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Principles Of Business Law - BOOK III CHAPTER I

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







BOOK III
NEGOTIABLE INSTRUMENTS

CHAPTER I

INTRODUCTION TO THE LAW OF NEGOTIABLE
INSTRUMENTS

Sec. 1. Definition of the term "negotiable." The commercial
world has for many years used the term "negotiable" as an adjective
describing a certain type of written contract designed as a vehicle
to represent credit. The term "negotiable" is of Latin origin. It
is derived from the Latin word "negotiatus," consisting of the fol-
lowing prefix and root "neg," meaning "not" or negation, plus the
root "otium," meaning leisure making the combination not-leisure
or non-leisure, plus the suffix "able," meaning capable of. The idea
as expressed by the Latin words was easily applicable to business.
It was further developed to mean the capacity of certain kinds of
paper to pass like money, from person to person, and was soon used
as a substitute for a medium of exchange.

Sec. 2. History. Just when this usage was first adopted can-
not be definitely determined. In Greek history, we find Isocrates,
about 40 B. c., relating an incident of a corn merchant, who came
to Athens with cargoes, giving an order upon a banker in a town on
the Black Sea with whom he had credit. And there are also refer-
ences to the use of what may be termed "bills of exchange" during
the time of Cicero. At the end of the twelfth century, this method
of extending credit was used quite extensively among the merchants
of Italy.

The use of such paper, as of many other things, arose out of ne-
cessity. The inconvenience and lack of safety in the transportation
of coins and metal as money necessarily led to the extensive use of
paper, which transferred credit rather than the physical money used
as a medium of exchange.

The paper was most extensively used in foreign trade and there-
fore derived the name bills of exchange. The idea of using paper
for this purpose was soon introduced into France and then into
England. An examination of the very early English law reports,
however, will not disclose any reference to commercial paper. This
lack of reference is due to the fact that the common-law courts of
the early days did not entertain disputes involving business trans-
actions.

All disputes between merchants were adjudicated in special
courts set up by the merchants themselves. The decisions were
reached after an application of the usage and customs of the mer-
chants. Out of this system arose a very definite form of what is
known as the "lex mercatores," or law merchant. The greater part
of commercial activity in England was conducted at great fairs, to
which all merchants came, both foreign and local, to display their
wares. At each of these fairs a court sat to adjust differences be-
tween buyers and sellers. The very nature of the situation de-
manded speedy and permanent termination of the disputes. These
special mercantile courts were called the Courts of Piepoudres
(pieds poudres), so called because justice was administered as the
dust still fell from the litigants' feet. These courts were later
created by statute, and continued as separate bodies until about
1756. The King's Court by this time, being jealous of the adminis-
tration of justice by others, through royal prerogative gradually
won its way and absorbed the merchants' courts. However, in de-
ciding commercial cases, the King's Court applied the law mer-
chant. When determining suits between merchants, or when a
merchant was a party to the suit, before the court would recognize
the law merchant in such cases, the party pleading such custom and
usage was under a duty to show himself to be a merchant. This
rule prevailed until about two hundred years ago.

The absorption of these merchants' courts by the King's Courts
over a period of thirty years, under Lord Mansfield, wove the law
merchant into and made it part of the common law. The practice
of permitting the proof of custom and usage of the merchants in the
common-law courts made possible the development of separate
rules which became established rules of law. The union of these
mercantile customs with the legal system already operating resulted
in the formation and further development of the law merchant by
judicial action.

Until 1882 in England and in all of the United States except
California, the law merchant was to be found largely in the reports
of judicial decisions, where previous usage and custom were inter-
preted and applied according to the prevailing and established
usage of the particular community. This situation led to varying
interpretations, much confusion, and a lack of uniformity. In
order to find the law, it was necessary to examine many decisions,
and the result of such search would often be futile, owing to the
many conflicts and contradictions of important rules.

Consequently, in England, in 1882, Parliament enacted what
is known as the Bills of Exchange Act. The Act codified in a very
complete manner the law as found in the decisions, and harmonized,
as far as possible, the existing rules in a very complete and compre-
hensive manner.

In 1895, in the United States, under the leadership of the Amer-
lean Bar Association and the American Bankers Association, a com-
mission was appointed for the purpose of revising and codifying the
law merchant in the United States. This committee, taking the
English Bills of Exchange Act as a model, derived, with modifica-
tions, our present Uniform Negotiable Instruments Law. This act
was completed in 1896, and was submitted to the legislatures of the
various states with recommendations for adoption. The act has
now been adopted, with some changes best suited to the state, by
every state.

In the text matter following, the quotations of the Negotiable
Instruments Law are from the Uniform Negotiable Instruments
Act as originally adopted. In some instances, however, reference
is made to changes adopted by some of the different states.

Negotiable Instruments Distinguished from Other Claims

for Money

Sec. 3. Claims for money. The right that one person may
have against another for money may arise out of many different
situations. It may arise out of a contract for the sale of goods, for
services rendered, or for injuries received. The evidences of such
claims may be simple contracts, either written or oral. Conse-
quently, the words and language used in simple contracts and other
claims for money lack uniformity and vary with each particular
circumstance. However, claims for money evidenced by negotiable
instruments must comply, with reference to the use of words and
language, with certain rules of uniformity prescribed by the law.
It is not necessary that the same words be used in the same place
in each instrument, but it is necessary that the same meaning be
expressed. A discussion of the language which must appear upon
the face of an instrument to give it the character of negotiability
will be taken up in the following chapter.

Another distinguishing feature between negotiable instruments
and other claims for money is the method of transferring title from
one person to another. Nonnegotiable contract rights are trans-
ferred by assignment, whereas negotiable contract rights are trans-
ferred by negotiation.

Sec. 4. Difference between negotiation and assignment. In
the book on Contracts, we learned that contract rights were trans-
ferable by a legal process called assignment. Suppose A owed B
$100 for goods sold by B to A, or for services rendered by B for A.
B has a right that A pay him $100. A is under duty to B to pay
this $100. This type of contract right owed by A is called a chose
in action. Under the early common law, this type of right for
money due was not transferable. Under the modern rule, this right



142 NEGOTIABLE INSTRUMENTS

is transferable by the process of assignment. B may sell to C his
right to collect $100 from A. Let us suppose that A had a counter-
claim against B for $35 for any number of reasons, either that the
goods sold were not as required by contract or that the contract was
induced by fraud on the part of B. If so, then the right that C
purchased from B would be subject to A's defense of fraud, or fail-
ure of consideration. C, the assignee, would secure no better right
against A than the original right held by B, the assignor.

In the example given above, let the situation be changed, so that
the evidence of the debt is not a simple contract for money, but a
negotiable promissory note given by A to B. Under the law mer-
chant, the right that B now has against A is superior to the right
B had as evidenced by the simple contract right. The distinguish-
ing feature of the latter is its unique capacity of transferability. B
sells the note to C. Assuming that C is a purchaser in good faith
before maturity, C will get a better title as purchaser of the nego-
tiable paper than as purchaser of the simple contract right; that is,
C, as holder of a right evidenced by negotiable paper, takes title free
from defenses that are available against the original party to the
paper. This feature is the very essence of negotiability. Business
convenience requires this characteristic by reason of the very pur-
pose for which the paper is created. A businessman would not be
willing to take a note, a check, or a bill of exchange from the payee
if he incurred all the risk of an assignee of an ordinary contract
right. Negotiability eliminates all personal defenses between the
original parties, thus making negotiable paper free to pass from
person to person as money, fulfilling the purpose for which it was
created.

Sec. 5. Negotiability of instruments other than bills and notes.
In the preceding section it is stated that written claims for
money, in order to have the attributes of negotiability, must satisfy
certain formal requisites as to certainty and uniformity prescribed
by the Negotiable Instruments Law.

The Negotiable Instruments Law defines only three kinds of
negotiable instruments: promissory notes, drafts, and checks. Sec-
tion 126 states: "A bill of exchange (draft) is an unconditional
order in writing addressed by one person to another signed by the
person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain
in money to order or bearer/ 7

Section 184 states: "A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by
one person to another, signed by the maker, engaging to pay on
demand or at a fixed or determinable future time a sum certain in



LAW OF NEGOTIABLE INSTRUMENTS 143

money to order or bearer. When the note is drawn to the maker's
own order, it is not complete until indorsed by him/' Section 185
defines a check as "a bill of exchange drawn on a bank payable on
demand."

Three problems are raised by reason of the codification of the
Negotiable Instruments Law. Does codification mean that other
types of credit instruments, generally accepted in commerce and
shown by the usage of business to have the characteristics of ne-
gotiability, are nonnegotiable unless such instruments strictly com-
ply with the terms of the Act? Should the language of the Ne-
gotiable Instruments Law be broadly interpreted in order to cover
new instruments developed in commerce which in fact pass freely
in trade? Should the Negotiable Instruments Law be strictly
limited in its application to bills of exchange, promissory notes, and
checks, leaving other instruments, by custom and usage or legisla-
tive enactment, to acquire their own particular attributes of negoti-
ability?

Section 196 of the Negotiable Instruments Law states, "in any
case not provided for in this Act, rules of the law merchant shall
govern."

The following instruments are illustrative of types of credit paper
which are not defined by the Negotiable Instruments Law, but
which carry some characteristics of negotiability: corporate bonds
containing language referring to trust deeds, registered bonds, mu-
nicipal warrants, interim certificates, interest coupons, trading
stamps, conditional sale contracts, insurance policies, warehouse
receipts, stock certificates, and bills of lading. If, however, negoti-
able character is measured by the strict language of the Negotiable
Instruments Law, these instruments must be held nonnegotiable.
To meet business needs, uniform acts have been adopted specifically
giving negotiable character to such instruments as bills of lading,
warehouse receipts, and certificates of stock. Where the legisla-
tures have not enacted statutes giving negotiable attributes to
instruments other than bills of exchange, promissory notes, and
checks, negotiability has been given to such instruments by court
decisions. In some jurisdictions, bonds of a joint stock association
otherwise negotiable in form but nonnegotiable under the Nego-
tiable Instruments Law because of a provision making them pay-
able out of the assets of a firm assigned to a trustee as security,
have been held negotiable. However, interim certificates issued
by bankers stating that the bearer of such interim certificates is
entitled to foreign bonds on surrender of the certificates are held
nonnegotiable under the Negotiable Instruments Law because they
do not contain an unconditional order or promise to pay a sum cer-



144 NEGOTIABLE INSTRUMENTS

tain in money. 1 By statute, however, such instruments now may
be given negotiable character. 2

Review Questions and Problems

1. What is the purpose of a negotiable instrument?

2. Were the early cases relating to negotiable instruments decided in
the common-law courts? Where must reference now be made to deter-
mine the law of negotiable instruments?

3. How do negotiable instruments differ from other claims for money?

4. Which transfers the greater rights, an assignment or a negotiation?
What is the difference between the two? Does this affect the transfer-
ability of claims?

5. Discuss the methods by which negotiable characteristics are given
to new kinds of commercial paper not defined in the Negotiable Instru-
ments Law.




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