Studies in Civics

by J. T. McCleary

But this liability to have to pay another person than the one named, cannot be imposed upon the maker or drawer without his consent. This he gives by inserting after the name of the payee the words "or order," or the words "or bearer." In the latter case, whoever holds the paper when it becomes due can collect upon it. In case the former words are used, the paper can be transferred only by indorsement, of which more anon.

A very important characteristic of negotiability is that it enables a person to grant to another rights which he may not himself possess. To illustrate: As between the maker and the payee, a note is a contract, and is binding only if it has all the requisites of a binding contract. Therefore, if there was no consideration, or if the note was obtained by fraud or by intimidation, the payee, knowing these facts, has no right to collect upon the note, and he could not by law compel payment. But with a third party it is different. He sees only the note, and may not— presumably does not—know anything else about the contract. To compel him before buying the note to learn all the details of its history, might be embarrassing to the parties, even where everything is all right, and would certainly delay, perhaps materially, the transfer. Therefore, to enable people to keep their business to themselves, and to facilitate transfers of commercial paper, it has seemed best not to require this investigation. The law presumes that when a person makes a transferable note, he has done so deliberately; and if loss ensues, it says that he must bear it rather than the innocent purchaser of his note.

Conditions of Negotiability.—But this peculiar protection is given, be it observed, only to an innocent purchaser. If in good faith, in the regular course of business, a person comes into possession of commercial paper, negotiable in form, not yet mature, and for which he has given a reasonable consideration, he can collect on it. On the other hand, if he has found the paper or stolen it, or if he has bought it under circumstances calculated to raise a suspicion as to right of the seller, he should not have, and will not by law receive, this privilege. Thus if a man is offered commercial paper of perfectly responsible parties at one-third its value, it would be reasonable to suppose that the person offering it had found or stolen it, and the buyer would obtain only the rights of the person from whom he bought. Or if a note past due is offered for sale, the presumption is that it is paid or that it is for some reason uncollectable, and the purchaser would buy at his peril. In other words, if there is anything on the face of the paper or in the circumstances of the case to warn the purchaser, he buys at his own risk, and secures only such rights as the vendor has.

Transfer.—Negotiable paper with the words "or bearer" is transferable by delivery alone. If made payable to some person "or order," it is transferable only by his indorsement. An "indorsement in full" consists of the signature of the payee and his order that the money be paid to a specified person. An "indorsement in blank" consists simply of the signature of the payee. The effect of the latter mode of indorsing is to make the paper payable to bearer.

Responsibility of Maker.—A note being a contract, the maker of one is responsible to the payee, as has been said, only if all the requisites of a binding contract are present. If the note is negotiable in form, he is responsible to the innocent purchaser of it.

Responsibility of Drawee.—The person drawn upon may know nothing of the draft. He cannot be made a party to a contract without his knowledge and consent. That he may have knowledge of the draft, it must be presented to him. If upon seeing it he is willing to assume the responsibility of paying it when due, he signifies his willingness by writing across the face of the draft the word "accepted," with the date of presentation and his name. The draft thereby becomes his unconditional promise, and he becomes the principal debtor, occupying the position of a maker of a note.

Responsibility of Indorser.—When a person endorses any commercial paper, he not only expresses thereby his consent to the transfer of it, but he also enters into a conditional contract with each person who may afterward come into possession of the paper, whereby he becomes responsible for its payment, if the principal debtor fails to meet his obligation. To fix responsibility upon an indorser, payment must be demanded of the principal debtor on the very day when the obligation matures, and if payment is not made notice of the fact must be sent to the indorser before the end of the following day.

Responsibility of Drawer.—Between the drawer and the payee a draft is a conditional contract, whereby the former impliedly agrees to pay the draft if the person drawn upon does not. His obligation is that of a surety or first indorser. To fix responsibility upon the drawer, the holder of the draft must promptly present it for acceptance to the person drawn upon; then, if it is not accepted, he must immediately notify the drawer.

Forged Paper.—Forgery is the fraudulent making or altering of a written instrument. One whose name is forged cannot be made responsible, since the act is not his. And since money paid under a mistake must be refunded, a person who, deceived by the skill of the forger, should pay the seeming obligation, would be entitled to get his money back.

But every person is bound to use reasonable effort to prevent forgery. Thus, if a merchant writes out a note all but the amount, and authorizes a clerk to put that in at some other time, and the clerk inserts a larger sum, any innocent purchaser can compel the merchant to pay the full amount. In some states it is held that a person who leaves space in an obligation wherein the amount can readily be raised, is bound to stand the loss caused by his negligence.