Collection Of Commercial Paper - Negotiable Instruments Law
( Originally Published 1918 )
Bank Liable to Depositor.—In making collections of drafts, notes, checks, and other negotiable instruments, the bank to which they are entrusted for collection assumes certain duties and obligations, and for its failure properly to discharge the same it is liable to the depositor. The collecting bank becomes the agent for the depositor and is bound to carry out special instructions if given, and if no special instructions are given it is bound to exercise reasonable care and diligence.
Bank's Duties in Collecting.—The duties assumed by the collecting bank include the proper presentation of the paper for acceptance or pay-ment, and if dishonored, of giving due notice thereof, at least to its endorser, and if protest is necessary, of seeing that protest is properly made. In carrying out its duties, in the absence of special instructions, it may act through sub-agents. In some jurisdictions the collecting bank will be held responsible for any failure of its sub-agent to perform its full duty, but in other jurisdictions, if the collecting bank is found to have exercised due care in the selection of its sub-agent, it will not be responsible for the conduct of the sub-agent.
In the Case of Checks it may happen that the collecting bank and its sub-agents may fully comply with the rules of the law merchant regulating the time within which checks may be transmitted through intermediate agents to the place of payment so far as such rules of law affect the duty of the collecting bank towards the depositor, and yet fail to make presentation within the time given by the law merchant to the holders of the checks to present the same for payment so as to bind the maker of the check or a prior endorser; for as against the maker and prior endorsers the holder should see that it is presented for payment not later than the day following its receipt, or, if it be payable in another place, that it be started on its direct journey to such place not later than the day following its receipt.
In Case of Promissory Notes or Drafts.—In the case of promissory notes or drafts payable upon a fixed date, it is the duty of the bank to have such instruments at the place of payment when due. The collecting bank will ordinarily be liable for failure to use due diligence in presenting paper for acceptance or payment; for not giving due notice of dishonor, or omitting to make protest when required; for departing from instructions and recognized customs and for taking an irregular acceptance. Usually a bank will be liable if it accept anything except money in pay-ment, although in cases of emergency it may be justified in accepting property or other security. In the absence of instructions, bills of lading and other collateral attached to time drafts may be surrendered on the acceptance of the draft, but in case of sight drafts payment should always be required before giving up such paper.
Impossible to Cover All Cases: The situations that may arise during the life of a particular piece of commercial paper are so varied, and frequently so intricate, that no summary statement can cover all possible cases ; but as a rule collecting banks must perform their duties as agents with fidelity and intelligence.
Uniformity of the Law.—Diversified laws in the various states of the Union, particularly in regards to finance and the laws relating to checks, notes, drafts and other instruments for the pay-ment of money worked such confusion and hardship that the states, beginning in 1897, adopted, one after the other, what is known as the "Negotiable Instruments Law," until all but one have written it upon their statute books. The solitary exception is the State of Georgia, but its law embodies practically all of the provisions of the uniform law. The law has also been extended to Alaska, District of Columbia, Hawaii and the Philippine Islands.
Scope of the Law.—The law as adopted codifies the law only so far as it pertains to negotiable, as distinguished from non-negotiable instruments. It is applicable only to instruments executed after the enactment of the statute, but it expressly repeals all conflicting statutes except insofar as expressly provided to the contrary by certain statutes not repealed, such a proviso being incorporated in some of the states, but not in the majority. It applies, so far as applicable, to bills of exchange, checks and promissory notes. It is conclusive so far as it goes, and for the most part is inclusive.
Instruments That Are Negotiable. In order to be negotiable, the act expressly provides that the instrument must be in writing, signed by the maker or drawer; contain an unconditional promise or order to pay a sum certain in money; be payable on demand or at a fixed or determinable future time; be payable to order or to bearer; and where addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. It provides in detail as to when the sum payable is a sum certain, when the order or promise is unconditional, when the instrument is payable at a determinable future time, and enumerates certain exceptions to the rule that the instrument is not negotiable if it contains an order or promise to do any act in addition to the payment of money. Negotiability is not affected by the want of a date, failure to specify a consideration, failure to specify the place where it is drawn or is made payable, the fact that it has a seal, or the fact that it designates a particular kind of current money in which payment is to be made. It also expressly defines when an instrument is payable on demand, when payable to order, and when payable to bearer.
Date.—The instrument need not be dated to be negotiable, but where dated, the date is prima facie the true date. Antedating or postdating does not invalidate the instrument unless done for an illegal or fraudulent purpose. If the date is omitted, any holder may insert the true date. Blanks in an instrument may be filled up by the person in possession thereof, and even where not filled, in accordance with the authority given, a bona fide holder in due course may recover.
Delivery.—Delivery is necessary to make a binding contract, but a valid delivery will be presumed where the instrument is in the hands of a holder in due course. The instrument may be good as an instrument for the payment of money even though the provision for attorney's fees may be non-enforceable under some other provisions of local law.
Rules of Construction.—Where in negotiable instruments there is a variation as between figures and written words naming amounts, the written words govern. Interest begins to run from the date of the instrument unless otherwise specified therein. Where the instrument is undated, it is considered as being dated as at the time it was issued. As in the case of amounts, written provisions control printed ones. If an instrument is ambiguous as to whether it be a bill or a note, the holder may treat it as either. If it is not clear in what capacity a person intended to sign, he is deemed an indorser. The words "I promise to pay," where the instrument is signed by two or more, make them jointly and severally liable.
Indorser Before Delivery.—A person placing his signature upon an instrument otherwise than as the maker, drawer or acceptor is deemed an indorser and liable as such unless a contrary intention is clearly indicated by appropriate words. This clears up a point regarding which there has been great conflict in the states, owing to the fact that many hold such an endorser liable as a maker.
Consideration.—A valuable consideration is presumed. An antecedent or pre-existing debt is a sufficient consideration, and one having a lien on the instrument is deemed a holder for value. A person who signs a negotiable instrument without receiving any consideration for the purpose of lending his name to some other party, is liable to a holder for value although such holder knew him to be only an accommodation party.
Acceptance.—Acceptance is necessary to charge the drawee of a bill of exchange. Presentment for acceptance, unless excused, is necessary in case of sight bills to fix their maturity; where it is stipulated for by the terms of the bills; and where the bill is payable elsewhere than at the residence or place of business of the drawee. Acceptance must be in writing and signed by the drawee (this changes the former law). The drawee is allowed twenty-four hours to decide whether he will accept or not. The presentment may be on any day on which presentment for payment may be made, and may be made before noon on Saturday (this last provision being omitted in Wisconsin).
Negotiation.—The instrument may be negotiated by delivery if payable to bearer or by endorsement, if payable to order. The indorse-ment must be written on the instrument or on a paper attached thereto, and may be either the mere signature of the indorser, without additional words, or may be an indorsement to a particular person, or may be qualified, as by adding the words "without recourse," or may be conditional. All payees must indorse unless they are partners or one has authority to act for the other. If the name of the payee is wrongly designated or spelled, he may indorse by such name and may add his proper signature. The endorsement is presumed, where not dated, to have been made before the instrument was due, and to have been made at the place where the instrument is dated. The holder may strike out unnecessary indorsements.
Protest.—Protest is not required except in case of foreign bills of exchange, which includes drafts drawn in a state other than where made payable. When necessary, it must be made on the day the instrument is dishonored. It is customary to have protest made in all cases of dishonor where there is an indorser, and by a notary public to facilitate proof.
Notice of Dishonor Notice of dishonor, unless the same be waived, must ordinarily be given to each drawer and endorser. It may be either written or oral, and delivered personally or by mail. Joint parties not partners must all be notified. If the person giving and the person to receive notice reside in the same place, notice must be given so that it will be received not later than the day following the day of maturity; while if they reside in different places, it must be mailed in time to go by mail the day following the day of maturity.
Time of Payment.—The time when payment is due is determined by excluding the day from which the time is to run and including the date of payment. When the day of maturity falls upon a Sunday or holiday, the instrument is payable on the next succeeding business day. In Massachusetts when the maturity falls on Saturday, Sunday or a holiday, the instrument is pay-able on the next succeeding business day which is not a Saturday. Instruments falling due on Saturday are to be presented for payment on the next succeeding business day, except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. This provision is omitted in Arizona, Kentucky and Wisconsin as well as Vermont except as to the optional clause. In Colo. the provision applies to any day when any part of such day is a holiday. In Mass. failure to present for payment paper payable on demand, before Saturday noon, is not negligence.
Demand Before Suing the Maker.—As a general rule, demand before suing the maker on a note payable on demand, is not necessary, although in certain states on certain demand notes it is necessary. The Negotiable Instruments Law makes no provision as to this matter.
Defenses.--Absence or failure of consideration is a defense, and partial failure of consideration is a defense to the extent of such failure, except as against "a holder in due course." Forgery is a defense even as against a holder in due course, unless the party is precluded from setting up the forgery. A material alteration is a defense except as against a bona fide holder who may enforce payment according to the original tenor of the instrument (this changes the law merchant as to bona fide holders). Alterations are material where they change the date, sum pay-able or in any way alter the effect of the instrument.