THE LAW OF COMMERCIAL PAPER

(PART 1)

INTRODUCTION

GENERAL REMARKS

1. In the business world are used certain instruments, all embraced under the general term of commercial paper. Some of these are strictly negotiable instruments, others have the attribute of negotiability in a limited sense, and others are non-negotiable; all, with the exception of those under seal, such as bonds, are classified as simple contracts. Designated as negotiable instruments are bills of exchange, promissory notes, and checks, and, in some respects, they (especially bills of exchange) play the part of money in business affairs. The primary purpose of negotiability is to impart to an instrument the essential characteristics of a circulating medium. It follows that it is not the only purpose of a bill of exchange, for instance, to serve the operations of commerce; it serves the further purpose of increasing the money circulation and enlarging the nominal capital in trade circles. Its negotiability gives the instrument many of the peculiarities of money, so that it becomes a part of the commercial currency of the world. Passing from hand to hand by the simple act of indorsement and delivery, it is given and received as a representative of value, and the more hands it passes through the more persons there are who guarantee its payment, adding a credit to it equal to money in the market.

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THE LAW MERCHANT

2. The law merchant is the body of commercial usages and rules recognized by civilized nations as regulating the rights of persons engaged in trade. Everywhere the courts regard this law, and the decisions in cases of dispute are based on it, every general usage once incorporated into a judicial decision becoming part of the law. The various dealings by means of commercial paper are subject to, and regulated by, the law merchant, applying not only to the three most convenient and common instruments, that is, bills, notes, and checks, but also to the other evidences of indebtedness named herein as commercial paper.

By that law, the peculiar instruments that are popularly classed as commercial paper are divided into negotiable and non-negotiable instruments. Those intended for circulating mediums are negotiable, while others are merely assignable as ordinary choses in action - evidences of indebtedness being devoid of the quality of conveying greater rights than the assignor or transferrer possesses. Assignability pertains to simple contracts generally, and negotiability is the attribute of a special class of instruments. To assign an instrument bestows on the assignee a property, or equity, in it. Negotiating an instrument passes the title to it and also gives the transferee, or indorsee, the right of action to recover on it.'

ENGLISH AND AMERICAN CODIFICATION

3. The great need of uniformity of the laws governing negotiable instruments was very manifest in England previous to the year 1882, and until about five years ago was vexatiously evident in the United States. By the Bills of Exchange Act, 1882, in England, which was the first enactment codifying any branch of the common law in that country, nothing more was attempted than a codification of the existing law. It resulted in placing the principles that govern negotiable instruments in a form most convenient

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1 See subtitles Negotiation of Instruments, Assignability Distinguished, infra.

and advantageous to the mercantile community, not to mention the great service bestowed upon the bench and bar, by placing at their disposal authoritative statements of the law, which before had been disputed points, over which much difference of opinion was constantly arising. The act has been adopted, with slight modifications, by Canada (1890) and by New Zealand, Victoria, New South Wales, South Australia, Queensland, and Tasmania.

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It was claimed for this act, by its draftsman, after nearly a decade of its operation, "that it is a great convenience" to merchants and bankers "to have the whole of the general principles of the law of bills, notes, and checks contained in a single act of one hundred sections," and "that it must also be an advantage to foreigners who have English bill transactions to have an authoritative statement of the English law on the subject in an accessible form.' This success, and the fact that, since its operation, there has been comparatively very little litigation over the English act, suggested to the bar of the United States the advisability of having similar enactments, and there are now negotiable instruments laws in operation in many of the United States, modeled largely on the English act, and, therefore, differing only minutely and in unimportant features from each other. These states are Connecticut, Colorado, Florida, Maryland, Massachusetts, New York, North Carolina, North Dakota, Oregon; Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, Washington, Wisconsin, and the District of Columbia.

Lord Mansfield's forceful adaptation of Cicero, in remarking that "the law respecting negotiable instruments may be declared to be in a great measure, not the law of a single country only, but of the commercial world," had its echo in the rule laid down by Lord Blackburn, concerning a check, that "there are in some cases differences and peculiarities

2 Chal. Dig. Eng. B. of E. Act (Introd. 3d Ed.), p. 47.

3 16 Pet. (U. S.) 18 (1842), citing 2 Burr. (Eng.) 883, 887 (1759). "There will not be one law at Rome, another at Athens; one law now, another hereafter; but one eternal and immutable law shall bind together all nations throughout all time." Cicero Frag. de Repub. lib. 3, c. 22; 3 Kent's Comm. 1.

which by the municipal law of each country are grafted upon it, and which do not affect other countries; but the general rules of the law merchant are the same in all countries.”

The provisions of the English Bills of Exchange Act, 1882, relating to bills, apply, with necessary modifications, to promissory notes, except the provisions, as to bills, concerning presentment for acceptance, acceptance, acceptance supraprotest, and bills in a set. In applying these provisions, the maker of a note is deemed to correspond with the acceptor of a bill, and the first indorser of a note is deemed to correspond with the drawer of an accepted bill payable to drawer's order."

The provisions of the negotiable instruments laws, in states that have adopted them, apply to all negotiable instruments, the provisions which apply definitively to bills of exchange being accorded separate consideration in the statutes; cases not provided for therein are governed by the rules of the law merchant. We have cited copiously from these statutes for the obvious reason that they encompass in systematic form the established principles of the law of negotiable instruments as embraced in decided

cases.

DEFINITE SCOPE OF THIS TITLE

4. Commercial paper, in a more restricted sense, comprises negotiable instruments for the payment of money, given in the course of business. In transacting business, a knowledge of the peculiar mercantile character of these instruments and the general rules or principles of law relating to them is necessary. It is, therefore, the purpose to treat in instructive detail of the employment of commercial paper in such simple and concise manner that every feature may be plainly set forth from the making to the honoring, or paying, of a bill, note, or other instrument, and in the event of the dishonoring, or non-payment, thereof, that the

49 App. Cas. (Eng.) 105 (1883).

5 Eng. B. of E. Act, Sec. 89; 2 Burr.

(Eng.) 678 (1758).