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.

[Illustration: 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_.

[Illustration: 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.

[Illustration: 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.

[Illustration: 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.       |
 |                                                                     |
 |  Village of X, Ohio, Improvement Bonds.                             |
 |                                                                     |
 | 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,       On the second day of January,   |
 | 1909,the village of X promises   1910, the village of X promises |
 | to paythe bearer at the City     to pay the bearer at the City   |
 | Trust Co.,Cleveland, Ohio,       Trust Co., Cleveland, Ohio,     |
 | twenty-fivedollars, being 6      twenty-five dollars, being 6    |
 | months' intereston its bond.     months' interest on its bond.   |
 |   No. 1 dated Jan. 2, 1909.        No. 2 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,       On the second day of January,   |
 | 1909,the village of X promises   1910, the village of X promises |
 | to paythe bearer at the City     to pay the bearer at the City   |
 | Trust Co.,Cleveland, Ohio,       Trust Co., Cleveland, Ohio,     |
 | twenty-fivedollars, being 6      twenty-five dollars, being 6    |
 | months' intereston its bond.     months' interest on its bond.   |
 |   No. 1 dated Jan. 2, 1909.        No. 2 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.

[Illustration: 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.

[Illustration: Fig. 6. One Form of Indorsement in Full.]

[Illustration: Fig. 7. Another Form of Indorsement in Full.]

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 further indorsements.

[Illustration: 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.

[Illustration: 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.

[Illustration: 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 _bon‚ 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 _bon‚ 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 _bon‚ 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 Ohio }
  Cuyahoga Co.  } SS

 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.

[Illustration: 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 _bon‚ 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 _bon‚ fide holder_.

 99. Define _holder in due course_.

100. Distinguish _bon‚ fide_ holder and assignee of a negotiable
       instrument.

101. Can a person be a _bon‚ 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?

[Illustration: 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.

[Illustration: 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.

[Illustration: 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