made payable after sight, the time does not begin to
run until the drawee has signified by his acceptance
that he will pay it when due.

A sight draft is one payable upon presentation or on
demand. To hold the indorsers, it is necessary to
present the draft within a reasonable time after it is
received. What is a reasonable time will depend
upon all the circumstances in any given case, but
demand paper should rarely be allowed to run longer
than sixty days, if there are indorsers.

A check has been defined as a draft drawn by a
person having money on deposit in a bank, ordering
that bank to pay, on demand, a certain sum of money
to a designated payee. The drawee bank is obliged
to honor a check, if the drawer has funds to his credit.
In this respect the check is different from the ordinary
three-party draft, as the ordinary drawee is under no
obligation to pay unless he wishes to do so. A check
should be presented for payment promptly, and if
the payee does not present it for payment within a
reasonable time, and the bank fails before present-
ment is made, he will be the loser, if the drawer had
funds on deposit at the bank at the time of its failure.



BILLS OF EXCHANGE 167

The holder of a check who does not wish the cash at
once, may take it to the bank on which it is drawn
and have the cashier certify it. This is done by
writing " accepted," or words to that effect, with the
cashier's signature on the face of the check. When
this is done, the credit of the bank is substituted for
the credit of the drawer of the check, and in case
of the bank's failure, the holder of the check will be
the loser. Certification releases all indorsers. If
the certification is procured by the drawer before
delivering the check, he is not released and he will
be the loser in case the bank fails before the holder
has presented the check for payment, if negligence
cannot be charged against the holder. But the
effect of acceptance, when secured by the drawer, is to
give the additional credit of the bank.

87. Parties and their Contracts. - - The person or
firm who orders the money to be paid is called the
drawer. The drawer contracts to be responsible to
the payee, or a holder for value, in case the drawee
refuses to pay, or agree to pay, in accordance with
the terms of the draft, providing he, the drawer, is
notified promptly of such refusal on the part of the
drawee.

The drawee is the person or firm who is ordered to
pay the money. The drawee is not obligated either
to pay, or to agree to pay, and may refuse to do
either if he wishes. If he is willing to make payment
in accordance with the conditions of the draft, he
signifies his willingness by accepting it. This is



1 68 NEGOTIABLE INSTRUMENTS

done by writing across the face of the instrument the
word " accepted," with his signature, and in the case
of drafts made payable after sight, with the date.
From this time on, he is known as the acceptor and
his liability is exactly the same as that of a maker on
a promissory note. He has unconditionally promised
to pay it and may be sued .upon his failure to fulfill
his agreement. The negotiability of the draft will
be destroyed if the drawee, in accepting, makes pay-
ment conditional upon the happening of any event.
For example, if he agreed to pay the draft "pro-
viding he was at the time of maturity indebted to the
drawer," his contract would be good, but the negotia-
bility of the draft would be destroyed. The same
would be true if he stated in his acceptance that he
would pay the amount " out of funds belonging to
the drawer and in his possession at the date of matur-
ity," as there would be no certainty that such funds
would be in his hands at that time.

If the drawee named in the draft refuses to accept,
a friend, or any third party, might accept the draft
for him and become liable upon it. In such cases,
the holder of the instrument at maturity would
again present it to the designated drawee, and upon
his failure to pay, would present it to the party who
had accepted it. Such an acceptance is called an
acceptance for honor, or an acceptance supra protest.

It sometimes happens that a drawee has previously
agreed in writing to accept a draft drawn by a cer-
tain party on him for a specified amount. When



NEGOTIATION AND INDORSERS 169

this is the case, the holder for value, or the original
payee, who has taken the draft with knowledge of
such previous promise to accept, does not need to
have further acceptance, and the drawee will be
liable on the draft the same as though he had ac-
cepted it in the usual way. Such an acceptance is
called a virtual acceptance. Drafts drawn by persons
on banks that have previously agreed to honor such
drafts, as, for example, those drawn against a letter of
credit, belong to this class. A letter of credit is an
agreement by a bank to honor drafts drawn, under
certain conditions, by a person named in the letter.



LESSON XLVI
NEGOTIATION AND INDORSERS

88. DEFINITION OF NEGOTIATION.

89. DEFINITION OF INDORSER.

90. KINDS OF INDORSERS.

91. THE CONTRACT.

92. KINDS OF INDORSEMENTS.

88. Definition of Negotiation. By negotiation
is meant the transfer of a negotiable instrument by
the original payee, or by a holder for value, by
delivery, in the case of an instrument that is payable
to bearer, or by indorsement and delivery, when pay-
able to a certain person or his order.

When an instrument is indorsed and delivered to



170 NEGOTIABLE INSTRUMENTS

another party, the one transferring it is called the
indorser, and the one to whom it is transferred, the
indorsee. The indorsement should be placed on the
back of the instrument, across the left end, as near
the top as is convenient, to allow for any subsequent
indorsements that may be made. An indorser is not
an ordinary surety or guarantpr, as he is entitled to
notice of dishonor by the maker or acceptor.

89. Definition of Indorser. An indorser is one
who writes his name on the back of a negotiable in-
strument and who is not in terms made an ordinary
surety or a guarantor.

90. Kinds of Indorsers. When the holder of an
instrument writes his name on the back for the pur-
pose of transferring the instrument in the regular
course of business, he is said to be a regular indorser.
When one who is not otherwise a party to the instru-
ment places his name on the back for the purpose of
guaranteeing the payment of the instrument, he is
called an irregular indorser. There is some conflict
in various jurisdictions regarding the exact contract
of the irregular indorser, but in general he is held to
be an indorser and has the same liability as the
regular indorser, so far as his warranties on the instru-
ment are concerned.

91. The Contract. - The regular indorser, when
he places his name on the back of the instrument,
makes a bill of sale of the instrument to the transferee,
conveying to him all right, title, and interest which



NEGOTIATION AND INDORSEES 171

the indorser may have in the instrument; he also
makes the following warranties regarding the instru-
ment :

(a) That all the parties whose signatures appear
on the instrument have capacity to contract ;

(b) that the signatures are genuine ;

(c) that the instrument is regular on its face ;

(d) that there are no defects which will interfere
with its collection when it is due ;

(i) that it will be paid according to its terms at
maturity;

(/) that if it is not paid, the indorser will pay
it, providing he is promptly notified of its non-
payment.

92. Kinds of Indorsements. - - The regular in-
dorsement may be made in blank by simply writing
the name of the indorser on the back. This makes
the instrument payable to bearer. If the indorser
writes the words, " Pay to the order of" a certain
person, above his name, the indorsement is said to be
in full. Further negotiation may be made by in-
dorsement and delivery by the holder.

A qualified indorsement may be made by writing the
words, " Without recourse," over the indorsement,
and the effect of this is to make the contract of the
indorser a bill of sale and a warranty on all points
except that it will be paid at maturity. When this
indorsement is used, the holder of the instrument must
look to the principal debtor for payment. However,
if there is a defect in the instrument, or the parties



172 NEGOTIABLE INSTRUMENTS

have not capacity to contract, or the instrument is a
forgery, the indorser is still liable on his warranty.
If, however, the principal debtor becomes insolvent
and does not pay the instrument, the holder cannot
look to the indorser who has indorsed without re-
course.

A restrictive indorsement may be made by writing
!< Pay to A only," over the indorser's name. This
limits the further negotiation of the instrument.
Merely indorsing with the words, " Pay to A," with-
out adding the words, " Or order," does not restrict
further negotiation. A special indorsement may
also be made by writing the words, "For collection."
above the indorser's name. This indicates .that
title to the instrument has not been surrendered
but that the transferee is authorized to collect for
the indorser, and to deliver the instrument as his
agent.

In some cases a party places his name on the back of
an instrument guaranteeing the happening of a cer-
tain event. For example, one may write on the back
of an instrument, " I hereby guarantee the collec-
tion of the within instrument." If the instrument
is not paid at maturity, the holder must proceed
against the party primarily liable and use every pos-
sible legal means to effect collection. If, after ex-
hausting all the means at his command, the instru-
ment still remains unpaid, the guarantor of collection
will then be liable. One who writes, " I hereby guar-
antee the payment of the within instrument," can



NEGOTIATION AND INDORSERS 173

be proceeded against immediately upon the failure
of the primary party to pay at the proper time.

Indorsers are individually liable in theorderin which
they sign their names on the back of the instrument,
unless evidence can be produced tending to show
that there was a different agreement between them.
Since this is the case, release of one indorser by the
holder will have the effect of releasing all subsequent
indorsers. An extension of time by the creditor
without the consent of the indorsers will release them.

If more indorsements are to be made on the in-
strument than can be made on the back, additional
ones may be made on a separate piece of paper which
is attached to the original instrument.

Proper notice is sent to the indorsers when it is
mailed within twenty-four hours after the default,
or, if the indorsers live in the same place, when it is
mailed so as to reach them in the due course of mails
within twenty-four hours after the default. If
only one indorser is notified, and he notifies the
others above him on the instrument, such notification
may be made within twenty-four hours after receipt
by each indorser, and such notification by indorsers to
other indorsers will be sufficient to enable the holder
of the instrument to proceed against any of them who
have received notice either directly or through subse-
quent indorsers. It is always best to notify all
the indorsers at the same time and thus avoid all
possibility of releasing any of them by reason of
failure to notify.



174 NEGOTIABLE INSTRUMENTS

LESSON XLVII
PRESENTMENT AND DEMAND

93. PRESENTMENT.

94. NOTICE OF DISHONOR.

95. LEGAL RATE OF INTEREST.

93. Presentment. When a negotiable instru-
ment becomes due, the holder should present it to the
party primarily liable on it and demand payment.
This is not necessary to fix the liability of such
party, and an action can be brought against him on
the instrument, without previous demand, any time
within the time allowed under the Statute of Limita-
tions, which is six years in most of the states. How-
ever, if no presentment and demand are made, no
interest can be recovered from the time the instru-
ment becomes due to the time of settlement. When
presentment and demand are made, the holder may
recover interest on the entire amount for the time it
remains unpaid after it becomes due. It is also
necessary to present the instrument and demand
payment in order to fix the liability of secondary
parties whose names appear on the instrument.

The presentment must be made at a proper time,
usually during business hours, if the presentment is
to be made at the place of business of the primary
party. If the presentment is to be made at the place
of residence of the one obligated to pay, any conven-



PRESENTMENT AND DEMAND 175

ient time during the day will satisfy the requirement
as to the time of presentment. It is not necessary
that presentment be made before the close of banking
hours, unless the instrument is payable at a bank, in
which case presentment would be made at a proper
time if it was made at any time before the regular
closing hour.

The place of payment should be designated in the
instrument, but when no place of payment is desig-
nated, the instrument is payable at the place of busi-
ness of the primary party, or, when no place of busi-
ness is known, at his last-known place of residence.
It has also been held that where no place of residence
or business is known, the holder may present it at
the place where the instrument was given and such
presentment will be deemed to be at a proper place.

In making presentment and demand, it is necessary
that the holder have the instrument with him and
actually show it to the party upon whom demand is