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.

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 agreed upon. Highest rate that may 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.

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 transactions it is to embrace, is a limited guaranty. If no limit of time or of number of transactions is placed therein, it continues until withdrawn by the guarantor. This is called a continuing guaranty.

190. Notice to Guarantors. A guarantor may be entitled to two kinds of notice. He may be entitled to notice of acceptance of the guaranty, and he may be entitled to notice of default of his principal. The first is called notice of acceptance of a guaranty, the second, notice of default of a guaranty. If a person stipulates in his letter of guaranty that he requires notice of acceptance of his guaranty, the creditor must give him such notice to hold him. Without such stipulation he is not, in most jurisdictions, entitled to notice. A addresses the following letter of credit to B:

Cleveland, O., Jan. 4, 1909.

Mr. B.

Give A credit at your store to the amount of $25.00. I will pay you if he does not.

Signed—C.

The letter of guaranty does not require B to notify C of its acceptance. In the Federal Courts, the rule requires notice of acceptance of guaranties. It is sound business practice always to notify a creditor of acceptance of a guaranty. If a letter of guaranty contains a stipulation that the guarantor is to receive notice of default of his principal, such notice must be given, or the guarantor will be discharged to the amount of his damage resulting from failure to receive this notice. In case of guaranties involving the payment of a definite amount at a definite time, for example, in case of guaranty of payment of a promissory note, no notice is necessary on the part of the creditor to the guarantor of the failure of the principal to pay. In other cases it may be stated as a general rule that notice should be given the guarantor of default of his principal. It is safe business policy for a creditor to give notice to a guarantor of default of payment on the part of his principal.

191. Defense of Payment. Suretyship obligations are obligations to answer for the debts or default of another. They may be in the form of a contract of a surety, of a guarantor, or of an indorser. Certain things constitute suretyship defenses. They apply equally to a surety, a guarantor and an indorser. If a principal debtor pays or settles the debt which another promises to pay, the promisor is thereby discharged. Payment by a principal is a complete suretyship defense. For example, A owes B $100.00. C in writing promises to pay A's debt when it is due. A pays B. C is thereby discharged.

193. Defense of Granting Extension of Time to Principal. If a creditor enters into a contract by which the principal is given an extension of time, the promisor is released. This does not mean mere delay in enforcing the collection of the principal debt, nor does it mean leniency of a creditor with his debtor. If, however, a creditor makes a contract based upon a valuable consideration, by which the principal debtor is granted an extension of time within which to pay his debt, the promisor is discharged. For example, if A owes B $1,000.00 on March 1st, and C in writing promises B to pay if A does not, if B does not collect from A on March 1st, but lets the debt run until March 15th or indefinitely, C is not thereby discharged. If, however, B in consideration of A's promise to pay him interest at a certain rate after March 1st, extends the time until April 1st, C is discharged. To discharge the promisor, the agreement with the principal to extend the time of payment must be based upon a valuable consideration, and must be for a definite time.

194. Defense of Fraud and Duress. Fraud practiced by the creditor upon the principal or upon the promisor is a defense to the promisor. For example, if A is indebted to B and C guarantees A's debt, and if B procured the contract with A by fraud, or procured the guaranty from C, by fraud, C can avoid the contract of guaranty by reason of the fraud. If the fraud is practiced by the principal upon the promisor, it is no defense to the promisor as against the creditor. For example, if C guarantees A's debt to B and the guaranty is procured through the fraud of A without B's knowledge or consent, the fraud will not avail C as a defense to an action brought by B upon the guaranty. The same is true of duress. For a fuller explanation of fraud and duress see sections on Fraud and Duress under Contracts.

195. Surety Cannot Compel Creditor to Sue Principal. Unless so provided for by statute, a promisor to a suretyship contract cannot compel a creditor to sue a principal when the debt secured is due, or claim his discharge for failure on the part of the creditor to comply with this request. A few states provide by statute that a promisor may by notice compel a creditor to sue a principal upon a suretyship obligation when due, or be discharged for his failure so to do.

196. Surety Companies. At the present time, corporations are organized for the purpose of entering into suretyship obligations for profit. Bonds of public officials as well as of private individuals, judicial bonds given in appeal of cases at law from one court to a higher court are commonly signed by surety companies. These companies, for an agreed annual consideration called a premium, sign as surety these bonds for responsible individuals. Sureties were once said to be favorites of the law. This was for the reason that individual sureties signed private, official or judicial bonds as a favor to the principal, ordinarily without receiving any compensation therefore. When a liability arose the surety escaped if possible, since it was not his obligation, but another's which he was called upon to pay. The courts favored him and technical defenses were recognized which were not recognized as a defense by persons primarily liable. In the case of surety companies, however, there is no reason for this favoritism, since the surety engages in the contract for a consideration, and not as a favor to anyone. The tendency of the courts is to hold surety companies strictly to the terms of their contracts.

197. Subrogation. By subrogation is meant the substitution of the promisor for the creditor in case the promisor to a suretyship obligation pays his principal's debt. For example, if A signs a guaranty by the terms of which he agrees to pay B's debt to C, when the debt is due if B fails to pay it, and A pays it, A is placed in C's position and may collect the debt from B. Any securities of B that C held for the debt now belong to A. If C has a judgment against B for the debt, A is subrogated to the judgment and may himself enforce it.

198. Indemnity. The law implies a contract on the part of the principal to a suretyship contract to pay the promisor when the latter pays the suretyship obligation. For example, if A guarantees B's debt to C, as soon as A is obliged to pay C, and does pay C, A may sue B on an implied contract of indemnity for the amount he has paid C.

199. Contribution. Contribution is the term applied to the right of one of two or more co-promisors to a suretyship obligation to secure a pro rata share from his co-promisors of the amount he is obliged to pay the creditor on a suretyship contract. For example, if A, B and C guarantee D's debt of $150.00 to E, and when the debt is due, E sues A and collects $150.00 from him, A can sue B and C for $50.00 each. If A pays C only $50.00 he can collect nothing from B and C, since this is only his share of the debt. But if A settles the debt with C for $50.00, he can recover one third the amount from both B and C. A can pay the debt when it is due, without waiting for suit if he so desires, and proceed to collect one third the amount from both B and C.

PERSONAL PROPERTY

200. Personal Property in General. Personal property is the term applied to property other than real estate. It may be either tangible or intangible. Personal property is sometimes divided into chattels real and chattels personal. Chattels real are interests in real estate not amounting to ownership. Real estate mortgages and leases are common examples of chattels real. Chattels personal embrace all personal property other than chattels real. Every thing subject to ownership not connected with the land is included in the classification of chattels personal. Promissory notes, personal apparel, furniture, tools and animals are common examples. Chattels personal are of a tangible, or of an intangible nature. They are mere rights, or they are things which may be handled and used. A promissory note, a contract, or a mortgage is a right as distinguished from a thing in possession. These rights are sometimes called choses in action, while tangible articles of personal property, such as watches, chairs and horses are called choses in possession. The law relating to personal property is discussed at length under the sections on Sales of Personal Property, Pledges, Chattel Mortgages, Carriers and Wills.

201. Acquisition of Title and Transfer of Personal Property. Title to personal property may be acquired in several ways, chief among them being by contract, by possession, by gift, and by operation of law. If A purchases a carriage from B, the transaction is a sale of personal property and A is entitled to possession of the carriage by reason of the contract. Title to the carriage is given to A by contract. Title to some kinds of property is acquired by possession. Title to wild animals is acquired by possession. The same is true of fish. Title to lost property, except as against the owner, is acquired by possession. Title to property is also acquired by voluntary gift on the part of the owner.

If A dies possessed of articles of personal property, the property passes to his personal representative to be turned into money to pay A's debt, or to be distributed in the form of money, or without being sold, to A's descendant designated by law. This is known as acquiring personal property by succession, or by operation of law. Personal property may also be transferred in specie by will.

SALES

202. Sale Defined. A transfer of title of personal property is termed a sale. By title is meant ownership. Mere possession of personal property does not constitute ownership, neither does right to possession constitute ownership. One may lease personal property, and by means of the lease have the right to possession, while the title or ownership is in another. One may find or borrow personal property, obtaining possession while the title or ownership remains in another. The transfer of the title or ownership of personal property as distinguished from the transfer of mere possession or the right of possession, constitutes the subject of Sales. A sale may be defined to be a contract by which the title to personal property is transferred for a consideration in money, or money's worth. This transfer of title to personal property may be entirely independent of the transfer of possession. One may make a sale of personal property by which the purchaser takes the title while the possession remains in the seller, or in some third person.

When, and under what circumstances the title passes is an important question. A sale of personal property ordinarily gives the purchaser the right to immediate possession of the property. The time the title actually passes to the purchaser does not depend upon the time the property is delivered to the purchaser, but upon the intention of the parties to the contract of sale. A sale is a contract requiring all the elements of a simple contract. There must be a meeting of the minds of the contracting parties, a valuable consideration, competency of parties, etc. (See Elements of a Contract, chapter on Contracts.)

203. Sale Distinguished from a Contract to Sell. A sale is a contract by which the title passes to the purchaser at the time the sale is made. A contract to sell is a contract by which the title passes to the purchaser at a future time. A sale is a present transfer of title or ownership to personal property. A contract to sell is an agreement to pass the title or ownership to personal property to another at a future time. The practical distinction is in determining upon whom the loss falls in case the goods are destroyed or injured by fire, or other accident. In case of a sale, title or ownership passes to the purchaser, even though possession remains in the seller. If the goods are lost by fire, without fault of the seller, the purchaser bears the loss. In case of a contract to sell, the title or ownership does not pass to the purchaser until the time for fulfilling the contract has arrived, and until the conditions of the contract are fulfilled. If the goods are lost before the contract is carried out, the loss falls on the seller. For example, A, a farmer, sells ten barrels of apples to B. B examines the apples, selects the ten barrels, pays A the stipulated price, and says he will call for them the following day. Before B calls, the apples are destroyed by fire, without fault of A. B must stand the loss. The title or ownership passed to him when the sale was made. If B calls on A and enters into a contract by the terms of which A agrees to deliver at B's residence ten barrels of apples the following day, at an agreed price, and the apples are destroyed by fire before A delivers them, the loss falls on A. This is a contract to make a sale, not a sale. Title to the apples does not pass to B until they are delivered by A, according to the terms of the agreement.

Parties may agree that title may pass at a certain time, or upon the performance of a certain condition. In this event, title does not pass until the time mentioned arrives, or the condition is fulfilled. In the majority of sales of personal property, the parties do not set forth the terms and conditions fully. In the absence of an express agreement or custom to the contrary, parties are presumed to intend the title or ownership to pass to the purchaser at the time the sale is made.

204. Sale Distinguished from Barter. A sale is an agreement to transfer the title of personal property for a consideration in money, or for something measured by a money standard. An agreement to exchange goods, or an exchange of goods, is a barter, and not a sale. The distinction is technical, but serves some useful purposes. If A, for a consideration of $200.00, purchases a car of cabbage from B in Nashville, to be delivered in Cleveland, June 20th, and the car does not arrive, A may go into the nearest market, and purchase a car of cabbage of the same quality, and collect the difference between the market price and contract price from B. If A is obliged to pay $250.00 for the cabbages, he can collect $50.00 from B. If, on the other hand, A agrees to give B a horse for a car of cabbages, no price having been fixed on the horse or on the cabbages, and B fails, and refuses to carry out the contract, A must sue B on the contract, and collect as damages such amounts as he is able to show he lost by reason of B's failure to carry out the contract.

Salesmen are commonly employed to sell goods. This means to sell for money, and unless they are expressly authorized to barter or exchange goods, attempted exchanges are without authority, and do not bind their principal.

205. Conditional Sales. The term, conditional sale, has come to have a technical meaning. Articles of merchandise, such as sewing machines, cream separators and cash registers are commonly sold under a special contract, by which possession is given the purchaser, and the title by express agreement remains in the seller until the entire purchase price is paid. The purpose of this form of contract is to obtain security for the purchase price of the article sold. In the absence of statutory regulations, if the purchaser does not pay the purchase price at the agreed time, the seller may take possession of the property. It is the custom of sellers using this form of contract to require the purchaser to sign a contract stipulating that the purchase price be represented by promissory notes of the purchaser, payable in installments, and that the title is to remain in the seller until the entire purchase price is paid. If the purchaser defaults in any one of his installments, by the terms of the contract all the remaining installments at once become due. This form of contract worked many hardships. Purchasers were required to make a substantial payment in advance. If they succeeded in paying practically all the installments, but defaulted in one, the seller could take possession of the property, causing the purchaser to lose all he had paid. This form of contract proved so unconscionable in some of its workings that the legislatures of most states have passed statutes requiring conditional sale contracts to be filed with a public official to be enforceable, and do not permit the seller to take possession of property without repaying the purchaser the amount already paid less the actual damage the property has sustained. This damage usually cannot exceed 50% of the original selling price of the property.

206. Sale Distinguished from a Bailment. Possession of personal property is frequently given another, for the purpose of having work performed on it, to be used by another, to secure a debt, or to be protected or preserved without transfer of title. Such a transaction is called a bailment. It is discussed more at length under a separate chapter. A bailment does not constitute a sale, in that there is no transfer of title, or ownership of the personal property, possession of which is given to another. For example, A hires the use of a horse and carriage from B, a liveryman, for two days. A secures possession of the horse and carriage. He has the right to retain possession of them for two days, and has the right to use them for the purpose hired. He cannot sell them, however, nor can he do anything inconsistent with B's ownership. This transaction is a bailment.

207. What May Be the Subject of a Sale. Any article of personal property having a present existence may be sold. It matters not, whether it is a chose in possession, or chose in action. By chose in possession is meant a tangible piece of personal property as distinguished from a mere right. A horse, plow, chair or desk is an example of a chose in possession. A promissory note, a contract or mortgage is an example of chose in action. Either may be the subject of a sale. The distinction between a sale or present transfer of title to personal property, and a contract to make a sale, must be borne in mind. If A sells his horse to B for $100.00, in the absence of any agreement as to delivery the title to the horse passes to B as soon as the contract is made. This transaction is a sale. If A promises to sell his horse to B the second of next month, if B will agree to pay him $100.00 when the horse is delivered the second of next month, and B so agrees, the contract is not a sale, but a contract to make a sale. Articles of personal property, to be made or manufactured, are not the subject of a sale.

Business men commonly make contracts to sell goods in the future which they do not have in stock, but expect to manufacture, or purchase elsewhere. Such contracts are not sales. The title to the goods does not, and cannot pass to the purchaser when the contract is made. They are mere agreements to make sales in the future. They are treated the same as ordinary contracts, not as present sales. If the goods are destroyed before they are completely manufactured, the seller stands the loss, since the title has not passed from him. If a person agrees to sell in the future goods to be manufactured, and fails to deliver the goods specified in the contract, the buyer has the usual remedy. He may purchase the goods in the market nearest the place of delivery at the time of delivery, and sue the seller for the difference between the contract price and the market price. The buyer is not obliged actually to purchase the goods to enable him to bring suit against the seller. He may bring a suit against the seller for the difference between the price he contracted to pay for the goods and the market price at the time and place of delivery. Crops to be grown are not the subject of present sale. Crops planted, but not matured, may be sold. Title to the crops at the present stage of their existence passes to the buyer.

208. Statute of Frauds, or Contracts of Sale Which Must Be in Writing. One section of the English Statute of Frauds applied to sales. This statute was passed in England about 1676. The seventeenth section, which applies to sales of personal property, is as follows:

And be it further enacted by aforesaid authority, that from and after the four and twentieth day of June, no contract for the sale of any goods, wares or merchandise for the price of ten pounds sterling, or upwards, shall be allowed to be good except the buyer shall accept part of the goods so sold, and actually receive the same, or give something in earnest to bind the bargain, or in part payment, or that some note or memorandum in writing of said bargain be made, and signed by the parties to be charged by such contract, or their agent thereunto lawfully authorized.

The states, generally, have a statute modelled after this section of the English statute, and providing that contracts for the sale of personal property, the price of which exceeds fifty dollars, shall not be enforceable unless a memorandum of the contract be made and signed, except there be a delivery of at least a part of the property, or except something be paid by the purchaser to bind the bargain. Some of the states have no statute of frauds containing a provision relating to the price of the goods. In many of the states, the valuation fixed by statute exceeds fifty dollars. Where the statute exists, contracts which are not in writing are not void. They are merely voidable. The parties may voluntarily carry them out if they so choose. The law does not prohibit them, but if one party refuses to recognize the contract, the other party cannot enforce it by an action at law. A portion of the fourth section of the English Statute of Frauds provides that contracts, by their terms not to be performed within one year from the time of the making thereof, must be in writing to be enforceable. The states, generally, have a similar statutory provision. This statute applies to sale of personalty as well as to real estate. If the contract can be performed within one year, it is not within the provisions of the statute.

209. Delivery of Personal Property Sold. In the absence of any express agreement to the contrary, there is an implied agreement, on the part of the seller, to deliver personal property sold, when the purchaser pays the price. By delivery is meant placing the personal property at the disposal of the purchaser. It must be borne in mind that in a contract of sale of personal property, title or ownership passes to the purchaser at the time the sale is made, even though possession remains in the seller. This gives the seller the right to obtain possession of the goods upon paying the price. If the goods are destroyed without fault of the seller after the sale, and before delivery, the loss falls on the buyer. If A offers to sell B his wagon for $100.00, and B accepts, nothing being said about delivery, the title to the wagon passes at once to B. If it is destroyed without fault of A, the loss falls on B, even though B has not paid the price or received possession of the wagon. B is entitled to possession of the wagon when he pays A $100.00. A is not obliged to give B possession of the wagon, even though B is the owner of it, until he receives the price, $100.00.

In the above example there is no stipulation about delivery. The parties make a sale, agreeing upon the price and thing to be sold, nothing being said about the delivery. The law in such cases impliedly requires the seller to deliver when the price is paid, and not until then. In many contracts, however, the time, place, and manner of delivery are stipulated in the contract. Sometimes usage and custom supply these things when the parties do not expressly so stipulate. When a time, place, or manner of delivery by the seller is stipulated in a contract, either by express agreement, or by usage and custom, title to the property usually does not pass to the buyer until the time has elapsed, and until the seller has delivered according to the manner stipulated, or has tendered delivery.

A stipulation in a contract of sale that the seller shall deliver at a particular time or place, or in a particular manner is deemed to show an intention on the part of the parties that title shall not pass until the seller has so delivered. If the seller refuses to accept the goods or pay the price, an offer to deliver by the seller is equivalent to a delivery. The seller, on the other hand, is not obliged to give up possession of the goods until he receives the agreed price. If the seller agrees to give the buyer credit, this rule is not applicable. If no time of delivery is mentioned, delivery must be made within a reasonable time, depending upon the circumstances connected with the particular contract. When delivery is to be made in installments, failure to pay for one installment ordinarily entitles the seller to refuse to deliver the balance, or if the seller refuses, or fails to deliver the first installment, the buyer may refuse to accept subsequent installments. The buyer is not obliged to accept anything except the article ordered. If more or less is tendered him, he is not bound to accept. If he accepts more or less, he is bound to pay the reasonable value of the same. If no place of delivery is mentioned, the presumption is that delivery is to be made at the place where the property is located at the time the sale is made.

The mere fact that delivery is to be made in the future does not prevent title from passing at the time the sale is made. There must be something in addition to the fact of future delivery to delay the passing of the title until the time of delivery. If A purchases an automobile from B, making the selection, delivery to be made the following Thursday, title passes at once to A. If the automobile is destroyed by fire, or injured without B's fault, the loss falls on A. If, however, B is to do anything with the property, or is himself to make delivery, this shows an intention on the part of the parties that title is not to pass until delivery is made.

210. When Title Passes. The question of when title to personal property, the subject of a sale, passes to the purchaser is important in determining upon whom the loss falls, if the property is destroyed, stolen, lost or levied upon by judgment of attaching creditors. Title or ownership to property sold does not depend upon possession. Personal property may be sold, and title or ownership may pass to the purchaser, while the seller still has possession, as well as the right to possession. The general rule is that title or ownership of personal property sold passes to the purchaser at the time the parties to the sale intend it to pass. If their intention is expressed, it governs, and the question is settled. In the great majority of sales, however, the parties do not expressly determine when title shall pass and this must be presumed from the circumstances.

For example, if A offers B $20.00 for a certain harness which is selected, and A accepts the offer, nothing being said about the delivery or payment, or when title or ownership shall pass to A, the law presumes it to be the intention of the parties that title shall pass when B accepts A's offer—and from that time, the harness belongs to A. B, however, has the right to retain possession of the harness until A pays him the purchase price of $20.00. When A offers B the $20.00 at the place where the harness was located when the sale was made, B must give A possession. B is not obliged to deliver at any other place. If, however, A offers B $20.00 for B's harness, which is determined upon and selected, B to deliver same at A's place of business the following evening, this shows an intention on the part of the parties that the title is not to pass to A until B delivers the property to A the following evening. A tender or offer by B to deliver the property to A the following evening, passes title and places the property at A's risk. If, however, delivery is to be made merely in the future, not requiring the seller to take the property to any particular place, the fact that delivery is to be made in the future does not prevent title passing to the purchaser at once.

If A purchases B's harness for $20.00, the harness having been selected, delivery to be made in five days, title passes at once to A.

COOK COUNTY BUILDING, CHICAGO, ILL. Holabird & Roche, Architects, Chicago, Ill.

Building Completed in 1907. Cost, $5,000,000. Length, 380 ft.; Width, 160 ft.; Height, 204 ft. Eleven Stories, with Sub-Basement Connecting with Tunnel System and Electric Railroad Service Underlying Business Portions of City. Walls, Gray Vermont Granite; Spandrel Sections, Green Terra-Cotta. The Corinthian Columns on the Exterior are 94 ft. Long and 9 ft. in Diameter. General Interior Plan is that of Letter E. Building Contains its Own Electric-Light and Steam-Heating Plants. City Hall, Shown at Left, is Practically a Duplicate of the Old County Building Replaced by this New Structure, and will Itself be Replaced by a Similar Building. Photographed June, 1907, 17 Months after Excavation was Started.

A is obliged to offer B $20.00 at the expiration of five days, and B must give possession to A. If the article sold is to be prepared for delivery, or any work is to be performed on it by the seller before delivery, title does not pass until this work has been completed. If the goods are to be weighed or measured to determine the quantity or price, title does not pass to the purchaser until this has been done. Probably, if the goods are determined upon, and the entire mass is sold and delivered to the seller who is to weigh or measure it to determine the quantity only, the title passes upon delivery.

If the contract, sale provides that goods are to be delivered to a carrier, delivery to the carrier passes title to the purchaser. Delivery to the carrier must be made so as to protect the interests and rights of the purchaser. The goods must be properly packed, and the proper kind of a bill of lading taken.

If goods are sold upon approval, or upon trial, they must be approved or tried before title passes.

If a portion of goods in mass or bulk is sold and the mass or bulk contains different qualities, the portion purchased must be separated and selected before the title passes. If a portion of goods in bulk is purchased, the bulk being of the same quality, separation of the portion sold is sufficient to pass title. Some courts even hold that separation is not necessary to pass title, if the bulk is of the same quality. Title to goods to be manufactured does not pass until the goods are manufactured and tendered.

211. When Payment of Price Must Be Made. Parties to a contract of sale may expressly agree upon a time of payment of the article sold. In this event, the time agreed upon prevails. In the absence of an agreed time of payment, the law presumes that payment is to be made at the time and place of delivery. The seller may retain possession of goods sold, until he receives payment of the agreed price, even though title has passed to the purchaser. If the sale is made on credit, the purchaser cannot be required to pay until the time for which he was to be given credit has expired. In the absence of an agreed time for payment, payment must be made at the time of delivery of the goods.

If the seller reserves any control over the goods, title remains in him. For example, if he is to ship the goods to another, and if he takes the bill of lading in his own name instead of the name of the purchaser, title remains in the seller.

212. Effect of Fraud Upon a Contract of Sale. Fraud has been defined by a prominent author to be "A false representation of facts, made with a knowledge of its falsehood, or recklessly, without belief in its truth, with the intention that it should be acted upon by the complaining party, and actually inducing him to act upon it." If a party innocently makes a representation, even though it proves to be false, the representation is not fraudulent unless the party making the representation should have known, or could easily have discovered, its falsity.

If A endeavors to buy goods from B, and tells B that he is worth $5,000.00, when in fact he is worth nothing, and B relying upon A's statement, sells the goods to A, B is entitled to rescind the contract by reason of the fraud. He may sue and recover the price of the goods, or he may retake the goods from the buyer. (See Rescission under chapter on Contracts.) If the goods have been sold to a third party who purchases for value and without notice of the fraud, the original seller cannot take the goods from him. A sale procured through fraud is voidable, and not void. The seller may avoid the sale if he chooses. That is, title vests in the purchaser subject to being retaken by the seller, if he chooses, when he discovers the fraud. If a third person innocently purchases the goods before the original seller rescinds the contract, the last purchaser's title cannot be disturbed. The seller may permit the purchaser to keep the goods, and bring an action for damages based upon deceit.