By the term "negotiable" we Indicate that certain instruments, so described, are given by law a property by virtue of which they may be transferred by the payee therein, and his transferees successively, to vest in each succeeding transferee the title thereto, unaffected by certain defenses to which they might have been subjected in the hands of the Immediate or any transferor, and to which non-negotiable paper would be subject notwithstanding such transfer; provided the transfer is made according to the rules established to govern commercial paper. And in addition to such transferability such paper has other peculiar properties, chiefly for the purpose, however, of aiding such transferability.
We cannot get a very adequate understanding of the nature of a negotiable instrument except through a detailed consideration of the subject, yet we may hope to know at the outset in a general sort of a way what the term negotiability means. It at once suggests the idea of transferability, and that is indeed its most important and governing characteristic. It is a principle of the law of contract, that contractual rights, except rights for personal services, may be assigned to another; but they cannot be negotiated unless put in a certain form. If put in that form, they may be negotiated simply because the law has so established it for the conveniences of trade.
When one makes a contract with another whereby he secures, or seems to have secured, a certain right, as for instance, to have a salary paid him upon a certain date, the law permits him to assign that right to another. This cannot injure the debtor, for the assignment is in effect no more than a direction by the creditor for the debtor to pay the salary to another person; the contract which exists between the employer and employee is unaffected in its obligations and duties. Suppose, however, it happens that the debtor (the employer) has defenses or counter-claims which he may set up against the claim for such salary, as, that the employee has been advanced a part of it, or that he has not performed the services. It would not be just to permit the employee by selling his claim, or apparent claim, to prevent the employer to set up his defense or counterclaims, for the simple reason that such assignment was not contemplated by the parties as an object of the contract. It was not contemplated by them that a purchaser of the debtor's promise could take that promise without reference to the transaction out of which it arose. The employer did not mean to consent that he would pay the salary whether earned or not, whether he has counterclaims or not, by reason of its assignment to a stranger, leaving the employer to his perhaps doubtful, and at any rate, circuitous, remedy against the employee. The law therefore says that though rights of this sort may be assigned, yet they must be taken in reference to the transaction out of which they arise. The assignee must step into the assignor's shoes and can claim no larger rights than that assignor could claim.
Yet for special reasons, it may be the desire of this employer and this employee to create a form of obligation which may pass upon its face for its full face value, upon which the apparent debtor shall have in effect written: "This promise of mine, while subject to defenses so long as not transferred, is put in this form in order that a transferee for value and in good faith, may take it without reference to the transaction out of which it arose. I hereby authorize my seeming creditor to separate this promise from his obligation, and it need not concern a purchaser what was given, or whether anything was given, so long as he does not know when he purchases this promise that I have any defenses against its enforcement. I have put my promise in this form so that my promisee may by selling it virtually separate it from and make it independent of his corresponding obligation to me."1
1. There are, however, gome few unusual defenses which may be set up against even the innocent purchaser of a negotiable instrument, as we shall note hereafter.
In order to accomplish this result, and give to promises a quasi-monetary value, that is, to make them instruments of credit, the law provides certain forms, which indicate, when adopted by a party, that he means and contemplates their transfer by the promisee or holder, and this is the reason why we came to have negotiable instruments. But a great body of rules has grown up which governs the drawing of such instruments and governs their transfer.
Inasmuch as the assignment of rights under a contract is not contemplated except incidentally by the parties, neither party need question whether there has been any assignment and is not affected by any assignment until he has received notice of the assignment. Thus if after assignment of a salary by an employee, the employer, having no notice of such assignment, pays it to the employee, he cannot be made to pay it over again to the assignee. But the maker of negotiable paper has put his promise in that form so that it may be negotiated if desired, and he* must always act with that possibility in mind. Consequently no notice need be given him, and he must protect himself by always seeing to it that the party to whom he pays money has in his possession the paper which evidences the liability, properly indorsed, and if he pays that paper before maturity he must take it up, lest it be further negotiated.
We may take another illustration to make the paragraph plainer:
A, a jeweler, has sold and delivered to B a stone, known to him to be a topaz worth a few dollars, but which he has fraudulently represented to be a rough diamond, worth $500.00, and for which B, relying on the representation, has agreed to pay him $500.00. We may suppose that B has not put his promise in writing, or that if he has done so, the writing does not contain the elements established by custom and law as indicative of the parties' intent to make the contract negotiable. Now the law permits A to transfer his rights under a contract of this sort and this transfer is called an assignment. A accordingly does assign to C, who knows nothing of the fraud and who pays A $500. B, however, learning of the fraud, can make his defense against C as readily as he could have done against A, for though A could transfer his rights under such a contract, he could transfer no more than his rights. C stands in A's shoes. But let us suppose that when B purchased and obtained the stone, he had given a promissory note to A in the sum of $500, containing all of the elements required to make an instrument negotiable, and that before its maturity A had sold the note for value to C, who was ignorant 6f the fraud. Under this assumption B cannot make the defense against C that he could have made against A. A can by negotiation transfer a better title than he had. In other words, putting the obligation in negotiable form may be said to separate and set it apart from the rest of the transaction for purposes of negotiability.
Negotiable instruments differ from other simple contracts in this threefold manner:
First: In the quality of their transferability as indicated;
Second: In the fact that a consideration will be presumed until the contrary is shown;
Third: In the fact that three days if grace were allowed by the common law, meaning that the instrument could not be sued on until three days had elapsed after the date named in it for its maturity. But this has been abolished by statute.
Let us now consider certain particular instruments to discover whether the law impresses upon them the property of negotiability. The chief of these, we will find, are promissory notes, bills of exchange, and checks; the law merchant being sometimes referred to as the law of bills, notes, and checks. But even such instruments are not negotiable unless drawn according to the rules established - containing all of the elements of negotiability hereinafter discussed. Yet it does not follow that because they may be non-negotiable, that they are for that reason ineffective as contracts. Thus we shall hereafter see that _a promissory note payable when one becomes of age is non-negotiable, but it may well be the expression of a good contract between the parties.