Section 24. "Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value."
Section 28. "Absence or failure of consideration is a matter of defence as against a person not a holder in due course."
So, we see, that in the general law of contracts, consideration is absolutely essential to a binding contract but in the law of negotiable paper, consideration is not absolutely essential except when you are dealing with the immediate parties. An illustration will explain this. I wish to make you a present on your next birthday which is January 12. To-day, September 15, I give you my promissory note due on your birthday for $50. This is to be my present to you. You take the note and then hold it until your birthday arrives and I do not pay it. Then you sue me on the note. You cannot recover anything because there was no consideration for the note and the absence of consideration is a perfectly good defence between you and me, whom the law calls the immediate parties. But, suppose, instead of doing this, you had kept the note about six weeks and then had taken it to your bank and asked them if they would discount the note for you and they had done so, taking it in absolutely good faith. They know me to be a responsible party, so they are willing to accept my promissory note. They knew you and they presumed that you had taken the note for a valuable consideration although, as a matter of fact, it was a gift to you. Under the circumstances, the bank is a holder in due course and when the note becomes due, if I do not pay, the bank will sue me and will collect from me because, as the Act says, "the failure of consideration is a matter of defence as against any person not a holder in due course." But the bank is a holder in due course.
ACCEPTANCE OF BILLS OF EXCHANGE.—The holder of a bill of exchange will take it, soon after receiving it, to the drawee, the person upon whom it is drawn, for his acceptance. The drawee will accept it by writing across the face of it "Accepted," signing his name and perhaps adding "Payable at the First National Bank." A form of bill of exchange, duly accepted, will be found elsewhere in this chapter. The Act provides that the acceptance must be in writing and signed, either on the document itself or on a separate piece of paper attached to the document. As soon as the drawee accepts the bill, he then becomes known, not as the drawee but as the acceptor and he is the party primarily liable on the bill, that is, he assumes responsibility for its payment. The holder has a right to demand an acceptance for the full amount of the bill and may refuse to take an acceptance for a less amount. It is not always possible for the drawee to know whether he has sufficient funds to justify an acceptance, and so the Act gives him twenty-four hours within which to make up his mind. During that time the holder is obliged to wait without taking any further action. Just as a conditional promise to pay money is not a good promissory note, just so a conditional acceptance is not looked upon as an acceptance which a party is obliged to take. There are, however, occasionally times when a person is willing to take a conditional acceptance. For example, I hold a bill of exchange for $1,000. There are three or four indorsers upon it and I take it to the drawee to have him accept. He will not accept for more than $500. Now I feel that the drawer and all of the indorsers are financially irresponsible and I would rather have the acceptance of the drawee for $500 than nothing. I am willing to take it. The question comes up as to the effect of this upon the other parties, the drawer and the indorsers. The Act covers that fully and it is important that it be kept in mind:
Section 142. "The holder may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder, or he will be deemed to have assented thereto."
NEGOTIATION.—If negotiable paper is a substitute for money, it follows that its most distinguishing characteristic is the fact that it may be transferred from one owner to another. This transfer is made in one of two ways. It may be by operation of law, or by act of the parties. By operation of law, we refer to such a case as where a person dies and his commercial paper then becomes the property of his administrator or executor. In other words, the law transfers the paper to the deceased person's legal representative. The other case, the transfer by the act of the parties is, of course, the ordinary case and the one we shall consider here. The sections in the Negotiable Instruments Act which discuss this matter are so clear that we can do no better than insert them in full at this time:
Section 30. "An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery."
Section 31. "The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement."
Section 32. "The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue."
NEGOTIATION BY INDORSEMENT.—Reference should be made to the several kinds of negotiation by indorsement. We have first the blank indorsement. There the person to whom the document is payable simply writes his name on the back in the same way as it appears on the front. That is, if John Jones is the payee, he writes his name across the back of the instrument "JOHN JONES." Next, there is the special indorsement. John Jones, in this case, is the payee and wishes to transfer the note to John Wanamaker. He writes across the back, "pay to the order of John Wanamaker" and signs his name, JOHN JONES. A restrictive indorsement is one where the further negotiation of the instrument is limited or restricted altogether. For example, the payee writes across the back "Pay to the order of John Jones only." That restricts the further negotiation of the instrument. Another form that is commonly used is in depositing checks in the bank in your own account; usually you indorse "for collection" and sign your name, or you indorse "for deposit only" and sign your name. This form of indorsement simply constitutes the bank your agent to make collection, but not for any other purpose except that the Act now authorizes a bank to begin suit to collect on a document indorsed in that way. Another form of indorsement, known as the qualified indorsement, is frequently used in the case where you wish to indorse without incurring the usual liability of the indorser. This is done by adding under your name the expression "without recourse." This does not mean, as is commonly supposed, that you are free from all liability as an indorser. We shall refer to this later.