ILLUSTRATIONS.—To illustrate the difference between the two: Jones worked for the Baltimore & Ohio Railroad Co. He presented his bill of $100 to the proper official, and a check was issued by the railroad payable to the order of Jones for that amount. Jones took the check, indorsed it, and with it paid his grocery bill. The grocery man deposited the check in his bank, and was notified shortly thereafter that payment had been stopped on the check by the Baltimore & Ohio. They claimed a fraud had been committed, that Jones was overpaid $50, and, therefore, they refused to honor the check. The grocery man, having taken this check in the usual course of business, is what we term a "holder in due course." The N.I.L. defines a holder in due course as:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That it is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."

A holder in due course, then, would be entitled to collect the full $100 from the Baltimore & Ohio. This check is governed by the law of negotiability with the result which we have just indicated. Now change the facts a trifle. Jones presented his bill to the same officer of the Baltimore & Ohio as before. The officer says that checks are made out regularly on the first of the month. It was the fifteenth, and Jones did not feel able to wait until the first of the next month. He went to a friend and told him of his claim against the Baltimore & Ohio, and said: "I will assign this claim to you for $95, and then you can present the assignment, which I will draw up and sign, to the Baltimore & Ohio on the first of the month, and get the $100." His friend agrees and advances the money. When he presents the written assignment to the proper officer on the first of the month, he is told that the railroad has discovered that Jones' claim was really good for only $50, and that is all they will pay. Although his assignment reads for $100, he can collect only $50. This illustration is governed by the law of assignability, which applies to practically all contracts, apart from commercial paper. Under the rules of assignability, a person can assign no better claim than he has, or, as is sometimes said, the assignee stands in the shoes of the assignor. Jones really had a claim of only $50 against the Baltimore & Ohio, although he claimed it was $100. He could assign no more than he really had. These two illustrations show the great difference in the result of the application of the two principles, negotiability and assignability.

THE FORMAL REQUIREMENTS OF NEGOTIABLE PAPER.—There are certain formalities which all negotiable paper must have. It must be in writing, and signed by the proper person. No form of writing is specified in the Act, and lead pencil, or even slate pencil, is as good as ink, except that in the two latter cases the ease with which these forms of writing may be altered makes them most undesirable for use. But there is no law requiring the use of ink.

MUST CONTAIN A PROMISE.—Every negotiable instrument must contain words of negotiability. These words are, "to order," "to bearer," "to holder" or their equivalent. "I promise to pay John Jones, $100," and signed "John Smith," is a promissory note, but not a negotiable promissory note, because it lacks the words to "order" or "bearer," and is a document which would, therefore, pass by the law of assignability rather than the law of negotiability. In taking negotiable paper, therefore, it is always important to see whether these words are present. If they are not, the holder will lose the peculiar advantage and rights which the holder in due course acquires by the law of negotiability. A promissory note must contain a promise and a bill of exchange must contain an unconditional order. An I.O.U. for $100 signed "John Jones" is not a promissory note, because there is no promise contained in such a document.

UNCONDITIONAL PROMISE.—All negotiable documents must be payable without reference to any contingency. A note reads: "I promise to pay to the order of John Jones $100 when I attain my twenty-second birthday" and is signed by John Jones, now twenty-one. That is not a good note because the person may not live to be twenty-two. Even if he lives to become twenty-two the note is still non-negotiable, for when it was made the contingency existed. A bill of exchange, regular in form, but adding the expression, "If the Republicans win the next congressional election," is not negotiable. The one exception, as it might appear at first sight, is a negotiable document reading: "I promise to pay to the order of William White six months after death," etc. Such a promise is not contingent. Death will arrive at some time, although it may be uncertain just when. In the other illustrations the republicans might not win the congressional election, and the person might not become twenty-two. Again, all commercial paper must be made payable in money. "I promise to pay to the order of John Jones $100 worth of tobacco," is not negotiable. "I promise to pay to the order of John Jones $100 and fifty pounds of tobacco" is not negotiable. In both cases, the medium of payment is something other than money.

INCEPTION OF THE INSTRUMENT AS AN OBLIGATION.—In our discussion of contracts, we made the statement that a legal intention to make a contract was necessary. The same is true in commercial paper. A man must intend legally to issue a negotiable instrument in order to be liable on one as maker or drawer. Thus, in the case of Walker v. Ebert, 29 Wis. 94, the defendant, a German, unable to read and write English, was induced by the payee to sign an instrument, in the form of a promissory note, relying on the false statement that it was a contract appointing the defendant agent to sell a patent right. It was held that the defendant was not liable. The instrument, though complete in form, was not the defendant's note and the plaintiff acquired nothing by his purchase of the paper.

ILLUSTRATION.—We must contrast this with another situation. Suppose I hand you a paper with a promissory note printed on it, complete in every detail except your signature. I ask you to sign it. You sign the paper, without reading it over or knowing what it is, and give it back to me. I then transfer it to a person who takes it for value, in good faith, etc., or who is, in other words, a holder in due course. The question is, are you liable on such a document? The answer is, "Of course, you are." You may say, "I did not intend to sign a promissory note." The law answers you by saying, "You were careless in signing something which you did not read over, and one is presumed to intend the consequences of his own careless acts." Our German was in a different situation. He was not careless. He could not read English and was obliged to rely upon someone to tell him what the document was, and, granting that he used due care in selecting a responsible person to explain to him the nature of the document, he had done all the law required. Had he been imposed upon, on several previous occasions, by the same person who told him what the document was, and in spite of that, had relied on him to explain this document, then, undoubtedly, the court would have held otherwise and he would have been liable on the ground that he must have intended the consequences of his negligent acts, he being deemed negligent when he trusts a person who had not only misrepresented things to him but had actually defrauded him several times.

DELIVERY.—A note found among the maker's papers, after his death, imposes no obligation either upon him or upon his estate. In other words, in addition to the intentional signing of the document, to complete its validity, there must also have been what we call delivery. This is a passing out of the possession of the maker or drawer, of the document, into the hands of some third party. Delivery may be made in three ways: (1) By intention; (2) By fraud; (3) By negligence.

A VALID DELIVERY NECESSARY.—I hand you my promissory note and you take it. That, of course, is an intentional delivery. You tell me that you have a fine watch which I decide to buy, and I give you my promissory note in payment. Afterwards, upon examining the watch, I find that it is worthless and entirely different from your description. You have secured the note from me in that case by fraud, or there is, as we say, a delivery procured by fraud. I am sitting on a bench in Central Park, and I take out of my pocket a completed promissory note and look at it and place it upon the bench. When I leave I forget it and it stays there until someone comes along and picks it up. That is a delivery by negligence. All these forms of delivery are valid, making the documents good, some in the hands of all parties, others in the hands of the holder in due course only. The N. I. L. is so clear upon this matter that reference must be made to sections 15 and 16. For this reason both of these sections are reproduced here in full:

Section 15. "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery."

Section 16. "Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved."

DISTINGUISHING FEATURES.—It is very important to distinguish between these two sections. Let us take for illustration the famous case of Baxendale v. Bennett, 3 Q.B.Div. 525. Here the defendant wrote his signature as acceptor on several printed blank forms of bills of exchange and left them in a drawer of his desk. The blanks were stolen, filled out, and negotiated to the plaintiff, an innocent purchaser. It was held that the plaintiff could not recover. The reason for this decision is that the document was incomplete and as the Act says: "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery." On the other hand, if I leave in my safe, checks which I have signed and made out in full and they are payable to bearer, although a thief breaks in and steals the checks from the safe, those documents will be valid in the hands of a holder in due course. The reason here is that although there has been no delivery, either by intention or by fraud or by negligence, nevertheless, the Negotiable Instruments Act has extended this theory of delivery, even further than the law went before the Act was passed, and says that when the document is in the hands of a holder in due course, a delivery is conclusively presumed.

CONSIDERATION.—Another essential in the inception of the instrument is consideration. We have already discussed this topic in the chapter on contracts. We made the statement at the beginning of this chapter that the law of negotiable paper came from the continent of Europe and was grudgingly received by the courts of England. The law of negotiable paper on the continent of Europe did not have any idea of consideration, and this is one reason why the law was reluctantly admitted to the English common law and explains the reason now why we have the doctrine of consideration in negotiable paper. It would not be safe for the student to accept all we have said in regard to consideration in the chapter on contracts and apply it to negotiable paper. The difference is at once apparent when you read Sections 24 and 28 of the Negotiable Instrument Act which read:

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.

THE HOLDER IN DUE COURSE.—As we have seen, the distinguishing feature of the law of commercial paper is negotiability as distinguished from assignability. The principles of negotiability are designed very largely for the protection of the person whom we call the holder in due course. It is essential then to bear in mind the condition under which a person becomes such. Section 52 of the Act defines a holder in due course as follows:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That the instrument is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Section 57 defines what the rights of this holder in due course are:

Section 57. "A holder in due course holds the instrument free from any defect of title of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon."

It is clear, then, that by this section, the Act means that the holder in due course takes free of personal defences, although he does not take free of absolute defences. It simply remains for us to consider briefly what is meant by a personal defence and what is meant by an absolute defence. We have already illustrated this in one of our cases where the note was a present. In this case, there was no consideration for the note. The boy to whom it was given could not recover, whereas when he transferred it to an innocent third party, a holder for value, he could recover. Thus we say, failure of consideration is a personal defence. Again, some person steals my check book, fills out a check, and forges my name. The check is then taken and finally gets into the hands of a person who is strictly a holder in due course. He could not recover on it, however, because forgery is a real defence. That is, no one can hold me liable on my forged check. The ordinary illustration of real or absolute defences are infancy, lunacy, illegality and sometimes fraud. Other defences are generally personal defences and do not affect the holder in due course. To put it another way, a real defence is good against the whole world; a personal defence is available only against such as are not holders in due course.

LIABILITY OF PARTIES.—The parties primarily liable on negotiable documents are, on a note, the maker; on a bill of exchange, the acceptor; and on a check, the drawer. The liability of these three parties is most concisely stated in Sections 60, 61, 62, as follows:

Section 60. "The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse."

Section 61. "The drawer by drawing the instrument admits the existence of the payee, and his then capacity to indorse; and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder."

Section 62. "The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: (1) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and, (2) The existence of the payee and his then capacity to indorse."

INDORSERS' LIABILITY.—We have not yet considered the question of the liability of persons who transfer negotiable documents. Indorsements may be made, as we have said, in two ways: either by indorsing the document, or if it is payable to bearer, by delivering it without indorsement. The liability of these two parties is stated in the Negotiable Instruments Act in Sections 65 and 66 in the following language:

Section 65. "Every person negotiating an instrument by delivery or by a qualified indorsement, warrants: (1) That the instrument is genuine and in all respects what it purports to be; (2) That he has a good title to it; (3) That all prior parties had capacity to contract; (4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision three of this section do not apply to persons negotiating public or corporation securities other than bills and notes."

Section 66. "Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (1) The matters and things mentioned in subdivision one, two and three of the next preceding section; and (2) That the instrument is at the time of his indorsement valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it."

QUALIFIED INDORSEMENT.—Section 65 speaks of delivery by qualified instrument. You will remember that we have already mentioned the indorsement in the form "without recourse." This is a qualified indorsement. The kind of liability a person incurs who indorses in that way is set forth in Section 65. This is important because the layman assumes that in indorsing "without recourse" one means to incur no liability as indorser. Such is not the case. Reread section 65, which covers the indorsement without recourse. There is liability for the things mentioned therein. Then in section 66, the last paragraph, you will notice that every indorser, who indorses without qualification "engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder." This does not mean that the indorser will always pay, but only if the necessary steps are taken. We shall consider what these necessary steps are when we take up the subject of "protest."

CHECKS.—A check is simply a bill of exchange drawn on a bank and payable on demand. Therefore, the general principles which we have been laying down, in regard to bills of exchange and other negotiable paper, apply to checks, although, of course, the check is a more recent development in the law of commercial paper than the other two forms, namely, the promissory note and the bill of exchange. Section 186 of the Act reads: "A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay."

HOLDER OF CHECK.—It is important to remember that the holder of a check has no right against the bank. Thus, if I hold John Rockefeller's check, drawn on the Institute National Bank, and I present it to the bank and the bank refuses to pay it for no reason at all, or for a purely arbitrary reason, I cannot sue the bank. The only thing I can do is to seek to get the money on the check from Mr. Rockefeller personally. This is because the drawing of a check is not the assignment of so much money to the payee named in the check. Of course, Mr. Rockefeller might sue his bank for failure to honor his check if it refuses to pay it to me for no valid reason. One further fact is important. When a holder of a check procures it to be certified by the bank, that releases all indorsers and also the drawer. And so, if I have a check drawn by Mr. Rockefeller and indorsed by six millionaires and I take that to the bank and have them certify it and then the bank fails, I have lost everything if the bank never pays anything to a depositor. By getting it certified I release Mr. Rockefeller and all of the indorsers.

THE MEANING OF PROTEST.—Protest is often used broadly to signify any dishonor of a negotiable instrument, but, of course, properly it means presentment by a notary, and his certification that an instrument has been presented for payment and has been dishonored. Protest is only necessary in regard to foreign bills. A foreign bill is one which is drawn in one State and payable in another. For this purpose the different States of the Union are foreign to each other. A bill drawn in New York payable in Boston is as much a foreign bill for this purpose as one drawn in England payable here.

WHAT MAY BE PROTESTED.—Though protest is not necessary for any other negotiable instrument except foreign bills of exchange, including foreign checks, it is convenient frequently to protest other negotiable instruments. The law provides that protest may be made of other negotiable instruments, and the certificate of protest is evidence in such cases, as well as in the case of foreign bills of exchange, of the facts which it states, namely, that the instrument has been duly presented and notice given. Statements in a certificate of protest, however, whether of foreign bills or of other instruments, are not conclusive evidence of the facts which they state. They are some evidence, but it may be shown by other evidence that the instrument was not presented, or was not presented at the time the certificate asserts, or that the notice was not given as therein asserted.

SUGGESTIONS FOR DRAWING NEGOTIABLE PAPER.—Very few suggestions are necessary in drawing checks. We almost always use the printed form. The only thing to be careful about is to draw lines through the blank spaces so that a check written for $70 may not have something else written before the word seventy, thereby raising the amount to, say, One thousand seventy, and the figures, because they are not near the dollar sign, correspondingly raised. The promissory note is frequently drawn by the parties without any printed form. In order to be negotiable, the note must bear the words "or order," or "bearer"; otherwise, it would not be negotiable, and would pass by the law of assignability without any of the advantages accruing to negotiable paper. The draft, or bill of exchange, is the document which the average layman is the least familiar with, and before drawing one, a printed form should be secured or a book on negotiable paper be consulted.

NEGOTIABILITY.—Care should be taken in the indorsement of any negotiable paper. The indorsement in blank, that is, simply writing your name upon the paper on the back, is the one commonly used, but is a dangerous one to use, if there is any possibility of the paper being lost or stolen. For example, A has a promissory note payable to his order, and he simply writes his name across the back and mails it to a person who has agreed to accept it in payment of a bill A owes him. The letter is lost, gets into the hands of X, who opens it and takes the note. Of course, the note is no good to X. X, however, takes the note to someone and persuades that person to discount the note for him. That person does it in good faith, believing X came by the note rightfully. The discounter is therefore a holder in due course, and he would be able to collect on the note. What A should have done, when he sent the note to his friend John Brown, was to have indorsed it specially, "Pay to the order of John Brown, A." Again, a person who is collecting some money for his friend receives a check payable to his order. He wants to turn the check over to his friend, and indorses it by a special indorsement. When the friend tries to collect on the check, it is returned "no funds." The friend now may hold the person responsible who indorsed the check, because an indorser guarantees the payment of the instrument if the proper steps be taken to fix his liability. Ordinarily, of course, we wish an indorser to assume this liability, but in this particular case there was no reason why this man should have indorsed the check in that way. He could have indorsed it, and added to his signature the words "without recourse," which would have relieved him from paying the instrument if the drawer did not pay it.