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CHAPTER X

NEGOTIABLE INSTRUMENTS

Terms Used. The term "commercial paper" has sometimes been used for a title as an alternative for "negotiable instruments," but the latter is the term more generally accepted by lawyers. Considered together, a better view-point of the subject is secured than by the use of either alone.

BILL OF EXCHANGE

Description. If a merchant A in London buys goods from, and owes money for them to, B in Paris; and if B in Paris, at the same time, owes money to C in London; it is very clumsy for A to send a bag of gold to B, who at once sends back most of it in a bag to C. It is much simpler for B to write to C, arranging for him to go to A and get the money which A owes B, or part of it.

Such a transaction in time became standardized into the "bill of exchange," a request, or rather an order, from B to A to pay a sum named to C, charging this sum to the account of B.

Form of Bill. A bill of exchange may be in the following form:

New York,....Jan. 2, 19/7.----.

Sixty days....after date pay to the order of Alexander Winchester..

$275,000

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value received and charge the same to the account of

To William Ames,

540 Weybosset Street,

Providence, R. J.

Dollars

Henry Jenks.....

The person who executes the bill, Henry Jenks, is called the drawer; William Ames, the drawee; and Alexander Winchester, the payee.

Acceptance. The routine established is for Alexander Winchester to take the "bill" to William Ames for his " acceptance." If the latter accepts the bill, he signs his name to that effect on the bill and this amounts to an acknowledgment of obligation to Henry Jenks, together with an agreement to pay Alexander Winchester or order at the specified time.

Form of Acceptance. The form of acceptance may be:

Accepted Feb. 9, 1917.

Payable at 540 Weyboaset Street,

William Ames.

Any other words, with signature, are sufficient if they show the intent. Negotiation. In the course of time the function of the bill of exchange was extended. Alexander Winchester owed money to Philip Clark who did not care to lug around coin; so Winchester turned the bill over to Clark, indorsing it to him; Clark perhaps indorsed to another, and the bill of exchange as a negotiable instrument was a great boon in business transactions.

Use of Bill of Exchange with Bill of Lading. A bill of exchange is now used mainly in connection with a sale of goods. Bills are often in duplicate, and sent by different mails. Sometimes the bill is sent attached to the bill of lading to some third party (perhaps a bank) who advances money on it, looking to the bill of lading in part for security. The carrier has no right to deliver goods without presentation of the bill of lading.

Sometimes the two bills are sent together to some one as agent for the drawer (perhaps again a bank) who is instructed to deliver the bill of lading when the bill of exchange is accepted, dependence being thus placed in part on the credit of the drawee, the consignee, and in part on his acknowledgment of his obligation to pay.

CHECKS

Checks. Later" banks" were established and merchants" deposited " money in them and kept their accounts sufficiently large so that they were drawing on them constantly, and the bill of exchange took a simpler form in the well-known "check" which is now accorded a character of its own, somewhat distinct from the bill of exchange. Debts were paid by checks and these were first sent to the banks for collection, but now they go at once into the depositor's account as the equivalent of cash. The check often goes through various hands before reaching the bank on which it is drawn, each holder indorsing it to the next holder; it has become a negotiable instrument.

Indorsement. The nature of indorsement is this. If a bill of exchange, or note, or check, has come into the hands of some man who is transferring it to another, he signs his name across it, commonly on its back. By this act of signing, unless there are added words of qualification, he authorizes its transfer to another who is often specified; if he delivers it, he does transfer it. He also agrees by thus signing his name that he will pay it if the drawer or maker does not do so. His indorsement is a protection to later holders; any earlier indorser is a protection to him. His act of signing is an "indorsement " and he is an indorser." A very common form of indorsement is:

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Pay to the order of Philip Clark
Alexander Winchester

PROMISSORY NOTES

Description. A merchant, manufacturer, or publisher finds that at certain times of the year he must make extensive payments for material or labor, while his sales and the payments for them come at a later time. It is good business policy for him to borrow money from one who has it available, giving his "promissory note " for it, promising a future payment. Nowadays his borrowing is from a bank as a rule. The payment for materials or goods may, however, be directly made by a "note note" to the seller, and in such case the payee of the note may take it to a bank and in effect sell it to them, indorsing it; it may go through several hands as a "negotiable instrument" with a series of indorsements.

Form of Promissory Note. The form of note may be:

$100000 New York,...-Jan. 2, 1917.---....Thirty days....after date I promise to pay to the order of Benjamin Holliday.

One Hundred 10000

Payable at....First National Bank of Boston.

Value received.

Dollars

Hiram Weeks......

or some similar form. Hiram Weeks who executes the note is called the maker and Benjamin Holliday the payee. The time of payment is sometimes "on demand" or on some specific date as "on May 1, 1917."

The use of checks and of promissory notes is widespread, and the use of bills of exchange is also sufficiently important so that the practice and rules of law connected with their use must be adapted to the necessities and convenience of business.

Law Merchant. It is sometimes stated that the law of negotiable instruments follows the "Law Merchant" rather than the Common Law. The distinction is a technical one except to lawyers; in the case of negotiable instruments the customs of business among merchants and the necessities of its convenient conduct formed the basis upon which finally grew up a series of decisions under the Common Law rather than apart from it. These decisions must be looked to in determining what the law is and the same courts pass upon it. It has sometimes been stated that the Law Merchant has been "grafted " upon the Common Law.

Some Distinctions. Promissory notes, or bills of exchange when accepted, are contracts, but of a special kind which the Common Law has treated in a special way, differing from that accorded most contracts. An important point of difference is that no consideration need be expressed in a negotiable instrument. A second is that in the hands of an innocent holder for value, an instrument legally issued is good, even if consideration has failed or other faults exist which would ordinarily render a contract voidable between the parties involved; this will better appear later.

Foreign and Inland. Bills of exchange are foreign or inland. When payable in another State or country from that where drawn, they are foreign; when in the same State or country, inland.

Drafts. What is known as a "draft" is in essence a bill of exchange, and differs from it in that a draft often does not presuppose any other commercial transaction, while the bill of exchange commonly does, often a sale, and the draft usually calls for immediate or prompt payment rather than acceptance. A student at college makes a draft on his father to pay his term bill, and this draft is deposited in the bank with the checks which others have paid in, and the draft is negotiable.

Bank Drafts. Banks are constantly issuing "bank drafts" or orders upon other banks where they have funds. If a depositor wishes to send money to some distant point, or if he travels far from home, he secures a bank draft which will be honored provided only the payee be identified, and where his own check might not be honored through lack of personal credit. Some acquaintance will gladly identify him, but ought not to be asked to indorse his personal check. A bank draft on a New York bank is accepted practically anywhere in the United States. A bank draft on Chicago, San Francisco, or Boston is almost equally good in the neighborhood of such city. Bank drafts are negotiable.

Certificates of Deposit. A depositor in a bank sometimes wants the money to draw interest, and does not care to draw checks against it. He takes a "certificate of deposit " which is substantially the promissory note of the bank. It is commonly assignable and negotiable.

Bank Notes. Bank notes of national banks are not receivable as money for certain purposes; they are not legal tender. They are essentially promissory notes, and are negotiable, and are made payable to bearer so that an indorsement is not necessary. United States gold and silver certificates are likewise not legal tender. Legal tender may be defined as money receivable for all debts. What is legal tender is defined by the Legal Tender Acts, which are United States Statutes.

Travelers' Cheques. People traveling abroad often use "travelers' cheques" of which the American Express Company checks were among the earliest; they are a series of checks against the American Express Company, each for a specified amount. They are negotiable, are signed by the traveler when he gets them, and are indorsed by him, as the payee, when he receives money for them.

Letters of Credit. "Letters of credit " serve a somewhat similar purpose, but are materially different in form and are not negotiable.

Coupon Bonds. Coupon bonds issued by railroads or by large corporations are also negotiable, unless registered so that any transfer must appear on the books of the company; it is not customary to indorse them. They have "coupons" attached to them, each due every half year as a rule, and containing a statement or agreement as to payment. Such coupons are negotiable, and commonly even when the bond is registered, which means registered as to principal. The coupons are seldom indorsed. Registered bonds often, however, have no coupons attached and the interest is then paid by check.

Certificates of Stock. Certificates of stock are assignable, but are simply evidence of rights in a company, and do not call for the payment of money at any time; although assignable, they are not negotiable.

The Negotiable Instruments Law. The law of negotiable instruments is exceptionally well stated and codified in what is called "The Negotiable Instruments Law," which has been adopted with little variation by a large majority of the States. It is given below substantially in full from the New York law. The order of Articles is changed slightly, and a few comments are made, and are distinguishable by the type, a smaller type being used for the law itself. It is unusually well prepared, a fine specimen of Statute Law. Most of what is contained in it was good Common Law in one or another of the States, but there had been appreciable variation in the law as interpreted in the different States which have adopted it.

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