COMMENTS AND CRITICISMS UPON THE INSTRUMENTS LAW.

NEGOTIABLE

THE NEGOTIABLE INSTRUMENTS LAW.2

BY JAMES BARR AMES.

HOWEVER much lawyers may differ as to the expediency of the attempt to secure by codification uniformity in American commercial law, all will agree that the commissioners for promoting uniformity of legislation in the United States could not have selected a better subject for the beginning of the experiment than that of negotiable paper. Even the opponents of codification must admit that the Negotiable Instruments Law, framed and recommended by the commissioners in 1896, and already enacted in fifteen states,3 contains a number of desirable changes in the law of Bills and Notes, and will, when generally adopted, settle definitively several questions which have given rise to much litigation and conflict of decisions. On the other hand, the friends of codification who chance to read the following pages may become convinced that there are serious defects of commission and omission in the new code. Codification is with us a new art, and it is not surprising, although it is unfortunate, that the commissioners did not realize, as continental codifiers realize, the extreme importance of the widest possible publication of the proposed code, and the necessity of abundant criticism, especially of public criticism, from practising lawyers and judges, professors and writers, merchants and bankers. It is far from an agreeable task to offer criticisms at this late hour. Nor would the following criticisms be offered now but for the writer's conviction that

1 The following articles are reprinted from 14 Harvard Law Review 241; 10 Yale Law Journal 84; 14 Harvard Law Review 442; 15 Harvard Law Review 26; 16 Harvard Law Review 255, and 41 American Law Register, N. S. 437, 499, 561.

2 Reprinted from 14 Harvard Law Review 241.

• Colorado, Connecticut, Florida, Maryland, Massachusetts, New York, North Carolina, North Dakota, Oregon, Rhode Island, Tennessee, Utah, Virginia, Washington, Wisconsin, and also the District of Columbia.

The writer, although interested in the subject of Bills and Notes both as an author and as a teacher, saw the Negotiable Instruments Law for the first time after its enactment by four state legislatures.

the Negotiable Instruments Law ought not to be enacted by any state which has not yet acted in the matter, unless changed in important respects, and that those states in which it has been adopted should remedy its defects by supplemental legislation.1 The plan of making the law of Bills and Notes uniform throughout the United States has found favor in so many states that the enterprise ought to be carried through on the basis of the commissioners' proposed code. But in the interest of future codification, as well as for the sake of the law itself, this new legislation should be in such form as to stand the fire of adverse, if also fair-minded, critics.

Before considering the defects in the new code attention should be called to its merits. These are of two kinds: first, salutary changes in the law; and, secondly, the settlement of controverted questions.

Under the new law a negotiable instrument may be made payable to one or more of several payees, or to the holder of an office for the time being. These provisions give effect to the tenor of the instrument and nullify certain unfortunate decisions to the contrary in which the judges failed to grasp the mercantile conception of such instruments. Another judicial error is corrected by the provision that an instrument, though indorsed in blank, ceases to be negotiable by delivery whenever the last indorsement thereon is a special indorsement.5 Section 166 enacts that the maturity of an acceptance for honor of a bill payable after sight shall be calculated from the date of the noting for nonacceptance, and not, as was erroneously decided in Williams v. Germaine, from the date of the acceptance for honor. Since an acceptor, by section 62, engages to pay the bill "according to the tenor of his acceptance," he must pay to the innocent payee or subsequent holder the amount called for by the bill at the time he accepted, even though larger than the original amount ordered

1 For several of the criticisms here suggested the writer gratefully acknowledges his indebtedness to his colleagues, Professor Williston and Professor Brannan, who successively have had charge of the subject of Bills and Notes in the Harvard Law School during the last ten years, and he takes satisfaction in adding that these experts in the law of Negotiable Paper concur with the views expressed in this paper.

2 N.-I. L. sec. 8-5. The references follow the numbering of the commissioners' draft. N. I. L. sec. 8-6.

♦ Blanckenhagen v. Blundell, 2 B. & Al. 417; Cowie v. Stirling, 6 E. & B. 333. N. I. L. sec. 9-5, nullifying the doctrine first advanced by Lord Kenyon in Smith v. Clarke, Peake, 225; 1 Esp. 180, s. c. The language of sec. 9-5 is not happily chosen for the reasons pointed out, infra, p. 46. 67 B. & C. 468.

by the drawer. A bank certifying a raised check is in the same case, since section 187 assimilates a certification to an acceptance. If the acceptor or certifying bank must honor his acceptance or certification in such a case, a fortiori a drawee who pays a raised bill or check, without acceptance or certification, should not recover the money paid from an innocent holder. These results are at variance with numerous American decisions, but they are changes for the better, and, so far as adopted, bring the law of this country into harmony with the law of nearly, if not indeed all, of the European states.1

3

Other judicious changes for the better, but not involving the correction of judicial mistakes, are the following: The abolition of days of grace; 2 the assimilation of sight and demand paper; the provisions that the negotiability of the instrument shall not be affected by its bearing a seal; that a payor may disregard a condition in an indorsement; and that the holder in due course may enforce payment of an altered instrument according to its original tenor.

8

Especially to be commended are those sections of the new code which settle, and in the right way, certain questions which have been a prolific source of litigation and antagonistic decisions. Nothing but good can come from enacting that the negotiability of an instrument is not destroyed by a clause providing for the payment of exchange, or the costs of collection, or an attorney's fee in case of default, or by a clause giving a power to confess judgment. The same is true of the provisions that an antecedent debt constitutes value; 10 that the holder in due course, although he paid less, may enforce payment of the face value from all parties to the instrument; 11 and that a check is not an assignment of the drawer's claim upon the bank.12 The rules regulating the liability of the anomalous indorser 13 are admirable, but for one slight omission which may be easily remedied, as will be shown on a subsequent page.14 The doctrine of section 16, that one who has signed a negotiable instrument complete on its face is liable thereon to a holder in due course, although it was never delivered by him, but lost by him, or stolen from him, or even from some one else after his death, is somewhat startling

at first. But it should commend itself on reflection. It has been adopted, after much consideration, in Germany.

The new code, it is believed, would have gained greatly in simplicity, arrangement, and expression, if its framers had grasped firmly the principle that the formal right of a claimant upon a bill or note depends solely upon whether he is the holder by the tenor of the instrument, and had also given due emphasis to the distinction between real and personal or equitable defences. It is, however, too late to recast the code. The critic must content himself with pointing out formal or substantial defects in particular sections.

If it be said that it is not worth while to make merely formal changes in sections that have been already enacted in sixteen jurisdictions, it may be answered that clearness, conciseness, and the right way of putting things are intrinsically desirable, and that improvements of this kind do not involve any sacrifice, as to the substantive law, of the principle of uniformity.

It is from this point of view that the following suggestions are made as to matters of form.

SECTION 3-2 provides that an order or promise is not rendered conditional by the addition of "A statement of the transaction which gives rise to the instrument." What do these words mean? Do they cover the case of a note coupled with the words, "Given as collateral security for A's debt to the payee"? Such an interpretation, although a literal one, would be deplorable, and would nullify several decisions.1 Mr. Crawford, the draftsman of the code, suggests that this sub-section applies to the case of notes containing a statement that it is given for a chattel which is to be the property of the owner of the note until the note is paid.2 Such a note is deemed negotiable in several states,3 and justly, being in effect nothing more than a note secured by a chattel mortgage. But it is highly improbable that the courts of Massachusetts, Kansas, and Minnesota, which have taken the opposite view, will treat this sub-section as changing the law of those

1 Robbins v. May, 11 A. & E. 213; Haskell v. Lambert, 16 Gray, 592; Costelo v. Crowell, 127 Mass. 293; 134 Mass. 280, 285; American Bank v. Sprague, 14 R. I. Hall v. Merrick, 40 Up. Can. Q. B. 566.

410;

2 Crawford, An. N. I. L. 12.

Chicago Co. v. Merch. Bank, 136 U. S. 268; Howard v. Simpkins, 69 Ga. 773; Choate v. Stevens, 116 Mich. 28; Heard v. Dubuque Bank, 8 Neb. 10; Mott v. Havana Bank, 22 Hun, 354; Kimball v. Mellon, 80 Wis. 133.

Sloan v. McCarty, 134 Mass. 245; South Bend Co. v. Paddock, 37 Kan. 510; Deering v. Thorn, 29 Minn. 120.

states. One New York judge has already ruled that the Negotiable Instruments Law has no application to such a note.1 Many cases have decided that the statement of a consideration in a note is not notice to a transferee of its failure.2 But the doctrine of these cases, which are doubtless the only ones which this sub-section can fairly be made to cover, is a rule as to bona fides, and has nothing to do with conditions. The sub-section in question should be stricken from the act. If interpreted literally, it is mischievous. If not taken literally, it is obscure, inartistic, and useless.

SECTION 36-2 and 3. An indorsement is restrictive which either (1) "constitutes the indorsee the agent of the indorser, or (2) vests the title in the indorsee in trust for or to the use of some other person." Since the so-called "agent of the indorser has, under section 37, the right to sue in his own name on the instrument, but for the benefit of the indorser, he is in truth a trustee, and not a mere agent. The sub-sections 2 and 3 should therefore be consolidated as follows: "An indorsement is restrictive which vests the title in the indorsee in trust for the indorser or some third person."

SECTION 137 is to the effect that a drawee who destroys a bill delivered to him for acceptance, or refuses to return it within the usual time, shall be deemed to have accepted it. A refusal to accept is an acceptance! Such a perversion of language would be strange enough anywhere, but in a deliberately framed code is well-nigh inexplicable. As a consequence of this fantastic provision the holder may bring concurrent actions: against the drawee because of his fictitious acceptance, and against the drawer because of the drawee's non-acceptance. Nor is anything gained by this fiction, of which there is no trace in the English act. the demands of justice are met by holding the misconducting drawee liable for a conversion of the bill. The section should be cancelled as worse than useless.

All

The following sections of the code seem to the writer to be defective, not merely in point of form, but in substance.

SECTION 9-3 declares an instrument to be payable to bearer, although it is "payable to the order of a fictitious or non-existing person." Such a rule ignores the tenor of the instrument; nor is

1 Third Bank v. Spring, 28 N. Y. Misc. Rep. 9.

21 Ames, Cases on Bills and Notes, 775, n. I.

* Under the New York statute, 2 Rev. Stat. (6th ed.) 1161, from which section 137 is copied, the holder, to recover, must prove a conversion of the bill. Matteson v. Moulton, 79 N. Y. 627.