This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 13.— A. draws a bill to the order of a bank, and C. endorses it in order that A. may be able to negotiate it with the banks. The bank discounts the bill, which is dishonoured at maturity and duly protested.
(1) Can the bank recover from C.?
(2) Can the bank's endorsee recover from C.? Answer.—The principle involved in this question is a very important one, and as it was presented to us by two or three correspondents we thought it best to obtain an opinion from Mr. Lash, which is as follows:
The impression derived from the various cases upon the subject, on a first reading, is that the cases are in conflict, and that the result of the whole is that the payee of a promissory note or the drawer of a bill of exchange cannot under any circumstances maintain an action against an endorser founded upon the instrument itself; but a more careful reading of the authorities will show that no such absolute rule can be deduced from them, and that, properly construed, the cases are not really in conflict, and that, although some remarks of some judges in some cases would appear to conflict with the decision in other cases, yet the decisions in all the cases and the principles embodied in those decisions are fairly reconcilable. The following rules or statements of the law are clearly laid down:
(1) That, in the absence of evidence to the contrary, the liabilities inter se of the maker and endorsers of a note, or the drawer, acceptor and endorsers of a bill, must be determined according to the ordinary principles of the law merchant, whereby the drawer and acceptor of a bill, or the maker and first endorser of a note, are liable to the subsequent endorsers.
(2) That the whole circumstances attendant upon the making, issue and transference of a bill or note may be legitimately referred to for the purpose of ascertaining the true relation to each other of the parties who put their signatures upon it, either as makers, acceptors, drawers or endorsers, and reasonable inferences derived from these circumstances are admitted to the effect of qualifying, altering, or even inverting the relative liabilities which the law merchant would otherwise assign to them.
(3) That the circumstances attendant upon the making, issue and transference of a bill or note may be shown in evidence for the purpose referred to, whether the action be upon the bill or note itself, or upon a collateral agreement between the parties.
Section 56 of the Bills of Exchange Act declares that " Where a person signs a bill otherwise than as a drawer or acceptor, he thereby incurs the liabilities of an endorser to a holder in due course, and is subject to all the provisions of this act respecting endorsers."
By section 88 it is provided that the provisions of the act relating to bills of exchange apply with the necessary modifications to promissory notes, the maker of the note being deemed to correspond with the drawer of an accepted bill payable to the drawer's order.
By section 29 a holder in due course is defined to be a holder who has taken a bill, complete and regular on the face of it, under the following conditions, viz.: (a) That he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; (b) That he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.
Sub-section (g) of section 2 of the Act declares that "The expression 'holder' means the payee or endorser of a bill or note who is in possession of it, or the bearer thereof."
Referring to the question asked, and assuming that the attendant circumstances were duly proven, and that the bank discounted the bill in due course, the answer is that the bank can recover from C. Assuming also that the bank's endorsee becomes a holder in due course, the answer is that he can recover from C. In order to make the bank's title or that of its endorsee technically regular, the bank, being named as payee of the bill, should endorse it without recourse, although it is by no means clear that this is necessary.
Under the attendant circumstances C. would be an endorser; the bank or its endorsee would be a holder in due course within the definition of section 2, sub-section (g), and section 29 of the Act; and under section 56 C, if not technically an endorser, would be liable as an endorser, and be subject to the provisions of the act respecting endorsers. Although, if the attendant circumstances be clearly shown, and the true relation to each other of the parties who put their signatures upon the bill be thereby ascertained, the payee would be entitled to recover against an endorser, yet the practice of discounting bills drawn like the one referred to in the question should be discouraged, as, owing to death, defective memory and false swearing and other reasons, it may not be possible for the bank to prove all the circumstances necessary to enable it to maintain the action, and before discounting a bill the bank should see that it is so drawn that if an action be brought upon it it will not be necessary to do more than prove the signatures so as to establish, prima facie at all events, the liability of the parties proceeded against.
For convenience of future reference the following cases are noted, all of which have been considered in connection with the foregoing: Steele v. McKinlay, L. E. 5 A. C. 754; Wilkinson v. Unwin, L. E. 7 Q. B. Div. 636; McDonald v. Whitfield, L. E. 8 A. C. 733; Bishop v. Hayward, 4 T. E. 470; Wilders v. Stevens, 15 M. & W. 208; Smith v. Marsack, 6 Q. B. Reports 486; Morris v. Walker, 15 Q. B. Reports 589; West v. Bown, 3 IT. C. Q. B. 290; Ayr Plough Co. v. Wallace, 21 S. C. E. 256; Duthie v. Essery, 22 Ont. A. E. 191; Pegg v. Howlett, 28 0. E. 473; Robertson v. Davis, 27 S. C. E. 571; Wells v. McCarthy, 10 Man. L. E. 639; Watson v. Harvie, 10 Man. L. E. 641.