In the article Exchange. Bill of, some of the general rules of the law of negotiable paper have been stated. In explanation of the central principle and foundation of this very peculiar system of law, we will briefly consider its origin and history. The earliest commerce must have been by barter, and therefore limited to the exchange of superfluities between neighbors. Then money was invented and used as the representative of all value and all property; and he who had anything to spare could exchange it for money, in which its value was vested, and this value could be retained by him who held it until he wished to exchange it for something he needed to use. It was an immense step thus to obtain a representative of all value; and the utility of it grew with the increasing commerce of the world, and was found adequate to the wants of this commerce until a few centuries ago, when the next step was taken, and something was found which is the representative of the representative of all value; and to this last invention the enormous increase of commerce since it came into use must be ascribed. As a bag of coin represented the value of 100 oxen, now a strip of paper represents the value of barrels of gold.
But while the principal benefit of negotiable paper is due to the fact of this perfect representation of all value, there are two other utilities attached to it of almost equal importance. One of these is the facility it offers for paying distant debts without transfer of money or property, by making debts in one place pay debts in another, through the instrumentality of bills of exchange. The other is the method it offers of accumulating credit and employing the whole mass as money by means of successive indorsements. The origin of bills of exchange has been accounted for on various theories, each having perhaps some basis in truth; but when it has been stated that some six centuries ago they came into general use in Europe, little more can bo said with certainty. Negotiable notes were not used until much later, and not until the statute of 3 and 4 Anne, eh. 9 which enacted that they should be "assignable and indorsahlc over in the same manner as inland bills of exchange are or may be by the custom of merchants," was their negotiability fully recognized by the courts.
In the article already referred to the chief incidents of negotiability were explained, namely: that when the paper is duly assigned the assignee is entitled to maintain suit upon it in his own name, and also may recover the sum promised to be paid by it notwithstanding there might have been defences to it in the hands of the assignor which would have precluded a recovery by him. Let us see, then, of what paper this quality of negotiability may be predicated. In the first place, independent of statute or of recent usages (which we shall refer to further on), it must be either a bill of exchange or a promissory note, which instruments are sufficiently explained under those heads. In the next place, if a bill of exchange, it must direct the person upon whom it is drawn to pay the sum of money therein specified to a person named (who is then called the payee), or to his order; and if a promissory note, it must promise to pay the sum specified to some person named or his order, or it may promise to make payment to the bearer, without naming any person whomsoever.
In the case last mentioned the note is in contemplation of law payable to any one who may lawfully become the owner thereof, and it is assigned from hand to hand by mere delivery, and any person receiving delivery on a purchase thereof may enforce payment as bearer. With a bill or note payable to the order of a person named it is different. Before it has been assigned or negotiated only the payee can demand the money or bring suit; but the payee may assign it by writing his name upon the back, which is called an indorsement, and by delivering it to the intended assignee. There are several methods of making this indorsement, and one or another will be resorted to according to circumstances. If nothing more is written upon the back of the paper than the indorser's name, this is called a general indorsement, and it is equivalent in legal effect to a direction to the drawee or maker to pay the bill or note to the bearer thereof. The disadvantage of this is that in case the paper should be lost or stolen the finder or thief would have upon it the evidence of a prima facie right to receive and collect the money, and he or his assignee, under the rules laid down further on, might actually succeed in making collection to the exclusion of the real owner.
To guard against such possible consequences, the payee in assigning may order the payment to be made to a person named, thus: " Pay A. B. or order;" and this being signed by him and delivered to A. B., who is thus made indorsee, the paper is payable to the indorsee only so long as he does not order it paid to any other person; but if he by a like indorsement shall order it paid to the order of another person named, the latter, until he shall give a similar order, becomes the only person entitled to demand and receive payment. In this way the paper may pass through many hands, and be the instrument of many payments; and the owner for the time being will be always protected against the consequences of a loss of the instrument, because so long as he keeps it the indorsements will show that he alone has legal right to the money. In either of these forms of indorsement the indorsee is held to undertake to make payment of the bill or note to the legal holder, provided the drawee or maker does not meet it when due, and the indorsee is duly notified of the dishonor; and if there are several indorsers, the undertaking of each is the same.
To avoid this, the indorsement may be without recourse; that is, the indorser in writing his name upon the paper may write over it " without recourse," or any other words indicating that he is not to be looked to for payment in any contingency. This does not affect the negotiability of the paper, but is only to shield the indorser from personal responsibility in case the drawee or maker fails to make payment. In order to understand the advantages to the holder of negotiable paper to be derived from this quality, the position of the holder may be compared with that of the assignee of other rights in action. Suppose, for instance, that one shall give his creditor a paper in these words: " Due A. B. five dollars, payable on the first day of January next," dated and signed by him; this paper is not negotiable, because it is payable only to A. B., and not to his order or to the bearer. If this paper is sold by the payee, and suit is brought upon it, this must be in the payee's name, as already stated. But it may be that when thus sued the maker will set up some defence to it, as that it was obtained by fraud, or without consideration, or that it has been paid; and such defence would be equally good against the paper in the assignee's hands as it would be were the payee still the owner.
On the other hand, suppose the paper to be a promise to pay five dollars to A. B. or order on the first day of January after its date; in this case, if A. B. sells the note and indorses and delivers it, the assignee may not only sue upon it in his own name if it is not paid at maturity, but if it was indorsed to him before it fell due, and he paid value for it in good faith and without notice or knowledge of any defence to it, he may enforce payment regardless of any such defence, though it might have been one that was perfectly good as against the payee himself. In this respect negotiable paper is placed on the footing of money. If a man loses his watch, or is robbed of it, and the finder or robber sells it for value to an innocent purchaser, who sells it to another, and he to another, and so on, the owner can take it wherever he can find it, for no buyer acquires the slightest property in it against the owner. But if a man loses or is robbed of gold coins, and the finder or robber pays them away to an innocent party in the purchase of goods, the owner loses his money. He cannot reclaim it unless by proof that the receiver of it knew when he took it that it belonged to some one other than the holder.
Now this is precisely so in relation to promissory notes or bills of exchange, payable to order or to bearer. A familiar example may be found in bank notes, which are only promissory notes payable to bearer, and which stand exactly on the footing of coined money, in that any one receiving them innocently for value holds them against any original owner. If we require the reason for this doctrine, it is that negotiable paper may become the adequate instrument of business, as the word negotiable implies; and for this end, that it may represent money, and take the place of money, and possess in all the transactions of business all the immunities and privileges of money. If we understand clearly this principle and purpose of negotiable paper, or rather of the rules of law in relation to negotiable paper, we shall be able to understand those rules. It is for this purpose that all those rules aim at giving to negotiable paper the certainty of money; at making it tell its own story as money does; and, in a few words, at enabling every person who holds it to use it precisely as he would use money, with the additional advantage that he may by his indorsement add his own credit to that which the paper already holds. - The chief rules governing negotiable paper may be here stated.
No especial form is necessary to either a bill or a note. The essential things are, a distinct promise, and sufficient certainty as to the payee, the payer, the amount, and the time of payment. The paper may be payable to any body or number of persons, if sufficiently designated, as "to the executors of A. B.," etc.; but if payable "to A. or B.," it is bad for want of certainty. It must be payable in money and not in property; and in England it has been decided that paper payable in bank of England notes was not negotiable, because such notes were not money. Similar decisions have been made in some of the states, while in others it is held otherwise if the paper is payable in what passes current as money at par. It is not to be inferred from what has been said that those only can be indorsers to whom or to whose order the paper has been made payable; any number of persons may indorse paper in order to charge themselves contingently with its payment under the rules given further on. - As soon as negotiable paper has been dishonored, or is over-due, it loses almost the whole of its peculiar character, and what may be called its privilege.
The reason is the obvious one, that it is no longer capable of negotiation in the proper sense of the word; that is, it is no longer fit to be an instrument of business: in the first case, because it is already discredited, and cannot be considered the equivalent of money; and in the second, because there is no longer any time fixed when it can be paid or converted into money. Hence it is now like paper not negotiable; that is, it may be sold or transferred as before, but the purchaser takes it now subject to the defence which could be made against it if it were still in the hands of the first party who transferred it after dishonor or after it fell due. - A bill of exchange should be presented for acceptance during the usual hours of business. The drawee may answer at once, or he may take a day for consideration; but if he does not accept before the end of the day after presentation, He refuses to accept. If not accepted absolutely, but upon some terms or conditions, the holder may assent to these, and then hold the acceptor; but he must treat it as no acceptance, and give notice accordingly in order to hold the drawer.
When a bill is accepted it becomes like a note; and every bill and every note must be presented for payment, or in other words, payment of them must be demanded, and the demand must be such as the law requires, or all parties except the maker or acceptor are discharged. The paper must be so presented and demanded at maturity, by the holder or his authorized agent, of the acceptor or maker, on the very day on which it falls due, and in the usual and proper business hours of that day. Neither the bankruptcy, nor the insolvency, nor the absence, nor the death of the acceptor or maker is a sufficient excuse for not making the demand. For the insolvent may pay it, and if the payer is absent the demand must be made at his house or residence, or at his place of business; and if he is dead, it must be made of his executors or administrators. If the holder dies before the paper matures, and his executors or administrators are not appointed until after it matures, they must make the demand as soon after as they can; and if they make it without unreasonable delay, it is sufficient. Generally, when the demand cannot be made in the usual way at the time, the law permits it to be made within a reasonable time after the obstruction is removed.
If the payee has absconded, or has no place of residence or business in the state, or is absent and cannot be found by diligent inquiry, demand is excused. But the same notice must be given of this non-demand as of non-payment; for the parties liable on the paper have not only a right to require demand upon all persons liable before them. but the further right to have notice given them if the paper is not paid. The purpose of this is to give them every opportunity of getting such security or indemnity as they can from the parties for- whom they are to make payment. Once, the law said only that the notice must be given in a reasonable time: but now, all over the commercial world, the law itself defines this reasonable time It requires that this notice be given on the day of non-acceptance or non-payment, or on the day immediately following. If the party entitled to notice lives at a distance, the notice should be given by mail, and must be put into the mail on the day of dishonor or the next day, if there be such a mail, and otherwise into the first mail that goes. A personal notice is, in general, good wherever given.
And it should be personal, or in writing left at the residence or place of business, if the person giving the notice (as the notary or agent) lives in the same town or city with the party to whom it is given. He may send it even then by mail, but takes the risk of its reaching the party in season; but if it is sent out of town He may send it by mail, and this risk is not on the sender. - As the holder has one whole day to give his notice, so every one receiving notice has the same indulgence. Thus, if a note with six indorsers falls due, and the indorsee makes due demand of the maker, he must give notice of the non-payment to his indorser (who is the sixth) on the next day. That indorser has also until the next day to notify the fifth, and so on. Hence the first indorser will not get notice until the sixth day after non-payment; but now he will be held not only to his indorsee but to all persons below him, because he has had his due notice. No person, however, is entitled to the delay of more days than his own single day. Thus, if the indorsee of the sixth indorser notifies his indorser on the next day, he holds him; but if that indorser neglects to notify others, and the holder, learning this, on the third day notifies all the rest, all are discharged but the sixth indorser.
Hence, it is usual for the holder not to take the risk of this, but to send notice himself to all the persons whose names are on the paper. (See Notary Public.) There is no precise form necessary for the notice. It should, however, state with sufficient distinctness what the paper is, its dishonor, and who the parties are, and the purport of the notice. After due demand and due notice have fixed the liability of parties, it remains in force, and there is no need of immediate suit. This right to demand and notice may be waived by any party entitled to it, and he may do this by any words of sufficient meaning; the usual way is by writing over his name when he indorses: " Waives demand and notice." It should be remembered that a waiver of notice is not a waiver of demand; although a waiver of demand is perhaps a waiver of notice. - The demand must be made when the note falls due, or, to use the common phrase, at its maturity. But this is not at the expiration of the time when the note is made payable on the face of it. The law adds three whole days, which are called days of grace. At first these were, as the name intimates, days of favor or mere indulgence; but usage, and now law, have converted them into an absolute right.
In most of the states statutes provide that all negotiable paper, not payable at sight or on demand, is entitled to three days of grace, unless it be expressly agreed otherwise. This is sometimes done, but not often; and the words used for this purpose are, simply, "without grace." One distinction is important. These days retain so much of their original character of mere indulgence, that if the last day of grace falls on Sunday, or on any holiday on which payment cannot be demanded, it is now due, and demand must be made, on the Saturday or other day preceding. But if paper without grace, or any payment not entitled to grace, falls due on Sunday, or any other legal holiday, the payer now gains a day, because payment cannot be demanded until Monday, or the day after the holiday. When and in what manner negotiable paper should be protested for nonpayment, and how payment may be made supra protest, or for honor, will be stated in the article Protest. - It should be added, that of late years some other instruments besides bills of exchange and promissory notes have been treated by courts as negotiable paper. Exchequer bills in England were so held; and then the bonds of foreign states, payable to the holder, were so considered.
In the United States the same doctrine has been extended to state and municipal bonds payable to bearer and transferable by delivery; and also to similar bonds of private corporations and their coupons. In some states all demands are so far negotiable that assignees are permitted to sue thereon in their own names.