The Essentials of Commercial Law

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Foreword

The aim of "Essentials of Commercial Law" is to develop in the student's mind such a knowledge of commercial law as will enable him, in conducting his business or profession later, to proceed within his legal rights, conserving his own best interests without trespassing upon the rights of others.

To fulfill this aim the author has set for himself and adhered to as far as possible the following ideals :

1. The course. is planned to teach the student the attitude of caution and deliberation so that he will undertake business ventures thoughtfully and with a knowledge of his legal rights.

2. The subject has been developed by the more accurate inductive method.

3. The legal principles governing all honorable commercial relations have been presented in an easy, practical language understandable by the average pupil of the high school or commercial college.

4. To crystallize the principles in the learner's mind, a carefully prepared recapitulation follows the exposition of the principles of each chapter.

5. In order that the student will associate the imparted knowledge with real life, there is provided an abstract of actual cases decided by the courts of the land.

6. The appended test questions have been made interesting. They are designed to draw the student out and to exercise and develop his power of analysis.

7. There is sufficient construction work provided to give the student a self-confidence and initiative in preparing commercial papers that will be of material advantage to him on entering a business career. Wherever possible forms are given, and many are to be written up by the student.

8. A dividing line has been drawn between the important and less important phases of Commercial law, with the result vi FOREWORD

that the vitally important are fully treated, while the less important are disposed of with a brief exposition.

The author wishes to express his great appreciation of the assistance of his collaborators and also to the following for valuable information, criticism, and assistance: W. C. Anderson, Esq., author of Anderson's Law Dictionary; the West Publishing Company, for permission to make extracts from the West's Digests ; O. D. Frederick, M. S., Tuley High School, Chicago; and Edward T. Taylor, Attorney at Law, Lane

Technical High School, Chicago.

W. H. W.

Chicago, August 1, 1913.

PLAN OF THE WORK

The following is a brief outline of the text, giving the teacher an idea of the author's plan of development, after fifteen years as a teacher of the subject in commercial and high schools and seven years as a teacher of common law in Chicago law schools.

1. Topical Outline.

2. Development of the Principles.

6. Hypothetical Questions.

1. The topical outlines given at the beginning of each chapter are to enable the instructor to follow the general development of the chapter without paying any attention to the text matter. This outline could be used as a blackboard outline if desired.

There is a certain continuity in each chapter that should be followed by the teacher from the beginning to the end, together with such illustrations as he may deem desirable. Then a study of a few selected cases should clinch the idea and enable the student to begin that differentiation of facts and conditions that is so important in all departments of law. No legal education is quite so liable to erroneous conclusions as that built on a knowledge of cases where the student has not mastered the legal principles that underlie and that should enable him to differentiate between the facts of several cases

•• VII viii PLAN OF THE WORK

that are applicable in whole or in part to the facts under consideration.

2. The development of the principles of law is in logical order, and a sequence in presentation is pursued in each chapter. Whenever it is thought necessary or desirable, illustrations are used. ^

3. The recapitulation at the end of each chapter should be valuable to the student for short reviews.

4. The sets of questions are given that the student may form an idea of the method used in determining the character of the text.

5. The lists of decisions contain very carefully selected cases stating the application of the law. A case is the result of a trial. In any given case certain facts are alleged to exist on one side and certain other facts or contra ones on the other side. The greater weight of evidence establishes the facts of the case; the law is applied to these facts, and the decision arrived at. When duly entered of record, it constitutes the judgment of the court.

The recapitulations and decisions by the courts should afford the student a splendid opportunity for a thorough review.

6. The hypothetical problems present sets of facts as they exist — to which the student may apply legal principles in arriving at a conclusion. They also afford ample field for discussion.

7. The construction work given should be made use of to the fullest extent. The study of commercial law produces greater benefit to the student by developing his ability to fill out properly the papers used in the business world than in training him to answer abstruse legal questions.

8. The search questions are to direct the student's attention to the laws of the particular state in which he lives. For example: The corporation is recognized by the general government and each of the forty-eight states as an association

PLAN OF THE WORK ix

of individuals for the purpose of conducting business. Yet no two of the several state governments have exactly the same laws for the organization and maintenance of such a business association. Therefore it becomes necessary to study the legal details in the particular state in which the student lives. But to study the statutes of his state alone in reference to corporations, would give him but a meager and hazy idea of a corporation. As a matter of fact, the state law is but the legal machinery to put the corporation engine in running order. The student must study the common law to get a knowledge of the general mechanism of corporations.

State laws are in reality rules and regulations for the conduct of the affairs of mankind rather than the laying down, development, or determination of a legal principle; and these rules and regulations are being constantly changed, yet the common law principles of several centuries' standing are practically unchanged.

The state laws or state statutes are not necessarily built on principles of the common law or conditions long established, but on what the people conceive to be the proper solution of economic or other conditions that exist to-day, and therefore require special attention. A knowledge of the statutes of a state does not constitute a legal education. It is a source of information in which social, economic, or political rights of to-day are readjusted to the legal principles of long established recognition. The next legislature may change the whole procedure.

The principles underlying the common law are woven into the entire fabric of human progress and may not be denied, but are susceptible to restriction and change in their course by statutory enactment and even by judicial interpretation.

9. The glossary containing the definition of legal terms is given for reference purposes. The student should have at hand a good law dictionary as well as a recognized unabridged dictionary.

X BIBLIOGRAPHY

Short Course. If the time allotted is short and the teacher desires to emphasize certain phases of commercial law rather than to hurry through a longer course, the following topics are suggested as offering a practical course: contracts, agency, partnership, bailments, corporations, and negotiable paper, emphasizing the first and the last.

BIBLIOGRAPHY

Reference books that would be of great value and assistance. Several are named on most of the subjects discussed in the text. One should be procured on each subject. The books named have been selected with special reference to their style and contents. The publishers* names are as follows and will be referred to by number :

No. I. West Publishing Co St. Paul, Minn.

No, 2. T. H. Flood & Co Chicago, 111.

No. 3. Callaghan & Co Chicago, 111.

No. 4. Little, Brown & Co Boston, Mass.

No. 5. F. H. Thomas Law Book Co St. Louis, Mo.

A short list of books that should be available :

The Statutes or Code of the student's State.

Anderson's Law Dictionary {No. 2) Price, $7.50

Owen's Law Quizzer, an extremely valuable book covering 27 legal subjects for class work, 2,925 questions and answers {No. i) Price, $4.00

Bishop on Contracts {No; 2) Price, $6.00

Tiedman Bills and Notes {No, 5) Price, $3.50

Sedgwick on Damages {No. 4) Price, $3.00

This book contains abstracts of several hundred cases.

Additional books of high standing and well adapted to student work:

Harriman on Contracts .- Price, $3.00

Huflfcut on Agency Price, $3.00

Burdick on Partnership Price, $3.C0

Burdick on Sales Price, $3.00

Taylor on Corporations Price, $6.00

Bigelow on Bills, Notes and Checks Price, $3.00

Schouler on Bailments Price, $3.00

Vance on Insurance Price, $3.75

Goodwin on Real Estate Price, $4.00

BIBLIOGRAPHY xi

No, I.

Clark on Contracts Price, $3.75

George on Partnership Price, $3.75

Tiffany on Agency Price, $3.75

Tiffany on Sales Price, $3.75

Hale on Torts Price. $3.75

Norton on Bills and Notes Price, $3.75

Hale on Bailments Price, $3.75

Lawson on Contracts Price, $5.00

Lawson on Bailments Price, $5.00

No, 2, Tiedman on Real Estate Price, $6.00

Anson on Contracts Price, $3.50

Mechem on Partnership Price, $2.50

Van Zile on Bailments Price, $6.00

Warvelle on Real Property Price, $4.00

[One text on any one subject is sufficient.]

Contents

Chapter pace

I Introduction I

II Property .• 6

Introduction

2. Kinds of Law

1. Natural Law

2. Moral Law

3. International Law

4. Municipal Law

5. Common Law

6. Statute Law

7. Commercial Law

3. Importance of Commercial Law

L Definition. A law is a rule of action. It is a rule of action or conduct, laid down by those having authority, for the guidance of all within its jurisdiction. "It should be kept in mind that the greatest good to the greatest number is the object of the law." The letter of the law and the forms of the law concern every man and woman at almost every important step in life.

The Legislative Department of the Government makes rules or laws for the people of the United States. Each State Legislature does the same for its particular State, so also the County Commissioners and the Board of Aldermen are given limited law-making powers. Among savages the chief makes the laws. In civilized communities the head of the family does likewise.

2 INTRODUCTION [Ch. I

The scope over which the law has force is bounded by the territory over which the law-making body has control or jurisdiction. Thus the laws of New York do not affect the people of California, or vice versa, unless the people of one state visit the other.

The necessity for law is self-evident. It is our assurance that the strong shall not trample on the weak ; that the rich and powerful shall not deprive the poor of their rights without just compensation. If all men were honest, and born with a disposition to "do unto others as they would that others should do unto them," there would be little need of laws and lawyers, but mankind is ever apt to be selfish and aggressive and to strive selfishly to obtain what is not right; consequently, laws are formed for the protection of him who otherwise would be at the mercy of those more powerful than himself. Law is protective. It consists of a code of principles based upon right and justice, the fundamentals of which are the Ten Commandments. It says to the thief, "You shall not steal and profit thereby"; to the murderer, "You shall not kill and escape unpunished"; to the robber, "You shall not have the property of another without giving value for value."

2. Kinds of Law. 1. Natural Law, The rules of human action as prescribed by the Creator and as revealed and discoverable by the light of reason, constitute natural law. Among others are three general precepts : That we should live honestly, should hurt nobody, and should render to everyone his due. The primitive laws of nature may be reduced to six, namely: (1) comparative sagacity, or reason, which enables a properly constituted human being to distinguish good from evil; (2) self-love, which includes self-preservation; (3) the rights of husband and wife; (4) the tenderness of parents toward their children; (5) the religious sentiment; and (6) sociability, the feeling upon which the existence of society depends.

2. Moral Law. The rules and laws of divinity, prescribed and laid down regarding moral conduct, the law of moral precepts of the Mosaic Code, as distinguished from the ceremonial and

§2.] KINDS OF LAW 3

civil features of that code, constitute the moral law. Example : — The Ten Commandments.

3. International Law. The law which regulates the conduct and mutual intercourse of independent states is called international law. It is largely determined and established by treaties and by principles and doctrines of long and recognized standing.

4. Municipal Law. Municipal law comprises the laws of a particular state or country, the rules of civil conduct, laid down by the supreme authority, commanding what is right and prohibiting what is wrong. Examples : — ^Abolition of days of grace in some states ; granting married women equal rights with men in holding and transferring property. Municipal laws change and modify other municipal laws or they change the common law.

5. Common Law, The common law is a collection of rules and customs, handed down from former generations, that have been finally adopted and incorporated into the general law of the country as best suited to the needs of its people. It originated in the early history of England, and has received additions from time to time from the decisions of great judges relating to the common affairs of life. It is sometimes called the unwritten law. Common law is constantly being formed by customs and usage.

6. Statute Law. The statute law is the written will of the people, or the acts of a legislature, expressed in the proper form. It constitutes the law of the government, state, county, city, or town passing same. Examples: — Acts passed by Congress, by any State Legislature, by any Board of Aldermen, by County Commissioners.

7. Commercial Law, or the Law Merchant. The body of commercial usages or rules recognized by civilized nations as relating to the rights of persons engaged in trade, is said to be "the system of law which the Courts of England and the United States apply to mercantile contracts. It is a branch of the Common Law, inferior in importance to no other, and in many respects quite distinct from any other. The principal objects embraced within it are the law of shipping (which includes the law of

4 INTRODUCTION ^ [Ch. I

marine insurance), the law of negotiable bills of exchange and promissory notes, and the law of sales."

3. Importance of Commercial Law. The importance of Commercial Law can hardly be overestimated from the standpoint of a business or a professional man who daily is brought in contact with the transaction of business. No man can be expected to know all the law, although the legal maxim, ** Ignorance of the law excuses no one," applies to all. Mr. Justice Story says : "As every man is presumed to know the law and to act upon the rights which it confers, when he knows the facts it is a culpable negligence in him to do an act, or make a contract, and then set up his ignorance as a defense." A business man must know the law or suffer the consequences. He should know his legal rights that he may protect himself fully, and also that he may escape the consequence of doing what he has no right to do under the mistaken idea that he is transacting business in a proper and legal manner.

A law is a rule of action.

Laws have been handed down to us as a part of the system known as the common law, or they are passed as statutes by Congress and the State Legislatures.

In general, the laws of a state have no operation beyond its boundaries.

The rules of human action revealed and discoverable by the light of reason constitute natural law.

The moral law comprises those rules laid down for the guidance of moral conduct.

International law is the law of nations. It regulates the mutual intercourse of independent states.

Municipal law is the law in force in a particular state or jurisdiction.

The common law is a collection of rules and customs handed down from former generations and adopted as well suited to the needs of the people.

Statute law is the written will or the acts of legislatures expressed in the form of positive rules as law.

Commercial law consists of the usages and rules adopted and long used in commercial transactions.

S. QUESTIONS

What IS law? What is its object? What is the source of our laws? What is the territorial boundary of a law? Why is law necessary?

Name the different kinds of law. What is natural law? Moral law? International law? Common law? Statute law? Give example of each.

What is commercial law? What are some of the subjects to which it relates? Why is a knowledge of commercial law important? Explain the legal maxim "'Ignorance of the law excuses no one." Why should not ignorance of a law excuse a wrongdoer?

Chapter II

7. Development

1. Personal Property

3. Mixed Property

8. Changes

9. Ownership

. 1. Kinds of Ownership 2. Limitations Placed Upon Ownership

6. Property. Property, in a general sense, is what one owns to the exclusion of others. The artist takes a canvas of little value, paints and oils, and by the strokes of genius produces a masterpiece. This picture that he has created is property. It is his exclusively. He has the right to do with it what he chooses so long as he does not interfere with the rights of others. It has value because it will satisfy the desire of others, it will be sought by them. The early settler pre-empts or takes up a claim of government lands. He acquires an exclusive right to this property. It is his to do with as he chooses. It is a thing of value — he may sell or exchange or use it for any of the purposes for which land is ordinarily used. Property, therefore, includes everything that may be owned ; it is an exclusive right to a transferable thing of value. Property, in an abstract sense, means ownership, title, estate, right; in a concrete sense, it means the thing owned.

7. Development. The first laws enacted, or handed down, were rules for the suppression of violence and the settling of quarrels. In its progress and development the community soon recognized the right of the individual to certain property, things necessary to sustaining and protecting life, such as the rude implements of agriculture and those used in the chase and in warfare. Lastly, it recognized the right of the individual to the use and occupancy of a portion of the land. Two classes of property came to be recognized, personal property and real property.

1. Personal Property. Personal property includes all property that may readily accompany the person and is easily moved from place to place. Examples of personal property are stocks, bonds, notes, moneys, horses, cattle, furniture, implements, etc.

2. Real Property. Real property includes air property that is of a fixed nature, generally defined as immovable; as, land, including all that is firmly attached thereto, not only the surface with the growing timber and buildings thereon, but mineral deposits beneath. Land, in contemplation of law, extends from the center of the earth upward indefinitely to the sky.

3. Mixed Property. Mixed property includes such property as in its nature partakes of the characteristics of both personal and real ; as, leasehold interests.

8. Changes. Through the agency of man property is frequently changed back and forth from one class to the other. Thus, growing timber is classed as real ; if cut down and manufactured into lumber, it is classed as personal ; but if the lumber is used in constructing fences or buildings, it again becomes real property. Many such examples exist.

9. Ownership. It frequently happens in the affairs of business that both the title and the possession of a chattel are not in the same person. If the title and possession are together, it illustrates a thing, or chose, in possession. If the title is in one person and the possession with another, the person having title is said to have a chose in action ; that is, he may have an action or suit at law to recover his property or the value thereof. A chose

8 OWNERSHIP [Ch. II

in possession consists in title and possession to personal property being in the same person. A chose in action consists in a thing of which one has the title but not the possession. In a large sense, a chose in action may be considered not only as a right to recover possession, but a right to damages, whether growing out of the commission of a tort, an omission of a duty, or a breach of contract. A sells a horse to B and takes B's note for the purchase price. The note is a chose in action. An action at law may be necessary to recover the value.

1. Kinds of Ownership. When the ownership rests in one person he is said to be the sole owner, but the ownership may be in several persons. If all have an equal share and the titles are the same, the estate is that of joint tenancy, and under the old common law the right of survivorship applies ; that is, the interest of one at his death passes to the remaining joint owners, rather than to his heirs or representatives. If the tenants merely hold the same possession, but the interests are not equal, or arise from different sources of title, it is tenancy in common. Upon the death of a tenant in common his interest descends to his heirs or representatives.

2. Limitations Placed Upon Ownership. While a person may own property to the exclusion of all others, there are yet certain limitations that will now be considered .

First. The owner is not at liberty to use his property in such a way as to injure another.

Second. The state or government reserves the right to take a part of a person's property for the support of the state and for the improvement of public institutions. This is the right of taxation.

Third. The state has the right to control the use of property under certain limitations and in some cases to take the property even to the extent of destroying it. This is known as police power.

Fourth. A person's property is liable to be taken by direction of the court for the payment of his debts. His just debts must be paid — ^he cannot give away his property and thereby defraud his creditors. However, one who makes a bona fide purchase will be protected in his title to the goods, or land, as the case may be. Fifth. Sovereignty implies the power to order and direct for the best interests of the community. Therefore, the state has power to dispossess a person of the ownership of property and convert it to the use of the public. When property is so taken the state is bound to pay to the owner a fair compensation. This is exercising the "right of eminent domain."

Property consists of those things which one holds by just right to the exclusion of others. It includes also the right of transfer or conveyance.

Property is of two kinds, personal and real.

Personal property is such as attends the person and is easily moved from place to place. It is subdivided into choses in action and in possession.

A chose in action consists in a thing of which one has the right or title but not the possession.

A chose in possession consists in a thing of which both the title and possession are held by the same person.

Real property includes all such property as is fixed or immovable in its nature.

Property which partakes in its nature of the qualities of both real and personal is called mixed property.

Ownership is sole or several when held by only one person ; when held by two or more persons it is joint.

At the common law, if the tenants held by the same interest, time, title, and possession, a joint tenancy arose; but if by the same possession merely, a tenancy in common.

There are several limitations placed on the ownership of property. It may not be so used as to injure another; it is subject to the right of taxation, police power, payment for debts, and eminent domain.

What is property? Give examples. How many elements are necessary? Name them.

Trace the development of property rights. Name the classes of property. Define personal property; real property; mixed property. Give several examples of each. Give illustrations of property changing from one class to the other.

10 OWNERSHIP [Ch. Ill

Name the classes of personal property. What is the basis for this classification? Give several examples of each. Give several examples of choses in action and then illustrate the separation of these. Name the kinds of ownership. Define each. What is the right of survivorship?

Has one an absolute or a relative ownership in his property? Explain the limitations of one's ownership. Point out a difference between the police power of a state and its power of eminent domain.

Chapter III. Sources Of Law

12. Federal and State Constitutions

12. Constitutions. During the colonial times, the laws in force in this country were the laws of England, now forming the greater part of our common law. During the Revolutionary War the Articles of Confederation were in force, and to a certain extent suspended the English laws. After independence was secured, a general government was established and the United States Constitution was adopted, enumerating and defining the government's rights and powers and modifying the English common law in so far as it was not suited to our changed condition. The people of each colony organized as a state by framing and adopting a constitution. The United States and each state made new rules and laws and changed old ones, thereby modifying the common law, yet never entirely doing away with it. In fact, it may be said that the old common law spreads over the entire country like a net, and if, perchance, a wrongdoer should escape all federal or state law, he would be caught in the meshes of the common law, the foundation of our whole legal system.

The United States secures the enforcement of rights and the punishment of transgressors by the law and rules found in the Constitution, Congressional enactments, and in the common law. Each state secures the same power from the state constitution, from state legislative enactments, as well as from the common law, being also at the same time under the protecting influence of the United States Constitution and Federal statutes.

12 DEVELOPMENT OF LAW [Ch. Ill

The fundamental legal principle is to allow citizens to do everything except what is forbidden; a despotic government allows its citizens to do only what is prescribed and denies all else.

When we wish to know the law on a particular point, we examine the authorities, law books, to see if the thing in question is prohibited, and if so, we are forbidden to do it; if no prohibition is found, the performing of it is perfectly legal and lawful. The reverse would be the rule under a despotism. Some of our laws trace their source back to the old Roman, or Civil law. The Civil Law is the foundation of the law of Louisiana.

The relationship of the laws from the several sources is such that if there is a conflict between any two, the one higher in the scale will prevail and the lower must cease to operate. This relationship was early determined by the Supreme Court of the United States in the celebrated case of Marbury v. Madison :

"The original and supreme will (the people) organizes and assigns to different departments their respective powers. The powers of the legislature are defined and limited. That these limits may not be forgotten the Constitution is written. To what purpose are powers limited, and to what purpose is that limitation committed to writing, if these limits may at any time be parsed by those intended to be restrained? Certainly all those who have framed written constitutions contemplate them as the fundamental paramount law of the nation, and consequently the theme of every such government must be that an act of the legislature repugnant to the constitution is void. It is emphatically the province and duty of the judicial department to say what the law is. If a law be in opposition to the Constitution, the court must either decide the case conformably to the law, disregarding the Constitution, or conformably to the Constitution, disregarding the law. The court must determine which of the conflicting rules governs the case. This is the very essence of the judicial duty. The courts cannot close their eyes to the Constitution and see only the law. This doctrine would subvert the very foundation of all written constitutions. It would be giving to the legislature a practical and real omnipotence with the same breath which professes to restrict their powers within narrow limits. It is prescribing limits, and declaring that these limits may be passed at pleasure."